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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 20-F

[  ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934

OR


[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


for the fiscal year ended DECEMBER 31, 2002


OR


[  ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934


|                       |  |        
|---------------------- |  | -------
|Commission file number |  | 0-27884

(GRAPHIC)

(Exact name of Registrant as specified in its charter)


MACRONIX INTERNATIONAL CO., LTD.


(Translation of Registrants name into English)Republic of China


(Jurisdiction of incorporation or organization)No. 16 Li-Hsin Road
Science-Based Industrial Park
Hsinchu, Taiwan, Republic of China
(Address of principal executive offices)




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


|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  | None                                     
|                    |  |                                          

Securities registered or to be registered pursuant to Section 12(g) of the Act.American Depositary Shares representing Common Shares
Common Shares, par value NT$10 per share*

(Title of Class)

* Not for trading in the United States, but only in connection with the registration of the American Depositary Shares.

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

None

(Title of Class)


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

As of December 31, 2002, 3,691,276,875 Common Shares were outstanding.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X]   No[  ]

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

Item 17 [  ]  Item 18 [X]



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TABLE OF CONTENTS



|                                                 |                                                                                       |  |  |  |  |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|SUPPLEMENTAL INFORMATION AND EXCHANGE RATES     
|CAUTIONARY STATEMENT                            
|PART I                                          
|                                                 | Item 1. Identity of Directors, Senior Management and Advisers                        
|                                                 | Item 2. Offer Statistics and Expected Timetable                                      
|                                                 | Item 3. Key Information                                                              
|                                                 | Item 4. Information on the Company                                                   
|                                                 | Item 5. Operating and Financial Review and Prospects                                 
|                                                 | Item 6. Directors, Senior Management and Employees                                   
|                                                 | Item 7. Major Shareholders and Related Party Transactions                            
|                                                 | Item 8.Financial Information                                                         
|                                                 | Item 9. The Offer and Listing                                                        
|                                                 | Item 10. Additional Information                                                      
|                                                 | Item 11. Quantitative and Qualitative Disclosure About Market Risk                   
|                                                 | Item 16A. Audit Committee Financial Expert                                           
|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                                                     
|                                                 | Item 16A. Audit Committee Financial Expert                                           
|                                                 | Item 16B. Code of Ethics                                                             
|                                                 | Item 16C. Principal Accountant Fees and Services                                     
|PART III                                        
|                                                 | Item 17. Financial Statements                                                        
|                                                 | Item 18. Financial Statements                                                        
|                                                 | Item 19. Exhibits                                                                    
|APPENDIX A                                      
|Signatures                                      
|EX-3.1 ARTICLES OF INCORPORATION                
|Ex-8.1 List of Subsidiaries of the Company      
|EX-10.2 INDENTURE, DATED AS OF FEBRUARY 10, 2003
|EX-10.10 SUMMARY OF TERMS AND CONDITIONS        



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TABLE OF CONTENTS

|                                            |  |                                                                              |     |  |     | 
|------------------------------------------- |  | ---------------------------------------------------------------------------- | --- |  | --- | 
|Supplemental Information and Exchange Rates |  |                                                                              | 1   | 
|Cautionary Statement                        |  |                                                                              | 1   | 
|PART I                                     
|Item 1.                                     |  | Identity of Directors, Senior Management and Advisers                        |     |  | 3   | 
|Item 2.                                     |  | Offer Statistics and Expected Timetable                                      |     |  | 3   | 
|Item 3.                                     |  | Key Information                                                              |     |  | 3   | 
|Item 4.                                     |  | Information on the Company                                                   |     |  | 20  | 
|Item 5.                                     |  | Operating and Financial Review and Prospects                                 |     |  | 41  | 
|Item 6.                                     |  | Directors, Senior Management and Employees                                   |     |  | 71  | 
|Item 7.                                     |  | Major Shareholders and Related Party Transactions                            |     |  | 76  | 
|Item 8.                                     |  | Financial Information                                                        |     |  | 79  | 
|Item 9.                                     |  | The Offer and Listing                                                        |     |  | 83  | 
|Item 10.                                    |  | Additional Information                                                       |     |  | 87  | 
|Item 11.                                    |  | Quantitative and Qualitative Disclosures About Market Risk                   |     |  | 100 | 
|Item 12.                                    |  | Description of Securities Other than Equity Securities                       |     |  | 105 | 
|PART II                                    
|Item 13.                                    |  | Defaults, Dividend Arrearages and Delinquencies                              |     |  | 105 | 
|Item 14.                                    |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |     |  | 105 | 
|Item 15.                                    |  | Controls and Procedures                                                      |     |  | 105 | 
|Item 16A.                                   |  | Audit Committee Financial Expert                                             |     |  | 105 | 
|Item 16B.                                   |  | Code of Ethics                                                               |     |  | 105 | 
|Item 16C.                                   |  | Principal Accountant Fees and Services                                       |     |  | 105 | 
|PART III                                   
|Item 17.                                    |  | Financial Statements                                                         |     |  | 106 | 
|Item 18.                                    |  | Financial Statements                                                         |     |  | 106 | 
|Item 19.                                    |  | Exhibits                                                                     |     |  | 106 | 
|Financial Statements                        |  |                                                                              | F-1 | 
|Appendix A - Glossary of Technical Terms    |  |                                                                              | A-1 | 
|Signatures                                  |  |                                                                              |     | 
|Certifications                              |  |                                                                              |     | 





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SUPPLEMENTAL INFORMATION AND EXCHANGE RATES

As used herein, except as the context otherwise requires, we, us,
our or the Company refers to Macronix International Co., Ltd. and our
subsidiaries.

All references herein to Taiwan or the ROC are to the island of Taiwan
and other areas under the effective control of the Republic of China. All
references herein to the ROC Government and the ROC Company Law are
references to the government of the Republic of China and the Company Law of
the Republic of China, respectively. All references herein to ROC GAAP and
U.S. GAAP are to accounting principles generally accepted in the ROC and the
United States, respectively. Any discrepancies in any table between totals and
sums of the amounts listed are due to rounding.

We publish our financial statements in New Taiwan dollars, the lawful
currency of Taiwan. All references herein to United States dollars, U.S.
dollars and US$ are to United States dollars and references to New Taiwan
dollars, NT dollars and NT$ are to New Taiwan dollars. All translations
from New Taiwan dollars to United States dollars were made, unless otherwise
indicated, on the basis of the noon buying rate in The City of New York for
cable transfers in NT dollars per U.S. dollar as certified for customs purposes
by the Federal Reserve Bank of New York on December 31, 2002 of NT$34.7 =
US$1.00. On June 26, 2003, the noon buying rate between New Taiwan dollars and
United States dollars was NT$34.6 = US$1.00. See Item 10. Additional
Information  D. Exchange Controls. All amounts translated into United
States dollars as described above are provided solely for the convenience of
the reader, and no representation is made that the New Taiwan dollar or United
States dollar amounts referred to herein could have been or could be converted
into United States dollars or New Taiwan dollars, as the case may be, at any
particular rate, the above rates or at all.




CAUTIONARY STATEMENT

This annual report contains various forward-looking statements. These
include statements about:



| |  |  | 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.                                         

These forward-looking statements are based on current expectations, estimates
and projections about our industry, our managements beliefs and assumptions
made by them. Words such as anticipates, expects, intends, plans,
believes, seeks, estimates and similar expressions are intended to

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identify these forward-looking statements. Although we believe that these
expectations and projections are reasonable, such forward-looking statements are
not guarantees of future performance or actual results and are inherently
subject to risks, uncertainties and assumptions about us, including, among
other things:



| |  |  | 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.                                                                                                                   

We undertake no obligation to update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this annual report might not occur and our actual results
could differ materially from those anticipated in these forward-looking
statements.

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PART I




ITEM 1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.




ITEM 2.     OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.




ITEM 3.     KEY INFORMATION



|A. |  | Selected Financial Data
|-- |  | -----------------------

The selected income statement data for the years ended December 31, 2000,
2001 and 2002, and the selected balance sheet data as of December 31, 2001 and
2002 presented below are derived from our audited financial statements included
in this annual report, which were prepared on a consolidated basis. The
selected income statement data for the years ended December 31, 1998 and 1999
and the selected balance sheet data as of December 31, 1998, 1999 and 2000
presented below are derived from our audited financial statements not included
in this annual report, which were also prepared on a consolidated basis.

The financial data set forth below should be read in conjunction with, and
are qualified in their entirety by reference to, our consolidated financial
statements for the years ended December 31, 2000, 2001 and 2002 and the related
notes included in this annual report, Item 8. Financial Information and
Item 5. Operating and Financial Review and Prospects. Our consolidated
financial statements are prepared and presented in accordance with ROC GAAP and
ROC reporting practices. For a discussion of certain differences between ROC
GAAP and U.S. GAAP, see note 20 to our consolidated financial statements for
the years ended December 31, 2000, 2001 and 2002 included in this annual report
and Item 5. Operating and Financial Review and Prospects  A. Operating
Results  U.S. GAAP Reconciliation.

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|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |       |  
|----------------------------------- | --------- | --------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | ------ | ----- |  | ----- | ------- | ----- |  | ----- | ------- | ----- |  |  | ------- | - |  |  | ------- | - |  |  | ----- | -
|                                    |           |                                                                                                                             |  | Year ended, and as of, December 31,         
|                                    |           |                                                                                                                             |  |                                             
|                                    |           |                                                                                                                             |  | 1998                                         |        | 1999  |  | 2000  |         | 2001  |  | 2002  |         | 2002 
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |      
|                                    |           |                                                                                                                             |  | (NT$)                                        |        | (NT$) |  | (NT$) |         | (NT$) |  | (NT$) |         | (US$)
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |      
|                                    |           |                                                                                                                             |  | (in millions, except per share and ADS data)
|Consolidated Income Statement Data: |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    | ROC GAAP  |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Net sales revenue                                                                                                           |  |                                              | 12,580 |       |  |       | 16,957  |       |  |       | 33,493  |       |  |  | 21,747  |   |  |  | 16,492  |   |  |  | 475   |  
|                                    |           | Cost of goods sold                                                                                                          |  |                                              | (9,888 | )     |  |       | (12,124 | )     |  |       | (15,494 | )     |  |  | (11,674 | ) |  |  | (17,105 | ) |  |  | (493  | )
|                                    |           | Less: Unrealized profit as of December 31, 2002                                                                             |  |                                              |       |       |  |       |        |       |  |       |        |       |  |  |        |   |  |  | (2      | ) |  |  |      |  
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    |           | Realized gross profit (loss)                                                                                                |  |                                              | 2,692  |       |  |       | 4,833   |       |  |       | 17,999  |       |  |  | 10,073  |   |  |  | (615    | ) |  |  | (18   | )
|                                    |           | Operating expenses                                                                                                          |  |                                              | (3,055 | )     |  |       | (3,258  | )     |  |       | (5,856  | )     |  |  | (6,557  | ) |  |  | (6,212  | ) |  |  | (179  | )
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    |           | Operating income (loss)                                                                                                     |  |                                              | (363   | )     |  |       | 1,575   |       |  |       | 12,143  |       |  |  | 3,516   |   |  |  | (6,827  | ) |  |  | (197  | )
|                                    |           | Total other income                                                                                                          |  |                                              | 698    |       |  |       | 846     |       |  |       | 945     |       |  |  | 1,356   |   |  |  | 466     |   |  |  | 13    |  
|                                    |           | Total other expenses                                                                                                        |  |                                              | (2,288 | )     |  |       | (1,830  | )     |  |       | (2,077  | )     |  |  | (4,795  | ) |  |  | (4,976  | ) |  |  | (143  | )
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    |           | Income (loss) before taxes and minority interest                                                                            |  |                                              | (1,953 | )     |  |       | 591     |       |  |       | 11,011  |       |  |  | 77      |   |  |  | (11,337 | ) |  |  | (327  | )
|                                    |           | Income tax benefit (expense)                                                                                                |  |                                              | 406    |       |  |       | 316     |       |  |       | (398    | )     |  |  | (943    | ) |  |  | (20     | ) |  |  |      |  
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    |           | Income (loss) before minority interest                                                                                      |  |                                              | (1,547 | )     |  |       | 907     |       |  |       | 10,613  |       |  |  | (866    | ) |  |  | (11,357 | ) |  |  | (327  | )
|                                    |           | Minority
interest loss                                                                                                      |  |                                              |       |       |  |       |        |       |  |       |        |       |  |  |        |   |  |  | 0.4     |   |  |  |      |  
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    |           | Net Income (loss)                                                                                                           |  |                                              | (1,547 | )     |  |       | 907     |       |  |       | 10,613  |       |  |  | (866    | ) |  |  | (11,357 | ) |  |  | (327  | )
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    |           | Net income (loss) per share basic(1)                                                                                       |  |                                              | (0.47  | )     |  |       | 0.27    |       |  |       | 2.93    |       |  |  | (0.23   | ) |  |  | (3.10   | ) |  |  | (0.09 | )
|                                    |           | Net income (loss) per share diluted(1)                                                                                     |  |                                              | (0.47  | )     |  |       | 0.27    |       |  |       | 2.91    |       |  |  | (0.23   | ) |  |  | (3.10   | ) |  |  | (0.09 | )
|                                    | U.S. GAAP |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Gross profit (loss)                                                                                                         |  |                                              | 1,548  |       |  |       | 4,558   |       |  |       | 17,615  |       |  |  | 6,598   |   |  |  | (4,018  | ) |  |  | (116  | )
|                                    |           | Operating income (loss)                                                                                                     |  |                                              | (1,620 | )     |  |       | 1,237   |       |  |       | 11,069  |       |  |  | (2,263  | ) |  |  | (10,186 | ) |  |  | (294  | )
|                                    |           | Net income (loss) before cumulative effect of
change in accounting principle in accordance
with U.S. GAAP                   |  |                                              | (3,072 | )     |  |       | 1,861   |       |  |       | 8,016   |       |  |  | (3,842  | ) |  |  | (13,841 | ) |  |  | (399  | )
|                                    |           | Basic net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP   |  |                                              | (0.96  | )     |  |       | 0.58    |       |  |       | 2.31    |       |  |  | (1.06   | ) |  |  | (3.77   | ) |  |  | (0.11 | )
|                                    |           | Diluted net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP |  |                                              | (0.96  | )     |  |       | 0.58    |       |  |       | 2.26    |       |  |  | (1.06   | ) |  |  | (3.77   | ) |  |  | (0.11 | )
|                                    |           | Net income (loss)(2)                                                                                                        |  |                                              | (3,072 | )     |  |       | 1,861   |       |  |       | 8,016   |       |  |  | (4,463  | ) |  |  | (13,841 | ) |  |  | (399  | )
|                                    |           | Net income (loss) per share-basic(1) (3)                                                                                    |  |                                              | (0.96  | )     |  |       | 0.58    |       |  |       | 2.31    |       |  |  | (1.23   | ) |  |  | (3.77   | ) |  |  | (0.11 | )
|                                    |           | Net income (loss) per share diluted(1)(3)                                                                                  |  |                                              | (0.96  | )     |  |       | 0.58    |       |  |       | 2.26    |       |  |  | (1.23   | ) |  |  | (3.77   | ) |  |  | (0.11 | )
|Balance Sheet Data:                 |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    | ROC GAAP  |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Total current assets                                                                                                        |  |                                              | 15,898 |       |  |       | 14,303  |       |  |       | 29,027  |       |  |  | 25,358  |   |  |  | 21,301  |   |  |  | 614   |  
|                                    |           | Net property, plant and equipment                                                                                           |  |                                              | 28,491 |       |  |       | 32,028  |       |  |       | 38,006  |       |  |  | 39,562  |   |  |  | 40,029  |   |  |  | 1,154 |  
|                                    |           | Total assets                                                                                                                |  |                                              | 49,604 |       |  |       | 51,197  |       |  |       | 72,451  |       |  |  | 72,309  |   |  |  | 68,120  |   |  |  | 1,963 |  
|                                    |           | Total current liabilities                                                                                                   |  |                                              | 5,841  |       |  |       | 8,868   |       |  |       | 11,786  |       |  |  | 9,632   |   |  |  | 18,357  |   |  |  | 529   |  
|                                    |           | Long-term liabilities                                                                                                       |  |                                              | 18,714 |       |  |       | 15,946  |       |  |       | 16,091  |       |  |  | 19,533  |   |  |  | 19,549  |   |  |  | 563   |  
|                                    |           | Total liabilities                                                                                                           |  |                                              | 24,555 |       |  |       | 24,814  |       |  |       | 27,877  |       |  |  | 29,165  |   |  |  | 37,906  |   |  |  | 1,092 |  
|                                    |           | Total shareholders equity                                                                                                  |  |                                              | 25,049 |       |  |       | 26,383  |       |  |       | 44,574  |       |  |  | 43,144  |   |  |  | 30,214  |   |  |  | 871   |  
|                                    | U.S. GAAP |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Total shareholders equity                                                                                                  |  |                                              | 23,945 |       |  |       | 26,433  |       |  |       | 41,831  |       |  |  | 43,300  |   |  |  | 28,351  |   |  |  | 817   |  
|Other Data:                         |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    | ROC GAAP  |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Capital expenditures                                                                                                        |  |                                              | 6,136  |       |  |       | 8,129   |       |  |       | 11,803  |       |  |  | 9,078   |   |  |  | 8,975   |   |  |  | 259   |  
|                                    |           | Depreciation and amortization                                                                                               |  |                                              | 4,255  |       |  |       | 4,855   |       |  |       | 6,048   |       |  |  | 8,006   |   |  |  | 8,742   |   |  |  | 252   |  
|                                    |           | Net cash provided by operating
activities                                                                                   |  |                                              | 2,766  |       |  |       | 5,062   |       |  |       | 16,123  |       |  |  | 8,837   |   |  |  | 86      |   |  |  | 2     |  
|                                    |           | Net income (loss) per ADS basic                                                                                            |  |                                              | (4.72  | )     |  |       | 2.73    |       |  |       | 29.27   |       |  |  | (2.34   | ) |  |  | (31.0   | ) |  |  | (0.9  | )
|                                    |           | Net income (loss) per ADS diluted                                                                                          |  |                                              | (4.72  | )     |  |       | 2.73    |       |  |       | 29.05   |       |  |  | (2.34   | ) |  |  | (31.0   | ) |  |  | (0.9  | )
|                                    |           | Number of common shares outstanding
(weighted, as adjusted)(4)                                                              |  |                                              | 3,286  |       |  |       | 3,315   |       |  |       | 3,625   |       |  |  | 3,695   |   |  |  | 3,660   |   |  |  | 3,660 |  
|                                    |           | Stock dividend per common share(5)                                                                                          |  |                                              | 22     | %     |  |       | 10      | %     |  |       | 13      | %     |  |  | 30      | % |  |  | 10      | % |  |  | 10    | %
|                                    | US GAAP   |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Total current assets                                                                                                        |  |                                              | 15,898 |       |  |       | 14,588  |       |  |       | 28,994  |       |  |  | 26,646  |   |  |  | 21,037  |   |  |  | 606   |  
|                                    |           | Total assets                                                                                                                |  |                                              | 49,630 |       |  |       | 51,578  |       |  |       | 72,342  |       |  |  | 73,595  |   |  |  | 66,179  |   |  |  | 1,907 |  
|                                    |           | Total current liabilities                                                                                                   |  |                                              | 6,342  |       |  |       | 8,886   |       |  |       | 14,425  |       |  |  | 10,768  |   |  |  | 18,797  |   |  |  | 542   |  
|                                    |           | Total liabilities                                                                                                           |  |                                              | 25,050 |       |  |       | 25,145  |       |  |       | 30,511  |       |  |  | 30,295  |   |  |  | 37,828  |   |  |  | 1,090 |  



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|(1) |  | Retroactively adjusted for all subsequent stock dividends and employee
bonuses declared.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The difference between net income under ROC GAAP and U.S. GAAP was
largely derived from different treatments under these two accounting
principles with respect to employee bonus shares and derivative contracts.
The difference in accounting treatment with respect to employee bonus
shares under the two accounting principles resulted in an additional
expense of NT$516 million in 1998, no additional expense or income in
1999, an additional expense of NT$1,622 million in 2000, an additional
expense of NT$4,273 million in 2001 and an additional expense of
NT$0 million (US$0 million) in 2002. The differences of accounting treatment
with respect to derivative contracts under the two accounting principles
resulted in an additional expense of NT$1,056 million in 1998, an
increased income of NT$1,301 million in 1999, an additional expense of
NT$898 million in 2000, an additional gain of NT$228 million in 2001 and
an additional gain of NT$449 million (US$12.9 million) in 2002.
|   
|(3) |  | Retroactively adjusted for all stock dividends declared. See note 20 to
our consolidated financial statements for the years ended December 31,
2000, 2001 and 2002 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 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
|-- |  | -------------------------------

Not applicable.



|C. |  | Reason for the Offer and Use of Proceeds
|-- |  | ----------------------------------------

Not applicable.



|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 2002, and we forecast that we
will record such losses in 2003. This could cause us to default on loan
covenants, and could also materially adversely affect the value of your
investment.

The severe and protracted semiconductor industry downturn that began in
the second half of 2000 continued throughout 2001 and 2002, with continued
erosion of the average selling prices of our products. In 2002, net sales
revenues declined by 24.2% compared to 2001, and our cost of goods sold (a
substantial portion of which consists of non-cash depreciation and
amortization) exceeded our net sales revenue, resulting in a realized gross
loss of NT$615 million (US$17.7 million) and an operating loss of NT$6,827
million (US$196.7 million). Due to the price erosion, and related inventory
losses, we recorded a net loss of NT$11,357 million (US$327.3 million). For
the same reasons, in 2001 we recorded a net loss of NT$866 million.
Furthermore, we forecast that we will incur gross, operating and net losses for
2003.

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As
a result of net losses of NT$866 million and NT$11,357 million
(US$327.3 million) that we incurred in 2001 and 2002,
respectively, and unrealized losses
on long-term investments of NT$540 million and
NT$332 million (US$9.6 million) in 2001 and 2002,
respectively, shareholders equity declined by 3.2% in 2001, and by 30% in
2002, to NT$30,214 million (US$870.7 million). Our loan agreements contain covenants
that require us to maintain certain financial ratios, including specified debt
to equity ratios. As a result of our losses in 2001 and 2002, and our
projected losses in 2003, we may be unable to meet the specified debt to equity
ratios, unless we are able to raise additional equity funding. We intend to
offer up to 1,000,000,000 new common shares for cash in 2003, to increase
shareholders equity, pursuant to a rights offering. We cannot assure you that we will be successful in
selling all or any of such common shares. If we are unable to raise additional equity
funding or renegotiate the terms of our loan agreements, we may be in default
of financial covenants in the future. Such a default would seriously impair
our ability to secure debt financing, and could require us to delay or cancel
capital expansion plans, dispose of assets or take other steps to meet the
financial ratios.

In addition, we cannot assure you that these losses will not continue or
increase. If we continue to record losses, the value of your investment may be
materially adversely affected.

We are vulnerable to cyclical downturns in the semiconductor industry and we
are currently experiencing a severe and protracted downturn.

The semiconductor industry is highly cyclical. Economic downturns
historically have caused reduced product demand, rapid declines in product
prices, low capacity utilization and production over-capacity. For example,
during 1997 and 1998, intense competition in the semiconductor industry
worldwide, coupled with a general economic downturn in the Asia Pacific region,
caused the average selling prices and demand for many of our products to
decline significantly. Since the end of 2000, the semiconductor industry has
been adversely affected by the sudden and rapid decline in worldwide demand for
electronic products such as personal computers, computer peripherals, consumer
electronics and other communications devices. As such, electronics systems and
applications companies have drastically reduced their orders for semiconductor
devices to avoid further inventory accumulation. This severe and protracted
downturn, which has continued throughout 2001 and 2002, has resulted in an even
more serious deterioration in the average selling prices of, as well as demand
for, most of our products and materially adversely affected our operating
results and financial condition. We cannot predict when the semiconductor
industry will recover. Even after the industry recovers, our product prices,
sales volumes and margins may continue to be adversely affected during future
cyclical downturns, and our business, financial condition and results of
operations may suffer accordingly.

Our results of operations fluctuate significantly, which may affect the value
of your investment.

Our historical net sales revenue and other results of operations have
varied, at times significantly, from quarter-to-quarter and from
year-to-year.
For example, we had net income under ROC GAAP of NT$10,613 million in 2000, a
net loss of NT$866 million in 2001 and NT$11,357 million (US$327.3 million) in
2002. Our future net sales revenue, gross profit (loss), operating income, net
income (loss) and more generally, our business and operations, may vary
significantly due to a combination of many factors, including:



| |  |  | changes in general economic and business conditions;                                                                                                                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the cyclical nature of both the semiconductor industry and the markets served by our customers;                                                                          
|
| |  |  | changes in average selling prices of our products;                                                                                                                       
|
| |  |  | shifts by integrated device manufacturers between internal and outsourced production;                                                                                    
|
| |  |  | our customers adjustments in their inventory;                                                                                                                           
|
| |  |  | the loss of 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;                               
|
| |  |  | natural disasters, such as fires, droughts, floods and earthquakes, or industrial accidents;                                                                             

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| |  |  | the long lead times required for building and equipping new facilities;  
| | - |  | -------------------------------------------------------------------------
|
| |  |  | 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.                                                   

Due to these factors and other risks, many of which are beyond our
control, you should not rely on quarter-to-quarter or year-to-year comparisons
to predict our future performance. Unfavorable changes in any of the above
factors may adversely affect our business and operations. In addition, it is
possible that in some future periods our operating results may be below the
expectations of public market analysts and investors, which may in turn cause
the prices of our securities to fall.

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.

We are a party to numerous loan and other agreements relating to the
incurrence of debt, many of which include restrictive covenants and broad
default provisions. In general, covenants in the agreements governing our
existing debt, and debt we may incur in the future, may materially restrict our
operations, including our ability to incur debt, pay dividends, make certain
investments and payments and encumber or dispose of assets. Under the current
severe and protracted downturn in the worldwide semiconductor industry, and in
view of the serious losses we have incurred in 2001 and 2002, and the losses we
forecast for 2003, we cannot assure you that we will be able to remain in
compliance with our financial covenants which, as a result, may lead to a
default. A default under one agreement may also trigger cross-defaults under
our other agreements. In the event of default, we may not be able to cure the
default or obtain a waiver on a timely basis, and our operations could be
significantly disrupted or harmed. An event of default under any agreement
governing our existing or future debt, if not cured or waived, could have a
material adverse effect on our liquidity, financial condition and results of
operations, and could seriously impair our ability to secure debt financing.

If we continue to experience significant investment losses from our
investments, our financial condition and results of operations may be adversely
affected.

We have made and expect to continue to make a series of equity joint
venture and strategic investments in companies located in Taiwan and elsewhere.
As a result of the market downturn in the second half of 2000, which continued
throughout 2001 and 2002, many of our invested companies experienced
significant declines in their operating results. This in turn caused us to
incur substantial investment losses as well as a reduction in the value of our
equity interests in these companies. We incurred a net investment loss from our
investments of approximately NT$780 million in 2001, an increase of
approximately NT$163 million compared to approximately NT$617 million in 2000.
In particular, we recorded an unrealized loss in Tower Semiconductor Ltd.
(Tower Semiconductor) of NT$646 million as of December 31, 2001 due to a
decline in the market value of the shares of Tower Semiconductor. This
unrealized loss was charged to shareholders equity. We incurred a net
investment loss from our investments of approximately NT$415 million (US$12.0
million) in 2002. Any further significant losses from our investments in the
future may materially and adversely affect our financial condition and results
of operations.

You should not rely on our financial forecasts reported by us from time to time
pursuant to the requirements of the Taiwan Securities and Futures Commission.

We urge you not to rely on the forecasts published by us from time to time
pursuant to the requirements of the Taiwan Securities and Futures Commission as
such forecasts are based upon a number of estimates and assumptions regarding
our industries, investments and general market, political and economic
conditions, many of which are beyond our control, and are inherently subject to
significant uncertainties and contingencies. None of the information included
in this annual report has formed or will form the basis of our future
forecasts. We do not undertake any obligation to update these forecasts, except
as required by applicable laws and regulations.
- 7 -Table of Contents

Internally prepared annual financial information published by us from time to
time pursuant to Taiwan Securities and Futures Commission reporting
requirements may be inaccurate and incomplete.

Since 1993, the Taiwan Securities and Futures Commission requires ROC
companies that meet certain statutory criteria to publish financial forecasts
and to report to the Taiwan Securities and Futures Commission certain
internally prepared unaudited unconsolidated financial information regarding
such companies during the prior fiscal year. For a public company listed on the
Taiwan Stock Exchange or the GreTai Securities Market, the statutory criteria
for the financial forecast requirement currently include without limitation:
(i) an offering of securities, (ii) election of one-third of its directors on
the board, (iii) the execution, amendment or termination of any contract for
leasing the companys entire business, entrusted business or joint operation
with another party, the transfer of the whole or essential part of its business
or assets, or the acquisition of another partys entire business or assets, or
(iv) merger with another company under the ROC Company Law or ROC Enterprise
Merger Law. We have complied with this requirement every year since 1995 due
to one of the following reasons in each year: offering of securities or
convertible bonds, election of directors or capital increase. We intend to
continue to comply with this requirement whenever necessary. The unaudited
unconsolidated information we publish in response to this requirement will not
be subject to the same scrutiny to which we subject quarterly unaudited
unconsolidated financial information we publish from time to time pursuant to
the requirements of the Taiwan Securities and Futures Commission, or to our
audited consolidated semiannual or annual financial statements. Furthermore, as
this information is not audited, it may vary materially from our audited
consolidated financial statements for the same period.

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 profitability.

A significant percentage of our net sales revenue, that is, our gross
sales revenue less sales returns and discounts, is derived from customers who
use our products for consumer electronics, computers and computer peripherals
and other communications products. A significant decrease in the demand for
consumer electronics, computers and computer peripherals and other
communications products may decrease the demand for our products and could
adversely affect our results of operations. Since the end of 2000, worldwide
demand for electronic products has experienced a rapid and sudden decline. In
particular, declining average selling prices of these products have resulted in
significant downward pressure on the prices of our products that are used in
these products. If the average selling prices for these products continue to
decrease, the average selling prices for our products will also continue to
decrease, and our revenue and profitability will suffer.

If we cannot compete successfully in our industry, we may lose customers and
our revenue may decrease.

The semiconductor industry is highly competitive. We compete with major
international semiconductor companies, including Intel Corporation (Intel),
SanDisk Corporation, Atmel Corporation (Atmel), Sharp Corporation (Sharp),
Advanced Micro Devices, Inc. (Advanced Micro Devices), STMicroelectronics NV.
(STMicroelectronics), Samsung Electronics Co., Ltd. (Samsung), NEC
Corporation (NEC), Fujitsu Limited (Fujitsu), Hynix Semiconductor Inc.,
Toshiba Corporation (Toshiba), Oki Semiconductor Co. (Oki) and various
other industry participants. Many of our competitors have greater access to
capital and technology and substantially greater production, research and
development, sales and marketing and other resources than we do. As a result,
these companies may be able to compete more aggressively over a longer period
of time than our company.

The principal elements of competition in our industry include:



| |  |  | technological expertise and technical competence;                                   
| | - |  | ------------------------------------------------------------------------------------
|
| |  |  | time-to-market;                                                                     
|
| |  |  | ability to obtain raw materials and components on a timely and cost-effective basis;

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| |  |  | research and development capabilities;
| | - |  | --------------------------------------
|
| |  |  | available capacity;                   
|
| |  |  | manufacturing capabilities and yields;
|
| |  |  | customer service; and                 
|
| |  |  | price.                                

Moreover, since the basic manufacturing processes for the production of
volatile and nonvolatile memory chips are similar, manufacturers of volatile
memory products may migrate into our nonvolatile memory markets, which would
create additional competition. Many of our competitors have shown a willingness
to quickly and sharply reduce prices, as they did in 2001, in order to maintain
high capacity utilization in their facilities during periods of reduced demand.
Any renewed erosion in the prices for our products could cause our profits to
decrease and have a material adverse effect on our financial condition and
results of operations.

Due to our high percentage of fixed costs, we will be unable to maintain our
profitability at past levels if we are unable to achieve relatively high
capacity utilization rates.

Our operations are characterized by relatively high fixed costs, and we
expect to continue to incur substantial depreciation and other expenses. Our
profitability depends in part not only on absolute pricing levels for our
products, but also on utilization rates for our equipment, commonly referred to
as capacity utilization rates. In particular, increases or decreases in our
capacity utilization rates can have a significant effect on gross margins since
per-unit costs generally decrease as fixed costs are allocated over a larger
number of units. In periods of low demand, we experience relatively low
capacity utilization rates in our operations due to relatively low growth in
demand, which leads to reduced margins during that period. During 2001, we
experienced lower than anticipated utilization rates in our operations due to a
significant decline in worldwide demand for our products, which led to reduced
margins during that period. Although our capacity utilization rates have
improved in 2002, we cannot assure you that we will be able to maintain or
surpass our past profitability levels if we cannot consistently achieve or
maintain 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.

Our customers generally place purchase orders between one to two months
before the desired shipment date, and our contracts with customers generally do
not require minimum purchases of our products. In addition, due to the cyclical
nature of the semiconductor industry, our customers purchase orders have
varied significantly from period to period. As a result, we do not typically
operate with any significant backlog. The lack of significant backlog makes
it difficult for us to forecast our revenues and allocate resources for future
periods. Moreover, our expense levels are based in part on our expectations of
future revenue and we may be unable to adjust costs in a timely manner to
compensate for revenue shortfalls. We expect that our future revenue in any
quarter will continue to be substantially dependent upon purchase orders
received in that quarter. We cannot assure you that any of our customers will
continue to place orders with us in the future at the same level as in prior
periods. We also cannot assure you that the volume of our customers orders
will be consistent with our expectations when we plan our expenditures for raw
materials, components, labor and equipment.

As we depend on mask ROM sales for a substantial portion of our revenue, a
significant decrease in mask ROM sales could result in the loss of a
significant portion of our revenue.

In 2000, 2001 and 2002, approximately 57.6%, 56.8% and 45.9%,
respectively, of our gross sales revenue was derived from mask ROM sales.
Historically, most of our mask ROM products have been used in video game
cartridges. Competing technological alternatives, such as CD-ROMs, DVD-ROMs,
magnetic disks and telephone-linked and internet databases, are now available
to video game machine producers for some applications. For example, Nintendo,
which is our largest customer, began marketing in September 2001 a new game
platform that utilizes a DVD-ROM-based storage system.

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We are seeking to sustain our mask ROM sales volume by diversifying our
customer base to include telecommunications, handheld computing and information
devices and office automation equipment manufacturers. We cannot assure you,
however, that these initiatives will be successful. Any significant reduction
in the use of mask ROMs in the video game manufacturing industry will
significantly reduce our revenue and adversely affect our business, financial
condition and results of operations.

We intend to increase our manufacturing capacity in flash products, which may
expose our business and operations to additional risks that may adversely
affect our financial condition and results of operations.

We intend to increase our manufacturing capacity in flash products in
order to diversify our product profile and capitalize on the growing demand for
these products. However, unlike certain semiconductor products that require
advanced technology and substantial design capacity, flash products are
commodity products. As a result, flash products generally compete on the basis
of price and volume and require a large scale of production to sustain profit
margins. Furthermore, the flash products market is dominated by large players,
including Advanced Micro Devices, Intel, Sharp and ST Microelectronics, all of
which have greater financial and other resources than our company. Flash
products are also subject to inventory obsolescence much more quickly. As of
December 31, 2001 and 2002, flash products accounted for
approximately 55.6%and 66.6% of our product inventory, respectively. Our
business and profitability will suffer if we are unable to compete effectively
in the flash products market. Moreover, any inventory loss from flash products
may adversely affect our financial condition and results of operations.

If we are unable to successfully execute or integrate our new organizational
and business unit structure, our operations and future profitability may be
adversely affected.

We recently completed a reorganization of our organizational and business
unit structure, under which our existing organizational and business unit
structure organized on the basis of memory products, SOC products and services,
and multimedia products were reorganized into two main strategic business
groups. However, we may not be able to effectively and efficiently assimilate
our business, operations and personnel under the new organizational and
business unit structure, and may experience disruption to our business and
encounter difficulty in implementing effective operational, management and
financial information systems. Moreover, we cannot assure you that our new
organizational and business unit structure will be compatible with our existing
business model. Any failure to successfully execute or integrate our new
organizational and business unit structure may adversely affect our operations
and future profitability.

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.

In 2000, 2001 and 2002,
approximately 32.5%, 42.2% and 36.5%,
respectively, of our net sales revenue was derived from sales to Megachips
Corporation (Megachips), which is the exclusive distributor of our products
to Nintendo. Nintendo may not continue to place orders with us in the future at
the same levels as in prior periods or at all. The loss of Nintendo as a
customer, delayed or reduced orders by Nintendo, decreases in product prices or
significant changes in delivery schedules to Nintendo could materially and
adversely affect our business, financial condition and results of operations.
In addition, any negative development in the relationship between us and
Megachips or the relationship between Nintendo and Megachips could harm our
sales to Nintendo. Nintendo faces intense competitive pressure in the
electronics entertainment market, which is characterized by frequent new
product introductions and rapidly shifting consumer preferences. Nintendos new
game platform, the GameCube, utilizes a DVD-ROM-based storage system, which is
different from mask ROM-based cartridges used in Nintendos other game
platforms. This new game platform came to market in Japan in September 2001, in
the United States in November 2001 and in Europe in May 2002. As a result, we
have been shifting our production toward the output of mask ROMs for Nintendos
Game Boy series of handheld gaming devices and other semiconductor solutions

for the GameCube and related accessories. Unit sales volumes or prices of mask
ROMs and other products sold through Megachips to Nintendo may fluctuate
significantly depending on the products offered by Nintendo and its need for
our products. If we cannot successfully market and sell our mask ROM products
for inclusion in other devices such as game cartridges used in Nintendos Game
Boy Advance devices, or if Nintendo delays or reduces its orders

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from us, or if we cannot replace Nintendo with a customer purchasing our
products at similar levels, our sales may decline significantly and our
business, financial condition and results of operations will be adversely
affected.

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 we fail to maintain our existing arrangements with our
technology partners or enter into new arrangements with other technology
providers.

Enhancing our product design and manufacturing process technologies is
critical to our ability to provide products and services for our customers. In
particular, we have an internal research and development team focusing on
developing new semiconductor manufacturing process technologies. We also depend
on our technology arrangements with leading integrated device manufacturers and
fabless semiconductor companies, consumer electronics and communications
companies and other technology providers to advance our portfolio of process
technologies. We currently have joint development or technology sharing
arrangements with Mitsubishi Electric Corporation (Mitsubishi) and Tower
Semiconductor. We believe these arrangements also reduce our development costs

and capital expenditures and increase the capacity utilization rates in our
fabrication plants. If we are unable to maintain successful technology
arrangements on mutually beneficial economic terms, or are unable to enter into
new technology arrangements with other leading semiconductor companies,
electronics companies and other technology providers, we may not be able to
continue providing our customers with leading-edge process technologies, which
may adversely affect our competitiveness as well as our business and prospects.

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

We depend on the continued service of our executive officers and skilled
technical and other personnel. Our business could suffer if we lose the
services of any of these personnel and cannot adequately replace them. Although
some of these management personnel have entered into employment agreements with
us, most of these employment agreements do not specify the duration of
employment. Therefore, the relevant management personnel may, subject to the
terms of the relevant agreements, terminate such agreements at any time. We are
not insured against the loss of any of our personnel. In particular, we may be
required to substantially increase the number of these employees in connection
with our future expansion plans, and there is intense competition for their
services in the semiconductor industry. We may not be able to either retain our
present personnel or attract additional qualified personnel as and when needed.
In addition, we may need to increase employee compensation levels in order to
attract and retain our existing officers and employees and the additional
personnel that we expect to require. Moreover, in order to attract and retain
personnel, we must devote significant resources to training and benefits. These
benefits have historically and may in the future include bonuses in the form of
our common shares and our stock performance-based employee bonuses.

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 profitability may be adversely affected.

Our capital requirements are difficult to plan in our highly cyclical and
rapidly changing industry. We will need capital to fund the expansion of our
facilities as well as research and development activities in order to remain
competitive. Our ability to obtain external financing in the
future is subject to a variety of uncertainties, including:



| |  |  | our future financial condition, results of operations and cash flows;             
| | - |  | ----------------------------------------------------------------------------------
|
| |  |  | general market conditions for financing activities by semiconductor companies; and

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| |  |  | economic, political and other conditions in Taiwan and elsewhere.
| | - |  | -----------------------------------------------------------------

If we are unable to obtain funding in a timely manner or on acceptable
terms, our growth prospects and future profitability may decline.

If needed cash resources are unavailable to us, we will be unable to implement
successfully our research and development plans.

To keep up with the rapid pace of technological change and to develop
attractive and cost-effective products, we need to invest significantly in
research and development. We currently intend to spend annually no less than
10% of our net sales revenue on research and development. We may not be able to
generate cash flow from operations in sufficient amounts to allow us to
maintain this level of spending on research and development. Any failure to
maintain adequate research and development spending could reduce our
competitiveness and jeopardize our long-term prospects.

Our results of operations may continue to be adversely affected by the
writedown of inventory resulting from an industry downturn.

Historically, companies in the semiconductor industry have expanded
aggressively during periods of increased demand. As a result, periods of excess
capacity, overproduction, inventory buildup, rapid declines in average selling
prices and technological obsolescence in the semiconductor industry have
frequently followed periods of increased demand. The semiconductor industry has
experienced deteriorating market conditions since the end of 2000. This has
resulted in a rapid increase in our inventory levels, a decline in average
selling prices for our products and a corresponding decrease in the stated
value of our inventories. Inventory loss provisions are recognized as
non-operating losses under ROC GAAP. We held approximately 229 days of total
inventory as of December 31, 2002, compared to 264 days as of December 31,
2001. In addition, we recorded inventory losses of NT$2,929 million (US$84.4
million) in the year ended December 31, 2002, compared with NT$2,587 million in
the year ended December 31, 2001. We may be required to further increase our
inventory loss provision or provide a significant writedown of our inventory
due to inventory obsolescence and price declines in future periods if market
conditions do not improve. Furthermore, due to the cyclical nature of the
semiconductor industry, we cannot assure you that we will be able to maintain
our inventories at a satisfactory level or that we will not incur additional
losses on inventories in the future.

If we are unable to manage our expansion effectively, our growth prospects may
be limited and our future profitability may be affected.

We have significantly expanded our operations in recent years, and expect
to continue to expand our operations in the future. Rapid expansion puts strain
on our managerial, technical, financial, operational and other resources. As a
result of our expansion, we have implemented and will continue to need to
implement additional operational and financial controls and hire and train
additional personnel. Any failure to manage our expansion effectively could
lead to inefficiencies and redundancies and result in reduced growth prospects
and profitability.

If we are unable to effectively manage seasonal fluctuations in the demand for
our products, our business and profitability may be adversely affected.

We have in the past experienced, and we expect to continue to experience,
seasonal fluctuations in the demand for our products. In particular, we
generally operate at a higher capacity utilization level during the first and
fourth quarters of the year. If we are unable to increase our manufacturing
capacity to meet seasonal or additional future demand on a timely basis, our
customers may seek other manufacturing sources to meet their needs and our
business and profitability may be adversely affected. In addition, if we are
unable to effectively manage our manufacturing capacity during a seasonal
downturn in demand, our results of operations would also be adversely affected.

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Delays or other constraints in the expansion or construction of our fabrication
plants could delay increases in our capacity, which may adversely affect our
growth and prospects.

We completed construction of Fab III in July 2002. However, due to the
adverse market conditions currently prevailing in the semiconductor industry,
we expect full commencement of operations at Fab III to be delayed until 2005
or later. We expect to utilize part of the space in Fab III to house equipment
relating to the planned upgrade of the manufacturing facilities in Fab II. We
could delay the commencement of full commercial operation of Fab III beyond
2005 if there is no significant improvement in market conditions.

If we experience delays or other constraints in the expansion,
construction or the commencement of full commercial operations of our
fabrication plants, planned increases in our capacity could be delayed and our
results of operations could be adversely affected.

Our revenues and profitability may decline if we are unable to obtain adequate
supplies of raw materials in a timely manner and at a reasonable price.

Our manufacturing operations require that we obtain adequate supplies of
raw materials on a timely basis. Our primary raw materials include six-inch and
eight-inch wafers, chemicals and gases and other inputs, which we purchase from
a limited number of suppliers. In particular, wafer manufacturing capacity and
supply in the Taiwan semiconductor industry have from time to time been, and in
the future may be, limited, and our future growth will depend in large part on
securing a continuous supply of six-inch and eight-inch wafers. We cannot
assure you that we will be able to obtain adequate supplies of raw materials in
a timely manner and at a reasonable price. Our revenue and net income could
decline if we are unable to obtain adequate supplies of high quality raw
materials in a timely manner or if there are significant increases in the costs
of raw materials that we could not pass on to our customers.

If we are unable to obtain additional equipment in a timely manner and at
reasonable cost, our competitiveness and future profitability may be adversely
affected.

We expect to purchase a significant amount of additional equipment to
expand our operations. In particular, our plans for the enhancement of Fab I
and Fab II, as well as the commencement of full commercial operations of Fab III, will require additional advanced and expensive equipment. The market for
our equipment is characterized, from time to time, by intense demand, limited
supply and long delivery cycles. In addition, we do not have binding supply
agreements with any of our suppliers and acquire our equipment on a purchase
order basis, which exposes us to changing market conditions and other
substantial risks. As a result, if we are unable to obtain equipment in a
timely manner and at a reasonable cost, we may not be able to expand our
manufacturing capacity and fulfill our customers orders, which could adversely
affect our growth prospects as well as our financial condition and results of
operations.

If the trading price of our common shares decreases significantly or if the
exchange rate between the Japanese yen and the U.S. dollar fluctuates
significantly, we may suffer substantial losses as a result of derivative
contracts to which we are or may become a party.

We enter into derivative contracts from time to time with our common
shares as the underlying reference securities. Certain of these contracts also
include a reference to foreign currency exchange rates. These contracts may
significantly affect our net income or loss for any given period. We recorded
losses of NT$297 million in 2000, NT$171 million in 2001
and NT$677 million
(US$19.5 million) in 2002 with respect to these derivative contracts under U.S.
GAAP. These losses were primarily attributable to a significant decline in the
trading price of our common shares, as well as significant fluctuations in the
exchange rate between the Japanese yen and the U.S. dollar. See Item 5.
Operating and Financial Review and Prospects  A. Operating Results  Equity
Derivative Contracts. Future decreases in the trading price of our common
shares or fluctuations in the exchange rate between the Japanese yen and the
U.S. dollar may adversely affect our financial condition and results of
operations.

Derivative contracts may expose us to risks that may adversely affect our
financial condition and results of operations.

We enter into a variety of derivative transactions from time to time for
both hedging and trading purposes. These derivative contracts may expose us to
or increase our exposure to financial market risks, including foreign currency
exchange rates, marketable securities prices (including those of our common

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shares and bonds) and changes in interest rates. Even when we enter into
derivative contracts for hedging purposes, there may be imperfect correlation,
or even no correlation, between price movements of a derivative instrument and
price movements of the underlying item being hedged, which will result in a
less effective or ineffective hedge. Moreover, although successful hedging
strategies could reduce our risk of loss by wholly or partially offsetting the
negative effect of unfavorable price movements in the hedged item, hedging
strategies could also reduce our opportunity for gain by offsetting the
positive effect of favorable price movements in the hedged item.

We may also be required to pledge assets as collateral security, maintain
segregated accounts or make margin payments when we take positions in
derivative instruments involving obligations to third parties (i.e., derivative
instruments other than purchased options). If we were to be unable to close out
our positions in these derivative instruments, we may be required to continue
to pledge such assets, maintain such accounts or make such payments until the
positions expire or mature. Our ability to close out a position in a derivative
instrument prior to its expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a market, the ability and
willingness of a counterparty to enter into a transaction closing out the
position. We cannot assure you that we will be able to close out a derivative
position at a time and price that is favorable to us.

We are also exposed to the credit risk of the counterparties to our
derivatives contracts. In particular, any failure by a counterparty to honor the
terms of its derivatives contracts with us may adversely affect our financial
condition and results of operations.

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 earnings.

All of our existing manufacturing operations are in Hsinchu, Taiwan, which
is vulnerable to natural disasters. Disruption of operations at our
manufacturing facilities for any reason, including work stoppages, power
outages, fires, typhoons, earthquakes or other natural disasters, would cause
delays in shipments of our products, which could result in the loss of
customers. As a result of the rapid growth of the Taiwan semiconductor
industry, which is primarily based in Hsinchu, severe constraints have been
placed on the water and electricity supply in that region. Any shortages of
water or electricity could have a material and adverse effect on our
operations. For example, we have in the past experienced major power outages,
each of which resulted in a brief suspension of production. In addition, many
areas in Taiwan experienced a severe drought in 2002, causing the Taiwan
authorities to announce water-rationing measures in the northern parts of
Taiwan. If a drought occurs again and the authorities are unable to source
water from alternative sources in sufficient quantities, we may be required to
temporarily shut down or substantially reduce the operations of our facilities
in the affected areas, which would seriously affect our operations. Taiwan is
also susceptible to earthquakes and has experienced severe earthquakes that
caused significant property damage and loss of life, particularly in the
central and eastern parts of Taiwan. These earthquakes damaged production
facilities and equipment, and adversely affected the operations of many
companies involved in the semiconductor and other industries, including our
company. Moreover, there were interruptions to our production schedule
primarily as a result of power outages caused by the earthquakes.

While we maintain several insurance policies relating to our business,
including business interruption insurance, we cannot assure you that the
insurance coverage will be sufficient to protect us from the losses resulting
from natural disasters and other events beyond our control. In addition, we
cannot assure you that the premium payable for these insurance policies upon
renewal will not increase substantially, which may adversely affect our
financial condition and results of operations. Furthermore, any failure or
inability to obtain the necessary insurance coverage on a timely basis, or at
all, may severely affect or materially disrupt our business and operations.

Our production facilities as well as many of our suppliers and customers
and providers of semiconductor manufacturing services, including foundries, are
located in Taiwan. If our customers are affected by an earthquake, a drought or
other natural disasters, it could result in a decline in the demand for our
products and services. If our suppliers and providers of semiconductor
manufacturing services are affected, our production schedule could be
interrupted or delayed. As a result, a major earthquake, drought or other
natural disaster in Taiwan could severely disrupt the normal operation of
business and have a material adverse effect on our financial condition and
results of operations.

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If we violate environmental regulations, we may be required to pay significant
fines, our operations may be delayed or interrupted and our business could
suffer.

We are subject to environmental regulations relating to our manufacturing
processes, including the use, storage, discharge and disposal of chemical
by-products of, and water used in, our production process. A failure, or a
claim that we have failed, to comply with these environmental regulations could
result in the assessment of damages or imposition of significant fines, delays
in our production and capacity expansion and negative publicity, all of which
could harm our business. New regulations could also require us to acquire
costly equipment or to incur other significant expenses. In addition, any
failure by us to control the use of, or adequately restrict the discharge of,
hazardous substances could subject us to future liabilities that may have a
material adverse effect on our financial condition and results of operations.

Any impairment charges required under U.S. GAAP may have a material adverse
effect on our net income on a U.S. GAAP reconciled basis.

Under currently effective U.S. GAAP, we are required to evaluate our
equipment and other long-lived assets for impairment whenever there
is an indication of impairment. If certain criteria are met, we are required to
record an impairment charge. We can give no assurance that impairment charges
will not be required in periods subsequent to December 31, 2002. We are
currently not able to estimate the extent and timing of any goodwill impairment
charge for future years. Please see
note 20 to our consolidated financial statements for the years ended December
31, 2000, 2001 and 2002 included in this annual report for a discussion of the
criteria that, if met, may require impairment charges.

The determination of an impairment charge at any given time is based
significantly on our expected results of operation over a number of years
subsequent to that time. As a result, an impairment charge is more likely to
occur during a period when our operating results are otherwise already
depressed.

The differences between ROC GAAP and U.S. GAAP result in different amounts of
net income under those standards, which makes evaluating our financial
performance difficult.

Our consolidated financial statements are prepared under ROC GAAP, which
differ in many significant respects from U.S. GAAP. For example, ROC GAAP do
not require the recognition of the value of shares distributed as bonuses to
employees when calculating net income, and ROC GAAP and U.S. GAAP differ in
some important respects in accounting for gains and losses on derivative
financial instruments. Largely as a result of the differences in accounting for
employee bonuses in the form of our common shares and derivative instruments,
we reported under U.S. GAAP net income of NT$8,016 million in 2000, net loss of
NT$4,463 million in 2001 and net loss of NT$13,841 million (US$398.9 million)
in 2002, as compared to, under ROC GAAP, net income of NT$10,613 million, net
loss of NT$866 million and net loss of NT$11,357 million (US$327 million) for
the same periods, respectively. See note 20 to our consolidated financial
statements for the years ended December 31, 2000, 2001 and 2002 included in
this annual report.

Corporate governance scandals and new legislation could increase the cost of
our operations.

As a result of recent corporate governance scandals in the United States
and the legislative and litigation environment resulting from those scandals,
the costs of being a public reporting company in the United States generally
are expected to increase in the near future. New legislation, such as the
recently enacted Sarbanes-Oxley Act of 2002, will have the effect of increasing
the burdens and potential liabilities of being a public reporting company in
the United States. This and other proposed legislation may increase the fees of
our professional advisors and our insurance premiums.

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Risks Relating to Technology and Intellectual Property

Our profitability depends on our ability to respond to rapid technological
changes in the semiconductor industry.

The markets for semiconductors and electronic systems that use
semiconductor products are subject to rapid technological change. This rapid
change results in:



| |  |  | introduction of new and increasingly complex and powerful products;
| | - |  | -------------------------------------------------------------------
|
| |  |  | rapidly evolving industry standards;                               
|
| |  |  | rapid and significant product price declines; and                  
|
| |  |  | rapid product obsolescence.                                        

Our success depends on our ability to improve and develop our core
technologies in a rapidly changing technological environment. In particular, we
expect that we will need to constantly offer more sophisticated technologies
and processes in order to respond to competitive industry conditions and
customer requirements. We cannot assure you, however, that we will be able to
identify new product opportunities or to timely develop and successfully market
new products. We may also experience delays in developing or achieving volume
production of new products. Moreover, new products may fail to gain market
acceptance, and existing products may become obsolete. For example, our sales
of mask ROM products have been falling and may continue to fall as Nintendo
shifts to DVD-ROM technology in its newer products. If we fail to develop, or
obtain access to, advances to technologies and processes, we may become less
competitive and less profitable.

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.

Our manufacturing processes are highly complex, require advanced and
costly equipment and are continuously being modified to improve manufacturing
yields and product performance. Impurities or other difficulties in the
manufacturing process or defects with respect to equipment or supporting
facilities can lower manufacturing yields, interrupt production or result in
losses of products in process. As system complexity has increased and process
technology has become more sophisticated, requirements for precision have
become even more stringent. In particular, defective production can result from
a number of factors, including:



| |  |  | the cleanliness of the manufacturing environment;
| | - |  | -------------------------------------------------
|
| |  |  | human error;                                     
|
| |  |  | equipment malfunction;                           
|
| |  |  | use of defective raw materials; and              
|
| |  |  | inadequate testing.                              

From time to time, we experience lower than anticipated production yields
as a result of these factors, particularly in connection with the expansion of
our capacity or changes in our processing methods. Our yield on new products is
often lower as time is required for us to develop expertise and experience in
producing these products. If we fail to maintain high quality production
standards and yields, our business and profitability may suffer and our
customers may cancel their orders or return our products.

Our business depends in part on our ability to obtain and preserve intellectual
property rights.

Our ability to compete successfully and achieve future growth will depend,
in part, on our ability to protect our proprietary technology. We rely on
patents, copyrights and trade secret protection rights to protect some of our
proprietary technologies and products. We cannot assure you that these measures
will provide meaningful protection of our intellectual property or commercial
advantage. For example,

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our competitors may be able to use our technologies to develop similar or
superior products, and we may not have sufficient financial and legal resources
to protect and enforce our rights. We intend to continue to file patent
applications when appropriate to protect our proprietary technologies, but the
process of seeking patent protection can be lengthy and expensive. In addition,
patents may not be issued for pending or future applications. Furthermore, if
patents are issued, they may be challenged, invalidated or circumvented.
Moreover, the various countries in which we market our products may not protect
our intellectual property rights to the same extent as does the United States.
See Item 5. Operating and Financial Review and Prospects
 C. Research and
Development, Patents and Licenses, etc.  Research and Development and 
Intellectual Property.

We may be subject to intellectual property rights disputes that could expose us
to serious liabilities.

The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. Our ability to compete
successfully depends on our ability to operate without infringing the
proprietary rights of others. We have no means of knowing what patent
applications have been filed in the United States or elsewhere until the
applications or resulting patent (if one is granted) are made available to the
public. We are currently involved in certain litigation matters involving
patent infringement. See Item 8. Financial Information  A. Consolidated
Statements and Other Financial Information  Legal Proceedings. As is typical
in the semiconductor industry, from time to time we receive communications from
third parties asserting patents that cover certain of our technologies and
alleging infringement of intellectual property rights. We expect to receive
similar communications in the future. If a valid claim is made against us or
our customers, we may be required to:



| |  |  | 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.

We could be seriously harmed by any of these developments. Litigation,
which could result in substantial costs to us and divert our resources, may
also be necessary to enforce our patents or other intellectual property rights
or to defend against claimed infringement of the rights of others. Our failure
to obtain necessary licenses or the occurrence of patent infringement or other
intellectual property litigation could seriously harm our company. In addition,
although we have from time to time made a reserve in anticipation of royalty
payments we may potentially be required to make in relation to any possible
claims or allegations, we cannot assure you that we have made, or will continue
to make, sufficient reserve for all claims and allegations against our company
for any patent infringement. See Item 8. Financial Information  A.
Consolidated Statements and Other Financial Information  Legal Proceedings.

Political and Economic Risks

Strained relations between the ROC and the Peoples Republic of China could
adversely affect our business and the market value of your investment.

Our principal executive offices and most of our assets are located in, and
most of our revenue is derived from, our operations in Taiwan. The ROC has a
unique international political status. The Peoples Republic of China asserts
sovereignty over all of China, including Taiwan. The Peoples Republic of China
government does not recognize the legitimacy of the ROC government. Although
significant economic and cultural relations have been established in recent
years between the ROC and the Peoples Republic of China, relations have often
been strained and the Peoples Republic of China government has indicated that
it may use military force to gain control over Taiwan in some circumstances,
such as the declaration of independence by the ROC. Relations between the ROC
and the Peoples Republic of China have been particularly strained in recent
years. Past developments in relations between the ROC and the Peoples Republic
of China have on occasion depressed the market

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price of the securities of ROC companies. Relations between the ROC and
the Peoples Republic of China and other factors affecting the political or
economic conditions in Taiwan could have a material adverse effect on our
financial condition and results of operations, as well as the market price and
the liquidity of our securities.

Fluctuations in exchange rates could result in foreign exchange losses.

Currently, the majority of our revenue is denominated in Japanese yen and
U.S. dollars. Our costs of revenues and operating expenses, on the other hand,
are incurred in several currencies, including NT dollars and U.S. dollars. In
addition, a substantial portion of our capital expenditures has been, and is
expected to continue to be, primarily denominated in Japanese yen and U.S.
dollars. Fluctuations in exchange rates, primarily among the U.S. dollar, the
NT dollar and the Japanese yen, will affect our costs and operating margins. In
addition, these fluctuations could result in exchange losses and increased
costs in NT dollar and other local currency terms. Despite hedging and
mitigating techniques implemented by us, fluctuations in exchange rates have
affected, and may continue to affect, our financial condition and results of
operations. See Item 11. Quantitative and Qualitative Disclosures About
Market Risk  Foreign Currencies.

Disruptions in the international trading environment may significantly reduce
our international sales and revenue.

A substantial portion of our net sales revenue is derived from sales from
Taiwan to customers located outside Taiwan. In 2000, 2001 and 2002, export
sales from Taiwan to our customers outside Taiwan accounted for 74.0%, 72.5%
and 81.0%, respectively, of our net sales revenue. We expect sales to customers
outside Taiwan to continue to represent a significant portion of our net sales
revenue. Accordingly, our financial condition and results of operations and the
market price of our securities may be affected by changes in governmental
policies, inflation, increasing interest rates, social instability and other
political, economic, or social developments in or affecting the countries in
which we sell our products that are not within our control. As a result, our
business will continue to be vulnerable to disruptions in the international
trading environment, including adverse changes in foreign government
regulations, political unrest and international economic downturns. These
disruptions in the international trading environment affect the demand for our
products and the terms upon which we sell our products overseas, which 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.

Our common shares are listed on the Taiwan Stock Exchange. The trading
price of our common shares may be affected by the general activities of the
Taiwan Stock Exchange and the economic performance of Taiwan. The Taiwan Stock
Exchange is smaller and, as a market, more volatile than the securities markets
in the United States and a number of European countries. The Taiwan Stock
Exchange has experienced substantial fluctuations in the prices and volumes of
sales of listed securities, and there are currently limits on the range of
daily price movements on the Taiwan Stock Exchange. In the past decade, the
Taiwan Stock Exchange Index peaked at 10,394 in February 2000 and
subsequently fell to a low of 3,850 in September 2001. During 2002,
the Taiwan Stock Exchange Index peaked at 6,462 on April 19, 2002 and
reached a low of 3,850 on October 11, 2002. From January 1, 2002 to June 26, 2003, daily closing prices
of our common shares ranged from NT$32.7 per share to NT$4.12 per share. On June 26, 2003, the Taiwan Stock Exchange Index closed at 4,894 and the daily closing
value of our common shares was NT$7.8 per share. The Taiwan Stock Exchange is
particularly volatile during times of political instability, such as when
relations between Taiwan and the Peoples Republic of China are strained.
Moreover, the Taiwan Stock Exchange has experienced problems such as market
manipulation, insider trading and payment defaults, and the ROC government has
from time to time intervened in the stock market by purchasing stocks listed on
the Taiwan Stock Exchange. The recurrence of these or similar problems could
decrease the market prices and liquidity of our common shares.

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Risks Relating to our Common Shares and our ADSs

We cannot assure you that the market for our common shares and ADSs will be
active and liquid.

The
average daily trading volumes for our common shares and ADSs have
fluctuated greatly in the past. From January 1, 2002 to
June 26, 2003, the average daily trading volume of our common
shares ranged from approximately 16,000 to approximately 92,000.
During the same period, the average daily trading volume of our ADSs
ranged from approximately 12,000 to approximately 96,000. We cannot assure you
that the liquidity of our common shares or ADSs will be maintained or enhanced.
Market prices of technology companies shares have been and continue to be
extremely volatile. As a result, volatility in the price of our common shares
and ADSs may be caused by factors outside of our control and may be unrelated
or disproportionate to our operating results.

We have limited liquidity and may be unable to repurchase our outstanding debt
securities when requested by holders.

Under certain circumstances, the holders of our outstanding debt
securities may require us to repurchase all or a portion of the debt
securities. We cannot assure you that we will have enough funds or would be
able to arrange for sufficient funding to repurchase all the outstanding debt
securities tendered by the holders. Our ability to repurchase the outstanding
debt securities may also be limited by applicable law as well as the terms of
our outstanding indebtedness.

We may have to spend significant amounts of capital to repurchase the
outstanding debt securities put to us under such circumstances, and obligations
to make such purchases may occur at a time, or from time to time, when we have
insufficient liquidity to make such purchases. Such purchases may require us to
borrow funds to otherwise convert long-term investments to liquid funds, which
could adversely affect our financial condition and the price of our common
shares or ADSs.

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.

The market price of our common shares and ADSs could decline as a result
of future sales of a large number of common shares or ADSs or the perception
that such sales could occur. If we or the holders of our common shares sell a
large number of common shares or the holders of ADSs sell a large number of
ADSs, the market price for the common shares or ADSs could be depressed. In
addition, we plan to issue, from time to time, additional common shares in
connection with employee compensation as well as to finance possible future
investments or acquisitions. The issuance of additional shares may have a
dilutive effect on other shareholders and may cause the price of our common
shares and ADSs to decrease. See Item 6. Directors, Senior Management and Employees 
E. Share Ownership  Stock Plans  Share Option Plans for a discussion of the share option
plan that we have adopted for the benefit of all of our officers and employees
and those of our subsidiaries.

ADS holders do not have the same voting rights as our common shareholders,
which may affect the value of the ADSs.

The voting rights of ADS holders as to the common shares represented by
the ADSs are limited to the extent set forth in the relevant deposit agreement.
With respect to matters other than the election of our directors or
supervisors, ADS holders generally are not able to exercise voting rights on an
individual basis. With respect to matters other than the election of our
directors or supervisors, if holders representing 51% of the outstanding ADSs
instruct the depositary to vote in a particular manner, the depositary will
cause all common shares represented by the ADSs to be voted in that manner. If
the depositary does not receive instructions representing at least 51% of the
outstanding ADSs to vote in a particular manner, ADS holders will be deemed to
have instructed the depositary to authorize all the common shares represented
by their ADSs to be voted at the discretion of our designated representative,
which may not be in the interest of all ADS holders.

The ROC Company Law and our articles of incorporation provide that a
shareholder has one vote for each common share. There is also cumulative voting
for the election of directors and supervisors.

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The rights of holders of our ADSs to participate in our rights offerings may be
limited, which may cause dilution to their holdings.

We may from time to time distribute rights to our shareholders, including
rights to acquire our securities. Under the applicable deposit agreement, the
depositary will not offer those rights to holders of ADSs unless both the
rights and the underlying securities to be distributed to holders of ADSs are
either registered under the U.S. Securities Act of 1933 (the
Securities Act) or exempt from registration under
the Securities Act. We are under no obligation to file a registration statement
with respect to any such rights or underlying securities or to endeavor to
cause such a registration statement to be declared effective. Accordingly,
holders of our ADSs may be unable to participate in our rights offerings and
may experience dilution in their holdings.

Our public shareholders may have more difficulty protecting their interests
than they would as shareholders of a U.S. corporation.

Our corporate affairs are governed by our articles of incorporation and by
the laws governing Taiwanese corporations. The rights and responsibilities of
our shareholders and members of our board of directors under Taiwan law are
different from those that apply to a U.S. corporation. Therefore, our public
shareholders may have more difficulty protecting their interests against
certain actions of our management, members of our board of directors or
controlling shareholders than they would as shareholders of a U.S. corporation.

ADS holders may be required to appoint agents in Taiwan to handle various tax
and administrative matters if they withdraw common shares from our ADS program
and become shareholders, which may make share ownership burdensome.

Non-ROC persons wishing to withdraw their common shares from our ADS
program and become shareholders are required under current ROC laws and
regulations to appoint a local agent or representative (a Tax Guarantor) in
Taiwan for making tax payments on their behalf. A Tax Guarantor must meet
certain qualifications set by the ROC Ministry of Finance and, upon
appointment, becomes a guarantor of the holders ROC tax obligations. Holders
wishing to repatriate profits derived from the sale of common shares or cash
dividends or interest derived from any such common shares, will be generally
required to submit evidence of appointment of a Tax Guarantor and the approval
of the appointment by the ROC tax authorities. We cannot assure you that you
will be able to appoint and obtain approval for a Tax Guarantor in a timely
manner.

Under ROC law and regulations, citizens of the Peoples Republic of China
are not permitted to hold our common shares.

In addition, under current ROC law, such ADSs holders will be required to
appoint a local agent in Taiwan to, among other things, open a securities
trading account with a local securities brokerage firm, remit funds and
exercise shareholders rights. They must also appoint a local bank to act as
custodian for handling confirmation and settlement of trades, safekeeping of
securities and cash proceeds and reporting and declaration of information.
Without this local agent, the custodian and the opening of the trading account,
they will not be able to hold, sell or otherwise transfer our common shares on
the Taiwan Stock Exchange.




Item 4.     Information on the Company



|A. |  | History and Development of the Company
|-- |  | --------------------------------------

We
are an independent semiconductor designer, producer and supplier. Our product
portfolio includes mask ROM, flash, EPROM, logic, application-specific
integrated circuit products and highly integrated system-on-a-chip, or SOC,
solutions. We view ourselves as an integrated solutions provider. In
particular, we treat our clients as strategic partners and work closely with
them starting from early stages of product development to design silicon chip
solutions that meet their specific needs. These partners include Nintendo Co.,
Ltd., with whom we have had a relationship for over ten years, and
Hewlett-Packard Company, with whom we have had a relationship for over five
years. We differentiate ourselves by our ability to offer a full range of
in-house design, product and process

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engineering capabilities.

Until completion of our recent business reorganization, we were organized
into three strategic business units, each with its own end application focus:



| |  |  | our memory products unit, which encompassed our mask ROM, flash and
EPROM areas;                           
| | - |  | -----------------------------------------------------------------------------------------------------------
|
| |  |  | our SOC unit, which focused on our system-on-a-chip (including
embedded memory) and foundry activities; and
|
| |  |  | our multimedia unit, which focused on our logic products for the
audio, video and networking markets.      

We were founded in 1989 by engineers who returned to Taiwan from Silicon
Valley in the United States to launch an integrated technology-focused firm.
Our founders chose to form our company in Taiwan to take advantage of the
availability of capital and Taiwans manufacturing strengths. Today, many of
the worlds leading semiconductor companies which design, market and sell
critical components for communications, computing, consumer, industrial and
other applications are located in Taiwan. Additionally, many companies outside
of Taiwan outsource some or all of their semiconductor manufacturing needs to
Taiwans semiconductor manufacturing service providers. We believe customers
have been able to take advantage of the proximity of the facilities of many
Taiwanese companies. In addition, Taiwan is a center for the design and
manufacture of electronic systems that have semiconductor devices as their
primary components.

We generate our revenue from customers who are in the consumer
electronics, computer and communications industries. For 2002, of our total net
sales, excluding sales made by agents, 68.6% was generated by our products for
consumer electronics applications, 18.2% by our products for computer
applications and 10.8% by our products for communications applications.

In March 1995, our common shares were listed on the Taiwan Stock Exchange
and we became the first company to be listed under that stock exchanges High
Technology category of companies. In May 1996, our ADSs were accepted for
quotation on the Nasdaq National Market, and we became the first Taiwanese
company with securities listed in the United States.

Our contact information is:

|  |                   |                                                                                        |  | 
|- | ----------------- | -------------------------------------------------------------------------------------- |  | 
| | Business address: | No. 16 Li Hsin Road, Science-Based Industrial Park
Hsinchu, Taiwan, Republic of China

|  |                   |                  |  | 
|- | ----------------- | ---------------- |  | 
| | Telephone number: | (8863) 578-6688 
|  |                   |                 
| | Website:          | www.macronix.com

We were named by Business Week in June 2001 in a survey based on return on
equity, revenue growth and total revenues as one of the top 100 information
technology companies worldwide, ranking ninety-ninth largest among companies in
this industry. In addition, our president, Miin Wu, was named by Business Week
in July 2001 as one of 13 entrepreneurs among 50 stars of Asia.

In combination with our manufacturing capabilities, we have developed a
range of core technologies, design capabilities and the intellectual property
necessary to develop customer application-specific products. We believe that we
were the first in Taiwan, in August 1992, to develop a digital signal
processor, and that we were the worlds first manufacturer to announce the
commercial availability of a 4Mb flash chip in October 1992. Additionally, in
1997, we became one of the first companies in Taiwan to produce an embedded
flash microcontroller. Through our manufacturing capabilities and technological
innovations, we have also established strong market positions in the various
nonvolatile memory markets that we serve.

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Capital Expenditures

We operate our own fabrication facilities and therefore require
significant amounts of capital to build, expand, modernize and maintain our
facilities and equipment. Increases in property, plant and equipment amounted
to NT$11,803 million, NT$9,078 million and NT$8,975 million (US$258.7 million)
in 2000, 2001 and 2002, respectively. The following table sets forth our
capital expenditures for 2000, 2001 and 2002:

|        |  |               |        |               |  |               |       |  |  |  |       | 
|------- |  | ------------- | ------ | ------------- |  | ------------- | ----- |  |  |  | ----- | 
|        |  | 2000          |        | 2001          |  | 2002         
|        |  |               |        |               |  |              
|        |  | (NT$ million) |        | (NT$ million) |  | (NT$ million)
|Fab I   |  |               | 1,553  |               |  |               | 609   |  |  |  | 370   | 
|Fab II  |  |               | 9,913  |               |  |               | 2,915 |  |  |  | 1,184 | 
|Fab III |  |               | 320    |               |  |               | 3,726 |  |  |  | 4,720 | 
|Other   |  |               | 17     |               |  |               | 1,828 |  |  |  | 2,701 | 
|        |  |               |        |               |  |               |       |  |  |  |       | 
|Total   |  |               | 11,803 |               |  |               | 9,078 |  |  |  | 8,975 | 
|        |  |               |        |               |  |               |       |  |  |  |       | 

These amounts include the expansion and upgrade of Fab I and Fab II, the
construction of Fab III and the development of trainee and/or employee
facilities and other areas. See Item 4. Information on the Company  D.
Property, Plant and Equipment.

In
2002, our capital expenditures consisted mainly of the
construction of, and facility for, Fab III and further upgrade of Fab II. We
intend to obtain funding for our future capital expenditures, including a portion of
the costs associated with Fab III, from debt and equity financing that we may
consider from time to time, depending on market conditions, our financial
performance and other relevant factors, and from internally generated funds.
We believe that we will have sufficient resources available to meet our planned
capital expenditure requirements.

Recent Developments

Repurchase of Convertible Bonds and Tender Offer

We made open market repurchases of our outstanding 1% convertible bonds
due 2005 from time to time, and had acquired an aggregate principal amount of
US$87 million through December 2002 for total payments of US$105 million. In
addition, bondholders holding an aggregate principal amount of approximately
US$11 million exercised their rights to require us to redeem their bonds at the
principal amount plus specified premium effective February 1, 2003 for a total
payment of US$13 million. On December 24, 2002, we also announced a tender
offer for the bonds, and on January 28, 2003 we accepted and made payment for
tendered bonds with an aggregate principal amount of US$61 million for a total
payment of US$74 million. Following these repurchases, redemptions and the
tender offer, 1% convertible bonds due 2005 with a principal amount of US$295,000 remained outstanding as of February 1, 2003. We repurchased
the outstanding amount in full on April 10, 2003 for a total payment of US$363,297.

Zero Coupon Convertible Bonds Due 2008

On
February 10, 2003 and March 4, 2003, we issued zero coupon convertible bonds totaling
US$90 million. The bonds will mature on February 10, 2008 at a redemption
price equal to their principal amount, together with redemption premium. The
bonds do not bear interest. Unless previously redeemed or repurchased and
cancelled, the bonds, at the option of the holders of the bonds, are
convertible at anytime, except during a closed period, on or after March 12,
2003 and on or before January 11, 2008, into common shares, par value NT$10.00
per share. The initial conversion price will be NT$12.06 per common share,
subject to adjustment in certain events. The bonds are evidenced by the
indenture included as Exhibit 10.2 hereto.

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Redemption of Secured Zero
Coupon Convertible Bonds; Settlement and Extension of Related
Derivatives Contracts

On
April 23, 2003, we repurchased the entire
outstanding principal amount of US$80 million of
our zero coupon secured convertible bonds due May 5, 2003 in accordance with
the terms and conditions of such bonds for a total payment of
US$103.8 million.

In
May 2003, we settled a call option and currency swap contract
relating to the zero coupon convertible bonds by payment of
US$13 million. In April 2003, we extended a contract with a
financial institution for the settlement of five options relating to
the zero coupon convertible bonds to May 2004. See note 17c to
the consolidated financial statements for the years ended
December 31, 2000, 2001 and 2002 included in this annual
report.

Additional Obligation under
Stock Appreciation Rights Contracts

In
April 2003, we recorded additional obligations under our stock
appreciation rights contracts in the amount of NT$179.1 million.
See note 17c to the consolidated financial statements, for the
years ended December 31, 2000, 2001 and 2002 included in this
annual report.

Line of Credit

In
March and April 2003, we drew down our long-term line of credit with
Chaio Tung Bank in an aggregate amount of NT$2,910 million.

Reorganization

In order to better serve the increasingly sophisticated needs of our
customers, we recently completed a reorganization of our organizational and
business unit structure. Our previous organizational and business unit
structure was organized on the basis of the principal types of products and
services we provided, which consisted of memory products, SOC products and
services, and multimedia products. Under our new organizational and business
unit structure, we organize our operations into two main strategic business
groups. We believe that our new organizational and business unit structure
will increase our operational efficiency and effectiveness in meeting the needs
of our customers, as well as improve our overall competitiveness.

Integrated Solutions Group. The integrated solutions group is responsible
for focusing on applications excellence and providing value-added design
services and system-level platform solutions to our customers based upon the
type of end-market application that such services and solutions are designed to
serve. In addition, this business group will be responsible for developing
strategic partnerships with our customers and leveraging on our close
relationships with our platform and system partners to provide integrated
solutions for customers. This business group will also be the channels and
marketing arm of our company. In particular, this business group will be
responsible for the implementation of our strategic initiatives to leverage on
our current strengths to penetrate key customers through the cross-selling of
our products and services.

Integrated Technology and Manufacturing Group. The integrated technology
and manufacturing group will provide the technology to support our core
business of providing semiconductor products and design services. This
business group will focus mainly on the research and development of new
advanced process technologies and design capabilities, as well as the operation
and capacity planning of our manufacturing facilities. This business group
will also be responsible for the management of our relationship and technology
arrangements with our strategic manufacturing partners to advance our portfolio
of process technologies.

Spin-Off of Magic Pixel

In
December 2002, we initiated a spin-off of a certain portion of our
business and formed Magic Pixel Inc. Magic Pixel will focus on
digital signal processing technology, digital still camera and LCD
controller products. We own 100% of the outstanding capital of Magic
Pixel.



|B. |  | Business Overview
|-- |  | -----------------

Our Strategy

In addition to manufacturing, our business model goes beyond that of a
traditional integrated device manufacturer or wafer foundry to cover strategic
partnerships and value-added design services to customers. We view our
relationships with our strategic partners and our customers as the key factor
to our ongoing success and to achieving our objective of being one of the
preeminent semiconductor companies from Taiwan. We are confident that this
overall strategy will help us build a core base of strategic clients that will
position us to take advantage of both the opportunities and challenges of the
various phases of the semiconductor business cycle.

The components of our strategic initiatives are as follows:

Maintain our leadership in the nonvolatile memory market by enhancing our product
design capabilities and upgrading our technology

We
are a leading supplier of nonvolatile memory semiconductors. Our
leadership position is backed by our extensive proprietary product designs and
advanced technologies. For our mask ROM products, we were the first company in
the world to introduce a 512Mb ROM using 0.18 micron process technology in
2001. We plan to introduce 1Gb ROM products using 0.15 micron technology in
2003. For our flash products, we are currently developing 128Mb and 256Mb
products using 0.15 micron process technology and two-bit per cell technology,
targeting high-density and embedded applications.

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We believe that our focus on and expertise in the development of advanced
nonvolatile memory technologies will allow us to maintain our leading market
position.

Capitalize our strengths in nonvolatile memory for embedded applications to
provide SOC design and production services

To complement our leading position in the nonvolatile memory market, we
are seeking to extend further capabilities into the logic and multimedia
devices. The shift in the growth of semiconductor use from personal computers
to communications and consumer electronics has given rise to increasing demand
for SOC solutions. As SOC solutions combine logic design with embedded memory
and require substantial design and manufacturing capability, we believe our
years of design and production expertise have enabled us to provide SOC
solutions to our customers. We plan to continue to provide embedded flash
products and work closely with our strategic customers to provide them with
customized and high value-added SOC products. We believe this will enable us to
reduce our exposure to the cyclicality of the memory market while building a
broad range of product and process capabilities that will better enable us to
provide SOC solutions for our customers.

Leverage our strengths in nonvolatile memory and broad range of product and
process capabilities to penetrate key customers through cross-selling

We plan to expand our business with our existing customers and increase
our revenues by broadening the range of our products and increasing our
cross-selling efforts, with a view towards satisfying the increasingly complex
and specific needs of our customers. We intend to capitalize on our strength in
mask ROM to cross-sell our other products. For example, we have successfully
sold flash, logic and SOC products to Nintendo, which originally had been a
customer for our mask ROM products only. We believe the increasing
cross-selling opportunities allow us to better understand the needs of, and
strengthen our relationships with, our customers.

Continue to focus on providing system level solutions on wireless
communications and portable consumer electronics applications

We plan to focus on extending our expertise in the nonvolatile memory
market into the logic market by combining logic products with embedded memory
to offer comprehensive system solutions to our customers. We are seeking to
take advantage of the growth in the demand for non-personal computer platforms
such as portable consumer electronics platforms and, in particular, the demand
for better and smaller integrated circuits for communications and consumer
applications. We believe that our extensive design capability, strong research
and development team and our close relationship with system vendors will enable
us to provide complete system level solutions to our customers. We view our
future capability in providing complete system level solutions as the key to
success in the end markets that we are targeting.

Continue to upgrade our process technology and expand capacity prudently

We have been successfully migrating our production to more advanced
process technologies by making significant investments in equipment and
leveraging on our strategic partners expertise. We expect to continue to do
so. Fab I is currently employing 0.35 micron process technology and 0.32 micron
process technology for certain chips, compared with the 0.40 micron process
technology primarily used in 1997. Fab II began commercial operation in 1997
with 0.35 micron process technology. It has been using 0.18 micron process
technology since the second half of 2000. Our latest initiatives on process
technology draw upon reduction of linewidths to a level of 0.15 micron and we
successfully migrated to 0.15 micron process technology for both flash and mask
ROM in the fourth quarter of 2002. We also intend to continue stressing quality
control and operational discipline to enhance production yield.

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We believe that our manufacturing facilities provide us with a strategic
advantage that enables us to provide a full range of services to our clients
while retaining control over manufacturing processes and benefiting from the
cost savings that result. We will continue to maintain this capability
in-house. We completed the construction of Fab III in July 2002. However,
due to the adverse conditions currently prevailing in the semiconductor
industry, we expect full commencement of operations at Fab III to be delayed
until 2005 or later.

We plan to continue to explore ways to increase our manufacturing capacity
in a prudent manner. For example, we have entered into technology sharing
arrangements with, and outsourced some wafer production to, Tower
Semiconductor. We may also in the future consider establishing joint ventures
with our strategic partners to build and operate new fabs.

Our Products and Services

Our principal products and services consist of memory products, SOC
products and services, and multimedia products. The following table sets forth
our main products, their characteristics and applications, and the percentage
of net sales revenue represented by these products in 2000, 2001 and 2002:

|                    |  |                                                                                                           |  |                                                                                                                                                               |  |                         |  |       |  |      
|------------------- |  | --------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- |  | ----- |  | -----
|                    |  |                                                                                                           |  |                                                                                                                                                               |  | % of net sales revenue 
|                    |  |                                                                                                           |  |                                                                                                                                                               |  |                        
|                    |  |                                                                                                           |  |                                                                                                                                                               |  | Year ended December 31,
|                    |  |                                                                                                           |  |                                                                                                                                                               |  |                        
|Product             |  | Characteristics                                                                                           |  | Applications                                                                                                                                                  |  | 2000                    |  | 2001  |  | 2002 
|                    |  |                                                                                                           |  |                                                                                                                                                               |  |                         |  |       |  |      
|Nonvolatile Memory: |  |                                                                                                           |  |                                                                                                                                                               |  |                         |  |       |  |      
|Mask ROM            |  | Not reprogrammable                                                                                        |  | Games, PDAs, word
processors,
printers, fax
modems, VCDs,
cellulars, STBs                                                                                     |  | 57.6%                   |  | 56.8% |  | 45.9%
|Flash               |  | Reprogrammable
within the
application system;
less expensive than
EEPROM                                  |  | Mobile phones,
PDAs, digital
cameras, STBs, Web
TVs                                                                                                           |  | 19.3%                   |  | 14.8% |  | 26.8%
|EPROM               |  | Reprogrammable
outside the
applicable system
using industrial
processors                                  |  | Fax modems, VCDs,
cellulars, STBs                                                                                                                             |  | 3.7%                    |  | 4.5%  |  | 3.6% 
|SOC                 |  | Highly integrated
system-on-a-chip
solutions featuring
embedded flash
technology and
value-added
services |  | Internet
applications, CDs,
DVDs,
microcontrollers
with embedded flash
technology                                                                             |  | 10.5%                   |  | 14.8% |  | 6.1% 
|Multimedia          |  | Logic IC products
for various audio,
video and
networking products                                        |  | Digital still
cameras, flat panel
displays, digital
answering machines,
digital recorders,
home networking
devices, various
MSB, DVD and
Ethernet
controllers |  | 4.5                     |  | 7.3%  |  | 14.5%

Memory Products

Our memory products consist of Mask ROM, flash and EPROM.

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Memory Products Mask ROMs

Applications.Mask ROMs are often used for the storage of video game
software and data storage for office automation equipment, including fonts for
laser printers and dictionary data for word processors. Recently, major new
growth areas in the mask ROM market have developed, including applications such
as pre-recorded MP3 music, mobile telecommunications and multimedia devices. We
believe we are well-positioned to capitalize on the growing demand for these
products.

We manufacture mask ROMs using a patented 0.450.15 micron process
technology in densities ranging from 1Mb to 512Mb and in a variety of
configurations. We believe that our patented technology allows us to produce
smaller, higher density mask ROM devices than many of our competitors. We
migrated to 0.18 micron process technology in the second half of 2000 and
successfully migrated to 0.15 micron process technology for both flash and mask
ROM in the fourth quarter of 2002.

Although the majority of the circuitry in a mask ROM chip is relatively
standard, we often incorporate customer design specifications into
application-specific portions of the circuitry during the manufacturing
process. For example, we are presently co-developing with a third party
manufacturer 32 Mb mask ROM devices that will be used in its memory cards of
different form factors in a variety of computing and consumer electronic
devices.

The following table provides an overview of our principal mask ROM
products and the percentage of mask ROM net sales revenue represented by these
products in 2000, 2001 and 2002:

|        |        |               |           |          |  |       |         |                     |  |        |           |                          |                         |      |  |      |              |  |                             |      |     |  |  |      |     |  |  |  | 
|------- | ------ | ------------- | --------- | -------- |  | ----- | ------- | ------------------- |  | ------ | --------- | ------------------------ | ----------------------- | ---- |  | ---- | ------------ |  | --------------------------- | ---- | --- |  |  | ---- | --- |  |  |  | 
|        |        |               |           |          |  |       |         |                     |  |        |           |                          |                         |      |  |      |              |  | % of our net mask ROM sales
|        |        |               |           |          |  |       |         |                     |  |        |           |                          |                         |      |  |      |              |  | Year ended                 
|        |        |               |           |          |  |       |         |                     |  |        | Fastest   |                          |                         |      |  |      | December 31,
|        |        |               |           |          |  |       |         |                     |  |        | Available |                          |                         |      |  |      |             
|Density |        | Configuration |           | Voltage  |  | speed |         | Sample applications |  | 2000   |           | 2001                     |                         | 2002
|        |        |               |           |          |  |       |         |                     |  |        |           |                          |                         |     
|        | 1 Mb   |               |           | 128K x 8 |  |       |         | 3V/5V               |  |        | 100 ns    |                          | Pagers, data banks      |      |  | 0.1  | %            |  |                             | -    | (1) |  |  | -    | (1)
|        |        |               | 64K x 16  |          |  |       | 5V      |                     |  | 100 ns |           | STBs, BIOS               |                         |      |  |      |              |  |                             |      |     |  |  |     
|        | 2 Mb   |               |           | 256K x 8 |  |       |         | 3V/5V               |  |        | 100 ns    |                          | Pagers, data banks      |      |  | 1.4  | %            |  |                             | 0.2  | %   |  |  | -    | (1)
|        |        |               | 128K x 8  |          |  |       | 5V      |                     |  | 100 ns |           | GPS, STBs                |                         |      |  |      |              |  |                             |      |     |  |  |     
|        | 4 Mb   |               |           | 512K x 8 |  |       |         | 3V/5V               |  |        | 100 ns    |                          | PHSs, data banks        |      |  | 3.5  | %            |  |                             | 2.1  | %   |  |  | 3.1  | %  
|        |        |               | 256K x 16 |          |  |       | 3.3V/5V |                     |  | 100 ns |           | Games PHSs               |                         |      |  |      |              |  |                             |      |     |  |  |     
|        | 8 Mb   |               |           | 1 M x 8  |  |       |         | 5V                  |  |        | 100 ns    |                          | Sound cards, data banks |      |  | 7.1  | %            |  |                             | 4.7  | %   |  |  | 2.5  | %  
|        |        |               | 512K x 16 |          |  |       | 5V      |                     |  | 100 ns |           | BIOS, games, sound cards |                         |      |  |      |              |  |                             |      |     |  |  |     
|        | 16 Mb  |               |           | 2 M x 8  |  |       |         | 5V                  |  |        | 100 ns    |                          | Games                   |      |  | 20.1 | %            |  |                             | 17.8 | %   |  |  | 16.2 | %  
|        |        |               | 1 M x 16  |          |  |       | 3.3V/5V |                     |  | 100 ns |           | Word processors, games   |                         |      |  |      |              |  |                             |      |     |  |  |     
|        | 24 Mb  |               |           | 3 M x 8  |  |       |         | 5V                  |  |        | 100 ns    |                          | Games, networking       |      |  | 0.2  | %            |  |                             | -    | (1) |  |  | -    | (1)
|        |        |               | 1.5M x 16 |          |  |       | 5V      |                     |  | 100 ns |           | Games                    |                         |      |  |      |              |  |                             |      |     |  |  |     
|        | 32 Mb  |               |           | 4 M x 8  |  |       |         | 5V                  |  |        | 100 ns    |                          | Games, DVDs, data       |      |  | 16.1 | %            |  |                             | 24.9 | %   |  |  | 25.4 | %  
|        |        |               | 2 M x 16  |          |  |       | 3.3V/5V |                     |  | 100 ns |           | Communications           |                         |      |  |      |              |  |                             |      |     |  |  |     
|        | 64 Mb  |               |           | 4 M x 16 |  |       |         | 3.3V                |  |        | 350 ns    |                          | Word processors, games  |      |  | 10.5 | %            |  |                             | 27.3 | %   |  |  | 36.9 | %  
|        |        |               | 8 M x 8   |          |  |       | 3.3V/5V |                     |  | 120 ns |           | Games, PDAs, STBs        |                         |      |  |      |              |  |                             |      |     |  |  |     
|        |        |               |           |          |  |       |         |                     |  | 9 yn@  |           | Word processors, data    |                         |      |  |      |              |  |                             |      |     |  |  |     
|        |        |               |           |          |  |       |         |                     |  | 66MHz  |           | banks, printers          |                         |      |  |      |              |  |                             |      |     |  |  |     
|        | 96 Mb  |               |           | 6 M x 16 |  |       |         | 3.3V                |  |        | 350 ns    |                          | Games                   |      |  | 2.0  | %            |  |                             | 0.8  | %   |  |  | 0.1  | %  
|        | 128 Mb |               |           | 8M x 16  |  |       |         | 3.3V                |  |        | 120 ns    |                          | Games, PDAs             |      |  | 7.9  | %            |  |                             | 7.5  | %   |  |  | 12.9 | %  
|        | 256 Mb |               |           | 16M x 16 |  |       |         | 3.3V                |  |        | 350 ns    |                          | Games, memory cards     |      |  | 31.1 | %            |  |                             | 14.7 | %   |  |  | 2.8  | %  
|        | 512 Mb |               |           | 16M x 32 |  |       |         | 3.3V                |  |        | 75 ns     |                          | Games, entertainment    |      |  | -    | (1)          |  |                             | -    | (1) |  |  | 0.1  | %  



---

|(1) |  | Less than 0.1%.
|--- |  | ---------------

Competition.The mask ROM industry is highly competitive. We compete with
major international semiconductor companies, including Oki, NEC and Sharp,
among others. We believe that with our broad range of mask ROM products, our
relative flexibility in adjusting our product mix and our additional capacity
in Fab II and later in Fab III, we should be well-positioned in the mask ROM

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market over the next few years. In particular, we believe that our focus
on sophisticated mask ROM products will position us well to meet increasing
market demand for these products.

According to a report published by Gartner Dataquest on June 24, 2002, we
were ranked first in terms of revenues with 53.1% of market share in the
global mask ROM market in 2001. Competing technologies to mask ROM such as
CD-ROMs, DVD-ROMs, magnetic disks and on-demand software available through
telephone-linked and Internet databases are available. In particular, our key
customer, Nintendo, began to migrate its video game products from Nintendo 64
to its new game platform, the GameCube, during the second half of 2001. The
GameCube utilizes a DVD-ROM-based storage system rather than the mask ROM-based
system used in Nintendo 64. See  Customers  Nintendo. As a result, we have
been shifting a portion of our production toward the output of mask ROMs for
Nintendos Game Boy series of handheld computing devices. In 2001, sales of
mask ROM for use in Game Boy Advance amounted to a small portion of our net
sales revenue due to the weak demand. Our sales revenue for Game Boy Advance
increased in the second half of 2002 as the demand increased. We plan to
protect and improve our mask ROM market by jointly developing with existing and
prospective customers new applications for this product in high-end mobile
consumer goods, such as mobile phones and MP3 players, which we believe will
support the demand for mask ROMs. We may also seek to diversify our customer
base to include telecommunication, toys and entertainment, personal digital
assistant and office automation equipment providers.

Memory Products Flash

Applications.Applications for flash products range from most types of
portable electronic equipment devices to high volume mass storage of data.
Flash is particularly suitable for applications such as handheld devices,
combining the need for portability, high density and lower power requirements.
Flash products are also well-suited for audio products such as digital
answering machines, mobile telephone systems and MP3 players, as well as other
applications including networking devices, digital cameras and personal
computer motherboards. Flash products are smaller and use less power than the
hard disk drives now commonly used for mass data storage and, therefore, are
considered candidates to replace disk drives in selected applications,
particularly in handheld computers.

During the past eight years, we have continued to develop our flash
products. Currently, we manufacture and distribute 1Mb to 128Mb devices in a
range of designs down to 2.7 volts. Among them, for example, our
simultaneous read/write, 2.7 volt 16Mb device, is used in cellular phones. In addition to
low voltage design, we also provide the combo flash series which is a
multi-chip packaging product combined with high density flash and pseudo SRAM.

Our proprietary PAC-AND design architecture for flash is one of three
major competing architectural standards currently in the market. The other two
competing technologies are the NOR and NAND standards. These architectural
standards can be differentiated largely by the manner in which they write and
erase data. The NOR design architecture, commonly known as code flash, produces
fast devices but does not support high-density products at a competitive price.
NAND design architecture, commonly known as data flash, supports low-cost,
high-density products but cannot be used for random access code storage
purposes. Our PAC-AND design architecture produces devices with a cost
advantage similar to that of NAND devices that are generally comparable with
most NOR devices in terms of speed. Our PAC-AND design architecture is suitable
for both high-density and high-performance applications.

Beginning in the fourth quarter of 2000, we provided 32 Mb flash products
based on Mitsubishis DINOR flash design. We started providing 64Mb and 128Mb
flash products based on Mitsubishis DINOR flash design in the fourth quarter
of 2002. DINOR offers the high-speed random-access capability of the NOR
architecture, as well as the high-density and single power-supply
characteristics of the NAND flash architecture. We believe that, with our
PAC-AND design architecture and Mitsubishis DINOR design architecture, we can
compete effectively with other flash manufacturers using other design
architectures.

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We are also developing core technologies to achieve two-bit per cell
manufacturing capabilities, which are expected to reduce our unit production
costs. We have currently achieved multiple time programming standard for
two-bit per cell manufacturing and expect to achieve flash standard in 2003.
See  Manufacturing and Quality Control  Manufacturing.

The following table provides an overview of our principal flash products
and the percentage of flash memory net sales revenue represented by these
products in 2000, 2001 and 2002:

|         |  |               |           |              |                |       |        |                     |           |        |  |                            |  |                               |     |   |      |              |     |                                 |      |     |   |     |      |     |  |  |  | 
|-------- |  | ------------- | --------- | ------------ | -------------- | ----- | ------ | ------------------- | --------- | ------ |  | -------------------------- |  | ----------------------------- | --- | - | ---- | ------------ | --- | ------------------------------- | ---- | --- | - | --- | ---- | --- |  |  |  | 
|         |  |               |           |              |                |       |        |                     |           |        |  |                            |  |                               |     |   |      |              |     | % of our net flash memory sales
|         |  |               |           |              |                |       |        |                     |           |        |  |                            |  |                               |     |   |      |              |     |                                
|         |  |               |           |              |                |       |        |                     |           |        |  |                            |  |                               |     |   |      |              |     | Year ended                     
|         |  |               |           |              |                |       |        |                     |           |        |  | Fastest                    |  |                               |     |   |      | December 31,
|         |  |               |           |              |                |       |        |                     |           |        |  | Available                  |  |                               |     |   |      |             
|Density  |  | Configuration |           | Voltage      |                | speed |        | Sample applications |           | 2000   |  | 2001                       |  | 2002                         
|         |  |               |           |              |                |       |        |                     |           |        |  |                            |  |                              
|         |  | 1M            |           |              | 128K x 8       |       |        |                     | 12V/5V/3V |        |  | 45 ns                      |  | BIOS, HDDs, games             |     |   | 9.9  | %            |     |                                 | 4.3  | %   |   |     | 4.2  | %  
|         |  |               | 64K x 16  |              |                |       | 5V     |                     |           | 55 ns  |  | DVD-ROM drives             |  |                               |     |   |      |              |     |                                 |      |     |   |    
|         |  | 2M            |           |              | 256K x 8       |       |        |                     | 12V/5V    |        |  | 45 ns                      |  | BIOS, HDDs,                   |     |   | 13.5 | %            |     |                                 | 6.6  | %   |   |     | 0.8  | %  
|         |  |               |           |              |                |       |        |                     |           |        |  |                            |  | CD R/W drives                 |     |   |      |              |     |                                 |      |     |   |     |      |    
|         |  |               | 128K x 16 |              |                |       | 12V/5V |                     |           | 55 ns  |  | BIOS, HDDs, CD R/W         |  |                               |     |   |      |              |     |                                 |      |     |   |    
|         |  |               |           |              |                |       |        |                     |           |        |  |                            |  | Drives, communication Boxes   |     |   |      |              |     |                                 |      |     |   |     |      |    
|         |  | 4M            |           |              | 512K x 8       |       |        |                     | 5V        |        |  | 45 ns                      |  | BIOS                          |     |   | 30.4 | %            |     |                                 | 47.6 | %   |   |     | 30.2 | %  
|         |  |               | 256K x 16 |              |                |       |        |                     |           | 55 ns  |  | BIOS, CD R/W drives, cable |  |                               |     |   |      |              |     |                                 |      |     |   |    
|         |  |               |           |              |                |       |        |                     |           |        |  |                            |  | modems                        |     |   |      |              |     |                                 |      |     |   |     |      |    
|         |  | 8M            |           |              | 1M x 8         |       |        |                     | 5V/3V     |        |  | 90 ns                      |  | DVD Players, STBs, ISDN boxes |     |   | 7.6% | %            |     |                                 | 9.9  | %   |   |     | 13.6 | %  
|         |  |               | 512K x 16 |              |                |       | 5V/3V  |                     |           | 90 ns  |  | DVD players, STBs, ISDN    |  |                               |     |   |      |              |     |                                 |      |     |   |    
|         |  |               |           |              |                |       |        |                     |           |        |  |                            |  | boxes, PDAs                   |     |   |      |              |     |                                 |      |     |   |     |      |    
|         |  | 16M           |           |              | 2M x 8 /       |       |        |                     | 5V /      |        |  | 100 ns                     |  | STBs, communication           |     |   | 36.0 | %            |     |                                 | 23.3 | %   |   |     | 32.7 | %  
|         |  |               | 1M x 16   |              |                |       | 3V     |                     |           |        |  |                            |  | boxes, printers, music,       |     |   |      |              |     |                                 |      |     |   |     |      |    
|         |  |               |           |              |                |       |        |                     |           |        |  |                            |  | games, web TVs, mobile        |     |   |      |              |     |                                 |      |     |   |     |      |    
|         |  |               |           |              |                |       |        |                     |           |        |  |                            |  | phones                        |     |   |      |              |     |                                 |      |     |   |     |      |    
|         |  | 32M           |           |              | 4M x 8 /       |       |        |                     | 3.3V      |        |  | 100ns /                    |  | printer                       |     |   | 0.9  | %            |     |                                 | 7.7  | %   |   |     | 12.9 | %  
|         |  |               | 2M x 16   |              |                |       |        |                     |           | 50 ns  |  |                            |  |                               |     |   |      |              |     |                                 |      |     |   |     |      |    
|         |  | ATA           |           | PCMCIA cards |                |       | 5V/3V  |                     |           |        |  |                            |  | Digital cameras               |     |   | 0.2  | %            |     |                                 | 0.1  | %   |   |     | -    | (1)
|Cassette |  |               | N/A       |              |                |       | 5V     |                     |           | 120 ns |  | Games                      |  |                               | 1.5 | % |      |              | 0.4 | %                               |      |     | - | (1)
|         |  | 64M           |           |              | 8M x 8/4M x 16 |       |        |                     | 3V        |        |  | 90ns                       |  | Games, printers, STBs         |     |   | -    | (1)          |     |                                 | -    | (1) |   |     | 5.6  | %  



---

|(1) |  | Less than 0.1%.
|--- |  | ---------------

Competition.Flash has been one of the fastest growing segments of the
memory products market. However, the flash market has been characterized by
long production cycles, complex processes, competing technologies and intense
overall competition. Currently, the market is dominated by Intel, Samsung,
Toshiba, Advanced Micro Devices, Fujitsu and STMicroelectronics, which together
accounted for a global market share of approximately 79% in 2002 (based on
sales revenue), and various other competitors. Before 2001, we did not have a
significant share of the global flash market, primarily because of our limited
capacity. However, with increasing market demand, and our commencement of mass
production of single voltage flash products in 2001, we increased our sales of
flash products. Our sales revenues for flash products increased 35.8% to
NT$4,357 million (US$125.6 million) in the year ended December 31, 2002 from
NT$3,208 million in the year ended December 31, 2001.

Memory Products EPROMs

Applications.Applications using EPROMs include disk drives for personal
computers, video games, fax machines and modems, cellular phones, pagers and
notebook computers, among others. We believe our one-time programmable EPROM
devices are among the least expensive EPROM memory solutions currently
available. However, with the accelerated decline in prices for flash products,
the price advantage of our EPROM products has eroded.

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The following table provides an overview of our principal EPROM products
and the percentage of EPROM net sales revenue represented by these products in
2000, 2001 and 2002:

|        |     |               |         |          |  |       |       |                     |  |      |           |                    |                              |                 |     |      |              |  |              |      |   |  |      |      |    |  |  |  | 
|------- | --- | ------------- | ------- | -------- |  | ----- | ----- | ------------------- |  | ---- | --------- | ------------------ | ---------------------------- | --------------- | --- | ---- | ------------ |  | ------------ | ---- | - |  | ---- | ---- | -- |  |  |  | 
|        |     |               |         |          |  |       |       |                     |  |      |           |                    |                              |                 |     |      |              |  | % of our net
|        |     |               |         |          |  |       |       |                     |  |      |           |                    |                              |                 |     |      |              |  | EPROM sales 
|        |     |               |         |          |  |       |       |                     |  |      |           |                    |                              |                 |     |      |              |  |             
|        |     |               |         |          |  |       |       |                     |  |      |           |                    |                              |                 |     |      |              |  | Year ended  
|        |     |               |         |          |  |       |       |                     |  |      | Fastest   |                    |                              |                 |     |      | December 31,
|        |     |               |         |          |  |       |       |                     |  |      | Available |                    |                              |                 |     |      |             
|Density |     | Configuration |         | Voltage  |  | speed |       | Sample applications |  | 2000 |           | 2001               |                              | 2002           
|        |     |               |         |          |  |       |       |                     |  |      |           |                    |                              |                
|256Kb   |     |               | 32K x 8 |          |  |       | 3V/5V |                     |  | 45ns |           | GUI                |                              |                 | 2.0 | %    |              |  | 2.1          | %    |   |  | -    | (1) 
|512Kb   |     |               | 64K x 8 |          |  |       | 3V/5V |                     |  | 45ns |           | CD-ROM drives, GUI |                              |                 | 8.6 | %    |              |  | 5.8          | %    |   |  | 12.9 | %   
|        | 1Mb |               |         | 128K x 8 |  |       |       | 3V/5V               |  |      | 45ns      |                    | Fax modem, VCD players,      |                 |     | 19.2 | %            |  |              | 12.8 | % |  |      | (0.7 | )%
|        |     |               |         |          |  |       |       |                     |  |      |           |                    |                              | cellular phones |     |      |              |  |              |      |   |  |      |      |    | 
|        | 2Mb |               |         | 256K x 8 |  |       |       | 3V/5V               |  |      | 70ns      |                    | VCD players, cellular phones |                 |     | 29.1 | %            |  |              | 29.6 | % |  |      | 68.0 | % 
|        | 4Mb |               |         | 512K x 8 |  |       |       | 3V/5V               |  |      | 90ns      |                    | Printer, arcade games, STBs  |                 |     | 21.8 | %            |  |              | 19.4 | % |  |      | 7.4  | % 
|        | 8Mb |               |         | 1M x 8   |  |       |       | 5V                  |  |      | 100ns     |                    | Printer, arcade games, STBs  |                 |     | 19.3 | %            |  |              | 30.2 | % |  |      | 12.4 | % 



---

|(1) |  | Less than 0.1%.
|--- |  | ---------------

Competition.In 2001, we were the worlds fourth largest supplier of
EPROMs according to a report published by Gartner Dataquest on June 24,
2002, accounting for 5.3% of global market share (based on sales revenue).
While EPROMs remain viable mainly for applications requiring low-cost
solutions, flash has begun to replace EPROMs in certain applications as the
prices of flash products have declined. In addition, over the last few years,
as the long-term outlook for this market has weakened, industry production has
declined. For example, Advanced Micro Devices, Intel, National Semiconductor
Corporation and Texas Instruments Incorporated have all reduced EPROM
production during the last few years. If current conditions continue, we do not
expect EPROM products to represent a significant growth area for us in the
future.

System-on-a-Chip Products and Services

We focus on providing the following products and services:



| |  |  | core SOC products, mainly embedded flash products which incorporate
flash directly in logic devices embedded on a single semiconductor chip;
and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | value-added services, which center on providing application-specific
solutions to our strategic customers.                                      

Core SOC products.Since 1999, we have provided an ASIC service for
microcontrollers with embedded flash or ROM and products used in CD-ROM,
DVD-ROM and other consumer electronics applications. Our most important
products in this area are microcontrollers with embedded flash technology that
we have jointly developed with Koninklijke Philips Electronics N.V.
(Philips).

Value-added services.We have combined our SOC and strategic manufacturing
operations in one unit as part of our strategy of leveraging our competitive
manufacturing capability. With our extensive fab experience and advanced
nonvolatile memory technology, we strive to work closely with our customers as
strategic manufacturing partners and to provide them high value-added services.
By growing with our key strategic customers, we seek to provide SOC design and
production services with a focus on the information appliances market.

Competition.The SOC product market is diversified. We compete with other
SOC providers by establishing sustainable customer relationships and design
expertise to provide customized and innovative solutions for specific customer
needs. We face competition from numerous competitors in

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##### Table of Contents



this market, including, among others, Atmel, Samsung, STMicroelectronics,
International Business Machines Corporation (IBM) and Infineon Technologies
AG.

Multimedia Products

In 2001, we focused on extending our expertise in the nonvolatile memory
market into the logic area, by combining logic products with embedded memory in
order to offer comprehensive system solutions to our customers. Unlike memory
products, our emphasis on logic products is centered more on product design
than on fabrication. We have concentrated on four key logic technologies:



| |  |  | digital signal processing;    
| | - |  | ------------------------------
|
| |  |  | mixed signal processing;      
|
| |  |  | digital/analog conversion; and
|
| |  |  | microprocessors.              

As we grow our multimedia and SOC businesses, we intend to concentrate on
producing logic chips and chipsets for higher value-added applications in the
consumer product and communications area. Examples of products with multimedia
applications include video conferencing and video input/synthesis equipment.

Our multimedia products focus on the following end-market applications:

Digital Still Camera.We are the first company to provide 16-million pixel
digital still camera solution to our customers, including Minolta, for their
high end digital cameras.

Flat Panel Display.Our products include flat panel display controllers
for monitors, televisions and projectors, scan controllers and timing
controllers for liquid crystal display flat panel applications. We supply video
controller devices to, among others, Samsung, LG Electronics Investment,
TopVision Technologies, Inc. and Chunghwa Picture Tubes Ltd., for
flat panel
display applications.

Sound Generator. Our MIDI solution for handset customers, with 32
Polyphony Sound Generator and high-quality wavetable sound synthesizer,
provides enhanced ring-tone sound clarity. We have delivered samples to the
major cellular phone makers, who are now conducting evaluation by cellular
phone customers. We are ramping up our production in anticipation of volume
shipments to start in the third quarter of 2003.

Home Customer Premises Equipment.Our home customer premises equipment
products include integrated circuits for use in digital answering machines and
digital recorders. 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.
In line with our strategy of moving towards higher value-added applications, we
enhanced our current digital answering machine product offering in 1999 to
include features such as a speakerphone and caller identification and to
provide for compatibility with additional flash.

Home Networking Devices.Our main products in this area are 16 port and 24
port switch controllers. The controllers are memory embedded to provide cost
effective solutions. Major OEM makers in Taiwan using the controllers include
Accton Technology Corporations (Accton), D-Link Systems, Inc. (D-Link) and
Lite-On Technology Corporation (Lite-On).

Key Customer Accounts.In addition to the products mentioned above, we
also design ASICs for major accounts, including USB controller, DVD controller
and Ethernet controller for specific customers. For example, we design clock
generators, joystick controllers, wireless game controllers and Ethernet
controllers for Nintendo.

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##### Table of Contents



Reorganization

In order to better serve the increasingly sophisticated needs of our
customers, we recently completed a plan to reorganize our organizational and
business unit structure. Our previous organizational and business unit
structure was organized on the basis of the principal types of products and
services we provided, which consist of memory products, SOC products and
services, and multimedia products. Under our new organizational and business
unit structure, we organize our operations into two main strategic business
groups. We believe that our new organizational and business unit structure will
increase our operational efficiency and effectiveness in meeting the needs of
our customers, as well as improve our overall competitiveness. Our
reorganization has helped us to focus our research and development
projects more efficiently.

Product and Marketing
Integration Group

The
product and marketing integration group is responsible for focusing on applications
excellence and providing value-added design services and system-level platform
solutions to our customers based upon the type of end-market application that
such services and solutions are designed to serve. In addition, this business
group is responsible for developing strategic partnerships with our customers
and leveraging on our close relationships with our platform and systems
partners to provide integrated solutions for customers. This business group
will also be the channels and marketing arm of our company. In particular, this
business group will be responsible for the implementation of our strategic
initiative to leverage on our current strengths to penetrate key customers
through the cross-selling of our products and services.

Technology and Manufacturing Service Group

The
technology and manufacturing service group will provide the technology to
support our core business of providing semiconductor products and design
services. This business group will focus mainly on the research and development
of new advanced process technologies and design capabilities, as well as the
operation and capacity planning of our manufacturing facilities. This business
group will also be responsible for the management of our relationship and
technology arrangements with our strategic manufacturing partners to advance
our portfolio of process technologies.

See Item 3. Key Information  D. Risk Factors  Risks Relating to Our
Company  If we are unable to successfully execute or integrate our new
organizational and business unit structure, our operations and future
profitability may be adversely affected.

Customers

General

We emphasize customer relations as a key to our growth and profitability.
A key aspect of our customer development strategy is to have major global
computer and electronics companies accept our products for use in their
devices. We also strive to supply products to original equipment manufacturers
and subcontractors, who in turn supply these products to computer,
communications and consumer electronics companies.

We seek to develop system-related solutions with key consumers of memory
and logic products for their requirements. Some of these key customers with
which we are currently working include Nintendo, Hewlett-Packard, Philips,
Toshiba, Matsushita, Palm Inc., Mitsubishi, Inventec Corporation (Inventec),
Siemens AG (Siemens), Thomson Multimedia S.A. (Thomson), Samsung, Sony
Corporation (Sony), Yamaha Corporation (Yamaha), Benq Corporation (Benq)
and Leapfrog Enterprises, Inc. (Leapfrog). In addition,

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##### Table of Contents





| |  |  | we have developed, and are developing, additional logic and memory
devices with Nintendo for use in several of Nintendos game machines. We
expect to continue cooperating with Nintendo to develop memory and logic
and other ASIC devices; and      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we are working with Mitsubishi to jointly develop high-density flash
products for electronic communication devices including cellular
telephones and information appliances. We design 128 Mb flash products
based on Mitsubishis DINOR flash design.

Top Customers

The following table sets forth top customers (by sales) of our products by
percentage of our net sales revenue in 2002 and the type of product purchased:

|                |  |                        |      |                    |  |                        |  | 
|--------------- |  | ---------------------- | ---- | ------------------ |  | ---------------------- |  | 
|                |  | % of net sales revenue |      |                    |  |                       
|                |  | Year ended             |      |                    |  |                       
|Customers       |  | December 31, 2002      |      | Products purchased
|                |  |                        |      |                   
|Nintendo(1)     |  |                        | 36.5 | %                  |  | Mask ROM, flash, logic
|Hewlett-Packard |  |                        | 7.32 | %                  |  | Mask ROM, flash       
|Philips         |  |                        | 3.3  | %                  |  | Logic                 
|Inventec        |  |                        | 2.5  | %                  |  | Mask ROM              
|Mitsubishi      |  |                        | 2.3  | %                  |  | SRAM, flash           
|Leapfrog        |  |                        | 2.2  | %                  |  | Mask ROM,             



---

|(1) |  | Represents our sales to Megachips, which on-sells our products to
Nintendo.
|--- |  | ---------------------------------------------------------------------------

Top Products and Applications

The
following table sets forth, based upon a survey of our current
customers, the major product areas and applications of our products purchased
by our key customers, and the percentage of total net sales revenue that these
customers comprised in 2000, 2001 and 2002:

|                                 |  |                                                                                                                  |  |                                                                                                                                                               |  |                          |      |      |  |      |      |   |  |  |      |  
|-------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                 |  |                                                                                                                  |  |                                                                                                                                                               |  | % of our total sales (1)
|                                 |  |                                                                                                                  |  |                                                                                                                                                               |  |                         
|                                 |  |                                                                                                                  |  |                                                                                                                                                               |  | Year ended December 31, 
|                                 |  |                                                                                                                  |  |                                                                                                                                                               |  |                         
|Product area                     |  | Sample applications                                                                                              |  | Customers                                                                                                                                                     |  | 2000                     |      | 2001 |  | 2002
|                                 |  |                                                                                                                  |  |                                                                                                                                                               |  |                          |      |      |  |     
|Consumer Electronics             |  | Game, STB,                                                                                                       |  | Nintendo, General                                                                                                                                             |  |                          | 63.9 | %    |  |      | 66.9 | % |  |  | 68.6 | %
|                                 |  | electronic dictionary,digital answering machine,
musical instruments,
CD-ROM, CD-RW, TV,
DVD, VCD, DSC,
pachinko |  | Instrument,
Inventec, GSL,
Sony, Yamaha,
Philips, Siemens,
Thomson, Sankyo,
Minolta                                                                           |  |                          |      |      |  |      |      |   |  |  |      |  
|Computer and
Computer Peripheral |  | HDD, printer, LCD
monitor                                                                                        |  | Hewlett-Packard,
Lexmark
International,
Compaq, Dell,
Brother, Cannon,
Matsushita Electric
Industrial, Oki,
Benq Corporation,
Hitachi, Toshiba,
Philips, Sony |  |                          | 20.8 | %    |  |      | 26.2 | % |  |  | 18.2 | %
|Communications                   |  | PHS, LAN, WAN,
modem, switch                                                                                     |  | NEC, Motorola,
Accton Technology,
Japan Radio,
D-Link, Microdyne,
Sonic Systems, AVM,
Askey                                                                   |  |                          | 15.3 | %    |  |      | 6.9  | % |  |  | 10.8 | %



---

|(1) |  | Excludes sales to distributors where the end-use application is unknown.
|--- |  | ------------------------------------------------------------------------

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Nintendo

In
2000, 2001 and 2002, approximately 32.5%, 42.2% and 36.5%,
respectively, of our total net sales revenue was derived from Megachips, which
on-sells our products to Nintendo. Nintendo is one of the worlds largest users
of mask ROMs, which are used in Nintendo game cartridges. Since 1996, we have
been Nintendos largest supplier of mask ROMs for the Nintendo 64 and earlier
generations of Nintendo gaming platforms. We believe that our long-term
relationship with Nintendo is based on trust, as evidenced by the fact that
Nintendo supplies sensitive game codes to us as part of the design and
production process. Our relationship is also predicated on our ability to
supply quality products in a timely manner at competitive prices.

In August 2000, Nintendo announced that its new video game platform, the
GameCube, would utilize a DVD-ROM-based storage system to replace the current
mask ROM-based cartridges. This new game platform went on sale in Japan in
September 2001, in the United States in November 2001 and in Europe in May
2002. We have been engaging in active discussions with Nintendo and Megachips
since 2000 to assist in developing semiconductor solutions for the GameCube.
Currently we provide product design, development and manufacturing services for
multiple semiconductor devices to Nintendo for the production of the GameCube,
notwithstanding Nintendos change of principal memory devices for this product.
Our primary product offerings for the GameCube relate mainly to accessory
products and include:



| |  |  | clock generator integrated circuits;                                                                           
| | - |  | ---------------------------------------------------------------------------------------------------------------
|
| |  |  | ethernet adaptors;                                                                                             
|
| |  |  | radio frequency component integrated circuits used in a Nintendo
wireless controller for use with the GameCube;
|
| |  |  | 4Mb and 16Mb code flash used in conjunction with each game software; and                                       
|
| |  |  | 16Mb ROM used in the GameCube consoles operation system.                                                      

We have been shifting additional production towards the output of mask
ROMs for Nintendos Game Boy series of handheld computing devices, including
Game Boy Advance, which was released in the spring of 2001. See Item 3. Key
Information  D. Risk Factors  Risks Relating to Our Company  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.

In the third quarter of 2001, we entered into a capital equipment lease
agreement with Nintendo in the amount of up to US$75 million for the use of
manufacturing equipment. As of December 31, 2002, we had lease obligations of
approximately US$46 million payable to Nintendo over a four-year period in
monthly installments. At the end of the lease term, title to the leased
equipment will be transferred to us.

Manufacturing and Quality Control

Manufacturing

Currently, all of our internal wafer fabrication is carried out at Fabs I
and II. Our location in the Science-Based Industrial Park in Hsinchu
(the Science Park) provides certain advantages, including
preferential tax treatment, streamlined customs administration and
government-subsidized development grants.

We use complementary metal oxide silicon process technology to manufacture
our semiconductor products. This manufacturing technology involves a sequence
of numerous complex processes in which 200 to 500 different steps are taken in
the manufacture of a single chip. These steps

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include a series of cleaning, patterning, etching, deposition and
implantation processes. At the end of these processes, the chips are tested for
functionality and assembled. Depending on the product line, we either
sub-contract this back-end work to companies in Taiwan and Hong Kong,
including Advanced Semiconductor Engineering Inc., Siliconware Precision
Industries Co., Ltd. and other ROC assembly subcontractors, or perform the work
ourselves. We sub-contract approximately 79% of the testing and assembly of our
logic products, while testing most of our mask ROM products internally.

In August 2000, we entered into a five-year manufacturing and technology
cooperation agreement with Tower Semiconductor whereby Tower Semiconductor will
provide silicon wafer manufacturing processing services that can employ its
microFLASH(r) technology. Such technology is based on proprietary technology
licensed from Saifun Semiconductors Ltd. (Saifun Semiconductor). We also have
entered into a separate agreement with Saifun Semiconductor that provides us
with rights to develop and manufacture certain products related to the
microFLASH(r) process technology. Under the agreement with Tower Semiconductor,
Tower Semiconductor will be obligated to manufacture for us up to an agreed
number of six-inch wafers per month upon receiving our orders. Due to the
market conditions in 2001 and 2002, we have placed orders for less than the
numbers of wafers that we could have required Tower Semiconductor to
manufacture for us in those periods.

In December 2000, we entered into a foundry agreement with Tower
Semiconductor. Until the agreement expires in 2011 or if we cease to own a
minimum number of shares in Tower Semiconductor, Tower Semiconductor is
obligated to make available to us, and in the event we decide to
provide foundry service using Saifun technology we are obligated to purchase, certain
minimum numbers of wafers based on percentages of the manufacturing capacity of
a specified production line in Tower Semiconductors new manufacturing
facility, up to certain limits. Tower Semiconductors new manufacturing
facility is now in the start-up stage. So long as we own a
minimum number of shares in Tower Semiconductor, Tower Semiconductor is also
obliged to grant us favorable pricing treatment for up to a designated amount
of wafers per month. As of December 31, 2002 and as of the date hereof, we
continue to own not less than the specified minimum number of shares in Tower
Semiconductor.

Quality Control

All of our products undergo 100% final testing before shipment. In most
cases, externally packaged chips are returned to us for final testing before
shipment. We occasionally sub-contract final testing work, which allows us to
use the sub-contractors drop shipment services.

Fab I and Fab II operate 360 days a year on a two-shift, twelve hours per
shift basis which minimizes downtime between shift changes as compared to
operation on a three-shift, eight hours per shift basis. Operators at Fab I and
Fab II work on a two-day-on, two-day-off rotation. We believe that these
production arrangements, together with our operator discipline, quality of
maintenance and level of equipment utilization, have resulted in a high level
of productivity.

In order to minimize the introduction of particles into the manufacturing
process, Fab I operates a Class 1 clean room, with less than one particle of
0.1 micron or greater per cubic foot, and Fab II uses the SMIF Box system, an
advanced system whereby we isolate and keep clean the localized manufacturing
environment surrounding the integrated circuits, rather than the entire plant.
Although the manufacturer guarantees our SMIF Box system to have less than one
particle of 0.1 micron or greater per cubic foot, we believe that our system is
cleaner than the guaranteed amount based on our manufacturing experience. Both
Fab I and Fab II use advanced systems to filter our chemical, gas and water
supplies.

As part of our quality assurance program, we conduct three tests during
the production process:



| |  |  | the wafer acceptance test, which detects faults from the manufacturing process:
| | - |  | -------------------------------------------------------------------------------
|
| |  |  | the wafer sort test, which probes defaults in circuitry; and                   

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| |  |  | the final test, which reviews the operation of each integrated circuit.
| | - |  | -----------------------------------------------------------------------

We also offer burn-in testing of our products when necessary. Burn-in is
the process of electrically stressing a device, usually at high temperature and
voltage, for a period of time long enough to cause the failure of marginal
devices. In line with industry standards, we have experienced customer returns
of less than 10 pieces per one million pieces shipped.

We adopted a matrix system of quality assurance, under which, we maintain
a single, company-wide quality engineering center. Currently, we have
approximately 115 engineers, technicians and other employees whose duty is to
develop and maintain a quality system, perform qualifications for new products
and new processes. At the same time, quality control personnel in each
strategic business unit monitor design and production processes to ensure high
quality products, and are involved from initial design to production.

We received the International Standards Organization (ISO) 9001
certification in January 1994 from the Lloyds Register Inspection Limited for
our quality management system. In August 1997, we received the ISO 14001
certification for our environmental management system. In September 2001, we
received the Quality System 9000 certification from the International
Automotive Sector Group for our quality system. In March 2002, we received the
Occupation Health and Safety Assessment Series (OHSAS) 18001 certification
for our occupational health and safety assessment. The certification process
involves subjecting our production processes and the quality management systems
at our factories to review and surveillance for various periods. The ISO
certifications also provide independent verification to our customers as to the
quality control in our manufacturing processes.

Raw Materials

Our primary raw materials are silicon wafers and certain chemicals and
gases. To date, all of these raw materials have generally been available to us
from a limited number of sources, at competitive prices, in adequate quantities
and on reasonable delivery terms. We typically order our target metals,
specialty gases and chemicals on a just-in-time basis to minimize the cost of
inventory.

The prices of most of the raw materials used by us, excluding wafers, have
been relatively stable during the period of our operation. In 2000, 2001 and
2002, raw materials costs comprised approximately 4.2%, 6.7% and 5.0%,
respectively, of our net sales revenue. We currently believe that if we were to
lose access to one or more of our suppliers, we would be able to obtain
substitute quantities from other suppliers without any material interruption of
our operations and without any material adverse effect on the price we would
pay for the relevant supplies.

Silicon Wafers

Our future growth will depend in large part on securing a continuous
supply of both six-inch and eight-inch wafers. Wafer capacity in the
semiconductor industry has from time to time been, and in the future may be,
limited. However, in anticipation of possible shortages, we maintain a one and
one-half month inventory of six-inch wafers and a two-month inventory of
eight-inch wafers. Prices for six-inch wafers and for eight-inch wafers both
increased on average by approximately 15.9% in 2001 from 2000, and prices for
both decreased on average by approximately 5.2% between December 31, 2001 and
December 31, 2002.

We obtain our six-inch and eight-inch wafer supplies principally from four
suppliers, namely Toshiba Ceramics Co., Ltd., Shin-Etsu Handotai Europe Ltd.
and Sumitomo Mitsubishi Silicon Corporation, all of which are overseas
suppliers, and Taisil Electronic Materials Corp., an ROC company. We settle all
our wafer purchases in U.S. dollars.

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Chemicals

We obtain our supplies of industrial chemicals principally from a Taiwan
joint venture entity formed by Merck Kgaa and Kanto Chemical Co., Inc. We
obtain our supplies of bulk gases, such as nitrogen, oxygen and hydrogen,
principally from our investee, United Industry Gas Co., Ltd. (United Industry
Gas), an affiliate of Lian Hwa Gas Co., Ltd., and our specialty gases from
several overseas suppliers. Other raw materials used in the production process
include target metals and photo resist. These materials are also principally
obtained from several overseas suppliers.

Water

Water is critical in the production of semiconductors. We obtain our water
supplies from a state-owned water company. The ROC government also operates a
purified water supply system by which we clean our integrated circuits during
the fabrication process. Fab I and Fab II both have advanced water recycling
systems which allow us to reclaim approximately 73% of the water used in our
fabrication process. Although we have experienced several water shortage
incidences in the past, we are not currently experiencing any water shortage
problems. In the event of any short-term water shortage, we have our own
5,000-ton water reserve that is capable of supplying two and a half days of
water for Fab I and 21,000-ton water reserve that is capable of supplying seven
days of water for Fab II. Since the beginning of 2002, Taiwan has experienced a
serious water shortage problem, particularly in the northern Taiwan region. The
ROC government has taken a series of measures to alleviate the impact of the
water shortage problem, including restricting agricultural water usage.
However, if the water shortage problem occurs again, the government may further
restrict industrial water usage and our production may be materially adversely
affected. See Item 3. Key Information  D. Risk Factors  Risks Relating to
Our Company  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 earnings. To alleviate long-term water supply
problems, the government has constructed a major pipeline connecting the
Science Park to a reservoir in Miao-li County. The government has also
indicated that it intends to construct a dam in Hsinchu County by 2003 to meet
the water supply requirements of the Science Park area.

Electricity

Electricity is our main source of energy and we receive all of our
electricity supplies from Taiwan Power Company, the national power utility. As
a resident of the Science Park, we have priority in obtaining our supply of
electricity from the Taiwan Power Company over businesses outside the Science
Park. Although we experience power supply reductions scheduled by the Taiwan
Power Company from time to time during the summer season, we receive advance
notice of the timing of these reductions and can rely on our own internal
emergency generators during these periods. We purchased approximately 226, 260
and 316 million kilowatt hours of electricity from the national power grid in
2000, 2001 and 2002, respectively.

In order to obtain and maintain reliable electric power supplies, we are
connected to the national grid through a 69 kilovolt and a 161 kilovolt double
loop electric supply system located within the Science Park. We maintain
several back-up electricity generators to ensure continuous Fab I operation in
the event of interruptions to the external power supply. We also maintain
back-up generators at Fab II capable of supplying close to 100% of the power
normally used to run Fab II. Fab II is one of the first semiconductor
facilities in Taiwan to use a dynamic uninterrupted power supply system
utilizing emergency power back-up generators that operate with no time delay.

Sales and Marketing

We distribute our products on a global basis. The following table sets
forth percentages of net sales
revenue by geographic regions:



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|                                     |  |                         |       |      |  |      |       |   |  |  |       |  
|------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                     |  | Year ended December 31,
|                                     |  |                        
|Area                                 |  | 2000                    |       | 2001 |  | 2002
|                                     |  |                         |       |      |  |     
|Japan                                |  |                         | 46.3  | %    |  |      | 50.3  | % |  |  | 48.8  | %
|Taiwan                               |  |                         | 26.0  | %    |  |      | 27.4  | % |  |  | 19.0  | %
|Hong Kong, Singapore and South
Korea |  |                         | 14.3  | %    |  |      | 12.6  | % |  |  | 22.2  | %
|United
States                        |  |                         | 7.9   | %    |  |      | 6.7   | % |  |  | 7.9   | %
|Europe and other
countries           |  |                         | 5.5   | %    |  |      | 3.0   | % |  |  | 2.1   | %
|                                     |  |                         |       |      |  |      |       |   |  |  |       |  
|Total                                |  |                         | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|                                     |  |                         |       |      |  |      |       |   |  |  |       |  

We have relationships with over 45 distributors and manufacturers
representatives to market our products worldwide. The distributors purchase our
products at a discount while the manufacturers representatives generally
receive a commission of 5% of the goods sold. We maintain sales offices in
Taipei; San Jose, California; Chicago, Illinois; Brussels, Belgium; Tokyo and
Osaka, Japan and Singapore. These offices conduct sales efforts and monitor the
effectiveness of distributors and manufacturers representatives.

We originate sales for our products within Taiwan either directly from our
Taipei sales office or through non-exclusive distributorships. Sales to Asia,
excluding Taiwan and Japan, are also conducted through these non-exclusive
distributorships. Sales to Nintendo are made indirectly through Megachips.
Megachips receives a fixed percentage discount on all products purchased from
us.

We sell our products in Japan (with the exception of sales to Nintendo,
which is conducted solely through Megachips) through third-party distributors
with marketing and technical support from our sales offices in Tokyo and Osaka.
These distributors usually maintain small inventories and they distribute our
products in eastern Japan on a non-exclusive basis. Our customers in eastern
Japan include major Japanese semiconductor and consumer electronics product
producers, such as Sony, Yamaha and Matsushita.

We sell and distribute our products in North America and Europe through
our direct wholly-owned subsidiaries, Macronix America and Macronix Europe
N.V., using manufacturers representatives and distributors. Representatives
generally do not maintain a product inventory; instead, their customers place
orders directly with us. Distributors generally handle smaller volume orders
and they usually maintain small inventories but also carry competitors
products. We recognize revenue when we ship products to distributors if such
products cannot be returned except for defective products or, if applicable,
when we ship products to customers directly. Our agreements with our
representatives and domestic and international distributors are generally
terminable by either party on short notice.

Backlog and Order Process

Our business is characterized by short-term order and shipment schedules.
The majority of our sales are made primarily by way of standard purchase orders
instead of long-term contracts. We foster customer relationships by focusing on
timely delivery of product, competitive pricing, product performance and
reliability, continuing customer service (including technical support),
responsiveness to customer requirements and advanced technology.

We produce a portion of our products in advance of the receipt of a formal
purchase order based on anticipated purchase schedules discussed between us and
our significant customers. In addition, since the yield of dies in the
production process varies, we must manufacture a slightly greater number of
dies, usually 2% to 3% higher than the actual number of dies our customers
order. To the extent we improve our yield during the manufacturing process, we
may produce additional dies beyond the number ordered by customers. These
additional dies are kept in inventory to fill any additional purchase orders
for the product involved.

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Environmental Matters

Our manufacturing operations use a variety of chemicals and gases, and our
use, storage, discharge and disposal of these chemicals and gases and other
emissions and waste are regulated by ROC environmental authorities. Over the
course of our operating history, we have consistently invested in equipment and
processes designed to comply fully with our environmental responsibilities.

By the end of 2001, we had paid NT$790,000 in fees for infringement of
the ROC Air Pollution Control Act, ROC Water Pollution Control Act and ROC
Waste Disposal Act. We spent an aggregate of approximately NT$225 million in
installing pollution prevention equipment, operation, waste treatment and
pollutant composition in the year ended December 31, 2001 and NT$1,299 million
in the year ended December 31, 2002. We also dispatch some of our industrial
waste solvents for disposal by outside waste treatment companies approved by
the ROC Environmental Protection Administration. Certain common waste gases are
also processed and disposed of by the Science Park environmental cleaning team.
In addition, we have also established environmental protection policies,
received ISO 14001 certification for our environment management system in August
1997, and have put in place environmental management teams trained by the ROC
Environmental Protection Administration. Fab II was designed as an
environmentally-friendly facility and includes a modern waste water treatment
and recycling system.

In April 2000, we applied to the management bureau of the Hsinchu Science-Based Industrial Park Administration for the approval of the anticipated
construction of Fab III and the commercial production of wafers at the
facility. In July 2000, we received final approval for Fab III from the ROC
Environmental Protection Administration. We believe that our current and
proposed operations comply in all material respects with all presently
applicable environmental laws and regulations.

Strategic Investments

We have made and expect to continue to make a series of equity joint
venture and strategic investments in companies located in Taiwan and elsewhere.
We believe that our participation in these companies allows us to enhance and
complement our product offerings, expand our capacity, secure access to raw
materials and services and keep up-to-date with technological changes in the
semiconductor industry. As of December 31, 2002, these participations include:



| |  |  | Caesar Technology, Inc.  Prior to its liquidation, we owned a 29.7%
direct equity interest in Caesar Technology. We recorded investment
losses from Caesar Technology of NT$351 million in 1999, NT$495 million
in 2000 and NT$406 million in 2001. For the nine months ended September
30, 2001, we recorded investment losses from Caesar Technology of NT$179
million. On December 26, 2001, the shareholders of Caesar Technology
approved a voluntary winding up of the company. As a result of the
planned dissolution of Caesar Technology, we wrote off all of our
remaining NT$227 million investment in Caesar Technology in the fourth
quarter of 2001.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Tower Semiconductor,
Ltd.  A 13.7% indirect interest in Tower
Semiconductor. Tower Semiconductor is an independent foundry
manufacturer of semiconductor integrated circuits on silicon wafers.
We have written down this investment by NT$646 million and NT$538
million (US$15.5 million) in 2001 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Prominent Communications,
Inc.  A 35.2% direct equity interest in
Prominent Communications. Prominent Communications 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 in late 1999 as part of
an arrangement to jointly develop integrated circuits for 900MHz
cordless telephones. In July 2002, we purchased an additional 1,200,000 shares of Prominent Communications at US$1.75 per share.                                                                                                      
|
| |  |  | Biomorphic VLSI Inc.  A 35.1% indirect equity interest in Biomorphic
VLSI. Biomorphic VLSI develops and markets intelligent imaging sensors
for digital cameras, automobiles and industrial applications. In
2002, we recognized a loss of US$3.4 million due to the loan we
guaranteed for Biomorphic.                                                                                                                                                                                                                                                                                                                                                           

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| |  |  | Chantek Electronic Co.
Ltd.  A 3.7% direct and 0.6% indirect equity interest in Chantek. Chantek has
experienced difficulty in securing sufficient funding for its operations. Therefore, we wrote off all of our
remaining NT$206 million investment in Chantek in the fourth quarter of 2001.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Ardentec Corporation.  A 11.8% direct equity interest in Ardentec, which is a semiconductor testing company to which
we subcontract a portion of our operations on terms we believe to be
market-based.                                                                                        
|
| |  |  | Chipbond Technology Corporation.  A 5.9% indirect and a 1.3% direct
equity interest in Chipbond, which
specializes in wafer-level bumping in order to facilitate the latest
semiconductor packaging technologies, such as ball grid array and flip
chip.                                       
|
| |  |  | Raio Technology, Inc.  A 28% indirect equity interest in Raio
Technology, which provides intellectual property, software and ASIC
design solutions for PC-peripheral products and consumer products.                                                                                           

Insurance

Our insurance coverage as of December 31, 2002 includes:



| |  |  | 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;                                                                            
|
| |  |  | position schedule 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.                                                                                          

We believe our insurance is adequate and in conformity with industry
standards prevailing in Taiwan.



|C. |  | Organizational Structure
|-- |  | ------------------------

The following table sets forth the identity of our subsidiaries and their
jurisdictions of incorporation as of December 31, 2002. We directly or
indirectly own at least 92.5% of the equity of each of our subsidiaries.

|                            |  |                     |  |                        |  |                 |  |               |      |  
|--------------------------- |  | ------------------- |  | ---------------------- |  | --------------- |  | ------------- | ---- | -
|                            |  |                     |  |                        |  | Total Paid-in   |  |               |      |  
|                            |  |                     |  | Jurisdiction of        |  | Capital of such |  | Direct Equity
|Name of subsidiary          |  | Main business       |  | incorporation          |  | Entity          |  | Interest     
|                            |  |                     |  |                        |  |                 |  |              
|Hui Ying Investment, Ltd.   |  | Investment          |  | Taiwan, ROC            |  | NT$500,000,000  |  |               | 100  | %
|Joytech Co.,
Ltd.           |  | Systems solutions   |  | Taiwan, ROC            |  | NT$18,500,000   |  |               | 92.5 | %
|Macronix America, Inc.      |  | Sales and marketing |  | California, USA        |  | US$100,000      |  |               | 100  | %
|Macronix Europe N.V         |  | Sales and marketing |  | Belgium                |  | EUR 62,000      |  |               | 100  | %
|Macronix (B.V.I.) Co., Ltd. |  | Investment          |  | British Virgin Islands |  | US$138,647,126  |  |               | 100  | %
|New Trend Technology Inc.   |  | IC design           |  | California, USA        |  | US$23,000,000   |  |               | 100  | %

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|                             |  |                     |  |                        |  |                 |  |               |     |  
|---------------------------- |  | ------------------- |  | ---------------------- |  | --------------- |  | ------------- | --- | -
|                             |  |                     |  |                        |  | Total Paid-in   |  |               |     |  
|                             |  |                     |  | Jurisdiction of        |  | Capital of such |  | Direct Equity
|Name of subsidiary           |  | Main business       |  | incorporation          |  | Entity          |  | Interest     
|                             |  |                     |  |                        |  |                 |  |              
|Wedgewood International Ltd. |  | Investment          |  | British Virgin Islands |  | US$15,010,000   |  |               | 100 | %
|Macronix Pte Ltd             |  | Sales and marketing |  | Singapore              |  | US$100,000      |  |               | 100 | %
|Kang Bao Investment Inc.     |  | Investment          |  | Taiwan, ROC            |  | NT$500,000,000  |  |               | 100 | %
|Rui Hong Investment Inc.     |  | Investment          |  | Taiwan, ROC            |  | NT$500,000,000  |  |               | 100 | %
|Magic Pixel
Inc.             |  | IC design           |  | Taiwan, ROC            |  | NT$50,000,000   |  |               | 100 | %



|D. |  | Property, Plant and Equipment
|-- |  | -----------------------------

Our headquarters and Fabs I, II and III are located in Hsinchu, Taiwan. Fab I commenced its commercial
operations in 1992. Fab I occupies approximately 172,000 square feet on land
that is leased from the Science Park. The lease expires in March 2010 but is
renewable at our option. The facility has a production area of approximately
67,888 square feet. Fab Is test operations are located in a building adjacent
to Fab I, which sits on a lot of approximately 80,000 square feet.

Fab II commenced its commercial operations in October 1997. Fab II
occupies approximately 883,000 square feet on land that is leased from the
Science Park. The lease expires in June 2015. The facility has a production
area of approximately 84,000 square feet and a production support area of
approximately 32,000 square feet. Space has also been reserved for testing
facilities in Fab II, although Fab II currently shares Fab Is test operations
plant for all of Fab IIs eight-inch wafers. Fab II has advanced and modernized
production equipment, and incorporates advanced computer automated production
systems. Fab II is equipped with a total energy management system and an
advanced waste treatment system. Production capacity at Fab II reached 42,000
eight-inch wafers per month at the end of 2001. We began to manufacture mask
ROMs at Fab II at linewidths of 0.18 micron from the second half of 2000 and
successfully migrated to 0.15 micron process technology for both flash and mask
ROM in the fourth quarter of 2002. We own all the facilities comprising Fab I
and Fab II.

In July 2002, we completed construction of Fab III, our third wafer
fabrication facility, on a parcel of leased land next to Fab II, with a
production area of approximately 170,000 square feet and a production support
area of approximately 25,500 square feet. However, due to the adverse market
conditions currently prevailing in the semiconductor industry, we expect full
commencement of operations at Fab III to be delayed until 2005 or later. We
currently expect Fab III to have a production capacity of approximately 15,000
eight-inch wafers and 25,000 twelve-inch wafers per month when fully loaded and
operational. Depending on the then prevailing market conditions, we expect to
expand our production in Fab III in the future. See Item 5. Operating and
Financial Review and Prospects  Overview  Cost Reduction Initiatives.

The following table sets forth our wafer capacity, in terms of wafers per
month, at Fab I and Fab II as of December 31, 1995 through 2002 and expected
fabrication capacity for 2003:

|                           |  |         |        |         |  |         |        |      |  |      |        |      |  |      |        |      |  |         |        |  |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        | 
|-------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ------- | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                           |  | 1995(1) |        | 1996(1) |  | 1997(1) |        | 1998 |  | 1999 |        | 2000 |  | 2001 |        | 2002 |  | 2003(2)
|                           |  |         |        |         |  |         |        |      |  |      |        |      |  |      |        |      |  |        
|Fab I (six-inch wafers)    |  |         | 31,000 |         |  |         | 35,000 |      |  |      | 35,000 |      |  |      | 35,000 |      |  |         | 35,000 |  |  |  | 36,000 |  |  |  | 36,000 |  |  |  | 35,000 |  |  |  | 35,000 | 
|Fab II (eight-inch wafers) |  |         |       |         |  |         |       |      |  |      | 15,000 |      |  |      | 15,000 |      |  |         | 20,500 |  |  |  | 40,000 |  |  |  | 42,000 |  |  |  | 40,000 |  |  |  | 37,000 | 



---

|(1) |  | Includes capacity resulting from machines provided by Taiwan Semiconductor
Manufacturing Company Limited.
|--- |  | ---------------------------------------------------------------------------------------------------------
|   
|(2) |  | Planned capacity.                                                                                        

We have been recently granted by the government of the ROC a parcel of
land adjacent to our Fab II under a lease that is renewable annually for a
maximum of 20 years. As of the date of this annual report, we have not
finalized our plan on how to use this land.

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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 ROC GAAP, which differ in certain material respects from U.S.
GAAP. See note 20 to our consolidated financial statements for the years ended
December 31, 2000, 2001 and 2002 included in this annual report and A.
Operating Results  U.S. GAAP Reconciliation.



|A. |  | Operating Results
|-- |  | -----------------

Introduction

We are an independent semiconductor designer, producer and supplier. Our
product portfolio includes mask ROM, flash, EPROM, logic, application-specific
integrated circuit products and highly integrated SOC solutions. We view
ourselves as an integrated solutions provider. In particular, we treat our
clients as strategic partners and work closely with them starting from early
stages of product development to design silicon chip solutions that meet their
specific needs. These partners include Nintendo, with whom we have had a
relationship for over ten years, and Hewlett-Packard, with whom we have had a
relationship for over five years. We differentiate ourselves by our ability to
offer a full range of in-house design, product and process engineering
capabilities.

From mid-1999 and throughout most of 2000, we benefited from growing
worldwide demand for semiconductors and experienced significant growth in net
sales revenue and operating income. Our net sales revenue increased 97.5% from
1999 to 2000 principally as a result of:



| |  |  | increases in the average selling prices of our products due to
improved market conditions; and               
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | high-density products, particularly flash products, accounting for
a larger share of our overall product mix.

The severe and protracted semiconductor industry downturn that began in
the second half of 2000 continued throughout 2001 and 2002, with continued
erosion of the average selling prices of our products. In 2002, net sales
revenues declined by 24.2% compared to 2001, and our cost of goods sold (a
substantial portion of which consists of non-cash depreciation and
amortization) exceeded our net sales revenue, resulting in a realized gross
loss of NT$615 million (US$17.7 million) and an operating loss of NT$6,827
million (US$196.7 million). Due to the price erosion, and related inventory
losses, we recorded a net loss of NT$11,357 million (US$327.3 million). For
the same reasons, in 2001 we recorded a net loss of NT$866 million.
Furthermore, we forecast that we will incur gross, operating and net losses for
2003. We cannot assure you that these losses will not continue or increase, or
that we will return to profitability in the future. In addition, it will take
some time before the positive impact of any improvement that may occur in the
end-markets for our products may be reflected in our financial performance.

Our capacity utilization rate, which is the utilization rate for our
equipment prior to any production bottleneck, was approximately 100% in 2000
but decreased to approximately 76% in the third quarter of 2001 and 70% in the
fourth quarter of 2001. In 2002, our quarterly utilization rates were 50.0%,
63.5%, 65.1%, and 56.8%, respectively. We do not expect our capacity
utilization rates to improve unless there is a significant recovery in the
semiconductor industry, and we cannot assure you that our capacity utilization
rates will not continue to decline in the foreseeable future.

As a result of the market downturn in 2000, which continued throughout
2001 and 2002, many of our investee companies experienced significant
deterioration in their operating results. This in turn caused us to incur
substantial investment losses as well as a reduction in the value of our equity
interests in these companies. Our net investment loss and net loss from equity
investment increased by 26.4% to NT$780 million in 2001 from NT$617 million in
2000. In particular, we recorded an unrealized loss in Tower Semiconductor of
NT$646 million as of December 31, 2001. In 2002, our net investment loss and
net loss from equity investment was NT$415 million (US$12.0 million), a
decrease of 46.8% compared to 2001.

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Nintendo continued to be our single largest customer in 2001 and 2002. In
2001 and 2002, Nintendo launched its new GameCube video game platform,
which utilizes a DVD-ROM-based storage system instead of the mask ROM-based
cartridges traditionally used in other Nintendo game platforms, in Japan, the
United States and Europe. As a result, we have been shifting our production
towards the output of mask ROMs for Nintendos Game Boy series of handheld
computing devices, including the Game Boy Advance. In addition, we currently
supply other accessories for the GameCube video game platform. Although sales
of the Game Boy Advance did not meet anticipated levels in the fourth quarter
of 2001 and 2002, our sales of mask ROM to Nintendo in 2001 and 2002 for use in
Game Boy Advance software cartridges continued to account for a large portion
of our total sales of mask ROM. See Item 3. Key Information  D. Risk
Factors  Risks Relating to Our Company  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.

For
certain material developments of our company since December 31, 2002 with
respect to our financial condition and results of operations, please refer to
the discussion set forth in Recent Developments included elsewhere in this
annual report.

Overview

Sales Revenue

We derive our sales revenue primarily from the manufacture and sale of
four types of semiconductors: mask ROM, flash, EPROM, SOC and multimedia
products. We also derive a portion of our sales revenue from value-added
manufacturing or foundry services that we provide on a contract basis to
integrated device manufacturers. In addition, we earn royalty income from
products under joint development with our strategic partners and from the
production of wafer and other products under limited term arrangements. We
experienced rapid growth in net sales revenue in 1999 and 2000. However, due to
a severe and protracted market downturn that began in the second half of 2000
and continued throughout 2001 and 2002, net sales revenues decreased by 35.1%
to NT$21,747 million in 2001, and decreased a further 24.2% to NT$16,492
million (US$475.3 million) in 2002. As a result, in 2002 we realized a gross
loss of NT$615 million (US$17.7 million), and an operating loss of NT$6,827
million (US$196.7 million). The decline in net sales revenues in 2001 was
attributable to a decrease in our sales volume and a decline in the average
selling prices of our products, and in 2002 to a continuing decline in average
selling prices.

Cost of Goods Sold

Our cost of goods sold consists principally of:



| |  |  | 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.                                                

Product Pricing Trends

The following table sets forth the average selling prices of each category
of our nonvolatile memory products for the periods indicated:

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|             |  |                         |       |      |  |      |      |      |  |      |       |  |  |  |      |  |  |  |      | 
|------------ |  | ----------------------- | ----- | ---- |  | ---- | ---- | ---- |  | ---- | ----- |  |  |  | ---- |  |  |  | ---- | 
|             |  | Year ended December 31,
|             |  |                        
|             |  | 1998                    |       | 1999 |  | 2000 |      | 2001 |  | 2002
|             |  |                         |       |      |  |      |      |      |  |     
|             |  | (NT$ per die)          
|Mask
ROM     |  |                         | 101.6 |      |  |      | 94.9 |      |  |      | 105.8 |  |  |  | 89.6 |  |  |  | 54.8 | 
|Flash
Memory |  |                         | 76.0  |      |  |      | 53.0 |      |  |      | 110.4 |  |  |  | 74.3 |  |  |  | 49.0 | 
|EPROM        |  |                         | 36.1  |      |  |      | 35.5 |      |  |      | 55.0  |  |  |  | 40.1 |  |  |  | 22.0 | 

The global semiconductor industry is highly competitive and average
selling prices typically decrease over the life of a semiconductor product.
Average selling prices for the memory products that we sell have generally
declined on an annual basis since 1995. We seek to offset this general decline
in average selling prices by constantly improving the density, sophistication
and performance of our products and by customizing our products to suit the
needs of our strategic partners and other customers. Where this approach is
successful, we may avoid declines in the average selling prices of our products
and maintain our gross profit margins despite general industry-wide declines.
However, throughout most of 2000, we experienced a general improvement in the
selling prices for almost all memory products, which resulted in increases in
the average selling prices for all of our products, wholly apart from increases
due to product improvement.

In the second half of 2000, selling prices for memory products started to
decline, primarily as a result of the overall decrease in global demand for
memory products. In 2001, we experienced a decrease in the selling prices for
almost all of our memory products, particularly flash products, as compared to
2000. These price declines continued throughout 2001 and 2002. As a result of
this price trend, in 2002 our cost of goods sold (a substantial portion of
which consists of non-cash depreciation and amortization) was higher than our
net sales revenue, and we realized a gross loss of NT$615 million (US$17.7
million), and an operating loss of NT$6,827 million (US$196.7 million).

High Fixed Costs

Our operations are capital intensive and our primary capital requirements
are for the purchase of manufacturing equipment. In particular, fixed costs,
primarily depreciation expense, are a major component of our cost of goods
sold. As a result, increases or decreases
in capacity utilization rates can have a significant effect on gross
profit or loss margins, as per-unit costs generally decrease as fixed costs,
such as equipment depreciation expenses, are allocated over a larger number of
units. Our ability to maintain or improve our margins will continue to depend
to a large extent on our ability to effectively manage capacity utilization
levels.

Capital Expenditures and Increasing Depreciation

An additional element affecting our overall profitability is the impact of
our capital expenditure program, which will result in higher depreciation
costs, as well as interest charges accruing from the debt incurred to finance
our capital expansion. Depreciation and amortization expense increased by 32.4%
to NT$8,006 million in 2001 from NT$6,048 million in 2000. This increase was
primarily due to increased depreciation arising from our capital expansion
program for Fab II. In 2002, depreciation and amortization increased
by 9.2% to
NT$8,742 million (US$251.9 million), arising from a full year of increased
depreciation on Fab II, and the commencement of depreciation on Fab III.

In 2000, 2001 and 2002, our depreciation expense as a percentage of net
sales revenue was 16.8%, 34.2% and 49.2%, respectively. The significant
increase in depreciation expense as a percentage of net sales revenue in 2001
and 2002 primarily reflected the significant decrease in net sales revenue
during those periods, as well as increases in depreciation expenses. We expect
our depreciation expense to increase in the foreseeable future as a result of
our capital expenditure program.

We begin depreciating our equipment when it is placed into service. There
may sometimes be a time lag between when our equipment is placed into service
and when it achieves commercial levels of utilization. In periods of depressed
industry conditions, such as those that have prevailed in 2001 and 2002, we may
experience lower than expected demand from customers and a sharp decline in
average selling price, resulting in an increase in depreciation expense
relative to net sales revenue.

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Inventory

The semiconductor industry has experienced deteriorating market conditions
since the second half of 2000. This has resulted in a rapid increase in our

inventory levels, a decline in average selling prices for our products and a
corresponding decrease in the stated value of our inventories. We held
approximately 229 days of total inventory as of December 31, 2002, compared to
264 days as of December 31, 2001. We recorded an inventory loss provision of
NT$2,929 million (US$84.4 million) for the year ended December 31, 2002,
compared with NT$2,587 million for year ended December 31, 2001.

We make provisions for inventory loss based on our evaluation of historical
data and projected sales volume to determine current trends so as to identify
products or product classes that are at risk of obsolescence or are slow
moving.

Cost Reduction Initiatives

We seek to reduce our variable manufacturing costs and our unit fixed
costs by maximizing sales volumes and capacity utilization. Under this
approach, declines in the average selling prices of our products in 1998 and
1999 were wholly or partially offset by declines in our unit costs. We have
been able to obtain cost reductions through our continuing efforts to improve
yields of functional dies per wafer, decrease line widths by improving die-size
technology and increase economies of scale. We employ 0.35 micron process
technology and 0.32 micron process technology for certain chips at Fab I. We originally employed 0.25 micron process technology at Fab II for our primary mask ROM products. We
migrated to 0.18 micron process
technology for our mask ROM products produced at Fab II in the second half
of 2000, and successfully migrated to 0.15 micron process technology for both
flash and mask ROM in the fourth quarter of 2002.

Our wafer production in terms of six-inch wafer equivalents increased
46.1% to 621,587 wafers in 2000 from 425,479 wafers in 1999. However, it
decreased 4.5% to 593,661 wafers in 2001 and further decreased 28.5% to 424,594
wafers in 2002. We have supplemented our capacity by contracting for wafer
fabrication on a foundry basis by third parties, including Taiwan Semiconductor
Manufacturing Co., Ltd and Tower Semiconductor. We have also pursued the
enlargement of our manufacturing capacity through the enhancement of Fab I and
Fab II. In addition, we completed the construction of Fab III in July 2002,
which we expect will further increase our manufacturing capacity by
approximately 15,000 eight-inch wafers and 25,000 twelve-inch wafers per month
when fully operational. However, due to the adverse market conditions currently
prevailing in the semiconductor industry, we expect commencement of operations
at Fab III to be delayed until 2005 or later.

The following table sets forth six-inch and eight-inch wafer production
(in eight-inch wafer equivalents) by product for each of the periods indicated:

|                        |  |            |         |             |  |             |       |             |  |            |         |             |  |  |       |  |  |             |         |  |  |  |       | 
|----------------------- |  | ---------- | ------- | ----------- |  | ----------- | ----- | ----------- |  | ---------- | ------- | ----------- |  |  | ----- |  |  | ----------- | ------- |  |  |  | ----- | 
|                        |  | 2000       |         | 2001        |  | 2002       
|                        |  |            |         |             |  |            
|                        |  |            |         |             |  | (% of total |       |             |  |            |         | (% of total |  |  |       |  |  | (% of total
|                        |  | (number of |         | wafer       |  | (number of  |       | wafer       |  | (number of |         | wafer      
|                        |  | wafers)    |         | production) |  | wafers)     |       | production) |  | wafers)    |         | production)
|                        |  |            |         |             |  |             |       |             |  |            |         |            
|Mask ROM                |  |            | 338,634 |             |  |             | 62.5  |             |  |            | 289,538 |             |  |  | 48.8  |  |  |             | 151,384 |  |  |  | 35.7  | 
|Flash                   |  |            | 144,758 |             |  |             | 23.3  |             |  |            | 260,859 |             |  |  | 43.9  |  |  |             | 248,899 |  |  |  | 58.6  | 
|EPROM                   |  |            | 17,025  |             |  |             | 2.8   |             |  |            | 11,531  |             |  |  | 1.9   |  |  |             | 12,990  |  |  |  | 3.1   | 
|Logic(1)                |  |            | 8,019   |             |  |             | 1.3   |             |  |            | 7,815   |             |  |  | 1.3   |  |  |             | 11,222  |  |  |  | 2.6   | 
|Value-added services(2) |  |            | 62,971  |             |  |             | 10.1  |             |  |            | 23,918  |             |  |  | 4.1   |  |  |             | 99      |  |  |  | 0.0   | 
|                        |  |            |         |             |  |             |       |             |  |            |         |             |  |  |       |  |  |             |         |  |  |  |       | 
|Total                   |  |            | 621,587 |             |  |             | 100.0 |             |  |            | 593,661 |             |  |  | 100.0 |  |  |             | 424,594 |  |  |  | 100.0 | 
|                        |  |            |         |             |  |             |       |             |  |            |         |             |  |  |       |  |  |             |         |  |  |  |       | 



---

|(1) |  | Includes data for core SOC products and multimedia products. Excludes
logic wafers fabricated by Tower Semiconductor and Mitsubishi on a
contract basis for us. 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Production of DRAM under a cooperative arrangement with Matsushita for
1999, 2000 and 2001, and production of SRAMs for Mitsubishi during 2001
and 2002.                                                                                                                                                                                      

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Geographic Markets

We distribute our products to a wide variety of customers in a number of
geographical markets, including:



| |  |  | Japan;                               
| | - |  | -------------------------------------
|
| |  |  | Taiwan:                              
|
| |  |  | Hong Kong, Singapore and South Korea;
|
| |  |  | the United States; and               
|
| |  |  | Europe and other countries.          

The following table sets forth the breakdown of our net sales revenue and
percentages of net sales revenue by geographic regions:

|                                     |  |                         |        |                |  |             |       |                |  |           |        |                |  |  |       |  |  |             |        |  |  |  |       | 
|------------------------------------ |  | ----------------------- | ------ | -------------- |  | ----------- | ----- | -------------- |  | --------- | ------ | -------------- |  |  | ----- |  |  | ----------- | ------ |  |  |  | ----- | 
|                                     |  | Year ended December 31,
|                                     |  |                        
|                                     |  | 2000                    |        | 2001           |  | 2002       
|                                     |  |                         |        |                |  |            
|                                     |  |                         |        |                |  | (% of total |       |                |  |           |        | (% of total    |  |  |       |  |  | (% of total
|                                     |  | (millions               |        | net            |  | (millions   |       | net            |  | (millions |        | net           
|                                     |  | in NT$)                 |        | sales revenue) |  | in NT$)     |       | sales revenue) |  | in NT$)   |        | sales revenue)
|Japan                                |  |                         | 15,502 |                |  |             | 46.3  |                |  |           | 10,933 |                |  |  | 50.3  |  |  |             | 8,052  |  |  |  | 48.8  | 
|Taiwan                               |  |                         | 8,702  |                |  |             | 26.0  |                |  |           | 5,970  |                |  |  | 27.4  |  |  |             | 3,131  |  |  |  | 19.0  | 
|Hong Kong, Singapore and
South
Korea |  |                         | 4,786  |                |  |             | 14.3  |                |  |           | 2,740  |                |  |  | 12.6  |  |  |             | 3,655  |  |  |  | 22.2  | 
|United
States                        |  |                         | 2,640  |                |  |             | 7.9   |                |  |           | 1,454  |                |  |  | 6.7   |  |  |             | 1,309  |  |  |  | 7.9   | 
|Europe and other
countries           |  |                         | 1,863  |                |  |             | 5.5   |                |  |           | 650    |                |  |  | 3.0   |  |  |             | 345    |  |  |  | 2.1   | 
|                                     |  |                         |        |                |  |             |       |                |  |           |        |                |  |  |       |  |  |             |        |  |  |  |       | 
|Total                                |  |                         | 33,493 |                |  |             | 100.0 |                |  |           | 21,747 |                |  |  | 100.0 |  |  |             | 16,492 |  |  |  | 100.0 | 
|                                     |  |                         |        |                |  |             |       |                |  |           |        |                |  |  |       |  |  |             |        |  |  |  |       | 

Our sales to Japan are generally denominated in Japanese yen, our sales to
Taiwan are generally denominated in NT dollars, Japanese yen and U.S. dollars,
and our sales to other countries are generally denominated in U.S. dollars. In
2000, 2001 and 2002, approximately 92.5%, 90.8% and 99.2%, respectively, of our
net sales revenue was denominated in currencies other than NT dollars,
primarily Japanese yen and U.S. dollars.

We use hedging techniques such as foreign currency borrowings, forward
exchange rate contracts and foreign currency swaps to mitigate these risks.

Results of Operations

The following table sets forth, for the periods indicated, certain
financial data from our statements of operations, expressed in each case as a
percentage of net sales revenue:

|              |                           |  |          |              |   |                         |       |      |   |      |       |      |   |      |      | 
|------------- | ------------------------- |  | -------- | ------------ | - | ----------------------- | ----- | ---- | - | ---- | ----- | ---- | - | ---- | ---- | 
|              |                           |  |          |              |   | Year ended December 31,
|              |                           |  |          |              |   |                        
|              |                           |  |          |              |   | 2000                    |       | 2001 |   | 2002
|              |                           |  |          |              |   |                         |       |      |   |     
|Sales
revenue |                           |  | 100.9    |              |   |                         | 101.4 |      |   |      | 100.9 |     
|              | Memory:                   |  |          |              |   |                         |       |      |   |      |       |      |  
|              |                           |  | Mask
ROM |              |   | 57.6                    |       |      |   | 56.8 |       |      |   | 45.9 |     
|              |                           |  | Flash    |              |   | 19.3                    |       |      |   | 14.8 |       |      |   | 26.8 |     
|              |                           |  | EPROM    |              |   | 3.7                     |       |      |   | 4.5  |       |      |   | 3.6  |     
|              |                           |  |          |              |   |                         |       |      |   |      |       |     
|              |                           |  |          | Total memory |   |                         | 80.6  |      |   |      | 76.1  |      |   |      | 76.3 | 
|SOC:          |                           |  |          |              |   |                         |       |      |   |      |       |     
|              | Core
SOC                  |  |          | 1.2          |   |                         |       | 2.4  |   |      |       | 3.3  |  
|              | Value-added
services      |  |          | 9.3          |   |                         |       | 12.4 |   |      |       | 2.8  |  
|              | Multimedia                |  |          | 4.5          |   |                         |       | 7.3  |   |      |       | 14.5 |  
|              | Royalties and
commissions |  |          | 0.3          |   |                         |       | 0.4  |   |      |       | 0.3  |  
|              | Others                    |  |          | 5.0          |   |                         |       | 2.8  |   |      |       | 3.7  |  
|              | Less: sales returns       |  |          | (0.8         | ) |                         |       | (1.0 | ) |      |       | (0.2 | )

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|                               |                                   |  |                         |       |      |  |       |       |   |  |        |       |  
|------------------------------ | --------------------------------- |  | ----------------------- | ----- | ---- |  | ----- | ----- | - |  | ------ | ----- | -
|                               |                                   |  | Year ended December 31,
|                               |                                   |  |                        
|                               |                                   |  | 2000                    |       | 2001 |  | 2002 
|                               |                                   |  |                         |       |      |  |      
|                               | Sales
discounts                   |  |                         | (0.1  | )    |  |       | (0.4  | ) |  |        | (0.7  | )
|                               |                                   |  |                         |       |      |  |       |       |   |  |        |      
|                               | Net sales
revenue                 |  |                         | 100.0 |      |  |       | 100.0 |   |  |        | 100.0 |  
|Cost of goods
sold             |                                   |  | (46.2                   | )     |      |  | (53.7 | )     |   |  | (103.7 | )    
|                               |                                   |  |                         |       |      |  |       |       |   |  |        |      
|Gross profit
(loss)            |                                   |  | 53.8                    |       |      |  | 46.3  |       |   |  | (3.7   | )    
|                               |                                   |  |                         |       |      |  |       |       |   |  |        |      
|Operating
expenses             |                                   |  |                         |       |      |  |       |       |   |  |        |      
|                               | Selling
expenses                  |  |                         | (2.8  | )    |  |       | (2.8  | ) |  |        | (3.5  | )
|                               | Administrative
expenses           |  |                         | (5.3  | )    |  |       | (9.8  | ) |  |        | (11.1 | )
|                               | Research and development
expenses |  |                         | (9.4  | )    |  |       | (17.6 | ) |  |        | (23.1 | )
|                               |                                   |  |                         |       |      |  |       |       |   |  |        |      
|Total operating
expenses       |                                   |  | (17.5                   | )     |      |  | (30.2 | )     |   |  | (37.7  | )    
|                               |                                   |  |                         |       |      |  |       |       |   |  |        |      
|Operating income
(loss)        |                                   |  | 36.3                    |       |      |  | 16.1  |       |   |  | (41.4  | )    
|Other income and
gains         |                                   |  | 2.8                     |       |      |  | 6.2   |       |   |  | 2.8    |      
|Other expenses and
losses      |                                   |  | (6.2                    | )     |      |  | (22.0 | )     |   |  | (30.2  | )    
|                               |                                   |  |                         |       |      |  |       |       |   |  |        |      
|Income (loss) before
taxes     |                                   |  | 32.9                    |       |      |  | 0.3   |       |   |  | (68.8  | )    
|                               |                                   |  |                         |       |      |  |       |       |   |  |        |      
|Income tax benefit
(provision) |                                   |  | (1.2                    | )     |      |  | (4.3  | )     |   |  | (0.1   | )    
|                               |                                   |  |                         |       |      |  |       |       |   |  |        |      
|Net income
(loss)              |                                   |  | 31.7                    |       |      |  | (4.0  | )     |   |  | (68.9  | )    
|                               |                                   |  |                         |       |      |  |       |       |   |  |        |      

Year Ended December 31, 2002 compared to Year Ended December 31, 2001

Net Sales Revenue.Our total net sales revenue decreased 24.2% to
NT$16,492 million (US$475.3 million) in 2002 from NT$21,747 million in 2001.
This decrease was primarily due to a decline in average selling prices
resulting from the continued market downturn, despite an increase in sales
volume in 2002.

The proportion of our net sales revenue from mask ROM products decreased
to 45.9% in 2002 from 56.8% in 2001. This decrease was primarily due to
decreased demand for mask ROM products from Nintendo following its introduction
of the GameCube and a decrease in the average selling prices for our mask ROM
products. The average selling prices for mask ROM products decreased to NT$54.8
per die in 2002 from NT$89.6 per die in 2001, principally as a result of a
decrease in demand for high-density mask ROM products.

The proportion of our net sales revenue from flash products increased to
26.8% in 2002 from 14.8% in 2001. This increase was primarily due to an
increase in the sales volume of our flash products, which was partially offset
by a decrease in the average selling prices for flash products. The increase in
sales volume was primarily due to an increase in demand in GameCubes, printers
and LANs. Average selling prices for flash products decreased to NT$49.0 per
die in 2002 from NT$74.3 per die in 2001, principally as a result of increased
price competition.

The proportion of our net sales revenue from EPROM products decreased to
3.6% in 2002 from 4.5% in 2001. This decrease was primarily due to a decrease
in the sales volume and average selling prices of our EPROM products. The
average selling prices for EPROM products decreased to NT$22.0 per die in 2002
from NT$40.1 per die in 2001, principally as a result of a decrease in demand.

The proportion of our net sales revenue from our SOC products decreased to
6.1% in 2002 from 14.8% in 2001. This decrease was principally due to a
decrease in the sales volume of our SOC products and a decrease in the average
selling prices of our SOC products as a result of a decrease in demand.

The proportion of our net sales revenue from our multimedia products
increased to 14.5% in 2002 from 7.3% in 2001. This increase was mainly due to
an increase in the sales volume of our multimedia products as a result of
increased end-use applications for our multimedia products, which was partially
offset by a decrease in the average selling prices of our multimedia products.
The decrease in the average selling prices of multimedia products is due to
continued industry downturn.

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Cost of Goods Sold and Gross Profit (Loss).Cost of goods sold increased
46.5% to NT$17,108 million (US$493.0 million) in 2002 from NT$11,674 million in
2001. This increase was primarily due to an increase of 9.2% in depreciation
and amortization expenses and the increased sales volume, which resulted in
increased in raw materials costs and subcontracting
expenses for outsourced services such as testing and packaging. This
increase also reflected a change in our product mix towards a higher proportion
of flash products, which have higher manufacturing costs.

As a result of the foregoing, we had a realized gross loss of NT$615
million (US$17.7 million) in 2002 compared to gross income of NT$10,073 million
in 2001. We had a negative gross margin of 3.7% in 2002 compared to a positive
gross margin of 46.3% in 2001.

Operating Expenses.Total operating expenses decreased 5.3% to NT$6,211
million (US$179.0 million) in 2002 from NT$6,557 million in 2001. Selling
expenses decreased 7.2% to NT$568 million (US$16.4 million) in 2002 from NT$611
million in 2001. This decrease was primarily due to decreases in compensation
for sales personnel as a result of lower net sales revenue and selling expenses
of certain overseas subsidiaries. Administrative expenses decreased 13.3% to
NT$1,838 million (US$53.0 million) in 2002 from NT$2,121 million in 2001. This
decrease was primarily due to lower administrative expenses at certain overseas
subsidiaries. Research and development expenses decreased 0.5% to NT$3,806
million (US$109.7 million) in 2002 from NT$3,825 million in 2001, as our total
sales revenue decreased 24.2% from 2001 and related fees accrued for patent
rights decreased.

Operating Income (Loss).As a result of the foregoing, we incurred an
operating loss in 2002 of NT$6,827 million (US$196.7 million) compared to
operating income of NT$3,516 million in 2001.

Other Income.Total other income decreased 65.6% to NT$466 million
(US$13.4 million) in 2002 from NT$1,356 million in 2001, largely as a result of
a decrease in foreign exchange gain and interest income. We recorded no foreign
exchange gains from our Japanese yen based currency derivative contracts in
2002, under which we incurred foreign exchange losses (discussed below),
compared to foreign exchange gains of NT$454 million in 2001. Interest income
decreased 56.3% to NT$216.9 million (US$6.3 million) in 2002 from NT$496
million in 2001, principally as a result of lower interest rates and lower cash
deposits.

Other Expenses.Total other expenses increased 3.8% to NT$4,976 million
(US$143.4 million) in 2002 from NT$4,795 million in 2001. Our inventory loss
provision increased 13.2% to NT$2,929 million (US$84.4 million) in 2002 from
NT$2,587 million in 2001, largely as a result of a decline in average selling
prices for our products and a corresponding decrease in the stated value of our
inventories. Net loss from equity investment and net investment loss decreased
46.8% to NT$415 million (US$12.0 million) in 2002 from NT$780 million in 2001
because our past substantial net investment losses were mostly written off in
2001. Foreign exchange losses recorded under our Japanese yen based currency
derivative contracts were NT$321 million (US$9.3 million) in 2002, compared to
foreign exchange gains recorded in 2001 (discussed above). Interest expense
increased 5.5% to NT$1,238 million (US$35.7 million) in 2002 from NT$1,173
million in 2001, as a 31.6% increase in the aggregate principal amount of our
outstanding indebtedness was partially offset by a general decrease in interest
rates. Other expenses decreased 70.6% to NT$72.9 million (US$2.1 million) in
2002 from NT$248 million in 2001. Other expenses were significantly higher in
2001 because we recorded a provision for doubtful accounts receivable for an
insurance claim in the amount of NT$227 million.

Net Loss.As a result of the foregoing, we recorded a net loss of
NT$11,357 million (US$327.3 million) in 2002 compared to a net loss of NT$866
million in 2001.

Year Ended December 31, 2001 compared to Year Ended December 31, 2000

Net Sales Revenue.Our total net sales revenue decreased 35.1% to
NT$21,747 million in 2001 from NT$33,493 million in 2000. This decrease
resulted primarily from lower sales volume and declining average selling prices
due to the market downturn.

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The proportion of our net sales revenue from mask ROM products decreased
to 56.8% in 2001 from 57.6% in 2000. This decrease was primarily due to
decreasing sales of mask ROM products to Nintendo following its introduction of
the GameCube and a decrease in the average selling prices of mask ROM products.
The average selling prices for mask ROM products decreased to NT$89.6 per die
in 2001 from NT$105.8 per die in 2000, primarily as a result of a decrease in
demand for high-density mask ROM products.

The proportion of our net sales revenue from flash products decreased to
14.8% in 2001 from 19.3% in 2000. This decrease was primarily due to decreasing
demand and average selling prices for flash products as a result of an
oversupply in the flash market in 2001. The average selling prices for flash
products decreased to NT$74.3 per die in 2001 from NT$110.4 per die in 2000.

The proportion of our net sales revenue from EPROM products increased to
4.5% in 2001 from 3.7% in 2000. Sales revenue for EPROM were generally stable
during the two periods. The average selling prices for EPROM products decreased
to NT$40.1 per die in 2001 from NT$55.0 per die in 2000, principally as a
result of a continued downturn in the industry.

The proportion of our net sales revenue from our SOC products increased to
14.8% in 2001 from 10.5% in the same period in 2000. This increase was
primarily due to increasing shipments of SRAMs and flash to Mitsubishi, which
accounted for 11.8% of our net sales revenue in 2001, as compared to 8.0% of
our net sales revenue in 2000.

The proportion of our net sales revenue from our multimedia products
increased to 7.3% in 2001 from 4.5 % in the same period in 2000. This increase
was mainly due to an increase in the sales volume as a result of increased
end-use applications for our multimedia products, which was partially offset by
a decrease in the average selling prices of these products. The decrease in the
average selling prices of our multimedia products was due to a continued
industry downturn.

Cost of Goods Sold and Gross Profit.Cost of goods sold decreased 24.7% to
NT$11,674 million in 2001 from NT$15,494 million in 2000, largely as a result
of lower sales volumes. The decrease in cost of goods sold was also
attributable to a decrease of 27.9% in subcontracting expense for services,
such as testing and packaging resulting from an overall reduction of charges
for such services during the market downturn. In addition, compensation expense
decreased by 36.3% mainly due to a decrease in compensation expense for
production personnel. These decreases were partially offset by an increase of
30.8% in depreciation and amortization expenses.

As a result of the foregoing, our gross profit decreased to NT$10,073
million in 2001 from NT$17,999 million in 2000. Our gross margin decreased to
46.3% in 2001 from 53.8% in 2000.

Operating Expenses.Total operating expenses increased 12.0% to NT$6,557
million in 2001 from NT$5,857 million in 2000. Selling expenses decreased 35.0%
to NT$611 million in 2001 from NT$940 million in 2000. This decrease was
primarily due to decreases in compensation for sales personnel as a result of
lower net sales revenue. Administrative
expenses increased 19.7% to NT$2,121 million in 2001 from NT$1,772 million
in 2000. This increase was primarily due to an increase in the compensation
expenses relating to our stock performance-based bonus plan. Research and
development expenses increased 21.7% to NT$3,825 million in 2001 from NT$3,l44
million in 2000, as we increased our development activities and continued to
pursue our long-term objective of spending not less than 10% of net sales
revenue on research and development.

Operating Income.As a result of the foregoing, we had operating income of
NT$3,516 million in 2001 compared to NT$12,143 million in 2000.

Other
Income.Total other income increased 43.5% to NT$1,356 million in
2001 from NT$945 million in 2000. This increase was primarily due to (i) an
increase in foreign exchange gain of 54.9%

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to NT$454 million in 2001 from
NT$293 million in 2000, attributable to our Japanese yen based currency
derivatives contracts as a result of the depreciation of the Japanese yen and
(ii) an increase in other income to NT$309 million in 2001 from NT$64 million
in 2000 primarily as a result of a reversal of allowance for doubtful
accounts,
damage reimbursement from our supplier and other miscellaneous items. These
increases were partially offset by a decrease in interest income of 8.3% to
NT$496 million in 2001 from NT$541 million in 2000, largely resulting from
lower interest rates and our lower level of cash deposits and a net investment
gain of NT$76 million.

Other Expenses.Total other expenses increased to NT$4,795 million in 2001
from NT$2,077 million in 2000. Our inventory loss provision increased
substantially to NT$2,587 million in 2001 from NT$81 million in 2000. This
increase was primarily due to an increase in our inventory levels, a decline in
average selling prices for our products and a corresponding decrease in the
stated value of our inventories. Interest expense decreased 7.3% to NT$1,173
million in 2001 from NT$1,266 million in 2000, due to declining interest rates.
Net loss from equity investment decreased 34.3% to NT$395 million in 2001 from
NT$601 million in 2000. We incurred substantial losses in our equity investment
primarily as a result of the write off of our investments in Caesar Technology and Chantek. Other
expenses increased to NT$248 million in 2001 from NT$107 million in 2000. This
increase was principally a result of a provision for insurance claim relating
to an earthquake in Taiwan in 1999. See Item 4. Information on the Company 
Strategic Investments.

Net Income (Loss).As a result of the foregoing, we had a net loss of
NT$866 million in 2001 compared to net income of NT$10,613 million in 2000.

Inflation

We do not believe that inflation in Taiwan has had a material impact on
our results of operations. The average annual rate of change in Taiwans
Wholesale Price Index was approximately (2.7)% in 2000, (l.3)% in 2001 and
(0.05)% in 2002.

Taxation

As our facilities are located in the Science Park, we enjoy preferential tax treatment in some respects
under the ROC Statute for the Establishment and Administration of Science-Based
Industrial Park (referred to in this section as the Science Park
regulations). The income tax rate applicable to us through 2000 was 20%,
rather than the 25% rate applicable to corporations located outside the Science
Park. Beginning in 2001, the preferential income tax rate of 20% is no longer
available to business operations in the Science Park. In addition, we are
entitled to an initial exemption from income taxes for the amount of our income
attributable to the manufacture and sale of our products
produced at Fab I and Fab II, less any value-added amount attributable to
third-party contractors, for a period of five years for Fab I and four years
for Fab II, from the first date of sales, and we may defer the commencement of
this exemption for up to four years. We chose the period from January 1, 1994
to December 31, 1998 as the five-year exemption period for Fab I. We have
chosen the period from January 1, 2001 to December 31, 2004 as the four-year
exemption period for Fab II. As such tax exemption benefit was rescinded under
an amendment to the Science Park regulations taking effect on January 20, 2000,
after the expiration of the relevant exemption periods, we would no longer
qualify for any new exemptions under the amended Science Park regulations.

Under the Statute for Upgrading Industries, we are also entitled to other
tax incentives generally available to ROC companies. We may take tax credits
currently at rates ranging between 5% and 20% of the amount spent on qualifying
machinery and equipment, and at rates up to 30% (25% prior to February 2002)
for qualifying research and development costs and employee training expenses.
An additional tax credit may also be available to us, equal to 50% of the
amount by which the qualifying research and development costs or employee
training expenses in a given year exceed the average qualifying research and
development costs or employee training expenses for the previous two years. The
tax credit may be utilized within five years from the date of its occurrence.
The available tax credit

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in each year is limited to 50% of the corporate tax
payable in that year, except for the last of the five years for which there is
no limit.

We utilized NT$1,849 million of tax credits in 2000, NT$738 million of tax
credits in 2001 and NT$318 million (US$9.2 million) of tax credits in 2002.

Net operating losses may be carried forward for a period of five years. As
of December 31, 2002, unused tax credits available to reduce future taxable
income totaled NT$4,066 million (U.S.$117.2 million). See note 14 to our
consolidated financial statements for the years ended December 31, 2000, 2001
and 2002 included in this annual report.

In 2002, we recorded an additional tax provision of NT$3,318 million
(US$95.6 million), which relates primarily to deferred tax assets that, based
on our estimates, will not be realized.

Equity Derivative Contracts

We enter into derivative contracts from time to time with our common
shares as the underlying reference securities. Certain of these contracts also
include a reference to foreign currency exchange rates. These contracts may
significantly affect our net income or loss for any given period. We recorded
losses of NT$297 million in 2000, NT$171 million in 2001
and NT$677 million
(US$19.5 million) in 2002 with respect to these derivative contracts under U.S.
GAAP. These losses were primarily attributable to a significant decline in the
trading price of our common shares as well as significant fluctuations in the
exchange rate between the Japanese yen and the U.S. dollar. Future decreases in
the trading price of our common shares or fluctuations in the exchange rate
between the Japanese yen and the U.S. dollar may adversely affect our financial
condition and results of operations. See Item 11. Quantitative and Qualitative
Disclosures About Market Risk and notes 19 and 20 to our consolidated financial statements for the years ended December
31, 2000, 2001 and 2002 included in this annual report.

U.S. GAAP Reconciliation

General

Our consolidated financial statements are prepared in accordance with ROC
GAAP, which differ in certain significant respects from U.S. GAAP. The following tables set forth comparisons of our net income (loss) and
shareholders equity accounts in accordance with ROC GAAP and U.S. GAAP:

|                                      |           |  |                         |        |       |  |       |        |       |  |  |         |   |  |  |        |  
|------------------------------------- | --------- |  | ----------------------- | ------ | ----- |  | ----- | ------ | ----- |  |  | ------- | - |  |  | ------ | -
|                                      |           |  | Year ended December 31,
|                                      |           |  |                        
|                                      |           |  | 2000                    |        | 2001  |  | 2002  |        | 2002 
|                                      |           |  |                         |        |       |  |       |        |      
|                                      |           |  | (NT$)                   |        | (NT$) |  | (NT$) |        | (US$)
|                                      |           |  | (in millions)          
|Net income (loss) in accordance with: |           |  |                         |        |       |  |       |        |       |  |  |         |   |  |  |       
|                                      | ROC GAAP  |  |                         | 10,613 |       |  |       | (866   | )     |  |  | (11,357 | ) |  |  | (327.3 | )
|                                      | U.S. GAAP |  |                         | 8,016  |       |  |       | (4,463 | )     |  |  | (13,841 | ) |  |  | (398.9 | )

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|                                         |           |  |                    |        |       |  |       |        |       |  |  |        |  |  |  |       | 
|---------------------------------------- | --------- |  | ------------------ | ------ | ----- |  | ----- | ------ | ----- |  |  | ------ |  |  |  | ----- | 
|                                         |           |  | As of December 31,
|                                         |           |  |                   
|                                         |           |  | 2000               |        | 2001  |  | 2002  |        | 2002 
|                                         |           |  |                    |        |       |  |       |        |      
|                                         |           |  | (NT$)              |        | (NT$) |  | (NT$) |        | (US$)
|                                         |           |  | (in millions)     
|Shareholders equity in accordance with: |           |  |                    |        |       |  |       |        |       |  |  |        |  |  |  |      
|                                         | ROC GAAP  |  |                    | 44,573 |       |  |       | 43,144 |       |  |  | 30,214 |  |  |  | 870.7 | 
|                                         | U.S. GAAP |  |                    | 41,831 |       |  |       | 43,300 |       |  |  | 28,351 |  |  |  | 817.0 | 

Note 20 to our
consolidated financial statements for the years ended
December 31, 2000, 2001 and 2002 included in this annual report provides a
description of the principal differences between ROC GAAP and U.S. GAAP as they
relate to us, and a reconciliation to U.S. GAAP of specific items, including
net income (loss) and shareholders equity.

Our gross profit in accordance with U.S. GAAP was NT$17,615 million in
2000 and NT$6,598 million in 2001. We had a gross loss in accordance with U.S.
GAAP of NT$4,018 million (US$115.8 million) in 2002. Under U.S. GAAP, our gross
profit margin in 2000 was 52.6% as compared to 30.3% in 2001 and we
had negative gross margin of 24.4% in 2002. Under U.S. GAAP we had operating income of NT$ 11,069
million in 2000, operating loss of NT$2,263 million in 2001 and operating loss
of NT$10,186 million (US$293.5 million) in 2002.

Differences between ROC GAAP and U.S. GAAP, which have an effect on our
net income or loss as reported under ROC GAAP, relate to:



| |  |  | compensation expense pertaining to employee bonuses and
distributions to directors and supervisors;
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | plant capacity expense variances;                                                                  
|
| |  |  | income taxes;                                                                                      
|
| |  |  | additional pension gain on an actuarial basis;                                                     
|
| |  |  | the effect of the capitalization of intangible assets;                                             
|
| |  |  | marketable securities;                                                                             
|
| |  |  | derivative financial instruments; and                                                              
|
| |  |  | compensation expense pertaining to stock performance-based employee bonuses.                       

Employee Bonuses

Subject to shareholder approval, we expect to pay all or some portion of
employee bonuses for future periods in the form of common shares. In this case,
the number of common shares distributed is obtained by dividing the total
nominal NT dollar amount of the bonus by the par value of our common shares, or
NT$10 per share, rather than their market value, which has generally been
substantially higher than par value. Under ROC GAAP, the distribution of
employee bonus shares is treated as an allocation from retained earnings, and
we are not required to, and do not, charge the value of the employee bonus
shares to income.

Under U.S. GAAP, however, we are required to charge the market value of
the employee bonus shares to employee compensation expense in the period to
which they relate, correspondingly reducing our net income and income per share
calculated in accordance with U.S. GAAP. However, since the form of the payment
of the compensation expense is only determinable at the annual shareholders
meeting, which is generally held after the issuance of our consolidated
financial statements, the compensation expense is initially accrued in the
period to which it relates based on the sum of the NT dollar amount of the
aggregate bonus payable in cash in accordance with our articles of
incorporation and amounts payable in stock. The difference between the amount
initially accrued and the market value of the common shares issued as payment
of all or any part of the bonus is recorded as employee compensation expense in
the period in which shareholder approval is obtained. See note 20 to our
consolidated

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financial statements for the years ended December 31, 2000, 2001
and 2002 included in this annual report.

Additional compensation expense in the amount of NT$1,622 million for
2000, NT$4,273 million in 2001 and nil for 2002 was reflected in our net income
under U.S. GAAP with respect to employees bonuses and remuneration of
directors and supervisors paid in the form of our common shares.

Gross Profit (Loss) and Operating Income (Loss)

ROC GAAP permits government subsidies for research and development,
inventory loss provision and the reversal of bad debt expense to be presented
below the operating income subtotal in the statement of operations. Under U.S.
GAAP, the inventory loss provision is included in the determination of gross
profit or loss, while the government subsidies for research and development and
the reversal of bad debt expense are included in the determination of operating
income or loss.

Plant Capacity Expense Variances

As permitted under ROC GAAP, all plant capacity expense variances may
either be charged to the statement of operations or allocated between cost of
goods sold and inventory using an appropriate allocation method. Our policy is
to expense such variances.

Under U.S. GAAP, such plant capacity variances may only be allocated
between cost of goods sold and inventory. This may also result in additional
inventory allowances.

Income Taxes

Our undistributed earnings generated after 1997 are subject to a 10% tax
in compliance with the ROC Income Tax Law. Under ROC GAAP, the 10% tax on
undistributed earnings is recorded as an expense at the time our shareholders
resolve that earnings be retained. Under U.S. GAAP, we measure income tax
expense, including the tax effects of temporary differences, using the tax rate
that includes the tax on undistributed earnings.

Pension Expense

Prior to 1996, in accordance with ROC GAAP, pension expense was recognized
based on contributions required under government regulations, while under U.S.
GAAP, pension obligations and expense are determined on an actuarial basis.
Under the Accounting for Pensions guidelines issued by the ROC Accounting
Research Development Foundation in 1991, which are substantially similar to
U.S. Statement of Financial Accounting Standards (SFAS) No. 87 under U.S.
GAAP, each ROC listed company, including our company, was required, beginning
in 1996, to accrue its unfunded or underfunded accumulated pension
obligations as a liability in its balance sheet on an actuarial basis and to
expense amounts related to these obligations in its statement of operations
systematically over the estimated service lives of the employees covered by the
pension plan. See note 20 to our consolidated financial statements for the
years ended December 31, 2000, 2001 and 2002 included in this annual report.
For U.S. GAAP reconciliation purposes, we amortize our related pension
obligation differences in accordance with U.S. SFAS No. 87 over a period of 21
years, retroactive from 1993. This adjustment increased our net income before
taxes under U.S. GAAP by NT$3 million in 2000 and NT$3 million in 2001 and
reduced net loss before taxes under U.S. GAAP by NT$3 million (US$0.1 million)
in 2002.

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Marketable Securities

Under ROC GAAP, marketable equity securities held as short-term
investments are carried at the lower of aggregate cost or market value. The
unrealized losses of marketable equity securities held as short-term
investments are recorded as investment loss in the statement of operations,
while unrealized gains of marketable equity securities held as short-term
investments are not recognized. Marketable equity securities held as long-term
investments are carried at cost, or lower of aggregate cost or market value if
the market price is available. The unrealized losses of marketable equity
securities held as long-term investments are reported as a reduction of
shareholders equity, while the unrealized gains are not recognized. An other
than temporary decline in value is not required to be recognized under ROC GAAP
due to the less prescriptive nature of the principles.

U.S. SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, requires that all applicable investments be classified as trading
securities, available-for-sale securities or held-to-maturity securities. We
did not have any investments classified as trading securities or
held-to-maturity securities during the periods presented. SFAS No. 115 further
requires that available-for-sale securities be reported at fair value, with
unrealized gains and losses excluded from earnings but reported in a separate
component of shareholders equity until they are sold. Under U.S. GAAP, if an
other than temporary decline in value of a long-term investment exists, the
unrealized loss should be charged to the statement of operations.

Derivative Financial Instruments

Under ROC GAAP, we are required to disclose certain information in our
consolidated financial statements regarding derivative financial instruments.
However, there are no specific accounting requirements for derivative financial
instruments, except for foreign currency forward exchange contracts for which
there is no significant difference in the accounting treatment under U.S. GAAP
prior to January 1, 2001. In addition, ROC GAAP has no specific regulations
with respect to the accounting of derivative financial instruments indexed to
and potentially settled in our own common shares.

In June 1998, the U.S. Financial Accounting Standards Board (FASB)
issued U.S. SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. U.S. SFAS No. 133 established accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in the derivatives fair value

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be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivatives gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting treatment.

U.S. SFAS No. 133 was to be effective for fiscal years beginning after
June 15, 1999, but was postponed for one year by U.S. SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities  Deferral of the Effective
Date of FASB Statement No. 133  an amendment of FASB Statement No. 133. The
adoption of U.S. SFAS No. 133 on January 1, 2001 resulted in the cumulative
effect of an accounting change loss of NT$621 million being recognized in
earnings in our consolidated accounting statement of operations and a charge of
zero in other comprehensive income for U.S. GAAP purposes.

The Company has issued certain
convertible debt instruments that contain embedded derivatives
because the currency in which the instrument is denominated is
different from the currency in which the underlying stock is
denominated. The Company has bifurcated such conversion options in
accordance with SFAS No. 133 and accounted for the bifurcated
derivative instrument in accordance with SFAS No. 133 and the host
instrument in accordance with the applicable standards.

For derivative financial instruments indexed to and potentially settled in
our own common shares, we are required to record those agreements which are
required to be settled in cash at their fair values, with changes in fair value
reported in earnings. See notes 19 and 20 to
our consolidated financial statements for the years ended December 31,
2000, 2001 and 2002 included in this annual report.

After application of these principles, our net income for U.S. GAAP
purposes decreased by NT$898 million in 2000, our net loss decreased by NT$228
million in 2001 and our net loss decreased by NT$449 million (US$12.9 million)
in 2002.

Stock Performance-Based Employee Bonus Plan

In April 1999, our board of directors approved a program similar to a
stock appreciation rights plan under which our employees who are eligible to
participate would receive cash bonuses based on increases in the market price
of our common shares. Our board of directors has authorized our chairman to use
his discretion to alter the terms of this plan, including the vesting period
and the amount of the bonus allocated to our employees. We initially allocated
61,179,500 shares upon the establishment of the plan. Rights to receive cash
bonuses under the plan are scheduled to vest with respect to 25% of the common
shares allocated to the plan on August 1 of each year, starting August 1, 2000
through 2002. In April 2002, our board of directors approved an amendment of
the plan, changing the vesting date for the final 25% to August 1, 2002 from
March 31, 2003. Employees who discontinue their employment before the scheduled
vesting dates will forfeit the rights to receive cash bonuses.

Between the establishment of the plan and December 31, 2002, rights to
receive cash bonuses with respect to a total of 6,197,600 shares have been
forfeited, and rights to receive cash bonuses with respect to a net additional
17,227,048 shares were allocated under the plan as a result of stock dividends
made on the shares allocated to the plan, exercise of rights under the plan and
allocation of additional rights. As of December 31, 2002, 72,208,948 shares
were outstanding under the plan, including vested rights to 72,208,948 shares
and unvested rights to 0 shares. We may from time to time increase the size of
the plan in the future to allocate additional stock appreciation rights.

U.S. GAAP requires us to account for this plan in accordance with
Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for
Stock Issued to Employees. Under APB No. 25, we recognize compensation expense
for the plan based on the amount by which the quoted market value of our shares
covered by the grant exceeds the exercise price of the rights. Compensation
determined in accordance with the preceding sentence will be accrued as a
charge to expense over the vesting period during which the employee performs
the related services. As a result, the compensation expense adjustment under
U.S. GAAP for this plan in 1999 was NT$245 million of additional expense. Due
to the reversal of compensation expense accrued on an ROC GAAP basis, we
recorded an increase in income adjustment of NT$598 million in 2000, NT$496
million in 2001 and NT$93 million (US$2.7 million) in 2002 for this plan under
U.S. GAAP. Unlike U.S. GAAP, ROC GAAP has no specific accounting provisions for
stock appreciation rights plans. For ROC GAAP reporting purposes, we do not
recognize compensation expense until the year in which these appreciation right
vests. In 1999, no rights vested and, as a result, we did not recognize any
compensation expense. When the rights vest,

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we recognize compensation expense
that is calculated based on the difference between (i) the fair market value of
our shares plus additional costs related to the rights vested and (ii) the
aggregate exercise price of the rights having vested in the period. We have
entered into a number of equity derivative contracts to cover the rights under
the plan. We recognized compensation expense for the stock appreciation rights
under ROC GAAP of NT$1,093 million in 2000, NT$345 million in 2001 and a gain of
NT$21 million (US$0.6 million) in 2002.

Purchase and Sale of Our Own Shares

Under ROC GAAP, the net gain or loss resulting from the purchase and sale
of our own common shares for trading purposes is recorded as non-operating
income or loss in the consolidated statement of operations. However,
effective from January 1, 2002, purchases or sales of our own
shares are treated as a treasury stock transaction.

U.S. GAAP requires that if we or our affiliates acquire our own common
shares for purposes other than retirement, the cost of the acquired shares may
be shown separately as a deduction from the total of capital stock, additional
paid-in capital and retained earnings, or may be accorded the accounting
treatment appropriate for retired stock. Gains on sales of the repurchased
stock not previously accounted for as constructively retired are credited to
additional paid-in capital; losses may 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 to retained earnings. As a
result of the gain of NT$7 million in 2000, a loss of NT$17 million in 2001 and
gain or loss of nil in 2002 on the purchase and sale of our common shares for
ROC GAAP purposes, a corresponding amount was credited to additional paid-in
capital and deducted from net income for U.S. GAAP purposes.

Investment in Equity Investees

Under ROC GAAP, if an investee company issues new shares and the original
shareholders do not purchase new shares proportionally such that the investor
increases its percentage of ownership, the difference between the investment
cost for the portion of the investee acquired and the acquired net assets is
charged to equity.

Under U.S. GAAP, if an investee company issues new shares and the original
shareholders do not purchase new shares proportionally such that the investor
increases its percentage of ownership, the difference between the investment
cost for the portion of investee acquired and the acquired net assets is
recorded as part of the investment. The difference is assigned to individual
assets and liabilities acquired on the basis of the assets and liabilities
fair values. Any remaining difference between the cost of the investment and
net assets acquired is allocated to goodwill. Goodwill for equity
method investments is not separable from the instruments.

Research and Development Expense

Under ROC GAAP, our royalty expense is included in research and
development expense. Under U.S. GAAP, our royalty expense is included in
selling expense or administrative expense depending on the nature of the
expense. Accordingly, on a U.S. GAAP basis, research and development expenses
were NT$2,486 million in 2000, NT$3,335 million in 2001 and NT$3,444 million
(US$99.3 million) in 2002.

Rights Issues and Earnings Per Share

Under U.S. GAAP, a rights issue with exercise price less than the fair
value of the shares contains a bonus element that is similar to a stock
dividend and is accounted for as such accordingly. As a result, the basic and
diluted earnings per share are adjusted retroactively for the bonus element for
all periods presented. There are no requirements under ROC GAAP to adjust
earnings per share arising from the bonus element of a rights issue.

Under ROC GAAP, earnings per share is retroactively adjusted for shares
issued for employee bonus. Under U.S. GAAP, shares issued for employee bonus
will affect the current periods earnings per share only.

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New Accounting Pronouncements

In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities.
SFAS No. 146 represents the
second and final phase of the FASBs project on accounting for the impairment
or disposal of long-lived assets and for obligations associated with exit or
disposal activities. The adoption of SFAS No. 146 in January 2003 is not
expected to have a material effect on our financial position or results of
operations.

During the year ended December 31, 2002, the FASB has issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No.13, and Technical Corrections, SFAS No. 147 Acquisition of Certain
Financial Institutions and SFAS No. 148 Accounting for Stock-Based
Compensation-Transition and Disclosure. These statements were effective for us
during the year ended December 31, 2002 and did not have any material effect on
our earnings or financial position for the year then ended.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN45). FIN45 requires certain
guarantees to be recorded at fair value, which is different from the general
current practice of recording a liability only when a loss is probable and
reasonably estimable, as those terms are defined in SFAS No. 5, Accounting for
Contingencies. FIN45 also requires a guarantor to make significant new
disclosure for virtually all guarantees even if the likelihood of the
guarantors having to make payments under the guarantee is remote. The
disclosure requirements of FIN45 are effective for financial statements of
interim or annual periods ending after December 15, 2002.

As discussed in note 15 to our consolidated financial statements for the
years ended December 31, 2000, 2001 and 2002 included in this annual report, we
acted as guarantor for a loan to Biomorphic to a maximum amount of US$3,400.
Due to the financial condition of Biomorphic, we have recognized investment
loss of US$3,400 as of December 31, 2002. In addition, we have made several
commitments under different contracts, such as construction and operating lease
contracts. See note 15 and 16 to our consolidated financial statements for the years
ended December 31, 2000, 2001 and 2002 included in this annual report.

The initial recognition and initial measurement provision of FIN45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. We believe that the adoption of FIN45 will not have a
material impact on our financial statements.

In January 2003, the FASB issued Interpretation No. 46 Consolidation of
Variable Interest Entities (FIN46). FIN 46 requires an investor with a
majority of the variable interests in a variable interest entity to consolidate
the entity and also requires majority and significant variable interest
investors to provide certain disclosures. A variable interest entity is an
entity in which the equity investors do not have a controlling interest or the
equity investment at risk is insufficient to finance the entitys activities
without receiving additional subordinated financial support from the other
parties. We are currently reviewing our investment portfolio to determine
whether any of our equity investments are considered variable interest
entities. We do not expect to identify any variable interest entities that must
be consolidated, but may be required to make additional disclosures.

In May 2003, the U.S. FASB issued SFAS Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. We are currently evaluating the
effect that the adoption of SFAS No. 150 will have on our
consolidated financial statements.

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In
November 2002, the FASB issued Emerging
Issues Task Force Issue No. 00-21 Revenue Arrangements with Multiple
Deliverables (EITF Issue No. 00-21). EITF Issue No. 00-21 addresses
certain aspects of the accounting by a company for arrangements under which it
will perform multiple revenue-generating activities. EITF Issue No. 00-21
addresses when and how an arrangement involving multiple deliverables should be
divided into separate units of accounting. EITF Issue No. 00-21 provides
guidance with respect to the effect of certain customer rights due to company
nonperformance on the recognition of revenue allocated to delivered units of
accounting. EITF Issue No. 00-21 also addresses the impact on the measurement
and/or allocation of arrangement consideration of customer cancellation
provisions and consideration that varies as a result of future actions of the
customer or the company. Finally, EITF Issue No. 00-21 provides guidance with
respect to the recognition of the cost of certain deliverables that are
excluded from the revenue accounting for an arrangement entered into fiscal
periods beginning after June 15, 2003. We are currently evaluating the effect
that the adoption of EITF Issue No. 00-21 will have on our consolidated
financial statements.



|B. |  | Liquidity and Capital Resources
|-- |  | -------------------------------

Liquidity

We have historically financed our business with cash flow from operations,
long-term and short-term debt (including debt convertible into our common
shares) and the proceeds from the issuance of equity securities. Our ability to
meet our working capital needs through cash flow from operations is affected by
the demand for, and prices of our products, which in turn may be affected by
several factors. Many of these factors are beyond our control, such as economic
downturns and declines in the prices of our products caused by a downturn in
the semiconductor industry. The average selling prices of our products are
likely to be subject to further downward pressure in the future.

To the extent we do not generate sufficient cash flow from our operations
to meet our cash requirements, we will have to rely on external financing.
However, our ability to access external sources of financing could be
materially adversely affected by our recent and forecast gross, operating and
net losses resulting from the severe and protracted industry downturn. We
cannot give assurance that we will be able to secure financing on satisfactory
terms, or at all.

We had net cash from operating activities of NT$86 million (US$2.5
million) in 2002, after adjusting for, among other things, non-cash
depreciation and amortization of NT$8,742 million (US$251.9 million) and for
inventory provision of NT$2,929 million (US$84.4 million). The reason for the
low level of cash flow provided by operations was the net loss of NT$11,357
million recorded for this period. Our net cash provided by operating activities
amounted to NT$8,837 million in 2001, after adjusting for depreciation, and
amortization of NT$8,006 million, and inventory loss provision of NT$2,587
million. Net cash generated by operating activities was affected by our net
loss of NT$866 million in 2001, compared to a net income of NT$10,613 million
in 2000. Net cash provided by operating activities amounted to NT$16,123
million in 2000, after adjusting for depreciation, and amortization of NT$6,048
million and for inventory loss provision of NT$81 million. Depreciation and
amortization increased in 2002 and 2001 due to the additional capital
expenditures arising from our expansion plan for Fab II and our construction
plan for Fab III.

Net cash used in investing activities was NT$11,596 million (US$334.2
million) in 2002. The most significant components of these investing activities
were the payment of NT$8,434 million (US$243.1 million) for the purchase of
property, plant and equipment relating to the construction of Fab III and
increases in restricted investments of NT$1,856 million (US$53.5 million). Net
cash used in investing activities was NT$14,335 million in
2001. The major components of these investing activities were the payment
of NT$9,432 million for the purchase of property, plant and equipment relating to the
construction of Fab III, sinking fund requirements of NT$1,460 million relating
to our outstanding convertible debentures, deposits of NT$262 million relating
to the Nintendo lease, and long-term investments of NT$1,492 million. Net cash
used in investing activities was NT$12,683 million in 2000. The most
significant component of these investing activities was the payment of
NT$11,948 million for purchase of property, plant and equipment relating to the
upgrade and expansion program for Fab II and the construction of Fab III.

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Net cash provided by financing activities amounted to NT$6,358 million
(US$183.2 million) in 2002. This amount primarily reflects proceeds of
long-term debt of NT$12,288 million (US$354.1 million), partially offset by the
payment of NT$6,310 million (US$181.8 million) for payments of long-term debt
and capital lease obligations. Net cash provided by financing activities
amounted to NT$2,333 million in 2001. This amount primarily reflects proceeds
from long-term debt of NT$7,424 million and proceeds from short-term debt of
NT$5,025 million, partially offset by the payments of short-term debt of
NT$5,878 million and payments of long-term debt and capital lease obligations
of NT$4,049 million. Net cash provided by financing activities amounted to
NT$7,966 million in 2000. This amount primarily reflects proceeds from
short-term debt of NT$7,209 million and proceeds from long-term debt of
NT$6,170 million, partially offset by payments of short-term debt of NT$6,833
million.

As of December 31, 2002, our primary sources of liquidity were NT$7,394
million (US$213.1 million) of cash and cash equivalents and NT$1,185 million
(US$34.2 million) of short-term investments. We held this amount in the form of
cash, primarily checking and savings accounts with banks and other financial
institutions in Taiwan and other jurisdictions and in the form of time
deposits. Our short-term investments primarily consisted of investments in bond
funds denominated in New Taiwan dollars. As of December 31, 2002, we had total
availability under existing short-term lines of credit of NT$17,283 million
(US$498.1 million), of which we had borrowed NT$2,159 million (US$62.2
million). The interest rate for borrowings under these facilities ranged from
2.0719% to 2.61% per year as of December 31, 2002. All of our short-term loans
are revolving facilities with a term of one year, each of which may be extended
on an annual basis with lender consent.

Capital Resources and Capital Expenditures

As
a result of net losses of NT$866 million and NT$11,357 million
(US$327.3 million) that we incurred in 2001 and 2002,
respectively, and unrealized losses
on long-term investments of NT$540 million and
NT$332 million (US$9.6 million) in 2001 and 2002,
respectively, shareholders equity declined by 3.2% in 2001, and by 30% in
2002, to NT$30,214 million (US$870.7 million). Our loan agreements contain covenants
that require us to maintain certain financial ratios, including specified debt
to equity ratios. As a result of our losses in 2001 and 2002, and our
projected losses in 2003, we may be unable to meet the specified debt to equity
ratios, unless we are able to raise additional equity funding. We intend to
offer up to 1,000,000,000 new common shares for cash in 2003, to increase
shareholders equity, pursuant to a rights offering. We cannot assure you that we will be successful in
selling all or any of such common shares. If we are unable to raise additional equity
funding or renegotiate the terms of our loan agreements, we may be in default
of financial covenants in the future. Such a default would seriously impair
our ability to secure debt financing, and could require us to delay or cancel
capital expansion plans, dispose of assets or take other steps to meet the
financial ratios.

Our long-term liabilities consist primarily of long-term debt and capital
lease obligations. As of December 31, 2002, we had aggregate long-term debt,
net of the current portion, of NT$18,358 million (US$529.1 million). The
long-term debt was provided pursuant to eight different facilities with ROC
banks and financial institutions and four fixed rate corporate bonds and
debentures. The long-term bank loans carried variable interest rates which
ranged between 2.53% and 6.7% per annum as of December 31, 2002, mature
between 2003 and 2016 and, in general, require payments of principal and
interest on either a quarterly or monthly basis throughout the remainder of
their terms.

As
of December 31, 2002, the
maturity schedule of our existing long-term debt is as follows:

|                                  |  |                 |       | 
|--------------------------------- |  | --------------- | ----- | 
|Period                            |  | NT$ in millions
|                                  |  |                
|January 1, 2003-December 31, 2003 |  |                 | 8,722 | 
|January 1, 2004-December 31, 2004 |  |                 | 1,808 | 
|January 1, 2005-December 31, 2005 |  |                 | 950   | 

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|                                  |  |                 |        | 
|--------------------------------- |  | --------------- | ------ | 
|Period                            |  | NT$ in millions
|                                  |  |                
|January 1, 2006-December 31, 2006 |  |                 | 3,859  | 
|January 1, 2007-December 31, 2007 |  |                 | 9,971  | 
|After December 31, 2007           |  |                 | 1,770  | 
|                                  |  |                 |        | 
|Total                             |  |                 | 27,080 | 
|                                  |  |                 |        | 

See note 10 to our consolidated financial statements for the years ended
December 31, 2000, 2001 and 2002 included in this annual report.

Our long-term loans and facilities contain various financial and other
covenants that could trigger a requirement for early payment. Among other
things, these covenants require the maintenance of certain financial ratios,
such as current ratio and debt to equity ratio. In general, covenants in the agreements governing our
existing debt, and debt we may incur in the future, may materially restrict our
operations, including our ability to incur debt, pay dividends, make certain
investments and payments and encumber or dispose of assets. A default under one
debt instrument may also trigger cross-defaults under our other debt
instruments. An event of default under any debt instrument, if not cured or
waived, could have a material adverse effect on our liquidity, as well as our
financial condition and operations.

Among our long-term debt at December 31, 2002 were the following
convertible bonds and debentures, all of which are convertible into common
shares (or ADSs) in accordance with their terms:

The following convertible bonds were offered and sold outside of the ROC:



| |  |  | US$150 million original principal amount of zero coupon secured
convertible bonds due May 5, 2003, originally issued May 1998; the
outstanding amount at December 31, 2002 was US$80.0 million (NT$2,776
million);        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | US$200 million original principal amount of 1% convertible bonds
due February 1, 2005, originally issued February 2000; the outstanding
principal amount at December 31, 2002 was US$72.1 million (NT$2,502
million); and 
|
| |  |  | US$169.2 million original principal amount of 0.5% convertible
bonds due February 7, 2007, originally issued February 2002; the
outstanding principal amount at December 31, 2002 was US$169.2 million
(NT$5,872 million).

The following convertible debentures were offered and sold in the ROC to
ROC persons:



| |  |  | NT$3,200 million original principal amount of zero coupon
convertible debentures due December 12, 2007, originally issued
December 2002; the outstanding principal amount at December 31, 2002
was NT$3,200 million (US$92.2 million).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Following open market repurchases, redemptions of bonds at the option of
holders and the closing of a tender offer for our 1% convertible bonds in
January 2003, an aggregate principal amount of US$295,000 of such
bonds remained outstanding as of February 1, 2003. We
repurchased the outstanding amount in full on April 10, 2003
for a total payment of US$363,297.

On
April 23, 2003, we repurchased the entire outstanding principal amount of
US$80 million of our zero coupon secured convertible bonds due May 5, 2003 in accordance with
the terms and conditions of such bonds for a total payment of US$103.8 million.

Among our total long-term debt at December 31, 2002 of NT$18,358 million
(US$529.0 million), a total of NT$9,834 million (US$283.4 million) was secured by our
assets, principally property, plant and equipment.

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On September 25, 2001, we entered into a syndicated loan for an amount of
up to NT$12.0 billion and we have drawn down NT$5.9 billion of the syndicated
loan as of May 31, 2003. We issued approximately NT$3.0 billion principal
amount of secured corporate bonds in Taiwan in the months of October and
November 2001, to fund the construction of Fab III, as well as the purchase of
machinery and equipment and other capital expenditures.

On January 30, 2002, we prepaid a syndicated loan which had an outstanding
amount of 3.17 billion Japanese yen. On February 7, 2002, we issued US$169
million aggregate principal amount of 0.5% convertible bonds due 2007. On
December 12, 2002, we received the proceeds from the issue of NT$3.2 billion
aggregate principal amount of convertible bonds in Taiwan.

On February 10, 2003 and March 4, 2003, we issued US$90 million aggregate
principal amount of zero coupon convertible bonds due February 10, 2008.

As of December 31, 2002, we had aggregate lease obligations of NT$1,607
million (US$46.3 million). In the third quarter of 2001, we entered into a
capital equipment lease agreement with Nintendo in the amount of up to US$75
million for the use of certain manufacturing equipment. As of December 31,
2002, we had lease obligations of approximately US$46.2 million (NT$1,603
million) payable to Nintendo over a four year period in monthly installments.
Title to the leased equipment will be transferred to us at the end of the lease
term.

We operate our own fabrication facilities and therefore require
significant amounts of capital to build, expand, modernize and maintain our
facilities and equipment. Our total capital expenditures were NT$11,803 million
in 2000, NT$9,078 million in 2001 and NT$8,975 million (US$258.7 million) in
2002. The following table sets forth our principal capital expenditures
incurred in 2000, 2001 and 2002:

|        |  |               |        |               |  |               |       |  |  |  |       | 
|------- |  | ------------- | ------ | ------------- |  | ------------- | ----- |  |  |  | ----- | 
|        |  | 2000          |        | 2001          |  | 2002         
|        |  |               |        |               |  |              
|        |  | (NT$ million) |        | (NT$ million) |  | (NT$ million)
|        |  |               |        |               |  |              
|Fab I   |  |               | 1,553  |               |  |               | 609   |  |  |  | 370   | 
|Fab II  |  |               | 9,913  |               |  |               | 2,915 |  |  |  | 1,184 | 
|Fab III |  |               | 320    |               |  |               | 3,726 |  |  |  | 4,720 | 
|Others  |  |               | 17     |               |  |               | 1,828 |  |  |  | 2,701 | 
|        |  |               |        |               |  |               |       |  |  |  |       | 
|Total   |  |               | 11,803 |               |  |               | 9,078 |  |  |  | 8,975 | 
|        |  |               |        |               |  |               |       |  |  |  |       | 

These amounts include the expansion and upgrade of Fab II and the
construction of Fab III during 2000, 2001 and 2002 and the development of
trainee and/or employee facilities and other areas.

We have budgeted capital expenditures of approximately NT$2,217 million
for 2003, primarily to purchase machinery and equipment for
Fab III. In addition, we may make additional investments in
subsidiaries in 2003 of up to NT$1,217 million. We intend to fund these capital expenditures with the proceeds of debt
and equity financing that we may undertake from time to time. We may adjust the
amount of our capital expenditure upward or downward based on cash flow from
operations, the progress of our expansion plans and market conditions. We
cannot assure you that we will be able to raise additional capital should it
become necessary, on satisfactory terms or at all.

We believe that our existing cash and cash equivalents, short-term
investments, expected cash flow from operations and existing credit lines under
our short-term and long-term loan facilities will be sufficient to meet our
capital expenditures, working capital, payment obligations under our existing
debt and lease arrangements, and other requirements.

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Commitments and Contingencies

At December 31, 2002, we had the following
commitments and contingencies that do not appear in the consolidated
financial statements:

Letters of Credit

The amount of outstanding letters of credit for
future deliveries of inventories and equipment was
NT$1,114 million (US$32.1 million).

Construction and Equipment Purchase
Contracts

The amount of outstanding contracts for
construction of facilities and purchase of machinery and equipment
totaled NT$14,908 million (US$429.6 million), of which we
have previously made payment in the amount of
NT$11,766 million (US$339.0 million).

Operating Leases

Total minimum operating lease payments, relating to
the lease of the land on which our buildings are located, were
NT$735,945 (US$21,208), including
NT$192,192 (US$5,539) for the years 2003
through 2005.

Payments under these leases for the years ended
December 31, 2000, 2001 and 2002 were NT$66 million,
NT$71 million and NT$73 million (US$2.1 million).

Payments to Tower Semiconductor Ltd.; Other

Pursuant to the proposed amendment to the share
purchase agreement, we will be obliged to make payments to Tower of
not less than US$3.0 million, and up to a maximum of
US$7.4 million, in respect of the fifth and final milestone
payment. See Item 7. Major Shareholders and Related Party
Transactions  B. Related Party Transactions.

See Item 8. Financial Information 
A. Consolidated Statements and Other Financial Information 
Legal Proceedings for a description of the outstanding and
pending legal proceedings to which we are a party.

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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with ROC GAAP. We also provide a reconciliation
from our ROC GAAP financial statements to U.S. GAAP in note 20 to our
consolidated financial statements for the years ended December 31, 2000, 2001
and 2002. The preparation of our consolidated financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We record estimates based on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily available from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe that the following critical accounting policies are the more
significant policies used in the preparation of our consolidated financial
statements.

Revenue Recognition

We recognize revenue in accordance with ROC GAAP and SEC Staff Accounting
Bulletin No. 101. Revenue Recognition in Financial Statements, as amended
(SAB No. 101), and other related guidance. SAB No. 101 requires that four
basic criteria must be met before revenue may be recognized: (1) pervasive
evidence of an arrangement exists; (2) delivery has occurred or services have
been rendered; (3) the fee is fixed and determinable; and (4) collectibility is
reasonably assured. We record revenue when all four of these criteria have been
met.

Our customers have the right to return defective products. The costs of
replacement items are recorded as costs of sales. We generally experience an
insignificant amount of
returns for our products, primarily because we co-develop our products
with our customers and we have an extensive quality control program, which
includes the testing of products prior to shipment.

Inventories

A principal risk in our industry is the rapid rate of obsolescence of
products due to changes in technology or other economic factors. We had total
provisions for inventory loss under ROC GAAP of NT$2,587 million in 2001 and
NT$2,929 million (US$84.4 million) in 2002 due to obsolete or slow moving
items. Our financial and production management evaluates historical experience,
current trends and projected sales volumes to identify products or classes of
products that are at risk for obsolescence or are slow moving. Our projected
sales volumes are based on projected demand information provided by our
customers and our estimates of general market conditions.

We recorded a production variance under U.S. GAAP of NT$1,512 million
(US$43.6 million) to our cost of goods sold in 2002. The capacity variance was
calculated based on a standard production capacity of 100%. Our standard
costing system is updated every six months for all components of our fixed
production costs. The primary fixed cost in our production process is
depreciation.

Our
provision for inventory loss under ROC GAAP in 2002 is approximately
NT$1,512 million higher when compared with the corresponding provision under
ROC GAAP, because the production variance was allocated between cost of goods
sold and inventory on a U.S. GAAP basis.

Stock Appreciation Right Program

Our stock appreciation right (SAR) program, which is based on the market
value of our shares, is a key component of the compensation package for many of
our employees. The costs related to the

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SAR program are recorded as costs of
goods sold or as administrative expenses, depending upon the employees
responsibilities.

We record expenses related to the SAR program under ROC GAAP in the period
in which the rights vest. As of December 31, 2002, approximately 72.2 million
SAR rights were vested. The exercise price was NT$17.98 and NT$33.86 for 15.6
million and 56.6 million of the shares, respectively. We have the right to and
we have periodically revised the exercise prices under the SAR program at our
discretion, although we currently have no intention to further revise the
exercise prices. As discussed further below, a portion of the SAR obligation
recorded for vested rights is based on the excess, if any, of the average fair
market value of our underlying shares compared with the exercise price for a 30
day period prior to the end of the reporting period.

We have entered into a derivative contract to hedge our risk related to
the SAR program. We receive or pay the benefit or obligation represented by the
fair market value of our share price in NT dollars divided by the then
prevailing exchange rates between the NT dollar and the U.S. dollar compared
with the strike price in the contract. The current expiration date of the
contract is May 5, 2004. We can settle portions of the contract at our
discretion up to the expiration date. Under ROC GAAP, we allocate a portion of
the gains or losses from the derivative contract to SAR expense by correlating
the number of rights in the SAR plan that have vested with the same number of
shares referenced in the derivative contract. We record 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. We record as investment gains or losses changes in the value of the
derivative
contract that do not correlate with vested rights. Therefore, to the
extent the employees exercise price on vested rights exceeds the fair market
value of our shares, a portion of the derivative obligation is not recorded. To
the extent that employees vest in rights for which the exercise price exceeds
the fair market value of our shares, the obligation recorded related to the
derivative contract may be reduced, having a positive impact on our earnings.
As of December 31, 2002, the unrecorded obligation related to the derivative
contract was NT$503 million (US$14.5 million). In April
2003, we recorded the additional obligation on a ROC GAAP basis
in the amount of NT$719 million based on market price of the underlying
shares of NT$5 per share at that time. Furthermore, since the strike
price of the derivative contract is in U.S. dollars, changes in the value of
the contract may not correlate with changes in our obligation under the SAR
program.

Under U.S. GAAP, the derivative contract is marked to market through
earnings at each reporting date as non-operating gains or losses. The
obligation is recorded based on the excess, if any, of the fair market value of
the underlying shares over the exercise price using a graded vesting approach
to record the expense.

Employee Stock Options

We
have issued employee stock options during the year. In accordance
with U.S. SFAS No. 123, Accounting for Stock-Based
Compensation, we are required to disclose pro forma information
regarding net income and earnings per share. The pro forma net income
is determined as if the fair value of our employee stock options was
included as compensation expense for the year. In estimating the fair
value of the stock options, the Black-Scholes option valuation model
is used. The use of the model requires the input of
subjective assumptions. In assessing the required inputs, we use
historical records wherever available such as past dividend yields
and historical volatility. Since this is our first issue of employee
stock options, we do not have actual experience regarding when
employees could
be expected to exercise their bonds. As such, we use mid-points for
the estimation of expected life of options.

Net Deferred Tax Assets

Under ROC GAAP, our income tax expense is recorded based on calculations
using the statutory tax rate of each entitys jurisdiction of incorporation. As
of December 31, 2002, our deferred tax assets exceeded our deferred tax
liabilities by NT$6,762 million (US$194.9 million), and we recorded a valuation
allowance of NT$4,816 million (US$138.8 million) against our tax assets
resulting in a net deferred tax asset of NT$1,946 million (US$56.1 million).
Our deferred tax assets relate principally to income tax credits that expire
between 2003 and 2005. The realization of these assets is based upon estimates
of future taxable income. In preparing estimates of future taxable income, we
have used the same assumptions and projections utilized in our internal 5-year
forecasts. Based on these projections, we estimate that a portion of these tax
credits will be fully utilized prior to their expiration. We expect to achieve
future earnings through the expansion of our business, which includes Fab III.
We cannot assure you that we will be able to generate sufficient additional
income to fully utilize our deferred tax assets. In particular, an additional
valuation allowance may be required to the extent we are not able to fully
utilize our deferred tax assets.

Undistributed earnings generated after 1997 are subject to 10% tax in
compliance with the ROC Income Tax Law. Under U.S. GAAP, we measure our income
tax expense, including the tax effect of temporary differences, using a tax
rate that includes the tax on undistributed earnings. Our income tax expense is
significantly different on a U.S. GAAP basis due to this difference. In
addition, we recorded

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an increase of the valuation allowance under U.S.
GAAP, compared with ROC GAAP, of NT$2,107 million
(U.S.$60.7 million) as of December 31, 2002.

Cost Method Investments

Under ROC GAAP, the unrealized losses on marketable equity securities held
for short-term investment are recorded as investment loss in the statement of
operations and the unrealized gains are not recognized. Unrealized losses on
marketable equity securities held for long-term investment are reported as a
reduction of shareholders equity and the unrealized gains are not recorded.
Non-marketable equity securities are recorded at cost. In determining if and
when a cost method investees decline in value below cost is not recoverable,
we evaluate the market conditions, offering prices, trends of earnings, price
multiples and other key measures for our investments accounted for at cost.
When such a decline in value is deemed to be a permanent diminution, we
recognize an impairment loss in the current period operating results to the
extent of the decline. As of December 31, 2002, we recorded an unrealized loss
of NT$979 million (US$28.2 million), which was primarily attributable to our
investment in Tower Semiconductor.

U.S. GAAP requires that certain investments be classified as trading
securities, available-for-sale securities or held-to-maturity securities. We
did not have any investments classified as trading securities or
held-to-maturity securities during the periods presented. U.S. GAAP further
requires that available-for-sale securities be reported at fair value, with
unrealized gains and losses excluded from earnings but reported in a separate
component of shareholders equity until they are sold. If an other than
temporary decline in value of a long-term investment exists, the unrealized
loss should be charged to the statement of operations. In determining if and
when a decline in value below cost is an other than temporary decline in value,
we evaluate the market conditions, offering prices, trends of earnings, price
multiples and other key measures for our investments accounted for at cost.
When such a decline in value is deemed to be an other than temporary decline in
value, we recognize an impairment loss in the current period operating results
to the extent of the decline. As of December 31, 2001 and
December 31, 2002, we believe the decline
in the market value of our investment in Tower Semiconductor met U.S. GAAPs
more prescriptive threshold of an other than temporary decline in value and as
a result we recorded the unrealized loss to income.

Fixed Assets

We evaluate our property, plant, and equipment for impairment whenever
indicators of impairment exist. Our current estimates as of December 31, 2002
support the recoverability for approximately NT$74,353 million (US$2,142.7
million) of long-lived assets. Our recoverability estimates are based on
current volume and pricing levels.

Derivatives

Other than the derivative contract relating to the SAR program, we have
another significant derivative contract outstanding. On May 5, 1998, we issued
US$150 million aggregate principal amount of zero coupon convertible
debentures, which were privately placed with a financial institution. We
subsequently entered into a call option contract with the financial institution
with the underlying reference securities being the convertible debentures. The
terms of the contract provided that the notional amount of US$150 million is
divided into fifteen options of US$10 million each, and that we are entitled to
exercise the options separately during the life of the contract, but at a
minimum of two times and a maximum of fifteen times. We simultaneously entered
into currency swaps, based on the notional amount of the debt, converting
Japanese yen into New Taiwan dollars and New Taiwan dollars into United States
dollars. Subsequently, the option contract and the currency swaps were combined
into a single contract. We exercised two options on January 22, 2000 and five
options on June 26, 2000, respectively. In May 2003, we settled the contract by paying US$13 million (NT$456 million).

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Under ROC GAAP, we do not account for the option portion of this compound
derivative until the options are exercised. In addition, we record a premium or
discount upon entering into currency swaps, which are subsequently amortized,
and we record subsequent changes in spot rates underlying the contract during
reporting periods. Gains and losses are recorded as foreign exchange gains and
losses. As of December 31, 2002, the outstanding portion of this compound
derivative contract had a negative fair value of US$14.534 million (NT$504
million), and the carrying amount had a negative fair value of US$10.3 million
(NT$359 million).

Under U.S. GAAP, all of our derivative contracts, including embedded
derivative contracts, are marked to market
through earnings at each reporting date as non-operating gains or losses.
Accordingly, as of December 31, 2002, the carrying value of all derivative
contracts was at fair value. Please see Item 11. Quantitative and Qualitative
Disclosures About Market Risk for information on how we estimate the fair
value of our derivatives contracts.

We also enter into other derivative contracts in the ordinary course of
business. We believe such other derivative contracts do not have a significant
impact on our financial condition and results of operations. We do not believe
that we are exposed to more than a nominal amount of credit risk as the
counterparties to our derivative contracts parties are established,
well-capitalized financial institutions.

Allowance for Doubtful Accounts

We evaluate the collectibility of our accounts receivable based on a
combination of factors. In circumstances where we are aware of a specific
customers inability to meet its financial obligations to us (e.g., bankruptcy
filings, substantial downgrading of credit ratings), we record a specific
reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount we reasonably believe will be collected. For all other
customers, we recognize reserves for bad debts based on the length of time the
receivables are past due, ranging from 3% for current amounts to 100% for
amounts more than 365 days past due based on our historical experience. If
circumstances change (i.e., higher than expected defaults or an unexpected
material adverse change in a major customers ability to meet its financial
obligations to us), our estimates of the recoverability of amounts due to us
could be reduced.



|C. |  | Research and Development, Patents and Licenses, etc.
|-- |  | ----------------------------------------------------

Research and Development

We believe that research and development is critical to our future
success, and we are committed to maintaining our level of research and
development expenditures. We incurred expenses of NT$3,144 million in 2000,
NT$3,825 million in 2001 and NT$3,806 million (US$109.7 million) in 2002 on
research and development, or 9.4%, 17.6% and 23.1% of net sales revenue in
those periods, respectively. On an ROC GAAP basis, royalty payments are
included in research and development expense. We have a long-term objective of
spending no less than 10% of net sales revenue on research and development.

As of December 31, 2002, we had 652 employees engaged in research and new
product development activities. We review our new product development plans at
quarterly strategic meetings, utilizing the knowledge gained from close
relationships with our key customers to determine future product requirements
of the semiconductor industry. We also engage research firms that follow the
semiconductor industry and publish data on the size of the markets and their
historical and projected growth rates. These firms also generally publish a
competition and market share profile for each market. By combining these
sources of product development information, we endeavor to position our next
generation of products competitively.

Through our research and development efforts, we have developed core
design technologies in the following five areas: memory, system logic,
communications, audio and video. In addition to our know-how in each of these
core design technologies, we believe that one of our strengths is our ability
to integrate these various core technologies, enabling us to develop and
manufacture integrated circuit

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products for use in products with multimedia
applications. Examples of products with these multimedia applications include
video conferencing and voice input/synthesis equipment.

New Product Development

Examples of new products under development or recently developed are as
follows:

Mask ROM



| |  |  | new 64/128/256Mb product designs for Game Boy Advance;             
| | - |  | -------------------------------------------------------------------
|
| |  |  | introduce cost-effective two-bit per cell manufacturing technology;
|
| |  |  | introduce one time programmable product; and                       
|
| |  |  | a new low pin-count design for 64Mb products.                      

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 0.12 micron cost-effective two-bit per cell manufacturing technology; and                                                                                     
|
| |  |  | a 0.11 micron high endurance PAC-AND cost-effective manufacturing technology.                                                                                   

EPROM



| |  |  | a 0.25 micron, two-bit per cell, page mode high-speed model,
64/128Mb multiple time programmable product.
| | - |  | ---------------------------------------------------------------------------------------------------------

Memory Card



| |  |  | 2Mb to 64Mb ROM multimedia card;                    
| | - |  | ----------------------------------------------------
|
| |  |  | 16/32/64Mb one-time-programmable multimedia card;   
|
| |  |  | 64/128/256Mb SD ROM card;                           
|
| |  |  | 64/128/256Mb memory stick ROM card; and             
|
| |  |  | flash multimedia card and flash secure digital card.

Multimedia Products



| |  |  | a BluetoothTM chipset for communication devices;                                            
| | - |  | --------------------------------------------------------------------------------------------
|
| |  |  | an intelligent multiple-port gigabit ethernet switch controller;                            
|
| |  |  | a sound generator for cellular phone ring tones;                                            
|
| |  |  | a highly integrated controller for flat panel display and plasma display panel applications;
|
| |  |  | a highly integrated controller for digital televisions;                                     

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| |  |  | an audio control chip featuring long-time recording;                                                                                                                             
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a low-power consumption digital still camera control chip;                                                                                                                       
|
| |  |  | an ultra-high resolution 16-million pixel control chip for digital still camera applications;                                                                                    
|
| |  |  | 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; and              
|
| |  |  | an integrated chipset combined
with a 32-bit ARM7TM microprocessor
and embedded flash and mixed signal for optical disk drive, internet
appliance and laser printer applications.

SOC



| |  |  | 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;
|
| |  |  | introduce 0.18/0.15 micron manufacturing technology for low power
consumption embedded flash product;                                                                                                                                                                                                                                   
|
| |  |  | introduce new process technology for MEMS applications;                                                                                                                                                                                                                                                                                 
|
| |  |  | develop embedded EEPROM intellectual property for smart card applications;                                                                                                                                                                                                                                                              
|
| |  |  | introduce low-end derivative processes for consumer products; and                                                                                                                                                                                                                                                                       
|
| |  |  | new technology on FPGA logic process.                                                                                                                                                                                                                                                                                                   

Intellectual Property

A number of elements of our products and technological processes are
proprietary in nature, and are owned by us or utilized under license from
others. We also have entered into patent license or cross-license agreements
with other companies such as IBM, AT&T Corporation (AT&T), Agere Systems Inc.
(Agere) and Lemelson Medical, Education & Research Foundation Limited
Partnership. We own patents for a number of our mask ROM, flash, EPROM and
logic products on processes in various countries, including the United States
and Taiwan. As of December 31, 2002, we had a total of 229 U.S., 286 ROC, 8
Japanese and 9 European patents for products and technology developed through
our own efforts or joint research and development efforts with other companies.
Most of our patents expire between 2008 and 2019.

As of December 31, 2002, we had over 2,020 patent applications pending in
various jurisdictions, including the United States, Taiwan, Japan and Europe.
We intend to continue to seek patent protection on significant new inventions.

We license the manufacturing technology underlying a variety of our memory
products, including mask ROM devices. We earned in royalties approximately
NT$85 million in 2000, NT$77 million in 2001 and NT$34 million (US$1.0 million)
in 2002.

We have registered 17 types of trademarks including MXIC, Macronix,
MX and MTP EPROM. We have a total of 85 trademark registrations granted and
23 applications pending in various jurisdictions including Australia, China,
European Union, India, Japan,
Korea, Singapore, Taiwan and the United States. The trademarks are used in
our core business including integrated circuits, computer chips, electronic
circuits and services of designing, manufacturing and testing of integrated
circuit

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related products. As is the case with many companies in the
semiconductor industry, we have from time to time experienced incidents of
patent infringement of our intellectual property rights and illegal copies of
our products, including some incorporating our trademarks. None of these,
however, has had any material adverse effect upon our results of operations.

To decrease the risk of infringing patented technologies of others, we
have procedures to evaluate related patents as part of our product development
process. In addition, we have retained various patent counsel to review and
document our own patent monitoring and enforcement process. Where appropriate,
we will enter into license or cross license arrangements with existing patent
holders. These payments amounted to NT$217 million in 2000, NT$l76 million in
2001 and NT$785 million (US$22.6 million) in 2002. In spite of our efforts to
decrease the risk of infringement, we are the subject of several patent
infringement claims. See Item 8. Financial Information  A. Consolidated
Statements and Other Financial Information  Legal Proceedings.



|D. |  | Trend Information
|-- |  | -----------------

Industry Trend

General

Semiconductors are critical components used in a wide and growing array of
applications. In recent years, semiconductor performance has improved markedly
and the size and cost of semiconductors have decreased. As a result,
semiconductors have expanded from their original primary applications, first in
mainframe and then in personal computers, to other applications including
consumer electronics, telecommunications systems, automation and control
systems and security applications. According to a report published by Gartner
Dataquest on November 15, 2002, semiconductors used in communications
electronics, consumer electronics and data processing electronics sectors are
expected to grow at an average of 8.9%, 13.1% and 10.6% per year from 2001 to
2006, respectively.

Historically, personal computers have been the principal application for
semiconductors. However, as the penetration rate of personal computers in many
developed countries exceeds 70%, and as there is a general lack of new
computing intensive applications to require the purchase of newer and more
powerful personal computers, future growth of the personal computer market is
expected to be driven more by replacement cycles than by expanded new markets.
Prior to 2001, the segment that had enjoyed the most rapid growth in
semiconductor demand was the communications market, resulting from growth in
demand for cellular and wireless phone products and significant broadband
internet infrastructure investments worldwide. Continued growth in wireless
subscribers and the initial deployment of next-generation mobile networks
resulted in rapid demand growth for semiconductors in 2000. In addition,
potential new products, including handheld computing devices, wireless
communications devices and digital audio devices, are expected to contribute to
the growth in the communications market. These new applications require
semiconductors of increasing power and decreasing size. This is expected to
drive innovation and product volume growth. For example, next generation mobile
phone handsets, such as third generation mobile phones and smartphones, will
have features which support more data processing applications, multimedia
applications and internet applications, and these applications will drive the
consumption of high performance logic and memory products, such as high-density
mask ROM and flash products.

Demand for STBs is expected to be another driver for growth in the market
for communications- related semiconductor products, as existing cable
infrastructure is expected to become a platform, for residential and commercial
broadband internet access in the United States and other countries.

The evolution and integration of computing and communications devices,
particularly in the consumer market, is another significant new development.
The longer term proliferation of new digital

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consumer electronics appliances
such as DVD players, flat panel digital televisions, digital cameras, MP3
digital audio players, internet connecting video game consoles, electronic
dictionaries and electronic books are expected to spur substantial new demand
for semiconductors.

After a downturn exacerbated by the economic crisis in the Asia Pacific
region, the semiconductor industry experienced a recovery in 1999. Demand was
strong across the industry, supported by a recovery in demand from Asia. By the
end of 2000, the overall semiconductor market experienced another down cycle,
caused by weak global macroeconomic conditions and slower growth in the
computing and communications markets. Since the beginning of 2001, we have
experienced excess capacity, overproduction, significant inventory buildup and
decreases in average selling prices in the semiconductor industry. Gartner
Dataquest has forecast in a report published on November 15, 2002 that
semiconductor revenue worldwide will remain essentially unchanged between 2001
and 2002 with an estimated growth rate of 0.5%. In addition, Gartner Dataquest
has forecast marginal positive growth in 2003 and a strong recovery is expected
in 2004 with an approximately 26.2% annual market revenue growth for the
semiconductor industry.

Semiconductor Products

Semiconductors may be classified based on the type of technology used:
analog, digital or mixed. Analog semiconductors collect, monitor, condition and
transform analog signals into electrical current, and vice versa. Digital
semiconductors store information from digital signals or process data. Mixed
signal semiconductors combine analog and digital devices to process both analog
signals and digital data.

Digital semiconductors that store information are referred to as memory
products and tend to be standardized products that are differentiated by cost,
performance, capacity, size, power consumption and speed. Digital
semiconductors that process data are referred to as logic devices and require
greater intellectual property and more sophisticated design.

Memory Products.Memory products are classified as either volatile
memories, which lose their data content when power supplies are switched off,
or nonvolatile memories, which retain their data content without the need for
constant power supply. Volatile memories can be used to store data in virtually
all computer systems, from large and mid-range computers to personal computers
and workstations. The primary volatile memory devices are dynamic random access
memory (DRAM) devices. Static random access memory (SRAM) devices are
another type of volatile memory devices that are faster, more complex and
expensive, but less efficient, than DRAM devices.

Nonvolatile memories are typically used to store program instructions that
control the operation of microprocessors and electronic systems. There are four
basic types of nonvolatile memories: ROM, EPROM, EEPROM and flash.

ROM:The earliest and most basic type of nonvolatile memory is the
read-only memory (ROM) which is permanently encoded when produced and cannot
be reprogrammed after it is fabricated. Mask ROM is the least expensive
measured by cost per Mb and the most cost-effective nonvolatile memory
currently produced. Mask ROM is widely applied in the video game and printer
applications given its non- erasable nature and cheap unit cost. Long-term
proliferation of new consumer electronic products, such as electronic books,
electronic dictionary and multimedia cards for third generation phone
applications will increase the consumption of mask ROM.

EPROM and EEPROM: EPROM 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. Despite this costly
and time-consuming erasure procedure, EPROM has achieved market acceptance in a
wide variety of applications.

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System manufacturers generally prefer nonvolatile memory devices that can
be reprogrammed efficiently in the system to achieve several important
advantages in terms of cost, speed, customization and data storage functions,
such as storage of phone numbers for speed dialing in a cellular phone. These
market opportunities were initially addressed by electronically erasable
programmable ROM (EEPROM) devices, which could be electronically altered
while remaining in the system. However, EEPROM has remained considerably more
expensive than EPROM for a given amount of storage capacity or density. As a
result, their market acceptance has been limited, and the overall EEPROM market
still remains substantially smaller than the EPROM market.

Flash:Flash products bridge a distinct product gap between EPROMs and
EEPROMs. Like EEPROM, flash can be erased and reprogrammed without being
removed from the system in which the chip is installed. However, the cost of
flash products is substantially less than that of EEPROMs. In addition, flash
products are smaller in size and have lower power consumption rates than RAMs.
With flash integrated circuits, the user is able to erase selected blocks of
data on a chip in a flash, instead of byte by byte, while the device remains
in the system. The flash market has grown as customers increasingly substitute
flash for EPROM and the more expensive EEPROM. As flash continues to increase
in performance and decrease in cost, the applications for flash are expected to
expand rapidly. Flash products are competitive with DRAMs in speed, while
providing the benefits of nonvolatile memory not offered by DRAMs. Flash demand
has increased significantly in recent years, driven by growing usage in
cellular phones, VCD/DVD players, STBs, digital still camera and networking
devices. The market is expanding in both the number of key applications and
memory usage per system.

Logic Products.Logic devices process digital data to control the
operation of electronic systems. The largest segment of the logic market,
standard logic devices, includes microprocessors, microcontrollers and digital
signal processors (DSPs). Microprocessors are the central processing units of
computer systems. Standard devices are intended to be used by a large group of
systems designers for a broad range of applications. Consequently, standard
devices usually contain more functions than are actually required and,
therefore, may not be cost-effective for some applications.

In addition to standard logic devices, there are also ASICs which are
custom-designed semiconductors. These devices include a broad range of
full-custom, semi-custom and application-specific standard product logic
devices, which have been developed for a wide variety of applications. These
devices are typically designed to meet particular customer requirements.
Compared to memory markets, logic device markets are much more differentiated
and dependent upon intellectual property and advanced product design skills.

The global market for logic products differs significantly from the
various memory product markets, due largely to the special nature of these
products, as they are often designed for specific applications. The production
of these products tends to foster closer relationships with customers,
resulting in early knowledge of their evolving requirements and opportunities
to access their markets for other products. As a result, the pricing for these
products reflects specific types of system solutions required by the customer
and the nature of the customer relationship.

System-on-a-chip.SOC refers to a process of combining the functions of
several integrated circuits on a single chip. SOC products are generally
faster, smaller and use less power than a device employing independent
integrated circuits. An SOC generally includes all of a systems components,
including a microprocessor, linear components, control components, power
management and a variety of embedded memory. They differ from ASIC devices in
that ASICs generally adapt a particular chip function to a specific product
without integrating other chip functions onto the silicon.

The shift in the growth of semiconductor use from personal computers to
communications and consumer electronics, such as cellular phones and personal
digital assistants, which require low power consumption and smaller size, has
given rise to increasing demands for SOC solutions. Furthermore, convergence of
cellular phones and personal digital assistants will further increase the
complexity and functionality of semiconductors and this trend will continue to
drive the demands for SOC solutions.

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Producers of SOC designs and wafers require access to both manufacturing
capacity and product designs. In particular, they need to combine an ability to
design an SOC product, which requires substantial design experience, with the
ability to manufacture the product at a competitive price. SOC manufacturers
generally possess existing product portfolios that they use to design their own
ASICs or collaborate with other producers.




ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES



|A. |  | Directors and Senior Management
|-- |  | -------------------------------

The following table sets forth the name of each director, supervisor and
executive officer, position with us, the date of initial appointment
and age as of May 31, 2003. We do not have any executive officers other
than the directors, supervisors and executive officers listed below.

|                 |  |                                       |  |                                         |  |     |    | 
|---------------- |  | ------------------------------------- |  | --------------------------------------- |  | --- | -- | 
|Name             |  | Position with Our Company             |  | Date of Initial Appointment             |  | Age
|                 |  |                                       |  |                                         |  |    
|Ding-Hua Hu      |  | Executive Director and Chairman       |  | November 25, 1989                       |  |     | 61 | 
|Miin Wu          |  | Executive Director and President      |  | November 25, 1989 and
September 1, 1989 |  |     | 54 | 
|H. C. Chen(1)    |  | Executive Director                    |  | July 18, 1992                           |  |     | 64 | 
|An Cheng(2)      |  | Director                              |  | April 19, 2001                          |  |     | 39 | 
|Ing-Jiunn Hai(2) |  | Director                              |  | April 19, 2001                          |  |     | 54 | 
|Hong-Hui Chen(3) |  | Director                              |  | November 27, 1995                       |  |     | 69 | 
|Dang-Hsing Yiu   |  | Director and Chief Operating Officer  |  | June 5, 1995 and June 29, 1998          |  |     | 50 | 
|C.Y. Lu(4)       |  | Director and Chief Technology Officer |  | April 18, 2003 and October 1, 1999      |  |     | 53 | 
|Y. S. Tan        |  | Director and Vice President           |  | June 29, 1998 and February 19, 1990     |  |     | 49 | 
|Raymond S. Mak   |  | Director and Vice President           |  | June 29, 1998 and September 1, 1995     |  |     | 52 | 
|Wen-Lung Lee(3)  |  | Supervisor                            |  | June 5, 1995                            |  |     | 53 | 
|Roger Chu(2)     |  | Supervisor                            |  | July 18, 1992                           |  |     | 55 | 
|Ping Tien Wu     |  | Supervisor                            |  | November 27, 1993                       |  |     | 61 | 
|Cheng Yi Fang    |  | Supervisor                            |  | April 19, 2001                          |  |     | 61 | 
|Paul Yeh         |  | Associate Vice President in charge    |  | July 1, 2001                            |  |     | 46 | 
|                 |  | of Finance Center                     |  |                                         |  |     |    | 



---

|(1) |  | Nominees of Hung Chih Investment Corporation.                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Nominee of Delta Electronics Ltd.                                                                                                                                                                                                                                                                              
|   
|(3) |  | Nominee of PICVUE Electronics Inc.                                                                                                                                                                                                                                                                             
|   
|(4) |  | Nominee of Hui Yin Investment,
Ltd. As of April 25, 2002, Mr. J.P. Peng
resigned from office and Mr. Fuja Shone replaced Mr. Peng as the nominee of
Hui Yin Investment, Ltd. As of April 18, 2003, Mr. Shone resigned from
office and Mr. C.Y. Lu replaced Mr. Shone as the nominee of Hui Yun
Investment, Ltd.

Ding-Hua Huis an executive director and has been our chairman and a
director since our inception in 1989. He is also the chairman of Champion
Consulting Group, Inc., a shareholder of our company. Dr. Hu has additionally
served as the chairman of Zyxel Communications Corporation as well as a
director of Accton and Maxspeed Corporation. He received a B.S. degree in
electrical engineering from National Taiwan University, an M.S. degree in
electronic engineering from the National Chiao Tung University in Taiwan, an
M.S. degree in Management from Stanford University and a Ph.D. in electrical
engineering from the University of Missouri.

Miin Wuis an executive director and our president. Mr. Wu has been one of
our executive officers since our inception in 1989. He has over 20 years of
experience in the semiconductor industry. Mr. Wu received both a B.S. degree
and an M.S. degree in electrical engineering from National

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Cheng-Kung
University in Taiwan as well as a M.S. degree in material science and
engineering from Stanford University.

H.C. Chenhas been a director since 1992. He has also been the president
of Chin Ho Fa Steel & Iron Consent Order, Ltd. for over six years. He received
a B.S. degree in economics from Soochow University.

An Chenghas been a director since 2001. Mr. Cheng is vice president of
the video display business unit for Delta Electronics Ltd. Mr. Cheng holds a
B.S. degree and an M.S. degree in electrical engineering from the University of
Santa Clara.

Ing-Jiunn Haihas been a director since 2001. Mr. Hai is the head of
global strategic planning of Delta Electronics Group, one of our shareholders.
Before joining Delta Electronics Group, Mr. Hai was the country president of GE
Capital in Taiwan for several years. He also served in key positions of several
international financial institutions such as Citibank, JP Morgan and Lehman
Brothers. Mr. Hai holds a B.A. degree from National Taiwan University and an
M.A. degree in international business management from the University of Texas
in Dallas.

Hong-Hui Chenhas been a director since 1995. He has also been the
chairman of PICVUE Electronics, Ltd. since 1994. PICVUE Electronics Ltd. is a
shareholder of our company. He received a B.S. degree in agricultural economics
from National Taiwan University.

Dang-Hsing Yiuhas been a director since 1995 and our chief operating
officer since 1998. Mr. Yiu has been an executive officer of our company since
1990. He has also worked in
the semiconductor and technology related industries since 1979. Mr. Yiu
received a B.S. degree in electrical engineering from National Taiwan
University and an M.S. degree in electronic engineering from the University of
California, Berkeley. He represents us on the board of directors of Chantek.

C.Y. Luhas been a director since 2003. He has been the chief technology
officer since 1999. Mr. Lu also is the Chairman and Chief Executive Officer of
Ardentec Corporation. He has over 20 years experience in the semiconductor and
technology related industries. Mr. Lu received a Ph.D in physics from Columbia
University.

Y. S. Tanhas been a director since 1998 and a vice president since 1990.
He received a B.S. degree in electrophysics from National Chiao Tung University
in Taiwan.

Raymond S. Makhas been a director since 1998 and a vice president since
1995. He has also served as chairman of Macronix America, our United States
subsidiary, since 1995. Before that, he was an executive officer of Macronix
America from 1987 to 1995. Mr. Mak was the engineering manager of VLSI
Technology Inc. in the United States from 1982 to 1987. He received a B.S.
degree in electrical engineering from San Francisco State University.

Wen-Lung Leehas been a supervisor since 1995, and has also been the
president of Yung-Kwang Hwa Steel, Inc. since 1985. He also serves as a
director of Hsin Steel, Chun Yuan Steel, Innova Technology, Inc., Technology
Associates Corp. and Tech Alliance Corp. Mr. Lee graduated from Shing-Wu Junior
College in Taiwan.

Roger Chuhas been a supervisor since 1992. He is also the financial
controller of Delta Electronics, Ltd. and has been with that company since
1986. He received a B.S. degree in economics from the Chinese Cultural
University in Taiwan.

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##### Table of Contents



Ping Tien Wuhas been a supervisor since 1993. Mr. Wu is also president of
Trace Storage Technology Corporation, and before that, was president of Asia
Chemical Corporation. He received a Ph.D. in physics from the University of
Iowa.

Cheng Yi Fanghas been a supervisor since 2001. Mr. Fang is a director of
Mercuries & Associates Ltd. and president of Avnet Mercuries Company. He
received a B.A. degree from the business administration department of National
Taiwan University.

Paul Yehhas been the associate vice president in charge of our finance
center since July 2001. Prior to that, he was the senior director of our
finance center from 1995 to June 2001. He received an M.B.A. degree from
National Chengchi University in Taiwan and a B.S. degree in management science
from National Chiao Tung University in Taiwan.

The business address for all of our directors and senior management is our
principal executive offices at No. 16 Li Hsin Road, Science-Based Industrial
Park, Hsinchu, Taiwan, Republic of China, except that the business address for
Raymond Mak is Macronix America, Inc., 1338 Ridder Park Drive, San Jose,
California 95131.



|B. |  | Compensation
|-- |  | ------------

The following table sets forth cash remuneration paid to our individual
directors, executive officers and supervisors in 2002:

|                   |  |                                                      |  |                 |            | 
|------------------ |  | ---------------------------------------------------- |  | --------------- | ---------- | 
|                   |  |                                                      |  | Total          
|Name               |  | Position with our Company                            |  | compensation(1)
|                   |  |                                                      |  |                
|Ding-Hua Hu        |  | Executive Director and Chairman                      |  |                 | 4,785,000  | 
|Miin Wu            |  | Executive Director and President                     |  |                 | 4,380,000  | 
|H.C. Chen          |  | Executive Director                                   |  |                 | 113,000    | 
|Kao-Hsiung Wang(2) |  | Director                                             |  |                 | 25,000     | 
|Maria D.H. Lu(3)   |  | Director                                             |  |                 | 66,000     | 
|An Cheng           |  | Director                                             |  |                 | 100,000    | 
|Ing-Jiunn Hai      |  | Director                                             |  |                 | 100,000    | 
|Hong-Hui Chen      |  | Director                                             |  |                 | 100,000    | 
|Dang-Hsing Yiu     |  | Director and Chief Operating Officer                 |  |                 | 3,800,000  | 
|J. P. Peng(4)      |  | Director and Vice President                          |  |                 | 1,155,000  | 
|Fuja Shone(5)      |  | Director and Vice President                          |  |                 | 2,063,000  | 
|Y. S. Tan          |  | Director and Vice President                          |  |                 | 3,413,000  | 
|Raymond S. Mak     |  | Director and Vice President                          |  |                 | 638,000    | 
|Wen-Lung Lee       |  | Supervisor                                           |  |                 | 100,000    | 
|Roger Chu          |  | Supervisor                                           |  |                 | 100,000    | 
|Ping Tien Wu       |  | Supervisor                                           |  |                 | 100,000    | 
|Cheng Yi Fang      |  | Supervisor                                           |  |                 | 100,000    | 
|Paul Yeh           |  | Associate Vice President in charge
of Finance Center |  |                 | 2,237,000  | 
|                   |  |                                                      |  |                 |            | 
|Total              |  |                                                      |  |                 | 23,375,000 | 
|                   |  |                                                      |  |                 |            | 



---

|(1) |  | Includes amounts to cover expenses associated with attending board
meetings or duties as a supervisor.
|--- |  | ------------------------------------------------------------------------------------------------------
|   
|(2) |  | Resigned from office effective April 2, 2002.                                                         
|   
|(3) |  | Resigned from office effective
November 26, 2002.                                                     
|   
|(4) |  | Resigned from office effective April 25, 2002.                                                        
|   
|(5) |  | Resigned from office effective
April 18, 2003.                                                        



|C. |  | Board Practices
|-- |  | ---------------

Our shareholders elect the members of our board of directors. Our board of
directors is currently composed of 10 directors, three of whom are members of
our executive director committee. The chairman of our board of directors is
elected from among our executive directors. The chairman of our board of
directors presides at meetings of our shareholders, meetings of our board of
directors and

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meetings of the executive director committee, and also represents
us in connection with external matters. Between meetings of our board of
directors, the executive director committee regularly exercises power and
authority on behalf of our board of directors in accordance with applicable
law, our articles of incorporation and resolutions adopted at shareholders
meetings and meetings of the board of directors. although we currently do not
have an audit committee or a remuneration committee, we are in the process of
evaluating our current governance structures.

All of our directors were elected April 19, 2001 for a three-year term.
Our board of directors appoints our executive officers. In accordance with the
ROC Company Law, our supervisors cannot concurrently serve as our directors,
executive officers or other staff members. We currently have four supervisors,
each of whom were elected in 2001 and serves a three-year term. Our
supervisors duties and powers include, but are not limited to, investigation
of our condition, inspection of corporate records, verification of statements
by our board of directors at shareholders meetings, calling of shareholders
meetings, representation of us in negotiations with our directors and giving
notification, when appropriate, to our board of directors to cease acting in
contravention of applicable law or regulation or our articles of incorporation
or resolution adopted at our shareholders meeting.



|D. |  | Employees
|-- |  | ---------

As of December 31, 2002, we employed 3,792 full time employees, of whom
503 were executive officers and administrators, 1,830 were engineers and
technicians and 1,459 were operators of machinery and equipment. Of all our
operators, we employed 180 persons from overseas. Approximately 24.8% of our
employees as of that date had undergraduate degrees, including approximately
1.3% who possessed doctoral degrees and approximately 23.5% who held masters
degrees. As of December 31, 2002, the average age of our employees was 31.0
years.

The following table sets forth, as of the dates indicated, the number of
our full-time employees serving in the capacity indicated:

|                                      |          |      |                         |       |  |      |       |       |  |  |       |       | 
|------------------------------------- | -------- | ---- | ----------------------- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                      |          |      | Year ended December 31,
|                                      |          |      |                        
|Position                              |          | 2000 |                         | 2001  |  | 2002
|                                      |          |      |                         |       |  |     
|Executive Officers and
Administrators |          |      | 697                     |       |  |      | 782   |       |  |  | 503   |      
|Engineers and Technicians             |          |      | 1,425                   |       |  |      | 1,424 |       |  |  | 1,830 |      
|Operations                            |          |      |                         |       |  |      |       |       |  |  |       |      
|                                      | Local    |      |                         | 1,434 |  |      |       | 1,332 |  |  |       | 1,279 | 
|                                      | Overseas |      |                         | 202   |  |      |       | 182   |  |  |       | 180   | 
|                                      |          |      |                         |       |  |      |       |       |  |  |       |      
|Total                                 |          |      | 3,758                   |       |  |      | 3,720 |       |  |  | 3,792 |      
|                                      |          |      |                         |       |  |      |       |       |  |  |       |      

Our future success will depend, in part, on our ability to continue to
attract and retain highly qualified technical, marketing, engineering and
management personnel. The competition for qualified engineers and managers with
experience in the semiconductor industry is particularly intense. We have had
considerable success in attracting engineers and managers of ROC origin working
in the United States to emigrate back to Taiwan but this success may not
continue. We have not experienced any strikes or significant work stoppages and
believe that our relations with our employees are good.

We believe that our management policies and comprehensive benefits to
employees have contributed to good employee relations and employee retention.
Our employee benefits include subsidized meals and housing, health insurance,
life insurance and education/training subsidies, as well as employee bonuses,
which often involve distributions in the form of common shares. We have also
recently introduced a stock performance-based employee bonus program. We also
have an employee pension plan under which we contribute an amount equal to 2%
of each employees annual salary to a pension fund deposited with the Central
Trust of China. We have a 15-member pension fund committee

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consisting of five
management representatives and 10 employee representatives to manage and
administer the fund. The pension fund reserve was approximately NT$589.5
million (US$17.0 million) as of December 31, 2002. We have completed construction of modern
athletic and recreational facilities for use by our employees in the fourth
quarter of 2002.

We have also established an employee benefit committee for implementing a
variety of employee programs including, among others, recreational activities,
special group travel programs, emergency assistance programs, maternity
assistance programs and holiday gift certificate programs.



|E. |  | Share Ownership
|-- |  | ---------------

The following table sets forth the personal share ownership of our
directors, supervisors and executive officers and their immediate families as
of May 31, 2003:

|                                                     |  |                  |  |                  |            |                 |  |                             |      |            |  |  |           |  |  |  |      |   |  | 
|---------------------------------------------------- |  | ---------------- |  | ---------------- | ---------- | --------------- |  | --------------------------- | ---- | ---------- |  |  | --------- |  |  |  | ---- | - |  | 
|                                                     |  |                  |  |                  |            | Share Ownership |  | Shares owned by Spouses and
|                                                     |  |                  |  |                  |            |                 |  | minor children             
|Title                                                |  | Name             |  | Number of Shares |            | Percentage      |  | Number of Shares            |      | Percentage
|                                                     |  |                  |  |                  |            |                 |  |                             |      |           
|Executive Director and Chairman                      |  | Ding-Hua Hu      |  |                  | 2,933,283  |                 |  |                             | 0.08 | %          |  |  | 4,928,066 |  |  |  | 0.13 | %
|Executive Director and President                     |  | Miin Wu          |  |                  | 30,832,711 |                 |  |                             | 0.83 | %          |  |  | 0         |  |  |  | 0.0  | %
|Executive Director                                   |  | H. C. Chen(1)    |  |                  | 4,328,906  |                 |  |                             | 0.12 | %          |  |  | 2,494,000 |  |  |  | 0.07 | %
|Director                                             |  | An Cheng(2)      |  |                  | 0          |                 |  |                             | 0.0  | %          |  |  | 375,703   |  |  |  | 0.01 | %
|Director                                             |  | Ing-Jiunn
Hai(2) |  |                  | 0          |                 |  |                             | 0.0  | %          |  |  | 0         |  |  |  | 0.0  | %
|Director                                             |  | Hong-Hui
Chen(3) |  |                  | 1,334,254  |                 |  |                             | 0.04 | %          |  |  | 800,552   |  |  |  | 0.02 | %
|Director and Chief Operating
Officer                 |  | Dang-Hsing Yiu   |  |                  | 19,072,119 |                 |  |                             | 0.51 | %          |  |  | 2,115,701 |  |  |  | 0.06 | %
|Director
and Chief Technology Officer                |  | C.Y. Lu(4)       |  |                  | 2,331,224  |                 |  |                             | 0.06 | %          |  |  | 0         |  |  |  | 0.0  | %
|Director and Vice President                          |  | Y. S. Tan        |  |                  | 4,073,159  |                 |  |                             | 0.11 | %          |  |  | 47,526    |  |  |  | 0.0  | %
|Director and Vice President                          |  | Raymond S. Mak   |  |                  | 6,430,638  |                 |  |                             | 0.17 | %          |  |  | 0         |  |  |  | 0.0  | %
|Supervisor                                           |  | Wen-Lung
Lee(3)  |  |                  | 4,651,511  |                 |  |                             | 0.12 | %          |  |  | 3,542,845 |  |  |  | 0.09 | %
|Supervisor                                           |  | Roger
Chu(2)     |  |                  | 50,877     |                 |  |                             | 0.0  | %          |  |  | 35,521    |  |  |  | 0.0  | %
|Supervisor                                           |  | Ping Tien Wu     |  |                  | 198,489    |                 |  |                             | 0.01 | %          |  |  | 0         |  |  |  | 0.0  | %
|Supervisor                                           |  | Cheng Yi Fang    |  |                  | 1,086,739  |                 |  |                             | 0.03 | %          |  |  | 360,895   |  |  |  | 0.01 | %
|Associate Vice President in charge
of Finance Center |  | Paul Yeh         |  |                  | 9,514,102  |                 |  |                             | 0.25 | %          |  |  | 43,060    |  |  |  | 0.0  | %



---



|(1) |  | Nominee of Hung Chih Investment Corporation.                                                                                                                                                                                                                                                                   
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Nominee of Delta Electronics Ltd.                                                                                                                                                                                                                                                                              
|   
|(3) |  | Nominee of PICVUE Electronics Inc.                                                                                                                                                                                                                                                                             
|   
|(4) |  | Nominee of Hui Yin Investment, Ltd. As of April 25, 2002, Mr. J.P. Peng
resigned from office and Mr. Fuja Shone replaced Mr. Peng as the nominee
of Hui Yin Investment, Ltd. As of April 18, 2003, Mr. Shone resigned
from office and Mr. C.Y. Lu replaced Mr. Shone as the
nominee of Hui Yin
Investment, Ltd.

Stock Plans

Stock Performance-Based Employee Bonus Plan

In April 1999, our board approved a program similar to a stock
appreciation rights plan under which our employees who are eligible to
participate would receive cash bonuses based on increases in the market price
of our common shares. Our board has authorized our chairman to use his
discretion to alter the terms of this plan, including the vesting period and
the amount of the bonus allocated to our employees. We initially allocated
61,179,500 shares upon the establishment of the plan. Rights to receive cash
bonuses under the plan are scheduled to vest with respect to 25% of the common
shares allocated to the plan on August 1 of each year, starting August 1, 2000
through 2002. In April 2002, our board of directors approved an
amendment to the plan, changing the vesting date for the final 25% to
August 1, 2002 from March 31, 2003. These rights to receive cash bonuses
will be forfeited for employees who discontinue their employment before the
scheduled vesting dates.

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Between the establishment of the plan and December 31, 2002, rights to
receive cash bonuses with respect to a total of 6,197,600 shares have been
forfeited, and rights to receive cash bonuses with respect to a net additional
17,227,048 shares were allocated under the plan as a result of stock dividends
made on the shares allocated to the plan, exercise of rights under the plan and
allocation of additional rights. As of December 31, 2002, 72,208,948 shares
were outstanding under the plan, rights to all of which were vested. We may from time to time increase the size of
the plan in the future to allocate additional stock appreciation rights.

U.S. GAAP requires us to account for this plan in accordance with
Accounting Principles Board
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees.
Under APB 25, we recognize compensation expense for the plan based on the
amount by which the quoted market value of our shares covered by the grant
exceeds the exercise price of the rights. Compensation determined in accordance
with the preceding sentence will be accrued as a charge to expense over the
vesting period during which the employee performs the related services. As a
result, the compensation expense adjustment under U.S. GAAP for this plan in
1999 was NT$245 million of additional expense. Due to the reversal of
compensation expense accrued on a ROC GAAP basis, we recorded an increase in
income adjustment of NT$598 million in 2000, NT$496 million in 2001 and NT$93
million (US$2.7 million) for 2002 for this plan under U.S. GAAP. Unlike U.S.
GAAP, ROC GAAP has no specific accounting provisions for stock appreciation
rights plans. For ROC GAAP reporting purposes, we do not recognize compensation
expense until the year in which such appreciation right vests. In 1999, no
rights vested and as a result, we did not recognize any compensation expense.
When the rights vest, we recognize compensation expense that is calculated
based on the difference between (a) the fair market value of our shares plus
additional costs related to the rights vested and (b) the aggregate exercise
price of the rights having vested in the period. We have entered into a number
of equity derivative contracts to cover the rights under the plan. We
recognized compensation expense for the stock appreciation rights under ROC
GAAP of NT$1,093 million in 2000, NT$345 million in 2001
and a gain of NT$21 million
(US$0.6 million) in 2002. See Item 5. Operating and Financial Review and
Prospects  A. Operating Results  U.S. GAAP Reconciliation  Stock
Performance-Based Employee Bonus Plan.

Share Option Plans

We
adopted two share option plans in November 29, 2001 and April 24, 2002,
respectively.

These share option plans provide that our officers and employees and those
of our subsidiaries may, at the discretion of our board of directors, be
granted options to purchase our common shares at an exercise price of the
reported closing price of our common shares traded on the Taiwan Stock Exchange
on the date the options are granted. According to the share option plan, upon
expiry of the second anniversary of the date the options are granted, up to 50%
of the granted options may be vested, and another 25% of the granted options
may be vested upon the expiry of each of the third anniversary and fourth
anniversary of the date the options are granted. Each vested option can be
exercised within a period of six years from the relevant date the options are
granted. Our board of directors will have complete discretion to determine
which eligible individuals are to receive option grants and the number of
shares subject to each grant.

Under the November 2001 share option plan, we granted 71,768,500, 560,000
and 1,507,000 share options at exercise prices of NT$22.8, NT$22.3 and NT$11.5
on January 16, 2002, May 6, 2002 and October 1, 2002, respectively. Under the
April 2002 share option plan, we granted 150,000,000 share options at an
exercise of NT$11.5 on October 1, 2002.




ITEM 7.     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



|A. |  | Major Shareholders
|-- |  | ------------------

The following table sets forth certain information, as of May 31, 2003,
with respect to the common shares of our company owned of record by our top
five shareholders and all directors, supervisors and executive officers as a
group:

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|                                                           |  |               |             |               |  |                     |      |  
|---------------------------------------------------------- |  | ------------- | ----------- | ------------- |  | ------------------- | ---- | -
|                                                           |  |               |             |               |  | Percentage of total
|                                                           |  | Number of     |             | outstanding  
|Name of Shareholder                                        |  | common shares |             | common shares
|                                                           |  |               |             |              
|Delta Electronics, Ltd.(1)                                 |  |               | 81,335,400  |               |  |                     | 2.2  | %
|National Stabilization Fund                                |  |               | 65,777,140  |               |  |                     | 1.8  | %
|Civil Servant Retirement Pension Fund                      |  |               | 54,114,940  |               |  |                     | 1.5  | %
|Postal Saving Fund                                         |  |               | 43,368,945  |               |  |                     | 1.2  | %
|Labor Retirement Fund Supervisory Committee                |  |               | 40,006,347  |               |  |                     | 1.1  | %
|Director, supervisors and executive officers as a group(2) |  |               | 100,584,780 |               |  |                     | 2.69 | %

---

|(1) |  | Messrs. Ing-Jiunn Hai and An Cheng were nominated by Delta Electronics
and are currently serving on our board of directors. Mr. Roger Chu was
nominated by Delta Electronics and is currently serving as our supervisor.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Excludes common shares held by other entities (exclusive of Delta
Electronics), officers of which currently serve on our board of directors.                                                                            



|B. |  | Related Party Transactions
|-- |  | --------------------------

Members of our board of directors also serve or have served as directors
of companies with which we do business. These individuals include our
former director Ms. Maria
D.H. Lu of Chiao Tung Bank, a lender to us and a shareholder of our company,
Mr. Paul Yeh, who previously served as a supervisor of Caesar, Mr. Miin Wu, who
serves as a director of Tower, Mr. Dang-Hsing Yiu, who previously served as a
director of Chantek, Mr. Ding- Hua Hu, who previously served as a director of
United Industry Gas Co., Ltd. and our former director Mr. Fuja Shone, who serves as a director of
Fuetrek. A consortium of Taiwanese and foreign commercial banks led by Chiao
Tung Bank arranged a syndicated loan facility of approximately US$300 million
for us in 1996. In addition, Chiao Tung Bank arranged a syndicated loan
facility of NT$12.0 billion for us in the second half of 2001. Chiao Tung Bank
also arranged our issuance of NT$3.0 billion principal amount of corporate
bonds in the second half of 2001, and was a member of the bank syndicate that
guaranteed the bonds. We believe that the transactions we conduct with these
parties are on an arms-length commercial basis.

We subcontract a portion of our assembly and testing requirements to
Powertech Co. Ltd, and Ardentech. Previously, we also
subcontracted a portion of our assembly and testing requirements to Caesar and
Chantek. For services performed by Caesar, we incurred manufacturing processing
charges of NT$594 million in 2000 and NT$240 million in 2001. For services
performed by Chantek, we incurred manufacturing processing charges of NT$390
million in 2000 and NT$104 million in 2001. For services performed by
Powertech, we incurred manufacturing processing charges of NT$96 million in
2000, NT$106 million in 2001 and NT$173 million (US$5.0 million) in 2002. For
services performed by Ardentech, we incurred manufacturing processing charges
of NT$64 million in 2000, NT$108 million in 2001 and NT$241 (US$7.0 million) in
2002. We purchase industrial gases from United Industry Gas. We incurred NT$117
million in 2000, NT$119 million in 2001 and NT$110 million (US$3.2 million) in
2002 in charges for industrial gases provided by United Industry Gas.

We entered into an equipment lease agreement with Caesar, the term of
which was from May 1, 1999 to April 30, 2005. The cost of the equipment amounted
to NT$25 million. Future obligations were repayable over the six-year lease
period and originally amounted to NT$17 million. Following
Caesars liquidation, the lease was terminated and we purchased
the equipment for NT$3 million (US$92,651). We also purchased 6,395,000 shares of
Powertech Technology Inc. from Caesar for a total cash consideration of NT$83
million.

In August 2000, we entered into a five-year manufacturing and technology
cooperation agreement with Tower Semiconductor, an Israeli
company, whereby Tower will provide silicon wafer manufacturing processing
services that can employ Towers microFLASH® technology. This technology is
based on proprietary technology licensed from Saifun Semiconductors Ltd., or
Saifun, an Israeli integrated circuit design company. We also have entered into
a separate agreement with Saifun that provides us with rights to develop and
manufacture certain products related to the microFLASH process technology.
Under the agreement with Tower, Tower will be obligated to manufacture for us
up
to an agreed number of six-inch wafers per month upon receiving our
orders. Due to the market conditions in 2001 and 2002, we have placed orders
for less than the numbers of

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wafers that we could have required Tower to
manufacture for us in those periods. Wafer purchases in 2001 totalled
NT$157 million, and in 2002 totalled NT$136 million
(US$3.9 million).

In December 2000, we entered into a share purchase agreement and related
additional purchase obligation agreements to invest a total of US$75 million in
Tower, together with a foundry agreement. Under the agreements, we are entitled
to appoint one member of Towers board of directors and to a guaranteed portion of
the wafer manufacturing capacity of Towers new eight-inch fabrication
facility, which is now in the start-up stage. Under the agreements, we agreed to purchase approximately 2.7 million Tower
ordinary shares, of which 866,551 shares were purchased at the initial closing
in January 2000, and the remainder were to be purchased in five equal
installments at subsequent closings upon achievement of certain milestones by
Tower. The purchase price at each closing is to be based on the fair market
value of the shares at the time, subject to a minimum of US$12.50 and a maximum
of US$30 per share. Our payment obligations are US$20 million for the initial
closing, and US$11 million at each subsequent closing.

In September 2001, following the first two subsequent closings at which we
acquired a further 733,380 shares, Tower underwent a financial restructuring
under which, among other things, it issued additional shares. We purchased
1,255,848 shares at a price per share of US$12.75, and funded the purchase from
our prepaid credit account, discussed below. Pursuant to the third and fourth
subsequent closings in April and October 2002, we purchased a total of
2,416,326 shares at prices per share adjusted to take account of dilution. In
October 2002 we purchased a further 660,000 shares pursuant to a rights
offering for US$5.00 per share, and received warrants for the purchase of a
further 297,000 shares.

In March 2003, we and other Tower investors reached an agreement with
Tower to amend our obligations in relation to the fifth and final subsequent
closing purchase obligation. Under the proposed amendment, we and the other
investors will advance a total of US$24.6 million as a part of the fifth
milestone payment, prior to Towers satisfaction of the conditions. Of this
amount, we are obliged to pay US$6.6 million, for the purchase of shares at
US$2.983 per share. As of May 2003, we have already paid US$3.6 million of
this amount for the purchase of 1,206,839 shares, and a further US$3 million is
outstanding. If Tower is able to raise an additional US$22 million additional
funds for its new fabrication facility by not later than December 31, 2003, we
and the other investors will be required to pay the balance of the fifth and
final purchase obligation, which may be up to US$4.4 million in our case.
Otherwise, we will be released from our obligation to pay the balance. This
proposed amendment remains subject to the approval of Towers shareholders,
banks and relevant regulatory bodies.

Our payments to Tower to date total US$70.9 million, and of this the total
share purchase consideration is US$56.8 million. Under the original share
purchase agreement, the excess of our payment obligations over the total share
purchase consideration is credited to a prepaid credit account. Amounts in the
credit account may be applied to future purchases of wafers, purchases of
Towers shares (not including purchases under the original purchase
commitments) or royalty payments.

At December 31, 2002, our credit account balance was US$14.1 million, and
we owned approximately 13.7% of Towers outstanding shares. Our average
purchase price per share is US$7.95, which is somewhat higher than the fair
market values due to the minimum per share price in the original agreement.

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ITEM 8.     FINANCIAL INFORMATION



|A. |  | Consolidated Statements and Other Financial Information
|-- |  | -------------------------------------------------------

The selected income statement data for the years ended December 31, 2000,
2001 and 2002, and the selected balance sheet data as of December 31, 2001 and
2002 presented below are derived from our audited financial statements included
in this annual report, which were prepared on a consolidated basis. The
selected income statement data for the years ended December 31, 1998 and 1999
and the selected balance sheet data as of December 31, 1998, 1999 and 2000
presented below are derived from our audited financial statements not included
in this annual report, which were also prepared on a consolidated basis.

We publish our financial statements in New Taiwan dollars, the lawful
currency of Taiwan. All references in this annual report to United States
dollars, U.S. dollars and US$ are to United States dollars and references
to New Taiwan dollars, NT dollars and NT$ are to New Taiwan dollars. All
translations from New Taiwan dollars to United States dollars were made, unless
otherwise indicated, on the basis of the noon buying rate in The City of New
York for cable transfers in NT dollars per U.S. dollar as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 2002 of
NT$34.7= US$1.00. On June 26, 2003, the noon buying rate between New Taiwan
dollars and United States dollars was NT$34.6 = US$1.00.

The financial data set forth below should be read in conjunction with, and
are qualified in their entirety by reference to, our financial statements and
the related notes included in this annual report, and Item 5. Operating and
Financial Review and Prospects. Our financial statements are prepared and
presented in accordance with ROC GAAP and ROC reporting practices. For a
discussion of certain differences between ROC GAAP and U.S. GAAP, see note 20
to our consolidated financial statements for the years ended December 31, 2000,
2001 and 2002 included in this annual report and Item 5. Operating and
Financial Review and Prospects  A. Operating Results  U.S. GAAP
Reconciliation.

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|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |       |  
|----------------------------------- | --------- | --------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | ------ | ----- |  | ----- | ------- | ----- |  | ----- | ------- | ----- |  |  | ------- | - |  |  | ------- | - |  |  | ----- | -
|                                    |           |                                                                                                                             |  | Year ended, and as of, December 31,         
|                                    |           |                                                                                                                             |  |                                             
|                                    |           |                                                                                                                             |  | 1998                                         |        | 1999  |  | 2000  |         | 2001  |  | 2002  |         | 2002 
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |      
|                                    |           |                                                                                                                             |  | (NT$)                                        |        | (NT$) |  | (NT$) |         | (NT$) |  | (NT$) |         | (US$)
|                                    |           |                                                                                                                             |  | (in millions, except per share and ADS data)
|Consolidated Income Statement Data: |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    | ROC GAAP  |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Net sales revenue                                                                                                           |  |                                              | 12,580 |       |  |       | 16,957  |       |  |       | 33,493  |       |  |  | 21,747  |   |  |  | 16,492  |   |  |  | 475   |  
|                                    |           | Cost of goods sold                                                                                                          |  |                                              | (9,888 | )     |  |       | (12,124 | )     |  |       | (15,494 | )     |  |  | (11,674 | ) |  |  | (17,105 | ) |  |  | (493  | )
|                                    |           | Less: Unrealized profit as of December 31, 2002                                                                             |  |                                              |       |       |  |       |        |       |  |       |        |       |  |  |        |   |  |  | (2      | ) |  |  |      |  
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |       |  
|                                    |           | Realized gross profit (loss)                                                                                                |  |                                              | 2,692  |       |  |       | 4,833   |       |  |       | 17,999  |       |  |  | 10,073  |   |  |  | (615    | ) |  |  | (18   | )
|                                    |           | Operating expenses                                                                                                          |  |                                              | (3,055 | )     |  |       | (3,258  | )     |  |       | (5,856  | )     |  |  | (6,557  | ) |  |  | (6,212  | ) |  |  | (179  | )
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |       |  
|                                    |           | Operating income (loss)                                                                                                     |  |                                              | (363   | )     |  |       | 1,575   |       |  |       | 12,143  |       |  |  | 3,516   |   |  |  | (6,827  | ) |  |  | (197  | )
|                                    |           | Total other income                                                                                                          |  |                                              | 698    |       |  |       | 846     |       |  |       | 945     |       |  |  | 1,356   |   |  |  | 466     |   |  |  | 13    |  
|                                    |           | Total other expenses                                                                                                        |  |                                              | (2,288 | )     |  |       | (1,830  | )     |  |       | (2,077  | )     |  |  | (4,795  | ) |  |  | (4,976  | ) |  |  | (143  | )
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |       |  
|                                    |           | Income (loss) before taxes and minority interest                                                                            |  |                                              | (1,953 | )     |  |       | 591     |       |  |       | 11,011  |       |  |  | 77      |   |  |  | (11,337 | ) |  |  | (327  | )
|                                    |           | Income tax benefit (expense)                                                                                                |  |                                              | 406    |       |  |       | 316     |       |  |       | (398    | )     |  |  | (943    | ) |  |  | (20     | ) |  |  |      |  
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |       |  
|                                    |           | Net
income (loss) before minority interest                                                                                  |  |                                              | (1,547 | )     |  |       | 907     |       |  |       | 10,613  |       |  |  | (866    | ) |  |  | (11,357 | ) |  |  | (327  | )
|                                    |           | Minority interest loss                                                                                                      |  |                                              |       |       |  |       |        |       |  |       |        |       |  |  |        |   |  |  | 0.4     |   |  |  |      |  
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |       |  
|                                    |           | Net Income (loss)                                                                                                           |  |                                              | (1,547 | )     |  |       | 907     |       |  |       | 10,613  |       |  |  | (866    | ) |  |  | (11,357 | ) |  |  | (327  | )
|                                    |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |       |  
|                                    |           | Net income (loss) per share  basic(1)                                                                                      |  |                                              | (0.47  | )     |  |       | 0.27    |       |  |       | 2.93    |       |  |  | (0.23   | ) |  |  | (3.10   | ) |  |  | (0.09 | )
|                                    |           | Net income (loss) per share  diluted(1)                                                                                    |  |                                              | (0.47  | )     |  |       | 0.27    |       |  |       | 2.91    |       |  |  | (0.23   | ) |  |  | (3.10   | ) |  |  | (0.09 | )
|                                    | U.S. GAAP |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Gross profit (loss)                                                                                                         |  |                                              | 1,548  |       |  |       | 4,558   |       |  |       | 17,615  |       |  |  | 6,598   |   |  |  | (4,018  | ) |  |  | (116  | )
|                                    |           | Operating income (loss)                                                                                                     |  |                                              | (1,620 | )     |  |       | 1,237   |       |  |       | 11,069  |       |  |  | (2,263  | ) |  |  | (10,186 | ) |  |  | (294  | )
|                                    |           | Net income (loss) before cumulative effect of
change in accounting principle in accordance
with U.S. GAAP                   |  |                                              | (3,072 | )     |  |       | 1,861   |       |  |       | 8,016   |       |  |  | (3,842  | ) |  |  | (13,841 | ) |  |  | (399  | )
|                                    |           | Basic net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP   |  |                                              | (0.96  | )     |  |       | 0.58    |       |  |       | 2.31    |       |  |  | (1.06   | ) |  |  | (3.77   | ) |  |  | (0.11 | )
|                                    |           | Diluted net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP |  |                                              | (0.96  | )     |  |       | 0.58    |       |  |       | 2.26    |       |  |  | (1.06   | ) |  |  | (3.77   | ) |  |  | (0.11 | )
|                                    |           | Net income (loss) (2)                                                                                                       |  |                                              | (3,072 | )     |  |       | 1,861   |       |  |       | 8,016   |       |  |  | (4,463  | ) |  |  | (13,841 | ) |  |  | (399  | )
|                                    |           | Net income (loss) per share-basic(1) (3)                                                                                    |  |                                              | (0.96  | )     |  |       | 0.58    |       |  |       | 2.31    |       |  |  | (1.23   | ) |  |  | (3.77   | ) |  |  | (0.11 | )
|                                    |           | Net
income (loss) per share  diluted(1)(3)                                                                                 |  |                                              | (0.96  | )     |  |       | 0.58    |       |  |       | 2.26    |       |  |  | (1.23   | ) |  |  | (3.77   | ) |  |  | (0.11 | )
|Balance Sheet Data:                 |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    | ROC GAAP  |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Total current assets                                                                                                        |  |                                              | 15,898 |       |  |       | 14,303  |       |  |       | 29,027  |       |  |  | 25,358  |   |  |  | 21,301  |   |  |  | 614   |  
|                                    |           | Net property, plant and equipment                                                                                           |  |                                              | 28,491 |       |  |       | 32,028  |       |  |       | 38,006  |       |  |  | 39,562  |   |  |  | 40,029  |   |  |  | 1,154 |  
|                                    |           | Total assets                                                                                                                |  |                                              | 49,604 |       |  |       | 51,197  |       |  |       | 72,451  |       |  |  | 72,309  |   |  |  | 68,120  |   |  |  | 1,963 |  
|                                    |           | Total current liabilities                                                                                                   |  |                                              | 5,841  |       |  |       | 8,868   |       |  |       | 11,786  |       |  |  | 9,632   |   |  |  | 18,357  |   |  |  | 529   |  
|                                    |           | Long-term liabilities                                                                                                       |  |                                              | 18,714 |       |  |       | 15,946  |       |  |       | 16,091  |       |  |  | 19,533  |   |  |  | 19,549  |   |  |  | 563   |  
|                                    |           | Total liabilities                                                                                                           |  |                                              | 24,555 |       |  |       | 24,814  |       |  |       | 27,877  |       |  |  | 29,165  |   |  |  | 37,906  |   |  |  | 1,092 |  
|                                    |           | Total shareholders equity                                                                                                  |  |                                              | 25,049 |       |  |       | 26,383  |       |  |       | 44,574  |       |  |  | 43,144  |   |  |  | 30,214  |   |  |  | 871   |  
|                                    | U.S. GAAP |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Total shareholders equity                                                                                                  |  |                                              | 23,945 |       |  |       | 26,433  |       |  |       | 41,831  |       |  |  | 43,300  |   |  |  | 28,351  |   |  |  | 817   |  
|Other Data:                         |           |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  | 
|                                    | ROC GAAP  |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Capital expenditures                                                                                                        |  |                                              | 6,136  |       |  |       | 8,129   |       |  |       | 11,803  |       |  |  | 9,078   |   |  |  | 8,975   |   |  |  | 259   |  
|                                    |           | Depreciation and amortization                                                                                               |  |                                              | 4,255  |       |  |       | 4,855   |       |  |       | 6,048   |       |  |  | 8,006   |   |  |  | 8,742   |   |  |  | 252   |  
|                                    |           | Net cash provided by operating
activities                                                                                   |  |                                              | 2,766  |       |  |       | 5,062   |       |  |       | 16,123  |       |  |  | 8,837   |   |  |  | 86      |   |  |  | 2     |  
|                                    |           | Net income (loss) per ADS  basic                                                                                           |  |                                              | (4.72  | )     |  |       | 2.73    |       |  |       | 29.27   |       |  |  | (2.34   | ) |  |  | (31.0   | ) |  |  | (0.9  | )
|                                    |           | Net income (loss) per ADS  diluted                                                                                         |  |                                              | (4.72  | )     |  |       | 2.73    |       |  |       | 29.05   |       |  |  | (2.34   | ) |  |  | (31.0   | ) |  |  | (0.9  | )
|                                    |           | Number of common shares outstanding
(weighted, as adjusted) (4)                                                             |  |                                              | 3,286  |       |  |       | 3,315   |       |  |       | 3,625   |       |  |  | 3,695   |   |  |  | 3,660   |   |  |  | 3,660 |  
|                                    |           | Stock dividend per common share(5)                                                                                          |  |                                              | 22     | %     |  |       | 10      | %     |  |       | 13      | %     |  |  | 30      | % |  |  | 10      | % |  |  | 10    | %
|                                    | US GAAP   |                                                                                                                             |  |                                              |        |       |  |       |         |       |  |       |         |       |  |  |         |   |  |  |         |   |  |  |      
|                                    |           | Total current assets                                                                                                        |  |                                              | 15,898 |       |  |       | 14,588  |       |  |       | 28,994  |       |  |  | 26,646  |   |  |  | 21,037  |   |  |  | 606   |  
|                                    |           | Total assets                                                                                                                |  |                                              | 49,630 |       |  |       | 51,578  |       |  |       | 72,342  |       |  |  | 73,595  |   |  |  | 66,179  |   |  |  | 1,907 |  
|                                    |           | Total current liabilities                                                                                                   |  |                                              | 6,342  |       |  |       | 8,886   |       |  |       | 14,425  |       |  |  | 10,768  |   |  |  | 18,797  |   |  |  | 542   |  
|                                    |           | Total liabilities                                                                                                           |  |                                              | 25,050 |       |  |       | 25,145  |       |  |       | 30,511  |       |  |  | 30,295  |   |  |  | 37,828  |   |  |  | 1,090 |  



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|(1) |  | Retroactively adjusted for all subsequent stock dividends and employee
bonuses declared.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The difference between net income under ROC GAAP and U.S. GAAP was
largely derived from different treatments under these two accounting
principles with respect to employee bonus shares and derivative contracts.
The difference in accounting treatment with respect to employee bonus
shares under the two accounting principles resulted in an additional
expense of NT$516 million in 1998, no additional expense or income in
1999, an additional expense of NT$1,622 million in 2000, an additional
expense of NT$4,273 million in 2001 and an additional expense of NT$0
million (US$0 million) in 2002. The differences of accounting treatment
with respect to derivative contracts under the two accounting principles
resulted in an additional expense of NT$1,056 million in 1998, an
increased income of NT$1,301 million in 1999, an additional expense of
NT$898 million in 2000, an additional gain of NT$228 million in 2001 and
an additional gain of NT$449 million (US$12.9 million) in 2002.
|   
|(3) |  | Retroactively adjusted for all stock dividends declared. See note 20 to
our consolidated financial statements for the years ended December 31,
2000, 2001 and 2002 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 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

Our export sales accounted for 74.0%, 72.5% and 81.0% of total net sales
for the years ended December 31, 2000, 2001 and 2002, respectively. The
following table sets forth our export net sales in 2000, 2001 and 2002. See
note 17 to our consolidated financial statements for the years ended December
31, 2000, 2001 and 2002 included in this annual report.

|            |  |               |        |      |  |      |        |      |  |  |        |  |  |  |       | 
|----------- |  | ------------- | ------ | ---- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ----- | 
|            |  | 2000          |        | 2001 |  | 2002 |        | 2002
|            |  |               |        |      |  |      |        |     
|            |  | (in millions)
|            |  | NT$           |        | NT$  |  | NT$  |        | US$ 
|            |  |               |        |      |  |      |        |     
|Japan       |  |               | 15,502 |      |  |      | 10,933 |      |  |  | 8,052  |  |  |  | 232.0 | 
|USA         |  |               | 2,640  |      |  |      | 1,454  |      |  |  | 1,309  |  |  |  | 37.7  | 
|Hong
Kong   |  |               | 2,815  |      |  |      | 1,592  |      |  |  | 2,006  |  |  |  | 57.8  | 
|Singapore   |  |               | 1,971  |      |  |      | 1,148  |      |  |  | 1,649  |  |  |  | 47.5  | 
|South
Korea |  |               |       |      |  |      |       |      |  |  |       |  |  |  |      | 
|Europe      |  |               | 1,863  |      |  |      | 650    |      |  |  | 345    |  |  |  | 10.0  | 
|            |  |               |        |      |  |      |        |      |  |  |        |  |  |  |       | 
|Total       |  |               | 24,791 |      |  |      | 15,777 |      |  |  | 13,361 |  |  |  | 385.0 | 
|            |  |               |        |      |  |      |        |      |  |  |        |  |  |  |       | 

Dividend Policy

We generally are not permitted under ROC Company Law and our articles of
incorporation to distribute dividends or make other distributions to
shareholders for any year in which we have no current or retained earnings
(excluding reserves). ROC Company Law also requires that 10% of annual net income,
less prior years losses, if any, and applicable income taxes be set aside as a
legal reserve until our accumulated legal reserve equals our paid-in capital.
In addition, we may set aside a special reserve in accordance with applicable
laws and regulations. Our articles of incorporation further provide that, after
we pay our income taxes, deduct any losses incurred in prior years and deduct
the legal and/or special reserve from our net income, the remaining portion of
our net income maybe appropriated or distributed in the proportions specified
in our articles of incorporation. We may pay these distributions in stock or
cash or a combination of stock and cash, except that any employee bonuses and
shareholder dividends will normally be distributed in stock unless we determine
otherwise, and provided that not more than 20% of our distributable net income
maybe distributed in the form of cash. All or part of the dividends to
shareholders maybe reserved at the relevant annual shareholders meeting as
retained earnings for distribution in later years. See
Item 10  Additional
Information  B. Memorandum and Articles of
Association  Description of Our Common Shares  Dividends and Distributions.

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Our shareholders on a dividend record date will be entitled to the full
dividend declared without regard to any prior or subsequent transfer of these
common shares. The record date for the annual shareholders meeting and a
recommendation for the annual dividend was determined by the board of
directors
at a meeting that was held on April 7, 2003. The annual dividend was declared
at our annual general meeting of shareholders held on June 27, 2003.

For information relating to ROC withholding taxes payable on dividends,
see Item 10. Additional Information  E. Taxation
 ROC Taxation, and note
13 to our consolidated financial statements for the years ended December 31,
2000, 2001 and 2002 included in this annual report.

Legal Proceedings

On February 18, 1997, Atmel filed an action against us and two other
semiconductor manufacturers with the International Trade Commission (ITC).
Atmel is engaged in the business of designing, manufacturing and selling
semiconductor devices, EEPROM and flash memory semiconductor devices, The
complaint alleged a violation of Section 337 of the 1930 Tariff Act for the
infringement of the U.S. Patent No. 4,451,903 (the 903 patent) owned or
controlled by Atmel. At each stage of the proceedings during this four-year
investigation, the independent ITC authorities who reviewed the substance of
the infringement claim lodged by Atmel concluded that we did not infringe the
903 patent. On June 1, 2001, the ITC issued a Notice of Final Determination and
ruled again that our products did not infringe the 903 patent and that we did
not violate Section 337 of the Tariff Act, and terminated the Section 337
investigation against us. Atmel filed a petition for reconsideration asking the
ITC to reverse its non-infringement finding. On July 26, 2001, the ITC denied
Atmels petition for reconsideration. The 903 patent expired on September 14,
2001. Atmel did not appeal the Notice of Final Determination with the United
States Court of Appeals for the Federal Circuit before the required deadline.
Accordingly, Atmel is bound by the ITCs Notice of Final Determination finding that we
did not infringe the 903 patent nor violate Section 337 of the Tariff Act.

In addition, on August 8, 1997, Atmel filed an action against Macronix
America in the United States District Court for the Northern District of
California. The complaint alleged that Macronix America was selling devices
which infringe Atmels U.S. patent numbers 4,419,747 (the 747 patent) and
4,833,096 (the 096 patent).

With respect to the 747 patent (which expired on September 14, 2001),
Macronix America filed a motion on December 3, 1999 for summary judgment for
the invalidity of the 747 patent on grounds that Atmel did not name the
co-inventors of the 747 patent. On February 11, 2000, Atmel filed a motion to
correct the inventorship of the 747 patent. An evidentiary hearing on
inventorship was held on November 7 and November 8, 2001. On January 14, 2002,
the court issued an order in favor of Macronix America denying Atmels motion
to correct the inventorship of the 747 patent. Following the courts order,
Macronix America requested the court to grant its motion for summary judgment
for invalidity of the 747 patent. On May 14, 2003, the court issued an order
granting Macronix Americas motion for summary judgment of invalidity of the
747 patent for nonjoinder of co-inventors. Pursuant to this order, the court
entered judgment in favor of Macronix America and against Atmel.

With respect to the 096 patent, Macronix America filed a motion for
summary judgment on November 15, 1999 for the invalidity of the 096 patent on
the grounds that sales activities were conducted by Atmel prior to the critical
date. On August 16, 2000, the court granted Macronix Americas motion for
summary judgment against several independent claims of the 096 patent, leaving
a single independent claim outstanding in the case. The outstanding claim is
currently going through the discovery process and no trial date has been set as
of the date of this annual report.

Although we believe Atmels claims are unwarranted and we intend to
continue to contest vigorously Atmels allegations, it is not possible to
predict the outcome of these litigation. If we are found to have infringed
Atmels patents, Atmel has requested injunctive relief to prohibit Macronix

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America from selling products violating Atmels patents and an award
to Atmel of treble damages caused by the alleged infringements.

On August 21, 2001, Agere, which was spun off by Lucent Technologies Inc.
(Lucent) in March 2001, filed a complaint against us in the United States
District Court for the Southern District of New York alleging, among other
things, that certain royalty payments were overdue under a patent license
agreement which we previously entered into with AT&T. AT&T subsequently
transferred its right to receive royalties to Lucent. Agere claimed that the
right to receive royalties under the agreement had been assigned to it as a
result of internal reorganization, and that we owed them outstanding royalties
and late fees for the period from January 1, 1999 to June 30, 2001. We filed a
motion to dismiss Ageres lawsuit because the dispute at issue arose out of a
previous agreement that expressly provided that all disputes should be
arbitrated. On February 11, 2002, the court granted our motion to compel
arbitration and entered judgment dismissing the complaint. On February 19,
2002, Agere filed a demand for arbitration before the American Arbitration
Association. After a period of negotiation, we executed a patent cross license
agreement with Agere in January 2002 and the arbitration was settled and
closed.

As is the case with many companies in the semiconductor industry, we from
time to time receive communications from third parties asserting certain
patents to our products. We have entered into discussions with some of these
third parties as to their respective positions and the terms of any possible
licenses. We could incur significant costs with respect to the defense of the
claims which could have a material adverse effect on our results of operations
or financial condition. For royalty payments under the existing license
agreements or the potential new patent license agreements, we have estimated
the royalty budgets based on historical experiences and specific arrangements.
The royalty accrual was NT$538 million in 2000, NT$490 million in 2001 and
NT$360 million (US$10.4 million) in 2002. As of December 31, 2002, the
outstanding balance of this reserve was NT$672.6 million (US$19.4 million).

Except as described above, we are currently not involved in any material
legal proceedings, although we may become involved in other litigation in the
future. See Item 5. Operating and Financial Review and Prospects  E.
Research and Development, Patents and Licenses, etc.  Intellectual Property.

B.    Significant Changes

We
have not incurred any significant changes since December 31,
2002. See Item 4. Information on the Company 
History and Development of the Company  Recent
Developments and note 17c of our consolidated financial
statements for the years ended December 31, 2000, 2001 and 2002
included in this annual report.




Item 9.   The Offer and Listing

A.     Offer and Listing Details

Each ADS represents ten of our common shares. Our ADSs have been listed
on the Nasdaq National Market since May 9, 1996. The table below presents, for
the periods indicated, the high and low closing prices on the Nasdaq National Market for our outstanding
ADSs.

|      |  |  |                         |  |       |  |      |  | 
|----- |  |  | ----------------------- |  | ----- |  | ---- |  | 
|      |  |  | Closing
PricePer ADS(1)
|      |  |  |                        
|      |  |  | High                    |  | Low   | 
|      |  |  |                         |  |      
|      |  |  | (US$)                   |  | (US$) | 
|1998: |  |  | 8.89                    |  |       |  | 3.26 | 
|1999: |  |  | 11.93                   |  |       |  | 4.11 | 
|2000: |  |  | 22.72                   |  |       |  | 8.01 | 

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|      |                        |  |                         |       |       |  |      |      | 
|----- | ---------------------- |  | ----------------------- | ----- | ----- |  | ---- | ---- | 
|      |                        |  | Closing
PricePer ADS(1)
|      |                        |  |                        
|      |                        |  | High                    |       | Low  
|      |                        |  |                         |       |      
|      |                        |  | (US$)                   |       | (US$) | 
|2001: |                        |  |                         |       |       |  |      |     
|      | First Quarter          |  |                         | 12.68 |       |  |      | 3.86 | 
|      | Second Quarter         |  |                         | 12.68 |       |  |      | 9.16 | 
|      | Third Quarter          |  |                         | 11.45 |       |  |      | 8.84 | 
|      | Fourth Quarter         |  |                         | 9.68  |       |  |      | 3.86 | 
|      |                        |  | 7.91                    |       |       |  | 4.09 |     
|2002: |                        |  |                         |       |       |  |      |     
|      | First Quarter          |  |                         | 8.55  |       |  |      | 2.73 | 
|      | Second Quarter         |  |                         | 8.09  |       |  |      | 6.18 | 
|      | Third Quarter          |  |                         | 8.55  |       |  |      | 5.31 | 
|      | Fourth Quarter         |  |                         | 4.92  |       |  |      | 3.00 | 
|      |                        |  | 4.09                    |       |       |  | 2.73 |     
|2003: |                        |  |                         |       |       |  |      |     
|      | January                |  |                         | 3.65  |       |  |      | 3.07 | 
|      | February               |  |                         | 3.27  |       |  |      | 2.85 | 
|      | March                  |  |                         | 2.94  |       |  |      | 2.55 | 
|      | April                  |  |                         | 2.65  |       |  |      | 1.70 | 
|      | May                    |  |                         | 1.72  |       |  |      | 1.20 | 
|      | June
(through June 26) |  |                         | 2.70  |       |  |      | 1.70 | 



---

|   
|---
|(1)

Our common shares have been listed on the Taiwan Stock Exchange since
March 15, 1995. The table below presents, for the periods indicated, the high
and low closing prices and the average daily volume of trading activity on the
Taiwan Stock Exchange for our common shares and the highest and lowest of the
daily closing values of the Taiwan Stock Exchange Index.

|      |                |  |               |      |                  |  |                |      |      |  |        |        |  |  |        |       |  |  |       |       | 
|----- | -------------- |  | ------------- | ---- | ---------------- |  | -------------- | ---- | ---- |  | ------ | ------ |  |  | ------ | ----- |  |  | ----- | ----- | 
|      |                |  | Closing price |      | Average daily    |  | Taiwan Stock  
|      |                |  | per share(1)  |      | trading volume   |  | Exchange Index
|      |                |  |               |      | (in thousands of |  |               
|      |                |  | High          |      | Low              |  | shares)        |      | High |  | Low   
|      |                |  |               |      |                  |  |                |      |      |  |       
|      |                |  | (NT$)         |      | (NT$)            |  |                |      |      |  |        |        |  |  |       
|1998: |                |  | 63.0          |      |                  |  | 20.7           |      |      |  | 22,623 |        |  |  | 9,277  |       |  |  | 6,251 |      
|1999: |                |  | 41.5          |      |                  |  | 13.9           |      |      |  | 55,173 |        |  |  | 8,609  |       |  |  | 5,475 |      
|2000: |                |  | 76.2          |      |                  |  | 26.6           |      |      |  | 54,549 |        |  |  | 10,202 |       |  |  | 4,615 |      
|2001: |                |  | 29.9          |      |                  |  | 16.0           |      |      |  | 55,503 |        |  |  | 6,104  |       |  |  | 3,446 |      
|      | First Quarter  |  |               | 44.2 |                  |  |                | 33.3 |      |  |        | 91,473 |  |  |        | 6,104 |  |  |       | 4,895 | 
|      | Second Quarter |  |               | 40.4 |                  |  |                | 30.8 |      |  |        | 32,271 |  |  |        | 5,609 |  |  |       | 4,769 | 
|      | Third Quarter  |  |               | 36.2 |                  |  |                | 16.8 |      |  |        | 31,297 |  |  |        | 4,887 |  |  |       | 3,494 | 
|      | Fourth Quarter |  |               | 29.9 |                  |  |                | 16.0 |      |  |        | 83,825 |  |  |        | 5,551 |  |  |       | 3,446 | 
|2002: |                |  | 32.7          |      |                  |  | 9.2            |      |      |  | 55,503 |        |  |  | 6,462  |       |  |  | 3,850 |      
|      | First Quarter  |  |               | 31.5 |                  |  |                | 24.7 |      |  |        | 91,149 |  |  |        | 6,243 |  |  |       | 5,488 | 
|      | Second Quarter |  |               | 32.7 |                  |  |                | 18.7 |      |  |        | 37,731 |  |  |        | 6,462 |  |  |       | 5,072 | 
|      | Third Quarter  |  |               | 18.0 |                  |  |                | 10.5 |      |  |        | 29,608 |  |  |        | 5,417 |  |  |       | 4,186 | 
|      | Fourth Quarter |  |               | 14.6 |                  |  |                | 9.2  |      |  |        | 68,462 |  |  |        | 4,824 |  |  |       | 3,850 | 

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|      |                              |  |               |      |                  |  |                |      |      |  |     |        |  |  |  |       |  |  |  |       | 
|----- | ---------------------------- |  | ------------- | ---- | ---------------- |  | -------------- | ---- | ---- |  | --- | ------ |  |  |  | ----- |  |  |  | ----- | 
|      |                              |  | Closing price |      | Average daily    |  | Taiwan Stock  
|      |                              |  | per share(1)  |      | trading volume   |  | Exchange Index
|      |                              |  |               |      | (in thousands of |  |               
|      |                              |  | High          |      | Low              |  | shares)        |      | High |  | Low
|      |                              |  |               |      |                  |  |                |      |      |  |    
|      |                              |  | (NT$)         |      | (NT$)            |  |                |      |      |  |     |        |  |  | 
|      |                              |  |               |      |                  |  |                |      |      |  |     |        |  |  |  |       |  |  |  |       | 
|2003: |                              |  |               |      |                  |  |                |      |      |  |     |        |  |  |  |       |  |  |  |      
|      | January                      |  |               | 12.8 |                  |  |                | 10.8 |      |  |     | 58,532 |  |  |  | 5,079 |  |  |  | 4,525 | 
|      | February                     |  |               | 11.0 |                  |  |                | 4.1  |      |  |     | 22,923 |  |  |  | 4,834 |  |  |  | 4,432 | 
|      | March                        |  |               | 10.2 |                  |  |                | 8.8  |      |  |     | 16,416 |  |  |  | 4,599 |  |  |  | 4,260 | 
|      | April                        |  |               | 9.6  |                  |  |                | 6.0  |      |  |     | 19,352 |  |  |  | 4,658 |  |  |  | 4,140 | 
|      | May                          |  |               | 6.0  |                  |  |                | 4.1  |      |  |     | 48,319 |  |  |  | 4,556 |  |  |  | 4,188 | 
|      | June (through June 26, 2003) |  |               | 9.5  |                  |  |                | 5.8  |      |  |     | 92,296 |  |  |  | 5,049 |  |  |  | 4,678 | 



---

|   
|---
|(1)

The Taiwan Stock Exchange has experienced substantial fluctuations in the
prices of listed securities and there are currently limits on the range of
daily price movements, as set forth in Article 63 of the operating rules of the
Taiwan Stock Exchange Corporation. See Cautionary Statement for purposes of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, Item 3. Key Information  D. Risk Factors  Political and Economic
Risks  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,   The Taiwan Stock Exchange and   Taiwan Stock Exchange
Index.

As of May 31, 2003, a total of 3,733,149,529 of our common shares were
outstanding. Holders of common shares that are not ROC persons are required to
hold these common shares through a brokerage or custodial account in the ROC.
The entities in which these accounts are maintained are the registered holders
of the shares and thus all of the registered holders of our common shares are
ROC persons. As of May 31, 2003, 16,135,393 common shares are registered in
the name of a nominee of The Bank of New York, the depositary under the deposit
agreement. The Bank of New York has advised us that, as of May 31, 2003,
1,613,539.3 ADSs, representing 16,135,393 common shares, were held of record by
Cede & Co. and five other U.S. persons. We have no further information as to
common shares of our company held, or beneficially owned, by U.S. persons.

The Taiwan Stock Exchange

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

The Taiwan Stock Exchange commenced operations in 1962. During the early
1980s, the Securities and Futures Commission actively encouraged new listings
on the Taiwan Stock Exchange and the number of listed companies grew from 119
in 1983 to 638 by the end of December 2002. As of the end of December 2002,
the market capitalization of companies listed on the Taiwan Stock Exchange was
NT$9,095 billion.

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

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

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| |  |  | shareholder diversification;
| | - |  | ----------------------------
|
| |  |  | length of time in business; 
|
| |  |  | amount of capital; and      
|
| |  |  | profitability.              

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

The GreTai Securities Market

To complement the Taiwan Stock Exchange, the GreTai Securities Market
(formerly known as the Over-the-Counter Securities Exchange) was established in
September 1982 on the initiative of the Securities and Futures Commission to
encourage the trading of securities of companies who do not qualify for listing
on the Taiwan Stock Exchange. As of December 31, 2002, 384 companies had
listed equity securities on the GreTai Securities Market and the total market
capitalization of those companies was approximately NT$627 billion. In
addition, the Emerging Stock Board of the GreTai Securities Market was
established on January 1, 2002 at the initiative of the Securities and Futures
Commission to encourage trading of securities of companies that are public
companies but not qualified for listing on the Taiwan Stock Exchange or the
GreTai Securities Market.

Taiwan Stock Exchange Index

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

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

The following table shows for the periods indicated information relating
to the Taiwan Stock Exchange Index.

|                          |  |                |     |       |  |       |        |            |  |  |       |  |  |  |       | 
|------------------------- |  | -------------- | --- | ----- |  | ----- | ------ | ---------- |  |  | ----- |  |  |  | ----- | 
|                          |  | Number of      |     |       |  |       |        |            |  |  |       |  |  | 
|                          |  | listed         |     |       |  |       |        |            |  |  |       |  |  | 
|                          |  | companies at   |     | Index |  | Index |        | Index at  
|Period ended December 31, |  | the period end |     | high  |  | low   |        | period end
|                          |  |                |     |       |  |       |        |           
|1990                      |  |                | 199 |       |  |       | 12,495 |            |  |  | 2,560 |  |  |  | 4,530 | 
|1991                      |  |                | 221 |       |  |       | 6,305  |            |  |  | 3,316 |  |  |  | 4,601 | 
|1992                      |  |                | 256 |       |  |       | 5,392  |            |  |  | 3,328 |  |  |  | 3,377 | 
|1993                      |  |                | 285 |       |  |       | 6,071  |            |  |  | 3,136 |  |  |  | 6,071 | 
|1994                      |  |                | 313 |       |  |       | 7,184  |            |  |  | 5,195 |  |  |  | 7,125 | 
|1995                      |  |                | 347 |       |  |       | 7,051  |            |  |  | 4,503 |  |  |  | 5,174 | 
|1996                      |  |                | 375 |       |  |       | 6,983  |            |  |  | 4,690 |  |  |  | 6,934 | 
|1997                      |  |                | 404 |       |  |       | 10,117 |            |  |  | 6,820 |  |  |  | 8,187 | 
|1998                      |  |                | 437 |       |  |       | 9,277  |            |  |  | 6,251 |  |  |  | 6,418 | 
|1999                      |  |                | 462 |       |  |       | 8,609  |            |  |  | 5,475 |  |  |  | 8,449 | 
|2000                      |  |                | 474 |       |  |       | 10,202 |            |  |  | 8,350 |  |  |  | 8,843 | 
|2001                      |  |                | 584 |       |  |       | 5,551  |            |  |  | 4,647 |  |  |  | 5,551 | 
|2002                      |  |                | 638 |       |  |       | 6,462  |            |  |  | 3,850 |  |  |  | 4,452 | 
|2003 (through May 31)     |  |                | 639 |       |  |       | 5,079  |            |  |  | 4,140 |  |  |  | 4,556 | 



---

Sources: Status of Securities Listed on Taiwan Stock Exchange.

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

B.   Plan
of Distribution

Not applicable.

C.   Markets

The principal trading market for our common shares is the Taiwan Stock
Exchange. The ADSs have been issued by The Bank of New York as depositary and
are quoted on the Nasdaq National Market under the symbol MXICY. Prior to the
initial public offering and subsequent listings on the Taiwan Stock Exchange on
March 15, 1995 and May 9, 1996, respectively, there was no market for the
common shares or the ADSs.

D.   Selling Shareholders

Not applicable.

E.   Dilution

Not applicable.

F.   Expenses of the Issue

Not applicable.




Item 10.   ADDITIONAL INFORMATION

A.   Share Capital

Not applicable.

B.   Memorandum and Articles of Association

Description of Our Common Shares

Set forth below is a description of our common shares, including summaries
of the material relevant provisions of our articles of incorporation, the ROC
Company Law, the ROC Securities and Exchange Law and the rules and regulations
under these laws. Unless otherwise indicated in this annual report, holders of
our ADSs generally have the same rights as holders of our common shares. See
Item 3. Key Information  D. Risk Factors  Risks Relating to our Common
Shares and our ADSs for a description of certain differences.

General

Our
authorized capital is NT$65.5 billion, divided into 6.55 billion shares,
including up to 650 million shares reserved for the exercise of employee stock
options. As of May 31, 2003, 3,733,149,529 of our common shares had been fully
paid-in and were outstanding. All of our common shares are in registered form.

As of May 31, 2003, 16,135,393 common shares underlying ADSs were held in
the name of The Bank of New York, as depositary for our ADS facility. The Bank
of New York has advised us that, as of May 31, 2003, 1,613,539.3 ADSs,
representing 16,135,393 common shares, were held of record by Cede & Co. and
five registered holders. We have no further information as to our common
shares held, or beneficially owned, by U.S. persons.

The ROC Company Law, the ROC Statute for Establishment and Administration
of Science-Based Industrial Park and the ROC Securities and Exchange Law
provide that any change in the issued share capital of a publicly-listed
company, such as our company, requires various approvals. These include:



| |  |  | the approval of the board of directors;                                                                                                                                                                                                                                                                                                                                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an amendment to the articles of incorporation (which requires
shareholder approval) if the original paid-in share capital plus the
number of the shares 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 ROC Securities and Futures Commission and the
ROC Ministry of Economic Affairs or the Hsinchu Science-Based
Industrial Park Administration, as applicable.                                                                                                                                                                                                                          

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Increase in Capital; Delivery of Certificates

We are required under ROC law to file an amendment to our corporate
registration within 15 days after the capital increase record date. Under the
ROC Securities and Exchange Law and applicable regulations, we are required to
deliver common share certificates to the relevant purchasers within 30 days
after receiving approval from the Hsinchu Science-Based Industrial
Park Administration of our amendment to our corporate registration.

An amendment to the ROC Company Law was passed by the ROC Legislative Yuan
on October 25, 2001 and became effective on November 14, 2001. Under the
amended ROC Company Law, when a public company, such as our company, issues new
shares, it could:

| |  |  | 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

Except in limited circumstances, we are not permitted under the ROC
Company Law and our articles of incorporation to distribute dividends or make
other distributions to shareholders for any year in which we did not have
current or retained earnings (excluding reserves). The ROC Company Law also
requires that 10% of our annual net income, less prior years losses, if any,
and applicable income taxes be set aside as a legal reserve until the
accumulated legal reserve equals our paid-in capital. In addition, we may set
aside a special reserve in accordance with applicable laws and regulations.
Our articles of incorporation further provide that, after we pay our income
taxes, deduct losses incurred in prior years and deduct the legal reserve and
any special reserve, the remaining portion of our net income for any year may
be appropriated or distributed by our board of directors, subject to the
approval of our shareholders, as described in the following paragraph, in the
following sequence:

| |  |  | 83% as a dividend to shareholders;               
| | - |  | -------------------------------------------------
| |  |  | 15% for bonuses to employees; and                
| |  |  | 2% for remuneration to directors and supervisors.

We may pay these distributions in shares or cash or a combination of
shares and cash, except that any employee bonuses and shareholder dividends
will normally be distributed in shares unless we determine otherwise, and
provided that not more than 20% of our distributable net income may be
distributed in the form of cash. All or part of the dividends to shareholders
as described above may be reserved at the relevant annual shareholders meeting
as retained earnings for distribution in subsequent years.

Our articles of incorporation also provide that employee bonuses will be
distributed in the same form as the distribution of dividends to shareholders.
In addition, distribution of shares as bonuses to employees is applicable to
the employees of our affiliated companies that satisfy the requirements set by
our board of directors. In 2000, we did not distribute any employee bonuses.
In 2001, we distributed approximately 143 million common shares in the form of
employee bonuses for 2000. In 2002, we did not distribute any employee
bonuses. The number of common shares issued as a bonus is obtained by dividing
the total nominal NT dollar amount of the bonus by the par value of our common shares, or NT$10 per
share. See note 12 to our consolidated financial statements for the years
ended December 31, 2000, 2001 and 2002 included in this annual report. Subject
to compliance with the above requirements, we may pay dividends or make other
distributions from our earnings and reserves as permitted by ROC Company Law.

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

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

For information as to ROC taxes on dividends and distributions, see Item
10  Additional Information  E. Taxation  ROC Taxation.

Preemptive Rights and Issues of Additional Common Shares

According to the ROC Company Law, when a company issues new common shares
for cash, 10% to 15%of the issue must be offered to its employees. In
addition, the ROC Securities and Exchange Law and the relevant securities
regulations require that, if a company listed on the Taiwan Stock Exchange or
whose shares are traded on the GreTai Securities Market intends to offer new
shares for cash, at least 10% of the issue must be offered to the public,
except under certain circumstances or when exempted by the ROC Securities and
Futures Commission. This percentage can be increased by a resolution passed at
a shareholders meeting, thereby reducing the number of new shares subject to
the preemptive rights of existing shareholders. Unless the percentage of shares
to be offered to the public is increased by the shareholders, existing
shareholders who are listed on the shareholders register as of the record date
have a preemptive right to acquire the remaining 75% to 80% of the issue. The
shares not subscribed for by the employees and shareholders at the expiration
of the period for the exercise of their rights should be sold to the public or
specified persons at the direction of our board of directors. According to the
amended ROC Securities and Exchange Law, which became effective on February 8,
2002, the preemptive rights provisions will not apply to offerings of new
shares through a private placement approved at a shareholders meeting.

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

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Meetings of Shareholders

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

Voting Rights

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

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



| |  |  | any amendment to the articles of incorporation, which is required,
among other things, for any increase in authorized share capital;                           
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | entering into, modification or termination of any contracts
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.                                                                                                                        

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

Other Rights of Shareholders

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

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

Register of Shareholders and Record Dates

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

The ROC Company Law permits us to set a record date and close our
shareholder register for a specified period in order for us to determine the
shareholders or pledgees that are entitled to certain rights pertaining to our
common shares by giving advance public notice.

Under the amended ROC Company Law, a public companys shareholder
register, such as ours, is closed for a period of 60 days before each ordinary
shareholders meeting, 30 days before each extraordinary shareholders meeting
and a period of five days before each record date.

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Annual Financial Statements

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

Acquisition of Common Shares by our Company

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

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



| |  |  | 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.                                                                                          

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

Liquidation Rights

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

Transfer Restrictions

The ROC Securities and Exchange Law requires each director, supervisor,
manager or shareholder who, together with such shareholders spouse, minor
children or nominees, holds more than 10% of our shares, to report the amount
of such persons holding to us and limits the number of shares that can be sold
or transferred on the Taiwan Stock Exchange or on the GreTai Securities Market
by such person per day (unless the number of shares transferred does not exceed
10,000).

An
English translation of our Articles of Incorporation is filed herewith as Exhibit 3.1.

C.   Material Contracts

Except for the contracts stated below we have not been a party to
any material contracts that were entered into beyond our ordinary course of
business during the preceding two year period. See Item 7.
Major Shareholders and Related Party Transactions  B. Related
Party Transactions for a summary of contracts with certain of
our related parties.

Indenture for Convertible Bonds

On
February 10, 2003 and March 4, 2003, we issued zero coupon convertible bonds totaling
US$90 million pursuant to an international bond offering. The bonds will
mature on February 10, 2008 at a redemption price equal to their principal
amount, together with redemption premium. The bonds do not bear interest.
Unless previously redeemed or repurchased and cancelled, the bonds, at the
option of the holders of the bonds, are convertible at anytime, except during a
closed period, on or after March 12, 2003 and on or before January 11, 2008,
into common shares,

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par value NT$10.00 per share. The initial conversion price will be NT$12.06
per common share, subject to adjustment in certain events. The bonds are
evidenced by the indenture included as Exhibit 10.2 hereto.

Summary of Terms and Conditions for Convertible Bonds

On December 12, 2002, we issued zero coupon convertible bonds totaling
NT$3,200 million pursuant to a domestic bond offering. The bonds will mature
on December 12, 2007 at a redemption price equal to their principal amount,
together with redemption premium. The bonds do not bear interest. Unless
previously redeemed or repurchased and cancelled, the bonds, at the option of
the holders of the bonds, are convertible at anytime, except during a closed
period, on or after March 12, 2003 and on or before
December 2, 2007, into common shares, par value
NT$10.00 per share. The initial conversion price will be NT$11.00 per common
share, subject to adjustment in certain events. See
Exhibit 10.10 hereto for an English summary of the terms and conditions of the bonds.

D.     Exchange Controls

Foreign Exchange

Set forth below are the period-end noon buying rates in effect between the
NT dollar and the U.S. dollar, expressed in NT dollars per U.S. dollar, for the
periods indicated.

|           |                        |                 |       |       | 
|---------- | ---------------------- | --------------- | ----- | ----- | 
|Period-End |                        | NT$ per US$1.00
|           |                        |                
|1998       |                        |                 | 32.27 |      
|1999       |                        |                 | 31.39 |      
|2000       |                        |                 | 33.17 |      
|2001       |                        |                 |       |      
|           | First Quarter          |                 |       | 32.85 | 
|           | Second Quarter         |                 |       | 34.48 | 
|           | Third Quarter          |                 |       | 34.56 | 
|           | Fourth Quarter         |                 |       | 35.00 | 
|2002       |                        |                 |       |      
|           | First Quarter          |                 |       | 35.00 | 
|           | Second Quarter         |                 |       | 33.46 | 
|           | Third Quarter          |                 |       | 34.92 | 
|           | Fourth Quarter         |                 |       | 34.70 | 
|2003       |                        |                 |       |      
|           | January                |                 |       | 34.61 | 
|           | February               |                 |       | 34.78 | 
|           | March                  |                 |       | 34.75 | 
|           | April                  |                 |       | 34.85 | 
|           | May                    |                 |       | 34.71 | 
|           | June (through June 26) |                 |       | 34.60 | 



---

|       |  |                                                                                                                                                             
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|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

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

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

In addition, a foreign person may, subject to certain requirements but
without foreign exchange approval, remit to and from Taiwan foreign currencies
of up to US$100,000 per remittance if the required documentation is provided to
the Taiwan authorities. This limit applies only to remittances involving a
conversion between New Taiwan dollars and U.S. dollars or other foreign
currencies.

E.   Taxation

ROC Taxation

General

The following summary addresses the principal ROC tax consequences of the
ownership and disposition of common shares or ADSs to a nonresident individual
or non-resident entity that holds such common shares or ADSs (a Non-ROC
Holder). As used in the preceding sentence, a non-resident individual (a
Non-ROC Individual) is a foreign national individual who is not physically
present in the ROC for 183 days or more during any calendar year in which he or
she owns common shares or ADSs and a non-resident entity (a Non-ROC Entity)
is a corporation or a non-corporate body that is organized under the laws of a
jurisdiction other than the ROC for profit-making purposes and does not have a
fixed place of business or other permanent establishment in the ROC.

ADS HOLDERS AND COMMON SHARE HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS
CONCERNING THE TAX CONSEQUENCES OF OWNING THE ADSs OR COMMON SHARES IN TAIWAN
AND ANY OTHER RELEVANT TAXING JURISDICTION TO WHICH THEY ARE SUBJECT.

ADSs

Dividends.Dividends, whether in cash or stock declared by us out of
retained earnings and distributed to a Non- ROC Holder in respect of our shares
represented by ADSs are subject to ROC withholding tax, currently at a rate of
20% on the amount of the distribution, in the case of cash dividends, or on the
par value of the distributed shares, in the case of stock dividends. The
Depositary may dispose of a portion of the dividends to pay such tax.
Distributions of stock dividends out of capital reserves are not subject to ROC
withholding tax.

Sale.
Transfers of ADSs are not subject to ROC securities transaction
tax. Gains on sale of ADSs are not subject to ROC income tax.

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Common Shares

Dividends.Dividends (whether in cash or common shares) declared by us
out of retained earnings and distributed to a Non-ROC Holder in respect of
common shares are subject to ROC withholding tax, currently at the rate of 20%,
on the amount of the distribution (in the case of cash dividends) or on the par
value of the common shares (in the case of stock dividends).

Distributions of common shares declared by us out of capital reserves are
not subject to ROC withholding tax.

Sale.Security transaction tax will be withheld at the rate of 0.3% of
the transaction price upon a sale of common shares.

Capital gains on transactions in securities issued by ROC companies are
exempt from income tax. This exemption applies to capital gains derived from
the sale of common shares.

Preemptive Rights.Distributions of statutory subscription rights for the
common shares in compliance with the ROC Company Law are not subject to ROC
tax. Proceeds derived from sales of statutory subscription rights evidenced by
securities are currently exempted from income tax but are subject to securities
transaction tax, currently at the rate of 0.3% of the gross sales amount.
Proceeds derived from sales of statutory subscription rights which are not
evidenced by securities are subject to capital gains tax at the rate of (i) 25%
of the gains realized by Non-ROC Entity Holders and (ii) 35% of gains realized
by Non-ROC Individual Holders. Subject to compliance with ROC law, we have the
sole discretion to determine whether statutory subscription rights shall be
evidenced by the issuance of securities.

Inheritance Tax and Gift Tax

ROC inheritance tax is payable on any property situated within the ROC of
a deceased Non-ROC Individual, and ROC gift tax is payable on any property
situated within the ROC donated by such person. Inheritance tax is payable at
rates ranging from 2% of the first NT$600,000 to 50% of amounts over
NT$100,000,000. Gift tax is payable at rates ranging from 4% of the first
NT$600,000 to 50% of amounts over NT$45,000,000. Under ROC inheritance and gift
tax law, bonds and shares issued by ROC companies are deemed situated within
the ROC irrespective of the location of the owner. It is unclear whether a
holder of ADRs will be considered to own common shares for this purpose.

Tax Treaties

The United States does not have an income tax treaty with the ROC. At
present, the ROC has income tax treaties with Australia, Gambia, Indonesia,
Malaysia, Macedonia, the Netherlands, New Zealand, Singapore, South Africa,
Swaziland, United Kingdom and Vietnam which limit the rate of withholding tax
on dividends or interest paid with respect to shares or bonds in ROC companies.
It is unclear whether a Non-ROC Holder will be considered to own common
shares for the purposes of such income tax treaties. Accordingly,
holders of common shares who are otherwise entitled to the benefits of
the relevant income tax treaty should consult their own tax advisors concerning
their eligibility for benefits under the treaty with respect to the common shares.

An amendment to the ROC Income Tax Law (the Amendment) was enacted on
January 1, 1998, to integrate the corporate income tax and the shareholder
dividend tax with the aim of eliminating the double taxation effect for
resident shareholders of Taiwanese corporations. In accordance with the
Amendment, a 10% retained earnings tax will be imposed on a company for its
after-tax earnings generated after January 1, 1998 that are not distributed in
the following year. The retained earnings tax so paid will further reduce the
retained earnings available for future distribution. When the company declares
dividends out of those retained earnings, the retained earnings tax can be
credited against the 20% withholding tax imposed on the Non-ROC Holders up to
10% of the declared dividends.

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United States Federal Income Taxation

General

The following discussion addresses the principal United States federal
income tax consequences to United States Holders, as defined below, of
purchasing, owning and disposing of ADSs or common shares, but it does not
purport to be a comprehensive description of all of the United States federal
income tax considerations that maybe relevant to a decision to purchase, own,
or dispose of the ADSs or common shares and does not address the tax treatment
under applicable state or local tax laws or the laws of any jurisdiction other
than the United States. The following discussion only applies to United States
Holders (as defined below) that:



| |  |  | own ADSs and common shares as capital assets; and                 
| | - |  | ------------------------------------------------------------------
|
| |  |  | actually and constructively own less than 10% of our voting stock.

In particular, this discussion does not address special United States
federal income tax situations, such as the consequences applicable to persons
who are subject to special treatment because they are:



| |  |  | 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;                                                                                                   
|
| |  |  | tax-exempt organizations;                                                                                                        
|
| |  |  | persons liable for alternative minimum tax;                                                                                      
|
| |  |  | persons who hold ADSs 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 or common shares pursuant to certain retirement plans;                                                     
|
| |  |  | persons who receive ADSs 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 or common shares.                                                                      

The following discussion of United States federal income tax matters is
based:



| |  |  | 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
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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; and  
|
| |  |  | in part, on certain representations made by us with respect to the
nature of our past, present and future income and assets.                                                                             

As used in this discussion, the term United States Holder means a
Beneficial owner of ADSs and common shares that is:



| |  |  | an individual who is a citizen or resident (as defined below) of the
United States;                                                                                                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a corporation organized under the laws of the United States or any
State or the District of Columbia (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.                                                                                               

If a partnership holds our ADSs or common shares, the tax treatment of a
partner in such partnership will generally depend upon the status of the
partner and the activities of the partnership. We encourage any such partners
to consult their own tax advisor.

A resident of the United States generally includes an individual that
(i) is lawfully admitted for permanent residence in the United States; (ii) is
present in the United States for 183 days or more during a calendar year; or
(iii)(a) is present in the United States for 31 days or more during a calendar
year, (b) is present in the United States for an aggregate of 183 days or more,
on a weighted basis, over a three-year period ending with such calendar year,
and (c) does not have a closer connection to a tax home that is located
outside the United States.

A Non-United States Holder is any Beneficial owner of ADSs or common
shares that is
not a United States Holder as defined above.

HOLDERS OF ADSs OR COMMON SHARES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF ADSs OR COMMON SHARES, INCLUDING PARTICULARLY THE POSSIBLE
IMPLICATIONS OF THE PASSIVE FOREIGN INVESTMENT COMPANY RULES DISCUSSED BELOW AS
WELL AS THE EFFECT OF ANY STATE OR LOCAL TAX LAWS OR THE LAWS OF ANY
JURISDICTION OTHER THAN THE UNITED STATES.

ADSs and Common Shares

For United States federal income tax purposes, a United States Holder will
be treated as the Beneficial owner of the common shares underlying its ADSs,
and exchanges of common shares for ADSs, and ADSs for common shares, will not
be subject to United States federal income tax.

Taxation of Dividends. Subject to the discussion under   Passive
Foreign Investment Company Status

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below, distributions, other than certain pro rata distributions of common
shares and rights to acquire common shares discussed below, in respect of
common shares to United States Holders, including the amount of any ROC tax
withheld, will constitute foreign source dividend income for United States
federal income tax purposes to the extent these distributions are made from our
current or accumulated earnings and profits, as determined in accordance with
United States federal income tax principles. Dividend distributions in respect
of ADSs, other than certain pro rata distributions of common shares and rights
to acquire common shares discussed below, including the amount of any ROC tax
withheld, will generally constitute partly foreign source and partly United
States source dividend income. These dividends will not be eligible for the
dividends received deduction otherwise allowed to U.S. Corporations. Such
dividend income will be includable in the gross income of a United States
Holder as ordinary income on the day it is actually or constructively received
by the United States Holder, in the case of common shares, or by the
depositary, in the case of ADSs. A non-corporate United States Holder of ADSs
will generally be eligible for reduced rates of tax (i.e., the rates applicable
to net long-term capital gain, which are 5% and 15%) with respect to dividends
on ADSs under section 1(h) of the Code if the United States Holder has held the
ADSs for more than 60 days during the 120-day period that begins on the date
that is 60 days before the ex-dividend date. For the purpose of determining
the holding period, no account is taken of days on which the holders risk of
loss with respect to the ADSs is diminished by virtue of various hedging
strategies described in section 246(c) of the Code. To the extent, if any,
that the amount of any distribution of this type exceeds our current and
accumulated earnings and profits as so computed, it will be treated first as a
tax-free return of the United States Holders tax basis in its ADSs and common
shares, and then, to the extent that any distribution of this type is in excess
of the United States Holders tax basis, as capital gain. Any such
distributions in excess of our current and accumulated earnings and profits
will not give rise to foreign source income, and a United States Holder will
not be able to use the foreign tax credit arising from any ROC withholding tax
imposed on such distribution unless such credit can be applied (subject to
applicable limitations) against United States federal income tax due on other
foreign source income in the appropriate category for foreign tax credit
purposes. The amount of any cash distribution paid in NT dollars will generally
equal the U.S. dollar value of the NT dollar distribution, including the amount
of any ROC tax withheld, calculated by reference to the exchange rate in effect
on the date the dividend is actually or constructively received by the United
States Holder, in the case of common shares, or by the depositary, in the case
of ADSs, regardless of whether the payment is in fact converted into U.S.
dollars on that date. If the NT dollars received are not converted into U.S.
dollars on the date of receipt, a United States Holder will have a basis in the
NT dollars equal to their U.S. dollar value on the date of receipt. Generally,
gain or loss, if any, realized on a subsequent conversion or other disposition
of the NT dollars will be ordinary income or loss. This gain or loss will
generally be treated as United States source income for United States foreign
tax credit limitation purposes. The amount of any distribution of property
other than cash will be the fair market value of the property on the date of
distribution.

Subject to specified limitations, including holding period requirements,
ROC taxes withheld from dividend distributions maybe eligible for credit
against the United States Holders United States federal income taxes or, at
the United States Holders option, for deduction from United States taxable
income. Under the Code, the limitation on foreign taxes eligible for credit is
calculated separately with respect to specific classes of income. For this
purpose, dividends paid by us will generally be passive income or, in the
case of certain United States Holders,  financial services income. Due to the
complexity of the rules governing foreign tax credits, we encourage United
States Holders of ADSs and common shares to consult their own tax advisors
concerning the availability of foreign tax credits under their particular
circumstances. Certain distributions of common shares and rights to acquire
common shares that are made on a pro rata basis to our stockholders, including
holders of ADSs, will not be subject to United States federal income tax.
Accordingly, any distributions of this type will not give rise to United States
federal income tax against which ROC tax withheld with respect to the
distribution, if any, maybe credited. Any ROC tax of this kind generally will
be creditable only against a United States Holders United States federal
income tax liability with respect to general limitation income and not
passive income or  financial services income. The basis of any common
shares or rights to acquire common shares received pro rata in a tax-free
distribution by United States Holders will be determined by allocating the
United States Holders basis in his existing common shares or rights to acquire
common shares between the existing common shares or rights to acquire common
shares and the newly issued common shares or rights to acquire common shares in
proportion to

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their relative fair market values on the date of distribution. However, the
basis of the rights will be zero if (i) the fair market value of the rights is
less than 15% of the fair market value of the existing common shares at the
time of distribution (unless the United States Holder makes an election to
allocate the basis in his existing common shares as described above) or (ii)
the rights are not exercised and thus expire.

Sale or Other Disposition of Common Shares or ADSs. Subject to the
discussion under   Passive Foreign Investment Company Status below, a
United States Holder will recognize capital gain or loss for United States
federal income tax purposes on a sale or other disposition of ADSs or common
shares in an amount equal to the difference between the United States Holders
adjusted basis in the ADSs or common shares and the amount realized on the
disposition. This capital gain or loss will be long-term capital gain or loss
if the United States Holder has held the ADSs or common shares for more than
one year at the time of the sale or exchange. The holding period of the ADSs or
common shares will include the holding period of the bonds converted into such
ADSs or common shares. Long-term capital gain of a non-corporate United States
Holder is generally subject to a maximum rate of 15% in respect of property
held for more than one year. For corporate United States Holders, a capital
gain is currently taxed at the same rate as ordinary income. The deductibility
of capital losses is subject to limitations for both corporate and
non-corporate United States Holders. Any gain or loss recognized by a United
States Holder will generally be treated as United States source gain or loss.
United States Holders should note that any ROC securities transaction taxes
imposed on a sale may not be eligible for credit and may not be eligible for
deduction against the United States Holders United States federal income
taxes. In the event that any ROC securities taxes are not eligible for
deduction, however the amount of any such taxes will reduce the amount realized
by the United States Holder upon the disposition of the common shares or ADSs.

Passive Foreign Investment Company Status

Certain adverse United States federal income tax rules apply to United
States persons who are holders of equity interests in a corporation classified
as a passive foreign investment company (PFIC). Based on current and
projected financial data, we believe that we will not currently be treated as a
PFIC for United States federal income tax purposes and we do not expect to
become one in the future, but this conclusion is a factual determination made
annually and thus may be subject to change based on future operations and the
composition and valuation of our assets. In general, we will be a PFIC with
respect to a United States Holder if, for any taxable year in which the United
States Holder holds ADSs or common shares , after the application of certain
look through rules to the assets and income of 25% or greater owned
subsidiaries, either:



| |  |  | 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.

If we are treated as a PFIC, a United States Holder will be subject to
taxation under one of three alternative tax regimes. Under the first regime, a
United States Holder that does not make a qualified electing fund election or a
mark-to-market election, as described below, would be subject to special,
generally unfavorable, rules with respect to:



| |  |  | any gain realized on the sale or other disposition of ADSs or common shares; and
| | - |  | --------------------------------------------------------------------------------
|
| |  |  | any excess distribution by us to the United States Holder.                    

Generally, excess distributions are any distributions to the United
States Holder in respect of the ADSs or common shares during a single taxable
year that are greater than 125% of the average annual distributions received by
the United States Holder in respect of the ADSs or common shares during the
three preceding taxable years or, if shorter, the United States Holders
holding period for the ADSs or the common shares (which would include the
holding period of the bonds converted into such ADSs or common shares).

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Under the PFIC rules, if no special election is made:



| |  |  | the gain or excess distribution would be allocated ratably over the United
State Holders holding period;                                                                                                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the amount allocated to the taxable year in which the gain or excess
distribution was realized would be taxable as ordinary income;                                                                                                  
|
| |  |  | the amount allocated to each prior year, with certain exceptions,
would be subject to tax at the highest tax rate in effect for that year;
and                                                                                       
|
| |  |  | an interest charge, which maybe nondeductible in the case of United
States Holders that are individuals, generally applicable to
underpayments of tax would be imposed in respect of the deferred tax
attributable to each such year.

Under the second regime, a United States Holder actually or constructively
owning marketable stock (within the meaning of the Code and regulations
promulgated thereunder) of a PFIC maybe able to avoid the imposition of the
PFIC tax rules described above by making a mark-to-market election. Under
current law, the mark-to-market election is only available for stock traded on
certain designated United States exchanges and foreign exchanges that meet
certain trading, listing, financial disclosure and other requirements to be
treated as a qualified exchange under applicable United States Treasury
regulations. The common shares are listed on the Taiwan Stock Exchange and
existing ADSs are listed on Nasdaq. Nasdaq is a qualified exchange
for purposes of marketable stock and the mark-to-market election, but the
Taiwan Stock Exchange would need to meet the trading, listing, financial
disclosure and other requirements of the United States Treasury regulations. In
addition, both the ADSs listed on Nasdaq and the common shares listed on the
Taiwan Stock Exchange would need to be regularly traded on such exchanges in
order for the ADSs and common shares to be potentially eligible for the
mark-to-market election.

Generally, pursuant to this election, such holder would include in
ordinary income an amount equal to the increase in the market value of such
stock during the taxable year and would be allowed to recognize an ordinary
loss for any decrease in such market value to the extent of prior gain
recognized. The mark-to-market election would be effective for the taxable year
for which made and all subsequent taxable years, unless the stock ceased to be
marketable, or the Internal Revenue Service consented to the revocation of the
election. United States Holders desiring to make the mark-to-market election
should consult their tax advisors with respect to the application and effect of
making such election.

In the case of a United States Holder who does not make a mark-to-market
election, the special PFIC tax rules described above will not apply to such
United States Holder if the United States Holder makes an election to have us
treated as a qualified electing fund and we provide certain required
information to such holders.

Under this third regime, a United States Holder that makes a qualified
electing fund election will be currently taxable on its pro rata share of our
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) and ordinary earnings, at long-term capital gains and ordinary
income rates, respectively, for each of our taxable years during which we are
treated as a PFIC, regardless of whether or not such amounts are actually
distributed. The United States Holders basis will be increased to reflect such
taxed but undistributed amounts of income. Distributions of income that have
previously been taxed will result in a corresponding reduction in the United
States Holders basis and will not be taxed again as a distribution to the
United States Holder. United States Holders desiring to make a qualified
electing fund election should consult their tax advisors with respect to the
advisability of making such election. For a United States Holder to make a
qualified electing fund election, we would have to satisfy certain reporting
requirements. We have not determined whether we will undertake the necessary
measures to be able to satisfy such requirements, in the event that we are
treated as a PFIC.

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United States Federal Income Taxation of Non-United States Holders

Subject to the discussion of United States backup withholding tax below, a
Non-United States Holder of ADSs or common shares will not be subject to United
States federal income or withholding tax on distributions on a common share or
ADS or gains realized on the sale of ADSs or common shares, provided that (i)
such income items are not effectively connected with the conduct by the
Non-United States Holder of a trade or business within the United States (or,
in the case where a Non-United States Holder is eligible for the benefits of an
income tax treaty with the United States, the Non-United States Holder does not
have a permanent establishment or fixed place of business in the United States
to which such income is attributable), (ii) the Non-United States Holder is not
or was not present in or does not have or did not have a permanent
establishment or fixed place of business in the United States, (iii) there has
not been a present or former connection between the Non-United States Holder
and the United States, including, without limitation, such Non-United States
Holders status as a citizen or former citizen, or resident or former resident,
of the United States, and (iv) in case of a gain from the sale or disposition
of ADS or common shares by an individual, the Non-United States Holder is not
present in the United States for 183 days or more during the taxable year of
the sale. Where a Non-United States Holder that is also a corporation for
United States federal income tax purposes is subject to United States federal
income tax in respect of such items of income in the same manner as a United
States Holder, such items of income, net of United States federal corporate
income taxes, may also be subject to an additional  branch profits tax of 30%
(or such lower rate as maybe specified by a tax treaty for whose benefits the
Non-United States Holder corporation is eligible).

United States Backup Withholding Tax and Information Reporting

Payments made by a paying agent within the United States to the United
States Holders other than corporations and other exempt recipients in respect
of the ADSs or common shares maybe subject to information reporting to the
United States Internal Revenue Service. A backup withholding tax on amounts
received will apply to those payments if a non-exempt United States Holder
fails to provide certain identifying information, such as the holders taxpayer
identification number, and to comply with certain other requirements concerning
backup withholding. Currently, this backup withholding rate is 30% for payments
made in 2002 and 2003, but this rate will be reduced to 29% for payments made
in 2004 and 2005, and 28% for payments made in 2006 and thereafter. Non-United
States Holders maybe required to comply with applicable certification
procedures to establish that they are not United States Holders in order to
avoid the application of such information reporting requirements and backup
withholding tax.

Any amounts withheld under the backup withholding tax rules from a payment
to a holder generally will be allowed as a refund or a credit against such
holders United States federal income tax, provided that the required
information is furnished to the Internal Revenue Service.

F.     Dividends and Paying Agents

Not applicable.

G.     Statement by Experts

Not applicable.

H.     Documents on Display

We are required to file reports and other information with the SEC under
the provisions of the U.S. Securities Exchange Act of 1934 which apply to
foreign private issuers. We are required to file annual reports on Form 20-F
and submit reports on Form 6-K and other information with the SEC. We do not
intend to file any other reports, including interim reports on Form 10-Q. These reports and
other information filed, submitted or to be submitted by us can be inspected
and copied at the public reference facilities maintained by the SEC at:

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| |  | Judiciary Plaza
450 Fifth Street, N.W.
Room 1024
Washington, D. C. 20549                  
| |  | ------------------------------------------------------------------------------------------
|
| |  | Northwestern Atrium Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60611-2511
|

Copies of these materials can also be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington D. C. 20549, at
prescribed rates.

The SEC maintains a website at www.sec.gov that contains reports, proxy
and information statements, and other information regarding registrants that
make electronic filings with the SEC using its EDGAR system. As a foreign
private issuer, we are required to make our SEC filings as electronic
filings using the EDGAR system, commencing with this annual report on
Form 20-F. This annual report and our future filings will be
available at the website referred to above.

Our periodic reports and other information may also be inspected at the
offices of the Nasdaq National Market, Reports Section, 1735 K Street, N.W.,
Washington, D. C. 20006. As a foreign private issuer, we are exempt from
the rules under the U.S. Securities Exchange Act of 1934 which require the
furnishing and govern the content of proxy statements, and our executive
officers, directors, supervisors, and principal shareholders are exempt
from the reporting and short-swing profit recovery provisions contained in
Section 16 of the Exchange Act.

I.     Subsidiary Information

Not applicable.




Item 11. Quantitative and Qualitative Disclosure About Market Risk

For the purposes of compiling the respective tables, the following rates
have been used:



| |  |  | The exchange rates as at December 31, 2002 are based on the official
exchange rates as determined by the Bank of Taiwan, being
NT$34.7=US$1.00 and NT$0.2924=JPY1.00.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Interest rates are derived from the prevailing interest rate swap
market in the respective currencies as at January 2, 2003.                                         

Interest Rates

Our exposure to interest rate risk relates primarily to our long-term
debt, which is normally entered into to fund our corporate activities,
primarily for capital expenditures. Other interest rate sensitive short-term
assets and liabilities include mainly cash in banks and bank loans.

The table below presents the period-end principal amounts outstanding and
the contractual rate, where
applicable, or the related weighted-average implied forward interest rate by
year of maturity, of our debt obligations.

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Principal (notional) amount by expected maturity for non-trading purposes

|                           |                          |                                                   |                     |                       |           |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           |  |           |              |           | 
|-------------------------- | ------------------------ | ------------------------------------------------- | ------------------- | --------------------- | --------- | --------- | ------- | ---- | --------- | ---- | ------- | ---- | --------- | ---- | --------- | ---------- |  | ----------- | --------- | ---- |  |  | --------- | - |  |  | --------- | - | --------- | --------- | --------- |  | --------- | ------------ | --------- | 
|                           |                          |                                                   |                     |                       |           |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           |  |           | Fair value  
|                           |                          |                                                   |                     |                       |           |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           |  |           | December 31,
|                           |                          |                                                   |                     |                       |           | 2003      |         | 2004 |           | 2005 |         | 2006 |           | 2007 |           | Thereafter |  | Total(2)(3) |           | 2002
|                           |                          |                                                   |                     |                       |           |           |         |      |           |      |         |      |           |      |           |            |  |             |           |     
|Rate sensitive assets      |                          |                                                   |                     |                       |           |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           | 
|                           | Cash                     |                                                   |                     |                       |           |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           |  |          
|                           |                          | Variable rate                                     |                     |                       | 8,836,581 |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   | 8,836,581 |           |           |  | 8,836,581 |             
|                           |                          | Average interest rate                             |                     |                       | 0.26      | %         |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   | 0.26      | %         |           |  |           |             
|                           |                          | Fixed rate                                        |                     |                       | 1,894,949 |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   | 1,894,949 |           |           |  | 1,894,949 |             
|                           |                          | Average interest rate                             |                     |                       | 1.24      | %         |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   | 1.24      | %         |           |  |           |             
|                           |                          | Others                                            |                     |                       | 14,402    |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   | 14,402    |           |           |  | 14,402    |             
|Rate sensitive liabilities |                          |                                                   |                     |                       |           |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           | 
|                           | Long term debt           |                                                   |                     |                       |           |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           |  |          
|                           |                          | Zero
coupon convertible debentures due 2003 (1)   |                     |                       | 3,607,189 |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   | 3,607,189 |           |           |  | 3,465,618 |             
|                           |                          | 1%
convertible debentures due 2005 (2)            |                     |                       | 3,054,477 |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   | 3,054,477 |           |           |  | 3,545,306 |             
|                           |                          | Unsecured
0.5% convertible debentures due 2007(3) |                     |                       |           |           |         |      | 6,341,862 |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   | 6,341,862 |           |           |  | 5,973,650 |             
|                           |                          | Zero
coupon convertible debentures due 2007(4)    |                     |                       |           |           |         |      |           |      |         |      | 2,915,424 |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   | 2,915,424 |           |           |  | 2,558,644 |             
|                           |                          | Zero
coupon convertible debentures due 2008(5)    |                     |                       |           |           |         |      | 3,127,500 |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   | 3,127,500 |           |           |  | 0         |             
|US$
debt                   |                          |                                                   |                     |                       |           |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           | 
|                           |                          |                                                   |                     | Variable rate         | 1,166,210 |           |         |      | 1,166,210 |      |         |      | 34,750    |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   | 2,367,170 |           |           |  | 2,367,170 |             
|                           |                          |                                                   |                     | Average interest rate |           |           | 2.20    | %    |           |      | 2.20    | %    |           |      | 2.20      | %          |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           |  |           |              |           | 
|                           |                          | NT$ debt                                          |                     |                       |           |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           |  |           |             
|                           |                          |                                                   |                     | Fixed rate            |           |           |         |      |           |      |         |      |           |      |           |            |  |             | 3,000,000 |      |  |  |           |   |  |  |           |   |           |           | 3,000,000 |  |           |              | 3,056,599 | 
|                           |                          |                                                   |                     | Average interest rate |           |           |         |      |           |      |         |      |           |      |           |            |  |             | 3.30      | %    |  |  |           |   |  |  |           |   |           |           |           |  |           |              | 8,770,610 | 
|                           |                          |                                                   |                     | Variable rate         |           |           | 991,430 |      |           |      | 641,426 |      |           |      | 1,497,666 |            |  |             | 1,441,236 |      |  |  | 1,264,986 |   |  |  | 2,933,867 |   |           |           | 8,770,610 |  |           |              |           | 
|                           |                          |                                                   |                     | Average interest rate |           |           | 3.80    | %    |           |      | 3.80    | %    |           |      | 3.80      | %          |  |             | 3.80      | %    |  |  | 3.80      | % |  |  | 3.80      | % |           |           |           |  |           |              |           | 
|                           | Purchased
call option(1) |                                                   |                     |                       |           |           |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           |  |          
|                           |                          |                                                   | Notional amount     |                       |           | 3,607,189 |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           | 3,607,189 |           |  |           |              |          
|                           |                          |                                                   | Redemption
price(1) |                       |           | 23.4226   |         |      |           |      |         |      |           |      |           |            |  |             |           |      |  |  |           |   |  |  |           |   |           |           |           |  |           |              |          



---

|(1) |  | In 1998, we issued zero coupon convertible debentures in the amount of
US$150 million due in 2003. The debentures were privately placed with a
financial institution. We subsequently purchased 15 call option contracts
which in total cover the full principal amount of the debentures. Each
option covers US$10 million of the debentures and can be exercised at our
discretion on business days until the maturity of the debentures. We are
required to exercise a minimum of two options at any given time. On
exercise of an option we will receive from the financial institution the
portion of the debentures covered by the option and will pay to the
institution a settlement amount. The settlement amount is the sum of the
relevant hedge amount plus the principal amount of the debentures under
the option exercised. The relevant hedge amount is the sum of the net
present value of a hypothetical swap transaction, plus an accrued interest
amount. The hypothetical swap transaction swaps a strip of U.S. dollar
floating interest payments, calculated using 3 month LIBOR plus 0.45%,
plus the U.S. dollar notional amount, paid at maturity, for a single
Japanese yen payment at maturity. The Japanese yen payment is calculated
as the U.S. dollar notional amount converted to the Japanese yen at a
fixed exchange rate of 135. Under the hypothetical swap transaction we
receive the U.S. dollar payments and pay the Japanese yen payment. The
U.S. dollar notional amount of the hypothetical swap is the same as the
principal amount of the options being exercised. The accrued interest
amount is calculated on the swap notional amount using the last U.S. dollar 3
month LIBOR reset rate of the swap plus 0.45%. The accrual period is from
the last reset date of the swap and the exercise date of the option. If
any options remain unexercised at the maturity of the contracts, the
principal amount of those options multiplied by 129.755% will be exchanged
with the financial institution for Japanese yen at a fixed exchange rate
of 135. We receive U.S. dollars and pay Japanese yen. We exercised two of
the options on January 22, 2000 and five of the options on June 26, 2000.
As of December 31, 2002, approximately US$80 million principal amount of
the debentures and eight of the options remain outstanding. As April 23,
2003, we exercised our option to redeem all the remaining outstanding bonds
US$80 million.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In January 2000, we issued US$200 million aggregate principal amount of
our unsecured 1% convertible debentures due 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) |  | In February 2002, we issued US$169.2 million aggregate principal amount
of our unsecured 0.5% convertible debentures due 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(4) |  | In December 2002, we issued zero coupon convertible debentures in the
amount of NT$3.2 billion due 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(5) |  | In February 2003, we issued zero coupon convertible debentures in the
amount of US$80 million due in 2008. In March 2003, we issued the
over-allotment in the amount of US$10 million due in 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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Foreign Currencies

A significant portion of our revenues are denominated in currencies other
than the NT dollar. As of
December 31, 2002, most of our accounts payable and payables for purchases of
capital goods were denominated in currencies other than the NT dollar,
primarily in U.S. dollars and Japanese yen. In addition, as of December 31,
2002, most of our long-term debts were in U.S. dollars, including the long-term
debentures. To protect against reductions in value and volatility of future
cash flows caused by changes in foreign exchange rates, we utilize derivative
financial instruments to hedge our currency exposure. These hedging
transactions are designed to reduce, but do not eliminate, the impact of
foreign currency exchange rate movements. Our policy is to account for these
contracts on a hedge accounting basis.

Most of our sales are denominated in Japanese yen and our debts are in
U.S. dollars. An appreciation of the Japanese yen against the NT dollar would
result in a foreign exchange gain to us from our underlying sales. However, a
depreciation of the Japanese yen against the NT dollar would result in a
foreign exchange loss to us. Conversely, an appreciation of the U.S. dollar
against the NT dollar would result in a foreign exchange loss to us, while a
depreciation of the U.S. dollar against the NT dollar would result in a foreign
exchange gain to us. To reduce the foreign exchange loss from a depreciation of
Japanese yen, we entered into foreign exchange option contracts.

If the Japanese yen appreciates, it is highly likely that the
counter-parties would exercise the options. However, we would be compensated
from the gain from our underlying Japanese yen sales and use the U.S. dollars
received to pay down the U.S. dollar debts. If the Japanese yen depreciates, it
is highly likely the counter-parties would not exercise the option, and the
premiums received would provide us additional cash flow against the foreign
exchange loss from our sales as a result of the weak Japanese yen.

In writing the options described, we could be considered to be taking on
additional foreign exchange risk. To mitigate this risk, a number of the
contracts we entered into include barriers. These barriers have the effect
that, if the Japanese yen exchange rate to U.S. dollar exceeds a given rate,
the contracts are automatically terminated. The barriers have the impact of
reducing the upfront cost of the options. The written option contracts, either
entered into with or without barriers, do not qualify as hedges for accounting
purposes and accordingly are carried in our financial statements at fair value.
For U.S. GAAP purposes, beginning on January 1, 2001, all of our derivative
contracts are accounted for at fair value through our statement of
operations.

The table below presents our assets and liabilities denominated in
currencies other than the NT dollar functional currency and the outstanding
forward foreign exchange, cross currency interest rate swap and option
contracts as of December 31, 2002 by expected year of maturity.

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Principal (notional) amount by expected maturity for non-trading purposes

|                                              |  |        |     |                  |           |                    |         |      |            |      |  |      |         |            |  |       |  |                   |  |  |  |  |  |  |            |  |         |  |            |            |        | 
|--------------------------------------------- |  | ------ | --- | ---------------- | --------- | ------------------ | ------- | ---- | ---------- | ---- |  | ---- | ------- | ---------- |  | ----- |  | ----------------- |  |  |  |  |  |  | ---------- |  | ------- |  | ---------- | ---------- | ------ | 
|                                              |  |        |     |                  |           |                    |         |      |            |      |  |      |         |            |  |       |  |                   |  |  |  |  |  |  |            |  |         |  |            | Fair value
|                                              |  |        |     |                  |           | 2003               |         | 2004 |            | 2005 |  | 2006 |         | Thereafter |  | Total |  | December 31, 2002
|                                              |  |        |     |                  |           |                    |         |      |            |      |  |      |         |            |  |       |  |                  
|                                              |  |        |     |                  |           | (NT$ in thousands)
|Liabilities
denominated in foreign currencies |  |        |     |                  |           |                    |         |      |            |      |  |      |         |            |  |       |  |                   |  |  |  |  |  |  |            |  |         | 
|                                              |  | JPY    |     |                  |           |                    |         |      |            |      |  |      |         |            |  |       |  |                   |  |  |  |  |  |  |            |  |         |  |            |           
|                                              |  | US$(1) |     |                  | 8,453,734 |                    |         |      | 11,283,560 |      |  |      | 367,287 |            |  |       |  |                   |  |  |  |  |  |  | 20,104,581 |  |         |  | 22,731,036 |           
|Financial instruments                         |  |        |     |                  |           |                    |         |      |            |      |  |      |         |            |  |       |  |                   |  |  |  |  |  |  |            |  |         | 
|                                              |  |        | CCS |                  |           |                    |         |      |            |      |  |      |         |            |  |       |  |                   |  |  |  |  |  |  |            |  |         |  |            |            |       
|                                              |  |        |     | Sell JPY/Buy US$ |           |                    |         |      |            |      |  |      |         |            |  |       |  |                   |  |  |  |  |  |  |            |  |         |  |            |            | 20,895 | 
|                                              |  |        |     | Buy US$          |           |                    | 139,000 |      |            |      |  |      |         |            |  |       |  |                   |  |  |  |  |  |  |            |  | 139,000 |  |            |            |        | 
|                                              |  |        |     | Sell JPY         |           |                    | 118,372 |      |            |      |  |      |         |            |  |       |  |                   |  |  |  |  |  |  |            |  | 118,372 |  |            |            |        | 



---

|(1) |  | In January 2000, we issued US$200 million unsecured 1% convertible
debentures due 2005. As of December 31, 2002, there was approximately
US$72.1 million aggregate
principal amount of these debentures outstanding. In May 1998, we issued
US$150 million unsecured zero coupon convertible debentures due 2003. As of
December 31, 2002, there were approximately US$80 million aggregate
principal amount of these debentures outstanding. In February 2002, we
issued US$169.2 million aggregate principal amount of our unsecured 0.5%
convertible debentures due 2007. In 2003, we issued US$90 million aggregate
principal amount of our zero coupon convertible debentures due 2008.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Market Price Sensitivity Analysis

Equity Swap

On July 16, 1999, we entered into an equity swap with a financial
institution, with the underlying reference equity being our common shares. If
the final average share price, which is evaluated monthly at a predetermined
date over the life of the contract, is greater than the initial share price, we
would be entitled to receive that value from the financial institution. If the
final average share price is less than the initial share price, then we would
pay this amount to the financial institution. However, the contract is subject
to a floor of 95%, which limits our risk exposure should the final average
share price fall by more than 5% of the initial share price. The notional
amount of the contract is US$55 million (equivalent to NT$1.7 billion at the
rate of US$1.00=NT$30.90).

We pay six-month LIBOR plus 1.75% on the notional amount to the financial
institution for this equity swap. The interest rate sensitivity of these
payments are included in the tabular presentation of interest rate sensitivity
above.

The above equity swap would have expired on July 16, 2002 but was
terminated early on February 2, 2000, which resulted in a gain of US$7 million
(equivalent to NT$218 million) to us.

Equity Contract

On May 5, 1998, we issued convertible debentures amounting to US$150
million, which were privately placed with a financial institution. One of our
wholly-owned subsidiaries 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 million is divided into fifteen options and our 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. We simultaneously entered into currency swaps, based on the notional
amount of the debt, converting Japanese Yen into New Taiwan dollars and New
Taiwan dollars into United States dollars. Subsequently, the option contract
and the currency swaps were combined into one contract. The subsidiary
exercised two options and five options on January 22, 2000 and June 26, 2000,
respectively. As of December 31, 2002, the outstanding portion of this
compound derivative contract had a negative fair value of US$14.5 million
(NT$504 million), and the carrying amount had a negative fair value of US$10.3
million (NT$359 million).

In
May 2003, we settled the contract by paying US$13 million
(NT$456 million).

In June 2000, we entered into a contract with a financial institution for
the settlement of five options relating to our zero coupon convertible
debenture due 2003 with the underlying reference being 47,727,535 of our common
shares. The contract, as amended, will expire on May 5, 2004. As
of December 31, 2002, the remaining underlying reference was 53,253,964 of our common
shares. If the share price is greater than the predetermined contract price, we
would pay the differences between the two amounts to the financial institution.
The contract rate at which the contract is settled is based in US dollars, and
our share price is converted into US dollars using current NT dollars to US
dollars exchange rates in order to determine the settlement amount. The
contract rate as of December 31, 2002 was US$1.3656. The carrying amount of
this contract as of December 31, 2002 was a loss of US$39.9 million (NT$1,385
million) while the fair value was a loss of US$54.3 million (NT$1,888 million).

In
April 2003, we extended this contract to May 2004 and recorded the
additional obligation on a ROC GAAP basis in the amount of
NT$719 million based on market price of the underlying shares of
NT$9.5 per share at that time.

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##### Table of Contents






Item 12. Description of Securities Other than Equity Securities

Not applicable.




PART II




Item 13. Default, Dividend Arrearages and Delinquencies

As of December 31, 2002, we were not in default in the payment of
principal or interest to any of our lenders.




Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable.




Item 15. Controls and Procedures

An evaluation was performed under the supervision and with the
participation of our management, including our chief executive officer and
chief financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended). Based on that evaluation, which was
completed within 90 days of the filing date of this annual report, our chief
executive officer and chief financial officer, concluded that our disclosure
controls and procedures were effective though we are constantly engaged in the
process of improving these controls and procedures. There have been no
significant changes in our disclosure controls or in other factors that could
significantly affect disclosure controls subsequent to the date of the
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.




Item 16A. Audit Committee Financial Expert

Not applicable.




Item 16B. Code of Ethics

Not applicable.




Item 16C. Principal Accountant Fees and Services

Not applicable.

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##### Table of Contents






PART III




Item 17. Financial Statements

We have elected to provide the financial statements and related
information specified in Item 18 in lieu of Item 17.




Item 18. Financial Statements

Reference
is made to pages F-1 to F-78 for year-end financial statements.




Item 19. Exhibits

|        |  |                                                                                                                                                                                                                                                                     
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                     
|Number  |  | Description                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                     
|2b.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*.                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                     
|10.1    |  | 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).
|        |  |                                                                                                                                                                                                                                                                     
|10.2    |  | Indenture, dated as of February 10, 2003, by and between the
Company and The Bank of New York, as trustee*.                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                     
|10.3    |  | Indenture, dated as of February 1, 2000, by and between the
Company and The Bank of New York, as trustee(2).                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                     
|10.4    |  | Indenture, dated as of May 5, 1998, by and between the Company and
The Bank of New York, as trustee(3).                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                     
|10.5    |  | 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).                                                                         
|        |  |                                                                                                                                                                                                                                                                     
|10.6    |  | 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).                                                                        
|        |  |                                                                                                                                                                                                                                                                     
|10.7    |  | 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).                                                                             
|        |  |                                                                                                                                                                                                                                                                     
|10.8    |  | 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 Site(7).                                                                                             
|        |  |                                                                                                                                                                                                                                                                     
|10.9    |  | Indenture, dated as of February 7, 2002, by and between the
Company and The                                                                                                                                                                                         

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|      |  |                                                                                                           
|----- |  | ----------------------------------------------------------------------------------------------------------
|      |  | Bank of New York, as trustee(8).                                                                          
|      |  |                                                                                                           
|10.10 |  | Summary of terms and conditions of domestic convertible bonds
issued December 12, 2002 (English summary)*.



---

|*   |  | Filed with this Form 20-F.                                                                                                                                      
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | 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.
|   
|(2) |  | Incorporated by reference to Exhibit 2.3 to the Companys Form 20-F filed
with the Commission on July 14, 2000.                                                 
|   
|(3) |  | Incorporated by reference to Exhibit 2.4 to the Companys Form 20-F filed
with the Commission on July 14, 2000.                                                 
|   
|(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 10.9 to the Companys Form 20-F
filed with the Commission on July 1, 2002.                                                 

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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                  |  |    
|----------------------------------------------------------------------------------------------------------------- |  | ---
|Independent Auditors Report                                                                                      |  | F-2
|                                                                                                                  |  |    
|Consolidated Balance Sheets as of December 31, 2001 and 2002                                                      |  | F-3
|                                                                                                                  |  |    
|Consolidated Statements of Operations for each of the three years in the period ended December 31, 2002           |  | F-5
|                                                                                                                  |  |    
|Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2002           |  | F-6
|                                                                                                                  |  |    
|Consolidated Statements of Shareholders Equity for each of the three years in the period ended
December 31, 2002 |  | F-8
|                                                                                                                  |  |    
|Notes to Consolidated Financial Statements                                                                        |  | F-9

F - 1



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors,
Supervisors, and Shareholdersof Macronix International Co., Ltd.

We have audited the accompanying consolidated balance sheets of Macronix
International Co., Ltd. as of December 31, 2001 and 2002, and the related
consolidated statements of operations, shareholders equity, and cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Macronix International Co., Ltd. at December 31, 2001 and 2002, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the Republic of China.

As discussed in Note 2 to the consolidated financial statements,
effective January 1, 2002, the Company changed its method of accounting for
shares owned by subsidiaries as required by ROC Statement of Financial
Accounting Standards No. 30, Accounting for Treasury Stock.

Accounting principles generally accepted in the Republic of China vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Application of generally accepted accounting
principles in the United States of America would have affected the consolidated
shareholders equity as of December 31, 2001 and 2002, and the consolidated
results of operations for each of the three years in the period ended December
31, 2002, to the extent summarized in note 20 to the consolidated financial
statements.

DIWAN, ERNST & YOUNG
CERTIFIED PUBLIC ACCOUNTANTS

/s/ Diwan, Ernst  & Young

Taipei, Taiwan, R.O.C.
March 5, 2003

F - 2



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2002
(Amounts in thousands except share and per share data)

|                                   |                                     |                                   |          |      |  |      |            |             |            |  |  |  |  |     |            |             |            |  |  |     |  |  |           |           |           | 
|---------------------------------- | ----------------------------------- | --------------------------------- | -------- | ---- |  | ---- | ---------- | ----------- | ---------- |  |  |  |  | --- | ---------- | ----------- | ---------- |  |  | --- |  |  | --------- | --------- | --------- | 
|ASSETS                             |                                     | Notes                             |          | 2001 |  | 2002
|                                   |                                     |                                   |          |      |  |     
|                                   |                                     |                                   |          |      |  |      |            | NT$         |            |  |  |  |  | NT$ |            |             |            |  |  | US$
|Current assets                     |                                     |                                   |          |      |  |      |            |             |            |  |  |  |  |     |            |             |            |  |  |     |  |  |           |          
|                                   | Cash and cash equivalents           |                                   |          | 3    |  |      |            | 12,560,954  |            |  |  |  |  |     |            | 7,394,361   |            |  |  |     |  |  |           | 213,094   |          
|                                   | Restricted investments-current      |                                   |          | 10   |  |      |            | 34,000      |            |  |  |  |  |     |            | 3,351,572   |            |  |  |     |  |  |           | 96,587    |          
|                                   | Short-term investments              |                                   |          | 4    |  |      |            | 1,243,907   |            |  |  |  |  |     |            | 1,185,324   |            |  |  |     |  |  |           | 34,159    |          
|                                   | Notes and accounts receivable (net) |                                   |          | 5    |  |      |            | 2,319,225   |            |  |  |  |  |     |            | 2,710,193   |            |  |  |     |  |  |           | 78,104    |          
|                                   | Inventories (net)                   |                                   |          | 6    |  |      |            | 7,298,502   |            |  |  |  |  |     |            | 5,140,820   |            |  |  |     |  |  |           | 148,150   |          
|                                   | Deferred income taxes (net)         |                                   |          | 14   |  |      |            | 761,889     |            |  |  |  |  |     |            | 495,112     |            |  |  |     |  |  |           | 14,268    |          
|                                   | Prepaid expenses                    |                                   |          |      |  |      |            | 566,709     |            |  |  |  |  |     |            | 606,577     |            |  |  |     |  |  |           | 17,481    |          
|                                   | Others                              |                                   |          |      |  |      |            | 572,709     |            |  |  |  |  |     |            | 416,655     |            |  |  |     |  |  |           | 12,007    |          
|                                   |                                     |                                   |          |      |  |      |            |             |            |  |  |  |  |     |            |             |            |  |  |     |  |  |           |          
|                                   |                                     | Total current assets              |          |      |  |      |            |             | 25,357,895 |  |  |  |  |     |            |             | 21,300,614 |  |  |     |  |  |           |           | 613,850   | 
|                                   |                                     |                                   |          |      |  |      |            |             |            |  |  |  |  |     |            |             |            |  |  |     |  |  |           |          
|Property, plant and equipment      |                                     |                                   | 10,15,16 |      |  |      |            |             |            |  |  |  |  |     |            |             |            |  |  |     |  |  |           |          
|                                   | Land                                |                                   |          |      |  |      |            | 1,359,287   |            |  |  |  |  |     |            | 1,354,931   |            |  |  |     |  |  |           | 39,047    |          
|                                   | Buildings                           |                                   |          |      |  |      |            | 13,362,736  |            |  |  |  |  |     |            | 18,315,334  |            |  |  |     |  |  |           | 527,819   |          
|                                   | Production equipment                |                                   |          |      |  |      |            | 41,038,791  |            |  |  |  |  |     |            | 42,937,505  |            |  |  |     |  |  |           | 1,237,392 |          
|                                   | Research and development equipment  |                                   |          |      |  |      |            | 1,216,401   |            |  |  |  |  |     |            | 1,518,588   |            |  |  |     |  |  |           | 43,763    |          
|                                   | Office furniture and equipment      |                                   |          |      |  |      |            | 904,795     |            |  |  |  |  |     |            | 940,814     |            |  |  |     |  |  |           | 27,113    |          
|                                   | Leased equipment                    |                                   |          |      |  |      |            | 966,347     |            |  |  |  |  |     |            | 1,750,658   |            |  |  |     |  |  |           | 50,451    |          
|                                   | Construction in progress            |                                   |          |      |  |      |            | 7,103,107   |            |  |  |  |  |     |            | 7,534,791   |            |  |  |     |  |  |           | 217,141   |          
|                                   |                                     |                                   |          |      |  |      |            |             |            |  |  |  |  |     |            |             |            |  |  |     |  |  |           |          
|                                   | Total property, plant and equipment |                                   |          |      |  |      |            | 65,951,464  |            |  |  |  |  |     |            | 74,352,621  |            |  |  |     |  |  |           | 2,142,726 |          
|                                   | Less: Accumulated depreciation      |                                   |          |      |  |      |            | (26,389,547 | )          |  |  |  |  |     |            | (34,323,303 | )          |  |  |     |  |  |           | (989,144  | )        
|                                   |                                     |                                   |          |      |  |      |            |             |            |  |  |  |  |     |            |             |            |  |  |     |  |  |           |          
|                                   |                                     | Net property, plant and equipment |          |      |  |      |            |             | 39,561,917 |  |  |  |  |     |            |             | 40,029,318 |  |  |     |  |  |           |           | 1,153,582 | 
|Deferred income taxes (net)        |                                     |                                   | 14       |      |  |      | 1,193,526  |             |            |  |  |  |  |     | 1,451,245  |             |            |  |  |     |  |  | 41,823    |          
|Intangible assets (net)            |                                     |                                   |          |      |  |      | 854,535    |             |            |  |  |  |  |     | 1,051,228  |             |            |  |  |     |  |  | 30,295    |          
|Long-term equity investments       |                                     |                                   | 7        |      |  |      | 1,502,672  |             |            |  |  |  |  |     | 1,827,089  |             |            |  |  |     |  |  | 52,654    |          
|Restricted investments-non-current |                                     |                                   |          |      |  |      | 1,721,801  |             |            |  |  |  |  |     | 260,625    |             |            |  |  |     |  |  | 7,511     |          
|Other assets                       |                                     |                                   |          |      |  |      | 2,116,436  |             |            |  |  |  |  |     | 2,199,942  |             |            |  |  |     |  |  | 63,399    |          
|                                   |                                     |                                   |          |      |  |      |            |             |            |  |  |  |  |     |            |             |            |  |  |     |  |  |           |          
|Total assets                       |                                     |                                   |          |      |  |      | 72,308,782 |             |            |  |  |  |  |     | 68,120,061 |             |            |  |  |     |  |  | 1,963,114 |          
|                                   |                                     |                                   |          |      |  |      |            |             |            |  |  |  |  |     |            |             |            |  |  |     |  |  |           |          

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, 2001 and 2002
(Amounts in thousands except share and per share data)

|                                           |                                                                                                                                                                                                                     |                           |    |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |           |         | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | -- | ---- |  | ---- | ---------- | ---------- | --------- |  |  |  |  | --- | ---------- | ---------- | ---------- |  |  | --- |  |  | --------- | --------- | ------- | 
|LIABILITIES & SHAREHOLDERS' EQUITY         |                                                                                                                                                                                                                     | Notes                     |    | 2001 |  | 2002
|                                           |                                                                                                                                                                                                                     |                           |    |      |  |     
|                                           |                                                                                                                                                                                                                     |                           |    |      |  |      |            | NT$        |           |  |  |  |  | NT$ |            |            |            |  |  | US$
|Current liabilities                        |                                                                                                                                                                                                                     |                           |    |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |          
|                                           | Short-term debts                                                                                                                                                                                                    |                           |    | 8    |  |      |            | 733,950    |           |  |  |  |  |     |            | 2,159,151  |            |  |  |     |  |  |           | 62,223    |        
|                                           | Current portion of capital lease obligations                                                                                                                                                                        |                           |    | 9    |  |      |            | 322,073    |           |  |  |  |  |     |            | 625,989    |            |  |  |     |  |  |           | 18,040    |        
|                                           | Current portion of long-term debts                                                                                                                                                                                  |                           |    | 10   |  |      |            | 2,877,581  |           |  |  |  |  |     |            | 8,721,428  |            |  |  |     |  |  |           | 251,338   |        
|                                           | Notes and accounts payable                                                                                                                                                                                          |                           |    |      |  |      |            | 1,095,469  |           |  |  |  |  |     |            | 1,385,826  |            |  |  |     |  |  |           | 39,937    |        
|                                           | Payables to related parties                                                                                                                                                                                         |                           |    | 15   |  |      |            | 133,177    |           |  |  |  |  |     |            | 156,809    |            |  |  |     |  |  |           | 4,519     |        
|                                           | Payables to equipment suppliers                                                                                                                                                                                     |                           |    |      |  |      |            | 1,010,363  |           |  |  |  |  |     |            | 1,551,915  |            |  |  |     |  |  |           | 44,724    |        
|                                           | Accrued expenses                                                                                                                                                                                                    |                           |    |      |  |      |            | 2,958,637  |           |  |  |  |  |     |            | 3,016,253  |            |  |  |     |  |  |           | 86,924    |        
|                                           | Income taxes payable                                                                                                                                                                                                |                           |    | 14   |  |      |            | 403,963    |           |  |  |  |  |     |            | 304,444    |            |  |  |     |  |  |           | 8,774     |        
|                                           | Others                                                                                                                                                                                                              |                           |    |      |  |      |            | 96,905     |           |  |  |  |  |     |            | 434,991    |            |  |  |     |  |  |           | 12,536    |        
|                                           |                                                                                                                                                                                                                     |                           |    |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |          
|                                           |                                                                                                                                                                                                                     | Total current liabilities |    |      |  |      |            |            | 9,632,118 |  |  |  |  |     |            |            | 18,356,806 |  |  |     |  |  |           |           | 529,015 | 
|                                           |                                                                                                                                                                                                                     |                           |    |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |          
|Long-term liabilities                      |                                                                                                                                                                                                                     |                           |    |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |          
|                                           | Capital lease obligations, less current portion                                                                                                                                                                     |                           |    | 9    |  |      |            | 1,615,738  |           |  |  |  |  |     |            | 980,525    |            |  |  |     |  |  |           | 28,257    |        
|                                           | Long-term debts, less current portion                                                                                                                                                                               |                           |    | 10   |  |      |            | 17,892,680 |           |  |  |  |  |     |            | 18,358,201 |            |  |  |     |  |  |           | 529,055   |        
|                                           | Accrued pension cost                                                                                                                                                                                                |                           |    | 11   |  |      |            | 24,533     |           |  |  |  |  |     |            | 105,194    |            |  |  |     |  |  |           | 3,031     |        
|                                           | Other liabilities                                                                                                                                                                                                   |                           |    |      |  |      |            | 88         |           |  |  |  |  |     |            | 104,253    |            |  |  |     |  |  |           | 3,004     |        
|                                           | Minority interest                                                                                                                                                                                                   |                           |    |      |  |      |            |           |           |  |  |  |  |     |            | 788        |            |  |  |     |  |  |           | 23        |        
|                                           |                                                                                                                                                                                                                     |                           |    |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |          
|Total liabilities                          |                                                                                                                                                                                                                     |                           |    |      |  |      | 29,165,157 |            |           |  |  |  |  |     | 37,905,767 |            |            |  |  |     |  |  | 1,092,385 |          
|                                           |                                                                                                                                                                                                                     |                           |    |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |          
|Commitments and contingencies              |                                                                                                                                                                                                                     |                           | 16 |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |          
|Shareholders equity                       |                                                                                                                                                                                                                     |                           | 12 |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |          
|                                           | Common shares NT$10 par value, authorized
4,500,000,000 and 5,350,000,000 shares
as of December 31, 2001 and 2002, and issued
3,359,342,613 and 3,691,276,875 shares
as of December 31, 2001 and 2002, respectively |                           |    |      |  |      |            | 33,593,426 |           |  |  |  |  |     |            | 36,912,769 |            |  |  |     |  |  |           | 1,063,769 |        
|                                           | Additional paid-in capital                                                                                                                                                                                          |                           |    |      |  |      |            | 5,949,964  |           |  |  |  |  |     |            | 2,630,621  |            |  |  |     |  |  |           | 75,810    |        
|                                           | Capital reserve                                                                                                                                                                                                     |                           |    |      |  |      |            | 16,360     |           |  |  |  |  |     |            | 356        |            |  |  |     |  |  |           | 10        |        
|                                           | Legal reserve                                                                                                                                                                                                       |                           |    |      |  |      |            | 1,707,053  |           |  |  |  |  |     |            | 1,708,689  |            |  |  |     |  |  |           | 49,242    |        
|                                           | Special reserve                                                                                                                                                                                                     |                           |    |      |  |      |            | 1,425      |           |  |  |  |  |     |            | 378,657    |            |  |  |     |  |  |           | 10,912    |        
|                                           | Retained earnings (accumulated deficit)                                                                                                                                                                             |                           |    |      |  |      |            | 2,249,996  |           |  |  |  |  |     |            | (9,469,175 | )          |  |  |     |  |  |           | (272,887  | )      
|                                           | Unrealized losses on long-term investments                                                                                                                                                                          |                           |    |      |  |      |            | (647,618   | )         |  |  |  |  |     |            | (979,081   | )          |  |  |     |  |  |           | (28,215   | )      
|                                           | Cumulative translation adjustments                                                                                                                                                                                  |                           |    |      |  |      |            | 273,019    |           |  |  |  |  |     |            | 219,894    |            |  |  |     |  |  |           | 6,337     |        
|                                           | Treasury stock                                                                                                                                                                                                      |                           |    | 13   |  |      |            |           |           |  |  |  |  |     |            | (1,188,436 | )          |  |  |     |  |  |           | (34,249   | )      
|                                           |                                                                                                                                                                                                                     |                           |    |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |          
|Total shareholders equity                 |                                                                                                                                                                                                                     |                           |    |      |  |      | 43,143,625 |            |           |  |  |  |  |     | 30,214,294 |            |            |  |  |     |  |  | 870,729   |          
|                                           |                                                                                                                                                                                                                     |                           |    |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |          
|Total liabilities and shareholders equity |                                                                                                                                                                                                                     |                           |    |      |  |      | 72,308,782 |            |           |  |  |  |  |     | 68,120,061 |            |            |  |  |     |  |  | 1,963,114 |          
|                                           |                                                                                                                                                                                                                     |                           |    |      |  |      |            |            |           |  |  |  |  |     |            |            |            |  |  |     |  |  |           |          

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, 2000, 2001 and 2002
(Amounts in thousands except share and per share data)

|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |          |          |        |  
|----------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------ | --------------- |  | ----- | ------- | ----------- | ---------- | ---------- | ------- | ----------- | ---------- | ---------- | --------- | - | --------- | --- | --------- | ----------- | ---------- | ---------- | -------- | -------- | -------- | -------- | ------ | -
|                                                                                                            |                                                   |                          |                 |  | Notes |         | 2000        |            | 2001       |         | 2002       
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |            
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            | NT$        |         | NT$         |            |            |           |   |           | NT$ |           | US$        
|Sales revenue                                                                                               |                                                   |                          |                 |  |       |         | 33,810,791  |            |            |         | 22,036,281  |            |            |           |   |           |     |           | 16,647,525  |            |            |          | 479,756  |         
|Less: Sales returns                                                                                         |                                                   |                          |                 |  |       |         | (273,154    | )          |            |         | (208,920    | )          |            |           |   |           |     |           | (42,650     | )          |            |          | (1,229   | )       
|                                                                                                            |                                                   |                          | Sales discounts |  |       |         |             |            |            | (44,529 | )           |            |            | (80,131   | ) |           |     |           |             |            |            | (112,411 | )        |          |          | (3,240 | )
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Net sales revenue                                                                                           |                                                   |                          |                 |  |       |         | 33,493,108  |            |            |         | 21,747,230  |            |            |           |   |           |     |           | 16,492,464  |            |            |          | 475,287  |         
|Cost of goods sold                                                                                          |                                                   |                          |                 |  |       |         | (15,493,667 | )          |            |         | (11,674,103 | )          |            |           |   |           |     |           | (17,104,860 | )          |            |          | (492,935 | )       
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Gross profit (loss)                                                                                         |                                                   |                          |                 |  |       |         | 17,999,441  |            |            |         | 10,073,127  |            |            |           |   |           |     |           | (612,396    | )          |            |          | (17,648  | )       
|Less:Unrealized profit as of December 31, 2002                                                              |                                                   |                          |                 |  |       |         |            |            |            |         |            |            |            |           |   |           |     |           | (2,895      | )          |            |          | (83      | )       
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Realized gross profit (loss)                                                                                |                                                   |                          |                 |  |       |         | 17,999,441  |            |            |         | 10,073,127  |            |            |           |   |           |     |           | (615,291    | )          |            |          | (17,731  | )       
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Operating expenses                                                                                          |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|                                                                                                            | Selling expenses                                  |                          |                 |  |       |         |             | (940,347   | )          |         |             | (611,406   | )          |           |   |           |     |           |             | (567,660   | )          |          |          | (16,359  | )       
|                                                                                                            | Administrative expenses                           |                          |                 |  |       |         |             | (1,772,441 | )          |         |             | (2,120,718 | )          |           |   |           |     |           |             | (1,838,025 | )          |          |          | (52,969  | )       
|                                                                                                            | Research and development                          |                          |                 |  |       |         |             | (3,143,896 | )          |         |             | (3,825,049 | )          |           |   |           |     |           |             | (3,805,742 | )          |          |          | (109,676 | )       
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|                                                                                                            |                                                   | Total operating expenses |                 |  |       |         |             |            | (5,856,684 | )       |             |            | (6,557,173 | )         |   |           |     |           |             |            | (6,211,427 | )        |          |          | (179,004 | )     
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Operating income (loss)                                                                                     |                                                   |                          |                 |  |       |         | 12,142,757  |            |            |         | 3,515,954   |            |            |           |   |           |     |           | (6,826,718  | )          |            |          | (196,735 | )       
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Other income                                                                                                |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|                                                                                                            | Research and development subsidies                |                          |                 |  |       |         |             | 30,914     |            |         |             |           |            |           |   |           |     |           |             |           |            |          |          |         |         
|                                                                                                            | Interest income                                   |                          |                 |  |       |         |             | 541,387    |            |         |             | 495,611    |            |           |   |           |     |           |             | 216,937    |            |          |          | 6,252    |         
|                                                                                                            | Foreign exchange gain                             |                          |                 |  |       |         |             | 293,480    |            |         |             | 453,965    |            |           |   |           |     |           |             |           |            |          |          |         |         
|                                                                                                            | Gain on disposal of property, plant and equipment |                          |                 |  |       |         |             | 15,543     |            |         |             | 21,284     |            |           |   |           |     |           |             | 252        |            |          |          | 7        |         
|                                                                                                            | Gain on disposal of long-term investments         |                          |                 |  |       |         |             |           |            |         |             |           |            |           |   |           |     |           |             | 27,791     |            |          |          | 801      |         
|                                                                                                            | Net gain on short-term investments                |                          |                 |  |       |         |             |           |            |         |             | 75,582     |            |           |   |           |     |           |             |           |            |          |          |         |         
|                                                                                                            | Others                                            |                          |                 |  |       |         |             | 63,695     |            |         |             | 309,497    |            |           |   |           |     |           |             | 220,908    |            |          |          | 6,366    |         
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|                                                                                                            |                                                   | Total other income       |                 |  |       |         |             |            | 945,019    |         |             |            | 1,355,939  |           |   |           |     |           |             |            | 465,888    |          |          |          | 13,426   |       
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Other expenses                                                                                              |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|                                                                                                            | Interest expense                                  |                          |                 |  |       |         |             | (1,265,902 | )          |         |             | (1,173,312 | )          |           |   |           |     |           |             | (1,237,902 | )          |          |          | (35,675  | )       
|                                                                                                            | Foreign exchange losses                           |                          |                 |  |       |         |             |           |            |         |             |           |            |           |   |           |     |           |             | (321,266   | )          |          |          | (9,258   | )       
|                                                                                                            | Inventory loss provision                          |                          |                 |  |       |         |             | (80,775    | )          |         |             | (2,586,505 | )          |           |   |           |     |           |             | (2,929,284 | )          |          |          | (84,417  | )       
|                                                                                                            | Loss on disposal of property, plant and equipment |                          |                 |  |       |         |             | (5,935     | )          |         |             | (7,262     | )          |           |   |           |     |           |             |           |            |          |          |         |         
|                                                                                                            | Net loss from equity investment                   |                          |                 |  |       |         |             | (601,187   | )          |         |             | (395,088   | )          |           |   |           |     |           |             | (141,077   | )          |          |          | (4,066   | )       
|                                                                                                            | Net investment loss                               |                          |                 |  |       |         |             | (15,941    | )          |         |             | (384,438   | )          |           |   |           |     |           |             | (273,865   | )          |          |          | (7,892   | )       
|                                                                                                            | Others                                            |                          |                 |  |       |         |             | (107,115   | )          |         |             | (248,273   | )          |           |   |           |     |           |             | (72,897    | )          |          |          | (2,101   | )       
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|                                                                                                            |                                                   | Total other expenses     |                 |  |       |         |             |            | (2,076,855 | )       |             |            | (4,794,878 | )         |   |           |     |           |             |            | (4,976,291 | )        |          |          | (143,409 | )     
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Income (loss) before taxes and minority interest                                                            |                                                   |                          |                 |  |       |         | 11,010,921  |            |            |         | 77,015      |            |            |           |   |           |     |           | (11,337,121 | )          |            |          | (326,718 | )       
|Income tax expense                                                                                          |                                                   |                          | 14              |  |       |         | (398,097    | )          |            |         | (943,495    | )          |            |           |   |           |     |           | (19,898     | )          |            |          | (574     | )       
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Income (loss) before minority interest                                                                      |                                                   |                          |                 |  |       |         | 10,612,824  |            |            |         | (866,480    | )          |            |           |   |           |     |           | (11,357,019 | )          |            |          | (327,292 | )       
|Minority interest loss                                                                                      |                                                   |                          |                 |  |       |         |            |            |            |         |            |            |            |           |   |           |     |           | 356         |            |            |          | 10       |         
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Net income (loss)                                                                                           |                                                   |                          |                 |  |       |         | 10,612,824  |            |            |         | (866,480    | )          |            |           |   |           |     |           | (11,356,663 | )          |            |          | (327,282 | )       
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Earnings Per Common Share:                                                                                  |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Net
income (loss) per common share - basic                                                                  |                                                   |                          |                 |  |       | NT$2.93 |             | (NT$0.23)  |            |         |             |            |            | (NT$3.10) |   | (NT$0.09)
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Net income (loss) per common share - diluted                                                                |                                                   |                          |                 |  |       | NT$2.91 |             | (NT$0.23)  |            |         |             |            |            | (NT$3.10) |   | (NT$0.09)
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Pro-forma data: assuming that the Companys shares owned by subsidiaries were not treated as treasury stock |                                                   |                          | 2               |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Net loss                                                                                                    |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           | (11,426,697 | )          |            |          | (329,300 | )       
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         
|Net loss per common share - basic                                                                           |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     | (NT$3.12) |             | (NT$0.09) 
|                                                                                                            |                                                   |                          |                 |  |       |         |             |            |            |         |             |            |            |           |   |           |     |           |             |            |            |          |          |         

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, 2000, 2001 and 2002


(Amounts in thousands except share and per share data)


|                                                                                          |                                                                                    |                               |             |             |            |      |             |             |            |     |             |            |          |   |          |          |         |  
|----------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ----------------------------- | ----------- | ----------- | ---------- | ---- | ----------- | ----------- | ---------- | --- | ----------- | ---------- | -------- | - | -------- | -------- | ------- | -
|                                                                                          |                                                                                    |                               |             | 2000        |            | 2001 |             | 2002       
|                                                                                          |                                                                                    |                               |             |             |            |      |             |            
|                                                                                          |                                                                                    |                               |             | NT$         |            | NT$  |             | NT$         |            | US$
|Cash flows from operating activities:                                                     |                                                                                    |                               |             |             |            |      |             |             |            |     |             |            |          |   |          |         
|Net income (loss)                                                                         |                                                                                    |                               | 10,612,824  |             |            |      | (866,480    | )           |            |     | (11,356,663 | )          |          |   | (327,282 | )       
|Adjustments to reconcile net income (loss) to net cash provided by
operating activities : |                                                                                    |                               |             |             |            |      |             |             |            |     |             |            |          |   |          |         
|Depreciation                                                                              |                                                                                    |                               | 5,656,781   |             |            |      | 7,443,341   |             |            |     | 8,107,296   |            |          |   | 233,640  |         
|Amortization                                                                              |                                                                                    |                               | 391,419     |             |            |      | 562,415     |             |            |     | 634,805     |            |          |   | 18,294   |         
|Deferred income taxes                                                                     |                                                                                    |                               | (126,113    | )           |            |      | 849,259     |             |            |     | 9,058       |            |          |   | 261      |         
|Gain on disposal of long-term investments                                                 |                                                                                    |                               |            |             |            |      |            |             |            |     | (27,791     | )          |          |   | (801     | )       
|Net loss (net gain) on short-term investments                                             |                                                                                    |                               | (77,059     | )           |            |      | (6,446      | )           |            |     | 4,631       |            |          |   | 133      |         
|Allowance (reversal of allowance) for bad debts                                           |                                                                                    |                               | 91,048      |             |            |      | 9,431       |             |            |     | 14,918      |            |          |   | 430      |         
|Inventory provision                                                                       |                                                                                    |                               | 80,775      |             |            |      | 2,586,505   |             |            |     | 2,929,284   |            |          |   | 84,417   |         
|Net loss from equity investment                                                           |                                                                                    |                               | 601,187     |             |            |      | 395,088     |             |            |     | 141,077     |            |          |   | 4,066    |         
|Write off on long term investments                                                        |                                                                                    |                               |            |             |            |      | 384,438     |             |            |     |            |            |          |   |         |         
|Loss from charge on long-term investee                                                    |                                                                                    |                               | 93,000      |             |            |      |            |             |            |     |            |            |          |   |         |         
|Net gain on disposal of property, plant and equipment                                     |                                                                                    |                               | (9,608      | )           |            |      | (14,022     | )           |            |     | (252        | )          |          |   | (7       | )       
|Net changes in operating assets and liabilities                                           |                                                                                    |                               |             |             |            |      |             |             |            |     |             |            |          |   |          |         
|                                                                                          |                                                                                    | Notes and accounts receivable |             |             | (2,196,738 | )    |             |             | 3,005,685  |     |             |            | (405,886 | ) |          |          | (11,697 | )
|                                                                                          |                                                                                    | Inventories                   |             |             | (1,712,693 | )    |             |             | (4,597,771 | )   |             |            | (767,482 | ) |          |          | (22,118 | )
|                                                                                          |                                                                                    | Other current assets          |             |             | (79,528    | )    |             |             | 124,968    |     |             |            | 156,054  |   |          |          | 4,497   |  
|                                                                                          |                                                                                    | Prepaid expenses              |             |             | (79,852    | )    |             |             | (158,460   | )   |             |            | (43,988  | ) |          |          | (1,268  | )
|                                                                                          |                                                                                    | Notes and accounts payable    |             |             | 377,003    |      |             |             | (555,561   | )   |             |            | 290,357  |   |          |          | 8,368   |  
|                                                                                          |                                                                                    | Payables to related parties   |             |             | 21,135     |      |             |             | (172,956   | )   |             |            | 23,632   |   |          |          | 681     |  
|                                                                                          |                                                                                    | Accrued expenses              |             |             | 1,814,958  |      |             |             | 335,752    |     |             |            | 57,616   |   |          |          | 1,660   |  
|                                                                                          |                                                                                    | Income taxes payable          |             |             | 432,252    |      |             |             | (294,655   | )   |             |            | (99,519  | ) |          |          | (2,868  | )
|                                                                                          |                                                                                    | Other current liabilities     |             |             | 229,798    |      |             |             | (196,083   | )   |             |            | 338,086  |   |          |          | 9,743   |  
|                                                                                          |                                                                                    | Other liabilities             |             |             | 492        |      |             |             | (404       | )   |             |            |         |   |          |          |        |  
|                                                                                          |                                                                                    | Accrued pension cost          |             |             | 1,772      |      |             |             | 3,265      |     |             |            | 80,661   |   |          |          | 2,325   |  
|                                                                                          |                                                                                    |                               |             |             |            |      |             |             |            |     |             |            |          |   |          |         
|Net cash provided by operating activities                                                 |                                                                                    |                               | 16,122,853  |             |            |      | 8,837,309   |             |            |     | 85,894      |            |          |   | 2,474    |         
|                                                                                          |                                                                                    |                               |             |             |            |      |             |             |            |     |             |            |          |   |          |         
|Cash flows from investing activities:                                                     |                                                                                    |                               |             |             |            |      |             |             |            |     |             |            |          |   |          |         
|                                                                                          | Decrease (increase) in restricted investments                                      |                               |             | 774,375     |            |      |             | 182,000     |            |     |             | (1,856,396 | )        |   |          | (53,498  | )      
|                                                                                          | Proceeds
from disposal of marketable securities                                    |                               |             | 3,305,855   |            |      |             | 9,164,765   |            |     |             | 7,661,859  |          |   |          | 220,803  |        
|                                                                                          | Payments
for purchase of marketable securities                                     |                               |             | (3,417,022  | )          |      |             | (10,091,281 | )          |     |             | (7,691,078 | )        |   |          | (221,645 | )      
|                                                                                          | Additions to long-term equity investments                                          |                               |             | (754,784    | )          |      |             | (1,492,004  | )          |     |             | (762,940   | )        |   |          | (21,987  | )      
|                                                                                          | Proceeds from disposals of long-term equity investments(non-marketable securities) |                               |             | 12,500      |            |      |             | 3,038       |            |     |             |           |          |   |          |         |        
|                                                                                          | Payments for purchase of property, plant and equipment                             |                               |             | (11,948,143 | )          |      |             | (9,432,281  | )          |     |             | (8,433,728 | )        |   |          | (243,047 | )      
|                                                                                          | Proceeds from disposals of property, plant and equipment                           |                               |             | 177,446     |            |      |             | 92,658      |            |     |             | 6,023      |          |   |          | 174      |        
|                                                                                          | Other assets                                                                       |                               |             | (125,105    | )          |      |             | (405,231    | )          |     |             | (83,506    | )        |   |          | (2,407   | )      
|                                                                                          | Additions to intangible assets                                                     |                               |             | (549,269    | )          |      |             | (635,249    | )          |     |             | (436,686   | )        |   |          | (12,586  | )      
|                                                                                          | (Additions) deductions to other liabilities  refundable deposits                  |                               |             | (159,187    | )          |      |             | (1,721,801  | )          |     |             | 60         |          |   |          | 2        |        
|                                                                                          |                                                                                    |                               |             |             |            |      |             |             |            |     |             |            |          |   |          |         
|Net cash used in investing activities                                                     |                                                                                    |                               | (12,683,334 | )           |            |      | (14,335,386 | )           |            |     | (11,596,392 | )          |          |   | (334,191 | )       
|                                                                                          |                                                                                    |                               |             |             |            |      |             |             |            |     |             |            |          |   |          |         

See accompanying notes to consolidated financial statements.

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, 2000, 2001 and 2002


(Amounts in thousands except share and per share data)


|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |         |  
|------------------------------------------------------------ | --------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | --- | ---------- | ----------- | ---------- | - | -------- | -------- | ------- | -
|                                                             |                                                                                                     |                                                         |            | 2000       |            | 2001 |            | 2002      
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |           
|                                                             |                                                                                                     |                                                         |            | NT$        |            | NT$  |            | NT$        |            | US$
|Cash flows from financing activities:                        |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |         
|                                                             | Proceeds from short-term debts                                                                      |                                                         |            | 7,209,095  |            |      |            | 5,025,485  |            |     |            | 12,559,352  |            |   |          | 361,941  |        
|                                                             | Repayments of short-term debts                                                                      |                                                         |            | (6,832,979 | )          |      |            | (5,878,037 | )          |     |            | (11,134,151 | )          |   |          | (320,869 | )      
|                                                             | Proceeds from short-term notes                                                                      |                                                         |            |           |            |      |            | 2,600,000  |            |     |            | 4,630,000   |            |   |          | 133,429  |        
|                                                             | Repayments of short-term notes                                                                      |                                                         |            | (248,409   | )          |      |            | (2,600,000 | )          |     |            | (4,630,000  | )          |   |          | (133,429 | )      
|                                                             | Proceeds from long-term debts and capital lease obligations                                         |                                                         |            | 6,170,000  |            |      |            | 7,424,432  |            |     |            | 12,288,062  |            |   |          | 354,123  |        
|                                                             | Repayments of long-term debts and capital lease obligations                                         |                                                         |            | (1,944,964 | )          |      |            | (4,048,757 | )          |     |            | (6,309,991  | )          |   |          | (181,844 | )      
|                                                             | Subscriptions received                                                                              |                                                         |            | 3,613,555  |            |      |            |           |            |     |            |            |            |   |          |         |        
|                                                             | Distribution of directors and supervisors remuneration                                            |                                                         |            |           |            |      |            | (190,148   | )          |     |            |            |            |   |          |         |        
|                                                             | Common stock repurchased                                                                            |                                                         |            |           |            |      |            |           |            |     |            | (1,046,071  | )          |   |          | (30,146  | )      
|                                                             | Minority interest                                                                                   |                                                         |            |           |            |      |            |           |            |     |            | 788         |            |   |          | 23       |        
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        
|                                                             | Net cash provided by financing activities                                                           |                                                         |            | 7,966,298  |            |      |            | 2,332,975  |            |     |            | 6,357,989   |            |   |          | 183,228  |        
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        
|Effect of exchange rate changes on cash and cash equivalents |                                                                                                     |                                                         | 1,189      |            |            |      | 164,162    |            |            |     | (14,084    | )           |            |   | (406     | )       
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        
|Net increase (decrease) in cash and cash equivalents         |                                                                                                     |                                                         | 11,407,006 |            |            |      | (3,000,940 | )          |            |     | (5,166,593 | )           |            |   | (148,895 | )       
|Cash and cash equivalents at the beginning of the year       |                                                                                                     |                                                         | 4,154,888  |            |            |      | 15,561,894 |            |            |     | 12,560,954 |             |            |   | 361,987  |         
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        
|Cash and cash equivalents at the end of the year             |                                                                                                     |                                                         | 15,561,894 |            |            |      | 12,560,954 |            |            |     | 7,394,361  |             |            |   | 213,092  |         
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        
|Supplemental disclosures of cash flow information:           |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |         
|                                                             | Interest paid during the year                                                                       |                                                         |            | 1,225,134  |            |      |            | 1,157,978  |            |     |            | 1,176,317   |            |   |          | 33,900   |        
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        
|                                                             | Income tax paid during the year                                                                     |                                                         |            | 55,795     |            |      |            | 568,013    |            |     |            | 152,985     |            |   |          | 4,409    |        
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        
|Non-cash activities:                                         |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |         
|                                                             | Current portion of long-term debts and capital lease obligations
transferred to current liabilities |                                                         |            | 3,263,543  |            |      |            | 3,199,654  |            |     |            | 9,347,417   |            |   |          | 269,378  |        
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        
|                                                             | Payments for purchases of property, plant and equipment:                                            |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        
|                                                             |                                                                                                     | Payable to equipment suppliers (beginning balance)      |            |            | 1,510,163  |      |            |            | 1,364,891  |     |            |             | 1,010,363  |   |          |          | 29,117  |  
|                                                             |                                                                                                     | Add: Purchases of property, plant and equipment         |            |            | 11,802,871 |      |            |            | 9,077,753  |     |            |             | 8,975,280  |   |          |          | 258,654 |  
|                                                             |                                                                                                     | Less: Payable to equipment suppliers (ending balance)   |            |            | (1,364,891 | )    |            |            | (1,010,363 | )   |            |             | (1,551,915 | ) |          |          | (44,724 | )
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        
|                                                             |                                                                                                     | Payments for purchases of property, plant and equipment |            |            | 11,948,143 |      |            |            | 9,432,281  |     |            |             | 8,433,728  |   |          |          | 243,047 |  
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        
|                                                             | Convertible bonds converted to common stock                                                         |                                                         |            | 4,022,584  |            |      |            |           |            |     |            |            |            |   |          |         |        
|                                                             |                                                                                                     |                                                         |            |            |            |      |            |            |            |     |            |             |            |   |          |          |        

See accompanying notes to consolidated financial statements.

F - 7



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

For the years ended December 31, 2000, 2001 and 2002
(Amounts in thousands except share and per share data)




|                                                                                 |                                            |  |            |           |         |  |               |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |         |         | 
|-------------------------------------------------------------------------------- | ------------------------------------------ |  | ---------- | --------- | ------- |  | ------------- | ---------- | ------- |  | -------- | - | ------- |  | ------- | - |  |  | --------- | --------- |  |  | ------- | ------- | 
|                                                                                 |                                            |  |            |           |         |  | Additional    |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |        
|                                                                                 |                                            |  | Common     |           | paid-in |  | Subscriptions |            | Capital |  | Legal    |   | Special
|                                                                                 |                                            |  | shares     |           | capital |  | received      |            | reserve |  | reserve  |   | reserve
|                                                                                 |                                            |  |            |           |         |  |               |            |         |  |          |   |        
|                                                                                 |                                            |  | NT$        |           | NT$     |  | NT$           |            | NT$     |  | NT$      |   | NT$    
|                                                                                 |                                            |  |            |           |         |  |               |            |         |  |          |   |        
|Balance as of January 1, 2000                                                    |                                            |  | 19,644,060 |           |         |  | 4,801,195     |            |         |  | 448,812  |   |         |  | 5,778   |   |  |  | 556,745   |           |  |  |        |        
|Appropriation and distribution of 1999 retained earnings:                        |                                            |  |            |           |         |  |               |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |         |        
|                                                                                 | Legal reserve                              |  |            |          |         |  |               |           |         |  |          |  |         |  |         |  |  |  |           | 90,270    |  |  |         |        | 
|                                                                                 | Stock dividends                            |  |            | 2,765,785 |         |  |               | (2,127,527 | )       |  |          |  |         |  |         |  |  |  |           |          |  |  |         |        | 
|Issuance of additional common shares for cash                                    |                                            |  | 1,355,900  |           |         |  | 2,706,467     |            |         |  | (448,812 | ) |         |  |        |   |  |  |          |           |  |  |        |        
|Conversion of convertible bonds                                                  |                                            |  | 978,346    |           |         |  | 3,044,238     |            |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|Gain on disposal of property, plant
and equipment transferred to capital reserve |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  | 12,435  |   |  |  |          |           |  |  |        |        
|Unrealized losses on long-term investments                                       |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|Net income, 2000                                                                 |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|Cost of investment in excess of
purchased assets of an equity investee           |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  | (1,853  | ) |  |  |          |           |  |  |        |        
|Cumulative translation adjustment                                                |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|                                                                                 |                                            |  |            |           |         |  |               |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |         |        
|Balance as of December 31, 2000                                                  |                                            |  | 24,744,091 |           |         |  | 8,424,373     |            |         |  |         |   |         |  | 16,360  |   |  |  | 647,015   |           |  |  |        |        
|                                                                                 |                                            |  |            |           |         |  |               |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |         |        
|Appropriation and distribution of
2000 retained earnings:                        |                                            |  |            |           |         |  |               |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |         |        
|                                                                                 | Special reserve                            |  |            |          |         |  |               |           |         |  |          |  |         |  |         |  |  |  |           |          |  |  |         | 1,425   | 
|                                                                                 | Legal reserve                              |  |            |          |         |  |               |           |         |  |          |  |         |  |         |  |  |  |           | 1,060,038 |  |  |         |        | 
|                                                                                 | Stock dividends                            |  |            | 8,849,335 |         |  |               | (2,474,409 | )       |  |          |  |         |  |         |  |  |  |           |          |  |  |         |        | 
|                                                                                 | Remuneration of directors and
supervisors  |  |            |          |         |  |               |           |         |  |          |  |         |  |         |  |  |  |           |          |  |  |         |        | 
|                                                                                 | Unrealized losses on long-term
investments |  |            |          |         |  |               |           |         |  |          |  |         |  |         |  |  |  |           |          |  |  |         |        | 
|Net loss, 2001                                                                   |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|Cumulative translation adjustment                                                |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|                                                                                 |                                            |  |            |           |         |  |               |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |         |        
|Balance as of December 31, 2001                                                  |                                            |  | 33,593,426 |           |         |  | 5,949,964     |            |         |  |         |   |         |  | 16,360  |   |  |  | 1,707,053 |           |  |  | 1,425   |        
|                                                                                 |                                            |  |            |           |         |  |               |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |         |        
|Appropriation and distribution of 2001 retained earnings:                        |                                            |  |            |           |         |  |               |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |         |        
|                                                                                 | Special reserve                            |  |            |          |         |  |               |           |         |  |          |  |         |  |         |  |  |  |           |          |  |  |         | 377,232 | 
|Capital reserve transferred back to retained earnings                            |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  | (16,360 | ) |  |  | 1,636     |           |  |  |        |        
|Additional paid-in capital transferred to common
stock (331,934,262 shares)      |                                            |  | 3,319,343  |           |         |  | (3,319,343    | )          |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|Unrealized loss on long-term investments                                         |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|Recognition of an investees capital reserve                                     |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  | 356     |   |  |  |          |           |  |  |        |        
|Net loss, 2002                                                                   |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|Cumulative translation adjustment                                                |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|Common stock repurchased                                                         |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|Treasury stock owned by subsidiaries                                             |                                            |  |           |           |         |  |              |            |         |  |         |   |         |  |        |   |  |  |          |           |  |  |        |        
|                                                                                 |                                            |  |            |           |         |  |               |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |         |        
|Balance as of December 31, 2002                                                  |                                            |  | 36,912,769 |           |         |  | 2,630,621     |            |         |  |         |   |         |  | 356     |   |  |  | 1,708,689 |           |  |  | 378,657 |        
|                                                                                 |                                            |  |            |           |         |  |               |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |         |        
|Balance as of December 31, 2002(US$)                                             |                                            |  | 1,063,769  |           |         |  | 75,810        |            |         |  |         |   |         |  | 10      |   |  |  | 49,242    |           |  |  | 10,912  |        
|                                                                                 |                                            |  |            |           |         |  |               |            |         |  |          |   |         |  |         |   |  |  |           |           |  |  |         |        

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                 |                                            |  |                       |            |                   |  |             |          |          |  |         |   |  |  |            |   |  |  |             |          |  
|-------------------------------------------------------------------------------- | ------------------------------------------ |  | --------------------- | ---------- | ----------------- |  | ----------- | -------- | -------- |  | ------- | - |  |  | ---------- | - |  |  | ----------- | -------- | -
|                                                                                 |                                            |  | Retained              |            | Unrealized losses |  |             |          |          |  |         |   |  |  |            |   | 
|                                                                                 |                                            |  | earnings              |            | on long-term      |  | Translation |          | Treasury |  |         |   | 
|                                                                                 |                                            |  | (accumulated deficit) |            | investments       |  | adjustments |          | stock    |  | Total  
|                                                                                 |                                            |  |                       |            |                   |  |             |          |          |  |        
|                                                                                 |                                            |  | NT$                   |            | NT$               |  | NT$         |          | NT$      |  | NT$    
|                                                                                 |                                            |  |                       |            |                   |  |             |          |          |  |        
|Balance as of January 1, 2000                                                    |                                            |  | 902,696               |            |                   |  | (23,289     | )        |          |  | 47,647  |   |  |  |           |   |  |  | 26,383,644  |         
|Appropriation and distribution of 1999 retained earnings:                        |                                            |  |                       |            |                   |  |             |          |          |  |         |   |  |  |            |   |  |  |             |         
|                                                                                 | Legal reserve                              |  |                       | (90,270    | )                 |  |             |         |          |  |         |  |  |  |            |  |  |  |             |         |  
|                                                                                 | Stock dividends                            |  |                       | (638,258   | )                 |  |             |         |          |  |         |  |  |  |            |  |  |  |             |         |  
|Issuance of additional common shares for cash                                    |                                            |  |                      |            |                   |  |            |          |          |  |        |   |  |  |           |   |  |  | 3,613,555   |         
|Conversion of convertible bonds                                                  |                                            |  |                      |            |                   |  |            |          |          |  |        |   |  |  |           |   |  |  | 4,022,584   |         
|Gain on disposal of property, plant
and equipment transferred to capital reserve |                                            |  | (12,435               | )          |                   |  |            |          |          |  |        |   |  |  |           |   |  |  |            |         
|Unrealized losses on long-term investments                                       |                                            |  |                      |            |                   |  | (84,011     | )        |          |  |        |   |  |  |           |   |  |  | (84,011     | )       
|Net income, 2000                                                                 |                                            |  | 10,612,824            |            |                   |  |            |          |          |  |        |   |  |  |           |   |  |  | 10,612,824  |         
|Cost of investment in excess of
purchased assets of an equity investee           |                                            |  | (31,544               | )          |                   |  |            |          |          |  |        |   |  |  |           |   |  |  | (33,397     | )       
|Cumulative translation adjustment                                                |                                            |  |                      |            |                   |  |            |          |          |  | 58,228  |   |  |  |           |   |  |  | 58,228      |         
|                                                                                 |                                            |  |                       |            |                   |  |             |          |          |  |         |   |  |  |            |   |  |  |             |         
|Balance as of December 31, 2000                                                  |                                            |  | 10,743,013            |            |                   |  | (107,300    | )        |          |  | 105,875 |   |  |  |           |   |  |  | 44,573,427  |         
|                                                                                 |                                            |  |                       |            |                   |  |             |          |          |  |         |   |  |  |            |   |  |  |             |         
|Appropriation and distribution of
2000 retained earnings:                        |                                            |  |                       |            |                   |  |             |          |          |  |         |   |  |  |            |   |  |  |             |         
|                                                                                 | Special reserve                            |  |                       | (1,425     | )                 |  |             |         |          |  |         |  |  |  |            |  |  |  |             |         |  
|                                                                                 | Legal reserve                              |  |                       | (1,060,038 | )                 |  |             |         |          |  |         |  |  |  |            |  |  |  |             |         |  
|                                                                                 | Stock dividends                            |  |                       | (6,374,926 | )                 |  |             |         |          |  |         |  |  |  |            |  |  |  |             |         |  
|                                                                                 | Remuneration of directors and
supervisors  |  |                       | (190,148   | )                 |  |             |         |          |  |         |  |  |  |            |  |  |  |             | (190,148 | )
|                                                                                 | Unrealized losses on long-term
investments |  |                       |           |                   |  |             | (540,318 | )        |  |         |  |  |  |            |  |  |  |             | (540,318 | )
|Net loss, 2001                                                                   |                                            |  | (866,480              | )          |                   |  |            |          |          |  |        |   |  |  |           |   |  |  | (866,480    | )       
|Cumulative translation adjustment                                                |                                            |  |                      |            |                   |  |            |          |          |  | 167,144 |   |  |  |           |   |  |  | 167,144     |         
|                                                                                 |                                            |  |                       |            |                   |  |             |          |          |  |         |   |  |  |            |   |  |  |             |         
|Balance as of December 31, 2001                                                  |                                            |  | 2,249,996             |            |                   |  | (647,618    | )        |          |  | 273,019 |   |  |  |           |   |  |  | 43,143,625  |         
|                                                                                 |                                            |  |                       |            |                   |  |             |          |          |  |         |   |  |  |            |   |  |  |             |         
|Appropriation and distribution of 2001 retained earnings:                        |                                            |  |                       |            |                   |  |             |          |          |  |         |   |  |  |            |   |  |  |             |         
|                                                                                 | Special reserve                            |  |                       | (377,232   | )                 |  |             |         |          |  |         |  |  |  |            |  |  |  |             |         |  
|Capital reserve transferred back to retained earnings                            |                                            |  | 14,724                |            |                   |  |            |          |          |  |        |   |  |  |           |   |  |  |            |         
|Additional paid-in capital transferred to common
stock (331,934,262 shares)      |                                            |  |                      |            |                   |  |            |          |          |  |        |   |  |  |           |   |  |  |            |         
|Unrealized loss on long-term investments                                         |                                            |  |                      |            |                   |  | (331,463    | )        |          |  |        |   |  |  |           |   |  |  | (331,463    | )       
|Recognition of an investees capital reserve                                     |                                            |  |                      |            |                   |  |            |          |          |  |        |   |  |  |           |   |  |  | 356         |         
|Net loss, 2002                                                                   |                                            |  | (11,356,663           | )          |                   |  |            |          |          |  |        |   |  |  |           |   |  |  | (11,356,663 | )       
|Cumulative translation adjustment                                                |                                            |  |                      |            |                   |  |            |          |          |  | (53,125 | ) |  |  |           |   |  |  | (53,125     | )       
|Common stock repurchased                                                         |                                            |  |                      |            |                   |  |            |          |          |  |        |   |  |  | (1,046,071 | ) |  |  | (1,046,071  | )       
|Treasury stock owned by subsidiaries                                             |                                            |  |                      |            |                   |  |            |          |          |  |        |   |  |  | (142,365   | ) |  |  | (142,365    | )       
|                                                                                 |                                            |  |                       |            |                   |  |             |          |          |  |         |   |  |  |            |   |  |  |             |         
|Balance as of December 31, 2002                                                  |                                            |  | (9,469,175            | )          |                   |  | (979,081    | )        |          |  | 219,894 |   |  |  | (1,188,436 | ) |  |  | 30,214,294  |         
|                                                                                 |                                            |  |                       |            |                   |  |             |          |          |  |         |   |  |  |            |   |  |  |             |         
|Balance as of December 31, 2002(US$)                                             |                                            |  | (272,887              | )          |                   |  | (28,215     | )        |          |  | 6,337   |   |  |  | (34,249    | ) |  |  | 870,729     |         
|                                                                                 |                                            |  |                       |            |                   |  |             |          |          |  |         |   |  |  |            |   |  |  |             |         

See accompanying notes to consolidated financial statements.

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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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | Macronix International Co., Ltd. was incorporated in the Hsinchu Science
Based Industrial Park (HSIP) under the laws of the Republic of China (the
ROC) on December 9, 1989. Macronix International Co., Ltd. operates
principally as a designer, manufacturer, and supplier of integrated
circuits and memory chips.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | The accompanying consolidated financial statements include all domestic and
foreign subsidiaries that are more than 50% owned and controlled. The
wholly owned subsidiaries of Macronix International Co., Ltd. include
Macronix America, Inc. (MXA), Macronix (B.V.I.) Co. Ltd., Huiv Ying
Investment, Ltd., Kang Bao Investment, Ltd., Run Hong Investment, Ltd.,
Magic Pixel Inc. In addition, the four wholly-owned
subsidiaries of Macronix (B.V.I.) Co., Ltd including Wedgewood
International Ltd., New Trend Technology Inc., Macronix Europe N.V., and
Macronix Pte Ltd. and Huiv Ying Investment, Ltd.s 92.5% owned subsidiary,
Joytech Technology Co., are also consolidated. Macronix International Co.,
Ltd. and its subsidiaries are hereinafter collectively referred to as the
Company or Macronix. All significant inter-company balances and
transactions have been eliminated.
|  
|2. |  | Summary of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Generally Accepted Accounting Principles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | The financial statements have been prepared in accordance with accounting
principles generally accepted in the Republic of China (ROC GAAP). ROC
GAAP varies in certain significant respects from accounting principles
generally accepted in the United States of America (US GAAP). Application
of US GAAP would have affected shareholders equity as of December 31, 2001
and 2002, and the results of operations for each of the three years in the
period ended December 31, 2002 to the extent summarized in note 20.                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The preparation of financial statements in conformity with ROC GAAP
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash, and so near to their maturity that
they present insignificant risk of changes in interest rates. Commercial
paper, negotiable certificates of deposit, and bank acceptances with
original maturities of three months or less are considered to be cash
equivalents.                                                                                                                                               
|
| |  | Foreign Currency Translation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Macronix International Co. Ltd. maintains its accounting records in New
Taiwan dollars (NT dollars or NT$), the national currency of the ROC.
Transactions denominated in foreign currencies are recorded in NT dollars
using the exchange rates in effect at the date of the transactions. Assets
and liabilities denominated in foreign currencies are translated into NT
dollars using the exchange rates in effect at the balance sheet date.
Foreign exchange gains or losses are included in the statements of
operations.
|
| |  | The assets and liabilities of the foreign subsidiaries are translated into
NT dollars, with the local currency of each foreign subsidiary as its
functional currency, at current exchange rates in effect at the balance
sheet date. Revenue and expense accounts are translated using a weighted
average exchange rate for the period. Translation gains and losses are
included as a component of shareholders equity.                                                                                                           
|
| |  | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | a. Foreign exchange forward contracts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|

| |  | A forward foreign exchange contract obligates the Company to exchange
predetermined amounts of specified foreign currencies at specified
exchange rates for another currency on a specified date. The Companys
forward contracts are designated as hedges; discounts or premiums, being
the difference between the spot exchange rate and the forward exchange
rate at the inception of the contract, are accreted or amortized to the
statement of operations over the contract lives using the straight-line
method. Realized gains and losses from settlement or unrealized gains and
losses resulting from changes in the spot exchange rate at the balance
sheet date are recorded in the statement of operations as foreign
exchange gains or losses in the period in which they relate. The related
amounts due to or from counter-parties are included in other current
assets or other current liabilities.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | b. Currency option contracts
| |  | ----------------------------
|

| |  | At maturity the Company or the financial institution, depending upon
which party has the right of the option, may exercise the option to
receive a said amount denominated in one currency and pay a said amount
in a different currency. The conversion rate is stated in the contract.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | For options, premiums are amortized over the contract lives using
the straight-line method. Gains and losses are dealt with in the
statement of operations upon exercise.                                                                                                               

|
|
|

|
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F - 11



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Information Expressed in US Dollars                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The financial statements are stated in NT dollars, the national currency of
the ROC. Translation of NT dollar amounts into US dollar amounts is
included solely for the convenience of the readers outside Taiwan and has
been made at the rate of NT$34.7 to US $1 ( on the basis of noon buying
rate in New York for cable transfers as certified for customs purposes by
the Federal Reserve Bank of New York on December 31, 2002). No
representation is made that the NT dollar amounts could have been, or could
be, converted into US dollars at that or any other rate.
|
| |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Inventories are carried at the lower of cost or market value using the
weighted average cost method. Replacement cost is used to determine the
market value of raw materials and supplies, and others. Net realizable
value is used to determine the market value of work in process and finished
goods, and commodities purchased. The lower of cost or market method is
applied to each major category.                                                                                                                                                                      
|
| |  | Short-Term Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Short-term investments are carried at the lower of cost or market value at
the balance sheet date using the weighted average cost method.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Long-Term Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Long-term investments in which the Company holds an interest of 20% or more
and has the ability to exercise significant influence are accounted for
under the equity method of accounting. The difference between the cost of
the investment and the fair value of the identifiable assets at the date of
acquisition is amortized over five years. Other long-term investments are
carried at the lower of cost or market, with unrealized losses recorded as
a separate component of shareholders equity. There is no recognition of
unrealized gains.                      

F - 12



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Property, Plant and Equipment                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided on the straight-line basis over the
following useful lives:

|                                   |  |         |  |      
|---------------------------------- |  | ------- |  | -----
|Buildings                          |  | 5 to 20 |  | years
|Production equipment               |  | 1 to 5  |  | years
|Research and development equipment |  | 1 to 5  |  | years
|Office furniture and equipment     |  | 1 to 10 |  | years
|Leased equipment                   |  | 5       |  | years



| |  | Improvements and replacements are capitalized and depreciated over their
estimated useful lives while ordinary repairs and maintenance are expensed
as incurred. Gains or losses resulting from the disposal of property, plant
and equipment are presented under other income or expenses. Interest
incurred associated with the additions of property, plant and equipment is
capitalized until those assets are ready for use.                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Lease agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Provided a lease agreement meets the capitalization criteria, the present
value of the minimum lease payments net of executory costs are capitalized
as an asset along with a corresponding liability. Leased equipment is
depreciated using the straight-line method over the estimated useful life.
A lease that does not qualify as a capital lease is classified as an
operating lease and the lease payments are recorded as rental expense.                                                                            
|
| |  | Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Intangible assets are originally recorded at cost and are amortized over
their estimated useful lives using the straight-line method. Royalties and
issuing costs of convertible bonds are amortized over the contracts lives
and durations of the bonds, respectively. Computer software is amortized
over one to three years, while other assets are over one to five years.
Accumulated amortization of intangibles amounted to NT$1,653,834 and
NT$2,288,639 (US$65,955) as of December 31, 2001 and 2002, respectively.

F - 13



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Employee Retirement Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has a defined benefit pension plan covering substantially all
of its employees. The plan provides for a lump sum payment upon retirement
based on years of service and the employees compensation during the last
six months of employment. In accordance with the Labor Standards Law of
the ROC, the Company makes a monthly contribution equal to 2% of the wages
and salaries paid during the period to a pension fund maintained with the
Central Trust of China. On the basis of an actuarial report, the monthly
contribution was changed in May 1996 to 5% of the wages and salaries paid.
Effective from January 1, 2002, the Company was authorized to change the
monthly contribution rate to 2%. The fund, established during 1990 to meet
employees retirement benefit entitlements, is administered by the
Employees Retirement Fund Committee and is registered in the committees
name. Therefore, the pension fund is not included in the financial
statements of the Company.
|
| |  | The Company adopted, on a prospective basis, ROC Statement of Financial
Accounting Standards No. 18 Accounting for Pensions in 1996. The
Statement requires that the pension plan assets and the benefit obligation
be determined on an actuarial basis. Based on the actuarial report with the
measurement date of December 31, 1995, the minimum pension liability was
recorded for the excess of accumulated pension obligation over the fair
value of plan assets. The Company has been recognizing the related net
pension cost since January 1, 1996. Net transition asset or obligation,
prior service cost, and gains or losses from the plan assets are amortized
on the straight-line basis over the employees average remaining service
period of about twenty five years.                                                                                                                                                                                                                      
|
| |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their tax bases,
including investment and research and development tax credits. A valuation
allowance is provided based on the expected realization of the deferred tax
assets. Undistributed earnings generated after 1997 are subject to a 10%
tax in compliance with the Income Tax Law of the ROC. The 10% tax on
undistributed earnings is recorded as an expense at the time the
shareholders resolve that its earnings shall be retained.                                                                                                                                                                                                                                                                                                                                               
|
| |  | Income tax credits resulting from the acquisition of equipment, research
and development expenditures, employee training and investment in equity
stock are recognized using the flow-through method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F - 14



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Revenue is recognized when it is realized or realizable and when it is
earned. Revenue from the sale of products is recognized when ownership is
transferred to the customer, which normally is when shipment is made.
Provisions for discounts and rebates to customers, and returns and other
adjustments are provided for in the same period the related sales are
recorded.                                                                                                                                                                                                                                                                                                                
|
| |  | Employee Bonuses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Amounts distributed to employees, directors and supervisors pursuant to the
Companys articles of incorporation on 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 such distribution is made in the form of common shares, the
amount transferred from retained earnings is based on the par value of the
common shares issued.                                                                                                                                                                                                                        
|
| |  | Research and Development Subsidies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Government subsidies for research and development are recorded as revenue
in the period the qualifying research and development activities are
undertaken.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Minority Interests                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Minority interest in the Consolidated Statements of Operations includes
interest in the earnings or losses of less than wholly owned subsidiaries
and the pre-acquisition earnings of companies acquired during the year that
the Company was not entitled to recognize.                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Net Income Per Common Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | In accordance with R.O.C. Statement of Financial Accounting Standard No.24,
Earnings per Share, the Company presents basic earnings per share if a
simple capital structure exists; or both basic earnings per share and
diluted earnings per share if a complex capital structure exists. Basic
earnings per share is equal to the net income (loss) attributable to common
stock divided by the weighted-average number of common shares. When
calculating diluted earnings per share, the numerator should include or add
back potential common stock dividends, interest and other conversion
revenues (expenses). The denominator should include all potentially
dilutive common shares.

F - 15



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | The weighted average numbers of outstanding common shares for the
calculation of basic earnings per share are computed as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------

|                                                                                 |  |      |               |      |  |      |               |  |  |  |               |  
|-------------------------------------------------------------------------------- |  | ---- | ------------- | ---- |  | ---- | ------------- |  |  |  | ------------- | -
|                                                                                 |  | 2000 |               | 2001 |  | 2002
|                                                                                 |  |      |               |      |  |     
|Number of common shares outstanding on January 1                                 |  |      | 1,964,406,063 |      |  |      | 2,474,409,144 |  |  |  | 3,359,342,613 |  
|Issuance of common shares for cash on January 22, 2000                           |  |      | 128,160,411   |      |  |      |              |  |  |  |              |  
|Bonds converted to common shares on February 18, 2000                            |  |      | 22,720,465    |      |  |      |              |  |  |  |              |  
|Bonds converted to common shares on March 7, 2000                                |  |      | 1,193,644     |      |  |      |              |  |  |  |              |  
|Bonds converted to common shares on June 26, 2000                                |  |      | 35,460,102    |      |  |      |              |  |  |  |              |  
|Bonds converted to common shares on November 9, 2000                             |  |      | 264,659       |      |  |      |              |  |  |  |              |  
|Weighted average effect of 2000 stock dividend                                   |  |      | 275,142,476   |      |  |      |              |  |  |  |              |  
|Stock dividends and transfer of capital reserve to
capital on May 28, 2001 (30%) |  |      |              |      |  |      | 742,322,744   |  |  |  |              |  
|Employee bonus transfer to capital on May 28, 2001                               |  |      | 139,898,381   |      |  |      | 142,610,725   |  |  |  |              |  
|Weighted average effect of 2001 stock dividend                                   |  |      | 728,204,346   |      |  |      |              |  |  |  |              |  
|Weighted-average number of treasury stock                                        |  |      |              |      |  |      |              |  |  |  | (26,205,248   | )
|Stock dividends on July 13, 2002                                                 |  |      |              |      |  |      |              |  |  |  | 333,313,737   |  
|Weighted average effect of 2002 stock dividend                                   |  |      | 329,545,055   |      |  |      | 335,934,261   |  |  |  |              |  
|                                                                                 |  |      |               |      |  |      |               |  |  |  |               |  
|Subtotal                                                                         |  |      | 3,624,995,602 |      |  |      | 3,695,276,874 |  |  |  | 3,666,451,102 |  
|Less: Treasury stock owned by subsidiaries                                       |  |      |              |      |  |      |              |  |  |  | (6,023,152    | )
|                                                                                 |  |      |               |      |  |      |               |  |  |  |               |  
|Weighted-average number of shares                                                |  |      | 3,624,995,602 |      |  |      | 3,695,276,874 |  |  |  | 3,660,427,950 |  
|                                                                                 |  |      |               |      |  |      |               |  |  |  |               |  



| |  | Basic and diluted earnings per share (the EPS) were calculated as
follows:
| |  | ----------------------------------------------------------------------------

|             |                                                    |  |      |               |      |  |       |               |   |  |       |               |  
|------------ | -------------------------------------------------- |  | ---- | ------------- | ---- |  | ----- | ------------- | - |  | ----- | ------------- | -
|             |                                                    |  | 2000 |               | 2001 |  | 2002 
|             |                                                    |  |      |               |      |  |      
|Basic EPS:   |                                                    |  |      |               |      |  |       |               |   |  |       |              
|             | Income (loss) available to common share holders    |  |      | 10,612,824    |      |  |       | (866,480      | ) |  |       | (11,356,663   | )
|             |                                                    |  |      |               |      |  |       |               |   |  |       |              
|             | Weighted average common shares outstanding         |  |      | 3,624,995,602 |      |  |       | 3,695,276,874 |   |  |       | 3,660,427,950 |  
|             |                                                    |  |      |               |      |  |       |               |   |  |       |              
|             | Basic EPS                                          |  |      | 2.93          |      |  |       | (0.23         | ) |  |       | (3.10         | )
|             |                                                    |  |      |               |      |  |       |               |   |  |       |              
|Diluted EPS: |                                                    |  |      |               |      |  |       |               |   |  |       |              
|             | Income available to common share holders           |  |      | 10,612,824    |      |  |       | (866,480      | ) |  |       | (11,356,663   | )
|             |                                                    |  |      |               |      |  |       |               |   |  |       |              
|             | Income impact of assumed conversion of
convertible |  |      | 487,451       |      |  |       |              |   |  |       |              |  
|             |                                                    |  |      |               |      |  |       |               |   |  |       |              
|             | Income available to common shares plus assumed     |  |      | 11,100,275    |      |  |       | (866,480      | ) |  |       | (11,356,663   | )
|             |                                                    |  |      |               |      |  |       |               |   |  |       |              
|             | Weighted average common shares outstanding         |  |      | 3,624,995,602 |      |  |       | 3,695,276,874 |   |  |       | 3,660,427,950 |  
|             | Weighted average assumed conversion of
convertible |  |      | 195,006,994   |      |  |       |              |   |  |       |              |  
|             |                                                    |  |      |               |      |  |       |               |   |  |       |              
|             | Adjusted weighted average shares                   |  |      | 3,820,002,596 |      |  |       | 3,695,276,874 |   |  |       | 3,660,427,950 |  
|             |                                                    |  |      |               |      |  |       |               |   |  |       |              
|Diluted EPS  |                                                    |  | 2.91 |               |      |  | (0.23 | )             |   |  | (3.10 | )            
|             |                                                    |  |      |               |      |  |       |               |   |  |       |              

F - 16



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | The diluted earnings per share calculation excludes the statement of
operations impact of NT$433,525 and NT$413,809 related to the assumed
conversion of convertible bonds into 210,301,619 weighted average shares
and 374,454,410 weighted average shares for 2001 and 2002, respectively.
The impact of the assumed conversion has been excluded due to the
anti-dilutive effect.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pro-forma data:

Assuming that the Companys shares owned by its subsidiaries were not treated
as treasury stock for 2002, the net loss and loss per share would be as
follows:

|                                      |  |                    |             |     |  |  |          |  
|------------------------------------- |  | ------------------ | ----------- | --- |  |  | -------- | -
|                                      |  | For the year ended
|                                      |  | December 31, 2002 
|                                      |  |                   
|                                      |  | NT$                |             | US$
|Net loss                              |  |                    | (11,356,663 | )   |  |  | (327,282 | )
|Unrealized short-term investment loss |  |                    | (70,034     | )   |  |  | (2,018   | )
|                                      |  |                    |             |     |  |  |          |  
|Net loss (pro-forma)                  |  |                    | (11,426,697 | )   |  |  | (329,300 | )
|                                      |  |                    |             |     |  |  |          |  

|                      |          |  |                    |             |           |  |               |             |                    |  |           |               |  |  |   |       |   |  |   |       |  
|--------------------- | -------- |  | ------------------ | ----------- | --------- |  | ------------- | ----------- | ------------------ |  | --------- | ------------- |  |  | - | ----- | - |  | - | ----- | -
|                      |          |  | Amount (numerator) |             |           |  |               |             | Net loss per share
|                      |          |  |                    |             |           |  |               |             |                   
|                      |          |  |                    |             |           |  |               |             |                    |  | Shares    |               |  |  |   |       |   |  |  
|                      |          |  | Before tax         |             | After tax |  | (denominator) |             | Before tax         |  | After tax
|                      |          |  |                    |             |           |  |               |             |                    |  |          
|2002:                 |          |  |                    |             |           |  |               |             |                    |  |           |               |  |  |   |       |   |  |   |      
|Basic EPS (pro-forma) |          |  |                    |             |           |  |               |             |                    |  |           |               |  |  |   |       |   |  |   |      
|                      | Net loss |  | $                  | (11,426,696 | )         |  | $             | (11,426,696 | )                  |  |           | 3,666,451,102 |  |  | $ | (3.12 | ) |  | $ | (3.12 | )
|                      |          |  |                    |             |           |  |               |             |                    |  |           |               |  |  |   |       |   |  |   |       |  

Treasury Stock

In accordance with the ROC Statement of Financial Accounting Standards
No.30, Accounting for Treasury Stock, treasury stock is accounted for
under the cost method. Under the cost method, the gross cost of shares
reacquired is charged to treasury stock which is presented as a
contra-equity account in the financial statements. Any surplus or deficit
on treasury stock transactions are credited or charged to capital
reserves. In addition, effective from January 1, 2002, the
Companys shares owned by its subsidiaries were treated as treasury stock.
Retroactive adjustments were not required.

F - 17



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




|   |  | Reason and Effect of a Change in Accounting Policies                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Effective from January 1, 2002, the Companys shares owned by its
subsidiaries were treated as treasury stock according to ROC Statement of
Financial Accounting Standards No. 30, Accounting for Treasury Stock.
The adoption of this statement reduced the net loss and loss per share for
2002 by NT$ 70,033 and NT$ 0.02, respectively. Long-term equity
investments and shareholders equity decreased by NT$ 142,365.
|  
|3. |  | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                    

|                              |  |              |            |      |  |     |           |  |  |  |         | 
|----------------------------- |  | ------------ | ---------- | ---- |  | --- | --------- |  |  |  | ------- | 
|                              |  | December 31,
|                              |  |             
|                              |  | 2001         |            | 2002
|                              |  |              |            |     
|                              |  | NT$          |            | NT$  |  | US$
|Petty cash                    |  |              | 49,690     |      |  |     | 55,257    |  |  |  | 1,593   | 
|Checking and savings accounts |  |              | 1,681,924  |      |  |     | 5,760,903 |  |  |  | 166,020 | 
|Time deposits                 |  |              | 8,247,274  |      |  |     | 1,025,330 |  |  |  | 29,548  | 
|Cash equivalents              |  |              | 2,582,066  |      |  |     | 552,871   |  |  |  | 15,933  | 
|                              |  |              |            |      |  |     |           |  |  |  |         | 
|Total                         |  |              | 12,560,954 |      |  |     | 7,394,361 |  |  |  | 213,094 | 
|                              |  |              |            |      |  |     |           |  |  |  |         | 



|4. |  | Short-Term Investments
|-- |  | ----------------------

|                                         |  |              |           |      |  |     |           |   |  |  |        |  
|---------------------------------------- |  | ------------ | --------- | ---- |  | --- | --------- | - |  |  | ------ | -
|                                         |  | December 31,
|                                         |  |             
|                                         |  | 2001         |           | 2002
|                                         |  |              |           |     
|                                         |  | NT$          |           | NT$  |  | US$
|Marketable securities                    |  |              | 159,061   |      |  |     |          |   |  |  |       |  
|Mutual funds                             |  |              | 1,135,272 |      |  |     | 1,202,539 |   |  |  | 34,655 |  
|Less: Allowance for market value decline |  |              | (50,426   | )    |  |     | (17,215   | ) |  |  | (496   | )
|                                         |  |              |           |      |  |     |           |   |  |  |        |  
|Net                                      |  |              | 1,243,907 |      |  |     | 1,185,324 |   |  |  | 34,159 |  
|                                         |  |              |           |      |  |     |           |   |  |  |        |  

F - 18



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




|5. |  | Notes and Accounts Receivable (Net)
|-- |  | -----------------------------------

|                                      |  |              |           |      |  |     |           |   |  |  |        |  
|------------------------------------- |  | ------------ | --------- | ---- |  | --- | --------- | - |  |  | ------ | -
|                                      |  | December 31,
|                                      |  |             
|                                      |  | 2001         |           | 2002
|                                      |  |              |           |     
|                                      |  | NT$          |           | NT$  |  | US$
|Notes receivable                      |  |              | 68,798    |      |  |     | 95,947    |   |  |  | 2,765  |  
|Accounts receivable                   |  |              | 2,446,443 |      |  |     | 2,825,129 |   |  |  | 81,416 |  
|                                      |  |              |           |      |  |     |           |   |  |  |        |  
|Total                                 |  |              | 2,515,241 |      |  |     | 2,921,076 |   |  |  | 84,181 |  
|Less: Allowance for doubtful accounts |  |              | (196,016  | )    |  |     | (210,883  | ) |  |  | (6,077 | )
|                                      |  |              |           |      |  |     |           |   |  |  |        |  
|Net                                   |  |              | 2,319,225 |      |  |     | 2,710,193 |   |  |  | 78,104 |  
|                                      |  |              |           |      |  |     |           |   |  |  |        |  



|6. |  | Inventories (Net)
|-- |  | -----------------

|                                                          |  |              |            |      |  |     |            |   |  |  |          |  
|--------------------------------------------------------- |  | ------------ | ---------- | ---- |  | --- | ---------- | - |  |  | -------- | -
|                                                          |  | December 31,
|                                                          |  |             
|                                                          |  | 2001         |            | 2002
|                                                          |  |              |            |     
|                                                          |  | NT$          |            | NT$  |  | US$
|Merchandise                                               |  |              | 16,343     |      |  |     | 82,102     |   |  |  | 2,366    |  
|Finished goods                                            |  |              | 1,710,658  |      |  |     | 2,422,366  |   |  |  | 69,809   |  
|Work in process                                           |  |              | 8,287,946  |      |  |     | 8,038,534  |   |  |  | 231,658  |  
|Raw materials                                             |  |              | 361,175    |      |  |     | 229,586    |   |  |  | 6,616    |  
|Supplies                                                  |  |              | 165,468    |      |  |     | 119,484    |   |  |  | 3,443    |  
|Others                                                    |  |              | 578        |      |  |     | 483        |   |  |  | 14       |  
|                                                          |  |              |            |      |  |     |            |   |  |  |          |  
|Total                                                     |  |              | 10,542,168 |      |  |     | 10,892,555 |   |  |  | 313,906  |  
|Less: Allowance for market
value decline and obsolescence |  |              | (3,243,666 | )    |  |     | (5,751,735 | ) |  |  | (165,756 | )
|                                                          |  |              |            |      |  |     |            |   |  |  |          |  
|Net                                                       |  |              | 7,298,502  |      |  |     | 5,140,820  |   |  |  | 148,150  |  
|                                                          |  |              |            |      |  |     |            |   |  |  |          |  

The insurance coverage for inventories amounted to $9,752,705 and
$6,700,681(US$193,103) as of December 31, 2001 and 2002, respectively.

F - 19



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




|7. |  | Long-Term Equity Investments
|-- |  | ----------------------------

|                                   |                                          |          |  |                   |  |     |           |           |           |  |  |         |   | 
|---------------------------------- | ---------------------------------------- | -------- |  | ----------------- |  | --- | --------- | --------- | --------- |  |  | ------- | - | 
|                                   |                                          |          |  | December 31, 2001
|                                   |                                          |          |  |                  
|                                   |                                          |          |  |                   |  |     |           |           |           |  |  | Percent
|                                   |                                          |          |  | Shares            |  | NT$ |           | Owned    
|                                   |                                          |          |  |                   |  |     |           |          
|Accounted for under cost method:   |                                          |          |  |                   |  |     |           |           |           |  |  |        
|                                   | Chantek Electronic Co., Ltd. **          |          |  | 15,211,746        |  |     |           |          |           |  |  | 8.89    | %
|                                   | United Industrial Gases Co., Ltd.        |          |  | 5,274,212         |  |     |           | 58,500    |           |  |  | 3.41    | %
|                                   | Quality Test System Inc.                 |          |  | 4,538,333         |  |     |           |          |           |  |  | 14.64   | %
|                                   | Chien Cheng Venture Capital Co., Ltd.    |          |  | 8,000,000         |  |     |           | 80,000    |           |  |  | 15.38   | %
|                                   | Ardentec Corp.                           |          |  | 23,987,500        |  |     |           | 237,500   |           |  |  | 11.78   | %
|                                   | Powertech Co. Ltd.                       |          |  | 7,034,500         |  |     |           | 83,135    |           |  |  | 3.17    | %
|                                   | Taiwan Mask Corp.**                      |          |  | 714               |  |     |           | 81        |           |  |  | *      |  
|                                   | Chipbond Technology Corp.**              |          |  | 11,988,450        |  |     |           | 189,936   |           |  |  | 8.57    | %
|                                   | Pico Netics Inc.                         |          |  | 1,000,000         |  |     |           | 31,455    |           |  |  | 4.00    | %
|                                   | Global Strategic Investment Fund         |          |  | 2,000,000         |  |     |           | 69,900    |           |  |  | 2.52    | %
|                                   | FueTrek Co., Ltd.                        |          |  | 480               |  |     |           | 43,342    |           |  |  | 17.65   | %
|                                   | Tower Semiconductor Ltd.**               |          |  | 2,855,779         |  |     |           | 1,281,408 |           |  |  | 11.28   | %
|                                   |                                          |          |  |                   |  |     |           |           |           |  |  |        
|                                   |                                          | Subtotal |  |                   |  |     |           |           | 2,075,257 |  |  |         |   | 
|                                   | Less: Allowance for market value
decline |          |  |                   |  |     |           | (647,618  | )         |  |  |         |  
|                                   |                                          |          |  |                   |  |     |           |           |           |  |  |        
|                                   | Net                                      |          |  |                   |  |     |           | 1,427,639 |           |  |  |         |  
|                                   |                                          |          |  |                   |  |     |           |           |           |  |  |        
|Accounted for under equity method: |                                          |          |  |                   |  |     |           |           |           |  |  |        
|                                   | Caesar Technology, Inc.                  |          |  | 74,129,603        |  |     |           |          |           |  |  | 29.65   | %
|                                   | Prominent Communications, Inc.           |          |  | 6,100,000         |  |     |           | 42,022    |           |  |  | 32.54   | %
|                                   | Biomorphic VLSI Inc.                     |          |  | 4,660,252         |  |     |           | 14,126    |           |  |  | 35.60   | %
|                                   | Raio Electronic Co. Ltd.                 |          |  | 3,140,000         |  |     |           | 18,885    |           |  |  | 26.17   | %
|                                   |                                          |          |  |                   |  |     |           |           |           |  |  |        
|                                   | Subtotal                                 |          |  |                   |  |     |           | 75,033    |           |  |  |         |  
|Total                              |                                          |          |  |                   |  |     | 1,502,672 |           |           |  |  |        
|                                   |                                          |          |  |                   |  |     |           |           |           |  |  |        

F - 20



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)


|                                   |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  |         |   | 
|---------------------------------- | ---------------------------------------- | -------- |  | ----------------- |  | --- | --------- | --------- | --------- | ----- | ------ | ------- | ------ |  |  | ------- | - | 
|                                   |                                          |          |  | December 31, 2002
|                                   |                                          |          |  |                  
|                                   |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  | Percent
|                                   |                                          |          |  | Shares            |  | NT$ |           | US$       |           | owned
|                                   |                                          |          |  |                   |  |     |           |           |           |      
|Accounted for under cost method:   |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  |        
|                                   | Caesar Technology, Inc.                  |          |  | 74,129,603        |  |     |           |          |           |       |        |        |        |  |  | 29.65   | %
|                                   | Chantek Electronic Co., Ltd. **          |          |  | 15,211,746        |  |     |           |          |           |       |        |        |        |  |  | 4.35    | %
|                                   | United Industrial Gases Co., Ltd.        |          |  | 5,274,212         |  |     |           | 58,500    |           |       |        | 1,686   |        |  |  | 3.38    | %
|                                   | Quality Test System Inc.                 |          |  | 4,538,333         |  |     |           |          |           |       |        |        |        |  |  | 14.64   | %
|                                   | Chien Cheng Venture Capital Co., Ltd.    |          |  | 8,000,000         |  |     |           | 80,000    |           |       |        | 2,305   |        |  |  | 15.38   | %
|                                   | Ardentec Corp.                           |          |  | 23,987,500        |  |     |           | 237,500   |           |       |        | 6,844   |        |  |  | 11.78   | %
|                                   | Powertech Co. Ltd.                       |          |  | 7,386,225         |  |     |           | 83,135    |           |       |        | 2,396   |        |  |  | 2.99    | %
|                                   | Taiwan Mask Corp.**                      |          |  | 806               |  |     |           | 81        |           |       |        | 2       |        |  |  | *      |  
|                                   | Chipbond Technology Corp.**              |          |  | 10,028,450        |  |     |           | 158,302   |           |       |        | 4,562   |        |  |  | 7.17    | %
|                                   | Pico Netics Inc.                         |          |  | 1,000,000         |  |     |           | 31,275    |           |       |        | 901     |        |  |  | 4.16    | %
|                                   | Global Strategic Investment Fund         |          |  | 2,000,000         |  |     |           | 69,500    |           |       |        | 2,003   |        |  |  | 2.52    | %
|                                   | FueTrek Co., Ltd.                        |          |  | 480               |  |     |           | 43,094    |           |       |        | 1,242   |        |  |  | 17.65   | %
|                                   | Tower Semiconductor Ltd.**               |          |  | 5,932,105         |  |     |           | 1,847,480 |           |       |        | 53,242  |        |  |  | 13.66   | %
|                                   |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  |        
|                                   |                                          | Subtotal |  |                   |  |     |           |           | 2,608,867 |       |        |         | 75,183 |  |  |         |   | 
|                                   | Less: Allowance for market value decline |          |  |                   |  |     |           | (979,081  | )         |       |        | (28,215 | )      |  |  |         |  
|                                   |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  |        
|                                   | Net                                      |          |  |                   |  |     |           | 1,629,786 |           |       |        | 46,968  |        |  |  |         |  
|                                   |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  |        
|Accounted for under equity method: |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  |        
|                                   | Prominent Communications, Inc.           |          |  | 7,300,000         |  |     |           | 65,864    |           |       |        | 1,898   |        |  |  | 35.23   | %
|                                   | Biomorphic VLSI Inc.                     |          |  | 4,660,252         |  |     |           |          |           |       |        |        |        |  |  | 35.08   | %
|                                   | Raio Electronic Co. Ltd.                 |          |  | 3,140,000         |  |     |           | 11,439    |           |       |        | 330     |        |  |  | 28.04   | %
|                                   |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  |        
|                                   | Subtotal                                 |          |  |                   |  |     |           | 77,303    |           |       |        | 2,228   |        |  |  |         |  
|                                   |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  |        
|Prepaid Investment                 |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  |        
|                                   | Honbond Venture Capital Co., Ltd.        |          |  |                   |  |     |           | 120,000   |           |       |        | 3,458   |        |  |  | 15.00   | %
|                                   |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  |        
|Total                              |                                          |          |  |                   |  |     | 1,827,089 |           |           |       | 52,654 |         |        |  |  |        
|                                   |                                          |          |  |                   |  |     |           |           |           |       |        |         |        |  |  |        

*Less than 0.01%

**Publicly traded.

The Companys investments in Chantek Electronic Co., Ltd., Taiwan Mask
Corp., Chipbond Technology Corp. and Tower Semiconductor Ltd. are
classified as marketable equity securities and accounted for at the lower
of cost or market.

No long-term equity investments were pledged as of December 31, 2001 and
2002.

F - 21



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




|8. |  | Short-Term Debts
|-- |  | ----------------

|                                                                    |  |              |         |      |  |     |           |  |  |  |        | 
|------------------------------------------------------------------- |  | ------------ | ------- | ---- |  | --- | --------- |  |  |  | ------ | 
|                                                                    |  | December 31,
|                                                                    |  |             
|                                                                    |  | 2001         |         | 2002
|                                                                    |  |              |         |     
|                                                                    |  | NT$          |         | NT$  |  | US$
|Letter of credit loans within 180 days
at variable interest rates   |  |              |        |      |  |     | 696,176   |  |  |  | 20,063 | 
|Working capital loan due within 180
days at variable interest rates |  |              | 733,950 |      |  |     | 1,462,975 |  |  |  | 42,160 | 
|                                                                    |  |              |         |      |  |     |           |  |  |  |        | 
|                                                                    |  |              | 733,950 |      |  |     | 2,159,151 |  |  |  | 62,223 | 
|                                                                    |  |              |         |      |  |     |           |  |  |  |        | 



|   |  | The weighted average interest rate of the short-term debt was 2.66% and
2.32% as of December 31, 2001 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The short-term debt includes a foreign currency facility with a balance
outstanding as of December 31, 2002 of US$42,100 (NT$1,462,975).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | The Companys unused
short-term lines of credit (including unused letters of credit) amounted to NT$18,202,678
and NT$15,124,176 (US$435,855) as of December 31, 2001 and 2002,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|9. |  | Capital Lease Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | The Company entered into a lease agreement for equipment with Caesar
Technology, Inc. in 1999. The lease term is from May 1, 1999 to April 30,
2005. The equipment shall, upon expiration of the agreement, belong to the
Company. Cost of the equipment amounted to NT$24,946. The lease obligation
is repayable in 24 quarterly installments from May 31, 1999 to April 30,
2005. However, Caesar Technology, Inc. was formally placed in liquidation
in January 2002. As of April 30, 2002, the Companys capital lease
obligation to Caesar Technology, Inc. amounted to NT$13,958. On August 14,
2002, the Company entered into a settlement with Caesar Technology, Inc.
requiring the Company to pay NT$3,215 to acquire the ownership of the
equipment, and Caesar Technology should waive its right to claim the
remaining capital lease obligation.
|  
|   |  | In 2001, the Company entered into a lease agreement with Nintendo for
equipment with a cost of NT$1,750,658. The lease term is from July 31, 2001
to June 30, 2005. The lease obligation is repayable in 36 monthly
installments from July 31, 2002 to June 30, 2005. During the lease period,
the Company is not allowed to modify or sublease the equipment. Upon the
expiry of the agreement, the ownership of the equipment shall be
unconditionally transferred to the Company.                                                                                                                                                                                                                                                                                                                                                                         

F - 22



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)


Future lease obligations resulted from the above leases as of
December 31, 2002 are as follows:

|                                  |  |     |           |     |  |  |        |  
|--------------------------------- |  | --- | --------- | --- |  |  | ------ | -
|Year                              |  | NT$ |           | US$
|                                  |  |     |           |    
|2003                              |  | $   | 671,971   |     |  |  | 19,365 |  
|Less: unrealized interest expense |  |     | (45,982   | )   |  |  | (1,325 | )
|                                  |  |     |           |     |  |  |        |  
|Current portion                   |  |     | 625,989   |     |  |  | 18,040 |  
|                                  |  |     |           |     |  |  |        |  
|2004                              |  |     | 671,840   |     |  |  | 19,361 |  
|2005                              |  |     | 335,920   |     |  |  | 9,681  |  
|                                  |  |     |           |     |  |  |        |  
|Subtotal                          |  |     | 1,007,760 |     |  |  | 29,042 |  
|Less: unrealized interest expense |  |     | (27,235   | )   |  |  | (785   | )
|                                  |  |     |           |     |  |  |        |  
|Lease obligations  long-term     |  |     | 980,525   |     |  |  | 28,257 |  
|                                  |  |     |           |     |  |  |        |  
|Total lease obligations           |  | $   | 1,606,514 |     |  |  | 46,297 |  
|                                  |  |     |           |     |  |  |        |  

Accumulated depreciation of assets
under capital leases amounted to NT$60,874 and NT$306,402 (US$8,830)
as of December 31, 2001 and 2002, respectively.

F - 23



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)


10. Long-Term Debt

|                                                                                                                                                                    |  |               |              |             |  |      |             |      |  |     |            |   |  |  |            |   |  |  |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------------ | ----------- |  | ---- | ----------- | ---- |  | --- | ---------- | - |  |  | ---------- | - |  |  | -------- | -
|                                                                                                                                                                    |  | Interest Rate |              | December 31
|                                                                                                                                                                    |  |               |              |            
|                                                                                                                                                                    |  | 2001          |              | 2002        |  | 2001 |             | 2002
|                                                                                                                                                                    |  |               |              |             |  |      |             |     
|                                                                                                                                                                    |  | %             |              | %           |  | NT$  |             | NT$  |  | US$
|Secured                                                                                                                                                             |  |               |              |             |  |      |             |      |  |     |            |   |  |  |            |   |  |  |          |  
|Medium term loans
from one bank,
repayable in 8
semi-annual
installments from
May 2001 to November
2004 with variable
interest
rates                                |  |               | 4.00~8.62    |             |  |      | 3.00~6.70   |      |  |     | 300,000    |   |  |  | 200,000    |   |  |  | 5,764    |  
|Loan from one bank,
repayable in 21
quarterly
installments from
May 1998 to May 2003
with variable
interest
rates                                                   |  |               | 6.35         |             |  |      | 5.64        |      |  |     | 114,000    |   |  |  | 38,000     |   |  |  | 1,095    |  
|Debentures, 5-year
secured debentures
repayable in full at
maturity in October
2006 with interest
paid annually at a
fixed interest
rate                            |  |               | 3.3          |             |  |      | 3.3         |      |  |     | 3,000,000  |   |  |  | 3,000,000  |   |  |  | 86,455   |  
|Medium term loans
from 7 banks,
repayable in 10
semi-annual
installments from
December 1998 to
June 2003 with
variable interest
rates, fully repaid
before maturity |  |               | 0.775~0.8092 |             |  |      |            |      |  |     | 844,349    |   |  |  |           |   |  |  |         |  
|Medium term loans
from one bank,
repayable in 96
monthly installments
from May 1999 to
April 2007 with
variable interest
rates                                      |  |               | 6.525        |             |  |      | 5.695       |      |  |     | 233,600    |   |  |  | 189,800    |   |  |  | 5,470    |  
|Medium term loan
from 14 banks,
repayable in 19
quarterly
installments from
July 1999 to
December 2005 with
variable interest
rates                                 |  |               | 3.025~7.6    |             |  |      | 2.525~5.635 |      |  |     | 4,938,036  |   |  |  | 3,181,570  |   |  |  | 91,688   |  
|Medium term loan
from 20 banks,
repayable in 10
semi-annual
installments from
March 2005 to
December 2009 with
variable interest
rates                              |  |               |             |             |  |      | 2.854       |      |  |     |           |   |  |  | 3,000,000  |   |  |  | 86,455   |  
|Medium term loan
from one bank,
repayable in 156
monthly installments
from May 2003 to
April 2016 with
variable interest
rates                                      |  |               | 6.655        |             |  |      | 5.695       |      |  |     | 889,000    |   |  |  | 889,000    |   |  |  | 25,620   |  
|Debentures, 5 year
secured convertible
debentures due May
5,
2003                                                                                                   |  |               |             |             |  |      |            |      |  |     | 2,796,000  |   |  |  | 2,780,000  |   |  |  | 80,115   |  
|Medium term loan
from one bank,
repayable in 17
quarterly
installments from
April 2002 to April
2006 with variable
interest
rates                                   |  |               | 6.475        |             |  |      | 5.365       |      |  |     | 400,000    |   |  |  | 329,410    |   |  |  | 9,493    |  
|Medium term loan
from one bank,
repayable in 8
semi-annual
installments from
June 2003 to October
2006 with variable
interest
rates                                 |  |               | 5.150        |             |  |      | 5.025       |      |  |     | 400,000    |   |  |  | 400,000    |   |  |  | 11,527   |  
|Unsecured                                                                                                                                                           |  |               |              |             |  |      |             |      |  |     |            |   |  |  |            |   |  |  |          |  
|Debentures, 5- year
unsecured
convertible
debentures due
February 1,
2005                                                                                           |  |               | 1.25         |             |  |      | 1.25        |      |  |     | 5,554,324  |   |  |  | 2,505,370  |   |  |  | 72,201   |  
|Debentures, 5- year
unsecured
convertible
debentures due
February 7, 2007                                                                                           |  |               |             |             |  |      | 0.625       |      |  |     |           |   |  |  | 5,880,534  |   |  |  | 169,468  |  
|Debentures, 5- year
unsecured
convertible
debentures due
December 12, 2007                                                                                          |  |               |             |             |  |      |            |      |  |     |           |   |  |  | 3,200,000  |   |  |  | 92,219   |  
|                                                                                                                                                                    |  |               |              |             |  |      |             |      |  |     |            |   |  |  |            |   |  |  |          |  
|                                                                                                                                                                    |  |               |              |             |  |      |             |      |  |     | 19,469,309 |   |  |  | 25,593,684 |   |  |  | 737,570  |  
|Add: Interest payable                                                                                                                                               |  |               |              |             |  |      |             |      |  |     | 1,300,952  |   |  |  | 1,485,945  |   |  |  | 42,823   |  
|Less: Current portion                                                                                                                                               |  |               |              |             |  |      |             |      |  |     | (2,877,581 | ) |  |  | (8,721,428 | ) |  |  | (251,338 | )
|                                                                                                                                                                    |  |               |              |             |  |      |             |      |  |     |            |   |  |  |            |   |  |  |          |  
|                                                                                                                                                                    |  |               |              |             |  |      |             |      |  |     | 17,892,680 |   |  |  | 18,358,201 |   |  |  | 529,055  |  
|                                                                                                                                                                    |  |               |              |             |  |      |             |      |  |     |            |   |  |  |            |   |  |  |          |  

F - 24



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | On October 29, 2001, the Company issued five-year secured debentures, due
in October 2006 amounting to NT$3,000,000 with a stated interest rate of
3.3%. The interest expense is repayable annually and the bonds are to be
repaid in full at maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The non-interest bearing 5-year secured convertible debentures are
convertible at the option of the holder into the Companys common stock at
an initial conversion price of NT$53.728 per share. As of December 31,
2002, the split adjusted conversion price was NT$23.4226 per share.
However, the conversion price is subject to adjustment if there is a
capital increase or the issue of other convertible bonds for which the
conversion price is less than the market price at the time of such
subsequent issue. The convertible debentures are redeemable at 129.775% of
par at maturity, or at the option of the Company after May 6, 2001, or at
the option of bondholders on May 5, 2003. Sinking fund requirements will
apply if, at any time in the 24 months immediately prior to the maturity
date of the bonds, the aggregate outstanding amount of principal and
accrued interest is greater than the lesser of US$45 million and an amount
equal to 30% of the related security letters of credit of
US$103,804(NT$3,601,999). The Company has deposited NT$2,897,473
(US$83,381) in compliance with the sinking fund requirements as of December
31, 2002. 
|
| |  | The 1.25% 5-year unsecured convertible debentures are convertible at the
option of the holder into the Companys common stock at an initial
conversion price of NT$69 per share. As of December 31, 2002, the split
adjusted conversion price was NT$41.3505 per share. However, the conversion
price is subject to adjustment if there is a capital increase or the issue
of other convertible bonds for which the conversion price is less than the
market price at the time of such subsequent issue. The convertible
debentures are redeemable at par at maturity or at the option of
bondholders at 121.422% of par on February 1, 2003. During 2002, the
Company repurchased and cancelled US$86,825 of the debentures from the
market. The related debt extinguishment loss of NT$45,144 was not
considered unusual or infrequent. Thus it was included in other
non-operating expense account instead of extraordinary losses. In addition,
during the period from January 1, 2003 to March 5, 2003, the Company
repurchased and redeemed, under the request of bondholders, US$71,802 of
the debentures from the market. The extinguishment loss amounted to
NT$56,967.

F - 25



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | The 0.625% 5-year unsecured convertible debentures are convertible at the
option of the holder into the Companys common stock at an initial
conversion price of NT$31.32 per share. As of December 31, 2002, the split
adjusted conversion price was NT$28.4727 per share. However, the conversion
price is subject to adjustment if there is a capital increase or the issue
of other convertible bonds for which the conversion price is less than the
market price at the time of such subsequent issue. The convertible
debentures are redeemable at par, together with redemption premium, at
maturity or at the option of bondholders at 107.845% of par on August 9,
2004.                                          
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The non-interest bearing 5-year unsecured convertible debentures are
convertible at the option of the holder into the Companys common stock at
an initial conversion price of NT$11 per share. As of December 31, 2002,
the split adjusted conversion price was NT$11 per share. However, the
conversion price is subject to adjustment if there is a capital increase or
the issue of other convertible bonds for which the conversion price is less
than the market price at the time of such subsequent issue. The convertible
debentures are redeemable at the option of the bondholders, in whole or in
part, at 110.07% and 115.87% of par from 30 days before December 11, 2005
and December 11, 2006, respectively.
|
| |  | The above long-term debt, excluding the convertible debentures, as of
December 31, 2002 is repayable in US$68,120 (NT$2,367,170) and in
NT$5,860,610.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Maturity of existing long-term debt for the 5 years succeeding December 31,
2002 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|           |  |     |            | 
|---------- |  | --- | ---------- | 
|Years      |  | NT$
|           |  |    
|2003       |  |     | 8,721,428  | 
|2004       |  |     | 1,807,636  | 
|2005       |  |     | 950,416    | 
|2006       |  |     | 3,859,235  | 
|2007       |  |     | 9,971,047  | 
|After 2007 |  |     | 1,769,867  | 
|           |  |     |            | 
|Total      |  |     | 27,079,629 | 
|           |  |     |            | 



| |  | Certain of the debt agreements require the Company to issue new share
capital for cash if the debt to equity ratio is greater than 1.2 to 1.0
for respective loans. In addition, a debt agreement requires the Company
to maintain a current ratio of no less than 100 percent.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                
| |  | The Companys assets pledged as collateral for security for foreign labor,
customs clearance deposits, compensated deposits, secured loans and
capital leases as of December 31, 2001 and 2002 were as
follows:                                                                

F - 26



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)


|                                   |  |              |            |      |  |     |            |  |  |  |         | 
|---------------------------------- |  | ------------ | ---------- | ---- |  | --- | ---------- |  |  |  | ------- | 
|                                   |  | December 31,
|                                   |  |             
|Accounts                           |  | 2001         |            | 2002
|                                   |  |              |            |     
|                                   |  | NT$          |            | NT$  |  | US$
|Restricted Investments-current     |  |              | 34,000     |      |  |     | 3,351,572  |  |  |  | 96,587  | 
|Restricted investments-non-current |  |              | 1,721,801  |      |  |     | 260,625    |  |  |  | 7,511   | 
|Property, plant and equipment      |  |              | 16,197,916 |      |  |     | 14,986,581 |  |  |  | 431,890 | 
|                                   |  |              |            |      |  |     |            |  |  |  |         | 
|Total                              |  |              | 17,953,717 |      |  |     | 18,598,778 |  |  |  | 535,988 | 
|                                   |  |              |            |      |  |     |            |  |  |  |         | 



|11. |  | Retirement Pension Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In 1990, the Company enacted provisions for employees retirement. The
provisions state that employees are entitled to 2 base points for every
year of service for the first 15 years and 1 base point for every
additional year of service up to a maximum of 45 base points. Employee
pension obligation is computed based on years of service and average
salaries or wages for the 6 months prior to approved retirement. Prior to
May 1996, the Company made a monthly contribution equal to 2% of the wages
and salaries to the pension fund maintained with the Central Trust of
China. On the basis of an actuarial report, the monthly contribution in May
1996 was changed to 5% of the wages and salaries paid. However, effective
from January 1, 2002, the monthly contribution rate was changed back to 2%.
Contributions to the fund are deposited in the Employees Retirement Fund
Committees name.
|   
|    |  | In August 1999, the Company revised its pension plan to allow early
retirement under certain conditions. The resulting prior service cost
amounted to NT$32,557 and is amortized on the straight line basis over the
employees average remaining service period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | The key assumptions underlying the value of the pension assets and
obligations are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                           |  |      |     |      |  |      |     |   |  |  |     |  
|-------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                           |  | 2000 |     | 2001 |  | 2002
|                           |  |      |     |      |  |     
|Discount rate              |  |      | 6.0 | %    |  |      | 5.0 | % |  |  | 4.0 | %
|Salary increase            |  |      | 5.5 | %    |  |      | 4.5 | % |  |  | 3.5 | %
|Expected investment return |  |      | 6.0 | %    |  |      | 5.0 | % |  |  | 4.0 | %

F - 27



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | The funded status of the Companys pension plan as of December 31, 2001 and
2002 was as follows:
| |  | ------------------------------------------------------------------------------------------------

|                                                      |                                |  |              |          |      |  |          |          |   |  |        |         |  
|----------------------------------------------------- | ------------------------------ |  | ------------ | -------- | ---- |  | -------- | -------- | - |  | ------ | ------- | -
|                                                      |                                |  | December 31,
|                                                      |                                |  |             
|                                                      |                                |  | 2001         |          | 2002
|                                                      |                                |  |              |          |     
|                                                      |                                |  | NT$          |          | NT$  |  | US$     
|Pension obligation                                    |                                |  |              |          |      |  |          |          |   |  |        |        
|                                                      | Vested benefit obligation      |  |              |         |      |  |          |         |   |  |        |        |  
|                                                      | Non-vested benefit obligation  |  |              | (291,447 | )    |  |          | (397,536 | ) |  |        | (11,456 | )
|                                                      |                                |  |              |          |      |  |          |          |   |  |        |         |  
|                                                      | Accumulated benefit obligation |  |              | (291,447 | )    |  |          | (397,536 | ) |  |        | (11,456 | )
|                                                      | Effect of future pay increases |  |              | (389,883 | )    |  |          | (367,091 | ) |  |        | (10,579 | )
|                                                      |                                |  |              |          |      |  |          |          |   |  |        |         |  
|                                                      | Projected benefit obligation   |  |              | (681,330 | )    |  |          | (764,627 | ) |  |        | (22,035 | )
|Plan assets at fair value                             |                                |  | 535,118      |          |      |  | 589,501  |          |   |  | 16,989 |        
|                                                      |                                |  |              |          |      |  |          |          |   |  |        |         |  
|Projected benefit obligation in excess of plan assets |                                |  | (146,212     | )        |      |  | (175,126 | )        |   |  | (5,046 | )      
|Unrecognized net transition obligation                |                                |  | 58,751       |          |      |  | 55,659   |          |   |  | 1,604  |        
|Unrecognized prior service cost                       |                                |  | 29,410       |          |      |  | 28,108   |          |   |  | 810    |        
|Unrecognized net loss (gain)                          |                                |  | 33,518       |          |      |  | (13,835  | )        |   |  | (399   | )      
|                                                      |                                |  |              |          |      |  |          |          |   |  |        |         |  
|Accrued pension cost                                  |                                |  | (24,533      | )        |      |  | (105,194 | )        |   |  | (3,031 | )      
|                                                      |                                |  |              |          |      |  |          |          |   |  |        |         |  



| |  | The components of the 2000, 2001 and 2002 net pension costs are as follows:
| |  | ---------------------------------------------------------------------------

|                               |  |      |         |      |  |      |         |     |  |  |         |   |  |  |       |  
|------------------------------ |  | ---- | ------- | ---- |  | ---- | ------- | --- |  |  | ------- | - |  |  | ----- | -
|                               |  | 2000 |         | 2001 |  | 2002
|                               |  |      |         |      |  |     
|                               |  | NT$  |         | NT$  |  | NT$  |         | US$
|                               |  |      |         |      |  |      |         |    
|Service cost                   |  |      | 79,843  |      |  |      | 100,021 |     |  |  | 114,324 |   |  |  | 3,295 |  
|Interest cost                  |  |      | 24,146  |      |  |      | 25,349  |     |  |  | 30,577  |   |  |  | 881   |  
|Expected return on plan assets |  |      | (23,387 | )    |  |      | (28,193 | )   |  |  | (25,010 | ) |  |  | (721  | )
|Amortization                   |  |      | 3,226   |      |  |      | 1,487   |     |  |  | 4,394   |   |  |  | 127   |  
|                               |  |      |         |      |  |      |         |     |  |  |         |   |  |  |       |  
|Net pension cost               |  |      | 83,828  |      |  |      | 98,664  |     |  |  | 124,285 |   |  |  | 3,582 |  
|                               |  |      |         |      |  |      |         |     |  |  |         |   |  |  |       |  

F - 28



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Additional pension disclosures:
| |  | -------------------------------

|                                                       |  |              |         |      |  |     |         |   |  |  |        |  
|------------------------------------------------------ |  | ------------ | ------- | ---- |  | --- | ------- | - |  |  | ------ | -
|                                                       |  | December 31,
|                                                       |  |             
|                                                       |  | 2001         |         | 2002
|                                                       |  |              |         |     
|                                                       |  | NT$          |         | NT$  |  | US$
|Benefit obligation at January 1                        |  |              | 422,491 |      |  |     | 681,330 |   |  |  | 19,634 |  
|Service cost                                           |  |              | 100,021 |      |  |     | 114,324 |   |  |  | 3,295  |  
|Interest cost                                          |  |              | 25,349  |      |  |     | 30,577  |   |  |  | 881    |  
|Paid to retirees                                       |  |              | (223    | )    |  |     | (1,532  | ) |  |  | (44    | )
|Increase in unrecognized transition cost               |  |              |        |      |  |     |        |   |  |  |       |  
|Increase in unrecognized prior service cost            |  |              |        |      |  |     |        |   |  |  |       |  
|Increase in unrecognized actuarial (gain) loss         |  |              | 133,692 |      |  |     | (60,072 | ) |  |  | (1,731 | )
|                                                       |  |              |         |      |  |     |         |   |  |  |        |  
|Benefit obligation at the end of the year              |  |              | 681,330 |      |  |     | 764,627 |   |  |  | 22,035 |  
|                                                       |  |              |         |      |  |     |         |   |  |  |        |  
|Change in plan assets                                  |  |              |         |      |  |     |         |   |  |  |        |  
|Fair value of plan assets at the beginning of
the year |  |              | 420,695 |      |  |     | 535,118 |   |  |  | 15,422 |  
|Actual return on plan assets                           |  |              | 19,247  |      |  |     | 12,639  |   |  |  | 364    |  
|Contributions                                          |  |              | 95,399  |      |  |     | 43,624  |   |  |  | 1,257  |  
|Paid                                                   |  |              | (223    | )    |  |     | (1,532  | ) |  |  | (44    | )
|Other adjustments                                      |  |              |        |      |  |     | (348    | ) |  |  | (10    | )
|                                                       |  |              |         |      |  |     |         |   |  |  |        |  
|Fair value of plan assets at the end of the year       |  |              | 535,118 |      |  |     | 589,501 |   |  |  | 16,989 |  
|                                                       |  |              |         |      |  |     |         |   |  |  |        |  

F - 29



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




|12. |  | Shareholders Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Common Shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | According to the ROC Company Law, when a company issues new shares of
common stock for cash, 10% to 15% of the issue must be offered to the
companys employees. According to the Securities and Exchange Law of the
ROC, at least 10% of the issue must also be offered to the public.                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | During the year ended December 31, 2000, convertible debentures totaling
NT$4,022,584 were converted to the Companys common shares and additional
paid-in capital which resulted in the issuance of 97,834,589 additional
common shares.                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | On May 3, 2000, the Companys shareholders resolved in the annual general
meeting to increase the authorized share capital to NT$35,000,000. On the
same date, the shareholders also resolved to declare a 13% stock dividend
which resulted in the issuance of 276,578,492 common shares. The board of
directors resolved that the ex-right date was June 13, 2000.                                                                                                                                                                                                                                                                               
|   
|    |  | On April 19, 2001, the Companys shareholders resolved in the annual
general meeting to increase the authorized share capital to NT$45,000,000.
The shareholders also declared a 30% stock dividend, which resulted in the
issuance of 742,322,744 common shares. The board of directors resolved that
the ex-right date was May 28, 2001. The Companys shareholders also
resolved to issue 142,610,725 common shares in settlement of the 2000
employee bonus.                                                                                                                                                                                   
|   
|    |  | The Company has two stock option plans (2001 plan and 2002 plan) that
provide for the granting of options to qualified employees for purchase of
the Companys common shares at the market price of the grant date. Stock
options expire in six years from the date granted and vest over service
periods that range from two to four years. The Company is authorized to
grant options for up to 80,000,000 shares and 170,000,000 shares under 2001
plan and 2002 plan, respectively. The Company granted 79,400,000 and
160,284,540 shares for the 2001 and 2002 plan, respectively. In 2002 and
2001, no stock options have been exercised.
|   
|    |  | On May 30, 2002, the Companys shareholders resolved in the annual meeting
to increase the authorized share capital to NT$53,500,000, divided to
5,350,000,000 shares (including 450,000,000 shares reserved for future
exercises of stock options). In addition, the shareholders also resolved to
declare a 10% stock dividend which resulted in the issuance of 331,934,262
common shares.                                                                                                                                                                                                                                                      
|   
|    |  | As of December 31, 2001 and 2002,
the Company's outstanding common stock amounted to NT$33,593,426 and
NT$36,912,769, respectively, divided into 3,359,342,613 shares and
3,691,276,875 shares, respectively, each at a par value of NT$10.                                                                                                                                                                                                                                                                                                                                                                                                        

F - 30



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Legal Reserve                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | According to the ROC Company Law, 10% of the Companys net income, after
deducting previous years losses, if any, is appropriated as a legal
reserve prior to any distribution until such reserve is equal to the
Companys paid-in capital. When the legal reserve is equal to 50% of the
paid-in capital, 50% of such reserve may be distributed to the Companys
shareholders through the issuance of additional common shares.
|
| |  | Special Reserve                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | According to the ROC Security Exchange Law, the Company must provide for a
special reserve for any debit balance, normally arising from unrealized
losses on long-term investments or cumulative translation adjustments, in
shareholders equity. The reserve related to the debit balance is recorded
upon shareholder approval in the period following the fiscal year end in
which the debit balance arises.                   
|
| |  | Capital reserve                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | According to the ROC Company Law, the capital reserve can only be used for
making up deficiencies or distribution of stock dividends. The Company
shall not use the capital reserve to make up its losses unless the legal
reserve is insufficient for making good such losses.                                                                                                                                                    
|
| |  | On May 31, 2002, the Companys shareholders resolved in the annual meeting
to transfer a gain of NT$16,360 earned on disposal of property, plant and
equipment to retained earnings.                                                                                                                                                                                                                                               
|
| |  | Income distributions                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Prior to May 2000, the Companys articles of incorporation provide that the
net income, after deducting the previous years losses and the
appropriation of the legal reserve (Distributable Earnings), may be
appropriated or distributed in the following sequence:                                                                                                                                                            
|
| |  | a.  Dividend to shareholders at 10% of the Companys paid-in capital;                                                                                                                                                                                                                                                                                                                                                              
|
| |  | b.  Employee bonuses at 15% of Distributable Earnings;                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | c.  Remuneration for directors and supervisors services at 2% of Distributable Earnings;                                                                                                                                                                                                                                                                                                                                          
|
| |  | d.  Shareholders bonuses.                                                                                                                                                                                                                                                                                                                                                                                                         

F - 31



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




|    |  | The Companys articles of incorporation, revised on May 3, 2000, provide
that the net income, after deducting the previous years losses and the
appropriation to the legal reserve (Distributable Earnings), may be
appropriated or distributed proportionally as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | a.  Dividend to shareholders at 83% of the Companys Distributable Earnings;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | b.  Employee bonuses at 15% of Distributable Earnings; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | c.  Remuneration for directors and supervisors services at 2% of Distributable Earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | Distributions, except for the remuneration for directors and supervisors
which must be made in cash, may be made in cash or in the form of common
shares or a combination thereof, as determined by the shareholders at the
annual general meeting of the Companys shareholders. The Companys
articles of incorporation provide that no more than 20% of any distribution
to shareholders and employees may be in cash and employee bonuses will be
distributed in the same form as the distribution of dividends to
shareholders on a proportionate basis. Further, with the approval of the
shareholders at such meeting, the dividend and bonuses may be held wholly
or partially as retained earnings for distribution in future years.
|   
|    |  | Distributions are not deductible in the determination of taxable income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|13. |  | Treasury Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | On April 24, 2002, the Companys board of directors authorized the
repurchase of up to 335,934,621 shares (NT$9,546,141) from the open market
for the purpose of transferring shares to employees. The Company
repurchased 40 million shares for NT$1,046,071 in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | According to the Stock Exchange Regulations of Taiwan, total shares
repurchased shall not exceed 10% of the Companys issued stock. Total
repurchased amounts shall not exceed the sum of retained earnings and the
realized capital reserve. The Company was approved by Securities and
Forwards Commission in April 2002 to repurchase stock. The maximum amount
approved to repurchase was NT$9,546,141.                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | In accordance with the Stock Exchange Regulations of Taiwan, treasury
stock shall not be pledged, nor does it possess voting rights or receive
dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F - 32



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Effective from January 1, 2002, the Companys shares owned by its
subsidiaries were treated as treasury stock. The treasury stock
transactions during 2002 are as follows :
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|            |  |                 |           |           |  |           |         |                   |  |        |         |        |  |               |   |        |  |        |   |              |  |  |   |  |  |  |   |  |  |  |           |  |  |  |         |  |  |  |        | 
|----------- |  | --------------- | --------- | --------- |  | --------- | ------- | ----------------- |  | ------ | ------- | ------ |  | ------------- | - | ------ |  | ------ | - | ------------ |  |  | - |  |  |  | - |  |  |  | --------- |  |  |  | ------- |  |  |  | ------ | 
|            |  | January 1, 2002 |           | Additions |  | Disposals |         | December 31, 2002
|            |  |                 |           |           |  |           |         |                  
|Subsidiary  |  | Shares          |           | Amount    |  | Shares    |         | Amount            |  | Shares |         | Amount |  | Selling price |   | Shares |  | Amount |   | Market Value
|            |  |                 |           |           |  |           |         |                   |  |        |         |        |  |               |   |        |  |        |   |             
|Huiv Ying   |  |                 |           |           |  |           |         |                   |  |        |         |        |  |               |   |        |  |        |   |              |  |  |   |  |  |  |   |  |  |  |           |  |  |  |         |  |  |  |        | 
|Investment, |  |                 |           |           |  |           |         |                   |  |        |         |        |  |               |   |        |  |        |   |              |  |  |   |  |  |  |   |  |  |  |           |  |  |  |         |  |  |  |        | 
|Ltd.        |  |                 | 5,475,593 |           |  |           | 142,365 |                   |  |        | 547,559 |        |  |               |  |        |  |        |  |              |  |  |  |  |  |  |  |  |  |  | 6,023,152 |  |  |  | 142,365 |  |  |  | 72,332 | 
|            |  |                 |           |           |  |           |         |                   |  | (note) |         |        |  |               |   |        |  |        |   |              |  |  |   |  |  |  |   |  |  |  |           |  |  |  |         |  |  | 



|    |  | (note) Huiv Ying Investment, Ltd. received a 2002 stock dividend of
547,559 shares from the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|14. |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | The Company is located in the HSIP. In order for business operations to be
eligible to be located in the HSIP, the operations must be high technology
related manufacturing activities. Based on the HSIP regulations, a
preferential income tax rate of 20%, instead of 25% applicable to other
business entities located in Taiwan, is imposed on profits generated from
HSIP business operations through 2000. Beginning 2001, the preferential
income tax rate of 20% is no longer available to HSIP business operations.                                                                                                                   
|   
|    |  | The Company is entitled to a four-year income tax exemption period on
income generated from the expansion of operations located in the HSIP. Such
exemption period must start within four years from the date the expanded
operations begin operational activities. Alternatively, the Company may
irrevocably elect to utilize tax credits at 15% of the cost of expansion
operations located in the HSIP, during a five year period beginning in the
year taxable income is first generated from the expanded operations. The
Company has elected to start the four-year tax exemption period to be from
January 1, 2001 to December 31, 2004.
|   
|    |  | As of December 31, 2002, unused tax credits available to reduce future
taxable income amounted to NT$4,066,198. The available tax credit in each year is limited to 50% of the corporate tax payable in that year, except for the last of the five years, for which there is no limit. Details are as follows:                                                                                                                                                                                                                                                                                                                                  

|                 |  |     |           |     |  |  |         | 
|---------------- |  | --- | --------- | --- |  |  | ------- | 
|Expiration Years |  | NT$ |           | US$
|                 |  |     |           |    
|2003             |  |     | 1,160,243 |     |  |  | 33,437  | 
|2004             |  |     | 121,285   |     |  |  | 3,495   | 
|2005             |  |     | 1,138,922 |     |  |  | 32,822  | 
|2006             |  |     | 1,645,748 |     |  |  | 47,428  | 
|                 |  |     |           |     |  |  |         | 
|Total            |  |     | 4,066,198 |     |  |  | 117,182 | 
|                 |  |     |           |     |  |  |         | 

F - 33



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Under the rules of R.O.C. Income Tax Law, operating losses can be carried
forward for five years. As of December 31, 2002, the unutilized loss
carryforwards amounted to NT$2,244,203, which will expire in 2007.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The components of income tax expense (benefit) and deferred income tax
assets and liabilities are as follows:                                                                                                    
|
| |  | Components of income tax expense (benefit):                                                                                                                                                                      

|         |  |              |          |      |  |      |         |     |  |  |        |  |  |  |     | 
|-------- |  | ------------ | -------- | ---- |  | ---- | ------- | --- |  |  | ------ |  |  |  | --- | 
|         |  | December 31,
|         |  |             
|         |  | 2000         |          | 2001 |  | 2002
|         |  |              |          |      |  |     
|         |  | NT$          |          | NT$  |  | NT$  |         | US$
|Current  |  |              | 524,210  |      |  |      | 94,236  |     |  |  | 10,840 |  |  |  | 313 | 
|Deferred |  |              | (126,113 | )    |  |      | 849,259 |     |  |  | 9,058  |  |  |  | 261 | 
|         |  |              |          |      |  |      |         |     |  |  |        |  |  |  |     | 
|Total    |  |              | 398,097  |      |  |      | 943,495 |     |  |  | 19,898 |  |  |  | 574 | 
|         |  |              |          |      |  |      |         |     |  |  |        |  |  |  |     | 



| |  | The reconciliation of book income tax expense (benefit) computed at the
Companys preferential 20% tax rate through 2000 and a 25% tax rate
beginning in 2001 to income tax
expense (benefit) recorded is summarized below:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            |  |              |            |      |  |      |           |     |  |  |            |   |  |  |         |  
|------------------------------------------- |  | ------------ | ---------- | ---- |  | ---- | --------- | --- |  |  | ---------- | - |  |  | ------- | -
|                                            |  | December 31,
|                                            |  |             
|                                            |  | 2000         |            | 2001 |  | 2002
|                                            |  |              |            |      |  |     
|                                            |  | NT$          |            | NT$  |  | NT$  |           | US$
|Expected income tax expense
(benefit)       |  |              | 2,202,184  |      |  |      | 19,254    |     |  |  | (2,834,280 | ) |  |  | (81,679 | )
|Undistributed earnings tax                  |  |              |           |      |  |      | 465,488   |     |  |  | 318,378    |   |  |  | 9,176   |  
|Additional tax assessment                   |  |              | 93,246     |      |  |      | 58,879    |     |  |  |           |   |  |  |        |  
|Effect of tax exempt earnings               |  |              |           |      |  |      | (256,260  | )   |  |  |           |   |  |  |        |  
|Tax credits earned                          |  |              | (1,548,034 | )    |  |      | (920,993  | )   |  |  | (1,405,069 | ) |  |  | (40,492 | )
|Change in valuation allowance               |  |              | (630,739   | )    |  |      | 1,255,102 |     |  |  | 3,318,646  |   |  |  | 95,638  |  
|Net gain on long-term equity
investment     |  |              | 120,237    |      |  |      | (20,466   | )   |  |  | (13,194    | ) |  |  | (380    | )
|Effect of rate change                       |  |              | 104,973    |      |  |      |          |     |  |  | 653,667    |   |  |  | 18,837  |  
|Impact of industrial park
reduced tax rates |  |              |           |      |  |      | 317,936   |     |  |  |           |   |  |  |        |  
|Others                                      |  |              | 56,230     |      |  |      | 24,555    |     |  |  | (18,250    | ) |  |  | (526    | )
|                                            |  |              |            |      |  |      |           |     |  |  |            |   |  |  |         |  
|Income tax expense                          |  |              | 398,097    |      |  |      | 943,495   |     |  |  | 19,898     |   |  |  | 574     |  
|                                            |  |              |            |      |  |      |           |     |  |  |            |   |  |  |         |  

F - 34



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Components of deferred income tax assets and liabilities:
| |  | ---------------------------------------------------------

|                                    |                                  |                                                 |            |              |         |      |            |           |         |  |          |         |       | 
|----------------------------------- | -------------------------------- | ----------------------------------------------- | ---------- | ------------ | ------- | ---- | ---------- | --------- | ------- |  | -------- | ------- | ----- | 
|                                    |                                  |                                                 |            | December 31,
|                                    |                                  |                                                 |            |             
|                                    |                                  |                                                 |            | 2001         |         | 2002
|                                    |                                  |                                                 |            |              |         |     
|                                    |                                  |                                                 |            | NT$          |         | NT$  |            | US$      
|Deferred tax liabilities            |                                  |                                                 |            |              |         |      |            |           |         |  |          |        
|                                    |                                  | Tax depreciation in excess of
book depreciation |            |              | 536,015 |      |            |           | 253,074 |  |          |         | 7,293 | 
|                                    |                                  | Unrealized foreign exchange gains               |            |              |        |      |            |           | 45,900  |  |          |         | 1,323 | 
|                                    |                                  | Others                                          |            |              |        |      |            |           | 47      |  |          |         | 1     | 
|                                    |                                  |                                                 |            |              |         |      |            |           |         |  |          |         |       | 
|Total deferred tax liabilities      |                                  |                                                 | 536,015    |              |         |      | 299,021    |           |         |  | 8,617    |        
|                                    |                                  |                                                 |            |              |         |      |            |           |         |  |          |         |       | 
|Deferred tax assets                 |                                  |                                                 |            |              |         |      |            |           |         |  |          |        
|                                    | Tax credits                      |                                                 |            | 2,979,508    |         |      |            | 4,066,198 |         |  |          | 117,182 |      
|                                    | Inventory provision              |                                                 |            | 501,304      |         |      |            | 444,135   |         |  |          | 12,799  |      
|                                    | Bad debt allowance               |                                                 |            | 25,917       |         |      |            | 13,710    |         |  |          | 395     |      
|                                    | Accrued royalty expense          |                                                 |            | 132,543      |         |      |            | 52,127    |         |  |          | 1,502   |      
|                                    | Unrealized foreign exchange loss |                                                 |            | 114,461      |         |      |            | 11,853    |         |  |          | 342     |      
|                                    | Loss carryforwards               |                                                 |            |             |         |      |            | 2,244,203 |         |  |          | 64,674  |      
|                                    | Others                           |                                                 |            | 235,088      |         |      |            | 229,189   |         |  |          | 6,605   |      
|                                    |                                  |                                                 |            |              |         |      |            |           |         |  |          |         |       | 
|Total deferred tax assets           |                                  |                                                 | 3,988,821  |              |         |      | 7,061,415  |           |         |  | 203,499  |        
|Valuation allowance                 |                                  |                                                 | (1,497,391 | )            |         |      | (4,816,037 | )         |         |  | (138,791 | )      
|                                    |                                  |                                                 |            |              |         |      |            |           |         |  |          |         |       | 
|Net deferred tax assets             |                                  |                                                 | 2,491,430  |              |         |      | 2,245,378  |           |         |  | 64,708   |        
|                                    |                                  |                                                 |            |              |         |      |            |           |         |  |          |         |       | 
|Total net deferred tax assets       |                                  |                                                 | 1,955,415  |              |         |      | 1,946,357  |           |         |  | 56,091   |        
|                                    |                                  |                                                 |            |              |         |      |            |           |         |  |          |         |       | 
|Net deferred tax assets-current     |                                  |                                                 | 761,889    |              |         |      | 495,112    |           |         |  | 14,268   |        
|Net deferred tax assets-non-current |                                  |                                                 | 1,193,526  |              |         |      | 1,451,245  |           |         |  | 41,823   |        
|                                    |                                  |                                                 |            |              |         |      |            |           |         |  |          |         |       | 
|Total net deferred tax assets       |                                  |                                                 | 1,955,415  |              |         |      | 1,946,357  |           |         |  | 56,091   |        
|                                    |                                  |                                                 |            |              |         |      |            |           |         |  |          |         |       | 

F - 35



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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)


15.      Related Party Transactions



| | a. |  | Related Parties and Relationships
| | -- |  | ---------------------------------

|                                         |  |                                                                                              |  |  |  | 
|---------------------------------------- |  | -------------------------------------------------------------------------------------------- |  |  |  | 
|Related parties                          |  | Relationships                                                                                |  |  |  | 
|                                         |  |                                                                                              |  |  |  | 
|Caesar Technology, Inc.
(Caesar)       |  | Equity investee of the Company                                                              
|                                         |  |                                                                                             
|Biomorphic VLSI. Inc.
(Biomorphic)     |  | Equity investee of the Company                                                              
|                                         |  |                                                                                             
|Prominent Communications, Inc.
(PCI)   |  | Equity investee of the Company                                                              
|                                         |  |                                                                                             
|Chantek Electronic Co., Ltd.
(Chantek) |  | The Company was represented on Chanteks board
of directors up to October 29, 2001.         
|                                         |  |                                                                                             
|United Industry Gases Co., Ltd.
(UIG)  |  | The Company is UIGs supervisor.                                                            
|                                         |  |                                                                                             
|Powertech Technology, Inc.
(Powertech) |  | The Company is represented on Powertechs board of directors.                               
|                                         |  |                                                                                             
|Ardentech Corporation (Ardentech)      |  | The Company is represented on
Ardentechs board of directors.                               
|                                         |  |                                                                                             
|Tower Semiconductor, Ltd. (Tower)      |  | The Company is represented on Towers
board of directors.                                   
|                                         |  |                                                                                             
|Chiao Tung Bank
(Chiao Tung)           |  | Chiao Tung Bank was represented on
the Companys board of directors up
to November 26, 2002.
|                                         |  |                                                                                             
|FueTrek Co., Ltd. (FueTrek)            |  | The Company is represented on FueTreks board of directors.                                 
|                                         |  |                                                                                             
|Raio Technology Co., Ltd. (Raio)       |  | The Company is represented on Raios
board of directors.                                    



| | b. |  | Transactions with related parties
| | -- |  | ---------------------------------



| |                                              
| | ---------------------------------------------
| | (a) Sales to related parties were as follows:

|           |  |      |        |      |  |      |        |     |  |  |         |  |  |  |       | 
|---------- |  | ---- | ------ | ---- |  | ---- | ------ | --- |  |  | ------- |  |  |  | ----- | 
|           |  | 2000 |        | 2001 |  | 2002
|           |  |      |        |      |  |     
|           |  | NT$  |        | NT$  |  | NT$  |        | US$
|Raio       |  |      | 63,198 |      |  |      | 88,721 |     |  |  | 158,194 |  |  |  | 4,559 | 
|PCI        |  |      |       |      |  |      |       |     |  |  | 155,923 |  |  |  | 4,493 | 
|Biomorphic |  |      |       |      |  |      | 9,749  |     |  |  | 15,298  |  |  |  | 441   | 
|           |  |      |        |      |  |      |        |     |  |  |         |  |  |  |       | 
|Total      |  |      | 63,198 |      |  |      | 98,470 |     |  |  | 329,415 |  |  |  | 9,493 | 
|           |  |      |        |      |  |      |        |     |  |  |         |  |  |  |       | 

F - 36



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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




|    |  | Sales prices to Prominent, Biomorphic and Raio are not
comparable with those of regular customers.                                  
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The general collection terms with related parties are 45-60
days, which is similar to regular customers.                            
|   
|(b) |  | Manufacturing processing charges to related parties for the
years ended December 31, 2000, 2001 and 2002, are summarized as
follows:

|          |  |      |           |      |  |      |         |     |  |  |         |  |  |  |        | 
|--------- |  | ---- | --------- | ---- |  | ---- | ------- | --- |  |  | ------- |  |  |  | ------ | 
|          |  | 2000 |           | 2001 |  | 2002
|          |  |      |           |      |  |     
|          |  | NT$  |           | NT$  |  | NT$  |         | US$
|Caesar    |  |      | 593,965   |      |  |      | 240,003 |     |  |  |        |  |  |  |       | 
|Chantek   |  |      | 390,190   |      |  |      | 103,873 |     |  |  |        |  |  |  |       | 
|Powertech |  |      | 96,197    |      |  |      | 106,263 |     |  |  | 172,778 |  |  |  | 4,979  | 
|Ardentech |  |      | 63,538    |      |  |      | 108,329 |     |  |  | 240,686 |  |  |  | 6,936  | 
|          |  |      |           |      |  |      |         |     |  |  |         |  |  |  |        | 
|Total     |  |      | 1,143,890 |      |  |      | 558,468 |     |  |  | 413,464 |  |  |  | 11,915 | 
|          |  |      |           |      |  |      |         |     |  |  |         |  |  |  |        | 



|    |  | Such charges form a part of cost of goods sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(c) |  | The Company purchased industrial gases from UIG totaling
NT$116,944, NT$119,137 and NT$109,940(US$3,168) for the years ended
December 31, 2000, 2001 and 2002, respectively. Such purchases
form a part of cost of goods sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(d) |  | During the years ended December 31, 2001 and 2002, the
Company purchased wafers from Tower totaling NT$157,263 and
NT$136,047 (US$3,921). Such purchases form a part of cost of goods
sold. In September 2001, the Company utilized US$16 million of its
prepaid credit account to purchase 1,255,848 Tower shares for
US$12.75 per share. Moreover, as stated in 16.e, the Company made
the third and the fourth milestone payments to Tower on April 23,
2002 and October 1, 2002, respectively, which in aggregate,
increased the Companys investment in Tower by US$13,201
(NT$458,069) and the prepaid credit account by US$8,800
(NT$305,379), respectively. As of December 31, 2002, NT$490,586
(US$14,138) remained in the prepaid credit account.

F - 37



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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




|(e) |  | Merchandise purchased from related parties were as follows:
|--- |  | -----------------------------------------------------------

|           |  |      |    |      |  |      |       |     |  |  |         |  |  |  |        | 
|---------- |  | ---- | -- | ---- |  | ---- | ----- | --- |  |  | ------- |  |  |  | ------ | 
|           |  | 2000 |    | 2001 |  | 2002
|           |  |      |    |      |  |     
|           |  | NT$  |    | NT$  |  | NT$  |       | US$
|PCI        |  |      | 97 |      |  |      | 232   |     |  |  | 404,717 |  |  |  | 11,663 | 
|Biomorphic |  |      |   |      |  |      | 3,300 |     |  |  | 46,716  |  |  |  | 1,346  | 
|Raio       |  |      |   |      |  |      | 2,653 |     |  |  | 13,863  |  |  |  | 400    | 
|           |  |      |    |      |  |      |       |     |  |  |         |  |  |  |        | 
|Total      |  |      | 97 |      |  |      | 6,185 |     |  |  | 465,296 |  |  |  | 13,409 | 
|           |  |      |    |      |  |      |       |     |  |  |         |  |  |  |        | 



|(f) |  | The Company entered into an IP License Agreement with
FueTrek. Total amount of this agreement was NT$10,050 (US$290) and
remained unpaid as of December 31, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(g) |  | Refer to note 9 for the Companys capital lease agreement
with Caesar.                                                                                           
|   
|(h) |  | Accounts receivables from related parties as of December
31, 2001 and 2002 were as follows.                                                                      

|                                       |  |              |        |      |  |     |        |   |  |  |       |  
|-------------------------------------- |  | ------------ | ------ | ---- |  | --- | ------ | - |  |  | ----- | -
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2001         |        | 2002
|                                       |  |              |        |     
|                                       |  | NT$          |        | NT$  |  | US$
|PCI                                    |  |              | 3      |      |  |     | 33,237 |   |  |  | 958   |  
|Raio                                   |  |              | 10,198 |      |  |     | 27,498 |   |  |  | 793   |  
|UIG                                    |  |              |       |      |  |     | 21,200 |   |  |  | 611   |  
|Biomorphic                             |  |              |       |      |  |     | 15,999 |   |  |  | 461   |  
|Others                                 |  |              | 9,875  |      |  |     |       |   |  |  |      |  
|                                       |  |              |        |      |  |     |        |   |  |  |       |  
|Total                                  |  |              | 20,076 |      |  |     | 97,934 |   |  |  | 2,823 |  
|Less
:
Allowance for doubtful accounts |  |              |       |      |  |     | (7,000 | ) |  |  | (202  | )
|                                       |  |              |        |      |  |     |        |   |  |  |       |  
|                                       |  |              | 20,076 |      |  |     | 90,934 |   |  |  | 2,621 |  
|                                       |  |              |        |      |  |     |        |   |  |  |       |  

F - 38



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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




|(i) |  | Payables to related parties as of December 31, 2001 and
2002 were as follows:
|--- |  | -----------------------------------------------------------------------------

|          |  |              |         |      |  |     |         |  |  |  |       | 
|--------- |  | ------------ | ------- | ---- |  | --- | ------- |  |  |  | ----- | 
|          |  | December 31,
|          |  |             
|          |  | 2001         |         | 2002
|          |  |              |         |     
|          |  | NT$          |         | NT$  |  | US$
|PCI       |  |              |        |      |  |     | 32,091  |  |  |  | 925   | 
|Caesar    |  |              | 28,538  |      |  |     |        |  |  |  |      | 
|Chantek   |  |              | 20,321  |      |  |     |        |  |  |  |      | 
|UIG       |  |              | 10,290  |      |  |     | 8,517   |  |  |  | 245   | 
|Powertech |  |              | 34,723  |      |  |     | 60,292  |  |  |  | 1,737 | 
|Tower     |  |              | 11,183  |      |  |     | 17,070  |  |  |  | 492   | 
|Ardentech |  |              | 24,290  |      |  |     | 31,255  |  |  |  | 901   | 
|Others    |  |              | 3,832   |      |  |     | 7,584   |  |  |  | 219   | 
|          |  |              |         |      |  |     |         |  |  |  |       | 
|Total     |  |              | 133,177 |      |  |     | 156,809 |  |  |  | 4,519 | 
|          |  |              |         |      |  |     |         |  |  |  |       | 



|(j) |  | As of December 31, 2002, the Company has prepaid Biomorphic
NT$29,646(US$854) for the purchase of merchandise. Such amount was
accounted for under prepaid expenses.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(k) |  | Loans                                                                                                                                                               

|           |  |                               |           |        |  |         |  |               |           |         |  |  |           |   |  |   |         |  |  | 
|---------- |  | ----------------------------- | --------- | ------ |  | ------- |  | ------------- | --------- | ------- |  |  | --------- | - |  | - | ------- |  |  | 
|           |  | Year ending December 31, 2001
|           |  |                              
|           |  | Maximum balance               |           |        |  |         |  |              
|           |  |                               |           | Ending |  |         |  | Interest     
|           |  | Amount                        |           | Month  |  | balance |  | Interest
rate |           | expense
|           |  |                               |           |        |  |         |  |               |           |        
|Chiao Tung |  |                               | 6,275,370 |        |  | March   |  |               | 5,052,036 |         |  |  | 1.5%-7.79 | % |  | $ | 337,381 | 
|           |  |                               |           |        |  |         |  |               |           |         |  |  |           |   |  |   |         | 

|           |  |                               |           |        |  |          |  |               |           |         |  |  |            |   |  |  |         |  |  | 
|---------- |  | ----------------------------- | --------- | ------ |  | -------- |  | ------------- | --------- | ------- |  |  | ---------- | - |  |  | ------- |  |  | 
|           |  | Year
ending December 31, 2002
|           |  |                              
|           |  | Maximum balance               |           |        |  |          |  |              
|           |  |                               |           | Ending |  |          |  | Interest     
|           |  | Amount                        |           | Month  |  | balance  |  | Interest
rate |           | expense
|           |  |                               |           |        |  |          |  |               |           |        
|Chiao Tung |  |                               | 6,440,948 |        |  | November |  |               | 6,418,928 |         |  |  | 2.09%-5.92 | % |  |  | 170,071 | 
|           |  |                               |           |        |  |          |  |               |           |         |  |  |            |   |  |  |         | 



|(l) |  | The Company acted as guarantor for a loan to Biomorphic to
a maximum amount of US$3,400. As of December 31, 2001 and 2002,
such loan amounted to US$3,400 and US$2,750, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)


16.      Commitments and Contingencies



| | The Companys commitments and contingencies, not included in the financial
statements, as of December 31, 2002 were as follows:
| | -------------------------------------------------------------------------------------------------------------------------------
|
| | a.                                                                                                                             
|
| | b.                                                                                                                             
|
| | c.                                                                                                                             
|
| |                                                                                                                                
|
| |                                                                                                                                

|                             |  |                  |         |     |  |  |        | 
|---------------------------- |  | ---------------- | ------- | --- |  |  | ------ | 
|                             |  | Operating Leases
|                             |  |                 
|                             |  | NT$              |         | US$
|2003                         |  |                  | 64,064  |     |  |  | 1,846  | 
|2004                         |  |                  | 64,064  |     |  |  | 1,846  | 
|2005                         |  |                  | 64,064  |     |  |  | 1,846  | 
|2006                         |  |                  | 64,064  |     |  |  | 1,846  | 
|2007                         |  |                  | 64,064  |     |  |  | 1,846  | 
|Thereafter                   |  |                  | 415,625 |     |  |  | 11,978 | 
|                             |  |                  |         |     |  |  |        | 
|Total minimum lease payments |  |                  | 735,945 |     |  |  | 21,208 | 
|                             |  |                  |         |     |  |  |        | 



| |  | Rental expenses under the operating leases amounted to NT$65,524,
NT$71,746, NT$72,796 (US$2,098), for the years ended December 31,
2000, 2001 and 2002, respectively.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| | d. | On February 18, 1997, Atmel Corporation (Atmel) filed a legal
action against MXA, one of the Companys subsidiaries, with the
International Trade Commission (ITC) for violation of Atmels
patent No. 903. On June 1, 2001, the ITC issued a Notice of Final
Determination and ruled again that MXA did not infringe the 903
patent. Atmel filed a petition to the ITC to reverse its
non-infringement finding. On July 26, 2001, the ITC denied Atmels
petition for reconsideration. The 903 patent expired on September 14,
2001. Atmel did not appeal the final determination and therefore is
bound by the ITCs finding that MXA did not infringe the 903 patent.                                                                                                                                                                                                                                                                                
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | In August 1997, Atmel filed another legal action against MXA for
violation of Atmels patents No. 096 and 747. The first patent is a
patent similar to the one in issue with the ITC. The second relates to
manufacturing processes used by the Company. MXA applied for summary
judgment for both patents. The Court has granted MXA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 patents. On
January 14, 2002, the Court issued an order denying Atmels motion to
correct inventorship of the 747 patent due to incorrect inventorship,
and is awaiting the Courts decision. There is no set trial date. In
light of the results to date, the Company believes that there will be
no significant impact on its business, financial condition and results
of operations related to this dispute.                                                         
|
| |    | As is the case with many companies in the semiconductor industry, the
Company may from time to time receive communications from third parties
asserting patent or process technology rights to the Companys
products. The Company may enter into discussions with these third
parties as to their respective positions and the terms of any possible
licenses in respect of these patent or process technology rights.
Irrespective of the validity or the successful assertion of these
claims, the Company could incur significant costs with respect to the
defense of the claims, which could have a material adverse effect on
the Companys financial condition and results of operations. For
royalty costs related to potential patent infringement claims or
payments that are required to be made in accordance with existing
royalty arrangements, the Company accrues royalty expense based on
historical experience and specific arrangements.

F - 41



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| | e. | The Company entered into an agreement with Tower Semiconductor
Ltd. (Tower), an Israel public company listed on 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 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 in December 2000, the Company
entered into share purchase agreements with Tower whereby the Company
agreed to invest US$75 million in Tower. Following an initial payment
of US$20 million for 866,551 shares 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 366,690 shares of Tower. Payment for the first milestone was
made in March 2001 and payment for the second milestone was made in
April 2001. The Company acquired both 366,690 shares with the first two
payments. The payments are held on deposit with Tower and may be used
to purchase Tower shares or wafers or make royalty payments.                                                                                                                                                                                                                                                                                        
|
| |    | In September 2001, in connection with Towers financial restructuring,
the Company (together with the other wafer producers) exchanged
US$16,012 of its prepaid credit account to purchase 1,255,848 Tower
shares at US$12.75 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F - 42



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | 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. 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 and US$4.908 per share, respectively. In addition, the Company
participated in Towers shares offering on October 21, 2002 and
acquired 660,000 shares at US$5 per share.                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As of December 31, 2002, the Companys prepaid credit account amounted
to NT$491,293 (US$14,138). Pursuant to the terms applicable to the
credits issued in connection with the various milestone payments, this
account may be used to be applied against wafer purchases by 7.5% to
15%. 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 wafer partners to Tower, including certain
payments to be made by the Company under SCM Waiver Agreement dated
December 12, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In February 2003, the board of Tower agreed, subject to shareholders
approval, however, to further amend the shares purchase agreement. The
terms of the amendment require the payment of US$11,000 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 will be
due five business days after the amendment is approved by all required
parties, including Towers shareholders; the second installment of
approximately US$4,400 will be due five business days after Tower has
raised additional funds equal to approximately US$22,000, referred to
as the Minimum Financing. Immediately following the advancement of the
first installment, the Company will be issued fully-paid and
non-assessable ordinary shares of Tower equivalent to the first
installment divided by the average trading price for the ordinary
shares of Tower during the thirty consecutive trading days preceding
the date that the amendment is approved by Towers board of directors.
Immediately following the advancement of the second installment, the
Company will be issued fully-paid and non-assessable ordinary shares of
Tower equivalent to the second installment divided by the price per
ordinary share of Tower paid in connection with the Minimum Financing
(the Minimum Financing Price);

F - 43



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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | provided, however, that if the Minimum Financing Price cannot
reasonably be calculated from the documents evidencing the Minimum
Financing, then the Minimum Financing Price shall be the average
trading price for the ordinary shares of Tower during the thirty
consecutive trading days preceding the date the second installment is
paid. 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 into
Towers unregistered shares based on the average closing price of Towers common
shares during the thirty consecutive days preceding December 31, 2005.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As of December 31, 2002, the Company owned approximately 13.66% of
Towers shares and had NT$491,293 or about US$14,138 remaining on
deposit. If Tower is unable to meet the milestones, under certain
circumstances, the Company may terminate the agreement and would no
longer be required to purchase additional shares according to the terms
of the arrangement.                                                                                                                                                                                                                                                                                                                                   

17.     Other Disclosures



| | a | Property, plant and equipment                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   | Total capitalized interest amounted to NT$310,082, NT$153,373 and
NT$363,670 (US$10,480) for the years ended December 31, 2000,
2001 and 2002, respectively.                            
|
| |   | The insurance coverage for property, plant and equipment amounted to
NT$38,575,907, NT$59,526,195 and NT$60,128,403 (US$1,732,807) as of
December 31, 2000, 2001 and 2002, respectively.
|
| | b | Royalty Revenue
Royalty revenue earned amounted to NT$84,973, NT$76,759 and
NT$34,462(US$993) for the years ended December 31, 2000, 2001 and 2002,
respectively.                       
|
| | c | Significant Subsequent Events                                                                                                                                                           
|

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |               | The Company issued 0% Convertible Bonds (the Bonds)
totalling US$90,000 on February 10, 2003. The Bonds will mature on
February 10, 2008 at a redemption price equal to their principal
amount. The Bonds, at the option of the bond holders, are convertible
at anytime, except during a closed period, on or after March 12, 2003
and on or before January 11, 2008, into common shares, par value NT$10
per share.
| | ------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (Unaudited)  | The Company repurchased and cancelled the remaining
outstanding convertible debentures issued , totaling US$295, from
the market on March 27, 2003. The repurchase price was at 122.96% of
par and the related debt the extinguishment loss amounted to NT$88.                                                                                                                                                         
|
| | (Unaudited)  | The Company repurchased and cancelled the total amount of the
second overseas convertible debentures from the market at the price
of 129.755% of par on April 23, 2003. The debt extinguishment loss
was NT$22,765.                                                                                                                                                                                                    
|
| | (Unaudited)  | In May 2003, the Company settled the derivative contract
relating to the convertible debentures (as discussed in Note 19.f)
by paying US$13,147 (NT$456,185).                                                                                                                                                                                                                                                          
|
| | (Unaudited)  | In April 2003, the Company extended the contract with a
financial institution for the settlement of the 5 options (as
discussed in Note 19.f) to May 2004.                                                                                                                                                                                                                                                             
|
| | (Unaudited)  | In March and April 2003, the Company utilized the long-term line of credit with Chaio Tung Bank in an aggregated amount of NT$2,910,000.                                                                                                                                                                                                                                                                               

F - 45



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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




|  | (Unaudited)                                                                                                                                                                    | In April 2003, the Company recorded the additional
obligation of SAR I and SAR II on a ROC GAAP basis (as discussed in Note 19.f) in the
amount of NT$719,079 based on market price of the underlying shares
of NT$9.5 per share at that time.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|d | Information on
Investments in Mainland China
There were not material investments in Mainland China.                                                                            
| 
|e | Other
Certain accounts in the financial statements of the Company as of
December 31, 2000 and 2001 have been reclassified to conform with the
presentation of the current year.

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)


18.     Segment Information



| | a) | Segment and geographic data                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | The Company operates predominantly in one industry segment, the
design, manufacturing, and supply of integrated circuits. The
Company has two reportable segments, Macronix International Co.,
Ltd. and Macronix America, Inc. The accounting policies of the
segments are the same as those described in the summary of
significant accounting policies. All intersegment sales prices are
market based. The Company evaluates performance based on operating
income of the respective business units. Segment operating income
is revenue less direct and allocable operating expenses. Segment
identifiable assets are those which are directly used in or
identified to segment operations.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The geographic distributions of
the Companys identifiable assets, operating income and revenues
are summarized in the following table.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  |            |  
|------------------------------------------------- |  | -------- | ---------- | --- |  | ------ | --------- | ----------- |  | ------------ | --------- | - |  |  | ---------- | - |  |  | ---------- | -
|2000                                              |  | Domestic |            | USA |  | Others |           | Elimination |  | Consolidated
|                                                  |  |          |            |     |  |        |           |             |  |             
|                                                  |  | NT$      |            | NT$ |  | NT$    |           | NT$         |  | NT$         
|Sales to unaffiliated customers                   |  |          | 28,086,268 |     |  |        | 3,244,508 |             |  |              | 2,162,332 |   |  |  |           |   |  |  | 33,493,108 |  
|Sales between geographic areas                    |  |          | 4,151,714  |     |  |        | 61,526    |             |  |              |          |   |  |  | (4,213,240 | ) |  |  |           |  
|                                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  |            |  
|Net Sales                                         |  |          | 32,237,982 |     |  |        | 3,306,034 |             |  |              | 2,162,332 |   |  |  | (4,213,240 | ) |  |  | 33,493,108 |  
|                                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  |            |  
|Operating income (loss),
including other expenses |  |          | 11,602,123 |     |  |        | 117,140   |             |  |              | (275,948  | ) |  |  | 292,121    |   |  |  | 11,735,436 |  
|                                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  |            |  
|Interest revenue                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  | 541,387    |  
|Interest expense                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  | (1,265,902 | )
|                                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  |            |  
|Income before taxes                               |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  | 11,010,921 |  
|Tax expense                                       |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  | (398,097   | )
|                                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  |            |  
|Net income                                        |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  | 10,612,824 |  
|                                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  |            |  
|Identifiable assets                               |  |          | 71,205,052 |     |  |        | 1,493,371 |             |  |              | 2,407,247 |   |  |  | (2,655,039 | ) |  |  | 72,450,631 |  
|                                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  |            |  
|Capital expenditures                              |  |          | 11,785,823 |     |  |        | 4,807     |             |  |              | 12,241    |   |  |  |           |   |  |  | 11,802,871 |  
|                                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  |            |  
|Depreciation and amortization                     |  |          | 6,045,466  |     |  |        | 2,734     |             |  |              |          |   |  |  |           |   |  |  | 6,048,200  |  
|                                                  |  |          |            |     |  |        |           |             |  |              |           |   |  |  |            |   |  |  |            |  

F - 47



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)


|                                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  |            |  
|------------------------------------------------- |  | -------- | ---------- | --- |  | ------ | --------- | ----------- |  | ------------ | ------- |  |  |  | ---------- | - |  |  | ---------- | -
|2001                                              |  | Domestic |            | USA |  | Others |           | Elimination |  | Consolidated
|                                                  |  |          |            |     |  |        |           |             |  |             
|                                                  |  | NT$      |            | NT$ |  | NT$    |           | NT$         |  | NT$         
|Sales to unaffiliated customers                   |  |          | 19,315,375 |     |  |        | 1,625,430 |             |  |              | 806,425 |  |  |  |           |   |  |  | 21,747,230 |  
|Sales between geographic areas                    |  |          | 2,045,346  |     |  |        | 73,754    |             |  |              |        |  |  |  | (2,119,100 | ) |  |  |           |  
|                                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  |            |  
|Net Sales                                         |  |          | 21,360,721 |     |  |        | 1,699,184 |             |  |              | 806,425 |  |  |  | (2,119,100 | ) |  |  | 21,747,230 |  
|                                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  |            |  
|Operating income (loss),
including other expenses |  |          | 567,227    |     |  |        | (156,008  | )           |  |              | 19,402  |  |  |  | 324,095    |   |  |  | 754,716    |  
|                                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  |            |  
|Interest revenue                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  | 495,611    |  
|Interest expense                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  | (1,173,312 | )
|                                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  |            |  
|Income before taxes                               |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  | 77,015     |  
|Tax expense                                       |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  | (943,495   | )
|                                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  |            |  
|Net loss                                          |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  | (866,480   | )
|                                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  |            |  
|Identifiable assets                               |  |          | 71,974,574 |     |  |        | 4,076,899 |             |  |              | 212,175 |  |  |  | (3,958,924 | ) |  |  | 72,304,724 |  
|                                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  |            |  
|Capital expenditures                              |  |          | 8,294,353  |     |  |        | 777,500   |             |  |              | 5,900   |  |  |  |           |   |  |  | 9,077,753  |  
|                                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  |            |  
|Depreciation and amortization                     |  |          | 7,996,672  |     |  |        | 5,237     |             |  |              | 3,847   |  |  |  |           |   |  |  | 8,005,756  |  
|                                                  |  |          |            |     |  |        |           |             |  |              |         |  |  |  |            |   |  |  |            |  

|                                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  |             |  
|------------------------------------------------- |  | -------- | ----------- | --- |  | ------ | ---------- | ----------- |  | ------------ | --------- | - |  |  | ---------- | - |  |  | ----------- | -
|2002                                              |  | Domestic |             | USA |  | Others |            | Elimination |  | Consolidated
|                                                  |  |          |             |     |  |        |            |             |  |             
|                                                  |  | NT$      |             | NT$ |  | NT$    |            | NT$         |  | NT$         
|Sales to unaffiliated customers                   |  |          | 14,686,242  |     |  |        | 1,378,719  |             |  |              | 427,503   |   |  |  |           |   |  |  | 16,492,464  |  
|Sales between geographic areas                    |  |          | 1,388,914   |     |  |        | 106,973    |             |  |              | 109,318   |   |  |  | (1,605,205 | ) |  |  |            |  
|                                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  |             |  
|Net Sales                                         |  |          | 16,075,156  |     |  |        | 1,485,692  |             |  |              | 536,821   |   |  |  | (1,605,205 | ) |  |  | 16,492,464  |  
|                                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  |             |  
|Operating income (loss),
including other expenses |  |          | (10,467,666 | )   |  |        | (1,110,247 | )           |  |              | (1,212    | ) |  |  | 1,262,969  |   |  |  | (10,316,156 | )
|                                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  |             |  
|Interest revenue                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  | 216,937     |  
|Interest expense                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  | (1,237,902  | )
|                                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  |             |  
|Income before taxes                               |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  | (11,337,121 | )
|Tax expense                                       |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  | (19,898     | )
|Minority interest                                 |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  | 356         |  
|                                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  |             |  
|Net loss                                          |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  | (11,356,663 | )
|                                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  |             |  
|Identifiable assets                               |  |          | 66,320,896  |     |  |        | 309,266    |             |  |              | 4,531,592 |   |  |  | (3,041,646 | ) |  |  | 68,120,108  |  
|                                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  |             |  
|Capital expenditures                              |  |          | 8,576,597   |     |  |        |           |             |  |              | 3,871     |   |  |  |           |   |  |  | 8,580,468   |  
|                                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  |             |  
|Depreciation and amortization                     |  |          | 8,731,930   |     |  |        | 4,774      |             |  |              | 5,397     |   |  |  |           |   |  |  | 8,742,101   |  
|                                                  |  |          |             |     |  |        |            |             |  |              |           |   |  |  |            |   |  |  |             |  

F - 48



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Major customers                                                                  
| |  | ---------------------------------------------------------------------------------
|
| |  | Revenues from customers representing over 10% of total net sales were as
follows:

|           |  |      |            |      |  |      |       |   |  |     |            |   |  |     |       |  |  |  |           |  |  |  |       |  |  |  |         | 
|---------- |  | ---- | ---------- | ---- |  | ---- | ----- | - |  | --- | ---------- | - |  | --- | ----- |  |  |  | --------- |  |  |  | ----- |  |  |  | ------- | 
|           |  | 2000 |            | 2001 |  | 2002
|           |  |      |            |      |  |     
|Customers  |  | NT$  |            | %    |  | NT$  |       | % |  | NT$ |            | % |  | US$
|           |  |      |            |      |  |      |       |   |  |     |            |   |  |    
|Megachips* |  |      | 10,871,630 |      |  |      | 32.46 |   |  |     | 9,181,228  |   |  |     | 42.22 |  |  |  | 6,022,198 |  |  |  | 36.52 |  |  |  | 173,550 | 
|Mitsubishi |  |      | 2,684,798  |      |  |      | 8.02  |   |  |     | 2,556,058  |   |  |     | 11.75 |  |  |  | 379,412   |  |  |  | 2.30  |  |  |  | 10,934  | 
|           |  |      |            |      |  |      |       |   |  |     |            |   |  |     |       |  |  |  |           |  |  |  |       |  |  |  |         | 
|           |  |      | 13,556,428 |      |  |      | 40.48 |   |  |     | 11,737,286 |   |  |     | 53.97 |  |  |  | 6,401,610 |  |  |  | 38.82 |  |  |  | 184,484 | 
|           |  |      |            |      |  |      |       |   |  |     |            |   |  |     |       |  |  |  |           |  |  |  |       |  |  |  |         | 



|*Megachips is a
distributor for Nintendo.
|-----------------------------------------
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         

|              |  |      |            |      |  |      |            |     |  |  |            |  |  |  |         | 
|------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | --- |  |  | ---------- |  |  |  | ------- | 
|              |  | 2000 |            | 2001 |  | 2002
|              |  |      |            |      |  |     
|              |  | NT$  |            | NT$  |  | NT$  |            | US$
|              |  |      |            |      |  |      |            |    
|Japan         |  |      | 15,502,559 |      |  |      | 10,932,611 |     |  |  | 8,052,071  |  |  |  | 232,048 | 
|United States |  |      | 2,639,938  |      |  |      | 1,454,140  |     |  |  | 1,308,643  |  |  |  | 37,713  | 
|Hong Kong     |  |      | 2,814,773  |      |  |      | 1,592,119  |     |  |  | 2,006,260  |  |  |  | 57,817  | 
|Singapore     |  |      | 1,971,024  |      |  |      | 1,148,113  |     |  |  | 1,648,719  |  |  |  | 47,514  | 
|Europe        |  |      | 1,862,740  |      |  |      | 650,391    |     |  |  | 345,174    |  |  |  | 9,947   | 
|              |  |      |            |      |  |      |            |     |  |  |            |  |  |  |         | 
|Total         |  |      | 24,791,034 |      |  |      | 15,777,374 |     |  |  | 13,360,867 |  |  |  | 385,039 | 
|              |  |      |            |      |  |      |            |     |  |  |            |  |  |  |         | 



| |  | Products                                                                                                                                                                                                                                                                         
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company's principal products and services consist of memory products, SOC products and services, and multimedia products. The following
table sets forth the amounts of total net sales revenue from external customers represented by these products in 2000, 2001 and 2002:

|                                  |  |      |            |      |  |      |            |     |  |  |            |   |  |  |         |  
|--------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | --- |  |  | ---------- | - |  |  | ------- | -
|                                  |  | 2000 |            | 2001 |  | 2002
|                                  |  |      |            |      |  |     
|                                  |  | NT$  |            | NT$  |  | NT$  |            | US$
|                                  |  |      |            |      |  |      |            |    
|Memory
products                   |  |      | 27,005,719 |      |  |      | 16,548,453 |     |  |  | 12,586,083 |   |  |  | 362,711 |  
|SOC
products and services         |  |      | 3,542,028  |      |  |      | 3,212,506  |     |  |  | 1,010,949  |   |  |  | 29,134  |  
|Multimedia
products               |  |      | 1,501,154  |      |  |      | 1,582,773  |     |  |  | 2,386,735  |   |  |  | 68,782  |  
|Others                            |  |      | 1,761,890  |      |  |      | 692,549    |     |  |  | 663,758    |   |  |  | 19,129  |  
|                                  |  |      |            |      |  |      |            |     |  |  |            |   |  |  |         |  
|Total
sales revenue               |  |      | 33,810,791 |      |  |      | 22,036,281 |     |  |  | 16,647,525 |   |  |  | 479,756 |  
|Less: sales returns and discounts |  |      | (317,683   | )    |  |      | (289,051   | )   |  |  | (155,061   | ) |  |  | (4,469  | )
|                                  |  |      |            |      |  |      |            |     |  |  |            |   |  |  |         |  
|Total
net sales revenue           |  |      | 33,493,108 |      |  |      | 21,747,230 |     |  |  | 16,492,464 |   |  |  | 475,287 |  
|                                  |  |      |            |      |  |      |            |     |  |  |            |   |  |  |         |  

19.      Financial Instruments



| |  | Significant portions of the Companys revenues are denominated in
currencies other than the NT dollar. Most of the Companys debt and
payables for purchases of capital goods are denominated in currencies
other than the NT dollar, primarily in US dollars and Japanese Yen.
As of December 31, 2002, approximately 55.44% of the Companys
long-term debt was in US dollars and approximately 51.79% of the
Companys accounts receivable were in Japanese Yen. To protect against
reductions in value and volatility of future cash flows caused by
changes in foreign exchange rates, the Company utilizes financial
instruments to hedge its foreign currency exposure. These hedging
transactions are designed to reduce the impact of foreign currency
exchange rate movements.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 49



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| | The Company also entered into certain derivative contracts for
trading purposes. 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. The outstanding financial instrument positions,
identified as hedging or trading purposes, as of December 31, 2001 and
2002 are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | a.                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |                                                                                                                                                                                                                                                                                                                                                                                                                  

|             |  |              |         |      |  |     |         |      |  |  |   |  |  |  |   | 
|------------ |  | ------------ | ------- | ---- |  | --- | ------- | ---- |  |  | - |  |  |  | - | 
|             |  | December 31,
|             |  |             
|             |  | 2001         |         | 2002
|             |  |              |         |     
|             |  | Buy          |         | Sell |  | Buy |         | Sell
|             |  |              |         |      |  |     |         |     
|US dollar    |  |              | 314,550 |      |  |     |        |      |  |  |  |  |  |  |  | 
|Japanese Yen |  |              |        |      |  |     | 333,660 |      |  |  |  |  |  |  |  | 



| |    | As of December 31, 2001, the net receivable (payable) resulting from
the above exchange contracts amounted to NT$699.                                                                                                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | Net exchange gains (losses) related to foreign currency forward
contracts for the years ended December 31, 2000, 2001 and 2002 were,
NT$(6,267), NT$47,821, and NT$(30,612), respectively.                                                                                                                                                                 
|
| | b. | Option contracts                                                                                                                                                                                                                                                                                                                                           
|
| |    | The Company entered into foreign currency option contracts for hedging
purposes. The option contracts were entered into to mitigate foreign
exchange risk. The contracts were used to reduce the Companys exposure
to foreign currency risk from its receivables and payables resulting from
its normal operations and its debt denominated in US dollars.
|
| |    | A number of the contracts entered into by the Company include barriers.
Such barriers have the effect that, if the rate of one currency to the
other currency in exchange exceeds a given rate, the contracts are
automatically terminated. These have the impact of reducing the upfront
cost of the options.                                         

F - 50



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| | c. | Cross currency and interest rate swaps                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | To hedge against certain of the Companys long-term debt denominated in
US 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 US dollar to Japanese
Yen mitigates the foreign exchange exposure.                                                                                                                                                                                        
|
| | d. | Structured deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |    | The Company entered into certain structured deposits, or dual currency
deposits, to earn higher interest rates, but expose 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
trading purposes.
|
| | e. | The estimated fair values of the Companys financial instruments
are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |    | On balance sheet:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                    |  |              |             |            |  |                 |             |            |  |     |             |     |  |  |          |   |  |  |             |   |  |  |          |  
|----------------------------------- |  | ------------ | ----------- | ---------- |  | --------------- | ----------- | ---------- |  | --- | ----------- | --- |  |  | -------- | - |  |  | ----------- | - |  |  | -------- | -
|                                    |  | December 31,
|                                    |  |             
|                                    |  | 2001         |             | 2002      
|                                    |  |              |             |           
|                                    |  | Carrying     |             |            |  |                 |             |            |  |     |             |     |  |  |          |   |  |  |             |   |  | 
|                                    |  | amount       |             | Fair value |  | Carrying amount |             | Fair value
|                                    |  |              |             |            |  |                 |             |           
|                                    |  | NT$          |             | NT$        |  | NT$             |             | US$        |  | NT$ |             | US$
|Cash and cash equivalents           |  |              | 12,560,954  |            |  |                 | 12,560,954  |            |  |     | 7,394,361   |     |  |  | 213,094  |   |  |  | 7,394,361   |   |  |  | 213,094  |  
|Short-term investments              |  |              | 1,243,907   |            |  |                 | 1,107,494   |            |  |     | 1,185,324   |     |  |  | 34,159   |   |  |  | 1,187,125   |   |  |  | 34,211   |  
|Long-term equity investments        |  |              | 1,502,672   |            |  |                 | 1,511,837   |            |  |     | 1,827,089   |     |  |  | 52,654   |   |  |  | 1,838,860   |   |  |  | 52,993   |  
|Short-term debt and notes           |  |              | (733,950    | )          |  |                 | (733,950    | )          |  |     | (2,159,151  | )   |  |  | (62,223  | ) |  |  | (2,159,151  | ) |  |  | (62,223  | )
|Long-term debts                     |  |              | (20,770,261 | )          |  |                 | (18,402,577 | )          |  |     | (27,079,629 | )   |  |  | (780,393 | ) |  |  | (27,360,152 | ) |  |  | (788,477 | )
|Cross currency interest rate        |  |              | 62,830      |            |  |                 | 64,882      |            |  |     | 20,425      |     |  |  | 589      |   |  |  | 20,895      |   |  |  | 602      |  
|Equity contract                     |  |              | (1,042,047  | )          |  |                 | (1,239,250  | )          |  |     | (1,385,110  | )   |  |  | (39,917  | ) |  |  | (1,887,620  | ) |  |  | (54,319  | )
|Derivative
related to the 8 options |  |              | 453,798     |            |  |                 | (12,841     | )          |  |     | (359,181    | )   |  |  | (10,336  | ) |  |  | (504,333    | ) |  |  | (14,534  | )
|Foreign exchange forwards           |  |              | 699         |            |  |                 | 1,119       |            |  |     |            |     |  |  |         |   |  |  |            |   |  |  |         |  



F - 51



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Off balance sheet:
| |  | ------------------

|                                 |  |              |   |            |  |                 |        |            |  |     |   |     |  |  |   |  |  |  |        |  |  |  |     | 
|-------------------------------- |  | ------------ | - | ---------- |  | --------------- | ------ | ---------- |  | --- | - | --- |  |  | - |  |  |  | ------ |  |  |  | --- | 
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2001         |   | 2002      
|                                 |  |              |   |           
|                                 |  | Carrying     |   |            |  |                 |        |            |  |     |   |     |  |  |   |  |  |  |        |  |  | 
|Derivative financial instruments |  | Amount       |   | Fair Value |  | Carrying Amount |        | Fair Value
|                                 |  |              |   |            |  |                 |        |           
|                                 |  | NT$          |   | NT$        |  | NT$             |        | US$        |  | NT$ |   | US$
|Hedging:                         |  |              |   |            |  |                 |        |            |  |     |   |     |  |  |   |  |  |  |        |  |  |  |     | 
|Options                          |  |              |  |            |  |                 | 21,310 |            |  |     |  |     |  |  |  |  |  |  |       |  |  |  |    | 
|Call options of debentures       |  |              |   |            |  |                 | 20,412 |            |  |     |   |     |  |  |   |  |  |  | 14,680 |  |  |  | 423 | 



| | f. | Derivative contracts relating to convertible debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | On May 5, 1998, the Company issued convertible debentures amounting to
US$150,000, 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$150,000 is divided into
fifteen options and the Subsidiary is entitled to exercise the options
separately, at the discretion of the Subsidiary during the life of the
contract, but at a minimum number of two and a maximum number fifteen.
The Company simultaneously entered into currency swaps, based on the
notional amount of the debt, converting Japanese Yen into New Taiwan
dollars and New Taiwan dollars into United States dollars. Subsequently,
the option contract and the currency swaps were combined into one
contract. The Subsidiary exercised two options and five options on
January 22, 2000 and June 26, 2000, respectively. As of December 31,
2002, the fair value of the outstanding portion of the contract was
US$(14,513)(NT$(504,333)), and the carrying amount was
US$(10,336)(NT$(359,181)).

F - 52



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | 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, will
expire in May 2003. As of December 31, 2002, the remaining underlying
reference was 53,253,964 of the Companys common shares. If the price is
greater 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 in US dollars,
and the Companys share price is converted into US dollars using current
NT dollars to US dollars exchange rates in order to determine the
settlement amount. The contract rate as of December 31, 2002 was
US$1.3656. The carrying amount of this contract as of December 31, 2002
was a loss of US$39,917 (NT$1,385,110) while the fair value was a loss of
US$54,319 (NT$1,887,620).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Under the SAR I 15,638,207 shares and SAR II 18,723,829 shares vested in
the current year with an exercise price of $17.98 and $33.86. With
respect to the contract referenced to the 53,253,964 shares, the Company
recorded a liability relating to a portion of the contract representing
the 15,638,207 and 18,723,829 shares based on the difference between the
contract strike price and NT$17.98 and NT$33.86, this resulted in a total
liability related to the contract of NT$1,385,110. The Companys
additional obligation on a ROC GAAP basis related to the contract, based on the fair value of
the underlying shares of NT$12.009 at December 31, 2002, is NT$502,510.                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The Company has another SAR plan (SAR III) with shares of 18,954,984
originally scheduled to vest in 2003. The Company advanced the vesting
schedule therefore these shares vested in 2002. The Company did not
recognize any expense for these shares. These shares are not referenced
to the derivative contract. The exercise price of SAR III was
NT$33.86 per share as of December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | In entering into financial instruments, the Company is subject to credit,
price, liquidity and cash flow risks as discussed below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Credit risk relates to the extent to which failures by counter-parties to
discharge their obligations could reduce the amount of future cash flows
from financial assets on hand as at the balance sheet date. The Company
minimizes exposure to credit risk by only dealing with reputable banks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F - 53



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | The notional amounts of the financial instruments as of December 31,
2001 and 2002 are as follows (amounts in thousands):
| |  | -------------------------------------------------------------------------------------------------------------------------

|                                                |  |              |               |      |  |  |           | 
|----------------------------------------------- |  | ------------ | ------------- | ---- |  |  | --------- | 
|                                                |  | December 31,
|                                                |  |             
|Financial instruments:                          |  | 2001         |               | 2002
|                                                |  |              |               |     
|Currency forward-hedging                        |  |              | YEN1, 251,538 |      |  |  |          | 
|Buying options-hedging                          |  |              | YEN4, 574,400 |      |  |  |          | 
|Selling options-hedging                         |  |              | YEN2, 874,600 |      |  |  |          | 
|Cross currency interest rate swaps-hedging      |  |              | US$8,000      |      |  |  | US$4,000  | 
|Call options relating to convertible debentures |  |              | US$80,000     |      |  |  | US$80,000 | 



| |  | Price risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | There are three types of price risk: currency, interest rate and market
risks. Currency risk is the risk that the value of a financial instrument
will fluctuate due to changes in foreign exchange rates; interest rate
risk is the risk that the value of a financial instrument will fluctuate
due to changes in market interest rates and market risk is the risk that
the value of financial instrument will fluctuate as a result of changes
in market prices. The Company considers that the price risk related to
the hedge transactions is minimal as gains or losses from contracts for
hedging purposes are likely to be offset by gains or losses from the
underlying assets and liabilities denominated in foreign currencies.                                                                                                                                                                                      
|
| |  | The Company entered into certain structured deposits, or dual currency
deposits, to earn higher interest rates, but expose 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
trading purposes. Therefore, if the foreign exchange option embedded in
the structured deposits favors the financial institutions, they will
settle the principal in a different currency than the original currency,
which will result in a loss to the Company.
|
| |  | The Company also entered into a currency (JPY v.s. USD) swap contract for
the US$80,000 convertible debentures, which exposes the Company to
currency risks for both Japanese yen and U.S. dollars. The Company
considers that the currency risk related to the contract is minimal as
gains or losses from the contract will be offset by gains or losses from
the underlying assets and liabilities denominated in Japanese yen or U.S.
dollars.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Liquidity and cash flow risks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Liquidity risk is the risk that the Company will encounter difficulty in
raising funds to meet commitments associated with financial instruments.
Liquidity risk may result from an inability to sell a financial asset
quickly at close to its fair value. Cash flow risk is the risk that
future cash flows associated with a monetary financial instrument will
fluctuate by a significant amount.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The Company anticipates that the liquidity risk is minimal because the
financial instruments entered into for hedging purposes are liquid and
are entered into, pursuant to binding contracts, for hedging purposes
with reputable banks. The purpose of entering into forward exchange
contracts, option contracts and cross currency and interest rate swaps is
to limit the Company exposure to losses resulting from adverse
fluctuations in assets and liabilities denominated in foreign currency.
Therefore, no significant additional cash requirement is anticipated. For
structured deposit contracts, there are no additional cash flows required
since the principal has been deposited with the counter-parties. However,
the Company might receive an amount less than the principal deposited
should the counter-parties settle the principal in a different foreign
currency. In addition, the Company might be exposed to additional cash
flow risk for written option contracts if the contracts are out of the
money at maturity.
|
| |  | The fair values of the financial instruments were determined as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Cash and cash equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate its fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Short-term investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The fair value of the Companys short-term investments is based on the
market prices at the reporting date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Long-term equity investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The fair value of the
Companys long-term equity investments is based on
the average market prices in the last month of the year if the market
prices are available or on the financial data or any other
information if market prices are not available.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




|    |  | Long and short-term debts:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The carrying amounts of the Companys short-term borrowings approximate
their fair values. The fair value of the Companys long-term borrowings
bearing variable interests, which includes current portion of long-term
debt, is estimated using the book value of the debt at the reporting
date. The fair value of long-term borrowings bearing fixed interest
rates, bonds payable and convertible bonds payable is based on the market
prices at the reporting date if the market prices are available or
estimated using the discounted cash flow method based on the Companys
borrowing rates for similar types of borrowings.
|   
|    |  | Off balance sheet financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  | The fair values of foreign exchange forward contracts and foreign
currency option contracts are estimated based on quoted forward rates,
adjusted through interpolation where necessary. The fair values of the
equity swaps were obtained from the financial institution, being the
counter parties and calculation agents of the contracts.                                                                                                                                                                                                                                                                                        
|   
|    |  | The call option contract was entered into by the Subsidiary to redeem the
Companys convertible debentures, which were privately placed with a
bank. Upon the redemption of the convertible debenture from the bank, the
Subsidiary will pay 100% for the value of the debentures plus accrued
interest as stipulated in the call option contract. The value of the
related outstanding convertible debentures and the respective accrued
interest have been included as liabilities in the financial statements.                                                                                                                    
|   
|20. |  | Reconciliation to Accounting Principles Generally Accepted in the United
States of America                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | The Companys financial statements have been prepared in accordance with
ROC GAAP. ROC GAAP varies in certain significant respects from US GAAP.
Differences which have a significant effect on the Companys consolidated
results of operations and shareholders equity are as follows:                                                                                                                                                                                                                                                                                                                                            

F - 56



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| | a. | Employee Bonuses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | Under ROC 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.                                                                                                                                                                                                                            
|
| |    | US 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 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.
|
| | b. | Employee Retirement Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |    | As permitted under ROC GAAP, prior to 1996, the pension expense recorded
by the Company in connection with its defined benefit pension plan was
based on the amount of the contributions made by the Company to the
pension plan required by government regulations. Under US GAAP, the
accumulated pension obligation and the pension expense is determined on
an actuarial basis, assuming the Company first adopted this policy at the
beginning of 1993 since it was not feasible to apply the actuarial basis
at an earlier date. The amount of the transition obligation is
insignificant.                                                                                                                                                                                                                                                                                                               

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| | c. | Plant capacity expense variances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | As permitted under ROC 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 US GAAP, such plant capacity variances can only be allocated
between cost of goods sold and inventory. This may also result in
additional inventory allowances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | d. | Marketable Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |    | Under ROC GAAP, short-term marketable equity securities are carried 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. Long-term marketable
equity securities are carried at cost, or 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. An
other-than-temporary decline in value is not required to be recognized
under ROC GAAP due to the less prescriptive nature of the principles. The
Companys policy is to account for all unrealized losses on long-term investments as a charge to
shareholders equity.
|
| |    | Under US GAAP, SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, requires that certain investments be classified
as trading securities, available-for-sale securities or held-to-maturity
securities. The Company did not have any investments classified as
trading securities or held-to-maturity securities during the periods
presented. The statement further requires that available-for-sale
securities be reported at fair value, with unrealized gains and losses
excluded from earnings but reported in a separate component of
shareholders equity until they are sold. Under US GAAP if an
other-than-temporary decline in value of a long-term investment exists,
the unrealized loss should be charged to the statement of operations.                                                                                                                                           

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Under US GAAP, available-for-sale securities as of December 31, 2001 and
2002 are as follows:
| |  | ---------------------------------------------------------------------------------------------

|                                             |  |             |           |      |  |              |           |      |  |     |           |     |  |  |        |  |  |  |           |  |  |  |        | 
|-------------------------------------------- |  | ----------- | --------- | ---- |  | ------------ | --------- | ---- |  | --- | --------- | --- |  |  | ------ |  |  |  | --------- |  |  |  | ------ | 
|                                             |  | December 31
|                                             |  |            
|                                             |  | 2001        |           | 2002
|                                             |  |             |           |     
|                                             |  | Market      |           |      |  |              |           |      |  |     |           |     |  |  |        |  |  |  |           |  |  | 
|                                             |  | value       |           | Cost |  | Market value |           | Cost
|                                             |  |             |           |      |  |              |           |     
|                                             |  | NT$         |           | NT$  |  | NT$          |           | US$  |  | NT$ |           | US$
|Classified as current assets:                |  |             |           |      |  |              |           |      |  |     |           |     |  |  |        |  |  |  |           |  |  |  |        | 
|Open-end mutual funds,
marketable securities |  |             | 1,107,494 |      |  |              | 1,135,272 |      |  |     | 1,187,125 |     |  |  | 34,211 |  |  |  | 1,202,539 |  |  |  | 34,655 | 
|                                             |  |             |           |      |  |              |           |      |  |     |           |     |  |  |        |  |  |  |           |  |  |  |        | 
|Classified as non-current:                   |  |             |           |      |  |              |           |      |  |     |           |     |  |  |        |  |  |  |           |  |  |  |        | 
|Equity securities                            |  |             | 631,812   |      |  |              | 1,281,489 |      |  |     | 800,934   |     |  |  | 23,082 |  |  |  | 2,005,863 |  |  |  | 57,806 | 
|                                             |  |             |           |      |  |              |           |      |  |     |           |     |  |  |        |  |  |  |           |  |  |  |        | 



| |    | Realized gains from sale of securities classified as available-for-sale
for the years ended December 31, 2000 and 2001, and 2002 were NT$28,022,
NT$42,697 and NT$6,778 (US$ 195), respectively. For the purpose of determining realized gains and losses, the cost of securities sold was
based on specific identification.                                                                                                                                                                                                                                                                                                  
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | During 2001 and 2002, an other-than-temporary decline in value of
NT$645,556 and NT$538,151 (US$15,509) was recognized, respectively, under
US GAAP for the Companys investment in Tower. At December 31, 2002 the
price of Towers shares was US$3.22 compared to the average cost to the
Company of US$8.96.                                                                                                                                                                                                                                                                                                               
|
| | e. | Derivative Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |    | Under ROC GAAP, the Company is required to disclose certain information
in the financial statements regarding derivative financial instruments
but there are no specific accounting requirements for derivative
financial instruments (except for foreign currency forward exchange
contracts for which the accounting is documented in note 2a and for which
there is no significant difference in the accounting treatment with US
GAAP prior to January 1, 2001). In addition, ROC GAAP has no specific
regulations with respect to the accounting for derivative financial
instruments indexed to the Companys own stock.

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |       | Prior to January 1, 2001, under US GAAP, generally, written options are
marked to market through earnings in all situations, unless they are part
of a combination of options which also includes a purchased option of
equal or greater fair value. Purchased options are eligible for hedge
accounting and changes in the intrinsic value of the option are treated
as an adjustment of the basis of the hedged assets or liabilities. For
derivative financial instruments indexed to the Companys own stock, the
Company is required to record those agreements which are required to be
settled in cash at their fair values, with changes in fair value reported
in earnings (See note 19(f)). Differences between ROC GAAP and US GAAP in
accounting for derivative financial instruments are detailed below:
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (i).  | Options contracts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |       | Under ROC 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |       | For periods prior to January 1, 2001, US 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 deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |       | Under ROC 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |       | For periods prior to January 1, 2001, under US 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |    | In June 1998, the U.S. Financial Accounting Standards Board (U.S.
FASB) issued Statement 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement requires the Company to
recognize all derivatives on the balance sheet date at fair value.
Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset
against the change in fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The
ineffective portion of a derivatives change in fair value will be
immediately recognized in earnings. The adoption of Statement No. 133
on January 1, 2001 resulted in the cumulative effect of an accounting
change of NT$620,503 being recognized in earnings in the consolidated
statement of operations and a charge of nil to other comprehensive
income. Subsequent to December 31, 2000, none of the Companys
derivative positions qualified as hedges under U.S. GAAP. The Company
has issued certain convertible debt instruments that contain embedded
derivatives because the currency in which the instrument is
denominated is different from the currency in which the underlying
stock is denominated. The Company has bifurcated such conversion
options in accordance with FAS 133 and accounted for the
bifurcated derivative instrument in accordance with FAS 133 and the host instrument in accordance with the applicable standards.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | f. | Stock Appreciation Rights                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |    | ROC GAAP has no specific accounting provisions for Stock Appreciation
Rights (SAR) plans and the Company only recognizes compensation
expense for the plan 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 ROC 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 plan based on the difference between the
strike price in the derivative contract and the employees exercise
price. The Companys additional unrecorded obligation related to the
derivative contract, based on the fair value of the underlying shares of
NT$10.8 at December 31, 2002, is NT$544,056. See also note 19f.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |    | US 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.                                                                                 
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | g. | Employee Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |    | The Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
related interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, Accounting for Stock-Based
Compensation, requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, if the
exercise price of the Companys employee stock options equals the market
price of the underlying stock on the date of grant, no compensation
expense is recognized for the Company.
|
| |    | Under the 2001 plan and 2002 (as discussed in Note 12), the Company
granted 71,168,500 shares, 560,000 shares, 151,507,000 shares and
16,449,040 shares to its employees on January 16, 2002, May 6, 2002,
October 1, 2002 and December 16, 2002, respectively, at exercise prices
of NT$22.8, NT$22.3, NT$11.5 and NT$11.7, respectively. Employees may
exercise up to 50% of the options after two years, up to 75% after three
years and up to 100% after four years.                                                                                                                                                                                                       
|
| |    | Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions, respectively: risk-free interest rate of 1.9%; dividend
yield of 0.00%; volatility factors of the expected market price of the
Companys common stock ranging from 0.57 to 0.59; and a weighted-average
expected life of the option of 4.4 years.                                           

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Companys employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options vesting period. The
Companys pro forma information is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                                                                                                                            |  |      |           |      |  |      |            |     |  |  |             |   |  |  |          |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | ---------- | --- |  |  | ----------- | - |  |  | -------- | -
|                                                                                                                                            |  | 2000 |           | 2001 |  | 2002
|                                                                                                                                            |  |      |           |      |  |     
|                                                                                                                                            |  | NT$  |           | NT$  |  | NT$  |            | US$
|Net income (loss), as
reported under US GAAP                                                                                                |  |      | 8,016,269 |      |  |      | (4,462,878 | )   |  |  | (13,840,747 | ) |  |  | (398,869 | )
|Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects |  |      |           |      |  |      |            |     |  |  | (379,539    | ) |  |  | (10,937  | )
|                                                                                                                                            |  |      |           |      |  |      |            |     |  |  |             |   |  |  |          |  
|Pro forma net income (loss)                                                                                                                 |  |      | 8,106,269 |      |  |      | (4,462,878 | )   |  |  | (14,220,286 | ) |  |  | (409,806 | )
|                                                                                                                                            |  |      |           |      |  |      |            |     |  |  |             |   |  |  |          |  
|Earnings (loss) per share (in dollars)                                                                                                      |  |      |           |      |  |      |            |     |  |  |             |   |  |  |          |  
|Basic  as reported                                                                                                                         |  |      | 2.31      |      |  |      | (1.06      | )   |  |  | (3.77       | ) |  |  | (0.11    | )
|                                                                                                                                            |  |      |           |      |  |      |            |     |  |  |             |   |  |  |          |  
|Diluted  as reported                                                                                                                       |  |      | 2.26      |      |  |      | (1.23      | )   |  |  | (3.77       | ) |  |  | (0.11    | )
|                                                                                                                                            |  |      |           |      |  |      |            |     |  |  |             |   |  |  |          |  
|Basic  pro forma                                                                                                                           |  |      | 2.31      |      |  |      | (1.06      | )   |  |  | (3.88       | ) |  |  | (0.11    | )
|                                                                                                                                            |  |      |           |      |  |      |            |     |  |  |             |   |  |  |          |  
|Diluted  pro forma                                                                                                                         |  |      | 2.31      |      |  |      | (1.23      | )   |  |  | (3.88       | ) |  |  | (0.11    | )
|                                                                                                                                            |  |      |           |      |  |      |            |     |  |  |             |   |  |  |          |  



| |  | A summary of the Companys stock option activity and related
information for the year ended December 31, 2002 is as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)


|                              |  |                         |         |                |  |                  |       | 
|----------------------------- |  | ----------------------- | ------- | -------------- |  | ---------------- | ----- | 
|                              |  | As of December 31, 2002
|                              |  |                        
|                              |  |                         |         |                |  | Weighted-Average
|                              |  | Options (in thousand)   |         | Exercise Price
|                              |  |                         |         |               
|Outstanding-beginning of year |  |                         |         |                |  |                 
|Granted                       |  |                         | 239,685 |                |  |                  | 14.89 | 
|Exercised                     |  |                         |        |                |  |                  |      | 
|Forfeited                     |  |                         |        |                |  |                  |      | 
|                              |  |                         |         |                |  |                  |       | 
|Outstanding-end of year       |  |                         | 239,685 |                |  |                  | 14.89 | 
|                              |  |                         |         |                |  |                  |       | 



| |    | Weighted-average fair value of options granted during the year was
NT$7.19 per unit. The weighted average remaining contractual life of
those options is 5.54 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | h. | Purchase and Sale of the Companys Own Shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |    | Under ROC GAAP, the net gain or loss resulting from the purchase and
sale of the Companys own shares for trading purposes are recorded as
non-operating income or loss in the statements of operations. However,
effective from January 1, 2002, purchases or sales of the Companys own
shares are treated as treasury stock transactions.                                                                                                                                                                                                                                                                                                                                                                                          
|
| |    | US 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.
|
| | i. | Gross Profit and Operating Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |    | Government subsidies for research and development, inventory loss
provision and the reversal of bad debt expense are presented below the
operating income subtotal in the statement of operations as permitted
under ROC GAAP. Under US GAAP, the inventory loss provision is included
in the determination of gross profit. The government subsidies for
research and development and the reversal of bad debt expense are
included in the determination of operating income.                                                                                                                                                                                                                                                        

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| | j. | Investment in Equity Investees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | Under ROC GAAP, if an investee company issues new shares and the
original shareholders do not purchase new shares proportionally such
that the investor increases its percentage of ownership, the
difference between the investment cost for the portion of the
investee acquired and the acquired net assets is charged to equity.                                                                                                                                                                                                                                                                                                                                          
|
| |    | Under US GAAP, if an investee company issues new shares and the
original shareholders do not purchase new shares proportionally such
that the investor increases its percentage of ownership, the
difference between the investment cost for the portion of investee
acquired and the acquired net assets is recorded as part of the
investment. The difference is assigned to individual assets and
liabilities acquired on the basis of the assets and
liabilities fair values. Any remaining difference between the cost of
the investment and net assets acquired is allocated to goodwill. Goodwill
for equity method investments is not separable from the investment.

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| | k. | Income Tax                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | Undistributed earnings generated after 1997 are subject to a 10% tax in
compliance with the Income Tax Law of the ROC. Under ROC GAAP the 10%
tax on undistributed earnings is recorded as an expense at the time
shareholders resolve that its earnings shall be retained. Under US
GAAP, the Company would measure its income tax expense, including the
tax effects of temporary differences, using the tax rate that includes
the tax on undistributed earnings.                                                                                                                                                                                                             
|
| | l. | Research and Development Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |    | On a ROC GAAP basis, royalty expense for the Company is included in
research and development expense. On a U.S. GAAP basis, royalty expense
for the Company is included in selling expense or administrative expense
depending on the nature of the expense. Accordingly, on a U.S. GAAP
basis, research and development expenses were NT$2,485,896 in 2000,
NT$3,335,049 in 2001, NT$3,443,456 (US$99,235) in 2002.                                                                                                                                                                                                                                                             
|
| | m. | Rights Issues and Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |    | Under ROC GAAP, earnings per share is retroactively adjusted for shares
issued for employee bonuses. Under US GAAP, shares issued for
employee bonuses will affect the current periods earnings per share
only. Under US GAAP, a rights issue with an
exercise price less than the fair value of the stock contains a bonus
element that is similar to a stock dividend and is accounted for as
such accordingly. As a result, the basic and diluted earnings per share
shall be adjusted retroactively for the bonus element for all periods
presented. There are no requirements under ROC GAAP to adjust earnings
per share arising from the bonus element of a rights issue.

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | The number of weighted average shares outstanding under US GAAP is
presented below:
| |  | -----------------------------------------------------------------------------------

|                                                                                |  |                         |               |      |  |      |               |  |  |  |               |  
|------------------------------------------------------------------------------- |  | ----------------------- | ------------- | ---- |  | ---- | ------------- |  |  |  | ------------- | -
|                                                                                |  | Year ended December 31,
|                                                                                |  |                        
|                                                                                |  | 2000                    |               | 2001 |  | 2002
|                                                                                |  |                         |               |      |  |     
|Number of common shares outstanding on January 1                                |  |                         | 1,964,406,063 |      |  |      | 2,474,409,144 |  |  |  | 3,359,342,613 |  
|Issuance of common shares for cash on January 22,
2000                          |  |                         | 128,160,411   |      |  |      |              |  |  |  |              |  
|Bonus element included in the rights issue on
January 22, 2000                  |  |                         | 2,723,259     |      |  |      |              |  |  |  |              |  
|Bonds converted to common shares on February 18,
2000                           |  |                         | 22,720,465    |      |  |      |              |  |  |  |              |  
|Bonds converted to common shares on March 7, 2000                               |  |                         | 1,193,644     |      |  |      |              |  |  |  |              |  
|Bonds converted to common shares on June 26, 2000                               |  |                         | 35,460,102    |      |  |      |              |  |  |  |              |  
|Bonds converted to common shares on November 9,
2000                            |  |                         | 264,659       |      |  |      |              |  |  |  |              |  
|Weighted average effect of 2000 stock dividend                                  |  |                         | 275,142,476   |      |  |      |              |  |  |  |              |  
|Stock dividends and transfer of capital reserve
to capital on May 28, 2001(30%) |  |                         |              |      |  |      | 742,322,744   |  |  |  |              |  
|Employee bonus transfer to capital on May 28, 2001                              |  |                         |              |      |  |      | 84,785,006    |  |  |  |              |  
|Weighted average effect of 2001 stock dividend                                  |  |                         | 728,204,346   |      |  |      |              |  |  |  |              |  
|Weighted average number of treasury stock                                       |  |                         |              |      |  |      |              |  |  |  | (26,205,248   | )
|Capital reserve transferred to common stock (10%)                               |  |                         |              |      |  |      |              |  |  |  | 333,313,737   |  
|Weighted average effect of 2002 stock dividend                                  |  |                         | 315,827,543   |      |  |      | 330,151,689   |  |  |  |              |  
|                                                                                |  |                         |               |      |  |      |               |  |  |  |               |  
|                                                                                |  |                         | 3,474,102,968 |      |  |      | 3,631,668,583 |  |  |  | 3,666,451,102 |  
|                                                                                |  |                         |               |      |  |      |               |  |  |  |               |  

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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Net income (loss) for US GAAP purposes is reconciled as follows:
| |  | ----------------------------------------------------------------

|                                                                                                             |                                                                                                           |  |            |           |      |  |            |            |     |  |             |             |   |  |          |          |  
|------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------- |  | ---------- | --------- | ---- |  | ---------- | ---------- | --- |  | ----------- | ----------- | - |  | -------- | -------- | -
|                                                                                                             |                                                                                                           |  | 2000       |           | 2001 |  | 2002      
|                                                                                                             |                                                                                                           |  |            |           |      |  |           
|                                                                                                             |                                                                                                           |  | NT$        |           | NT$  |  | NT$        |            | US$
|Net income (loss) as reported under ROC GAAP                                                                 |                                                                                                           |  | 10,612,824 |           |      |  | (866,480   | )          |     |  | (11,356,663 | )           |   |  | (327,282 | )       
|(a) Compensation expense relating to employee bonuses and
remuneration to directors and supervisors (Note I) |                                                                                                           |  | (1,621,861 | )         |      |  | (4,272,717 | )          |     |  |            |             |   |  |         |         
|(b) Additional pension gain on an actuarial basis                                                            |                                                                                                           |  | 2,696      |           |      |  | 2,696      |            |     |  | 2,696       |             |   |  | 78       |         
|(c) Plant capacity loss                                                                                      |                                                                                                           |  |           |           |      |  | 527,987    |            |     |  | (527,987    | )           |   |  | (15,216  | )       
|(d) Unrealized (losses) gains on marketable securities                                                       |                                                                                                           |  |           |           |      |  | 33,731     |            |     |  | (16,516     | )           |   |  | (476     | )       
|(e) Unrealized (loss) gain on marketable securities                                                          |                                                                                                           |  |           |           |      |  | (645,556   | )          |     |  | (538,151    | )           |   |  | (15,509  | )       
|(f) Derivative financial instruments:                                                                        |                                                                                                           |  |            |           |      |  |            |            |     |  |             |             |   |  |          |         
|                                                                                                             | (i) Net gains (losses) on derivative financial instruments
held for trading purposes                      |  |            | (242,542  | )    |  |            | 227,908    |     |  |             | 449,041     |   |  |          | 12,941   |  
|                                                                                                             | (ii) Losses on derivative financial instruments held for
hedging purposes                                 |  |            | (655,937  | )    |  |            |           |     |  |             |            |   |  |          |         |  
|(g) Compensation cost recognized for stock appreciation rights
(Note II)                                     |                                                                                                           |  | 598,489    |           |      |  | 496,347    |            |     |  | 93,190      |             |   |  | 2,686    |         
|(h) Purchase and sale of the Companys own shares                                                            |                                                                                                           |  | (6,988     | )         |      |  | 16,695     |            |     |  |            |             |   |  |         |         
|(i) Investment in equity investees                                                                           |                                                                                                           |  | (3,914     | )         |      |  | (29,484    | )          |     |  |            |             |   |  |         |         
|(j) Adjustment for taxes                                                                                     |                                                                                                           |  | (666,498   | )         |      |  | 666,498    |            |     |  | (1,946,357  | )           |   |  | (56,091  | )       
|                                                                                                             | Tax effect on the above reconciled items                                                                  |  |            |          |      |  |            |           |     |  |             |            |   |  |          |         |  
|                                                                                                             |                                                                                                           |  |            |           |      |  |            |            |     |  |             |             |   |  |          |         
|                                                                                                             | Net
income (loss) before cumulative effect of a change in
accounting principle in accordance with US GAAP |  |            | 8,016,269 |      |  |            | (3,842,375 | )   |  |             | (13,840,747 | ) |  |          | (398,869 | )
|(k) Cumulative effect on prior years (to December 31, 2000) of a
change in accounting principle for FAS 133  |                                                                                                           |  |           |           |      |  | (620,503   | )          |     |  |            |             |   |  |         |         
|                                                                                                             |                                                                                                           |  |            |           |      |  |            |            |     |  |             |             |   |  |          |         
|                                                                                                             | Net income (loss) in accordance with U.S. GAAP                                                            |  |            | 8,016,269 |      |  |            | (4,462,878 | )   |  |             | (13,840,747 | ) |  |          | (398,869 | )
|                                                                                                             | Other comprehensive income:                                                                               |  |            |           |      |  |            |            |     |  |             |             |   |  |          |          |  
|(l) Unrealized gains (losses) on available-for-sale securities                                               |                                                                                                           |  | (112,823   | )         |      |  | (27,841    | )          |     |  | (36,637     | )           |   |  | (1,056   | )       
|                                                                                                             | Change in translation adjustment                                                                          |  |            | 58,228    |      |  |            | 167,144    |     |  |             | (53,125     | ) |  |          | (1,531   | )
|                                                                                                             | Reclassification adjustment for realized gains (losses) on
available-for-sale securities                  |  |            | (72,260   | )    |  |            | 112,823    |     |  |             | 27,841      |   |  |          | 803      |  
|                                                                                                             |                                                                                                           |  |            |           |      |  |            |            |     |  |             |             |   |  |          |         
|                                                                                                             | Comprehensive income (loss) in accordance with US
GAAP                                                    |  |            | 7,889,414 |      |  |            | (4,210,752 | )   |  |             | (13,902,668 | ) |  |          | (400,653 | )
|                                                                                                             |                                                                                                           |  |            |           |      |  |            |            |     |  |             |             |   |  |          |         

F - 68



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)


|                                                                                                                                                         |                                                                                                                                                          |  |   |      |  |  |       |       |   |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---- |  |  | ----- | ----- | - |  | - | ----- | - |  | - | ----- | -
|Per share amounts:                                                                                                                                       |                                                                                                                                                          |  |   |      |  |  |       |       |   |  |   |       |   |  |   |      
|                                                                                                                                                         | Basic net income (loss) per share
before cumulative effect of change
in accounting principle in
accordance with U.S
GAAP                                 |  |   | 2.31 |  |  |       | (1.06 | ) |  |   | (3.77 | ) |  |   | (0.11 | )
|                                                                                                                                                         | Basic net income (loss) per share
for cumulative effect on prior
years (to December 31, 2000) of a
change in accounting principle for
FAS 133 (note 20e) |  |   |     |  |  |       | (0.17 | ) |  |   |      |   |  |   |      |  
|                                                                                                                                                         |                                                                                                                                                          |  |   |      |  |  |       |       |   |  |   |       |   |  |   |      
|                                                                                                                                                         | Basic net income (loss) per share                                                                                                                        |  |   | 2.31 |  |  |       | (1.23 | ) |  |   | (3.77 | ) |  |   | (0.11 | )
|                                                                                                                                                         |                                                                                                                                                          |  |   |      |  |  |       |       |   |  |   |       |   |  |   |      
|                                                                                                                                                         | Diluted net income (loss) per share
before cumulative effect of change
in accounting principle in
accordance with U.S
GAAP                               |  |   | 2.26 |  |  |       | (1.06 | ) |  |   | (3.77 | ) |  |   | (0.11 | )
|Basic net income (loss) per share for
cumulative effect on prior years (to
December 31, 2000) of a change in
accounting principle for FAS 133
(note 19e) |                                                                                                                                                          |  |  |      |  |  | (0.17 | )     |   |  |  |       |   |  |  |      
|                                                                                                                                                         |                                                                                                                                                          |  |   |      |  |  |       |       |   |  |   |       |   |  |   |      
|                                                                                                                                                         | Diluted net income (loss) per share                                                                                                                      |  |   | 2.26 |  |  |       | (1.23 | ) |  |   | (3.77 | ) |  |   | (0.11 | )
|                                                                                                                                                         |                                                                                                                                                          |  |   |      |  |  |       |       |   |  |   |       |   |  |   |      



| |  | The diluted earnings per share calculation excludes the statement of
operations impact of NT$433,525 and NT$413,809 related to the assumed
conversion of convertible bonds into 210,301,619 weighted average shares
and 374,454,410 weighted average shares for 2001 and 2002, respectively.
The impact of the assumed conversion has been excluded due to the
anti-dilutive effect.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note I: |  | At the shareholders meeting on May 30, 2002, no employee
bonuses were distributed. Additional compensation expense for employees
bonuses and remuneration of directors and supervisors in the amount of
NT$1,621,861, $4,272,717 and $0 was reflected in the statement of
operations under US GAAP for the years ended December 31, 2000, 2001
and 2002, respectively.

F - 69



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except
share, per share, and percentage data)




| |          | Under the Companys articles of incorporation, if the Company elects
to pay such employee bonuses in the form of common shares, a dividend
to shareholders in the form of common shares would also be required to
be paid. The amount of the additional expense related to the employee
bonus being paid in shares, if any, is dependent upon (i) shareholder
approval and, if such approval is obtained, (ii) the amount of the
bonus to be paid in shares and (iii) the market price of the common
shares on the date of shareholder approval for the settlement of
employee bonuses in the form of common shares. When the shareholders
determine a bonus amount to be paid in shares, the number of shares is
determined by dividing the bonus amount by the par value of the shares
(NT$10). The resulting number of common shares is then fixed. Any
subsequent declaration of stock dividend that increases the number of
common shares outstanding without any consideration paid into the
Company requires that the market price used to value the bonus shares
be adjusted for the effect of the stock dividend.                                                                                                                                                        
| | -------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Note II: | In 1999 and 2000, the Company granted its employees stock
appreciation rights (SAR), which entitled the holder to a cash payment
per share equivalent to the excess of the quoted market price of the
shares of the Company stock over the exercise price of the right. During
1999, the Company granted 61,179,500 shares under the SAR plan. As of
December 31, 1999, 967,500 shares had been forfeited and there were
60,212,000 shares outstanding. As of December 31, 2000, with the addition
of 1,806,232 shares, there were 62,018,232 shares outstanding, including
vested rights to 15,632,961 shares and unvested rights to 46,385,271
shares. As of December 31, 2001 there were 73,415,260 shares outstanding
which resulted from the forfeiture of 2,470,900 shares, the exercise of
3,868,880 shares and a stock dividend of 17,736,808 shares during the
year. The 2001 outstanding shares also represent vested rights to
35,081,684 shares and unvested rights to 38,333,576 shares. As of
December 31, 2002 there were 72,208,948 shares outstanding which resulted
from the forfeiture of 2,755,696 shares, the exercise of 5,316,670 shares and
a stock dividend of 6,866,054 shares during the year. The 2002
outstanding shares all represent vested rights.
|
| |          | The general terms of the SAR plan are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |          | 1. Vesting period: 25% of the SAR granted are vested on
August 1, starting August 1, 2000 and 2001, and the remaining 50%
on August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F - 70



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | 2. Estimated grant price: The grant price is estimated in
accordance with the SAR plan if the actual cost is not available.
The Companys management has the legal right to alter the grant
price. Estimated grant prices after adjusting for the stock
dividend in July 2002 are as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | NT$17.98
for SAR vested August 1, 2000,                                                                                                                                                                                                                                                      
|
| |  | NT$33.86
for SAR vested August 1, 2001,                                                                                                                                                                                                                                                      
|
| |  | NT$33.86
for SAR vested August 1, 2002.                                                                                                                                                                                                                                                      
|
| |  | Gross profit (loss) for US GAAP purposes is reconciled as follows:                                                                                                                                                                                                                           

|                                                                                                                     |  |      |            |      |  |      |            |     |  |  |            |   |  |  |           |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | --- |  |  | ---------- | - |  |  | --------- | -
|                                                                                                                     |  | 2000 |            | 2001 |  | 2002
|                                                                                                                     |  |      |            |      |  |     
|                                                                                                                     |  | NT$  |            | NT$  |  | NT$  |            | US$
|Gross
profit (loss) as reported under ROC GAAP                                                                       |  |      | 17,999,441 |      |  |      | 10,073,127 |     |  |  | (615,291   | ) |  |  | (17,731   | )
|Inventory loss provision                                                                                             |  |      | (83,974    | )    |  |      | (2,586,505 | )   |  |  | (2,929,284 | ) |  |  | (84,417   | )
|Compensation expense relating to
employee bonuses and remuneration of
directors and supervisors (cost of
goods sold) |  |      | (521,189   | )    |  |      | (1,606,114 | )   |  |  |           |   |  |  |          |  
|Compensation cost recognized for stock
appreciation rights                                                           |  |      | 217,969    |      |  |      | 186,577    |     |  |  | 51,627     |   |  |  | 1,488     |  
|Pension gain on actuarial basis                                                                                      |  |      | 2,696      |      |  |      | 2,696      |     |  |  | 2,696      |   |  |  | 77        |  
|Plant capacity loss                                                                                                  |  |      |           |      |  |      | 527,987    |     |  |  | (527,987   | ) |  |  | (15,216   | )
|                                                                                                                     |  |      |            |      |  |      |            |     |  |  |            |   |  |  |           |  
|Gross
profit (loss) in accordance with US GAAP                                                                       |  |      | 17,614,943 |      |  |      | 6,597,768  |     |  |  | (4,018,239 | ) |  |  | (115, 799 | )
|                                                                                                                     |  |      |            |      |  |      |            |     |  |  |            |   |  |  |           |  



| |  | Operating income (loss) for US GAAP purposes is reconciled as follows:
| |  | ----------------------------------------------------------------------

|                                                                                                |  |      |            |      |  |      |            |     |  |  |             |   |  |  |          |  
|----------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | --- |  |  | ----------- | - |  |  | -------- | -
|                                                                                                |  | 2000 |            | 2001 |  | 2002
|                                                                                                |  |      |            |      |  |     
|                                                                                                |  | NT$  |            | NT$  |  | NT$  |            | US$
|Operating income (loss) as reported under ROC GAAP                                              |  |      | 12,142,757 |      |  |      | 3,515,954  |     |  |  | (6,826,718  | ) |  |  | (196,735 | )
|Compensation cost recognized for stock
appreciation rights                                      |  |      | 598,489    |      |  |      | 496,347    |     |  |  | 93,190      |   |  |  | 2,686    |  
|Compensation expense relating to employee bonuses
and remuneration of directors and supervisors |  |      | (1,621,861 | )    |  |      | (4,272,717 | )   |  |  |            |   |  |  |         |  
|Pension gain on actuarial basis                                                                 |  |      | 2,696      |      |  |      | 2,696      |     |  |  | 2,696       |   |  |  | 78       |  
|Reversal of allowance for bad debt                                                              |  |      |           |      |  |      | 54,810     |     |  |  |            |   |  |  |         |  
|Inventory loss provision and research and
development subsidies                                 |  |      | (53,060    | )    |  |      | (2,587,894 | )   |  |  | (2,926,998  | ) |  |  | (84,352  | )
|Plant capacity loss                                                                             |  |      |           |      |  |      | 527,987    |     |  |  | (527,987    | ) |  |  | (15,216  | )
|                                                                                                |  |      |            |      |  |      |            |     |  |  |             |   |  |  |          |  
|Operating income (loss) in accordance with US GAAP                                              |  |      | 11,069,021 |      |  |      | (2,262,817 | )   |  |  | (10,185,817 | ) |  |  | (293,539 | )
|                                                                                                |  |      |            |      |  |      |            |     |  |  |             |   |  |  |          |  

F - 71



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Shareholders equity for US GAAP purposes is reconciled as follows:
| |  | -------------------------------------------------------------------

|                                                                                                    |  |              |            |      |  |      |            |     |  |  |            |   |  |  |         |  
|--------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---- |  | ---- | ---------- | --- |  |  | ---------- | - |  |  | ------- | -
|                                                                                                    |  | December 31,
|                                                                                                    |  |             
|                                                                                                    |  | 2000         |            | 2001 |  | 2002
|                                                                                                    |  |              |            |      |  |     
|                                                                                                    |  | NT$          |            | NT$  |  | NT$  |            | US$
|Shareholders equity as reported under ROC GAAP                                                     |  |              | 44,573,427 |      |  |      | 43,143,625 |     |  |  | 30,214,293 |   |  |  | 870,729 |  
|(a) Compensation cost recognized for stock
appreciation rights                                      |  |              | 353,166    |      |  |      | 849,513    |     |  |  | 942,703    |   |  |  | 27,167  |  
|(b) Accrual for pension costs under actuarial method                                                |  |              | (43,127    | )    |  |      | (40,431    | )   |  |  | (37,735    | ) |  |  | (1,087  | )
|(c) Net unrealized gain (loss) on
available-for-sale securities                                     |  |              | (5,523     | )    |  |      | 7,951      |     |  |  | (224,047   | ) |  |  | (6,457  | )
|(d) Net loss on derivative financial instruments                                                    |  |              | (653,670   | )    |  |      | (1,046,265 | )   |  |  | (597,224   | ) |  |  | (17,211 | )
|(e) Compensation expense relating to employee
bonuses and remuneration of directors and
supervisors |  |              | (1,621,861 | )    |  |      |           |     |  |  |           |   |  |  |        |  
|(f) Treasury stock                                                                                  |  |              | (134,392   | )    |  |      | (142,365   | )   |  |  |           |   |  |  |        |  
|(g) Goodwill on investment                                                                          |  |              | 29,483     |      |  |      |           |     |  |  | (356       | ) |  |  | (10     | )
|(h) Additional tax on undistributed earnings                                                        |  |              | (666,498   | )    |  |      |           |     |  |  | (1,946,357 | ) |  |  | (56,091 | )
|(i) Plant capacity loss                                                                             |  |              |           |      |  |      | 527,987    |     |  |  |           |   |  |  |        |  
|                                                                                                    |  |              |            |      |  |      |            |     |  |  |            |   |  |  |         |  
|Shareholders equity in accordance with US GAAP                                                     |  |              | 41,831,005 |      |  |      | 43,300,015 |     |  |  | 28,351,277 |   |  |  | 817,040 |  
|                                                                                                    |  |              |            |      |  |      |            |     |  |  |            |   |  |  |         |  



| |  | Shareholders equity consists of the following:
| |  | -----------------------------------------------

|                                       |  |              |  |      |  |     |            |   |  |  |  |     |  |     |             |   |  |  |           |  
|-------------------------------------- |  | ------------ |  | ---- |  | --- | ---------- | - |  |  |  | --- |  | --- | ----------- | - |  |  | --------- | -
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2001         |  | 2002
|                                       |  |              |  |     
|                                       |  |              |  |      |  | NT$ |            |   |  |  |  | NT$ |  | US$
|Common shares                          |  |              |  |      |  |     | 33,593,426 |   |  |  |  |     |  |     | 36,912,769  |   |  |  | 1,063,769 |  
|Additional paid-in capital             |  |              |  |      |  |     | 17,309,224 |   |  |  |  |     |  |     | 13,989,882  |   |  |  | 403,167   |  
|Accumulated deficit                    |  |              |  |      |  |     | (9,421,479 | ) |  |  |  |     |  |     | (23,639,458 | ) |  |  | (681,252  | )
|Accumulated other comprehensive income |  |              |  |      |  |     | 245,178    |   |  |  |  |     |  |     | 183,257     |   |  |  | 5,281     |  
|Treasury stock                         |  |              |  |      |  |     | (159,061   | ) |  |  |  |     |  |     | (1,205,131  | ) |  |  | (34,730   | )
|Reserves                               |  |              |  |      |  |     | 1,732,727  |   |  |  |  |     |  |     | 2,109,958   |   |  |  | 60,805    |  
|                                       |  |              |  |      |  |     |            |   |  |  |  |     |  |     |             |   |  |  |           |  
|                                       |  |              |  |      |  |     | 43,300,015 |   |  |  |  |     |  |     | 28,351,277  |   |  |  | 817,040   |  
|                                       |  |              |  |      |  |     |            |   |  |  |  |     |  |     |             |   |  |  |           |  

F - 72



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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Accumulated other comprehensive income consists of the following:
| |  | -----------------------------------------------------------------

|                                                   |  |      |         |      |  |     |         |   |  |  |        |  
|-------------------------------------------------- |  | ---- | ------- | ---- |  | --- | ------- | - |  |  | ------ | -
|                                                   |  | 2001 |         | 2002
|                                                   |  |      |         |     
|                                                   |  | NT$  |         | NT$  |  | US$
|Unrealized gains (losses) on marketable securities |  |      | (27,841 | )    |  |     | (36,636 | ) |  |  | (1,056 | )
|Cumulative translation adjustments                 |  |      | 273,019 |      |  |     | 219,893 |   |  |  | 6,337  |  
|                                                   |  |      |         |      |  |     |         |   |  |  |        |  
|Total                                              |  |      | 245,178 |      |  |     | 183,257 |   |  |  | 5,281  |  
|                                                   |  |      |         |      |  |     |         |   |  |  |        |  



| |  | Domestic and international components of pre-tax income (loss) are as
follows:
| |  | ------------------------------------------------------------------------------

|              |  |      |           |      |  |      |            |     |  |  |             |   |  |  |          |  
|------------- |  | ---- | --------- | ---- |  | ---- | ---------- | --- |  |  | ----------- | - |  |  | -------- | -
|              |  | 2000 |           | 2001 |  | 2002
|              |  |      |           |      |  |     
|              |  | NT$  |           | NT$  |  | NT$  |            | US$
|Domestic      |  |      | 9,273,553 |      |  |      | (3,964,937 | )   |  |  | (10,708,768 | ) |  |  | (308,610 | )
|International |  |      | (192,689  | )    |  |      | (220,944   | )   |  |  | (1,166,080  | ) |  |  | (33,605  | )
|              |  |      |           |      |  |      |            |     |  |  |             |   |  |  |          |  
|Total         |  |      | 9,080,864 |      |  |      | (4,185,881 | )   |  |  | (11,874,848 | ) |  |  | (342,215 | )
|              |  |      |           |      |  |      |            |     |  |  |             |   |  |  |          |  



| |  | A reconciliation of the significant differences between the expected income
tax expense (benefit) and the income tax expense (benefit) is as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|                                                        |  |  |            |   |      |  |            |   |     |  |            |   |  |  |         |   | 
|------------------------------------------------------- |  |  | ---------- | - | ---- |  | ---------- | - | --- |  | ---------- | - |  |  | ------- | - | 
|                                                        |  |  | 2000       |   | 2001 |  | 2002      
|                                                        |  |  |            |   |      |  |           
|                                                        |  |  | NT$        |   | NT$  |  | NT$        |   | US$
|Expected income tax expense (benefit)                   |  |  | 1,816,173  |   |      |  | (1,046,470 | ) |     |  | (2,968,712 | ) |  |  | (85,553 | )
|Additional income tax on undistributed
earnings         |  |  | 858,394    |   |      |  | (710,771   | ) |     |  | 444,851    |   |  |  | 12,820  |  
|Additional income tax assessed                          |  |  | 93,246     |   |      |  | 58,879     |   |     |  |           |   |  |  |        |  
|Tax exemption                                           |  |  |           |   |      |  | (256,260   | ) |     |  |           |   |  |  |        |  
|Tax credit earned                                       |  |  | (1,548,034 | ) |      |  | (920,993   | ) |     |  | (1,405,069 | ) |  |  | (40,492 | )
|Change in valuation allowance                           |  |  | (873,028   | ) |      |  | 1,783,776  |   |     |  | 5,426,075  |   |  |  | 156,371 |  
|Net gain on long-term equity investment                 |  |  | 168,332    |   |      |  | (20,466    | ) |     |  | (13,194    | ) |  |  | (380    | )
|Non-deductible employee bonus                           |  |  | 291,934    |   |      |  | 1,068,179  |   |     |  |           |   |  |  |        |  
|Non-taxable net (gains) losses on
financial instruments |  |  | 251,574    |   |      |  | 98,149     |   |     |  | (112,260   | ) |  |  | (3,235  | )
|Non-deductible
compensation cost                        |  |  | (167,577   | ) |      |  | (124,087   | ) |     |  | (23,298    | ) |  |  | (672    | )
|Effect of rate change                                   |  |  | 92,561     |   |      |  |           |   |     |  | 653,667    |   |  |  | 18,838  |  
|Impact of industrial park reduced tax rates             |  |  |           |   |      |  | 329,430    |   |     |  |           |   |  |  |        |  
|Others, net                                             |  |  | 81,020     |   |      |  | 17,631     |   |     |  | (35,805    | ) |  |  | (1,032  | )
|                                                        |  |  |            |   |      |  |            |   |     |  |            |   |  |  |         |  
|Income tax expense (benefit)                            |  |  | 1,064,595  |   |      |  | 276,997    |   |     |  | 1,966,255  |   |  |  | 56,665  |  
|                                                        |  |  |            |   |      |  |            |   |     |  |            |   |  |  |         |  



| |  | The tax exemption for 2002 had no impact on earnings per share.
| |  | ---------------------------------------------------------------

F - 73



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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Concentration of Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company designs, develops, manufactures and markets a variety of
semiconductor products. The Companys revenues are derived primarily from
the sale of mask ROMs and EPROMs. The Companys other products include flash
memory products, logic products and wafers. The Company distributes its
products on a global basis but mainly to customers in Asia. The Companys
largest customer, Megachips, and the Companys largest five customers
accounted for 36.52% and 56.71% of the Companys total net sales,
respectively, for the year ended December 31, 2002. The Companys sales are
primarily denominated in currencies other than NT Dollars, primarily US
Dollars and Japanese Yen.
|
| |  | Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
trade accounts and notes receivable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The Company maintains cash and cash equivalents with various financial
institutions. Most of these financial institutions are located in the ROC
and Company policy is designed to limit exposure to any one institution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Substantially all of the Companys accounts receivable are due from
companies in high technology industries located primarily in Asia. Further,
as of December 31, 2001 and 2002, the three largest accounts receivable
balances amounted to NT$1,340,501 and NT$1,558,152 (US$44,904), respectively. The Company performs periodic credit evaluations of its
customers financial condition and generally does not require collateral.
Receivables generally are due within 45 to 60 days.                                                                                                                                                                                                        

F - 74



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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | Valuation and Qualifying Accounts                                                                                             
| |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table summarizes the changes in the allowance for accounts
and notes receivable, inventory and royalty accruals:

|                                  |  |              |           |      |  |      |           |     |  |  |           |   |  |  |         |  
|--------------------------------- |  | ------------ | --------- | ---- |  | ---- | --------- | --- |  |  | --------- | - |  |  | ------- | -
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2000         |           | 2001 |  | 2002
|                                  |  |              |           |      |  |     
|                                  |  | NT$          |           | NT$  |  | NT$  |           | US$
|Allowance for doubtful accounts:  |  |              |           |      |  |      |           |     |  |  |           |   |  |  |         |  
|Balance as at beginning of period |  |              | 231,136   |      |  |      | 284,403   |     |  |  | 196,016   |   |  |  | 5,649   |  
|Bad debt expense                  |  |              | 91,048    |      |  |      | 9,431     |     |  |  | 14,918    |   |  |  | 430     |  
|Bad debts written off             |  |              | (37,781   | )    |  |      | (97,818   | )   |  |  | (51       | ) |  |  | (2      | )
|                                  |  |              |           |      |  |      |           |     |  |  |           |   |  |  |         |  
|Balance at the end of the year    |  |              | 284,403   |      |  |      | 196,016   |     |  |  | 210,883   |   |  |  | 6,077   |  
|                                  |  |              |           |      |  |      |           |     |  |  |           |   |  |  |         |  
|Allowance for inventory losses:   |  |              |           |      |  |      |           |     |  |  |           |   |  |  |         |  
|Balance as at beginning of period |  |              | 1,091,457 |      |  |      | 1,054,883 |     |  |  | 3,243,666 |   |  |  | 93,478  |  
|Amount expensed during the period |  |              | 79,995    |      |  |      | 2,586,505 |     |  |  | 2,929,384 |   |  |  | 84,417  |  
|Write-off of inventories          |  |              | (116,569  | )    |  |      | (397,722  | )   |  |  | (421,215  | ) |  |  | (12,139 | )
|                                  |  |              |           |      |  |      |           |     |  |  |           |   |  |  |         |  
|Balance at the end of the year    |  |              | 1,054,883 |      |  |      | 3,243,666 |     |  |  | 5,751,735 |   |  |  | 165,756 |  
|                                  |  |              |           |      |  |      |           |     |  |  |           |   |  |  |         |  
|Royalty accruals:                 |  |              |           |      |  |      |           |     |  |  |           |   |  |  |         |  
|Balance as at beginning of period |  |              |          |      |  |      |          |     |  |  | 278,645   |   |  |  | 8,030   |  
|Amount expensed during the period |  |              |          |      |  |      | 278,645   |     |  |  | 138,355   |   |  |  | 3,987   |  
|Payments made during the period   |  |              |          |      |  |      |          |     |  |  |          |   |  |  |        |  
|                                  |  |              |           |      |  |      |           |     |  |  |           |   |  |  |         |  
|Balance at the end of the year    |  |              |          |      |  |      | 278,645   |     |  |  | 417,000   |   |  |  | 12,017  |  
|                                  |  |              |           |      |  |      |           |     |  |  |           |   |  |  |         |  



|21. |  | Summarized Financial Information of Equity Investees                                                                                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The following table presents summarized financial information in accordance
with US GAAP for equity investees with an ownership percentage between
20-50% as of December 31, 2001 and 2002 and for the years ended December 31,
2000, 2001 and 2002.

|                           |  |      |         |      |  |     |         |  |  |  |        | 
|-------------------------- |  | ---- | ------- | ---- |  | --- | ------- |  |  |  | ------ | 
|                           |  | 2001 |         | 2002
|                           |  |      |         |     
|                           |  | NT$  |         | NT$  |  | US$
|Current assets             |  |      | 368,680 |      |  |     | 350,816 |  |  |  | 10,110 | 
|Non-current assets         |  |      | 949,643 |      |  |     | 66,645  |  |  |  | 1,921  | 
|Current liabilities        |  |      | 769,005 |      |  |     | 322,471 |  |  |  | 9,293  | 
|Non-current liabilities    |  |      | 34,996  |      |  |     | 452     |  |  |  | 13     | 
|Total shareholders equity |  |      | 514,324 |      |  |     | 94,538  |  |  |  | 2,724  | 

F - 75



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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)


|                         |  |              |  |      |  |      |            |   |  |  |  |  |  |  |  |     |  |  |            |   |  |  |  |  |  |     |  |     |  |  |          |   |  |  |        |  
|------------------------ |  | ------------ |  | ---- |  | ---- | ---------- | - |  |  |  |  |  |  |  | --- |  |  | ---------- | - |  |  |  |  |  | --- |  | --- |  |  | -------- | - |  |  | ------ | -
|                         |  | December 31,
|                         |  |             
|                         |  | 2000         |  | 2001 |  | 2002
|                         |  |              |  |      |  |     
|                         |  |              |  |      |  | NT$  |            |   |  |  |  |  |  |  |  | NT$ |  |  |            |   |  |  |  |  |  | NT$ |  | US$
|Net sales                |  |              |  |      |  |      | 1,396,132  |   |  |  |  |  |  |  |  |     |  |  | 511,359    |   |  |  |  |  |  |     |  |     |  |  | 669,073  |   |  |  | 19,282 |  
|Sales less cost of sales |  |              |  |      |  |      | (565,033   | ) |  |  |  |  |  |  |  |     |  |  | (307,529   | ) |  |  |  |  |  |     |  |     |  |  | 204,681  |   |  |  | 5,899  |  
|Net income (loss)        |  |              |  |      |  |      | (1,919,582 | ) |  |  |  |  |  |  |  |     |  |  | (1,027,095 | ) |  |  |  |  |  |     |  |     |  |  | (191,905 | ) |  |  | (5,530 | )



| |     | At December 31, 2002, the unamortized difference between the amount of
which the investments were carried and the amount of the Companys
underlying equity in the investees net assets amounted to NT$4,037
(US$116). Such difference is amortized over 3-5 years from the date of
the investment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 22. | New Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     | In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities. The Statement represents the second and
final phase of the FASBs project on accounting for the impairment or
disposal of long-lived assets and for obligations associated with exit or
disposal activities. The adoption of SFAS No. 146 in January 2003 is not
expected to have a material effect on the Companys financial position or
results of operations.                                                                                                                                                                                                                                                                                                                                         
|
| |     | During the year ended December 31, 2002, the FASB has issued SFAS No.145,
Rescission of FASB Statements No.4, 44 and 64, Amendment of FASB Statement
No.13, and Technical Corrections, SFAS No.147 Acquisition of Certain
Financial Institutions and SFAS No.148 Accounting for Stock-Based
Compensation-Transition and Disclosure. These Statements were effective
for the Company during the year ended December 31, 2002 and did not have
any material effect on the earnings or financial position of the Company
for the year then ended.                                                                                                                                                                                                                                                                     
|
| |     | In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN45). FIN45 requires certain
guarantees to be recorded at fair value, which is different from the
general current practice of recording a liability only when a loss is
probable and reasonably estimable, as those terms are defined in SFAS No.
5, Accounting for Contingencies. FIN45 also requires a guarantor to make
significant new disclosure for virtually all guarantees even if the
likelihood of the guarantors having to make payments under the guarantee
is remote. The disclosure requirements of FIN45 are effective for financial
statements of interim or annual periods ending after December 15, 2002.

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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | As discussed in Note 15, the Company acted as guarantor for a loan to
Biomorphic to a maximum amount of US$3,400. Due to the financial condition
of Biomorphic, the Company has recognized investment loss of US$3,400 as of
December 31, 2002. In addition, the Company has made several commitments
under different contracts, such as construction and operating lease
contracts. Please refer to Note 16.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The initial recognition and initial measurement provision of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company believes that the adoption of the standard
will not have a material impact on its financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | In January 2003, the FASB issued Interpretation No. 46, or FIN 46,
Consolidation of Variable Interest Entities. FIN 46 requires an investor
with a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest
entity is an entity in which the equity investors do not have a controlling
interest or the equity investment at risk is insufficient to finance the
entitys activities without receiving additional subordinated financial
support from the other parties. The Company is currently reviewing its
investment portfolio to determine whether any of its equity investments are
considered variable interest entities. The Company does not expect to
identify any variable interest entities that must be consolidated, but may
be required to make additional disclosures.
|
| |  | In May 2003, the U.S. FASB issued SFAS Statement No. 150,  Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity.  This Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of nonpublic
entities. The Company is currently evaluating the effect that the
adoption of this Statement will have on its Consolidated Financial
Statements.                                              

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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)

(Amounts in thousands except share, per share, and percentage data)




| |  | In November 2002, the Financial Accounting Standards Board issued Emerging
Issues Task Force ( referred to as EITF ) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables.  EITF Issue No. 00-21 addresses
certain aspects of the accounting by a company for arrangements under which
it will perform multiple revenue-generating activities. EITF Issue No.
00-21 addresses when and how an arrangement involving multiple deliverables
should be divided into separate units of accounting. EITF Issue No. 00-21
provides guidance with respect to the effect of certain customer rights due
to company nonperformance on the recognition of revenue allocated to
delivered units of accounting. EITF Issue No. 00-21 also addresses the
impact on the measurement and/or allocation of arrangement consideration of
customer cancellation provisions and consideration that varies as a result
of future actions of the customer or the company. Finally, EITF Issue No.
00-21 provides guidance with respect to the recognition of the cost of
certain deliverables that are excluded from the revenue accounting for an
arrangement entered into fiscal periods beginning after June 15, 2003. The
Company is currently evaluating the effect that the adoption of EITF Issue
No. 00-21 will have on its Consolidated Financial Statements.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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.

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|                          |  |                                                                                                                                                                                                                                                                                                                                                                
|------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                   
|                          |  |                                                                                                                                                                                                                                                                                                                                                                
|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.
|                          |  |                                                                                                                                                                                                                                                                                                                                                                
|Embedded flash controller |  | A device which incorporates flash memory on
which other devices rely for access to a
computer system. A disk controller, for
example, controls access to one or more disk
drives, managing physical and logical access to
the drive or drives.                                                                                                                 
|                          |  |                                                                                                                                                                                                                                                                                                                                                                
|ERROM                     |  | 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.                                                                                                                                                             

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|                   |  |                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                                                                      
|                   |  |                                                                                                                                                                                                                                                                                                                                                                                                        
|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.                                                                                                                                                                                                                                                                                                                                                

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|                   |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 I 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.
A logic circuit in which the output signal is a
logical 1 if any one or more of its input                                                                                                                                                                                       
|                   |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|OR circuit         |  | 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.                                                                                                                                                                                                                        
|                   |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|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 means that
customers can 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,                                                                                                                                                                                                                                                                                                   

A-4



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##### Table of Contents



|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

A-5



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##### Table of Contents






Signatures

The registrant hereby certifies that it meets all the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

|                    |  |                                
|------------------- |  | -------------------------------
|                    |  | MACRONIX INTERNATIONAL CO., LTD
|                    |  | (Registrant)                   
|                   
|Date:
June 30, 2003 |  | By:
    /s/      Miin
Wu       
|                    |  | Name:      Miin Wu             
|                    |  | Title:        President        





---



##### Table of Contents



CERTIFICATIONS

I, Miin Wu, certify that:



|1. |  | I have reviewed this annual report on Form 20-F of Macronix International
Co., Ltd.;                                                                                                                                                                                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    |  |                   
|------------------- |  | ------------------
|Date: June 30, 2003 |  | By:/s/     Miin Wu
|                    |  |                   
|                    |  | Name:     Miin Wu 
|                    |  | Title: President  





---



##### Table of Contents



CERTIFICATIONS

I, Paul Yeh, certify that:



|1. |  | I have reviewed this annual report on Form 20-F of Macronix International
Co., Ltd.;                                                                                                                                                                                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   |  |                                                     
|------------------ |  | ----------------------------------------------------
|Date: June 30,2003 |  | By: /s/     Paul Yeh                                
|                   |  |                                                     
|                   |  | Name:     Paul Yeh                                  
|                   |  | Title: Associate Vice President  Finance
Department





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##### Table of Contents



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                     
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                     
|Number  |  | Description                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                     
|2b.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*.                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                     
|10.1    |  | 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).
|        |  |                                                                                                                                                                                                                                                                     
|10.2    |  | Indenture, dated as of February 10, 2003, by and between the
Company and The Bank of New York, as trustee*.                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                     
|10.3    |  | Indenture, dated as of February 1, 2000, by and between the
Company and The Bank of New York, as trustee(2).                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                     
|10.4    |  | Indenture, dated as of May 5, 1998, by and between the Company and
The Bank of New York, as trustee(3).                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                     
|10.5    |  | 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).                                                                         
|        |  |                                                                                                                                                                                                                                                                     
|10.6    |  | 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).                                                                        
|        |  |                                                                                                                                                                                                                                                                     
|10.7    |  | 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).                                                                             
|        |  |                                                                                                                                                                                                                                                                     
|10.8    |  | 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 Site(7).                                                                                             
|        |  |                                                                                                                                                                                                                                                                     
|10.9    |  | Indenture, dated as of February 7, 2002, by and between the Company
and The Bank of New York, as trustee(8).                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                     
|10.10   |  | Summary of terms and conditions of domestic convertible bonds
issued December 12, 2002 (English summary)*.                                                                                                                                                          



---

|*   |  | Filed with this Form 20-F.                                                                                                                                      
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | 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.





---



##### Table of Contents



|(2) |  | Incorporated by reference to Exhibit 2.3 to the Companys Form 20-F filed
with the Commission on July 14, 2000.                                              
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(3) |  | Incorporated by reference to Exhibit 2.4 to the Companys Form 20-F filed
with the Commission on July 14, 2000.                                              
|   
|(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 10.9 to the Companys Form 20-F
filed with the Commission on July 1, 2002.