##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 20-F



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(Mark One)

| ̈ | Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------------------

or



|x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year endedDecember 31, 2005

or



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

or



| ̈ | Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | -------------------------------------------------------------------------------------------

Date of event requiring this shell company report

Commission file number 001-31731



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Chunghwa Telecom Co., Ltd.

(Exact Name of Registrant as Specified in Its Charter)



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Taiwan, Republic of China

(Jurisdiction of Incorporation or Organization)

21-3 Hsinyi Road, Section 1, Taipei,

Taiwan, Republic of China

(Address of Principal Executive Offices)



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Securities registered or to be registered pursuant to Section 12(b) of the Act:



|                                                                                                             |  |                                          
|------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------
|Title of Each Class                                                                                          |  | Name of Each Exchange on Which Registered
|Common Shares, par value NT$10 per share                                                                     |  | New York Stock Exchange*                 
|American Depositary Shares, as evidenced by American Depositary Receipts, each representing 10 Common Shares |  | New York Stock Exchange                  

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None



---

Indicate the number of outstanding
shares of each of the Issuers classes of capital or common stock as of the close of the period covered by the annual report.

9,647,724,900 Common Shares

246,043,119 American Depositary Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No ̈

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.    Yes ̈No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated
filer  x    Accelerated filer ̈Non-accelerated filer ̈

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ̈Item 18  x

If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes ̈No  x



|* | Not for trading, but only in connection with the listing on the New York Stock Exchange of the American Depositary Shares
|- | -------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

CHUNGHWA TELECOM CO., LTD.

FORM 20-F ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2005

TABLE OF CONTENTS



|                                                                     |  |                                                                              |  |     
|-------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- |  | ----
|                                                                     |  |                                                                              |  | Page
|SUPPLEMENTAL INFORMATION                                             |  | 1                                                                           
|                                                                     | 
|FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT MAY NOT BE REALIZED |  | 1                                                                           
|                                                                     | 
|PART I                                                               |  | 2                                                                           
|                                                                     |  |                                                                             
|ITEM 1.                                                              |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        |  | 2   
|                                                                     |  |                                                                             
|ITEM 2.                                                              |  | OFFER STATISTICS AND EXPECTED TIMETABLE                                      |  | 2   
|                                                                     |  |                                                                             
|ITEM 3.                                                              |  | KEY INFORMATION                                                              |  | 2   
|                                                                     |  |                                                                             
|ITEM 4.                                                              |  | INFORMATION ON THE COMPANY                                                   |  | 13  
|                                                                     |  |                                                                             
|ITEM 4A.                                                             |  | UNRESOLVED STAFF COMMENTS                                                    |  | 49  
|                                                                     |  |                                                                             
|ITEM 5.                                                              |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 |  | 50  
|                                                                     |  |                                                                             
|ITEM 6.                                                              |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   |  | 71  
|                                                                     |  |                                                                             
|ITEM 7.                                                              |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |  | 78  
|                                                                     |  |                                                                             
|ITEM 8.                                                              |  | FINANCIAL INFORMATION                                                        |  | 79  
|                                                                     |  |                                                                             
|ITEM 9.                                                              |  | THE OFFER AND LISTING                                                        |  | 80  
|                                                                     |  |                                                                             
|ITEM 10.                                                             |  | ADDITIONAL INFORMATION                                                       |  | 81  
|                                                                     |  |                                                                             
|ITEM 11.                                                             |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |  | 96  
|                                                                     |  |                                                                             
|ITEM 12.                                                             |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       |  | 97  
|                                                                     | 
|PART II                                                              |  | 98                                                                          
|                                                                     |  |                                                                             
|ITEM 13.                                                             |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              |  | 98  
|                                                                     |  |                                                                             
|ITEM 14.                                                             |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |  | 98  
|                                                                     |  |                                                                             
|ITEM 15.                                                             |  | CONTROLS AND PROCEDURES                                                      |  | 98  
|                                                                     |  |                                                                             
|ITEM 16A.                                                            |  | AUDIT COMMITTEE FINANCIAL EXPERT                                             |  | 98  
|                                                                     |  |                                                                             
|ITEM 16B.                                                            |  | CODE OF ETHICS                                                               |  | 98  
|                                                                     |  |                                                                             
|ITEM 16C.                                                            |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       |  | 98  
|                                                                     |  |                                                                             
|ITEM 16D.                                                            |  | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   |  | 99  
|                                                                     |  |                                                                             
|ITEM 16E.                                                            |  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       |  | 99  
|                                                                     | 
|PART III                                                             |  | 100                                                                         
|                                                                     |  |                                                                             
|ITEM 17.                                                             |  | FINANCIAL STATEMENTS                                                         |  | 100 
|                                                                     |  |                                                                             
|ITEM 18.                                                             |  | FINANCIAL STATEMENTS                                                         |  | 100 
|                                                                     |  |                                                                             
|ITEM 19.                                                             |  | EXHIBITS                                                                     |  | 100 



i



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##### Table of Contents

SUPPLEMENTAL INFORMATION

All references to we, us, our and our
company in this annual report are to Chunghwa Telecom Co., Ltd. All references to shares and common shares are to our common shares, par value NT$10 per share, and to ADSs are to our American depositary
shares, each of which represents ten of our common shares. The ADSs are issued under the deposit agreement, as amended, supplemented or modified from time to time, dated as of July 17, 2003, among Chunghwa Telecom Co., Ltd., The Bank of New
York, as depository, and the holders and beneficial owners from time to time of American Depositary Receipts issued thereunder. All references to Taiwan are to the island of Taiwan and other areas under the effective control of the
Republic of China. All references to the government or the Republic of China government are to the government of the Republic of China. All references to the Ministry of Transportation and Communications are to
the Ministry of Transportation and Communications of the Republic of China. All references to the Securities and Futures Bureau are to the Securities and Futures Bureau of the Republic of China or its predecessors, as applicable.
ROC GAAP means the generally accepted accounting principles of the Republic of China, and US GAAP means the generally accepted accounting principles of the United States. Any discrepancies in any table between totals and sums
of the amounts listed are due to rounding. Unless otherwise indicated, or the context otherwise requires, references in this annual report to financial and operational data of the Company for a particular year refer to the fiscal year of the Company
ending December 31 of that year.

When we refer to our privatization or our being privatized in this annual
report, we mean our status as a non-state-owned entity after the government reduces its ownership of our outstanding common shares, including our common shares owned by entities majority-owned by the government, to less than 50%. We were privatized
in August 2005.

We publish our financial statements in New Taiwan dollars, the lawful currency of the Republic of China. In this annual
report, NT$ and NT dollars mean New Taiwan dollars, $, US$ and U.S. dollars mean United States dollars.

FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT MAY NOT BE REALIZED

This annual report contains
forward-looking statements, including statements regarding:



| |  |  | our business and operating strategy;
| | - |  | ------------------------------------



| |  |  | our network expansion plans;
| | - |  | ----------------------------



| |  |  | our business, operations and prospects;
| | - |  | ---------------------------------------



| |  |  | our financial condition and results of operations;
| | - |  | --------------------------------------------------



| |  |  | our dividend policy;
| | - |  | --------------------



| |  |  | the telecommunications industry regulatory environment in Taiwan; and
| | - |  | ---------------------------------------------------------------------



| |  |  | future developments in the telecommunications industry in Taiwan.
| | - |  | -----------------------------------------------------------------

These forward-looking statements are generally indicated by the use of forward-looking terminology such as believe, expect, anticipate, estimate, plan, project,
may, will or other similar words that express an indication of actions or results of actions that may or are expected to occur in the future. These statements are subject to risks, uncertainties and assumptions, many of which
are beyond our control. You should not place undue reliance on these statements, which apply only as of the date of this annual report. These forward-looking statements are based on our own information and on information from other sources we
believe to be reliable. Actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause differences include, but are not limited to, those discussed under Item 3. Key
InformationD. Risk Factors. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur and our actual results could differ materially from those anticipated in these
forward-looking statements. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.



1



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##### Table of Contents

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

The Company has been privatized as a result of secondary ADR offering and
concurrent domestic auction of our common shares since August 12, 2005. The privatization enables us to develop our business and respond to changing market conditions more rapidly and efficiently.

A. Selected Financial Data

The selected income
statement data and cash flow data for the years ended December 31, 2003, 2004 and 2005, and the selected balance sheet data as of December 31, 2004 and 2005, set forth below are derived from our audited financial statements included
elsewhere in this annual report and should be read in conjunction with, and are qualified in their entirety by reference to these financial statements and the related notes. The selected income statement and cash flow data for the years ended
December 31, 2001 and 2002, and the selected balance sheet data as of December 31, 2001, 2002 and 2003 set forth below are derived from our audited financial statements not included in this annual report.



|                                                    |  |                                                                   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |      |  
|--------------------------------------------------- |  | ----------------------------------------------------------------- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ---- | -
|                                                    |  | As of or for the year ended December 31,                          |  
|                                                    |  | 2001                                                              |   |  | 2002  |   |  | 2003  |   |  | 2004  |   |  | 2005  |  
|                                                    |  | (in billions, except per share and per pro forma ADS information) |  
|                                                    |  | NT$                                                               |   |  | NT$   |   |  | NT$   |   |  | NT$   |   |  | NT$   |   |  | US$  |  
|Income Statement Data:                              |  |                                                                   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |      |  
|Revenues                                            |  | 184.4                                                             |   |  | 179.4 |   |  | 182.5 |   |  | 185.2 |   |  | 184.7 |   |  | 5.6  |  
|                                                    |  |                                                                   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |      |  
|Operating costs and expenses:                       |  |                                                                   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |      |  
|Costs of services(1)                                |  | 72.7                                                              |   |  | 58.1  |   |  | 59.6  |   |  | 60.3  |   |  | 70.1  |   |  | 2.1  |  
|Marketing(1)                                        |  | 21.9                                                              |   |  | 20.2  |   |  | 20.0  |   |  | 19.3  |   |  | 23.7  |   |  | 0.7  |  
|General and administrative(1)                       |  | 3.5                                                               |   |  | 2.7   |   |  | 2.7   |   |  | 2.5   |   |  | 3.5   |   |  | 0.1  |  
|Research and development(1)                         |  | 2.8                                                               |   |  | 2.4   |   |  | 2.6   |   |  | 2.5   |   |  | 3.1   |   |  | 0.1  |  
|Depreciation and amortizationcosts of services     |  | 36.6                                                              |   |  | 37.9  |   |  | 39.2  |   |  | 38.4  |   |  | 38.8  |   |  | 1.2  |  
|Depreciation and amortizationoperating expenses    |  | 2.3                                                               |   |  | 2.4   |   |  | 2.4   |   |  | 2.3   |   |  | 2.4   |   |  | 0.1  |  
|                                                    |  |                                                                   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |      |  
|Total operating costs and expenses                  |  | 139.8                                                             |   |  | 123.7 |   |  | 126.5 |   |  | 125.3 |   |  | 141.6 |   |  | 4.3  |  
|Operating income                                    |  | 44.6                                                              |   |  | 55.7  |   |  | 56.0  |   |  | 59.9  |   |  | 43.1  |   |  | 1.3  |  
|Other income(2)                                     |  | 3.7                                                               |   |  | 2.5   |   |  | 2.2   |   |  | 2.7   |   |  | 4.0   |   |  | 0.1  |  
|Other expenses(3)                                   |  | 1.4                                                               |   |  | 1.3   |   |  | 0.6   |   |  | 0.4   |   |  | 1.1   |   |  |     |  
|                                                    |  |                                                                   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |      |  
|Income before income tax                            |  | 46.9                                                              |   |  | 56.9  |   |  | 57.6  |   |  | 62.2  |   |  | 46.0  |   |  | 1.4  |  
|Income tax                                          |  | 9.5                                                               |   |  | 12.8  |   |  | 10.3  |   |  | 11.3  |   |  | 12.7  |   |  | 0.4  |  
|                                                    |  |                                                                   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |      |  
|Net income                                          |  | 37.4                                                              |   |  | 44.1  |   |  | 47.3  |   |  | 50.9  |   |  | 33.3  |   |  | 1.0  |  
|                                                    |  |                                                                   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |      |  
|Net income per share(4)                             |  | 3.87                                                              |   |  | 4.57  |   |  | 4.90  |   |  | 5.28  |   |  | 3.45  |   |  | 0.11 |  
|Net income per pro forma equivalent ADS(5)          |  | 38.73                                                             |   |  | 45.70 |   |  | 49.04 |   |  | 52.78 |   |  | 34.51 |   |  | 1.05 |  
|                                                    |  |                                                                   |   |  |       |  
|Balance Sheet Data:                                 |  |                                                                   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |      |  
|Cash and cash equivalents                           |  | 4.6                                                               |   |  | 7.6   |   |  | 13.5  |   |  | 29.3  |   |  | 41.9  |   |  | 1.3  |  
|Property, plant and equipmentnet                   |  | 336.4                                                             |   |  | 338.4 |   |  | 329.7 |   |  | 311.6 |   |  | 293.5 |   |  | 8.9  |  
|Total assets                                        |  | 411.4                                                             |   |  | 428.6 |   |  | 429.7 |   |  | 438.4 |   |  | 395.2 |   |  | 12.0 |  
|Total debt                                          |  | 17.0                                                              |   |  | 17.7  |   |  | 0.7   |   |  | 0.7   |   |  | 0.5   |   |  |     |  
|Total liabilities                                   |  | 121.7                                                             |   |  | 128.6 |   |  | 118.9 |   |  | 119.7 |   |  | 67.4  |   |  | 2.0  |  
|Capital stock                                       |  | 96.5                                                              |   |  | 96.5  |   |  | 96.5  |   |  | 96.5  |   |  | 96.5  |   |  | 2.9  |  
|Total stockholders equity                          |  | 289.7                                                             |   |  | 300.0 |   |  | 310.8 |   |  | 318.7 |   |  | 327.8 |   |  | 10.0 |  
|                                                    |  |                                                                   |   |  |       |  
|Cash Flow Data:                                     |  |                                                                   |   |  |       |   |  |       |   |  |       |   |  |       |   |  |      |  
|Net cash provided by operating activities           |  | 73.1                                                              |   |  | 91.3  |   |  | 93.6  |   |  | 91.6  |   |  | 86.2  |   |  | 2.6  |  
|Net cash used in investing activities               |  | (53.7                                                             | ) |  | (55.3 | ) |  | (32.2 | ) |  | (32.4 | ) |  | (28.0 | ) |  | (0.8 | )
|Net cash provided by (used in) financing activities |  | (38.9                                                             | ) |  | (33.0 | ) |  | (55.5 | ) |  | (43.4 | ) |  | (45.5 | ) |  | (1.4 | )



2



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##### Table of Contents

|                                   |  |                                                                   |  |      |  |      |  |      |  |      |  |     
|---------------------------------- |  | ----------------------------------------------------------------- |  | ---- |  | ---- |  | ---- |  | ---- |  | ----
|                                   |  | As of or for the year ended December 31,                         
|                                   |  | 2001                                                              |  | 2002 |  | 2003 |  | 2004 |  | 2005
|                                   |  | (in billions, except per share and per pro forma ADS information)
|                                   |  | NT$                                                               |  | NT$  |  | NT$  |  | NT$  |  | NT$  |  | US$ 
|Capital expenditures               |  | 52.9                                                              |  | 43.3 |  | 32.2 |  | 22.9 |  | 22.9 |  | 0.7 
|                                   |  |                                                                   |  |      |  |     
|Other:(6)                          |  |                                                                   |  |      |  |      |  |      |  |      |  |     
|Cash dividends declared per share  |  | 3.50                                                              |  | 4.00 |  | 4.50 |  | 4.70 |  | 4.30 |  | 0.13
|Stock dividends declared per share |  |                                                                   |  |      |  |      |  |      |  | 0.20 |  | 0.01

---

|(1) | Excludes related depreciation and amortization.
|--- | -----------------------------------------------

|(2) | Includes interest income of NT$649 million, NT$187 million, NT$100 million, NT$224 million and NT$452 million (US$14 million) for the years ended December 31, 2001, 2002, 2003,
2004 and 2005, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes interest expense of NT$392 million, NT$171 million, NT$43 million, NT$5 million and NT$2 million (US$0.1 million) for the years ended December 31, 2001, 2002, 2003,
2004 and 2005, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Net income per share is the same on both an undiluted and a fully diluted basis.
|--- | --------------------------------------------------------------------------------

|(5) | Each equivalent ADS represents ten of our common shares.
|--- | --------------------------------------------------------

|(6) | Dividend distributed under ROC GAAP.
|--- | ------------------------------------

Currency Translations and
Exchange Rates

In portions of this annual report, we have translated New Taiwan dollar amounts into U.S. dollars for the convenience of
readers. The rate we used for the translations was NT$32.80 = US$1.00, which was the noon buying rate in the City of New York for cable transfers of New Taiwan dollars as certified for customs purposes by the Federal Reserve Bank of New York on
December 30, 2005. This translation does not mean that New Taiwan dollars could actually be converted into U.S. dollars at that or any other rate or at all. The following table shows the noon buying rates for New Taiwan dollars expressed in New
Taiwan dollar per US$1.00.



|                        |  |            |  |       |  |       |  |              
|----------------------- |  | ---------- |  | ----- |  | ----- |  | -------------
|Year Ended December 31, |  | Average(1) |  | High  |  | Low   |  | At Period-End
|2001                    |  | 33.91      |  | 35.13 |  | 32.23 |  | 35.00        
|2002                    |  | 34.53      |  | 35.16 |  | 32.85 |  | 34.70        
|2003                    |  | 34.40      |  | 34.98 |  | 33.72 |  | 33.99        
|2004                    |  | 33.27      |  | 34.16 |  | 31.74 |  | 31.74        
|2005                    |  | 32.13      |  | 33.77 |  | 30.65 |  | 32.80        
|November                |  | 33.29      |  | 33.71 |  | 33.39 |  | 33.51        
|December                |  | 33.58      |  | 33.56 |  | 32.80 |  | 32.80        
|2006                    |  |            |  |       |  |       |  |              
|January                 |  | 32.04      |  | 32.59 |  | 31.83 |  | 31.97        
|February                |  | 32.32      |  | 32.65 |  | 31.97 |  | 32.40        
|March                   |  | 32.46      |  | 32.62 |  | 32.28 |  | 32.42        
|April                   |  | 32.29      |  | 32.54 |  | 31.90 |  | 31.90        
|May (through May 21)    |  | 31.60      |  | 31.90 |  | 31.28 |  | 31.89        

---

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



|(1) | Annual averages are calculated using the average of the exchange rates on the last day of each month during the period. Monthly averages are calculated using the average of the
daily rates during the relevant period.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of
Proceeds

Not applicable.

D. Risk
Factors

Our business and operations are subject to various risks, many of which are beyond our control. If any of the risks
described below actually occurs, our business, financial condition or results of operations could be seriously harmed.



3



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##### Table of Contents

Risks Relating to Our Company and the Taiwan Telecommunications Industry

We were privatized in August 2005, so we have a very limited history of operations as a non-state-owned enterprise. We may not enjoy the benefits of privatization
as quickly or at the level that we expect.

Before we were privatized in August 2005, our business and operations were subject to
extensive regulations under the applicable Republic of China laws, rules and regulations. As a result, we only have a very limited history of operations as a non-state-owned enterprise. We cannot assure you that we will be successful in achieving
the benefits we expect from our privatization, such as increased management flexibility in implementing measures to improve our cost structure, efficiently operate our business and expand into new businesses in a timely manner or at all. Factors
that may cause the actual benefits we may enjoy from privatization to deviate from our expectations include:



| |  |  | adverse developments in our relations with our labor union that affect our costs, including with respect to pension and other benefits, and efficient management of our workforce;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs and inefficiencies associated with replacing employees who retire or depart from our company in connection with our privatization;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased costs with respect to our plans to incentivize employees through contributions to employee child education funds, performance-based cash bonuses and company subsidized
purchases by employees of our common shares;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in regulations affecting us following our privatization; and
| | - |  | --------------------------------------------------------------------



| |  |  | the speed with which we are able to implement more efficient procurement and other management systems, and the resulting levels of cost savings.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

If we fail to maintain a good relationship with our labor union, work stoppages or labor unrest could occur and the quality of our services as well as our
reputation could suffer.

We currently have the largest labor union in Taiwan. As of March 31, 2006, substantially all of our
employees were members of our principal labor union. Since our incorporation in 1996, we have experienced disputes with our labor union on such issues as employee benefits and retirement benefits in connection with our privatization as well as the
right to protest. In particular, our labor union initiated a demonstration in August 2000 to express concerns over job security after our privatization. Furthermore, following our failure to sign the collective agreement proposed by the labor union,
the union resolved on December 5, 2004 to hold strikes anytime before our privatization. In response to our proposed privatization, the labor union held a strike on May 17, 2005. The labor union also strongly opposed our privatization and
has threatened to launch a nationwide strike or take other forms of action to hinder our privatization. In addition, one of our 15 directors has been designated by the Republic of China government as a labor union representative on our board. Any
deterioration of our relationship with our labor union could result in work stoppages or worker unrest. Any work stoppage or strike or any threat to take such an action could disrupt our business and operations, and materially and adversely affect
the quality of our services and harm our reputation. In addition, we expect the collective agreement which was entered into between us and our labor union on January 6, 2006 and commenced in effect from March 3, 2006 will result in our
having to incur higher costs in connection with the implementation of certain incentive programs, including employee skill development programs, as well as employee child education funds, company subsidized share purchases by employees, and
discretionary, performance-based cash bonuses. We cannot accurately quantify the increase in costs at this time, but we expect that it may be material.

Extensive regulation of our industry may limit our flexibility to respond to market conditions and competition, and our operations may suffer.

As a telecommunications service provider in Taiwan, we are subject to extensive regulation by and under the supervision of the Ministry of Transportation and Communications and the Directorate General of
Telecommunications of the Republic of China. We have been designated by the government as a dominant provider of fixed line and cellular services within the meaning of applicable telecommunications regulations, and as a result, we are subject to
special additional requirements imposed by the Ministry of Transportation and Communications. For example, the regulation governing setting and changing of tariffs allows non-dominant telecommunications service providers greater freedom to set and
change tariffs within the range set by the government. If we are unable to respond effectively to tariff changes by our competitors, then our competitiveness, market position and profitability will be materially and adversely affected.



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The regulatory framework within which we operate may limit our flexibility to respond to market
conditions, competition or changes in our cost structure. In particular, future decreases in tariff policies and rates could immediately and substantially decrease our revenues. In addition, we operate our businesses with approvals and licenses
granted by the government. If these approvals or licenses are revoked or suspended or are not renewed, or if we are unable to obtain any additional licenses that we may need to operate our business in the manner we desire, then our operations will
suffer.

Increasing competition resulting from the ongoing liberalization of the Taiwan telecommunications industry or from alternative means of
communication may materially and adversely affect our growth and profitability by causing us to lose customers, charge lower tariffs or spend more on marketing.

We have faced increasing competition from new entrants in the Taiwan telecommunications market in recent years. In particular, the Republic of China government enacted legislation in 1996 that sets the guidelines for
competition in the Taiwan telecommunications industry. Multiple licenses to operate fixed line, cellular, paging and other services have been issued since 1996. Since June 2001, three additional operators have begun providing fixed line services,
and since August 2001, licenses have been granted to four undersea cable operators to engage in the undersea cable leased-circuit business. In addition, the government awarded third generation cellular services concessions to five companies in
February 2002, including two new cellular operators. Since early 2004, the government has also issued four mobile virtual network operator licenses that allow operators without a spectrum allocation to provide cellular services by leasing the
network capacity and facilities from a licensed cellular service provider. Local loop unbundling of voice was completed in June 2004, and we completed negotiations on full unbundling local loop with one fixed line operation in July 2005. While we
expect competition to intensify from local loop unbundling, we believe its impact will be limited. Many of our competitors are in alliances with leading international telecommunications service providers and have access to financial and other
resources or technologies that may not be available to us. Further, as the government continues to liberalize the telecommunications market, such as through the issuance of new licenses or establishment of additional networks, our market position
and competitiveness could be adversely affected.

Focus of competition among mobile service providers in Taiwan has gradually shifted from
2G to 3G as some mobile service providers currently offering 2G services, including our company, began offering 3G services in 2005 and one new 3G service provider also entered the market in that year.

We may also be subject to competition from providers of new telecommunications services as a result of technological development and the convergence of
various telecommunications services. In particular, as a result of technological innovations and other factors, we have been facing competition from alternative means of communication, including voice over Internet protocol, high-speed cable
Internet service, cable telephony, e-mail and wireless services. Providers of these products and services include cable television companies, direct broadcast satellite companies and digital subscriber line resellers.

Increasing competition may also cause the rate of our customer growth to reverse or decline, bring about further decreases in tariff rates and
necessitate increases in our selling and promotional expenses. Any of these developments could materially and adversely affect our business growth and profitability.

Changes in technology may render our current technologies obsolete or require us to obtain licenses for introducing new services or make substantial capital investments, financing for which may not be available
to us on favorable commercial terms.

The Taiwan telecommunications industry has been characterized by rapid increases in the
diversity and sophistication of the technologies and services offered. As a result, we expect that we will need to constantly upgrade our telecommunications technologies and services in order to respond to competitive industry conditions and
customer requirements. Developments of new technologies have rendered some less advanced technologies unpopular or obsolete. For example, our paging services have declined significantly since the introduction of the mobile services. As a result, we
recognized an impairment charge of NT$343 million (US$10.5 million) in 2005. If we fail to develop, or to obtain timely access to, new technologies and equipment, or if we fail to obtain the necessary licenses to provide services using these new
technologies, then we may lose our customers and market share and become less profitable. For example, we recently began offering multimedia on demand services on a limited basis. Although we were not, and are not, in compliance with some applicable
ownership restrictions under the Cable Radio and Television Law of the Republic of China, we were nevertheless granted a cable operator license by the Government Information Office. However, we cannot assure you that fines will not be imposed and
our cable operator license will not be revoked. Moreover, our plans to introduce voice over Internet protocol telephone services have also been delayed because the applicable regulatory authority has not issued the requisite approvals to any
operator.



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In addition, the cost of implementing new technologies, upgrading our networks or expanding capacity
could be significant. In particular, we have made and will continue to make substantial capital expenditures in the near future in order for us to effectively respond to technological changes, such as the introduction of a third-generation cellular
telecommunications platform. We will also need to make additional capital expenditures relating to the launch of new businesses, including multimedia on demand, asymmetrical digital subscriber line services, fiber-to-the-building services and voice
over Internet protocol services, and the implementation of a network modernization program, including the planned migration of our fixed line networks to Internet protocol next generation networks. To the extent these expenditures exceed our cash
resources, we will be required to seek additional debt or equity financing. Our ability to obtain additional financing on favorable commercial terms will depend on a number of factors. These factors include our financial condition, results of
operations and cash flows, prevailing economic conditions in Taiwan and the prevailing market conditions in the Taiwan telecommunications industry, the cost of financing and conditions in the financial markets, and the issuance of relevant
government and other regulatory approvals. The failure to obtain funding for our capital expenditures on commercially acceptable terms and on a timely basis, or at all, could jeopardize our expansion plans and materially and adversely affect our
business, competitive position and prospects.

We may not realize the benefits we expect from our investments, which may materially and adversely
affect our business, financial condition, results of operations and prospects.

We have made significant capital investments in our
network infrastructure and information technology systems to provide the services we offer. In 2005, we had capital expenditures in relation to our network infrastructure and information technology systems of NT$22.9 billion. Of this amount, we had
capital expenditures of NT$5.2 billion in our fixed line services, NT$4.4 billion in our cellular services, NT$12.7 billion in our Internet and data services and NT$0.6 billion in other areas. In order to continue to develop our business and offer
new and more sophisticated services, we intend to continue to invest in these areas as well as new technologies. The launch of new and commercially viable products and services is important to the success of our business. We expect to incur
substantial capital expenditures to further develop our range of services and products. Commercial acceptance by consumers of new and more sophisticated services we offer may not occur at the rate or level expected, and we may not be able to
successfully adapt these services to effectively and economically meet customers demand, thus impairing our expected return from our investments.

We cannot assure you that services enabled by new technologies we implement, such as third generation cellular technology, will be accepted by the public to the extent required to generate an acceptable rate of
return. In addition, we face the risk of unforeseen complications in the deployment of these new services and technologies, and we cannot assure you that our estimate of the necessary capital expenditure to offer such services will not be exceeded.

New services and technologies may not be developed and/or deployed according to expected schedules or may not achieve commercial
acceptance or be cost effective. The failure of any of our services to achieve commercial acceptance could result in additional capital expenditures or a reduction in profitability to the extent that we are required under the applicable accounting
standards to recognize a charge for the impairment of assets. Any such charge could materially and adversely affect our financial condition and results of operations.

We may also from time to time make equity investments in companies, but we cannot assure you of their profitability. For example, Chunghwa Investment Co., Ltd, a company in which we hold a 49% interest and which we
account for using the equity method, suffered losses in 2004. As a result, the carrying value of Chunghwa Investment in our financial statements was reduced from NT$987 million in 2003 to NT$930 million in 2004. These losses were partially
attributable to the write-off of certain short-term investments in the amount of NT$80 million that were not authorized by Chunghwa Investment, but were made by the then chairman of Chunghwa Investment, Mr. Jing-Biao Hu, who was removed from
office on December 31, 2004. In addition, another of our investments, the Taipei Financial Center Corporation, in which we hold an 11.8% interest and which we account for using the cost method, has only recently commenced commercial operations
after completion of construction in December 2004 of Taipei 101, which it owns and which is the tallest building in Taiwan. In 2005, we recognized a loss of NT$740 million (US$22.6 million) in relation to this investment. We cannot assure you that
any unprofitable equity investments will not materially or adversely affect our results of operations or financial condition.

Our ability to deliver
services may be interrupted due to a systems failure or shutdown in our networks.

Our services are currently carried through our
fixed line and cellular telecommunications networks, as well as through our transmission networks comprised of optical fiber cable, microwave, submarine cable and satellite transmission links. Our networks may be vulnerable to damage or
interruptions in operations due to adverse weather conditions, earthquakes, fires, power loss, telecommunications failures, software flaws, transmission cable cuts or similar events. Any



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failure of our networks, servers, or any link in the delivery chain that results in an interruption in our operations or
an interruption in the provision of any of our services, whether from operational disruption, natural disaster, military or terrorist activity, or otherwise, could damage our ability to attract and retain subscribers and materially and adversely
affect our financial condition, results of operations and prospects.

If new technologies adopted by us do not perform as expected, or if we are
unable to effectively deliver new services based on these technologies in a commercially viable manner, our revenue growth and profitability will decline.

We are pursuing a number of new growth opportunities in the broader telecommunications industry, including wireless data services, multimedia on-demand services and voice over Internet protocol services. These
opportunities involve new services for which there are no proven markets. Our ability to deploy and deliver these services will depend, in many instances, on new and unproven technologies. These new technologies, such as third generation cellular
telecommunications technologies, may not perform as expected or generate an acceptable rate of return. In addition, we may not be able to successfully develop new technologies to effectively and economically deliver these services, or be able to
compete successfully in the delivery of telecommunications services based on new technologies. Furthermore, the success of our wireless data services is substantially dependent on the availability of wireless data applications and devices that are
being developed by third-party developers. These applications or devices may not be sufficiently developed to support the deployment of our wireless data services. If we are unable to deliver commercially viable services based on the new
technologies that we adopt, then our revenue growth and profitability, as well as our financial condition and results of operations, will be materially and adversely affected.

We depend on select personnel and could be affected by the loss of their services.

We depend
on the continued service of our executive officers and skilled technical and other personnel. Our business could suffer if we lose the services of any of these personnel and cannot adequately replace them. In particular, we are not insured against
the loss of any of our personnel. Moreover, we may be required to increase substantially the number of these employees in connection with any expansion, and there is intense competition for experienced personnel in the Taiwan telecommunications
industry. We may not be able to either retain our present personnel or attract additional qualified personnel as and when needed. In addition, we may need to increase employee compensation levels in order to attract and retain personnel. We cannot
assure you that the loss of the services of any of these personnel would not disrupt our business and operations, and materially and adversely affect the quality of our services and harm our reputation.

Our largest shareholder may take actions that conflict with our public shareholders best interests.

As of April 26, 2006, the most recent practicable date, the Republic of China government, through the Ministry of Transportation and Communications,
owned approximately 41.37% of our outstanding common shares. Accordingly, the government, through its control over our board, may continue to have the ability to control our business, including matters relating to:



| |  |  | any sale of all or substantially all of our assets;
| | - |  | ---------------------------------------------------



| |  |  | the approval of our annual operation and projects budget;
| | - |  | ---------------------------------------------------------



| |  |  | the composition of our senior management;
| | - |  | -----------------------------------------



| |  |  | the timing and distribution of dividends; and
| | - |  | ---------------------------------------------



| |  |  | the election of a majority of our directors and supervisors.
| | - |  | ------------------------------------------------------------

In addition, pursuant to the Republic of China Telecommunications Act and our articles of incorporation, our board of directors approved the issuance of two preferred shares on March 28, 2006. The Ministry of Transportation and
Communications, as the holder of these preferred shares, has the rights to veto any change in our name or our business and any transfer of the whole or the main part of our business or property and to act as a director and supervisor. These
preferred shares are non-transferable and will be redeemed by us three years after the date of their issuance at their par value.



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The value of your investment may be reduced by future sales of our ADSs or common shares by us, by the Republic of
China government or by other shareholders.

The government may continue to sell our common shares following our privatization. Sales
of substantial amounts of ADSs or common shares by the government or any other shareholder in the public market, or the perception that future sales may occur, could depress the prevailing market price of our ADSs and common shares.

Actual or perceived health risks related to cellular handsets and base stations could lead to decreased cellular telephone usage and difficulties in increasing
network coverage and could expose us to potential liability.

According to some published reports, the electromagnetic signals from
cellular handsets and cellular base stations may pose health risks or interfere with the operation of electronic equipment. Although the findings of those reports are disputed, actual or perceived risks of using cellular telecommunications devices
or of base stations could have a material adverse effect on cellular service providers, including us. For example, our customer base could be reduced, our customers may reduce their usage of our cellular services or we could encounter difficulties
in obtaining sites for additional cellular base stations required to expand our network coverage. As a result, our cellular business may generate less revenue and our financial condition and results of operations may be materially and adversely
affected. In addition, we could be exposed to potential liability for any health problems caused by cellular handsets and base stations.

The market
value of your investment may fluctuate due to financial results released in the Republic of China that are prepared on a basis that is different from generally accepted accounting principles in the United States

Our ongoing financial reporting with the U.S. Securities and Exchange Commission, or SEC, are currently under US GAAP and we plan to begin the
preparation of our financial reporting with the SEC under generally accepted accounting principles in the Republic of China, or ROC GAAP, with reconciliation to US GAAP in accordance with the requirements of the SEC in 2008. Before we were
privatized, under laws and regulations applicable to state-owned enterprises, our financial statements prepared for reporting purposes in the Republic of China were subject to government review and audit, and the government had required adjustments
to be made to our internally prepared and audited financial statements prior to approving our official government audited financial statements. These adjustments had affected our reported revenues, expenses, income before tax and income available
for distribution of dividends. However, these adjustments had not had any material impact on our financial statements presented in this annual report. The financial statements presented in this annual report were not subject to adjustment under the
government review and audit process. Our reported financial condition and results of operations under US GAAP and under other accounting principles and standards may differ significantly. The price of our common shares trading on the Taiwan
Stock Exchange may be based on, among other things, our financial statements prepared for ongoing reporting purposes in the Republic of China, and this in turn may affect the market price of our ADSs.

We may be sanctioned or lose our licenses for violations of limits on foreign ownership of our common shares and these limits may materially and adversely affect
our ability to obtain financing.

The laws of the Republic of China limit foreign ownership of our common shares. Currently, the
Ministry of Transportation and Communications limits direct and indirect foreign ownership of our common shares to 40%. If we fail to comply with the applicable foreign ownership limitations, our licenses to operate some of our businesses could be
revoked. In addition, the Cable Radio and Television Law, under which we operate our multimedia on demand business, provides that direct foreign ownership in a cable operator may not exceed 20% of the total outstanding shares, and that the combined
direct and indirect foreign ownership in a cable operator may not exceed 60% of the total outstanding shares. We were granted a license under this law, even though we were not, and are not, in compliance with this and other ownership restrictions.
Since we are unable to control ownership of our common shares or ADSs representing our common shares, and because we have no ability to stop transfers among shareholders, to force particular shareholders to sell their shares, or otherwise remedy a
breach of these foreign ownership limits, we may lose our licenses through no fault of our own and we do not have any effective means to protect our business from this risk. These limitations may also materially and adversely affect our ability to
obtain adequate financing to fund our future capital requirements or to obtain strategic partners, and alternate forms of financing may not be available on terms favorable to us or at all.

We are subject to litigation that could expose us to substantial liabilities.

We are from time to time involved in litigation, arbitration or administrative proceedings in the ordinary course of our business. See Item 4. Information on the Company  B. Business OverviewLegal
Proceedings. We cannot predict the outcome of these proceedings, and we cannot assure you that if a judgment is rendered against us in any or all of these proceedings, our financial condition and results of operations would not be materially
and adversely affected.



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Investor confidence in us may be adversely impacted if we or our independent registered public accountants are
unable to attest to the effectiveness of our internal control over financial reporting as of December 31, 2006 as required by Section 404 of the Sarbanes-Oxley Act of 2002.

We are subject to the reporting requirements of the SEC. The SEC, as directed by Section 404 of the U.S. Sarbanes-Oxley Act of 2002, adopted rules
requiring U.S. public companies to include a report of management on our internal control over financial reporting in its Annual Report on Form 20-F, as the case may be, that contains an assessment by management of the effectiveness of the
companys internal control over financial reporting. In addition, the companys independent registered public accountants must attest to and report on the design and operating effectiveness of and managements assessment of the
effectiveness of the companys internal control over financial reporting. These requirements will first apply to our Annual Report on Form 20-F for the fiscal year ending on December 31, 2006.

We cannot assure you that our management will be able to conclude that our internal control over financial reporting is effective when the requirements
of Section 404 become applicable to us. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may still conclude that our internal control
is not effective due to any inability to fully remedy the material weaknesses already reported to our audit committee by our independent registered public accounting firm or additional material weaknesses that may be identified during the
Section 404 audit process or other reasons. Furthermore, during the course of the evaluation, documentation and attestation, we may identify weaknesses and deficiencies that we may not be able to remedy in time to meet the deadline imposed by
the Sarbanes-Oxley Act for compliance with the requirements of Section 404. If we fail to achieve and maintain effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act, we could suffer a loss of investor
confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of our ADSs, result in lawsuits being filed against us by our shareholders or otherwise harm our reputation. Furthermore, we have
incurred and anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

Implementation of the Alternative Minimum Tax may affect our effective tax rate.

According to the recently implemented Alternative Minimum Tax, or the AMT, Act effective from January 1, 2006, a company will be subject to a 10% AMT
if its alternative minimum taxable annual income exceeds NT$2 million, and an individual will be subject to a 20% AMT if his or her annual 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 items that are exempted under relevant tax regulations, such as the Statute for the Establishment and Administration of the Science-Based Industrial Park (now known as the Hsinchu
Science Park), or SEASIP, and the Statute for Upgrading Industries, or SUI, will now be subject to the new AMT system and added back into the calculation of business taxpayers aggregate incomes. We will pay AMT if our tax payable
under this revised calculation at the AMT rate of 10% exceeds the tax which would otherwise have been payable under the ordinary taxable income calculation and the ordinary corporate tax rate of 25%. The AMT Act also provides that businesses already
qualified for five-year tax holidays before December 31, 2005 may continue to enjoy tax incentives and not be subject to AMT, so long as the construction of their investment projects breaks ground within one year and is completed within three
years of the implementation of the AMT Act.

Risks Relating to the Republic of China

Any further economic downturn or decline in the growth of the population in Taiwan may materially and adversely affect our financial condition, results of operations and prospects.

We conduct most of our operations and generate most of our revenues in Taiwan. As a result, any decline in the Taiwan economy or a decline in the growth
of the population in Taiwan may materially and adversely affect our financial condition, results of operations and prospects. In recent years, the banking and financial sectors in Taiwan have been seriously harmed by the general economic downturn in
Taiwan and the rest of Asia, which has resulted in a depressed property market and an increase in the number of companies filing for corporate reorganization and bankruptcy protection. Although economic conditions in Taiwan improved since 2003, the
global slowdown in technology expenditures has also from time to time adversely affected the Taiwan economy, which is highly dependent on the technology industry. We cannot assure you that economic conditions in Taiwan will continue to improve in
the future or that our business and operations will not be materially and adversely affected by a deterioration in the Taiwan economy.



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Any future outbreak of contagious diseases may materially and adversely affect our business and operations, as well
as our financial condition and results of operations.

Any future outbreak of contagious diseases, such as severe acute respiratory
syndrome or avian influenza, may disrupt our ability to adequately staff our business and may generally disrupt our operations. If any of our employees is suspected of having contracted any contagious disease, we may under certain circumstances be
required to quarantine such employees and the affected areas of our premises. As a result, we may have to temporarily suspend part or all of our operations. Furthermore, any future outbreak may restrict the level of economic activity in affected
regions, including Taiwan, which may adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak of contagious diseases would not have a material adverse effect on our financial condition and results of
operations.

We face substantial political risks associated with doing business in Taiwan, particularly due to the tense relationship between the
Republic of China and the Peoples Republic of China that could negatively affect the value of your investment.

Our principal
executive offices and substantially all of our assets are located in Taiwan, and substantially all of our revenues are derived from our operations in Taiwan. Accordingly, our business, financial condition and results of operations and the market
price of our common shares and the ADSs may be affected by changes in Republic of China governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments in or affecting Taiwan which are
outside of our control. Taiwan has a unique international political status. Since 1949, Taiwan and the Chinese mainland have been separately governed. The Peoples Republic of China, or PRC, claims that it is the sole government in China and
that Taiwan is part of China. Although significant economic and cultural relations have been established during recent years between the Republic of China and the PRC, relations have often been strained. The PRC government has refused to renounce
the use of military force to gain control over Taiwan. Furthermore, the PRC government passed an Anti-Secession Law in March 2005, which authorizes non-peaceful means and other necessary measures should Taiwan move to gain independence from the PRC.
In February 2006, the president of Taiwan ceased activities of the countrys National Unification Council, a committee established to assist Taiwan in its efforts to reunite with the PRC. Such cease is commonly viewed as having a detrimental
effect to reunification efforts between the two countries. Past developments in relations between the Republic of China and the PRC have on occasion depressed the market prices of the securities of companies in the Republic of China. Relations
between the Republic of China and the PRC and other factors affecting military, political or economic conditions in Taiwan could materially and adversely affect our financial condition and results of operations, as well as the market price and the
liquidity of our securities.

Taiwan is susceptible to severe earthquakes and typhoons that could severely disrupt the normal operation of our
business and adversely affect our earnings.

All of our properties are located in Taiwan, which is susceptible to earthquakes and
typhoons. On September 21, 1999, the central part of Taiwan experienced a severe earthquake that caused significant property damage and loss of life. This earthquake damaged our network facilities and adversely affected our operations. In
particular, we suffered property losses totaling approximately NT$1 billion. Since that time, other parts of Taiwan have also experienced earthquakes that damaged or disrupted the businesses of many other companies. In addition, parts of our network
were damaged, and our operations were disrupted, by two typhoons in 2001. As a result of these typhoons, we suffered property losses totaling approximately NT$200 million. We do not carry any insurance to cover damages caused by earthquakes or
typhoons, or to cover any resulting business interruption. In the event of a major earthquake, typhoon or other natural disaster in Taiwan, our business could be severely disrupted and our business and results of operations could be materially and
adversely affected.

Shareholders may have more difficulty protecting their interests under the laws of the Republic of China than they would under
the laws of the United States.

Our corporate affairs are governed by our Articles of Incorporation, the Telecommunications Act, the
Statute of Chunghwa Telecom Co., Ltd., and by the laws governing corporations incorporated in the Republic of China. The rights of shareholders and the responsibilities of management and the members of the board of directors of Taiwan companies are
different from those applicable to a corporation incorporated in the United States. For example, controlling or major shareholders of Taiwan companies do not owe fiduciary duties to minority shareholders. In addition, before we were privatized, our
corporate affairs are governed by laws and regulations not generally applicable to other Taiwan companies. Therefore, holders of our common shares and ADSs may have more difficulty in protecting their interests in connection with actions taken by
our management or members of our board of directors than they would as public shareholders of a United States corporation.



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The market value of your investment may fluctuate due to the volatility of, and government intervention in, the
Taiwan securities market.

Our common shares are traded on the Taiwan Stock Exchange, which has a smaller market capitalization and
is more volatile than the securities markets in the United States and many European countries. The market value of our ADSs may fluctuate in response to the fluctuation of the trading price of our common shares on the Taiwan Stock Exchange. The
Taiwan Stock Exchange has experienced substantial fluctuations in the prices and trading volumes of listed securities and there are currently limits on the range of daily price movements. In recent years, the Taiwan Stock Exchange Index reached a
peak of 10,202.2 in February 2000 and subsequently fell to a low of 3,446.3 in October 2001. During 2005, the Taiwan Stock Exchange Index peaked at 6,575.53 on December 29, 2005, and reached a low of 5,632.97 on October 28, 2005. On
April 28, 2006, the Taiwan Stock Exchange Index closed at 7,171.77. The Taiwan Stock Exchange has experienced certain problems, including market manipulation, insider trading and payment defaults. The recurrence of these or similar problems
could have a material adverse effect on the market price and liquidity of the securities of Taiwan companies, including our ADSs and common shares, in both the domestic and the international markets.

In response to declines and volatility in the securities markets in Taiwan, the Republic of China government formed the National Financial Stabilization
Fund to support these markets through open market purchases of shares in Taiwan companies from time to time. The details of the transactions of the National Financial Stabilization Fund have not been made public. In addition, the governments
Labor Insurance Fund and other funds associated with the government have in the past purchased, and may from time to time purchase, shares of Taiwan companies listed on the Taiwan Stock Exchange or other markets. As a result of these activities, the
market price of common shares of Taiwan companies may have been and may currently be higher than the prices that would otherwise prevail in the open market. Market intervention by government entities, or the perception that such activity is taking
place, may take place or has ceased, may cause sudden movements in the market prices of the securities of Taiwan companies, which may affect the market price and liquidity of our common shares and ADSs.

Risks Relating to Ownership of Our ADSs

Restrictions on the
ability to deposit our common shares into our ADS program may adversely affect the liquidity and price of the ADSs.

The ability to
deposit shares into our ADS program is restricted by Republic of China law, under which no person or entity, including you and us, may deposit our common shares into our ADS program without specific approval of the Securities and Futures Bureau,
except for the deposit of the common shares into our ADS program and for the issuance of additional ADSs in connection with:



| |  |  | distribution of share dividends or free distribution of our common shares;
| | - |  | --------------------------------------------------------------------------



| |  |  | exercise of preemptive rights of ADS holders applicable to the common shares evidenced by our ADSs in the event of capital increases for cash; or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | purchases of our common shares in the domestic market in Taiwan by the investor directly or through the depositary and delivery of such shares or delivery of our common shares held
by such investors to the custodian for deposit into our ADS program, subject to the following conditions: (a) the depositary may accept deposit of those shares and issue the corresponding number of ADSs with regard to such deposits only if the
total number of ADSs outstanding after the deposit does not exceed the number of ADSs previously approved by the Securities and Futures Bureau, plus any ADSs issued pursuant to the events described above; and (b) this deposit may only be made
to the extent previously issued ADSs have been cancelled.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of the limited ability to deposit common shares into
our ADS program, the prevailing market price of our ADSs on the New York Stock Exchange may differ from the prevailing market price of the equivalent number of our common shares on the Taiwan Stock Exchange.

You will be more restricted in your ability to exercise voting rights than the holders of our common shares, which may diminish your influence over our corporate
affairs and may reduce the value of your ADSs.

Holders of American depositary receipts evidencing our ADSs may exercise voting
rights with respect to the common shares represented by these ADSs only in accordance with the provisions of our deposit agreement. The deposit



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agreement provides that, upon receipt of notice of any meeting of holders of our common shares, the depositary bank will,
as soon as practicable thereafter if requested by us in writing, mail to ADS holders the notice of the meeting sent by us, voting instruction forms and a statement as to the manner in which instructions may be given by the holders.

ADS holders will not generally be able to exercise voting rights attaching to the deposited securities on an individual basis. Under the deposit
agreement, the voting rights attaching to the deposited securities must be exercised as to all matters subject to a vote of shareholders collectively in the same manner, except in the case of an election of directors and supervisors. The election of
our directors and supervisors is by means of cumulative voting. In the event the depositary does not receive voting instructions from ADS holders in accordance with the deposit agreement, our chairman or his or her designee will be entitled to vote
the common shares represented by the ADSs in the manner he or she deems appropriate at his or her discretion, which may not be in your interest.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement, the depositary will not offer you those rights unless the distribution to ADS holders of both the
rights and any related securities are either registered under the U.S. Securities Act of 1933, as amended, or the Securities Act, or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with
respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be
unable to participate in our rights offerings and may experience dilution in your holdings.

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

Changes in exchange controls that restrict your ability to convert proceeds received from your ownership of ADSs may have an adverse effect on the value of your
investment.

Your ability to convert proceeds received from your ownership of ADSs depends on existing and future exchange control
regulations of the Republic of China. Under the current laws of the Republic of China, an ADS holder or the depositary, without obtaining further approvals from the Central Bank of China or any other governmental authority or agency of the Republic
of China, may convert NT dollars into other currencies, including U.S. dollars, in respect of:



| |  |  | the proceeds of the sale of common shares represented by ADSs or received as share dividends with respect to the common shares and deposited into the depositary receipt facility;
and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any cash dividends or distributions received from the common shares represented by ADSs.
| | - |  | ----------------------------------------------------------------------------------------

In addition, the depositary may also convert into NT dollars incoming payments for purchases of common shares for deposit in the depositary receipt facility against the creation of additional ADSs. If you withdraw the
common shares underlying your ADSs and become a holder of our common shares, you may convert into NT dollars subscription payments for rights offerings. The depositary may be required to obtain foreign exchange approval from the Central Bank of
China on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights of new common shares. Although it is expected that the Central Bank of China will grant approval as a
routine matter, required approvals may not be obtained in a timely manner, or at all.

Under the Republic of China Foreign Exchange Control
Law, the Executive Yuan of the Republic of China may, without prior notice but subject to subsequent legislative approval rendered within ten days from such imposition, impose foreign exchange controls or other restrictions in the event of, among
other things, a material change in domestic or international economic conditions which might threaten the stability of the domestic economy in Taiwan.

You are required to register with the Taiwan Stock Exchange and appoint several local agents in Taiwan if you withdraw common shares from our ADS facility and become our shareholder, which may make your ownership burdensome.

If you are a non-Republic of China person and wish to withdraw common shares represented by your ADSs from our ADS facility and
hold those common shares, you are required under the current laws and regulations of the Republic of China to appoint an agent, also referred to as a tax guarantor, in the Republic of China for filing tax returns and making tax



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payment. A tax guarantor must meet certain qualifications set by the Ministry of Finance of the Republic of China and,
upon appointment, becomes a guarantor of your Republic of China tax obligations. If you wish to repatriate profits derived from the sale of withdrawn common shares or cash dividends or interest on funds derived from the withdrawn common shares, you
will be required to submit evidence of your appointment of a tax guarantor and the approval of the appointment by the Republic of China tax authorities. You may not be able to appoint and obtain approval for a tax guarantor in a timely manner.

In addition, under the current laws of the Republic of China, you will be required to be registered as a foreign investor with the Taiwan
Stock Exchange for making investments in the Republic of China securities market prior to your withdrawal and holding of common shares represented by the ADSs. You 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 a bank account to remit funds, exercise shareholders rights and perform other functions as holders of ADSs may designate. You must also appoint a local bank to act as
custodian for handling confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting and declaration of information. Without the relevant registration and appointment of the local agent and custodian and the
opening of the trading account and bank account, you will not be able to hold, subsequently sell or otherwise transfer our common shares withdrawn from the ADSs facilities on the Taiwan Stock Exchange.

Our actual financial results in 2006 may differ materially from our announced full year guidance for 2006.

On May 1, 2006, we announced our guidance for 2006 prepared in accordance with ROC GAAP and the requirements of the Taiwan Stock Exchange. In
particular, we estimated that for the year ending December 31, 2006, our revenues will be NT$184.2 billion, income before income tax will be NT$55.7 billion, net income will be NT$44.2 billion and earnings per share will be NT$4.56. These
projections were based on a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies, including the risks factors described in this annual report. These projections were not prepared with a view
towards compliance with published guidelines of the SEC, the U.S. Public Company Accounting Oversight Board or generally accepted accounting principles and, accordingly, you should not rely on this information. In particular, projections are
forward-looking statements that are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections were based will not materialize or will vary significantly from actual results, and such
variances will likely increase over time. You should not regard the inclusion of the projections described above as a representation by us, or any other person that these projections or the assumptions underlying the projections will be achieved.

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

Our legal and commercial name is Chunghwa Telecom Co., Ltd. Our shares have been listed on the Taiwan Stock Exchange under the number 2412
since October 27, 2000 and our ADSs have been listed on the New York Stock Exchange under the symbol CHT since July 17, 2003. Our principal executive offices are located at 21-3 Hsinyi Road, Section 1, Taipei, Taiwan,
Republic of China, and our telephone number is (886) 2-2344-5488. Our website address is http://www.cht.com.tw. The information on our website does not form a part of this annual report.

We were established as a company on July 1, 1996 as a result of the separation of the business and regulatory functions of the Directorate General
of Telecommunications. We were privatized in August 2005.

We are the largest telecommunications service provider in Taiwan and one of the
largest in Asia in terms of revenues. As an integrated telecommunications service provider, our principal services include:



| |  |  | fixed line services, including local, domestic long distance and international long distance telephone services;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | wireless services, including cellular and paging services; and
| | - |  | --------------------------------------------------------------



| |  |  | Internet and data services, including HiNet, our Internet service provider, asymmetrical digital subscriber line services and leased line services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

As our traditional fixed line business has matured and new technologies have become available, we have pursued new growth opportunities in the cellular
and Internet and data services markets. We are focusing on enhancing our leading position in each of our principal lines of business, and expanding into new lines of business such as third generation cellular services. We enjoy leading positions
across a number of areas:



| |  |  | we are Taiwans largest provider of fixed line services in terms of both revenues and subscribers;
| | - |  | --------------------------------------------------------------------------------------------------



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| |  |  | we are Taiwans largest cellular service provider in terms of both revenues and subscribers, and are in the process of rolling out a third generation cellular network;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we are Taiwans largest broadband Internet access provider as well as Taiwans largest Internet service provider in terms of both revenues and subscribers; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we are also a leading player in the data communications market in Taiwan.
| | - |  | -------------------------------------------------------------------------

In 2005, our revenues were NT$184.7 billion (US$5.6 billion), our net income was NT$33.3 billion (US$1.0 billion) and our net income per share was NT$3.45 (US$0.11).

We incurred capital expenditures totaling NT$22.9 billion (US$0.7 billion) in 2005, of which, 22.5% was spent on fixed line services, 19.4% on cellular
services, 55.4% on Internet and data services and 2.7% on other items. See Item 5. Operating and Financial Review and ProspectsB. Liquidity and Capital ResourcesCapital Expenditures for a discussion of our capital
expenditures.

Competitive Strengths

We believe that we are well positioned to take advantage of growth opportunities in the telecommunications market in Taiwan as new technologies evolve. In particular, we have maintained our leading market share in cellular and Internet and
data services since the opening of the Taiwan telecommunications market to competition in June 2001. Furthermore, we have enjoyed greater flexibility in making purchasing decisions after we were privatized in August 2005. In addition, our
responsiveness to market conditions has been enhanced by the shortening in May 2002 of the approval period for primary tariff adjustments and promotional packages from 40 to 14 days.

We believe that further deregulation and market liberalization will continue to drive the growth of the overall market for telecommunications services in
Taiwan, as well as the development of new products and services. We expect to benefit from additional opportunities as the telecommunications market in Taiwan continues to grow.

We believe that our primary competitive strengths are:



| |  |  | our position as the only integrated, full-service telecommunications provider in Taiwan, and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | our capital resources and technology, which we believe we can build on to expand our leading position in the growing cellular and Internet and data services markets, including
through our continued construction of a third generation cellular network, our Internet protocol-based multimedia on demand services and our rollout of voice over Internet protocol services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are the only integrated full-service telecommunications provider in Taiwan.

We are the largest telecommunications service provider in Taiwan with a leading position in local, domestic long distance and international long distance
telephone services, wireless services and Internet and data services.

Broad range of communications products and services.We
believe that our ability to provide an attractive and comprehensive range of telecommunications services uniquely positions us to provide bundled and value-added services to our business and residential customers. In addition, we are able to offer
innovative bundled services and tariff packages to meet the specific needs of our customers.

Broad network coverage.The breadth of
our network and our ownership of the so called last mile infrastructure in Taiwan, which comprises the connection between the local telephone service providers switching centers to the end-users buildings or homes, provide us
with access to existing and potential customers and creates a platform for expanding our services. As of December 31, 2005, substantially all of our installed telephone lines are capable of delivering asymmetrical digital subscriber line
services. In addition, our cellular services network provides nationwide coverage. Our large cellular spectrum allocation together with our network of 8,413 base stations position us well for the continued expansion of our cellular services in
Taiwan.



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Brand awareness, distribution channels and customer service.Our principal brands Chunghwa
Telecom and HiNet have a reputation for quality, reliability and technology. In particular, we are the leading Internet service provider in Taiwan through HiNet. We serve our large and well-established customer base through our
extensive customer service network in Taiwan, including 27 operations offices, 312 service centers and six integrated call centers. We also offer comprehensive and high-quality point of sale and after sale services, and we provide web-based customer
services. Moreover, our extensive sales and distribution channels help us attract additional customers and develop new business opportunities. In the Readers Digest Super Brands Award 2005, we stood out and won Platinum Award of Telecom
Company in Taiwan.

Operational expertise.Our management and employees have extensive operating experience and technical knowledge,
which we believe cannot be easily replicated by competitors. We also believe we will continue to attract and retain high quality employees.

Comprehensive customer billing infrastructure.As Taiwans leading telecommunications services provider, we have extensive resources and infrastructure relating to billing services. In particular, we issue, in the aggregate,
approximately 16 million invoices, including integrated bills, every month. We intend to continue taking advantage of this unique attribute by offering bill collection services to Internet content providers and other entities that lack the
necessary resources and infrastructure for effective customer billing.

We have the capital resources and technology to enhance our leading position
in the growing cellular and Internet services markets.

Established position in growing markets.Revenues from our cellular
and Internet and data services have increased from 55.8% of revenues in 2003 to 62.3% in 2005. We expect our cellular and Internet and data services to continue to be the key drivers of our future growth. With our leading market share, we enjoy
substantial economies of scale in equipment procurement as well as the marketing of our products and services.

Strong capital
structure.We believe we have greater financial resources than other telecommunications operators in Taiwan. In particular, our relatively low debt-to-equity capital structure, together with our high levels of cash and operating cash flows,
provides us with the flexibility and resources to invest in capital intensive and growing businesses. In particular, we continue to invest in broadband Internet protocol networks, fiber-optic networks, and third generation cellular communications
networks and services.

Advanced network technology. Since January 1, 2003, we have spent in excess of NT$11.5 billion on
capital expenditures, including developing advanced networks, such as an asymmetrical digital subscriber line network, a high-speed Internet protocol backbone network and a third generation cellular services network. Our investment in network
infrastructure places us in a position to capture a significant share of Internet-related and high-speed data transmission business.

Research and development expertise.We employ over 1,172 research professionals and engineers whose principal focus is to develop advanced network services and operations support systems and to build selected core technologies. In
2005, our research and development expenses, excluding depreciation and amortization, accounted for 1.7% of our revenues. We believe our focus on research and development will allow us to efficiently develop and deploy new technologies and services
ahead of our competitors.

Business Strategy

Taiwan has one of the highest fixed line penetration rates in Asia and has also experienced rapid adoption of wireless communications and Internet services, including broadband access services. We believe that telecommunications services
will evolve over the coming years, driven by a number of technological innovations. We also believe that the convergence of communications technologies will provide a significant competitive advantage to integrated telecommunications service
providers that are able to design and construct sophisticated and scalable networks capable of serving as a common platform for a broad range of services.

Our key strategic objectives are to maintain our position as a leading integrated telecommunications services provider in Taiwan and to enhance our leadership position in growing markets, such as cellular and Internet
and data markets, including broadband access services and value-added services.



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Consistent with our strategic objectives, we have developed the following business strategies:

Focus on our core strengths while expanding our scope of services to capture new growth opportunities

Our core strengths are the management of telecommunication networks and the provision of services over these networks. We currently operate several
networks linked by a core backbone infrastructure consisting of public switched telephone, cellular, asymmetrical digital subscriber line and Internet protocol networks. Our strategy for each network differs depending on the market dynamics and
future growth prospects of services delivered over these networks. In general, we endeavor to maintain our strong market position in each of our business lines and seek to expand the scope of our business beyond network services by offering
value-added services to generate growth and new opportunities.

Fixed line: Our strategy for fixed line services is to maintain our
substantial market share of the local telephone market following deregulation of international and domestic long distance telephone services in June 2001 and local loop unbundling of voice in June 2004. We have introduced voice over Internet
protocol services and plan to launch phone-to-phone and phone-to-PC voice over Internet protocol services in the second half of 2006, subject to our obtaining the approval of the Directorate General of Telecommunications. We plan to introduce
value-added services for the local telephone market, such as personal ring back tone. We also seek to enhance customer loyalty by promoting virtual private network and information communication systems integration services targeted at our enterprise
customers. We are currently developing a detailed business plan for the migration to next-generation networks. Although our core backbone and public switched telephone network is the initial focus of this migration, we expect our entire fixed line
network to be eventually based on a fully integrated Internet protocol telephony system.

Cellular: Our strategy for our existing 2G
cellular services, which uses the global system for mobile communications standard, is to continue to expand service offerings that take advantage of our strong customer base and extensive network coverage. In particular, we will focus on increasing
our average revenue per subscriber by expanding our post-paid subscriber base and increasing take-up of wireless value-added services, such as our emome mobile Internet service, Java games, ring back tone services and video streaming.
Furthermore, we launched our third generation cellular service based on a wideband code division multiple access technology on July 26, 2005. Our strategy with respect to our third generation cellular service includes the following initiatives:



| |  |  | taking advantage of our ability to provide services using either the global system for mobile communications or wideband code division multiple access standards and offer seamless
service to customers with dual mode handsets, which enable our customers to enjoy the benefits of network coverage while retaining their global system for mobile communications cellular phone number. In order to meet the demand from our customers
for high-speed wireless data access, we adopted high-speed downlink packet access technology and continued developing third-generation cellular technology;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | encouraging our high-end customers, who are more likely to demand wireless Internet services with higher data speed access capabilities, to use our third generation cellular
services by offering attractive service packages;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | converging fixed line and cellular services to provide customers with access to personalized information through personal computers, personal digital assistants or cellular
handsets; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | taking advantage of our superior brand and network quality to attract our competitors subscribers.
| | - |  | ---------------------------------------------------------------------------------------------------

Internet and data: Our strategy for Internet and data services is to continue to build on the success of our HiNet Internet services and
asymmetrical digital subscriber line access services. We seek to complement the Republic of China governments plan to grow the broadband subscriber base to 6 million subscribers by the end of 2007, of which we aim to capture at least an
80% share, or 4.8 million subscribers. We are the leading provider of broadband Internet access in Taiwan, with a significant market share as of December 31, 2005. We have successfully migrated many of our customers from low-speed to
higher-speed Internet access services. Approximately 59% of our broadband customers subscribe for downlink speeds of over 2 megabits per second, and the average downlink speed of our Internet subscribers, defined as the total downlink speed
subscribed divided by the total number of subscribers, increased from 0.6 Mbps as of December 31, 2002 to 2.14 Mbps as of December 31, 2005. We are developing new media to provide both higher-speed access as well as attractive content to
our customers. We are continuing our build-out of fiber-to-the-building infrastructure, and continually enhancing our Internet value-added services, such as online gaming, Internet music, Internet banking and Internet protocol video services,
including multimedia on demand and hiChannel. We are currently developing voice over Internet protocol services, including best effort and carrier class services.



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Bundled services: We believe bundled services are effective in encouraging usage and enhancing
customer loyalty. We intend to increase our offerings for bundled services. In particular, we believe we are uniquely positioned to provide our customers with fully integrated solutions across fixed line, cellular and Internet platforms. Our
Friends and Family service, which offers customers preferential rates, has attracted over 1.6 million subscribers. In addition, we provide a wide range of bundled services customized to meet the needs of our enterprise customers.

Emphasize quality of service and customer satisfaction

Quality of service is critical in attracting and retaining customers and enhancing our long-term profitability. In order to continually enhance and improve the quality of our services, we have, in addition to the
quality assurance function of our regular operating units, established a number of dedicated task forces to monitor our network performance. Our senior management sets our quality evaluation criteria and regularly reviews our performance quality.

In order to ensure that our quality of service will translate into strong customer loyalty, we plan to continue to focus on and invest in
the provision of a full range of services that emphasize customer care from the point of sale onward. In particular, we have extended the focus of our business customer services group from major accounts to include small and medium enterprises. Our
business customer service group is staffed by approximately 800 professionals and offers packaged and customized services, innovative telecommunications solutions and dedicated customer support. We have completed the integration of all of our call
centers, which can now be reached by a single calling number 123. We offer 24-hour customer service, including the handling of service and billing inquiries with the assistance of an information system. We also offer consolidated billing
for our customers who use multiple services. We began to provide an e-bill service option to our customers in August 2005. Moreover, we have put in place processes to enhance bill collection and improve the quality of our billing services. To
improve the quality of our customer services, we implemented a customer relationship management system, which encompass, among other things, a customer complaint system, a business information database for the use of our call centers, and a data
mining system to enhance our sales and market analysis efforts.

Improve operational efficiency and cost structure

We have historically been focused, and will continue to focus, on cost control, particularly in the areas of network efficiencies and personnel costs. We
expect to be able to further improve our operational efficiency and cost structure by migrating to more advanced networks and sophisticated operational support systems, and efficiently managing our workforce.

Capital expenditures: Our long-term goal is to optimize our capital expenditures by focusing on investing in innovative products and services with
attractive return profiles. We evaluate our investment opportunities by benchmarking them against internal return requirements. We are currently finalizing plans for the gradual upgrade of our entire public switched telephone network to a
next-generation network. Next-generation Internet protocol switches will have substantially more capacity and greater upgrade flexibility, and should result in savings from a reduced number of switching centers, and related property, materials and
personnel costs. We have also devoted resources toward the expansion of our third generation cellular network and the continuing build-out of our fiber-to-the-building infrastructure.

Personnel costs:We seek to improve our operational efficiency by reducing our personnel costs. For example, we offered a number of voluntary
retirement programs between June 1, 2000 and December 31, 2001, which resulted in a reduction in our workforce of 6,480 employees, or approximately 20% of our total workforce before the implementations of these voluntary retirement
programs. We also offered a number of voluntary retirement programs between July 1, 2003 and April 30, 2006 which resulted in reductions of 3,712 employees. On the other hand, we also hired more than 400 new employees after privatization.
In addition, we will further align our organizational structure by integrating our various operating units and departments on the local level. We will also continue to reallocate our personnel from traditional fixed line services to our growing
businesses and to our marketing and customer services departments, as well as exploring outsourcing opportunities where we deem appropriate.

Expand
our business through alliances and investments

We plan to expand our business in high growth areas, such as interactive multimedia
broadband services, content delivery services and value-added services, through alliances and investments. We believe that our experience, operational scale and large subscriber base make us an attractive ally for other service providers.



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Alliances. We have formed and will continue to pursue alliances with information content
providers, multimedia service platform providers and customer premises equipment providers to diversify our business operations and enhance our service offerings. As of the date of this annual report, we have collaborated with more than 400
information content providers, more than 20 customer premises equipment providers, more than 10 Internet service providers and one Internet portal operator.

Investments. We have invested in several telecom-related businesses such as Chunghwa Investment Co. Ltd., which was established in 2002 to manage our investment activities. We will concentrate on investments
that compliment our businesses. However, we will continue to focus on our core business and carefully evaluate any investment opportunity.

Maintain
focus on maximizing shareholder value

We are committed to maximizing shareholder value, and intend to maintain our high dividend
payout policy. We have historically maintained a conservative capital structure, and we were in a net cash position as of March 31, 2006. Following our privatization, we have more flexibility to implement capital management initiatives,
including possible repurchases of our outstanding common shares and increases in our leverage through debt financing. We bought back 192,000,000 shares between February 10, 2006 and April 9, 2006 and plan to cancel those shares before
August 9, 2006.

B. Business Overview

Our
Principal Lines of Business

The following table sets forth our revenues from our principal lines of business for the periods indicated.



|                            |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|--------------------------- |  | --------------------------------- |  | ----- | ---- |  | ----- | ---- | ----- | - |  | ----- |  | ----- | -
|                            |  | Year ended December 31,           | 
|                            |  | 2003                              |  |       | 2004 |  |       | 2005 |      
|                            |  | (in billions, except percentages) | 
|                            |  | NT$                               |  |       | NT$  |  |       | NT$  |      
|Fixed line:                 |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Local                       |  | 48.4                              |  | 26.5  | %    |  | 44.9  |      | 24.3  | % |  | 40.7  |  | 22.1  | %
|Domestic long distance      |  | 13.4                              |  | 7.4   |      |  | 12.0  |      | 6.4   |   |  | 11.0  |  | 5.9   |  
|International long distance |  | 15.7                              |  | 8.6   |      |  | 15.2  |      | 8.2   |   |  | 14.6  |  | 7.9   |  
|                            |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Total fixed line            |  | 77.5                              |  | 42.5  |      |  | 72.1  |      | 38.9  |   |  | 66.3  |  | 35.9  |  
|                            |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Wireless:                   |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Cellular                    |  | 66.2                              |  | 36.3  |      |  | 70.3  |      | 38.0  |   |  | 73.0  |  | 39.5  |  
|                            |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Paging                      |  | 0.6                               |  | 0.3   |      |  | 0.3   |      | 0.2   |   |  | 0.1   |  | 0.1   |  
|                            |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Total wireless              |  | 66.8                              |  | 36.6  |      |  | 70.6  |      | 38.2  |   |  | 73.1  |  | 39.6  |  
|                            |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Internet and data:          |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Internet                    |  | 25.9                              |  | 14.2  |      |  | 29.5  |      | 15.9  |   |  | 32.1  |  | 17.3  |  
|                            |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Data                        |  | 9.7                               |  | 5.3   |      |  | 9.8   |      | 5.3   |   |  | 10.1  |  | 5.5   |  
|                            |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Total Internet and data     |  | 35.6                              |  | 19.5  |      |  | 39.3  |      | 21.2  |   |  | 42.2  |  | 22.8  |  
|                            |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Other                       |  | 2.6                               |  | 1.4   |      |  | 3.2   |      | 1.7   |   |  | 3.1   |  | 1.7   |  
|                            |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  
|Total revenues              |  | 182.5                             |  | 100.0 | %    |  | 185.2 |      | 100.0 | % |  | 184.7 |  | 100.0 | %
|                            |  |                                   |  |       |      |  |       |      |       |   |  |       |  |       |  

Fixed Line

The provision of fixed line services is one of our principal business activities. We are the largest provider of local, domestic long distance and international long distance telephone services in Taiwan. We also
provide interconnection with our fixed line network to other cellular and fixed line operators. Since June 2001, three new operators have begun offering fixed line services. Our revenues from fixed line services were NT$77.5 billion, or
approximately 42.5% of our revenues, in 2003, NT$72.1 billion, or approximately 38.9% of our revenues, in 2004, and NT$66.3 billion, or approximately 35.9% of our revenues, in 2005. Owing primarily to the expansion of our broadband and cellular
services, we expect that revenues from our fixed line business will continue to decline as a percentage of our total revenues.

Local Telephone

The following table sets forth our revenues from local telephone services for the periods indicated.



|                          |  |                         |  |      |  |     
|------------------------- |  | ----------------------- |  | ---- |  | ----
|                          |  | Year ended December 31,
|                          |  | 2003                    |  | 2004 |  | 2005
|                          |  | (in billions)          
|                          |  | NT$                     |  | NT$  |  | NT$ 
|Local telephone revenues: |  |                         |  |      |  |     
|Usage                     |  | 18.2                    |  | 16.3 |  | 14.6
|Subscription              |  | 17.6                    |  | 18.0 |  | 18.2
|Interconnection           |  | 3.6                     |  | 3.1  |  | 3.0 
|Pay telephone             |  | 0.6                     |  | 0.4  |  | 0.2 
|Other                     |  | 8.4                     |  | 7.1  |  | 4.7 
|                          |  |                         |  |      |  |     
|Total                     |  | 48.4                    |  | 44.9 |  | 40.7
|                          |  |                         |  |      |  |     



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We provide local telephone services to over 13.2 million subscribers in Taiwan. Our fixed line
network reaches virtually all homes and businesses in Taiwan. Revenues from local telephone services comprised approximately 26.5%, 24.3% and 22.1% of our revenues in 2003, 2004 and 2005, respectively. Approximately 75% of our local telephone
subscribers as of December 31, 2005 were residential customers, accounting for approximately 61.8% of our local telephone revenues in 2005. We are currently the leader of the local telephone service market, with an average market share of
approximately 98.4%, 97.9% and 97.4% in 2003, 2004 and 2005, respectively.

The following table sets forth information with respect to our
local telephone subscribers and penetration rates as of the dates indicated.



|                                                            |  |                                                           |   |  |        |   |  |        |  
|----------------------------------------------------------- |  | --------------------------------------------------------- | - |  | ------ | - |  | ------ | -
|                                                            |  | As of December 31,                                        |  
|                                                            |  | 2003                                                      |   |  | 2004   |   |  | 2005   |  
|                                                            |  | (in thousands, except percentages and per household data) |  
|Taiwan population(1)                                        |  | 22,605                                                    |   |  | 22,689 |   |  | 22,770 |  
|Fixed line subscribers:                                     |  |                                                           |   |  |        |   |  |        |  
|Residential                                                 |  | 9,892                                                     |   |  | 9,950  |   |  | 9,942  |  
|Business                                                    |  | 3,245                                                     |   |  | 3,292  |   |  | 3,319  |  
|                                                            |  |                                                           |   |  |        |   |  |        |  
|Total                                                       |  | 13,137                                                    |   |  | 13,242 |   |  | 13,261 |  
|                                                            |  |                                                           |   |  |        |   |  |        |  
|Growth rate (compared to the same period in the prior year) |  | 1.2                                                       | % |  | 0.8    | % |  | 0.1    | %
|Penetration rate (as a percentage of the population)        |  | 58.1                                                      | % |  | 58.4   | % |  | 58.2   | %
|Lines in service per household                              |  | 1.40                                                      |   |  | 1.39   |   |  | 1.36   |  

---

|(1) | Data from the Department of Population, Ministry of the Interior, Republic of China.
|--- | ------------------------------------------------------------------------------------

Demand for local subscriber lines has historically been driven by population growth. In each of 2003, 2004 and 2005, fixed line subscriber growth slowed compared to prior periods, primarily due to market saturation
and competition.

The following table sets forth information with respect to local telephone usage for the periods indicated.



|                                                            |  |                                   |    |  |        |    |  |        |   
|----------------------------------------------------------- |  | --------------------------------- | -- |  | ------ | -- |  | ------ | --
|                                                            |  | Year ended December 31,           |   
|                                                            |  | 2003                              |    |  | 2004   |    |  | 2005   |   
|                                                            |  | (in millions, except percentages) |   
|Minutes from local calls(1)(2)                              |  | 29,125                            |    |  | 24,548 |    |  | 21,116 |   
|Growth rate (compared to the same period in the prior year) |  | (15.0                             | )% |  | (15.7  | )% |  | (14.0  | )%

---

|(1) | Includes minutes from local calls made on pay telephones.
|--- | ---------------------------------------------------------

|(2) | Calls to our HiNet service, which are recorded as part of our Internet and data services, are not included in our local call minutes or revenues.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

Minutes from local calls have declined as non-HiNet narrowband subscribers migrate to broadband Internet services, which do not require dial-up telephone
access. This decline was also due to traffic migration to broadband and cellular services. As a result of our promotion in 2005 of lower speed asymmetrical digital subscriber line services, we have experienced that some non-HiNet dial-up customers
migrated to asymmetrical digital subscriber line service, which has also contributed to a continued decline of minutes from local calls. However, we believe the rate of migration of traffic from fixed line services to broadband and cellular services
is slowing.

We charge our local telephone service subscribers a monthly fee and a usage fee. We also charge separate fees for some
value-added services. The monthly fees for our primary tariff plans are NT$70 with a deductible on usage fees of NT$25 for residential customers and NT$295 for business customers. Our primary peak time usage fee is NT$1.6 for three minutes or NT$2.7
for ten minutes, depending on the tariff plan selected by the subscriber, and our off-peak usage fee is NT$1.0 for ten minutes. Our usage fees are the same for residential and business customers. We reduced our local tariffs in April
1997, April 2000 and January 2001.



19



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##### Table of Contents

The following table sets forth information with respect to the average local usage charge per minute for
the periods indicated.



|                                                            |  |                         |      |   |      |     |      |      |  |     |      |  
|----------------------------------------------------------- |  | ----------------------- | ---- | - | ---- | --- | ---- | ---- |  | --- | ---- | -
|                                                            |  | Year ended December 31, |     
|                                                            |  | 2003                    |      |   | 2004 |     |      | 2005 | 
|Average local telephone usage fee (per minute)              |  | NT$                     | 0.65 |   |      | NT$ | 0.68 |      |  | NT$ | 0.70 |  
|Growth rate (compared to the same period in the prior year) |  |                         | 3.2  | % |      |     | 4.6  | %    |  |     | 2.9  | %

Average per minute usage charges increased from NT$0.65 per minute in 2003 to NT$0.68 per minute
in 2004 and to NT$0.7 per minute in 2005. The increases were primarily due to a decline in demand for our discounted Internet tariff packages as a result of a migration of non-HiNet dial-up subscribers to our asymmetrical digital subscriber line
services.

Part of our competitive strategy is to offer customers innovative products and services intended to both secure customer loyalty
and enhance revenues. In particular, our value-added services are designed to increase our call revenues by increasing the number of calls our customers make and by receiving fees for usage of the value-added services. These services include call
waiting, caller identification, call forwarding, three-party calls and voicemail.

Domestic Long Distance Telephone

We provide domestic long distance telephone services in Taiwan. Revenues from domestic long distance telephone services comprised approximately 7.4%,
6.4%, and 5.9% of our revenues in 2003, 2004 and 2005, respectively. Our average market share in the domestic long distance market was 88.2%, 86.4% and 84.7% in 2003, 2004 and 2005, respectively. Residential customers accounted for approximately
62.4% of our domestic long distance revenues in 2005.

The following table sets forth information with respect to usage of our domestic
long distance telephone services for the periods indicated.



|                                                            |  |                                   |    |  |       |    |  |       |   
|----------------------------------------------------------- |  | --------------------------------- | -- |  | ----- | -- |  | ----- | --
|                                                            |  | Year ended December 31,           |   
|                                                            |  | 2003                              |    |  | 2004  |    |  | 2005  |   
|                                                            |  | (in millions, except percentages) |   
|Minutes from domestic long distance calls                   |  | 6,195                             |    |  | 5,621 |    |  | 5,131 |   
|Growth rate (compared to the same period in the prior year) |  | (9.3                              | )% |  | (9.3  | )% |  | (8.7  | )%

Minutes of use for domestic long distance calls have been declining as a result of traffic
migration to cellular services and competition from other fixed line operators. We expect the decline minutes of use for fixed line services to continue in the future because of the same reasons. However, we believe that the rate of migration to
cellular services is slowing.

The following table sets forth information with respect to the average domestic long distance usage charge
per minute for the periods indicated:



|                                                            |  |                         |      |      |     |      |      |  |     |      |  
|----------------------------------------------------------- |  | ----------------------- | ---- | ---- | --- | ---- | ---- |  | --- | ---- | -
|                                                            |  | Year ended December 31, |     
|                                                            |  | 2003                    |      | 2004 |     |      | 2005 | 
|Average domestic long distance usage charge (per minute)    |  | NT$                     | 1.63 |      | NT$ | 1.65 |      |  | NT$ | 1.65 |  
|Growth rate (compared to the same period in the prior year) |  |                         |     |      |     | 1.2  | %    |  |     | 0    | %

All domestic long distance calls, regardless of the distance between the calling parties, have the
same tariff. We changed the unit of billing from a per-minute basis to a per-second basis effective February 1, 1999. In addition, we reduced our peak hour domestic long distance rate in April 2001 from NT$0.045 per second to our current rate
of NT$0.035 per second. Our current domestic long distance rate for off peak hours is NT$0.025 per second. The rates for both peak hours and off peak hours are the same for residential and business customers. Our average domestic long distance usage
charge per minute increased 1.2% from 2003 to 2004, mainly due to a greater decrease in minutes of use during off peak hours than during peak hours. Our average domestic long distance usage charge per minute remained flat between 2004 and 2005.

We provide so-called intelligent network services over our domestic long distance network, including toll free calling,
universal number, televoting, premium rate service and virtual private networks. We also focus on offering our customers an increasing number of value-added services and flexible tariff packages.



20



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##### Table of Contents

International Long Distance Telephone

We provide international long distance telephone services in Taiwan. Revenues from international long distance telephone services comprised approximately
8.6%, 8.2% and 7.9% of our revenues in 2003, 2004 and 2005, respectively. Residential customers generated approximately 35.8% of our international long distance revenues during 2005. In addition, we provide wholesale international long distance
services to international simple resale operators who do not possess their own telephone network or infrastructure.

We believe other fixed
line operators consider the international long distance market to be their primary focus. Our average market share of the international long distance market was approximately 60.1%, 61.3% and 57.8% in 2003, 2004 and 2005, respectively. Our market
share declined in 2005 primarily because of competition and the inclusion by another operator of voice over Internet protocol interconnect minutes in its international long distance minutes. Since fixed line services have been open for competition
since 2001, we expect competition in this line of business will continue to intensify in the near future.

Our international long distance
services consist primarily of international direct dial services and our discounted Super eCall services, which we introduced in April 2000. Under Super eCall, we use voice over Internet protocol technology through international
dedicated circuits which connect to our major correspondent carriers that route calls internationally. Super eCall customers are offered rates that are approximately 30% lower than those for our international direct dial service. Calls made over
Super eCall represented approximately 11.4% and 7.2% of our total outgoing international traffic in 2004 and 2005, respectively.

We
commenced the wholesale of international long distance minutes to licensed international resale operators and other international carriers in 2001. International resale operators require a fixed line operator in Taiwan to complete their long
distance telephone services originating in Taiwan. In addition, other international carriers often find it less expensive to route international calls through Taiwan. These resale operators and carriers purchase from us large numbers of minutes at
discounted rates. Our international long distance wholesale business has grown rapidly since its introduction. In 2003, 2004 and 2005, we sold 573.2 million, 595.4 million and 781.9 million of wholesale outgoing minutes, which
represented approximately 31.0%, 32.1% and 39.0% of our total outgoing international long distance minutes, respectively. Revenues from the wholesale of international long distance minutes increased by approximately 28.9% from NT$872 million in 2004
to NT$1,124 million in 2005. As the international long distance market becomes more competitive, we believe the wholesale business will allow us to generate increases in international minutes without accelerating the decline in international long
distance rates in the more profitable retail segment.

International calls to and from our top five destinations represented approximately
60.7% our international long distance call traffic in 2005.

The following table shows the percentage of total outgoing and incoming
international long distance minutes for our top five outgoing destinations in 2005.



|                               |  |                                      |   |  |                                     |  
|------------------------------ |  | ------------------------------------ | - |  | ----------------------------------- | -
|Destination                    |  | Percentage of total outgoing minutes |   |  | Percentage of totalincoming minutes |  
|Mainland China                 |  | 32.6                                 | % |  | 33.7                                | %
|United States                  |  | 9.4                                  |   |  | 12.6                                |  
|Hong Kong                      |  | 6.8                                  |   |  | 6.2                                 |  
|Japan                          |  | 3.9                                  |   |  | 6.0                                 |  
|Philippines                    |  | 9.1                                  |   |  | 0.6                                 |  
|                               |  |                                      |   |  |                                     |  
|Total of top five destinations |  | 61.8                                 | % |  | 59.1                                | %
|                               |  |                                      |   |  |                                     |  

The following table sets forth information with respect to usage of our international long
distance services for the periods indicated.



|                                                            |  |                                                                |   |  |       |   |  |       |   
|----------------------------------------------------------- |  | -------------------------------------------------------------- | - |  | ----- | - |  | ----- | --
|                                                            |  | As of December 31,                                             |  
|                                                            |  | 2003                                                           |   |  | 2004  |   |  | 2005  |   
|                                                            |  | (in thousands, except percentages and incoming/outgoing ratio) |  
|Incoming minutes                                            |  | 1,190                                                          |   |  | 1,291 |   |  | 1,289 |   
|Growth rate (compared to the same period in the prior year) |  | 21.9                                                           | % |  | 8.5   | % |  | (0.2  | )%
|Outgoing minutes                                            |  | 1,848                                                          |   |  | 1,855 |   |  | 2,004 |   
|Growth rate (compared to the same period in the prior year) |  | 29.9                                                           | % |  | 0.4   | % |  | 8.0   | % 
|Total minutes                                               |  | 3,038                                                          |   |  | 3,146 |   |  | 3,293 |   
|Incoming/outgoing ratio                                     |  | 0.64                                                           |   |  | 0.70  |   |  | 0.64  |   



21



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##### Table of Contents

Total outgoing international long distance minutes increased slightly by 0.4% from 2003 to 2004 and by
8.0% from 2004 to 2005, primarily due to promotions and increased wholesale minutes. Our incoming call volume increased approximately 8.5% from 2003 to 2004 due to our efforts to increase sales of wholesale minutes and slightly decreased by 0.2%
from 2004 to 2005 due to increased competition resulting from lower priced calls offered by our competitors, which reduced our incoming international call volume.

Outgoing calls made by customers in Taiwan and by customers from foreign destinations using Taiwan direct service are billed in accordance with our international long distance rate schedule for the destination called.
Rates vary depending on the time of day at which a call is placed. Customers are billed on a per minute basis for Super eCall services, whereas customers are billed on a six second unit basis for international direct dial services.

The following table sets forth information with respect to the average international long distance usage charge per minute that we received for outgoing
international calls during the periods indicated:



|                                                              |  |                         |       |    |      |     |      |      |  |     |       |   
|------------------------------------------------------------- |  | ----------------------- | ----- | -- | ---- | --- | ---- | ---- |  | --- | ----- | --
|                                                              |  | Year ended December 31, |      
|                                                              |  | 2003                    |       |    | 2004 |     |      | 2005 | 
|Average international long distance usage charge (per minute) |  | NT$                     | 6.2   |    |      | NT$ | 6.1  |      |  | NT$ | 5.4   |   
|Growth rate (compared to the same period in the prior year)   |  |                         | (21.5 | )% |      |     | (1.6 | )%   |  |     | (11.5 | )%

Tariffs for international long distance calls have generally been declining worldwide and we
expect this trend to continue. We do not expect the increase in international call traffic to fully offset the decline in tariffs. In anticipation of new competition, we substantially reduced our international tariffs by an average of 37% in April
2001 to defend our business and market share. In addition, we offered our customers significant promotional packages and discounts during off-peak hours in 2003, 2004 and 2005 to maintain their loyalty. In particular, we increased the discounts
offered to our high-usage international long distance customers in each of these three years.

We pay for the use of networks of carriers
in foreign destinations for outgoing international calls and receive payments from foreign carriers for the use of our network for incoming international calls. Traditionally, these payments have been made pursuant to settlement arrangements under
the general auspices of the International Telecommunications Union. Settlement payments are generally denominated in U.S. dollars and are made on a net basis.

The following table sets forth information with respect to our gross settlement receipts and payments during the periods indicated.



|                                        |  |                         |  |      |  |     
|--------------------------------------- |  | ----------------------- |  | ---- |  | ----
|                                        |  | Year ended December 31,
|                                        |  | 2003                    |  | 2004 |  | 2005
|                                        |  | (in billions)          
|                                        |  | NT$                     |  | NT$  |  | NT$ 
|Gross international settlement receipts |  | 3.8                     |  | 3.5  |  | 3.3 
|Gross international settlement payments |  | 5.6                     |  | 5.3  |  | 3.4 

Our payments on an aggregate basis to international carriers have been more than our receipts from
these carriers, primarily because our customers outgoing minutes exceeded incoming minutes. As international settlement rates have fallen, our international settlement receipts and our international settlement payments have both declined.

In order to compete more effectively in the international long distance market, we have implemented innovative and customized discount
calling plans and marketing campaigns directed at high-usage business customers. We also continue to promote our intelligent network services, including international virtual private networks, international toll free calling and calling card
services, and our international long distance minutes wholesale business. We have introduced PC-to-phone and PC-to-PC voice over Internet protocol services and plan to launch phone-to-phone and phone-to-PC voice over Internet protocol services in
the second half of 2006, subject to our obtaining the approval of the Directorate General of Telecommunications. We plan to target specific customers for these services and offer bundled services to increase customer retention in the competitive
business environment.



22



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##### Table of Contents

Wireless Services

The provision of wireless services, comprising cellular and paging services, is one of our principal business activities. We are Taiwans largest cellular service provider in terms of both revenues and
subscribers. In 2003, we generated revenues of NT$66.8 billion, or approximately 36.6% of our revenues, from wireless services. In 2004, we generated revenues of NT$70.6 billion, or approximately 38.2% of our revenues, from wireless services. In
2005, we generated revenues of NT$73.1 billion (US$2.2 billion), or approximately 39.6% of our revenues, from wireless services.

The
following table sets forth our revenues from wireless services for the periods indicated.



|                   |  |                         |  |      |  |     
|------------------ |  | ----------------------- |  | ---- |  | ----
|                   |  | Year ended December 31,
|                   |  | 2003                    |  | 2004 |  | 2005
|                   |  | (in billions)          
|                   |  | NT$                     |  | NT$  |  | NT$ 
|Wireless revenues: |  |                         |  |      |  |     
|Cellular           |  | 66.2                    |  | 70.3 |  | 73.0
|Paging             |  | 0.6                     |  | 0.3  |  | 0.1 
|                   |  |                         |  |      |  |     
|Total wireless     |  | 66.8                    |  | 70.6 |  | 73.1
|                   |  |                         |  |      |  |     

Cellular Services

The following table sets forth our revenues from cellular services for the periods indicated.



|                   |  |                         |  |      |  |     
|------------------ |  | ----------------------- |  | ---- |  | ----
|                   |  | Year ended December 31,
|                   |  | 2003                    |  | 2004 |  | 2005
|                   |  | (in billions)          
|                   |  | NT$                     |  | NT$  |  | NT$ 
|Cellular revenues: |  |                         |  |      |  |     
|Usage(1)           |  | 57.6                    |  | 60.0 |  | 60.8
|Interconnection    |  | 5.3                     |  | 6.3  |  | 7.0 
|Mobile data        |  | 1.6                     |  | 2.3  |  | 3.2 
|Other              |  | 1.7                     |  | 1.7  |  | 2.0 
|                   |  |                         |  |      |  |     
|Total cellular     |  | 66.2                    |  | 70.3 |  | 73.0
|                   |  |                         |  |      |  |     

---

|(1) | Includes monthly fees.
|--- | ----------------------

As the market for cellular
services has continued to expand, we have experienced substantial growth in our cellular customer base. We are the largest cellular operator in Taiwan in terms of revenues and number of subscribers. We had 8.16 million cellular subscribers, for
a market share of approximately 39.6% of total cellular subscribers and approximately 35.0% of total cellular services revenues in Taiwan, as of December 31, 2005. Revenues from cellular services comprised approximately 36.3%, 38.0% and 39.5%
of our revenues in 2003, 2004 and 2005, respectively. Mobile data revenues as a percentage of total cellular revenues were 2.4%, 3.3% and 4.4% for the years ended December 31, 2003, 2004 and 2005, respectively.

We offer digital cellular service through our dual band global system for mobile communications network. We are one of three national licensed providers
of global system for mobile communications services. We have been allocated 15 MHz in the 900 MHz frequency band and 11.25 MHz in the 1800 MHz frequency band for global system for mobile communications services and general packet-switched radio
services and 15 MHz paired spectrum plus 5 MHz unpaired spectrum in the 2 GHz frequency band for third generation cellular services. This is the largest frequency spectrum allocation to any cellular operator in Taiwan. In February 2002, the Ministry
of Transportation and Communications granted third generation cellular services concessions to five companies, including us. In March 2002, we paid NT$10.2 billion to the government for our concession. We have received a third generation cellular
services license, which is valid from May 26, 2005 to December 31, 2018. On July 26, 2005, we launched our third generation cellular telephone services using wideband code division multiple access technology. We also offer the largest
international roaming network. In particular, our 2G subscribers have access to 289 networks in 158 countries through our global system for mobile communications service roaming network and 96 networks in 54 countries through our general
packet-switched radio service roaming network. In addition, our 3G service system includes 14 networks in seven counties. We discontinued offering analog cellular service through our advanced mobile phone service in December 2001, and returned the
spectrum allocation in the 800 MHz frequency band to the government. All subscribers to this service have switched to our global system for mobile communications network.



23



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##### Table of Contents

As of December 31, 2005, we had approximately 8,413 cellular base stations covering substantially
all of Taiwans population. We use these base stations to support both our global system for mobile communications network and our general packet-switched radio service network.

The following table sets forth information regarding our cellular service operations and our cellular subscriber base for the periods indicated.



|                                                                 |  |                                          |        |   |      |     |        |      |  |     |        |  
|---------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---- | --- | ------ | ---- |  | --- | ------ | -
|                                                                 |  | As of or for the year ended December 31, |       
|                                                                 |  | 2003                                     |        |   | 2004 |     |        | 2005 | 
|Taiwan population (in thousands)(1)                              |  |                                          | 22,605 |   |      |     | 22,689 |      |  |     | 22,770 |  
|Total cellular subscribers in Taiwan (in thousands)(2)           |  |                                          | 25,090 |   |      |     | 21,528 |      |  |     | 19,876 |  
|Penetration (as a percentage of the population)(3)               |  |                                          | 111.0  | % |      |     | 94.9   | %    |  |     | 87.3   | %
|Total cellular revenues in Taiwan (in billions)(3)               |  | NT$                                      | 189.5  |   |      | NT$ | 198.2  |      |  | NT$ | 205.2  |  
|Number of our cellular subscribers (in thousands)(2)(4)          |  |                                          | 8,267  |   |      |     | 8,191  |      |  |     | 8,158  |  
|Our market share by subscribers(2)(2G)                           |  |                                          | 33.0   | % |      |     | 38.0   | %    |  |     | 39.6   | %
|Our market share by revenues (2G)                                |  |                                          | 34.7   | % |      |     | 35.4   | %    |  |     | 35.0   | %
|Number of our prepaid subscribers (in thousands)                 |  |                                          | 1,417  |   |      |     | 968    |      |  |     | 603    |  
|Our prepaid subscribers as a percentage of our total subscribers |  |                                          | 17.1   | % |      |     | 11.8   | %    |  |     | 7.4    | %
|Annualized churn rate(5)                                         |  |                                          | 21.4   | % |      |     | 22.9   | %    |  |     | 16.8   | %
|Minutes of usage (in millions of minutes)                        |  |                                          |        |   |      |     |        |      |  |     |        |  
|Incoming                                                         |  |                                          | 8,641  |   |      |     | 9,352  |      |  |     | 9,720  |  
|Outgoing                                                         |  |                                          | 7,737  |   |      |     | 8,668  |      |  |     | 8,921  |  
|Average minutes of usage per cellular subscriber per month(2)(6) |  |                                          | 174    |   |      |     | 182    |      |  |     | 190    |  
|Average revenue per cellular subscriber per month(2)(7)          |  | NT$                                      | 703    |   |      | NT$ | 712    |      |  | NT$ | 744    |  

---

|(1) | Data from the Department of Population, Ministry of the Interior, Republic of China
|--- | -----------------------------------------------------------------------------------

|(2) | The number of cellular subscribers is based on the number of subscriber identification module cards. From 2004, the number of our cellular subscribers excludes prepaid subscription
accounts that are inactive for more than three months. Before 2004, we did not generally exclude inactive prepaid accounts from our subscriber base.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Data from the statistical monthly release by Ministry of Transportation and Communications, Republic of China.
|--- | --------------------------------------------------------------------------------------------------------------

|(4) | Includes general systems for mobile communication, general packet-switched radio services and advanced mobile phone services.
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(5) | Measures the rate of subscriber disconnections from cellular service, determined by dividing (a) our aggregate voluntary and involuntary deactivations (excluding deactivations
due to subscribers switching from one of our cellular services to another) during the relevant period by (b) the average number of subscribers during the period (calculated by averaging the number of subscribers at the beginning of the period
and the end of the period), and multiplying the result by the fraction where (c) the numerator is 12 and (d) the denominator is the number of months in that period.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Average minutes of usage per cellular subscriber per month is calculated by dividing the total minutes of usage during the period by the average of the number of our cellular
subscribers on the first and last days of the period and dividing the result by the number of months in the relevant period.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Average revenue per subscriber per month is calculated by dividing our aggregate cellular telecommunications services revenue during the relevant period by the average of the number
of our cellular subscribers on the first and last days of the period and dividing the result by the number of months in the relevant period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The cellular market in Taiwan has grown rapidly since the liberalization of the market in 1997. Total cellular subscribers in Taiwan reached approximately 21.5 million as of December 31, 2004, but decreased
to approximately 19.9 million as of December 31, 2005, primarily as a result of the increased attention to the closing of inactive prepaid accounts by cellular operators. Cellular penetration was approximately 87.3% on December 31,
2005, and is among the highest worldwide. We expect the number of cellular subscribers in Taiwan to decline in the short-term because of the net effect of slower subscriber growth as a result of market saturation, the decline in prepaid subscribers
as a result of the closing of inactive accounts and new regulations prohibiting multiple prepaid subscriptions. We believe that any future growth in the number of cellular subscribers will depend largely upon continuing improvements in wireless
technologies and wireless data applications and the availability of advanced cellular handsets.

We began offering prepaid card services in
October 2000. As of December 31, 2005, we had approximately 0.6 million prepaid customers representing approximately 7.4% of our total cellular subscribers. Prepaid subscribers as a percentage of total cellular subscribers has declined to
7.1% in the first quarter of 2006. Prepaid customers do not pay monthly fees but pay a higher usage charge on a per second basis. Once the prepayment has been fully utilized, a prepaid customer can make additional prepayments to continue the
services. Alternatively, the customer may convert to become a post-paid customer while retaining the same telephone number.

We offer
handset subsidies to new subscribers that agree to sign a two-year contract with us, and to existing subscribers who renew their contracts with us for a period of two years. We generally offer subsidies on handsets equipped



24



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##### Table of Contents

with more advanced data functions to promote the expansion of our general packet-switched radio services and third
generation cellular services. In December 2005, the average handset subsidy we offered was NT$2,566 per subscriber. We expect the level of our average handset subsidy to remain at a similar level for the foreseeable future, with a decrease in
subsidy for global system for mobile communications handsets generally offset by higher subsidies for third generation handsets.

Traffic
growth has also been strong, as pricing has declined and the number of post-paid subscribers have increased. We have also experienced a significant increase in the number of short messaging service messages sent by our subscribers, which has had a
positive impact on traffic volume. However, the average minutes of usage per subscriber declined in 2003 because of an increase in our prepaid customers, who tend to have lower minutes of usage, and increased usage of our short messaging services.
The average minutes of usage per subscriber rose in 2004, which is attributable to a decline in prepaid customers as a percentage of total cellular customers, primarily as a result of accelerated deletion of inactive prepaid customer accounts. The
average minutes of usage per subscriber increased in 2005 because of a decrease in the number of prepaid customers.

Our tariffs for
post-paid cellular subscribers primarily consist of usage fees and monthly fees. When our subscribers are outside Taiwan, they pay roaming charges plus international long distance charges and, where applicable, local charges in roaming destinations.
We charge a flat fee per transaction for our short messaging service and a fee per packet for our general packet-switched radio service based on the volume of data transmitted. We also offer discounts on usage fees for calls made between our
cellular subscribers to encourage subscription to our cellular service. Our 3G service also provides a monthly flat rate service to our customers using our 3G service for Internet purposes.

Our average revenue per subscriber per month increased from NT$703 in 2003 to NT$712 in 2004 primarily due to a decrease in the number of our prepaid
subscribers and, to a lesser extent, an increase in revenues from cellular value-added services. The decrease in the number of our prepaid subscribers in 2005 was primarily the result of our increased attention to closing inactive accounts. Our
average revenue per subscriber per month increased to NT$744 in 2005, primarily due to an increase in the number of postpaid subscribers and an increase in the revenues of cellular value-added services. From December 2004, the number of our cellular
subscribers excludes prepaid subscription accounts inactive for more than three months. Before 2004, we did not actively exclude inactive prepaid accounts from our subscriber base. In order to sustain the gradual increases in average revenue per
subscriber, we intend to continue introducing new value-added services in order to generate additional sources of revenue and closing inactive prepaid subscriber accounts.

In addition to our basic cellular services, we also offer a broad range of value-added telecommunications and information services. We introduced in
August 2001 a platform of integrated cellular value added services under the brand name emome. Our emome services offer a broad range of value-added services, including financial information, transaction services, emergency
services access numbers, directory information, time, weather and traffic reports. In addition, we have launched other cellular value added services, such as JAVA games, unstructured supplementary service data, mobile Internet and multimedia
messaging services. We believe these services enhance customer loyalty and satisfaction and increase cellular traffic. Revenues from mobile data services represented approximately 2.4%, 3.3% and 4.4% of our total cellular revenues in 2003, 2004 and
2005, respectively.

Paging Services

We offer nationwide and regional paging services in Taiwan. In addition to traditional paging services, we offer a broad range of wireless information services, including stock quotes on our InterMessenger service, weather
information, news and agricultural information. We had approximately 35,520 paging subscribers as of December 31, 2005.

Revenues from
paging services comprised approximately 0.3%, 0.2% and 0.1% of our revenues in 2003, 2004 and 2005, respectively. As cellular usage has increased, we have seen a sharp reduction in the number of our paging subscribers. We expect the number of our
paging subscribers to continue to decline.

Internet and Data Services

We have experienced continued growth in our Internet and data services. Our Internet and data revenues represented approximately 19.5%, 21.2% and 22.8% of our revenues in 2003, 2004 and 2005, respectively. We provide:



| |  |  | Internet services, including HiNet, our Internet service provider, asymmetrical digital subscriber line Internet access, Internet value-added services, wireless local area networks
and fiber-to-the-building services; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



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##### Table of Contents

| |  |  | Data services, including leased line services, managed data services and Internet data center services.
| | - |  | -------------------------------------------------------------------------------------------------------

The following table sets forth our revenues from Internet and data services for the periods indicated.



|                            |  |                         |  |      |  |     
|--------------------------- |  | ----------------------- |  | ---- |  | ----
|                            |  | Year ended December 31,
|                            |  | 2003                    |  | 2004 |  | 2005
|                            |  | (in billions)          
|                            |  | NT$                     |  | NT$  |  | NT$ 
|Internet and data revenues: |  |                         |  |      |  |     
|Internet                    |  | 25.9                    |  | 29.5 |  | 32.1
|Data                        |  | 9.7                     |  | 9.8  |  | 10.1
|Total Internet and data     |  | 35.6                    |  | 39.3 |  | 42.2

Internet Services

HiNet and Internet Access

The following table sets forth our revenues from Internet services for the
periods indicated.



|                                                                       |  |                         |  |      |  |     
|---------------------------------------------------------------------- |  | ----------------------- |  | ---- |  | ----
|                                                                       |  | Year ended December 31,
|                                                                       |  | 2003                    |  | 2004 |  | 2005
|                                                                       |  | (in billions)          
|                                                                       |  | NT$                     |  | NT$  |  | NT$ 
|Internet revenues:                                                     |  |                         |  |      |  |     
|Narrowband access                                                      |  | 1.4                     |  | 0.7  |  | 0.3 
|Narrowband Internet service                                            |  | 1.1                     |  | 0.7  |  | 0.5 
|Broadband access (asymmetrical digital subscriber line only)           |  | 13.3                    |  | 14.7 |  | 16.2
|Broadband Internet service (asymmetrical digital subscriber line only) |  | 7.8                     |  | 10.8 |  | 12.1
|Other Internet                                                         |  | 2.3                     |  | 2.6  |  | 3.0 
|                                                                       |  |                         |  |      |  |     
|Total Internet                                                         |  | 25.9                    |  | 29.5 |  | 32.1
|                                                                       |  |                         |  |      |  |     

We are the largest Internet service provider in Taiwan, with a market share of 56.6% as of
December 31, 2005. As of December 31, 2005, HiNet had approximately 4.1 million subscribers, and our number of subscribers increased by a 7.6% compound annual growth rate over the two years ended December 31, 2005.

The following table sets forth HiNets subscribers as of each of the dates indicated.



|                                                       |  |                                    |   |  |       |   |  |       |  
|------------------------------------------------------ |  | ---------------------------------- | - |  | ----- | - |  | ----- | -
|                                                       |  | As of December 31,                 |  
|                                                       |  | 2003                               |   |  | 2004  |   |  | 2005  |  
|                                                       |  | (in thousands, except percentages) |  
|Total Internet access subscribers in Taiwan            |  | 7,839                              |   |  | 8,036 |   |  | 7,271 |  
|HiNet subscribers                                      |  |                                    |   |  |       |   |  |       |  
|HiNet dial-up subscribers                              |  | 1,616                              |   |  | 1,376 |   |  | 1,166 |  
|HiNet asymmetrical digital subscriber line subscribers |  | 1,902                              |   |  | 2,413 |   |  | 2,909 |  
|Other access technology subscribers                    |  | 32                                 |   |  | 32    |   |  | 38    |  
|Total HiNet subscribers                                |  | 3,550                              |   |  | 3,821 |   |  | 4,113 |  
|Market share(1)                                        |  | 45.3                               | % |  | 47.5  | % |  | 56.6  | %

---

|(1) | Based on data provided by the Ministry of Transportation and Communications.
|--- | ----------------------------------------------------------------------------

We have maintained our leading market position despite a highly competitive market with over 186 Internet service providers in Taiwan. We expect the competitive conditions currently prevailing in the Internet service
provider market to continue to intensify.

Customers can access HiNet through various technologies. We provide narrowband dial-up Internet
access through connections based on standard telephone modems. We provide broadband Internet access through connections based on asymmetrical digital subscriber lines and our fiber-to-the-building technology. As of December 31, 2005,
approximately 79.6%, or 2.9 million, of subscribers who access the Internet through our asymmetrical digital subscriber lines are our HiNet subscribers, and we expect this ratio to increase as a result of recent promotions to attract dial-up
customers to upgrade to broadband Internet access.



26



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##### Table of Contents

We are the largest broadband Internet access provider in Taiwan in terms of subscribers. We began
providing our asymmetrical digital subscriber line service in August 1999, and we had approximately 3.7 million subscribers as of December 31, 2005. Our market share of Taiwans broadband market was approximately 80.6%, 83.0% and
85.3% in 2003, 2004 and 2005, respectively. Our asymmetrical digital subscriber line service allows for transmission of data at high access rates and offers high- speed broadband Internet access services. We also provide asymmetrical digital
subscriber line services to other Internet service providers that do not have their own network infrastructure.

The following table sets
forth our asymmetrical digital subscriber line service subscribers as of each of the dates indicated.



|                                                                            |  |                    |  |       |  |      
|--------------------------------------------------------------------------- |  | ------------------ |  | ----- |  | -----
|                                                                            |  | As of December 31,
|                                                                            |  | 2003               |  | 2004  |  | 2005 
|Our asymmetrical digital subscriber line service subscribers (in thousands) |  | 2,426              |  | 3,071 |  | 3,654
|Average downlink speed (Mbps)(1)                                            |  | 0.82               |  | 1.60  |  | 2.14 

---

|(1) | Average downlink speed is calculated by dividing the total downlink speed subscribed by the total number of subscribers as of the relevant date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

Our asymmetrical digital subscriber line service offers downlink speeds that range from 256 kilobits per second to 12 megabits per second and uplink
speeds that range from 64 kilobits per second to 1 megabit per second. In December 2001, we began providing symmetrical digital service with uplink and downlink speeds of 512 kilobits per second. After our promotions in 2004 to increase customer
access speeds, including our promotions for subscribers to upgrade to higher-speed access, the average uplink and downlink speeds of our subscribers have increased substantially. As of December 31, 2004, over 54% of our subscribers had
subscribed for downlink speeds of 2 megabits per second and our average downlink speed was 1.6 Mbps. As of December 31, 2005, approximately 59% of our subscribers had subscribed for downlink speeds of over 2Mbps per second and our average
downlink speed was 2.14 Mbps.

We have experienced limited competition in the asymmetrical digital subscriber line service market because
other fixed line operators and cable operators have not established a nationwide network infrastructure to provide this service.

Our
revenues from providing Internet access are generated from installation fees, monthly subscription fees and usage fees from fixed line telephone calls made to access HiNet, which are recorded as Internet services revenues rather than as fixed line
revenues. Usage fees from fixed line telephone calls made to access Internet service providers other than HiNet are recorded as local fixed line revenues.

Charges for our HiNet dial-up service include a monthly fee entitling the subscriber to a fixed number of minutes of service, with an additional charge per minute when the fixed number of minutes is exceeded.
Alternatively, we offer our subscribers an unlimited number of minutes for a fixed monthly fee. Charges for our asymmetrical digital subscriber line service include one-time installation charges and monthly subscription fees. These charges vary
based on connection speed.

The following table sets forth our average revenues per user for each of the periods indicated.



|                                                                                 |  |                         |  |      |  |     
|-------------------------------------------------------------------------------- |  | ----------------------- |  | ---- |  | ----
|                                                                                 |  | Year ended December 31,
|                                                                                 |  | 2003                    |  | 2004 |  | 2005
|                                                                                 |  | NT$                     |  | NT$  |  | NT$ 
|Average revenue per HiNet dial-up subscriber per month(1)                        |  | 116                     |  | 81   |  | 50  
|Average revenue per asymmetrical digital subscriber line subscriber per month(2) |  | 940                     |  | 863  |  | 780 

---

|(1) | Average revenue per HiNet dial-up subscriber per month is calculated by dividing the total local telephone usage revenues generated by HiNet dial-up subscribers and Internet access
revenues by the average of the number of our HiNet dial-up subscribers on the first and last days of the period and dividing the result by the number of months in the relevant period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Average revenue per asymmetrical digital subscriber line service subscriber per month is calculated as the sum of (a) asymmetrical digital subscriber line access revenues for
the relevant period divided by the average of the number of our asymmetrical digital subscriber line service subscribers on the first and last days of the period divided by the number of months in the relevant period and (b) HiNet asymmetrical
digital subscriber line Internet service provider revenue divided by the average of the number of HiNet asymmetrical digital subscriber line subscribers on the first and last days of the period divided by the number of months in the relevant period.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Our average revenues per subscriber have declined over the last three years due to increasing
competition. In addition, we were required by the Directorate General of Telecommunications to decrease our tariffs by an average of 24% in June 2004. However, we expect our average revenue per subscriber for broadband services to decline more
gradually going forward, as subscribers migrate towards more expensive, higher bandwidth digital subscriber line services.

Internet Value-added
Services

Our HiNet portal at www.hinet.netprovides value-added services to our subscribers, such as gaming, e-learning,
financial information and links to other portals. We charge fees for some of these services. We also receive commissions for transactions completed on some of these other portals. Our broadband Internet portal at www.hichannel.hinet.net
offers online entertainment services through the Internet. In particular, our HiNet asymmetrical digital subscriber line customers can access music, television programs, movies and other multi-media content on demand. We charge access fees for some
of this content. We expect the revenues generated from these value-added services to grow as a percentage of our total Internet and data services revenues. The information contained in our HiNet portal and broadband Internet portal is not a part of
this annual report. Our Internet value-added services revenues as a percentage of total Internet revenues were 5.5%, 5.8% and 6.9% in 2003, 2004 and 2005, respectively.

Wireless Local Area Network Service

We launched our wireless local area network service in May 2002.
As of December 31, 2005, we had a total of approximately 23,745 residential and business customers that lease our access points. In addition, we have established 977 hot spots in public areas, such as airports and international convention
centers, where individuals can access our wireless local area network. We expect the revenues generated from our wireless local area network services to continue to grow.

Data Services

The following table sets forth our revenues from data services for the periods
indicated.



|               |  |                         |  |      |  |     
|-------------- |  | ----------------------- |  | ---- |  | ----
|               |  | Year ended December 31,
|               |  | 2003                    |  | 2004 |  | 2005
|               |  | (in billions)          
|               |  | NT$                     |  | NT$  |  | NT$ 
|Data revenues: |  |                         |  |      |  |     
|Leased line    |  | 7.7                     |  | 7.6  |  | 7.6 
|Other          |  | 2.0                     |  | 2.2  |  | 2.5 
|               |  |                         |  |      |  |     
|Total data     |  | 9.7                     |  | 9.8  |  | 10.1
|               |  |                         |  |      |  |     

Leased Line Services

We are the leading provider of domestic leased line services in Taiwan. We are also a leading provider of overseas leased line services. Leased line services involve offering exclusive lines that allow point-to-point
connection for voice and data traffic. Leased lines are used by business customers to assemble their own private networks and by telecommunications service providers to establish networks to offer telecommunications services.

We provide data transmission services to major business customers in Taiwan. We also provide leased lines to other cellular and fixed line service
operators for interconnection with our fixed line network and for connection within their networks. Since August 2001, licenses have been awarded to four undersea cable operators to engage in leased line services. Demand for high-speed data
transmission services has been growing rapidly, as a result of growing consumer demand and lower tariffs due to increased competition. In particular, the total bandwidth of our lines leased increased by 12.3% over the two years ended
December 31, 2005.



28



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##### Table of Contents

The following table shows the bandwidth of lines leased to third parties as of each of the dates
indicated.



|                |  |                          |  |       |  |      
|--------------- |  | ------------------------ |  | ----- |  | -----
|                |  | As of December 31,      
|                |  | 2003                     |  | 2004  |  | 2005 
|                |  | (in gigabits per second)
|Total bandwidth |  | 393.4                    |  | 501.7 |  | 495.8

Rental fees for local leased lines are generally based on transmission speed while domestic long
distance and international long distance leased line rental fees are generally based on transmission speed and distance.

We continue to
experience a decline in rental fees for all of our leased line products. The decline in rental fees since 2000 has been substantial, particularly for international leased lines, partly as a result of our efforts to address competition from new
international leased line service providers. We are actively implementing marketing and service campaigns to retain our high-value business customers.

Managed Data Services

We provide a wide range of managed data services, including frame relay services, asynchronous
transfer mode services and virtual private network services. Frame relay services provide high-speed data communications linking remote sites. Asynchronous transfer mode services are used to handle high-bandwidth, integrated voice, video, data and
Internet traffic between sites.

Internet Data Center Services

Internet data centers are facilities providing the physical environment necessary to keep computer network servers running at all times. These facilities are custom-designed with high-volume air conditioning
temperature control systems, secure access, reliable electricity supply and connections to high-bandwidth Internet and data networks. Data centers house, protect and maintain network server computers that store and deliver Internet and other network
content, such as web pages, applications and data.

We currently have 13 Internet data centers in Taiwan. We offer co-location, web hosting
and application service provider services.

Other Telecommunications Services

We provide other telecommunications services, including multimedia on demand services, satellite services, telephone directories, corporate solution
services and billing handling services. In 2003, we generated NT$2.6 billion, or approximately 1.4% of our revenues, from these various other telecommunications services. In 2004, we generated NT$3.2 billion, or approximately 1.7% of our revenues.
In 2005, we generated NT$3.1 billion or approximately 1.7% of our revenues, from these various other telecommunications services.

Multimedia on Demand
Services

We launched our multimedia on demand service in Taipei County and Keelung City in March 2004. We expanded this service to
cover 13 counties and cities of Taiwan by the end of 2005. Using video streaming technology through a set top box that connects to our asymmetrical digital subscriber lines, our customers can access TV programs and other services. We had 33
broadcasting channels, over 1,600 on-demand programs and served approximately 118,000 subscribers as of March 31, 2006. In addition, our video-on-demand service provides movies, e-learning and music programs for home entertainment. We also plan
to introduce popular channels and bundle them with other pay channels in order to enhance our service content and satisfy our customers needs.

Satellite Services

We are a 50% owner of the ST-1 telecommunications satellite. Singapore Telecommunications Ltd. owns the
remaining 50%. ST-1 was launched on August 26, 1998 and began commercial operations on December 1, 1998. We lease out transponder capacity on ST-1 and provide satellite lease circuits. In addition, we have two satellite communication
centers that enable us to provide satellite value-added services. We also provide satellite services to Southeast Asia.



29



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##### Table of Contents

Telephone Directories

We are the largest provider of classified advertising directory and associated products and services in Taiwan with over 60 years of experience in publishing and distributing telephone directories to households and
businesses in Taiwan. Our yearly circulation is approximately 6.3 million copies. To address the needs of advertisers and users for multiple platforms of directory search, we offer buyers and sellers related directory products and services
through print, onlinethe Internet Yellow pages (http://hipage.hinet.net) and voicean operator-assisted search service (City Search 1288).

Interconnection

We provide interconnection of our fixed line network with other cellular operators and, since July 2001,
with other fixed line operators.

The following table sets forth our interconnection fee revenues and costs for the periods indicated.
These revenues and costs are included, depending on the nature of the call made, in local, domestic long distance services or cellular revenues and expenses, respectively.



|                              |  |                         |  |      |  |     
|----------------------------- |  | ----------------------- |  | ---- |  | ----
|                              |  | Year ended December 31,
|                              |  | 2003                    |  | 2004 |  | 2005
|                              |  | (in billions)          
|                              |  | NT$                     |  | NT$  |  | NT$ 
|Interconnection fee revenues: |  |                         |  |      |  |     
|Local                         |  | 3.6                     |  | 3.1  |  | 3.0 
|Domestic long distance        |  | 2.0                     |  | 1.3  |  | 1.1 
|Cellular                      |  | 5.3                     |  | 6.3  |  | 7.0 
|Interconnection costs:        |  |                         |  |      |  |     
|Fixed line                    |  | 0.9                     |  | 0.7  |  | 0.4 
|Cellular                      |  | 4.6                     |  | 5.6  |  | 6.2 

Currently, tariffs for telephone calls between our fixed line subscribers and cellular subscribers
of other cellular operators are set by the cellular operators. The cellular operators pay us interconnection fees based on minutes of usage, regardless of who initiated the call. The Directorate General of Telecommunications has consulted the public
regarding a change to the regulation that will allow us to set and collect the tariffs for telephone calls made by our fixed line subscribers to cellular subscribers of other cellular operators. For such calls, cellular operators will no longer pay
us interconnection fees, but we will be required to pay them termination charges. However, the relevant regulation has not yet been changed.

In the interim, the Directorate General of Telecommunications has approved, effective January 2004, an interconnection rate of NT$0.59 per minute for calls initiated by cellular subscribers, and NT$0.814 per minute for calls initiated by
fixed line subscribers. The interconnection rate between our fixed line subscribers and other fixed line subscribers is approximately NT$0.32 per minute. The interconnection rate between our cellular subscribers and other cellular subscribers is
approximately NT$2.15 per minute.

All interconnections by the networks of cellular operators and other fixed line operators with our fixed
line network are made through dedicated lines that these operators lease from us. We record the revenue for these leased lines as part of our Internet and data revenues.

We expect an increase in interconnection revenue due to an increase in traffic between different fixed line networks as a result of the competition from other fixed line operators.

In accordance with governmental regulations, the contracts governing our interconnection arrangements must specifically address a number of prescribed
issues. For example, our interconnection charge should reflect our cost with respect to the network elements used. In addition, cost increases are subject to approval by the regulatory authorities. We expect that our interconnection contracts will
generally be reviewed annually, although we may also enter into long-term contracts.



30



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##### Table of Contents

Marketing, Sales and Distribution

Marketing Strategy

In order to retain and expand our large customer base and to encourage our
customers to increase their use of our services and products, we plan to focus our marketing strategy on the following areas.



| |  |  | Services, Products and Bundled Offerings. We continually develop new value-added services and products, and bundle our services and products based on different market
segments, with the aim of increasing our high-usage customers and enhancing customer loyalty.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pricing and Promotions. We design flexible pricing packages that allow customers to select structures best tailored to their usage patterns, and design special promotional
packages to encourage usage. For example, we have provided our Friends and Family promotion package to attract cellular subscribers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Distribution Channels. We seek to facilitate customer subscription by adding more service points. In addition, we seek to broaden our distribution reach by strengthening our
cross-industry alliances and marketing relationships. Furthermore, we seek to expand our sales channels by implementation of a sales agent system. We have also developed staff incentive programs to better motivate our sales staff.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Business Customers. We have expanded our customer focus to include small- and medium-sized enterprises in addition to large corporations. We seek to serve the needs of large
corporate customers by devoting a project manager or project engineer to service these customers. These account managers are responsible for developing customized solutions and tariff packages to meet the specific needs of our customers. We
continually update and expand our service offerings so that we can remain a one-stop telecommunications services provider to our corporate customers and provide for all of their telecommunications needs. Our dedicated local teams serve the needs of
small- and medium-sized enterprises. These teams also use our data bank to identify and target potential clients for promoting our e-commerce and cellular services. In addition, we help our corporate customers improve their efficiency and
competitiveness by creating information systems for them.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Advertising. We are committed to further strengthening the Chunghwa Telecom brand and image as well as strengthening and expanding market recognition of our specialized
product brands, such as HiNet and emome. We plan to leverage our leading market position and status to strengthen the overall advantage of our product brands.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Sales and Distribution

Our marketing department at our corporate headquarters in Taipei is
responsible for central business planning and formulating our marketing strategies and objectives. We have six business divisions, each of which has its own marketing department that is responsible for business and marketing planning.

We also have 27 operations offices and 312 service centers located throughout Taiwan that are responsible for operations, sales and customer service in
their local areas.

Customer Service and Billing

We believe our reputation for quality customer service has helped us attract new customers and maintain customer loyalty. We regularly survey our customers to improve our service and better understand market demand
and subscriber preferences, and seek to develop products and services accordingly.

We provide the following services to
our customers:



| |  |  | 24-hour customer service and technical support through our service centers, call centers and website;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | English billing documents available upon request;
| | - |  | -------------------------------------------------



| |  |  | free of charge itemized billing for international and domestic long distance calls;
| | - |  | -----------------------------------------------------------------------------------



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| |  |  | bill payment services at 24-hour convenience stores, bank service counters, automatic teller machines, direct debit, over the phone, website (www.cht.com.tw), cellpone emome and
service centers throughout Taiwan;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | online information and bill payment services at our website, www.cht.com.tw, and customer service hotline for telephone payment; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | consolidated and automated billing for all services.
| | - |  | ----------------------------------------------------

Network
Infrastructure

Our network infrastructure consists of transmission networks that convey voice and data traffic, switching networks that
route traffic between networks, and cellular, paging, Internet, leased line and data switching networks.

We purchase most of our network
equipment from well-known international suppliers. As part of the purchase contract, these suppliers deliver and install the equipment for us. We also purchase from local suppliers a variety of components such as transmission lines, switches,
telephone sets and radio transmitters.

Approximately 14,161 of our employees were engaged in network infrastructure development,
maintenance, operation and planning as of December 31, 2005.

Internet Protocol Broadband Backbone Network

Our Internet protocol broadband backbone network consists of a core network and edge networks. We completed the construction of our high-speed Internet
protocol backbone network at the end of 2005 with 14 sets of 640 Gbps giga switch routers for the core network and more than 56 sets of 320 Gbps gigabit switch routers for the edge networks. We believe this network will enable us to meet the
increasing demand for broadband access and broadband multimedia services. Moreover, this network will also serve as the backbone for our third generation cellular services and voice over Internet protocol services.

Transmission Networks

As of December 31,
2005, our transmission networks consisted of 1,007,964 fiber kilometers of fiber optic cable for trunking and 925,671 fiber kilometers of fiber optic cable for local loop.

Between 1999 and 2002, we made significant progress in the upgrading of our plesiochronous digital hierarchy network transmission facilities to
synchronous digital hierarchy network transmission facilities. Plesiochronous digital hierarchy is the traditional technology for voice network transmission systems. Synchronous digital hierarchy architecture is an advanced technology that allows
for instantaneous rerouting and eliminates downtime in the event of a fiber cut. In addition, synchronous digital hierarchy offers better reliability and performance for optical fiber transmissions at a lower operating cost. In December 2002 we
installed synchronous transport module 64 multiplexer and 10 gigabit capacity 32-wavelength dense wavelength division multiplexing equipment on our long-haul backbone network. Our synchronous transport module 64 multiplexer can multiplex several low
speed signals into a 10 gigabit per second high-speed signal. Dense wavelength division multiplexing equipment uses a technology that puts data from different sources together on an optical fiber with each signal carried on its own separate
wavelength. Both synchronous transport module 64 multiplexer and dense wavelength division multiplexing equipment can increase our network capacity. Furthermore, between 2003 and 2005, we completed the deployment of eighteen 32-wavelength optical
add-drop multiplexer rings in the main metropolitan areas of Taipei, Taichung, Tainan and Kaohsiung in 2003, in order to provide new data services such as gigabit Ethernet, fiber channel, 2.5 gigabit packet over synchronous digital hierarchy and 10
gigabit Ethernet. To meet the demand for broadband services, we completed the deployment of a next generation synchronous digital hierarchy network in June 2005. The next generation synchronous digital hierarchy network will provide gigabit Ethernet
over synchronous digital hierarchy service that is expected to leverage on our existing synchronous digital hierarchy network.

Based on
the transmission network described above, we launched connection circuit service of 10 gigabit packet over synchronous digital hierarchy and 10 gigabit Ethernet to the governments Taiwan Advanced Research and Education Network in 2003.

As part of our strategic focus on the Internet and data markets, our local loop connections use asymmetrical digital subscriber line
technology. This enables us to deliver high-speed Internet, multimedia and other data services to our



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customers. As of March 31, 2006, substantially all of our installed telephone lines were capable of delivering
asymmetrical digital subscriber line services. In addition, the Ethernet based Fiber to the Building system is also introduced into our access network to provide the broadband services, such as MOD, high speed Internet access and VPN, etc.

Switching Networks

Domestic telecommunications network. Our domestic public switched telephone network consists of 14 message areas connected by a long distance network. As of December 31, 2005, we had 71 long distance exchanges, which are
interconnection points between our telecommunications network.

We currently have intelligent networks installed over our public switched
telephone networks for our domestic long distance and international networks, as well as a local intelligent network in the Taipei, Taichung and Kaohsiung metropolitan areas. Our intelligent network is designed to facilitate the use of value-added
services by providing more information about calls and allowing greater management of those calls.

As of December 31, 2005, our
domestic network included 17 million installed telephone lines, and reached virtually all homes and businesses in Taiwan.

International network.Our international transmission infrastructure consists of both submarine cable and satellite transmission systems, which link our national network directly to 103 telecommunications service providers in
58 international destinations.

International calls are routed between Taiwan and international destinations through one of our two
international switching centers, one located in Taipei and the other in Kaohsiung. Each center had two international gateway switches. In total, we had a trunks capacity of 85,040 channels as of December 31, 2005.

We currently have invested in 28 submarine cables, five of which land in Taiwan. Our aggregate total capacity in the undersea cables in which we have
invested is 81 gigabits per second.

Cellular Services Network

Our cellular services network consists of:



| |  |  | cell sites, which are physical locations equipped with a base station consisting of transmitters, receivers and other equipment used to communicate through radio channels with
subscribers cellular telephone handsets within the range of a cell;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | base station controllers, which connect to, and control, the base station within each cell site;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | mobile switching service centers, which control the base station controllers and the processing and routing of telephone calls;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | gateway general packet-switched radio service support nodes, which connect our general packet-switched radio service network to the Internet;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | serving general packet-switched radio service support nodes, which connect the general packet-switched radio service network to the base station controllers; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | transmission lines, which link (1) with respect to the global system for mobile communications network, the mobile switching service centers, base station controllers, base
stations and the public switched telephone network, and (2) with respect to the general packet-switched radio service network, the base station controllers, the support nodes and the Internet.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table sets forth selected information regarding our cellular networks as of the dates indicated.



|                                                      |  |                    |  |       |  |      
|----------------------------------------------------- |  | ------------------ |  | ----- |  | -----
|                                                      |  | As of December 31,
|                                                      |  | 2003               |  | 2004  |  | 2005 
|GSM system                                            |  |                    |  |       |  |      
|Global system for mobile communications base stations |  | 7,791              |  | 8,207 |  | 8,413



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|                                                            |  |                    |   |  |       |   |  |       |  
|----------------------------------------------------------- |  | ------------------ | - |  | ----- | - |  | ----- | -
|                                                            |  | As of December 31, |  
|                                                            |  | 2003               |   |  | 2004  |   |  | 2005  |  
|GSM system                                                  |  |                    |   |  |       |   |  |       |  
|Switches                                                    |  | 54                 |   |  | 54    |   |  | 54    |  
|Lines of capacity (in thousands)                            |  | 8,500              |   |  | 8,500 |   |  | 8,500 |  
|Taiwan population coverage                                  |  | 99.9               | % |  | 99.9  | % |  | 99.9  | %
|Taiwan geographical coverage                                |  | 90.0               | % |  | 90.0  | % |  | 90.0  | %
|General packet-switched radio service gateway support nodes |  | 25                 |   |  | 25    |   |  | 25    |  
|GPRS Serving support nodes                                  |  | 20                 |   |  | 20    |   |  | 20    |  
|GPRS System capacity (in thousands)                         |  | 1,000              |   |  | 1,000 |   |  | 2,000 |  



|                                                            |  |                         |  
|----------------------------------------------------------- |  | ----------------------- | -
|                                                            |  | As of December 31, 2005 |  
|3G system                                                   |  |                         |  
|Third generation cellular services base stations            |  | 2,511                   |  
|Radio Network Controller (RNC)                              |  | 25                      |  
|Switches                                                    |  | 8                       |  
|Lines of capacity (in thousands)                            |  | 1,900                   |  
|Taiwan population coverage                                  |  | 65                      | %
|General packet-switched radio service gateway support nodes |  | 16                      |  
|Serving support nodes                                       |  | 8                       |  
|System capacity (in thousands)                              |  | 2,400                   |  

We provide cellular services based on the global system for mobile communications network
standards. We have dual band 900 MHz and 1800 MHz frequency spectrums for our global system for mobile communications services. In addition, we have installed an intelligent network on our cellular services network infrastructure to enable us to
provide prepaid services as well as a wide range of advanced call features and value-added services. We have also installed wireless application protocol gateways on our cellular services network that enable us to provide wireless application
protocol services. We began providing cellular communications services based on the general packet-switched radio service network standards in August 2001, using emome as the portal name.

As our subscriber base has continued to grow, we have increased the capacity of our intelligent network to more than 1.5 million subscribers. We
also completed a system expansion of our cellular services network to accommodate more than 8.5 million subscribers (including 2 million general packet-switched radio service subscribers) at the end of 2003. We have general packet-switched
radio services and 15 MHz paired spectrum plus 5 MHz unpaired spectrum in the 2 GHz frequency band for our third generation cellular services. In preparation for the launch of third generation cellular services, we contracted with Nokia Corporation
to provide the core network, radio access network, service network, transmission network and maintenance network. As of December 31, 2005, we have completed the construction of approximately 2,511 third generation base stations with a network
capacity of 1.9 million lines. Our third generation network is comprised of 3,085 base stations, with a capacity of 2.4 million lines upon completion of contract. We launched our third generation cellular services on July 26, 2005. As
of December 31, 2005, our third generation cellular services customers amounted to approximately 296,000.

Paging Network

The primary components of our paging network are:



| |  |  | paging control systems, which receive and encode incoming messages; and
| | - |  | -----------------------------------------------------------------------



| |  |  | base stations, which transmit messages to the subscribers pager.
| | - |  | -----------------------------------------------------------------

Our paging network uses, among other technologies, the open paging protocol developed by Motorola. This technology provides higher data rate, larger content capacity, longer battery life and better error correction
capabilities than other existing paging technologies.

Internet Network

HiNet, our Internet service provider, has the largest Internet access network in Taiwan, with 35 points of presence, approximately 9,000 dial-up ports,
approximately 4,040,000 broadband remote access server ports and a backbone bandwidth of approximately 294 gigabits per second as of December 31, 2005. We plan to increase HiNets points of presence and backbone bandwidth to approximately
424 gigabits per second by the end of 2006.



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HiNets total international connection bandwidth is 39.6 gigabits per second as of December 31,
2005. As we expect that Internet traffic flows to and from the United States will continue to increase, we plan to expand our bandwidth to the United States. We also plan to increase our links to other countries, including Japan, Korea, Hong Kong,
Singapore, Mainland China, Malaysia and Australia.

Leased Line and Data Switching Networks

We operate leased line networks on both a managed and unmanaged basis. In addition, we operate a number of switched digital networks used principally for
the provision of packet-switched, frame relay, asynchronous transfer mode technology and a multi protocol label switching internet protocol virtual private network. We have completed the construction of a digital cross connect system throughout
Taiwan with a total of 53 nodes. As of December 31, 2005, we had 4,604 frame relay ports, 7,873 X.25 ports, 7,717 asynchronous transfer mode ports and approximately 50,000 multi protocol label switching internet protocol virtual private network
virtual ports.

Our data networks support a variety of transmission technologies, including X.25 protocol, frame relay and asynchronous
transfer mode technology. We have also built up our HiLink virtual private network that combines internet protocol and asynchronous transfer mode technologies. The advantage of a HiLink virtual private network based on multi protocol label switching
technology is that it can carry different classes of services, such as video, voice and data together to provide services with various qualities of service, high performance transmission and fast forward solution in an enhanced security
network. A HiLink virtual private network can be accessed by an asymmetrical digital subscriber line and can include built-in mechanisms that can deal with overlapping internet protocol addresses. Therefore, the network potentially is less costly
and requires less management for business applications.

Competition

We face competition in virtually all aspects of our business.

Fixed Line

We are the largest fixed line service provider in Taiwan, with a market share of approximately 97.4% in terms of subscribers for local telephone services,
approximately 84.7% in terms of traffic for domestic long distance telephone services and approximately 57.8% in terms of traffic for international long distance telephone services in 2005. Three new providers, namely, Taiwan Fixed Network, New
Century Infocomm Tech. Co., Ltd., and Asia Pacific Broadband Telecom Co. Ltd., have provided fixed line services since June 2001. We believe these operators are primarily focused on international long distance services. In addition, we anticipate
that these operators will focus on business customers, which typically generate higher profit margins than residential customers. Since August 2001, four undersea cable services licenses have been granted. These undersea cable operators, as well as
Internet service providers and international simple resale operators, have begun offering international leased line services to other fixed line operators, Internet service providers and international simple resale operators.

We are required by Republic of China regulations to provide number portability and unbundled local loop access.

Our domestic long distance services compete with cellular services as people increasingly use cellular telephones. In addition, our international long
distance services compete with international long distance resale services and alternative mediums for making international calls, including voice over Internet protocol technologies, such as those provided by Skype. One of our competitors has
sought an alliance with Taiwan Railway Administration to use its infrastructure to deliver telecommunications services. We believe that the fixed line competition in Taiwan will be primarily based on price, quality of service, network coverage and
customer services, such as call centers and unified billing.

Wireless

There are currently three major global system for mobile communications cellular operators in Taiwan, namely, Taiwan Mobile Co., Ltd., Far EasTone
Telecommunications Co., Ltd. and us. Based on data provided by the Directorate General of Telecommunications, as of December 31, 2005, we were the largest cellular operator, with a 39.6% market share in terms of 2G subscribers. In addition,
there are two new third generation cellular operators in Taiwan, namely Asia Pacific



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Broadband Wireless Communications Inc., and Vibo Telecom Inc., as well as one personal handyphone system operator, First
International Telecom. Furthermore, the government issued six mobile virtual network operator licenses to New Century InfoComm Tech. Co., Ltd., KGEx.com, Hicall Telecom Co., Ltd., China Motion Telecom (Taiwan) Limited, Taiwan Fixed Network and 10net
which allow operators without a spectrum allocation to provide cellular services by leasing the capacity and facilities of a cellular service network from a licensed cellular service provider. We may cooperate with other mobile virtual network
operators in Taiwan in future. We compete in the wireless services market primarily on the basis of price, quality of service, network reliability and attractiveness of service packages.

Internet and Data

Our primary competitors in Internet and data services include:

Internet services:



| |  |  | Internet services providers: SeedNet, Asia Pacific Online, GigaMedia and So-net Taiwan;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Broadband Internet access providers: Asia Pacific Broadband Telecom Co., Ltd., GigaMedia, Taiwan Fixed Network and New Century Infocomm Tech. Co., Ltd.; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cable operators: Eastern Multimedia Co., Ltd., China Network Systems Co., Ltd., Taiwan Broadband Communications Co., Ltd., Pacific Broadband Co., Ltd., and Taiwan Infrastructure
Technology Co., Ltd.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Data services:



| |  |  | Leased line service providers: Taiwan Fixed Network, New Century Infocomm Tech. Co., Ltd., Asia Pacific Broadband Telecom Co. Ltd., Asia Netcom, Reach Global Services Ltd., FLAG
Telecom and Taiwan International Gateway Corporation.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are the largest provider of Internet services in Taiwan. As of
December 31, 2005, we had a 56.6% share of the Internet service market in terms of subscribers and a 85.3% share of the broadband Internet access market in terms of subscribers. We compete in the Internet and data services market primarily on
the basis of price, technology, speed of transmission, amount of bandwidth available for use, network coverage and value-added services.

Properties

Our properties consist mainly of land, land improvements and buildings located throughout Taiwan.

Our properties were deemed by the cabinet of the government of the Republic of China, or the Executive Yuan, to be vested in us as the successor to the
telecommunications business formerly owned and operated by the Directorate General of Telecommunications. Under Republic of China law, we are required to register our title to the land, land improvements and buildings at the relevant local land
bureaus. By the end of 2004, we had completed all the title registration of our land, land improvements and buildings.

Insurance

We do not carry comprehensive insurance for all properties. We maintain in-transit insurance for key materials, such as cables, equipment and components
of equipment. We also carry insurance for the ST-1 satellite while it is in orbit.

As part of our efforts to enhance our risk management
capabilities, we have been assessing our equipment that requires the most time and cost to repair or replace, in order to determine whether and to what extent we should carry fire insurance for such equipment.

Employees

Almost all of our employees are located in
Taiwan and all are employed on a full-time basis. As of December 31, 2005, approximately 66.7% of our employees had university, graduate or post-graduate degrees. We intend to improve our operational efficiency by reducing personnel costs. We
offered a number of voluntary retirement programs between June 1, 2000 and April 30, 2006, which resulted in a reduction in our workforce of approximately 10,192 employees.



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Please refer to Item 6. Directors, Senior Management and EmployeesD. Employees for a
discussion of our employees.

Our Pension Plans

We maintained two non-contributory defined benefit pension plans prior to our privatization. The first plan, which we refer to as the civil service plan, covered our employees who qualify as civil servants and a limited number of other
employees. The second plan, which was administered in accordance with the Republic of China Labor Standards Law and which we refer to as the labor standards plan, covered all other employees. Both plans provided for a lump-sum payment at an
employees retirement based on the employees years of service and monthly salary. Employees with the same seniority and monthly salary would receive a greater lump sum payment under the labor standards plan than under the civil service
plan. The civil service plan also provided for a monthly annuity payment to certain qualified employees after retirement based on the employees years of service and monthly salary.

The Republic of China Labor Pension Act, which became effective on July 1, 2005, provides for a contributory defined pension plan. Under this new
pension plan, we make a monthly contribution to each employees pension fund account of at least 6% of an employees monthly salary, matching the employees own contribution of up to 6% of the monthly salary. Employees who were hired
on or after July 1, 2005 are covered under the new pension plan. All of our other employees, including those who continue their employment after our privatization, were able to elect to be covered by the labor standards plan or the new pension
plan. As of the date of this annual report, a substantial majority of our employees are covered under the labor standards plan.

We were
required by the Statute Governing Privatization of State-Owned Enterprises to make severance payments to all employees at the date of our privatization as settlement of their accrued benefits under the pre-existing pension plans in the following
manner:



| |  |  | for employees who chose to continue their employment with us, a lump sum equal to the amount that they would have been entitled to if they had retired on the date of privatization
under the labor standards plan, regardless of which pension plan they were covered under prior to our privatization; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | for employees who chose not to continue their employment with us, in addition to the same lump sum payment described above, six months salary plus one months wages
(including salary, bonuses, allowances and other regular payments) in lieu of prior notice of termination.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On June 28,
2005, the Council of Labor Affairs issued an interpretation of the Labor Pension Act to the effect that our employees who were eligible to retire on the date of our privatization under the civil service plan were able to elect to retire on the date
of our privatization and be re-hired by us on the same date and accordingly would be entitled to an option to retain their monthly annuity payments. Re-hired employees who chose not to forego the monthly annuity payments from the government would
receive the lump sum due to them upon their retirement under the civil service plan. Re-hired employees who chose to forego the monthly annuity payments from the government would receive the lump sum due to them upon their retirement determined as
if they were covered by the labor standards plan.

All continuing employees whose employment is terminated by us within five years of our
privatization will be entitled to a payment equivalent to the pension plan benefit accrued from the date of our privatization to the date of termination, as well as six months salary plus one months wages in lieu of notice of
termination. Under the Statute Governing Privatization of State-Owned Enterprises, the Ministry of Transportation and Communications is responsible for paying the six months salary portion, while we are responsible for paying the remainder of
the payments due to our employees.

Prior to the date of our privatization, eligible employees who retired under pre-existing pension plans
would receive lump-sum payments from our pension plan funds. Employees who retired under the civil service plan would also be entitled to monthly annuity payments. Under relevant Republic of China regulations, the Ministry of Transportation and
Communications is responsible for these monthly annuity payments after our privatization. On the date of our privatization, the Ministry of Transportation and Communications settled all employees past service costs. The portion of the pension
obligations that was settled by the Ministry of Transportation and Communications, represented by the difference between the accrued pension liabilities and the deferred pension cost and related deferred income tax assets, amounted to NT$8,352
million (US$254 million) and was accounted for as contributed capital and recorded in stockholders equity as of August 12, 2005. The non-cash financial activities and related amounts of pension obligation settlement as of the date of our
privatization are



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disclosed on our statement of cash flows. In 2005, we implemented a special incentive retirement program that provides
for a payment equal to six months salary plus one months wages to employees who retire and are not re-hired upon our privatization. We are responsible for making these payments.

In 2005, we approved two special incentive retirement programs which allowed eligible employees who voluntarily left us on or prior to February 1, 2005
and August 11, 2005 respectively, to receive a payment equal to six months salary plus one months wages. The special termination benefits totaled NT$2.1 billion and were expensed in 2005.

After privatization, in December 2005, our board of directors approved a principle of incentive retirement program which allowed eligible employees who
voluntarily leave us to receive a payment equal to or greater than six months salary plus one months wages. An incentive retirement program was conducted according to the abovementioned principle in the first quarter of 2006. The special
termination benefits totaled NT$2.2 billion and were recognized as expense in the first quarter of 2006.

We intend to contribute NT$0.5
billion to our pension plans in 2006, of which contributions of NT$0.4 billion were made in the three months ended March 31, 2006. We believe that we have substantially funded all of our pension obligations. However, we determined our estimated
pension obligations based on a number of actuarial assumptions. To the extent these assumptions are different from actual experience, our actual pension obligations could be significantly increased. Moreover, we cannot assure you that other events
outside of our control, such as new laws, rules or regulations or interpretations of existing laws, rules or regulations, would not similarly result in a significant increase in our actual pension obligations.

After our privatization, our continuing employees are deemed to have begun employment on the date our privatization was completed for seniority purposes
under our pension plans in effect after privatization. The civil service plan terminated after our privatization.

Legal Proceedings

We are involved in litigation, arbitration or administrative proceedings in the ordinary course of our business. Although we cannot accurately predict the
outcome of these matters, we do not expect any proceeding, if determined adversely against us, to have a material adverse effect on our business, financial condition or results of operation.

Capital Expenditures

See Item 5. Operating and
Financial Review and ProspectsB. Liquidity and Capital ResourcesCapital Expenditures for a discussion of our capital expenditures.

Enforceability of Judgments in Taiwan

We are a company limited by shares and incorporated under the Republic of China
Company Law and the Statute of Chunghwa Telecom Co., Ltd. All of our directors and executive officers, our supervisors and some of the experts named in this annual report are residents of Taiwan and a substantial portion of our assets and the assets
of those persons are located in Taiwan. As a result, it may not be possible for investors to effect service of process upon us or those persons outside of Taiwan, or to enforce against them judgments obtained in courts outside of Taiwan. We have
been advised by our Republic of China counsel that in their opinion any final judgment obtained against us in any court other than the courts of the Republic of China in connection with any legal suit or proceeding arising out of or relating to the
ADSs will be enforced by the courts of the Republic of China without further review of the merits only if the court of the Republic of China in which enforcement is sought is satisfied that:



| |  |  | the court rendering the judgment has jurisdiction over the subject matter according to the laws of the Republic of China;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the judgment and the court procedure resulting in the judgment are not contrary to the public order or good morals of the Republic of China;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if the judgment was rendered by default by the court rendering the judgment, we were served within a reasonable period of time in accordance with the laws and regulations of the
jurisdiction of the court or process was served on us with judicial assistance of the Republic of China; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | judgments at the courts of the Republic of China are recognized and enforceable in the court rendering the judgment on a reciprocal basis.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



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A party seeking to enforce a foreign judgment in the Republic of China would be required to obtain
foreign exchange approval from the Central Bank of China for the payment out of Taiwan of any amounts recovered in connection with the judgment denominated in a currency other than NT dollars if a conversion from NT dollars to a foreign currency is
involved.

Regulation

Overview

Before March 1, 2006, the Taiwan telecommunications industry was subject to extensive regulation by and under the supervision
of the former competent authorities, the Ministry of Transportation and Communications and the Directorate General of Telecommunications pursuant to the provisions of the Telecommunications Act and various other telecommunications laws and
regulations, as well as regulations under various laws of general application. Since March 1, 2006, regulatory authority over the Taiwan telecommunications industry has been transferred from the Ministry of Transportation and Communications and
the Directorate General of Telecommunications to the National Communications Commission.

In addition, we are subject to the Statute of
Chunghwa Telecom Co., Ltd., which remains effective until it is formally abolished by the government.

Regulatory Authorities

The Communications and Broadcast Basic Law became effective on January 7, 2004. This law requires the establishment of the National Communications
Commission, a new regulatory authority over the telecommunications industry, and the National Communications Commission shall exercise its powers independently of other government agencies. The Communications and Broadcast Basic Law also requires
that related communications statutes be amended pursuant to the principles set forth in the Communications and Broadcast Basic Law within two years following the establishment of the National Communications Commission. Based on the Communications
and Broadcast Basic Law, the NCC Organization Law governing the constitution and authority of the National Communications Commission became effective on November 9, 2005. The National Communication Commission currently comprises nine
commissioners who have been recommended by the government and opposition political parties in the Legislative Yuan as well as the head of the Executive Yuan and approved by the Legislative Yuan.

Before March 1, 2006, the primary regulatory authority of the Taiwan telecommunications industry was the Ministry of Transportation and
Communications. The Ministry of Transportation and Communications issued policy directives and telecommunications licenses and oversaw the activities of the Directorate General of Telecommunications, which was responsible for the implementation of
these directives and the day-to-day supervision of the telecommunications industry. In addition, the television, radio, satellite television and cable industries were also regulated by the News and Broadcasting Division of the Government Information
Office under the Executive Yuan before March 1, 2006. Internet access through cable was regulated by the Directorate General of Telecommunications.

The National Communications Commission is responsible for:



| |  |  | formulating, implementing and interpreting telecommunications laws and regulations;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | issuing telecommunications licenses and regulating the operation of telecommunications industry participants;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | assessing and testing telecommunication systems and equipment;
| | - |  | --------------------------------------------------------------



| |  |  | drafting and promulgating technical standards for telecommunications and broadcasting;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | classifying and censoring the contents of telecommunications and broadcasting;
| | - |  | ------------------------------------------------------------------------------



| |  |  | managing telecommunications and media resources in Taiwan;
| | - |  | ----------------------------------------------------------



| |  |  | maintaining competition order in the telecommunication and broadcasting industries;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | governing technical standards in connection with the safety of information communications;
| | - |  | ------------------------------------------------------------------------------------------



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| |  |  | managing and facilitating the resolution of disputes pertaining to the Taiwan telecommunications and broadcasting industries;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | managing offshore matters relating to Taiwans telecommunications and broadcasting industries including matters of international cooperation;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | managing funds allocated for the development of Taiwans telecommunications and broadcasting industries;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | monitoring, investigating and determining matters in relating to Taiwans telecommunications and broadcasting industries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | enforcing restrictions under telecommunications and broadcasting laws and punishing violators; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | supervising other matters in relation to communications and media.
| | - |  | ------------------------------------------------------------------

Prior to our privatization, in each fiscal year, the Legislative Yuan approved the annual budget prepared by us, as a state-owned enterprise, and the Ministry of Audit under the Control Yuan audited, and adjusted, our
financial statements, including our earnings and losses. Our annual budget is no longer subject to Legislative Yuan or Control Yuan approval or audit.

Telecommunications Act

The Telecommunications Act and the regulations under the Telecommunications Act establish the
framework and govern the various aspects of the Taiwan telecommunications industry, including:



| |  |  | licensing of telecommunications services;
| | - |  | -----------------------------------------



| |  |  | restrictions on dominant telecommunications service providers;
| | - |  | --------------------------------------------------------------



| |  |  | tariff control and price cap regulation;
| | - |  | ----------------------------------------



| |  |  | accounting separation system;
| | - |  | -----------------------------



| |  |  | interconnection arrangements;
| | - |  | -----------------------------



| |  |  | bottleneck facilities;
| | - |  | ----------------------



| |  |  | spectrum allocation;
| | - |  | --------------------



| |  |  | provision of universal services;
| | - |  | --------------------------------



| |  |  | equal access;
| | - |  | -------------



| |  |  | number portability; and
| | - |  | -----------------------



| |  |  | ownership limitations.
| | - |  | ----------------------

Each of these aspects is
described below. The Telecommunications Act also establishes a non-auction pricing system for assignment of radio frequencies.

Licensing of Telecommunications Services

Type I and Type II Service Providers

Under the Telecommunications Act, telecommunications service providers are classified into two categories:

Type I. Type I service providers are providers that install network infrastructure, such as network transmission, switching and auxiliary equipment
for the provision of telecommunications services. Type I services include fixed line services such as local, domestic long distance and international long distance services, as well as interconnection, leased line, asymmetrical digital subscriber
line and satellite services and wireless services such as cellular, including third generation cellular, paging, mobile data and trunked radio services.



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Type II. Type II service providers are defined as all telecommunications service providers other
than Type I service providers. Type II services are divided into special services and general services. Special services include simple resale, voice over Internet protocol, international leased circuit and other services specified by the Ministry
of Transportation and Communications before March 1, 2006 or by the National Communications Commission from March 1, 2006. General services include any Type II service other than special services.

Until 1996, we were the sole provider of Type I services in Taiwan. In 1996, the government opened the market for cellular, paging and trunked radio,
mobile data and digital low power cordless telephone services. In 1998, the government opened the market for fixed line and mobile satellite services. In June 2001, the government granted licenses to three operators for establishing fixed line
services, thereby opening the market for fixed line services. Since August 2000, the government has permitted four undersea cable operators to engage in the undersea cable leased-circuit business.

Beginning in September 2004, the government started to accept applications for integrated network services and circuit-leasing services (local, domestic
long-distance and international undersea cable) in March and September of each year.

Granting of Licenses

Type I

Type I service providers are
more closely regulated than Type II service providers. The government has broad powers to limit the number of providers and their business scope and to ensure that they meet their facilities roll-out obligations. Under the Telecommunications Act,
Type I service providers are subject to pre-licensing merit review of their business plans and tariff rates.

Before March 1, 2006,
licenses for Type I services were granted by the Ministry of Transportation and Communications through a three-step procedure. Applicants obtained a concession from the Ministry of Transportation and Communications. After obtaining a concession, the
applicant obtained a network construction permit and an assignment of spectrum, in the case of cellular telephone services and satellite services, from the Directorate General of Telecommunications or the Ministry of Transportation and
Communications prior to applying for a license. Upon completion of construction of its network and review by the Directorate General of Telecommunications, the applicant was granted a Type I license. The Ministry of Transportation and Communications
had the authority to grant Type I licenses for each of fixed line services, wireless services and satellite services. Type I licenses have different minimum paid-in capital requirements for applicants and varying durations depending on the
particular type of service.

Since March 1, 2006, the same procedure applies except that the licenses are granted by the National
Communications Commission.

The Telecommunications Act further authorizes the competent authority, now the National Communications
Commission to promulgate separate regulations governing each Type I service including the business scope of the Type I service provider, as well as the procedures and conditions for granting special permits and the length of the period of the
special permits of each Type I service. Each holder of a Type I license will pay a fee ranging from 0.5% to 2% of the annual revenues generated from the particular Type I service for which a license has been granted.

Fixed Line Services.Under the Telecommunications Act, the Fixed Network Regulations adopted by the Ministry of Transportation and Communications
continue to govern the issuance of fixed line service licenses and the business scope of fixed line providers. Fixed line service licenses are subdivided into the following categories:



| |  |  | integrated services, including local, domestic long distance, international long-distance telephone services;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | local telephone services;
| | - |  | -------------------------



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| |  |  | domestic long distance telephone services;
| | - |  | ------------------------------------------



| |  |  | international long distance telephone services; and
| | - |  | ---------------------------------------------------



| |  |  | local, domestic long distance and international long distance leased line services.
| | - |  | -----------------------------------------------------------------------------------

We conduct our fixed line services through a license for integrated services.

Licenses for local telephone
and integrated services are valid for 25 years. Licenses for domestic long distance and international long distance telephone services are valid for 20 years. Licenses for leased line services are valid for 15 years. The minimum paid-in capital
requirement for integrated services providers and international undersea leased cable service providers is NT$40 billion and NT$800 million, respectively. The minimum paid-in capital requirement for both domestic and international long distance
telephone service providers is NT$2 billion. The minimum paid-in capital requirement for local telephone service providers is NT$12 billion multiplied by the Local Network Operation Weights for the regions in which local network managerial rights
have been granted to the service provider. The Local Network Operation Weights are calculated as the population of the region as a proportion of the entire population of Taiwan and are announced by the competent authority every three years.

In March 2000, the government granted three new concessions to fixed line services providers for integrated services. Recipients of these
concessions are required to apply for a network construction permit to deploy broadband local access networks. Each recipient of these concessions is required to have capacity for 150,000 subscribers before they are able to apply for a fixed line
license to launch their proposed services. The three fixed line service providers have since obtained fixed line licenses and are required to achieve capacity for one million subscribers by the sixth year following the date of the grant of the
network construction permit awarded. Operators that applied for integrated service provider licenses after June 30, 2004 must achieve a capacity for 400,000 subscribers, ports or a combination of both by the fourth year following the date of
the grant of the network construction permit.

Wireless Services. Under the Telecommunications Act, the Wireless Regulations
promulgated by the Ministry of Transportation and Communications continue to govern the issuance of wireless services licenses and the business scope of wireless service providers. Wireless service licenses are subdivided into the following
categories:



| |  |  | cellular services;
| | - |  | ------------------



| |  |  | paging services;
| | - |  | ----------------



| |  |  | mobile data services;
| | - |  | ---------------------



| |  |  | digital low-power cordless telephone services; and
| | - |  | --------------------------------------------------



| |  |  | trunked radio services.
| | - |  | -----------------------

Wireless service licenses are
granted to both regional and national service providers through review and bidding procedures.

Wireless services licenses for cellular and
paging services are valid for 15 years, and licenses for mobile data, digital low-power cordless telephone and trunked radio are valid for ten years. The minimum paid-in capital requirement for regional cellular service providers and national
cellular service providers is NT$2 billion and NT$6 billion, respectively.

We are licensed to provide cellular and paging services in
Taiwan.

Third Generation Cellular Services.The Ministry of Transportation and Communications promulgated the Third Generation
Mobile Telecommunications Services Regulations on October 15, 2001 and these regulations were last amended on November 17, 2005. The regulations govern voice and non-voice telecommunications services provided using the spectrum assigned by
the Ministry of Transportation and Communications, and now governed by the National Communications Commission, that utilizes the IMT-2000 technical standards as announced by the International Telecommunications Union. Licenses for third generation
cellular services were granted by the Ministry of Transportation and Communications. We have received our third generation cellular services license, which is valid from May 26, 2005 to December 31, 2018.



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Satellite Services.Under the Telecommunications Act, the Satellite Regulations promulgated by the
Ministry of Transportation and Communications govern the issuance of satellite services licenses and the business scope of satellite service providers. Satellite services licenses are subdivided into fixed satellite services licenses and mobile
satellite services licenses.

Satellite services licenses are valid for 10 years. Minimum paid-in capital requirements for fixed satellite
services providers and mobile satellite services providers are NT$100 million and NT$500 million, respectively.

We currently hold a fixed
satellite services license, valid from December 10, 1998 to December 9, 2008.

Type II

The Telecommunications Act was amended in 1996 to open the market for all Type II services. Under the Type II Services Regulations as last amended on
November 15, 2005, Type II services are divided into special services and general services. Special services include simple resale, voice over Internet protocol, network telephone service of E.164 and non-E.164 user numbers (IP Phone Numbers),
international leased circuit and other services previously specified by the Ministry of Transportation and Communications and now by the National Communications Commission. General services include any Type II service other than special services.
The policy for granting a Type II service license is as follows:



| |  |  | there is no limit on the number of licenses to be issued;
| | - |  | ---------------------------------------------------------



| |  |  | licenses were granted by the Directorate General of Telecommunications before March 1, 2006 and are now granted by the National Communications Commission; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | no bidding procedure is required.
| | - |  | ---------------------------------

We hold a license to
operate all Type II services. Type II service licenses issued before November 15, 2005 are valid for ten years and may be renewed by application made two months prior to the expiration date. Type II service licenses issued or renewed on or
after November 15, 2005 are valid for three years and may be renewed during the period commencing two months prior to the expiration date. There is no minimum paid-in capital requirement for Type II service providers. Our license to operate
Type II services is included in our license to operate integrated services, and is valid from July 29, 2000 to July 28, 2025.

On
December 27, 2005, the Ministry of Transportation and Communications promulgated regulations governing the fees payable for Type II licenses. Under these regulations, operators of simple resale or network telephone services of E.164 or
non-E.164 user numbers must pay an annual license fee equal to 1% of annual revenues generated from these services during the previous year. Type II service operators providing services other than simple resale or network telephone services of E.164
or non-E.164 user numbers must pay license fees ranging from NT$6,000 to NT$150,000 depending on their respective paid-in capitals. The regulations do not apply to integrated services providers who are permitted to provide Type II services without
additional Type II Licenses. The annual license fee for an integrated services provider operating Type II businesses is 1% of its annual revenues generated from its Type II services.

The Directorate General of Telecommunications started to process the applications for allocating E.164 and non-E.164 user numbers (IP phone numbers) on
November 15, 2005. A few operators, including our company, have applied for IP phone numbers. We believe after these operators obtain the numbers and begin offering their services, competition in this area will become intense. We plan to
provide VoIP service after we obtain IP phone numbers.

Restrictions on Dominant Telecommunications Services Providers

Under the Telecommunications Act, the regulations governing dominant telecommunications services providers apply only to Type I
service providers. A Type I service provider is deemed to be dominant if it meets any of the following criteria and was declared by the Ministry of Transportation and Communications or now the National Communications Commission as dominant:



| |  |  | controls key basic telecommunications infrastructure;
| | - |  | -----------------------------------------------------



| |  |  | has dominant power over market price; or
| | - |  | ----------------------------------------



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| |  |  | has more than a 25% market share in terms of customers or revenues.
| | - |  | -------------------------------------------------------------------

We have been declared by the former competent authority Ministry of Transportation and Communications as a dominant Type I service provider for fixed line and cellular services.

Under the Telecommunications Act, a dominant Type I service provider must not engage in the following activities:



| |  |  | directly or indirectly hinder a request for interconnection with its proprietary technology by other Type I service providers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | refuse to release to other Type I service providers the calculation methods of its interconnection fees and other relevant materials;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | improperly determine, maintain or change its tariffs or means of services;
| | - |  | --------------------------------------------------------------------------



| |  |  | reject, without due cause, a request for leasing network components by other Type I service providers;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | reject, without due cause, a request for leasing lines by other service providers or subscribers;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | reject, without due cause, a request for negotiation or testing by other service providers or subscribers;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | reject, without due cause, a request for negotiation for co-location by other service providers;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | discriminate, without due cause, against other service providers or subscribers; or
| | - |  | -----------------------------------------------------------------------------------



| |  |  | abuse its position as a dominant provider, or engage in other unfair competition activities as determined by the regulatory authorities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------

In addition, a dominant Type I service provider is subject to special regulations limiting its tariff changes.

Tariff Control and Price Cap Regulation

In order to promote competition in the telecommunications market, and as part of the governments overall policy toward deregulation, the Telecommunications Act was amended in 1999 to abolish the former rate of
return system on tariff setting in favor of price cap regulation of Type I services.

Under the Regulations Governing Tariffs of Type I
Service Providers promulgated and last amended by the Ministry of Transportation and Communications on January 11, 2006, a dominant Type I service provider must submit its proposed adjustment in primary tariffs and promotional packages to the
Directorate General of Telecommunications for onward submission to the Ministry of Transportation and Communications or, from March 1, 2006, directly to the National Communications Commission from for approval at least 14 days prior to the date
of the proposed tariff changes and announce such change on media, website and business locations on the next day after the Ministry of Transportation and Communications or National Communications Commission grants the approval. The tariff change
will come into effect seven days after the announcement.

Primary tariffs include:



| |  |  | for fixed line local telephone services: monthly fees, usage fees, monthly rental fees of leased lines and pay telephone usage fees;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | for fixed line domestic long distance telephone services: usage fees and monthly rental fees of leased lines;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | for fixed line international long distance telephone services: usage fees and leased line monthly rental fees;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | for wireless services, including third generation cellular services: monthly rental fees and usage fees; and
| | - |  | ------------------------------------------------------------------------------------------------------------



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| |  |  | other fees or tariffs announced by the Directorate General of Telecommunications before March 1, 2006 or by the National Communications Commission from March 1, 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, a dominant Type I service provider is required to set wholesale prices for the provision of its
telecommunication services to other telecommunication enterprises. The wholesale prices set by a dominant Type I service provider may be the retail price less fees and expenses which need not be incurred, but shall not higher than its promotional
pricing. The Regulations Governing Tariffs of Type I Service Providers further prohibits a dominant Type I service provider from practising unfair competition against other telecommunication enterprises.

In comparison, all non-dominant Type I service providers are required to notify the Directorate General of Telecommunications or the National
Communications Commission from March 1, 2006 and the public of their proposed tariff adjustments seven days prior to the date of the proposed tariff change with respect to all tariffs. In addition, changes in tariffs charged by Type I service
providers (notwithstanding the type of their respective services) may not, in any event, be greater than the annual growth rate of the consumer price index in Taiwan adjusted by a set constant, which will be periodically determined and announced by
the National Communications Commission. For example, if:



| |  |  | the annual growth rate of the consumer price index in Taiwan minus the set constant is positive, the increased percentage of tariffs must not exceed such positive figure;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the annual growth rate of the consumer price index in Taiwan minus the set constant is negative, the decreased percentage of tariffs must be at least the absolute value of such
negative figure, and the tariffs used in the given year must not be higher than the decreased tariff; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the annual growth rate of the consumer price index in Taiwan minus the set constant equals to zero, no increase in tariffs is allowed to be made by any Type I service providers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In October 2000, the Directorate General of Telecommunications announced that effective from the date of the announcement,
the set constant to be applied for all tariff adjustments, except tariffs for our fixed line local telephone services, will be equal to the annual growth rate of the consumer price index in Taiwan. Accordingly, for the time being, the adjustment
would be equal to zero as calculated in (3) above and thus no increase in tariffs by Type I services providers will be allowed, except for increases in tariffs for fixed line local telephone services. The set constant to be applied for
adjustments in fixed line local telephone services has yet to be announced by the Directorate General of Telecommunications or the National Communications Commission.

Type II service providers are free to establish their own tariff schemes, but are required to notify the Directorate General of Telecommunications or, from March 1, 2006 the National Communications Commission and
the public upon adoption and upon any subsequent adjustments.

Accounting Separation System

The Telecommunications Act requires that a Type I service provider, including one who concurrently offers Type II services, separately calculate the
profits and losses for its different services and prohibits any cross-subsidization among services that will impede fair competition.

Interconnection Arrangements

The Telecommunications Act requires all Type I service providers to allow other Type I
service providers access to their networks. It further requires Type I service providers, within three months upon request by the other Type I service provider, to reach an agreement on the relevant terms for the interconnection. Prices charged for
interconnection must be based on cost. If the parties fail to reach an agreement within three months, the National Communications Commission may, either at the request of the parties or on its own accord, arbitrate and determine the interconnection
terms for the parties. According to the Administrative Rules for Network Interconnection Between Telecommunication Service Providers, the tariffs for communications (except for international communications) between a cellular telecommunications
network and a fixed line telecommunications network) shall be collected by the call-originating services provider from its subscribers pursuant to the tariff schedules set by the cellular services provider, and the revenue or any uncollectible
accounts from such tariffs shall go to the cellular services provider. In addition, tariffs for communications within cellular telecommunications networks shall be collected by the call-originating services provider from its subscribers pursuant to
the tariff schedules set by such provider, and the revenue or any uncollectible accounts from such tariffs shall be for the account of to the call-originating services provider.



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When a Type I service provider leases unbundled network components to another Type I service provider,
the parties are required to negotiate the rental fee. Unbundled network components include:



| |  |  | local loops;
| | - |  | ------------



| |  |  | local switch transmission equipment;
| | - |  | ------------------------------------



| |  |  | local trunks;
| | - |  | -------------



| |  |  | toll switch transmission equipment;
| | - |  | -----------------------------------



| |  |  | long-distance trunks;
| | - |  | ---------------------



| |  |  | international switch transmission equipment;
| | - |  | --------------------------------------------



| |  |  | network interfaces;
| | - |  | -------------------



| |  |  | directory equipment and services; and
| | - |  | -------------------------------------



| |  |  | signaling network equipment.
| | - |  | ----------------------------

The Telecommunications Act
authorizes the Directorate General of Telecommunications or, from March 1, 2006, the National Communications Commission to issue rules and regulations pertaining to interconnection. Under the Administrative Rules for Network Interconnection
issued by the Directorate General of Telecommunications, as last amended on November 17, 2005, we, as a dominant Telecommunication service provider for fixed line and cellular services, are required to unbundle our network and provide
cost-based interconnection charges calculated with reference to the total element long-run incremental cost incurred by us. We are required to submit our proposed calculations of the total element long-run incremental cost to the Directorate General
of Telecommunications or, from March 1, 2006, the National Communications Commission, for its approval each year. Local loop unbundlings for both voice and data have been completed.

Bottleneck Facilities

Under
the Telecommunications Act, when a Type I service provider cannot construct bottleneck facilities within a reasonable period of time or substitute those facilities by other available technologies, it may request for co-location on a fee basis from
the owner of the facilities located at the bottleneck of the relevant telecommunications network. The owner of the facilities so requested may not reject these requests without due cause. The Ministry of Transportation and Communications had the
authority, now held by the National Communications Commission, to prescribe facilities as bottleneck facilities, and has prescribed bridges, tunnels, lead-in tubes and telecommunications chambers located within buildings and horizontal and vertical
telecommunications cables and lines as bottleneck facilities in relation to fixed line telecommunications networks.

Spectrum
Allocation

The Ministry of Transportation and Communications previously and now the National Communications Commission allocates
all telecommunications related frequencies primarily according to the standards set by the International Telecommunications Union. The 900 MHz and 1,800 MHz frequency bands have been allocated for cellular applications. A total of 40 MHz spectrum
around the 800 MHz frequency band and a total of 130 MHz of spectrum around the 2 GHz band have been allocated for third generation cellular services.

Frequency allocation for fixed wireless platforms, such as wireless local loop and local multipoint distribution services, has already been set. Only some bands of the spectrum made available for these services are
completely clear and there is partial usage in all other bands. The cost of frequency usage will be based on quantity.



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Provision of Universal Services

A Type I service provider may be required by the Ministry of Transportation and Communications previously and now the National Communications Commission
under the Telecommunications Act, to provide universal telecommunications services in remote or unprofitable areas. All Type I service providers and certain Type II service providers designated by the Ministry of Transportation and Communications
previously and now the National Communications Commission will be required to contribute a fixed portion of their annual revenues to a universal services fund. Such a fund will be used to compensate any losses and management fees incurred by the
relevant Type I service provider in providing the universal services. In April 2005, the Ministry of Transportation and Communications amended the Regulations on Telecommunications Universal Services, pursuant to which Type I service providers are
required to provide universal telecommunications services and contribute to the costs and expenses of providing such services on a pro rata basis according to their respective revenues.

Equal Access

As a result of
the liberalization of Taiwans telecommunications industry, a Type I service provider, including a third generation cellular services provider, is required to provide its subscribers with equal access to the domestic and international long
distance telephone services provided by other service providers. A Type I service provider may provide equal access through pre-selection or call-by-call selection. Currently, all Type I service providers, including us, provide equal access only
through call-by-call selection. When a subscriber makes a call using call-by-call selection, such subscriber has the option to select a service provider by dialing the network identification prefix assigned to the service provider of his choice.
This will result in the automatic selection of the preferred service provider for the provision of relevant telecommunication services. Starting from July 1, 2005, all Type I service providers may also provide equal access through pre-selection
in Keelung City, Taipei City/County, Taichung City/County and Kaohsiung City/County. Equal access through pre-selection is available throughout Taiwan since January 1, 2006. The pre-selection function allows any subscriber to select in advance
a long distance or international service provider of his or her choice. When such subscriber makes a call using this function, the communications network will automatically interconnect to the long distance or international network previously
selected by such subscriber.

Number Portability

The Ministry of Transportation and Communications has adopted principles on fixed line number portability to enable customers to migrate their local and
toll free fixed line telephone numbers. Under these regulations, we are required to provide fixed line number portability in seven major cities and counties in Taiwan upon the grant of the first fixed line license to a new entrant. We are also
required to provide such number portability in other service areas no later than 181 days from the grant of such license and upon six months advanced written notification received from the new fixed line service provider. Since May 2002, fixed
line number portability has been made available to all customers in accordance with the then prevailing Fixed Network Regulations.

In
November 2003, the Directorate General of Telecommunications promulgated the Administration Rules Governing Number Portability governing both fixed line and cellular services and the Fixed Network Regulations were revised to reflect such new
regulation. Under the Administration Rules Governing Number Portability, which rules were amended on September 22, 2005, subscribers may migrate their telephone numbers when changing Type I service providers. The number portability for wireless
services commenced on October 15, 2005.

Cable Radio and Television Law

Under the 1999 amendment of The Cable Television Law (the predecessor of Cable Radio and Television Law), telecommunications service providers may be
licensed as cable radio and television operators. The Government Information Office also promulgated rules for integrated fixed line service providers to apply for licenses to engage in cable radio and television businesses. The competent authority
of the Cable Radio and Television Law is now the National Communications Commission from March 1, 2006.

We have been granted a
license to operate cable television business. The license is valid until February 3, 2013.

The tariff for cable television business
is subject to annual prior review by the tariff committees of municipal governments.



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Ownership Limitations

The Telecommunications Act provides that direct foreign ownership in Type I service providers, except for us, may not exceed 49%, and combined direct and indirect foreign ownership in Type I service providers, except
for us, may not exceed 60%. The Telecommunications Act places no limitation on foreign ownership in Type II service providers. The Ministry of Transportation and Communications separately prescribed limits on our foreign ownership. Currently, direct
and indirect foreign ownership of our common shares is limited to 40%. A fine of between NT$500,000 to NT$2,500,000 may be imposed on us if we fail to comply with this limitation within a prescribed period of time after receiving a notice to comply.
If we fail to comply within a prescribed period of time after such further notification, our licenses to operate our Type I services may be revoked.

The Cable Radio and Television Law provides that direct foreign ownership in a cable operator may not exceed 20%, and combined direct and indirect foreign ownership in a cable operator may not exceed 60%. The Cable
Radio and Television Law further prohibits direct and indirect government ownership in a cable operator and prohibits the government to act as the director or supervisor of a cable operator. Only institutional investors may directly hold the shares
of a cable operator. A fine between NT$100,000 to NT$1,000,000 may be imposed on, and a notice to comply will be sent to, us if we fail to comply with such limitation. The fine may be imposed consecutively if we fail to comply. If the non-compliance
is material, our license to operate cable television business may be revoked. We received our cable operator license on March 21, 2005, which is valid until February 3, 2013, and have recently begun offering multimedia on demand services
on a limited basis. We have been granted the license even though we were not, and are not, in compliance with the applicable ownership restrictions. We cannot assure you that fines will not be imposed on us or that our license will not be revoked.

Under the current Telecommunications Act and the Cable Radio and Television Law, the Chairman of a Type I service provider and a cable
operator is required to be a citizen of the Republic of China. Under the Cable Radio and Television Law, not less than two thirds of our directors are required to be citizens of the Republic of China.

Administrative Fee Law

According to the
Administrative Fee Law promulgated in December 2002, central and local governments, government agencies and schools are empowered to collect administrative fees from us and other telecommunications services providers for the telecommunications
facilities built on public roads and properties. Under the Administrative Fee Law and Local Road Act, road authorities of municipal governments may collect usage fees from users of local roads, including us, for establishing lines along with the
local roads. The fee schedule is set up in the Standard for Usage Fees of Local Roads.

In addition, under the Public Road Law, as amended
in July 2003, administrative authorities of public roads may collect usage fees from the users of public roads. According to the Rules Governing Collection of Usage Fees on Public Roads, the relevant collection agencies, including agencies
designated by the Ministry of Transportation and Communications and municipal governments, depending on the types of public roads, may collect usage fees from users, including us, for establishing lines along with the public roads.

Laws and Regulations Relating to State-Owned Enterprises and Our Privatization; Statute Governing Privatization of State-Owned Enterprises

On the date of our privatization, we were required to make termination payments in accordance with the pension payment determined under the Labor
Standards Law plus six months salary and one months wages in lieu of prior notice of termination to our employees who chose not to continue their employment. The government is responsible for paying the six months salary to our
employees who chose not to continue their employment.

Upon the completion of our privatization, we were required to make a settlement
payment to our employees who chose to remain with us, based on their seniority and in accordance with the pension payment determined under the Labor Standards Law as if they have retired at the time of privatization. Those employees who remained
with us and who are laid off within five years after the completion of our privatization will be entitled to a payment equal to the pension benefit accrued from the date of our privatization to the date of termination, six months salary and
one months wages (including salary, bonuses, allowances and other regular payments) in lieu of prior notice of termination. The government has agreed to assume the cost of paying the six months salary to the laid-off employees.



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The government will indemnify those employees who have suffered from any losses and damages due to our
privatization, such as losses arising from change of an insurance program.

Part of the funds realized from our privatization will be
allocated to the Privatization Fund, and the rest of the funds will go to the Treasury of the Republic of China. Indemnification payments by the government will be made from the Privatization Fund.

Statute of Chunghwa Telecom Co., Ltd.

In light of the privatization of our company, the Executive Yuan, on May 1, 2006, proposed a motion for the abolishment of the Statute of Chunghwa Telecom Co., Ltd. for legislative approval. We cannot determine when this motion will be
approved by the Legislative Yuan. Under Republic of China law, the Statute of Chunghwa Telecom Co., Ltd will continue in effect until the Legislative Yuan formally approves the motion and the President of the Republic of China pronounces the
abolishment of the law.

Approval of Ministry of Transportation and Communications

While the continued application of the Statute of Chunghwa Telecom Co., Ltd. remains unclear and it may be abolished in the near future, under that
statute we are required to obtain approval of the Ministry of Transportation and Communications for:



| |  |  | the adoption of and any changes to our articles of incorporation and board of directors organization rules;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | any changes to our authorized capital and any issuance of our common shares;
| | - |  | ----------------------------------------------------------------------------



| |  |  | any changes to primary tariffs for Type I services; and
| | - |  | -------------------------------------------------------



| |  |  | any changes to operational procedures of Type I services.
| | - |  | ---------------------------------------------------------

Pension Obligation

We are required to fund any shortfall in our pension fund reserves within eight years after our
incorporation. Consequently, if we record any extra earnings over our previous estimated earnings approved by the Legislative Yuan, these extra earnings must be first allocated to pension fund reserves.

Employee Subscription Rights for New Issues of Our Common Shares

In accordance with the Statute of Chunghwa Telecom Co., Ltd., our employees have rights to subscribe for not more than 10% of a new issuance of our common
shares at favorable terms in accordance with subscription rules which were to be announced by the Ministry of Transportation and Communications. However, no such rules were ever announced. In addition, under the Republic of China Company Law,
employees of Republic of China companies have pre-emptive rights to subscribe for between 10-15% of any new issue of shares by the company.

C. Organizational Structure

We do not have any subsidiaries.

D. Property, Plant and Equipment

Please refer
to B. Business Overview for a discussion of our property, plant and equipment.

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.



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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion of
our financial condition and results of operations together with the consolidated financial statements and the notes to such statements included in this annual report.

For the convenience of readers, NT dollar amounts used in this section for, and as of, the year ended December 31, 2005 have been translated into U.S. dollar amounts using US$1.00=NT$32.80, the noon buying
rate of the Federal Reserve Bank of New York on December 30, 2005. The US dollar translation appears in parentheses next to the relevant NT dollar amount.

Overview

A number of recent and expected future developments have had, and in the future may have, a material impact on our
financial condition and results of operations. These developments include:



| |  |  | changes in our revenue composition and sources of revenue growth;
| | - |  | -----------------------------------------------------------------



| |  |  | increased competition in the fixed line, leased line and cellular services markets, including the third generation cellular services market;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | tariff adjustments;
| | - |  | -------------------



| |  |  | capital expenditures as a result of technological improvements and changes in our business;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | provisions for pension payments and other stock-based compensations to our employees; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | taxation.
| | - |  | ---------

Each of these developments is discussed below.

Changes in our revenue composition and sources of revenue growth

Our fixed line revenues are derived primarily from the provision of local, domestic long distance and international long distance telephone services. In
addition, we also derive fixed line revenues from providing interconnection services to other carriers. Our revenues from wireless services are derived primarily from the provision of cellular services. Our revenues from Internet and data services
are generated principally from HiNet, our Internet service provider, from our asymmetrical digital subscriber line services, and from the provision of dedicated leased lines for our business customers and other operators.

The table below sets forth the revenues from our principal lines of business as a percentage of revenues for the periods indicated.



|                  |  |                         |   |  |       |   |  |       |  
|----------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                  |  | Year ended December 31, |  
|                  |  | 2003                    |   |  | 2004  |   |  | 2005  |  
|Revenues:         |  |                         |   |  |       |   |  |       |  
|Fixed line        |  | 42.5                    | % |  | 38.9  | % |  | 35.9  | %
|Wireless          |  | 36.6                    |   |  | 38.2  |   |  | 39.6  |  
|Internet and data |  | 19.5                    |   |  | 21.2  |   |  | 22.8  |  
|Other             |  | 1.4                     |   |  | 1.7   |   |  | 1.7   |  
|                  |  |                         |   |  |       |   |  |       |  
|Total             |  | 100.0                   | % |  | 100.0 | % |  | 100.0 | %
|                  |  |                         |   |  |       |   |  |       |  

Over the past three years, the composition of our revenue base has undergone a significant change
as a result of our strategy to diversify our revenues and focus on generating increased revenues from higher growth businesses, such as cellular and Internet and data services.

Cellular and Internet and data services have been our fastest growing sources of revenue over the last three years. Most of our increased revenues have
come from our cellular and Internet access services, with our asymmetrical digital subscriber line services accounting for a significant portion of such increase. We launched our asymmetrical digital



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subscriber line services in August 1999, and we had approximately 3.7 million subscribers as of December 31,
2005. Increasing Internet penetration in Taiwan and higher data traffic have contributed to a significant increase in our revenues from Internet and data services over this period. Revenues from our local telephone and domestic long distance
telephone and paging services have declined during this period, mainly due to traffic migration to cellular services. Revenues from our international long distance services have also declined, as international long distance tariffs have declined
worldwide. We believe that wireless and Internet and data services will continue to generate an increasing percentage of our revenues.

Increased
competition in the fixed line, leased line and cellular services markets, including the third generation cellular services market

Three operators in addition to us have been providing fixed line services in Taiwan since June 2001. We believe that these competitors are targeting largely business subscribers, which generally generate higher revenues per subscriber as
compared with residential customers. We are facing significant competition, particularly in the international long distance telephone services market, from these competitors.

Since August 2001, the Ministry of Transportation and Communications has awarded undersea cable service licenses to four additional operators. Moreover,
in February 2002, the Ministry of Transportation and Communications awarded five concessions to provide third generation cellular services. Two of these new concessions were awarded to new cellular operators. In addition, the government issued six
mobile virtual network operator licenses in 2004, and began to allow mobile number portability services in October 2005. Our mobile number portability service attracted a large number of customers. We seek to minimize loss of customers from the
increased competition by continuing to offer handset subsidies, more competitive pricing packages, our Friends and Family packages and mobile virtual private networks for our enterprise customers.

The increased competition in the areas of fixed line, leased line and cellular services has led to, and may continue to lead to, further declines in our
tariffs, which may result in a decrease in our revenues from these services. At the same time, the increased competition has stimulated consumer demand for telecommunications services, with results including higher international telephone usage and
increased international bandwidth demand.

Tariff adjustments

We adjust our tariffs and offer promotional packages from time to time primarily in response to market conditions, within the constraints of our budget requirements before we were privatized.

In July 2003, we reduced monthly rental fees for our asymmetrical digital subscriber line services by an average of 16%.

In June 2004, we:



| |  |  | reduced monthly rental fees for our asymmetrical digital subscriber line services by an average of 24%;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | reduced the tariff for HiNet asymmetrical digital subscriber line services by an average of 22%; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | reduced the short messaging service fee from NT$2 to NT$1.5 per message for messages sent between our customers and from NT$2.5 to NT$2 per message for messages sent to users of
other service providers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In April 2005, we reduced monthly rental fees for part of our asymmetrical digital subscriber line
services by an average of 2%. For downlink speeds of 256k services, the reduction rate was as high as 47%.

In June 2005, we reduced short
messaging service fees from NT$1.5 to NT$1.3 per message for messages sent between our customers and from NT$2 to NT$1.7 per message for messages sent to users of other service providers.

In December 2005, we reduced mobile dialing fees for calls to local telephone numbers by an average of 7%.

We expect to continue to adjust tariffs and offer a variety of promotional packages from time to time in response to increasing competition and in order
to take advantage of our pricing power from economies of scale.



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Capital expenditures as a result of technological improvements and changes in our business

In recent years, we have focused on modernizing and upgrading our cellular services network, and on developing our asymmetrical digital subscriber line
network, which enables transmission of digital information at a high-bandwidth over existing telephone lines. In particular, we have enhanced our telecommunications services through:



| |  |  | the introduction of a voice over Internet protocol exchange system in our long distance telephone network;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the implementation of a network modernization program, including a gradual transfer from our public switched telephone network to a system based on Internet protocol, to remain at
the forefront of new technologies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the development of an intelligent network for fixed line services;
| | - |  | ------------------------------------------------------------------



| |  |  | the deployment of a high-capacity long-haul dense wavelength division multiplexing system and a nationwide Internet protocol backbone network with 320 gigabits per second giga
switching routers for Internet and Internet protocol virtual private network services;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the expansion and upgrade of our cellular services network, including the rollout of general packet-switched radio services; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | the construction of our third generation cellular services network.
| | - |  | -------------------------------------------------------------------

As a result, we incurred aggregate capital expenditures of NT$78.0 billion over the period from January 1, 2003 to December 31, 2005.

Our long-term goal is to optimize our capital expenditures by focusing on investing in innovative products and services with attractive return profiles.
We evaluate our investment opportunities by benchmarking them against internal return requirements. We are currently finalizing plans for the gradual upgrade of our entire public switched telephone network to a next-generation network.
Next-generation Internet protocol switches will have substantially more capacity and greater upgrade flexibility, and should result in increased operational efficiencies from reduced switching centers, and related property, materials and personnel
costs. We have also devoted resources toward the effective rollout of our third generation cellular network and the continuing build-out of our fiber-to-the-building infrastructure.

Provisions for pension payments and other stock-based compensations to our employees

Personnel expenses constitute a significant portion of our operating costs and expenses. In 2003, 2004 and 2005, personnel expenses represented 32.6%, 32.4% and 38.8%, respectively, of our total operating costs and expenses, and pension
costs represented 10.3%, 11.3% and 7.8%, respectively, of our personnel expenses. The table below sets forth information regarding personnel expenses, depreciation and amortization and other operating costs and expenses in the aggregate and as a
percentage of our total operating costs and expenses for the periods indicated.



|                                                 |  |                                              |  |       |      |  |       |      |       |   |  |       |  |       |  
|------------------------------------------------ |  | -------------------------------------------- |  | ----- | ---- |  | ----- | ---- | ----- | - |  | ----- |  | ----- | -
|                                                 |  | For the year ended December 31,              | 
|                                                 |  | 2003                                         |  |       | 2004 |  |       | 2005 |      
|                                                 |  | (in billions of NT$, except for percentages) | 
|Operating costs and expenses:                    |  |                                              |  |       |      |  |       |      |       |   |  |       |  |       |  
|Personnel expenses                               |  |                                              |  |       |      |  |       |      |       |   |  |       |  |       |  
|Pension(1)                                       |  | 4.2                                          |  | 3.4   | %    |  | 4.6   |      | 3.7   | % |  | 4.3   |  | 3.0   | %
|Salaries and bonus                               |  | 37.0                                         |  | 29.2  |      |  | 36.0  |      | 28.7  |   |  | 50.6  |  | 35.8  |  
|                                                 |  |                                              |  |       |      |  |       |      |       |   |  |       |  |       |  
|Total personnel expenses                         |  | 41.2                                         |  | 32.6  |      |  | 40.6  |      | 32.4  |   |  | 54.9  |  | 38.8  |  
|                                                 |  |                                              |  |       |      |  |       |      |       |   |  |       |  |       |  
|Depreciation and amortizationcosts of services  |  | 39.2                                         |  | 31.0  |      |  | 38.4  |      | 30.6  |   |  | 38.8  |  | 27.4  |  
|Depreciation and amortizationoperating expenses |  | 2.4                                          |  | 1.9   |      |  | 2.3   |      | 1.9   |   |  | 2.4   |  | 1.7   |  
|Other                                            |  | 43.7                                         |  | 34.5  |      |  | 44.0  |      | 35.1  |   |  | 45.5  |  | 32.1  |  
|                                                 |  |                                              |  |       |      |  |       |      |       |   |  |       |  |       |  
|Total operating costs and expenses               |  | 126.5                                        |  | 100.0 | %    |  | 125.3 |      | 100.0 | % |  | 141.6 |  | 100.0 | %
|                                                 |  |                                              |  |       |      |  |       |      |       |   |  |       |  |       |  

---

|(1) | Does not include NT$37 million, NT$129 million and NT$183 million of pension costs associated with employees engaged in construction projects that were capitalized and not treated
as personnel expenses in 2003, 2004 and 2005, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following table sets forth our personnel expenses (divided into pension and non-pension portions)
allocated by categories of operating costs and expenses:



|                           |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  
|-------------------------- |  | -------------------------------------------- |  | ----- | ---- |  | ---- | ---- | ----- | - |  | ---- |  | ----- | -
|                           |  | For the year ended December 31,              | 
|                           |  | 2003                                         |  |       | 2004 |  |      | 2005 |      
|                           |  | (in billions of NT$, except for percentages) | 
|Personnel expenses         |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  
|Cost of Services           |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  
|Pension                    |  | 2.5                                          |  | 6.2   | %    |  | 2.8  |      | 6.9   | % |  | 2.5  |  | 4.6   | %
|Non-pension                |  | 23.3                                         |  | 56.6  |      |  | 22.5 |      | 55.4  |   |  | 30.8 |  | 56.1  |  
|                           |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  
|Total                      |  | 25.8                                         |  | 62.8  |      |  | 25.3 |      | 62.3  |   |  | 33.3 |  | 60.7  |  
|Sales and Marketing        |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  
|Pension                    |  | 1.2                                          |  | 2.9   |      |  | 1.2  |      | 3.1   |   |  | 1.3  |  | 2.3   |  
|Non-pension                |  | 9.5                                          |  | 23.0  |      |  | 9.6  |      | 23.6  |   |  | 14.4 |  | 26.2  |  
|                           |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  
|Total                      |  | 10.7                                         |  | 25.9  |      |  | 10.8 |      | 26.7  |   |  | 15.7 |  | 28.5  |  
|General and Administration |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  
|Pension                    |  | 0.3                                          |  | 0.6   |      |  | 0.3  |      | 0.6   |   |  | 0.2  |  | 0.5   |  
|Non-pension                |  | 2.2                                          |  | 5.3   |      |  | 2.0  |      | 5.0   |   |  | 2.9  |  | 5.2   |  
|                           |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  
|Total                      |  | 2.5                                          |  | 5.9   |      |  | 2.3  |      | 5.6   |   |  | 3.1  |  | 5.7   |  
|Research and Development   |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  
|Pension                    |  | 0.2                                          |  | 0.6   |      |  | 0.3  |      | 0.6   |   |  | 0.2  |  | 0.4   |  
|Non-pension                |  | 2.0                                          |  | 4.8   |      |  | 1.9  |      | 4.8   |   |  | 2.6  |  | 4.7   |  
|                           |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  
|Total                      |  | 2.2                                          |  | 5.4   |      |  | 2.2  |      | 5.4   |   |  | 2.8  |  | 5.1   |  
|                           |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  
|Total personnel expenses   |  | 41.2                                         |  | 100.0 | %    |  | 40.6 |      | 100.0 | % |  | 54.9 |  | 100.0 | %
|                           |  |                                              |  |       |      |  |      |      |       |   |  |      |  |       |  

At the time of our privatization, our then existing defined benefit pension obligations were
settled in full. After completion of our privatization, our continuing employees were deemed to have commenced employment as of the date our privatization was completed for seniority purposes under our pension plans in effect after privatization.
Under applicable Republic of China regulations, upon our privatization, the Ministry of Transportation and Communications assumed the obligation to make annuity payments to our employees who retired before our privatization. Under US GAAP
reporting, the portion of the pension obligations that was settled by the Ministry of Transportation and Communications, was represented by the difference between the accrued pension liabilities, the deferred pension cost and related deferred income
tax assets was accounted for as contributed capital and recorded under our stockholders equity as of August 12, 2005.

We expect
our pension costs for the fiscal year 2006 to be approximately NT$3.4 billion.

Increases in our costs and expenses in recent years were
also attributable to purchases of our common shares by our employees at discounts. We recognize compensation expenses when our employees purchase our common shares at discounts under the priority share subscription program. We recognized such
compensation expenses in the amounts of NT$1.9 billion, NT$0.5 billion and NT$12.8 billion (US$0.4 billion) in 2003, 2004 and 2005, respectively.

Under a program established pursuant to a regulation adopted by the Ministry of Transportation and Communications, our employees may subscribe for up to 476,858,252 of our common shares from the Ministry of Transportation and Communications
in offerings conducted by the Ministry of Transportation and Communications prior to our privatization. As long as our employees agree not to transfer or pledge these shares for two or three years, they will be eligible to receive a discount of 10%
or 20%, respectively, from the offering price. Pursuant to June 2005 amendment to the terms of this program, a majority of our employees who continue their employment with us after our privatization will also be eligible to receive a 50% discount if
they agree not to transfer or pledge the shares for four years.

At the time when we were privatized, the Ministry of Transportation and
Communications implemented another stock subscription program, allocating up to 476,858,252 common shares, or 4.9% of our then outstanding common shares, for a one-time subscription by our employees. Under this program, a majority of our employees
will be eligible to receive a discount of 10%, 20% or 50% from the offering price of the shares if they agree not to transfer or pledge these shares for two, three or four years, respectively.

As of the date of this annual report, 762,886,886 of our common shares, representing 7.9% of our outstanding common shares were sold under the two
programs mentioned above.



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Taxation

The current corporate income tax rate in the Republic of China is 25%. We have benefited from tax incentives generally available to technology companies in the Republic of China, including tax credits of up to 30%
(25% prior to February 2002) of the amount of some of our research and development, automation and employee training expenditures. Starting in 2001, we qualify for tax benefits at the rate of 5% to 20% for the amount of our investment in qualified
equipment and technology. As a result, our effective tax rate was 17.9%, 18.1% and 27.7% in 2003, 2004 and 2005, respectively.

In 1997,
the Income Tax Law of the Republic of China was amended to integrate corporate income tax and shareholder dividend tax to eliminate the double taxation effect for resident shareholders of Taiwan companies. Under the amendment, all retained earnings
generated from January 1, 1998 and not distributed to shareholders as dividends in the following year are assessed with a 10% retained earnings tax. See Item 10. Additional InformationE. TaxationRepublic of China
TaxationDividends. Historically, this has not had an impact on our financial results of operations, because the major portion of our earnings was distributed to the government by way of dividends. If we decide to retain a substantial
portion of our earnings in the future, we may be assessed with retained earnings tax and our effective tax rate may exceed the corporate income tax rate.

Segment Operating Losses

Our local telephone services had operating losses of NT$5.9 billion, NT$7.9 billion and NT$15.0
billion (US$0.5 billion) in 2003, 2004 and 2005, respectively. See Note 23 to our audited financial statements included elsewhere in this annual report. We expect our local telephone services to continue incurring operating losses as competition in
the local telephone services market further intensifies and traffic continues to migrate from fixed line services to cellular and broadband services.

Critical Accounting Policies

Our financial statements are prepared in accordance with US GAAP. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. We continually evaluate these estimates
and judgments, including those related to revenue recognition, allowance for doubtful accounts, estimated useful lives of long-lived assets, investments in unconsolidated companies, pension benefits and accounting for income taxes. We base these
estimates and judgments on our historical experience and other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

Revenue Recognition

We recognize revenues for our services in accordance with the Securities
and Exchange Commission Staff Accounting Bulletin No. 104. We record service revenues over the periods they are earned. The costs of providing services are recognized as incurred. Handset subsidy costs are paid to a vendor that sells a handset
to a customer who subscribes to the service, as an inducement to enter into a service contract, and are recognized as a cost of service when incurred. Usage revenues from fixed line services, cellular services, Internet and data services, and
interconnection and call transfer fees from other telecommunications companies and carriers are billed in arrears and are recognized based upon minutes of traffic processed when the services are provided in accordance with contract terms.

One-time subscriber connection fees, primarily in relation to fixed line service revenues, are deferred and recognized over the average
expected customer service periods, which we evaluate on a continual basis. For example, the average expected customer service period for fixed line service revenues has increased over time from 13 years at December 31, 2004 to 16 years at
December 31, 2005, and the average expected customer service period for cellular service revenues has declined over time from five years at December 31, 2004 to four years at December 31, 2005 and the average expected customer service
period for Internet service revenues increased from three years in 2004 to four years in 2005, while the average expected customer service periods for other service lines have remained relatively the same over the same period. If our estimates of
these customer service periods become longer, the amortization of our deferred income could be materially and adversely affected. This deferred income is also dependent on the amount of one-time connection fees received from subscribers.



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Allowance for Doubtful Accounts

We maintain allowance for doubtful accounts for estimated losses that result from the inability of our customers to make required payments. We base our
allowances on the likelihood of recoverability of accounts receivable by operating segment based on past experience and current collection trends that we expect to continue. Our evaluation also includes the length of time the receivables are past
due, geographic concentrations and the general business environment. If changes in these factors occur, or the historical data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect
outstanding receivables, additional provisions for doubtful accounts may be needed and our future results of operations could be materially and adversely affected.

Estimated Useful Lives of Long-Lived Assets

A significant portion of our total assets consists of long-lived assets,
primarily property, plant and equipment and definite-lived intangibles. We estimate the useful lives of property, plant and equipment and other long-lived assets with finite lives in order to determine the amount of depreciation and amortization
expense to be recorded during the reported period. The useful lives are estimated at the time assets are acquired and are based on historical experience with similar assets as well as the anticipated technological evolution or other environmental
changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and
amortization in the relevant periods. Alternatively, technological obsolescence could result in a write-down in the value of the assets to reflect impairment. We review these types of assets for impairment annually, or when events or circumstances
indicate that the carrying amount may not be recoverable over the remaining life of an asset. In assessing impairments, we use estimated cash flows that take into account managements estimates of future operations.

If at January 1, 2005 we would have determined that the remaining useful lives for our property, plant and equipment were shorter or longer by one
year than what we used in the preparation of our financial statements, our recorded depreciation expense in 2005 would have increased by approximately NT$12.5 billion or decreased by approximately NT$8.0 billion, respectively.

Investments in Unconsolidated Companies

We
hold investments in other companies that we account for under the equity method or cost method of accounting, depending on our ability to exert significant influence over the investee company. The amounts for our equity method investments generally
represent our cost of the initial investment adjusted for our share of the investee companys income or loss and any dividends received. The amounts for our cost method investments where the securities are not publicly traded generally
represent our cost of the initial investment less any adjustments we make when we determine that an investments net realizable value is less than its carrying cost.

The process of assessing whether a particular cost method investments net realizable value is less than its carrying cost requires a significant amount of judgment. We periodically evaluate these long-term
investments based on quoted market prices, if available, the financial condition of the investee company, economic conditions in the industry and our intent and ability to hold the investment for a long period of time. If quoted market prices are
not available, we estimate the fair value using the net asset values as well as the financial condition of the investee company. This information may be based on information that we request from the investee companies and may not be subject to the
same disclosure and audit requirements as required of U.S. companies, and as such, the reliability and accuracy of the information may vary. If we deem the fair value of an investment to be less than the book value based on the above factors, and
the decline in value is deemed to be other than temporary, we record the difference as impairment in the period of occurrence.

Estimating
the net realizable value of investments in privately held companies can be inherently subjective and may contribute to significant volatility in our reported results of operations. For example, if the investment environment worsens in 2006, we may
incur an impairment in our equity or cost method investments.

Pension Benefits

The amounts recognized in our financial statements related to pension benefits are determined on an actuarial basis that utilizes several different
assumptions in the calculation of such amounts. Significant assumptions used in determining our pension benefits are the discount rate, the expected long-term rate of return on plan assets, the rate of increase in compensation levels, and the
average remaining years of service for employees, which prior to 2005 included an estimate for



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##### Table of Contents

the number of employees that will retire upon our privatization. In addition, because we were required to fully fund our
pension plans on or prior to the date of our privatization to enable us to meet the requirements of making full benefit payments to our then existing employees, prior to 2005 we made an assumption of our privatization date in determining the amount
of the pension benefits.

We use long-term historical actual return information and estimate future long-term investment returns by
reference to external sources to develop the expected long-term return on plan assets. The discount rate is assumed based on the rates available on high-quality fixed-income debt instruments with the same period to maturity as the estimated period
to maturity of the pension benefit. We assume the rate of increase in compensation levels and average remaining years of service based on historical data. Any changes in one or more of these assumptions could impact our pension benefits.

A decrease in the discount rate or in the expected return on assets would increase the reported obligation. For example, if the discount rate in 2005
used in determining this obligation were 0.25% lower, it would generate a NT$41.2 million increase in the obligation reported on the balance sheet and a NT$69.1 million increase in the benefit costs. Similarly, if the expected return on assets
assumption were 0.25% lower, it would generate a NT$4.6 million increase in benefit costs, and a similar increase in the obligation reported on the balance sheet. A minor change in the estimate of health care cost assumptions or a delay of the
privatization date by one year would not materially affect our pension obligations or related benefit costs. See Item 3. Key Information  D. Risk Factors  Risks Relating to Our Company and the Taiwan Telecommunications Industry
 Our actual pension obligations may be significantly higher than what we have provided for under current actuarial assumptions and may also differ from actual experience, including as a result of events outside of our control.

Accounting for Income Taxes

Deferred income taxes represent the effect of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. We measure deferred tax assets
and liabilities using statutory tax rates that, if changed, would result in either an increase or a decrease in the provision for income taxes in the period of change. A one-percentage point increase in the statutory income tax rate as of
December 31, 2005 would have decreased our net income by approximately NT$460.3 million.

We record a valuation allowance to reduce
our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation
allowance, we cannot assure you that we would not need to increase the valuation allowance to cover additional deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a material adverse effect on our income
tax provision and net income in the period in which such determination is made.

We had a valuation allowance of NT$2,499 million on our
deferred tax asset balance as of December 31, 2005. We do not have a full valuation allowance on the deferred tax asset, as we believe these benefits will be fully realizable based on our projection of future operating income. If we experience
a significant decrease in our future operating income, the realizability of our deferred tax assets could be negatively impacted, and thus an increase in the valuation allowance might be required.

Our Financial Reporting Obligations

Our audited
financial statements included in this annual report are prepared under US GAAP. Prior to our privatization in August 2005, we prepared certain unaudited financial data on a monthly and quarterly basis and audited financial statements on a semiannual
and annual basis in accordance with our internal accounting principles, which take into account ROC GAAP and relevant laws and regulations and government guidelines applicable to state-owned enterprises in the Republic of China. These internal
accounting principles, which we refer to as Chunghwa Telecom Internal Accounting Principles, have been approved by the government.

Prior
to our privatization in August 2005, we were also required to prepare on an annual basis audited financial statements subject to the review and adjustment of the Ministry of Audit in accordance with the Audit Law of the Republic of China and other
relevant laws and regulations. As a result, prior to our privatization in August 2005, we may have published up to three separate audited annual financial statements, including financial statements prepared under US GAAP, the Chunghwa Telecom
Internal Accounting Principles and the accounting standards used by the government.



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Prior to our privatization in August 2005, we made available the following unaudited financial statements
prepared in accordance with US GAAP at the same time that we make available financial statements for the same periods prepared in accordance with Chunghwa Telecom Internal Accounting Principles as required by Republic of China law:



| |  |  | financial statements for the three months ended March 31 of each fiscal year;
| | - |  | -----------------------------------------------------------------------------



| |  |  | financial statements for the three months and six months ended June 30 of each fiscal year; and
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | financial statements for the three months and nine months ended September 30 of each fiscal year.
| | - |  | -------------------------------------------------------------------------------------------------

In addition, prior to our privatization in August 2005, we made available audited annual financial statements prepared in accordance with US GAAP at
the same time that we make available our annual financial statements prepared in accordance with Chunghwa Telecom Internal Accounting Principles as required by Republic of China law.

The Chunghwa Telecom Internal Accounting Principles and the accounting standards used by the government differ in significant respects from each other
and from US GAAP. In addition, the government may require that adjustments be made in accordance with the Audit Law of the Republic of China to our financial statements prepared under the Chunghwa Telecom Internal Accounting Principles. However,
these adjustments did not have any material impact on our financial statements presented in this annual report. The financial statements presented in this annual report have been prepared in accordance with US GAAP and were not subject to
adjustment under the government review and audit process. You should not rely on our audited financial statements prepared under the Chunghwa Telecom Internal Accounting Principles or our financial statements audited by the government for purposes
of comparison with our financial statements prepared under US GAAP.

In addition, prior to our privatization in August 2005, dividends paid
to our shareholders had historically been determined based on our net income determined in accordance with the Chunghwa Telecom Internal Accounting Principles, which take into account ROC GAAP and relevant laws and regulations and government
guidelines applicable to state-owned enterprises. Dividends to be paid subsequent to our privatization will be determined in accordance with ROC GAAP.

After our privatization, we intend to transition into financial reporting under ROC GAAP, with reconciliation to US GAAP, beginning in 2008. In the interim, we expect we will continue to make available our
quarterly and semi-annual financial statements prepared in accordance with US GAAP.

A. Operating Results

The following table sets forth our revenues, operating costs and expenses, income from operations and other financial data for the periods indicated.



|                              |  |                                 |  |       |  |       |  |    
|----------------------------- |  | ------------------------------- |  | ----- |  | ----- |  | ---
|                              |  | For the year ended December 31,
|                              |  | 2003                            |  | 2004  |  | 2005 
|                              |  | (in billions)                  
|                              |  | NT$                             |  | NT$   |  | NT$   |  | US$
|Revenues:                     |  |                                 |  |       |  |       |  |    
|Fixed line                    |  |                                 |  |       |  |       |  |    
|Local                         |  | 48.4                            |  | 44.9  |  | 40.7  |  | 1.2
|Domestic long distance        |  | 13.4                            |  | 12.0  |  | 11.0  |  | 0.3
|International long distance   |  | 15.7                            |  | 15.2  |  | 14.6  |  | 0.5
|                              |  |                                 |  |       |  |       |  |    
|Total fixed line              |  | 77.5                            |  | 72.1  |  | 66.3  |  | 2.0
|                              |  |                                 |  |       |  |       |  |    
|Wireless                      |  |                                 |  |       |  |       |  |    
|Cellular                      |  | 66.2                            |  | 70.3  |  | 73.0  |  | 2.2
|Paging                        |  | 0.6                             |  | 0.3   |  | 0.1   |  |   
|                              |  |                                 |  |       |  |       |  |    
|Total wireless                |  | 66.8                            |  | 70.6  |  | 73.1  |  | 2.2
|                              |  |                                 |  |       |  |       |  |    
|Internet and data:            |  |                                 |  |       |  |       |  |    
|Internet                      |  | 25.9                            |  | 29.5  |  | 32.1  |  | 1.0
|Data                          |  | 9.7                             |  | 9.8   |  | 10.1  |  | 0.3
|                              |  |                                 |  |       |  |       |  |    
|Total Internet and data       |  | 35.6                            |  | 39.3  |  | 42.2  |  | 1.3
|                              |  |                                 |  |       |  |       |  |    
|Other                         |  | 2.6                             |  | 3.2   |  | 3.1   |  | 0.1
|                              |  |                                 |  |       |  |       |  |    
|Total revenues                |  | 182.5                           |  | 185.2 |  | 184.7 |  | 5.6
|                              |  |                                 |  |       |  |       |  |    
|Operating costs and expenses: |  |                                 |  |       |  |       |  |    
|Costs of services(1)          |  | 59.6                            |  | 60.3  |  | 70.1  |  | 2.1



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|                                                 |  |                                 |  |       |  |       |  |    
|------------------------------------------------ |  | ------------------------------- |  | ----- |  | ----- |  | ---
|                                                 |  | For the year ended December 31,
|                                                 |  | 2003                            |  | 2004  |  | 2005 
|                                                 |  | (in billions)                  
|                                                 |  | NT$                             |  | NT$   |  | NT$   |  | US$
|Marketing(1)                                     |  | 20.0                            |  | 19.3  |  | 23.7  |  | 0.7
|General and administrative(1)                    |  | 2.7                             |  | 2.5   |  | 3.5   |  | 0.1
|Research and development(1)                      |  | 2.6                             |  | 2.5   |  | 3.1   |  | 0.1
|Depreciation and amortizationcosts of services  |  | 39.2                            |  | 38.4  |  | 38.8  |  | 1.2
|Depreciation and amortizationoperating expenses |  | 2.4                             |  | 2.3   |  | 2.4   |  | 0.1
|                                                 |  |                                 |  |       |  |       |  |    
|Total operating costs and expenses               |  | 126.5                           |  | 125.3 |  | 141.6 |  | 4.3
|                                                 |  |                                 |  |       |  |       |  |    
|Income from operations                           |  | 56.0                            |  | 59.9  |  | 43.1  |  | 1.3
|Other income                                     |  | 2.2                             |  | 2.7   |  | 4.0   |  | 0.1
|Other expenses                                   |  | 0.6                             |  | 0.4   |  | 1.1   |  | 0.0
|Income before income tax                         |  | 57.6                            |  | 62.2  |  | 46.0  |  | 1.4
|Income tax                                       |  | 10.3                            |  | 11.3  |  | 12.7  |  | 0.4
|                                                 |  |                                 |  |       |  |       |  |    
|Net income                                       |  | 47.3                            |  | 50.9  |  | 33.3  |  | 1.0
|                                                 |  |                                 |  |       |  |       |  |    

---

|(1) | Excludes related depreciation and amortization.
|--- | -----------------------------------------------

The
following table sets forth our revenues, operating costs and expenses, income from operations and other financial data as a percentage of our total revenues for the periods indicated.



|                                                 |  |                                    |   |  |       |   |  |       |  
|------------------------------------------------ |  | ---------------------------------- | - |  | ----- | - |  | ----- | -
|                                                 |  | For the year ended December 31,    |  
|                                                 |  | 2003                               |   |  | 2004  |   |  | 2005  |  
|                                                 |  | (as percentages of total revenues) |  
|Revenues:                                        |  |                                    |   |  |       |   |  |       |  
|Fixed line                                       |  |                                    |   |  |       |   |  |       |  
|Local                                            |  | 26.5                               | % |  | 24.3  | % |  | 22.1  | %
|Domestic long distance                           |  | 7.4                                |   |  | 6.4   |   |  | 5.9   |  
|International long distance                      |  | 8.6                                |   |  | 8.2   |   |  | 7.9   |  
|                                                 |  |                                    |   |  |       |   |  |       |  
|Total fixed line                                 |  | 42.5                               |   |  | 38.9  |   |  | 35.9  |  
|                                                 |  |                                    |   |  |       |   |  |       |  
|Wireless                                         |  |                                    |   |  |       |   |  |       |  
|Cellular                                         |  | 36.3                               |   |  | 38.0  |   |  | 39.5  |  
|Paging                                           |  | 0.3                                |   |  | 0.2   |   |  | 0.1   |  
|                                                 |  |                                    |   |  |       |   |  |       |  
|Total wireless                                   |  | 36.6                               |   |  | 38.2  |   |  | 39.6  |  
|                                                 |  |                                    |   |  |       |   |  |       |  
|Internet and data:                               |  |                                    |   |  |       |   |  |       |  
|Internet                                         |  | 14.2                               |   |  | 15.9  |   |  | 17.3  |  
|Data                                             |  | 5.3                                |   |  | 5.3   |   |  | 5.5   |  
|                                                 |  |                                    |   |  |       |   |  |       |  
|Total Internet and data                          |  | 19.5                               |   |  | 21.2  |   |  | 22.8  |  
|                                                 |  |                                    |   |  |       |   |  |       |  
|Other                                            |  | 1.4                                |   |  | 1.7   |   |  | 1.7   |  
|                                                 |  |                                    |   |  |       |   |  |       |  
|Total revenues                                   |  | 100.0                              |   |  | 100.0 |   |  | 100.0 |  
|                                                 |  |                                    |   |  |       |   |  |       |  
|Operating costs and expenses:                    |  |                                    |   |  |       |   |  |       |  
|Costs of services(1)                             |  | 32.7                               |   |  | 32.6  |   |  | 38.0  |  
|Marketing(1)                                     |  | 10.9                               |   |  | 10.4  |   |  | 12.8  |  
|General and administrative(1)                    |  | 1.5                                |   |  | 1.4   |   |  | 1.9   |  
|Research and development(1)                      |  | 1.4                                |   |  | 1.3   |   |  | 1.7   |  
|Depreciation and amortizationcosts of services  |  | 21.5                               |   |  | 20.7  |   |  | 21.0  |  
|Depreciation and amortizationoperating expenses |  | 1.3                                |   |  | 1.3   |   |  | 1.3   |  
|                                                 |  |                                    |   |  |       |   |  |       |  
|Total operating costs and expenses               |  | 69.3                               |   |  | 67.7  |   |  | 76.7  |  
|                                                 |  |                                    |   |  |       |   |  |       |  
|Income from operations                           |  | 30.7                               |   |  | 32.3  |   |  | 23.3  |  
|Other income                                     |  | 1.2                                |   |  | 1.5   |   |  | 2.2   |  
|Other expenses                                   |  | 0.3                                |   |  | 0.2   |   |  | 0.6   |  
|Income before income tax                         |  | 31.6                               |   |  | 33.6  |   |  | 24.9  |  
|Income tax                                       |  | 5.7                                |   |  | 6.1   |   |  | 6.9   |  
|                                                 |  |                                    |   |  |       |   |  |       |  
|Net income                                       |  | 25.9                               | % |  | 27.5  | % |  | 18.0  | %
|                                                 |  |                                    |   |  |       |   |  |       |  

---

|(1) | Excludes related depreciation and amortization.
|--- | -----------------------------------------------



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Year ended December 31, 2004 compared with year ended December 31, 2005

Revenues

Our revenues decreased by 0.3% from
NT$185.2 million in 2004 to NT$184.7 billion (US$5.6 billion) in 2005. This decrease was primarily due to a continuous decline in fixed network business and an expansion of the average expected customer service period which affects the revenue from
fixed network.

Fixed Line Services

Fixed line revenues comprised 38.9% and 35.9% of our revenues in 2004 and 2005, respectively. Our fixed line revenues decreased by 8.0% from NT$72.1 billion in 2004 to NT$66.3 billion (US$2.0 billion) in 2005.

Local telephone services.Our local telephone revenues decreased by 9.3% from NT$44.9 billion in 2004 to NT$40.7 billion (US$1.2 billion) in 2005.
This decrease was principally a result of a 14.0% decline in traffic volume from 24.5 billion minutes in 2004 to 21.1 billion minutes in 2005. This decline in traffic volume was primarily due to the continued migration of non-HiNet Internet
subscribers from dial-up to broadband Internet access, the continued traffic migration from fixed line services to broadband and cellular services, and increasing market competition. We expect this trend to continue as broadband and cellular
services become more widely adopted in Taiwan. However, we believe the rate of traffic migration from fixed-line services to broadband and cellular services is slowing. This decline in traffic volume was partially offset by a 2.9% increase in
average local usage fees, reflecting a continued decrease in the number of users of our discounted Internet tariff package. The decrease was also due to the expansion of the customer service period from an average of 13 years to 16 years, which has
caused a substantial decline in revenues in local telephone connection fees. Our local interconnection revenues decreased by NT$0.1 billion between these two years because of a decrease in local interconnection volume.

Domestic long distance telephone services.Our domestic long distance telephone revenues decreased by 8.3% from NT$12.0 billion in 2004 to NT$11.0
billion (US$0.3 million) in 2005. This decrease was mainly due to a decrease in traffic volume from 5.6 billion minutes in 2004 to 5.1 billion minutes in 2005. The decrease in traffic volume was primarily due to the continued traffic migration from
fixed line services to broadband and cellular services and increased competition from other fixed line operators. The rate of migration from fixed line services to cellular services has been slowing in the past two years as the cellular market
becomes increasingly saturated. Our interconnection revenues also decreased as a result of more direct connections between private operators.

International long distance telephone services.Our international long distance telephone revenues decreased by 4.1% from NT$15.2 billion in 2004 to NT$14.6 billion (US$0.4 billion) in 2005. This decrease was mainly due to intense
market competition and a decrease in the average per minute usage charge due to promotional packages to encourage usage. This was partially offset by an 8% increase in outgoing traffic volume from 2004 to 2005. Our international settlement revenues
decreased by 5.6% from NT$3.5 billion in 2004 to NT$3.3 billion (US$0.1 billion) in 2005. This decrease was primarily due to the continued decline in international settlement rates and translation losses due to fluctuations in foreign exchange
rates.

Wireless Services

Wireless
revenues comprised 38.2% and 39.6% of our revenues in 2004 and 2005, respectively. Our wireless revenues increased by 3.6% from NT$70.6 billion in 2004 to NT$73.1 billion (US$2.2 billion) in 2005. Our cellular services grew as a percentage of our
revenues from 38.0% in 2004 to 39.5% in 2005. Our paging services decreased as a percentage of our revenues from 0.2% in 2004 to 0.1% in 2005.

Cellular services.Our cellular services revenues increased by 3.9% from NT$70.3 billion in 2004 to NT$73.0 billion (US$2.2 billion) in 2005. This increase was mainly a result of an increase in outgoing traffic volume of 2.9% from
8.7 billion minutes in 2004 to 8.9 billion minutes in 2005, as a result of an increase in the number of customers using monthly rental service.

Paging services.Our paging revenues decreased by 55% from NT$0.3 billion in 2004 to NT$0.1 billion (US$4.1 million) in 2005. This decrease was primarily due to a 45.9% decrease in the number of paging subscribers, resulting from
continued customer migration to cellular services, as cellular services become more widely adopted in Taiwan.



59



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Internet and Data Services

Internet and data revenues comprised 21.2% and 22.8% of our revenues in 2004 and 2005, respectively. Our Internet and data revenues increased by 7.2% from NT$39.3 billion in 2004 to NT$42.2 billion (US$1.3 million) in
2005 due primarily to an increase in our Internet services.

Internet services.Our revenues attributable to Internet services
increased by 8.6% from NT$29.5 billion in 2004 to NT$32.1 billion (US$1.0 billion) in 2005. This increase was largely due to an increase in the number of our asymmetrical digital subscriber line subscribers from 3.1 million as of
December 31, 2004 to 3.7 million as of December 31, 2005. This increase was also due to a 7.6% increase in the number of our HiNet subscribers from 3.8 million as of December 31, 2004 to 4.1 million as of
December 31, 2005. Calls to HiNet are recorded as part of our Internet and data services and are not included in our local minutes or revenues. We include usage fees from fixed line telephone calls to access our HiNet service in our Internet
and data revenues. Usage fees from fixed line telephone calls to access Internet service providers other than HiNet are recorded as fixed line revenues.

Data services.Revenues from our data services increased by 3.0% from NT$9.8 billion in 2004 to NT$10.0 billion (US$0.3 billion) in 2005. This increase was principally due to an increase in revenues from our
hiLink virtual private network service. We continue to derive a substantial portion of our data revenues from leased line services. While demand for higher speed lease lines continues to increase, our overall leased line tariffs have continued to be
adversely affected by competition from other fixed line operators and international leased line service providers, as well as the continued migration of domestic leased line users to asymmetrical digital subscriber line services. The effects of
tariff decreases were generally offset by the continued increase in the usage of our leased line services in 2005.

Other

Other revenues comprised 1.7% and 1.7% of our revenues in 2004 and 2005, respectively.

Our other revenues decreased by 2.2% from NT$3.2 billion in 2004 to NT$3.1 billion (US$95.6 million) in 2005. This decrease in other revenues was
primarily due to an NT$0.3 billion decrease in revenues from our corporate solution business.

Operating Costs and Expenses

Our operating costs and expenses increased by 13.0% from NT$125.3 billion in 2004 to NT$141.6 billion (US$4.3 billion) in 2005. This increase was
primarily due to increases in stock compensation expenses and performance-based bonuses. As a percentage of revenues, operating costs and expenses increased from 67.7% in 2004 to 76.7% in 2005.

Costs of Services

Costs of services include
personnel expenses, international settlement costs, handset subsidies, spectrum usage and license fees, costs of materials and maintenance and interconnection fees among cellular operators.

Our costs of services increased by 16.4% from NT$60.3 billion in 2004 to NT$70.1 billion (US$2.1 billion) in 2005. This increase was principally a result
of: (1) an NT$7.2 billion increase in employees purchase of our common shares at discounts; (2) an NT$0.9 billion increase in our handset subsidies; (3) an NT$0.8 billion increase in performance-based bonuses; and (4) an
NT$0.3 billion impairment loss on long-term assets. We recognize compensation expense when our employees purchase our common shares at discounts under the priority share subscription program.

Marketing

Our marketing expenses, which include
personnel expenses, provisions for bad debt and expenses relating to advertising and other marketing-related activities, increased by 22.6% from to NT$19.3 billion in 2004 to NT$23.7 billion (US$0.7 billion) in 2005. This increase was mainly due to
(1) an NT$4.0 billion increase in employees purchase of our common shares at discounts; and (2) an NT$0.4 billion increase in performance-based bonuses. We recognize compensation expense when our employees purchase our common shares
at discounts under the priority share subscription program.



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General and Administrative

Our general and administrative expenses increased by 37.5% from NT$2.5 billion in 2004 to NT$3.5 billion (US$0.1 billion) in 2005. This increase was primarily due to (1) an increase of NT$0.7 billion in
compensation expense arising under our employee priority share subscription program; and (2) an increase of NT$76 million in performance-based bonuses. We recognize compensation expense when our employees purchase our common shares at discounts
under the priority share subscription program. The higher compensation expense in 2005 was largely due to an increase in such purchases by our employees compared to 2004.

Research and Development

Our research and development expenses increased by 27.0% from NT$2.5
billion in 2004 to NT$3.1 billion (US$0.1 billion) in 2005. This increase was primarily due to (1) an increase of NT$0.5 billion in compensation expense arising under our employee priority share subscription program, and (2) an increase of
NT$74 million in performance-based bonuses. Our research and development expenses increased as a percentage of our revenues from 1.3% in 2004 to 1.7% in 2005. We recognize compensation expense when our employees purchase our common shares at
discounts under the priority share subscription program. The higher compensation expense in 2005 was largely due to an increase in such purchases by our employees compared to 2004.

Depreciation and Amortization

Our depreciation and amortization expenses increased by 1.1% from
NT$40.7 billion in 2004 to NT$41.2 billion (US$1.3 billion) in 2005. This increase was mainly due to the amortization of our 3G licence.

Operating
Costs and Expenses by Business Segment



|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|---------------------------------------------- |  | -------------------- |  | ---------------------- |  | ------------------------- |  | ----------- |  | ---------------- |  | ----- |  | -----
|                                               |  | Local                |  | Domestic Long Distance |  | InternationalLongDistance |  | Wireless(1) |  | Internetand Data |  | Other |  | Total
|                                               |  | (in billions of NT$)
|As of and for the year ended December 31, 2005 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Operating costs and expenses                   |  | 36.7                 |  | 1.7                    |  | 7.8                       |  | 23.7        |  | 22.9             |  | 2.6   |  | 95.4 
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Unallocated corporate expenses                 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 5    
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Total operating costs and expenses             |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 100.4
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Depreciation and amortization                  |  | 19.0                 |  | 0.7                    |  | 0.7                       |  | 7.6         |  | 12.4             |  | 0.6   |  | 41.0 
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Unallocated corporate expenses                 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 0.1  
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Total depreciation and amortization            |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 41.1 
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|As of and for the year ended December 31, 2004 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Operating costs and expenses                   |  | 32.8                 |  | 1.4                    |  | 7.7                       |  | 20.4        |  | 16.6             |  | 1.7   |  | 80.6 
|Unallocated corporate expenses                 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 4.0  
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Total operating costs and expenses             |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 84.6 
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Depreciation and amortization                  |  | 20.0                 |  | 0.8                    |  | 0.7                       |  | 6.2         |  | 12.4             |  | 0.5   |  | 40.6 
|Unallocated corporate expenses                 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 0.1  
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Total depreciation and amortization            |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 40.7 
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      

---

|(1) | Includes cellular and paging services.
|--- | --------------------------------------

Local telephone services

Our local telephone operating expenses, excluding depreciation and amortization, increased by 11.9% from NT$32.8 billion in 2004 to
NT$36.7 billion (US$1.1 billion) in 2005. This increase was primarily due to an NT$4.5 billion increase in employees purchase of our common shares at discount. Our depreciation and amortization expenses relating to local telephone services
decreased by 4.9 % from NT$20.0 billion in 2004 to NT$19.0 billion (US$0.6 billion) in 2005. The decrease was a result of a decrease in depreciation and amortization expenses because of an increase in obsolete equipment.

Domestic long distance telephone services

Our
domestic long distance telephone operating expenses, excluding depreciation and amortization, increased by 22.8% from NT$1.4 billion in 2004 to NT$1.7 billion (US$51.2 million) in 2005. The increase was primarily due to an NT$0.2 billion increase in
the employees purchase of our common shares at discount. Our depreciation and amortization



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expenses relating to domestic long distance telephone services decreased by 12.7% from NT$0.8 billion in 2004 to NT$0.7
billion (US$21.9 million) in 2005. The decrease in depreciation and amortization expenses was mainly due to a slow-down of our upgrading equipment.

International long distance telephone services

Our international long distance telephone operating expenses, excluding
depreciation and amortization, increased by 1.0% from NT$7.7 billion in 2004 to NT$7.8 billion (US$0.2 billion) in 2005. The increase was primarily due to an NT$0.35 billion increase in the employees purchase of our common shares at discounts.
Our depreciation and amortization expenses relating to international long distance telephone services remained flat at NT$0.7 billion in 2004 and in 2005.

Wireless Services

Our wireless operating expenses, excluding depreciation and amortization, increased by 16.4% from NT$20.4
billion in 2004 to NT$23.7 billion (US$0.7 billion) in 2005. This increase was primarily due to (1) an NT$1.2 billion increase in the employees purchase of our common shares at discounts; (2) an NT$1 billion increase in marketing
expenses. Our depreciation and amortization expenses relating to wireless services increased by 23% from NT$6.2 billion in 2004 to NT$7.6 billion (US$0.2 billion) in 2005. The increase was mainly due to (1) an NT$1.0 billion increase in
depreciation caused by purchases of new equipment such as mobile exchangers and signal transmitters and receivers; and (2) an NT$0.4 billion increase in amortization of 3G license fees.

Internet and Data Services

Our Internet and data
operating expenses, excluding depreciation and amortization, increased by 37.3% from NT$16.6 billion in 2004 tp NT$22.9 billion (US$0.7 billion) in 2005. This increase was primarily due to an NT$5.3 billion increase in the employees purchase
of our common shares at discounts. Our depreciation and amortization expenses relating to Internet and data services increased by 0.2% from NT$12.4 billion in 2004 to NT$12.4 billion (US$0.4 billion) in 2005.

Operating Income and Operating Margin

As a
result of the foregoing, our operating income decreased by 28% from NT$59.9 billion in 2004 to NT$43.1 billion (US$1.3 billion) in 2005. Our operating margin decreased from 32.3% in 2004 to 23.3% in 2005.

The following table sets forth certain information regarding our operating income by business segment for the periods indicated.



|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  |       |  
|---------------------------------------------- |  | ------------- | - |  | ---------------------- |  | ------------------------- |  | ----------- |  | ---------------- | - |  | ----- | - |  | ----- | -
|                                               |  | Local         |   |  | Domestic Long Distance |  | InternationalLongDistance |  | Wireless(1) |  | Internetand Data |   |  | Other |   |  | Total |  
|                                               |  | (in billions) |  
|As of and for the year ended December 31, 2005 |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  |       |  
|Income from operations                         |  | (1.7          | ) |  | 7.6                    |  | 2.9                       |  | 29.1        |  | 10.9             |   |  | (0.6  | ) |  | 48.2  |  
|Elimination of intersegment income             |  | (13.3         | ) |  | 1.0                    |  | 3.2                       |  | 12.7        |  | (4.0             | ) |  | 0.4   |   |  |      |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  |       |  
|                                               |  | (15.0         | ) |  | 8.6                    |  | 6.1                       |  | 41.8        |  | 6.9              |   |  | (0.2  | ) |  | 48.2  |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  |       |  
|Unallocated corporate expenses                 |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  | (5.1  | )
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  |       |  
|Total income from operations                   |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  | 43.1  |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  |       |  
|As of and for the year ended December 31, 2004 |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  |       |  
|Income from operations                         |  | 5.4           |   |  | 8.4                    |  | 3.8                       |  | 32.2        |  | 13.5             |   |  | 0.7   |   |  | 64.0  |  
|Elimination of intersegment income             |  | (13.3         | ) |  | 1.4                    |  | 3.0                       |  | 11.8        |  | (3.2             | ) |  | 0.3   |   |  |      |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  |       |  
|                                               |  | (7.9          | ) |  | 9.8                    |  | 6.8                       |  | 44.0        |  | 10.3             |   |  | 1.0   |   |  | 64.0  |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  |       |  
|Unallocated corporate expenses                 |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  | (4.1  | )
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  |       |  
|Total income from operations                   |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  | 59.9  |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |   |  |       |  

---

|(1) | Includes cellular and paging services.
|--- | --------------------------------------

As a result of
the foregoing, in 2004 compared to 2005 (1) operating loss for our local telephone services increased by 90.5% from NT$7.9 billion to NT$15.0 billion (US$457.9 million); (2) operating income for our domestic long distance telephone
services decreased by 12.3% from NT$9.8 billion to NT$8.6 billion (US$260.7 million); (3) operating income for our international long distance telephone services decreased by 10.3% from NT$6.8 billion to NT$6.1 billion (US$187.4 million);
(4) operating income for our wireless services decreased by 5% from NT$44.0 billion to NT$41.8 billion (US$1.3 billion); and (5) operating income for our Internet and data services decreased by 33.1% from NT$10.3 billion to NT$6.9 billion
(US$209.7 million).



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Our management evaluates our business segments taking into account internal and inter-segment costs and
revenues. All of our business lines, particularly local telephone, domestic long distance telephone and international long distance telephone services, operate as an integrated business unit. Therefore, we have shown the inter-segment income in the
above table.

Other Income and Other Expenses

Our other income increased by 48.3% from NT$2.7 billion in 2004 to NT$4.0 billion (US$0.1 billion) in 2005. This increase was primarily due to (1) an NT$301 million gain on disposal of property, plant and
equipment; (2) an NT$255 million increase in penalties income; and (3) an NT$228 million increase in interest income.

Our other
expenses increased by 163.8% from NT$0.4 billion in 2004 to NT$1.1 billion (US$34 million) in 2005. This increase was largely due to a NT$740 million increase in impairment loss on our long-term investment in the Taipei 101 building.

Income Tax

Our income tax was NT$11.3 billion
in 2004, compared to NT$12.7 billion (US$388 million) in 2005. Our effective tax rate was 18.1% in 2004 and 27.7% in 2005.

Net Income

As a result of the foregoing, our net income decreased by 34.6% from NT$50.9 billion in 2004 to NT$33.3 billion (US$1.0 billion) in
2005. Our net margin was 27.5% in 2004 and 18.0% in 2005.

Year ended December 31, 2003 compared with year ended December 31, 2004

Revenues

Our revenues
increased by 1.5% from NT$182.5 billion in 2003 to NT$185.2 billion in 2004. This increase was primarily due to increases in revenues from our cellular services and our Internet and data services, which were partially offset by a continued decrease
in revenues from our fixed line services.

Fixed Line Services

Fixed line revenues comprised 42.5% and 38.9% of our revenues in 2003 and 2004, respectively. Our fixed line revenues decreased by 7.0% from NT$77.5 billion in 2003 to NT$72.1 billion in 2004.

Local telephone services.Our local telephone revenues decreased by 7.2% from NT$48.4 billion in 2003 to NT$44.9 billion in 2004. This decrease
was principally a result of a 15.7% decline in traffic volume from 29.1 billion minutes in 2003 to 24.5 billion minutes in 2004. This decline in traffic volume was primarily due to the continued migration of non-HiNet Internet subscribers from
dial-up to broadband Internet access, the continued traffic migration from fixed line services to broadband and cellular services, and increasing market competition. We expect this trend to continue as broadband and cellular services become more
widely adopted in Taiwan. However, we believe the rate of traffic migration from fixed-line services to broadband and cellular services is slowing. This decline in traffic volume was partially offset by a 4.6% increase in average local usage fees,
reflecting a continued decrease in the number of users of our discounted Internet tariff package. Our local interconnection revenues decreased by NT$0.2 billion between these two periods because of a decrease in interconnection fee rates in early
2004.

Domestic long distance telephone services.Our domestic long distance telephone revenues decreased by 11.1% from NT$13.4
billion in 2003 to NT$12.0 billion in 2004. This decrease was mainly due to a decrease in traffic volume from 6.2 billion minutes in 2003 to 5.6 billion minutes in 2004. The decrease in traffic volume was primarily due to the continued traffic
migration from fixed line services to broadband and cellular services and increased competition from other fixed line operators. The rate of migration from fixed line services to cellular services has been slowing in the past two years as the
cellular market becomes increasingly saturated. Our interconnection revenues also decreased as a result of lower interconnection fee rates and more direct connections between private operators.



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International long distance telephone services.Our international long distance telephone revenues
decreased by 2.9% from NT$15.7 billion in 2003 to NT$15.2 billion in 2004. This decrease was mainly due to intense market competition and a decrease in the average per minute usage charge due to promotional packages to encourage usage. This was
partially offset by a slight increase in traffic volume from 2003 to 2004. Our international settlement revenues decreased by 7.5% from NT$3.8 billion in 2003 to NT$3.5 billion in 2004. This decrease was primarily due to the continued decline in
international settlement rates and translation losses due to fluctuations in foreign exchange rates.

Wireless Services

Wireless revenues comprised 36.6% and 38.2% of our revenues in 2003 and 2004, respectively. Our wireless revenues increased by 5.7% from NT$66.8 billion
in 2003 to NT$70.6 billion in 2004. Our cellular services grew as a percentage of our revenues from 36.3% in 2003 to 38.0% in 2004. Our paging services decreased as a percentage of our revenues from 0.3% in 2003 to 0.2% in 2004.

Cellular services.Our cellular services revenues increased by 6.2% from NT$66.2 billion in 2003 to NT$70.3 billion in 2004. This increase was
mainly a result of an increase in outgoing traffic volume of 12.0%, from 7.7 billion minutes in 2003 to 8.7 billion minutes in 2004, as a result of various promotions and packaged rates.

Paging services.Our paging revenues decreased by 49.7% from NT$0.6 billion in 2003 to NT$0.3 billion in 2004. This decrease was primarily due to
a 43.7% decrease in the number of paging subscribers, resulting from continued customer migration to cellular services, as cellular services become more widely adopted in Taiwan.

Internet and Data Services

Internet and data revenues comprised 19.5% and 21.2% of our revenues in
2003 and 2004, respectively. Our Internet and data revenues increased by 10.5% from NT$35.6 billion in 2003 to NT$39.3 billion in 2004. This increase was principally due to the continued growth of our Internet services business.

Internet services.Our revenues attributable to Internet services increased by 13.9% from NT$25.9 billion in 2003 to NT$29.5 billion in 2004. This
increase was largely due to an increase in the number of our asymmetrical digital subscriber line subscribers from 2.4 million as of December 31, 2003 to 3.1 million as of December 31, 2004. This increase was also due to a 7.6%
increase in the number of our HiNet subscribers from 3.6 million as of December 31, 2003 to 3.8 million as of December 31, 2004. Calls to HiNet are recorded as part of our Internet and data services and are not included in our
local minutes or revenues. We include usage fees from fixed line telephone calls to access our HiNet service in our Internet and data revenues. Usage fees from fixed line telephone calls to access Internet service providers other than HiNet are
recorded as fixed line revenues.

Data services.Revenues from our data services increased by 1.4% from NT$9.7 billion in 2003 to
NT$9.8 billion in 2004. This increase was principally due to a slight increase in revenues from our hiLink virtual private network service. We continue to derive a substantial portion of our data revenues from leased line services. While demand for
higher speed lease lines continues to increase, our overall leased line tariffs have continued to be adversely affected by competition from other fixed line operators and international leased line service providers, as well as the continued
migration of domestic leased line users to asymmetrical digital subscriber line services. The effects of tariff decreases were generally offset by the continued increase in the usage of our leased line services in 2004.

Other

Other revenues comprised 1.4% and 1.7% of our
revenues in 2003 and 2004, respectively.

Our other revenues increased by 23.6% from NT$2.6 billion in 2003 to NT$3.2 billion in 2004. This
increase in other revenues was primarily due to an increase in revenues from our multimedia on demand services, which were launched in March 2004.



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Operating Costs and Expenses

Our operating costs and expenses decreased by 1.0% from NT$126.5 billion in 2003 to NT$125.3 billion in 2004. This decrease was primarily due to decreases in marketing expenses and depreciation and amortization. As a
percentage of revenues, operating costs and expenses decreased from 69.3% in 2003 to 67.7% in 2004.

Costs of Services

Costs of services include personnel expenses, international settlement costs, handset subsidies, spectrum usage and license fees, costs of materials and
maintenance and interconnection fees among cellular operators.

Our costs of services increased by 1.0% from NT$59.6 billion in 2003 to
NT$60.3 billion in 2004. This increase was principally a result of: (1) an increase in our costs of services, other than personnel expenses, of 3.6% from NT$33.8 billion in 2003 to NT$35.0 billion in 2004, which was primarily due to a NT$1.0
billion increase in interconnection fees among cellular operators and a NT$0.6 billion increase in costs of materials; and (2) a decrease in our personnel expenses, excluding pension costs, of 3.7% from NT$23.3 billion in 2003 to NT$22.5
billion in 2004, which was primarily due to a decrease of NT$0.8 billion in compensation expense arising under our employee priority share subscription program. We recognize compensation expense when our employees purchase our common shares at
certain discounted prices under the priority share subscription program. The lower compensation expense in 2004 was largely due to a decrease in such purchases by our employees compared to 2003.

Marketing

Our marketing expenses, which include
personnel expenses, provisions for bad debt and expenses relating to advertising and other marketing-related activities, decreased by 3.5% from NT$20.0 billion in 2003 to NT$19.3 billion in 2004. Our personnel expenses, excluding pension costs,
increased by 1.3% from NT$9.5 billion in 2003 to NT$9.6 billion in 2004. This increase was mainly due to a NT$0.6 billion increase in salaries and bonuses attributable to an increase in the number of marketing personnel, which was partially offset
by a decrease of NT$0.4 billion in compensation expense arising under our employee priority share subscription program. We recognize compensation expense when our employees purchase our common shares at certain discounted prices under the priority
share subscription program. The lower compensation expense in 2004 was largely due to a decrease in such purchases by our employees compared to 2003. Our marketing expenses, excluding personnel expenses, decreased by 9.3% from NT$9.3 billion in 2003
to NT$8.5 billion in 2004. This decrease was primarily due to: (1) a NT$1.7 billion decrease in provisions for bad debt due to better collection and stricter credit review of new clients; and (2) a NT$0.7 billion increase in business
advertising fees for our cellular, HiNet and asymmetrical digital subscriber line services.

General and Administrative

Our general and administrative expenses decreased by 6.5% from NT$2.7 billion in 2003 to NT$2.5 billion in 2004. This decrease was primarily due to a
decrease of NT$97 million in compensation expense arising under our employee priority share subscription program. We recognize compensation expense when our employees purchase our common shares at certain discounted prices under the priority share
subscription program. The lower compensation expense in 2004 was largely due to a decrease in such purchases by our employees compared to 2003.

Research and Development

Our research and development expenses decreased by 4.1% from NT$2.6 billion in 2003 to NT$2.5
billion in 2004. This decrease was primarily due to a decrease of NT$94 million in compensation expense arising under our employee priority share subscription program. Our research and development expenses decreased as a percentage of our revenues
from 1.4% in 2003 to 1.3% in 2004. We recognize compensation expense when our employees purchase our common shares at certain discounted prices under the priority share subscription program. The lower compensation expense in 2004 was largely due to
a decrease in such purchases by our employees compared to 2003.

Depreciation and Amortization

Our depreciation and amortization expenses decreased by 2.1% from NT$41.6 billion in 2003 to NT$40.7 billion in 2004. This decrease was due to fewer
purchases of new equipment and an increase in equipment retired in 2004 as compared to 2003.



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Operating Costs and Expenses by Business Segment



|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|---------------------------------------------- |  | -------------------- |  | ---------------------- |  | ------------------------- |  | ----------- |  | ---------------- |  | ----- |  | -----
|                                               |  | Local                |  | Domestic Long Distance |  | InternationalLongDistance |  | Wireless(1) |  | Internetand Data |  | Other |  | Total
|                                               |  | (in billions of NT$)
|As of and for the year ended December 31, 2004 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Operating costs and expenses                   |  | 32.8                 |  | 1.4                    |  | 7.7                       |  | 20.4        |  | 16.6             |  | 1.7   |  | 80.6 
|Unallocated corporate expenses                 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 4.0  
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Total operating costs and expenses             |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 84.6 
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Depreciation and amortization                  |  | 20.0                 |  | 0.8                    |  | 0.7                       |  | 6.2         |  | 12.4             |  | 0.5   |  | 40.6 
|Unallocated corporate expenses                 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 0.1  
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Total depreciation and amortization            |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 40.7 
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|As of and for the year ended December 31, 2003 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Operating costs and expenses                   |  | 32.2                 |  | 1.9                    |  | 8.3                       |  | 20.9        |  | 16.7             |  | 1.1   |  | 81.1 
|Unallocated corporate expenses                 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 3.8  
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Total operating costs and expenses             |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 84.9 
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Depreciation and amortization                  |  | 22.1                 |  | 1.3                    |  | 0.6                       |  | 5.8         |  | 10.8             |  | 0.8   |  | 41.4 
|Unallocated corporate expenses                 |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 0.2  
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      
|Total depreciation and amortization            |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  | 41.6 
|                                               |  |                      |  |                        |  |                           |  |             |  |                  |  |       |  |      

---

|(1) | Includes cellular and paging services.
|--- | --------------------------------------

Local telephone services

Our local telephone operating expenses, excluding depreciation and amortization, increased by 1.9% from NT$32.2 billion in 2003 to
NT$32.8 billion in 2004. This increase was primarily due to an increase in our pension costs. Our depreciation and amortization expenses relating to local telephone services decreased by 9.4% from NT$22.1 billion in 2003 to NT$20.0 billion in 2004.
The decrease was mainly as a result of the continued reallocation of network equipment originally dedicated to our local telephone services to our asymmetrical digital subscriber line services.

Domestic long distance telephone services

Our
domestic long distance telephone operating expenses, excluding depreciation and amortization, decreased by 26.7% from NT$1.9 billion in 2003 to NT$1.4 billion in 2004. Our depreciation and amortization expenses relating to domestic long distance
telephone services decreased by 37.4% from NT$1.3 billion in 2003 to NT$0.8 billion in 2004. These decreases were primarily due to a decrease in personnel as well as depreciation and amortization expenses allocated to our domestic long distance
telephone services as a result of the decline in revenues from this business in 2004 compared to 2003, and a decrease in provisions for bad debt.

International long distance telephone services

Our international long distance telephone operating expenses, excluding
depreciation and amortization, decreased by 7.1% from NT$8.3 billion in 2003 to NT$7.7 billion in 2004. This decrease was principally a result of: (1) a NT$0.3 billion decrease in usage charges as a result of lower international tariffs; and
(2) a decrease of NT$0.1 billion in provisions for bad debt. Our depreciation and amortization expenses relating to international long distance telephone services increased by 9.1% from NT$0.6 billion in 2003 to NT$0.7 billion in 2004. This
increase was primarily due to an increase in purchases of equipment related to international long distance telephone services.

Wireless Services

Our wireless operating expenses, excluding depreciation and amortization, decreased by 2.5% from NT$20.9 billion in 2003 to NT$20.4
billion in 2004. This decrease was primarily due to a NT$1.7 billion decrease in provisions for bad debt and a NT$0.2 billion decrease in paging costs, partially offset by a NT$0.3 billion increase in personnel expenses as a result of an increase in
the number of staff allocated and a NT$0.8 billion increase in interconnection fees paid to other cellular operators. Our depreciation and amortization expenses relating to wireless services increased by 6.2% from NT$5.8 billion in 2003 to NT$6.2
billion in 2004. This increase was primarily due to new purchases of mobile exchanges and asymmetrical digital subscriber line signal transmitters and receivers.



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Internet and Data Services

Our Internet and data operating expenses, excluding depreciation and amortization, were relatively constant at NT$16.7 billion and NT$16.6 billion in 2003 and 2004, respectively. Our depreciation and amortization
expenses relating to Internet and data services increased by 14.4% from NT$10.8 billion in 2003 to NT$12.4 billion in 2004. This increase was primarily due to an increase in purchases of Internet value-added equipment and asymmetrical digital
subscriber line equipment.

Operating Income and Operating Margin

As a result of the foregoing, our operating income increased by 7.0% from NT$56.0 billion in 2003 to NT$59.9 billion in 2004. Our operating margin
increased from 30.7% in 2003 to 32.3% in 2004.

The following table sets forth certain information regarding our operating income by
business segment for the periods indicated.



|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  |       |  
|---------------------------------------------- |  | ------------- | - |  | ---------------------- |  | ------------------------- |  | ----------- |  | ---------------- | - |  | ----- |  | ----- | -
|                                               |  | Local         |   |  | Domestic Long Distance |  | InternationalLongDistance |  | Wireless(1) |  | Internetand Data |   |  | Other |  | Total |  
|                                               |  | (in billions) |  
|As of and for the year ended December 31, 2004 |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  |       |  
|Income from operations                         |  | 5.4           |   |  | 8.4                    |  | 3.8                       |  | 32.2        |  | 13.5             |   |  | 0.7   |  | 64.0  |  
|Elimination of intersegment income             |  | (13.3         | ) |  | 1.4                    |  | 3.0                       |  | 11.8        |  | (3.2             | ) |  | 0.3   |  |      |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  |       |  
|                                               |  | (7.9          | ) |  | 9.8                    |  | 6.8                       |  | 44.0        |  | 10.3             |   |  | 1.0   |  | 64.0  |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  |       |  
|Unallocated corporate expenses                 |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  | (4.1  | )
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  |       |  
|Total income from operations                   |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  | 59.9  |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  |       |  
|As of and for the year ended December 31, 2003 |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  |       |  
|Income from operations                         |  | 7.5           |   |  | 8.1                    |  | 3.8                       |  | 27.8        |  | 12.3             |   |  | 0.5   |  | 60.0  |  
|Elimination of intersegment income             |  | (13.4         | ) |  | 2.1                    |  | 3.0                       |  | 12.3        |  | (4.2             | ) |  | 0.2   |  |      |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  |       |  
|                                               |  | (5.9          | ) |  | 10.2                   |  | 6.8                       |  | 40.1        |  | 8.1              |   |  | 0.7   |  | 60.0  |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  |       |  
|Unallocated corporate expenses                 |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  | (4.0  | )
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  |       |  
|Total income from operations                   |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  | 56.0  |  
|                                               |  |               |   |  |                        |  |                           |  |             |  |                  |   |  |       |  |       |  

---

|(1) | Includes cellular and paging services.
|--- | --------------------------------------

As a result of
the foregoing, in 2003 compared to 2004: (1) operating loss for our local telephone services increased by 34.4% from NT$5.9 billion to NT$7.9 billion; (2) operating income for our domestic long distance telephone services decreased by 4.9%
from NT$10.2 billion to NT$9.8 billion; (3) operating income for our international long distance telephone services was NT$6.8 billion and NT$6.8 billion, respectively; (4) operating income for our wireless services increased by 9.9% from
NT$40.1 billion to NT$44.0 billion; and (5) operating income for our Internet and data services increased by 27.5% from NT$8.1 billion to NT$10.3 billion.

Our management evaluates our business segments taking into account internal and inter-segment costs and revenues. All of our business lines, particularly local telephone, domestic long distance telephone and
international long distance telephone services, operate as an integrated business unit. Therefore, we have shown the inter-segment income in the above table.

Other Income and Other Expenses

Our other income increased by 23.4% from NT$2.2 billion in 2003 to NT$2.7 billion in
2004. This increase was primarily due to (1) a NT$270 million increase in income from the sale of scrap materials and (2) a NT$124 million increase in interest income resulting from a combination of a rise in interest rates and our
increased cash position.

Our other expenses decreased by 23.9% from NT$0.6 billion in 2003 to NT$0.4 billion in 2004. This decrease was
largely due to a NT$143 million decrease in charitable donations.

Income Tax

Our income tax was NT$10.3 billion in 2003, compared to NT$11.3 billion in 2004. Our effective tax rate was 17.9% in 2003 and 18.1% in 2004.



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Net Income

As a result of the foregoing, our net income increased by 7.6% from NT$47.3 billion in 2003 to NT$50.9 billion in 2004. Our net margin was 25.9% in 2003 and 27.5% in 2004.

B. Liquidity and Capital Resources

Liquidity

The following table sets forth the summary of our cash flows for the periods indicated:



|                                                 |  |                                 |   |  |       |   |  |       |   |  |      |  
|------------------------------------------------ |  | ------------------------------- | - |  | ----- | - |  | ----- | - |  | ---- | -
|                                                 |  | For the year ended December 31, |  
|                                                 |  | 2003                            |   |  | 2004  |   |  | 2005  |  
|                                                 |  | (in billions)                   |  
|                                                 |  | NT$                             |   |  | NT$   |   |  | NT$   |   |  | US$  |  
|Net cash provided by operating activities        |  | 93.6                            |   |  | 91.6  |   |  | 86.2  |   |  | 2.6  |  
|Net cash used in investing activities            |  | (32.2                           | ) |  | (32.4 | ) |  | (28.0 | ) |  | (0.8 | )
|Net cash used in financing activities            |  | (55.5                           | ) |  | (43.4 | ) |  | (45.6 | ) |  | (1.4 | )
|Net increase in cash and cash equivalents        |  | 5.9                             |   |  | 15.8  |   |  | 12.6  |   |  | 0.4  |  
|Cash and cash equivalents at beginning of period |  | 7.6                             |   |  | 13.5  |   |  | 29.3  |   |  | 0.9  |  
|Cash and cash equivalents at end of period       |  | 13.5                            |   |  | 29.3  |   |  | 41.9  |   |  | 1.3  |  

Our primary source of liquidity is cash flow from operations, which represents operating profit
adjusted for non-cash items, primarily depreciation and amortization and changes in current assets and liabilities. We believe that our working capital is sufficient for our present requirements.

In 2005, our net cash provided by operating activities totaled NT$86.2 billion (US$2.6 billion), compared with NT$91.6 billion in 2004. This decrease was
primarily due to a decrease in net income. In 2004, our net cash provided by operating activities totaled NT$91.6 billion compared with NT$93.6 billion in 2003. This decrease was primarily due to a decrease of NT$5.3 billion in accrued pension
liabilities, partially offset by an increase of NT$3.6 billion in net income.

Historically, net cash provided by operating activities has
been sufficient to cover our capital expenditures, including the ongoing expansion and modernization of our networks. Our net cash used in investing activities decreased from NT$32.4 billion in 2004 to NT$28.0 billion (US$0.8 billion) in 2005,
principally as a result of an NT$4.3 billion decrease in purchases and sales of short-term investments. Our net cash used in investing activities increased from NT$32.2 billion in 2003 to NT$32.4 billion in 2004, principally as a result of a NT$9.1
billion increase in purchases and sales of short-term investments and a NT$0.5 billion increase in acquisition of investments in unconsolidated companies, offset by a NT$9.4 billion decrease in acquisition of property, plant and equipment.

In 2005, our net cash used in financing activities totaled NT$45.6 billion (US$1.4 billion), which reflected NT$45.3 billion of payment of
dividends during that period. In 2004, our net cash used in financing activities totaled NT$43.4 billion, which reflected NT$43.4 billion of payment of dividends during that period. In 2003, our net cash used in financing activities totaled NT$55.5
billion, primarily due to NT$38.6 billion of payment of dividends and a NT$17.0 billion payment of long-term loans during that period.

Capital
Resources

We have historically financed our capital expenditure requirements with our cash flows from operations.

In future years, we expect to have capital expenditure requirements for the ongoing expansion and upgrade of our networks combined with anticipated
outlays for the introduction of new services, including our third generation cellular services. We also expect to make dividend payments on an ongoing basis. See Item 8. Financial InformationA. Consolidated Statements and Other Financial
Information. Furthermore, we may require working capital from time to time to finance purchases of materials for our maintenance and other overhead expenses. We expect to primarily rely on cash generated from operations and, to a lesser
extent, loans from commercial banks to meet our planned capital expenditures, planned dividend payments, repay debts and fulfill other commitments over the next 12 months.



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As of December 31, 2005, our primary source of liquidity was NT$41.9 billion (US$1.3 billion) of
cash and cash equivalents. Our long-term loans are revolving facilities with a term of five years ending in March 2007. We are not subject to any covenants under any of our long-term loan facilities.

In 1995, we and several other utilities in Taiwan that are controlled by the Republic of China government contributed to a fund that allows each of these
utilities to borrow funds on an interest-free basis, up to the amount such utility contributed, for the purpose of pipeline construction in connection with its business. As of December 31, 2005, we have contributed NT$2.0 billion to this fund,
and are not required to make any additional contributions in the future. As of December 31, 2005, we had total outstanding borrowings of NT$0.5 billion from this fund (including NT$0.2 billion due within one year). We are not required to
provide any collateral to secure these borrowings.

We have a revolving credit facility with a term of one year. As of December 31,
2005, we had not made any drawdowns under this facility. We are not subject to any covenants for borrowings under this facility. In the past, we had from time to time issued commercial paper to fund our working capital needs. In 2005, we did not
issue any commercial paper. We may issue commercial paper in the future for our short-term cash requirements.

We have not entered into any
financial guarantees or similar commitments to guarantee the payment obligations of third parties. In addition, we do not have any written options on non-financial assets.

Capital Expenditures

The following table sets forth a summary of our capital expenditures, according
to our principal lines of business, for the periods indicated.



|                           |  |                                          |  |       |      |  |      |      |       |   |  |      |  |       |  
|-------------------------- |  | ---------------------------------------- |  | ----- | ---- |  | ---- | ---- | ----- | - |  | ---- |  | ----- | -
|                           |  | For the year ended December 31,          | 
|                           |  | 2003                                     |  |       | 2004 |  |      | 2005 |      
|                           |  | (in billions of NT$, except percentages) | 
|Capital Expenditures       |  |                                          |  |       |      |  |      |      |       |   |  |      |  |       |  
|Fixed line                 |  | 9.3                                      |  | 28.8  | %    |  | 5.0  |      | 22.0  | % |  | 5.2  |  | 22.5  | %
|Cellular                   |  | 7.9                                      |  | 24.6  |      |  | 5.5  |      | 24.1  |   |  | 4.4  |  | 19.4  |  
|Internet and data          |  | 14.3                                     |  | 44.3  |      |  | 11.6 |      | 50.6  |   |  | 12.7 |  | 55.4  |  
|Others                     |  | 0.7                                      |  | 2.3   |      |  | 0.8  |      | 3.3   |   |  | 0.6  |  | 2.7   |  
|                           |  |                                          |  |       |      |  |      |      |       |   |  |      |  |       |  
|Total capital expenditures |  | 32.2                                     |  | 100.0 | %    |  | 22.9 |      | 100.0 | % |  | 22.9 |  | 100.0 | %
|                           |  |                                          |  |       |      |  |      |      |       |   |  |      |  |       |  

The following table sets forth a summary of our planned capital expenditures, according to our
principal lines of business, for the year ending December 31, 2006.



|                           |  |                                          |  |       |  
|-------------------------- |  | ---------------------------------------- |  | ----- | -
|                           |  | For the Year ending December 31, 2006    | 
|                           |  | (in billions of NT$, except percentages) | 
|Capital Expenditures       |  |                                          |  |       |  
|Fixed line                 |  | 4.71                                     |  | 18.0  | %
|Cellular                   |  | 7.59                                     |  | 29.0  |  
|Internet and data          |  | 13.39                                    |  | 51.1  |  
|Others                     |  | 0.49                                     |  | 1.9   |  
|Total capital expenditures |  | 26.18                                    |  | 100.0 | %
|                           |  |                                          |  |       |  

We expect fixed line investments to account for an increasingly smaller portion of our capital
expenditures, and we expect cellular and Internet and data investments to account for an increasingly larger portion of our capital expenditures. We expect to incur aggregate expenses of NT$12.0 billion in connection with the construction of our
third generation cellular network, which will include approximately 2,800 base stations and has a planned capacity for 2.4 million lines. Of these expected aggregate expenses of NT$12.0 billion, we incurred expenses of NT$3.3 billion and NT$205
billion in 2004 and 2005, respectively. We expect to incur another NT$4.68 billion of expenses in 2006.

We expect our total capital
expenditures to rise in future periods, because of: (1) the launch of new businesses, including multimedia on demand, asymmetrical digital subscriber line, fiber-to-the-building services, voice over Internet protocol and third generation
cellular telephone services; (2) the implementation of a network modernization program, including the planned migration of our fixed line networks to Internet protocol next generation networks; and (3) the need to replace outdated
equipment.



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Inflation/Deflation

We do not believe that deflation or inflation in Taiwan has had a material impact on our results of operations.

Recent
Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R) Share-Based Payment. SFAS No. 123(R)
requires that companies recognize compensation expense equal to the fair value of stock options or other share based payments for the annual reporting period beginning after June 15, 2005. SFAS No. 123(R) applies to all awards granted
after January 1, 2006, and prior periods awards that are modified, repurchased, or cancelled after January 1, 2006. There is no impact on us as a result of this standard as we do not currently issue stock options to our employees or
others.

In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error Corrections. SFAS No. 154 requires
that companies apply accounting changes and error corrections to financial statements retrospectively from previous period unless it is impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. There is no impact on us as a result of the adoption of this standard as we do not currently intend to change our accounting principles, estimate or reporting entity.

C. Research, Development, Patents and Licenses, Etc.

Research and Development

Our research and development efforts are focused on the development of advanced network services
and operation technologies as well as the development of core technologies for the domestic telecommunications market. For 2003, 2004 and 2005, our research and development expenses excluding depreciation and amortization were approximately NT$2.6
billion, NT$2.5 billion and NT$3.1 billion (US$0.1 billion), respectively, or 1.4%, 1.3% and 1.7% of our revenues, respectively.

We
currently have more than 1,170 researchers focusing on the following areas:



| |  |  | wireless communication;
| | - |  | -----------------------



| |  |  | broadband transmission and access;
| | - |  | ----------------------------------



| |  |  | Internet and multimedia applications;
| | - |  | -------------------------------------



| |  |  | network operation support;
| | - |  | --------------------------



| |  |  | customer service information;
| | - |  | -----------------------------



| |  |  | advanced technologies research; and
| | - |  | -----------------------------------



| |  |  | customer premises equipment.
| | - |  | ----------------------------

We have developed a number
of advanced network services, operation technologies and applications and value-added services, including our asymmetrical digital subscriber line deployment, Internet-based call center, e-commerce platform, global standard for mobile communications
billing system, a new telecommunications operation service system for all business units of our company, government public key infrastructure, a leased line testing and monitoring system and an intelligent transportation system. As of
December 31, 2005, we have been granted 270 domestic patents and 18 foreign patents.

D. Trend Information

See Overview for a discussion of the most significant recent trends that have had, and in the future may have, a material impact on our
results of operations, financial condition and capital expenditures. In addition, see discussions



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included in this Item for a discussion of known trends, uncertainties, demands, commitments or events that we believe are
reasonably likely to have a material effect on our net operating revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of
future operating results or financial condition.

E. Off-Balance Sheet Arrangements

We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward
contracts. We do not engage in trading activities involving non-exchange traded contracts.

F. Tabular Disclosure of Contractual Obligations

Set forth below are our total contractual obligations as of December 31, 2005.



|                        |  |                      |  |      |  |      |  |      |  |      |  |           
|----------------------- |  | -------------------- |  | ---- |  | ---- |  | ---- |  | ---- |  | ----------
|                        |  | Total                |  | 2006 |  | 2007 |  | 2008 |  | 2009 |  | After 2009
|                        |  | (in billions of NT$)
|Contractual Obligations |  |                      |  |      |  |      |  |      |  |      |  |           
|Long-term debt          |  | 0.5                  |  | 0.2  |  | 0.3  |  |     |  |     |  |          
|Operating leases        |  | 3.3                  |  | 1.3  |  | 0.9  |  | 0.6  |  | 0.3  |  | 0.2       

As of December 31, 2005, we had remaining commitments under non-cancelable contracts with
various parties as follows: (1) acquisition of lands and buildings of NT$2.7 billion and (2) acquisition of telecommunications equipment of NT$16.4 billion.

G. Foreign Exchange

Our revenues and costs and expenses are largely denominated in NT dollars.
Our principal expenses denominated in foreign currencies are capital expenditures on telecommunications equipment and settlement payments for the use of networks of carriers in foreign countries for outgoing international calls. Settlement receipts
have been a principal source of foreign currency for us. While future fluctuations of the NT dollar against foreign currencies could impact our financial condition and results of operations, we have not to date been materially affected by the
fluctuation of the NT dollar against foreign currencies.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

The following table sets forth the name, age, position and tenure of each of our directors, supervisors and executive officers and such persons
position as of March 31, 2006. There is no family relationship among any of these persons. All of our directors and supervisors were elected at our annual general shareholders meeting held on June 25, 2004 and have terms from
June 25, 2004 to June 24, 2007.



|                      |  |     |  |                                      |  |               
|--------------------- |  | --- |  | ------------------------------------ |  | --------------
|Name                  |  | Age |  | Position                             |  | Tenure with us
|Tan Ho Chen           |  | 56  |  | Chairman and Chief Executive Officer |  | 3 years       
|Shyue-Ching Lu        |  | 57  |  | Director and President               |  | 28 years      
|Oliver F.L. Yu        |  | 60  |  | Director                             |  | 4 years       
|Yu-Huei Jea           |  | 63  |  | Director                             |  | 8 years       
|Jeng-Tsuen Liaw       |  | 63  |  | Director                             |  | 2 years       
|Neng-Pai Lin          |  | 53  |  | Director                             |  | 3 months      
|Chiu-Kuei Huang       |  | 52  |  | Director                             |  | 3 years       
|Lo-Ming Chung         |  | 55  |  | Director                             |  | 3 years       
|Chien-Cheng Lin       |  | 49  |  | Director                             |  | 2 years       
|Jing-Twen Chen(1)     |  | 52  |  | Director                             |  | 5 years       
|Zse-Hong Tsai(1)      |  | 45  |  | Director                             |  | 4 years       
|Joyce H.Y. Jen(1)     |  | 49  |  | Director                             |  | 2 years       
|Hsu-Chung Simon Chang |  | 47  |  | Director                             |  | 29 years      
|Judy Fu-meei Ju       |  | 49  |  | Supervisor                           |  | 4 years       
|Ming-Daw Chang        |  | 53  |  | Supervisor                           |  | 3 years       
|Yu-Hsien Lin          |  | 49  |  | Supervisor                           |  | 3 years       



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|                   |  |     |  |                                                   |  |               
|------------------ |  | --- |  | ------------------------------------------------- |  | --------------
|Name               |  | Age |  | Position                                          |  | Tenure with us
|Yeong-Chwan Hwang  |  | 51  |  | Supervisor                                        |  | 7 years       
|Feng-Hsiung Chang  |  | 61  |  | Senior Vice President                             |  | 36 years      
|Chin-Yi Yue        |  | 64  |  | Senior Vice President                             |  | 39 years      
|Hank Han-Chao Wang |  | 56  |  | Chief Financial Officer and Senior Vice President |  | 31 years      
|Tsung-Yen Chang    |  | 57  |  | Senior Vice President                             |  | 32 years      
|John C.C. Hsueh    |  | 60  |  | Executive Vice President                          |  | 34 years      
|Chun-Ming Hsieh    |  | 62  |  | Executive Vice President                          |  | 38 years      
|Jung-Ho Lee        |  | 62  |  | Executive Vice President                          |  | 35 years      
|Shaio-Tung Chang   |  | 59  |  | Executive Vice President                          |  | 37 years      
|Jen-Hung Lin       |  | 60  |  | Executive Vice President                          |  | 37 years      
|Lai-Shi Chang      |  | 63  |  | Executive Vice President                          |  | 34 years      

---

|(1) | Independent director.
|--- | ---------------------

Tan Ho Chenis our Chairman
and Chief Executive Officer. Mr. Ho Chen is also currently an Executive Officer of The National Land Policy Advisory Committee, Office of the President, Republic of China. Mr. Ho Chen was the Executive Vice Minister of the Ministry of
Transportation and Communications from 2000 to 2001. Mr. Ho Chen holds a Masters degree in regional and urban planning from Virginia Polytechnic Institute & State University and a Bachelors degree in civil engineering from
the National Chung-Hsing University in Taiwan and studied urban planning while on a Humphrey Fellowship at Hunter College in New York.

Shyue-Ching Luis a director and the President of our company. Dr. Lu was the Director General of the Department of Posts and Communications of the Ministry of Transportation and Communications from 1993 to 1994 and the Deputy
Director General of the Directorate General of Telecommunications from 1994 to 1996. Dr. Lu holds a Ph.D. degree in electrical engineering from the University of Hawaii and a Bachelors degree in engineering from the National Cheng Kung
University in Taiwan.

Oliver F.L. Yu is a director of our company. Mr. Yu is also currently the Vice Minister of the Ministry
of Transportation and Communications. Mr. Yu was the Director of Kaohsiung Harbor Bureau from 1996 to 2001 and the Director General of Civil Aeronautics Administration, Ministry of Transportation and Communications from 2001 to 2002.
Mr. Yu holds a Master of Business Administration degree from the Institute of Management Science, National Chiao Tung University and a Bachelors degree in transportation and communications management science from the National Cheng Kung
University in Taiwan.

Yu-Huei Jeais a director of our company. Dr. Jea is also a Senior Counselor of the Ministry of
Transportation and Communications. Dr. Jea was the Director General of the Department of Posts and Telecommunications from 1994 to 1996 and the Director General of the Directorate General of Telecommunications from 1996 to 1997. Dr. Jea
holds a Ph.D. degree from the University of Texas at Austin.

Jeng-Tsuen Liawis a director of our company. Mr. Liaw is also a
Director of Personnel Department, the Ministry of Transportation and Communications. He was the Director General of the Department of Manpower of Central Personnel Administration, Executive Yuan from 1995 to 2001. He graduated from the Department of
Public Administration and Policy at the National Chung-Hsing University in Taiwan. His specialty field is human resources management.

Neng-Pai Lin is a director of our company. Mr. Lin is also a Professor of Health Care Organization Administration at the National Taiwan University. He holds a Ph.D. degree from Ohio State University, majored in Management.

Chiu-Kuei Huangis a director of our company. Ms. Huang is also currently the Director of Labor Relations, Department of the
Council of Labor Affairs. Ms. Huang was the Director of the Labor Condition Department from 2002 to 2003. She graduated from the Institute of Labor Science, Chinese Culture University, with a Masters degree.

Lo-Ming Chungis a director of our company. Mr. Chung is also currently the Executive Vice President of China Steel Corporation. He holds a
Master of Business Administration degree from Arizona State University and a Bachelors degree from National Taiwan University.

Chien-Cheng Lin is a director of our company. Since 1991, Dr. Lin has been a Professor of the Department of Materials Science and Engineering, National Chiao Tung University. He is also the Dean of General Affairs at the
National



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Chiao Tung University. He holds a Ph.D. degree in materials science and engineering from the University of Illinois at
Urbana-Champaign, a Bachelor of Science degree in mechanical engineering from the National Taiwan University, and a Master of Science degree in materials science and engineering from the National Sun Yat-Sen University in Taiwan.

Jing-Twen Chen is a director of our company. Dr. Chen is also a Professor at the Department of Finance of the National Central University in
Taiwan. Dr. Chen holds a Ph.D. degree in finance from the National Taiwan University of Science and Technology.

Zse-Hong Tsaiis a director of our company. Dr. Tsai is also currently a Professor of Electrical Engineering at the National Taiwan University. His research interest includes broadband networking, performance evaluation and telecommunication regulations.
Dr. Tsai holds a Ph.D. degree and a Master of Science degree in electrical engineering from the University of California, and a Bachelor of Science degree in electrical engineering from the National Taiwan University.

Joyce H.Y. Jen is a director of our company. Ms. Jen is the founder and a senior partner of Serenity Law Office. She graduated from the
National Taiwan University with Bachelors and Masters degrees in law. She also studied at the Law School of University College London, Great Britain, and the University of Wisconsin. She specializes in commercial law, business law and
corporate transactions, construction and public contracts law, intellectual property law and real estate law.

Hsu-Chung Simon Chang
is a director of our company. Mr. Chang is also President of Chunghwa Telecom Workers Union. He holds a Masters degree of Institute of Public Affair Management of National Sun Yat-Sen University, ROC and a Bachelors degree in
Foreign Languages & Literature, from National Cheng Kung University. Mr. Chang is currently a student in the Ph.D. program at the Institute of Public Affair Management of National Sun Yat-Sen University.

Judy Fu-meei Ju is a supervisor of our company. Ms. Ju also serves as the Third Department Director General of the Executive Yuan and as a
public prosecutor in the Taiwan Superior Court Prosecutors Office. Ms. Ju holds a Ph.D. degree in law from the National Taiwan University.

Ming-Daw Changis a supervisor of our company. Mr. Chang is currently the Deputy Director General of Examination Bureau of Financial Supervisory Commission. Mr. Chang has worked for MOF since 1985,
BOMA since 1991 and BOE since 2004. Mr. Chang holds a Masters degree in law from the Law Department of the Chinese Culture University in Taiwan.

Yu-Hsien Lin is a supervisor of our company. Mr. Lin is currently the Director of the Department of Accounting of the Ministry of Transportation and Communications. Mr. Lin was previously the Director
of General Affairs of Directorate General of Budget, Accounting & Statistics, the Executive Yuan. Mr. Lin holds a master degree in Statistics from the National Chung-Hsing University in Taiwan.

Yeong-Chwan Hwang is a supervisor of our company. Mr. Hwang is also currently the Director of Accounting Office and the Deputy Director of
Accounting Management Center of the Directorate General of Budget, Accounting and Statistics of the Executive Yuan. Mr. Hwang holds a Masters degree from Soochow University and a Bachelors degree in accounting from the Fu Jen
Catholic University, both in Taiwan.

Feng-Hsiung Changis a Senior Vice President of our company. Mr. Chang is also a director
of Siemens Telecommunications Systems and Chunghwa Investment Co., Ltd. Mr. Chang served as Deputy Managing Director of the Northern Taiwan Telecommunications Administration from 1994 to 1996. Mr. Chang holds a Bachelors degree from
Chung-Hsing University and a Master of Business Administration degree from the National Chiao Tung University, both in Taiwan.

Chin-Yi
Yueis a Senior Vice President of our company. Mr. Yue is also a supervisor to the International Telecommunications Development Corp. Mr. Yue served as Vice President for our Long Distance and Mobile Division from 1996 to 2000.
Mr. Yue was also a Vice President of our company and the manager of Han-Tong Branch from 2002 to 2004. Mr. Yue holds a Masters degree in electrical engineering from the National Taiwan University.

Hank Han-Chao Wang is the Chief Financial Officer and a Senior Vice President of our company. Mr. Wang is also a supervisor of Siemens
Telecommunication System Limited and Chunghwa Investment Co., Ltd. Mr. Wang served as the Senior Managing Director of the Finance Department of our company from 2001 to 2005 and has a total working experience of 30 years in our company.
Mr. Wang holds a Masters Degree in management science from the National Chiao Tung University in Taiwan.



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Tsung-yen Chang is a Senior Vice President of our company. Mr. Chang is also a director of
the Taiwan International Standard Electronics Ltd. Mr. Chang served as Assistant Vice President of our company and deputy manager of north district branch from August 2003 to January 2006. Prior to that, he was a Manager of Banciao Operation
Department. Mr. Chang holds a Master of Science degree from the National Chiao Tung University.

John C.C. Hsuehis an
Executive Vice President of our company. Dr. Hsueh served as Vice President of our Northern Taiwan Business Division from 1996 to 1998 and as President of our Telecommunications Laboratories from 1998 to 2000. Dr. Hsueh holds a Ph.D.
degree in electrical engineering and computer science from Northwestern University.

Chun-Ming Hsiehis an Executive Vice President
of our company. Mr. Hsieh served as Deputy Managing Director of the Central Taiwan Telecommunications Administration from 1994 to 1996 and Vice President from 1996 to 2004. Mr. Hsieh holds a Bachelors degree in electrical engineering
from the National Cheng-Kung University and a Masters degree in management science from the National Chiao Tung University, both in Taiwan.

Jung-Ho Lee is an Executive Vice President and general manager of south district branch of our company. Mr. Lee is also a director of the International Telecommunications Development Corp. Mr. Lee served as Assistant Vice
President and deputy manager of south district branch of our company from September 2004 to January 2006. Prior to that, he was the head of our Legal Department. Mr. Lee graduated from the National Taiwan University with a Master degree in law.

Shaio-Tung Changis an Executive Vice President of our company. Mr. Chang is also a director of Chunghwa Investment Co., Ltd.
Mr. Chang was the general manager of our Marketing Department from 1996 to 2001. Mr. Chang holds a Master of Business Administration degree from the National Chiao Tung University in Taiwan.

Jen-Hung Lin is an Executive Vice President and general manager of International Branch of our company. Mr. Lin is also a director of the
RPTI International Co., Ltd. Mr. Lin served as Assistant Vice President and deputy manager of Mobile Communications branch from July 1996 to January 2006. Mr. Lin graduated from New York Institute of Technology with Master degree in
electrical engineering.

Lai-Shi Changis an Executive Vice President of our company. Mr. Chang was the President of our
Telecommunication Training Center from 2002 to 2005. Mr. Chang has served in our company for 33 years. Mr. Chang holds a Ph.D. degree in electrical engineering from the National Chiao Tung University in Taiwan.

B. Compensation

Our directors and supervisors
currently do not receive any compensation in their capacities as such, although they may be reimbursed certain expenses incurred in the performance of their services in accordance with certain administrative directives and rules. The aggregate
amount of compensation that we paid to our directors, supervisors and executive officers for services performed as our directors, supervisors, officers or employees was NT$27.9 million, NT$33.2 million and NT$35.6 million (US$1.08 million) in 2003,
2004 and 2005, respectively. None of our directors receives any benefits upon expiration of his or her service as director. Under our articles of incorporation, following our privatization, the compensation of our directors and supervisors may not
exceed 0.2% of our distributable earnings and may be approved only by a validly convened shareholders meeting.

The following table
lists the total compensation paid to each of our directors, supervisors and executive officers in 2005.



|                 |  |                                      |  |                   
|---------------- |  | ------------------------------------ |  | ------------------
|Name             |  | Position                             |  | Total Compensation
|                 |  |                                      |  | (in NT$ thousands)
|Tan Ho Chen      |  | Chairman and Chief Executive Officer |  | 2,729             
|Shyue-Ching Lu   |  | Director and President               |  | 2,670             
|Oliver F.L. Yu   |  | Director                             |  | 88                
|Yu-Huei Jea      |  | Director                             |  | 110               
|Jeng-Tsuen Liaw  |  | Director                             |  | 86                
|Yen-Pin Wang (1) |  | Director                             |  | 68                
|Neng-Pai Lin (1) |  | Director                             |  | 34                
|Chiu-Kuei Huang  |  | Director                             |  | 92                
|Lo-Ming Chung    |  | Director                             |  | 94                
|Chien-Cheng Lin  |  | Director                             |  | 88                
|Jing-Twen Chen   |  | Director                             |  | 100               



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|                   |  |                                         |  |                                      
|------------------ |  | --------------------------------------- |  | -------------------------------------
|Name               |  | Position                                |  | Total Compensation (in NT$ thousands)
|Zse-Hong Tsai      |  | Director                                |  | 126                                  
|Joyce H.Y. Jen     |  | Director                                |  | 343                                  
|Shih-Peng Tsai     |  | Director                                |  | 1,463                                
|Yauh-Hong Lin (2)  |  | Director                                |  | 852                                  
|Yen-Chung Lu (2)   |  | Director                                |  | 1,009                                
|Judy Fu-meei Ju    |  | Supervisor                              |  | 108                                  
|Ming-Daw Chang     |  | Supervisor                              |  | 90                                   
|Yu-Hsien Lin       |  | Supervisor                              |  | 96                                   
|Yeong-Chwan Hwang  |  | Supervisor                              |  | 96                                   
|Feng-Hsiung Chang  |  | Senior Vice President                   |  | 2,177                                
|Chin-Yi Yue        |  | Senior Vice President                   |  | 2,177                                
|Hank Han-Chao Wang |  | Senior Vice President                   |  | 2,145                                
|John C.C. Hsueh    |  | Executive Vice President                |  | 2,177                                
|Chun-Ming Hsieh    |  | Executive Vice President                |  | 2,177                                
|Shaio-Tung Chang   |  | Executive Vice President                |  | 2,177                                
|Dian-Yin Lin       |  | Executive Vice President                |  | 2,183                                
|Cheng-Kann Wu      |  | Chief Accounting Officer                |  | 1,961                                
|Cheng-Luh Chen     |  | Executive Vice President                |  | 2,145                                
|Lang-Chee Chang    |  | Executive Vice President                |  | 2,185                                
|Yen-Sung Lee       |  | President of Telecom Laboratories       |  | 2,178                                
|Shan-Hsin Tsao     |  | President of Telecom Training Institute |  | 1,578                                

---

|(1) | Director Yen-Pin Wang was replaced by Neng-pai Lin on September 19, 2005.
|--- | -------------------------------------------------------------------------

|(2) | After privatization on August 12, 2005, the number of directors represented by labor union was reduced from previous three to one. The two labor union representatives Yauh-Hong
Lin and Yen-Chung Lu, were discharged by the Ministry of Transportation and Communications on August 16, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C. Board
Practices

All of our directors were elected in June 2004 for a three-year term, which may be renewed for any number of consecutive
terms. Pursuant to the Republic of China Company Law, however, the directors may be removed from office at any time by a resolution adopted at a shareholders meeting. The chairman of our board of directors is elected by our directors. Our
chairman presides at all meetings of our board of directors and also has the authority to act as our representative. We have not entered into any contract with any of our directors and supervisors by which our directors or supervisors are expected
to receive benefits upon termination of their employment.

Our articles of incorporation provide for a 15-member board of directors. Three
independent directors were elected during our annual general shareholders meeting held on June 25, 2004. Pursuant to the Republic of China Securities and Exchange Act, as amended in January 2006, the Financial Supervisory Commission on
March 28, 2006 published a rule requiring listed non-financial-institution companies with paid-in capital exceeding NT$50 billion to appoint independent directors to their board of directors in accordance with the Act. This requirement shall
apply to us upon expiry of the current term of our directors. The term independent director may have a different meaning when used in Taiwan than in other jurisdictions. The number of independent directors shall be not less than
one-fifth of the total number of directors and not less than two in number. Pursuant to the relevant Republic of China regulations, our company is required to adopt the candidate-nomination-system as specified in the Republic of China Company Law to
elect independent directors and both the board and shareholders holding one percent of our total outstanding shares or more will have the right to submit names for inclusion in the roster of independent director candidates. With respect to certain
material decisions to be made by our company as specified in the Republic of China Securities and Exchange Act, including the adoption or amendment to our internal control system, material loans or guarantees, the issuance of equity-type securities,
matters in which directors and supervisors have personal interests, the appointment and discharge of auditors, approval of financial reports, the appointment and discharge of financial, accounting or internal auditing officers and other matters
prescribed by the Republic of China Financial Supervisory Commission, the dissenting opinion or qualified opinion of an independent director is required to be noted in the minutes of the board of directors meeting. After our privatization on
August 12, 2005, the number of labor union representatives on our board was reduced from three to one. As a result, our board currently is composed of 13 directors.

Our articles of incorporation provide that we should have four supervisors. In accordance with the Republic of China Company Law, our supervisors are elected by our shareholders and may not concurrently serve as our
directors, executive officers or other staff members. The term of office for our supervisors is three years and their term may be renewed



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for any number of consecutive terms. Supervisors duties and powers include, but are not limited to, supervision of
our business operations, investigation of our financial condition, inspection of corporate records, verification of statements prepared by the board of directors prior to the annual general shareholders meeting, calling of and giving reports
at shareholders meetings, representation of us in negotiations with our directors and giving notification, when appropriate, to the board of directors to cease acting in contravention of applicable law or regulations, our articles of
incorporation or the resolutions adopted by our shareholders. The supervisors may be also removed from office at any time by a resolution adopted at a shareholders meeting.

In the event preferred shares are outstanding, the holder of these preferred shares will be entitled to appoint one director and one supervisor. Under
the Telecommunications Act of the Republic of China, the preferred shares may only be issued to the Ministry of Transportation and Communications. See Item 10. Additional Information  B. Memorandum and Articles of Association 
Preferred Shares.

Under the Republic of China Company Law, a person may serve as our director or supervisor in his personal capacity
or as the representative of another legal entity. A director or supervisor who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of that legal entity, and the replacement director or supervisor
may serve the remainder of the term of office of the replaced director or supervisor. Except for our three independent directors, all of our directors and supervisors are representatives of the Ministry of Transportation and Communications. However,
in accordance with the Republic of China Securities and Exchange Act, as amended, except with the approval of the Competent Authority (i.e. The National Communications Commission), a representative of the government or of a juristic person, as a
shareholder of our company, may not be concurrently selected or serve as the director or supervisor from the time of expiration of the term currently being served by our directors or supervisors.

The business address of our directors, supervisors and executive officers is the same as our registered address.

Our audit committee was established in September 2004 and is comprised of our three independent directors: Joyce H.Y. Jen, Dr. Jing-Twen Chen and
Dr. Zse-hong Tsai. Our audit committee is responsible for overseeing: (i) the review of and discussion with management regarding our financial statements and other financial reports and disclosure; (ii) the appointment of our
principal accounting firm and approval of non-audit services provided by the principal accounting firm; (iii) the review and assessment of our internal control policy, procedures and functions; (iv) assisting management and our principal
accounting firm to resolve any difficulties encountered in the course of audit work; (v) our compliance with legal and regulatory requirements impacting our financial reporting; (vi) the review and approval of procedures relating to major
financial actions and related party transactions; and (vii) the assessment and management of our existing and potential risk exposure. Our board of directors has concluded that Dr. Jing-Twen Chen is our audit committee financial expert.

Pursuant to the Republic of China Securities and Exchange Act, from January 1, 2007, our company is required to choose to establish
either (but not both) an audit committee or a board of supervisors provided that the Republic of China Financial Supervisory Commission has the authority to require certain companies to have an audit committee in view of the companys scale,
type of operations and other considerations. If we opt for an audit committee, from January 1, 2007, material matters including material asset or derivatives transactions, the adoption or amendment of internal control system, material loans or
guarantees, the issuance of equity-type securities, matters in which directors and supervisors have personal interests, the appointment and discharge of auditors, approval of financial reports, the appointment and discharge of financial, accounting
or internal auditing officers and other matters prescribed by the Republic of China Financial Supervisory Commission are required to be subject to be approved by one-half or more of all audit committee members and then be submitted to the board of
directors for resolution. With the exception of approval of financial reports, any materials matters that have not been approved by one-half or more of all audit committee members in accordance with this requirement may be undertaken with the
approval of two-thirds or more of all directors, and the resolution of the audit committee is to be recorded in the minutes of the directors meeting. The provisions regarding supervisors in the Republic of China Securities and Exchange Act,
the Republic of China Company Law, and other relevant laws and regulations shall apply mutatis mutandis to the audit committee.

In
addition to our audit committee, we also have a corporate strategy committee and drafting committee. Our corporate strategy committee is composed of five directors and is responsible for reviewing and advising on the budgets, capital requirements,
financial forecasts, matters related to investments, business license matters, corporate reorganization, development plans and other major issues affecting our development. The conclusions of the corporate strategy committee are considered at a
subsequent board of directors meeting. Our drafting committee is composed of three directors and is responsible for reviewing proposals to be considered by the board of directors in advance of the board of directors meeting. Approved proposals will
be reported, discussed and resolved at the subsequent board of directors meeting. The board of directors passed a resolution on November 8, 2005 to set up a compensation committee, which is composed of five directors. The compensation committee
will draft compensation proposals for the chairman, vice chairman, directors, supervisors, chief executive officer and general manager.



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In November 2003, the Securities and Exchange Commission approved changes to the New York Stock
Exchanges listing standards related to the corporate governance practices of listed companies. Under these rules, listed foreign private issuers, like us, must disclose any significant ways in which their corporate governance practices differ
from those followed by New York Stock Exchange-listed U.S. companies under the New York Stock Exchanges listing standards. A copy of the significant differences between our corporate governance practices and New York Stock Exchange corporate
governance rules applicable to U.S. companies is available on our website http://www.cht.com.tw. The information contained on our website is not a part of this annual report.

D. Employees

All of our employees are located in Taiwan and all are employed on a full-time
basis. As of December 31, 2005, approximately 66.67% of our employees had university, graduate or post-graduate degrees. We intend to improve our operational efficiency by reducing personnel costs. We offered a number of voluntary retirement
programs between June 1, 2000 and April 30, 2006, which resulted in a reduction in our workforce of approximately 10,190 employees.



|               |  |                    |  |        |  |       
|-------------- |  | ------------------ |  | ------ |  | ------
|               |  | As of December 31,
|               |  | 2003               |  | 2004   |  | 2005  
|Employees      |  |                    |  |        |  |       
|Technical      |  | 15,722             |  | 15,367 |  | 14,710
|Operations     |  | 11,391             |  | 11,293 |  | 10,920
|Administrative |  | 1,959              |  | 1,858  |  | 1,779 
|               |  |                    |  |        |  |       
|Total          |  | 29,072             |  | 28,518 |  | 27,409
|               |  |                    |  |        |  |       

As of December 31, 2005, approximately 99% of our employees were members of our principal
labor union. Our collective agreement sets forth work rules, grievance procedures and provides for union participation in performance evaluations and promotion decisions. Our union members also occupy a majority of the seats on our employee welfare
and pension fund committees. In addition, we will continue to maintain a good relationship with our labor union.

We strive to have good
communication with our employees and labor union by inviting representatives of our labor union to attend various meetings related to the performance of our employees. We continually enhance our communication with our employees.

Commencing in 2005, in which our privatization was completed, prior to distributing any dividends to our shareholders, we must first distribute
(1) not less than 1% of the distributable earnings to employees as bonuses and (2) not more than 0.2% of the distributable earnings to directors and supervisors as compensation. On March 28, 2006, the board of directors approved a
proposal for the distribution of 3% of unappropriated earnings as employee bonus which will be subject to the approval in the 2006 AGM scheduled on May 30, 2006. Distributions for 2005 will be distributed out of the profits generated from the
date of privatization to the end of 2005. See Item 10. Additional InformationB. Memorandum and Articles of AssociationDividends and Distributions.

Employee Stock Subscription Program

Under the Statue Governing Privatization of State-Owned
Enterprises, a certain portion of our shares were required to be reserved for purchase by our employees at favorable terms, in accordance with regulations issued by the Ministry of Transportation and Communications and approved by the Executive Yuan
in the process of privatization.

Under a program established pursuant to a regulation adopted by the Ministry of Transportation and
Communications, our employees may subscribe for up to 476,858,252 of our common shares from the Ministry of Transportation and Communications in offerings conducted by the Ministry of Transportation and Communications prior to our privatization. As
long as our employees agree not to transfer or pledge these shares for two or three years, they will be eligible to receive a discount of 10% or 20%, respectively, from the offering price. Pursuant to an amendment in June 2005 to the terms of this
program, a majority of our employees who continued their employment with us after our privatization will also be eligible to receive a 50% discount if they agree not to transfer or pledge the shares for four years.

At the time we were privatized, the Ministry of Transportation and Communications implemented another stock subscription program, allocating up to
476,858,252 common shares, or 4.9% of our then outstanding common shares, for a



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one-time subscription by our employees. Under this program, a majority of our employees will be eligible to receive a
discount of 10%, 20% or 50% from the offering price of the shares if they agree not to transfer or pledge these shares for two, three or four years, respectively.

As of the date of this annual report, 762,886,886 of our common shares, representing 7.9% of our outstanding common shares, were sold under the two programs mentioned above.

In addition, the Ministry of Transportation and Communications has sold 13,793,467 of our common shares to our employees at par value, representing 0.14%
of our outstanding shares.

Under the Statute of Chunghwa Telecom Co., Ltd. and our articles of incorporation, whenever we issue new shares
for cash, we must reserve up to 10% of the new shares to be issued on a favorable term for subscription by our employees.

E. Share Ownership

As of December 31, 2005, our directors, supervisors and executive officers personally held an aggregate 834,013 of our common
shares, representing less than 0.01% of our outstanding common shares. As of the same date, we do not have any outstanding or unexercised options.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

The following table sets forth information known to us with respect to the beneficial ownership of our shares (i) as of April 1, 2006, the most
recent practicable date and (ii) as of certain record dates in each of the preceding three years, for the shareholders known by us to own at least 5.0% of our outstanding common shares. Beneficial ownership is determined in accordance with
Securities and Exchange Commissions rules.



|                                                  |  |                      |  |                    |  |                      |  |                     |  |               |  |         |  |               |  |        
|------------------------------------------------- |  | -------------------- |  | ------------------ |  | -------------------- |  | ------------------- |  | ------------- |  | ------- |  | ------------- |  | -------
|                                                  |  | As of August 5, 2003 |  | As of July 9, 2004 |  | As of April 20, 2005 |  | As of April 1, 2006
|Name                                              |  | Number               |  | Percent            |  | Number               |  | Percent             |  | Number        |  | Percent |  | Number        |  | Percent
|The Republic of China government(1)               |  | 6,516,281,649        |  | 67.55              |  | 6,444,356,056        |  | 66.80               |  | 6,298,539,234 |  | 65.29   |  | 4,034,057,591 |  | 41.37  
|The Ministry of Transportation and Communications |  | 6,366,203,649        |  | 65.99              |  | 6,265,072,056        |  | 64.94               |  | 6,256,292,234 |  | 64.85   |  | 3,991,572,591 |  | 41.37  

---

|(1) | Includes shares held through the Ministry of Transportation and Communications and other government-controlled entities
|--- | -----------------------------------------------------------------------------------------------------------------------

The Ministry of Transportation and Communications owned 6,268,758,620, or 64.98%, 6,259,973,541, or 64.89%, and 4,001,984,546, or 41.48% of our
outstanding common shares as of December 31, 2003, 2004 and 2005, respectively. Under our articles of incorporation, the Ministry of Transportation and Communications has the right to subscribe for two preferred shares when the
governments ownership of our outstanding common shares falls below 50%, and the Ministry of Transportation and Communications exercised such right on April 4, 2006. Under our articles of incorporation, the holder of preferred shares is
entitled to certain rights, including the right to veto any change in our name or our business and any transfer of the whole or the main part of our business or property.

B. Related Party Transactions

Related Party Transactions Policies

We have not extended any loans or credit to any of our directors, supervisors or executive officers, and we have not provided guarantees for borrowings by
any of these persons. We have not entered into any fee-paying contract with any of these persons for them to provide services not within his or her capacity as a director, supervisor or executive officer of our company, except that three of our
directors who are also our employees receive salaries from our company in their capacity as our employees.

We currently own 40% of Taiwan
International Standard Electronics and 49% of Chunghwa Investment Co., Ltd. We have purchased telecommunications exchange facilities and related supplies and replacement parts from Taiwan International Standard Electronics for approximately NT$4.5
billion in 2003, NT$0.9 billion in 2004 and NT$0.5 billion (US$15 million) in 2005. We acquired from Chunghwa System Integration, a subsidiary of Chunghwa Investment Co., Ltd., network equipment and related supplies for approximately NT$0.05 billion
in 2003, NT$0.2 billion in 2004 and NT$0.3 billion (US$10 million) in 2005. We believe that these transactions with Taiwan International Standard Electronics and Chunghwa System Integration have been conducted on arms length terms.



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C. Interests of Experts and Counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

See Item 18 for a list of all financial statements filed as part of this annual report on Form 20-F.

Except as described in Item 4. Information on the CompanyB. Business OverviewLegal Proceedings, we are not currently involved in
material litigation or other proceedings that may have or have had in the recent past, significant effects on our financial position or profitability.

For our policy on dividend distributions, see Item 10. Additional InformationB. Memorandum and Articles of AssociationDividends and Distributions. The following table sets forth the dividends
declared on each of our common shares and in the aggregate for each of the fiscal years ended June 30, 1998 and 1999, for the 18 months ended December 31, 2000, and the years ended December 31, 2001, 2002, 2003, 2004 and 2005. All of
these dividends were paid, in the fiscal year following the period with respect to which the dividends relate, to the Republic of China government and, in the case of our dividend distribution for the 18 months ended December 31, 2000, the
years ended December 31, 2001, 2002, 2003, 2004 and 2005, also to our public shareholders.



|                                  |  |                              |      |     |                 |     |      |    
|--------------------------------- |  | ---------------------------- | ---- | --- | --------------- | --- | ---- | ---
|                                  |  | Cash dividendper commonshare |      |     | Total dividends |    
|                                  |  |                              |      |     | (in billions)   |    
|Fiscal year ended June 30, 1998   |  | NT$                          | 4.99 |     |                 | NT$ | 48.1 |    
|Fiscal year ended June 30, 1999   |  |                              | 4.76 |     |                 |     | 45.9 |    
|18 months ended December 31, 2000 |  |                              | 5.80 |     |                 |     | 56.0 |    
|Year ended December 31, 2001      |  |                              | 3.50 |     |                 |     | 33.8 |    
|Year ended December 31, 2002      |  |                              | 4.00 |     |                 |     | 38.6 |    
|Year ended December 31, 2003      |  |                              | 4.50 |     |                 |     | 43.4 |    
|Year ended December 31, 2004      |  |                              | 4.70 |     |                 |     | 45.3 |    
|Year ended December 31, 2005      |  |                              | 4.30 | (1) |                 |     | 40.7 | (1)
|                                  |  |                              | 0.20 | (2) |                 |     | 1.9  | (2)

---

|(1) | Cash dividend.
|--- | --------------

|(2) | Stock dividend.
|--- | ---------------

We have historically distributed cash
dividends to our shareholders equal to approximately 90% of our annual net income. We intend to maintain this dividend payout ratio in the future, subject to a number of commercial factors, including the interests of our shareholders, cash
requirements for future capital expenditures and investments, as well as relevant industry and market practice. Prior to our privatization, the amount of our net income was determined for these purposes in accordance with Chunghwa Telecom Internal
Accounting Principles, which take into account ROC GAAP and relevant laws and regulations and government guidelines applicable to state-owned enterprises. Our net income after our privatization will be determined in accordance with ROC GAAP. The
amount of our net income determined for purposes of calculating our annual dividend payout may differ from the amount of our net income determined in accordance with US GAAP.

In the past, we have periodically paid to the government, at its request, amounts in anticipation of dividends that the government, as our sole
shareholder, expected to approve at our next annual shareholders meeting. These payments have been recorded as shareholder advances. In January 2000, a payment of NT$13.0 billion was made to the government in this regard in anticipation of dividends
in respect of the fiscal period beginning on July 1, 1999 and ended on December 31, 2000. This amount was refunded by the government to us, without interest, on December 28, 2000.



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B. Significant Changes

Other than as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of the annual financial statements included in this annual report.

ITEM 9. THE OFFER AND LISTING

A. Offer and Listing Details

Market Price Information for Our Shares

Our shares
have been listed on the Taiwan Stock Exchange since October 27, 2000. There is no public market outside Taiwan for our shares. The table below shows, for the periods indicated, the high and low closing prices and the average daily volume of
trading activity on the Taiwan Stock Exchange for our shares. The closing price for our shares on the Taiwan Stock Exchange on May 12, 2006 was NT$61 per share.



|                                |  |                                |  |                             |  |               
|------------------------------- |  | ------------------------------ |  | --------------------------- |  | --------------
|                                |  | Closing price per common share |  | Average daily tradingvolume
|                                |  | High                           |  | Low                         | 
|                                |  | (NT$)                          |  | (NT$)                       |  | (in thousands)
|2000 (from October 27)          |  | 100.50                         |  | 75.00                       |  | 8,393         
|2001                            |  | 84.00                          |  | 39.60                       |  | 3,382         
|2002                            |  | 55.00                          |  | 43.20                       |  | 2,398         
|2003                            |  | 58.00                          |  | 46.00                       |  | 5,568         
|2004                            |  | 64.00                          |  | 50.50                       |  | 8,872         
|First Quarter                   |  | 59.50                          |  | 50.50                       |  | 12,971        
|Second Quarter                  |  | 58.00                          |  | 53.50                       |  | 6,731         
|Third Quarter                   |  | 58.50                          |  | 52.50                       |  | 6,115         
|Fourth Quarter                  |  | 64.00                          |  | 56.00                       |  | 10,060        
|2005                            |  | 65.50                          |  | 59.00                       |  | 8,617         
|First Quarter                   |  | 65.50                          |  | 62.50                       |  | 9,218         
|Second Quarter                  |  | 65.30                          |  | 59.00                       |  | 8,006         
|Third Quarter                   |  | 66.00                          |  | 56.50                       |  | 12,022        
|Fourth Quarter                  |  | 58.10                          |  | 56.10                       |  | 7,955         
|November                        |  | 58.10                          |  | 56.50                       |  | 7,207         
|December                        |  | 57.50                          |  | 56.60                       |  | 6,578         
|2006                            |  | 61.70                          |  | 55.10                       |  | 9,336         
|First Quarter                   |  | 61.30                          |  | 55.10                       |  | 10,973        
|January                         |  | 58.40                          |  | 55.80                       |  | 7,778         
|February                        |  | 59.70                          |  | 55.10                       |  | 17,343        
|March                           |  | 61.30                          |  | 58.50                       |  | 9,719         
|Second Quarter (through May 21) |  | 61.70                          |  | 59.50                       |  | 6,360         
|April                           |  | 61.40                          |  | 59.50                       |  | 7,785         
|May (through May 21)            |  | 61.70                          |  | 60.70                       |  | 4,425         

Market Price Information for Our American Depositary Shares

Our ADSs have been listed on the New York Stock Exchange under the symbol CHT since July 17, 2003. The outstanding ADSs are identified by the
CUSIP number 17133Q205. The table below shows, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the New York Stock Exchange for our ADSs. The closing price for our ADSs on the New York
Stock Exchange on April 3, 2006 was US$19.85 per ADS. Each of our ADSs represents the right to receive ten shares.



|                    |  |                       |  |                                |  |               
|------------------- |  | --------------------- |  | ------------------------------ |  | --------------
|                    |  | Closing Price Per ADS |  | Average ADSDaily TradingVolume
|                    |  | High                  |  | Low                            | 
|                    |  | US$                   |  | US$                            |  | (in thousands)
|2003 (from July 23) |  | 15.90                 |  | 13.38                          |  | 680           
|2004                |  | 21.09                 |  | 14.93                          |  | 326           
|First Quarter       |  | 17.85                 |  | 14.93                          |  | 431           



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|                                |  |                       |  |                                |  |               
|------------------------------- |  | --------------------- |  | ------------------------------ |  | --------------
|                                |  | Closing Price Per ADS |  | Average ADSDaily TradingVolume
|                                |  | High                  |  | Low                            | 
|                                |  | US$                   |  | US$                            |  | (in thousands)
|Second Quarter                  |  | 18.09                 |  | 15.85                          |  | 411           
|Third Quarter                   |  | 17.73                 |  | 15.71                          |  | 206           
|Fourth Quarter                  |  | 21.09                 |  | 17.81                          |  | 261           
|2005                            |  | 22.17                 |  | 16.88                          |  | 355           
|First Quarter                   |  | 22.13                 |  | 20.30                          |  | 400           
|Second Quarter                  |  | 21.55                 |  | 19.57                          |  | 306           
|Third Quarter                   |  | 22.17                 |  | 18.20                          |  | 1,755         
|Fourth Quarter                  |  | 18.48                 |  | 16.88                          |  | 1,286         
|November                        |  | 17.99                 |  | 17.18                          |  | 1,363         
|December                        |  | 18.35                 |  | 17.15                          |  | 1,151         
|2006 (through May 21)           |  | 22.65                 |  | 17.82                          |  | 1,030         
|First Quarter                   |  | 19.98                 |  | 17.82                          |  | 1,137         
|January                         |  | 18.90                 |  | 17.82                          |  | 1,187         
|February                        |  | 19.27                 |  | 17.99                          |  | 1,408         
|March                           |  | 19.98                 |  | 18.71                          |  | 870           
|Second Quarter (through May 21) |  | 22.65                 |  | 19.46                          |  | 834           
|April                           |  | 20.63                 |  | 19.46                          |  | 777           
|May (through May 21)            |  | 22.65                 |  | 20.66                          |  | 905           

As of April 1, 2006, a total of 246,043,119 ADSs and 9,647,724,900 of our common shares were
outstanding. With certain limited exceptions, holders of shares that are not Republic of China persons are required to hold these shares through a brokerage or custodial account in the Republic of China. As of April 1, 2006, 2,460,432,000
shares were registered in the name of a nominee of The Bank of New York, the depositary under the deposit agreement.

B. Plan of Distribution

Not applicable.

C. Markets

The principal trading market for our common shares is the Taiwan Stock Exchange and the principal trading market for our ADSs is the
New York Stock Exchange.

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

Not applicable.



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B. Memorandum and Articles of Association

Set forth below is information relating to our capital structure, including brief summaries of material provisions of our articles of incorporation,
the Republic of China Securities and Exchange Law, the Republic of China Company Law, the Statute of Chunghwa Telecom Co., Ltd. and the Telecommunications Act, all as currently in effect. The following summaries are qualified in their entirety by
reference to our articles of incorporation, the Republic of China Securities and Exchange Law, the Republic of China Company Law, the Statute of Chunghwa Telecom Co., Ltd. and the Telecommunications Act.

Objects and Purpose

The scope of business of
Chunghwa Telecom Co., Ltd. as set forth in Article 2 of our articles of incorporation, includes (i) Telecommunications Enterprise Type 1 and Type 2 businesses pursuant to the Telecommunications Act of the Republic of China,
(ii) installation of the computer equipment and radio-frequency equipment whose operation is controlled by the telecommunication business, (iii) telecommunications equipment wholesale, retail and engineering businesses, (iv) design,
engineering and operation of information software and hardware service businesses and (v) other businesses incidental or related to our companys telecommunications business operations and other business specified in our articles of
incorporation, except any business requiring a special permit.

General

Our authorized capital is NT$96,477,249,020, divided into 9,647,724,900 common shares, par value NT$10 per share, all of which are issued and outstanding
and in registered form, and two non-transferable preferred shares. The Ministry of Transportation and Communications has the right to subscribe for two preferred shares when the government owns less than 50% of our common shares. These preferred
shares, if issued, will be redeemed by us at their par value three years after their issuance

The Ministry of Transportation and
Communications, on behalf of the government of the Republic of China, owned approximately 41.37% of our outstanding common shares as of March 31, 2006. The remainder of our outstanding shares were held by public shareholders and other
investors. On April 4, 2006, we issued two preferred shares to the Ministry of Transportation and Communications. We currently do not have any other equity in the form of convertible bonds or otherwise outstanding as of the date of this annual
report.

Directors

Under Republic of
China Company Law, our board of directors, in conducting our business, shall act in accordance with laws and regulations, our articles of incorporation and the resolutions adopted at the meetings of shareholders. Where any resolution adopted by our
board of directors contravenes laws, our articles of incorporation and the resolutions adopted at the meetings of shareholders, thereby causing loss or damage to us, all directors taking part in the adoption of such resolution shall be liable to
compensate us for such loss or damage; however, those directors whose disagreement appears on record or is expressed in writing shall be exempted from liability.

If our board of directors decides, by resolution, to commit any act in violation of any law or our articles of incorporation, a supervisor or any shareholder who has continuously held our shares for a period of one
year or longer may request our board of directors to discontinue such act. One or more shareholders who have held more than 3% of our issued and outstanding shares for over a year may require a supervisor to bring an action on our behalf against a
director for losses suffered by us as a result of the directors unlawful actions or failure to act by sending a written request to a supervisor. In addition, if our shareholders meeting resolves to institute an action against a director,
we shall, within 30 days from the date of such resolution, institute such an action. In the case of a lawsuit between us and a director, a supervisor shall act on our behalf, unless otherwise provided by law; and our shareholders meeting may also
appoint some other person to act on our behalf in a lawsuit.

In addition, our board of directors owes fiduciary duty to us. Our directors
are liable to compensate us if they breach their fiduciary duty.

According to the Republic of China Company Law, a director who has a
personal interest in a matter to be discussed at the meeting of the board of directors, the outcome of which may conflict with his interests, shall abstain from voting on such matter. Our articles of incorporation also provide that commencing in the
fiscal year in which our privatization is completed, we may make compensation to all directors and supervisors and such compensation shall not exceed 0.2% of our



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distributable earnings and may be approved only by a validly convened shareholders meeting. Our articles of
incorporation do not impose a mandatory retirement age for our directors. Furthermore, our articles of incorporation do not impose a shareholding qualification for each director. According to our current internal Loan Procedures, we may not extend
any loan to our directors or our supervisors.

Preferred Shares

Under our articles of incorporation, the holder of preferred shares is entitled to the same rights as holders of common shares with respect to receiving distributions of dividends and bonuses, remaining assets
available for distribution upon our dissolution, liquidation or winding up, distribution of retained earnings or capital reserve, or capital allocation.

In addition, the holder of preferred shares will be entitled to the same voting rights as holders of common shares at any of our meetings of holders of common shares.

The holder of preferred shares, or its nominated representative, will act as our director and supervisor during the existing period of the preferred
shares. Any such representative is subject to removal and replacement by the holder of the preferred shares from time to time.

When we
issue new shares for cash, the holder of preferred shares will be entitled to the same pre-emptive rights as holders of common shares.

Without the prior consent of the holder of preferred shares, we may not:



| |  |  | change our corporate name;
| | - |  | --------------------------



| |  |  | change our business; or
| | - |  | -----------------------



| |  |  | transfer the whole or the main portion of our business or property.
| | - |  | -------------------------------------------------------------------

The holder of preferred shares may not transfer its preferred shares. We must redeem all outstanding preferred shares at par value three years from the date of their issuance. We are required to cancel these preferred
shares immediately after their redemption.

Dividends and Distributions

At each annual general shareholders meeting, our board of directors submits to the shareholders for their approval any proposal for the distribution
of dividend or the making of any other distribution to shareholders from our net income for the preceding fiscal year. All common shares outstanding and fully paid as of the relevant record date are entitled to share equally in any dividend or other
distribution so approved. Dividends may be distributed in cash, in the form of common shares or a combination of the two, as determined by the shareholders at the meeting.

We are not permitted to distribute dividends or make other distributions to shareholders in any year in which we do not have any net income or retained
earnings (excluding reserves). The Republic of China Company Law also requires that 10% of our annual net income, less prior years losses and outstanding tax, if any, be set aside as a legal reserve until the accumulated legal reserve equals
our paid-in capital. We may also set aside special reserve as determined by our shareholders at a shareholders meeting. In addition, our articles of incorporation provide that at least 50% of the remaining portion of the net income, less prior
years losses, outstanding taxes, the legal reserve and any special reserve, plus undistributed retained earnings from prior years will be distributed as dividends to shareholders. Not less than 10% of the total amount of the distributed
dividends must be in cash, but if the cash dividends to be distributed are less than NT$0.10 per share, the dividends may be distributed in the form of shares. Commencing in the fiscal year in which our privatization is completed, prior to
distributing any dividends to our shareholders, we must first distribute (1) not less than 1% of the distributable earning to employees as bonuses and (2) not more than 0.2% of the distributable earning to directors and supervisors as
compensation. Distributions for the year in which the privatization is completed will be distributed out of the profits generated from the date of privatization to the end of that fiscal year. The above percentages may be adjusted, with our
shareholders approval, according to our actual profits, capital budget and funding conditions of that year.

In addition, under the
Statute of Chunghwa Telecom Co., Ltd., we are required to make up any shortfall in the required telecommunications employees pension fund reserve within eight years after our incorporation. Consequently, if we record any extra earnings over our
previous estimated earnings approved by the Legislative Yuan, these extra earnings shall be first allocated as our pension fund reserve.



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Under the Republic of China Audit Law, the earnings and losses of a state-owned enterprise are audited by
the Ministry of Audit under the Control Yuan of the Republic of China. As a result, if the amount of our earnings or loses decided by the auditing authority is different from the amount approved at our shareholders meeting, the latter amount
shall be adjusted accordingly to be identical with the former amount, and the dividends and bonuses approved at our shareholders meeting will be adjusted accordingly and reported to the shareholders at the next shareholders meeting.

Under our articles of incorporation, if we do not have current or retained earnings (excluding reserves) but our legal reserve exceeds 50%
of our paid-in capital, we may use the excess amount to distribute dividends. In addition, under the Republic of China Company Law, if we do not incur a loss, we are also permitted to make distributions to our shareholders of additional common
shares by capitalizing reserves (including the legal reserve, the premium derived from the issuance of new shares and the income from endowments received by us). However, amounts payable by capitalizing our legal reserve are limited to 50% of the
total accumulated legal reserve and this capitalization can only be effected when the accumulated legal reserve exceeds 50% of our paid-in capital.

Changes in Share Capital

Under the Republic of China Company Law and the Statute of Chunghwa Telecom Co., Ltd., any change
in our authorized share capital requires an amendment to our articles of incorporation, which in turn requires approval at our shareholders meeting, as well as the approval of the Ministry of Transportation and Communications. Authorized but
unissued common shares may be issued, subject to applicable Republic of China law, upon terms as our board of directors may determine and approval by the Ministry of Transportation and Communications.

Preemptive Rights

Under the Republic of China
Company Law and the Statute of Chunghwa Telecom Co., Ltd., when we issue new shares for cash, existing shareholders who are listed on the shareholders register as of the record date have preemptive rights to subscribe for the new issue in
proportion to their existing shareholdings, while a companys employees, whether or not they are our shareholders, have rights to subscribe in accordance with subscription rules which were to be announced by the Ministry of Transportation and
Communications for not more than 10% of the new issue on favorable terms. Any new shares that remain unsubscribed at the expiration of the subscription period may be offered by us to the public or privately placed. However, no such subscription
rules were ever announced. In addition, under the Republic of China Company Law, employees of Republic of China companies have pre-emptive rights to subscribe for between 10-15% of any new issue of shares by the company.

In addition, in accordance with the Republic of China Securities and Exchange Law, a public company that intends to offer new shares for cash must offer
to the public at least 10% of the shares to be sold. This percentage can be increased by a resolution passed at a shareholders meeting, which would diminish the number of new shares subject to the preemptive rights of existing shareholders.

Meetings of Shareholders

We are
required by the Republic of China Company Law and our articles of incorporation to hold a general meeting of our shareholders within six months following the end of each fiscal year. These meetings are generally held in Taipei, Taiwan. Special
shareholders meetings may be convened by resolution of the board of directors or by the board of directors upon the written request of any shareholder or shareholders who have held 3% or more of the outstanding common shares for more than one
year. Shareholders meetings may also be convened by a supervisor. Notice in writing of general meetings of shareholders, stating the place, time and agenda must be dispatched to each shareholder at least 30 days, in the case of general
meetings, and 15 days, in the case of special meetings, before the date set for each meeting. Except in certain circumstances described below, a majority of the holders of all issued and outstanding common shares present at a shareholders
meeting constitutes a quorum for meetings of shareholders. Shareholders of 1% or more our issued and outstanding shares are entitled to submit one written proposal each year for consideration at our annual general shareholders meeting in
accordance with the Republic of China Company Law.



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Voting Rights

As previously required by the Republic of China Company Law, our articles of incorporation provide that a holder of common shares has one vote for each common share. Cumulative voting applies to the election of our directors and
supervisors. Separate ballots may be held for the election of independent directors.

In general, a resolution can be adopted by the
holders of at least a majority of the common shares represented at a shareholders meeting at which the holders of a majority of all issued and outstanding common shares are present. Under the Republic of China Company Law, the approval by at
least a majority of the common shares represented at a shareholders meeting in which a quorum of at least two-thirds of all issued and outstanding common shares are represented is required for major corporate actions, including:



| |  |  | amendment to our articles of incorporation;
| | - |  | -------------------------------------------



| |  |  | entering into, modification or termination of any contracts regarding leasing of all business, outsourcing of operations or joint operations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | transfer of the whole or substantial part of our business or assets;
| | - |  | --------------------------------------------------------------------



| |  |  | taking over of the whole of the business or assets of any other company which would have significant impact on our operations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | distribution of any share dividend;
| | - |  | -----------------------------------



| |  |  | dissolution;
| | - |  | ------------



| |  |  | merger or spin-off; and
| | - |  | -----------------------



| |  |  | removing of directors or supervisors.
| | - |  | -------------------------------------

Alternatively, the
Republic of China Company Law provides that in the case of a public company, such as us, a resolution may be adopted by the holders of at least two-thirds of the common shares represented at a meeting of shareholders at which holders of at least a
majority of issued and outstanding common shares are present.

A shareholder may be represented at a general or special meeting by proxy if
a valid proxy form is delivered to us five days before the commencement of the general or special shareholders meeting. Except for trust enterprises or share registrar approved by the Securities and Futures Bureau, where one person is
appointed as proxy by two or more shareholders who together hold more than 3% of the total issued common shares, the votes of those shareholders in excess of 3% of the outstanding common shares shall not be counted.

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

Holders of our ADSs generally will not be able to
exercise voting rights on the common shares underlying ADSs on an individual basis.

Other Rights of Shareholders

Under the Republic of China Company Law, dissenting shareholders are entitled to appraisal rights in certain major corporate actions, such as a planned
transfer of the whole or part of the business or a proposed merger by the company. A dissenting shareholder may request the company to purchase back all of the shares owned by the shareholder at a fair price determined by mutual agreement or
determined by the court if a mutual agreement cannot be reached. Shareholders may exercise their appraisal rights by serving notice in writing to the company prior to the related shareholders meeting and/or by raising his objection at the
shareholders meeting. Moreover, a shareholder has the right to file a petition in the court for annulment of any resolution adopted at a shareholders meeting where the procedures for convening the shareholders meeting or the method
of adopting the resolutions at the meeting is contrary to law or our Articles of Incorporation. One or more shareholders who have held more than 3% of the issued and outstanding shares of a company continuously for more than one year may require a
supervisor to institute, on behalf of the company, an action against a director. In addition, one or



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more shareholders who has/have continuously held 3% or more of the total number of the outstanding shares of our company
for more than one year may require the board of directors to convene a special shareholders meeting by sending a written request to the board of directors.

Register of Shareholders and Record Dates

Our share registrar, Taiwan Securities Co., Ltd., maintains our register of
shareholders at its offices in Taipei, Taiwan, and enters transfers of common shares in our register upon presentation of, among other documents, certificates representing the common shares transferred. Under the Republic of China Company Law and
our articles of incorporation, we may, by giving advance public notice, set a record date and close the register of shareholders for a specified period in order for us to determine the shareholders or pledgees that are entitled to rights pertaining
to the common shares. The specified period required is as follows:



| |  |  | general shareholders meeting60 days;
| | - |  | --------------------------------------



| |  |  | special shareholders meeting30 days; and
| | - |  | ------------------------------------------



| |  |  | relevant record datefive days.
| | - |  | -------------------------------

Annual Financial Statements

At least ten days before the annual general shareholders meeting, our annual financial statements must be available at our
principal office in Taipei, Taiwan for inspection by the shareholders.

Transfer of Common Shares

The transfer of common shares in registered form is effected by endorsement and delivery of the related share certificates but, in order to assert
shareholders rights against us, the transferee must have his name and address registered on our register of shareholders. Shareholders are required to file their respective specimen seals, also known as chops, with us. Chops are official
stamps widely used in Taiwan by individuals and other entities to authenticate the execution of official and commercial documents.

Acquisition of Our
Own Common Shares

Under the Republic of China Company Law, with minor exceptions, we cannot acquire our own common shares. Any common
shares acquired by us, under certain of such minor exceptions, must be sold at the market price within six months after their acquisition.

In addition, under the Republic of China Securities and Exchange Law, a company whose shares are listed on the Taiwan Stock Exchange or traded on the GreTai Securities Market may, pursuant to a board resolution adopted by a majority consent
at a meeting attended by more than two-thirds of the directors and pursuant to the procedures prescribed by the Securities and Futures Bureau, purchase its shares for the following purposes on the Taiwan Stock Exchange, the GreTai Securities Market
or by a tender offer:

(1) for transfers of shares to its employees;

(2) for conversion into shares from bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares
or certificates of warrants issued by the company; and

(3) for maintaining its credit and its shareholders equity,
provided that the shares so purchased shall be cancelled thereafter.

The total shares purchased by the company shall not exceed 10% of its
total issued and outstanding shares. In addition, the total amount for purchase of the shares shall not exceed the aggregate amount of the retained earnings, the premium from shares issues and the realized portion of the capital reserve.

The shares purchased by the company pursuant to items (1) and (2) above shall be transferred to the intended transferees within three years
after the purchase, otherwise the same shall be cancelled. For the shares to be cancelled pursuant to item (3) above, the company shall complete amendment registration for such cancellation within six months after the purchase.



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The shares purchased by the company shall not be pledged or hypothecated. In addition, the company may
not exercise any shareholders rights attaching to these shares. The companys affiliates (as defined in Article 369-1 of the Republic of China Company Law), directors, supervisors, managers and their respective spouses and minor children
and/or nominees are prohibited from selling the shares of the company held by them during the purchase period of such shares reported by the company to the Securities and Futures Bureau.

Liquidation Rights

In the event of our liquidation, the assets remaining after payment of all debts,
liquidation expenses and taxes will be distributed pro rata to the shareholders in accordance with the relevant provisions of the Republic of China Company Law and our articles of incorporation.

Substantial Shareholders and Transfer Restrictions

The Republic of China Securities and Exchange Law currently requires (1) each director, supervisor, manager, as well as their respective spouses, minor children and nominees, and substantial shareholder (i.e., a shareholder who
together with his or her spouse, minor children or nominees, holds more than 10% of the shares of a public company) to report any change in that persons shareholding to the issuer of the shares on a monthly basis and (2) each director,
supervisor, manager or substantial shareholder holding such common shares for more than a six month period to report his or her intent to transfer any shares listed on the Taiwan Stock Exchange or traded on the GreTai Securities Market to the
Securities and Futures Bureau at least three days before the intended transfer, unless the number of shares to be transferred is less than 10,000 shares. ADS holders holding more than 10% of our common shares, including common shares represented by
ADSs, may be subject to the reporting obligation in above item (1).

In addition, the number of shares that can be sold or transferred on
the Taiwan Stock Exchange or GreTai Securities Market by any person subject to the restrictions described above on any given day may not exceed:



| |  |  | 0.2% of the outstanding shares of the company in the case of a company with no more than 30 million outstanding shares;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | 0.2% of 30 million shares plus 0.1% of the outstanding shares exceeding 30 million shares in the case of a company with more than 30 million outstanding shares; or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in any case, 5% of the average daily trading volume (number of shares) on the Taiwan Stock Exchange or the GreTai Securities Market for the ten consecutive trading days preceding
the reporting day on which day the director, supervisor, manager or substantial shareholder or their respective spouse, minor child or nominee reports the intended share transfer to the Securities and Futures Bureau.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These restrictions do not apply to block trading, auction sale, purchase by auction, after-hour trading and sales or transfers of our ADSs. However,
these restrictions will apply to sales of common shares upon withdrawal.

C. Material Contracts

MOD Setup Box Tender Contracts

We entered into tender
contracts with HwaCom System Inc., or HwaCom, in February 2005, under which contracts HwaCom has agreed to deliver to us 285,500 sets of multimedia on demand, or MOD, setup box servers on or prior to October 18, 2005, and an additional 147,000
sets of MOD setup box servers upon notice. The total value of the contract amounts to approximately NT$2.1 billion.

XDSL Access Equipments Tender
Contracts

We entered into tender contracts with Taiwan International Standard Electronics Ltd., or Taiwan International Standard, in
June 2005, under which contracts Taiwan International Standard has agreed to deliver to us 336,735 ports of digital subscriber line access multiplexers on or prior to September 22, 2005, and an additional 490,722 ports of digital subscriber
line access multiplexers upon notice. The total value of the contract amounts to NT$1.4 billion.



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D. Exchange Controls

Foreign Investment and Exchange Controls in Taiwan

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

General

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

Foreign Investment in Taiwan Securities Market

On December 28, 1990, the Executive Yuan, the cabinet of the Republic
of China government, approved guidelines drafted by the Securities and Futures Commission (the predecessor of the Securities and Futures Bureau), which, since January 1, 1991, has allowed direct foreign investment in Taiwans securities
that are listed on the Taiwan Stock Exchange or other Taiwan securities approved by the Securities and Futures Bureau by certain eligible qualified foreign institutional investors.

In addition to qualified foreign institutional investors, certain individual and foreign institutional investors which meet certain qualifications set by
the Securities and Futures Bureau may invest in the shares of Taiwan Stock Exchange-listed companies, GreTai Securities Market (formerly known as Over-The-Counter Securities Exchange) traded companies, emerging market companies or other Taiwan
securities approved by the Securities and Futures Bureau up to a limit of US$50 million (in the case of institutional investors) and US$5 million (in the case of individual investors) after obtaining permission from the Taiwan Stock Exchange.

On September 30, 2003 and June 15, 2004, the Securities and Futures Bureau issued amendments to the Guideline Governing
Investment in Securities by Overseas Chinese and Foreign Nationals and relevant regulations, in which the Securities and Futures Bureau lifted certain restrictions and simplified the procedures required for foreign investments in Taiwans
securities market. The amendment focuses mainly on the following aspects:



| |  |  | The concept of qualified foreign institutional investors no longer exists. Foreign investors are reclassified as off-shore foreign institutional investors,
on-shore foreign institutional investors, off-shore general foreign investors, and on-shore general foreign investors based on whether they are institutions or natural persons, and whether they have presence in
Taiwan.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For foreign investors to invest in Taiwans securities market, registration with the Taiwan Stock Exchange, instead of the approval of the Securities and Futures Bureau, is
required. The Taiwan Stock Exchange may withdraw or rescind the registration if the application documents submitted by foreign investors are untrue or incomplete, or if any material violation of the relevant regulations exists.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Off-shore foreign investors may provide the securities they hold as the underlying shares of depositary receipts and act as selling shareholders in depositary receipts offerings.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Off-shore foreign institutional investors are required to appoint their agent or nominee to attend the shareholders meeting of the invested company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



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Currently, subject to the specific restriction imposed by relevant regulations, the off-shore foreign
institutional investors may invest in the Taiwan securities market without any amount restriction. However, a ceiling will be separately determined by the Securities and Futures Bureau after consultation with the Central Bank of China for investment
by offshore oversea Chinese and foreign individual investors.

Foreign Investment Approval

Other than:



| |  |  | foreign institutional investors;
| | - |  | --------------------------------



| |  |  | foreign individual investors; and
| | - |  | ---------------------------------



| |  |  | investors in overseas convertible bonds and depositary receipts,
| | - |  | ----------------------------------------------------------------

foreign
investors who wish to make direct investments in the shares of Taiwan companies may submit a foreign investment approval application to the Investment Commission of the Ministry of Economic Affairs of Taiwan or other government authority
to qualify for benefits granted under the Statute for Investment by Foreign Nationals. The Investment Commission or other government authority reviews each foreign investment approval application and approves or disapproves the application after
consultation with other governmental agencies. Any non-Taiwan person possessing a foreign investment approval may remit capital for the approved investment and repatriate annual net profits and interests and cash dividends attributable to an
approved investment. Stock dividends, investment capital and capital gains attributable to the investment may be repatriated with approval of the Investment Commission or other government authority.

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

Depositary Receipts

In April 1992, the Securities
and Futures Bureau began allowing Taiwan companies listed on the Taiwan Stock Exchange, with the prior approval of the Securities and Futures Bureau, to sponsor the issuance and sale of depositary receipts evidencing depositary shares. In December
1994, the Republic of China Ministry of Finance began allowing companies whose shares are traded on the GreTai Securities Market also to sponsor the issuance and sale of depositary receipts evidencing depositary shares representing shares of its
capital stock. Approvals for these issuances are still required.

After the issuance of a depositary share, a holder of the depositary
receipt evidencing the depositary shares may request the depositary issuing the depositary share to cause the underlying shares to be sold in Taiwan and to distribute the proceeds of the sale to or to withdraw the shares and deliver the shares to
the depositary receipt holder. A citizen of the Peoples Republic of China is not permitted to withdraw and hold our shares.

If you
are an offshore foreign institutional investor holding the depositary receipts, you must register with the Taiwan Stock Exchange as a foreign investor before you will be permitted to withdraw the shares represented by the depositary receipts. In
addition to obtaining registration with the Taiwan Stock Exchange, you must also (1) appoint a qualified local agent to, among other things, open a securities trading account with a local securities brokerage firm and a bank account to remit
funds, exercise shareholders rights and perform other functions as holders of ADSs may designate, (2) appoint a custodian bank to hold the securities and cash proceeds, confirm transactions, settle trades and report and declare other
relevant information and; (3) appoint a tax guarantor as guarantor for the full compliance of the withdrawing depositary receipt holders tax filing and payment obligations in the Republic of China. A depositary receipt holder not
registered as a foreign investor with the Taiwan Stock Exchange, or not have made the necessary appointments as outlined above, will be unable to hold or subsequently transfer the shares withdrawn from the depositary receipt facility.



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

(1) stock dividends;

(2) free distributions of shares;

(3) due to the exercise by the depositary receipt holder preemptive rights in the event of capital increases for cash; or

(4) if permitted under the deposit agreement and custody agreement and within the amount of depositary receipts which have been withdrawn, due to the direct purchase by investors or purchase through the depositary on
the Taiwan Stock Exchange or the GreTai Securities Market or delivery by investors of the shares for deposit in the depositary receipt facility. In this event, the total number of depositary receipts outstanding after an issuance cannot exceed the
number of issued depositary receipts previously approved by the Securities and Futures Bureau in connection with the offering plus any ADSs issued pursuant to the events described in (1), (2) and (3) above.

An ADS holder or the depositary, without obtaining further approvals from the Central Bank of China or any other governmental authority or agency of the
Republic of China, may convert NT dollars into other currencies, including U.S. dollars, in respect of:



| |  |  | the proceeds of the sale of common shares represented by ADSs or received as share dividends with respect to the common shares and deposited into the depositary receipt facility;
and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any cash dividends or distributions received from the common shares.
| | - |  | --------------------------------------------------------------------

In addition, the depositary may also convert into NT dollars incoming payments for purchases of common shares for deposit in the depositary receipt facility against the creation of additional ADSs. If you withdraw the
common shares underlying your ADSs and become a holder of our common shares, you may convert into NT dollars subscription payment for rights offerings. The depositary may be required to obtain foreign exchange payment approval from the Central Bank
of China on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights of new common shares. Although it is expected that the Central Bank of China will grant approval as a
routine matter, required approvals may not be obtained in a timely manner, or at all.

Exchange Controls

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

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

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



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E. Taxation

Republic of China Taxation

The discussion below describes the principal Republic of China tax consequences of the ownership
and disposition of ADSs representing common shares and of common shares. It applies to you only if you are:



| |  |  | an individual who is not a citizen of the Republic of China, who owns ADSs or common shares and who is not physically present in Taiwan for 183 days or more during any calendar
year; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a corporation or a non-corporate body that is organized under the laws of a jurisdiction other than the Republic of China for profit-making purposes and has no fixed place of
business or other permanent establishment in Taiwan.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

You should also consult your tax advisors concerning the tax
consequences of owning ADSs and common shares in the Republic of China and any other relevant taxing jurisdiction to which they are subject.

Dividends

Dividends declared by us out of our retained earnings and distributed to you are subject to Republic of
China withholding tax, currently at the rate of 20%, on the amount of the distribution in the case of cash dividends or on the par value of the common shares in the case of stock dividends. However, a 10% Republic of China retained earnings tax paid
by us on our undistributed after-tax earnings, if any, would provide a credit of up to 10% of the gross amount of any dividends declared out of such earnings that would reduce the 20% Republic of China tax imposed on these distributions.

Share dividends paid by us out of our capital reserves which are derived from the issuance of shares at a premium are not subject to Republic of China
withholding tax.

Capital Gains

Gains from the sale of property in the Republic of China are generally subject to Republic of China income tax. However, under current Republic of China law, capital gains on securities transactions (including sale of common stock) are
exempt from income tax.

Sales of ADSs by you are regarded as transactions relating to property located outside the Republic of China and
thus any gains derived therefrom are currently not subject to Republic of China income tax.

Preemptive Rights

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



| |  |  | 35% of the gains realized if you are a natural person; or
| | - |  | ---------------------------------------------------------



| |  |  | 25% of the gains realized if you are an entity that is not a natural person.
| | - |  | ----------------------------------------------------------------------------

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

Securities Transaction Tax

A securities
transaction tax, at the rate of 0.3% of the gross amount received, payable by the seller will be withheld upon a sale of common shares in Taiwan. Transfers of ADSs are not subject to Republic of China securities transaction tax. According to a
letter issued by the Ministry of Finance of the Republic of China in 1996, withdrawal of common shares from the deposit facility will not be subject to Republic of China securities transaction tax.



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Estate Taxation and Gift Tax

Republic of China estate tax is payable on any property within Taiwan of a deceased person who is a non-resident individual, and Republic of China gift tax is payable on any property within Taiwan donated by any such
person. Estate tax is currently payable at rates ranging from 2% of the first NT$600,000 to 50% of amounts over NT$100,000,000. Gift tax is payable at rates ranging from 4% of the first NT$600,000 to 50% of amounts over NT$45,000,000. Under Republic
of China estate and gift tax laws, common shares issued by Taiwan companies are deemed located in Taiwan regardless of the location of the owner. It is not clear whether the ADSs will be regarded as property located in Taiwan under Republic of China
estate and gift tax laws.

Tax Treaty

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

Retained Earnings Tax

Under the Republic of China Income Tax Laws, a 10% retained earnings tax will be imposed on a company for its after-tax earnings generated after
January 1, 1998 which are not distributed in the following year. The retained earnings tax so paid will further reduce the retained earnings available for future distribution. When the company declares dividends out of those retained earnings,
up to a maximum amount of 10% of the declared dividends will be credited against the 20% withholding tax imposed on the non-resident holders of its shares.

U.S. Federal Income Tax Considerations For U.S. Persons

The following is a summary of the material U.S. federal income tax
consequences of the ownership and disposition of our shares and ADSs. The discussion set forth below is applicable to beneficial owners of our shares or ADSs that hold the shares or ADSs as capital assets and that are U.S. holders and non-residents
of the Republic of China. You are a U.S. holder if you are:



| |  |  | an individual who is a citizen or resident of the United States;
| | - |  | ----------------------------------------------------------------



| |  |  | a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United States, any state thereof or the
District of Columbia;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an estate the income of which is subject to U.S. federal income taxation regardless of its source;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | a trust that is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a trust that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the Code), and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in U.S. federal income tax consequences different from those discussed below. It is for general purposes only and you should not
consider it to be tax advice. In addition, it is also based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. This
summary does not represent a detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances and does not address the effects of any state, local or non-U.S.



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tax laws (or other U.S. federal tax consequences, such as U.S. federal estate or gift tax consequences). In addition, it
does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:



| |  |  | a dealer in securities or currencies;
| | - |  | -------------------------------------



| |  |  | a trader in securities if you elect to use a mark-to-market method of accounting for your securities holdings;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | a financial institution or an insurance company;
| | - |  | ------------------------------------------------



| |  |  | a regulated investment company;
| | - |  | -------------------------------



| |  |  | a real estate investment trust;
| | - |  | -------------------------------



| |  |  | a tax-exempt organization;
| | - |  | --------------------------



| |  |  | a person liable for alternative minimum tax;
| | - |  | --------------------------------------------



| |  |  | a person holding shares or ADSs as part of a hedging, integrated or conversion transaction, constructive sale or straddle;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | a person owning, actually or constructively, 10% or more of our voting stock;
| | - |  | -----------------------------------------------------------------------------



| |  |  | an investor in a pass-through entity; or
| | - |  | ----------------------------------------



| |  |  | a U.S. holder whose functional currency is not the United States dollar.
| | - |  | --------------------------------------------------------------------------

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

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

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

In general, for U.S. federal income tax purposes, a U.S. person who is the beneficial owner of an ADS will be treated as the owner of the shares
underlying its ADS. Deposits or withdrawals of shares, actually or constructively, by U.S. holders for ADSs will not be subject to U.S. federal income tax. However, concern has been expressed that parties involved in transactions in which depositary
shares are pre-released may be taking actions that are inconsistent with the treatment of dividends set forth below. Accordingly, the tax consequences described below could be adversely affected by pre-release activities.

Taxation of Dividends

The amount of
distributions (other than certain pro rata distributions of shares to all shareholders) you receive on your shares or ADSs, including net amounts withheld in respect of Republic of China withholding taxes, will generally be treated as dividend
income to you if the distributions are made from our current and accumulated earnings and profits as calculated according to U.S. federal income tax principles. These amounts will be includible in your gross income as ordinary income on the day you
actually or constructively receive the distributions, which in the case of an ADS will be the date received by the depositary. You will not be entitled to claim a dividends received deduction with respect to distributions you receive from us.

With respect to U.S. holders who are individuals, certain dividends received from a foreign corporation in taxable years beginning before
January 1, 2011, on shares (or ADSs backed by such shares) that are readily tradable on an



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established securities market in the United States may be subject to reduced rates of taxation, provided further that the
foreign corporation was not, in the year prior to the year in which the dividends are paid, and is not, in the year in which the dividends are paid, a passive foreign investment company (see Passive Foreign Investment Company below).
Under current U.S. Treasury Department guidance, our ADSs, which are listed on the New York Stock Exchange, but not our common shares, are treated as readily tradable on an established securities market in the United States. Thus, we do not believe
that dividends that we pay on common shares that are not backed by ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs will continue to be readily tradable on an established securities
market in later years (or that our shares will be readily tradable on an established securities market in any given year). Individuals that do not meet a minimum holding period requirement during which they are not protected from the risk of loss,
or that elect to treat the dividend income as investment income pursuant to Section 163(d)(4) of the Code, will not be eligible for the reduced rates of taxation regardless of the trading status of our shares or ADSs. In addition,
the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period
has been met. You should consult your own tax advisor regarding the application of these rules given your particular circumstances.

The
amount of any dividend paid in NT dollars will equal the U.S. dollar value of the NT dollars you receive, calculated by reference to the exchange rate in effect on the date you actually or constructively receive the dividend, which in the case of an
ADS will be the date received by the depositary, regardless of whether the NT dollars are actually converted into U.S. dollars. If the NT dollars received as a dividend are not converted into U.S. dollars on the date of receipt, you will have a
basis in the NT dollars equal to its U.S. dollar value on the date of receipt. Any gain or loss you realize if you subsequently sell or otherwise dispose of the NT dollars will be ordinary income or loss from sources within the United States for
foreign tax credit limitation purposes.

Subject to certain limitations under the Code, you may be entitled to a credit or deduction
against your federal income taxes for the net amount of any Republic of China taxes that are withheld from dividend distributions made to you. In determining the amounts withheld in respect of Republic of China taxes, any reduction of the amount
withheld on account of a Republic of China credit in respect of the 10% retained earnings tax imposed on us is not considered a withholding tax and will not be treated as distributed to you or creditable by you against your U.S. federal income tax.
The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends we pay with respect to shares or ADSs will generally be considered passive income from sources
outside the United States. Further, a U.S. holder that



| |  |  | has held shares or ADSs for less than a specified minimum period during which it is not protected from risk of loss, or
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | is obligated to make payments related to the dividends,
| | - |  | -------------------------------------------------------

may not be
allowed a foreign tax credit for foreign taxes imposed on dividends paid on shares or ADSs. The rules governing the foreign tax credit are complex. We therefore urge you to consult your tax advisor regarding the availability of the foreign tax
credit under your particular circumstances.

To the extent that the amount of any distribution you receive exceeds our current and
accumulated earnings and profits for a taxable year, as determined under U.S. federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in your adjusted basis in the shares or ADSs and
thereby increasing the amount of gain, or decreasing the amount of loss, you will recognize on a subsequent disposition of the shares or ADSs. The balance in excess of adjusted basis, if any, will be taxable to you as capital gain recognized on a
sale or exchange. However, we do not expect to keep earnings and profits in accordance with U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed above).

It is possible that pro rata distributions of shares or ADSs to all shareholders may be made in a manner that is not subject to U.S.
federal income tax. The basis of any new shares or ADSs so received will generally be determined by allocating your basis in the old shares or ADSs between the old shares or ADSs and the new shares or ADSs, based on their relative fair market values
on the date of distribution.

For U.S. tax purposes, any such tax-free share distribution and any distributions in excess of current and
accumulated earnings and profits generally would not result in foreign source income to you. Consequently, you may not be able to use the foreign tax credit associated with any Republic of China withholding tax imposed on such distributions unless
you can use the credit against United States tax due on other foreign source income in the appropriate category for foreign tax credit purposes.



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Taxation of Capital Gains

When you sell or otherwise dispose of your shares or ADSs, you will generally recognize capital gain or loss in an amount equal to the difference between the U.S. dollar value of the amount realized for the shares or
ADSs and your basis in the shares or ADSs, determined in U.S. dollars. For foreign tax credit limitation purposes, such gain or loss will generally be treated as U.S. source. If you are an individual, and have held the shares or ADSs being sold or
otherwise disposed for more than one year, your gain recognized will be eligible for reduced rates of taxation. Your ability to deduct capital losses is subject to limitations.

Any Republic of China securities transaction taxes that you pay generally will not be creditable foreign taxes for U.S. federal income tax purposes, but
you may be able to deduct such taxes, subject to certain limitations under the Code. You are urged to consult your tax advisors regarding the U.S. federal income tax consequences of these taxes.

Passive Foreign Investment Company

We believe
that we were not a passive foreign investment company (PFIC) for U.S. federal income tax purposes for 2005. In addition, based on the projected composition of our income and valuation of our assets, including goodwill, we do
not expect to be a PFIC for 2006. However, since PFIC status depends upon the composition of our income and assets and the market value of our assets (including, among others, goodwill) from time to time, there can be no assurance that we will not
be considered a PFIC for any taxable year. If we were treated as a PFIC for any taxable year during which you held our shares or ADSs, you could be subject to additional U.S. federal income taxes on gain recognized with respect to the shares or ADSs
and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules.

Information Reporting
and Backup Withholding

In general, dividend payments, or other taxable distributions, made within the United States to you will be
subject to information reporting requirements if you are a non-corporate United States person. Such payments may also be subject to backup withholding if you:



| |  |  | fail to provide an accurate taxpayer identification number;
| | - |  | -----------------------------------------------------------



| |  |  | are notified by the Internal Revenue Service that you have failed to report all interest or dividends required to be shown on your federal income tax returns; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in certain circumstances, fail to comply with applicable certification requirements.
| | - |  | ------------------------------------------------------------------------------------

If you sell your shares or ADSs to or through a United States office of a broker, the payment of the proceeds is subject to both United States backup withholding and information reporting unless you establish an
exemption. If you sell your shares or ADSs outside the United States through a non-U.S. office of a non-U.S. broker, and the sales proceeds are paid to you outside the United States, then United States backup withholding and information reporting
requirements generally will not apply to that payment. However, United States information reporting, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made outside the United States, if you sell your
shares or ADSs through a non-U.S. office of a broker that:



| |  |  | is a United States person;
| | - |  | --------------------------



| |  |  | derives 50% or more of its gross income for a specified three-year period from the conduct of a trade or business in the United States;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | is a controlled foreign corporation as to the United States; or
| | - |  | -----------------------------------------------------------------



| |  |  | is a foreign partnership, if at any time during its tax year:
| | - |  | -------------------------------------------------------------



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| |  |  | one or more of its partners are U.S. persons, as defined in U.S. Treasury regulations, who in the aggregate hold more than 50% of the income or capital interest in the partnership;
or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the foreign partnership is engaged in a United States trade or business,
| | - |  | ------------------------------------------------------------------------

unless you establish an exemption.

You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the United States Internal Revenue Service.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not
applicable.

H. Documents on Display

We have filed this annual report on Form 20-F, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed with the SEC. This means that we can
disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.

You may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the SECs Public Reference Room
at 100 F Street, N.E., Washington, D.C. 20549 and at the SECs regional offices in New York, New York and Chicago, Illinois. You can also request copies of this annual report, including the exhibits incorporated by reference in this annual
report, upon payment of a duplicating fee, by writing information on the operation of the SECs Public Reference Room.

The SEC also
maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. Our annual report and some of the other information submitted by us to the SEC may
be accessed through this web site.

I. Subsidiary Information

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss
related to adverse changes in market prices, including interest rates and foreign exchange rates, of financial instruments. In the normal course of business, we are routinely subject to a variety of risks, including market risk associated with
interest rate movements and currency rate movements on non-NT dollar denominated assets and liabilities.

We regularly assess these
financial instruments and their ability to address market risk and have established policies and business practices to protect against the adverse effects of these and other potential exposures.

Interest Rate Sensitivity

We had a portfolio of
fixed rate debt of approximately NT$0.7 billion, NT$0.7 billion and NT$0.5 billion (US$15 million) as of December 31, 2003, 2004 and 2005, respectively.

Foreign Currency Risk

We have entered into certain transactions denominated in foreign currencies primarily related to
international settlement payments associated with our services for international calls. We have also entered into hedging transactions in respect of exchange rate risks associated with our foreign currency debt obligations in 2004. Gains and losses
from these transactions as of December 31, 2005 were not material to our financial condition and results of operations.



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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.



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PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None of these events occurred in any of
fiscal 2003, 2004 and 2005.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15. CONTROLS AND PROCEDURES

As of the end of the period covered by this annual report, an
evaluation has been carried out under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls
and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our
disclosure controls and procedures are effective in ensuring that material information required to be disclosed in this annual report is recorded, processed, summarized and reported to them for assessment, and required disclosure is made within the
time period specified in the rules and forms of the Securities and Exchange Commission.

Beginning with our Annual Report on Form 20-F for
the year ending December 31, 2006, we will be required under Section 404 of the Act to provide annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered
public accounting firm addressing these assessments.

There have been no changes in our internal controls or in other factors that could
significantly affect the internal controls subsequent to the date of their evaluation.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Jing-Twen Chen is our audit committee financial expert and an
independent director. See Item 6. Directors, Senior Management and EmployeesC. Board Practices.

ITEM 16B. CODE OF ETHICS

We have adopted a code of ethics that applies to our directors, supervisors,
employees and officers, including our chief executive officer and chief financial officer. Due to our privatization, we made some amendments to this code of ethics as an exhibit to this annual report, and a copy is available to any shareholder upon
request.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees by
categories specified below in connection with certain professional services rendered by Deloitte & Touche, our principal accountant for the years indicated. We did not pay any other fees to our auditors during the periods indicated below.



|                      |  |                                 |        |      |     |        |  |     |        |  |     |      
|--------------------- |  | ------------------------------- | ------ | ---- | --- | ------ |  | --- | ------ |  | --- | -----
|                      |  | For the year ended December 31,
|                      |  | 2003                            |        | 2004 |     | 2005  
|                      |  | (in thousands)                 
|Audit fees(1)         |  | NT$                             | 32,654 |      | NT$ | 27,664 |  | NT$ | 42,287 |  | US$ | 1,289
|Audit-related fees(2) |  |                                 |       |      |     |       |  |     |       |  |     |     
|Tax fees(3)           |  |                                 | 189    |      |     | 319    |  |     |       |  |     |     
|All other Fees(4)     |  |                                 |       |      |     |       |  |     |       |  |     |     

---

|(1) | Audit fees means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal accountant for the audit of our annual
financial statements or services that are normally provided by the auditors in connection with statutory and regulatory filings or engagements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Audit-related fees means the aggregate fees billed in each of the fiscal years listed for assurance and related services by our principal accountant that are reasonably
related to the performance of the audit or review of our financial statements and are not reported under Audit fees. Services comprising the fees disclosed under the category of Audit-related fees involve principally the
issuance of agreed upon procedures letters.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax fees means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal accountant for tax compliance, tax advice
and tax planning. Services comprising the fees disclosed under the category of Tax Fees involve tax advice.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | All other fees means the aggregate fees billed in each of the last two fiscal years for products and services provided by our principal accountant other than the
services reported in items (1) to (3) above.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Prior to forming an audit committee, our board of directors is
responsible for the oversight of the work performed by our principal accountant. The policy of our board of directors is to pre-approve all audit and non-audit services provided by Deloitte & Touche, including audit services, audit-related
services, tax services and other services as described above. After our audit committee was established in September 2004, all audit and non-audit services provided by Deloitte & Touche were pre-approved by our audit committee.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

None.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Issuer Purchases of
Equity Securities



|                                      |  |                                   |  |                                 |       |                                                                                  |            |                                                                                                             |            
|------------------------------------- |  | --------------------------------- |  | ------------------------------- | ----- | -------------------------------------------------------------------------------- | ---------- | ----------------------------------------------------------------------------------------------------------- | -----------
|Period                                |  | (a) TotalNumber ofSharesPurchased |  | (b) Average Price Paidper Share |       | (c) Total Number ofShares Purchased asPart of PubliclyAnnounced Plans
orPrograms |            | (d) Maximum Number(or ApproximateDollar Value) ofShares that May YetBe Purchased Underthe Plans
or Programs
|February 10, 2006  February 28, 2006 |  | 51,545,000                        |  | NT$                             | 58.43 |                                                                                  | 51,545,000 |                                                                                                             | 198,455,000
|March 1, 2006  March 31, 2006        |  | 97,613,000                        |  | NT$                             | 59.54 |                                                                                  | 97,613,000 |                                                                                                             | 100,842,000
|April 1, 2006  April 7, 2006         |  | 42,842,000                        |  | NT$                             | 59.96 |                                                                                  | 42,842,000 |                                                                                                             | 58,000,000 



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PART III

ITEM 17. FINANCIAL STATEMENTS

The Registrant has elected to provide the financial statements and related
information specified in Item 18 in lieu of Item 17.

ITEM 18. FINANCIAL STATEMENTS

The following is a list of the audited financial statements and report
of independent registered public accounting firm included in this annual report beginning on page F-1.

INDEX TO THE FINANCIAL
STATEMENTS



|                                                                                                   |  |     
|-------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                   |  | Page
|Financial Statements of Chunghwa Telecom Co., Ltd.                                                 |  |     
|Report of Independent Registered Public Accounting Firm                                            |  | F-2 
|Balance Sheets as of December 31, 2004 and 2005                                                    |  | F-3 
|Statements of Operations for the years ended December 31, 2003, 2004 and 2005                      |  | F-4 
|Statements of Changes in Stockholders Equity for the years ended December 31, 2003, 2004 and 2005 |  | F-5 
|Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005                      |  | F-6 
|Notes to Financial Statements                                                                      |  | F-8 

ITEM 19. EXHIBITS



|              |  |                                                                                                                                                                                                                                                                                                                                                                                          
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                                                                  
|1.1           |  | Statute of Chunghwa Telecom Co., Ltd. as last amended on November 29, 2000 (English translation) (incorporated by reference to Exhibit 1.1 to the Registrants Annual Report on Form 20-F
for the fiscal year ended December 31, 2003 (File No. 001-31731) filed with the Commission on May 17, 2004.)                                                                                   
|              | 
|1.2           |  | Articles of incorporation of the Company as last amended on June 25, 2004 (English Translation) (incorporated by reference to Exhibit 1.2 to the Registrants Annual Report on Form 20-F
for the fiscal year ended December 31, 2004 (File No. 001-31731) filed with the Commission on June 23, 2005).                                                                                   
|              | 
|4.1           |  | Form of Deposit Agreement among the Company, The Bank of New York, as depositary, and Holders and Beneficial Owners of American Depositary Shares issued thereunder, including the form of
American Depositary Shares (incorporated by reference to Exhibit (a) to the Registrants Registration Statement on Form F-6 (File No. 333-106416) filed with the Commission on July 15, 2003.)
|              | 
|*11.1         |  | Code of Ethics (English translation), as amended                                                                                                                                                                                                                                                                                                                                         
|              | 
|*12.1         |  | Certification of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                   
|              | 
|*12.2         |  | Certification of our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                   
|              | 
|*13           |  | Certification of our Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                       

---

|* | Filed herewith.
|- | ---------------



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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.



CHUNGHWA TELECOM CO., LTD.By:

/s/ Tan Ho ChenName:

Tan Ho ChenTitle:

Chairman and Chief Executive OfficerDate: May 26, 2006




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##### Table of Contents

INDEX TO THE FINANCIAL STATEMENTS



|                                                                                                   |  |     
|-------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                   |  | Page
|Financial Statements of Chunghwa Telecom Co., Ltd.                                                 |  |     
|Report of Independent Registered Public Accounting Firm                                            |  | F-2 
|Balance Sheets as of December 31, 2004 and 2005                                                    |  | F-3 
|Statements of Operations for the years ended December 31, 2003, 2004 and 2005                      |  | F-4 
|Statements of Changes in Stockholders Equity for the years ended December 31, 2003, 2004 and 2005 |  | F-5 
|Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005                      |  | F-6 
|Notes to Financial Statements                                                                      |  | F-8 



F-1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and
Stockholders

Chunghwa Telecom Co., Ltd.

We have audited the accompanying balance sheets of Chunghwa Telecom Co., Ltd. as of December 31, 2004 and 2005, and the related statements of operations and comprehensive income, changes in stockholders
equity, and cash flows for each of the years in the three year period ended December 31, 2005, all expressed in New Taiwan dollars. These financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. Our audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, 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 Chunghwa Telecom Co., Ltd. as of December 31, 2004 and 2005 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America.

Our audits also comprehended the translation of New Taiwan Dollar amounts into U.S. dollar amounts
and, in our opinion, such translation has been made in conformity with the basis stated in Note 3. Such U.S. dollar amounts are presented for the convenience of the readers.

Deloitte & Touche

Taipei, Taiwan

The Republic of China

March 17, 2006



F-2



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##### Table of Contents

CHUNGHWA TELECOM CO., LTD.

BALANCE SHEETS

(Amounts in Millions, Except Shares and Par Value Data)



|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|----------------------------------------------------------------------------------------------------------- |  | ------- |  | ----------- | ------- | - | ---- | - | ------- | -------- |  | - | ------
|                                                                                                            |  |         |  | December 31
|                                                                                                            |  | Notes   |  | 2004        |         |   | 2005
|                                                                                                            |  |         |  | NT$         |         |   | NT$  |   |         | US$     
|                                                                                                            |  |         |  |             |         |   |      |   |         | (Note 3)
|ASSETS                                                                                                      |  |         |  |             |         |   |      |   |         |          |  |   |       
|                                                                                                            |  |         |  |            
|CURRENT ASSETS                                                                                              |  |         |  |             |         |   |      |   |         |          |  |   |       
|Cash and cash equivalents                                                                                   |  | 2,4,22  |  | $           | 29,283  |   |      | $ | 41,891  |          |  | $ | 1,277 
|Short-term investments                                                                                      |  | 2,5,22  |  |             | 9,115   |   |      |   | 14,171  |          |  |   | 432   
|Trade notes and accounts receivable, net                                                                    |  | 2,6,18  |  |             | 13,673  |   |      |   | 12,839  |          |  |   | 392   
|Inventories                                                                                                 |  | 2,7     |  |             | 1,439   |   |      |   | 2,120   |          |  |   | 65    
|Prepaid expenses                                                                                            |  |         |  |             | 602     |   |      |   | 1,149   |          |  |   | 35    
|Deferred income taxes                                                                                       |  | 2,17    |  |             | 17,283  |   |      |   | 3,353   |          |  |   | 102   
|Other current assets                                                                                        |  | 17      |  |             | 1,609   |   |      |   | 5,805   |          |  |   | 177   
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|Total current assets                                                                                        |  |         |  |             | 73,004  |   |      |   | 81,328  |          |  |   | 2,480 
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|LONG-TERM INVESTMENTS                                                                                       |  | 2,8,22  |  |             | 4,035   |   |      |   | 3,391   |          |  |   | 103   
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|INVESTMENT IN PRIVATE MUTUAL FUND                                                                           |  | 9       |  |             |        |   |      |   | 481     |          |  |   | 15    
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|PROPERTY, PLANT AND EQUIPMENT, NET                                                                          |  | 2,10,18 |  |             | 311,638 |   |      |   | 293,525 |          |  |   | 8,949 
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|INTANGIBLE ASSETS                                                                                           |  |         |  |             |         |   |      |   |         |          |  |   |       
|Deferred pension cost                                                                                       |  | 2,16    |  |             | 33,222  |   |      |   |        |          |  |   |      
|3G concession, net                                                                                          |  | 2       |  |             | 10,179  |   |      |   | 9,732   |          |  |   | 297   
|Patents and computer software, net                                                                          |  | 2       |  |             | 207     |   |      |   | 184     |          |  |   | 5     
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|Total intangible assets                                                                                     |  |         |  |             | 43,608  |   |      |   | 9,916   |          |  |   | 302   
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|OTHER ASSETS                                                                                                |  |         |  |             |         |   |      |   |         |          |  |   |       
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|Deferred income taxes - non-current                                                                         |  | 2,17    |  |             | 2,444   |   |      |   | 2,626   |          |  |   | 80    
|Other                                                                                                       |  | 19,22   |  |             | 3,692   |   |      |   | 3,901   |          |  |   | 119   
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|Total other assets                                                                                          |  |         |  |             | 6,136   |   |      |   | 6,527   |          |  |   | 199   
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|TOTAL                                                                                                       |  |         |  | $           | 438,421 |   |      | $ | 395,168 |          |  | $ | 12,048
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                        |  |         |  |             |         |   |      |   |         |          |  |   |       
|                                                                                                            |  |         |  |            
|CURRENT LIABILITIES                                                                                         |  |         |  |             |         |   |      |   |         |          |  |   |       
|Trade notes and accounts payable                                                                            |  | 18      |  | $           | 14,484  |   |      | $ | 10,332  |          |  | $ | 315   
|Income tax payable                                                                                          |  | 2,17    |  |             | 5,032   |   |      |   | 997     |          |  |   | 30    
|Accrued expenses                                                                                            |  | 11,18   |  |             | 14,368  |   |      |   | 16,010  |          |  |   | 488   
|Accrued pension liabilities                                                                                 |  | 2,16    |  |             | 44,252  |   |      |   |        |          |  |   |      
|Current portion of deferred income                                                                          |  | 2       |  |             | 2,633   |   |      |   | 1,486   |          |  |   | 45    
|Current portion of long-term loan                                                                           |  | 13,22   |  |             | 200     |   |      |   | 200     |          |  |   | 6     
|Customers deposits                                                                                         |  | 22      |  |             | 9,262   |   |      |   | 8,250   |          |  |   | 252   
|Other current liabilities                                                                                   |  | 12,18   |  |             | 18,966  |   |      |   | 19,411  |          |  |   | 592   
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|Total current liabilities                                                                                   |  |         |  |             | 109,197 |   |      |   | 56,686  |          |  |   | 1,728 
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|LONG-TERM LIABILITIES                                                                                       |  |         |  |             |         |   |      |   |         |          |  |   |       
|Deferred income, net of current portion                                                                     |  | 2       |  |             | 9,778   |   |      |   | 10,147  |          |  |   | 309   
|Long-term loan, net of current portion                                                                      |  | 13,22   |  |             | 500     |   |      |   | 300     |          |  |   | 9     
|Other                                                                                                       |  |         |  |             | 203     |   |      |   | 207     |          |  |   | 7     
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|Total long-term liabilities                                                                                 |  |         |  |             | 10,481  |   |      |   | 10,654  |          |  |   | 325   
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|Total liabilities                                                                                           |  |         |  |             | 119,678 |   |      |   | 67,340  |          |  |   | 2,053 
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|COMMITMENTS AND CONTINGENT LIABILITIES                                                                      |  | 19      |  |             |         |   |      |   |         |          |  |   |       
|                                                                                                            |  |         |  |            
|STOCKHOLDERS EQUITY                                                                                        |  | 14      |  |             |         |   |      |   |         |          |  |   |       
|Capital stock - NT$10 (US $0.3) par value; authorized, issued and outstanding - 9,647,724,900 common shares |  |         |  |             | 96,477  |   |      |   | 96,477  |          |  |   | 2,941 
|Capital surplus                                                                                             |  |         |  |             | 136,362 |   |      |   | 157,490 |          |  |   | 4,802 
|Retained earnings                                                                                           |  |         |  |             | 85,909  |   |      |   | 73,864  |          |  |   | 2,252 
|Accumulated other comprehensive loss                                                                        |  |         |  |             | (5      | ) |      |   | (3      | )        |  |   |      
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|Total stockholders equity                                                                                  |  |         |  |             | 318,743 |   |      |   | 327,828 |          |  |   | 9,995 
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       
|TOTAL                                                                                                       |  |         |  | $           | 438,421 |   |      | $ | 395,168 |          |  | $ | 12,048
|                                                                                                            |  |         |  |             |         |   |      |   |         |          |  |   |       

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



F-3



---

##### Table of Contents

CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Amounts in Millions, Except Shares and Per Share and Per ADS Data)



|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|------------------------------------------------------------------- |  | ----- |  | ---------------------- | ------------- | ---- | - | ------------- | ---- |  | -------- | ------------- |  | - | -------------
|                                                                    |  |       |  | Year Ended December 31
|                                                                    |  | Notes |  | 2003                   |               | 2004 |   |               | 2005
|                                                                    |  |       |  | NT$                    |               | NT$  |   |               | NT$  |  | US$     
|                                                                    |  |       |  |                        |               |      |   |               |      |  | (Note 3)
|SERVICE REVENUES                                                    |  | 2,18  |  | $                      | 182,466       |      | $ | 185,163       |      |  | $        | 184,696       |  | $ | 5,631        
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|OPERATING COSTS AND EXPENSES                                        |  | 2     |  |                        |               |      |   |               |      |  |          |               |  |   |              
|Costs of services, excluding depreciation and amortization          |  | 18    |  |                        | 59,633        |      |   | 60,256        |      |  |          | 70,122        |  |   | 2,138        
|Marketing, excluding depreciation and amortization                  |  | 2     |  |                        | 19,992        |      |   | 19,298        |      |  |          | 23,650        |  |   | 721          
|General and administrative, excluding depreciation and amortization |  |       |  |                        | 2,726         |      |   | 2,550         |      |  |          | 3,505         |  |   | 107          
|Research and development, excluding depreciation and amortization   |  | 2     |  |                        | 2,581         |      |   | 2,476         |      |  |          | 3,144         |  |   | 96           
|Depreciation and amortization - cost of services                    |  |       |  |                        | 39,170        |      |   | 38,358        |      |  |          | 38,800        |  |   | 1,183        
|Depreciation and amortization - other operating expenses            |  |       |  |                        | 2,399         |      |   | 2,345         |      |  |          | 2,363         |  |   | 72           
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|Total operating costs and expenses                                  |  |       |  |                        | 126,501       |      |   | 125,283       |      |  |          | 141,584       |  |   | 4,317        
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|INCOME FROM OPERATIONS                                              |  |       |  |                        | 55,965        |      |   | 59,880        |      |  |          | 43,112        |  |   | 1,314        
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|OTHER INCOME                                                        |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|Interest                                                            |  |       |  |                        | 100           |      |   | 224           |      |  |          | 452           |  |   | 14           
|Other income                                                        |  |       |  |                        | 2,101         |      |   | 2,493         |      |  |          | 3,576         |  |   | 109          
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|Total other income                                                  |  |       |  |                        | 2,201         |      |   | 2,717         |      |  |          | 4,028         |  |   | 123          
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|OTHER EXPENSES                                                      |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|Interest                                                            |  |       |  |                        | 43            |      |   | 5             |      |  |          | 2             |  |   |             
|Impairment loss on long-term investments                            |  |       |  |                        |              |      |   |              |      |  |          | 740           |  |   | 23           
|Other expense                                                       |  |       |  |                        | 509           |      |   | 415           |      |  |          | 366           |  |   | 11           
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|Total other expenses                                                |  |       |  |                        | 552           |      |   | 420           |      |  |          | 1,108         |  |   | 34           
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|INCOME BEFORE INCOME TAX                                            |  |       |  |                        | 57,614        |      |   | 62,177        |      |  |          | 46,032        |  |   | 1,403        
|                                                                    |  |       |  |                        |              
|INCOME TAX                                                          |  | 2,17  |  |                        | 10,299        |      |   | 11,259        |      |  |          | 12,733        |  |   | 388          
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|NET INCOME                                                          |  |       |  | $                      | 47,315        |      | $ | 50,918        |      |  | $        | 33,299        |  | $ | 1,015        
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|NET INCOME PER SHARE                                                |  | 2     |  | $                      | 4.90          |      | $ | 5.28          |      |  | $        | 3.45          |  | $ | 0.11         
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                |  |       |  |                        | 9,647,724,900 |      |   | 9,647,724,900 |      |  |          | 9,647,724,900 |  |   | 9,647,724,900
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|NET INCOME PER PRO FORMA EQUIVALENT ADS                             |  | 2     |  | $                      | 49.04         |      | $ | 52.78         |      |  | $        | 34.51         |  | $ | 1.05         
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|WEIGHTED AVERAGE NUMBER OF PRO FORMA EQUIVALENT ADSs OUTSTANDING    |  |       |  |                        | 964,772,490   |      |   | 964,772,490   |      |  |          | 964,772,490   |  |   | 964,772,490  
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|COMPREHENSIVE INCOME                                                |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|Net income                                                          |  | 2     |  | $                      | 47,315        |      | $ | 50,918        |      |  | $        | 33,299        |  | $ | 1,015        
|Cumulative translation adjustments                                  |  |       |  |                        |              |      |   | (5            | )    |  |          | 2             |  |   |             
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              
|Comprehensive income                                                |  |       |  | $                      | 47,315        |      | $ | 50,913        |      |  | $        | 33,301        |  | $ | 1,015        
|                                                                    |  |       |  |                        |               |      |   |               |      |  |          |               |  |   |              

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



F-4



---

##### Table of Contents

CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(Amounts in Millions, Except Shares Data)



|                                                                                                               |  |               |  |                 |        |                   |               |         |                                               |     |                         |                            |   |       |     |   |         |     |  |   |         |   |  |   |    |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------- |  | --------------- | ------ | ----------------- | ------------- | ------- | --------------------------------------------- | --- | ----------------------- | -------------------------- | - | ----- | --- | - | ------- | --- |  | - | ------- | - |  | - | -- | - |  | - | ------- | -
|                                                                                                               |  | Capital Stock |  | Capital Surplus |        | Retained Earnings |               |         | Accumulated Other Comprehensive Income (Loss) |     |                         | Total Stockholders Equity |  
|                                                                                                               |  | Common Shares |  | Amount          |        |                   | Legal Reserve |         | Losses on Reserve                             |     | Unappropriated Earnings |                            |   | Total |     |   |        
|                                                                                                               |  |               |  | NT$             |        | NT$               |               | NT$     |                                               | NT$ |                         | NT$                        |   |       | NT$ |   |         | NT$ |  |   | NT$     |  
|BALANCE, DECEMBER 31, 2002 (IN NT$)                                                                            |  | 9,647,724,900 |  | $               | 96,477 |                   | $             | 133,862 |                                               | $   | 25,106                  |                            | $ | 2,675 |     | $ | 41,900  |     |  | $ | 69,681  |   |  | $ |   |   |  | $ | 300,020 |  
|                                                                                                               |  |               |  |                 |        |                   |               |         |                                              
|Additional capital contributed by government                                                                   |  |              |  |                 |       |                   |               | 80      |                                               |     |                        |                            |   |      |     |   |        |     |  |   |        |   |  |   |   |   |  |   | 80      |  
|Additional capital contributed by the MOTC through selling shares to employees at a discounted price           |  |              |  |                 |       |                   |               | 1,931   |                                               |     |                        |                            |   |      |     |   |        |     |  |   |        |   |  |   |   |   |  |   | 1,931   |  
|Appropriations and distributions of 2002 earnings:                                                             |  |               |  |                 |        |                   |               |         |                                               |     |                         |                            |   |       |     |   |         |     |  |   |         |   |  |   |    |   |  |   |         |  
|Legal reserve                                                                                                  |  |              |  |                 |       |                   |               |        |                                               |     | 4,331                   |                            |   |      |     |   | (4,331  | )   |  |   |        |   |  |   |   |   |  |   |        |  
|Dividends                                                                                                      |  |              |  |                 |       |                   |               |        |                                               |     |                        |                            |   |      |     |   | (38,591 | )   |  |   | (38,591 | ) |  |   |   |   |  |   | (38,591 | )
|Net income                                                                                                     |  |              |  |                 |       |                   |               |        |                                               |     |                        |                            |   |      |     |   | 47,315  |     |  |   | 47,315  |   |  |   |   |   |  |   | 47,315  |  
|                                                                                                               |  |               |  |                 |        |                   |               |         |                                               |     |                         |                            |   |       |     |   |         |     |  |   |         |   |  |   |    |   |  |   |         |  
|BALANCE, DECEMBER 31, 2003 (IN NT$)                                                                            |  | 9,647,724,900 |  |                 | 96,477 |                   |               | 135,873 |                                               |     | 29,437                  |                            |   | 2,675 |     |   | 46,293  |     |  |   | 78,405  |   |  |   |   |   |  |   | 310,755 |  
|                                                                                                               |  |               |  |                 |        |                   |               |         |                                              
|Additional capital contributed by government                                                                   |  |              |  |                 |       |                   |               | 32      |                                               |     |                        |                            |   |      |     |   |        |     |  |   |        |   |  |   |   |   |  |   | 32      |  
|Additional capital contributed by the MOTC through selling shares to employees at a discounted price           |  |              |  |                 |       |                   |               | 457     |                                               |     |                        |                            |   |      |     |   |        |     |  |   |        |   |  |   |   |   |  |   | 457     |  
|Appropriations and distributions of 2003 earnings:                                                             |  |               |  |                 |        |                   |               |         |                                               |     |                         |                            |   |       |     |   |         |     |  |   |         |   |  |   |    |   |  |   |         |  
|Legal reserve                                                                                                  |  |              |  |                 |       |                   |               |        |                                               |     | 4,850                   |                            |   |      |     |   | (4,850  | )   |  |   |        |   |  |   |   |   |  |   |        |  
|Special reserve                                                                                                |  |              |  |                 |       |                   |               |        |                                               |     |                        |                            |   | 1     |     |   | (1      | )   |  |   |        |   |  |   |   |   |  |   |        |  
|Dividends declared                                                                                             |  |              |  |                 |       |                   |               |        |                                               |     |                        |                            |   |      |     |   | (43,414 | )   |  |   | (43,414 | ) |  |   |   |   |  |   | (43,414 | )
|Net income                                                                                                     |  |              |  |                 |       |                   |               |        |                                               |     |                        |                            |   |      |     |   | 50,918  |     |  |   | 50,918  |   |  |   |   |   |  |   | 50,918  |  
|Cumulative translation adjustment for foreign-currency investments in unconsolidated companies                 |  |              |  |                 |       |                   |               |        |                                               |     |                        |                            |   |      |     |   |        |     |  |   |        |   |  |   | (5 | ) |  |   | (5      | )
|                                                                                                               |  |               |  |                 |        |                   |               |         |                                               |     |                         |                            |   |       |     |   |         |     |  |   |         |   |  |   |    |   |  |   |         |  
|BALANCE, DECEMBER 31, 2004 (IN NT$)                                                                            |  | 9,647,724,900 |  |                 | 96,477 |                   |               | 136,362 |                                               |     | 34,287                  |                            |   | 2,676 |     |   | 48,946  |     |  |   | 85,909  |   |  |   | (5 | ) |  |   | 318,743 |  
|Additional capital contributed by government                                                                   |  |              |  |                 |       |                   |               | 6       |                                               |     |                        |                            |   |      |     |   |        |     |  |   |        |   |  |   |   |   |  |   | 6       |  
|Additional capital contributed by the MOTC through selling shares to employees at a discounted price (Note 15) |  |              |  |                 |       |                   |               | 12,770  |                                               |     |                        |                            |   |      |     |   |        |     |  |   |        |   |  |   |   |   |  |   | 12,770  |  
|Additional capital contributed by MOTC - pension (Notes 2,16)                                                  |  |              |  |                 |       |                   |               | 8,352   |                                               |     |                        |                            |   |      |     |   |        |     |  |   |        |   |  |   |   |   |  |   | 8,352   |  
|Appropriations and distributions of 2004 earnings:                                                             |  |               |  |                 |        |                   |               |         |                                               |     |                         |                            |   |       |     |   |         |     |  |   |         |   |  |   |    |   |  |   |         |  
|Legal reserve                                                                                                  |  |              |  |                 |       |                   |               |        |                                               |     | 4,986                   |                            |   |      |     |   | (4,986  | )   |  |   |        |   |  |   |   |   |  |   |        |  
|Special reserve                                                                                                |  |              |  |                 |       |                   |               |        |                                               |     |                        |                            |   | 4     |     |   | (4      | )   |  |   |        |   |  |   |   |   |  |   |        |  
|Dividends declared                                                                                             |  |              |  |                 |       |                   |               |        |                                               |     |                        |                            |   |      |     |   | (45,344 | )   |  |   | (45,344 | ) |  |   |   |   |  |   | (45,344 | )
|Net income                                                                                                     |  |              |  |                 |       |                   |               |        |                                               |     |                        |                            |   |      |     |   | 33,299  |     |  |   | 33,299  |   |  |   |   |   |  |   | 33,299  |  
|Cumulative translation adjustment for foreign-currency investments in unconsolidated companies                 |  |              |  |                 |       |                   |               |        |                                               |     |                        |                            |   |      |     |   |        |     |  |   |        |   |  |   | 2  |   |  |   | 2       |  
|                                                                                                               |  |               |  |                 |        |                   |               |         |                                               |     |                         |                            |   |       |     |   |         |     |  |   |         |   |  |   |    |   |  |   |         |  
|BALANCE, DECEMBER 31, 2005 (IN NT$)                                                                            |  | 9,647,724,900 |  | $               | 96,477 |                   | $             | 157,490 |                                               | $   | 39,273                  |                            | $ | 2,680 |     | $ | 31,911  |     |  | $ | 73,864  |   |  | $ | (3 | ) |  | $ | 327,828 |  
|                                                                                                               |  |               |  |                 |        |                   |               |         |                                               |     |                         |                            |   |       |     |   |         |     |  |   |         |   |  |   |    |   |  |   |         |  
|BALANCE, DECEMBER 31, 2005 (IN US$) (Note 3)                                                                   |  | 9,647,724,900 |  | $               | 2,941  |                   | $             | 4,802   |                                               | $   | 1,197                   |                            | $ | 82    |     | $ | 973     |     |  | $ | 2,252   |   |  | $ |   |   |  | $ | 9,995   |  
|                                                                                                               |  |               |  |                 |        |                   |               |         |                                               |     |                         |                            |   |       |     |   |         |     |  |   |         |   |  |   |    |   |  |   |         |  

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



F-5



---

##### Table of Contents

CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF CASH FLOWS

(Amounts in Millions)



|                                                                                   |  |                        |        |   |      |   |        |      |  |   |          |   |  |   |       |  
|---------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | -------- | - |  | - | ----- | -
|                                                                                   |  | Year Ended December 31 |       
|                                                                                   |  | 2003                   |        |   | 2004 |   |        | 2005 | 
|                                                                                   |  | NT$                    |        |   | NT$  |   |        | NT$  |  |   | US$      |  
|                                                                                   |  |                        |        |   |      |   |        |      |  |   | (Note 3) |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                               |  |                        |        |   |      |   |        |      |  |   |          |   |  |   |       |  
|Net income                                                                         |  | $                      | 47,315 |   |      | $ | 50,918 |      |  | $ | 33,299   |   |  | $ | 1,015 |  
|Adjustments to reconcile net income to net cash provided by operating activities:  |  |                        |        |   |      |   |        |      |  |   |          |   |  |   |       |  
|Provision for doubtful accounts                                                    |  |                        | 3,239  |   |      |   | 1,565  |      |  |   | 920      |   |  |   | 28    |  
|Depreciation and amortization                                                      |  |                        | 41,569 |   |      |   | 40,703 |      |  |   | 41,163   |   |  |   | 1,255 |  
|Impairment loss on long-live assets                                                |  |                        |       |   |      |   |       |      |  |   | 343      |   |  |   | 10    |  
|Impairment loss on long-term investments                                           |  |                        |       |   |      |   |       |      |  |   | 740      |   |  |   | 23    |  
|Net unrealized loss (gain) on short-term investments                               |  |                        |       |   |      |   | 12     |      |  |   | (69      | ) |  |   | (2    | )
|Gain on sales of short-term investments                                            |  |                        |       |   |      |   |       |      |  |   | (163     | ) |  |   | (5    | )
|Net loss (gain) on disposal of scrap inventories and property, plant and equipment |  |                        | 143    |   |      |   | 168    |      |  |   | (305     | ) |  |   | (9    | )
|Equity in earnings of unconsolidated companies                                     |  |                        | (3     | ) |      |   | (70    | )    |  |   | (160     | ) |  |   | (5    | )
|Cash dividends received from equity investees                                      |  |                        |       |   |      |   | 56     |      |  |   | 66       |   |  |   | 2     |  
|Unrealized losses on investment in private mutual fund                             |  |                        |       |   |      |   |       |      |  |   | 19       |   |  |   | 1     |  
|Stock compensation expenses for shares sold to employees at a discount             |  |                        | 1,931  |   |      |   | 457    |      |  |   | 12,770   |   |  |   | 389   |  
|Deferred income taxes                                                              |  |                        | 425    |   |      |   | 157    |      |  |   | 9,689    |   |  |   | 295   |  
|Changes in operating assets and liabilities:                                       |  |                        |        |   |      |   |        |      |  |   |          |   |  |   |       |  
|Decrease (increase) in:                                                            |  |                        |        |   |      |   |        |      |  |   |          |   |  |   |       |  
|Trade notes and accounts receivable                                                |  |                        | (760   | ) |      |   | (382   | )    |  |   | (72      | ) |  |   | (2    | )
|Inventories                                                                        |  |                        | (1,719 | ) |      |   | (326   | )    |  |   | (831     | ) |  |   | (25   | )
|Prepaid expenses                                                                   |  |                        | (8     | ) |      |   | (108   | )    |  |   | (547     | ) |  |   | (17   | )
|Other current assets                                                               |  |                        | 145    |   |      |   | 134    |      |  |   | (4,210   | ) |  |   | (128  | )
|Other assets                                                                       |  |                        | (1,235 | ) |      |   | 742    |      |  |   | (274     | ) |  |   | (8    | )
|Increase (decrease) in:                                                            |  |                        |        |   |      |   |        |      |  |   |          |   |  |   |       |  
|Trade notes and accounts payable                                                   |  |                        | 2,159  |   |      |   | 2,879  |      |  |   | (4,002   | ) |  |   | (122  | )
|Income tax payable                                                                 |  |                        | (1,249 | ) |      |   | 109    |      |  |   | (4,035   | ) |  |   | (123  | )
|Accrued expenses                                                                   |  |                        | 402    |   |      |   | 162    |      |  |   | 1,642    |   |  |   | 50    |  
|Customers deposits                                                                |  |                        | (1,018 | ) |      |   | (2,421 | )    |  |   | (1,012   | ) |  |   | (31   | )
|Other current liabilities                                                          |  |                        | 1,138  |   |      |   | 464    |      |  |   | 587      |   |  |   | 18    |  
|Accrued pension liabilities                                                        |  |                        | 4,065  |   |      |   | (1,229 | )    |  |   | 1,381    |   |  |   | 42    |  
|Deferred income                                                                    |  |                        | (3,016 | ) |      |   | (2,385 | )    |  |   | (778     | ) |  |   | (24   | )
|Other liabilities                                                                  |  |                        | 90     |   |      |   | (40    | )    |  |   | 4        |   |  |   |      |  
|                                                                                   |  |                        |        |   |      |   |        |      |  |   |          |   |  |   |       |  
|Net cash provided by operating activities                                          |  |                        | 93,613 |   |      |   | 91,565 |      |  |   | 86,165   |   |  |   | 2,627 |  
|                                                                                   |  |                        |        |   |      |   |        |      |  |   |          |   |  |   |       |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                               |  |                        |        |   |      |   |        |      |  |   |          |   |  |   |       |  
|Purchase and sales of short-term investments, net                                  |  |                        |       |   |      |   | (9,127 | )    |  |   | (4,824   | ) |  |   | (147  | )
|Acquisition of investments in unconsolidated companies                             |  |                        |       |   |      |   | (530   | )    |  |   |         |   |  |   |      |  
|Acquisition of investment in private mutual fund                                   |  |                        |       |   |      |   |       |      |  |   | (500     | ) |  |   | (15   | )
|Proceeds from disposal of investments in unconsolidated companies                  |  |                        | 234    |   |      |   |       |      |  |   |         |   |  |   |      |  

(Continued)



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##### Table of Contents

|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|----------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | - |  | - | ------ | -
|                                                                                    |  | Year Ended December 31 |        
|                                                                                    |  | 2003                   |         |   | 2004 |   |         | 2005 | 
|                                                                                    |  | NT$                    |         |   | NT$  |   |         | NT$  |  |   | US$      |  
|                                                                                    |  |                        |         |   |      |   |         |      |  |   | (Note 3) |  
|Acquisitions of property, plant and equipment                                       |  | $                      | (32,248 | ) |      | $ | (22,889 | )    |  | $ | (22,930  | ) |  | $ | (699   | )
|Proceeds from disposal of property, plant and equipment                             |  |                        | 6       |   |      |   | 215     |      |  |   | 374      |   |  |   | 11     |  
|Acquisitions of patents and computer software                                       |  |                        | (193    | ) |      |   | (122    | )    |  |   | (139     | ) |  |   | (4     | )
|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|Net cash used in investing activities                                               |  |                        | (32,201 | ) |      |   | (32,453 | )    |  |   | (28,019  | ) |  |   | (854   | )
|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|Payments on principal of long-term loans                                            |  |                        | (17,000 | ) |      |   |        |      |  |   | (200     | ) |  |   | (6     | )
|Cash dividends paid                                                                 |  |                        | (38,591 | ) |      |   | (43,414 | )    |  |   | (45,344  | ) |  |   | (1,382 | )
|Additional capital contributed by government                                        |  |                        | 80      |   |      |   | 32      |      |  |   | 6        |   |  |   |       |  
|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|Net cash used in financing activities                                               |  |                        | (55,511 | ) |      |   | (43,382 | )    |  |   | (45,538  | ) |  |   | (1,388 | )
|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                           |  |                        | 5,901   |   |      |   | 15,730  |      |  |   | 12,608   |   |  |   | 385    |  
|                                                                                    |  |                        |         |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                        |  |                        | 7,652   |   |      |   | 13,553  |      |  |   | 29,283   |   |  |   | 892    |  
|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                                              |  | $                      | 13,553  |   |      | $ | 29,283  |      |  | $ | 41,891   |   |  | $ | 1,277  |  
|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|SUPPLEMENTAL INFORMATION                                                            |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|Interest paid                                                                       |  | $                      | 66      |   |      | $ | 4       |      |  | $ | 2        |   |  | $ |       |  
|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|Income tax paid                                                                     |  | $                      | 11,121  |   |      | $ | 10,993  |      |  | $ | 11,419   |   |  | $ | 348    |  
|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|NON-CASH FINANCING ACTIVITIES                                                       |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|Current portion of long-term loans                                                  |  | $                      |        |   |      | $ | 200     |      |  | $ | 200      |   |  | $ | 6      |  
|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|Activities related to the settlement of the pension obligations upon privatization: |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|Accrued pension liabilities                                                         |  |                        |         |   |      |   |         |      |  | $ | 46,915   |   |  | $ | 1,430  |  
|Deferred pension cost                                                               |  |                        |         |   |      |   |         |      |  |   | (34,504  | ) |  |   | (1,052 | )
|Deferred income taxes                                                               |  |                        |         |   |      |   |         |      |  |   | (4,059   | ) |  |   | (124   | )
|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  
|Additional capital contributed by MOTC- pension                                     |  |                        |         |   |      |   |         |      |  | $ | 8,352    |   |  | $ | 254    |  
|                                                                                    |  |                        |         |   |      |   |         |      |  |   |          |   |  |   |        |  



|                                                                         |  |            
|------------------------------------------------------------------------ |  | -----------
|The accompanying notes are an integral part of the financial statements. |  | (Concluded)



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##### Table of Contents

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS

(Amounts in Millions of New Taiwan Dollars, Unless Stated Otherwise)

---



|1. | GENERAL
|-- | -------

Chunghwa Telecom Co., Ltd.
(Chunghwa or the Company) was incorporated on July 1, 1996 in the Republic of China (ROC) pursuant to the Telecommunications Act No. 30. The Company is a company limited by shares and, prior to August
2000, was wholly owned by the Ministry of Transportation and Communications (MOTC). Prior to July 1, 1996, the current operations of Chunghwa were carried out under the Directorate General of Telecommunications (DGT).
The DGT was established by the MOTC in June 1943 to take primary responsibility in the development of telecommunications infrastructure and to formulate policies related to telecommunications. On July 1, 1996, the telecom operations of the DGT
were spun-off as Chunghwa which continues to carry out the business and the DGT continues to be the industry regulator.

As a
telecommunications service provider of fixed-line and cellular telephone services, within the meaning of applicable telecommunications regulations of the ROC, the Company is subject to requirements imposed by the MOTC.

Effective August 12, 2005, the MOTC had completed the process of privatizing the Company by reducing the government ownership to below 50%. Portions
of the MOTCs common share holdings had been sold, in connection with the foregoing privatization plan, in domestic public offerings at various dates from August 2000 to July 2003. Portions of the MOTCs common share holdings had also been
sold to the Companys employees at various dates from October 2000 to July 2005. In July 2003, the MOTC sold the Companys common shares in an international offering of securities in the form of American Depository Shares
(ADS). In August 2005, the MOTC sold 289,431,000 common shares in the ROC and 1,350,682,000 common shares in an international offering of securities in the form of ADS. As of August 12, 2005, the MOTC owned 47.84% shares of the
Company and the privatization plan was completed. As of December 31, 2005, the MOTC owns 41.48% shares of the Company.

The
Companys common shares were listed and traded on Taiwan Stock Exchange and New York Stock Exchange on October 27, 2000 and on July 17, 2003, respectively.



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------

Basis of Presentation

Prior to August 12, 2005, the effective date of privatization, the Company maintained its
accounting books and records based on the ROC government regulations for state-owned enterprises, ROC government regulations governing the preparation of financial statements of public companies and accounting principles generally accepted in the
ROC (ROC GAAP). Subsequent to August 12, 2005, the Company is no longer required to follow the ROC government regulations for state-owned enterprises. The accompanying financial statements have been prepared to present its financial
position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States (US GAAP).



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##### Table of Contents

Use of Estimates

The preparation of financial statements requires management to make certain estimates and assumptions that affect the recorded amounts of assets, liabilities, revenues and expenses of the Company. The Company
continually evaluates these estimates, including those related to allowances for doubtful accounts, useful lives of long term assets, pension plans, valuation allowances on deferred income taxes, customer service periods, impairment of assets and
the fair value of financial instruments. The Company bases its estimates on historical experience and other assumptions, which it believes to be reasonable under the circumstances. Actual results may differ from these estimates.

Foreign Currency Transactions

The
functional currency of the Company is the local currency, the New Taiwan dollar (NT$) as it is the currency of the primary economic environment. Thus, the transactions of the Company that are denominated in currencies other than the New Taiwan
dollars (the foreign currency) are recorded in New Taiwan dollars at the exchange rates prevailing on the transaction dates. Gains or losses realized upon the settlement of a foreign currency transaction are included in the period in
which the transaction is settled. The balances, at the balance sheet dates, of the foreign currency assets and liabilities are adjusted to reflect the prevailing exchange rates and the resulting differences are recorded as follows:



| | a. | Long-term stock investments accounted for by the equity method - as cumulative translation adjustment in stockholders equity.
| | -- | ------------------------------------------------------------------------------------------------------------------------------



| | b. | Financial assets and liabilities - credited or charged to current income.
| | -- | -------------------------------------------------------------------------

Cash Equivalents

Cash equivalents include negotiable certificates of deposit and commercial paper
purchased with maturities of three months or less from the date of acquisition.

Short-term Investments

Short-term investments including open-ended mutual funds, real estate investment trust funds, listed stocks and resell bonds are classified as trading
securities and are carried at their fair value. Unrealized holding gains and losses for trading securities are recognized in earnings.

The
credit linked investment is an interest-rate-risk financial instrument with an embedded derivative linked to credit risk in order to gain a higher rate of return. The hybrid financial instrument is remeasured at fair value with changes in fair value
reported in earnings. As such, the Company does not bifurcate the embedded derivative from the host contract.

Inventories

Inventories, consisting mainly of telecommunication cables, are stated at the lower of cost (weighted- average cost method) or market
value (replacement cost or net realizable value). If the market value is below cost, the Company writes down the inventory to the market value which then becomes the new cost basis.



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##### Table of Contents

Long-term Investments

Investments in shares of stock in companies where the Company exercises significant influence over operating and financial policy decisions are accounted
for using the equity method of accounting. The difference between the investment cost and the Companys proportionate share in the fair value of the net assets of the investee at the date of acquisition is recognized as equity method goodwill
which is not amortized. Any cash dividends received are recognized as a reduction in the carrying value of the investment. Profits and losses arising from equipment purchases from equity investees are eliminated. For other-than-temporary declines in
the value of investments accounted for using the equity method, the investment is reduced to its fair value and an impairment loss is recognized.

Investments in shares of stock with no readily determinable market values are accounted for using the cost method when the ownership is less than 20%. Cash dividends received are recorded as income and stock dividends received are accounted
for as increases in the number of shares held but not recognized as income.

The costs of investments sold are determined using the
weighted-average method.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation expense is determined based upon the assets estimated useful life using the
straight-line method.

The estimated useful lives are as follows:



|                              |  |                    
|----------------------------- |  | -------------------
|                              |  | Useful Life (Years)
|Buildings and improvements    |  | 10-60              
|Telecommunications equipment: |  |                    
|Transmission equipment        |  | 9-15               
|Exchange equipment            |  | 6-12               
|Miscellaneous equipment       |  | 3-10               

Cost of maintenance and repairs, including the cost of replacing minor items not constituting
substantial improvements, is charged to current income.

Gains and losses incurred for the sale or disposal of property, plant and equipment
are recorded as costs of services.

Valuation of Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in
accordance with Statement of Financial Accounting Standards (SFAS) No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. If the total of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the assets, a loss is recognized for the excess of the carrying amount over the fair value of the asset.



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3G Concession

3G Concession represents the amount paid by the Company on March 11, 2002 to the ROC government in connection with the grant of a concession to provide various telecommunication services using spectrum assigned
by the MOTC that utilizes the International Mobile Telecommunication - 2000: The Global Standard for Third Generation Wireless Communications technical standards as announced by the International Telecommunications Union (the 3G
concession). Licenses for 3G mobile telecommunication services are granted by the MOTC through a three-step procedure. Applicants first obtain a concession from the MOTC through a bidding process. The holder of the concession must then obtain
a network construction permit from the DGT. Once the network construction is complete, the applicant may apply for a 3G license from the MOTC. The Company received a 3G license from MOTC on May 26, 2005 and commenced operations of the network
on the same day. The 3G license is valid through December 31, 2018. The 3G concession and any additional licensing fees are amortized on a straight-line basis from the date operations commence through the date the license expires. Amortization
expense for the year ended December 31, 2005 was NT$447 million. The 3G Concession and its related asset group is subject to review for impairment in accordance with SFAS No. 144.

Patents and Computer Software

Patents are amortized using the straight-line method over the estimated useful lives ranging from 10 to 20 years. Computer software costs are capitalized and amortized using the straight-line method over the estimated useful lives of three
years. Patents and computer software are also reviewed for impairment in accordance with SFAS No. 144. Amortization expenses for the years ended December 31, 2003, 2004 and 2005 were NT$154 million, NT$166 million and NT$154 million,
respectively. Accumulated amortization was NT$979 million and NT$1,133 million as of December 31, 2004 and 2005, respectively.

Deferred Income

Deferred income represents one-time connection fees received from subscribers. The deferred income is
recognized over the average expected customer service periods.

The average expected customer service periods (in years) are as follows:



|           |  |                   |  |     
|---------- |  | ----------------- |  | ----
|           |  | As of December 31
|           |  | 2004              |  | 2005
|Fixed-line |  | 13                |  | 16  
|Cellular   |  | 5                 |  | 4   
|Paging     |  | 2                 |  | 2   
|Internet   |  | 3                 |  | 4   

The Company expenses the direct cost related to deferred income as incurred.

Revenue Recognition

The Company
recognizes revenue when they are realized or realizable and earned. Revenues are realized or realizable and earned when the Company has persuasive evidence of an arrangement, the goods have been delivered or the service have been rendered to the
customer, the sales price is fixed or determinable and collectibility is reasonably assured. In addition to this general policy, the following are specific revenue recognition policies:



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##### Table of Contents

The Company records service revenues over the periods they are earned. The costs of providing services
are recognized as incurred. Handset subsidy costs are paid to a vendor that sells a handset to a customer who subscribes to the service, as an inducement to enter into a service contract, and are recognized as a cost of service when incurred. Usage
revenues from fixed-line services, cellular services, Internet and data services, and inter-connection and call transfer fees from other telecommunications companies and carriers are billed in arrears and are recognized based upon minutes of traffic
processed when the services are provided in accordance with contract terms. The Company had accrued unbilled revenues for services provided amounting to NT$1,383 million and NT$1,435 million as of December 31, 2004 and 2005, and are
included in accounts receivable in the accompanying balance sheets.

Other revenues are recognized as follows: (a) one-time subscriber
connection fees are deferred and recognized over the average expected customer service periods, (b) fixed-monthly fees (on fixed-line services, wireless (cellular and paging) and Internet and data services) are accrued, and (c) prepaid
services (fixed-line, cellular and Internet) are recognized as income based upon actual usage by customers or when the right to use those services expires.

Concentrations

For all periods presented, no individual customer or supplier constituted more than
10% of the Companys revenues, trade notes and accounts receivables, purchases or trade notes and accounts payable. The Company invests its cash with several high-quality financial institutions. The Company also does not have concentrations of
available sources of labor, services or other rights that could, if suddenly eliminated, severely impact its operations. However, telecommunications franchises and licenses are issued solely by authority of the ROC government. The withdrawal or the
revocation of the franchise and licenses by the ROC government would severely impact the Companys operations.

Pension Costs

Pension costs are recorded on the basis of actuarial calculations. As a foreign private issuer, the Company adopted SFAS No. 87,
Employers Accounting for Pensions, on July 1, 1996 as it was not feasible for the Company to obtain the information necessary to adopt SFAS No. 87 as of July 1, 1989. The Company had allocated a portion of the
transition obligation directly to equity on the date of adoption based on the ratio of: (a) the years elapsed between the effective date in SFAS No. 87 and the adoption date, to (b) the remaining service period of employees expected
to receive benefits as estimated at the adoption date.

The projected benefit obligation has been determined by actuarial methods based on
the related employees service through the date of privatization. An intangible asset representing the unrecognized net losses and unrecognized transition obligations has been recorded on the balance sheet as deferred pension cost. Such amounts
represent an additional minimum pension liability and were recorded as an asset as such costs represent a receivable from the MOTC and was fully realized upon privatization.

The MOTC settled related pension obligations on the privatization date and recorded the difference between accrued pension liabilities, deferred pension
cost and related deferred income tax assets, as contributed capital in stockholders equity.

Advertising and Promotional Expenses

Advertising and promotional expenses are charged to income as incurred. These expenses were NT$1,861 million, NT$2,526 million and
NT$2,610 million for the years ended December 31, 2003, 2004 and 2005, respectively.

Research and Development Costs

Research and development costs are charged to income as incurred.



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##### Table of Contents

Employee Stock Compensation

In connection with the privatization plan of the Company, the MOTC made the Companys employees an offer to purchase shares of common stock of the
Company at a discount from the quoted market price. The Company records the difference between the market price of the stock on the date of purchase and the purchase price as compensation expense at the purchase date.

Derivative Financial Instruments

The
Company enters into forward contracts to reduce its exposure to foreign currency risk and variability in operating results due to fluctuations in exchange rates underlying the value of liabilities denominated in foreign currencies until such
liabilities are paid. A forward contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates. These foreign currency forward exchange contracts are denominated in the
same currency in which the underlying foreign currency liabilities are denominated and bear a contract value and maturity date that approximate the value and expected settlement date, respectively, of the underlying transactions. For contracts that
are designated and effective as fair value hedges, unrealized gains and losses on open contracts at the end of each accounting period, resulting from changes in the fair value of these contracts, are recognized in earnings in the same period as
gains and losses on the underlying foreign denominated receivables are recognized and generally offset. Gains and losses on forward contracts and foreign denominated liabilities are included in other income (expense), net.

Derivatives are recognized at fair value and included in either other current liabilities or other current assets on the balance sheet.

Income Tax

The Company is subject to
income tax in the ROC. The Company accounts for income tax using the asset and liability method. Under this method, deferred income tax is recognized for losses carried forward and the future tax consequences attributable to differences between
financial statement carrying amounts and their respective tax bases, using enacted laws. The Company treats the investment tax credit as a reduction of current income taxes of the year in which the credit arises and defers unutilized tax credit as
deferred income tax assets. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that a portion or the entire deferred tax asset will not be realized.

Under ROC tax regulations, the current years tax-basis earnings that are not distributed in the following year are subject to a 10% additional
income tax. This 10% additional income tax is recognized in the period during which the related income is generated. The Company adjusts the amount of accrued undistributed earnings tax after the Companys shareholders approve the distribution
of earnings in the following year.

Comprehensive Income

Comprehensive income includes net income plus the results of certain changes in stockholders equity during a period from non-owner sources that are
not reflected in the statement of operations. Other comprehensive income consists of cumulative translation adjustments.

Net Income Per
Share and Per Equivalent ADS

Net income per share is computed by dividing net income by the weighted-average number of common shares
outstanding during the periods. Net income per equivalent ADS is calculated by multiplying the above net income per share by ten as each ADS represents ten common shares.



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Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R) Share-Based Payment. SFAS No. 123(R) requires that companies recognize
compensation expense equal to the fair value of stock options or other share based payments for the annual reporting period that begins after June 15, 2005. SFAS No. 123(R) applies to all awards granted after January 1, 2006, and
prior periods awards that are modified, repurchased, or cancelled after January 1, 2006. There is no impact to the Company as a result of this standard as the Company does not currently issue stock options to its employees or others.

In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error Corrections. SFAS No. 154 requires that
companies apply accounting changes and error corrections to financial statements retrospectively from previous period unless it is impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. There is no impact to the Company as a result of the adoption of this standard as the Company does not currently intend to change its accounting principles, estimate or reporting entity.



|3. | U.S. DOLLAR AMOUNTS
|-- | -------------------

The Company maintains its
accounts and expresses its financial statements in New Taiwan dollars. For convenience only, U.S. dollar amounts presented in the accompanying financial statements have been translated at the noon buying rate for cable transfers as certified for
customs purposes by the Federal Reserve Bank of New York as of December 31, 2005, which was NT$32.80 to US$1.00. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have
been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange.



|4. | CASH AND CASH EQUIVALENTS
|-- | -------------------------



|                                  |  |             |        |      |   |       
|--------------------------------- |  | ----------- | ------ | ---- | - | ------
|                                  |  | December 31
|                                  |  | 2004        |        | 2005
|                                  |  | NT$         |        | NT$ 
|Cash and bank deposits            |  | $           | 1,958  |      | $ | 2,355 
|Negotiable Certificate of Deposit |  |             | 8,900  |      |   | 10,907
|Commercial paper                  |  |             | 18,425 |      |   | 28,629
|                                  |  |             |        |      |   |       
|                                  |  | $           | 29,283 |      | $ | 41,891
|                                  |  |             |        |      |   |       



|5. | SHORT-TERM INVESTMENT
|-- | ---------------------



|                                  |  |                |       |                       |      |     |                |  |                       |        |  |   |   
|--------------------------------- |  | -------------- | ----- | --------------------- | ---- | --- | -------------- |  | --------------------- | ------ |  | - | --
|                                  |  | December 31   
|                                  |  | 2004           |       |                       | 2005
|                                  |  | CarryingAmount |       | UnrealizedGain (Loss) |      |     | CarryingAmount |  | UnrealizedGain (Loss)
|                                  |  | NT$            |       | NT$                   |      |     | NT$            |  | NT$                  
|Trading securities                |  |                |       |                       |      |     |                |  |                       |        |  |   |   
|Open-end bond mutual fund         |  | $              | 8,901 |                       | $    | 1   |                |  | $                     | 13,959 |  | $ | 61
|Real estate investment trust fund |  |                |      |                       |      |    |                |  |                       | 104    |  |   | 4 
|Listed stock                      |  |                |      |                       |      |    |                |  |                       | 73     |  |   | 4 
|Resell bond                       |  |                | 214   |                       |      | (13 | )              |  |                       |       |  |   |  
|                                  |  |                |       |                       |      |     |                |  |                       |        |  |   |   
|                                  |  |                | 9,115 |                       |      | (12 | )              |  |                       | 14,136 |  |   | 69
|Credit linked investment          |  |                |      |                       |      |    |                |  |                       | 35     |  |   |  
|                                  |  |                |       |                       |      |     |                |  |                       |        |  |   |   
|                                  |  | $              | 9,115 |                       | $    | (12 | )              |  | $                     | 14,171 |  | $ | 69
|                                  |  |                |       |                       |      |     |                |  |                       |        |  |   |   



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##### Table of Contents

The Company entered into a contract with Citibank Taiwan Branch (Citibank) to invest NT$35
million in a credit-linked investment in October 2005. The Company will receive interest on a quarterly basis commencing from December 2005 through March 2007, the maturity date. In addition to the quarterly interest, Citibank will pay an additional
amount based on the embedded credit derivate. The embedded credit derivate is linked to credit events of Quanta Display Inc. which is a Taiwan Stock Exchange listed company. The credit events include bankruptcy, failure to pay certain obligations,
acceleration of obligations, repudiation, moratorium and restructuring. If a credit event occurs on any day prior to the maturity date, Citibank may at its option declare a credit event, designate a cash settlement date and pay the cash settlement
amount equal to 30% of the outstanding contract amount to the Company in New Taiwan Dollars. The contract also granted a call provision to Citibank enabling it to early terminate the contract. Following the exercise of the call provision, the Bank
shall pay the Company the terminated contract amount and any accrued interest.

The contract is accounted for as a hybrid financial
instrument and remeasured at fair value at the balance sheet date and any gain or loss was charged to income. As of December 31, 2005, the fair value of the contract was NT$35 million. On January 9, 2006, the Company sold the contract to a
third party and recognized an investment loss of NT$0.2 million.



|6. | ALLOWANCE FOR DOUBTFUL ACCOUNTS
|-- | -------------------------------

The changes in the
allowance for doubtful accounts are summarized as follows:



|                                                  |  |                        |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                  |  | Year Ended December 31 |       
|                                                  |  | 2003                   |        |   | 2004 |   |        | 2005 | 
|                                                  |  | NT$                    |        |   | NT$  |   |        | NT$  | 
|Balance, beginning of period                      |  | $                      | 7,505  |   |      | $ | 7,786  |      |  | $ | 4,473  |  
|Provision for doubtful accounts charged to income |  |                        | 3,158  |   |      |   | 1,522  |      |  |   | 906    |  
|Accounts receivable written off                   |  |                        | (2,877 | ) |      |   | (4,835 | )    |  |   | (1,774 | )
|                                                  |  |                        |        |   |      |   |        |      |  |   |        |  
|Balance, end of period                            |  | $                      | 7,786  |   |      | $ | 4,473  |      |  | $ | 3,605  |  
|                                                  |  |                        |        |   |      |   |        |      |  |   |        |  



|7. | INVENTORIES
|-- | -----------



|                     |  |             |       |      |   |      
|-------------------- |  | ----------- | ----- | ---- | - | -----
|                     |  | December 31
|                     |  | 2004        |       | 2005
|                     |  | NT$         |       | NT$ 
|Supplies             |  | $           | 1,111 |      | $ | 1,276
|Work in process      |  |             | 2     |      |   | 20   
|Materials in transit |  |             | 326   |      |   | 824  
|                     |  |             |       |      |   |      
|                     |  | $           | 1,439 |      | $ | 2,120
|                     |  |             |       |      |   |      

The insurance coverage on inventories as of December 31, 2005 amounted to NT$1,143 million.



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##### Table of Contents

|8. | LONG-TERM INVESTMENTS
|-- | ---------------------

The long-term investments
comprise the following:



|                                                   |  |               |       |               |    |               |   |               |  |   
|-------------------------------------------------- |  | ------------- | ----- | ------------- | -- | ------------- | - | ------------- |  | --
|                                                   |  | December 31  
|                                                   |  | 2004          |       | 2005         
|                                                   |  | CarryingValue |       | % ofOwnership |    | CarryingValue |   | % ofOwnership
|                                                   |  | NT$           |       |               |    | NT$           |   |              
|Equity investees:                                  |  |               |       |               |    |               |   |               |  |   
|Chunghwa Investment (CHI)                        |  | $             | 930   |               | 49 |               | $ | 950           |  | 49
|Taiwan International Standard Electronics (TISE) |  |               | 499   |               | 40 |               |   | 575           |  | 40
|                                                   |  |               |       |               |    |               |   |               |  |   
|                                                   |  |               | 1,429 |               |    |               |   | 1,525         |  |   
|                                                   |  |               |       |               |    |               |   |               |  |   
|Cost investees:                                    |  |               |       |               |    |               |   |               |  |   
|Taipei Financial Center (TFC)                    |  |               | 2,530 |               | 12 |               |   | 1,790         |  | 12
|RPTI International (RPTI)                        |  |               | 71    |               | 12 |               |   | 71            |  | 12
|Siemens Telecommunication Systems (Siemens)      |  |               | 5     |               | 15 |               |   | 5             |  | 15
|                                                   |  |               |       |               |    |               |   |               |  |   
|                                                   |  |               | 2,606 |               |    |               |   | 1,866         |  |   
|                                                   |  |               |       |               |    |               |   |               |  |   
|                                                   |  | $             | 4,035 |               |    |               | $ | 3,391         |  |   
|                                                   |  |               |       |               |    |               |   |               |  |   

TISE designs, manufactures and sells telecommunications equipment. It also provides maintenance
services on such telecommunications equipment. The Company received dividends of nil, NT$56 million and NT$66 million from TISE for the years ended December 31, 2003, 2004 and 2005.

CHI invests in companies engaged in telecom and software businesses. No dividends were declared by CHI for the years ended December 31, 2003, 2004
and 2005, respectively.

Earnings from equity method investees were NT$3 million, NT$70 million and NT$160 million for the years ended
December 31, 2003, 2004 and 2005, respectively.

The total aggregate cost of the Companys cost method investment was NT$2,606
million and NT$1,866 million at December 31, 2004 and 2005, respectively. Investments with an aggregate cost of NT$76 million both at December 31, 2004 and 2005 were not evaluated for impairment because the Company did not estimate the
fair value of those investments in accordance with SFAS No. 107 Disclosure about Fair Value of Financial Instruments and the Company did not identify any events or changes in circumstances that may have had a significant adverse
effect on the fair value of those investments. For the remaining investment in TFC, the Company identified an impairment indicator and determined the investment in TFC was impaired due to an adverse change in the market condition of the industry in
which TFC operates. The Company recognized an other-than-temporary impairment loss of NT$740 million in 2005.

The Company received
dividends of NT$58 million from Siemens for the year ended December 31, 2005.



|9. | INVESTMENT IN PRIVATE PLACEMENT FUND
|-- | ------------------------------------

The Company
invested NT$500 million in a private placement fund managed by First Global Investment Trust Company Limited (FGIT) from September 27, 2005 to September 28, 2008. FGIT, on-behalf of the Company, invested 95% of the total
investment principle in a three-year structured time deposit issued by Far Eastern International Bank and invested the rest of the investment principal in a currency swap with Ta Chong Bank. The Company marks to market the private placement fund
without distinguishing and presenting the underlying investment assets separately on its balance sheet because the majority of the fair value of the private placement fund is generated from the three-year structured time deposit and the fair value
of the currency swap is nominal.



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##### Table of Contents

|10. | PROPERTY, PLANT AND EQUIPMENT, NET
|--- | ----------------------------------



|                                             |  |             |         |      |   |        
|-------------------------------------------- |  | ----------- | ------- | ---- | - | -------
|                                             |  | December 31
|                                             |  | 2004        |         | 2005
|                                             |  | NT$         |         | NT$ 
|Cost                                         |  |             |         |      |   |        
|Land                                         |  | $           | 42,407  |      | $ | 42,463 
|Buildings and improvements                   |  |             | 56,265  |      |   | 57,687 
|Telecommunications equipment                 |  |             | 613,626 |      |   | 620,377
|Miscellaneous equipment                      |  |             | 27,361  |      |   | 27,317 
|                                             |  |             |         |      |   |        
|                                             |  |             | 739,659 |      |   | 747,844
|                                             |  |             |         |      |   |        
|Accumulated depreciation                     |  |             |         |      |   |        
|Buildings and improvements                   |  |             | 12,194  |      |   | 13,235 
|Telecommunications equipment                 |  |             | 426,649 |      |   | 447,888
|Miscellaneous equipment                      |  |             | 20,579  |      |   | 21,077 
|                                             |  |             |         |      |   |        
|                                             |  |             | 459,422 |      |   | 482,200
|                                             |  |             |         |      |   |        
|Construction in progress                     |  |             | 31,360  |      |   | 27,856 
|                                             |  |             |         |      |   |        
|Advances related to acquisition of equipment |  |             | 41      |      |   | 25     
|                                             |  |             |         |      |   |        
|Property, plant and equipment, net           |  | $           | 311,638 |      | $ | 293,525
|                                             |  |             |         |      |   |        

Because of the improvements of telecommunication technology and changes in the market, the paging
division is at risk of obsolescence. If the total expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the assets of paging division, a loss is recognized for the excess of the carrying amount
over the fair value. The Company performed an impairment analysis as required by SFAS No. 144 and concluded that the paging division assets were impaired. An impairment loss of NT$343 million (US$10 million) was recognized in 2005 and was
charged to cost of services.

No interest expense was capitalized for the years ended December 31, 2004 and 2005. Capitalized interest
expense aggregated to NT$46 million for the year ended December 31, 2003 and was determined using interest rates ranging from 0.56% to 1.67%.

The Company carries insurance on certain buildings and certain telecom equipment with carrying values of NT$1,802 million and NT$1,796 million as of December 31, 2004 and 2005, respectively. The Company does not carry comprehensive
insurance on all properties.



|11. | ACCRUED EXPENSES
|--- | ----------------



|                       |  |             |        |      |   |       
|---------------------- |  | ----------- | ------ | ---- | - | ------
|                       |  | December 31
|                       |  | 2004        |        | 2005
|                       |  | NT$         |        | NT$ 
|Accrued compensation   |  | $           | 9,207  |      | $ | 10,339
|Accrued franchise fees |  |             | 2,500  |      |   | 2,539 
|Other accrued expenses |  |             | 2,661  |      |   | 3,132 
|                       |  |             |        |      |   |       
|                       |  | $           | 14,368 |      | $ | 16,010
|                       |  |             |        |      |   |       



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##### Table of Contents

|12. | OTHER CURRENT LIABILITIES
|--- | -------------------------



|                                                                                                |  |             |        |      |   |       
|----------------------------------------------------------------------------------------------- |  | ----------- | ------ | ---- | - | ------
|                                                                                                |  | December 31
|                                                                                                |  | 2004        |        | 2005
|                                                                                                |  | NT$         |        | NT$ 
|Advances from subscribers                                                                       |  | $           | 6,835  |      | $ | 7,421 
|Amounts collected from subscribers on behalf of other telecommunications companies and carriers |  |             | 3,467  |      |   | 3,323 
|Payable to equipment suppliers                                                                  |  |             | 4,150  |      |   | 4,142 
|Payables to construction suppliers                                                              |  |             | 2,318  |      |   | 2,406 
|Other                                                                                           |  |             | 2,196  |      |   | 2,119 
|                                                                                                |  |             |        |      |   |       
|                                                                                                |  | $           | 18,966 |      | $ | 19,411
|                                                                                                |  |             |        |      |   |       



|13. | LONG-TERM LOANS (INCLUDING CURRENT PORTION OF LONG-TERM LOANS)
|--- | --------------------------------------------------------------



|                                         |  |             |      |   |      |   |      |  
|---------------------------------------- |  | ----------- | ---- | - | ---- | - | ---- | -
|                                         |  | December 31 |     
|                                         |  | 2004        |      |   | 2005 |  
|                                         |  | NT$         |      |   | NT$  |  
|Loan from the Common Tunnel Fund         |  | $           | 700  |   |      | $ | 500  |  
|Less: Current portion of long-term loans |  |             | (200 | ) |      |   | (200 | )
|                                         |  |             |      |   |      |   |      |  
|                                         |  | $           | 500  |   |      | $ | 300  |  
|                                         |  |             |      |   |      |   |      |  

The loan from the Common Tunnel Fund was obtained pursuant to a long-term loan agreement with the
Common Tunnel Fund managed by the Ministry of Interior that allows the Company to obtain unsecured interest-free credit until March 12, 2007. The outstanding principal is carried at its undiscounted amount and is payable in three annual
installments (NT$200 million, NT$200 million and NT$300 million) starting on March 12, 2005.

As of December 31, 2005, the Company
has unused credit lines of approximately NT$40,350 million, which are available for short-term and long-term borrowings.



|14. | STOCKHOLDERS EQUITY
|--- | --------------------

Under the Companys
Articles of Incorporation, authorized capital is NT$96,477,249,000. The Companys Articles of Incorporation and the Republic of China Telecommunications Act provide that the MOTC has the right to purchase two redeemable preferred shares at
NT$10 (par value) in the event its ownership in the Company falls below 50% of the outstanding common shares.

The MOTC, as the holder of
those preferred shares is entitled to the same rights as holders of common shares and certain additional rights as specified in the Companys Articles of Incorporation as follows:



| | a. | The holder of the preferred shares, or its nominated representative, will act as a director and/or supervisor during the entire period in which the preferred shares are outstanding.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | The holder of preferred shares has the same pre-emptive rights as holders of common shares when the Company raises capital by issuing new shares.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | The holder of the preferred shares will have the right to veto on any change in the name of the Company or the nature of its business and any transfer of a substantial portion of
the Companys business or property.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | d. | The holder of the preferred shares may not transfer the ownership. The Company must redeem all outstanding preferred shares at par value within three years from the date of their
issuance.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the purpose of privatizing the Company, the MOTC sold 1,109,750 thousand common shares of the Company in
an international offering of securities in the form of American Depositary Shares (ADS) amounting to 110,975 thousand units (one ADS represents ten common shares) on the New York Stock Exchange in July 17, 2003. Subsequently, the MOTC sold
1,350,682 thousand common shares in the form of ADS amounting to 135,068 thousand units on August 10, 2005. As of December 31, 2005, the MOTC has sold 2,460,432 thousand common shares in the form of ADS amounting to
246,043 thousand units.

The ADS holders generally have the same rights and obligations as other common shareholders, subject to the
provision of relevant laws. The exercise of such rights and obligations shall comply with the related regulations and deposit agreement, which stipulate, among other things, that ADS holders can, through deposit agents; exercise their voting rights,
sell their ADSs, and receive dividends declared and subscribe to the issuance of new shares.

As of December 31, 2005, the outstanding
ADSs were 246,043 thousand units, which equaled approximately 2,460,431 thousand common shares, and represented 25.50% of the Companys total outstanding common shares.

Under the ROC Company Law, capital surplus may only be utilized to offset deficits or be declared as stock dividends. Also, such capital surplus can only
be declared as a stock dividend by the Company at an amount calculated in accordance with the provisions of existing regulations. As of December 31, 2005, the amount of retained earnings available for dividends was NT$ 48,088 million and
was based on earnings as determined using ROC government regulations.

In addition, before distributing a dividend or making any other
distribution to stockholders, the Company must pay all outstanding taxes, recover any past losses and set aside a legal reserve equal to 10% of its net income, and, depending on its business needs or requirements, may also set aside a special
reserve. In accordance with the Articles of Incorporation, no less than 50% of the remaining earnings comprising remaining balance of net income, if any, plus cumulative undistributed earnings shall be distributed in the following: No less than 1%
of distributable earnings shall be distributed to employees as employee bonus and no more than 0.2% of distributable earnings shall be distributed to board of directors and supervisors as remuneration in the following years after privatization.
During the year of privatization, the distributable earnings are limited to the earnings generated after privatization. The remaining distributable earnings can be distributed to the shareholders based on the resolution of shareholders
meeting. Cash dividends to be distributed shall not be less than 10% of the total amount of dividends to be distributed. If cash dividends to be distributed is less than NT$0.10 per share, such cash dividend shall be distributed in the form of
common shares.

Under the ROC Company Law, the appropriation for legal reserve shall be made until the accumulated reserve equals the
aggregate par value of the outstanding capital stock of the Company. This reserve can only be used to offset a deficit, or when reaching 50% of the aggregate par value of the outstanding capital stock of the Company, up to 50% of the reserve may, at
the option of the Company, be declared as a stock dividend and transferred to capital.



|15. | EMPLOYEE STOCK COMPENSATION
|--- | ---------------------------

The MOTC, in
connection with the privatization plan of the Company, provided employees with two stock purchase plans: The market discount plan and the par value plan.



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Market discount plan - under the market discount plan, the MOTC sold shares of stock at discounted prices
to employees at various times from October 2000 to September 2005. The employees purchased the common shares at discounts of 10% and 20% and 50% from the quoted market price in consideration for their commitment to hold the common shares for two,
three and four years (the holding periods), respectively. The common shares are held by an escrow agent on behalf of the employees/stockholders. There are no circumstances under which the MOTC or the Company would be required to
repurchase these common shares. Also, the employees are not required to remain employed with the Company during the duration of the holding periods. The Company recognized NT$1,916 million, nil and NT$12,542 million as compensation expense for the
discounted shares purchased by employees for the years ended December 31, 2003, 2004 and 2005, respectively.

Par value plan - under
the par value plan, the MOTC sold shares of stock to employees at par value (NT$10). The difference between the market price of the stock on the offering dates and the par value was recognized as compensation expense. The total shares sold to
employees by the MOTC in 2004 and 2005 were 8,782,084 shares and 4,126,928 shares, respectively. The MOTC received total proceeds of NT$87.1 million and NT$41 million in 2004 and 2005, respectively, for these sales. The Company recognized NT$15
million, NT$457 million and NT$228 million as compensation expense for the discounted shares purchased by employees for the years ended December 31, 2003, 2004 and 2005, respectively.

In accordance with the policy of distribution of earnings stipulated in Articles of Incorporation, the Company accrued employee stock bonus of NT$460
million and remuneration to directors and supervisors of NT$15 million in 2005.



|16. | PENSION PLAN
|--- | ------------

At the time of its incorporation on
July 1, 1996, the Company continued the existing two noncontributory defined benefit pension plans covering all its employees, as previously adopted by the DGT. The first plan (hereinafter referred to as Plan A) covered civil
service eligible employees (i.e., employees who meet the necessary qualifications set by the ROC Government) and the second plan (hereinafter referred to as Plan B) covered all other employees of the Company (hereinafter referred to as
non-civil service eligible employees). The adoption of two pension plans was necessary as different pension laws apply to civil service eligible and non-civil service eligible employees.

Plan A provided benefits equal to the sum of: (a) the lump-sum payment equivalent to one benefit unit per year for the first twenty service years
rendered and one-half benefit unit per service year rendered thereafter, with one benefit unit equivalent to a portion of the salary of the employee at the time of retirement (referred to hereinafter as pensionable salary), and
(b) annuity payments payable monthly equivalent to a certain percentage of the benefit unit. Plan B provided benefits equal to the lesser of: (a) forty-five benefit units, or (b) two benefit units per service year rendered for the
first fifteen years, and one-half benefit unit per service year exceeding fifteen years rendered before August 1, 1984 and one benefit unit per service year for services rendered after August 1, 1984, with one benefit unit equivalent to
the monthly average base salary (consisting of regular salary items plus overtime salary). Plan A was funded based on amounts included in budgets approved by the Legislative Yuan and supplementary budgets approved by the Executive Yuan while Plan B
was funded by the Company at an amount equivalent to 2% to 15% of the monthly salary.

The Company adopted SFAS No. 87 on July 1,
1996 (adoption date), the date of its incorporation. The unrecognized net transition obligation recorded to shareholders equity on July 1, 1996 was NT$6,571 million which represents the difference in the net pension cost for the period
from the issuance of SFAS No. 87 and the date of adoption. The remaining unrecognized net transition obligation of NT$16,790 million is amortized over the estimated remaining service period of the employees as determined on July 1, 1996,
which is a period of twenty-five years and seventeen years for civil service eligible employees and non-civil service eligible employees, respectively.



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##### Table of Contents

As required by the ROC Government for state-owned enterprises instructed to undergo privatization plans
effective on the privatization date, except for those employees who reached the mandatory retirement age (the age of 65 for Plan A participants and age 60 for Plan B participants) by that day, employees received pension benefit payments calculated
in accordance with the Guidelines on Payments of Severance Benefits to Employees of State-Owned Enterprises (Guidelines).

Under
the Guidelines, on the privatization date, settlement benefit payments were distributed to both Plan A and Plan B participants as follows: (a) employees who voluntarily left the Company on the privatization date (hereinafter referred to as
separated employees) received a service clearance payment which is calculated similar to the benefit formula under the original Plan B as mentioned above plus an additional six-month salary and one-month advance notice pay (hereinafter
referred to as the additional separation payments); and (b) employees who opted to remain with the privatized company after the privatization date (hereinafter referred to as privatized company employees) would receive
an amount equivalent to those received by the separated employees without the additional separation payments. Privatized company employees who are involuntarily terminated by the Company within five years from the date of privatization (hereinafter
referred to as redundant employees) will receive redundancy benefits equivalent to the pension amount as computed based on one benefit unit for every year of service after privatization plus the additional separation payments
(hereinafter referred to as redundancy benefit payments). The six-month portion of the additional separation payments was paid by the MOTC. The accrued pension amount after privatization and the one-month advance notice pay were paid by
the Company.

The unrecognized prior service costs, which amounted to NT$30,018 million, related to the increased benefits provided under
the Guidelines described in the preceding paragraph were amortized through June 30, 2001. The unrecognized prior service costs excluded any costs expected to be incurred for the additional separation payments or redundancy benefit payments. The
additional separation payments under the Guidelines were accounted for as special termination benefits and were recognized in the period when the employee accepted the offer while the redundancy benefit payments will be recognized in the period
management approves a plan of termination.

In order to increase operational efficiency, the Company approved a Special Retirement Incentive
Program (Program A). Program A allowed eligible employees who voluntarily left the Company on February 1, 2005 to receive benefit payments based on the respective original plan (meaning Plan A or Plan B) plus the additional
separation payments. The present value of such amount over and above the lump sum amount was NT$821 million and was accounted for as special termination benefits in the statement of income for the year ended December 31, 2005. A portion of the
Program A benefits amounting to NT$243 million were recognized in 2004 when employees formally accepted the terms of Program A.

In order to
provide employees with additional consideration, the Company approved another Special Retirement Incentive Program (Program B) in May 2005. Program B allowed eligible employees who voluntarily left the Company on August 11, 2005,
the day before privatization, to also receive benefit payments based on the respective original plan (meaning Plan A or Plan B) plus the additional separation payments. The present value of such amount over and above the lump sum amount was NT$1,325
million and was accounted for as special termination benefits in the statement of income for the year ended December 31, 2005.

The
Company also approved another Special Retirement Incentive Program (Program C) in December 2005. Program C allowed eligible employees who voluntarily left the Company on March 31, 2006 to also receive benefit payments based on the
respective original plan plus the additional separation payments. The present value of such amount over and above the lump sum amount that would have been paid to the employees had they stayed until March 31, 2006 was accounted for as special
termination benefits. Accordingly, such benefits were recognized as a liability and charged to income when employees formally accepted the terms of Program C. No amounts were recognized for Program C as of December 31, 2005.



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Under applicable ROC regulations, upon the privatization, the obligation related to annuity payments due
after the date of privatization for civil serve eligible employees who retire prior to that date would be born by the MOTC. The Company completed its privatization plan on August 12, 2005. On the date of privatization, the MOTC settled all
employees past service costs mentioned above under Plan A and Plan B. The portion of the pension obligations that was settled by the MOTC, represented by the difference between the accrued pension liabilities and the deferred pension cost and
related deferred income tax assets, amounted to NT$8,352 million (US$254 million) and was accounted for as contributed capital and recorded in stockholders equity as of August 12, 2005. The non-cash financing activities and related
amounts of the pension obligation settlement as of the date of privatization are disclosed on the face of the statement of cash flows.

Upon
privatization, the MOTC settled all accrued pension obligations for Plan A and Plan B including service clearance payment, lump sum payment under civil service plan, additional separation payments, and other related obligations upon the completion
of the privatization in accordance with the Statute Governing Privatization of Stated-Owned Enterprises (the Privatization Fund). After paying all pension obligations for privatization, the plan assets will be transferred to the Fund for
Privatization of Government-owned Enterprises under the Executive Yuan. According to the instructions of MOTC, the Company has been requested to administer the distributions to employees for pension obligations including service clearance payment,
lump sum payment under civil service plan, additional separation payments, and other related obligations upon the completion of the privatization. As of December 31, 2005 the remaining balance of plan assets amounted to NT$7.1 billion, after
deducting amounts requested by the MOTC to be paid on its behalf, will be transferred to Privatization Fund on March 27, 2006.

Upon
privatization and settlement of the related obligations, Plan A and Plan B ceased to exist. A new plan (New Plan B), having similar terms and benefits as Plan B, was established and offered to employees. Employees choosing to enter into
New Plan B, were not credited with any prior service nor did they receive any accumulated benefits from prior service and benefits begin to accrue to them under this plan commencing from the privatization date. The components of net periodic benefit
costs before privatization are for both Plan A and Plan B. The effect of privatization relates to the both Plan A and Plan B. The amounts of plan assets remaining after privatization and the components of net periodic benefit costs after
privatization relate to New Plan B.

Before Privatization

The components of net periodic benefit costs are as follows:



|                                                       |  |                       |        |   |                           |   |        |     |  |   |       |  
|------------------------------------------------------ |  | --------------------- | ------ | - | ------------------------- | - | ------ | --- |  | - | ----- | -
|                                                       |  | Year EndedDecember 31 |        |   | PeriodEndedAugust 12,2005 |  
|                                                       |  | 2003                  |        |   | 2004                      |   |       
|                                                       |  | NT$                   |        |   | NT$                       |   |        | NT$ | 
|Service cost                                           |  | $                     | 1,970  |   |                           | $ | 1,943  |     |  | $ | 1,253 |  
|Interest cost                                          |  |                       | 2,362  |   |                           |   | 1,887  |     |  |   | 1,232 |  
|Expected return on plan assets                         |  |                       | (1,618 | ) |                           |   | (1,226 | )   |  |   | (798  | )
|Termination benefit under the Program A                |  |                       |       |   |                           |   | 243    |     |  |   |      |  
|Amortization of unrecognized net transition obligation |  |                       | 939    |   |                           |   | 939    |     |  |   | 575   |  
|Amortization of unrecognized net loss                  |  |                       | 635    |   |                           |   | 907    |     |  |   | 996   |  
|                                                       |  |                       |        |   |                           |   |        |     |  |   |       |  
|Net periodic benefit pension cost                      |  | $                     | 4,288  |   |                           | $ | 4,693  |     |  | $ | 3,258 |  
|                                                       |  |                       |        |   |                           |   |        |     |  |   |       |  



F-22



---

##### Table of Contents

The changes in benefits obligation and plan assets and the reconciliation of funded status are as
follows:



|                                                              |  |                        |          |   |                           |   |          |     |  |   |          |  
|------------------------------------------------------------- |  | ---------------------- | -------- | - | ------------------------- | - | -------- | --- |  | - | -------- | -
|                                                              |  | Year Ended December 31 |          |   | PeriodEndedAugust 12,2005 |  
|                                                              |  | 2003                   |          |   | 2004                      |   |         
|                                                              |  | NT$                    |          |   | NT$                       |   |          | NT$ | 
|Change in benefits obligation:                                |  |                        |          |   |                           |   |          |     |  |   |          |  
|Projected benefits obligation, beginning of year              |  | $                      | (119,822 | ) |                           | $ | (126,126 | )   |  | $ | (134,911 | )
|Services cost                                                 |  |                        | (1,970   | ) |                           |   | (1,943   | )   |  |   | (1,253   | )
|Interest cost                                                 |  |                        | (2,362   | ) |                           |   | (1,887   | )   |  |   | (1,232   | )
|Termination benefit under the Program A                       |  |                        |         |   |                           |   | (243     | )   |  |   |         |  
|Actuarial gain(loss)                                          |  |                        | (4,557   | ) |                           |   | (8,038   | )   |  |   | 2,294    |  
|Benefits paid                                                 |  |                        | 2,585    |   |                           |   | 3,326    |     |  |   | 2,126    |  
|                                                              |  |                        |          |   |                           |   |          |     |  |   |          |  
|Projected benefits obligation, end of period                  |  | $                      | (126,126 | ) |                           | $ | (134,911 | )   |  | $ | (132,976 | )
|                                                              |  |                        |          |   |                           |   |          |     |  |   |          |  
|Change in plan assets:                                        |  |                        |          |   |                           |   |          |     |  |   |          |  
|Fair value of plan assets, beginning of year                  |  | $                      | 83,478   |   |                           | $ | 82,578   |     |  | $ | 85,870   |  
|Actual return on plan assets                                  |  |                        | 1,462    |   |                           |   | 696      |     |  |   | 441      |  
|Employer contributions                                        |  |                        | 223      |   |                           |   | 5,922    |     |  |   | 2,956    |  
|Benefits paid                                                 |  |                        | (2,585   | ) |                           |   | (3,326   | )   |  |   | (2,126   | )
|                                                              |  |                        |          |   |                           |   |          |     |  |   |          |  
|Fair value of plan assets, end of period                      |  | $                      | 82,578   |   |                           | $ | 85,870   |     |  | $ | 87,141   |  
|                                                              |  |                        |          |   |                           |   |          |     |  |   |          |  
|Reconciliation of funded status:                              |  |                        |          |   |                           |   |          |     |  |   |          |  
|Funded status                                                 |  | $                      | (43,548  | ) |                           | $ | (49,041  | )   |  | $ | (45,835  | )
|Unrecognized net transition obligation                        |  |                        | 9,750    |   |                           |   | 8,811    |     |  |   | 8,237    |  
|Unrecognized actuarial loss                                   |  |                        | 21,539   |   |                           |   | 29,200   |     |  |   | 26,267   |  
|                                                              |  |                        |          |   |                           |   |          |     |  |   |          |  
|Net amount recognized                                         |  | $                      | (12,259  | ) |                           | $ | (11,030  | )   |  | $ | (11,331  | )
|                                                              |  |                        |          |   |                           |   |          |     |  |   |          |  
|The weighted-average asset allocations by asset category are: |  |                        |          |   |                           |   |          |     |  |   |          |  
|Time deposit                                                  |  |                        | 73       | % |                           |   | 85       | %   |  |   |          |  
|Short-term notes                                              |  |                        | 23       | % |                           |   | 15       | %   |  |   |          |  
|Taiwan government securities and loans                        |  |                        | 4        | % |                           |   |         | %   |  |   |          |  
|                                                              |  |                        |          |   |                           |   |          |     |  |   |          |  
|                                                              |  |                        | 100      | % |                           |   | 100      | %   |  |   |          |  
|                                                              |  |                        |          |   |                           |   |          |     |  |   |          |  

The target asset allocations are established through an investment policy established by the
Chunghwa Telecoms Employee Pension Fund Committee and agreed to by the Ministry of Finance (MOF). As increased liquidity of the fund is necessary due to the privatization of the Company, the current policy for plan assets is to
place funds in time deposit accounts of the financial and postal institutions, non-designated trust funds in an investing company or financial institution and government bonds. In addition, the pension fund may invest in beneficial certificates of
equity securities.



F-23



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##### Table of Contents

Effect of Privatization



|                                       |  |                     |          |   |                        |   |         |                    |  |   |      
|-------------------------------------- |  | ------------------- | -------- | - | ---------------------- | - | ------- | ------------------ |  | - | -----
|                                       |  | BeforePrivatization |          |   | Effect ofPrivatization |   |         | AfterPrivatization
|Projected benefits obligation          |  | $                   | (132,976 | ) |                        | $ | 132,976 |                    |  | $ |     
|Plan assets at fair value              |  |                     | 87,141   |   |                        |   | (86,061 | )                  |  |   | 1,080
|                                       |  |                     |          |   |                        |   |         |                    |  |   |      
|Funded status                          |  |                     | (45,835  | ) |                        |   | 46,915  |                    |  |   | 1,080
|Unrecognized net transition obligation |  |                     | 8,237    |   |                        |   | (8,237  | )                  |  |   |     
|Unrecognized net loss                  |  |                     | 26,267   |   |                        |   | (26,267 | )                  |  |   |     
|                                       |  |                     |          |   |                        |   |         |                    |  |   |      
|Net amount recognized                  |  | $                   | (11,331  | ) |                        | $ | 12,411  |                    |  | $ | 1,080
|                                       |  |                     |          |   |                        |   |         |                    |  |   |      

The plan assets and net period benefit costs after privatization represent those assets and costs
of New Plan B.

After Privatization

The components of net periodic benefit costs of New Plan B for the period from August 13, 2005 through December 31, 2005 are as follows:



|                                  |  |     |       |  
|--------------------------------- |  | --- | ----- | -
|                                  |  | NT$ |      
|Service cost                      |  | $   | 1,192 |  
|Expected return on plan assets    |  |     | (14   | )
|                                  |  |     |       |  
|Net periodic benefit pension cost |  | $   | 1,178 |  
|                                  |  |     |       |  

The changes in benefits obligation and plan assets and the reconciliation of funded status for New
Plan B are as follows:



|                                               |  |     |            |  
|---------------------------------------------- |  | --- | ---------- | -
|                                               |  | NT$ |           
|Change in benefits obligation:                 |  |     |            |  
|Projected benefits obligation, August 12, 2005 |  | $   |           |  
|Services cost                                  |  |     | 1,192      |  
|Actuarial loss                                 |  |     | 501        |  
|Benefits paid                                  |  |     | (10        | )
|                                               |  |     |            |  
|Projected benefits obligation, end of year     |  | $   | 1,683      |  
|                                               |  |     |            |  
|Change in plan assets:                         |  |     |            |  
|Fair value of plan assets, August 12, 2005     |  | $   | 1,080      |  
|Actual return on plan assets                   |  |     | (18        | )
|Employer contributions                         |  |     | 585        |  
|Benefits paid                                  |  |     | (10        | )
|                                               |  |     |            |  
|Fair value of plan assets, end of year         |  | $   | 1,637      |  
|                                               |  |     |            |  
|Reconciliation of funded status                |  |     |            |  
|Funded status                                  |  | $   | (46        | )
|Unrecognized actuarial loss                    |  |     | 504        |  
|                                               |  |     |            |  
|Net amount recognized                          |  | $   | 458        |  
|                                               |  |     |            |  
|                                               | 
|                                               |  |     | (Continued | )



F-24



---

##### Table of Contents

|                                                               |  |     |  
|-------------------------------------------------------------- |  | --- | -
|                                                               |  | NT$ |  
|The weighted-average asset allocations by assets category are: |  |     |  
|Time deposit                                                   |  | 49  | %
|Short-term notes                                               |  | 33  | %
|Taiwan government securities and loans                         |  | 18  | %
|                                                               |  |     |  
|                                                               |  | 100 | %
|                                                               |  |     |  

The amounts recognized in the accompanying balance sheets at December 31 are as follows:



|                                          |  |                        |         |   |      |   |         |      |  |   |  
|----------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -
|                                          |  | Year Ended December 31
|                                          |  | 2003                   |         |   | 2004 |   |         | 2005
|                                          |  | NT$                    |         |   | NT$  |   |         | NT$ 
|Amounts recognized                        |  |                        |         |   |      |   |         |      |  |   |  
|Accrued pension liability                 |  | $                      | (42,199 | ) |      | $ | (44,252 | )    |  | $ | 
|Intangible assets - deferred pension cost |  |                        | 29,940  |   |      |   | 33,222  |      |  |   | 
|                                          |  |                        |         |   |      |   |         |      |  |   |  
|Net amount recognized                     |  | $                      | (12,259 | ) |      | $ | (11,030 | )    |  | $ | 
|                                          |  |                        |         |   |      |   |         |      |  |   |  

Information for the Companys pension plans with an accumulated benefit obligation in excess
of plan assets is as follow:



|                                         |  |                        |          |   |      |   |          |      |  |   |  
|---------------------------------------- |  | ---------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -
|                                         |  | Year Ended December 31
|                                         |  | 2003                   |          |   | 2004 |   |          | 2005
|                                         |  | NT$                    |          |   | NT$  |   |          | NT$ 
|Aggregate accumulated benefit obligation |  | $                      | (125,499 | ) |      | $ | (130,982 | )    |  | $ | 
|                                         |  |                        |          |   |      |   |          |      |  |   |  
|Accumulated benefit obligation - Plan A  |  | $                      | (125,291 | ) |      | $ | (130,643 | )    |  | $ | 
|                                         |  |                        |          |   |      |   |          |      |  |   |  
|Fair value of plan assets - Plan A       |  | $                      | 81,813   |   |      | $ | 84,924   |      |  | $ | 
|                                         |  |                        |          |   |      |   |          |      |  |   |  

Actuarial assumptions:



|                                                |  |                     |   |  |                    |  
|----------------------------------------------- |  | ------------------- | - |  | ------------------ | -
|                                                |  | BeforePrivatization |   |  | AfterPrivatization |  
|Year ended December 31, 2003                    |  |                     |   |  |                    |  
|                                                |  |                    
|Discount rate used in determining present value |  | 1.50                | % |  |                   |  
|Rate of compensation increase                   |  |                     |   |  |                    |  
|All employees                                   |  | 0.50                | % |  |                   |  
|Annuity increase for retirees                   |  |                    |   |  |                   |  
|Rate of return on plan assets                   |  |                     |   |  |                    |  
|Plan A                                          |  | 1.50                | % |  |                   |  
|Plan B                                          |  | 1.50                | % |  |                   |  
|                                                |  |                    
|Year ended December 31, 2004                    |  |                     |   |  |                    |  
|                                                |  |                    
|Discount rate used in determining present value |  | 1.50                | % |  |                   |  
|Rate of compensation increase                   |  |                     |   |  |                    |  
|All employees                                   |  | 3.50                | % |  |                   |  
|Annuity increase for retirees                   |  | 3.00                | % |  |                   |  
|Rate of return on plan assets                   |  |                     |   |  |                    |  
|Plan A                                          |  | 1.50                | % |  |                   |  
|Plan B                                          |  | 1.50                | % |  |                   |  
|                                                |  |                    
|                                                |  |                     |   |  | (Continued         | )



F-25



---

##### Table of Contents

|                                                |  |                     |  |                    |  
|----------------------------------------------- |  | ------------------- |  | ------------------ | -
|                                                |  | BeforePrivatization |  | AfterPrivatization |  
|Year ended December 31, 2005                    |  |                     |  |                    |  
|                                                |  |                    
|Discount rate used in determining present value |  |                    |  | 2.25               | %
|Rate of compensation increase - all employees   |  |                    |  | 2.00               | %
|Rate of return on plan assets - all employees   |  |                     |  | 3.00               | %

The Labor Pension Act of ROC (Act) was effective beginning July 1, 2005 and this
pension mechanism was considered as a defined contribution plan. The employees who were subject to the Labor Standards Law prior to the enactment of the Act may choose to be subject to the pension mechanism under the Act or continue to remain
subject to the pension mechanism under the Labor Standards Law. For those employees who were subject to the Labor Standards Law prior to July 1, 2005 and still work for the same company after July 1, 2005 and choose to be subject to the
pension mechanism under the Act, their seniority as of July 1, 2005 shall be maintained. The rate of contribution by an employer to the Labor Pension Fund per month shall not be less than 6% of each employees monthly salary or wage. The
Company has contributed 6% of each employees monthly salary per month beginning July 1, 2005. For the year ended December 31, 2005, total contributions were NT$16 million (US$0.49 million).



|17. | INCOME TAXES
|--- | ------------

The components of income taxes are as
follows:



|         |  |                        |        |      |   |        |  |   |       
|-------- |  | ---------------------- | ------ | ---- | - | ------ |  | - | ------
|         |  | Year Ended December 31
|         |  | 2003                   |        | 2004 |   | 2005  
|         |  | NT$                    |        | NT$  |   | NT$   
|Current  |  | $                      | 9,874  |      | $ | 11,102 |  | $ | 3,044 
|Deferred |  |                        | 425    |      |   | 157    |  |   | 9,689 
|         |  |                        |        |      |   |        |  |   |       
|         |  | $                      | 10,299 |      | $ | 11,259 |  | $ | 12,733
|         |  |                        |        |      |   |        |  |   |       

A reconciliation between income tax expense computed by applying the statutory income tax rate of
25% to income before income tax and income tax expense shown in the statements of operations and comprehensive income is as follows:



|                                                  |  |                        |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                  |  | Year Ended December 31 |       
|                                                  |  | 2003                   |        |   | 2004 |   |        | 2005 | 
|                                                  |  | NT$                    |        |   | NT$  |   |        | NT$  | 
|Income tax expense computed at statutory tax rate |  | $                      | 14,404 |   |      | $ | 15,544 |      |  | $ | 11,508 |  
|Permanent differences                             |  |                        | 308    |   |      |   | (65    | )    |  |   | 3,158  |  
|Investment tax credits                            |  |                        | (4,348 | ) |      |   | (3,379 | )    |  |   | (1,987 | )
|Other                                             |  |                        | (65    | ) |      |   | (841   | )    |  |   | 54     |  
|                                                  |  |                        |        |   |      |   |        |      |  |   |        |  
|Income tax expense                                |  | $                      | 10,299 |   |      | $ | 11,259 |      |  | $ | 12,733 |  
|                                                  |  |                        |        |   |      |   |        |      |  |   |        |  

The balance of income tax payable as of December 31, 2004 was shown net of prepaid income
tax. Tax refund receivable as of December 31, 2005 amounted to $4,338 million (classified as other current assets).



F-26



---

##### Table of Contents

Upon privatization in the period when the governments ownership percentage falls below 50%, the
Company continues to be subject to a 10% tax on its undistributed earnings as required by the Income Tax Law of the ROC. As the Company had historically been required under government regulations before privatization to distribute all its earnings
within six months subsequent to year end, it has been required to pay a minimal amount of tax under this regulation. For ROC GAAP purposes, the 10% tax on undistributed earnings is recorded as an expense at the time shareholders resolve that its
earnings shall be retained and the liability is incurred. Upon privatization, the 10% tax on undistributed earnings is recorded as an expense in the year of the earnings.

Permanent differences consist primarily of tax-exempt income from the sale of trading securities, interest income on commercial paper purchased, which are subject to a separate income tax rate of 20% and employees
stock compensation expense.

Deferred income taxes arise due to temporary differences in the book and tax bases of certain assets and
liabilities. Significant components of deferred income tax assets (liabilities) are shown in the following table:



|                                                                                     |  |             |        |      |   |      
|------------------------------------------------------------------------------------ |  | ----------- | ------ | ---- | - | -----
|                                                                                     |  | December 31
|                                                                                     |  | 2004        |        | 2005
|                                                                                     |  | NT$         |        | NT$ 
|Current:                                                                             |  |             |        |      |   |      
|Provision for doubtful accounts                                                      |  | $           | 685    |      | $ | 234  
|Deferred income                                                                      |  |             | 658    |      |   | 371  
|Accrued pension costs                                                                |  |             | 15,723 |      |   | 1,772
|Prepaid card revenues (related liability is included in other current liabilities) |  |             | 735    |      |   | 668  
|Investment tax credits                                                               |  |             |       |      |   | 554  
|Other, net                                                                           |  |             | 1,963  |      |   | 1,202
|                                                                                     |  |             |        |      |   |      
|                                                                                     |  |             | 19,764 |      |   | 4,801
|Less - valuation allowance                                                           |  |             | 2,481  |      |   | 1,448
|                                                                                     |  |             |        |      |   |      
|                                                                                     |  | $           | 17,283 |      | $ | 3,353
|                                                                                     |  |             |        |      |   |      
|Non-current:                                                                         |  |             |        |      |   |      
|Deferred income                                                                      |  | $           | 2,444  |      | $ | 2,541
|Other                                                                                |  |             | 244    |      |   | 1,136
|                                                                                     |  |             |        |      |   |      
|                                                                                     |  |             | 2,688  |      |   | 3,677
|Less - valuation allowance                                                           |  |             | 244    |      |   | 1,051
|                                                                                     |  |             |        |      |   |      
|                                                                                     |  | $           | 2,444  |      | $ | 2,626
|                                                                                     |  |             |        |      |   |      

Upon the completion of the privatization, a significant portion of the deferred income tax assets
related to accrued pension costs was reversed due to the settlement of the related pension obligations.

The above deferred income tax
assets were computed based on a tax rate of 25%. A portion of the amount included in other relates to the timing differences between US GAAP reporting and the taxable base for the 10% undistributed earnings tax. These differences are computed
based on a tax rate of 10%.



F-27



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##### Table of Contents

|18. | TRANSACTIONS WITH RELATED PARTIES
|--- | ---------------------------------

As the Company
was a state-owned enterprise, the ROC Government is one of the Companys customers. The Company provides Fixed-line services, wireless services, Internet and other services to the various departments and agencies of the ROC Government and other
state-owned enterprises in the normal course of business and at arms-length prices before and after privatization. The information on service revenues from government bodies and related organizations have not been provided because details of
the type of users were not maintained by the Company. The Company believes that all costs of doing business are reflected in the financial statements and that no additional expenditures would be incurred as a result of the privatization being
completed.



| | a. | The Company engages in business transactions with the following related parties:
| | -- | --------------------------------------------------------------------------------



|                                                     |  |                  
|---------------------------------------------------- |  | -----------------
|Company                                              |  | Relationship     
|Taiwan International Standard Electronics (TISE)   |  | Equity investee  
|Chunghwa System Integration (CSI)                  |  | Subsidiary of CHI
|Chunghwa Precision Test Technical Co., Ltd. (CHPT) |  | Subsidiary of CHI
|Chunghwa Telecom Global, Inc. (CHTG)               |  | Subsidiary of CHI



| | b. | Significant transactions with the above related parties are summarized as follows:
| | -- | ----------------------------------------------------------------------------------



|                                                                           |  |             |    |      |   |        |   |     |  |  
|-------------------------------------------------------------------------- |  | ----------- | -- | ---- | - | ------ | - | --- |  | -
|                                                                           |  | December 31
|                                                                           |  | 2004        |    | 2005
|                                                                           |  | Amount      |    | %    |   | Amount |   | %  
|1) Receivables                                                             |  |             |    |      |   |        |   |     |  |  
|                                                                           |  |             |    |     
|Trade notes and accounts receivable                                        |  |             |    |      |   |        |   |     |  |  
|CHTG                                                                       |  | $           |   |      |  |        | $ | 49  |  | 
|CHPT                                                                       |  |             |   |      |  |        |   | 21  |  | 
|                                                                           |  |             |    |      |   |        |   |     |  |  
|                                                                           |  | $           |   |      |  |        | $ | 70  |  | 
|                                                                           |  |             |    |      |   |        |   |     |  |  
|2) Payables                                                                |  |             |    |      |   |        |   |     |  |  
|                                                                           |  |             |    |     
|Trade notes and accounts payable                                           |  |             |    |      |   |        |   |     |  |  
|CSI                                                                        |  | $           |   |      |  |        | $ | 55  |  | 1
|TISE                                                                       |  |             | 47 |      |  |        |   | 41  |  | 
|CHTG                                                                       |  |             |   |      |  |        |   | 28  |  | 
|                                                                           |  |             |    |      |   |        |   |     |  |  
|                                                                           |  | $           | 47 |      |  |        | $ | 124 |  | 1
|                                                                           |  |             |    |      |   |        |   |     |  |  
|Accrued expenses                                                           |  |             |    |      |   |        |   |     |  |  
|TISE                                                                       |  | $           | 58 |      |  |        | $ | 49  |  | 
|CSI                                                                        |  |             |   |      |  |        |   | 27  |  | 
|CHTG                                                                       |  |             |   |      |  |        |   | 11  |  | 
|                                                                           |  |             |    |      |   |        |   |     |  |  
|                                                                           |  | $           | 58 |      |  |        | $ | 87  |  | 
|                                                                           |  |             |    |      |   |        |   |     |  |  
|Payable to construction supplier (included in other current liabilities) |  |             |    |      |   |        |   |     |  |  
|TISE                                                                       |  | $           | 77 |      |  |        | $ | 319 |  | 2
|CSI                                                                        |  |             | 17 |      |  |        |   | 22  |  | 
|                                                                           |  |             |    |      |   |        |   |     |  |  
|                                                                           |  | $           | 94 |      |  |        | $ | 341 |  | 2
|                                                                           |  |             |    |      |   |        |   |     |  |  



F-28



---

##### Table of Contents

|                             |  |                        |       |      |   |        |   |     |  |  
|---------------------------- |  | ---------------------- | ----- | ---- | - | ------ | - | --- |  | -
|                             |  | Year Ended December 31
|                             |  | 2004                   |       | 2005
|                             |  | Amount                 |       | %    |   | Amount |   | %  
|3) Service revenues          |  |                        |       |      |   |        |   |     |  |  
|                             |  |                        |       |     
|CHTG                         |  | $                      |      |      |  |        | $ | 101 |  | 
|CHPT                         |  |                        |      |      |  |        |   | 25  |  | 
|                             |  |                        |       |      |   |        |   |     |  |  
|                             |  | $                      |      |      |  |        | $ | 126 |  | 
|                             |  |                        |       |      |   |        |   |     |  |  
|4) Cost of services          |  |                        |       |      |   |        |   |     |  |  
|                             |  |                        |       |     
|TISE                         |  | $                      | 193   |      |  |        | $ | 135 |  | 
|CSI                          |  |                        | 121   |      |  |        |   | 89  |  | 
|CHTG                         |  |                        |      |      |  |        |   | 81  |  | 
|                             |  |                        |       |      |   |        |   |     |  |  
|                             |  | $                      | 314   |      |  |        | $ | 305 |  | 
|                             |  |                        |       |      |   |        |   |     |  |  
|5) Acquisition of equipments |  |                        |       |      |   |        |   |     |  |  
|                             |  |                        |       |     
|TISE                         |  | $                      | 879   |      | 4 |        | $ | 478 |  | 2
|CSI                          |  |                        | 155   |      | 1 |        |   | 316 |  | 1
|CHTG                         |  |                        |      |      |  |        |   | 13  |  | 
|                             |  |                        |       |      |   |        |   |     |  |  
|                             |  | $                      | 1,034 |      | 5 |        | $ | 807 |  | 3
|                             |  |                        |       |      |   |        |   |     |  |  

The foregoing acquisitions were conducted under normal commercial terms.



|19. | COMMITMENTS AND CONTINGENT LIABILITIES
|--- | --------------------------------------

As of
December 31, 2005, the Company has commitments under non-cancelable contracts with various parties as follows: (a) acquisitions of land and buildings of NT$2,666 million, and (b) acquisitions of telecommunications equipment of
NT$16,422 million.

The Company also has non-cancelable operating leases covering certain buildings, computers, computer peripheral
equipment and operating system software under contracts that expire in various years. Minimum rental commitments under those leases are as follows:



|                                     |  |                  |      
|------------------------------------ |  | ---------------- | -----
|                                     |  | December 31,2005
|                                     |  | NT$             
|Within the following year            |  | $                | 1,311
|During the second year               |  |                  | 920  
|During the third year                |  |                  | 583  
|During the fourth year               |  |                  | 320  
|During the fifth year and thereafter |  |                  | 138  
|                                     |  |                  |      
|                                     |  | $                | 3,272
|                                     |  |                  |      

As of December 31, 2005, the Company had unused letters of credit of NT$4,914 million.



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---

##### Table of Contents

The Company has a commitment to contribute NT$2,500 million to a Fixed Line Fund administered by the
Ministry of Interior Affairs and Taiwan Power Company, of which NT$1,000 million was contributed by the Company on June 30, 1995 and was accounted for as other assets - other. If the balance of the Fixed Line Fund is not sufficient for its
operation, the above three parties will determine when to raise additional funds and the contribution amounts from each party. In addition, the Company has a commitment to contribute NT$2,000 million to a Piping Fund administered by the Taipei City
Government, of which NT$1,000 million was contributed by the Company on August 15, 1996 and was accounted for as other assets - other. Such amounts represent non-interest bearing, long-term loans to the respective government entities. The
maturity date of the loan receivable has not been agreed to by the parties to the contribution and cannot be estimated therefore, no discount was applied to the outstanding balance.



|20. | SUBSEQUENT EVENTS
|--- | -----------------

In order to improve the
Companys financial condition and utilize excess funds, the Company decided to buyback treasury shares and cancelled them. The purchase of treasury shares was approved by the board of directors on February 9, 2006. The Company plans to
acquire 250,000 thousand treasury shares (2.59% of total outstanding shares) from the TSE market within two months from February 10, 2006.

The estimated range of purchased prices is from NT$40 to NT$70. As of March 17, 2006, the Company has purchased 120,653 thousand common shares amounted to NT$7,101 million.



|21. | LITIGATION
|--- | ----------

A portion of the land used by the
Company during the period July 1, 1996 to December 31, 2004 was co-owned by the Company and Chunghwa Post Co., Ltd. (the former Directorate General of Postal Service). In accordance with the claims process in Taiwan, on July 12, 2005,
the Taiwan Taipei District Court sent a claim notice to the Company to reimburse Chunghwa Post Co., Ltd. in the amount of NT$768 million for land usage compensation due to the portion of land usage area in excess of the Companys ownership,
along with interest calculated at 5% interest rate from June 30, 2005 to the payment date. However, the Company believes that the computation used to derive the land usage compensation amount is inaccurate because most of the compensation
amount has expired as result of the expiration clause. Therefore, the Company has filed an appeal at the Taiwan Taipei District court. As of March 17, 2006, the case is still in the procedure of the first instance at the Taiwan Taipei District
Court. While the Company cannot make any assurance regarding the eventual resolution of the litigation, the Company does not believe the final outcome will have a material adverse effect on its results of operations or financial condition. As of
December 31, 2005, no provision was provided for the litigation.

The Company is involved in various legal proceedings of a nature
considered normal to its business. It is the Companys policy to accrue for amounts related to these legal matters when it is probable that a liability has been incurred and the amount is reasonably estimable.

The Company believes that the various asserted claims and litigation in which it is involved will not materially affect its financial position, future
operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation.



F-30



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##### Table of Contents

|22. | INFORMATION ON FINANCIAL INSTRUMENTS
|--- | ------------------------------------



| | a. | Derivative financial instruments
| | -- | --------------------------------

The Company entered into
forward contracts to reduce its exposure to foreign currency risk and variability in operating results due to fluctuations in exchange rates underlying the value of liabilities denominated in foreign currencies until such liabilities are paid. The
Company engaged in foreign currency forward exchange contracts for the year ended December 31, 2004. The net realized exchange loss for the year ended December 31, 2004 was of NT$27 million.



| | b. | Non-derivative financial instruments are as follows:
| | -- | ----------------------------------------------------



|                                                               |  |                |        |           |   |                |  |           |        |  |   |       
|-------------------------------------------------------------- |  | -------------- | ------ | --------- | - | -------------- |  | --------- | ------ |  | - | ------
|                                                               |  | December 31   
|                                                               |  | 2004           |        | 2005     
|                                                               |  | CarryingAmount |        | FairValue |   | CarryingAmount |  | FairValue
|                                                               |  | NT$            |        | NT$       |   | NT$            |  | NT$      
|Assets                                                         |  |                |        |           |   |                |  |           |        |  |   |       
|Cash and cash equivalents                                      |  | $              | 29,283 |           | $ | 29,283         |  | $         | 41,891 |  | $ | 41,891
|Short-term investments                                         |  |                | 9,115  |           |   | 9,115          |  |           | 14,171 |  |   | 14,171
|Long-term Investments for which it is:                         |  |                |        |           |   |                |  |           |        |  |   |       
|- Practicable to estimate fair value                           |  |                |       |           |   |               |  |           | 1,790  |  |   | 1,790 
|- Not practicable                                              |  |                | 2,606  |           |   |               |  |           | 76     |  |   |      
|Refundable deposits (included in other assets - other)       |  |                | 3,357  |           |   | 3,357          |  |           | 3,577  |  |   | 3,577 
|Liabilities                                                    |  |                |        |           |   |                |  |           |        |  |   |       
|Customers deposits                                            |  |                | 9,262  |           |   | 7,771          |  |           | 8,250  |  |   | 7,049 
|Long-term loans (including current portion of long-term loans) |  |                | 700    |           |   | 700            |  |           | 500    |  |   | 500   

The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:



| | 1) | Cash and cash equivalents and short-term investments. The carrying amounts approximate fair values because of the short maturity of those instruments.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | Long-term investments. The fair values of some investments are estimated based on quoted market prices for those or similar investments. For other investments for which there are no
quoted market prices, a reasonable estimate of fair value could not be made without incurring excessive costs. Additional information pertinent to the value of an unquoted investment is provided above.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | Refundable deposits. The carrying amounts approximate fair values as the carrying amounts are the amount receivable on demand at the reporting date.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------



| | 4) | Customers deposits. The fair value is the discounted value based on projected cash flows. The projected cash flows were discounted using the average expected customer service
periods.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5) | Long-term loans (including current portion). The fair value is based on the current rates offered to the Company for debt of the same remaining maturities.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|23. | SEGMENT REPORTING
|--- | -----------------

Operating segments are defined
as components of an enterprise regarding which separate financial information is available for regular evaluation by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

The Company organizes its operating segments based on the various types of telecommunications services provided to customers. The operating
segments are segregated as below:



| |  |  | Local operations - the provision of local telephone services;
| | - |  | -------------------------------------------------------------



| |  |  | DLD operations - the provision of domestic long distance call services;
| | - |  | -----------------------------------------------------------------------



| |  |  | ILD operations - the provision of international long distance call services;
| | - |  | ----------------------------------------------------------------------------



| |  |  | Cellular operations - the provision of cellular and related services;
| | - |  | ---------------------------------------------------------------------



| |  |  | Paging operation - the provision of paging and related services;
| | - |  | ----------------------------------------------------------------



| |  |  | Internet and data operation - the provision of Internet access, lease line, and related services;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | All other operations - the services other than the above six categories, such as carrying out project research and providing training.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

The operating segments are managed separately because each operating segment represents a strategic business unit that serves different markets.

The Company evaluates performance based on several factors using information prepared on the ROC government regulations basis. The
information below is provided on this basis with a summary of US GAAP adjustments to reconcile to the amounts presented in the statement of operations. The Company does not allocate interest and other income, interest expense or taxes to
operating segments, nor does the Companys chief operating decision maker evaluate operating segments on these criteria. Except as discussed above, the accounting policies for segment reporting are the same as for the company as a whole. The
Companys primary measure of segment profit is based on income or loss from operations.



| | a. | Business segments:
| | -- | ------------------

As of and for the year ended
December 31, 2003



|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |     |     |  |   |        |   |  |   |       |   |  |   |            |  
|--------------------------------------------------------------------------- |  | ---------- | ------- | - | --------------- | - | ------ | ------ |  | - | ---------------- | - |  | --------- | ------- | - | ----- | - | --- | --- |  | - | ------ | - |  | - | ----- | - |  | - | ---------- | -
|                                                                            |  | Fixed-line |         |   | CellularService |   |        | Paging |  |   | Internetand Data |   |  | All Other |         |   | Total |  
|                                                                            |  | Local      |         |   | DLD             |   |        | ILD    |  |   |                  |   |  |          
|                                                                            |  | NT$        |         |   | NT$             |   |        | NT$    |  |   | NT$              |   |  | NT$       |         |   | NT$   |   |     | NT$ |  |   | NT$    |  
|Service revenues for reportable segments                                    |  | $          | 64,508  |   |                 | $ | 16,000 |        |  | $ | 15,620           |   |  | $         | 66,659  |   |       | $ | 595 |     |  | $ | 44,159 |   |  | $ | 2,750 |   |  | $ | 210,291    |  
|Elimination of intersegment amount                                          |  |            | (18,145 | ) |                 |   | (2,600 | )      |  |   | (2               | ) |  |           | (987    | ) |       |   | (3  | )   |  |   | (8,582 | ) |  |   | (132  | ) |  |   | (30,451    | )
|US GAAP adjustments                                                         |  |            | 2,048   |   |                 |   | 35     |        |  |   | 45               |   |  |           | 516     |   |       |   |    |     |  |   | 4      |   |  |   | (22   | ) |  |   | 2,626      |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |     |     |  |   |        |   |  |   |       |   |  |   |            |  
|Total service revenues from external customers                              |  | $          | 48,411  |   |                 | $ | 13,435 |        |  | $ | 15,663           |   |  | $         | 66,188  |   |       | $ | 592 |     |  | $ | 35,581 |   |  | $ | 2,596 |   |  | $ | 182,466    |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |     |     |  |   |        |   |  |   |       |   |  |   |            |  
|Operating costs and expenses, excluding depreciation and amortization       |  | $          | 33,430  |   |                 | $ | 6,528  |        |  | $ | 11,059           |   |  | $         | 33,264  |   |       | $ | 482 |     |  | $ | 19,935 |   |  | $ | 930   |   |  | $ | 105,628    |  
|Elimination of intersegment amount                                          |  |            | (4,735  | ) |                 |   | (4,772 | )      |  |   | (2,942           | ) |  |           | (13,239 | ) |       |   | (86 | )   |  |   | (4,420 | ) |  |   | (257  | ) |  |   | (30,451    | )
|US GAAP adjustments                                                         |  |            | 3,516   |   |                 |   | 110    |        |  |   | 163              |   |  |           | 425     |   |       |   | 15  |     |  |   | 1,191  |   |  |   | 473   |   |  |   | 5,893      |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |     |     |  |   |        |   |  |   |       |   |  |   |            |  
|                                                                            |  | $          | 32,211  |   |                 | $ | 1,866  |        |  | $ | 8,280            |   |  | $         | 20,450  |   |       | $ | 411 |     |  | $ | 16,706 |   |  | $ | 1,146 |   |  |   | 81,070     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |     |     |  |   |        |   |  |   |       |   |  |   |            |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |     |     |  |   |        |   |  |   |       |   |  |   | 3,862      |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |     |     |  |   |        |   |  |   |       |   |  |   |            |  
|Total operating costs and expenses, excluding depreciation and amortization |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |     |     |  |   |        |   |  |   |       |   |  | $ | 84,932     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |     |     |  |   |        |   |  |   |       |   |  |   |            |  
|                                                                            |  |            |         |   |                 |   |        |       
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |     |     |  |   |        |   |  |   |       |   |  |   | (Continued | )



F-32



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##### Table of Contents

|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|--------------------------------------------------------------------------- |  | ---------- | ------- | - | --------------- | - | ------ | ------ |  | - | ---------------- | - |  | --------- | ------- | - | ----- | - | ----- | --- |  | - | ------- | - |  | - | ------ | - |  | - | ---------- | -
|                                                                            |  | Fixed-line |         |   | CellularService |   |        | Paging |  |   | Internetand Data |   |  | All Other |         |   | Total |  
|                                                                            |  | Local      |         |   | DLD             |   |        | ILD    |  |   |                  |   |  |          
|                                                                            |  | NT$        |         |   | NT$             |   |        | NT$    |  |   | NT$              |   |  | NT$       |         |   | NT$   |   |       | NT$ |  |   | NT$     |  
|Depreciation and amortization                                               |  | $          | 22,312  |   |                 | $ | 1,328  |        |  | $ | 616              |   |  | $         | 5,574   |   |       | $ | 311   |     |  | $ | 10,891  |   |  | $ | 786    |   |  | $ | 41,818     |  
|US GAAP adjustments                                                         |  |            | (248    | ) |                 |   | (11    | )      |  |   | (11              | ) |  |           | (52     | ) |       |   | (3    | )   |  |   | (86     | ) |  |   |       |   |  |   | (411       | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|                                                                            |  | $          | 22,064  |   |                 | $ | 1,317  |        |  | $ | 605              |   |  | $         | 5,522   |   |       | $ | 308   |     |  | $ | 10,805  |   |  | $ | 786    |   |  |   | 41,407     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   | 162        |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Total depreciation and amortization                                         |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  | $ | 41,569     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Income from operations                                                      |  | $          | 8,766   |   |                 | $ | 8,144  |        |  | $ | 3,945            |   |  | $         | 27,821  |   |       | $ | (198  | )   |  | $ | 13,333  |   |  | $ | 1,034  |   |  | $ | 62,845     |  
|Elimination of intersegment amount                                          |  |            | (13,410 | ) |                 |   | 2,172  |        |  |   | 2,940            |   |  |           | 12,252  |   |       |   | 83    |     |  |   | (4,162  | ) |  |   | 125    |   |  |   |           |  
|US GAAP adjustments                                                         |  |            | (1,220  | ) |                 |   | (64    | )      |  |   | (107             | ) |  |           | 143     |   |       |   | (12   | )   |  |   | (1,101  | ) |  |   | (495   | ) |  |   | (2,856     | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|                                                                            |  | $          | (5,864  | ) |                 | $ | 10,252 |        |  | $ | 6,778            |   |  | $         | 40,216  |   |       | $ | (127  | )   |  | $ | 8,070   |   |  | $ | 664    |   |  |   | 59,989     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   | (4,024     | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Total income from operations                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  | $ | 55,965     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Segment income before income tax                                            |  | $          | 8,897   |   |                 | $ | 8,221  |        |  | $ | 3,936            |   |  | $         | 28,037  |   |       | $ | (198  | )   |  | $ | 13,548  |   |  | $ | 994    |   |  | $ | 63,435     |  
|Elimination of intersegment amount                                          |  |            | (13,410 | ) |                 |   | 2,172  |        |  |   | 2,940            |   |  |           | 12,252  |   |       |   | 83    |     |  |   | (4,162  | ) |  |   | 125    |   |  |   |           |  
|US GAAP adjustments                                                         |  |            | (536    | ) |                 |   | (48    | )      |  |   | (81              | ) |  |           | 213     |   |       |   | (10   | )   |  |   | (895    | ) |  |   | (420   | ) |  |   | (1,777     | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|                                                                            |  | $          | (5,049  | ) |                 | $ | 10,345 |        |  | $ | 6,795            |   |  | $         | 40,502  |   |       | $ | (125  | )   |  | $ | 8,491   |   |  | $ | 699    |   |  |   | 61,658     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   | (4,044     | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Total segment income before income tax                                      |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  | $ | 57,614     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Segment assets                                                              |  | $          | 218,741 |   |                 | $ | 8,870  |        |  | $ | 14,510           |   |  | $         | 65,306  |   |       | $ | 1,103 |     |  | $ | 105,098 |   |  | $ | 12,814 |   |  | $ | 426,442    |  
|US GAAP adjustments                                                         |  |            | (41,770 | ) |                 |   | (1,810 | )      |  |   | (1,676           | ) |  |           | (4,921  | ) |       |   | (66   | )   |  |   | (14,052 | ) |  |   | (2,929 | ) |  |   | (67,224    | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|                                                                            |  | $          | 176,971 |   |                 | $ | 7,060  |        |  | $ | 12,834           |   |  | $         | 60,385  |   |       | $ | 1,037 |     |  | $ | 91,046  |   |  | $ | 9,885  |   |  |   | 359,218    |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   | 70,477     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Total segment assets                                                        |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  | $ | 429,695    |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Expenditures for segment assets                                             |  | $          | 7,545   |   |                 | $ | 1,314  |        |  | $ | 415              |   |  | $         | 7,938   |   |       | $ |      |     |  | $ | 14,302  |   |  | $ | 666    |   |  | $ | 32,180     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   | 68         |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Total expenditures for segment assets                                       |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  | $ | 32,248     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|                                                                            |  |            |         |  
|As of and for the year ended December 31, 2004                              |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |      
|                                                                            |  |            |         |   |                 |  
|                                                                            |  | Fixed-line |         |   | CellularService |   |        | Paging |  |   | Internetand Data |   |  | All Other |         |   | Total |  
|                                                                            |  | Local      |         |   | DLD             |   |        | ILD    |  |   |                  |   |  |          
|                                                                            |  | NT$        |         |   | NT$             |   |        | NT$    |  |   | NT$              |   |  | NT$       |         |   | NT$   |   |       | NT$ |  |   | NT$     |  
|Service revenues for reportable segments                                    |  | $          | 60,666  |   |                 | $ | 14,325 |        |  | $ | 15,159           |   |  | $         | 71,216  |   |       | $ | 299   |     |  | $ | 50,194  |   |  | $ | 3,252  |   |  | $ | 215,111    |  
|Elimination of intersegment amount                                          |  |            | (17,451 | ) |                 |   | (2,417 | )      |  |   | (3               | ) |  |           | (1,081  | ) |       |   | (1    | )   |  |   | (10,843 | ) |  |   | (17    | ) |  |   | (31,813    | )
|US GAAP adjustments                                                         |  |            | 1,711   |   |                 |   | 36     |        |  |   | 49               |   |  |           | 137     |   |       |   |      |     |  |   | (41     | ) |  |   | (27    | ) |  |   | 1,865      |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Total service revenues from external customers                              |  | $          | 44,926  |   |                 | $ | 11,944 |        |  | $ | 15,205           |   |  | $         | 70,272  |   |       | $ | 298   |     |  | $ | 39,310  |   |  | $ | 3,208  |   |  | $ | 185,163    |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Operating costs and expenses, excluding depreciation and amortization       |  | $          | 34,975  |   |                 | $ | 5,117  |        |  | $ | 10,728           |   |  | $         | 32,726  |   |       | $ | 273   |     |  | $ | 23,800  |   |  | $ | 1,908  |   |  | $ | 109,527    |  
|Elimination of intersegment amount                                          |  |            | (4,125  | ) |                 |   | (3,784 | )      |  |   | (3,070           | ) |  |           | (12,859 | ) |       |   | (62   | )   |  |   | (7,591  | ) |  |   | (322   | ) |  |   | (31,813    | )
|US GAAP adjustments                                                         |  |            | 1,961   |   |                 |   | 34     |        |  |   | 38               |   |  |           | 251     |   |       |   | 3     |     |  |   | 453     |   |  |   | 149    |   |  |   | 2,889      |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|                                                                            |  | $          | 32,811  |   |                 | $ | 1,367  |        |  | $ | 7,696            |   |  | $         | 20,118  |   |       | $ | 214   |     |  | $ | 16,662  |   |  | $ | 1,735  |   |  |   | 80,603     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   | 3,977      |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Total operating costs and expenses, excluding depreciation and amortization |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  | $ | 84,580     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Depreciation and amortization                                               |  | $          | 20,225  |   |                 | $ | 835    |        |  | $ | 671              |   |  | $         | 5,946   |   |       | $ | 307   |     |  | $ | 12,464  |   |  | $ | 509    |   |  | $ | 40,957     |  
|US GAAP adjustments                                                         |  |            | (227    | ) |                 |   | (10    | )      |  |   | (11              | ) |  |           | (56     | ) |       |   | (4    | )   |  |   | (104    | ) |  |   |       |   |  |   | (412       | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|                                                                            |  | $          | 19,998  |   |                 | $ | 825    |        |  | $ | 660              |   |  | $         | 5,890   |   |       | $ | 303   |     |  | $ | 12,360  |   |  | $ | 509    |   |  |   | 40,545     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   | 158        |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Total depreciation and amortization                                         |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  | $ | 40,703     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Income from operations                                                      |  | $          | 5,466   |   |                 | $ | 8,373  |        |  | $ | 3,760            |   |  | $         | 32,544  |   |       | $ | (281  | )   |  | $ | 13,930  |   |  | $ | 835    |   |  | $ | 64,627     |  
|Elimination of intersegment amount                                          |  |            | (13,326 | ) |                 |   | 1,367  |        |  |   | 3,067            |   |  |           | 11,778  |   |       |   | 61    |     |  |   | (3,252  | ) |  |   | 305    |   |  |   |           |  
|US GAAP adjustments                                                         |  |            | (23     | ) |                 |   | 12     |        |  |   | 22               |   |  |           | (58     | ) |       |   | 1     |     |  |   | (390    | ) |  |   | (176   | ) |  |   | (612       | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|                                                                            |  | $          | (7,883  | ) |                 | $ | 9,752  |        |  | $ | 6,849            |   |  | $         | 44,264  |   |       | $ | (219  | )   |  | $ | 10,288  |   |  | $ | 964    |   |  |   | 64,015     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   | (4,135     | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|Total income from operations                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  | $ | 59,880     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   |            |  
|                                                                            |  |            |         |   |                 |   |        |       
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |       |     |  |   |         |   |  |   |        |   |  |   | (Continued | )



F-33



---

##### Table of Contents

|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ---------- | ------- | - | --------------- | - | ------ | ------ |  | - | ---------------- | - |  | --------- | ------- | - | ----- | - | ---- | --- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                            |  | Fixed-line |         |   | CellularService |   |        | Paging |  |   | Internetand Data |   |  | All Other |         |   | Total |  
|                                                                            |  | Local      |         |   | DLD             |   |        | ILD    |  |   |                  |   |  |          
|                                                                            |  | NT$        |         |   | NT$             |   |        | NT$    |  |   | NT$              |   |  | NT$       |         |   | NT$   |   |      | NT$ |  |   | NT$     |  
|Segment income before income tax                                            |  | $          | 5,628   |   |                 | $ | 8,586  |        |  | $ | 3,929            |   |  | $         | 32,540  |   |       | $ | (283 | )   |  | $ | 14,317  |   |  | $ | 760    |   |  | $ | 65,477  |  
|Elimination of intersegment amount                                          |  |            | (13,326 | ) |                 |   | 1,367  |        |  |   | 3,067            |   |  |           | 11,778  |   |       |   | 61   |     |  |   | (3,252  | ) |  |   | 305    |   |  |   |        |  
|US GAAP adjustments                                                         |  |            | 746     |   |                 |   | 25     |        |  |   | (8               | ) |  |           | 139     |   |       |   | 3    |     |  |   | (168    | ) |  |   | (163   | ) |  |   | 574     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|                                                                            |  | $          | (6,952  | ) |                 | $ | 9,978  |        |  | $ | 6,988            |   |  | $         | 44,457  |   |       | $ | (219 | )   |  | $ | 10,897  |   |  | $ | 902    |   |  |   | 66,051  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   | (3,874  | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Total segment income before income tax                                      |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  | $ | 62,177  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Segment assets                                                              |  | $          | 199,136 |   |                 | $ | 6,406  |        |  | $ | 13,834           |   |  | $         | 65,831  |   |       | $ | 648  |     |  | $ | 106,402 |   |  | $ | 15,376 |   |  | $ | 407,633 |  
|US GAAP adjustments                                                         |  |            | (40,132 | ) |                 |   | (1,421 | )      |  |   | (1,452           | ) |  |           | (5,275  | ) |       |   | (43  | )   |  |   | (16,108 | ) |  |   | (1,831 | ) |  |   | (66,262 | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|                                                                            |  | $          | 159,004 |   |                 | $ | 4,985  |        |  | $ | 12,382           |   |  | $         | 60,556  |   |       | $ | 605  |     |  | $ | 90,294  |   |  | $ | 13,545 |   |  |   | 341,371 |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   | 97,050  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Total segment assets                                                        |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  | $ | 438,421 |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Expenditures for segment assets                                             |  | $          | 4,475   |   |                 | $ | 309    |        |  | $ | 255              |   |  | $         | 5,512   |   |       | $ |     |     |  | $ | 11,572  |   |  | $ | 722    |   |  | $ | 22,845  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   | 44      |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Total expenditures for segment assets                                       |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  | $ | 22,889  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|                                                                            |  |            |        
|As of and for the year ended December 31, 2005                              |  |            |         |   |                 |   |        |        |  |   |                  |   | 
|                                                                            |  |            |         |   |                 |  
|                                                                            |  | Fixed-line |         |   | CellularService |   |        | Paging |  |   | Internetand Data |   |  | All Other |         |   | Total |  
|                                                                            |  | Local      |         |   | DLD             |   |        | ILD    |  |   |                  |   |  |          
|                                                                            |  | NT$        |         |   | NT$             |   |        | NT$    |  |   | NT$              |   |  | NT$       |         |   | NT$   |   |      | NT$ |  |   | NT$     |  
|Service revenues for reportable segments                                    |  | $          | 57,873  |   |                 | $ | 13,268 |        |  | $ | 14,482           |   |  | $         | 73,938  |   |       | $ | 135  |     |  | $ | 56,951  |   |  | $ | 3,182  |   |  | $ | 219,829 |  
|Elimination of intersegment amount                                          |  |            | (17,360 | ) |                 |   | (2,400 | )      |  |   |                 |   |  |           | (1,167  | ) |       |   | (1   | )   |  |   | (14,806 | ) |  |   | (16    | ) |  |   | (35,750 | )
|US GAAP adjustments                                                         |  |            | 228     |   |                 |   | 83     |        |  |   | 99               |   |  |           | 238     |   |       |   |     |     |  |   | (1      | ) |  |   | (30    | ) |  |   | 617     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Total service revenues from external customers                              |  | $          | 40,741  |   |                 | $ | 10,951 |        |  | $ | 14,581           |   |  | $         | 73,009  |   |       | $ | 134  |     |  | $ | 42,144  |   |  | $ | 3,136  |   |  | $ | 184,696 |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Operating costs and expenses, excluding depreciation and amortization       |  | $          | 35,625  |   |                 | $ | 4,786  |        |  | $ | 10,550           |   |  | $         | 35,565  |   |       | $ | 165  |     |  | $ | 27,227  |   |  | $ | 2,921  |   |  | $ | 116,839 |  
|Elimination of intersegment amount                                          |  |            | (4,027  | ) |                 |   | (3,359 | )      |  |   | (3,183           | ) |  |           | (13,838 | ) |       |   | (31  | )   |  |   | (10,848 | ) |  |   | (464   | ) |  |   | (35,750 | )
|US GAAP adjustments                                                         |  |            | 5,140   |   |                 |   | 253    |        |  |   | 415              |   |  |           | 1,456   |   |       |   | 362  |     |  |   | 6,496   |   |  |   | 183    |   |  |   | 14,305  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|                                                                            |  | $          | 36,738  |   |                 | $ | 1,680  |        |  | $ | 7,782            |   |  | $         | 23,183  |   |       | $ | 496  |     |  | $ | 22,875  |   |  | $ | 2,640  |   |  |   | 95,394  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   | 5,027   |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Total operating costs and expenses, excluding depreciation and amortization |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  | $ | 100,421 |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Depreciation and amortization                                               |  | $          | 19,256  |   |                 | $ | 728    |        |  | $ | 662              |   |  | $         | 7,474   |   |       | $ | 214  |     |  | $ | 12,495  |   |  | $ | 586    |   |  | $ | 41,415  |  
|US GAAP adjustments                                                         |  |            | (233    | ) |                 |   | (8     | )      |  |   | (10              | ) |  |           | (65     | ) |       |   | (2   | )   |  |   | (105    | ) |  |   | 29     |   |  |   | (394    | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|                                                                            |  | $          | 19,023  |   |                 | $ | 720    |        |  | $ | 652              |   |  | $         | 7,409   |   |       | $ | 212  |     |  | $ | 12,390  |   |  | $ | 615    |   |  |   | 41,021  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   | 142     |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Total depreciation and amortization                                         |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  | $ | 41,163  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Income from operations                                                      |  | $          | 2,992   |   |                 | $ | 7,754  |        |  | $ | 3,270            |   |  | $         | 30,899  |   |       | $ | (244 | )   |  | $ | 17,229  |   |  | $ | (325   | ) |  | $ | 61,575  |  
|Elimination of intersegment amount                                          |  |            | (13,333 | ) |                 |   | 959    |        |  |   | 3,183            |   |  |           | 12,671  |   |       |   | 30   |     |  |   | (3,958  | ) |  |   | 448    |   |  |   |        |  
|US GAAP adjustments                                                         |  |            | (4,679  | ) |                 |   | (162   | )      |  |   | (306             | ) |  |           | (1,153  | ) |       |   | (360 | )   |  |   | (6,392  | ) |  |   | (242   | ) |  |   | (13,294 | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|                                                                            |  | $          | (15,020 | ) |                 | $ | 8,551  |        |  | $ | 6,147            |   |  | $         | 42,417  |   |       | $ | (574 | )   |  | $ | 6,879   |   |  | $ | (119   | ) |  |   | 48,281  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   | (5,169  | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Total income from operations                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  | $ | 43,112  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Segment income before income tax                                            |  | $          | 3,215   |   |                 | $ | 8,003  |        |  | $ | 3,416            |   |  | $         | 31,368  |   |       | $ | (592 | )   |  | $ | 17,653  |   |  | $ | (470   | ) |  | $ | 62,593  |  
|Elimination of intersegment amount                                          |  |            | (13,333 | ) |                 |   | 959    |        |  |   | 3,183            |   |  |           | 12,671  |   |       |   | 30   |     |  |   | (3,958  | ) |  |   | 448    |   |  |   |        |  
|US GAAP adjustments                                                         |  |            | (3,761  | ) |                 |   | (152   | )      |  |   | (302             | ) |  |           | (1,010  | ) |       |   | (15  | )   |  |   | (6,089  | ) |  |   | (213   | ) |  |   | (11,542 | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|                                                                            |  | $          | (13,879 | ) |                 | $ | 8,810  |        |  | $ | 6,297            |   |  | $         | 43,029  |   |       | $ | (577 | )   |  | $ | 7,606   |   |  | $ | (235   | ) |  |   | 51,051  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   | (5,019  | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Total segment income before income tax                                      |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  | $ | 46,032  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Segment assets                                                              |  | $          | 192,398 |   |                 | $ | 6,342  |        |  | $ | 11,779           |   |  | $         | 62,004  |   |       | $ | 245  |     |  | $ | 98,573  |   |  | $ | 17,394 |   |  | $ | 388,735 |  
|US GAAP adjustments                                                         |  |            | (40,455 | ) |                 |   | (1,510 | )      |  |   | (1,573           | ) |  |           | (4,591  | ) |       |   | (50  | )   |  |   | (13,827 | ) |  |   | (4,569 | ) |  |   | (66,575 | )
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|                                                                            |  | $          | 151,943 |   |                 | $ | 4,832  |        |  | $ | 10,206           |   |  | $         | 57,413  |   |       | $ | 195  |     |  | $ | 84,746  |   |  | $ | 12,825 |   |  |   | 322,160 |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   | 73,008  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Total segment assets                                                        |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  | $ | 395,168 |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Expenditures for segment assets                                             |  | $          | 4,518   |   |                 | $ | 403    |        |  | $ | 229              |   |  | $         | 4,449   |   |       | $ |     |     |  | $ | 12,707  |   |  | $ | 608    |   |  | $ | 22,914  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Unallocated corporate amount                                                |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   | 16      |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  
|Total expenditures for segment assets                                       |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  | $ | 22,930  |  
|                                                                            |  |            |         |   |                 |   |        |        |  |   |                  |   |  |           |         |   |       |   |      |     |  |   |         |   |  |   |        |   |  |   |         |  



F-34



---

##### Table of Contents

| | b. | Geographic information
| | -- | ----------------------

The users of the Companys
services are mainly from Taiwan, ROC. The revenues it derived outside Taiwan are mainly inter-connection fees from other telecommunication carriers. The geographic information for revenues is as follows:



|            |  |                        |         |      |   |         |  |   |        
|----------- |  | ---------------------- | ------- | ---- | - | ------- |  | - | -------
|            |  | Year Ended December 31
|            |  | 2003                   |         | 2004 |   | 2005   
|            |  | NT$                    |         | NT$  |   | NT$    
|Taiwan, ROC |  | $                      | 176,429 |      | $ | 180,031 |  | $ | 180,793
|Overseas    |  |                        | 6,037   |      |   | 5,132   |  |   | 3,903  
|            |  |                        |         |      |   |         |  |   |        
|            |  | $                      | 182,466 |      | $ | 185,163 |  | $ | 184,696
|            |  |                        |         |      |   |         |  |   |        



| | c. | Gross sales to major customers
| | -- | ------------------------------

The Company has no single
customer account representing 10% or more of its total revenues for all periods presented.

The Company has a non-revenue generating office
in Thailand. All non-current assets (including investments in unconsolidated companies, property, plant and equipment, intangible assets, and other assets) except for NT$0.02 million and NT$0.01 million at December 31, 2004 and 2005,
respectively, are located in Taiwan, ROC.



F-35