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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 for the fiscal year ended
DECEMBER 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    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 0-27884
(CHINESE CHARACTER)
(Exact name of Registrant as specified in its charter)
 MACRONIX INTERNATIONAL CO., LTD.
 Republic of China   No. 16 Li-Hsin Road
Science Park
Hsinchu, Taiwan, Republic of China
 
  Title of each class
    
    Name of each exchange on which registeredNone
    
    None
 American Depositary Shares representing Common Shares
Common Shares, par value NT$10 per share*
  *    Not for trading in the United States, but only in connection with the registration of the American Depositary Shares.
   
   As of December 31, 2005, 2,912,305,991 Common Shares were outstanding.
 o þ
 o þ
  þ o
  o o þ
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TABLE OF CONTENTS
 Supplemental Information and Exchange Rates
    
    3Cautionary Statement
    
    3PART IItem 1. Identity of Directors, Senior Management and Advisers
    
    4Item 2. Offer Statistics and Expected Timetable
    
    4Item 3. Key Information
    
    4Item 4. Information on the Company
    
    20Item 5. Operating and Financial Review and Prospects
    
    35Item 6. Directors, Senior Management and Employees
    
    61Item 7. Major Shareholders and Related Party Transactions
    
    69Item 8. Financial Information
    
    71Item 9. The Offer and Listing
    
    75Item 10. Additional Information
    
    79Item 11. Quantitative and Qualitative Disclosure About Market Risk
    
    95Item 12. Description of Securities Other than Equity Securities
    
    97PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    97Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    97Item 15. Disclosure Controls and Procedures
    
    97Item 16A. Audit Committee Financial Expert
    
    98Item 16B. Code of Ethics
    
    98Item 16C. Principal Accountant Fees and Services
    
    98Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    99Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    99PART IIIItem 17. Financial Statements
    
    99Item 18. Financial Statements
    
    99Item 19. Exhibits
    
    99Appendix A  Glossary of Technical Terms
    
    A-1SignaturesEX-3.1 ARTICLES OF INCORPORATIONEX-8.1 LIST OF SUBSIDIARIESEX-12.1 CERTIFICATIONS OF PRESIDENT PURSUANT TO SEC.302EX-12.2 CERTIFICATIONS OF ASSOCIATE VICE PRESIDENT, FINANCE DEPT., PURSUANT TO SEC. 302EX-13.1 CERTIFICATIONS OF PRESIDENT PURSUANT TO SEC.1350EX-13.2 CERTIFICATIONS OF ASSOCIATE VICE PRESIDENT, FINANCE DEPT., PURSUANT TO SEC. 1350
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SUPPLEMENTAL INFORMATION AND EXCHANGE RATES
    
 CAUTIONARY STATEMENT
  
    
    industry and product pricing trends;
    
    developments in technology affecting the market acceptance and competitiveness of our products;
    
    applications for our products;
    
    competition from other industry participants;
    
    pricing levels of our and our competitors products;
    
    our development and marketing of new products;
    
    our development and maintenance of relationships with our customers and strategic partners;
    
    the expansion and enhancement of our manufacturing capacity;
    
    our development of new process technologies;
    
    our ability to obtain funding for our capital expenditure plans;
    
    economic, political and financial developments in the markets for our products;
    
    our ability to obtain the necessary raw materials and the prices for these materials; and
    
    our ability to attract and retain qualified personnel.
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
    
    our dependence on frequent introduction of new services and technologies based on the latest developments;
    
    the intensely competitive semiconductor industry;
    
    risks associated with international business activities;
    
    our dependence on key personnel;
    
    natural disasters, such as earthquakes, which are beyond our control;
    
    general economic and political conditions, including those related to the semiconductor industry;
    
    possible disruptions in commercial activities caused by natural and human-induced
disasters, including terrorist activity and armed conflict, that may reduce end-user
purchases relative to expectations and orders;
    
    fluctuations in foreign currency exchange rates;
    
    additional disclosures we make in our previous and future Form 20-F annual reports and
Form 6-K periodic reports to the Securities and Exchange Commission; and
    
    those other risks identified in Item 3. Key Information  D. Risk Factors of this
annual report.
  
 PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 A. Selected Financial Data
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Year ended, and as of, December 31,2001
    

2002(Note)
    
    2003(Note)
    
    2004(Note)
    
    2005
    
    2005(NT$)
    
    (NT$)
    
    (NT$)
    
    (NT$)
    
    (NT$)
    
    (US$)(in millions except per share and ADS data)Consolidated Income Statement Data:R.O.C. GAAPNet sales revenue
    
    
    21,747
    
    
    
    16,492
    
    
    
    17,712
    
    
    
    23,380
    
    
    
    18,908
    
    
    
    576.5Cost of goods sold
    
    
    (11,674
    )
    
    
    (17,105
    )
    
    
    (20,657
    )
    
    
    (18,990
    )
    
    
    (18,666
    )
    
    
    (569.1
    )Less: Unrealized profit as of December 31,
    
    
    
    
    
    
    (2
    )
    
    
    3
    
    
    
    (1
    )
    
    
    
    
    
    
    Realized gross profit (loss)
    
    
    10,073
    
    
    
    (615
    )
    
    
    (2,942
    )
    
    
    4,388
    
    
    
    242
    
    
    
    7.4Operating expenses
    
    
    (6,557
    )
    
    
    (6,212
    )
    
    
    (4,742
    )
    
    
    (4,737
    )
    
    
    (5,116
    )
    
    
    (156.0
    )Operating income (loss)
    
    
    3,516
    
    
    
    (6,827
    )
    
    
    (7,684
    )
    
    
    (349
    )
    
    
    (4,875
    )
    
    
    (148.6
    )Total other income
    
    
    1,356
    
    
    
    466
    
    
    
    1,877
    
    
    
    1,619
    
    
    
    1,197
    
    
    
    36.5Total other expenses
    
    
    (4,795
    )
    
    
    (4,976
    )
    
    
    (2,370
    )
    
    
    (1,023
    )
    
    
    (3,205
    )
    
    
    (97.7
    )Income (loss) before taxes and minority interest
    
    
    77
    
    
    
    (11,337
    )
    
    
    (8,177
    )
    
    
    247
    
    
    
    (6,882
    )
    
    
    (210.0
    )Income tax benefit (expense)
    
    
    (943
    )
    
    
    (20
    )
    
    
    (21
    )
    
    
    (35
    )
    
    
    (215
    )
    
    
    (6.6
    )Income (loss) before minority interest
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    212
    
    
    
    (7,098
    )
    
    
    (216.4
    )Minority interest loss
    
    
    
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    5
    
    
    
    70
    
    
    
    2.1Net Income (loss)
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    218
    
    
    
    (7,027
    )
    
    
    (214.2
    )Net income (loss) per share  basic (1)
    
    
    (0.40
    )
    
    
    (5.32
    )
    
    
    (3.65
    )
    
    
    0.08
    
    
    
    (2.41
    )
    
    
    (0.07
    )Net income (loss) per share  diluted (1)
    
    
    (0.40
    )
    
    
    (5.32
    )
    
    
    (3.65
    )
    
    
    0.08
    
    
    
    (2.41
    )
    
    
    (0.07
    )U.S. GAAPGross profit (loss)
    
    
    6,598
    
    
    
    (4,018
    )
    
    
    (1,576
    )
    
    
    5,052
    
    
    
    688
    
    
    
    21.0Operating income (loss)
    
    
    (2,263
    )
    
    
    (10,186
    )
    
    
    (6,614
    )
    
    
    335
    
    
    
    (4,356
    )
    
    
    (132.8
    )Net income (loss) before cumulative effect of
change in accounting principle in accordance with
U.S. GAAP
    
    
    (3,842
    )
    
    
    (13,674
    )
    
    
    (8,027
    )
    
    
    (469
    )
    
    
    (4,636
    )
    
    
    (141.3
    )Basic net income (loss) per share before
cumulative effect of change in accounting principle
in accordance with U.S. GAAP
    
    
    (1.79
    )
    
    
    (6.39
    )
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )Diluted net income (loss) per share before
cumulative effect of change in accounting principle
in accordance with U.S. GAAP
    
    
    (1.79
    )
    
    
    (6.39
    )
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )Net income (loss) (2)
    
    
    (4,463
    )
    
    
    (13,674
    )
    
    
    (8,027
    )
    
    
    (469
    )
    
    
    (4,636
    )
    
    
    (141.3
    )Net income
(loss) per sharebasic (3)
    
    
    (2.07
    )
    
    
    (6.39
    )
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )Net income (loss) per share diluted (3)
    
    
    (2.07
    )
    
    
    (6.39
    )
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )Balance Sheet Data:R.O.C. GAAPTotal current assets
    
    
    25,358
    
    
    
    21,301
    
    
    
    21,002
    
    
    
    21,706
    
    
    
    20,027
    
    
    
    610.6Net property, plant and equipment
    
    
    39,562
    
    
    
    40,029
    
    
    
    32,600
    
    
    
    27,993
    
    
    
    16,202
    
    
    
    494.0Total assets
    
    
    71,693
    
    
    
    67,450
    
    
    
    59,919
    
    
    
    54,396
    
    
    
    45,604
    
    
    
    1,390.4Total current liabilities
    
    
    9,016
    
    
    
    17,687
    
    
    
    18,717
    
    
    
    9,449
    
    
    
    10,664
    
    
    
    325.1Long-term liabilities
    
    
    19,533
    
    
    
    19,549
    
    
    
    11,954
    
    
    
    10,602
    
    
    
    6,180
    
    
    
    188.4Total liabilities
    
    
    28,549
    
    
    
    37,236
    
    
    
    30,671
    
    
    
    20,051
    
    
    
    16,844
    
    
    
    513.5Total shareholders equity
    
    
    43,144
    
    
    
    30,214
    
    
    
    29,248
    
    
    
    34,344
    
    
    
    28,558
    
    
    
    870.7U.S. GAAPTotal current assets
    
    
    26,646
    
    
    
    21,037
    
    
    
    21,398
    
    
    
    21,716
    
    
    
    19,832
    
    
    
    604.6Total assets
    
    
    72,979
    
    
    
    65,509
    
    
    
    59,200
    
    
    
    52,807
    
    
    
    46,220
    
    
    
    1,409.1Total current liabilities
    
    
    10,152
    
    
    
    18,127
    
    
    
    18,986
    
    
    
    9,445
    
    
    
    10,699
    
    
    
    326.2Total liabilities
    
    
    29,679
    
    
    
    36,991
    
    
    
    31,051
    
    
    
    20,052
    
    
    
    16,877
    
    
    
    514.5Total shareholders equity
    
    
    43,300
    
    
    
    28,518
    
    
    
    28,149
    
    
    
    32,755
    
    
    
    29,264
    
    
    
    892.2Other Data:R.O.C. GAAPCapital expenditures
    
    
    9,078
    
    
    
    8,975
    
    
    
    1,606
    
    
    
    2,554
    
    
    
    1,595
    
    
    
    48.6Depreciation and amortization
    
    
    8,006
    
    
    
    8,742
    
    
    
    9,287
    
    
    
    7,562
    
    
    
    7,253
    
    
    
    221.1Net cash provided by operating activities
    
    
    9,209
    
    
    
    217
    
    
    
    1,484
    
    
    
    5,987
    
    
    
    4,397
    
    
    
    134.1Net income (loss) per ADS  basic
    
    
    (4.0
    )
    
    
    (53.2
    )
    
    
    (36.5
    )
    
    
    0.80
    
    
    
    (24.1
    )
    
    
    (0.70
    )Net income (loss) per ADS  diluted
    
    
    (4.0
    )
    
    
    (53.2
    )
    
    
    (36.5
    )
    
    
    0.80
    
    
    
    (24.1
    )
    
    
    (0.70
    )Number of common shares outstanding (weighted,
as adjusted) (4)
    
    
    2,157
    
    
    
    2,140
    
    
    
    2,272
    
    
    
    2,822
    
    
    
    2,912
    
    
    
    2,912Stock dividend per common share (5)
    
    
    30
    %
    
    
    10
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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(1)
    
    Retroactively adjusted for our capital reduction in 2006 and all subsequent stock dividends
and employee bonuses declared.(2)
    
    The difference between net income under R.O.C. GAAP and U.S. GAAP was largely derived from
different treatments under these two accounting principles with respect to employee bonus
shares, derivative contracts, plant capacity loss, other-than-temporary decline in value on
marketable securities, and convertible debt securities with beneficial conversion features.
The difference in accounting treatment with respect to employee bonus shares under the two
accounting principles resulted in an additional expense of NT$4,273 million in 2001, no
additional expense or income in 2002 and 2003, 2004 and 2005. The differences of accounting
treatment with respect to derivative contracts under the two accounting principles resulted in
additional income of NT$228 million in 2001, additional income of NT$616 million in 2002,
additional expense of NT$379 million in 2003, additional income of NT$34 million
in 2004 and additional expense of NT$32 million (US$1.0 million) in 2005. The
difference in accounting treatment with respect to plant capacity loss under the two
accounting principles resulted in an additional income of NT$528 million in 2001, an
additional expense of NT$528 million in 2002, and additional income of NT$269 million in 2003,
an additional expense of NT$258 million in 2004 and additional income of NT$0.4 million (US$0.01 million) in 2005.
The difference in accounting treatment with respect to other-than-temporary decline in value
on marketable securities under the two accounting principles resulted in an additional expense
of NT$646 million in 2001, an additional expense of NT$538 million in 2002, no additional
expense or income in 2003, an additional expense of
NT$448 million in 2004 and additional income of
NT$1,326 million (US$40.4 million) in 2005.(3)
    
    Retroactively adjusted for our capital reduction in 2006, all subsequent stock dividends and
employee bonuses declared. See note 22 to our consolidated financial statements for the years
ended December 31, 2003, 2004 and 2005 included in this annual report and Item 5. Operating
and Financial Review and Prospects  A. Operating Results  U.S. GAAP Reconciliation.(4)
    
    Common shares outstanding weighted, as adjusted for our capital reduction in 2006, any
employee share bonus and any subsequent stock dividends declared.(5)
    
    The percentage of our stock dividend is determined by the number of common shares we
distributed to existing shareholders divided by the common shares outstanding immediately
prior to the share issuance. We did not distribute any cash dividends in any of the periods
presented. B. Capitalization and Indebtedness
  C. Reason for the Offer and Use of Proceeds
  D. Risk Factors
 Holders of our securities should note that investment in our securities involves risks and
uncertainties that could affect our future business success or financial results. The following
important factors, and those important factors described in other reports submitted to, or filed
with, the Securities and Exchange Commission by our company, among other factors, could adversely
affect our results of operations and could cause our results of operations to differ materially
from those expressed in any forward-looking statements made by, or on behalf of, our company:
 Risks Relating to Our Company
 We recorded gross, operating and net losses in 2003 and 2005. Future losses could materially
adversely affect the value of your investment.
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Any delay or reduction in orders by Nintendo or the loss of Nintendo as a customer could result in
the loss of a significant portion of our revenue.
  We have limited liquidity and may be unable to repurchase our outstanding debt securities when
requested by holders, pay certain other obligations as they become due or otherwise meet our
working capital needs.
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Restrictive covenants and broad default provisions in the agreements governing our existing debt
may materially restrict our operations as well as adversely affect our liquidity, financial
condition and results of operations.
    Our revenues and operating results may decline if we are unable to obtain adequate supplies of raw
materials in a timely manner and at a reasonable price.
  We are vulnerable to cyclical downturns in the semiconductor industry, and our business, financial
condition and results of operations may suffer in future downturns.
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Our results of operations fluctuate significantly, which may affect the value of your investment
  
    
    changes in general economic and business conditions;
    
    the cyclical nature of both the semiconductor industry and the markets served by our customers;
    
    seasonality in demand for our customers products;
    
    changes in demand for our products and our customers products;
    
    technology development of our products and competing products;
    
    changes in the average selling prices of our products;
    
    inventory obsolescence;
    
    our customers adjustments in their inventory;
    
    the loss of or reduction of sales to a key customer or the postponement or cancellation of an order from a key customer;
    
    our ability to obtain adequate labor, equipment, components, raw materials, electricity,
water and other required production inputs on a timely and cost-efficient basis;
    
    capital expenditures and production uncertainties relating to the roll-out of new facilities;
    
    our ability to achieve target production yields, especially for new products;
    
    our ability to accurately predict customer demand, as we must commit to significant
capital expenditures in anticipation of future orders;
    
    changes in our business strategy or technology roadmap;
    
    natural disasters, such as fires, droughts, floods and earthquakes, or industrial accidents;
    
    the long lead times in securing a qualification from our customers;
    
    currency and interest rate fluctuations that may not be fully hedged; and
    
    technological changes.
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If we continue to experience significant investment losses from our investments, our financial
condition and results of operations may be adversely affected.
  As we depend on Mask ROM and Flash sales for a substantial portion of our revenue, a significant
decrease in Mask ROM or Flash sales or average selling prices could result in the loss of a
significant portion of our revenue.
     A decrease in demand for consumer electronics, computer and computer peripheral and other
communications products may significantly decrease the average selling prices for our products and
reduce our revenue and operating results.
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If we cannot compete successfully in our industry, we may lose customers and our revenue may
decrease.
   
    
    technological expertise and technical competence;
    
    time-to-market;
    
    ability to obtain raw materials and components on a timely and cost-effective basis;
    
    research and development capabilities and plans;
    
    available capacity;
    
    manufacturing capabilities and yields;
    
    customer service; and
    
    price.
  Due to our high percentage of fixed costs, we will not be profitable if we are unable to achieve
relatively high capacity utilization rates.
  Our customers generally do not place purchase orders in advance, which makes it difficult for us to
predict our future revenues, adjust production costs and allocate capacity efficiently and on a
timely basis.
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We depend on select personnel and could be affected by the loss of their services.
  Because of the highly cyclical nature of our industry, our capital requirements are difficult to
plan. If we cannot obtain additional capital when we need it, our growth prospects and future
operating results may be adversely affected.
  
    
    our future financial condition, results of operations and cash flows;
    
    our stock price and credit rating;
    
    general market conditions for financing activities by semiconductor companies; and
    
    economic, political and other conditions in Taiwan and elsewhere.
  If we are unable to manage our expansion effectively, our growth prospects may be limited and our
future operating results may be affected.
  If we are unable to effectively manage seasonal fluctuations in the demand for our products, our
business and operating results may be adversely affected.
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If we are unable to obtain additional equipment in a timely manner and at reasonable cost, our
competitiveness and future operating results may be adversely affected.
  Derivative contracts may expose us to risks that may adversely affect our financial condition and
results of operations.
    If needed cash resources are unavailable to us, we will be unable to implement successfully our
research and development plans.
  We are vulnerable to natural disasters and other events beyond our control, which could severely
disrupt the normal operation of our business and adversely affect our
operating results.
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We are subject to stringent environmental regulations and any violation could require us to pay
significant fines, or result in a delay or interruption of our operations.
  The differences between R.O.C. GAAP and U.S. GAAP result in different amounts of net income under
those standards, which makes evaluating our financial performance difficult.
  Risks Relating to Technology and Intellectual Property
 Our return to profitability depends on our ability to respond to rapid technological changes in the
semiconductor industry.
  
    
    introduction of new and increasingly complex and powerful products;
    
    rapidly evolving industry standards;
    
    rapid and significant product price declines;
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
    
    rapid product obsolescence; and
    
    introduction of competing technologies and solutions.
  We depend on our technology partners to advance our portfolio of process technologies, and we may
not be able to advance our portfolio of process technologies if our technology partners fail to
advance their technology, if we fail to maintain our existing arrangements with our technology
partners or if we are unable to enter into new arrangements with other technology providers.
  Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities and
other disruptions that can significantly increase our costs and delay product shipments to our
customers.
  
    
    the cleanliness of the manufacturing environment;
    
    human error;
    
    equipment malfunction;
    
    use of defective raw materials; and
    
    inadequate testing.
  Our business depends in part on our ability to obtain and preserve intellectual property rights.
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We may be subject to intellectual property rights disputes that could expose us to serious
liabilities.
   
    
    discontinue using process technologies which could cause us to stop manufacturing particular semiconductors;
    
    pay substantial monetary damages:
    
    seek to develop non-infringing technologies, which may not be feasible; or
    
    seek to acquire licenses to the infringed technology which may not be available on reasonable commercial terms, or at all.
  Political and Economic Risks
 Strained relations between the R.O.C. and the P.R.C. could adversely affect our business and the
market value of your investment.
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Fluctuations in exchange rates could result in foreign exchange losses.
  Disruptions in the international trading environment may significantly reduce our international
sales and revenue.
  The trading price of our common shares may be adversely affected by the general activities of the
Taiwan Stock Exchange and the economic performance of Taiwan.
   Risks Relating to our Common Shares, ADSs and GDSs
 We cannot assure you that the market for our common shares and ADSs will be active and liquid, and
trading of our GDSs has been extremely illiquid.
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Future sales of securities by our company or existing shareholders or future issuances of
securities by our company may have a dilutive effect and decrease the value of your investment.
   ADS and GDS holders do not have the same voting rights as our common shareholders, which may affect
the value of the ADSs and GDSs.
   The rights of holders of our ADSs and GDSs to participate in our rights offerings may be limited,
which may cause dilution to their holdings.
  18




---



##### Table of Contents



Our public shareholders may have more difficulty protecting their interests than they would as
shareholders of a U.S. corporation.
  ADS and GDS holders may be required to appoint agents in Taiwan to handle various tax and
administrative matters if they withdraw common shares from our ADS or GDS program and become
shareholders, which may make share ownership burdensome.
    Changes in exchange controls which restrict your ability to convert proceeds received from your
ownership of ADSs or GDSs may have an adverse effect on the value of your investment.
   When withdrawing the underlying common shares of the ADSs or GDSs, you may be required to provide
certain information to us or the Depositary, and failure to provide such information may result in
a delay of the withdrawal.
  19




---



##### Table of Contents



Item 4. Information on the Company
 A. History and Development of the Company
   
    
    our Microelectronics and Memory Solution Group, which encompasses Mask ROM, Flash, EPROM
products and strategic manufacturing services; and
    
    our Integrated Solution Group, which focuses largely on SLC products for the audio,
video, communications and microcontroller markets.
       
    
    Business address:
    
    No. 16 Li Hsin Road, Science Park
Hsinchu, Taiwan, Republic of China
    
    Telephone number:
    
    (8863) 578-6688
    
    Website:
    
    www.macronix.com
 20




---



##### Table of Contents



Capital Expenditures
  Year ended December 31,2003
    
    2004
    
    2005(NT$ million)
    
    (NT$ million)
    
    (NT$ million)Fab I
    
    
    88
    
    
    
    358
    
    
    
    134Fab II
    
    
    228
    
    
    
    92
    
    
    
    875Fab III
    
    
    834
    
    
    
    1,652
    
    
    
    0Others
    
    
    456
    
    
    
    452
    
    
    
    586Total
    
    
    1,606
    
    
    
    2,554
    
    
    
    1,595
   B. Business Overview
 Our Strategy
   Maintain our leadership in Mask ROM and develop the market for one-time programmable memory
products
    21




---



##### Table of Contents



Invest in Flash technologies to develop cost-competitive solutions, particularly for the handheld
device and wireless markets
   Leverage our competitive position in the non-volatile memory market to effectively cross-sell and
diversify our product mix and customer base
   Continue to upgrade our process technology and in-house manufacturing capabilities
    Our Business Groups
   22




---



##### Table of Contents



Our Products and Services
  % of net sales revenueYear ended December 31,Product
    
    Characteristics
    
    Applications
    
    2003
    
    2004
    
    2005Microelectronics and Memory Solution Group:Mask ROM
    
    Not re-programmable
    
    Games, PDAs, word processors, printers, fax modems, VCDs, cellular phones, STBs
    
    
    42.1
    
    
    
    35.8
    
    
    
    46.1Flash
    
    Re-programmable within the application system
    
    PDAs, digital cameras, STBs, Web TVs, DVD players, optical disk drive products Fax modems, VCDs
    
    
    32.8
    
    
    
    45.8
    
    
    
    36.3EPROM
    
    Re-programmable outside the application system using industrial processors
    
    STBs, Internet applications, CDs
    
    
    1.7
    
    
    
    0.7
    
    
    
    0.1SMS
    
    Value-added services
    
    DVDs, microcontrollers with embedded Flash technology
    
    
    13.3
    
    
    
    7.4
    
    
    
    8.8Integrated Solution Group:SLC
    
    Highly integrated system- on-a-chip solutions featuring embedded Flash technology
    
    Cellular phones, flat panel displays, digital still cameras, smart cards, PDAs, electronic
dictionaries, digital audio products
    
    
    7.3
    
    
    
    7.6
    
    
    
    6.3
 Microelectronics and Memory Solution Group
 Mask ROMs
  Applications.
    23




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##### Table of Contents



% of our net Mask ROM andXtraROM salesYear ended December 31,Density
    
    Sample applications
    
    2003
    
    2004
    
    2005512 Mb(1)
    
    Games, entertainment
    
    
    0.7
    
    
    
    3.9
    
    
    
    17.0256 Mb(1)
    
    Games, memory cards
    
    
    4.7
    
    
    
    15.4
    
    
    
    23.6128 Mb(1)
    
    Games, PDAs
    
    
    28.7
    
    
    
    32.7
    
    
    
    19.064Mb
    
    Word processors, games, PDAs, STBs, databanks, printers
    
    
    38.5
    
    
    
    21.4
    
    
    
    23.332 Mb
    
    Games, DVDs, data communications
    
    
    15.3
    
    
    
    13.0
    
    
    
    9.016 Mb
    
    Games, word processors
    
    
    6.7
    
    
    
    9.0
    
    
    
    5.18 Mb
    
    Sound cards, data banks, BIOS, games, sound cards
    
    
    4.2
    
    
    
    3.9
    
    
    
    2.34 Mb
    
    PHSs, data banks, games
    
    
    0.9
    
    
    
    0.4
    
    
    
    0.6Other
    
    Pages, data banks, STBs, BIOS, games, word processors, networking
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.1
 
 (1)
    
    Includes XtraROM products. Competition.
    Flash
  Applications.
 24




---



##### Table of Contents



% of our net Flash memory salesYear ended December 31,Density
    
    Sample applications
    
    2003
    
    2004
    
    2005256 Mb
    
    Games
    
    
    
    
    
    
    
    
    
    
    0.3128 Mb
    
    Games
    
    
    0.3
    
    
    
    0.5
    
    
    
    0.764 Mb
    
    Games, printers, STBs
    
    
    14.9
    
    
    
    5.3
    
    
    
    11.132 Mb
    
    Printers, PDAs, digital still cameras, ADSL products
    
    
    14.2
    
    
    
    18.7
    
    
    
    24.116 Mb
    
    STBs, communication boxes, printers, musical devices, games, web TVs, cellular phones
    
    
    22.3
    
    
    
    29.1
    
    
    
    31.28 Mb
    
    DVD Players, STBs, ISDN boxes
    
    
    14.4
    
    
    
    25.3
    
    
    
    17.44 Mb
    
    BIOS, CD R/W drives, cable modems
    
    
    21.3
    
    
    
    17.1
    
    
    
    11.82 Mb
    
    BIOS, HDDs, CD R/W drives, communication boxes
    
    
    4.5
    
    
    
    1.5
    
    
    
    2.01 Mb
    
    BIOS, HDDs, games, DVD-ROM drives
    
    
    7.3
    
    
    
    2.1
    
    
    
    1.1Other
    
    BIOS, HDDs, games
    
    
    0.9
    
    
    
    0.3
    
    
    
    0.3
 Competition.
 EPROM
 Applications.
 25




---



##### Table of Contents



Competition.
 Strategic Manufacturing Services
  Competition.
 Integrated Solution Group
    
    
    cellular phones-related solutions; and
    
    portable LCDs-related solutions.
 Cellular Phone-related Solutions
  Sound Generator Chip.
 Digital Still Camera Controller.
 26




---



##### Table of Contents



CMOS Sensor Camera Module.
 SIM Card IC.
 Portable LCD-related Solutions
  Other Solutions
  
    
    Digital Voice Recorder. Our digital voice recorder solution enables the integration of
digital voice recording functions in various devices such as electronic dictionaries,
language learning devices, electronic books and PDAs. Under our new structure, this product
will be offered through our Mobile Audio subsidiary.
    
    Digital Answering Machine IC. Our solutions include integrated circuits for digital
answering machines. The most important technology in these integrated circuits is digital
signal processor technology, which is also necessary for applications in voice messaging,
cordless telephones and cellular telephones. Under our new structure, this product will be
offered through our Mobile Audio subsidiary.
    
    Microcontrollers. In addition to microcontrollers for flat panel displays, our
microcontroller products also include microcontrollers for electronic dictionaries and PDAs,
smart cards and small displays. Under our new structure, this product will be offered
through our Mobile Payment subsidiary.
    
    Others. Clock generators, joystick controllers and wireless game controllers for
Nintendo.
 Customers
 General
  Top Customers
  27




---



##### Table of Contents



% of net sales revenueYear ended December 31Customers
    
    2003
    
    2004
    
    2005
    
    Products purchased(%)NINTENDO
    
    
    24.0
    
    
    
    22.4
    
    
    
    29.2
    
    
    Mask ROM, Flash, SLCLG
    
    
    1.2
    
    
    
    2.4
    
    
    
    5.0
    
    
    Mask ROM, FlashHP
    
    
    9.8
    
    
    
    5.3
    
    
    
    4.1
    
    
    Mask ROM, FlashHIMAX
    
    
    0.0
    
    
    
    0.2
    
    
    
    3.7
    
    
    SMSSONY
    
    
    4.0
    
    
    
    1.0
    
    
    
    2.2
    
    
    Mask ROM, FlashDAIICHI
    
    
    1.4
    
    
    
    1.7
    
    
    
    2.0
    
    
    Mask ROM, FlashLF MACAO
    
    
    0.8
    
    
    
    0.9
    
    
    
    1.9
    
    
    Mask ROM, SLCHONFFUJIN
    
    
    0.1
    
    
    
    0.7
    
    
    
    1.8
    
    
    FlashNANAO
    
    
    0.8
    
    
    
    1.2
    
    
    
    1.7
    
    
    FlashPHILIPS
    
    
    1.6
    
    
    
    1.6
    
    
    
    1.6
    
    
    SLC
 
 (1)
    
    Represents our sales to Megachips, which on-sells our products to Nintendo Nintendo
    Hewlett Packard
  LG Electronics Inc.
  Sales and Marketing
  Year ended December 31,Area
    
    2003
    
    2004
    
    2005(%)Japan
    
    
    41.0
    
    
    
    35.8
    
    
    
    40.8Taiwan
    
    
    32.1
    
    
    
    33.5
    
    
    
    29.8Hong Kong, the P.R.C., Singapore and South Korea
    
    
    19.7
    
    
    
    21.9
    
    
    
    21.6United States
    
    
    4.6
    
    
    
    4.2
    
    
    
    3.3Europe and other
    
    
    2.6
    
    
    
    4.6
    
    
    
    4.5100.0
    
    
    
    100.0
    
    
    
    100.0
 28




---



##### Table of Contents



Manufacturing and Quality Control
 Manufacturing
   2003
    
    2004
    
    2005
    
    2006Fab I (six-inch wafers)
    
    
    35,000
    
    
    
    34,000
    
    
    
    32,000
    
    
    
    30,000Fab II (eight-inch wafers)
    
    
    37,000
    
    
    
    44,000
    
    
    
    44,000
    
    
    
    49,000
    29




---



##### Table of Contents



Tower Semiconductor
   Quality Control
     
    
    the wafer acceptance test, which detects faults from the manufacturing process;
    
    the wafer sort test, which probes defaults in circuitry; and
    
    the final test, which reviews the operation of each integrated circuit.
  30




---



##### Table of Contents



Raw Materials
   Silicon Wafers
   Chemicals
  Water
  31




---



##### Table of Contents



Electricity
   Backlog and Order Process
   Environmental Matters
    32




---



##### Table of Contents



Insurance
  
    
    property damage all-risk insurance on our fixed assets, equipment and inventory;
    
    business interruption insurance;
    
    third-party liability insurance to cover claims in respect of personal injury or property damage arising from accidents;
    
    directors and officers liability insurance;
    
    fidelity bond insurance on all employees, providing coverage against losses due to employee fraud or dishonesty;
    
    marine cargo insurance;
    
    employee group insurance;
    
    employer liability insurance; and
    
    construction all-risk coverage.
  Strategic Investments
  
    
    Tower Semiconductor, Ltd. (Tower Semiconductor)  A 13.1% indirect interest in Tower
Semiconductor. Tower Semiconductor is an independent foundry manufacturer of semiconductor
integrated circuits on silicon wafers. As at December 31, 2005, Tower Semiconductor had a
capital of US$538.8 million, net assets of US$30.1 million and accumulated deficits of
US$559.8 million. For the year ended December 31, 2005, Tower Semiconductor recorded a net
loss of US$203.1 million. As of December 31, 2005, we held the shares of Tower Semiconductor
at a value of NT$541 million (US$16.5 million). The shares of Tower Semiconductor held
by us are fully paid-up. For the year ended December 31, 2005, we did not receive any
dividend on the shares of Tower Semiconductor. For the year ended December 31, 2005 there
were no inter-company loans between us and Tower Semiconductor.
    
    ProComm Inc.  A 38.4% direct equity interest in ProComm Inc. ProComm Inc. designs and
sells integrated chipsets and application-specific integrated circuits for applications used
in the wireless communications industry. We acquired our equity interest in Prominent
Communications Inc. in late 1999 as part of an arrangement to jointly develop integrated
circuits for 900MHz cordless telephones. Pursuant to a share swap transaction agreed among
Prominent Communications Inc., its shareholders and ProComm Inc. on September 1, 2004,
Procomm Inc. issued its own stock to shareholders of Prominent Communications Inc. in
exchange for shares of Prominent Communications Inc. Accordingly, we received. 7,300,000
shares of Prominent Communications Inc. in exchange for 10,132,513 shares of ProComm Inc.
    
    Magic Pixel Inc.  A 44.9% direct and indirect equity interest in Magic Pixel Inc., which
focuses on IC design of video and related products. Our shareholding was diluted in 2003
from 100% as a result of a private placement of shares by Magic Pixel Inc. to its employees.
 C. Organizational Structure
  33




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##### Table of Contents



Direct orTotal Paid-in
    
    IndirectJurisdiction of
    
    Capital of such
    
    EquityName of subsidiary
    
    Main business
    
    incorporation
    
    Entity
    
    InterestHui Ying Investment Ltd.
    
    Investment
    
    Taiwan, R.O.C.
    
    NT$500,000,000
    
    
    100
    %Run Hong Investment Ltd.
    
    Investment
    
    Taiwan, R.O.C.
    
    NT$500,000,000
    
    
    100
    %Kang Bao Investment Ltd.
    
    Investment
    
    Taiwan, R.O.C.
    
    NT$500,000,000
    
    
    100
    %Joyteck Co., Ltd.
    
    Systems Solutions
    
    Taiwan, R.O.C.
    
    NT$96,775,000
    
    
    87.98
    %Macronix America, Inc.
    
    Sales and marketing
    
    California, U.S.A.
    

EUR62,000
    
    
    100
    %Macronix Europe N.V.
    
    Sales and marketing
    
    Belgium
    
    US$63,984
    
    
    100
    %Macronix (B.V.I.) Co., Ltd.
    
    Investment
    
    British Virgin Islands
    
    US$174,147,826
    
    
    100
    %New Trend Technology Inc.
    
    IC design
    
    California, U.S.A.
    
    US$23,850,000
    
    
    100
    %Wedgewood International Ltd.
    
    Investment
    
    British Virgin Islands
    
    
    
    
    Macronix Pte Ltd.
    
    Sales and marketing
    
    Singapore
    
    US$100,000
    
    
    100
    %MaxNova Inc.
    
    IC design
    
    Taiwan, R.O.C.
    
    NT$85,500,000
    
    
    85.5
    %Macronix Japan (Cayman Islands)
    
    Investment
    
    Cayman Islands
    
    US$500,000
    
    
    100
    %Macronix (Hong Kong) Co., Ltd.
    
    Sales and marketing
    
    Hong Kong
    
    US$2,500,000
    
    
    100
    %Macronix Microelectronics (Suzhou)
Co., Ltd
    
    System Solution
    
    Suzhou China
    
    US$2,000,000
    
    
    100
    %Biomorphic Microsystems Corporation
    
    IC design
    
    Taiwan, R.O.C
    
    NT$542,921,739
    
    
    54.77
    %
 Macronix (BVI) Co., Ltd. (Macronix BVI)
   Wedgewood International Ltd. (Wedgewood)
  Biomorphic Microsystems Corporation (BMC)
  D. Property, Plant and Equipment
    34




---



##### Table of Contents



Item 5. Operating and Financial Review and Prospects
 The following discussion and analysis should be read in conjunction with our audited
consolidated financial statements and the related notes included in this annual report. These
financial statements have been prepared in accordance with R.O.C. GAAP, which differ in certain
material respects from U.S. GAAP. See note 28 to our consolidated financial statements for the
years ended December 31, 2003, 2004 and 2005 included in this annual report and A. Operating
Results  U.S. GAAP Reconciliation.
 Overview
 General
      35




---



##### Table of Contents



Sales Revenue
   Product Pricing Trends
    Year ended December 312003
    
    2004
    
    2005(NT$ per die)Mask ROM
    
    
    56.9
    
    
    
    54.2
    
    
    
    50.3Flash
    
    
    40.8
    
    
    
    45.8
    
    
    
    25.7
  Year ended December 312003
    
    2004
    
    2005(Mb per die)Mask ROM (1)
    
    
    61.5
    
    
    
    75.3
    
    
    
    114.3Flash
    
    
    11.4
    
    
    
    11.7
    
    
    
    14.4
 
 (1)
    
    The significant increase in megabit per die for Mask ROM products from 2003 to 2005 resulted
from the increase in demand for high-density Mask ROM products in 2004 and 2005. 36




---



##### Table of Contents



Cost of Goods Sold
  
    
    overhead, including depreciation of property, plant and equipment and amortization of intangible assets;
    
    costs of raw materials, including wafers, chemicals and other inputs, for semiconductor fabrication;
    
    costs of outsourcing production to third parties;
    
    direct labor costs; and
    
    service charges paid for testing and packaging services.
  Capital Expenditures and Depreciation
     Inventory
  37




---



##### Table of Contents



Research and Development
   Cost Reduction Initiatives
  Production Capacity
    Year ended December 31,2003
    
    2004
    
    2005(number of
    
    (% of total
    
    (number of
    
    (% of total
    
    (number of
    
    (% of totalwafers)
    
    production)
    
    wafers)
    
    production)
    
    wafers)
    
    production)Mask ROM
    
    
    166,627
    
    
    
    37.5
    
    
    
    236,722
    
    
    
    37.0
    
    
    
    303,605
    
    
    
    48.1Flash
    
    
    247,730
    
    
    
    55.7
    
    
    
    288,747
    
    
    
    45.0
    
    
    
    192,536
    
    
    
    30.5EPROM
    
    
    2,737
    
    
    
    0.6
    
    
    
    1,013
    
    
    
    0.2
    
    
    
    1,319
    
    
    
    0.2SMS
    
    
    
    
    
    
    
    
    
    
    69,734
    
    
    
    10.9
    
    
    
    114,149
    
    
    
    18.1SLC (1)
    
    
    27,821
    
    
    
    6.2
    
    
    
    44,332
    
    
    
    6.9
    
    
    
    19,855
    
    
    
    3.1Total
    
    
    44,915
    
    
    
    100.0
    
    
    
    640,548
    
    
    
    100.0
    
    
    
    631,464
    
    
    
    100.0
 38




---



##### Table of Contents



(1)
    
    Yields of dies per wafer vary with each type of logic product manufactured by us and a change
in product mix may cause variations in both wafer production and dies per wafer. Geographic Markets
  
    
    Japan;
    
    Taiwan;
    
    Singapore and Hong Kong;
    
    the United States; and
    
    Europe.
  Year ended December 31 (1)2003
    
    2004
    
    2005(millions
    
    (% of total net sales
    
    (millions
    
    (% of total net
    
    (millions
    
    (% of total netin NT$)
    
    revenue)
    
    in NT$)
    
    sales revenue)
    
    in NT$)
    
    sales revenue)Japan
    
    
    7,269
    
    
    
    41.0
    
    
    
    8,364
    
    
    
    35.8
    
    
    
    7,707
    
    
    
    40.8Taiwan
    
    
    5,679
    
    
    
    32.1
    
    
    
    7,839
    
    
    
    33.5
    
    
    
    5,636
    
    
    
    29.8Singapore and Hong Kong
    
    
    3,487
    
    
    
    19.7
    
    
    
    5,119
    
    
    
    21.9
    
    
    
    4,076
    
    
    
    21.6United States
    
    
    823
    
    
    
    4.6
    
    
    
    981
    
    
    
    4.2
    
    
    
    629
    
    
    
    3.3Europe
    
    
    454
    
    
    
    2.6
    
    
    
    1,077
    
    
    
    4.6
    
    
    
    860
    
    
    
    4.5Total
    
    
    17,712
    
    
    
    100.0
    
    
    
    23,380
    
    
    
    100.0
    
    
    
    18,908
    
    
    
    100.0
 
 (1)
    
    See note 26 to our consolidated financial statements for the years ended December 31, 2003,
2004 and 2005 for a discussion of our export sales. The numbers in this table do not represent
sales by shipping destination or by end customer origin.   Critical Accounting Policies
   39




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##### Table of Contents



Inventories
  Stock Appreciation Right Program
  Net Deferred Tax Assets
  Cost Method Investments
  Results of Operations
  40




---



##### Table of Contents



Year ended December 31,2003
    
    2004
    
    2005Sales revenue
    
    
    102.0
    
    
    
    100.5
    
    
    
    100.4Less: Sales returns
    
    
    (1.8
    )
    
    
    (0.1
    )
    
    
    (0.3
    )Sales discounts
    
    
    (0.2
    )
    
    
    (0.4
    )
    
    
    (0.1
    )Net sales revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0MMSG:Mask ROM
    
    
    42.1
    
    
    
    35.8
    
    
    
    46.1Flash
    
    
    32.8
    
    
    
    45.8
    
    
    
    36.3EPROM
    
    
    1.7
    
    
    
    0.7
    
    
    
    0.1SMS
    
    
    13.3
    
    
    
    7.4
    
    
    
    8.8ISG:SLC
    
    
    7.3
    
    
    
    7.7
    
    
    
    6.3Other(1)
    
    
    2.8
    
    
    
    2.6
    
    
    
    2.4Cost of goods sold
    
    
    (116.6
    )
    
    
    (81.2
    )
    
    
    (98.7
    )Gross profit (loss)
    
    
    (16.6
    )
    
    
    18.8
    
    
    
    1.3Operating expensesSelling expenses
    
    
    (3.2
    )
    
    
    (3.1
    )
    
    
    (3.7
    )Administrative expenses
    
    
    (8.1
    )
    
    
    (6.1
    )
    
    
    (6.9
    )Research and development expenses
    
    
    (15.5
    )
    
    
    (11.0
    )
    
    
    (16.5
    )Total operating expenses
    
    
    (26.8
    )
    
    
    (20.2
    )
    
    
    (27.1
    )Operating income (loss)
    
    
    (43.4
    )
    
    
    (1.4
    )
    
    
    (25.8
    )Non-operating income
    
    
    10.6
    
    
    
    6.9
    
    
    
    6.3Non-operating expenses
    
    
    (13.4
    )
    
    
    (4.4
    )
    
    
    (16.9
    )Income (loss) before taxes and minority interest
    
    
    (46.2
    )
    
    
    1.1
    
    
    
    (36.4
    )Income tax benefit (provision)
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (1.1
    )Minority interest
    
    

    
    *
    
    

    
    *
    
    

    
    *Net income (loss)
    
    
    (46.3
    )
    
    
    0.9
    
    
    
    (37.1
    )
 
 (1)
    
    Other sales revenue includes royalty revenues, masking charges, profit-sharing revenues and
other operating revenues.*
    
    Less than 0.1%. Year Ended December 31, 2005 compared to Year Ended December 31, 2004
 Net Sales Revenue.
     41




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##### Table of Contents



Cost of Goods Sold and Gross Profit (Loss).
  Operating Expenses.
 Operating Loss.
 Non-Operating Income.
 Non-Operating
Expenses.
 Income Tax Expense.
 Net Income (Loss).
 Year Ended December 31, 2004 compared to Year Ended December 31, 2003
 Net Sales Revenue.
  42




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##### Table of Contents



Cost of Goods Sold and Gross Profit (Loss).
  Operating Expenses.
 Operating Loss.
 Non-Operating Income.
 43




---



##### Table of Contents



Non-Operating Expenses.
 Income Tax Expense.
 Net Income (Loss).
 Inflation
  Taxation
    44




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##### Table of Contents



Equity Derivative Contracts
  U.S. GAAP Reconciliation
 General
  Year ended December 31,2003
    
    2004
    
    2005
    
    2005(NT$)
    
    (NT$)
    
    (NT$)
    
    (US$)(in millions)Net income (loss) in accordance with:R.O.C. GAAP
    
    
    (8,198
    )
    
    
    218
    
    
    
    (7,027
    )
    
    
    (214.2
    )U.S. GAAP
    
    
    (8,027
    )
    
    
    (469
    )
    
    
    (4,636
    )
    
    
    (141.3
    )
 Year ended December 31,2003
    
    2004
    
    2005
    
    2005(NT$)
    
    (NT$)
    
    (NT$)
    
    (US$)(in millions)Shareholders equity in accordance with:R.O.C. GAAP
    
    
    29,248
    
    
    
    34,345
    
    
    
    28,558
    
    
    
    870.7U.S. GAAP
    
    
    28,145
    
    
    
    32,755
    
    
    
    29,264
    
    
    
    892.2
    45




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##### Table of Contents




    
    plant capacity expense variances;
    
    income taxes;
    
    additional pension gain on an actuarial basis;
    
    marketable securities;
    
    amortization of goodwill;
    
    derivative financial instruments;
    
    compensation expense pertaining to stock performance-based employee bonuses; and
    
    convertible debt securities with beneficial conversion features.
 Gross Profit (Loss) and Operating Income (Loss)
  Plant Capacity Expense Variances
   Income Taxes
   Pension Expense
  46




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##### Table of Contents



Marketable Securities
   Derivative Financial Instruments
   (i)
    
    Options contractsUnder R.O.C. GAAP, gains and losses on option contracts are recognized upon exercise. Unrealized
gains and losses are not required to be recorded in the financial statements. However, effective
the quarter ended December 31, 2004, in accordance with No. 32 ruling issued by Accounting
Research and Development Foundation in 2005, The Accounting Treatment of Foreign Exchange Option
Contract Before the Effectiveness of Financial Accounting Standards No. 34, outstanding put
options at balance sheet date shall be accounted for at their fair values with the differences
included in the current net income. This change in accounting principles did not have significant
impact on the Companys financial statements.For periods prior to January 1, 2001, U.S. GAAP requires that unrealized gains and losses on
option contracts that do not qualify as hedges be recorded in the statement of operations. The
majority of option contracts entered into by the Company for hedging purposes, did not qualify as
hedges for financial reporting purposes and accordingly have been carried in the financial
statements at fair value.(ii)
    
    Structured depositsUnder R.O.C. GAAP, the respective interest on the deposits is accrued. The gains and losses
arising from the settlement of the contracts are dealt with in the statement of operations.
Unrealized gains and losses are not recognized.
 47




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##### Table of Contents



For periods prior to January 1, 2001, under U.S. GAAP, the option element of these contracts is
measured at fair value and is recognized on the balance sheet, subsequent changes in the fair
value of the option are recognized in earnings in the period of change.
    Stock Performance-Based Employee Bonus Plan
    48




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##### Table of Contents



Purchase and Sale of Our Own Shares
   Investment in Equity Investees
   Research and Development Expense
  Rights Issues and Earnings Per Share
   Employee Stock Options
  49




---



##### Table of Contents



Reclassification of Capital Account to Accumulated Deficit
   Convertible Debt Securities with Beneficial Conversion Feature
      50




---



##### Table of Contents



New Accounting Pronouncements
 U.S. GAAP
          51




---



##### Table of Contents



R.O.C. GAAP
     52




---



##### Table of Contents



Liquidity and Capital Resources
        53




---



##### Table of Contents



Capital Resources and Capital Expenditures
   Period
    
    NT$ in millionsJanuary 1, 2006  December 31, 2006
    
    
    4,635January 1, 2007  December 31, 2007
    
    
    2,340January 1, 2008  December 31, 2008
    
    
    1,525January 1, 2009  December 31, 2009
    
    
    1,480January 1, 2010  December 31, 2010
    
    
    68After December 31, 2010
    
    
    365Total
    
    
    10,413
  54




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##### Table of Contents



55




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##### Table of Contents



Year ended December 31,2003
    
    2004
    
    2005(NT$ million)
    
    (NT$ million)
    
    (NT$ million)Fab I
    
    
    88
    
    
    
    358
    
    
    
    134Fab II
    
    
    228
    
    
    
    92
    
    
    
    875Fab III
    
    
    834
    
    
    
    1,652
    
    
    
    0Others
    
    
    456
    
    
    
    452
    
    
    
    586Total
    
    
    1,606
    
    
    
    2,554
    
    
    
    1,595
 
    56




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##### Table of Contents



Contractual Obligations
  Payments Due by PeriodJanuary 1,
    
    January 1,
    
    January 1,2006 to
    
    2007 to
    
    2010 to
    
    January 1,December 31,
    
    December 31,
    
    December 31,
    
    2012 andTotal
    
    2006
    
    2009
    
    2011
    
    thereafter(in millions of NT$)Long-term debt
    
    
    10,413
    
    
    
    4,635
    
    
    
    5,345
    
    
    
    137
    
    
    
    296Capital lease obligations (1)
    
    
    0Operating lease obligations (2)
    
    
    609
    
    
    
    85
    
    
    
    195
    
    
    
    130
    
    
    
    199Letters of credit
    
    
    18
    
    
    
    18Construction and equipment
purchase obligations (3)
    
    
    3117
    
    
    
    3117License fees (3) (4)
    
    
    410
    
    
    
    410Other long-term liabilities (4)
    
    
    642
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    642Total
    
    
    15,209
    
    
    
    8,265
    
    
    
    5,540
    
    
    
    267
    
    
    
    1,137
 
 (1)
    
    Capital lease obligations represent our commitments for leases of equipment.(2)
    
    Operating lease obligations represent our commitments for leases relating to property and
research and development software. See note 24c and 24d to our consolidated financial
statements.(3)
    
    We cannot forecast the time of cash-out of our construction and equipment purchase
obligations and license fees become due.(4)
    
    License fees above reflect the fixed amount of royalty payments. See note 24e to 24h to our
consolidated financial statements.(5)
    
    Other long-term liabilities include accrued pension cost and other liabilities  refundable
deposits. Commitments and Contingencies
  Off-balance Sheet Arrangements
  Research and Development
    57




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##### Table of Contents



New Product Development
  Mask ROM
 
    
    new 64/128/256Mb product designs for Game Boy Advance;
    
    introduce cost-effective two-bit per cell manufacturing technology;
    
    a new low pin-count design for 64Mb products;
    
    2Mb to 64Mb ROM multimedia card;
    
    16/32/64Mb one-time programmable multimedia card;
    
    64/128/256Mb SD ROM card; and
    
    64/128/256Mb memory stick ROM card.
 Flash
 
    
    a 256Mb data storage/code storage Flash product;
    
    a 1.8 volt low voltage, synchronous, read-while-write product for portable devices and
mobile internet appliance applications;
    
    a monochip design which combines Flash and multiple time programmable devices that optimizes
data storage and code storage by using two-bit per cell technology;
    
    extend the capacity of SPI products by using two-bit per cell technology;
    
    a 0.13 micron cost-effective two-bit per cell manufacturing technology; and
    
    a 0.13 micron high endurance ETOX cost-effective manufacturing technology.
 SLC
 
    
    a 64-voice polyphonic sound generator for cellular phone ring tones;
    
    an audio control chip featuring long-time recording;
 58




---



##### Table of Contents




    
    custom-made control chips for educational devices and language learning machines;
    
    a custom-made broadband bridge chip, wireless game controller, frequency generator, and high
definition television display controller for video game platforms;
    
    a new architecture for the provision of data storage for SOC devices;
    
    provide intellectual property libraries and design services on single voltage embedded Flash
compilers, embedded mix signal devices, logic devices and SRAM/ROM memory devices for SOC
development of audio compact disc, general positioning system, internet appliance, LCD monitor and
educational and learning systems applications;
    
    develop embedded EEPROM intellectual property for smart card applications;
    
    introduce low-end derivative processes for consumer products; and
    
    develop a GSM base band chipset and module, which is a digital signal processor and
controller, for wireless communication applications.
 Intellectual Property
     59




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##### Table of Contents



Industry Trend
 General
    Semiconductor Products
   Memory Products.
   60




---



##### Table of Contents



Logic Products.
  System-on-a-chip.
  
 Item 6. Directors, Senior Management and Employees
 A. Directors and Senior Management
  61




---



##### Table of Contents



Name
    
    Position with Our Company
    
    Date of Initial Appointment
    
    AgeMiin Wu (1)
    
    President,
    
    September 1, 1989,
    
    
    57Executive Director and Chairman
    
    November 25, 1989 and March 7, 2005Ding-Hua Hu (1)(2)
    
    Executive Director
    
    November 25, 1989
    
    
    63H. C. Chen (3)
    
    Executive Director
    
    July 18, 1992
    
    
    67Y.S.Chuang(4)
    
    Director
    
    June 18, 2004
    
    
    70Takata Akira (5)
    
    Director
    
    May 12, 2005
    
    
    47Dang-Hsing Yiu
    
    Director and Senior Vice President of Integrated
    
    June 5, 1995
    
    
    53Solution Group
    
    March 14, 2003C.Y. Lu
    
    Director and Senior Vice President of Microelectronics
    
    April 18, 2003
    
    
    55and Memory Solution Group
    
    March 14, 2003Yaou-Dong Wang
    
    Director and Vice President
    
    June 18, 2004 and February 1, 2001
    
    
    51J.P. Peng (6)
    
    Director and Vice President
    
    June 18, 2004 and February 1, 2001
    
    
    50Raymond S. Mak
    
    Director and Vice President
    
    June 29, 1998 and September 18, 1995
    
    
    55C.L. Liu
    
    Independent Director
    
    June 27, 2003
    
    
    71Simon M. Sze
    
    Independent Director
    
    June 27, 2003
    
    
    69Cheng Yi Fang
    
    Independent Director
    
    April 19, 2001
    
    
    64Roger Chu(4)
    
    Supervisor
    
    July 18, 1992
    
    
    58Ping Tien Wu
    
    Supervisor
    
    November 27, 1993
    
    
    64J.D. Lee (5)
    
    Supervisor
    
    June 18, 2004
    
    
    47Paul Yeh
    
    Associate Vice President of Finance Center
    
    July 1, 2001
    
    
    49
 
 (1)
    
    Mr. Wu succeeded Dr. Hu as the chairman, and Dr. Hu resigned from the chairmanship, effective
March 7, 2005.(2)
    
    Nominee of Champion Investment Corporation(3)
    
    Nominee of Hung Chih Investment Corporation(4)
    
    Nominee of Delta Electronics Ltd.(5)
    
    Nominee of Shun Ying Investment(6)
    
    Nominee of Hui Ying Investment, Ltd. Miin Wu
 Ding-Hua Hu
 H.C. Chen
  Takata Akira
 Dang-Hsing Yiu
 62




---



##### Table of Contents



C.Y. Lu
 Yaou-Dong Wang
 J.P. Peng
 Raymond S. Mak
 C.L. Liu
 Simon M. Sze
 Cheng Yi Fang
 Roger Chu
 Ping Tien Wu
  Paul Yeh
 -
 63




---



##### Table of Contents



B. Compensation
  TotalName
    
    Position with our Company in 2004
    
    Compensation(thousands of NT$)Miin Wu (2)
    
    Executive Director, Chairman and President
    
    
    5,669Dang-Hsing Yiu (3)
    
    Director and Senior Vice President of Integrated Solution Group
    
    
    20,125Raymond S. Mak (3)
    
    Director and Vice PresidentYaou-Dong Wang(3)
    
    Director and Vice PresidentJ.P. Peng (3)
    
    Director and Vice PresidentC.Y. Lu (3)
    
    Director and Senior Vice President of Microelectronics and Memory Solution GroupDing-Hua Hu (1)
    
    Executive Director
    
    
    113H.C. Chen
    
    Executive Director
    
    
    113Akira Takata
    
    Director
    
    
    63C.L. Liu
    
    Independent Director
    
    
    700Simon M. Sze
    
    Independent Director
    
    
    700Cheng Yi Fang (4)
    
    Independent Director
    
    
    700Ping Tien Wu
    
    Independent Supervisor
    
    
    700J. D. Lee
    
    Supervisor
    
    
    100
 
 (1)
    
    Resigned from the chairmanship, effective March 7, 2005(2)
    
    Succeeded to the chairmanship, effective March 7, 2005(3)
    
    Total compensation for Dang-Hsing Yiu, Raymond S. Mak, Yaou-Dong Wang, J.P. Peng, and C.Y. Lu(4)
    
    Resigned as supervisor and re-elected as independent director, effective June 18, 2004    C. Board Practices
     64




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##### Table of Contents



Audit Committee
   Difference between NASDAQ Requirements and Home Country Practices
      D. Employees
  65




---



##### Table of Contents



Year ended December 31,Position
    
    2003
    
    
    2004
    
    
    2005Executive and Senior Managers
    
    
    278
    
    
    
    313
    
    
    
    325Supporting Staff and Administrators
    
    
    173
    
    
    
    277
    
    
    
    264Engineers and Technicians
    
    
    1,503
    
    
    
    1,562
    
    
    
    1,531OperationsLocal
    
    
    1,299
    
    
    
    1,223
    
    
    
    1,178Overseas
    
    
    181
    
    
    
    218
    
    
    
    231Total
    
    
    3,434
    
    
    
    3,593
    
    
    
    3,529
    E. Share Ownership
  66




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##### Table of Contents



Shares owned bySpouses and minorShare Ownership
    
    
    childrenNumber
    
    
    
    
    
    
    Number ofTitle
    
    Name
    
    of Shares
    
    
    Percentage
    
    
    Shares
    
    
    PercentageExecutive Director, Chairman and
President
    
    Miin Wu (1)
    
    
    18,055,841
    
    
    
    0.62
    %
    
    
    
    
    
    
    Executive Director
    
    Ding-Hua Hu (2)
    
    
    2,334,854
    
    
    
    0.08
    %
    
    
    
    
    
    
    Executive Director
    
    H. C. Chen (3)
    
    
    603,647
    
    
    
    0.02
    %
    
    
    
    
    
    
    Director and Senior Vice President of
Integrated Solution Group
    
    Dang-Hsing Yiu
    
    
    10,090,724
    
    
    
    0.35
    %
    
    
    2,335,263
    
    
    
    0.08
    %Director and Senior Vice President of
Microelectronics and Memory Solution
Group
    
    C.Y. Lu
    
    
    1,357,264
    
    
    
    0.05
    %
    
    
    
    
    
    
    Director and Vice President
    
    Raymond S. Mak
    
    
    4,045,506
    
    
    
    0.14
    %
    
    
    
    
    
    
    Director and Vice President
    
    Yaou Dong Wang
    
    
    3,288,788
    
    
    
    0.11
    %
    
    
    712,829
    
    
    
    0.03
    %Director and Vice President
    
    J.P. Peng (4)
    
    
    3,515,795
    
    
    
    0.12
    %
    
    
    
    
    
    
    Director
    
    Akira Takata (5)
    
    
    70,074,805
    
    
    
    2.40
    %
    
    
    
    
    
    
    Independent Director
    
    C.L. Liu
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    Independent Director
    
    Simon M. Sze
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Independent Director
    
    Cheng Yi Fang
    
    
    634,344
    
    
    
    0.02
    %
    
    
    210,659
    
    
    
    0.01
    %Independent Supervisor
    
    Ping Tien Wu
    
    
    115,860
    
    
    
    <0.01
    %
    
    
    
    
    
    
    Supervisor
    
    J.D. Lee (5)
    
    
    70,074,805
    
    
    
    2.40
    %
    
    
    
    
    
    
    Associate Vice President, Finance Center
    
    Paul Yeh
    
    
    4,517,418
    
    
    
    0.15
    %
    
    
    25,134
    
    
    
    <0.01
    %
 
 (1)
    
    Succeeded to the chairmanship, effective March 7, 2005.(2)
    
    Nominee of Champion Investment Corporation. Resigned from the chairmanship, effective March
7, 2005.(3)
    
    Nominee of Hung Chih Investment Corporation.(4)
    
    Nominee of Hui Yin Investment Corporation.(5)
    
    Nominee of Shun Yin Investment Co., Ltd. 67




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##### Table of Contents



F. Stock Plans
 Stock Performance-Based Employee Bonus Plan
    Share Option Plans
    68




---



##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions
 A. Major Shareholders
  Percentage of totalNumber of
    
    outstandingName of Shareholder
    
    common shares
    
    common sharesShun Ying Investment Co., Ltd.
    
    
    70,074,805
    
    
    
    2.40
    %National Stabilization Fund
    
    
    38,395,004
    
    
    
    1.31
    %Kuo Hua Life Insurance Co., Ltd.
    
    
    35,333,345
    
    
    
    1.21
    %ABP Pension Fund
    
    
    20,966,767
    
    
    
    0.71
    %Miin Wu
    
    
    18,055,841
    
    
    
    0.61
    %
 69




---



##### Table of Contents



B. Related Party Transactions
       70




---



##### Table of Contents



Item 8. Financial Information
 A. Consolidated Statements and Other Financial Information
    71




---



##### Table of Contents



Year ended, and as of, December 31,(in millions except per share and ADS data)2001
    
    

2002
(Notes)
    
    

2003
(Notes)
    
    

2004
(Notes)
    
    
    2005
    
    
    2005(NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (US$)Consolidated Income Statement Data:R.O.C. GAAPNet sales revenue
    
    
    21,747
    
    
    
    16,492
    
    
    
    17,712
    
    
    
    23,380
    
    
    
    18,908
    
    
    
    576.5Cost of goods sold
    
    
    (11,674
    )
    
    
    (17,105
    )
    
    
    (20,657
    )
    
    
    (18,990
    )
    
    
    (18,666
    )
    
    
    (569.1
    )Less: Unrealized profit as of December 31
    
    
    
    
    
    
    (2
    )
    
    
    3
    
    
    
    (1
    )
    
    
    
    
    
    
    Realized gross profit (loss)
    
    
    10,073
    
    
    
    (615
    )
    
    
    (2,942
    )
    
    
    4,388
    
    
    
    242
    
    
    
    7.4Operating expenses
    
    
    (6,557
    )
    
    
    (6,212
    )
    
    
    (4,742
    )
    
    
    (4,737
    )
    
    
    (5,116
    )
    
    
    (156.0
    )Operating income (loss)
    
    
    3,516
    
    
    
    (6,827
    )
    
    
    (7,684
    )
    
    
    (349
    )
    
    
    (4,875
    )
    
    
    (148.6
    )Total other income
    
    
    1,356
    
    
    
    466
    
    
    
    1,877
    
    
    
    1,619
    
    
    
    1,197
    
    
    
    36.5Total other expenses
    
    
    (4,795
    )
    
    
    (4,976
    )
    
    
    (2,370
    )
    
    
    (1,023
    )
    
    
    (3,205
    )
    
    
    (97.7
    )Income (loss) before taxes and minority interest
    
    
    77
    
    
    
    (11,337
    )
    
    
    (8,177
    )
    
    
    247
    
    
    
    (6,882
    )
    
    
    (210.0
    )Income tax benefit (expense )
    
    
    (943
    )
    
    
    (20
    )
    
    
    (21
    )
    
    
    (35
    )
    
    
    (215
    )
    
    
    (6.6
    )Income (loss) before minority interest
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    212
    
    
    
    (7,098
    )
    
    
    (216.4
    )Minority interest loss
    
    
    
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    5
    
    
    
    70
    
    
    
    2.1Net Income (loss)
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    218
    
    
    
    (7,027
    )
    
    
    (214.2
    )Net income (loss) per share  basic (1)
    
    
    (0.40
    )
    
    
    (5.32
    )
    
    
    (3.65
    )
    
    
    0.08
    
    
    
    (2.41
    )
    
    
    (0.07
    )Net income (loss) per share  diluted (1)
    
    
    (0.40
    )
    
    
    (5.32
    )
    
    
    (3.65
    )
    
    
    0.08
    
    
    
    (2.41
    )
    
    
    (0.07
    )U.S. GAAPGross profit (loss)
    
    
    6,598
    
    
    
    (4,018
    )
    
    
    (1,576
    )
    
    
    5,052
    
    
    
    688
    
    
    
    21.0Operating income (loss)
    
    
    (2,263
    )
    
    
    (10,186
    )
    
    
    (6,614
    )
    
    
    335
    
    
    
    (4,356
    )
    
    
    (132.8
    )Net income (loss) before cumulative effect
of change in accounting principle in
accordance with U.S. GAAP
    
    
    (3,842
    )
    
    
    (13,674
    )
    
    
    (8,027
    )
    
    
    (469
    )
    
    
    (4,636
    )
    
    
    (141.3
    )Basic net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP
    
    
    (1.79
    )
    
    
    (6.39
    )
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )Diluted net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP
    
    
    (1.79
    )
    
    
    (6.39
    )
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )Net income (loss) (2)
    
    
    (4,463
    )
    
    
    (13,674
    )
    
    
    (8,027
    )
    
    
    (469
    )
    
    
    (4,636
    )
    
    
    (141.3
    )Net income
(loss) per sharebasic (1) (3)
    
    
    (2.07
    )
    
    
    (6.39
    )
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )Net income (loss) per share diluted (1)(3)
    
    
    (2.07
    )
    
    
    (6.39
    )
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )Balance Sheet Data:R.O.C. GAAPTotal current assets
    
    
    25,358
    
    
    
    21,301
    
    
    
    21,002
    
    
    
    21,706
    
    
    
    20,027
    
    
    
    610.6Net property, plant and equipment
    
    
    39,562
    
    
    
    40,029
    
    
    
    32,600
    
    
    
    27,993
    
    
    
    16,202
    
    
    
    494.0Total assets
    
    
    71,693
    
    
    
    67,450
    
    
    
    59,919
    
    
    
    54,396
    
    
    
    45,604
    
    
    
    1,390.4Total current liabilities
    
    
    9,016
    
    
    
    17,687
    
    
    
    18,717
    
    
    
    9,449
    
    
    
    10,664
    
    
    
    325.1Long -term liabilities
    
    
    19,533
    
    
    
    19,549
    
    
    
    11,954
    
    
    
    10,602
    
    
    
    6,180
    
    
    
    188.4Total liabilities
    
    
    28,549
    
    
    
    37,236
    
    
    
    30,671
    
    
    
    20,051
    
    
    
    16,844
    
    
    
    513.5Total shareholders equity
    
    
    43,144
    
    
    
    30,214
    
    
    
    29,248
    
    
    
    34,344
    
    
    
    28,558
    
    
    
    870.7U.S. GAAPTotal current assets
    
    
    26,646
    
    
    
    21,037
    
    
    
    21,398
    
    
    
    21,716
    
    
    
    19,832
    
    
    
    604.6Total assets
    
    
    72,979
    
    
    
    65,509
    
    
    
    59,200
    
    
    
    52,807
    
    
    
    46,220
    
    
    
    1,409.1Total current liabilities
    
    
    10,152
    
    
    
    18,127
    
    
    
    18,986
    
    
    
    9,445
    
    
    
    10,699
    
    
    
    326.2Total liabilities
    
    
    29,679
    
    
    
    36,991
    
    
    
    71,051
    
    
    
    20,052
    
    
    
    16,877
    
    
    
    514.5Total shareholders equity
    
    
    43,300
    
    
    
    28,518
    
    
    
    28,149
    
    
    
    32,755
    
    
    
    29,264
    
    
    
    892.2Other Data:R.O.C. GAAPCapital expenditures
    
    
    9,078
    
    
    
    8,975
    
    
    
    1,606
    
    
    
    2,554
    
    
    
    1,595
    
    
    
    48.6Depreciation and amortization
    
    
    8,006
    
    
    
    8,742
    
    
    
    9,287
    
    
    
    7,562
    
    
    
    7,253
    
    
    
    221.1Net cash provided by operating activities
    
    
    9,209
    
    
    
    217
    
    
    
    1,484
    
    
    
    5,987
    
    
    
    4,397
    
    
    
    134.1Net income (loss) per ADS  basic
    
    
    (4.0
    )
    
    
    (53.2
    )
    
    
    (36.5
    )
    
    
    0.80
    
    
    
    (24.1
    )
    
    
    (0.70
    )Net income (loss) per ADS  diluted
    
    
    (4.0
    )
    
    
    (53.2
    )
    
    
    (36.5
    )
    
    
    0.80
    
    
    
    (24.1
    )
    
    
    (0.70
    )Number of common shares outstanding
(weighted, as adjusted ) (4)
    
    
    2,157
    
    
    
    2,140
    
    
    
    2,272
    
    
    
    2,822
    
    
    
    2,912
    
    
    
    2,912Stock dividend per common share (5)
    
    
    30
    %
    
    
    10
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Note: 2002, 2003 and 2004
U.S. GAAP data were restated. 72




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##### Table of Contents



(1)
    
    Retroactively adjusted for our capital reduction in 2006 and all subsequent stock dividends
and employee bonuses declared.(2)
    
    The difference between net income under R.O.C. GAAP and U.S. GAAP was largely derived from
different treatments under these two accounting principles with respect to employee bonus
shares, derivative contracts, plant capacity loss, other-than-temporary decline in value on
marketable securities, and convertible debt securities with beneficial conversion features.
The difference in accounting treatment with respect to employee bonus shares under the two
accounting principles resulted in an additional expense of NT$4,273 million in 2001, no
additional expense or income in 2002 and 2003, 2004 and 2005. The differences of accounting
treatment with respect to derivative contracts under the two accounting principles resulted in
additional income of NT$228 million in 2001, additional income
of NT$616 million in 2002,
additional expense of NT$379 million in 2003, additional income
of NT$34 million in 2004 and additional expense of
NT$32 million (US$1.0 million) in 2005. The
difference in accounting treatment with respect to plant capacity loss under the two
accounting principles resulted in an additional income of NT$528 million in 2001, an
additional expense of NT$528 million in 2002, additional income of NT$269 million in 2003,
an additional expense of NT$258 million in 2004 and an
additional income of NT$0.4 million (US$0.01 million) in 2005.
The difference in accounting treatment with respect to other-than-temporary decline in value
on marketable securities under the two accounting principles resulted in an additional expense
of NT$646 million in 2001, an additional expense of NT$538 million in 2002, no additional
expense or income in 2003, an additional expense of
NT$448 million in 2004 and additional income of NT$1,326 million
(US$40.4 million) in 2005.(3)
    
    Retroactively adjusted for our capital reduction in 2006, all subsequent stock dividends and
employee bonuses declared. See note 22 to our consolidated financial statements for the years
ended December 31, 2003, 2004 and 2005 included in this annual report and Item 5. Operating
and Financial Review and Prospects  A. Operating Results  U.S. GAAP Reconciliation.(4)
    
    Common shares outstanding weighted, as adjusted for our capital reduction in 2006, any
employee share bonus and any subsequent stock dividends declared.(5)
    
    The percentage of our stock dividend is determined by the number of common shares we
distributed to existing shareholders divided by the common shares outstanding immediately
prior to the share issuance. We did not distribute any cash dividends in any of the periods
presented. Export Sales
   For the year ended December 31,2003
    
    
    2004
    
    
    2005NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(in thousands)Japan
    
    
    7,269,548
    
    
    
    8,363,806
    
    
    
    7,706,521
    
    
    
    234,955Singapore and Hong Kong
    
    
    3,487,250
    
    
    
    5,119,396
    
    
    
    4,076,395
    
    
    
    124,280United States
    
    
    823,145
    
    
    
    980,911
    
    
    
    629,235
    
    
    
    19,184Europe
    
    
    453,641
    
    
    
    1,077,416
    
    
    
    888,867
    
    
    
    27,094Total
    
    
    12,033,584
    
    
    
    15,541,521
    
    
    
    13,300,838
    
    
    
    405,513
 Dividend Policy
  73




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Legal Proceedings
   74




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##### Table of Contents



Ô
  B. Significant Changes
  
 Item 9. The Offer and Listing
 A. Offer and Listing Details
  Average daily tradingvolume (in thousands
    
    Nasdaq CompositeClosing Price Per ADS(1)
    
    of ADSs)(1)
    
    IndexHigh
    
    Low
    
    
    
    
    
    High
    
    Low(US$)
    
    (US$)2001
    
    
    21.76
    
    
    
    6.62
    
    
    
    37.796
    
    
    
    2,859.15
    
    
    
    1,423.192002
    
    
    14.64
    
    
    
    4.68
    
    
    
    31.127
    
    
    
    2,059.38
    
    
    
    1,114.112003
    
    
    6.25
    
    
    
    2.06
    
    
    
    15.467
    
    
    
    2,009.88
    
    
    
    1,271.47First Quarter
    
    
    6.25
    
    
    
    4.37
    
    
    
    9.360
    
    
    
    1,460.99
    
    
    
    1,271.47Second Quarter
    
    
    4.63
    
    
    
    2.06
    
    
    
    29.994
    
    
    
    1,677.14
    
    
    
    1,348.30Third Quarter
    
    
    4.99
    
    
    
    3.75
    
    
    
    12.679
    
    
    
    1,909.55
    
    
    
    1,640.13Fourth Quarter
    
    
    5.43
    
    
    
    3.60
    
    
    
    9.777
    
    
    
    1,976.37
    
    
    
    1,832.252004
    
    
    8.79
    
    
    
    3.43
    
    
    
    9.868
    
    
    
    2,178.34
    
    
    
    1,752.49First Quarter
    
    
    6.68
    
    
    
    4.09
    
    
    
    16.480
    
    
    
    2,153.83
    
    
    
    1,901.80Second Quarter
    
    
    8.79
    
    
    
    4.88
    
    
    
    10.066
    
    
    
    2,079.12
    
    
    
    1,876.64Third Quarter
    
    
    5.57
    
    
    
    3.77
    
    
    
    7.594
    
    
    
    2,015.55
    
    
    
    1,752.49Fourth Quarter
    
    
    4.35
    
    
    
    3.43
    
    
    
    5.541
    
    
    
    2,178.34
    
    
    
    1,903.022005
    
    
    3.80
    
    
    
    1.56
    
    
    
    6.175
    
    
    
    2,273.37
    
    
    
    1,904.18First Quarter
    
    
    3.80
    
    
    
    2.23
    
    
    
    7.881
    
    
    
    2,152.15
    
    
    
    1,973.88Second Quarter
    
    
    3.43
    
    
    
    2.12
    
    
    
    3.653
    
    
    
    2,097.80
    
    
    
    1,904.18Third Quarter
    
    
    3.53
    
    
    
    1.60
    
    
    
    5.186
    
    
    
    2,218.15
    
    
    
    2,045.20Fourth Quarter
    
    
    2.71
    
    
    
    1.56
    
    
    
    7.614
    
    
    
    2,273.37
    
    
    
    2,037.47December
    
    
    2.71
    
    
    
    1.97
    
    
    
    9.889
    
    
    
    2,273.37
    
    
    
    2,205.322006January
    
    
    3.14
    
    
    
    2.36
    
    
    
    10.444
    
    
    
    2,231.36
    
    
    
    2,243.74February
    
    
    2.66
    
    
    
    2.28
    
    
    
    1.767
    
    
    
    2,310.56
    
    
    
    2,239.81March
    
    
    2.36
    
    
    
    2.00
    
    
    
    6.623
    
    
    
    2,340.82
    
    
    
    2,249.72April
    
    
    2.57
    
    
    
    2.16
    
    
    
    18.484
    
    
    
    2,370.88
    
    
    
    2,310.35May
    
    
    3.06
    
    
    
    2.41
    
    
    
    7.865
    
    
    
    2,344.99
    
    
    
    2,158.76June (through June 20)
    
    
    2.50
    
    
    
    1.61
    
    
    
    5.434
    
    
    
    2,219.86
    
    
    
    2,072.47
 
 Source: Bloomberg L.P. 75




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##### Table of Contents



(1)
    
    As adjusted retroactively by Bloomberg L.P. to give effect to stock dividends paid in the
periods indicated.
  Average dailytrading volume(in thousands of
    
    Luxembourg StockClosing Price Per GDS(1)
    
    GDSs)(1 )
    
    Exchange IndexHigh
    
    Low
    
    
    
    
    
    High
    
    Low(US$)
    
    (US$)2004Second Quarter (from April 5)
    
    
    20.90
    
    
    
    13.05
    
    
    
    0
    
    
    
    1,097.30
    
    
    
    992.73Third Quarter
    
    
    12.47
    
    
    
    8.8
    
    
    
    0
    
    
    
    1,104.12
    
    
    
    1,019.37Fourth Quarter
    
    
    9.20
    
    
    
    8.35
    
    
    
    0
    
    
    
    1,294.63
    
    
    
    1,112.89December
    
    
    9.20
    
    
    
    8.75
    
    
    
    0
    
    
    
    1,294.63
    
    
    
    1,223.832005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,639.50
    
    
    
    1,281.26First Quarter
    
    
    8.00
    
    
    
    5.25
    
    
    
    0
    
    
    
    1,396.69
    
    
    
    1,281.26Second Quarter
    
    
    7.50
    
    
    
    5.07
    
    
    
    0
    
    
    
    1,380.98
    
    
    
    1,295.92Third Quarter
    
    
    7.80
    
    
    
    3.80
    
    
    
    0
    
    
    
    1,491.42
    
    
    
    1,358.45Fourth Quarter
    
    
    6.39
    
    
    
    4.25
    
    
    
    0
    
    
    
    1,639.50
    
    
    
    1,440.26December
    
    
    6.39
    
    
    
    4.96
    
    
    
    0
    
    
    
    1,639.50
    
    
    
    1,553.652006January
    
    
    7.11
    
    
    
    6.32
    
    
    
    0
    
    
    
    1,850.35
    
    
    
    1,646.31February
    
    
    6.16
    
    
    
    5.17
    
    
    
    0
    
    
    
    1,920.35
    
    
    
    1,855.48March
    
    
    5.22
    
    
    
    4.67
    
    
    
    0
    
    
    
    1,896.57
    
    
    
    1,832.20April
    
    
    5.37
    
    
    
    5.11
    
    
    
    0
    
    
    
    1,902.02
    
    
    
    1,843.42May
    
    
    N/A
    
    
    
    N/A
    
    
    
    0
    
    
    
    1,949.33
    
    
    
    1,767.01June (through June 20)
    
    
    N/A
    
    
    
    N/A
    
    
    
    0
    
    
    
    1,778.72
    
    
    
    1,667.50
 
 Source: Bloomberg L.P.(1)
    
    Average includes only days in which GDSs were traded.  76




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Average dailytrading volume(in thousands of
    
    Taiwan StockClosing Price Per Share (1)
    
    shares)
    
    Exchange IndexHigh
    
    Low
    
    
    
    
    
    High
    
    Low(NT$)
    
    (NT$)2001
    
    
    68.89
    
    
    
    24.92
    
    
    
    38,127
    
    
    
    6,104.24
    
    
    
    3,446.262002
    
    
    50.93
    
    
    
    15.76
    
    
    
    34,149
    
    
    
    6,462.36
    
    
    
    3,850.042003
    
    
    21.84
    
    
    
    7.06
    
    
    
    25,556
    
    
    
    6,142.32
    
    
    
    4,139.502004
    
    
    28.78
    
    
    
    11.22
    
    
    
    35,877
    
    
    
    7,034.10
    
    
    
    5,316.87First Quarter
    
    
    15.85
    
    
    
    13.71
    
    
    
    31,124
    
    
    
    7,034.10
    
    
    
    6,041.56Second Quarter
    
    
    28.78
    
    
    
    16.96
    
    
    
    58,700
    
    
    
    6,880.18
    
    
    
    5,482.96Third Quarter
    
    
    18.50
    
    
    
    12.16
    
    
    
    17,516
    
    
    
    5,970.18
    
    
    
    5,316.87Fourth Quarter
    
    
    14.05
    
    
    
    11.22
    
    
    
    16,589
    
    
    
    6,139.69
    
    
    
    5,650.97December
    
    
    14.05
    
    
    
    11.65
    
    
    
    21,857
    
    
    
    6,139.69
    
    
    
    5,798.622005
    
    
    12.33
    
    
    
    5.19
    
    
    
    19,258
    
    
    
    6,575.53
    
    
    
    5,632.97First Quarter
    
    
    12.33
    
    
    
    7.02
    
    
    
    19,094
    
    
    
    6,259.69
    
    
    
    5,771.48Second Quarter
    
    
    10.55
    
    
    
    6.96
    
    
    
    22,619
    
    
    
    6,373.86
    
    
    
    5,693.01Third Quarter
    
    
    10.69
    
    
    
    5.19
    
    
    
    16,588
    
    
    
    6,455.57
    
    
    
    5,925.54Fourth Quarter
    
    
    9.01
    
    
    
    5.33
    
    
    
    18,725
    
    
    
    6,575.53
    
    
    
    5,632.97December
    
    
    9.01
    
    
    
    6.82
    
    
    
    29,507
    
    
    
    6,575.53
    
    
    
    6,179.822006January
    
    
    10.19
    
    
    
    7.81
    
    
    
    35,624
    
    
    
    6,742.39
    
    
    
    6,381.97February
    
    
    8.87
    
    
    
    7.20
    
    
    
    15,770
    
    
    
    6,720.08
    
    
    
    6,474.69March
    
    
    7.62
    
    
    
    6.41
    
    
    
    13,509
    
    
    
    6,642.96
    
    
    
    6,364.60April
    
    
    7.88
    
    
    
    6.89
    
    
    
    20,422
    
    
    
    7,171.77
    
    
    
    6,660.76May
    
    
    9.80
    
    
    
    8.43
    
    
    
    51,048
    
    
    
    7,474.05
    
    
    
    6,843.98June (through June 20)
    
    
    9.07
    
    
    
    7.04
    
    
    
    19,819
    
    
    
    6,959.64
    
    
    
    6,299.59
 
 Source: Bloomberg L.P.(1)
    
    As adjusted retroactively by Bloomberg L.P. to give effect to stock dividends paid in the
periods indicated.   The Taiwan Stock Exchange
   77




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##### Table of Contents




    
    shareholder diversification;
    
    length of time in business;
    
    amount of paid-in capital; and
    
    profitability.
  The GreTai Securities Market
  Taiwan Stock Exchange Index
   78




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##### Table of Contents



Number of listed
    
    
    
    
    
    
    
    
    
    Index atcompanies at
    
    Index
    
    Index
    
    periodPeriod ended December 31,
    
    the period end
    
    high
    
    low
    
    end1990
    
    
    199
    
    
    
    12,495
    
    
    
    2,560
    
    
    
    4,5301991
    
    
    221
    
    
    
    6,305
    
    
    
    3,316
    
    
    
    4,6011992
    
    
    256
    
    
    
    5,392
    
    
    
    3,328
    
    
    
    3,3771993
    
    
    285
    
    
    
    6,071
    
    
    
    3,136
    
    
    
    6,0711994
    
    
    313
    
    
    
    7,184
    
    
    
    5,195
    
    
    
    7,1251995
    
    
    347
    
    
    
    7,051
    
    
    
    4,503
    
    
    
    5,1741996
    
    
    375
    
    
    
    6,983
    
    
    
    4,690
    
    
    
    6,9341997
    
    
    404
    
    
    
    10,117
    
    
    
    6,820
    
    
    
    8,1871998
    
    
    437
    
    
    
    9,277
    
    
    
    6,251
    
    
    
    6,4181999
    
    
    462
    
    
    
    8,609
    
    
    
    5,475
    
    
    
    8,4492000
    
    
    474
    
    
    
    10,202
    
    
    
    8,350
    
    
    
    8,8432001
    
    
    584
    
    
    
    5,551
    
    
    
    4,647
    
    
    
    5,5512002
    
    
    638
    
    
    
    6,462
    
    
    
    3,850
    
    
    
    4,4522003
    
    
    669
    
    
    
    6,142
    
    
    
    4,140
    
    
    
    5,8912004
    
    
    697
    
    
    
    7,034
    
    
    
    5,317
    
    
    
    6,1402005
    
    
    691
    
    
    
    6,575
    
    
    
    5,632
    
    
    
    6,548
 
 Sources: Status of Securities Listed on Taiwan Stock Exchange.  B. Plan of distribution
  C. Markets
  D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  
 Item 10. Additional Information
 A. Share Capital
  B. Memorandum and Articles of Association
 Description of Our Common Shares
   79




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General
     
    
    the approval of the board of directors;
    
    an amendment to the articles of incorporation (which requires shareholder approval) if
the original paid-in share capital plus the number of the shares to be converted from the
convertible bonds or exercised from bonds with warrants, or to be exercised from employee
options, or the number of any new shares issued, exceeds the number of shares specified in
the articles of incorporation; and
    
    the approval of the R.O.C. Securities and Futures Commission and the R.O.C. Ministry of
Economic Affairs or the Hsinchu Science Park Administration, as applicable.
 Increase in Capital; Delivery of Certificates
   
    
    issue multiple share certificates and deliver them to shareholders;
    
    issue a single share certificate representing the total number of new shares and deposit
the certificate with the Taiwan Securities Central Depositary Co., Ltd. (the Central
Depositary); or
    
    register the new hares with the Central Depositary in lieu of issuing share certificates.
 Dividends and Distributions
  80




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
    
    83% as a dividend to shareholders;
    
    15% for bonuses to employees; and
    
    2% for remuneration to directors and supervisors.
      Preemptive Rights and Issues of Additional Common Shares
   81




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Meetings of Shareholders
   Voting Rights
   
    
    any amendment to the articles of incorporation, which is required, among other things,
for any increase in authorized share capital;
    
    entering into, modification or termination of any contracts regarding leasing of all
business, outsourcing of operations or joint operations;
    
    the dissolution, amalgamation or spin-off of a company;
    
    the removing of directors or supervisors;
    
    the transfer of the whole or an important part of a companys business or properties;
    
    the taking over of the whole of the business or properties of any other company which
would have a significant impact on the acquiring companys operations; or
    
    the distribution of any share dividend.
   Other Rights of Shareholders
  82




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Register of Shareholders and Record Dates
    Annual Financial Statements
  Acquisition of Common Shares by our Company
   
    
    for share transfer to our employees;
    
    for the delivery of shares following the conversion or exercise of bonds with warrants,
preferred shares with warrants, convertible bonds, convertible preferred shares or
certificates of warrants issued by us; and
    
    for maintaining our credit and our shareholders equity, except that the shares so
purchased shall be cancelled thereafter.
  83




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Liquidation Rights
  Transfer Restrictions
  Voting Rights of ADS Holders
      84




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##### Table of Contents



C. Material Contracts
  Indenture for Zero Coupon Convertible Bonds Due February 10, 2008
  85




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##### Table of Contents



GDS Deposit Agreement Dated April 5, 2004
       Rights Issues
  (1)
    
    if and to the extent that the depositary shall, at its discretion, deem it to be lawful
and reasonably practicable, the depositary shall make arrangements whereby the GDS holders
may, upon payment of the subscription price together with such fees, taxes, duties, charges,
costs and expenses as may be required under the deposit agreement and completion of such
undertakings, declarations, certifications and other documents as the depositary may
reasonably require, request the depositary to exercise such rights on their behalf with
respect to the deposited common shares and to distribute the common shares, securities or
other assets so subscribed or acquired to the holders entitled thereto by an increase in the
numbers of GDSs corresponding to the Master GDS
 86




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##### Table of Contents



(as defined in the deposit agreement) or an issue of certificates in definitive registered
form in respect of GDSs, according to the manner in which the holders hold their GDSs; or(2)
    
    if and to the extent that the depositary shall at its discretion, deem it to be lawful
and reasonably practicable, the depositary will distribute such rights to the holders
entitled thereto in such manner as the depositary may at its discretion determine; or(3)
    
    if and to the extent that the depositary deems any such arrangement and distribution as
is referred to in paragraphs (1) and (2) above to all or any holders not to be lawful and
reasonably practicable (including, without limitation, due to the fractions which would
otherwise result or to any requirement that we, the Custodian (as defined in the deposit
agreement) or the depositary withhold an amount on account of taxes or other governmental
charges) or to be unlawful, the depositary will, provided that holders have not taken up
rights through the depositary as provided in (1) above, sell such rights (either by public
or private sale and otherwise at its discretion subject to all applicable laws and
regulations) and distribute the net proceeds of such sale as a cash distribution pursuant to
the deposit agreement to the holders entitled thereto. If the depositary is unable to sell
such rights, it will allow such rights to lapse.
     Voting Rights of GDS Holders
   87




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88




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##### Table of Contents



D. Exchange Controls
 Foreign Exchange
  Period-End
    
    NT$ per US$1.001999
    
    
    31.392000
    
    
    33.172001
    
    
    35.002002
    
    
    34.702003:First Quarter
    
    
    34.72Second Quarter
    
    
    34.61Third Quarter
    
    
    33.78Fourth Quarter
    
    
    33.992004:First Quarter
    
    
    33.00Second Quarter
    
    
    33.66Third Quarter
    
    
    33.99Fourth Quarter
    
    
    31.742005:First Quarter
    
    
    31.46Second Quarter
    
    
    31.64Third Quarter
    
    
    33.18Fourth Quarter
    
    
    32.802006:January
    
    
    31.97February
    
    
    32.40March
    
    
    32.42April
    
    
    31.90May
    
    
    31.99June (through June 20)
    
    
    32.56
 
 Source:
    
    The noon buying rate in New York for cable transfers payable in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York.    89




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##### Table of Contents



E. Taxation
 R.O.C. Taxation
 General
   ADSs and GDSs
 Dividends.
 Sale
 Common Shares
 Dividends.
  Sale.
  Preemptive Rights.
 Inheritance Tax and Gift Tax
  90




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##### Table of Contents



Tax Treaties
   United States Federal Income Taxation
 General
   
    
    dealers in securities or currencies;
    
    traders in securities who elect to use a mark-to-market method of accounting for their securities holdings;
    
    banks;
    
    financial institutions;
    
    insurance companies;
    
    regulated investment companies;
    
    real estate investment trusts;
    
    persons who actually and constructively own less than 10% of our voting stock.
    
    tax-exempt organizations;
    
    persons liable for the alternative minimum tax;
 91




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##### Table of Contents




    
    persons who hold ADSs, GDSs or common shares as part of a hedging, integrated or
conversion transaction, constructive sale or straddle;
    
    persons who are citizens or residents of a possession or territory of the United States;
    
    persons who hold ADSs, GDSs or common shares pursuant to certain retirement plans;
    
    persons who receive ADSs, GDSs or common shares as compensation for services;
    
    persons whose functional currency is not the U.S. dollar; or
    
    partners in a partnership that holds ADSs, GDSs or common shares.
  
    
    on the federal income tax laws of the United States as in effect on the date of this
annual report, including the Internal Revenue Code of 1986, as amended (the Code),
judicial decisions, administrative pronouncements and Treasury regulations, changes to any
of which after the date of this annual report could apply on a retroactive basis and affect
the tax consequences described in this annual report; and
    
    in part, on representations by the depositary, and assumes that each obligation under the
applicable deposit agreement and any related agreements will be performed in accordance with
their terms.
  
    
    an individual who is a citizen or resident of the United States;
    
    a corporation (or other entity treated as a corporation) organized under the laws of the
United States or any State or the District of Columbia (a U.S. Corporation);
    
    an estate the income of which is subject to United States federal income taxation
regardless of its source;
    
    a trust if a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have the authority to
control all substantial decisions of the trust; or
    
    a trust that has a valid election in effect under applicable United States Treasury
regulations to be treated as a United States person.
    ADSs, GDSs and Common Shares
  92




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Taxation of Dividends
    Taxation of Sales or Other Dispositions
 R.O.C.
 93




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##### Table of Contents



Passive Foreign Investment Company Status
  
    
    at least 75% of our gross income for the taxable year is passive income; or
    
    at least 50% of the average percentage by value of our assets during the taxable year is
attributable to assets that produce or are held for the production of passive income.
   United States Federal Income Taxation of Non-United States Holders
  United States Backup Withholding Tax and Information Reporting
  94




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##### Table of Contents



F. Dividends and Paying Agents
  G. Statement by Experts
  H. Documents on Display
    I. Subsidiary Information
  
 Item 11. Quantitative and Qualitative Disclosure About Market Risk
               The exchange rates for Japanese yen as at December 31, 2005 is
based on the official exchange rate as determined by the Bank of
Taiwan, being NT$0.2796 = JPY1.00.             The exchange rates for U.S. dollars as at December 31, 2005 is
based on the official exchange rate as determined by the Bank of
Taiwan being NT$32.85 = US$1.00.
    
    
    Interest rates are derived from the prevailing interest rate swap
market in the respective currencies as at December 31, 2005.
 Interest Rates
   95




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##### Table of Contents



Principal (notional) amount by expected maturity for non-trading purposes
 Expected MaturityJanuary 1,
    
    January 1,
    
    January 1,
    
    January 1,
    
    January 1,2006 to
    
    2007 to
    
    2008 to
    
    2009 to
    
    2010 toDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    
    
    
    
    Fair value2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Total
    
    December 31, 2005NT$ in millionRate sensitive assetsCashVariable rate
    
    
    7,249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,252
    
    
    
    7,252Average
interest rate
    
    
    0.59
    %Fixed rate
    
    
    3,885
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,882
    
    
    
    3,882Average
interest rate
    
    
    1.29
    %Restricted deposit
    
    
    1,929
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,929
    
    
    
    1,929Fixed rate
    
    
    1.77
    %Rate sensitive liabilitiesShort term debt (US$
million)
    
    
    1,894
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,894
    
    
    
    1,894Variable rate
    
    
    4.48
    %Long term debtNT$ debtFixed rate
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    3,039Average interest rate
    
    
    3.3
    %Variable rate
    
    
    1,635
    
    
    
    2,384
    
    
    
    1,480
    
    
    
    1,480
    
    
    
    68
    
    
    
    7,048
    
    
    
    7,048Average interest rate
    
    
    2.73
    %
    
    
    2.39
    %
    
    
    2.70
    %
    
    
    2.70
    %
    
    
    3.47
    %
 Foreign Currencies
     96




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##### Table of Contents



Market Price Sensitivity Analysis
 Equity Contract
  5.
 
 Item 12. Description of Securities Other than Equity Securities
  
 PART II
 
 Item 13. Default, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
  
 Item 15. Controls and Procedures
      97




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##### Table of Contents



Item 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
   
 Item 16C. Principal Accountant Fees and Services
  2004
    
    
    2005(in thousands of NT$)Audit fees
    
    
    10,511
    
    
    
    10,202Audit-related fees
    
    
    4,028
    
    
    
    571Tax fees
    
    
    3,115
    
    
    
    1,989Others
    
    
    555
    
    
    
    1,910Total
    
    
    18,209
    
    
    
    14,672
 Audit-related Fees
  Tax Fees
  Others
  Pre-Approval of Services
  98




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##### Table of Contents



Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
 ExhibitNumber
    
    Description2b.1
    
    The Company hereby agrees to furnish to the Securities and
Exchange Commission, upon request, copies of instruments defining
the rights of holders of long-term debt of the Company and its
subsidiaries.3.1
    
    Articles of Incorporation of the Company (English translation).*8.1
    
    List of subsidiaries of the Company.*12.1
    
    Certifications of our President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*12.2
    
    Certifications of our Associate Vice President, Finance
Department, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*13.1
    
    Certifications of our President pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*13.2
    
    Certifications of our Associate Vice President, Finance
Department, pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*14.1
    
    Amended and Restated Deposit Agreement, dated as of February 7,
2002, among the Company, The Bank of New York, as depositary, and
Holders from time to time of American Depositary Receipts issued
thereunder, including the form of American Depositary Receipt(2).14.2
    
    Indenture, dated as of February 10, 2003, by and between the
Company and The Bank of New York, as trustee(3).14.3
    
    Land Lease Agreement, dated as of March 3, 1990, by and between
the Company and the Hsinchu Science-Based Industrial Park
Administration, in relation to Office Building and Fab I Site(4).14.4
    
    Land Lease Agreement, dated as of August 1, 1994, by and between
the Company and the Hsinchu Science-Based Industrial Park
Administration, in relation to Auxiliary Vehicular Facilities(5).14.5
    
    Land Lease Agreement, dated as of January 1, 1994, by and between
the Company and the Hsinchu Science-Based Industrial Park
Administration, in relation to Back-End Operation Plant(6).14.6
    
    Land Lease Agreement, dated as of June 1, 1995, by and between the
Company and the Hsinchu Science-Based Industrial Park
 99




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##### Table of Contents



ExhibitNumber
    
    DescriptionAdministration, in relation to Fab II and Fab III Site (7).14.7
    
    Deposit Agreement, dated as of April 5, 2004, among the Company,
Citibank, N.A., as depositary,
and Holders from time to time of Global Depositary Receipts issued
thereunder, including the form of Global Depositary Receipt(8).
 ExhibitNumber
    
    Description*
    
    Filed with this Form 20-F.(1)
    
    Incorporated by reference to Exhibit 3.1 to the Companys Form 20-F filed with the Commission on June 29, 2004.(2)
    
    Incorporated by reference to Exhibit 3(a) to the Companys Registration Statement on Form F-6 (File No. 333-8602) filed with the Commission on February 7, 2002.(3)
    
    Incorporated by reference to Exhibit 10.2 to the Companys Form 20-F filed with the Commission on July 1, 2003.(4)
    
    Incorporated by reference to Exhibit 10.6 to the Companys Registration Statement on Form F-1 (File No. 333-1870) filed with the Commission on March 1, 1996.(5)
    
    Incorporated by reference to Exhibit 10.7 to the Companys Registration Statement on Form F-1 (File No. 333-1870) filed with the Commission on March 1, 1996.(6)
    
    Incorporated by reference to Exhibit 10.8 to the Companys Registration Statement on Form F-1 (File No. 333-1870) filed with the Commission on March 1, 1996.(7)
    
    Incorporated by reference to Exhibit 10.9 to the Companys Registration Statement on Form F-1 (File No. 333-1870) filed with the Commission on March 1, 1996.(8)
    
    Incorporated by reference to Exhibit 14.9 to the Companys Form 20-F filed with the Commission on June 29, 2004.
 100




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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Consolidated Financial Statements of Macronix
International Co., Ltd. and its SubsidiariesIndependent Auditors Report
    
    
    F-2Consolidated Balance Sheets as of December 31, 2004 and 2005
    
    
    F-3Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2005
    
    
    F-5Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2005
    
    
    F-6Consolidated Statements of Shareholders Equity for each of
the three years in the period ended December 31, 2005
    
    
    F-8Notes to Consolidated Financial Statements
    
    
    F-9
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
       DIWAN, ERNST & YOUNG
CERTIFIED PUBLIC ACCOUNTANTS
  
 F-2




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2005
(Amounts in thousands except share and per share data)
 December 31ASSETS
    
    Notes
    
    2004
    
    2005NT$000
    
    NT$000
    
    US$000Current assetsCash and cash equivalents
    
    
    4
    
    
    
    10,115,688
    
    
    
    11,133,620
    
    
    
    339,440Restricted investments-current
    
    
    16
    
    
    
    2,429,606
    
    
    
    1,928,913
    
    
    
    58,808Short-term investments
    
    
    5
    
    
    
    918,040
    
    
    
    
    
    
    
    Notes and accounts receivable (net)
    
    
    6
    
    
    
    2,553,510
    
    
    
    2,006,456
    
    
    
    61,172Receivables from related parties
    
    
    23
    
    
    
    132,286
    
    
    
    707,095
    
    
    
    21,558Other receivables from related parties
    
    
    23
    
    
    
    
    
    
    
    38,379
    
    
    
    1,170Inventories (net)
    
    
    7
    
    
    
    4,826,241
    
    
    
    3,589,445
    
    
    
    109,434Deferred income taxes (net)
    
    
    18
    
    
    
    18,951
    
    
    
    19,494
    
    
    
    594Prepaid expenses
    
    
    
    
    
    
    496,326
    
    
    
    464,723
    
    
    
    14,169Others
    
    
    
    
    
    
    215,622
    
    
    
    139,295
    
    
    
    4,247Total current assets
    
    
    
    
    
    
    21,706,270
    
    
    
    20,027,420
    
    
    
    610,592Property, plant and equipment
    
    
    9,14Land
    
    
    
    
    
    
    1,288,720
    
    
    
    598,076
    
    
    
    18,234Buildings and facilities
    
    
    
    
    
    
    23,666,553
    
    
    
    15,833,841
    
    
    
    482,739Production equipment
    
    
    
    
    
    
    46,438,058
    
    
    
    49,780,215
    
    
    
    1,517,690Research and development equipment
    
    
    
    
    
    
    1,187,554
    
    
    
    2,388,842
    
    
    
    72,831Office furniture and equipment
    
    
    
    
    
    
    900,149
    
    
    
    907,391
    
    
    
    27,664Leased equipment
    
    
    
    
    
    
    1,754,540
    
    
    
    
    
    
    
    Construction in progress and prepaid equipment
    
    
    
    
    
    
    2,130,130
    
    
    
    285,338
    
    
    
    8,699Total property, plant and equipment
    
    
    
    
    
    
    77,365,704
    
    
    
    69,793,703
    
    
    
    2,127,857Less: Accumulated depreciation
    
    
    
    
    
    
    (49,372,239
    )
    
    
    (53,591,454
    )
    
    
    (1,633,886
    )Net property, plant and equipment
    
    
    
    
    
    
    27,993,465
    
    
    
    16,202,249
    
    
    
    493,971Deferred income taxes (net)
    
    
    18
    
    
    
    1,877,349
    
    
    
    1,679,447
    
    
    
    51,203Intangible assets (net)
    
    
    
    
    
    
    928,015
    
    
    
    810,010
    
    
    
    24,695Long-term investments
    
    
    8
    
    
    
    1,620,465
    
    
    
    1,226,753
    
    
    
    37,401Idle assets
    
    
    10
    
    
    
    
    
    
    
    314,802
    
    
    
    9,598Assets to be disposed (net)
    
    
    11
    
    
    
    
    
    
    
    5,300,000
    
    
    
    161,585Refundable deposits
    
    
    
    
    
    
    87,620
    
    
    
    17,506
    
    
    
    534Other assets
    
    
    
    
    
    
    182,492
    
    
    
    26,232
    
    
    
    800Total assets
    
    
    
    
    
    
    54,395,676
    
    
    
    45,604,419
    
    
    
    1,390,379
 See accompanying notes to consolidated financial statements.
 F-3




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
CONSOLIDATED BALANCE SHEETS-(Continued)
December 31, 2004 and 2005
(Amounts in thousands except share and per share data)
 December 31LIABILITIES
& SHAREHOLDERS EQUITY
    
    Notes
    
    2004
    
    2005NT$000
    
    NT$000
    
    US$000Current liabilitiesShort-term debts
    
    
    12
    
    
    
    2,896,854
    
    
    
    1,893,754
    
    
    
    57,736Short-term notes
    
    
    13
    
    
    
    99,924
    
    
    
    
    
    
    
    Current portion of capital lease obligations
    
    
    14
    
    
    
    303,446
    
    
    
    
    
    
    
    Current portion of long-term debts
    
    
    15
    
    
    
    2,196,469
    
    
    
    4,635,295
    
    
    
    141,320Notes and accounts payable
    
    
    
    
    
    
    1,685,279
    
    
    
    1,931,183
    
    
    
    58,878Payables to related parties
    
    
    23
    
    
    
    42,776
    
    
    
    79,413
    
    
    
    2,421Payables to equipment suppliers
    
    
    
    
    
    
    327,314
    
    
    
    147,958
    
    
    
    4,511Accrued expenses
    
    
    
    
    
    
    1,630,357
    
    
    
    1,667,294
    
    
    
    50,832Income taxes payable
    
    
    18
    
    
    
    197,218
    
    
    
    205,158
    
    
    
    6,255Others
    
    
    
    
    
    
    69,523
    
    
    
    104,110
    
    
    
    3,174Total current liabilities
    
    
    
    
    
    
    9,449,160
    
    
    
    10,664,165
    
    
    
    325,127Long-term liabilitiesLong-term debts, less current portion
    
    
    15
    
    
    
    10,313,038
    
    
    
    5,777,743
    
    
    
    176,151Accrued pension cost
    
    
    17
    
    
    
    278,656
    
    
    
    371,792
    
    
    
    11,335Credit balance of long term equity investments
    
    
    
    
    
    
    
    
    
    
    29,838
    
    
    
    910Other liabilities
    
    
    
    
    
    
    349
    
    
    
    143
    
    
    
    4Total liabilities
    
    
    
    
    
    
    20,041,203
    
    
    
    16,843,681
    
    
    
    513,527Commitments and contingencies
    
    
    24Shareholders equity
    
    
    19Common shares NT$10
par value, authorized 6,550,000,000
shares as of December 31, 2005
and issued 5,035,296,328 and 4,995,296,328
shares as of December 31, 2004 and 2005,
respectively.
    
    
    
    
    
    
    50,352,963
    
    
    
    49,952,963
    
    
    
    1,522,956Additional paid-in capital
    
    
    
    
    
    
    315,704
    
    
    
    
    
    
    
    Capital reserve
    
    
    
    
    
    
    39,945
    
    
    
    57,990
    
    
    
    1,768Accumulated deficits
    
    
    
    
    
    
    (13,886,018
    )
    
    
    (21,388,090
    )
    
    
    (652,076
    )Unrealized losses on long-term investments
    
    
    
    
    
    
    (1,351,527
    )
    
    
    
    
    
    
    Cumulative translation adjustments
    
    
    
    
    
    
    62,042
    
    
    
    77,902
    
    
    
    2,375Treasury stock
    
    
    21
    
    
    
    (1,188,436
    )
    
    
    (142,365
    )
    
    
    (4,340
    )Total shareholders equity
    
    
    
    
    
    
    34,344,673
    
    
    
    28,558,400
    
    
    
    870,683Minority interests
    
    
    
    
    
    
    9,800
    
    
    
    202,338
    
    
    
    6,169Total liabilities and shareholders equity
    
    
    
    
    
    
    54,395,676
    
    
    
    45,604,419
    
    
    
    1,390,379
 See accompanying notes to consolidated financial statements.
 F-4




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2003, 2004 and 2005
(Amounts in thousands except share and per share data)
 For the year ended December 31Notes
    
    
    2003
    
    
    2004
    
    
    2005NT$000
    
    
    NT$000
    
    
    NT$000
    
    
    US$000Sales revenue
    
    
    
    
    
    
    18,058,229
    
    
    
    23,499,507
    
    
    
    18,990,422
    
    
    
    578,976Less: Sales returns
    
    
    
    
    
    
    (313,544
    )
    
    
    (30,453
    )
    
    
    (51,047
    )
    
    
    (1,556
    )Sales discounts
    
    
    
    
    
    
    (32,498
    )
    
    
    (89,331
    )
    
    
    (31,239
    )
    
    
    (952
    )Net sales revenue
    
    
    
    
    
    
    17,712,187
    
    
    
    23,379,723
    
    
    
    18,908,136
    
    
    
    576,468Cost of goods sold
    
    
    
    
    
    
    (20,656,731
    )
    
    
    (18,990,296
    )
    
    
    (18,666,372
    )
    
    
    (569,097
    )Gross profit (loss)
    
    
    
    
    
    
    (2,944,544
    )
    
    
    4,389,427
    
    
    
    241,764
    
    
    
    7,371Less: Unrealized profit
    
    
    
    
    
    
    2,895
    
    
    
    (1,451
    )
    
    
    
    
    
    
    Realized gross profit (loss)
    
    
    
    
    
    
    (2,941,649
    )
    
    
    4,387,976
    
    
    
    241,764
    
    
    
    7,371Operating expensesSelling expenses
    
    
    
    
    
    
    (560,660
    )
    
    
    (729,246
    )
    
    
    (699,370
    )
    
    
    (21,322
    )Administrative expenses
    
    
    
    
    
    
    (1,443,449
    )
    
    
    (1,430,617
    )
    
    
    (1,307,283
    )
    
    
    (39,856
    )Research and development expenses
    
    
    
    
    
    
    (2,738,231
    )
    
    
    (2,576,801
    )
    
    
    (3,109,670
    )
    
    
    (94,807
    )Total operating expenses
    
    
    
    
    
    
    (4,742,340
    )
    
    
    (4,736,664
    )
    
    
    (5,116,323
    )
    
    
    (155,985
    )Operating income (loss)
    
    
    
    
    
    
    (7,683,989
    )
    
    
    (348,688
    )
    
    
    (4,874,559
    )
    
    
    (148,614
    )Non-operating incomeResearch and development subsidies
    
    
    
    
    
    
    5,125
    
    
    
    18,125
    
    
    
    21,918
    
    
    
    668Interest income
    
    
    
    
    
    
    103,847
    
    
    
    101,646
    
    
    
    99,860
    
    
    
    3,045Dividend income
    
    
    
    
    
    
    11,349
    
    
    
    23,589
    
    
    
    36,852
    
    
    
    1,124Reversal of allowance for bad debts
    
    
    
    
    
    
    34,476
    
    
    
    6,119
    
    
    
    50,712
    
    
    
    1,546Foreign exchange gain
    
    
    
    
    
    
    375,087
    
    
    
    
    
    
    
    
    
    
    
    Gain on disposal of property,
plant and equipment
    
    
    
    
    
    
    308
    
    
    
    3,408
    
    
    
    396
    
    
    
    12Gain on disposal of long-term
investments
    
    
    
    
    
    
    63,565
    
    
    
    374,806
    
    
    
    23,898
    
    
    
    729Net gain on short-term investments
    
    
    
    
    
    
    43,591
    
    
    
    10,209
    
    
    
    365,304
    
    
    
    11,137Reversal of inventory and spare
parts loss provision
    
    
    
    
    
    
    1,185,227
    
    
    
    918,545
    
    
    
    476,780
    
    
    
    14,536Others
    
    
    
    
    
    
    54,009
    
    
    
    162,601
    
    
    
    121,222
    
    
    
    3,696Total other income
    
    
    
    
    
    
    1,876,584
    
    
    
    1,619,048
    
    
    
    1,196,942
    
    
    
    36,493Non-operating expensesInterest expense
    
    
    
    
    
    
    (1,077,898
    )
    
    
    (684,105
    )
    
    
    (377,261
    )
    
    
    (11,502
    )Foreign exchange loss
    
    
    
    
    
    
    
    
    
    
    (154,023
    )
    
    
    (88,395
    )
    
    
    (2,695
    )Net loss from equity investment
    
    
    
    
    
    
    (87,219
    )
    
    
    (99,073
    )
    
    
    (89,525
    )
    
    
    (2,729
    )Net investment loss
    
    
    
    
    
    
    (737,382
    )
    
    
    (56,218
    )
    
    
    (1,536,483
    )
    
    
    (46,844
    )Impairment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (905,658
    )
    
    
    (27,612
    )Loss on allowance for prepaid
expenses
    
    
    
    
    
    
    (334,971
    )
    
    
    
    
    
    
    (141,711
    )
    
    
    (4,321
    )Others
    
    
    
    
    
    
    (132,162
    )
    
    
    (29,801
    )
    
    
    (65,472
    )
    
    
    (1,996
    )Total other expenses
    
    
    
    
    
    
    (2,369,632
    )
    
    
    (1,023,220
    )
    
    
    (3,204,505
    )
    
    
    (97,699
    )Income (loss) before taxes and
minority interest
    
    
    
    
    
    
    (8,177,037
    )
    
    
    247,140
    
    
    
    (6,882,122
    )
    
    
    (209,820
    )Income tax expense
    
    
    18
    
    
    
    (21,027
    )
    
    
    (34,781
    )
    
    
    (215,414
    )
    
    
    (6,568
    )Income (loss) before minority
interest
    
    
    
    
    
    
    (8,198,064
    )
    
    
    212,359
    
    
    
    (7,097,536
    )
    
    
    (216,388
    )Minority interest loss
    
    
    
    
    
    
    319
    
    
    
    5,333
    
    
    
    70,347
    
    
    
    2,145Net income (loss)
    
    
    
    
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    (7,027,189
    )
    
    
    (214,243
    )Earnings Per Common Share*:
    
    
    20Net income (loss) per common share
- basic
    
    
    
    
    
    NT$
    (3.65
    )
    
    NT$
    0.08
    
    
    NT$
    (2.41
    )
    
    US$
    (0.07
    )Net income (loss) per common share
- diluted
    
    
    
    
    
    NT$
    (3.65
    )
    
    NT$
    0.08
    
    
    NT$
    (2.41
    )
    
    US$
    (0.07
    )Pro-forma data: assuming that the
Companys shares owned by subsidiaries were not
treated as treasury stock
    
    
    18Net income (loss)
    
    
    
    
    
    
    (8,222,374
    )
    
    
    221,787
    
    
    
    (7,043,761
    )
    
    
    (214,749
    )Net income (loss) per common share
- basic
    
    
    
    
    
    NT$
    (3.66
    )
    
    NT$
    0.08
    
    
    NT$
    (2.42
    )
    
    US$
    (0.07
    )Net income (loss) per common share
- diluted
    
    
    
    
    
    NT$
    (3.66
    )
    
    NT$
    0.08
    
    
    NT$
    (2.42
    )
    
    US$
    (0.07
    )
 See accompanying notes to consolidated financial statements.
 F-5




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2003, 2004 and 2005
(Amounts in thousands except share and per share data)
 For the year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Cash flows from operating activities:Net income (loss)
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    (7,027,189
    )
    
    
    (214,243
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities :Depreciation
    
    
    8,614,734
    
    
    
    7,092,077
    
    
    
    6,740,549
    
    
    
    205,505Amortization
    
    
    672,277
    
    
    
    470,083
    
    
    
    511,984
    
    
    
    15,609Depreciation and market-value decline on idle assets
    
    
    91,530
    
    
    
    
    
    
    
    
    
    
    
    Loss on allowance for prepaid expenses
    
    
    334,971
    
    
    
    
    
    
    
    141,711
    
    
    
    4,320Gain on disposal of long-term investments
    
    
    (63,565
    )
    
    
    (374,806
    )
    
    
    (23,898
    )
    
    
    (729
    )Net gain on short-term investments
    
    
    (43,591
    )
    
    
    (10,209
    )
    
    
    (365,304
    )
    
    
    (11,137
    )Change in valuation allowance of accounts receivable and other receivable
    
    
    (33,059
    )
    
    
    (238
    )
    
    
    (49,886
    )
    
    
    (1,521
    )Inventory and spare parts provision (reversal)
    
    
    (1,185,227
    )
    
    
    (918,545
    )
    
    
    (476,780
    )
    
    
    (14,536
    )Net loss from equity investment
    
    
    87,219
    
    
    
    99,073
    
    
    
    89,525
    
    
    
    2,729Impairment loss
    
    
    
    
    
    
    
    
    
    
    905,658
    
    
    
    27,612Write off on long-term investments
    
    
    
    
    
    
    50,344
    
    
    
    1,536,483
    
    
    
    46,844Net gain on disposal of property, plant and equipment
    
    
    (308
    )
    
    
    (3,408
    )
    
    
    (396
    )
    
    
    (12
    )Net changes in operating assets and liabilitiesNotes and accounts receivable
    
    
    (56,457
    )
    
    
    151,459
    
    
    
    634,589
    
    
    
    19,347Receivables from related parties
    
    
    (12,137
    )
    
    
    (27,016
    )
    
    
    (555,538
    )
    
    
    (16,937
    )Other Receivable from relted parties
    
    
    
    
    
    
    
    
    
    
    (49,911
    )
    
    
    (1,522
    )Inventories
    
    
    2,268,453
    
    
    
    191,223
    
    
    
    1,654,614
    
    
    
    50,446Other current assets
    
    
    135,347
    
    
    
    12,000
    
    
    
    77,371
    
    
    
    2,359Prepaid expenses
    
    
    92,071
    
    
    
    (81,366
    )
    
    
    22,337
    
    
    
    681Deferred income tax assets
    
    
    48,143
    
    
    
    1,914
    
    
    
    198,039
    
    
    
    6,038Notes and accounts payable
    
    
    569,471
    
    
    
    (270,018
    )
    
    
    245,904
    
    
    
    7,497Payables to related parties
    
    
    (53,239
    )
    
    
    (60,794
    )
    
    
    36,638
    
    
    
    1,117Accrued expenses
    
    
    (416,501
    )
    
    
    (299,759
    )
    
    
    36,938
    
    
    
    1,126Income taxes payable
    
    
    (83,518
    )
    
    
    (23,708
    )
    
    
    7,940
    
    
    
    242Other current liabilities
    
    
    (381,938
    )
    
    
    20,470
    
    
    
    34,587
    
    
    
    1,054Accrued pension cost
    
    
    86,569
    
    
    
    86,893
    
    
    
    93,136
    
    
    
    2,840Interest payable of debentures
    
    
    (989,775
    )
    
    
    (336,725
    )
    
    
    (21,778
    )
    
    
    (664
    )Net cash provided by operating activities
    
    
    1,483,725
    
    
    
    5,986,636
    
    
    
    4,397,323
    
    
    
    134,065Cash flows from investing activities:Decrease (increase) in restricted investments
    
    
    1,527,888
    
    
    
    (345,297
    )
    
    
    358,349
    
    
    
    10,925Payments for purchase of marketable securities
    
    
    (10,077,010
    )
    
    
    (21,961,161
    )
    
    
    (11,467,983
    )
    
    
    (349,634
    )Proceeds from disposal of marketable securities
    
    
    10,455,091
    
    
    
    21,911,781
    
    
    
    12,995,611
    
    
    
    396,208Payments for purchase of other financial assets
    
    
    (173,730
    )
    
    
    (101,280
    )
    
    
    
    
    
    
    Proceeds from disposal of other financial assets
    
    
    173,730
    
    
    
    101,280
    
    
    
    
    
    
    
    Additions to long-term equity investments
    
    
    (542,451
    )
    
    
    (278,694
    )
    
    
    
    
    
    
    Proceeds from disposals of long-term equity investments
    
    
    124,113
    
    
    
    463,051
    
    
    
    175,705
    
    
    
    5,357Payments for purchase of property, plant and equipment
    
    
    (2,616,208
    )
    
    
    (2,768,934
    )
    
    
    (1,774,419
    )
    
    
    (54,098
    )Proceeds from disposals of property, plant and equipment
    
    
    6,979
    
    
    
    3,680
    
    
    
    3,186
    
    
    
    97Refundable deposits
    
    
    893,434
    
    
    
    (161,182
    )
    
    
    71,636
    
    
    
    2,184Other assets
    
    
    39,678
    
    
    
    40,575
    
    
    
    (44,507
    )
    
    
    (1,357
    )Additions to intangible assets
    
    
    (235,463
    )
    
    
    (532,968
    )
    
    
    (187,977
    )
    
    
    (5,731
    )Proceeds from disposals of intangible assets
    
    
    454
    
    
    
    
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (423,495
    )
    
    
    (3,629,149
    )
    
    
    129,601
    
    
    
    3,951
  F-6




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
For the years ended December 31, 2003, 2004 and 2005
(Amounts in thousands except share and per share data)
 For the year ended December 312003
    
    
    2004
    
    
    2005NT$000
    
    
    NT$000
    
    
    NT$000
    
    
    US$000Cash flows from financing activities:Net increase (decrease) in short-term debts
    
    
    624,815
    
    
    
    276,663
    
    
    
    (1,069,733
    )
    
    
    (32,614
    )Net increase (decrease) in short-term notes
    
    
    
    
    
    
    99,924
    
    
    
    (99,924
    )
    
    
    (3,046
    )Net decrease in debentures
    
    
    
    
    
    
    
    
    
    
    (415,315
    )
    
    
    (12,662
    )Additions (deductions) to other liabilities -
refundable deposits
    
    
    (5
    )
    
    
    206
    
    
    
    (206
    )
    
    
    (6
    )Proceeds from long-term debts
    
    
    5,835,305
    
    
    
    1,950,000
    
    
    
    100,000
    
    
    
    3,048Repayments of long-term debts and capital lease
obligations
    
    
    (8,201,614
    )
    
    
    (10,773,284
    )
    
    
    (2,062,822
    )
    
    
    (62,891
    )Common stock issued
    
    
    3,822,504
    
    
    
    5,565,704
    
    
    
    
    
    
    
    Minority interest
    
    
    117,712
    
    
    
    (69,867
    )
    
    
    82,070
    
    
    
    2,502Net cash provided by (used in) financing activities
    
    
    2,198,717
    
    
    
    (2,950,654
    )
    
    
    (3,465,930
    )
    
    
    (105,669
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    (4,794
    )
    
    
    60,341
    
    
    
    (43,062
    )
    
    
    (1,312
    )Net increase in cash and cash equivalents
    
    
    3,254,153
    
    
    
    (532,826
    )
    
    
    1,017,932
    
    
    
    31,035Cash and cash equivalents at the beginning of the
period
    
    
    7,394,361
    
    
    
    10,648,514
    
    
    
    10,115,688
    
    
    
    308,405Cash and cash equivalents at the end of the period
    
    
    10,648,514
    
    
    
    10,115,688
    
    
    
    11,133,620
    
    
    
    339,440Supplemental disclosures of cash flows information:Interest paid during the period
    
    
    998,922
    
    
    
    735,529
    
    
    
    385,154
    
    
    
    11,743Income tax paid during the period
    
    
    35,064
    
    
    
    65,261
    
    
    
    21,770
    
    
    
    664Non-cash activities:Current portion of long-term debts and capital
lease obligations
transferred to current liabilities
    
    
    11,163,741
    
    
    
    2,499,915
    
    
    
    1,635,295
    
    
    
    49,857Payments for purchases of property, plant and
equipment:Payable to equipment suppliers (beginning balance)
    
    
    1,551,915
    
    
    
    541,755
    
    
    
    327,314
    
    
    
    9,979Add: Purchases of property, plant and equipment
    
    
    1,606,048
    
    
    
    2,554,493
    
    
    
    1,595,063
    
    
    
    48,630Less: Payable to equipment suppliers (ending
balance)
    
    
    (541,755
    )
    
    
    (327,314
    )
    
    
    (147,958
    )
    
    
    (4,511
    )Payments for purchases of property, plant and
equipment
    
    
    2,616,208
    
    
    
    2,768,934
    
    
    
    1,774,419
    
    
    
    54,098Convertible bonds converted to common stock and
accumulated deficits
    
    
    2,453,866
    
    
    
    759,067
    
    
    
    
    
    
    
    
  F-7




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the years ended December 31, 2003, 2004 and 2005
(Amounts in thousands except share and per share data)
 Unrealized
    
    
    
    
    
    
    
    
    
    Total shareholders,Additional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    losses
    
    
    
    
    
    
    
    
    
    equity attributableCommon
    
    Common stock
    
    paid-in
    
    Capital
    
    Legal
    
    Special
    
    Retained earnings
    
    on long-term
    
    Translation
    
    Treasury
    
    to parent company'sshares
    
    to be registered
    
    capital
    
    reserve
    
    reserve
    
    reserve
    
    (accumulated deficit)
    
    investments
    
    adjustments
    
    stock
    
    shareholdersNT$
    
    NT$
    
    NT$000
    
    NT$000
    
    NT$000
    
    NT$000
    
    NT$000
    
    NT$000
    
    NT$000
    
    NT$000
    
    NT$000Balance as of December 31, 2002
    
    
    36,912,769
    
    
    
    
    
    
    
    2,630,621
    
    
    
    356
    
    
    
    1,708,689
    
    
    
    378,657
    
    
    
    (9,469,175
    )
    
    
    (979,081
    )
    
    
    219,894
    
    
    
    (1,188,436
    )
    
    
    30,214,294Additional paid-in capital used to cover accumulated deficits
    
    
    
    
    
    
    
    
    
    
    (2,630,621
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,630,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Legal reserve used to cover accumulated deficits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,708,689
    )
    
    
    
    
    
    
    1,708,689
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special reserve used to cover accumulated deficits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (378,657
    )
    
    
    378,657
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock issuance for cash
    
    
    4,750,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (927,496
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,822,504Conversion of convertible debentures
    
    
    2,364,814
    
    
    
    274,936
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (185,884
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,453,866Adjustments of capital reserve from equity investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,575Unrealized gains on long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    977,222
    
    
    
    
    
    
    
    
    
    
    
    977,222Net loss, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,197,745
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,197,745
    )Cumulative translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,182
    )
    
    
    
    
    
    
    (30,182
    )Balance as of December 31, 2003
    
    
    44,027,583
    
    
    
    274,936
    
    
    
    
    
    
    
    7,931
    
    
    
    
    
    
    
    
    
    
    
    (14,062,333
    )
    
    
    (1,859
    )
    
    
    189,712
    
    
    
    (1,188,436
    )
    
    
    29,247,534Issuance of common shares for Global Depositary Shares
    
    
    5,250,000
    
    
    
    
    
    
    
    315,704
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,565,704Conversion of convertible debentures
    
    
    1,075,380
    
    
    
    (274,936
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,377
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    759,067Adjustments of capital reserve from equity investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,014Unrealized losses on long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,349,668
    )
    
    
    
    
    
    
    
    
    
    
    (1,349,668
    )Net income, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217,692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217,692Cumulative translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (127,670
    )
    
    
    
    
    
    
    (127,670
    )Balance as of December 31, 2004
    
    
    50,352,963
    
    
    
    
    
    
    
    315,704
    
    
    
    39,945
    
    
    
    
    
    
    
    
    
    
    
    (13,886,018
    )
    
    
    (1,351,527
    )
    
    
    62,042
    
    
    
    (1,188,436
    )
    
    
    34,344,673Appropriation and distribution of 2004 retained earnings:Capital reserve used to cover accumulated deficits
    
    
    
    
    
    
    
    
    
    
    (315,704
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    315,704
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancellation of treasury stock
    
    
    (400,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (646,071
    )
    
    
    
    
    
    
    
    
    
    
    1,046,071
    
    
    
    Adjustments of capital reserve from equity investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,045
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,045Reversal of unrealized losses on long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,351,527
    
    
    
    
    
    
    
    
    
    
    
    1,351,527Net loss, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,027,189
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,027,189
    )Cumulative translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,860
    
    
    
    
    
    
    
    15,860Adjustments of accumulated deficits from equity investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144,516
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144,516
    )Balance as of December 31, 2005
    
    
    49,952,963
    
    
    
    
    
    
    
    
    
    
    
    57,990
    
    
    
    
    
    
    
    
    
    
    
    (21,388,090
    )
    
    
    
    
    
    
    77,902
    
    
    
    (142,365
    )
    
    
    28,558,400Balance as of December 31, 2005 (US$)
    
    
    1,522,956
    
    
    
    
    
    
    
    
    
    
    
    1,768
    
    
    
    
    
    
    
    
    
    
    
    (652,076
    )
    
    
    
    
    
    
    2,375
    
    
    
    (4,340
    )
    
    
    870,683
 F-8




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share, per share, and percentage data)
 1.
    
    Organization and Business
   2.
    
    Summary of Significant Accounting Policies
  Consolidation
  F-9




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##### Table of Contents



Ownership% as ofDecemberName of Investor
    
    Name of Investee
    
    Main Business
    
    31, 2005
    
    NoteMXIC
    
    Hui Ying Investment,
Ltd. (Hui Ying)
    
    Investment
    
    
    100.00
    %
    
    
    1MXIC
    
    Run Hong Investment,
Ltd. (Run Hong)
    
    Investment
    
    
    100.00
    %
    
    MXIC
    
    Kang Bao Investment,
Ltd. (Kang Bao)
    
    Investment
    
    
    100.00
    %
    
    MXIC
    
    MaxNova Inc. (MaxNova)
    
    Research,
development,
design,
manufacturing and
sales of memory
system and ASIC
memory products
    
    
    85.50
    %
    
    
    2MXIC
    
    Magic Pixel Inc. (MPI)
    
    Research,
development,
design,
manufacturing and
sales of digital
still camera
controller IC and
flat panel display
controller IC
    
    
    44.91
    %
    
    
    3MXIC
    
    Macronix America Inc.
(MXA)
    
    Sales and marketing
    
    
    100.00
    %
    
    MXIC
    
    Macronix (BVI) Co.,
Ltd. (MXBVI)
    
    Investment
    
    
    100.00
    %
    
    Hui Ying
Investment, Ltd.
    
    Joyteck Co., Ltd.
(Joyteck)
    
    Research,
development,
design,
manufacturing and
sales of the
software and
hardware of
handheld device
products
    
    
    87.98
    %
    
    
    4Macronix (BVI)
Co., Ltd.
    
    Macronix Japan
(Cayman Islands)
Limited. (MXJ Cayman)
    
    Sales and marketing
    
    
    100.00
    %
    
    Macronix (BVI)
Co., Ltd.
    
    Wedgewood
International Co., Ltd.
(Wedgewood)
    
    Investment
    
    
    100.00
    %
    
    
    5Macronix (BVI)
Co., Ltd.
    
    New Trend Technology
Inc.
(NTTI)
    
    IC design
    
    
    100.00
    %
    
    
 F-10




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##### Table of Contents



Ownership% as ofDecemberName of Investor
    
    Name of Investee
    
    Main Business
    
    31, 2005
    
    NoteMacronix (BVI)
Co., Ltd.
    
    Macronix (Hong Kong)
Co., Ltd. (MXHK)
    
    Sales and marketing
    
    
    100.00
    %
    
    
    6Macronix (BVI)
Co., Ltd.
    
    Macronix Europe NV.
(MXE)
    
    Sales and marketing
    
    
    100.00
    %
    
    Macronix (BVI)
Co., Ltd.
    
    Macronix Pte. Ltd.
(MPL)
    
    Sales and marketing
    
    
    100.00
    %
    
    Macronix (BVI)
Co., Ltd.
    
    Macronix
Microelecronics
(Suzhou) Co., Ltd. (MX
Suzhou)
    
    Sales and marketing
    
    
    100.00
    %
    
    Run Hong
Investment, Ltd.
    
    Biomorphic Microsystems
Corporation (BC)
    
    Research,
development,
design,
manufacturing and
sales of digital
still camera CMOS
Sensor
    
    
    54.77
    %
    
    
    7Biomorphic
Microsystems
Corporation (BC)
    
    Biomorphic VLSI, Inc.
    
    IC design
    
    
    100.00
    %
    
    Biomorphic
Microsystems
Corporation (BC)
    
    BM Chip Design Private
Limited.
    
    IC design
    
    
    97.75
    %
    
    
 
 Note 1:
    
    As of December 31, 2005, Hui Ying held 6,023,152 shares of MXIC, which represented
0.12% of MXICs outstanding common stock.
 Note 2:
    
    As of December 31, 2005, MXIC and Hui Ying held in aggregate an 85.5% ownership of
MaxNova. MXIC held a 50% of ownership of MaxNova and Hui Ying held a 35.5% of ownership of
MaxNova.
 Note 3:
    
    As of December 31, 2005, MXIC held a 44.91% of ownership of MPI. MXIC had the
controlling interest over the financial and operating decision in MPI as MXIC represented
over majority of the directors in MPI.
 Note 4:
    
    As of December 31, 2005, MXIC held a 87.98% of ownership of Joyteck. MXIC held
18.18% of Joyteck and Hui Ying held 69.8% of Joyteck.
 Note 5:
    
    On June 15, 2005, Wedgewood merged with MXBVI.
 Note 6:
    
    MXIC directly held the ownership of MXHK before the Company changed investment
structure on April 26, 2005.
 Note 7:
    
    As of December 31, 2005, MXIC held in aggregate a 54.77% of ownership of BC that
Hui Ying held a 20.41% of BC and Run Hong held 34.36% of BC.
 F-11




---



##### Table of Contents



Use of Estimates
  Foreign Currency Transactions and Translation
   Cash and Cash Equivalents
   F-12




---



##### Table of Contents



Short-Term Investments
    Allowance for Doubtful Accounts
  Inventories
   F-13




---



##### Table of Contents



Long-Term Investments
     F-14




---



##### Table of Contents



Property, Plant and Equipment
    F-15




---



##### Table of Contents



Lease agreements
  Intangible Assets
   Income Taxes
  F-16




---



##### Table of Contents



Derivative Financial Instruments
    F-17




---



##### Table of Contents



Convertible Bonds
    Pension Plans
  F-18




---



##### Table of Contents



Employees Stock Option Plan
  Treasury Stock
  F-19




---



##### Table of Contents



Minority Interests
  Earnings Per Share
  Revenue Recognition and Allowance for Sales Returns and Others
    F-20




---



##### Table of Contents



Research and Development Subsidies
  Employee Bonuses
  Reason and Effect of a Change in Accounting Policies
  F-21




---



##### Table of Contents



Recent Accounting Pronouncements
   F-22




---



##### Table of Contents



Reclassifications
  3.
    
    Information Expressed in U.S. Dollars
  4.
    
    Cash and Cash Equivalents
 As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Petty cash
    
    
    600
    
    
    
    1,814
    
    
    
    55Checking and savings accounts
    
    
    1,948,043
    
    
    
    7,246,740
    
    
    
    220,938Time deposits
    
    
    112,139
    
    
    
    2,778,283
    
    
    
    84,704Cash equivalents
    
    
    8,054,906
    
    
    
    1,106,783
    
    
    
    33,743Total
    
    
    10,115,688
    
    
    
    11,133,620
    
    
    
    339,440
 F-23




---



##### Table of Contents



5.
    
    Short-Term Investments
 As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Mutual funds
    
    
    901,871
    
    
    
    
    
    
    
    Equity securities
    
    
    16,169
    
    
    
    
    
    
    
    Total
    
    
    918,040
    
    
    
    
    
    
    
    Less: Allowance for market value decline
    
    
    
    
    
    
    
    
    
    
    Net
    
    
    918,040
    
    
    
    
    
    
    
    
 6.
    
    Notes and Accounts Receivable
 As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Notes receivable
    
    
    100,008
    
    
    
    6,028
    
    
    
    184Accounts receivable
    
    
    2,615,335
    
    
    
    2,093,185
    
    
    
    63,816Total
    
    
    2,715,343
    
    
    
    2,099,213
    
    
    
    64,000Less: Allowance for doubtful accounts
    
    
    (161,833
    )
    
    
    (92,757
    )
    
    
    (2,828
    )Net
    
    
    2,553,510
    
    
    
    2,006,456
    
    
    
    61,172
 7.
    
    Inventories
 As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Merchandise
    
    
    232,339
    
    
    
    184,471
    
    
    
    5,624Finished goods
    
    
    2,389,000
    
    
    
    1,716,412
    
    
    
    52,330Work in process
    
    
    5,217,347
    
    
    
    3,925,020
    
    
    
    119,665Raw materials
    
    
    150,159
    
    
    
    220,930
    
    
    
    6,735Supplies
    
    
    79,287
    
    
    
    119,087
    
    
    
    3,631Others
    
    
    324
    
    
    
    1,899
    
    
    
    58Total
    
    
    8,068,456
    
    
    
    6,167,819
    
    
    
    188,043Less: Allowance for market
value decline and obsolescence
    
    
    (3,242,215
    )
    
    
    (2,578,374
    )
    
    
    (78,609
    )Net
    
    
    4,826,241
    
    
    
    3,589,445
    
    
    
    109,434
  F-24




---



##### Table of Contents



8.
    
    Long-Term Investments
 As of December 31, 2004PercentShares
    
    NT$000
    
    ownedAccounted for under equity method:Magic Pixel Inc. (MPI)
    
    
    9,264,000
    
    
    
    95,032
    
    
    
    48.76
    %Biomorphic Microsystems Corporation (Biomorphic)
    
    
    14,524,521
    
    
    
    76,180
    
    
    
    30.08
    %Raio Electronic Co. Ltd. (Raio)
    
    
    2,523,210
    
    
    
    
    
    
    
    26.28
    %Procomm Inc. (Procomm)
    
    
    10,132,513
    
    
    
    
    
    
    
    38.38
    %Xinmax Technology Development (XTD)
    
    
    
    
    
    
    5,226
    
    
    
    45.00
    %Subtotal
    
    
    
    
    
    
    176,438Accounted for under cost method:Ardentec Corp. (Ardentec)
    
    
    30,148,752
    
    
    
    309,064
    
    
    
    10.64
    %Chien Cheng Venture Capital Co., Ltd. (Chien)
    
    
    8,000,000
    
    
    
    80,000
    
    
    
    15.38
    %Chipbond Technology Corp. (Chipbond)**
    
    
    4,749,765
    
    
    
    56,122
    
    
    
    2.77
    %FueTrek Co., Ltd. (FueTrek)
    
    
    480
    
    
    
    39,324
    
    
    
    16.22
    %Global Strategic Investment Fund (GSI)
    
    
    2,000,000
    
    
    
    63,420
    
    
    
    2.52
    %Honbond Venture Capital Co., Ltd. (Honbond)
    
    
    12,000,000
    
    
    
    120,000
    
    
    
    15.00
    %Pico Netics Inc. (Pico)
    
    
    1,000,000
    
    
    
    
    
    
    
    2.35
    %Powertech Co., Ltd. (Powertech)**
    
    
    3,694,000
    
    
    
    34,433
    
    
    
    1.09
    %Quality Test System Inc. (QTS)
    
    
    4,538,333
    
    
    
    
    
    
    
    14.64
    %Tower Semiconductor Ltd. (Tower)**
    
    
    8,773,395
    
    
    
    2,034,691
    
    
    
    13.35
    %United Industrial Gases Co., Ltd. (UIG)
    
    
    5,274,212
    
    
    
    58,500
    
    
    
    3.24
    %Subtotal
    
    
    
    
    
    
    2,795,554Less:Allowance for market value decline
    
    
    
    
    
    
    (1,351,527
    )Net of Long-Term Investment under Cost Method
    
    
    
    
    
    
    1,444,027Total Long-Term Investment
    
    
    
    
    
    
    1,620,465
 
 **
    
    Publicly traded F-25




---



##### Table of Contents



As of December 31, 2005PercentShares
    
    NT$000
    
    US$000
    
    ownedAccounted for under equity method:Raio Technology Co., Ltd. (Raio)
    
    
    504,642
    
    
    
    
    
    
    
    
    
    
    
    18.32
    %Accounted for under cost method:Ardentec Corporation (Ardentec)**
    
    
    28,679,983
    
    
    
    261,192
    
    
    
    7,963
    
    
    
    8.83
    %Chien Cheng Venture Capital Co., Ltd. (Chien)
    
    
    8,000,000
    
    
    
    80,000
    
    
    
    2,439
    
    
    
    15.38
    %Chipbond Technology Inc. (Chipbond)**
    
    
    3,871,134
    
    
    
    37,799
    
    
    
    1,152
    
    
    
    1.44
    %FueTrek Co., Ltd. (FueTrek)**
    
    
    1,420
    
    
    
    30,129
    
    
    
    919
    
    
    
    6.27
    %Global Strategic Investment Fund (GSI)
    
    
    2,000,000
    
    
    
    65,700
    
    
    
    2,003
    
    
    
    2.52
    %Honbond Venture Capital Co., Ltd. (Honbond)
    
    
    12,000,000
    
    
    
    120,000
    
    
    
    3,659
    
    
    
    15.00
    %Pico Netics Inc. (Pico)
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    2.23
    %Quality Test System, Inc. (QTS)
    
    
    4,538,333
    
    
    
    
    
    
    
    
    
    
    
    14.64
    %Tower Semiconductor Ltd. (Tower)**
    
    
    8,773,395
    
    
    
    540,583
    
    
    
    16,481
    
    
    
    13.11
    %United Industrial Gases Co., Ltd. (UIG)
    
    
    5,274,212
    
    
    
    58,500
    
    
    
    1,783
    
    
    
    3.18
    %Sub-total
    
    
    
    
    
    
    1,193,903
    
    
    
    36,399Add: Prepayment of long-term investment  Tower
    
    
    
    
    
    
    32,850
    
    
    
    1,002Total
    
    
    
    
    
    
    1,226,753
    
    
    
    37,401
 
 **
    
    Publicly Traded    F-26




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##### Table of Contents



9.
    
    Property, Plant and Equipment
   F-27




---



##### Table of Contents



For the year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Capitalized InterestBuildings and facilities
    
    
    1,801
    
    
    
    222
    
    
    
    862
    
    
    
    26Production equipment
    
    
    77,313
    
    
    
    32,245
    
    
    
    79,882
    
    
    
    2,436Total of capitalized interest
    
    
    79,114
    
    
    
    32,467
    
    
    
    80,744
    
    
    
    2,462Effective interest rate
    
    
    4.01
    %
    
    
    3.81
    %
    
    
    3.05
    %
    
    
    3.05
    %
  10.
    
    Idle Assets
 As of December 312004
    
    
    2005NT$000
    
    
    NT$000
    
    
    US$000CostLand
    
    
    
    
    
    
    706,125
    
    
    
    21,528Production equipment
    
    
    
    
    
    
    13,043
    
    
    
    398Research and development equipment
    
    
    
    
    
    
    180
    
    
    
    5Office furniture and fixtures
    
    
    
    
    
    
    353
    
    
    
    11Subtotal
    
    
    
    
    
    
    719,701
    
    
    
    21,942Accumulated DepreciationProduction equipment
    
    
    
    
    
    
    (13,043
    )
    
    
    (397
    )Research and development equipment
    
    
    
    
    
    
    (108
    )
    
    
    (3
    )Office furniture and fixtures
    
    
    
    
    
    
    (251
    )
    
    
    (8
    )Subtotal
    
    
    
    
    
    
    (13,402
    )
    
    
    (408
    )Accumulated Impairment Loss
 F-28




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##### Table of Contents



As of December 312004
    
    
    2005NT$000
    
    
    NT$000
    
    
    US$000Land
    
    
    
    
    
    
    (391,324
    )
    
    
    (11,931
    )Research and development equipment
    
    
    
    
    
    
    (72
    )
    
    
    (2
    )Office furniture and fixtures
    
    
    
    
    
    
    (101
    )
    
    
    (3
    )Subtotal
    
    
    
    
    
    
    (391,497
    )
    
    
    (11,936
    )Net of Idle Assets
    
    
    
    
    
    
    314,802
    
    
    
    9,598
  11.
    
    Assets to be Disposed
 As of December 312004
    
    
    2005NT$000
    
    
    NT$000
    
    
    US$000CostBuilding and facilities
    
    
    
    
    
    
    8,030,938
    
    
    
    244,846Accumulated DepreciationBuilding and facilities
    
    
    
    
    
    
    (2,220,456
    )
    
    
    (67,697
    )Accumulated Impairment LossBuilding and facilities
    
    
    
    
    
    
    (510,482
    )
    
    
    (15,564
    )Net of assets held for disposition
    
    
    
    
    
    
    5,300,000
    
    
    
    161,585
 12.
    
    Short-Term Debts
 As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Letter of credit due within 180 days
at variable interest rate
    
    
    342,282
    
    
    
    7,921
    
    
    
    241Working capital loans and secured
loans within 180 days at variable
interest rate
    
    
    2,554,572
    
    
    
    1,885,833
    
    
    
    57,495Total
    
    
    2,896,854
    
    
    
    1,893,754
    
    
    
    57,736
 F-29




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##### Table of Contents



13.
    
    Short-Term Notes
 As of December 31, 2004Interest
    
    
    Period
    
    
    NT$000Commercial Paper
    
    
    1.43463
    %
    
    
    2004.10.29~2005.1.21
    
    
    
    100,000Less: Discount
    
    
    
    
    
    
    
    
    
    
    (76
    )Net
    
    
    
    
    
    
    
    
    
    
    99,924
  14.
    
    Capital Lease Obligations
   2005.01.01 ~ 2005.06.30
    
    NT$000Capital lease obligations
    
    
    306,533Less: unrealized interest expense
    
    
    (3,087
    )Current portion of lease obligations
    
    
    303,446
 F-30




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##### Table of Contents



15. Long-Term Debts
 Interest Rate
    
    BalanceAs of December 31
    
    As of December 312004
    
    2005
    
    2004
    
    2005%
    
    %
    
    NT$000
    
    NT$000
    
    US$000SecuredMedium term loan
from one bank,
repayable in 8
semi-annual
installments from
June 2003 to
December 2006 with
variable interest
rates
    
    
    5.025
    
    
    
    2.92
    
    
    
    200,000
    
    
    
    100,000
    
    
    
    3,049Medium term loans
from one bank,
repayable in 96
monthly installments
from May 1999 to
April 2007 with
variable interest
rates
    
    
    4.45
    
    
    
    3.47
    
    
    
    102,200
    
    
    
    58,400
    
    
    
    1,780Medium term loan
from 14 banks,
repayable in 19
quarterly
installments from
July 1999 to
December 2005 with
variable interest
rates
    
    
    2.684~4.040
    
    
    
    
    
    
    
    41,070
    
    
    
    
    
    
    
    Medium term loan
from 1 bank,
repayable in 156
monthly installments
from May 2003 to
April 2016 with
variable interest
rates
    
    
    4.45
    
    
    
    3.47
    
    
    
    775,024
    
    
    
    706,638
    
    
    
    21,544Medium term loan
from 1 bank,
repayable in 17
quarterly
installments from
April 2002 to April
2006 with variable
interest rates
    
    
    5.255
    
    
    
    
    
    
    
    94,120
    
    
    
    
    
    
    
    Medium term loan
from 20 banks,
repayable in 10
semi-annual
installments from
March 2005 to
September 2009 with
variable interest
rates
    
    
    2.579
    
    
    
    2.66
    
    
    
    7,060,000
    
    
    
    5,648,000
    
    
    
    172,195Medium term loan
from 1 bank,
repayable in full at
maturity with
variable interest
rates
    
    
    1.50
    
    
    
    1.75
    
    
    
    800,000
    
    
    
    800,000
    
    
    
    24,390Medium-term loan
from 1 bank,
repayable in 9
quarterly
installments from
December 2006 with
variable interest
rates
    
    
    
    
    
    
    2.81
    
    
    
    
    
    
    
    100,000
    
    
    
    3,049SB II Debentures,
5-year secured
debentures repayable
in full at maturity
in October 2006 with
interest paid
annually at a fixed
interest rate
    
    
    3.30
    
    
    
    3.30
    
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    91,464
 F-31




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##### Table of Contents



Interest Rate
    
    BalanceAs of December 31
    
    As of December 312004
    
    2005
    
    2004
    
    2005%
    
    %
    
    NT$000
    
    NT$000
    
    US$000UnsecuredECB IV Debentures,
5-year unsecured
convertible
debentures puttable
in August 2004
    
    
    0.50
    
    
    
    
    
    
    
    3,171
    
    
    
    
    
    
    
    DCB I Debentures,
5-year unsecured
convertible
debentures puttable
in December 2005
    
    
    
    
    
    
    
    
    
    
    209,200
    
    
    
    
    
    
    
    ECB V Debentures,
5-year unsecured
convertible
debentures puttable
in February 2004
    
    
    
    
    
    
    
    
    
    
    202,944
    
    
    
    
    
    
    
    Subtotal
    
    
    
    
    
    
    
    
    
    
    12,487,729
    
    
    
    10,413,038
    
    
    
    317,471Add: Reserve for
redemption of
convertible bonds
    
    
    
    
    
    
    
    
    
    
    21,778
    
    
    
    
    
    
    
    Less: Current portion
    
    
    
    
    
    
    
    
    
    
    (2,196,469
    )
    
    
    (4,635,295
    )
    
    
    (141,320
    )Net
    
    
    
    
    
    
    
    
    
    
    10,313,038
    
    
    
    5,777,743
    
    
    
    176,151
  16. Convertible Bonds
    F-32




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##### Table of Contents



Years
    
    NT$000
    
    US$0002006
    
    
    4,635,295
    
    
    
    141,3202007
    
    
    2,339,428
    
    
    
    71,3242008
    
    
    1,524,829
    
    
    
    46,4892009
    
    
    1,480,384
    
    
    
    45,1342010
    
    
    68,384
    
    
    
    2,085After 2010
    
    
    364,716
    
    
    
    11,119Total
    
    
    10,413,036
    
    
    
    317,471
  As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Restricted investments-current
    
    
    2,429,606
    
    
    
    1,928,913
    
    
    
    58,808Property, plant and equipment
    
    
    15,644,550
    
    
    
    6,656,690
    
    
    
    202,948Held-for-Sale
    
    
    
    
    
    
    4,939,213
    
    
    
    150,586Total
    
    
    18,074,156
    
    
    
    13,524,816
    
    
    
    412,342
 F-33




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##### Table of Contents



17. Pension Plan
    As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Benefit obligationProjected benefit obligation at beginning of the year
    
    
    870,495
    
    
    
    1,077,317
    
    
    
    32,845Service cost
    
    
    119,969
    
    
    
    83,782
    
    
    
    2,554Interest cost
    
    
    30,326
    
    
    
    37,281
    
    
    
    1,137Unrecognized actuarial loss (gain)
    
    
    61,643
    
    
    
    (135,411
    )
    
    
    (4,128
    )Benefit paid to retirees
    
    
    (3,324
    )
    
    
    (1,965
    )
    
    
    (60
    )Others
    
    
    (1,792
    )
    
    
    5,010
    
    
    
    153Projected benefit obligation at end of the year
    
    
    1,077,317
    
    
    
    1,066,014
    
    
    
    32,501Plan assetsPlan assets at beginning of the year
    
    
    636,062
    
    
    
    679,505
    
    
    
    20,717Actual return on plan assets
    
    
    7,727
    
    
    
    10,075
    
    
    
    307Employers Contributions
    
    
    39,040
    
    
    
    42,025
    
    
    
    1,281Benefit paid to retirees
    
    
    (3,324
    )
    
    
    (1,965
    )
    
    
    (60
    )Plan assets at end of the year
    
    
    679,505
    
    
    
    729,640
    
    
    
    22,245
 F-34




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##### Table of Contents



As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Pension obligationVested benefit obligation
    
    
    
    
    
    
    
    
    
    
    Non-vested benefit obligation
    
    
    (649,133
    )
    
    
    (650,810
    )
    
    
    (19,842
    )Accumulated benefit obligation
    
    
    (649,133
    )
    
    
    (650,810
    )
    
    
    (19,842
    )Additional benefits based on future salary increases
    
    
    (428,184
    )
    
    
    (415,204
    )
    
    
    (12,659
    )Projected benefit obligation
    
    
    (1,077,317
    )
    
    
    (1,066,014
    )
    
    
    (32,501
    )Plan assets at fair value
    
    
    679,505
    
    
    
    729,640
    
    
    
    22,245Projected benefit obligation in excess of plan assets
    
    
    (397,812
    )
    
    
    (336,374
    )
    
    
    (10,256
    )Unrecognized net transition obligation
    
    
    49,475
    
    
    
    47,363
    
    
    
    1,444Unrecognized prior service cost
    
    
    25,504
    
    
    
    24,202
    
    
    
    738Unrecognized actuarial loss (gain)
    
    
    38,396
    
    
    
    (78,831
    )
    
    
    (2,403
    )Other
    
    
    5,781
    
    
    
    
    
    
    
    Accrued pension under LPA
    
    
    
    
    
    
    (28,152
    )
    
    
    (858
    )Accrued pension cost
    
    
    (278,656
    )
    
    
    (371,792
    )
    
    
    (11,335
    )
 The components of net pension costs for the years ended December 31, 2003, 2004 and 2005 were
listed as follows:
 For the year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Service cost
    
    
    118,257
    
    
    
    119,969
    
    
    
    132,450
    
    
    
    4,038Interest cost
    
    
    26,963
    
    
    
    30,326
    
    
    
    37,281
    
    
    
    1,137Expected return on plant assets
    
    
    (24,483
    )
    
    
    (22,906
    )
    
    
    (22,990
    )
    
    
    (701
    )Amortization of prior service costs and unrecognized
    
    
    4,394
    
    
    
    4,394
    
    
    
    4,469
    
    
    
    136Curtailment
gain
    
    
    
    
    
    
    
    
    
    
    (48,668)
    
    
    
    (1,484)Net pension cost
    
    
    125,131
    
    
    
    131,783
    
    
    
    102,542
    
    
    
    3,126
 F-34




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##### Table of Contents



For the year ended December 312003
    
    2004
    
    2005Discount rate
    
    
    3.5
    %
    
    
    3.5
    %
    
    
    2.5%3.75
    %Rate of increase in future compensation
    
    
    3.0
    %
    
    
    3.0
    %
    
    
    3.0
    %Expected long-term rate of return on
plan assets
    
    
    3.5
    %
    
    
    3.5
    %
    
    
    2.5%2.75
    %
  Years ended December 31
    
    
    NT$2006
    
    
    6,4322007
    
    
    6,6582008
    
    
    14,6592009
    
    
    13,3842010
    
    
    12,2722011-2015
    
    
    129,445
  18. Income Taxes
   F-36




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##### Table of Contents



Expiration Years
    
    NT$000
    
    US$0002006
    
    
    1,361,171
    
    
    
    41,4992007
    
    
    600,688
    
    
    
    18,3142008
    
    
    569,102
    
    
    
    17,3512009
    
    
    472,630
    
    
    
    14,409Total
    
    
    3,003,591
    
    
    
    91,573
  Expiration Years
    
    NT$000
    
    US$0002007
    
    
    6,059,315
    
    
    
    184,7352008
    
    
    8,604,045
    
    
    
    262,3192009
    
    
    338,469
    
    
    
    10,3192010
    
    
    2,762,561
    
    
    
    84,224Total
    
    
    17,764,390
    
    
    
    541,597
  As of December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Current
    
    
    (27,116
    )
    
    
    32,867
    
    
    
    18,054
    
    
    
    551Deferred
    
    
    48,143
    
    
    
    1,914
    
    
    
    197,360
    
    
    
    6,017Total
    
    
    21,027
    
    
    
    34,781
    
    
    
    215,414
    
    
    
    6,568
 F-37




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##### Table of Contents



For the year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Expected income tax expense (benefit)
    
    
    (2,044,259
    )
    
    
    61,785
    
    
    
    (1,720,531
    )
    
    
    (52,455
    )Undistributed earnings tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investment credits (earned) expired
    
    
    829,546
    
    
    
    (294,120
    )
    
    
    611,131
    
    
    
    18,632Change in valuation allowance
    
    
    1,256,140
    
    
    
    1,349,198
    
    
    
    1,656,582
    
    
    
    50,506Permanent differences
    
    
    317,135
    
    
    
    43,884
    
    
    
    (84,630
    )
    
    
    (2,580
    )Effect of rate change
    
    
    (373,681
    )
    
    
    (1,156,129
    )
    
    
    (246,630
    )
    
    
    (7,519
    )Others
    
    
    36,146
    
    
    
    30,163
    
    
    
    (508
    )
    
    
    (16
    )Income tax expense
    
    
    21,027
    
    
    
    34,781
    
    
    
    215,414
    
    
    
    6,568
  As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Deferred tax liabilitiesTax depreciation in excess of book depreciation
    
    
    282,970
    
    
    
    174
    
    
    
    5Unrealized foreign exchange gains
    
    
    
    
    
    
    
    
    
    
    Total deferred tax liabilities
    
    
    282,970
    
    
    
    174
    
    
    
    5Deferred tax assetsInvestment tax credits
    
    
    3,530,772
    
    
    
    2,919,641
    
    
    
    89,013Inventory provision
    
    
    804,719
    
    
    
    617,120
    
    
    
    18,815Bad debt allowance
    
    
    33,979
    
    
    
    21,439
    
    
    
    654Unrealized royalty expense
    
    
    175,443
    
    
    
    153,669
    
    
    
    4,685Book amortization in excess of tax amortization
    
    
    2,194
    
    
    
    
    
    
    
    Unrealized foreign exchange loss
    
    
    82,619
    
    
    
    7,278
    
    
    
    222Loss carry-forwards
    
    
    3,485,110
    
    
    
    4,345,568
    
    
    
    132,487Unrealized pension expense
    
    
    39,635
    
    
    
    112,215
    
    
    
    3,421Unrealized equity investment loss
    
    
    819,931
    
    
    
    1,425,991
    
    
    
    43,475Unrealized interest expense
    
    
    15,093
    
    
    
    16,908
    
    
    
    515Unrealized production variance
    
    
    8,711
    
    
    
    112,595
    
    
    
    3,433
 F-38




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##### Table of Contents



As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Book depreciation in excess of tax depreciation
    
    
    
    
    
    
    313,003
    
    
    
    9,543Impairment loss
    
    
    
    
    
    
    127,621
    
    
    
    3,891Others
    
    
    24,082
    
    
    
    25,667
    
    
    
    782Total deferred tax assets
    
    
    9,022,288
    
    
    
    10,198,715
    
    
    
    310,936Valuation allowance
    
    
    (6,843,018
    )
    
    
    (8,499,600
    )
    
    
    (259,134
    )Net deferred tax assets
    
    
    2,179,270
    
    
    
    1,699,115
    
    
    
    51,802Total net deferred tax assets
    
    
    1,896,300
    
    
    
    1,698,941
    
    
    
    51,797Net deferred tax assets-current
    
    
    18,951
    
    
    
    19,494
    
    
    
    594Net deferred tax assets- non-current
    
    
    1,877,349
    
    
    
    1,679,447
    
    
    
    51,203Total net deferred tax assets
    
    
    1,896,300
    
    
    
    1,698,941
    
    
    
    51,797
  19. Shareholders Equity
              F-39




---



##### Table of Contents



F-40




---



##### Table of Contents



F-41




---



##### Table of Contents



20. Employees Stock Option Plans
    Grant Dates
    
    Units Issued
    
    Units Outstanding
    
    Exercise Price2002.01.16
    
    
    71,768,500
    
    
    
    
    
    
    20.102002.05.06
    
    
    560,000
    
    
    
    
    
    
    19.802002.10.01
    
    
    1,507,000
    
    
    
    112,000
    
    
    11.102002.12.16
    
    
    6,164,500
    
    
    
    217,000
    
    
    11.30Total
    
    
    80,000,000
    
    
    
    329,000
    
    
    Total units authorized: 80, 000,000b. 2002 planGrant Dates
    
    Units Issued
    
    Units Outstanding
    
    Exercise Price2002.10.01
    
    
    150,000,000
    
    
    
    87,286,500
    
    
    11.102002.12.16
    
    
    10,284,500
    
    
    
    4,149,000
    
    
    11.302003.04.07
    
    
    2,753,500
    
    
    
    1,802,500
    
    
    9.20Total
    
    
    163,038,000
    
    
    
    93,238,000
    
    
    Total units authorized: 170,000,000
 F-42




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##### Table of Contents



Grant Dates
    
    Units Issued
    
    Units Outstanding
    
    Exercise Price2003.06.13
    
    
    193,212,000
    
    
    
    138,906,453
    
    
    7.752003.11.04
    
    
    829,000
    
    
    
    496,000
    
    
    9.002004.03.11
    
    
    685,000
    
    
    
    314,000
    
    
    12.902004.03.30
    
    
    785,000
    
    
    
    553,000
    
    
    12.202004.04.27
    
    
    749,000
    
    
    
    749,000
    
    
    14.10Total
    
    
    196,260,000
    
    
    
    141,018,453
    
    
    Total units authorized: 200,000,000
  Grant Dates
    
    Units Issued
    
    Units Outstanding
    
    Exercise Price2004.04.09
    
    
    176,972,000
    
    
    
    151,214,500
    
    
    14.552004.04.27
    
    
    4,919,000
    
    
    
    2,626,000
    
    
    14.102004.06.02
    
    
    2,176,000
    
    
    
    1,780,000
    
    
    11.002004.08.11
    
    
    5,015,500
    
    
    
    4,054,500
    
    
    9.252004.10.27
    
    
    4,466,000
    
    
    
    3,393,000
    
    
    7.052005.01.28
    
    
    4,428,500
    
    
    
    3,988,500
    
    
    7.052005.03.07
    
    
    1,172,000
    
    
    
    888,000
    
    
    6.88Total
    
    
    199,149,000
    
    
    
    167,944,500
    
    
    Total units authorized: 200,000,000
  Grant Dates
    
    Units Issued
    
    Units Outstanding
    
    Exercise Price2005.08.08
    
    
    188,958,500
    
    
    
    186,129,500
    
    
    5.842005.08.29
    
    
    7,978,500
    
    
    
    7,530,500
    
    
    5.832005.10.25
    
    
    2,372,000
    
    
    
    2,372,000
    
    
    5.81Total
    
    
    199,309,000
    
    
    
    196,032,000
    
    
    Total units authorized: 200,000,000
  F-43




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##### Table of Contents



Expiration Date of Issuance
    
    Units Cancelled2001 plan
    
    
    2002.12.17
    
    
    
    2002 plan
    
    
    2003.04.08
    
    
    
    6,962,0002003 plan
    
    
    2004.04.28
    
    
    
    3,740,0002004 plan
    
    
    2005.03.08
    
    
    
    851,000
  2003
    
    Units
    
    Weighted-Average Exercise PriceOutstanding units at beginning of the year
    
    
    217,741,800
    
    
    
    14.77Units granted
    
    
    196,794,500
    
    
    
    7.78Units cancelled
    
    
    (129,545,675
    )
    
    
    16.56Outstanding units at end of the year
    
    
    284,990,625
    
    
    
    9.13Units exercisable
    
    
    
    
    
    
    Weighted-average fair value
    
    
    
    
    
    
    4.48
 2004
    
    Units
    
    Weighted-Average Exercise PriceOutstanding units at beginning of the year
    
    
    284,990,625
    
    
    
    9.13Units granted
    
    
    195,767,500
    
    
    
    14.18Units cancelled
    
    
    (47,979,907
    )
    
    
    10.89Outstanding units at end of the year
    
    
    432,778,218
    
    
    
    11.21Units exercisable
    
    
    49,938,950
    
    
    
    11.11Weighted-average fair value
    
    
    
    
    
    
    6.59
 2005
    
    Units
    
    Weighted-Average Exercise PriceOutstanding units at beginning of the year
    
    
    432,778,218
    
    
    
    11.21Units granted
    
    
    204,909,500
    
    
    
    5.87Units cancelled
    
    
    (39,125,765
    )
    
    
    10.75Outstanding units at end of the year
    
    
    598,561,953
    
    
    
    9.42Units exercisable
    
    
    139,425,852
    
    
    
    9.42Weighted-average fair value
    
    
    
    
    
    
    2.55
 F-44




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##### Table of Contents



Expected dividend yield
    
    0%Expected volatility
    
    57.50%  52.10%Risk-free interest rate
    
    2.05%  1.55%Expected weighted-average life
    
    4.38 YearsFair value
    
    6.77  1.10
  For the year ended December 312004
    
    2005Basic EPS
    
    Diluted EPS
    
    Basic EPSAs reportedNet income (loss)
    
    
    217,692
    
    
    
    217,692
    
    
    
    (7,027,189
    )Earnings per share
    
    
    0.08
    
    
    
    0.08
    
    
    
    (2.41
    )Pro formaNet income (loss)
    
    
    (120,399
    )
    
    
    (120,399
    )
    
    
    (7,540,490
    )Earnings per share
    
    
    (0.04
    )
    
    
    (0.04
    )
    
    
    (2.59
    )
  F-45




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##### Table of Contents



Grant Date
    
    Units Issued
    
    Exercise Price2004.06.25
    
    
    180,000
    
    
    
    11.002004.11.29
    
    
    167,000
    
    
    
    11.002005.02.21
    
    
    124,000
    
    
    
    11.002005.06.20
    
    
    417,000
    
    
    
    11.002005.08.15
    
    
    112,000
    
    
    
    11.00
  2004
    
    Units
    
    Weighted-Average Exercise PriceOutstanding units at beginning of the year
    
    
    
    
    
    
    Units granted
    
    
    347,000
    
    
    
    11.00Units cancelled
    
    
    
    
    
    
    Outstanding units at end of the year
    
    
    347,000
    
    
    
    11.00Units exercisable
    
    
    
    
    
    
    Weighted-average fair value
    
    
    
    
    
    
    
 2005
    
    Units
    
    Weighted-Average Exercise PriceOutstanding units at beginning of the year
    
    
    347,000
    
    
    
    11.00Units granted
    
    
    653,000
    
    
    
    11.00Units exercised
    
    
    (900,000
    )
    
    
    11.00Units cancelled
    
    
    (100,000
    )
    
    
    11.00Outstanding units at end of the year
    
    
    
    
    
    
    Units exercisable
    
    
    
    
    
    
    Weighted-average fair value
    
    
    
    
    
    
    
  F-46




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##### Table of Contents



Expected dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    1.15%  0.99
    %Expected weighted-average life
    
    0.25 yearFair value
    
    
    
   For the year ended December 312004
    
    2005As reported
    
    Basic EPS
    
    Diluted EPS
    
    Basic EPSNet income (loss)
    
    
    217,692
    
    
    
    217,692
    
    
    
    (7,027,189
    )Earnings per share
    
    
    0.08
    
    
    
    0.08
    
    
    
    (2.41
    )Pro formaNet income (loss)
    
    
    217,692
    
    
    
    217,692
    
    
    
    (7,027,189
    )Earnings per share
    
    
    0.08
    
    
    
    0.08
    
    
    
    (2.41
    )
  F-47




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##### Table of Contents



Grant Dates
    
    Units Issued
    
    Units Outstanding
    
    Exercise Price2004.07.26
    
    
    660,000
    
    
    
    660,000
    
    
    
    12.002005.12.09
    
    
    1,054,000
    
    
    
    1,054,000
    
    
    
    10.00Total
    
    
    1,714,000
    
    
    
    1,714,000
    
    
    Total units authorized: 1,717,826
  Expected dividend yield
    
    
    4.88
    %Risk-free interest rate
    
    
    2.10%  1.55
    %Expected weighted-average life
    
    4.38 YearsFair value
    
    
    8.07   1.88
   For the year ended December 312004
    
    
    2005As reported
    
    Basic EPS
    
    
    Diluted EPS
    
    
    Basic EPSNet income (loss)
    
    
    217,692
    
    
    
    217,692
    
    
    
    (7,027,189
    )Earnings per share
    
    
    0.08
    
    
    
    0.08
    
    
    
    (2.41
    )Pro formaNet income (loss)
    
    
    217,467
    
    
    
    217,467
    
    
    
    (7,027,521
    )Earnings per share
    
    
    0.08
    
    
    
    0.08
    
    
    
    (2.41
    )
 F-48




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##### Table of Contents



21. Treasury Stock
  Beginning Balance
    
    Addition
    
    Disposal
    
    Ending BalanceFor the year ended December 31, 2004MXICs stocks held by Hui Ying
    
    
    6,023,152
    
    
    
    
    
    
    
    
    
    
    
    6,023,152Repurchase under share buyback plan
    
    
    40,000,000
    
    
    
    
    
    
    
    
    
    
    
    40,000,000Subtotal of Treasury Stocks
    
    
    46,023,152
    
    
    
    
    
    
    
    
    
    
    
    46,023,152For the year ended December 31, 2005MXICs stocks held by Hui Ying
    
    
    6,023,152
    
    
    
    
    
    
    
    
    
    
    
    6,023,152Repurchase under share buyback plan
    
    
    40,000,000
    
    
    
    
    
    
    
    40,000,000
    
    
    
    Subtotal of Treasury Stocks
    
    
    46,023,152
    
    
    
    
    
    
    
    40,000,000
    
    
    
    6,023,152
    F-49




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##### Table of Contents



22. Earnings per Share
  For the year ended December 312003
    
    2004
    
    2005Beginning balance of common shares outstanding
    
    
    3,651,276,875
    
    
    
    4,390,251,943
    
    
    
    4,995,296,328Retroactive adjustment for cancellation of
common stock on February 16, 2006
    
    
    (1,606,084,898
    )
    
    
    (2,015,097,916
    )
    
    
    (2,079,474,542
    )Issuance of 475,000,000 common shares for
cash on November 11, 2003
    
    
    66,369,863Bonds converted to common shares for the year
ended December 31, 2003
    
    
    134,088,222Retroactive adjustment for bonus element
included in the rights offering on November
3, 2003 (0.1688%)
    
    
    6,388,732Issuance of 525,000,000 common shares for
Global Depositary Shares on April 5, 2004
    
    
    
    
    
    
    388,729,508Bonds converted to common shares for the year
ended December 31, 2004 (80,044,385 shares)
    
    
    
    
    
    
    61,669,886Subtotal
    
    
    2,252,038,794
    
    
    
    2,825,553,421
    
    
    
    2,915,821,786Treasury stock owned by subsidiaries
    
    
    (3,515,795
    )
    
    
    (3,515,795
    )
    
    
    (3,515,795
    )Retroactive adjustment of treasury stock
owned by the subsidiary for bonus element
included in the rights offering on November
11, 2003
    
    
    (5,935
    )
    
    
    
    
    
    
    Weighted average common shares outstanding
    
    
    2,248,517,064
    
    
    
    2,822,037,626
    
    
    
    2,912,305,991Dilutive effect of employee stock options
    
    
    
    
    
    
    18,900,447
    
    
    
    Dilutive weighted average common shares
outstanding
    
    
    2,248,517,064
    
    
    
    2,840,938,073
    
    
    
    2,912,305,991
 F-50




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##### Table of Contents



For the year ended December 312003
    
    2004
    
    2005Income before tax available to MXICs shareholders
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    (6,829,227
    )Weighted average common shares outstanding
    
    
    2,248,517,064
    
    
    
    2,822,037,626
    
    
    
    2,912,305,991Basic EPS before tax
    
    
    (3.65
    )
    
    
    0.08
    
    
    
    (2.34
    )Net income (loss) available to MXICs shareholders
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    (7,027,189
    )Weighted average common shares outstanding
    
    
    2,248,517,064
    
    
    
    2,822,037,626
    
    
    
    2,912,305,991Basic EPS after tax
    
    
    (3.65
    )
    
    
    0.08
    
    
    
    (2.41
    )Income before tax available to MXICs shareholders
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    (6,829,227
    )Effect of dilutive potential common shares -options
    
    
    
    
    
    
    
    
    
    
    Income before tax available to common shares
(including the effect of dilutive potential common
stock)
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    (6,829,227
    )Dilutive weighted average common shares outstanding
    
    
    2,248,517,064
    
    
    
    2,840,938,073
    
    
    
    2,912,305,991Diluted EPS before tax
    
    
    (3.65
    )
    
    
    0.08
    
    
    
    (2.34
    )Net income (loss) available to MXICs shareholders
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    (7,027,189
    )Effect of dilutive potential common shares -options
    
    
    
    
    
    
    
    
    
    
    Net income (loss) available to common shares
(including the effect of dilutive potential common
stock)
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    (7,027,189
    )Dilutive weighted average common shares outstanding
    
    
    2,248,517,064
    
    
    
    2,840,938,073
    
    
    
    2,912,305,991Diluted EPS after tax
    
    
    (3.65
    )
    
    
    0.08
    
    
    
    (2.41
    )
  For the year ended December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Net income (loss)
    
    
    217,692
    
    
    
    (7,027,189
    )
    
    
    (214,244
    )Unrealized short-term investment income (loss)
    
    
    4,095
    
    
    
    (16,572
    )
    
    
    (505
    )Net income
(loss)  pro forma
    
    
    221,787
    
    
    
    (7,043,761
    )
    
    
    (214,749
    )
 F-51




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##### Table of Contents



Amount (numerator)
    
    Shares
    
    Net loss per shareEPS
    
    Before tax
    
    After tax
    
    (Denominator)
    
    Before tax
    
    After taxFor the year ended 12/31/2004Basic EPSNet loss
    
    $
    221,787
    
    
    $
    221,787
    
    
    
    2,825,553,421
    
    
    $
    0.08
    
    
    $
    0.08Diluted effect:Employee Stock Options
    
    
    
    
    
    
    
    
    
    
    18,900,447Diluted EPS
    
    $
    221,787
    
    
    $
    221,787
    
    
    
    2,844,453,868
    
    
    $
    0.08
    
    
    $
    0.08For the year ended 12/31/2005Basic EPSNet income
    
    $
    (6,845,799
    )
    
    $
    (7,043,761
    )
    
    
    2,915,821,786
    
    
    $
    2.35
    
    
    $
    2.42
  23. Related Party Transactions
  Related parties
    
    RelationshipProcomm Inc. (Procomm)
    
    The Companys equity investeeProminent Communications, Inc. (Prominent)
    
    Procomms equity investeeRaio Technology Co., Ltd. (Raio)
    
    A subsidiaries equity investee(Raio has not been a related party since
December, 2005)Tower Semiconductor Ltd. (Tower)
    
    A subsidiary served under the BoardFueTrek Co., Ltd. (FueTrek)
    
    A subsidiary served under the BoardArdentec Corporation (Ardentec)
    
    The Company served under the BoardMacronix Education Foundation (MXIC Education)
    
    The Companys executive director served as the
chairmanMegaChips Corporation(MegaChips)
    
    One of its sister company served under the BoardMegaChips LSI Solutions Inc. (MagaChips LSI)
    
    A subsidiary under MegaChipsMegaChips
LSI Solutions Inc. Taiwan Branch

(MagaChips LSI Taiwan Branch)
    
    Taiwan Branch of MegaChips
 F-52




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##### Table of Contents



b.
    
    Major transactions with related parties
  For the year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000BC
    
    
    
    
    
    
    239,748
    
    
    
    
    
    
    
    MPI
    
    
    
    
    
    
    175,894
    
    
    
    
    
    
    
    Raio
    
    
    174,466
    
    
    
    18,065
    
    
    
    11,087
    
    
    
    338Biomorphic
    
    
    45,953
    
    
    
    2
    
    
    
    
    
    
    
    FueTrek
    
    
    5,591
    
    
    
    11,674
    
    
    
    3,329
    
    
    
    101PCI
    
    
    341
    
    
    
    428
    
    
    
    
    
    
    
    MegaChips LSI
    
    
    
    
    
    
    
    
    
    
    5,620,371
    
    
    
    171,353Others
    
    
    
    
    
    
    9
    
    
    
    141,016
    
    
    
    4,299Total
    
    
    226,351
    
    
    
    445,820
    
    
    
    5,775,803
    
    
    
    176,091
  c.
    
    Manufacturing processing charges to related parties for the years ended December 31, 2003,
2004 and 2005 were summarized as follows:
 For the year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Powertech
    
    
    211,188
    
    
    
    
    
    
    
    
    
    
    
    Ardentec
    
    
    130,270
    
    
    
    260,199
    
    
    
    218,274
    
    
    
    6,655Total
    
    
    341,458
    
    
    
    260,199
    
    
    
    218,274
    
    
    
    6,655
 d.
    
    The Company purchased industrial gases from UIG at NT$100,016 for the year ended December 31,
2003. Such purchases were included in cost of good sold. There are no purchases of industrial
gases from UIG for the years ended December 31, 2004 and 2005, respectively.
 F-53




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##### Table of Contents



For the year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Tower
    
    
    36,600
    
    
    
    19,959
    
    
    
    188,562
    
    
    
    5,749MegaChips LSI Taiwan
Branch
    
    
    
    
    
    
    
    
    
    
    53,380
    
    
    
    1,627Total
    
    
    36,000
    
    
    
    19,595
    
    
    
    241,942
    
    
    
    7,376
  f.
    
    Merchandise purchased from related parties was as follows:
 For the year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Raio
    
    
    3,257
    
    
    
    1,570
    
    
    
    1,285
    
    
    
    39PCI
    
    
    63,798
    
    
    
    
    
    
    
    3,496
    
    
    
    107Biomorphic
    
    
    53,935
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    120,990
    
    
    
    1,570
    
    
    
    4,781
    
    
    
    146
 g.
    
    Operating leases to related parties were listed as follows:
 For the year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000MPI
    
    
    
    
    
    
    3,835
    
    
    
    
    
    
    
    Raio
    
    
    587
    
    
    
    1,295
    
    
    
    1,649
    
    
    
    50Total
    
    
    587
    
    
    
    5,130
    
    
    
    1,649
    
    
    
    50
  F-54




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##### Table of Contents



h.
    
    The Company entered into IP license agreements with FueTrek in 2002 and 2004 and obtained
related technology. The contractual amount of NT$ 13,502 (JPY45,800) and NT$19,743 (JPY66,650)
has been paid as of December 31, 2004 and 2005, and was recorded as deferred charges and
amortized over the contract terms. For the year ended December 31, 2004 and 2005, the amount
of research and development expenses paid to FueTrek was NT$0 and NT$3,780 (US$115),
respectively.
 i.
    
    The Company donated NT$22,360, NT$16,300 and NT$10,166 (US$310) to Macronix Education
Foundation for the years ended December 31, 2003, 2004 and 2005, respectively.
 j.
    
    For the year ended December 31, 2004 and 2005, the amount of research and development
expenses paid to Tower was NT$213 and NT$43,832 (US$1,336), respectively.
 k.
    
    For the year ended December 31, 2005, the amount of research and development expenses and the
sales expenses paid to MegaChips was NT$63 (US$2) and NT$1,452 (US$44), respectively. The
Company did not pay any research and development expenses and the sales expenses to MegaChips
for the year ended December 31, 2004.
 l.
    
    Accounts receivable from related parties as of December 31, 2004 and 2005 were listed as
follows:
 As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000BC
    
    
    95,443MPI
    
    
    29,447FueTrek
    
    
    4,836
    
    
    
    
    
    
    
    Procomm
    
    
    4,125
    
    
    
    17,722
    
    
    
    541Raio
    
    
    1,879
    
    
    
    8,432
    
    
    
    257MegaChips
    
    
    
    
    
    
    3,453
    
    
    
    105MegaChips LSI
    
    
    
    
    
    
    570,814
    
    
    
    17,403MegaChips LSI Taiwan Branch
    
    
    
    
    
    
    126,876
    
    
    
    3,868Others
    
    
    
    
    
    
    188
    
    
    
    6Total
    
    
    135,730
    
    
    
    727,485
    
    
    
    22,180Less: Allowance for doubtful accounts
    
    
    (3,444
    )
    
    
    (20,390
    )
    
    
    (622
    )Net
    
    
    132,286
    
    
    
    707,095
    
    
    
    21,558
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m.
    
    Other receivables from related parties as of December 31, 2004 and 2005 were listed as
follows:
 As of December 312004

    2005NT$000
    
    NT$000
    
    US$000MegaChips LSI
    
    
    
    
    
    
    49,911
    
    
    
    1,522Less: Allowance for doubtful accounts
    
    
    
    
    
    
    (11,532
    )
    
    
    (352
    )Net
    
    
    
    
    
    
    38,379
    
    
    
    1,170
   As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Ardentec
    
    
    38,335
    
    
    
    16,298
    
    
    
    497MPI
    
    
    2,898
    
    
    
    
    
    
    
    Tower
    
    
    1,364
    
    
    
    56,701
    
    
    
    1,729PCI
    
    
    107
    
    
    
    
    
    
    
    Others
    
    
    72
    
    
    
    6,414
    
    
    
    195Total
    
    
    42,776
    
    
    
    79,413
    
    
    
    2,421
 24. Commitments and Contingencies
  a.
    
    Amount available under unused letters of credits was NT$17,959 (US$548).
 b.  The Companys significant construction and machinery contracts totaled approximately
NT$1,857,463 (US$56,629). As of December 31, 2005, the Company has paid NT$1,607,005
(US$48,994) pursuant to these contracts. Future irrevocable payment
is NT$250,459(US$7,636).
 c.
    
    MXIC leases parcels of land from the SPA located in HCSP. The lease term is from 1990 to 2022
and renewable at the Companys option.
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Operating LeasesNT$000
    
    US$0002006
    
    
    69,348
    
    
    
    2,1142007
    
    
    65,029
    
    
    
    1,9832008
    
    
    65,029
    
    
    
    1,9832009
    
    
    65,029
    
    
    
    1,9832010
    
    
    65,029
    
    
    
    1,9832011
    
    
    65,029
    
    
    
    1,983Thereafter
    
    
    198,503
    
    
    
    6,051Total minimum lease payments
    
    592,996
    
    
    
    18,080
  d.
    
    MXIC entered into an operating lease agreement of US$2,608 for R&D software. The lease term
is from 2003 to 2006. The lease obligations shall be paid annually in four installments,
starting from November 20, 2003 to April 20, 2006. As of December 31, 2005, the Company has
paid US$2,131 pursuant to the agreements. Future irrevocable payment in 2006 is US$477.
 e.
    
    MXIC with Company A and Company B entered into the product royalty agreements for the terms
from January 2002 to December 2006, and from January 2001 to December 2006, respectively. The
total royalty fee was US$46,000 (NT$1,460,040). As of December 31, 2005, the Company has paid
US$41,000 (US$1,344,800) pursuant to the agreements. Future irrevocable payment in total is
US$5,000 (NT$164,000).
 f.
    
    MXIC and Company C entered into the product license agreement. The total license fee was
US$2,907 (NT$95,350). As of December 31, 2005, the Company has paid the total license fee in
full pursuant to the agreement. Future running royalties will be charged based on percentage
of net sales from licensed products as determined under the aforementioned agreement. For the
year ended December 31, 2005, no royalty was paid to Company C as the licensed products had
not been commercialized.
 g.
    
    MXIC and Company D entered into the technology agreement. As of December 31, 2005, the
Company has paid the total license fee in full pursuant to the aforementioned agreement.
Future running royalties will be charged based on percentage of net sales from the licensed
products pursuant to the agreement. According to the aforementioned agreement, the Company is
required to prepay US$24,000 of running royalty. As of
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December 31, 2005 US$24,000 has been paid. As of December 31, 2005, the unused running
royalty was NT$629,538 (US$19,193), of which NT$135,364 (US$4,127) was recorded under prepaid
expenses, while NT$494,174 (US$15,066) was recorded under deferred charges.h.
    
    In 2004, MXIC and Company D entered into two addendums to the aforementioned technology
agreement with the agreed license fee of US$7,500 in the contract term. As of December 31,
2005, the Company has paid the license fee of US$1,250 and accrued the license fee of US$250.
For the year ended December 31, 2005, no royalty was paid to Company D for the aforementioned
addendums as the licenses products had not been commercialized.i.
    
    In August 1997, Atmel Corporation (Atmel) filed a complaint against MXA for infringement of
Atmels patents No. 096 and 747. MXA applied for Motion for Summary Judgment for both patents.
On January 14, 2002, the Court issued an order denying Atmels motion to correct inventorship
of the 747 patents. Based on the order, MXA had sought a ruling of invalidity of the 747
patents due to incorrect inventorship, and kept awaiting the Courts decision. On May 14,
2003, the Court granted the Companys Motion for Summary Judgment of invalidity of the 747
patent due to nonjoinder of co-inventor. Specifically, the Courts Order found that all claims
of the 747 patent were invalid for nonjoinder of a co-inventor. The Court has also granted the
Companys Motion for Summary Judgment against three of the four asserted claims of the 096
patent, leaving only one claim to be litigated on the 096 patent. Both parties applied for
summary judgment for infringement of the 096 patent. On February 23, 2004, the court revoked
both parties summary judgments as the evidence was insufficient. However, the courts
explanation of inventorship was in favor of MXA. On April 16, 2004, MXA applied Renewed
Motion for Summary Judgment of Non-infringement according to the court explanation of the
patents scope. After Atmel applied the counterplea on May 26, 2004, MXA replied to Atmel
counterplea on June 18, 2004. On September 9, 2004, Atmel and MXA reached a settlement that
both parties agree to withdraw from the issue with no claim of loss reimbursement. The Court
dismissed the case accordingly.j.
    
    On April 1, 2002, certain shareholders of Tower Semiconductor Ltd. (Tower) filed a
lawsuit in U.S., naming Tower, several shareholders (including the Company), and Board
members (including Miin Wu, one of the Board member and the Chairman of the Company) as
defendants, alleging the defendants for violation of U.S. Securities Exchange Act of 1934
Section 14(a), Section 20(a) and Rule 14a-9. The Court overruled the alleging in August 19,
2004. One of the shareholders has further appealed. The Company believes it has meritorious
defense to the case.k.
    
    The Company entered into an agreement with Tower Semiconductor Ltd. (Tower), an Israeli
public company whose shares are quoted on the NASDAQ, to purchase silicon wafers to be
manufactured by Tower (Wafer) in an amount of 25% of then available quarterly manufacturing
capacity of a specified production line, after it passes qualification testing, but not more
than 4,750 Wafer outs per month (the Minimum Loading Obligation) commencing on the date
manufacturing on a specified production line commences and
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ending 12 months following the expected production date, the Minimum Loading Obligation shall,
from the third quarter of the expected production date, be reduced by 950 wafer outs per month
each quarter. The minimum Loading Obligations may be limited to 15% of Towers capacity before
Tower proves to the Company that the one time programmable or multiple time programmable pass the
production qualification. If the Company maintains specified levels of investment in Towers
shares, the Company will receive favorable pricing terms on the first 3,800 wafers purchased each
month until the contract expires in 2011. In conjunction with the foundry agreement, the Company
entered into share purchase agreements in December 2000 with Tower whereby the Company agreed to
invest US$75 million (NT$2,460 million) in Tower. Following an initial payment of US$20 million
(NT$656 million) for 866,551 shares (US$11,215 or NT$367,852) and US$8,785 (NT$288,148) of
prepaid credits made in January 2001, upon completion by Tower of certain milestones specified in
the agreement, payments to Tower are made in five equal installments of US$11 million each. Upon
satisfaction of each milestone, the Company is required to purchase 733,380 shares of Tower.
Payments for the first milestone and the second milestone were made in March and April 2001,
respectively. The Company acquired a total of 733,380 shares and increased its prepaid credit
account by US$12,564 (NT$412,099) with the first two payments. The prepaid credit account is held
on deposit with Tower. Pursuant to the terms applicable to the credits issued in connection with
the various milestone payments, the prepaid credit account may be applied against wafer purchases
by 7.5% to 15% of each wafer purchase amount. In addition, this account may in certain
circumstances be applied towards the purchase of additional unregistered ordinary shares or
credited against other amounts payable by the Company to Tower, including certain payments to be
made by the Company and Tower under the SCM Waiver Agreement dated December 12, 2000 between the
Company and Tower.In 2001, the initial investment and the first and the second milestone payment were undertaken to
a total amount of US$42,001 (NT$1,377,633), of which US$21,349 (NT$700,247) was reserved as
prepaid credit for future wafer purchase. In September 2001, the Company utilized US$16 million
(NT$525 million) of its prepaid credit account to purchase 1,255,848 Tower shares for US$12.75
(NT$418) per share.On March 22, 2002, an amendment to the above-mentioned share purchase agreements was implemented.
According to this amendment, the Company is required to make the third and fourth milestone
payments no later than April 2002 and October 2002, respectively, without regard to whether each
milestone is achieved. For 60% of each of the third and fourth milestone payment, Tower is
required to issue shares based on the average closing price of Towers shares on the NASDAQ in
the 30 trading days preceding the date of payments, provided, however, the average price per
share shall not exceed US$12.50. (NT$410) For the remaining 40%, Tower is required to increase
the Companys prepayment account. Accordingly, the Company made the third and the forth milestone
payment on April 23 and October 1, 2002, respectively. For these payments, the Company acquired
1,071,497 and 1,344,829 of Towers shares, respectively, at US$6.16 (NT$202) and US$4.908
(NT$161) per share, respectively, and aggregately increased its prepaid credit account by
US$8,800. In addition, the Company participated in Towers shares offering on October 21, 2002
and acquired 660,000 shares at US$5 (NT$164) per share.
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In February 2003, the board of Tower agreed to further amend the shares purchase agreement. The
terms of the amendment require the payment of US$11,000 (NT$360,800) for the fifth and also the
final milestone and this payment will be made in two installments. The first installment of
approximately US$6,600 (NT$216,480) will be due five business days after the amendment is
approved by Tower, the Company and certain shareholders of Tower; the second installment of
approximately US$4,400 (NT$144,320) will be due five business days after Tower has raised
additional funds equal to approximately US$22,000 (NT$721,600), referred to as the Minimum
Financing. In addition, under the terms of the amendment, the Company is granted an option to
convert all or a portion of its unused prepaid credit account associated with the fourth
milestone payment in the aggregate amount of NT$304,524 into Towers unregistered shares based on
the average closing price of Towers common shares during the 30 consecutive days preceding
December 31, 2005. On May 16, 2003, the Company paid US$3,600 (NT$118,080) for the first
installment, obtaining 1,206,839 shares of Towers at the price of US$2.983 (NT$98) per share.
There was US$3,000 (NT$98,400) of the first installment remained unpaid as of June 30, 2003.In November 2003, the Company agreed to amend the shares purchase agreement with Tower to, among
other things, (a) advance the entire amount of the remaining fifth milestone payment of US$7,400
(NT$242,720), (b) defer the use of the Companys wafer credits in Tower, and (c) extend the
lock-up period for the Companys Tower shares. Specifically,(a)
    
    The Company agreed to waive all terms of Towers milestones and advance to Tower in one
aggregate lump sum the remaining portion of the first installment (US$3,000 or NT$98,400) and
the entire second installment (US$4,400 or NT$144,320). With respect to the remaining portion
of the first installment, the Company will be issued non-assessable ordinary shares equivalent
to the aggregate of its remaining portion of the first installment divided by US$2.983
(NT$98). With respect to the second installment, the Company will be issued non-assessable
ordinary shares equal to the second installment divided by the price per share in a certain
public offering, provided, however, that such public offering is not consummated within 180
days from the date of the amendment, the Company will be issued non-assessable ordinary shares
equal to the second installment divided by the average trading price for Towers shares during
the 15 consecutive trading days preceding the payment of the second installment.(b)
    
    The Company agreed not to use wafer credits until January 1, 2007, except with respect to
purchase orders issued before the date of the amendment utilizing wafer credits. However, the
amendment provides an option for the Company to convert credits it would have otherwise been
able to utilize per quarter into non-assessable ordinary shares of Tower. Unconverted credits
will accrue interest at a rate per annum equal to three-month LIBOR plus 2.5% through December
31, 2007. Interest payments will be made quarterly and the aggregate principal amount of the
unconverted credits will be repaid in one lump sum on December 31, 2007.
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(c)
    
    The Company agreed not to sell the Tower shares until January 29, 2006, except the Company
may sell 30% of the Tower shares held by it as of January 29, 2004.In December 2003, the Company advanced to Tower the remaining portion of the fifth milestone
payment in the amount of US$4,400 (NT$144,320).As of December 31, 2005, the Company owned approximately 13.11 % of Towers shares and held
NT$463,726 or about US$14,138 of prepaid credit account. As of December 31, 2004 and 2005, the
Company provided an allowance of US$14,138 (NT$46,726) and US$14,138(NT$46,726), respectively,
for such prepaid credit account after assessing the impairment.25.
    
    Financial InstrumentsThe Companys derivative financial instruments are entered into for hedging and trading purposes.
The purposes of forward exchange contracts, option contracts and cross currency swaps for hedging
purpose were to hedge exchange rate risks resulting from assets, liabilities or commitments
denominated in foreign currency. The Companys hedging strategies were to mitigate into market
price risks. Derivative financial instruments selected for hedging purposes are reviewed
and inversely correlated with the fluctuation of the fair value of derivatives hedges. Derivatives are
evaluated periodically. In addition, the primary purposes of holding structured deposit contracts
are to earn higher interest revenue within a fixed range of foreign exchange rates, while premium
received from written option contracts is offset by that paid for purchased option contracts. To
mitigate the credit risk associated with financial instruments, all the counter-parties of the
contracts entered into by the Company are reputable global financial institutions.For the years ended December 31, 2003, 2004 and 2005, the foreign exchange gains or losses
resulted from the derivatives in aggregate were NT$236, NT$(13,442),
and NT$9,061 (US$297,201),
respectively.As of December 31, 2004 and 2005, the details of outstanding derivatives were listed as follows:
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a.
    
    Forward exchange contractsAs of December 31, 2005, the Company did not have any outstanding forward exchange
contracts. As of December 31, 2004, the outstanding forward exchange contract was listed as
follows:
 Maturity
    
    Amount to Pay
    
    Amount to Receive2005.01.18
    
    US$ 2,000
    
    NT$ 64,6242005.01.31
    
    US$ 2,000
    
    NT$ 63,8282005.02.03
    
    US$ 2,000
    
    NT$ 63,946Total
    
    US$ 6,000
    
    NT$ 192,398
   As of December 312004
    


    
    2005NT$
    
    NT$
    
    US$Receivable from forward exchange contracts
    
    
    192,398
    
    
    
    
    
    
    
    Payables from forward exchange contracts
    
    
    (190,260
    )
    
    
    
    
    
    
    Premium for forward exchange contracts
    
    
    304
    
    
    
    
    
    
    
    Net Receivables (Payables) from forward
exchange contracts
    
    
    2,442
    
    
    
    
    
    
    
    
 The net exchange (gains) or losses arising from forward exchange contracts for the years ended
December 31, 2003, 2004 and 2005 were NT$0, NT$11,695 and
NT$(11,851) (US$388,713), respectively.b.
    
    Option contractsAs of December 31, 2005, the Company did not have any outstanding foreign currency option
contracts. As of December 31, 2004, the outstanding foreign currency option contracts were
listed as follows:
 Purchase
    
    SaleTransaction Type
    
    Settlement Date
    
    Amount
    
    AmountSell
    
    2005.01.10
    
    NT$
    50,550
    
    
    US$
    1,500Sell
    
    2005.01.10
    
    US$
    1,500
    
    
    NT$
    47,700Total
    
    NT$
    50,550
    
    
    US$
    1,500US$
    1,500
    
    
    NT$
    47,700
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The gains or losses resulted from the foreign currency option contracts were recorded as the
non-operation income or losses when the option contracts were exercised. For the year ended
December 31 2003, 2004 and 2005, the (gains) or losses recorded upon exercise of the foreign
currency option contracts were NT$(311), NT$1,503 and NT$0, respectively.c.
    
    Cross currency and interest rate swapsTo hedge against certain of the Companys long-term debts denominated in U.S. dollars which
bear interest at floating three-month SIBOR, the Company entered into cross currency and
interest rate swaps which effectively converted the debts into Japanese Yen and the floating
interest rate into a fixed interest rate. Since most of the Companys receivables are
denominated in Japanese Yen, the conversion from U.S. dollar to Japanese Yen mitigates the
foreign exchange exposure.As of December 31, 2004 and 2005, the Company did not have any outstanding cross currency
and interest rate swap contracts. The gains or losses resulted from the cross currency and
interest rate swaps were recorded as the non-operating income or losses. For the year ended
December 31, 2003, 2004 and 2005, the gains or losses from cross currency and interest rate
swaps were NT$(20,220), NT$0 and NT$0, respectively.d.
    
    Structured depositsThe Company entered into certain structured deposits, or dual currency deposits, to earn
higher interest rates, but they exposed the Company to foreign exchange risk. The Company placed
deposits with certain financial institutions, which entitled the Company to earn interest rates
in excess of the market rates for a basic deposit. However, the financial institutions have the
option to settle the deposit and accrued interest in the original currency or settle the deposit
and accrued interest with an alternative currency other than the original currency. The
conversion rate is stated in the contracts. These contracts are entered into for hedging
purposes.As of December 31, 2004 and 2005, the Company did not have any outstanding structure
deposits. The gains or losses resulted from the structure notes were recorded as the
non-operating income or losses. For the year ended December 31, 2003, 2004 and 2005, the (gains)
or losses from structure notes NT$(20,296), NT$(3,249) and NT$2,790, respectively.
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e.
    
    Transaction Risk
 i)
    
    Credit risk: Credit risk represents the positive net settlement amount of those
contracts with positive fair values at the balance sheet date. The positive net
settlement amount represents the loss to be incurred by the Company if the counter-parties
breached the contracts. The counter-parties to the foregoing derivative financial
instruments are the reputable financial institutions. The Company believes its exposure
related to the potential default by the counter-parties is minimized.ii)
    
    Market price risk: All derivatives are intended to hedge for fluctuation in foreign
exchange rates and interest rates. The Company believes the market price risk related to
the derivatives is minimal as gains or losses from the derivative contracts for hedging
purpose are likely to be offset by gains or losses from the underlying assets and
liabilities denominated in foreign currencies.iii)
    
    Cash flow risk: The Company has sufficient Japanese and US dollar assets to meet the
cash requirements for the future needs. Further, there will be corresponding cash inflow
for the cash outflow. The Company believes the cash flow risk related to the derivative
contracts is minimal.
 f.
    
    Fair values of the financial instruments were listed as follows:
 As of December 312004
    
    2005Carrying amount
    
    Fair value
    
    Carrying amount
    
    Fair valueNT$000
    
    NT$000
    
    NT$000
    
    US$000
    
    NT$000
    
    US$000Non-DerivativesCash and cash equivalents
    
    
    10,115,688
    
    
    
    10,115,688
    
    
    
    11,133,620
    
    
    
    339,440
    
    
    
    11,133,620
    
    
    
    339,440Short-term investments
    
    
    918,040
    
    
    
    934,197
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term investments
    
    
    1,620,465
    
    
    
    2,036,402
    
    
    
    1,226,753
    
    
    
    37,401
    
    
    
    2,497,109
    
    
    
    76,131Short-term debts and notes
    
    
    (2,996,778
    )
    
    
    (2,996,778
    )
    
    
    (1,893,754
    )
    
    
    (57,736
    )
    
    
    (1,893,754
    )
    
    
    (57,736
    )Long-term debts
    
    
    (12,509,507
    )
    
    
    (12,550,359
    )
    
    
    (10,413,038
    )
    
    
    (317,470
    )
    
    
    (10,451,654
    )
    
    
    (318,648
    )Credit balance of long
term equity investments
    
    
    
    
    
    
    
    
    
    
    (29,838
    )
    
    
    (910
    )
    
    
    (29,838
    )
    
    
    (910
    )DerivativesForward
    
    
    
    
    
    
    1,477
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options
    
    
    
    
    
    
    (165
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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i)
    
    The fair value of the Companys short-term financial instruments was based on the book
value of the instruments at the report date due to the short maturities. The aforementioned
short-term financial instruments included cash and cash equivalents, restricted cash,
receivables, payables, short-term debts and notes.ii)
    
    The fair value of the Companys marketable securities was based on the market price of
the marketable securities at the reporting date when the market price is available. If
there is no market price for the marketable securities, the fair value of the Companys
marketable securities was based on the financial or other related information available.iii)
    
    The fair value of the Companys long-term debts included current portion bearing variable
interest rates was estimated using the book value of the debt at the report date.
 g.
    
    DerivativesOn May 5, 1998, the Company issued convertible debentures in an aggregate principal amount of
US$150,000 (NT$4,761,000), which were privately placed with a financial institution. A wholly
owned subsidiary (the Subsidiary) of the Company subsequently entered into a call option
contract with the financial institution, the underlying reference being the convertible
debentures. The terms of the contract provided that the notional amount of US$150,000
(NT$4,761,000) is divided into fifteen options and the Subsidiary is entitled to exercise the
options separately, at the discretion of the Subsidiary during the life of the contract, but at a
minimum number of two and a maximum number fifteen. The Company simultaneously entered into
currency swaps, based on the notional amount of the debt, converting Japanese Yen was combined
into one contract. The Subsidiary exercised two options and five options on January 22, 2000 and
June 26, 2000, respectively. In April 2003, the Company settled the remaining eight options by
paying US$13,147 (NT$417,286). The related settlement gain was US$1,207 (NT$38,310).In June 2000, the Company entered into a contract with a financial institution for the settlement
of five options relating to a zero coupon convertible debenture due 2003 with the underlying
reference being 47,727,535 of the Companys common shares. The contract, as amended, expires in
May 2003. However, in April 2003, the Company extended the contract to May 2004, which was
subsequently extended to May 2005. As of December 31, 2004, the remaining underlying reference
was 53,253,964 of the Companys common shares. If the share price was lower than the
predetermined contract price, then the Company would pay the difference between the two amounts
to the financial institution. The contract rate at which the contract is settled is based on U.S.
dollars, and the Companys share price is converted into U.S. dollars using current N.T. dollars
to U.S. dollars exchange rates in order to determine the settlement amount. The
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predetermined contract price and the share price converted into U.S. dollars using current
exchange rate were US$1.37 (NT$43) and US$0.23 (NT$7) per share, respectively. The carrying
amount of this contract as of December 31, 2004 was a receivable of US$1.7 million (NT$54
million), while the fair value was a receivable of US$1.4 million (NT$44 million).26.
    
    Segment InformationThe Company operates predominantly in one industry segment, the design, manufacturing, and
supply of integrated circuits. The Companys chief operating decision maker is the Chief
Executive Officer, who reviews consolidated results of manufacturing operations when making
decisions about allocating resources and assessing performance of the Company. The Company
believes it operates in one segment, and all financial segment information can be found in the
consolidated financial statements.The geographic Information was listed as follows:
 2003
    
    Domestic
    
    Others
    
    Elimination
    
    ConsolidatedNT$000
    
    NT$000
    
    NT$000
    
    NT$000Sales to unaffiliated customers
    
    
    15,799,829
    
    
    
    1,912,358
    
    
    
    
    
    
    
    17,712,187Sales between geographic areas
    
    
    1,782,732
    
    
    
    391,747
    
    
    
    (2,174,479
    )
    
    
    Net Sales
    
    
    17,582,561
    
    
    
    2,304,105
    
    
    
    (2,174,479
    )
    
    
    17,712,187Operating income (loss),
including other expenses
    
    
    (7,289,636
    )
    
    
    (1,198,463
    )
    
    
    1,285,113
    
    
    
    (7,202,986
    )Interest revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,847Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,077,898
    )Income before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,177,037
    )Tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,027
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,197,745
    )Identifiable assets
    
    
    57,769,932
    
    
    
    6,288,840
    
    
    
    (4,140,075
    )
    
    
    59,918,697Capital expenditures
    
    
    1,598,526
    
    
    
    7,522
    
    
    
    
    
    
    
    1,606,048Depreciation and amortization
    
    
    9,278,878
    
    
    
    10,553
    
    
    
    (2,420
    )
    
    
    9,287,011
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2004
    
    Domestic
    
    Others
    
    Elimination
    
    ConsolidatedNT$000
    
    NT$000
    
    NT$000
    
    NT$000Sales to Unaffiliated Customers
    
    
    18,485,417
    
    
    
    4,894,306
    
    
    
    
    
    
    
    23,379,723Sales between geographic areas
    
    
    4,515,956
    
    
    
    13,793
    
    
    
    (4,529,749
    )
    
    
    Net Sales
    
    
    23,001,373
    
    
    
    4,908,099
    
    
    
    (4,529,749
    )
    
    
    23,379,723Operating income (loss)
including other expenses
    
    
    561,410
    
    
    
    168,718
    
    
    
    99,471
    
    
    
    829,599Interest revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,646Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (684,105
    )Income before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247,140Tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,781
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,333Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217,692Identifiable assets
    
    
    52,401,768
    
    
    
    4,492,353
    
    
    
    (2,498,445
    )
    
    
    54,395,676Capital expenditures
    
    
    2,551,655
    
    
    
    2,838
    
    
    
    
    
    
    
    2,554,493Depreciation and Amortization
    
    
    7,557,032
    
    
    
    7,562
    
    
    
    (2,434
    )
    
    
    7,562,160
 2005
    
    Domestic
    
    
    Asia
    
    
    Others
    
    
    Elimination
    
    
    ConsolidatedNT$000
    
    
    NT$000
    
    
    NT$000
    
    
    NT$000
    
    
    NT$000Sales to unaffiliated Customers
    
    
    15,440,265
    
    
    
    1,928,043
    
    
    
    1,539,828
    
    
    
    
    
    
    
    18,908,136Sales between geographic areas
    
    
    3,445,552
    
    
    
    
    
    
    
    
    
    
    
    (3,445,552
    )
    
    
    Net Sales
    
    
    18,885,817
    
    
    
    1,928,043
    
    
    
    1,539,828
    
    
    
    (3,417,261
    )
    
    
    18,908,136Operating income (loss)
including other expenses
    
    
    (7,197,081
    )
    
    
    46,596
    
    
    
    (2,240,903
    )
    
    
    2,786,667
    
    
    
    (6,604,721
    )Interest revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,860Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (377,261
    )Income before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,882,122
    )Tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (215,414
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,347Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,027,189
    )Identifiable assets
    
    
    21,877,132
    
    
    
    363,210
    
    
    
    991,301
    
    
    
    (548,725
    )
    
    
    22,682,918Capital expenditures
    
    
    1,578,868
    
    
    
    7,327
    
    
    
    8,868
    
    
    
    
    
    
    
    1,595,063Depreciation and amortization
    
    
    7,251,710
    
    
    
    4,601
    
    
    
    3,670
    
    
    
    (7,448
    )
    
    
    7,252,533
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For the year ended December 312003
    
    2004
    
    2005NT$000
    
    %
    
    NT$000
    
    %
    
    NT$000
    
    %
    
    US$00CustomersNintendo
    
    
    4,256,764
    
    
    
    24.03
    
    
    
    5,239,963
    
    
    
    22.41
    
    
    
    5,574,616
    
    
    
    29.48
    
    
    
    169,958
    For the year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Japan
    
    
    7,269,548
    
    
    
    8,363,806
    
    
    
    7,706,521
    
    
    
    234,955Singapore and Hong Kong
    
    
    3,487,250
    
    
    
    5,119,396
    
    
    
    4,076,395
    
    
    
    124,280United States
    
    
    823,145
    
    
    
    980,911
    
    
    
    629,235
    
    
    
    19,184Europe
    
    
    453,641
    
    
    
    1,077,416
    
    
    
    888,687
    
    
    
    27,094Total
    
    
    12,033,584
    
    
    
    15,541,529
    
    
    
    13,300,838
    
    
    
    405,513
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For the year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000ROM
    
    
    7,463,464
    
    
    
    8,372,758
    
    
    
    8,712,060
    
    
    
    265,611Flash
    
    
    5,810,494
    
    
    
    10,714,857
    
    
    
    6,870,378
    
    
    
    209,463SMS*
    
    
    2,359,687
    
    
    
    1,732,539
    
    
    
    1,661,678
    
    
    
    50,661SLC**
    
    
    1,286,807
    
    
    
    1,786,711
    
    
    
    1,191,553
    
    
    
    36,328EPROM
    
    
    303,519
    
    
    
    162,573
    
    
    
    16,883
    
    
    
    515Others
    
    
    488,216
    
    
    
    610,285
    
    
    
    455,584
    
    
    
    13,890Total net sales Revenue
    
    
    17,712,187
    
    
    
    23,379,723
    
    
    
    18,908,136
    
    
    
    576,468
 
 *
    
    SMS (Strategic Manufacturing Service) refers to value added service of memory and wafer
manufacturing to strategic alliance.**
    
    SLC (Systematic Logic Chip) refers Logic and Core SOC products. 27.
    
    Other Disclosuresa.
    
    Significant Subsequent EventsThe Companys shareholders approved and authorized in the Special Shareholders Meeting (SSM),
held on November 16, 2005, the Companys BOD to cancel 2,079,474,542 common shares at the amount
of NT$20,795 million. On February 7, 2006, the Companys BOD resolved to issue, by private
placement, 100,000 common shares at the discount price of NT$8.07 per share. The record dates
for cancellation and issuance of common shares were February 16, 2006 and February 17, 2006,
respectively. As of April 21, 2006, the registration has been completed.On January 18, 2006, the Companys BOD resolved to sell the FAB III building with the clean room
and adjunctive facilities to Powerchip Semiconductor Corporation at the amount of NT$5,300
million.On February 7, 2006, the Companys BOD resolved to issue 691,000 units of employee stock options
as the 4th issuance under 2005 Plan. The grant date of the issuance was set on
February 7, 2006 with the exercise price at the amount of NT$5.72 per unit.
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On March 7, 2006, Spansion, Inc. filed an action against Macronix International Co., LTD. and
Macronix America Inc. in the U.S. District Court for the Northern District of California (Case
No. C 06-1733 MJJ). The original Complaint asserted causes of action for false advertising,
trademark dilution and unfair competition. The Complaint further sought $100 million in
enhanced damages, attorneys fees, and injunctive relief. On May 19, 2006, Spansion filed a
First Amended Complaint alleging an additional claim for copyright infringement. All claims
asserted by Spansion arise out of the comparative advertising and marketing of the Macronix
NBitÔ flash memory chips. On June 5, 2006, Macronix International and Macronix America
filed Answers to the first Amended Complaint denying the allegations of the First Amended
Complaint and asserting a number of affirmative defenses. A Case Management Conference was
held on June 13, 2006, and the trial date was set on April 16, 2007. The parties are currently
in the beginning stages of discovery. Macronix International and Macronix America deny any
liability to Spansion and intend to vigorously defend the action. The management
considered the outcome of the judgment on and the expenditures from the lawsuit to be quite
uncertain. Therefore, no provision was made for any losses that may arise on the lawsuit.b.
    
    Significant Disaster LossesNo significant disasters occurred during the year ended December 31, 2005.28.
    
    Summary of Significant Differences between Accounting Principles Followed by the Company and
Accounting Principles Generally Accepted in the United States of
America (Restated)
   As of December 31, 2002(In million NT dollars)
    
    As reported
    
    Restatement
    
    As restatedShareholders equity
    
    
    28,351
    
    
    
    167
    
    
    
    28,518
 For the year ended December 31, 2003(In million NT dollars, except per share amounts)
    
    As reported
    
    Restatement
    
    As restatedNet Loss
    
    
    8,877
    
    
    
    (850
    )
    
    
    8,027Basic loss per share (in dollars)
    
    
    2.28
    
    
    
    (0.22
    )
    
    
    2.06Diluted loss per share (in dollars)
    
    
    2.28
    
    
    
    (0.22
    )
    
    
    2.06Basic loss
per share with reverse stock split retroactively adjusted
(in dollars)
    
    
    3.91
    
    
    
    (0.38
    )
    
    
    3.53Diluted loss per share with
reverse stock split retroactively
adjusted (in dollars)
    
    
    3.91
    
    
    
    (0.38
    )
    
    
    3.53
 As of December 31, 2003(In million NT dollars)
    
    As reported
    
    Restatement
    
    As restatedShareholders equity
    
    
    28,195
    
    
    
    (46
    )
    
    
    28,149
 For the year ended December 31, 2004(In million NT dollars, except per share amounts)
    
    As reported
    
    Restatement
    
    As restatedNet Loss
    
    
    429
    
    
    
    40
    
    
    
    469Basic loss per share (in dollars)
    
    
    0.09
    
    
    
    0.01
    
    
    
    0.10Diluted loss per share (in dollars)
    
    
    0.09
    
    
    
    0.01
    
    
    
    0.10Basic loss
per share with reverse stock split retroactively adjusted
(in dollars)
    
    
    0.15
    
    
    
    0.02
    
    
    
    0.17Diluted loss per share with
reverse stock split retroactively
adjusted (in dollars)
    
    
    0.15
    
    
    
    0.02
    
    
    
    0.17
 As of December 31, 2004(In million NT dollars)
    
    As reported
    
    Restatement
    
    As restatedShareholders equity
    
    
    32,760
    
    
    
    (5
    )
    
    
    32,755
 The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the Republic of China (R.O.C. GAAP) that differ in
the following respects from accounting principles generally accepted in the United States of
America (U.S. GAAP):a.
    
    Reclassification of time depositsUnder R.O.C GAAP, cash and cash equivalents include time
deposits regardless of original maturity. Under U.S. GAAP, cash
equivalents are short-term, highly liquid investments that are readily convertible to cash with
original maturities of 3 months or less. Therefore, time deposits with original maturities of
more than 3 months would not be considered cash and cash
equivalents under U.S. GAAP. As of
December 31, 2005 and 2004, time deposits with original maturities of
more than 3 months amounted to NT$1,520 million
(US$46.3 million) and NT$0, respectively.b.
    
    Marketable SecuritiesUnder R.O.C. GAAP, the Company carries the short-term marketable equity securities at the
lower of aggregate cost or market value. The unrealized losses of short-term marketable
equity securities are recorded as investment losses in the statement of operations, while
unrealized gains of short-term marketable equity securities are not recognized. The
Company carries the long-term marketable equity securities at the lower of aggregate cost
or market value if market price is available. The unrealized losses of long-term marketable
equity securities are reported as a deduction of shareholders equity, while the unrealized
gains are not recognized. Until January 1, 2005, the Company does not evaluate the marketable equity securities
for an other-than-temporary decline in value since the evaluation is not specifically
required under R.O.C. GAAP. The Companys policy is to account for all unrealized losses on
long-term investments as a charge to shareholders equity. Beginning January 1, 2005, the Company is required by ROC GAAP SFAS No.35 to evaluate
holding assets for any indication of impairment. If there is an indication that an asset may
be impaired, the Company is required to estimate the recoverable amount of assets and to record
impairment loss when the carrying value is less than the recoverable amount of the assets.
Subsequent reversal of an impairment loss is allowed when any indication of the impairment loss
recognized in the prior years may no longer exist.Under U.S. GAAP, SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, debt and equity securities that have readily determinable fair values are to be
classified as either trading,
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available-for-sale or held-to-maturity securities. Debt securities that the Company has the
positive intent and ability to hold to maturity are classified as held-to-maturity securities
and reported at amortized cost. Debt and equity securities that are bought and traded for
short-term profits are classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings of the current period. Debt and equity
securities not classified as either held-to-maturity or trading are classified as
available-for-sale securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders equity; however,
unrealized losses relating to declines in fair value deemed to be other-than-temporary are
recorded in earnings for both available-for-sales and held to maturity
securities. The Company did not have any investments classified as trading securities
or held-to-maturity securities during the periods presented.Under U.S. GAAP, the available-for-sale securities as of December 31, 2004 and 2005 were as
follows:
 As of December 312004
    
    2005Market value
    
    Cost
    
    Market value
    
    CostNT$000
    
    NT$000
    
    NT$000
    
    US$000
    
    NT$000
    
    US$000Classified as short-term investments:Open-end mutual funds, marketable
securities
    
    
    904,190
    
    
    
    901,871
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity securities
    
    
    31,660
    
    
    
    16,169
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal of short-term investments
    
    
    935,850
    
    
    
    918,040
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Classified as long-term investments:Equity securities
    
    
    1,049,921
    
    
    
    719,296
    
    
    
    2,245,220
    
    
    
    68,452
    
    
    
    747,019
    
    
    
    22,775
   Less than 12 months
    
    12 months or more
    
    TotalFair value
    
    Unrealized loss
    
    Fair value
    
    Unrealized loss
    
    Fair value
    
    Unrealized lossClassified as
short-term
investments:Open-end mutual
funds, marketable
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity securitiesClassified as
long-term
investments:Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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The Company accounts for the investments either on the cost basis or equity basis. The Company
regularly reviews its cost and equity investments to determine whether a significant event or
changes in circumstances has occurred that may have an adverse effect on the fair value of the
each investment. In the event a decline in fair value of an investment is determined, the
Company will evaluate if the decline in value is other than temporary.The Company generally considers its investments to be strategic and long-term in nature, so the
Company will evaluate if the fair value decline is recoverable within a reasonable period of
time. For investments accounted for using cost or equity method of accounting, the Company
evaluates fair value based on specific information available. Factors indicative of
other-than-temporary decline include, but are not limited to, recurring operating losses, credit
defaults and subsequent rounds of financing with pricing that is below the cost basis of the
investment. The Company considered all available quantitative and qualitative factors in
determining if an other-than-temporary decline in value of an investment has occurred. In the
event the carrying value of an investment exceeds its fair value and the decline in fair value
is determined to be other than temporary, the Company writes down the value of the investment to
its fair value. The Company generally believes when the fair value of an investment is below the
carrying value for six consecutive months, a rebuttable presumption exists that such decline is
other than temporary.As of December 31, 2005, the market price of Tower of US$1.45 was significantly below our
average cost basis of US$2.26 for a prolonged period of time without indicators of a near-term
recovery. Accordingly, the Company concluded the decline in the market value of Towers shares
was other-than-temporary. On a U.S. GAAP basis, an impairment charge of NT$210,843(US$6,428) was
recognized, based on the difference between Towers market price of US$1.45 per share and
average cost of Towers share of US$2.26 per share on
December 31, 2005. An other-than-temporary impairment from
decline in the market value of Towers shares of NT$0 and
NT$447,995 was recognised, in 2003 and 2004, respectively.The aggregate cost of the Companys cost method investments totaled NT$324,200 as of December
31, 2005 and were not evaluated for impairment because (a) the Company did not estimate the fair
value of those investments in accordance with paragraphs 14 and 15 of Statement 107 and (b) 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.
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c.
    
    Purchase accountingUnder ROC GAAP SFAS No. 5, when an investor purchased newly issued shares from an investee such
that its holding interest on the investee increases after the purchase, the investor shall book
the difference between net assets acquired and purchase consideration as an equity adjustment.
When allocating net assets acquired, ROC GAAP did not provide guidance over recognition of
intangible assets.Under US GAAP SFAS No. 141, Business Combinations, Goodwill arises when purchase consideration
exceeds net assets acquired. In addition, Statement 141 requires that intangible assets
be recorded apart from goodwill if they meet one of the criteria established in Statement 141
(i.e., either the contractual-legal criterion or the separability criterion.In September 2005, the Company purchased additional shares from its then equity investee,
Biomorphic Microsystems Corporation (Biomorphic), and increased its holding interest on
Biomorphic from 30.08% to 54.77%. The transaction leads to an
adjustment to equity of NT$147,894
under ROC GAAP.The Company is in the process of obtaining third-party
valuations of certain intangible assets; thus, the allocation of
purchase price is subject to change. The Companys goodwill under US GAAP is
currently valued at NT$147,894 for US GAAP purposes but is subject to
change from the allocation of the purchase price.d.
    
    Goodwill impairmentUnder R.O.C. GAAP, the Company recorded the excess of the investment cost over the fair value of
acquired net assets as goodwill and amortizes the goodwill over 5 to 20 years. Effective
January 1, 2005, the Company reviews goodwill for impairment whenever an event occurs or
circumstances change to reduce the fair value of goodwill below its carrying amount.Effective January 1, 2002, the Company adopted U.S. SFAS No. 142, Goodwill and Other Intangible
Assets and ceased amortization of goodwill which is now assessed for impairment annually or
more frequently if impairment indicators arise. Statement 142 requires that all goodwill be
assigned to one or more reporting units as of the acquisition date. The Biomorphic goodwill has,
however, not yet been allocated to a reporting unit as of
December 31, 2005, because the allocation of purchase price is not
finalizede.
    
    Impairment of long-term assetsUnder R.O.C. GAAP SFAS No. 35, effective January 1, 2005 the Company is required to recognize an
impairment loss when there is an indication that the carrying amount
of an asset or an asset group is not recoverable from the expected future cash flows. However, if the recoverable
amount increases in a
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future period, the amount previously recognized as impairment would be reversed and recognized
as a gain. The adjusted amount may not exceed the carrying amount that would have been
determined, net of depreciation, as if no impairment loss had been
recognized. In addition, ROC GAAP SFAS No.
35 requires an asset to be assessed for impairment individually when
an indication of
impairment exists for the individual asset.Under U.S. GAAP SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
an impairment loss is recognized when the carrying amount of an asset or a group of assets is
not recoverable from the expected future cash flows and an impairment loss is measured as the
difference between fair value and carrying amount of the asset or group of assets. The
impairment losses are recorded in current period earnings and cannot be reversed subsequently.
Long-lived assets (excluding goodwill and other indefinite-lived assets effective January 1,
2002) held and used by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. US GAAP SFAS
No. 144 requires a company to group its assets at the lowest
level of identifiable cash flows for determining possible impairment.In 2005 the Company has two assets where indicators of impairment exist and are required to be
assessed for impairment individually, and the Company wrote-off a
total of NT$901M impairment loss under R.O.C. GAAP. Under US GAAP such assets are either grouped or
considered entity-wide assets and are evaluated for impairment as
part of the group compared with the groups expected future cash flows. No
impairment under US GAAP is required and the Company reversed the impairment loss
under US GAAP.f.
    
    Pension benefitsAs permitted under R.O.C. GAAP, prior to 1996, the pension expense recorded by the Company in
connection with its defined benefit plans was based on the amount of the contributions made by
the Company to the pension plans required by government regulations. In 1996, the Company
adopted R.O.C. SFAS No. 18 that is similar in many respects to U.S. SFAS No. 87, Employers
Accounting for Pensions.U.S. SFAS No. 87, Employers Accounting for Pensions requires the Company to determine the
accumulated pension obligation and the pension expense on an actuarial basis. The difference in
the dates of adoption gives rise to a U.S. GAAP difference in the actuarial computation for
transition obligation pension expense and is allocated directly to
equity. The Company believes
the amount of the transition obligation is insignificant.g.
    
    Derivative Financial instrumentsUnder R.O.C. GAAP, foreign currency forward contracts are accounted for in a manner similar
to the requirement under U.S. SFAS No. 52. All other derivative financial instruments are
recorded based upon the accounting policies stated in Note 2.
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Differences between R.O.C. GAAP and U.S. GAAP in accounting for derivative financial instruments
were listed as follows:Currency option contractsUnder R.O.C. GAAP, the Company recorded gains or losses from the currency option contracts upon
settlement. Effective in October 2004, the Company complied with R.O.C. SFAS No. 32, The
Accounting Treatment of Foreign Exchange Option Contracts Before the Effectiveness of Financial
Accounting Standards No. 34, issued by the ARDF, and accounted for the option at the fair
values on the balance sheet date with the differences recorded in the net income.Under U.S. GAAP, the Company is required to record the gains or losses resulted from the
difference of the fair value at the balance sheet dates for the option contracts that do not
qualify for hedge accounting. The option contracts entered into by the Company did not
qualify as hedges for financial reporting purpose under U.S. GAAP; therefore, the Company
carried the option contracts at the fair value and recorded the gain
or losses resulting from
the changes in fair value at the balance sheet dates.Structured depositsUnder R.O.C. GAAP, the Company recorded the interest on the structure deposits on the accrual
basis. The gains and losses arising from the settlement of the structure deposit contracts are
recorded in the statement of operations.Under U.S. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Company is required to recognize the derivatives including embedded
derivatives not qualifying for hedge accounting at fair value on the
balance sheet with the difference recognized as gains or losses in the statement of operation.
Subsequent to December 31, 2000, none of the Companys derivatives contracts qualified for
hedges purpose under U.S. GAAP.h.
    
    Convertible bondsUnder ROC GAAP, when convertible bonds are issued, the entire instrument is recorded as a
liability at an amount equal to the proceeds received. Any discount or premium to the par value
of the convertible bond is amortized to the statement of income by using the effective interest
rate method. If the convertible bonds contain a redemption premium above its par value amount,
the excess is accrued, using the effective interest rate method, over the period to redemption as
a charge to interest expense. Upon conversion, the carrying value of the bond is credited to
common stock at its par value and the difference between the carrying value of the bond and the
par value of stock is recorded to capital reserve. No gain or loss is recognized. Effective
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from January 1, 2006, ROC SFAS No. 34 and ROC SFAS No. 36, Financial Statement Presentation and
Disclosure of Financial Instruments (ROC SFAS 36) require derivative embedded in hybrid
instrument, if not clearly and closely related to the host contract, to be bifurcated and
accounted for at fair value.The Company issued certain convertible debt instruments that contained embedded derivatives
based upon the features set in the convertible bond contracts. Under R.O.C. GAAP, there is no
accounting guidance specific to the embedded derivatives and beneficial conversion features. The
Company accounted for the convertible bonds with the aforementioned features in the manner
similar to the conventional bonds without the aforementioned features.Under U.S. GAAP, the Company considered whether the convertible bonds contain embedded
derivative features using the guidance provided in U.S. SFAS No. 133. Convertible bonds with
premium put options contain embedded derivatives subject to bifurcation in accordance with EITF
85-29.To the extent the embedded derivatives are determined to exist, the embedded derivatives
are bifurcated and accounted for in accordance with SFAS No. 133. If there are no
embedded derivatives present, the Company then considers whether there are beneficial
conversion features. To the extent the beneficial conversion features exist, the Company
would account for the beneficial conversion features in accordance with EITF 98-5 and EITF 00-27.Under U.S. GAAP, in accordance with EITF 00-27 Application of EITF98-5 Accounting for
Convertible Securities with Beneficial Conversion Features (EITF 00-27), convertible securities
with beneficial conversion features or contingently adjustable conversion ratios are recognized
and measured by allocating a portion of the proceeds equal to the intrinsic value of that
feature to additional paid-in capital. The amount to be allocated should be calculated at the
commitment date as the difference between the conversion price and the fair value of the common
stock into which the security is convertible, multiplied by the number of shares into which the
security is convertible. The resulting discount on the convertible security is accreted, as
interest expense, from the date the beneficial conversion feature is fixed to the stated
redemption date.All convertible bonds outstanding as of December 31,
2003, 2004 and 2005 contained embedded derivatives features that
require bifurcation in accordance with SFAS No. 133 and the
Company bifurcated the embedded derivatives from the host contracts
for these convertible bonds. The host bond contract was then accreted
from the initial amount to the maturity amount over the period from
the date of issuance to the maturity date using the effective
interest method. The net difference between R.O.C. GAAP and
U.S. GAAP represents 1) change in fair value of embedded
derivatives, and 2) difference between accretion period under both GAAP, and premium or discounts subject to accretion under both GAAP.
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i.
    
    Stock appreciation rightsR.O.C. GAAP has no specific accounting provisions for Stock Appreciation Rights (SAR) plans
and the
Company only recognizes compensation expense for SAR to the extent it is not covered by the gain
on the derivative financial instruments intended to fund the costs of the SAR. The Company
allocates a portion of the gains or losses from a derivative contract designated as a hedge of
the SAR program for R.O.C. GAAP purposes by correlating the number of shares in the SAR plan
that have vested with a number of shares referenced in the derivative contract. The Company
records gains or losses on the portion of the derivative contract related to the SAR based on
the difference between the strike price in the derivative contract and the employees exercise
price. Under R.O.C. GAAP basis the derivative contract related to the SAR in now accounted for
as a derivative contract not held for hedging and that therefore the U.S. GAAP differences for
derivatives now include any differences related to the SAR contract.U.S. GAAP requires the Company to account for its stock appreciation rights granted to employees
in accordance with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees. Under APB 25, the Company recognizes compensation expense for the plan
based on the amount by which the quoted market value of the shares of the Companys stock
covered by the grant exceeds the exercise price of the rights. Compensation is accrued as a
charge to expense over the vesting period based on current market values of the SAR at the end
of each period. As of December 31, 2003, all shares under SAR totaling 72,208,948 were expired
and cancelled.j.
    
    Employees stock option plansUnder R.O.C. GAAP, there were no specific regulations with respect to the accounting for stock
options prior to 2004. Effective January 1, 2004, the Company is required to use either the
fair value method or the intrinsic value method to account for the employees stock option plan.
Under the fair value method, stock options are stated on the fair value calculated by pricing
models such as Black-Scholes or binomial model. Under the intrinsic value method, stock options
are recorded by the excess of the market price of the underlying shares at the grant date over
the exercise price of the stock option. The fair value method is encouraged but not required. If
the intrinsic value is used, the Company is required to disclose pro-forma net income and
earnings per share assuming the fair value method is used. The Company chose the intrinsic value
method to account for the employees stock option plans. Under R.O.C. GAAP, no compensation
expense was recognized for the year ended December 31, 2003, 2004 and 2005.Under U.S. GAAP, the Company elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations to
account for the employees stock option plans. Under U.S. APB Opinion No. 25 and its
related interpretations, the Company is required to record the compensation expense over
the vesting period based on the difference between the exercise price and the current
market price at the end of each period. The Company did not record any compensation
expense on the U.S. GAAP basis as the exercise price of the stock options was equal to the
market price of the underlying common stock on the grant date.
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Under U.S. SFAS No. 123, Accounting for Stock-Based Compensation, the Company is required to
disclose the pro forma information regarding the options granted to the employees as if the fair
value method has been applied.For purposes of pro forma disclosures, the estimated fair value of the options is amortized
over the vesting period. For the year ended December 31, 2003, 2004 and 2005, the
compensation expense recognized under fair value method would have been NT$84,913,
NT$338,091 and NT$513,301, respectively. The Companys pro-forma information is as follows:
 For the year ended December 312003 (Restated)
    
    2004 (Restated)
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Net income (loss) under U.S. GAAP
    
    
    (8,026,653
    )
    
    
    (468,884
    )
    
    
    (4,635,555
    )
    
    
    (141,328
    )Total compensation expense of employees stock options
    
    
    (84,913
    )
    
    
    (338,091
    )
    
    
    (513,301
    )
    
    
    (15,650
    )Pro forma net income (loss)
    
    
    (8,111,566
    )
    
    
    (806,975
    )
    
    
    (5,148,856
    )
    
    
    (156,978
    )
  For the year ended December 312003 (Restated)
    
    2004 (Restated)
    
    2005NT$
    
    NT$
    
    NT$
    
    US$As reportedBasic EPS
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )Diluted EPS
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )Pro formaBasic EPS
    
    
    (3.57
    )
    
    
    (0.29
    )
    
    
    (1.77
    )
    
    
    (0.05
    )Diluted EPS
    
    
    (3.57
    )
    
    
    (0.29
    )
    
    
    (1.77
    )
    
    
    (0.05
    )
  As of December 31, 2004
    
    As of December 31, 2005Weighted-AverageOptions
    
    Weighted-Average
    
    Options
    
    Exercise(in thousand)
    
    Exercise Price
    

(in thousand)
    
    PriceOutstanding-beginning of year
    
    
    290,300
    
    
    
    9.31
    
    
    
    432,779
    
    
    
    11.21Granted
    
    
    195,768
    
    
    
    14.18
    
    
    
    204,909
    
    
    
    5.87Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (53,289
    )
    
    
    10.83
    
    
    
    (39,126
    )
    
    
    10.75Outstanding-end of year
    
    
    432,779
    
    
    
    11.21
    
    
    
    598,562
    
    
    
    9.42
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Weighted-average fair value of options granted for the year ended December 31, 2004 and 2005 was
NT$6.59 and NT$2.55 per unit, respectively. The weighted average remaining contractual life of those options
for the year ended December 31, 2004 and 2005 is 5.29 years
and 4.32 years, respectively.k.
    
    Purchase and Sale of the Companys Own SharesUnder R.O.C. GAAP, the net gains or losses resulting from the purchase and sale of the Companys
own shares for trading purposes are recorded as non-operating income or losses in the statements
of operations. Effective January 1, 2002, purchases or sales of the Companys own shares are
treated as treasury stock transactions.U.S. GAAP requires that if the Company acquires shares of its own capital stock for purposes
other than retirement, the cost of the acquired stock should be shown separately as a
deduction from the total of capital stock, additional paid-in capital, and retained
earnings, or accorded the accounting treatment appropriate for retired stock. Gains on
sales of the repurchased stock not previously accounted for as constructively retired
should be credited to additional paid-in capital; losses should be charged to additional
paid-in capital to the extent that previous net gains from sales or retirements of the same
class of stock are included therein, otherwise the losses are charged to retained earnings.l.
    
    Reclassification of Capital Account to Accumulated DeficitUnder R.O.C. GAAP, under the approval of shareholders, a company may reclassify its additional
paid-in capital account to accumulated deficit.Under U.S. GAAP, according to SAB Topic 5S, the SEC staff believes a deficit reclassification of
any nature is considered to be quasi-reorganization. As such, a company may not reclassify or
eliminate a deficit in retained earnings unless all requisite conditions for a
quasi-reorganization are satisfied. For the year ended December 31, 2003 and 2005, the Company
reclassified NT$2,630,621 and NT$315,704 of its additional paid-in capital to accumulated
deficit account, respectively. Under U.S. GAAP, this reclassification
is reversed.
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m.
    
    Rights issues and earnings per shareUnder R.O.C. GAAP, the portion of rights issues that are offered to employees contain a bonus
element, basic and diluted EPS shall be adjusted retroactively for the bonus element for
all periods presented. However, under
U.S. GAAP, such retroactive adjustment is required for all rights issues containing bonus
element, regardless whether the rights issuance is offered to employees or existing
shareholders.Under U.S. GAAP, earnings per share is calculated by dividing net income by the
weighted-average number of shares outstanding in each period, adjusted retroactively for
any stock dividends and stock splits issued subsequently. Other shares issued from
un-appropriated earnings, such as stock bonus to employees, are included in the calculation
of weighted-average number of shares outstanding from the date of occurrence. Earnings per
equivalent American Depository Share (ADS) are calculated by multiplying earnings per
share by 10 since one ADS represents 10 common shares. Under U.S. GAAP, Earnings per share
after retroactively adjusted by the capital reduction was NT$(3.53), NT$(0.17) and
NT$(1.59) for the year ended December 31, 2003, 2004 and 2005,
respectively.The number of weighted average shares outstanding under U.S. GAAP is presented below:
 For the year ended December 312003
    
    2004
    
    2005Number of common shares outstanding on January 1
    
    
    2,154,648,056
    
    
    
    2,585,997,762
    
    
    
    2,939,170,325Weighted average number of treasury stock
    
    
    (3,515,795
    )
    
    
    (3,515,795
    )
    
    
    (3,515,795
    )Cancellation of treasury stock
    
    
    (23,348,539
    )
    
    
    (23,348,539
    )
    
    
    (23,348,539
    )Bonds converted to common for the years ended
December 31, 2003 (263,975,068 shares)
    
    
    78,269,103
    
    
    
    
    
    
    
    Issuance of common shares for cash on November 11,
2003 (475,000,000 shares*51/365)
    
    
    38,740,984
    
    
    
    
    
    
    
    Issuance of 525,000,000 common shares for Global
Depositary Shares on April 5, 2004
    
    
    
    
    
    
    226,906,653
    
    
    
    Bonds converted to common shares for the year ended
December 31, 2004 (80,044,385 shares)
    
    
    
    
    
    
    35,997,545
    
    
    
    Retroactive adjustment for bonus element included
in the rights offering on November 3, 2003
(1.2462%)
    
    
    27,491,830
    
    
    
    
    
    
    
    Basic and dilutive weighted-average number of shares
    
    
    2,272,285,639
    
    
    
    2,822,037,626
    
    
    
    2,912,305,991
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n.
    
    Inventory cost basisUnder ROC GAAP, it is allowed to subsequently reverse inventory reserve and recognize a gain
even when said inventory is not sold yet. Under US GAAP, ARB43 requires that when inventory
is written down below cost, such reduced amount is to be
considered the cost for subsequent
accounting purposes. SEC Topic 5BB further states that a write-down of inventory to the lower of
cost or market at the close of a fiscal period creates a new cost basis that subsequently cannot
be marked up based on changes in underlying facts and circumstances.o.
    
    Plant capacity variancesAs permitted under R.O.C. GAAP, all plant capacity expense variances can either be charged to
the statement of operations or allocated between cost of goods sold and inventory using an
appropriate allocation method. The Companys policy is to expense such variances.Under U.S. GAAP, such plant capacity variances can only be allocated between cost of goods sold
and inventory. This has resulted in additional inventory allowances by NT$740,416, NT$24,823
and NT$28,144 as of December 31, 2003, 2004 and 2005, respectively.p.
    
    Gross profit and operating incomeUnder R.O.C. GAAP, a number of operating income and expenses are presented under the non-operating
income/expenses in the statement of operations, including the government subsidies for research and
development, inventory loss provision, allowance for prepaid expenses and the reversal of bad debt
expense. Under U.S. GAAP, the government subsidies for research and development, allowance for
prepaid expenses and the reversal of bad debt expense are included in operating income. The
inventory loss provision is included in the gross profit.q.
    
    Employee bonusesUnder R.O.C. GAAP, the employee bonuses and the remuneration to directors and supervisors, paid
in accordance with the provisions of the Companys articles of incorporation applicable to the
distribution of earnings, are recorded as an appropriation from retained earnings in the period
shareholder approval is obtained for the distribution of the Companys earnings. If the employee
bonuses are settled through the issuance of common shares of the Company, the amount transferred
from retained earnings is based on the par value of the common shares issued. The remuneration
to directors and supervisors may not be settled through the issuance of common shares.U.S. GAAP requires that such bonuses and remuneration to employees, directors and supervisors be
recorded as compensation expense in the period to which they relate. In addition, if the
employee bonuses are paid in the form of common shares, the fair value of the shares issued is
used to determine the amount of the expense. However, since the form of the payment of the
compensation expense is only determinable at the annual shareholders meeting, which is
generally after the issuance of the Companys annual financial
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statements, the compensation
expense is initially accrued in accordance with the Companys articles of incorporation in the
period to which it relates. The difference between the compensation expense initially
recorded and the fair value of the shares issued to settle the accrual, if any, is recorded in
the period in which shareholder approval is obtained.r.
    
    Research and Development ExpenseUnder R.O.C. GAAP, the Company recorded royalty expenses as the research and development
expense in operating expenses. Under U.S. GAAP, the Company stated the royalty
expenses as selling expenses or administrative expenses, based upon the nature of the
royalty expenses. Accordingly, U.S. GAAP basis research and development expenses
were NT$2,535,259 in 2003, NT$2,418,208 in 2004 and NT$2,784,483
(US$84,893) in 2005.s.
    
    10% tax on undistributed earningsUnder R.O.C. Tax Law, the undistributed earnings generated after 1997 are subject to a 10%
tax. Under R.O.C. GAAP, the Company recorded the 10% tax on undistributed earnings in the
year of shareholders approval on the retained earnings.Starting from 2002, the American Institute of Certified Public Accountants International
Practices Task Force (the Task Force) concluded that, in accordance with Emerging Issues
Task Force (EITF) 95-10, Accounting for Tax Credits Related to Dividends in Accordance
with U.S. SFAS No. 109, the 10% tax on undistributed earnings shall be accrued during the
period the earnings arise and adjusted to the extent that distributions are approved by the
shareholders in the following year. The U.S. GAAP policy had no effect on the income tax
expenses for the year ended December 31, 2003, 2004 and 2005 as the Company had the net
losses for tax purpose in the respective year.Under U.S. GAAP, if a company has experienced cumulative losses in recent years, it is not
generally able to consider subjective projections of future operating profits for the
purpose of determining the valuation allowance for deferred income tax assets. A valuation
allowance is provided on deferred tax assets to the extent that it is not more likely than
not that such deferred tax assets will be realized. Under U.S. GAAP, the Companys
valuation allowance for deferred tax assets was NT$10,302,448 and NT$12,096,445 as of
December 31, 2004 and 2005, respectively.t.
    
    Consolidated entitiesR.O.C. SFAS No.7 requires a company to consolidate all investees that a company has a controlling
interest in. Such control can be established by the companys majority representation in the Board
of Directors even if a company does not have a controlling financial interest through direct or
indirect ownership of a majority voting interests.Under U.S. GAAP, a company is required to consolidate all investees in which a company has a
controlling financial interest through direct or indirect ownership of a majority voting interest.
A company would not have a controlling financial interest in its investee by majority
representation in the Board of Directors alone. Magic Pixel Inc. was consolidated by the Company
in 2005 under R.O.C. GAAP. The Company did not have a controlling financial interest in Magic
Pixel Inc. and it should not be consolidated under U.S. GAPP. The deconsolidation of Magic Pixel Inc.
resulted in a reduction in cash and cash equivalents of NT$183,278
and revenues of NT$33,699.Change in capital structureUnder R.O.C. GAAP, a company is not required to retroactively adjust its shares for capital
reduction, except for purpose of EPS calculation.Under U.S. GAAP, SEC Topic 4C requires the effect of a capital structure change to a stock
dividend, stock split or reverse split which occurs after the date of the latest reported balance
sheet but before the release of the financial statements be given retroactive effect in the balance
sheet.As disclosed in Note 19 and 27a, on February 16, 2006, the Company cancelled 2,079 million common
shares proportionately amongst existing shareholders. The cancellation is effectively a reverse
stock split and accordingly has been given retroactive effect in the balance sheet under U.S. GAAP. The
number of common shares outstanding under U.S. GAAP amounted to 2,585,997,762, 2,939,170,325 and
2,915,821,786 in 2003, 2004 and 2005, respectively.
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The following reconciles net income and shareholders equity under R.O.C. GAAP as reported in
the consolidated financial statements to the net income and shareholders equity amounts
determined under U.S. GAAP, giving effect to the differences listed above.Net income (loss) for U.S. GAAP purposes is reconciled as follows:
 For the year ended December 312003
    
    2004(Restated)
    
    (Restated)
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Net income (loss) as reported under R.O.C. GAAP
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    (7,027,189
    )
    
    
    214,243
    )Additional pension gain on an actuarial basis
    
    
    2,696
    
    
    
    2,696
    
    
    
    2,696
    
    
    
    82Plant capacity loss
    
    
    268,671
    
    
    
    (257,565
    )
    
    
    368
    
    
    
    11Unrealized (losses) gains on marketable securities
    
    
    4,444
    
    
    
    (21,659
    )
    
    
    
    
    
    
    Other-than-temporary decline in value on marketable
securities
    
    
    
    
    
    
    (447,995
    )
    
    
    1,325,640
    
    
    
    40,416Derivative financial instrumentNet gains
(losses) on derivative financial instruments, including embedded
derivatives in convertible bonds
    
    
    378,615
    
    
    
    34,005
    
    
    
    (31,879
    )
    
    
    (972
    )Gain on embedded derivative in share purchase
agreement
    
    
    225,753
    
    
    
    
    
    
    
    
    
    
    
    Adjustment for taxes
    
    
    48,143
    
    
    
    1,914
    
    
    
    197,359
    
    
    
    6,017Accrued compensated absences
    
    
    
    
    
    
    
    
    
    
    (4,356
    )
    
    
    (133
    )Fixed asset impairment
    
    
    
    
    
    
    
    
    
    
    901,806
    
    
    
    27,494Amortization of goodwill
    
    
    
    
    
    
    2,028
    
    
    
    
    
    
    
    Net income (loss) in accordance with U.S. GAAP
    
    
    (8,026,653
    )
    
    
    (468,884
    )
    
    
    (4,635,555
    )
    
    
    (141,328
    )Other comprehensive income:Unrealized gains (losses) on available-for-sale securities
    
    
    1,642,167
    
    
    
    (1,519,910
    )
    
    
    618,388
    
    
    
    18,853Change in translation adjustment
    
    
    (30,182
    )
    
    
    (127,670
    )
    
    
    (26,516
    )
    
    
    (808
    )Reclassification adjustment for realized gains (losses)
on available-for-sale securities
    
    
    19,318
    
    
    
    243,497
    
    
    
    531,378
    
    
    
    16,201Comprehensive income (loss) in accordance with U.S.
GAAP
    
    
    (6,395,350
    )
    
    
    (1,872,967
    )
    
    
    (3,512,305
    )
    
    
    (107,082
    )
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2003
    
    2004(Restated)
    
    (Restated)
    
    2005NT$
    
    NT$
    
    NT$
    
    US$Basic net income (losses) per share
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )Diluted net income (losses) per share
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    (0.05
    )
   For the year ended December 312003
    
    2004(Restated)
    
    (Restated)
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Gross profit (loss) reported under R.O.C. GAAP
    
    
    (2,941,649
    )
    
    
    4,387,976
    
    
    
    241,764
    
    
    
    7,371Reversal of inventory losses provision
    
    
    1,185,227
    
    
    
    918,545
    
    
    
    478,129
    
    
    
    14,577Pension gain on actuarial basis
    
    
    2,696
    
    
    
    2,696
    
    
    
    2,696
    
    
    
    82Depreciation of idle assets
    
    
    (49,869
    )
    
    
    
    
    
    
    
    
    
    
    Impairment of idle assets
    
    
    (41,661
    )
    
    
    
    
    
    
    
    
    
    
    Vacation Accrual
    
    
    
    
    
    
    
    
    
    
    (3,652
    )
    
   $
    (111
    )Deconsolidation
    
    
    
    
    
    
    
    
    
    
    (31,797
    )
    
    
    (969
    )Plant capacity loss
    
    
    268,671
    
    
    
    (257,565
    )
    
    
    368
    
    
    
    11Gross profit (loss) in accordance with U.S. GAAP
    
    
    (1,576,585
    )
    
    
    5,051,652
    
    
    
    (687,508
    )
    
    
    (20,961
    )
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For the year ended December 312003
(Restated)
    
    2004
(Restated)
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Operating income (losses) under R.O.C. GAAP
    
    
    (7,683,989
    )
    
    
    (348,688
    )
    
    
    (4,874,559
    )
    
    
    (148,615
    )Pension gain on actuarial basis
    
    
    2,696
    
    
    
    2,696
    
    
    
    2,696
    
    
    
    82Government subsidy
    
    
    5,125
    
    
    
    18,125
    
    
    
    21,918
    
    
    
    668Allowance for prepaid expenses
    
    
    (334,971
    )
    
    
    
    
    
    
    (141,711
    )
    
    
    (4,320
    )Depreciation of idle assets
    
    
    (49,869
    )
    
    
    
    
    
    
    
    
    
    
    Impairment of idle assets
    
    
    (41,661
    )
    
    
    
    
    
    
    478,129
    
    
    
    14,577Reversal of inventory loss provision
    
    
    1,185,227
    
    
    
    918,545
    
    
    
    
    
    
    
    Accounts
receivable provision
    
    
    34,476
    
    
    
    2,028
    
    
    
    50,712
    
    
    
    1,546Vacation
accrued
    
    
    
    
    
    
    
    
    
    
    (4,356
    )
    
    
    (133
    )Deconsolidation
    
    
    
    
    
    
    
    
    
    
    69,740
    
    
    
    2,126Plant capacity loss
    
    
    268,671
    
    
    
    (257,565
    )
    
    
    368
    
    
    
    11Other reclassification
    
    
    
    
    
    
    
    
    
    
    (40,701
    )
    
    
    (1,241
    )Operating income (losses) under U.S. GAAP
    
    
    (6,614,295
    )
    
    
    335,141
    
    
    
    (4,356,362
    )
    
    
    (132,817
    )
  As of December 312003
(Restated)
    

2004
(Restated)
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Shareholders equity under R.O.C. GAAP
    
    
    29,247,534
    
    
    
    34,344,673
    
    
    
    28,558,400
    
    
    
    870,683Accrual for pension cost under actuarial method
    
    
    (35,039
    )
    
    
    (32,343
    )
    
    
    (29,647
    )
    
    
    (904
    )Net unrealized gain (losses) on
available-for-sale Securities
    
    
    682,837
    
    
    
    294,013
    
    
    
    1,375,517
    
    
    
    41,937Net losses
on derivative financial instruments, including embedded derivatives in convertible bonds
    
    
    (116,598
    )
    
    
    (31,881
    )
    
    
    
    
    
    
    Goodwill on investment
    
    
    (356
    )
    
    
    2,028
    
    
    
    149,923
    
    
    
    4,571Additional tax on undistributed additional tax
    
    
    (1,898,214
    )
    
    
    (1,896,300
    )
    
    
    (1,698,941
    )
    
    
    (51,797
    )Plant capacity loss
    
    
    268,671
    
    
    
    11,106
    
    
    
    11,474
    
    
    
    350Accrued compensated absences
    
    
    
    
    
    
    
    
    
    
    (4,356
    )
    
    
    (133
    )Fixed asset impairment
    
    
    
    
    
    
    
    
    
    
    901,806
    
    
    
    27,494Shareholders equity under U.S. GAAP
    
    
    28,148,835
    
    
    
    32,755,058
    
    
    
    29,264,176
    
    
    
    892,201
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As of December 312004(Restated)
    
    2005NT$000
    
    NT$000
    
    US$000Common shares
    
    
    29,391,703
    
    
    
    29,158,218
    
    
    
    888,970Additional paid-in capital
    
    
    13,982,563
    
    
    
    14,003,985
    
    
    
    426,951Accumulated deficits
    
    
    (9,991,069
    )
    
    
    (15,272,695
    )
    
    
    (465,631
    )Accumulated other comprehensive income
    
    
    410,477
    
    
    
    1,533,728
    
    
    
    46,760Treasury stock
    
    
    (1,038,616
    )
    
    
    (159,060
    )
    
    
    (4,849
    )Reserves
    
    
    
    
    
    
    
    
    
    
    Total of shareholders equity
    
    
    32,755,058
    
    
    
    29,264,176
    
    
    
    892,201
  As of December 312004
    
    2005NT$000
    
    NT$000
    
    US$000Unrealized gain (losses) on marketable securities
    
    
    348,435
    
    
    
    1,498,202
    
    
    
    45,677Cumulative translation adjustments
    
    
    62,042
    
    
    
    35,526
    
    
    
    1,083Total
    
    
    410,477
    
    
    
    1,533,728
    
    
    
    46,760
  For the year ended December 312003(Restated)
    
    2004(Restated)
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Domestic
    
    
    (6,786,384
    )
    
    
    (83,898
    )
    
    
    (4,089,772
    )
    
    
    (124,688
    )International
    
    
    (1,267,704
    )
    
    
    (357,452
    )
    
    
    (554,896
    )
    
    
    (16,918
    )Total
    
    
    (8,054,088
    )
    
    
    (441,350
    )
    
    
    (4,644,668
    )
    
    
    (141,606
    )
  For the year ended December 312003(Restated)
    
    2004(Restated)
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Expected income tax expense (benefit)
    
    
    (2,013,522
    )
    
    
    (110,338
    )
    
    
    (1,171,962
    )
    
    
    (35,731
    )Additional income tax due to different tax rate
under U.S. GAAP
    
    
    674,687
    
    
    
    (587,498
    )
    
    
    (559,397
    )
    
    
    (17,055
    )Tax credit forfeited (earned)
    
    
    829,546
    
    
    
    (294,120
    )
    
    
    611,131
    
    
    
    18,632Change in valuation allowance
    
    
    468,595
    
    
    
    1,997,992
    
    
    
    1,793,997
    
    
    
    54,695Net losses (gain) on long-term equity investment
    
    
    317,135
    
    
    
    43,884
    
    
    
    (84,630
    )
    
    
    (2,580
    )Non-taxable/deductible net losses (gain) on
financial instruments
    
    
    38,216
    
    
    
    108,913
    
    
    
    (331,943
    )
    
    
    (10,120
    )Effects of rate change
    
    
    (373,681
    )
    
    
    (1,051,035
    )
    
    
    (246,630
    )
    
    
    (7,519
    )Others
    
    
    31,908
    
    
    
    (74,931
    )
    
    
    7,488
    
    
    
    228Income tax expense (benefit)
    
    
    (27,116
    )
    
    
    32,867
    
    
    
    18,054
    
    
    
    550
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Concentration of Risk
     Valuation and Qualifying Accounts
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At December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Allowance for doubtful accounts at the beginning
    
    
    210,883
    
    
    
    165,257
    
    
    
    165,277
    
    
    
    5,039Bad debt expense (reversal)
    
    
    (33,059
    )
    
    
    787
    
    
    
    (50,712
    )
    
    
    (1,546
    )Bad debts written Off
    
    
    (12,567
    )
    
    
    
    
    
    
    
    
    
    
    Other adjustments
    
    
    
    
    
    
    (767
    )
    
    
    9,515
    
    
    
    290Balance at the end of the year
    
    
    165,257
    
    
    
    165,277
    
    
    
    124,080
    
    
    
    3,783Allowance for inventory losses at the beginning
    
    
    5,751,735
    
    
    
    4,380,019
    
    
    
    3,242,215
    
    
    
    98,848Amount expensed (reversal)
    
    
    (1,185,227
    )
    
    
    (923,686
    )
    
    
    (487,070
    )
    
    
    (14,850
    )Write-off of inventories
    
    
    (186,489
    )
    
    
    (211,092
    )
    
    
    (316,068
    )
    
    
    (9,636
    )Change in
consolidated entities
    
    
    
    
    
    
    
    
    
    
    133,874
    
    
    
    4,082Other adjustments
    
    
    
    
    
    
    (3,026
    )
    
    
    3,525
    
    
    
    107Balance at the end of the year
    
    
    4,380,019
    
    
    
    3,242,215
    
    
    
    2,576,476
    
    
    
    73,525Royalty accruals at the beginning
    
    
    672,604
    
    
    
    675,457
    
    
    
    683,918
    
    
    
    20,851Amount expensed
    
    
    195,000
    
    
    
    140,468
    
    
    
    218,051
    
    
    
    6,648Payment made
    
    
    (192,147
    )
    
    
    (132,007
    )
    
    
    (289,495
    )
    
    
    (8,826
    )Balance at the end of the year
    
    
    675,457
    
    
    
    683,918
    
    
    
    612,474
    
    
    
    18,673
 29
    
    Summarized Financial Information of Equity InvesteesThe following table presents summarized financial information in accordance with U.S. GAAP for
equity investees with an ownership percentage between 20-50% as of December 31, 2004 and 2005
and for the years ended December 31, 2003, 2004 and 2005:
 Year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Current assets
    
    
    215,390
    
    
    
    435,455
    
    
    
    211,515
    
    
    
    6,449Non-current assets
    
    
    46,820
    
    
    
    85,088
    
    
    
    58,102
    
    
    
    1,771Current liabilities
    
    
    176,643
    
    
    
    167,460
    
    
    
    87,097
    
    
    
    2,655Non-current liabilities
    
    
    326
    
    
    
    18,423
    
    
    
    1,690
    
    
    
    52Total shareholders equity
    
    
    85,241
    
    
    
    334,660
    
    
    
    180,830
    
    
    
    5,513
 Year ended December 312003
    
    2004
    
    2005NT$000
    
    NT$000
    
    NT$000
    
    US$000Net sales
    
    
    311,391
    
    
    
    466,717
    
    
    
    209,908
    
    
    
    6,400Sales less cost of sales
    
    
    38,969
    
    
    
    158,614
    
    
    
    78,062
    
    
    
    2,380Net income (loss)
    
    
    (284,591
    )
    
    
    (154,804
    )
    
    
    (116,445
    )
    
    
    (3,550
    )
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30.
    
    New Accounting PronouncementsU.S. GAAPIn March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force (EITF)
Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The Issues objective is to provide guidance for identifying
other-than-temporarily impaired investments. EITF 03-1 also provides new disclosure requirements
for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued a
FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the measurement and
recognition guidance in EITF 03-1 until further notice. In November 2005, the FASB issued a FASB
Staff Position (FSP) FAS 115-1/124-1 that addresses the measurement and recognition guidance for
identifying other-than-temporarily impaired investments. This FSP also includes accounting
consideration subsequent to the recognition and requires certain disclosures about unrealized
losses that have not been recognized as other-than-temporary impairment. The disclosure
requirements of EITF 03-1 and FSP 115-1/124-1 are effective with this annual report for fiscal
2004 and 2005.In November 2004, FASB issued FASB Statement No. 151, which amended the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that
those items be recognized as current-period charges and requires the allocation of fixed
production overheads to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during fiscal years beginning after June 15,
2005. The Company expected to adopt the guidance on January 1, 2006. The adoption of this
Statement is expected to increase cost of goods sold and reduce inventory balance on a US GAAP
basis.On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an alternative.Statement 123(R) originally required adoption no later than July 1, 2005. In April 2005, the
Securities and Exchange Commission (SEC) issued a release that amends the compliance dates for
Statement 123(R). Under the SECs new rule, the Company will be required to apply Statement
123(R) as of January 1, 2006. Early adoption will be permitted in periods in which financial
statements have not yet been issued. We expect to adopt Statement 123(R) on January 1, 2006.Statement 123(R) permits public companies to adopt its requirements using one of two methods:A modified prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of Statement 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of Statement 123 for all
awards granted to employees prior to the effective date of Statement 123(R) that remain unvested
on the effective date.A modified retrospective method which includes the requirements of the modified prospective
method described above, but also permits entities to restate, based on the amounts previously
recognized under Statement 123 for purposes of pro forma disclosures, either (a) all prior
periods presented or (b) prior interim periods of the year of adoption.The company plans to adopt Statement 123 using the modified-prospective method.As permitted by Statement 123, the company currently accounts for share-based payments to
employees using Opinion 25s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s
fair value method will have a significant impact on our result of operations, although it will
have no impact on our overall financial position. The impact of adoption of Statement 123(R)
cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods,
the impact of that standard would have approximated the impact of Statement 123 as described in
the disclosure of pro forma net income and earnings per share in Note 28(j) to our consolidated
financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after adoption. While the
company cannot estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amount of operating cash flows
recognized in prior periods for such excess tax deductions were $-, $-, and $- in 2005, 2004 and
2003, respectively.
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In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment
of APB Opinion No.29. APB Opinion No.29, Accounting for Nonmonetary Transactions, is based on
the principle that exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. SFAS No. 153 amends APB Opinion No. 29, eliminating the exception to fair
value accounting for nonmonetary exchanges of similar productive assets and replaces it with a
general exception to fair value accounting for nonmonetary exchanges that do not have commercial
substance if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The statement is effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company does not expect this statement to have
a material impact on the financial condition or results of operation.In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error Corrections. SFAS No.
154 replaces APB Opinion No. 20 Accounting Change, and SFAS No. 3 Reporting Accounting
Changes in Interim Financial Statements and changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS No. 154 also applies to all voluntary
changes in accounting principle and changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition provision. The
statement also defines retrospective application and restatement. The retrospective
application of a change in accounting principles is limited to the direct effects of the
changes. The statement should be affective for accounting changes made in fiscal years beginning
after December 15, 2005. The Company does not expect this statement to have a material impact on
the financial condition or results of operation.
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In February 2006, the FASB issued SFAS No. 155 Accounting for Certain Hybrid Financial
Instruments 
An Amendment of SFAS No. 133 and 140. The Statement permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative that otherwise would require
bifurcation; establish a requirement to evaluate interests in securitized financial assets and
allow a qualifying special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial instrument. The
statement is effective for all financial instruments acquired or issued after the beginning of
an entitys first fiscal year that begins after September 15, 2006. The Company is currently
evaluating the potential impact of this standard on its financial position and the result of
operations, but does not believe the adoption of SFAS No. 155 will have a material effect on the
result of operations or financial position of the Company.R.O.C. GAAPIn December 25, 2003, the R.O.C. Accounting Research and Development Foundation (ARDF) issued
Statement of Financial Accounting Standards No. 34, Accounting for Financial Instruments,
which is effective for financial statements with fiscal years ending on or after December 31,
2006. Early adoption of this statement is not allowed. SFAS No. 34 requires that all financial
instruments, excluding certain financial instruments specified in this statement, as either
trading, available-for-sale or held-to-maturity. Debt securities owned with positive intent and
ability to hold to maturity are classified as held-to-maturity securities and reported at
amortized cost. Debt and equity securities that are purchased and traded for short-term profit
are classified as trading securities and reported at fair value, with unrealized holding gains
and losses reported as part of net income. Debt and equity securities not classified as either
held-to-maturity or trading are classified as available-for-sale securities, which should be
reported at fair value, with unrealized gains and losses reported as a separate component of
stockholders equity. In addition, all derivatives are required to be reported at fair value.
The Company is currently evaluating the effect of the adoption of this statement.In July 1, 2004, the R.O.C. ARDF issued SFAS No. 35, Accounting for Impairment of Assets,
which is effective for financial statements with fiscal years ending on or after December 31,
2005. This statement requires that impairment loss should be recognized whenever events or
changes in circumstance indicate the carrying amount of an asset may be lesser than its
recoverable amount. The Company is currently evaluating the effect of the adoption of this
statement.In December 9, 2004, the R.O.C. ARDF issued the revision for SFAS No. 5(R), Accounting for
Long-Term Equity Investment, which is effective for financial statements with fiscal years
beginning on or after January 1, 2005. This revision of the guidance requires that operating
losses of investees evaluated under equity method be allocated between controlling and
non-controlling interest until those losses exceed the non-controlling interests investment. In
that event, the excess of any further losses are charged to the
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controlling interest except to
the extent that the minority interest has a binding obligation to, and is able to undertake the
losses. The Company does not expect SFAS No. 5(R) have a material impact on the financial
condition or results of operation.In December 9, 2004, the R.O.C. ARDF issued the revision for SFAS No. 7(R), Consolidated
Financial Statements, which is effective for financial statements with fiscal years beginning
on or after January 1, 2005. This revision of the guidance requires the Company to consolidate
all investees under the control of the Company. Control is not only presumed when the parent
company owns over 50% of voting rights of the investee but also evidenced by control under
certain situations specified in SFAS No. 7(R). In addition, the threshold for the determination
of whether to consolidate an investee was revoked. Before the adoption of SFAS No. 7(R), the
Company was not required to file consolidated financial statements to SFC in Taiwan, as none of
the investees of the Company pass the threshold for consolidation. However, after the adoption
of this revised statement, the Company will be required to file the semi-annual consolidated
financial statements to SFC in Taiwan.In June 2005, the R.O.C. ARDF issued SFAS No. 36 Financial Instruments: Disclosure and
Presentation, which is also required to be applied by the Company on January 1, 2006. SFAS No.
36 will require the Company for the presentation of financial instruments and identifies the
information that should be disclosed about them. The presentation requirements apply to the
classification of financial instruments, from the perspective of the issuer, into financial
assets, financial liabilities and equity instruments; the classification of related interest,
dividends, losses and gains; and the circumstances in which financial assets and financial
liabilities should be offset. The guidance requires disclosure of information about factors that
affect the amount, timing and certainty of an entitys future cash flows relating to financial
instruments and the accounting policies applied to those instruments. The guidance also requires
disclosure of information about the nature and extent of an entitys use of financial
instruments, the business purposes they serve, the risks associated with them, and managements
policies for controlling those risks. SFAS No. 36 complements the principles for recognizing
and measuring financial assets and financial liabilities in SFAS No. 34 Accounting for
Financial Instruments.
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APPENDIX A
 GLOSSARY OF TECHNICAL TERMS
 AND circuit
    
    A circuit which has two or more
input signal gates and which
delivers an output only if and when
every input signal gate is energized
simultaneously.ASIC
    
    Application Specific Integrated
Circuit. A custom designed
integrated circuit that performs
specific functions which would
otherwise require a number of
commodity integrated circuits to
perform. The use of an ASIC in place
of a conventional integrated circuit
reduces product size and cost and
also improves reliability.ASSP
    
    Application Specific Standard
Product. A standard integrated
circuit designed for a specific
product or application, such as a
VCR or microwave.ATA
    
    AT attachment, or Advanced
Technology Attachment. The
specification for an Integrated
Device Electronics interface which
is a type of hardware interface
widely used to connect various
peripheral devices to a personal
computer.BIOS
    
    Basic Input Output System. This
software controls the basic power-up
functioning of a computer system.CD-ROM
    
    Compact Disc used for data storage
on a read-only basis.CD-R/W
    
    CD-recordable and rewritable.
Originally called CD-erasable,
CD-RW can be erased and new
information can be re-recorded onto
the same physical location on the
disc by a CD-RW recorder.DAM
    
    Digital Answering Machine.Die
    
    A piece of a semiconductor wafer
containing the circuitry of a single
chip.DINOR
    
    Divided bit-line NOR
Mitsubishi-patented Flash
architecture used in its Flash
memory product line. DINOR offers
the high-speed random-access
capability of the NOR architecture,
without NORs over-erase problems or
the need to set all bits to zero
before erase. It also offers the
high-density and single power-supply
characteristics of the NAND Flash
architecture. Programming occurs at
a lower threshold voltage than erase
in the DINOR Flash architecture, the
opposite of the NOR architecture.DRAM
    
    Dynamic Random Access Memory. A type
of volatile memory product that is
used in electronic systems to store
data and program instructions. It is
the most common type of RAM and must
be refreshed with electricity
thousands of times per second or
else it will fade away.
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DSP
    
    Digital Signal Processor. A type of
integrated circuit that processes
and manipulates digital information
after it has been converted from an
analog source. DSPs are parallel
processors used for high complexity,
high-speed real-time computations in
a wide variety of applications,
including digital cell telephone
systems and data compression
systems. A device which incorporates
Flash memory on which other devices
rely for access to a computerEmbedded Flash controller
    
    system. A disk controller, for
example, controls access to one or
more disk drives, managing physical
and logical access to the drive or
drives.EPROM
    
    Erasable Programmable ROM.
Nonvolatile memory which can be
reprogrammed by removing the device
from the system, erasing the data
through exposure to ultraviolet
light and reprogramming and
reinstalling the device in the
system.EEPROM
    
    Electrically Erasable Programmable
ROM. Similar to EPROM, except that
it can be erased electronically
before being reprogrammed.Ethernet
    
    A type of LAN.Flash Memory
    
    A type of non-volatile memory, similar to an EEPROM in
tint it is erasable and reprogrammable. The difference
is that it can be erased and reprogrammed in the
electronic system into which the Flash memory chip has
been incorporated.GPS
    
    Global Positioning Satellite System. A network of
satellites that provides precise location determination
to receivers.GSM
    
    Global System for Mobile Communications. A standard for
digital mobile telephone networks.GUI
    
    Graphics User Interface. An interface which allows
operation of a computer by manipulating graphical icons
and windows (usually by pointing and clicking a mouse)
rather than using text commands.HDD
    
    Hard Disk Drive. An electro-mechanical device that
records data onto spinning rigid magnetic disks in
discrete data blocks each of which can be randomly
accessed. The primary mass storage device of a
computer.
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Integrated Circuit
    
    A combination of two or more transistors on a base
material, usually silicon. All semiconductor chips,
including memory chips and logic chips, are just very
complicated integrated circuits with thousands of
transistors.LAN
    
    Local Area Network. A short distance network designed
to connect computers within a localized environment to
enable the sharing of databases and other
communications.LCD
    
    Liquid Crystal Display. A type of display that uses a
liquid compound with a polar molecular structure,
sandwiched between two transparent electrodes. When an
electric field is applied, the molecules align with the
light passing through it. A polarized filter laminated
over the electrodes can selectively turn on a cell or
a pixel, containing the liquid crystal material,
turning it dark.Logic Product
    
    A product that contains digital integrated circuits
that process, rather than store, information.Mask
    
    A piece of glass on which an integrated circuits
circuitry design is laid out. Integrated circuits may
require up to 20 different layers of design each with
its own Mask. In the integrated circuit production
process a light shines through the Mask leaving an
image of the design on the wafer.Mb
    
    Mega Bit. One million (or 1,048,576) bits as a unit of
data size or memory capacity.Memory
    
    A group of integrated circuits that a computer uses to
store data and programs, such as ROM, RAM, DRAM and
SRAM.MHz
    
    Megahertz. One million cycles per second. Typically
measures the clock speed of microprocessors.Micron
    
    1/25,000 of an inch. Circuitry on an integrated circuit
typically follows lines that are less than one micron
wide.Motherboard
    
    The main piece of circuitry inside a personal computer.MP3
    
    Motion Picture Experts Group-I, Audio Layer 3. A
digital data compression and storage technology for
music.NAND circuit
    
    Not AND. A logic circuit whose output signal is a
logical 1 if any of its input signals is a logical 0
and the output signal of which is a logical 0 if all of
its input signals are logical 1s.Nonvolatile memory
    
    Memory products which retain their data content without
the need for constant power supply.NOR circuit
    
    Not OR. A logic circuit in which an output signal appears
only when a signal is absent from all of its input gates.OR circuit
    
    A logic circuit in which the output signal is a logical 1
if any one or more of its input signals is a logical 1.PAC
    
    Paired Array Contact.PCMCIA cards
    
    Personal computer cards, standardized by Personal Computer
Memory Card International of San Jose, California or
credit card sized, removable modules for portable
computers.
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PDA
    
    Personal Digital Assistant. A hand-held multifunctional
minicomputer used for, among other things, word
processing, name card retention and appointment calendars.PHS
    
    Personal Hand Set. A lower capability but less expensive
mobile telephone communications system currently achieving
substantial consumer acceptance in Japan.PROM
    
    Programmable Read-Only Memory. Similar to ROM in that once
programmed it can be read only and not changed.
Programmable ROM enables customers to program the
integrated circuits themselves, rather than it being
programmed when it is manufactured. The programming is
possible because of a series of fuses in the circuitry
that can be selectively blown to create a unique type of
data.RAM
    
    Random Access Memory. A type of volatile memory, forming
the main memory of a computer where applications and files
are run.ROM
    
    Read-Only Memory. Memory that is programmed by the
manufacturer and cannot be changed. Typically, ROM is used
to provide start-up data when a computer is first turned
on.Semiconductor
    
    A material with electrical conducting properties in
between those of metals and insulators. (Metals always
conduct and insulators never conduct, but semiconductors
sometimes conduct.) Essentially, semiconductors transmit
electricity only under certain circumstances, such as when
given a positive or electric charge. Therefore, a
semiconductors ability to conduct can be turned on or off
by manipulating those charges and this allows the
semiconductor to act as an electric switch. The most
common semiconductor material is silicon, used as the base
of most semiconductor chips today because it is relatively
inexpensive and easy to create.SMIF Box System
    
    Standard Mechanical Interface Box System. A system which
links process microenvironments so that a wafer is never
exposed to room air. With a SMIF Box System, traditional
environmental conditions are replaced with a
microenvironment that can be pressurized with air or
nitrogen to keep out room air.SRAM
    
    Static Random Access Memory. A type of volatile memory
product that is used in electronic systems to store data
and program instructions. Unlike the more common DRAM, it
does not need to be refreshed.STB
    
    Set top box. A device to differentiate signals from
television and multimedia service providers.SXGA
    
    Super Extended Graphics Array. An enhanced set of Video
Graphics Array standards that is capable of displaying an
image ranging from 768 x 1024 pixels to 1024 x 1280
pixels.Transistor
    
    An individual circuit that can amplify or switch electric
current. This is the building block of all integrated
circuits and semiconductors.VCD
    
    Video Compact Disk.Volatile memory
    
    Memory products which lose their data content when the
power supply is switched off.Wafer
    
    Thin, round, flat piece of silicon that is the base of
most integrated circuits.
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##### Table of Contents



Signatures
  MACRONIX INTERNATIONAL CO., LTD.(Registrant)Date:
July 17, 2006
    

By:
    /s/
Miin WuName: Miin WuTitle: President




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EXHIBIT INDEX
 ExhibitNumber
    
    Description2b.1
    
    The Company hereby agrees to furnish to the Securities and
Exchange Commission, upon request, copies of instruments defining
the rights of holders of long-term debt of the Company and its
subsidiaries.3.1
    
    Articles of Incorporation of the Company (English translation)*.8.1
    
    List of subsidiaries of the Company*.12.1
    
    Certifications of our President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*12.2
    
    Certifications of our Associate Vice President, Finance
Department, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*13.1
    
    Certifications of our President pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*13.2
    
    Certifications of our Associate Vice President, Finance
Department, pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*14.1
    
    Amended and Restated Deposit Agreement, dated as of February 7,
2002, among the Company, The Bank of New York, as depositary, and
Holders from time to time of American Depositary Receipts issued
thereunder, including the form of American Depositary Receipt(1).14.2
    
    Indenture, dated as of February 10, 2003, by and between the
Company and The Bank of New York, as trustee(2).14.3
    
    Land Lease Agreement, dated as of March 3, 1990, by and between
the Company and the Hsinchu Science-Based Industrial Park
Administration, in relation to Office Building and Fab I Site(3).14.4
    
    Land Lease Agreement, dated as of August 1, 1994, by and between
the Company and the Hsinchu Science-Based Industrial Park
Administration, in relation to Auxiliary Vehicular Facilities(4).14.5
    
    Land Lease Agreement, dated as of January 1, 1994, by and between
the Company and the Hsinchu Science-Based Industrial Park
Administration, in relation to Back-End Operation Plant(5).14.6
    
    Land Lease Agreement, dated as of June 1, 1995, by and between the
Company and the Hsinchu Science-Based Industrial Park
Administration, in relation to Fab II and Fab III Site (6).14.7
    
    Deposit Agreement, dated as of April 5, 2004, among the Company,
Citibank, N.A., as depositary, and Holders from time to time of
Global Depositary Receipts issued thereunder, including the form
of Global Depositary Receipt(8).




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##### Table of Contents



ExhibitNumber
    
    Description*
    
    Filed with this Form 20-F.(1)
    
    Incorporated by reference to Exhibit 3.1 to the Companys Form 20-F filed with the Commission on June 29, 2004.(2)
    
    Incorporated by reference to Exhibit 3(a) to the Companys Registration Statement on Form F-6 (File No. 333-8602) filed with the Commission on February 7, 2002.(3)
    
    Incorporated by reference to Exhibit 10.2 to the Companys Form 20-F filed with the Commission on July 1, 2003.(4)
    
    Incorporated by reference to Exhibit 10.6 to the Companys Registration Statement on Form F-1 (File No. 333-1870) filed with the Commission on March 1, 1996.(5)
    
    Incorporated by reference to Exhibit 10.7 to the Companys Registration Statement on Form F-1 (File No. 333-1870) filed with the Commission on March 1, 1996.(6)
    
    Incorporated by reference to Exhibit 10.8 to the Companys Registration Statement on Form F-1 (File No. 333-1870) filed with the Commission on March 1, 1996.(7)
    
    Incorporated by reference to Exhibit 10.9 to the Companys Registration Statement on Form F-1 (File No. 333-1870) filed with the Commission on March 1, 1996.(8)
    
    Incorporated by reference to Exhibit 14.9 to the Companys Form 20-F filed with the Commission on June 29, 2004.
 100