##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 20-F o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION
12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
 OR þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 for the fiscal year ended DECEMBER 31, 2003 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 0-27884 (COMPANY NAME IN CHINESE)
(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 Park
Hsinchu, Taiwan, Republic of China
(Address of principal executive offices)   Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class
    
    Name of each exchange on which registeredNone
    
    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, 2003, 4,402,758,305 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 þ     No o Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 o     Item 18 þ




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TABLE OF CONTENTS Supplemental Information and Exchange Rates
    
    
    1Cautionary Statement
    
    
    1PART IItem 1.
    
    Identity of Directors, Senior Management and Advisers
    
    
    3Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    3Item 3.
    
    Key Information
    
    
    3Item 4.
    
    Information on the Company
    
    
    20Item 5.
    
    Operating and Financial Review and Prospects
    
    
    39Item 6.
    
    Directors, Senior Management and Employees
    
    
    64Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    71Item 8.
    
    Financial Information
    
    
    72Item 9.
    
    The Offer and Listing
    
    
    77Item 10.
    
    Additional Information
    
    
    81Item 11.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    98Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    101PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    102Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    102Item 15.
    
    Disclosure Controls and Procedures
    
    
    102Item 16A.
    
    Audit Committee Financial Expert
    
    
    102Item 16B.
    
    Code of Ethics
    
    
    102Item 16C.
    
    Principal Accountant Fees and Services
    
    
    102Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    103Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    103PART IIIItem 17.
    
    Financial Statements
    
    
    104Item 18.
    
    Financial Statements
    
    
    104Item 19.
    
    Exhibits
    
    
    104Appendix A  Glossary of Technical Terms
    
    
    A-1SignaturesEX-3.1 Articles of IncorporationEx-8.1 List of Subsidiaries of the CompanyEx-12.1 Certification 302 - PresidentEx-12.2 Certification 302-Associate VP-FinancialEx-13.1 Certification 906 - PresidentEx-13.2 Certification 906-Associate VP-FinancialEx-14.9 Deposit Agreement dated April 5, 2004




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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, 2003 of NT$33.99 =
US$1.00. On June 23, 2004, the noon buying rate between New Taiwan dollars and
United States dollars was NT$33.79 = 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
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; -1-




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
    
    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. -2-




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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, 2001,
2002 and 2003, and the selected balance sheet data as of December 31, 2002 and
2003 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, 1999 and 2000
and the selected balance sheet data as of December 31, 1999, 2000 and 2001
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, 2001, 2002 and 2003 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, 2001, 2002 and 2003 included in this annual report
and Item 5. Operating and Financial Review and Prospects  A. Operating
Results  U.S. GAAP Reconciliation. Year ended, and as of, December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(NT$)
    
    (NT$)
    
    (NT$)
    
    (NT$)
    
    (NT$)
    
    (US$)(in millions except per share and ADS data)Consolidated Income Statement Data:ROC GAAPNet sales revenue
    
    
    16,957
    
    
    
    33,493
    
    
    
    21,747
    
    
    
    16,492
    
    
    
    17,712
    
    
    
    521.1Cost of goods sold
    
    
    (12,124
    )
    
    
    (15,494
    )
    
    
    (11,674
    )
    
    
    (17,105
    )
    
    
    (20,657
    )
    
    
    (607.7
    )Less: Unrealized profit as of December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    3
    
    
    
    Realized gross profit (loss)
    
    
    4,833
    
    
    
    17,999
    
    
    
    10,073
    
    
    
    (615
    )
    
    
    (2,942
    )
    
    
    (86.6
    )Operating expenses
    
    
    (3,258
    )
    
    
    (5,856
    )
    
    
    (6,557
    )
    
    
    (6,212
    )
    
    
    (4,742
    )
    
    
    (139.5
    )Operating income (loss)
    
    
    1,575
    
    
    
    12,143
    
    
    
    3,516
    
    
    
    (6,827
    )
    
    
    (7,684
    )
    
    
    (226.1
    )Total other income
    
    
    846
    
    
    
    945
    
    
    
    1,356
    
    
    
    466
    
    
    
    1,877
    
    
    
    55.2Total other expenses
    
    
    (1,830
    )
    
    
    (2,077
    )
    
    
    (4,795
    )
    
    
    (4,976
    )
    
    
    (2,370
    )
    
    
    (69.7
    )Income (loss) before taxes and minority interest
    
    
    591
    
    
    
    11,011
    
    
    
    77
    
    
    
    (11,337
    )
    
    
    (8,177
    )
    
    
    (240.6
    )Income tax benefit (expense)
    
    
    316
    
    
    
    (398
    )
    
    
    (943
    )
    
    
    (20
    )
    
    
    (21
    )
    
    
    (0.6
    )Income (loss) before minority interest
    
    
    907
    
    
    
    10,613
    
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    (241.2
    )Minority interest loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    Net Income (loss)
    
    
    907
    
    
    
    10,613
    
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    (241.2
    )Net income (loss) per share  basic (1)
    
    
    0.27
    
    
    
    2.92
    
    
    
    (0.23
    )
    
    
    (3.10
    )
    
    
    (2.13
    )
    
    
    (0.06
    )Net income (loss) per share  diluted (1)
    
    
    0.27
    
    
    
    2.91
    
    
    
    (0.23
    )
    
    
    (3.10
    )
    
    
    (2.13
    )
    
    
    (0.06
    )U.S. GAAPGross profit (loss)
    
    
    4,558
    
    
    
    17,615
    
    
    
    6,598
    
    
    
    (4,018
    )
    
    
    (1,576
    )
    
    
    (46.3
    )Operating income (loss)
    
    
    1,237
    
    
    
    11,069
    
    
    
    (2,263
    )
    
    
    (10,186
    )
    
    
    (6,649
    )
    
    
    (195.6
    )Net income (loss) before cumulative effect of
change in accounting principle in accordance
with U.S. GAAP
    
    
    1,861
    
    
    
    8,016
    
    
    
    (3,842
    )
    
    
    (13,841
    )
    
    
    (8,877
    )
    
    
    (261.2
    )
 -3-




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Year ended, and as of, December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(NT$)
    
    (NT$)
    
    (NT$)
    
    (NT$)
    
    (NT$)
    
    (US$)(in millions except per share and ADS data)Basic net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP
    
    
    0.57
    
    
    
    2.31
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )Diluted net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP
    
    
    0.57
    
    
    
    2.26
    
    
    
    (1.04
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )Net income (loss) (2)
    
    
    1,861
    
    
    
    8,016
    
    
    
    (4,463
    )
    
    
    (13,841
    )
    
    
    (8,877
    )
    
    
    (261.2
    )Net income (loss) per share-basic (1) (3)
    
    
    0.57
    
    
    
    2.31
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )Net income (loss) per share diluted (1)(3)
    
    
    0.57
    
    
    
    2.26
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )Balance Sheet Data:ROC GAAPTotal current assets
    
    
    14,303
    
    
    
    29,027
    
    
    
    25,358
    
    
    
    21,301
    
    
    
    21,002
    
    
    
    617.9Net property, plant and equipment
    
    
    32,028
    
    
    
    38,006
    
    
    
    39,562
    
    
    
    40,029
    
    
    
    32,600
    
    
    
    959.1Total assets
    
    
    51,197
    
    
    
    72,451
    
    
    
    72,309
    
    
    
    68,120
    
    
    
    61,422
    
    
    
    1807.1Total current liabilities
    
    
    8,868
    
    
    
    11,786
    
    
    
    9,632
    
    
    
    18,357
    
    
    
    20,220
    
    
    
    594.9Long-term liabilities
    
    
    15,946
    
    
    
    16,091
    
    
    
    19,533
    
    
    
    19,549
    
    
    
    11,954
    
    
    
    351.7Total liabilities
    
    
    24,814
    
    
    
    27,877
    
    
    
    29,165
    
    
    
    37,906
    
    
    
    32,174
    
    
    
    946.6Total shareholders equity
    
    
    26,383
    
    
    
    44,574
    
    
    
    43,144
    
    
    
    30,214
    
    
    
    29,248
    
    
    
    860.5U.S. GAAPTotal shareholders equity
    
    
    26,433
    
    
    
    41,831
    
    
    
    43,300
    
    
    
    28,351
    
    
    
    28,195
    
    
    
    829.5Other Data:ROC GAAPCapital expenditures
    
    
    8,129
    
    
    
    11,803
    
    
    
    9,078
    
    
    
    8,975
    
    
    
    1,606
    
    
    
    47.2Depreciation and amortization
    
    
    4,855
    
    
    
    6,048
    
    
    
    8,006
    
    
    
    8,742
    
    
    
    9,287
    
    
    
    273.2Net cash provided by operating activities
    
    
    5,062
    
    
    
    16,123
    
    
    
    9,399
    
    
    
    271
    
    
    
    2,317
    
    
    
    68.2Net income (loss) per ADS  basic
    
    
    2.7
    
    
    
    29.2
    
    
    
    (2.3
    )
    
    
    (31.0
    )
    
    
    (21.3
    )
    
    
    (0.6
    )Net income (loss) per ADS  diluted
    
    
    2.7
    
    
    
    29.1
    
    
    
    (2.3
    )
    
    
    (31.0
    )
    
    
    (21.3
    )
    
    
    (0.6
    )Number of common shares outstanding (weighted,
as adjusted) (4)
    
    
    3,321
    
    
    
    3,631
    
    
    
    3,702
    
    
    
    3,667
    
    
    
    3,852
    
    
    
    113.3Stock dividend per common share (5)
    
    
    10
    %
    
    
    13
    %
    
    
    30
    %
    
    
    10
    %
    
    
    
    
    
    
    U.S. GAAPTotal current assets
    
    
    14,588
    
    
    
    28,994
    
    
    
    26,646
    
    
    
    21,037
    
    
    
    21,398
    
    
    
    629.5Total assets
    
    
    51,578
    
    
    
    72,342
    
    
    
    73,595
    
    
    
    66,179
    
    
    
    60,703
    
    
    
    1785.9Total current liabilities
    
    
    8,886
    
    
    
    14,425
    
    
    
    10,768
    
    
    
    18,797
    
    
    
    20,489
    
    
    
    602.8Total liabilities
    
    
    25,145
    
    
    
    30,511
    
    
    
    30,295
    
    
    
    37,828
    
    
    
    32,508
    
    
    
    956.4
   (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, derivative
contracts and convertible debt securities with beneficial conversion features.
The difference in accounting treatment with respect to employee bonus
shares under the two accounting principles resulted in 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 no additional
expense or income in 2002 and 2003. The differences of accounting
treatment with respect to derivative contracts under the two accounting
principles resulted in an increased income of NT$1,301 million in 1999, an
additional expense of NT$898 million in 2000, an additional income of
NT$228 million in 2001, an additional income of NT$449 million in 2002 and
an additional expense of NT$386 million (US$11.3 million)
in 2003. The difference in accounting treatment with respect to convertible debt
securities with beneficial conversion features under the two accounting
principles resulted in no additional expense or income in 1999 to 2002, and an
additional expense of NT$617 million (US$18.2 million) in 2003.(3)
    
    Retroactively adjusted for all stock dividends declared. See note 20 to
our consolidated financial statements for the years ended December 31,
2001, 2002 and 2003 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. -4-




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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 2001, 2002 and 2003. Continued
losses could 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, 2002 and the first half of
2003, with a continued drop in demand and general decline in the average
selling prices of our products. For 2001, we realized a net loss of NT$866
million. For 2002, we recorded a net loss of NT$11,357 million. Net sales
revenues declined by 24.2% compared to 2001, and our cost of goods sold, a
substantial portion of which consists of fixed costs such as depreciation and
amortization, exceeded our net sales revenue. Although our net sales revenues
in 2003 increased compared to 2002, our cost of goods sold continued to exceed
our net sales revenue in 2003. For 2003, we recorded a gross loss of NT$2,942
million (US$86.5 million), an operating loss of NT$7,684 million (US$226.1
million) and a net loss of NT$8,198 million (US$241.2 million). We cannot
assure you that we will not continue to incur gross, operating and net losses
for the full year 2004. Primarily as a result of the net losses we incurred and unrealized losses
on long-term investments of NT$540 million in 2001, and NT$331 million in 2002
which was partially offset by an unrealized gain of NT$977 million (US$28.8 million)
in 2003, shareholders equity declined by 3.2% in 2001, 30% in 2002, and a
further 3.2% in 2003, to NT$29,248 million (US$860.5 million) as of December
31, 2003. 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 have limited liquidity and may be unable to repurchase our outstanding debt
securities when requested by holders, pay certain other obligations as they
become due or otherwise meet our working capital needs. We have a substantial amount of obligations that will or may come due
within the next year, and we may not have sufficient funds to pay these
obligations. These obligations include the potential mandatory redemption of
some of our convertible bonds, payment of our short-term debt, payment of the
current portion of our long-term debt, expenditures required under contractual
obligations and the payment of the costs of the day-to-day operation of our
business. See Item 5. Operating and Financial Review and Prospects 
Liquidity and Capital Resources. The holders of certain of our outstanding debt securities may require us
to redeem all or a portion of their debt securities. In particular, as of
December 31, 2003, we had outstanding US$90 million principal amount of zero
coupon convertible bonds due February 10, 2008, which were redeemable at the
option of the holders on February 10, 2004 and are redeemable on the same date
each year thereafter until maturity, and US$169.2 million principal amount of
0.5% convertible bonds due February 7, 2007, which are redeemable at the option
of the holders on August 9, 2004. On February 10, 2004, pursuant to the
exercise of the option by holders of the bonds due February 10, 2008, we
redeemed US$78.1 million aggregate principal amount of such bonds. In April
2004, we sold 13,125,000 global depositary shares, or GDSs, representing
525,000,000 new common shares, for cash to fund repayment of our debts and to
acquire machinery and equipment. Had we not conducted this share offering, we
would have had difficulty in meeting our bond redemption obligations in 2004.
As of May 31, 2004, the balance of the outstanding bonds due February 10, 2008
was US$6.4 million (NT$218 million) and the aggregate principal amount of the
outstanding bonds due February 7, 2007 was US$136.7 million NT$4,646 million).
To the extent that the current price per share of the our shares remains below
the adjusted conversion price, the likelihood increases -5-




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that bondholders will elect to require us to redeem the bonds rather than
convert. In addition to the convertible bonds discussed above, in 2004 we have been
or will also be required to pay short-term debt and notes in the aggregate
principal amount of approximately NT$2,748 million (US$80.8 million) and
current portion of long-term debt and capital lease obligations in the
aggregate principal amount of NT$11,164 million (US$328.4 million). In
addition, we also have obligations under contracts, which we have entered into
for goods and services and for other purposes, which require us to make minimum
payments for our day-to-day business operations of approximately NT$18,476
million (US$543.6 million) in 2004. If our cash flow from operations and the proceeds of approximately
US$173.25 million from our GDS offering in April 2004 are not sufficient, we
may not be able to meet these payment obligations when due. At December 31,
2003, we had NT$10,649 million (US$313.3 million) of unrestricted cash and cash
equivalents. We cannot assure you that we will be able to finance any of these
payment obligations by using our current loan facilities or other means of
financing. We have available to us a syndicated loan under which we may
drawdown up to an additional principal amount of NT$5,390 million (US$158.6
million) as of May 31, 2004. However, we may only drawdown these amounts for
the purchase of certain specified equipment, must still meet certain other
conditions for drawdown and there is no assurance that we would be able to
satisfy such conditions for new borrowings. We also cannot assure you that any
alternate means of financing will be available to us on acceptable terms or at
all. Further, our ability to repurchase the outstanding debt securities may
also be limited by applicable law as well as the terms of our other outstanding
indebtedness. See  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. Insufficient liquidity could materially restrict our operations, require
us to reduce our budgeted capital expenditures and otherwise adversely affect
our financial condition and results of operations. Borrowing funds, raising
additional equity capital or converting long-term investments to liquid funds
to meet our payment obligations and/or working capital requirements could
adversely affect our financial condition or cause our shareholders to suffer
dilution, and thereby adversely affect the price of our common shares, ADSs or
GDSs. In addition, if we are or appear to be unable to make payments when due,
we may be unable to continue operating, bankruptcy or insolvency proceedings
could be commenced against us and, if this occurs, the value of our common
shares, ADSs and GDSs would be materially impaired. 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. Our loan agreements contain covenants that require us to
maintain specified debt to equity ratio and ratio of current assets to current
liabilities. In November 2003, we sold 475,000,000 new common shares for cash
to increase shareholders equity pursuant to a share offering in Taiwan. Had we
not conducted this share offering, we would have had difficulty in meeting the
debt to equity ratio contained in our loan covenants as of the end of 2003. We
may need to issue additional shares, ADSs or GDSs to increase shareholders
equity, and we cannot assure you that we will be successful in selling all or
any of such common shares, ADSs or GDSs. If we continue to incur losses,
resulting in an erosion of our shareholders equity, and 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 or
defaults 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. Defaults or potential defaults
in our financial covenants could also impair our ability to raise additional
equity capital. 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, repurchase our outstanding debt
securities, pay dividends, make certain investments and payments and encumber
or dispose of assets. 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. -6-




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We are vulnerable to cyclical downturns in the semiconductor industry, and our
business, financial condition and results of operations may suffer in future
downturns. 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. Since the second
half 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. The severe and protracted downturn throughout
2001, 2002 and the first half of 2003 has resulted in a 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. Although conditions in the semiconductor industry have improved
since the third quarter of 2003, we cannot predict whether this improvement
will continue. 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, a net loss of NT$11,357 million in
2002 and a net loss of NT$8,198 million (US$241.2 million) in 2003. Our future
net sales revenue, gross profit (loss), operating income, net income (loss) and
more generally, our business and results of 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;
    
    seasonality in demand for our customers products;
    
    changes in demand for our products and our customers products;
    
    technology development of our products and competing products;
    
    changes in the average selling prices of our products;
    
    inventory obsolescence;
    
    our customers adjustments in their inventory;
    
    the loss of or reduction of sales to a key customer or the
postponement or cancellation of an order from a key customer;
    
    our ability to obtain adequate labor, equipment, components, raw
materials, electricity, water and other required production inputs on a
timely and cost-efficient basis;
    
    capital expenditures and production uncertainties relating to the roll-out of new facilities;
    
    our ability to achieve target production yields, especially for new products;
    
    our ability to accurately predict customer demand, as we must commit
to significant capital expenditures in anticipation of future orders;
    
    changes in our business strategy or technology roadmap;
    
    natural disasters, such as fires, droughts, floods and earthquakes, or industrial accidents;
    
    the long lead times in securing a qualification from our customers;
    
    currency and interest rate fluctuations that may not be fully hedged; and
    
    technological changes. -7-




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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 materially and adversely affect our business and results of
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. 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
principally related to the semiconductor industry. As a result of the market
downturn in the second half of 2000, which continued throughout 2001, 2002 and
the first half of 2003, 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 NT$780 million in 2001, NT$415 million in 2002 and NT$825
million (US$24.3 million) in 2003. Any further significant losses from our
investments in the future may materially and adversely affect our financial
condition and results of operations. 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 2001, 2002 and 2003, our Mask ROM net sales were NT$12,309 million,
NT$7,575 million and NT$7,463 million (US$219.6 million), respectively, or
56.6%, 45.9% and 42.1%, respectively, of our net sales revenue in those
periods. 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, have been
adopted by some 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. Nintendo
is one of our major customers and accounted for 61.8%, 43.7% and 46.6% of our
net Mask ROM sales in 2001, 2002 and 2003, respectively. 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 and expanding the base of
devices that may use Mask ROM. We cannot assure you, however, that these
initiatives will be successful. Further, there has been an overall shrinkage of the Mask ROM market as
products move away from using Mask ROM technologies to competing technologies,
in particular Flash. We also expect that our Mask ROM sales will continue to
decline for the foreseeable future, although we believe that due to our market
position we will continue to be one of the major providers of Mask ROM
products. Any significant reduction in the use of Mask ROMs in the video game
manufacturing industry and generally will significantly reduce our revenue and
adversely affect our business, financial condition and results of operations. 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
experienced deteriorating market conditions from the end of 2000 through the
first half of 2003. This decline resulted in 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. Although
conditions in the semiconductor industry have improved since the third quarter
of 2003, we cannot predict whether this improvement will continue. In addition,
seasonal fluctuations in the demand for our products requires a seasonal
buildup in our inventory, which increases our risk of inventory loss due to
obsolescence. Although we recorded an inventory loss reversal of NT$1,185 million
(US$34.9 million) in 2003, we recorded inventory losses of NT$2,929 million in
2002 and NT$2,587 million in 2001. We may be required to provide for inventory
loss -8-




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or provide a significant write-down of our inventory due to inventory
obsolescence and price declines in future periods if market conditions do not
continue to 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. Financial forecasts and internally prepared 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. We have met the statutory criteria
in each of the years beginning in 1995 and, accordingly, have complied with
this reporting requirement. We intend to continue to comply with this
requirement whenever necessary. The unaudited unconsolidated information we publish in response to this
requirement is not given the same scrutiny to which we subject our quarterly,
semi-annual and annual financial statements. Furthermore, as this information
is neither audited nor consolidated, it may vary materially from our audited
consolidated financial statements for the same period. In addition, the financial forecasts published by us from time to time
pursuant to these requirements are based upon a number of estimates and
assumptions regarding our industry, investments and general market, political
and economic conditions, many of which are beyond our control, and are
inherently subject to significant uncertainties and contingencies. We do not
undertake any obligation to update these forecasts, except as required by
applicable laws and regulations. We urge you not to rely on these forecasts. A decrease in demand for consumer electronics, computer and computer peripheral
and other communications products may significantly decrease the average
selling prices for our products and reduce our revenue and operating results. A significant percentage of our net sales revenue (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 due to cyclicality or the non-acceptance of our customers products in
the market, may decrease the demand for our products and could adversely affect
our results of operations. Worldwide demand for consumer electronic products
experienced a rapid and sudden decline between the second half of 2000 and the
first half of 2003. 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 during that period. If the average
selling prices for these products decrease again, the average selling prices
for our products will also decrease and our revenue and operating results 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),
Atmel Corporation (Atmel), Sharp Corporation (Sharp), Fujitsu AMD
Semiconductor Ltd. (FASL), STMicroelectronics NV (STMicroelectronics),
Renesas Technology Corporation (Renesas), Silicon Storage Technology, Inc.
(SST), Hynix Semiconductor Inc. (Hynix), Toshiba Corporation (Toshiba),
Oki Semiconductor Co. (Oki) and various other industry participants. Many of
our competitors have greater access to capital and technology and have
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;
    
    research and development capabilities and plans; -9-




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
    
    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 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 not be profitable if we are
unable to achieve relatively high capacity utilization rates. Our operations are characterized by relatively high fixed costs, such as
depreciation, and we expect this to continue. Our profitability depends 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, which lead to reduced margins during such periods, which occurred
in 2001, 2002 and the first half of 2003. Although our capacity utilization
rates have improved recently, we cannot assure you that we will be able to
achieve or maintain profitability if we cannot consistently achieve or maintain
relatively high capacity utilization rates. Furthermore, high capacity
utilization rates in the absence of high demand could result in inventory
buildup and obsolescence, which may result in write-downs of inventory. 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. Due to the cyclical nature of
the semiconductor industry, our customers purchase orders have varied
significantly from period  to period, and it is difficult to forecast future
order quantities. 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, plan our production 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 cannot assure you that any of our customers will
continue to place orders with us in the future and 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. 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 capitalize on the growing demand for these products. The Flash
products market is dominated by large players, including FASL, Intel, Sharp and
STMicroelectronics, all of which may have greater financial and other resources
than our company. As of December 31, 2001,
2002 and 2003, Flash products accounted for 54.5%, 66.6% and 58.4% of our
product inventory, respectively. If we allocate resources and manufacturing
capacity to Flash products but are unable to compete effectively in the Flash
products market, our business and operating results will suffer. Moreover, any
inventory loss from Flash products may adversely affect our financial condition
and results of operations. -10-




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Any delay or reduction in orders by Nintendo or the loss of Nintendo as a
customer could result in the loss of a significant portion of our revenue. In 2001, 2002 and 2003, our net sales to Megachips Corporation
(Megachips), which resells our products to Nintendo, aggregated NT$8,390
million, NT$5,646 million and NT$3,510 million (US$103.3 million),
respectively, or 38.6%, 34.2%, and 19.8%, respectively, of our net sales
revenue in those periods. 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 competitive pressure in the electronics entertainment
market, which is characterized by frequent new product introductions and
rapidly shifting consumer preferences. Nintendos current game platform, the
Game Cube, utilizes a DVD-ROM-based storage system, which is different from
Mask ROM-based cartridges that were used in Nintendos previous game platforms.
This 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
Game Cube and related accessories. However, sales to Nintendo for Game Boy may
not compensate for the loss of Mask ROM sales for Nintendos console-card game
platform, and in fact did not in 2002 or in 2003. Further, Nintendos Game Boy
platform is expected to face competition with the planned roll out of Sonys
PSP portable gaming device at the end of 2004. In addition, 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, if Nintendo delays or reduces its orders
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. If we are unable to successfully execute or integrate our new organizational
and business unit structure, our operations and future operating results may be
adversely affected. In 2003, we reorganized our existing organizational and business unit
structure (which was organized on the basis of memory products, SMS products
and services, and multimedia products) 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
operating results. 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. At
present, there is a shortage in Taiwan of persons with the special technical
skill set we require. Further, although some of these personnel have entered
into employment agreements with us, most of these employment agreements do not
specify the duration of employment. Therefore, the relevant 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. When we
commence operations at Fab III, we may be required to substantially increase
the number of these employees 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 may require in the future. 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 or otherwise based on the performance
of our stock. -11-




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Because of the highly cyclical nature of our industry, our capital requirements
are difficult to plan. If we cannot obtain additional capital when we need it,
our growth prospects and future operating results may be adversely affected. Our 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. 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 loan facilities will be sufficient to meet our capital
expenditures, working capital, cash obligations under our existing debt and
lease arrangements, and other requirements for at least the next twelve months.
However, future capacity expansions or market or other developments may cause
us to require additional funds. 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;
    
    our stock price and credit rating;
    
    general market conditions for financing activities by semiconductor companies; and
    
    economic, political and other conditions in Taiwan and elsewhere. If we are unable to obtain external financing in a timely manner, on
acceptable terms or at all, we may be unable to implement our expansion plans
or conduct planned research and development and develop new products and our
growth prospects and future operating results 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 may not be able to generate cash flow from
operations in sufficient amounts to allow us to maintain our planned 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. If we are unable to manage our expansion effectively, our growth prospects may
be limited and our future operating results 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 operating results. If we are unable to effectively manage seasonal fluctuations in the demand for
our products, our business and operating results 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
typically generate higher sales during the third and fourth quarters of the
year. In anticipation of the higher demand in these quarters and to smooth out
and manage rationally the use of our capacity over the course of the full year,
we typically build up inventory in the first and second quarters of the year.
However, if we are unable to increase our manufacturing capacity or build up
inventory ahead of demand 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 operating results may be adversely affected. In
addition, if we are unable to effectively manage our manufacturing capacity
during a seasonal downturn in demand or if we build up inventory in
anticipation of demand that does not materialize, our results of operations
would also be adversely affected. 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
recent adverse market conditions that prevailed in the semiconductor industry,
we expect full commencement of operations at Fab III to be delayed until 2005
or later. We are utilizing part of the space in Fab III to supplement
production in Fab II. We could delay the commencement of full commercial
operation of Fab III beyond 2005 if there is no significant sustained
improvement in market conditions. -12-




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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 operating results 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, in short supply, 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
operating results 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 operating results 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. 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
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 entered into a derivative contract with our common shares as the
underlying reference securities in connection with our stock appreciation
rights plan. This contract also included a reference to foreign currency
exchange rates. The contract, as amended, expires in May 2005. See Item 5. Operating and Financial Review and
Prospects  Operating Results  Equity Derivative
Contracts and Item 11. Quantitative and Qualitative
Disclosure About Market Risk  Market
Price Sensitivity Analysis  Equity Contract. Future decreases
in the trading price of our common shares may adversely affect our financial
condition and results of operations. 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 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. -13-




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We are vulnerable to natural disasters and other events beyond our control,
which could severely disrupt the normal operation of our business and adversely
affect our operating results. 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 earthquakes, droughts, power
outages, typhoons or other events beyond our control, would cause delays in
shipments of our products, which could result in the loss of revenue and/or
customers. 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 these
earthquakes. As a result of the rapid growth of the Taiwan semiconductor industry,
which is primarily based in Hsinchu, there has been increased demand for water
and electricity in that region. Any shortage of water or electricity could have
a material and adverse effect on our operations. Many areas in Taiwan
experienced a severe drought in 2002 causing Taiwan authorities to announce
water-rationing measures in the northern parts of Taiwan. If a drought occurs
again and authorities are unable to source water from alternative sources in
sufficient quantities, we may be required to temporarily shut down or
substantially reduce production at our facilities in the affected areas, which
would seriously affect our operations. 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. 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 potential 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 increase our operating risk. We are subject to stringent environmental regulations and any violation could
require us to pay significant fines, or result in a delay or interruption of
our operations. 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. New corporate governance legislation and regulations in the United States could
increase the cost of compliance, while recent corporate scandals could increase
the risks associated with non-compliance. 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
have increased and are expected to increase further in the near future as we
implement measures to comply with applicable laws and regulations. New
legislation, such as the 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. Any failure
to comply with these requirements will increase our exposure and the exposure
of our chief executive officer and chief financial officer, to the risk of
enforcement actions and litigation, and could cause our share price to fall. -14-




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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, 2003. 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, 2001, 2002 and 2003 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 does
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, derivative
instruments and convertible debt securities with beneficial conversion features,
we reported under U.S. GAAP net loss of NT$4,463 million in 2001, NT$13,841
million in 2002 and NT$8,877 million (US$261.2 million) in 2003, as compared
to, under ROC GAAP, net loss of NT$866 million in 2001, NT$11,357 million in
2002 and NT$8,198 million (US$241.2 million) in 2003. See note 20 to our
consolidated financial statements for the years ended December 31, 2001, 2002
and 2003 included in this annual report. Risks Relating to Technology and Intellectual Property Our return to profitability depends on our ability to respond to rapid
technological changes in the semiconductor industry. 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;
    
    rapid product obsolescence; and
    
    introduction of competing technologies and solutions. 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, our new products may fail to gain market
acceptance, and existing products may become obsolete. For example, our sales
of Mask ROM products fell when Nintendo shifted to DVD-ROM technology in its
newer products, and may continue to fall further as products move to competing
technologies. If we fail to develop, or obtain access to, advances to
technologies and processes, we may become less competitive and be unable to
return to profitability. -15-




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We depend on our technology partners to advance our portfolio of process
technologies, and we may not be able to advance our portfolio of process
technologies if our technology partners fail to advance their technology, if we
fail to maintain our existing arrangements with our technology partners or if we are unable to enter
into new arrangements with other technology providers. 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 believe these arrangements help 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. 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. We typically sell our products on a per-die basis and
lower yields can reduce the number of units we can sell, which causes our
revenues and profits to suffer. If we fail to maintain high quality production
standards and yields, our business and operating results 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, our competitors may be able to use our technologies to
develop similar or superior products, and we may not have sufficient financial
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 
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 -16-




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or resulting patent (if one is granted) are made available to the public.
Because of the complexity of the technologies used and the multitude of
patents, copyrights and other overlapping intellectual property rights, it is
often difficult for semiconductor companies to determine infringement. We are
currently involved in certain litigation matters involving patent infringement.
See Business  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, 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. Recent speeches and statements by President Chen Shui-bian hinting at
independence issues and reactions of Chinese officials to these speeches and
statements have increased tensions between the ROC and the Peoples Republic of
China. Past developments in relations between the ROC and the Peoples Republic
of China have on occasion depressed the market 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 U.S. dollars and
Japanese yen. 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 U.S. dollars and Japanese
yen. 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. -17-




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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 2001, 2002 and 2003, export
sales from Taiwan to our customers outside Taiwan accounted for 73.7%, 82.5%
and 67.9%, 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 10,202 in February 2000 and subsequently
fell to a low of 3,446 in October 2001. During 2003, the Taiwan Stock Exchange
Index peaked at 6,142 on November 5, 2003 and reached a low of 4,140 on April
28, 2003. During 2002 and 2003, daily closing prices of our common shares
ranged from NT$32.7 per share on April 3, 2003 to NT$4.12 per share on May 22,
2003. On June 23, 2004, the Taiwan Stock Exchange Index closed at 5,729 and the
daily closing value of our common shares was NT$10.4 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. The recurrence of
these or similar problems could decrease the market prices and liquidity of our
common shares, ADSs and GDSs. In response to past declines and volatility in the securities markets in
Taiwan, and in line with similar activities by other countries in Asia, the
government of the ROC formed the Stabilization Fund, which has purchased and
may from time to time purchase shares of Taiwan companies to support these
markets. In addition, other funds associated with the ROC government have in
the past purchased, and may from time to time purchase, shares of Taiwan
companies on the Taiwan Stock Exchange or other markets. In the future, market
activity by government entities, or the perception that such activity is taking
place, may take place or has ceased, may cause fluctuations in the market
prices of our common shares, ADSs and GDSs. Risks Relating to our Common Shares, ADSs and GDSs We cannot assure you that the market for our common shares and ADSs will be
active and liquid, and trading of our GDSs has been extremely illiquid. The average daily trading volumes for our common shares and ADSs have
fluctuated greatly in the past. During 2003, the daily trading volume of our
common shares ranged from approximately 217,633,760 to approximately 3,486,579.
During the same period, the average daily trading volume of our ADSs ranged
from approximately 255,632 to approximately 100. Since our GDSs began trading
in April 2004, trading of our GDSs has been extremely illiquid, and underlying
common shares have been withdrawn with respect to a very substantial majority
of our GDSs. As of June 21, 2004, GDS holders representing over
95% of our GDSs issued in April 2004 have withdrawn from our GDS
program and converted their GDSs to common shares.
We cannot assure you that the liquidity of our common shares or ADSs will be
maintained or enhanced and expect that trading in our GDSs will continue to be
extremely illiquid. 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, ADSs and GDSs may be caused by factors outside of our control
and may be unrelated or disproportionate to our operating results. In addition, the EU Transparency Obligations Directive is currently being
finalized and may be implemented in Luxembourg, where our GDSs are listed, in a
manner that is unduly burdensome for our company. In particular, we may be
required to publish financial statements in the EU prepared in accordance with,
or reconciled to, International Financial Reporting Standards. In such
circumstances we may decide to seek an alternative listing for the GDSs on a
stock exchange outside the European Union. -18-




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Future sales of securities by our company or existing shareholders or future
issuances of securities by our company may have a dilutive effect and decrease
the value of your investment. The market price of our common shares and ADSs and GDSs could decline as a
result of future sales of a large number of common shares, ADSs or GDSs or the
perception that such sales could occur. If we or the holders of our common
shares, ADSs or GDSs sell a large number of common shares, ADSs or GDSs, or the
perception develops that such an event may occur, the market price for the
common shares, ADSs or GDSs could be depressed. In particular, if cash flow
from operations is insufficient to allow us to conduct our day-to-day
operations or to redeem or otherwise repay our debt or if net losses reduce our
equity near or below the minimum level stipulated in covenants under our bank
loans, we may need to issue more common shares, ADSs or GDSs in the future, or
the perception may arise that we need to do so. 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, ADSs and GDSs to decrease. The conversion of our convertible bonds into
common shares (and, where applicable, exercise of the right to deposit those
common shares in exchange for ADSs or GDSs) may also have a dilutive effect.
See Item 6. Directors, Senior Management and Employees  E. Share Ownership
 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 and GDS holders do not have the same voting rights as our common
shareholders, which may affect the value of the ADSs and GDSs. The voting rights of ADS and GDS holders as to the common shares
represented by the ADSs or GDSs 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 and GDS 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 or GDSs, as the case may be, instruct the depositary to
vote in a particular manner, the depositary will cause all common shares
represented by the ADSs or GDSs to be voted in that manner. If the depositary
does not receive instructions representing at least 51% of the outstanding ADSs
or GDSs, as the case may be, to vote in a particular manner, ADS or GDS
holders, as the case may be, will be deemed to have instructed the depositary
to authorize all the common shares represented by their ADSs or GDSs to be
voted at the discretion of our designated representative, which may not be in
the interest of all ADS or GDSs 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. The rights of holders of our ADSs and GDSs to participate in our rights
offerings may be limited, which may cause dilution to their holdings. We may from time to time distribute rights to our shareholders, including
rights to acquire our securities. Under the ADS 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. Under the GDS deposit
agreement, the depositary will not offer those rights to holders of GDSs if it
deems the distribution of rights to holders of GDSs not to be lawful and
reasonably practicable.
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 and GDSs 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. -19-




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ADS and GDS holders may be required to appoint agents in Taiwan to handle
various tax and administrative matters if
they withdraw common shares from our ADS or GDS program and become
shareholders, which may make share ownership burdensome. Non-ROC persons wishing to withdraw their common shares from our ADS or
GDS 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 ADS or GDS 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. In
addition, they will be required to register with the Taiwan Stock Exchange for
making investments in the ROC securities market (and if you are an offshore
foreign institutional investor, to obtain the prior approval of the Central
Bank of China) prior to withdrawing common shares. Without meeting these
requirements, non-ROC persons will not be able to hold, subsequently sell or
otherwise transfer our common shares on the Taiwan Stock Exchange. Changes in exchange controls which restrict your ability to convert proceeds
received from your ownership of ADSs or GDSs may have an adverse effect on the
value of your investment. Under current ROC law, a holder of our ADSs or GDSs who withdraws and
becomes a holder of our common shares may be required to obtain foreign
exchange approval from the Central Bank of China on a payment-by-payment basis
for conversion from NT dollars into foreign currencies of the proceeds from the
sale of subscription rights for new common shares. Although it is expected that
the Central Bank of China will grant this approval as a routine matter, we
cannot assure you that in the future any approval will be obtained in a timely
manner, or at all. Furthermore, pursuant to the ROC Foreign Exchange Control Law, the
Executive Yuan of the ROC government may, without prior notice but subject to
subsequent legislative approval, impose foreign exchange controls in the event
of, among others, a material change in international economic conditions. We
cannot assure you that foreign exchange controls or other restrictions will not
be introduced in the future. When withdrawing the underlying common shares of the ADSs or GDSs, you may be
required to provide certain information to us or the Depositary, and failure to
provide such information may result in a delay of the withdrawal. When withdrawing the underlying common shares of ADSs or GDSs, you may be
required to provide certain information to us or the depositary, including the
name and nationality of the person to be registered as the shareholder, the
number of common shares to be acquired by such person and the number of common
shares acquired by such person in the past through the date of the withdrawal
of the underlying common shares. Under applicable ROC laws, we are required to
report to the ROC Securities and Futures Commission (the ROC SFC) if the
person to be registered as a shareholder (i) is a related party of ours as
defined in the ROC Statement of Financial Accounting Standard No. 6 or (ii)
will hold, immediately following such withdrawal, more than 10% of the
underlying common shares of the ADSs or GDSs. Failure to provide such
information may cause the delay of such withdrawal of the underlying common
shares. 
 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, strategic manufacturing
services, or SMS, and system logic center, or SLC, products. We view ourselves
as an integrated provider and treat our principal clients as strategic
partners. We 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 and -20-




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Hewlett-Packard, with whom we have had relationships for over ten years.
We differentiate ourselves by our ability to offer a full range of in-house
design, product and process engineering capabilities. Following our recently completed reorganization of our business unit
structure, we organize our operations into two main strategic business groups:  
    
    our Microelectronics and Memory Solution Group, which encompasses
Mask ROM, Flash, EPROM products and strategic manufacturing services;
and
    
    our Integrated Solution Group, which focuses largely on SLC products
for the audio, video, communications and microcontroller markets. We generate our revenue from customers in the consumer electronics,
computer and communications industries. For 2003, of our total net sales,
excluding sales made by distributors, 60.7% was generated by our products for
consumer electronics applications, 19.6% by our products for computer
applications and 19.7% by our products for communications applications. We were founded and incorporated on December 9, 1989 by engineers who
returned to Taiwan from Silicon Valley in the United States. 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 largest
semiconductor companies are located in Taiwan. Many companies outside Taiwan
outsource some or all of their semiconductor manufacturing needs to Taiwans
semiconductor manufacturing service providers. In addition, Taiwan is a center
for the design and manufacture of electronic systems that have semiconductor
devices as their primary components. 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. 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. In April 2004, we issued
GDSs which were listed on the Luxembourg Stock Exchange. Our contact information is: 
    
    Business address:
    
    No. 16 Li-Hsin Road, Science
Park
Hsinchu, Taiwan, Republic of China
    
    Telephone number:
    
    (8863) 578-6688
    
    Website:
    
    www.macronix.com
 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$9,078 million, NT$8,975 million and NT$1,606 million (US$47 million) in
2001, 2002 and 2003, respectively. The following table sets forth our capital
expenditures for 2001, 2002 and 2003. Year ended December 31,2001
    
    2002
    
    2003(NT$ million)
    
    (NT$ million)
    
    (NT$ million)Fab I
    
    
    609
    
    
    
    370
    
    
    
    88Fab II
    
    
    2,915
    
    
    
    1,184
    
    
    
    228Fab III
    
    
    3,726
    
    
    
    4,720
    
    
    
    834Others
    
    
    1,828
    
    
    
    2,701
    
    
    
    456Total
    
    
    9,078
    
    
    
    8,975
    
    
    
    1,606
 -21-




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##### Table of Contents



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 2003, our capital expenditures consisted mainly of residual payments
following the completion of the construction of Fab III and our upgrade of Fab
II. In order to commence commercial operations for our Fab III, we will
require funding for our capital expenditures for equipment, which we expect we
will obtain 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 in 2004. Recent Developments In April 2004, we sold 13,125,000 GDSs, representing 525,000,000 new common
shares. The offering price for GDSs was US$13.20 per GDS and net proceeds were
approximately US$173.25 million. The GDSs are listed on the Luxembourg Stock
Exchange plc. Our GDSs are not fungible with our ADSs, and each GDS represents
40 of our common shares. As of June 21, 2004, GDS holders
representing over 95% of the GDSs issued in April 2004 have withdrawn from our
GDSs program and converted their GDSs to common shares. B. Business Overview Our Strategy We aim to be a global leader in the non-volatile memory market by offering
our customers a total non-volatile memory solution for their electronic system
requirements. We seek to distinguish ourselves from traditional integrated
device manufacturers and wafer foundries by forging strategic partnerships with
our key customers from an early stage of their product development to ensure
our products meet their present and future requirements. Beginning in the second half of 2000, the semiconductor sector experienced
a severe downturn, during which we and other market participants were unable to
maintain profitability amidst slumping demand and a sustained decline in
average selling prices. In addition, just prior to the downturn, we had been
investing in a number of research and development projects that resulted in an
even greater strain on our resources when the downturn occurred. We believe we are beginning to see the initial signs of recovery in the
sector, affording us the opportunity to leverage our core skills to seek to
expand on our leadership in Mask ROM products and to further expand our Flash
business. We have streamlined our corporate structure by organizing operations
into two distinct business units, and we have focused our operations and
research and development initiatives on select technologies, which we expect
will not only improve our technology migration and time to market but also
allow us to maximize the benefits from our available resources. The components of our strategic initiatives are as follows: Focus our management efforts, research and development initiatives and
technology development on select businesses In order to better focus our resources on key projects and customers, we
have recently reorganized our business into two distinct business units,
namely, the Microelectronic and Memory Solution Group, which focuses on our
non-volatile memory and manufacturing business, and the Integrated Solution
Group, which focuses on combining our non-volatile memory products with
third-party or in-house SLC products to develop customized integrated device
solutions for our customers. As a result of this reorganization, we have also refocused our research
and development efforts on key selected projects and discontinued other
projects. For instance, we are no longer developing our in-house PAC-AND Flash
technology, and are instead working with strategic partners on other Flash
technologies that we believe are more likely to be successful and competitive
in the future. We have spun off two subsidiaries, MagicPixel and MaxNova, as part of our
efforts to focus our technology and product development. We believe such
internally developed technologies and capabilities are better pursued
independently so as not to divert our efforts and resources from non-volatile
memory development. At the same time, our Integrated Solutions -22-




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##### Table of Contents



Group will continue to be able to leverage these capabilities in
developing customized solutions for our customers, as we maintain close working
partnerships with these subsidiaries. We believe these efforts will help to allocate resources to those projects
and initiatives that we believe will have the greatest impact on this
objective. Maintain our leadership in Mask ROM and multiple-time-programmable products Although the Mask ROM market has been declining over time, it remains the
preferred low-cost, high-volume solution for certain applications and hence
continues to be an important segment of our business. We have been able to
increase our market share in the Mask ROM segment over time while maintaining
relatively strong margins in spite of declining average selling prices. In the future, we expect Mask ROM and/or similar one-time or
multiple-time-programmable products to continue to play an important role in
our business. We plan to continue to focus on maintaining our competitiveness
in this segment by improving our technology capabilities as well as introducing
new applications for Mask ROM, including, in particular, digitally stored
content for mobile and handheld devices. Invest in Flash technologies to develop cost-competitive solutions,
particularly for the handheld device and wireless markets We believe Flash will be the dominant non-volatile memory product in the
future and are committed to expanding our capabilities and market share in
Flash technologies. We believe that our ability to develop expertise in
advanced Flash technologies is critical to our long-term competitiveness and
success. In the near term, we plan to focus on medium-density Flash products using
advanced manufacturing processes and reduce micron line widths to develop
cost-effective solutions. At the same time, in order to become a leader in the
Flash industry, we plan to work with strategic technology partners to mitigate
research and development risks. We plan to continue to develop NBit based
technology, which we believe provides a simple and cost-effective solution, by
migrating to lower geometries and higher densities. In addition, we are
currently jointly developing 0.13 micron process technology with Renesas based
on its DINOR Flash design. We believe that such strategic partnerships not only
allow us to share the risk associated with research and development, but also
improve the speed at which we can migrate to more advanced Flash technologies
in a cost-competitive manner. Leverage our competitive position in the non-volatile memory market to
effectively cross-sell and diversify our product mix and customer base As the worlds leading manufacturer of Mask ROMs, we are able to provide
our customers with a cost-effective means to procure large volumes of capacity
in a relatively short time frame. Our Mask ROM business has therefore been
critical to our efforts in developing relationships with, and eventually
cross-selling other products to, some of our key customers. For example, we
have successfully sold Flash, SLC and SOC products to Nintendo, which
originally began as a customer for our Mask ROM products only. We plan to continue to leverage our Mask ROM business with our existing
and potential customers, thereby expanding our ability to cross-sell and
diversify product mix and customer base. Capitalize on our strengths in non-volatile memory for embedded applications to
provide integrated solutions To complement our leading position in the non-volatile memory market, we
are seeking to extend further resources and capabilities into SLC 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 capabilities,
we believe our years of design and production expertise, our strong research
and development team and our close relationship with system vendors will enable
us to provide SOC solutions to our customers. In particular, we are seeking to take advantage of the growth in the
demand for platforms for other than personal computers, such as portable
consumer electronics platforms and the demand for smaller and more advanced
integrated circuits for communications and consumer applications. We believe
the expansion into SLC and multimedia devices will enable us to
reduce our exposure to the cycles of the memory market while building a
broad range of product and process capabilities. -23-




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Continue to upgrade our process technology and in-house manufacturing
capabilities while expanding capacity prudently Our manufacturing facilities enable us to provide a full range of services
and timely delivery to our key clients. We will continue to maintain in-house
manufacturing capacities and stress quality control and operational discipline
to enhance production yield at our manufacturing facilities. Where necessary to
enhance our competitive position, we intend to continue migrating our
production to more advanced process technologies by making prudent investments
in equipment and leveraging on our strategic partners expertise. However, in light of the capital-intensive nature of semiconductor
manufacturing, we plan to continue to explore ways to align our product
portfolio with our manufacturing capabilities and to increase our manufacturing
capacity in a prudent manner. For example, while we have already migrated Fab I
to 0.32 micron process technology for certain chips from the 0.40 micron
process technology primarily used in 1997, in order to maintain profitability
at Fab I and minimize the amount of new investment required, we have initiated
an Evergreen project. This allocates to Fab I manufacturing of products that
do not require leading edge technologies, such as low-density Flash and ROM
products and certain of our SLC and SMS products, including high voltage,
microelectronic-mechanical system, or MEMS and embedded ROM products. Similarly, although we completed the construction of the shell of our Fab
III in July 2002, we have decided to defer investing in any twelve-inch
equipment until market conditions improve further. In order to alleviate
capacity constraints in Fab II, which is an eight-inch facility, we have used
approximately 7% of the space in Fab III to install eight-inch equipment to
complement production at Fab II. As another example of our efforts in managing
capacity constraints, we outsource some of our wafer production requirements to
TSMC and Tower Semiconductor. Our Reorganization We reorganized our business unit structure in 2003. Our previous business
unit structure was organized on the basis of the principal types of products
and services we provided. Under our new business unit structure, we organize
our operations into two strategic business units, namely, our Microelectronics
and Memory Solution Group and our Integrated Solution Group. Our
Microelectronics and Memory Solution Group is primarily responsible for the
management and operation of our business relating to our non-volatile memory
products, such as Mask ROM, Flash and EPROM products, and for SMS products. Our
Integrated Solution Group is responsible for the management and operation of
our business relating to SLC products. Our Microelectronics and Memory Solution Group supports the technologies
that enable us to provide semiconductor products and design services. It
focuses primarily on the research and development of the advanced process
technologies that we require for our business and on advancing our design
capabilities, as well as the operation and capacity planning of our
manufacturing facilities. It is also responsible for managing our process
technologies and reinforcing our relationships with our strategic manufacturing
partners through technology arrangements. We believe that the integration of our former business units under our
Microelectronics and Memory Solution Group will, among other improvements,
enable us to more efficiently utilize and plan our manufacturing capacity and
allocate our resources. Our Integrated Solution Group is responsible for providing value-added
design services and system-level platform solutions to our customers based on
the requirements of the end-market application. In addition, it is responsible
for developing strategic partnerships with our key customers and leveraging on
our platform partners to provide integrated solutions for our key customers.
Our Integrated Solution Group is also our marketing channel for cross-selling
our products and services to key customers. We believe that our new 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 is also
expected to enable us to better allocate our resources by consolidating
research and development teams and increasing our focus on projects that are
strategic to our business. As part of our reorganization, we spun off two design teams into separate
wholly-owned subsidiaries in 2003, namely Magic Pixel Inc. and MaxNova Inc.
Magic Pixel Inc. was established to focus on our IC design of video and related
products, while MaxNova Inc. was established to focus on IC design for our
memory cards. We believe that these spin-offs will allow
us to allocate our resources more effectively. -24-




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##### Table of Contents



Our Products and Services The following table sets forth our main products, their characteristics
and applications, and the percentage of net sales revenue represented by these
products and services in 2001, 2002 and 2003: % of net sales revenueYear ended December 31,Product
    
    Characteristics
    
    Applications
    
    2001
    
    2002
    
    2003Microelectronics and Memory Solution Group:Mask ROM
    
    Not re-programmable
    
    Games, PDAs, word
processors, printers,
fax modems, VCDs,
mobile phones, STBs
    
    
    56.6
    %
    
    
    45.9
    %
    
    
    42.1
    %Flash
    
    Re-programmable
within the
application system
    
    Mobile phones, PDAs,
digital cameras, STBs,
Web TVs
    
    
    14.0
    %
    
    
    26.4
    %
    
    
    32.8
    %EPROM
    
    Re-programmable
outside the
application system
using industrial
processors
    
    Fax modems, VCDs, mobile
phones, STBs
    
    
    4.5
    %
    
    
    3.6
    %
    
    
    1.7
    %SMS
    
    Value-added services
    
    Internet applications,
CDs, DVDs,
microcontrollers with
embedded Flash
technology
    
    
    12.8
    %
    
    
    2.5
    %
    
    
    13.3
    %Integrated Solution Group:SLC
    
    Highly integrated
system-on-a-chip
solutions featuring
embedded Flash
technology
    
    Digital still cameras,
flat panel displays,
smart cards, PDAs,
electronic dictionaries,
digital audio products
    
    
    9.2
    %
    
    
    17.6
    %
    
    
    7.3
    %
 Microelectronics and Memory Solution Group Mask ROMs We believe that we are currently the largest Mask ROM manufacturer in the
world. Although the global Mask ROM market has been shrinking, we have
increased our market share in recent years as certain key competitors have
exited the market. We differentiate ourselves by providing customized
solutions, faster turnaround times and higher volume capacity. We continue to
focus on the Mask ROM market because it provides higher margins than our other
memory products as well as the opportunity for us to cross-sell other products
to our customers. Applications.Mask ROMs are used for applications in a wide range of
electronic products, including the storage of software for video games and data
storage for office automation equipment, such as fonts for laser printers and
dictionary data for word processors. Recently, significant new applications for
Mask ROM products have been developed, including applications for pre-recorded
MP3 music, mobile telecommunications, pachinko machines and multimedia devices. We manufacture Mask ROMs using 0.45 micron and 0.15 micron patented
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
Mask ROM products that are smaller in size and with higher densities than the
Mask ROM products from our competitors. We migrated our process technology to
0.18 micron in the second half of 2000 and successfully migrated our process
technology to 0.15 micron for both Flash and Mask ROM in the fourth quarter of
2002. -25-




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Although the majority of the circuitry in a Mask ROM chip is based on a
relatively standard design, we often incorporate customer design specifications
into application-specific portions of the circuitry during the manufacturing
process. For example, we have delivered Mask ROM products with densities
ranging from 4 Mb to 32 Mb for use in memory cards of different form factors
for use in a variety of consumer electronic devices. We also manufacture a range of Mask ROM products that are compatible with
Flash products. This provides our customers with the benefit of compatibility
and the flexibility of using our Flash devices during their design and
development stages where software modifications are required, while using our
Mask ROM devices in the mass production of their products without the need for
software modification. The following table provides an overview of our principal Mask ROM
products and the percentage of net sales revenue represented by these products
in 2001, 2002 and 2003: % of our net Mask ROM salesYear ended December 31,Density
    
    Sample applications
    
    2001
    
    2002
    
    2003512 Mb
    
    Games, entertainment
    
    
    
    
    
    
    0.1
    %
    
    
    0.7
    %256 Mb
    
    Games, memory cards
    
    
    14.7
    %
    
    
    2.8
    %
    
    
    4.7
    %128 Mb
    
    Games, PDAs
    
    
    7.5
    %
    
    
    12.9
    %
    
    
    28.7
    %64Mb
    
    Word processors, games, PDAs,
STBs, databanks, printers
    
    
    27.3
    %
    
    
    36.9
    %
    
    
    38.5
    %32 Mb
    
    Games, DVDs, data communications
    
    
    24.9
    %
    
    
    25.4
    %
    
    
    15.3
    %16 Mb
    
    Games, word processors
    
    
    17.8
    %
    
    
    16.2
    %
    
    
    6.7
    %8 Mb
    
    Sound cards,
data banks, BIOS, games, sound cards
    
    
    4.7
    %
    
    
    2.5
    %
    
    
    4.2
    %4 Mb
    
    PHSs, data banks, games
    
    
    2.1
    %
    
    
    3.1
    %
    
    
    0.9
    %Other
    
    Pages, data banks, STBs, BIOS,
games, word processors,
networking
    
    
    1.0
    %
    
    
    0.1
    %
    
    
    0.3
    %
 Competition.The Mask ROM industry is highly competitive. Our major
competitors include Samsung, Oki, NEC and Hynix, although Samsung has publicly
announced that it plans to withdraw from the Mask ROM business. We believe that
with our relative flexibility in adjusting our product mix and allocating our
capacity in Fab II and later in Fab III, we should be well positioned in the
Mask ROM market over the next few years. In the future, we plan to increase our
emphasis on high-density Mask ROM products for use in the games industry, as
well as to explore the demand for applications in other industries to increase
demand for our Mask ROM products. We plan to maintain our leadership in the Mask ROM market by participating
in the product design process of our existing and prospective customers at an
early stage to ensure that our Mask ROM products meet the requirements in their
high-end mobile consumer goods, such as mobile phones and MP3 players. We also
plan to diversify our customer base to increase the variety of applications of
our Mask ROM products in the markets for telecommunications products, toys and
entertainment products, personal digital assistants and office automation
equipment. Competing technologies to Mask ROM include CD-ROMs, DVD-ROMs, magnetic
disks and on-demand software available through telephone-linked and Internet
databases. In particular, one of our key customers, Nintendo, migrated its
video game products from the Nintendo 64 platform to the Game Cube platform
during the second half of 2001. The Game Cube 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 reallocated a portion of our production
resources to the manufacture of Mask ROMs for Nintendos Game Boy series of
handheld computing devices. Sales of Mask ROM for use in Game Boy Advance
represented 46.0% of our Mask ROM revenue in 2003. Flash Flash is the fastest growing non-volatile memory product. We believe that
Flash will be the dominant non-volatile memory product in the foreseeable
future due to the wide variety of applications of Flash products. We currently
focus on medium-density Flash products to take advantage of cost efficiencies.
We seek to increase the cost-effectiveness and our focus -26-




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##### Table of Contents



on higher density Flash products in the near future in order to increase
our market share and to improve our gross margins. Applications.Applications for Flash products range from a wide variety
of portable electronic equipment devices to high volume mass storage of data.
Flash is particularly suited for applications in handheld devices, as it has
the combined benefits of portability, high-density and lower power consumption.
Flash products are also used in various audio products, such as digital
answering machines, mobile telephone systems, MP3 players, networking devices,
digital cameras and personal computer motherboards. As Flash products are much
smaller and more economical in power consumption than the hard disk drives
commonly used for mass data storage, we believe that they will gradually
replace disk drives in selected applications, particularly in handheld
computers. The two current major architectural standards for Flash products are the
NOR and NAND standards. These standards are differentiated largely by the
manner in which the Flash products write and erase data. The NOR design
architecture, commonly known as Code Flash, produces faster devices but does
not support high-density products at a competitive price. NAND design
architecture, commonly known as Data Flash, can support higher density Flash
products at lower cost, but cannot be used for random access code storage
purposes. We previously developed our proprietary PAC-AND design architecture, which
was a competing alternative standard to NOR and NAND, to seek to meet the
requirements of both NOR and NAND. However, in order to focus our resources on
the development of products based on NBit technology and the DINOR design,
discussed below, which we believe hold more potential in the longer term, we
recently decided not to further develop our PAC-AND design architecture beyond
the present 0.15 micron process technology. However, we plan to develop further
products utilizing our PAC AND design architecture based on the present 0.15
micron process technology. Beginning in the fourth quarter of 2000, we provided 32 Mb Flash products
based on 0.25 micron process technology and Mitsubishis DINOR Flash design,
which has been transferred to Renesas, a new joint venture between Mitsubishi
and Hitachi. We started providing 64 Mb and 128 Mb Flash products based on
Renesass DINOR Flash design and 0.15 micron process technology 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 have developed core technologies to achieve two bit per cell
manufacturing capabilities, based on proprietary technology licensed from
Saifun Semiconductors Ltd. (Saifun) known as Nitrided Read Only Memory, or
N-ROM, which we also refer to as two bit per cell or NBit technology. See
" Intellectual Property. This technology enjoys significant advantages over
conventional floating gate devices, requiring simpler masking steps and
allowing smaller bit size and die size and production cost efficiencies. We
have currently achieved multiple-time programming standard for two bit per cell
manufacturing and have also introduced 64Mb and 128Mb MTP devices using 0.25
micron process technology that support up to 100 program/ erase cycles. We
expect to achieve Flash standard by the end of 2004. If we are successful in developing Flash products using two bit per cell
technology, together with Renesass DINOR design architecture, we believe that
we would be well-positioned to compete effectively with other Flash
manufacturers using other design architectures. 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 2001, 2002 and 2003: % of our net Flash memory salesYear ended December 31,Density
    
    Sample applications
    
    2001
    
    2002
    
    2003128 Mb
    
    Games
    
    
    
    
    
    
    
    
    
    
    0.6
    %64 Mb
    
    Games, printers, STBs
    
    
    
    
    
    
    5.6
    %
    
    
    18.1
    %32 Mb
    
    Printers
    
    
    7.7
    %
    
    
    12.9
    %
    
    
    15.6
    %16 Mb
    
    STBs, communication boxes, printers,
musical devices,
games, web TVs, mobile phones
    
    
    23.3
    %
    
    
    32.7
    %
    
    
    24.8
    %8 Mb
    
    DVD Players, STBs, ISDN boxes
    
    
    9.9
    %
    
    
    13.6
    %
    
    
    14.1
    %4 Mb
    
    BIOS, CD R/W drives, cable modems
    
    
    47.6
    %
    
    
    30.2
    %
    
    
    15.6
    %2 Mb
    
    BIOS, HDDs, CD R/W drives,
communication boxes
    
    
    6.6
    %
    
    
    0.8
    %
    
    
    2.1
    %1 Mb
    
    BIOS, HDDs, games, DVD-ROM drives
    
    
    4.3
    %
    
    
    4.2
    %
    
    
    9.1
    %Other
    
    BIOS, HDDs, games
    
    
    0.6
    %
    
    
    
    
    
    
    
 -27-




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##### Table of Contents



Competition.Flash has been one of the fastest growing segments of the
memory products market. 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. 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. We plan to focus on higher density Flash
products in the future in order to further increase our market share and to
improve our gross margins. We may also in the future consider supplying Flash
products to the cellular handset market in order to increase our market share. EPROM Applications.Applications using EPROM include disk drives, video games,
fax machines, modems, cellular phones, pagers and notebook computers, among
others. We believe our EPROM devices are among the least expensive EPROM memory
solutions currently available. However, with the continued decline in prices
for Flash products, the price advantage of our EPROM products has eroded. We produce a range of EPROM products with densities ranging from 256Kb to
8Mb. The majority of our EPROM products have 2Mb density and are used in VCD
players and cellular phones. Competition.While EPROMs remain viable mainly for applications requiring
low-cost solutions, Flash products have begun to replace EPROM 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. Our revenues from EPROM
have been declining for more than the past five years. If current conditions
continue, we do not expect EPROM products to represent a significant growth
area for us in the future. Strategic Manufacturing Services We focus on providing value-added services, which center on providing
application-specific solutions to our strategic customers. We use our strategic
manufacturing services to develop customer relationships with these strategic
customers, which may lead to cross-selling our other products and services in
the future. Our strategic manufacturing services also allow us to engage in
joint development of new technology with our strategic customers and strengthen
our strategic customer relationships. For example, we are currently jointly
developing 0.13 micron process technology with Renesas based on its DINOR Flash
design. Our strategic manufacturing services enable us to leverage our competitive
manufacturing capability. With our extensive fab experience and advanced
non-volatile 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 these services
with a focus on the information appliances market. Competition.We do not plan to compete with foundries with respect to
these services, and provide strategic manufacturing services to selected
strategic customers primarily to complement our other services. Integrated Solution Group The principal products of our integrated solution group are SLC and
multimedia products. In 2001, we extended our expertise from the non-volatile
memory market into the logic area by combining SLC products with embedded
memory to offer comprehensive system solutions to our customers. Unlike with
memory products, our emphasis on SLC and multimedia products is centered more
on product design than on fabrication. We have focused on four key areas:  
    
    audio;
    
    video;
    
    communications; and
    
    microcontrollers. -28-




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##### Table of Contents



As we grow our SLC and multimedia businesses, we intend to concentrate on
producing SLC 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 SLC and multimedia products are currently used in the following
end-market applications: Audio Sound Generator.Our MIDI solutions for cellular handset customers, with
multi-voice polyphonic sound generator based on high-quality wavetable sound
synthesizers, provide enhanced ring-tone sound clarity. We have successfully
designed our large scale integration 32-voice polyphonic sound generator chip
into cellular phones models of several major cellular phone manufacturers, and
anticipate that volume shipments will take place in the third quarter of 2004.
We also expect that our large scale integration 64-voice polyphonic sound
generator chip will be available in the third quarter of 2004. Digital Voice Recorder.Our digital voice recorder solution enables the
integration of digital voice recording functions in various devices such as
electronic dictionaries, language learning devices, electronic books and PDAs. Home Equipment.Our home equipment products include integrated circuits
for digital answering machines. The most important technology in these
integrated circuits is digital signal processor technology, which is also
necessary for applications in voice messaging, cordless telephones and cellular
telephones. Video Digital Still Camera.We were the first company to provide to our
customers, including Minolta Co., Ltd, a digital still camera controller that
supports up to 16 million pixels for high-end digital cameras. Flat Panel Display.Our products include flat panel display controllers
for monitors, televisions, projectors, scan controllers and timing controllers
for liquid crystal display flat panel applications. We supply video controller
devices for flat panel display applications to, among others, Samsung, LG
Electronics Investment, TopVision Technologies, Inc. and Chunghwa Picture Tubes
Ltd. CMOS Sensor Camera Module.We provide to our customers highly integrated
CMOS image sensors and companion processor ICs for use in digital cameras and
portable information appliances (such as PDAs and cell phones). We also offer
compact modular solutions to our customers, including support in hardware
design and algorithm development for specific applications. Our video-related SLC products also include DVD display controllers and
game display controllers for pachinko machines. Communications 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, D-Link Systems, Inc. and Lite-On
Technology Corporation. We also design clock generators, joystick controllers and wireless game
controllers for Nintendo. Microcontrollers In addition to microcontrollers for flat panel displays, our
microcontroller products also include microcontrollers for electronic
dictionaries and PDAs, smart cards and small displays. -29-




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Customers General We emphasize customer relations as a key to our growth and profitability.
As a key aspect of our customer development strategy, we strive to have major
global computer and electronics companies accept our products for use in their
devices, and seek to do this in part by participating in the product design
process of our existing and prospective customers at an early stage to ensure
that our products meet their present and future requirements. 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 also plan to continue to leverage our Mask ROM business with our
existing and potential customers, thereby expanding our ability to cross-sell
and diversify product mix and customer base. 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 sales revenue that these
customers represented in 2001, 2002 and 2003: % of our net sales (1)Year ended December 31,Product Area
    
    Sample applications
    
    Customers
    
    2001
    
    2002
    
    2003Consumer
Electronics
    
    Game, STB,
electronic
dictionary, digital
answering machine,
musical instruments,
digital TV, DVD,
DSC, pachinko
    
    Nintendo, Motorola,
Inventec, GSL, Sony,
Yamaha, Thomson,
Sankyo, Minolta,
Leapfrog, LG, Canon,
Terayon
    
    
    66.9
    %
    
    
    68.6
    %
    
    
    60.7
    %Computer and
Computer
Peripheral
    
    HDD, printer, LCD
monitor, CD-ROM,
CD-RW
    
    Hewlett-Packard,
Lexmark
International,
Dell, Brother,
Cannon,
Matsushita, Epson
Oki,
Benq Corporation,
Hitachi, Toshiba,
Philips, Sony,
LG, Samsung
    
    
    26.2
    %
    
    
    18.2
    %
    
    
    19.6
    %Communications
    
    LAN, WAN, switch,
DECT, ADSL, handsets
    
    NEC, Motorola,
Accton,
D-Link, AVM, Askey,
Siemens, Ambit,
Renesas
    
    
    6.9
    %
    
    
    10.8
    %
    
    
    19.7
    %
   (1)
    
    Excludes sales to distributors where the end-use application is unknown. Top Customers The following table sets forth top customers (by sales) of our products by
percentage of our net sales revenue in 2001, 2002 and 2003 and the type of
product purchased: -30-




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% of net sales revenueYear ended December 31Customers
    
    2001
    
    2002
    
    2003
    
    Products purchased(%)Nintendo(1)
    
    
    38.6
    
    
    
    34.2
    
    
    
    19.8
    
    
    Mask ROM, Flash, SLCRenesas(2)
    
    
    11.8
    
    
    
    2.3
    
    
    
    10.4
    
    
    SRAM, FlashHewlett Packard
    
    
    6.3
    
    
    
    10.3
    
    
    
    9.8
    
    
    Mask ROM, FlashSony
    
    
    0.2
    
    
    
    1.2
    
    
    
    4.0
    
    
    Mask ROM, FlashSankyo
    
    
    0.0
    
    
    
    0.6
    
    
    
    2.6
    
    
    FlashInventec
    
    
    1.4
    
    
    
    2.5
    
    
    
    2.2
    
    
    Mask ROMToshiba
    
    
    0.6
    
    
    
    1.6
    
    
    
    1.8
    
    
    Mask ROM, FlashPhilips
    
    
    2.4
    
    
    
    3.3
    
    
    
    1.6
    
    
    SLC
   (1)
    
    Represents our sales to Megachips, which on-sells our products to
Nintendo.(2)
    
    The semiconductor operations of Mitsubishi Electric were transferred to
Renesas on April 1, 2003. Nintendo The percentage of our total net sales revenue derived from Megachips,
which on-sells our products to Nintendo, was 38.6% in 2001, 34.2% in 2002 and
19.8% in 2003. Nintendo is one of the worlds largest users of Mask ROMs, which
are used in Nintendo hand-held gaming devices, including Game Boy Advance. We
have historically, since the beginning of our relationship, sold our products
to Nintendo through Megachips, although we work directly with Nintendo with
regard to technical matters. 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 2001 and 2002, Nintendo launched its new Game Cube 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. Currently we
provide product design, development and manufacturing services for multiple
semiconductor devices to Nintendo for the production of the Game Cube,
notwithstanding Nintendos change of principal memory devices for this product.
Our primary product offerings for the Game Cube relate mainly to accessory
products and include clock generator integrated circuits used in the console,
ethernet adaptors used in an accessory, radio frequency component integrated
circuits used in a wireless controller, 4Mb and 16Mb code Flash used in
conjunction with each game software, and 16Mb ASIC memory used in the consoles
operation system. However, the Game Cube platform faces competition in the gaming console
market, and Nintendo temporarily halted production of the Game Cube for a
number of months in 2003 in order to clear excess inventory. As a result, sales
of our products for Nintendo and in particular for the Game Cube as a
percentage of our total net sales have been declining since 2002, although
demand increased in late 2003 due to a significant reduction in prices for the
Game Cube. We have been shifting additional production towards the output of
Mask ROMs for Nintendos Game Boy series of handheld gaming devices, including
Game Boy Advance, which was released in the spring of 2001, and Game Boy
Advance Super, which was released in 2003. We expect to begin supplying Mask
ROMs for Nintendos new dual screen Game Boy DS around the end of the third
quarter of 2004. We expect that demand for Mask ROMs for handheld gaming
devices relative to demand for products for the Game Cube will continue to
increase. 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 payable over a thirty-six month period in monthly
installments. Title to the leased equipment will be transferred to us at the
end of the lease term. -31-




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Renesas We began our business relationship with Renesas, a joint venture between
Mitsubishi and Hitachi, after its
establishment in April 2003 following the transfer of certain agreements
between Mitsubishi and us to Renesas. Prior to this, our relationship was with
Mitsubishi. We supplied Mitsubishi with 4Mb SRAM based on 0.25 micron process
technology in 1999, 32Mb Flash products based on 0.25 micron process technology
in 2001, and 128Mb/64Mb Flash products based on 0.15 micron process technology
from 2002. In October 2003, we signed a memorandum of understanding (the
October MOU) with Renesas to cooperate in a joint effort to develop advanced
high density DINOR Flash technology and products based on 0.13 micron process
technology. We expect that this joint development will require close
cooperation involving various aspects of technology, design, production and
marketing. The October MOU will expire on June 30, 2004. We are
in the process of negotiating definitive agreements with Renesas. The percentage of our total net sales
revenue derived from Renesas was 11.8% in 2001, 2.3% in 2002 and 10.4% in 2003. Hewlett Packard We are the main supplier of Mask ROMs to Hewlett-Packard, worlds largest
manufacturer of laser and inkjet printers, which requires Mask ROMs to store
fonts in its laser and inkjet printers. We have had a relationship with
Hewlett-Packard for over 10 years. We also supply Flash ROM to Hewlett-Packard,
and we plan to market our SLC and ASIC products to Hewlett Packard in the
future. The percentage of our total net sales revenue derived from Hewlett
Packard was 6.3% in 2001, 10.3% in 2002 and 9.8% in 2003. Sales and Marketing We distribute our products on a global basis. The following table sets
forth percentages of net sales revenue based on the geographic regions of our
customers: Year ended December 31,Area
    
    2001
    
    2002
    
    2003(%)Japan
    
    
    50.1
    
    
    
    48.4
    
    
    
    41.0Taiwan
    
    
    26.3
    
    
    
    17.5
    
    
    
    32.1Hong Kong, Singapore and South Korea
    
    
    12.4
    
    
    
    22.2
    
    
    
    19.7United States
    
    
    8.3
    
    
    
    9.8
    
    
    
    4.6Europe and other
    
    
    2.9
    
    
    
    2.1
    
    
    
    2.6100.0
    
    
    
    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 in California, Chicago, Brussels, Tokyo, Osaka 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 non-exclusive
distributorships. Sales to Nintendo are made indirectly through Megachips.
Megachips receives a 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 Japan on a non-exclusive basis. Our customers in 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 wholly-owned subsidiaries, Macronix America and Macronix Europe N.V., which
sell the products through 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. Our agreements with our representatives and domestic and
international distributors are generally terminable by either party on short
notice. -32-




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Manufacturing and Quality Control Manufacturing 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 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
77% of the testing and assembly of our SLC products, while testing most of our
Mask ROM products internally. The following table sets forth our wafer fabrication capacity, in terms of
wafers per month, at Fab I and Fab II as of December 31, 2001, 2002 and 2003,
and our expected capacity as of December 31, 2004, which is subject to
adjustment depending on market conditions: 2001
    
    2002
    
    2003
    
    2004(1)Fab I (six-inch wafers)
    
    
    36,000
    
    
    
    35,000
    
    
    
    35,000
    
    
    
    33,000Fab II (eight-inch wafers)
    
    
    42,000
    
    
    
    40,000
    
    
    
    37,000
    
    
    
    36,000
   (1)
    
    Planned capacity. In order to maintain utilization rate at Fab I, which uses 0.32 micron and
above process technology, and minimize the amount of new investment required,
we plan to allocate to Fab I manufacturing of products that do not require
leading edge technologies, such as low-density Flash and ROM products and
certain of our SLC and SMS products, including high voltage, MEMS and embedded
ROM products. We began to manufacture Mask ROMs at Fab II at line widths 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 are
still in the process of converting some of our Mask ROM manufacturing capacity
in Fab II to Flash manufacturing capacity in anticipation of demand, and have
increased our Flash manufacturing capacity in the first half of 2004. We currently expect that Fab III will initially have a production capacity
of approximately 15,000 eight-inch wafers and 25,000 twelve-inch wafers per
month when fully loaded. Commencement and expansion of production at Fab III
will depend on the then prevailing market conditions. See Item 5. Operating
and Financial Review and Prospects  Overview  Cost Reduction Initiatives. Our sales and capacity utilization tend to follow seasonal trends,
particular with respect to Mask ROM, and typically peak around the end of the
third quarter and the beginning of the fourth quarter of each year. In order to
maximize our capacity utilization rate during the low season and to cope with
demands during the high season, we typically use our excess capacity during the
low season to build up an inventory of partially manufactured Mask ROMs and
store them in Mask ROM banks. This would then allow us to complete the
manufacture of Mask ROMs, incorporating our customers software codes, in a
shorter time during the high season. See Item 5. Operating
and Financial Review and Prospects  Overview 
General for our quarterly capacity utilization rates for the past three
years and Item 5. Operating and Financial Review and
Prospects  Capital Resources and Capital
Expenditures for our capital expenditure plans. Tower Semiconductor 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 to us that can employ
its microFLASH(r) technology. This technology is based on the proprietary N-ROM
technology licensed from Saifun. 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. To date, due to
adverse market conditions, we have placed orders for less wafers than we could
have required Tower Semiconductor to manufacture for us, and have used Towers
manufacturing services to manufacture only our EPROM and SLC products. 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 -33-




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available to us, and in the event we decide to provide foundry services
using NBit 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 manufacturing facility, up to certain
limits. Tower Semiconductors Fab II fabrication facility began production in
December 2003. 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. We
continue to own at least the specified minimum number of shares in Tower
Semiconductor. See Item 7. Major Shareholders and Related Party Transactions 
B. Related Party Transactions. Quality Control All of our products undergo 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
    
    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. We have experienced customer returns of less than 10 pieces per one
million pieces shipped, which is in line with industry standards. We operate a matrix system of quality assurance under which we maintain a
single, company-wide quality engineering center. As of December 31, 2003, we
employed 3,434 engineers, technicians and other employees whose duty is to
develop and maintain a quality system and 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 Quality Assurance 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 Lloyds Register
Quality Assurance 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. In January 2004, we received
the ISO/TS 16949 certification from the Lloyds Register Quality Assurance for
our quality system. 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. We also received the SONY Green Partner
certification in June 2004 for Environmental Quality Management. -34-




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Raw Materials Our primary raw materials are silicon wafers, 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 have been relatively
stable during the period of our operation. Raw material costs as a percentage
of our net sales revenue was 6.6% in 2001, 4.9% in 2002 and 5.3% in 2003. 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,
insufficient. 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
decreased on average by approximately 5.2% between December 31, 2001 and
December 31, 2002. Between December 31, 2002 and December 31, 2003, prices for
six-inch wafers and for eight-inch wafers both decreased on average by
approximately 26.5%. We obtain our wafer supplies principally from three suppliers, namely
Toshiba Ceramics Co., Ltd. and Sumitomo Corporation, Tokyo office, both of
which are overseas suppliers and Taisil Electronic Materials Corp., an ROC
company. We settle all our wafer purchases in U.S. dollars. Chemicals We obtain our supplies of industrial chemicals principally from a Taiwan
joint venture entity formed by Merck Group of Germany and Kanto Kagaku (K.K.)
of Japan. We obtain our supplies of bulk gases, such as nitrogen, oxygen and
hydrogen, principally from our investee, United Industry Gas Co., Ltd., 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 that allow us to reclaim approximately 73% of the water used in our
fabrication process. Although we have experienced several water shortages in
the past, we are not currently experiencing any water shortages. 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, particularly in the northern Taiwan region. The ROC government has
taken a series of measures to alleviate the impact of the water shortage,
including restricting agricultural water usage. However, if the water shortage
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 shortages, 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 complete
the construction of a dam in Hsinchu by 2005 to meet the water supply
requirements of the Hsinchu Science Park. Electricity Electricity is our main source of energy and we receive all of our
electricity supplies from the 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 from the -35-




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national power grid approximately 260 million kilowatt hours of
electricity in 2001, 316 million kilowatt hours of electricity in 2002 and 316
million kilowatt hours of electricity in 2003. 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. 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. 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. We spent an aggregate of NT$225 million in installing pollution prevention
equipment, operation, waste treatment and pollutant composition in 2001,
NT$1,299 million in 2002 and NT$479 million (US$14.1 million) in 2003. We
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 processed and disposed of by the
Science Park environmental cleaning team. In addition, we have also established
environmental protection policies 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. We received ISO 14001
certification for our environment management system in August 1997. We believe that our current and proposed operations comply in all material
respects with all presently applicable environmental laws and regulations. Insurance Our insurance coverage as of December 31, 2003 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;
    
    fidelity bond insurance on all employees, providing coverage against
losses due to employee fraud or dishonesty;
    
    marine cargo insurance; -36-




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
    
    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. 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, 2003, these participations included:  
    
    Tower Semiconductor, Ltd. (Tower Semiconductor)  A 15.8% indirect
interest in Tower Semiconductor. Tower Semiconductor is an independent
foundry manufacturer of semiconductor integrated circuits on silicon
wafers. As at December 31, 2003, we beneficially owned 15.8% of the
issued share capital of Tower Semiconductor. As at December 31, 2003,
Tower Semiconductor had a capital of US$441.0 million, net assets of
US$229.5 million and accumulated deficits of US$218.9 million. For the
year ended December 31, 2003, Tower Semiconductor recorded a net loss of
US$114.3 million. As at December 31, 2003, we held the shares of Tower
Semiconductor at a value of NT$2,180 million
(US$64.1 million). The shares of Tower Semiconductor held by us are fully paid-up. For the year
ended December 31, 2003, we did not receive any dividend on the shares
of Tower Semiconductor. For the year ended December 31, 2003 there were
no inter-company loans between us and Tower Semiconductor.
    
    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.
    
    Biomorphic VLSI Inc.  A 46.5% indirect equity interest in Biomorphic
VLSI Inc., or Biomorphic. Biomorphic develops and markets intelligent
imaging sensors for digital cameras, automobiles and industrial
applications. In the second half of 2003, as we had guaranteed a loan of
US$3.4 million made to Biomorphic, we injected a further US$3.4 million
in capital into Biomorphic to enable the loan to be repaid and also
exercised warrants at an aggregate exercise price of US$0.6 million.
    
    Ardentec Corporation  A 1.2% indirect and a 10.5% direct equity
interest in Ardentec Corporation, or 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 3.5% 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 26.3% indirect equity interest in RAIO
Technology Inc., which provides intellectual property, software and ASIC
design solutions for PC-peripheral products and consumer products.
    
    Magic Pixel Inc.  A 48.8% direct equity interest in Magic Pixel
Inc., which focuses on IC design of video and related products. Our
shareholding was diluted in 2003 from 100% as a result of a private
placement of shares by Magic Pixel Inc. to its employees. -37-




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C.     Organizational Structure The following table sets forth the identity of our subsidiaries and their
jurisdictions of incorporation as of December 31, 2003. Direct orTotal Paid-in
    
    IndirectJurisdiction of
    
    Capital of such
    
    EquityName of subsidiary
    
    Main business
    
    incorporation
    
    Entity
    
    InterestHui Ying Investment, Ltd.
    
    Investment
    
    Taiwan, ROC
    
    NT$500,000,000
    
    
    100
    %Joytech Co., Ltd.
    
    Systems Solutions
    
    Taiwan, ROC
    
    NT$96,775,000
    
    
    87.98
    %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$169,647,826
    
    
    100
    %New Trend Technology Inc.
    
    IC design
    
    California, USA
    
    US$23,000,000
    
    
    100
    %Wedgewood International Ltd.
    
    Investment
    
    British Virgin Islands
    
    US$35,010,000
    
    
    100
    %Macronix Pte Ltd.
    
    Sales and marketing
    
    Singapore
    
    US$100,000
    
    
    100
    %Kang Bao Investment Ltd.
    
    Investment
    
    Taiwan, ROC
    
    NT$500,000,000
    
    
    100
    %Run Hong Investment Ltd.
    
    Investment
    
    Taiwan, ROC
    
    NT$500,000,000
    
    
    100
    %MaxNova Inc.
    
    IC design
    
    Taiwan, ROC
    
    NT$50,000,000
    
    
    100
    %Macronix (Hong Kong) Co., Ltd
    
    Sales and marketing
    
    Hong Kong
    
    US$1,000,000
    
    
    100
    %
 Macronix (BVI) Co., Ltd. (Macronix BVI) Macronix BVI is an investment holding company. As at December 31, 2003, we
beneficially owned 100% of the issued share capital of Macronix BVI. As at
December 31, 2003, Macronix BVI had a capital of US$162.9 million, net assets
of US$56.6 million and accumulated deficits of US$113.7 million. For the year
ended December 31, 2003, Macronix BVI recorded a net loss of US$38.6 million. As at December 31, 2003, we held the shares of Macronix BVI at a value of
US$56.6 million. The shares of Macronix BVI held by us are fully paid-up. For
the year ended December 31, 2003, we did not receive any dividend on the shares
of Macronix BVI. For the year ended December 31, 2003 there were no
inter-company loans between us and Macronix BVI. Wedgewood International Ltd. (Wedgewood) Wedgewood is an investment holding company. As at December 31, 2003, we
beneficially owned 100% of the issued share capital of Wedgewood. As at
December 31, 2003, Wedgewood had a capital of US$35.0 million, net assets with
a negative value of US$60.2 million and accumulated deficits of US$95.2
million. For the year ended December 31, 2003, Wedgewood recorded a net loss of
US$31.1 million. As at December 31, 2003, we held the shares of Wedgewood at a negative
value of US$60.2 million. The shares of Wedgewood held by us are fully
paid-up. For the year ended December 31, 2003, we did not receive any dividend
on the shares of Wedgewood. For the year ended December 31, 2003 there were no
inter-company loans between Wedgewood and us. We injected a further US$20
million in capital into Wedgewood in 2003 through Macronix BVI to enable it to
fulfill its obligations under one of our derivative contracts. D.     Property, Plant and Equipment Our headquarters and Fabs I, II and III are located in Hsinchu, Taiwan.
Currently, all of our internal wafer fabrication is carried out at Fabs I and
II. Our location in the Science Park in Hsinchu provides certain advantages,
including preferential tax treatment, streamlined customs administration and
government-subsidized development grants. Fab I commenced commercial operations in 1992. Fab I occupies
approximately 172,000 square feet on land that is leased from the Science Park
Administration. 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 commercial operations in October 1997. Fab II occupies
approximately 883,000 square feet on land that is leased from the Science Park
Administration. 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 modernized production
equipment, incorporates computer automated production systems and will be able -38-




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to support 0.13 micron process technology without the need for major
upgrades. Fab II is equipped with a total energy management system and an
advanced waste treatment system. 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. In order to alleviate capacity
constraints in Fab II, which is an eight-inch facility, we have used
approximately 7% of the space in Fab III to install eight-inch equipment to
complement production at Fab II. 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, although we expect
that we will be able to ramp up production in approximately six months if
required by market conditions. In addition, we may commence operations at Fab
III sooner if a suitable co-operative opportunity presents itself with an
existing or new business partner. The Science Park Administration has granted us a parcel of land adjacent
to our Fab II under a lease that is renewable annually for a maximum of 20
years. This land is to be used to build research and development laboratories. 
 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, 2001, 2002 and 2003 included in this annual report and A.
Operating Results  U.S. GAAP Reconciliation. Overview General The semiconductor industry has been cyclical, with periods of growth being
followed by downturns due to global economic growth trends, inventory
adjustments as well as periodic mismatches between semiconductor demand and
manufacturing capacity. From mid-1999 through mid-2000, we 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 began in the
second half of 2000 and continued throughout 2001, 2002 and the first half of
2003, with continued erosion of the average selling prices of our products. In
2001, net sales revenue declined by 35.1% compared to 2000, and we recorded a
realized gross profit of NT$10,073 million, operating income of NT$3,516
million and net loss of NT$866 million. 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 depreciation and amortization, exceeded our net sales
revenue, resulting in a realized gross loss of NT$615 million and an operating
loss of NT$6,827 million. Due primarily to price erosion and related inventory
losses, we recorded a net loss of NT$11,357 million in 2002. The semiconductor industry began to show signs of recovery at the end of
the second quarter of 2003. In particular, we recorded an inventory loss
provision reversal of NT$1,185 million (US$34.9 million) in 2003. In 2003, net
sales revenue increased by 7.4% compared to the 2002, but our cost of goods sold
continued to exceed our net sales revenue, resulting in a realized gross loss
of NT$2,942 million (US$86.5 million) and an operating loss of NT$7,684 million
(US$226.1 million). In 2003, we recorded a net loss of NT$8,198 million
(US$241.2 million). Although there were continued signs of improvement in the semiconductor
industry during the third and fourth quarters of 2003, we cannot predict
whether this improvement will continue. We cannot assure you that these losses
will not continue or increase, or that we will be profitable 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 to be reflected in our
financial performance. Our capacity utilization rate is calculated using our actual production in
the respective period divided by total production capacity. Our quarterly
capacity utilization rates were, respectively, approximately 87%, 88%, 76% and
70% in 2001, approximately 50%, 64%, 65%, and 57% in 2002 and approximately
49%, 64%, 89% and 89% in 2003. Our capacity utilization for the first quarter
of 2004 was 91%. We expect that our capacity utilization for the second quarter
of 2004 will -39-




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continue to improve. We cannot assure you that our capacity
utilization rates will not decline in the future. Nintendo continued to be our single largest customer in 2001, 2002 and
2003. In 2001 and 2002, Nintendo launched its new Game Cube 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. 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, which was released in the spring of 2001, and Game Boy
Advance Super, which was released in 2003. In addition, we currently supply
other accessories for the Game Cube video game platform. Our sales of Mask ROMs
to Nintendo in 2001, 2002 and 2003 for use in Game Boy Advance software
cartridges accounted for a large portion of our total sales of Mask ROMs. 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. We completed a reorganization of our operations in 2003. Under our new
organizational and business unit structure, we organize our operations into two
strategic business units, namely, our Microelectronics and Memory Solution
Group and our Integrated Solution Group. Our Microelectronics and Memory
Solution Group is primarily responsible for the management and operation of our
business relating to our non-volatile memory products, such as Mask ROM, Flash
and EPROM products, and for our SMS products. Our Integrated Solution Group is
responsible for the management and operation of our business relating to our
SLC products. See Item 4. Information on the Company  B. Business Overview
 Our Reorganization. In addition, we continue to make adjustments in our
product mix and in our customer profile on an on-going basis. See Item 4.
Information on the Company  B. Business Overview   Our Strategy. For certain material developments of our company with respect to our
financial condition and results of operations since December 31, 2003, please
refer to the discussion set forth in Item 4. Information on the Company  B.
History and Development of the Company   Recent Developments. included
elsewhere in this annual report. Sales Revenue We derive our sales revenue primarily from the provision and sale of five
categories of semiconductor products and services: Mask ROM, Flash, EPROM, SMS
and SLC products. We earn additional revenues primarily from royalty income,
masking charges and profit sharing arrangements. The majority of our products are used in consumer electronics
applications. We have experienced in the past, and
we expect to continue to experience, seasonal fluctuations in the demand
for our products. In particular, we generally earn higher sales revenues during
the third and fourth quarters of the year. Product Pricing Trends The global semiconductor industry is highly competitive, and average
selling prices typically decrease over the life of a semiconductor product.
Average selling prices for our Mask ROM and Flash memory products have
generally declined on an annual basis since 1995, with the exception of 2000
and Mask ROM products in 2003, as discussed below. 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. In addition,
we rely on our leadership, market share and technology in the Mask ROM market
to minimize the impact of a general decline in average selling prices. When
this approach is successful, particularly in the Mask ROM market, we may be
able to minimize declines in the average selling prices of our products and
maintain our gross profit margins despite general industry-wide declines. In 2001, we experienced a decrease in the average selling prices for
almost all of our memory products, particularly Flash products, as compared to
2000. These price declines continued throughout 2001 and 2002. In 2003, prices
for Flash products continued to decline while prices for Mask ROM products
increased slightly due to more shipments of higher density Mask ROM products. -40-




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The following table sets forth the average selling prices per die for our
Mask ROM and Flash memory products for the periods indicated: Year ended December 31,2001
    
    2002
    
    2003(NT$ per die)Mask ROM
    
    
    89.6
    
    
    
    54.8
    
    
    
    56.9Flash Memory
    
    
    74.3
    
    
    
    49.0
    
    
    
    40.8
 The following table sets forth the average megabit (Mb) per die for our
Mask ROM and Flash memory products for the periods indicated: Year ended December 31,2001
    
    2002
    
    2003(Mb per die)Mask ROM(1)
    
    
    43.4
    
    
    
    39.4
    
    
    
    61.5Flash Memory
    
    
    6.1
    
    
    
    9.5
    
    
    
    11.4
   (1)
    
    The decrease in megabit per die for Mask ROM products from 2001 to 2002
was a result of a decrease in demand for high-density Mask ROM products
following Nintendos introduction of the Game Cube. The products we
produce for Nintendos Game Boy Advance are lower in density than the
products we produced previously for Nintendo 64. The increase in megabit
per die for Mask ROM products from 2002 to 2003 resulted from the increase
in demand for high-density Mask ROM products in 2003. 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. As a result of the price trend discussed above, beginning in 2002 our cost
of goods sold, a substantial portion of which consists of depreciation and
amortization, was higher than our net sales revenue. We realized a gross loss
of NT$615 million and an operating loss of NT$6,827 million in 2002. For the
same reason, in 2003, our cost of goods sold remained higher than our net sales
revenue, which resulted in a realized a gross loss of NT$2,942 million (US$86.6
million) and an operating loss of NT$7,684 million (US$226.1 million). Capital Expenditures and Increasing Depreciation The semiconductor industry is capital intensive. This requires us to
invest in plant and equipment on an on-going basis in order to increase
capacity and upgrade technology. In particular, fixed costs, primarily
depreciation expenses, 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. Higher capacity utilization
results in lower fixed costs per-unit 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. 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 increased by 9.2% to
NT$8,742 million in 2002 from NT$8,006 million in 2001. This increase was
primarily due to increased depreciation arising from a full year of increased
depreciation at Fab II following our capital expansion program for Fab II
completed in 2001 and the commencement of depreciation at Fab III. In 2003,
depreciation and amortization increased by 6.2% to NT$9,287 million (US$273.2
million). Based on our current depreciation schedule -41-




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following the capital expansion program at Fab II and the commencement of depreciation at
Fab III, we expect that we will record our highest level of depreciation expense in 2003.
Although we anticipate that our depreciation expense will decrease in 2004, our future
depreciation expense depends on our capital expenditure program. In 2001, 2002 and 2003, our depreciation expense was NT$7,443 million,
NT$8,107 million and NT$8,615 (US$253.4 million), and represented 34.2%, 49.2%
and 48.6% of net sales revenue, respectively. The significant increase in
depreciation expense as a percentage of net sales revenue in 2002 primarily
reflected the significant decrease in net sales revenue during those periods,
as well as increases in depreciation expenses following our capital expansion
program at Fab II and commencement of depreciation at Fab III, while the
increase in depreciation expense as a percentage of net sales revenue in 2003
despite the increase in depreciation expenses reflected the increase in net
sales revenue. 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, 2002 and the
first half of 2003, we may experience lower than expected demand from customers
and a sharp decline in average selling prices, resulting in an increase in
depreciation expense relative to net sales revenue. Inventory Due to seasonal fluctuations in the demand for our products, we choose to
build up inventory during low demand periods to decrease customer turnaround
time and to minimize fluctuations in levels of production during the year. This
seasonal buildup in our inventory increases our risk of inventory loss due to
obsolescence. Deteriorating market conditions in the semiconductor industry since the
second half of 2000 have resulted in a decline in average selling prices for
our products generally and a corresponding decrease in the stated value of our
inventories. We make provisions for inventory loss based on product age and our
evaluation of historical data and projected sales price and volume to determine
current trends so as to identify products or product classes that are at risk
of obsolescence or are slow moving. We recorded a reversal of inventory loss
provision of NT$1,185 million (US$34.9 million) in 2003 due to improving market
conditions, compared to an inventory loss provision of NT$2,929 million for the
year ended December 31, 2002 and NT$2,587 million for the year ended December
31, 2001. Research and Development We believe that research and development is critical to our future
success. We incurred expenses of NT$3,825 million in 2001, NT$3,806 million in
2002 and NT$2,738 million (US$80.6 million) in 2003 on research and
development, or 17.6%, 23.1% and 15.5% of net sales revenue in those periods,
respectively. See  Results of Operations for a more detailed discussion of
our research and development expenditures. Our reorganization in 2003 enabled us to consolidate our research and
development efforts and reduce the total number of projects by approximately
two-thirds. As a result, we have reduced our level of research and development
expenditures. See Item 5. Operating and Financial Review
and Prospects  Research and Development, Patents and Licenses, etc.  Research and
Development. Cost Reduction Initiatives As discussed above, average selling prices for our products have generally
declined over time. As a result, we need to reduce our costs continuously in
order to maintain the margins on our products. The need for such measures will
increase following our strategy to increase our production of Flash products,
which have a higher per unit cost. We seek to reduce our unit fixed costs by
focusing on technology migration and product development, as well as improving
manufacturing capabilities and maximizing sales volumes and capacity
utilization. In addition, we seek to leverage our memory products capabilities
for strategic manufacturing services for certain key customers in order to
minimize capacity loss during slow demand periods. For example, 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 currently employ 0.4 micron
process technology, 0.35 micron process technology and, to a limited extent,
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 - 42 -




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of 2002. We began mass production using 0.15 micron process technology for
Flash in the second quarter of 2003. We plan to migrate to 0.13 micron process
technology for Flash products produced at Fab II in late 2004. Production Capacity Due to decline in demand as a result of the market downturn in the
semiconductor industry, our wafer production in terms of eight-inch wafer
equivalents decreased 4.5% to 593,661 wafers in 2001 from 621,587 wafers in
2000 and further decreased 28.5% to 424,594 wafers in 2002. In 2003, our wafer
production increased 4.8% to 444,915 wafers. In order to decrease customer turnaround time and to utilize greater
economies of scale in the future, we have supplemented and increased our
manufacturing capacity. We have supplemented our logic process manufacturing
capacity by contracting for wafer fabrication on a foundry basis by third
parties, including Taiwan Semiconductor Manufacturing Co., Ltd and Tower
Semiconductor. We also have increased our overall 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
overall manufacturing capacity by approximately 15,000 eight-inch wafers and
25,000 twelve-inch wafers (56,520 eight-inch wafer equivalents) per month when
it is placed in operation. Although we currently are utilizing a portion of the
space in Fab III to increase our production capacity at Fab II, due to the
adverse market conditions currently prevailing in the semiconductor industry,
we expect commencement of full ramp-up of operations at Fab III to be delayed
until 2005 or later. The following table sets forth our wafer production (eight-inch
equivalents) by product for each of the periods indicated: Year ended December 31,2001
    
    2002
    
    2003(number of
    
    (% of total
    
    (number of
    
    (% of total
    
    (number of
    
    (% of totalwafers)
    
    production)
    
    wafers)
    
    production)
    
    wafers)
    
    production)Mask ROM
    
    
    289,538
    
    
    
    48.8
    
    
    
    151,384
    
    
    
    35.7
    
    
    
    166,627
    
    
    
    37.5Flash
    
    
    260,859
    
    
    
    43.9
    
    
    
    248,899
    
    
    
    58.6
    
    
    
    247,730
    
    
    
    55.7EPROM
    
    
    11,531
    
    
    
    1.9
    
    
    
    12,990
    
    
    
    3.1
    
    
    
    2,737
    
    
    
    0.6SMS
    
    
    23,918
    
    
    
    4.1
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    SLC(1)
    
    
    7,815
    
    
    
    1.3
    
    
    
    11,222
    
    
    
    2.6
    
    
    
    27,821
    
    
    
    6.2Total
    
    
    593,661
    
    
    
    100.0
    %
    
    
    424,594
    
    
    
    100.0
    %
    
    
    444,915
    
    
    
    100
    %
   (1)
    
    Yields of dies per wafer vary with each type of logic product
manufactured by us and a change in product mix may cause variations in
both wafer production and dies per wafer. Geographic Markets 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, based on sales
generated by our sales branches located in such regions: - 43 -




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##### Table of Contents



Year ended December 31,2001(1)
    
    2002(1)
    
    2003(1)(% of total
    
    
    
    
    
    (% of total
    
    
    
    
    
    (% of total(millions
    
    net sales
    
    (millions
    
    net sales
    
    (millions
    
    net salesin NT$)
    
    revenue)
    
    in NT$)
    
    revenue)
    
    in NT$)
    
    revenue)Japan
    
    
    10,893
    
    
    
    50.1
    
    
    
    7,983
    
    
    
    48.4
    
    
    
    7,269
    
    
    
    41.0Taiwan
    
    
    5,711
    
    
    
    26.3
    
    
    
    2,891
    
    
    
    17.5
    
    
    
    5,679
    
    
    
    32.1Hong Kong, Singapore
and South Korea
    
    
    2,702
    
    
    
    12.4
    
    
    
    3,656
    
    
    
    22.2
    
    
    
    3,487
    
    
    
    19.7United States
    
    
    1,808
    
    
    
    8.3
    
    
    
    1,617
    
    
    
    9.8
    
    
    
    823
    
    
    
    4.6Europe and other
countries
    
    
    633
    
    
    
    2.9
    
    
    
    345
    
    
    
    2.1
    
    
    
    454
    
    
    
    2.6Total
    
    
    21,747
    
    
    
    100.0
    
    
    
    16,492
    
    
    
    100.0
    
    
    
    17,712
    
    
    
    100.0
   (1)
    
    See note 18 to our consolidated financial statements for the years ended
December 31, 2001, 2002 and 2003 for a discussion of our export sales. The
numbers in this table do not represent sales by shipping destination or by
end customer origin. Our sales to Japan are generally denominated in U.S. dollars and Japanese
yen, our sales to Taiwan are generally denominated in U.S. dollars and NT
dollars, and our sales to other countries are generally denominated in U.S.
dollars. In 2001, 2002 and 2003, 90.8%, 99.2% and 96.4%, respectively, of our
net sales revenue was denominated in currencies other than NT dollars,
primarily U.S. dollars and Japanese yen. We use hedging techniques such as foreign currency borrowings, forward
exchange rate contracts and foreign currency swaps to mitigate our currency
exposure risks. 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 18 to our
consolidated financial statements for the years ended December 31, 2001, 2002
and 2003. 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. Inventories A principal risk in our industry is the rapid rate of obsolescence of
products due to changes in technology or other economic factors. Our financial
and production management evaluates historical experience, current trends and
projected sales prices and 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 an inventory loss
provision under ROC GAAP of NT$2,587 million in 2001 and NT$2,929 million in
2002 due to obsolete or slow moving items. We recorded an inventory loss
provision reversal of NT$1,185 million (US$34.9 million) in 2003 due to
improving market conditions. Stock Appreciation Right Program We entered into a derivative contract to hedge our risk related to our
stock appreciation right (SAR) program which, as amended, expires on May 5,
2005. We received or paid 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. We could settle portions of the contract at our
discretion up to the expiration date. Under ROC GAAP, we allocated 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 had vested with the same number of
shares referenced in the derivative contract. We recorded 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 recorded as investment gains or losses changes in
the value of the derivative contract that did not correlate with vested rights.
Therefore, to the extent the employees exercise price - 44 -




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on vested rights exceeded the fair market value of our shares, a portion
of the derivative obligation was not recorded. To the extent that employees
vested in rights for which the exercise price exceeded 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. Due to the expiration of the
SAR program, there were no unrecorded obligations relating to the derivative
contract as of December 31, 2003. 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 obligations under the SAR program. 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.
Our deferred tax assets relate principally to income tax credits that expire
between 2003 and 2007. 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
forecasts. Based on these projections, we estimate that a portion, but not all,
of these tax credits will be fully utilized prior to their expiration. We
expect to achieve future earnings through the expansion of our business.
However, we may not 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. As of December 31, 2003, our deferred tax assets exceeded
our deferred tax liabilities NT$7,392 million (US$217.5 million), and we
recorded a valuation allowance of NT$5,494 million (US$161.6 million) against
our tax assets resulting in net deferred tax assets of NT$1,898 million
(US$55.8 million). Cost Method Investments Under ROC GAAP, unrealized losses on marketable equity securities held for
short-term investment are recorded as investment loss in the statement of
operations, and 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. 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, 2003, we recorded a cumulative unrealized loss of NT$2 million
(US$0.1 million), which was primarily attributable to our investment in Tower
Semiconductor. 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 31,2001
    
    2002
    
    2003Sales revenue
    
    
    101.4
    
    
    
    100.9
    
    
    
    102.0Less: Sales returns
    
    
    (1.0
    )
    
    
    (0.2
    )
    
    
    (1.8
    )Sales discounts
    
    
    (0.4
    )
    
    
    (0.7
    )
    
    
    (0.2
    )Net sales revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0MMSG:Mask ROM
    
    
    56.6
    
    
    
    45.9
    
    
    
    42.1Flash
    
    
    14.0
    
    
    
    26.4
    
    
    
    32.8EPROM
    
    
    4.5
    
    
    
    3.6
    
    
    
    13.3SMS
    
    
    12.8
    
    
    
    2.5
    
    
    
    7.3ISG:SLC
    
    
    9.2
    
    
    
    17.6
    
    
    
    1.7Other(1)
    
    
    2.9
    
    
    
    4.0
    
    
    
    2.8Cost of goods sold
    
    
    (53.7
    )
    
    
    (103.7
    )
    
    
    (116.6
    )Gross profit (loss)
    
    
    46.3
    
    
    
    (3.7
    )
    
    
    (16.6
    )Operating expensesSelling expenses
    
    
    (2.8
    )
    
    
    (3.5
    )
    
    
    (3.2
    )Administrative expenses
    
    
    (9.7
    )
    
    
    (11.1
    )
    
    
    (8.1
    )Research and development expenses
    
    
    (17.6
    )
    
    
    (23.1
    )
    
    
    (15.5
    )Total operating expenses
    
    
    (30.1
    )
    
    
    (37.7
    )
    
    
    (26.8
    )Operating income (loss)
    
    
    16.2
    
    
    
    (41.4
    )
    
    
    (43.4
    )Non-operating income
    
    
    6.2
    
    
    
    2.8
    
    
    
    10.6Non-operating expenses
    
    
    (22.0
    )
    
    
    (30.2
    )
    
    
    (13.4
    )Income (loss) before taxes and minority interest
    
    
    0.4
    
    
    
    (68.8
    )
    
    
    (46.2
    )Income tax benefit (provision)
    
    
    (4.3
    )
    
    
    (0.1
    )
    
    
    (0.1
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    (3.9
    )
    
    
    (68.9
    )
    
    
    (46.3
    )
   (1)
    
    Other sales revenue includes royalty revenues, masking charges,
profit-sharing revenues and other operating revenues. - 45 -




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Year Ended December 31, 2003 compared to Year Ended December 31, 2002 Net Sales Revenue.Our total net sales revenue increased 7.4% to
NT$17,712 million (US$521.1 million) in 2003 from NT$16,492 million in 2002.
This increase was primarily due to increases in sales volume of Flash products
and SMS products, which were partially offset by the decreases in sales volume
of Mask ROM, EPROM and SLC products. Our net sales revenue from Mask ROM products decreased 1.5% to NT$7,463
million (US$219.6 million) in 2003 from NT$7,575 million in 2002. This decrease
was primarily due to a continued decrease in sales volume of Mask ROM products
in 2003, which was partially offset by an increase in the average selling
prices for Mask ROM products. Sales volume decreased to 128 million dies in
2003 compared to 138.0 million dies in 2002 as a result of decreased demand for
Mask ROM products from Nintendo following its introduction of the Game Cube
products. The average selling prices for Mask ROM products increased to NT$56.9
per die in 2003 from NT$54.8 per die in 2002, principally as a result of
increased sales of high-density Mask ROM products. The proportion of our net
sales revenue from Mask ROM products decreased to 42.1% in 2003 from 45.9% in
2002. Our net sales revenue from Flash products increased 33.4% to NT$5,810
million (US$170.9 million) in 2003 from NT$4,356 million in 2002. 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. Sales volume increased to 115.1 million dies in 2003 compared
to 100.8 million dies in 2002 due to an increased demand in game products,
printers and other consumer applications. Average selling prices for Flash
products decreased to NT$40.8 per die in 2003 from NT$49.0 per die in 2002,
principally as a result of declines in market prices, particularly in the first
half of 2003. The proportion of our net sales revenue from Flash products
increased to 32.8% in 2003 from 26.4% in 2002. Our net sales revenue from EPROM products decreased 48.7% to NT$304
million (US$8.9 million) in 2003 from NT$592 million in 2002. This decrease was
primarily due to the migration from EPROM products to Flash products by our
customers. Sales volume decreased to 15.9 million dies in 2003 compared to 30.6
million dies in 2002 as a result of the decline of the demand from our
customers. The average selling prices for EPROM products decreased to NT$19.2
per die in 2003 from NT$22.0 per die in 2002, principally as a result of the
downward price trend of our EPROM products. The proportion of our net sales
revenue from EPROM products decreased to 1.7% in 2003 from 3.6% in 2002. Our net sales revenue from SMS products increased 474.6% to NT$2,360
million (US$69.4 million) in 2003 from NT$411 million in 2002. This increase
was mainly due to the increased demand for the manufacturing service we provide
to Renesas as well as increases in purchase orders from our major existing
contract customers. The proportion of our net sales revenue from our SMS
products increased to 13.3% in 2003 from 2.5% in 2002. Our net sales revenue from SLC products decreased 55.5% to NT$1,287
million (US$37.9 million) in 2003 from NT$2,894 million in 2002. This decrease
was principally due to the decline in demand of SLC products from one of our
key customers, which was partially offset by increases generally in the average
selling prices for SLC products. The proportion of our net sales revenue from
our SLC products decreased to 7.3% in 2003 from 17.6% in 2002. Other sales revenue includes royalty revenues, masking charges,
profit-sharing revenues and other operating revenues. Other sales revenue
decreased 26.6% to NT$488 million (US$14.4 million) in 2003 from NT$664 million
in 2002. This decrease was primarily due to the decrease of profit sharing
received from Phillips. The proportion of our net sales revenue from others
decreased to 2.8% in 2003 from 4.0% in 2002. Cost of Goods Sold and Gross Profit (Loss).Cost of goods sold increased
20.8% to NT$20,657 million (US$607.7 million) in 2003 from NT$17,105 million in
2002. This significant increase was primarily due to the change in our product
mix towards a higher proportion of Flash products, which have higher
manufacturing costs per unit, and a 6.3% increase in - 46 -




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depreciation expense resulting from commencing depreciation at Fab III in
July 2002. See  Overview  Cost of Goods Sold  Capital Expenditures and
Depreciation Trend. The higher per unit manufacturing costs for our Flash
products reflect that our Flash technology was in the process of migrating to
more advanced technology and was therefore not cost competitive until around
the fourth quarter of 2003. As a result of the foregoing, our realized gross loss increased 378.1% to
NT$2,942 million (US$86.5 million) in 2003 from NT$615 million in 2002. We had
a negative gross margin of 16.6% in 2003 compared to a negative gross margin of
3.7% in 2002. Operating Expenses.Total operating expenses decreased 23.7% to NT$4,742
million (US$139.5 million) in 2003 from NT$6,212 million in 2002. This
decrease was primarily due to decreases in research and development expenses
and administrative expenses. Research and development expenses decreased 28.1%
to NT$2,738 million (US$80.6 million) in 2003 from NT$3,806 million in 2002,
due to our strategic policy of integrating our resources and streamlining the
number of research and development projects. See Item 5. Operating and
Financial Review and Prospects  C. Research and Development, Patents and
Licenses, etc.  Research and Development. Administrative expenses decreased
21.5% to NT$1,443 million (US$42.5 million) in 2003 from NT$1,838 million in
2002. This decrease was primarily due to cost control measures that we
implemented in 2003. Selling expenses remained relatively unchanged at NT$561
million (US$16.5 million) in 2003 compared to NT$568 million in 2002. Operating Loss.As a result of the foregoing, our operating loss
increased 12.6% to NT$7,684 million (US$226.1 million) in 2003 from NT$6,827
million in 2002. Non-Operating Income.Non-operating income increased 302.8% to NT$1,877
million (US$55.2 million) in 2003 from NT$466 million in 2002. This increase
was primarily due to an inventory loss provision reversal and an increase in
foreign exchange gains, which were partially offset by a decrease in interest
income and other income. We recorded an inventory loss provision reversal of
NT$1,185 million (US$34.9 million) in 2003 largely as a result of the increased
sales out of inventory that was written off for obsolescence in prior periods,
compared to an inventory loss provision of NT$2,929 million in 2002 resulting
from inventory obsolescence due to aging and price declines. Our foreign
exchange gains were NT$375 million (US$11.0 million) in 2003, principally as a
result of the appreciation of the NT dollar against the U.S. dollar as well as
the appreciation of the Japanese yen against the U.S. dollar, compared to a
foreign exchange loss of NT$321 million in 2002. Interest income decreased
52.1% to NT$103.1 million (US$3.1 million) in 2003 from NT$217 million in 2002,
primarily due to declining interest rates. Other income decreased 54.3% to
NT$100 million (US$2.9 million) in 2003 from NT$219 million in 2002. The higher
amount of other income in 2002 was principally the result of insurance claims
received in 2002 for earthquake damage that occurred in 1999 and the
electricity shutdown that occurred in 2000. Non-Operating Expenses.Non-operating expenses decreased 52.4% to
NT$2,370 million (US$69.7 million) in 2003 from NT$4,976 million in 2002. This
decrease was primarily due to an inventory loss provision reversal, foreign
exchange gains and a decrease in interest expense, which were partially offset
by increases in net investment loss, loss on allowance for prepaid expenses and
other expenses. As discussed above, we recorded an inventory loss provision
reversal of NT$1,185 million (US$34.9 million), compared to an inventory loss
provision of NT$2,929 million in 2002. Our foreign exchange gains were NT$375
million (US$11.0 million) in 2003, compared to foreign exchange losses of
NT$321 million in 2002. Interest expense decreased 12.9% to NT$1,078 million
(US$31.7 million) in 2003 from NT$1,238 million in 2002, principally as a
result of declining interest rates. Net loss from equity investment decreased
38.2% to NT$87 million (US$2.6 million) in 2003 from NT$141 million in 2002
because of approximately NT$117 million in losses from our equity investment in
Biomorphic in 2002, compared to approximately NT$43 million in 2003. However,
net investment loss increased 169.3% to NT$737 million (US$21.7 million) in
2003 from NT$274 million in 2002 because of a mark-down in investments in 2003
as a result of adverse market conditions. We recorded a loss on allowance for
prepaid expenses of NT$335 million (US$9.9 million) due to reserves for unused
prepaid credit for wafer production with Tower, compared to no loss in 2002.
Other expenses increased 81.3% to NT$132 million (US$3.9 million) in 2003 from
NT$73 million in 2002, primarily due to increased assets identified as idle in
2003 compared to 2002 and the related depreciation and market value decline for
such assets, which are reflected in other expenses rather than cost of goods
sold. Income Tax Expense.Total income tax expense increased 5.7% to NT$21
million (US$0.6 million) in 2003 from NT$20 million in 2002. This increase
resulted primarily from tax expenses relating to income earned by Macronix
(Hong Kong) Co., Ltd, which was a new consolidated subsidiary in 2003. Net Loss.As a result of the foregoing, our net loss decreased 27.8% to
NT$8,198 million (US$241.2 million) in 2003 from NT$11,357 million in 2002. - 47 -




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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 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 56.6% 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
26.4% in 2002 from 14.0% 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. Cost of Goods Sold and Gross Profit (Loss).Cost of goods sold increased
46.5% to NT$17,107 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 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$6,212
million in 2002 from NT$6,557 million in 2001. Selling expenses decreased 7.0%
to NT$568 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 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 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 compared to operating income of
NT$3,516 million in 2001. Other Income.Total other income decreased 65.6% to NT$466 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$217 million in 2002 from NT$496 million in 2001, principally as a result of lower interest
rates and lower cash deposits. - 48 -




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Other Expenses.Total other expenses increased 3.8% to NT$4,976 million in
2002 from NT$4,795 million in 2001. Our inventory loss provision increased
13.2% to NT$2,929 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 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 in
2002, compared to foreign exchange gains recorded in 2001 (discussed above).
Interest expense increased 5.5% to NT$1,238 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$73 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$228 million. Net Loss.As a result of the foregoing, we recorded a net loss of
NT$11,357 million in 2002 compared to a net loss of NT$866 million in 2001. 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 (l.34)% in 2001, (0.05)% in 2002 and
2.48% in 2003. Taxation Our facilities, Fab I, II and III, 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 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 a temporary exemption from income taxes
for our income attributable to sales of our products manufactured at Fab I and
Fab II after subtracting any value-added amount to our products attributable to
third-party contractors. We were entitled to choose a tax exemption period of
five years for Fab I and four years for Fab II. The tax exemption period
commences from the first date of sales, although we may defer the tax 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. Because we completed a substantial
expansion of Fab II in 2001, we are entitled to choose separate tax expansion
periods for Phase I and Phase II of Fab II. For Phase I of Fab II, we have
chosen the period from January 1, 2001 to December 31, 2004 as the four-year
tax exemption period. We have not chosen the tax exemption period for Phase II
of Fab II. Although this tax exemption benefit has been rescinded under an
amendment to the Science Park regulations effective on January 20, 2000, we are
still entitled to claim the tax exemption period for Phase II of Fab II. We
have not chosen the tax exemption period for Fab III. After the expiration of
the relevant exemption periods, we will apply for new tax exemptions under the
Statute of Upgrading Industries for the expansion of Fab II and Fab III in the
future. In 2001, the benefit was NT$606 million based on exempted income of
NT$2,426 million at a rate of 25%. 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 is also 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 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$738 million of investment credits in 2001, NT$318 million
of investment credits in 2002 and none in 2003. As of December 31, 2003, unused
investment credits available to reduce future tax payments amounted to NT$3,237
million (US$95.2 million), which expire between the period 2004 and 2007. - 49 -




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Net operating losses may be carried forward for a period of five years. As
of December 31, 2003, loss carryforwards available to reduce future taxable
income totaled NT$14,604 million (US$429.7 million) of which NT$6,045 million
expire in 2007 and NT$8,559 million expire in 2008. See note 14 to our
consolidated financial statements for the years ended December 31, 2001, 2002
and 2003 included in this annual report. In 2001, we recorded a tax provision of NT$1,255 million, which relates
primarily to deferred tax assets that, based on our estimates, will not be
realized. For this same reason, we recorded an additional tax provision of
NT$2,740 million in 2002. In 2003, we recorded an additional tax provision of
NT$1,256 million (US$37.0 million). Equity Derivative Contracts We entered into a derivative contract with our common shares as the
underlying reference securities in connection with our stock appreciation
rights plan in order to provide liquidity. This contract also included a
reference to foreign currency exchange rates. This contract significantly
affected our net income or loss during the period 2001 through 2003. The
carrying amount of this contract was a loss of US$60.3 million (NT$2,050
million) and the fair value of this contract was a loss of US$60.7 million
(NT$2,062 million) as at December 31, 2003. The negative carrying amount and
fair value were primarily attributable to a significant decline in the trading
price of our common shares. The contract, as amended, expires in May 2005. Future decreases in the trading price of our common
shares may continue to adversely affect the value of this equity derivative
contract. 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, 2001, 2002 and 2003 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 31,2001
    
    2002
    
    2003
    
    2003(NT$)
    
    (NT$)
    
    (NT$)
    
    (US$)(in millions)Net income (loss) in accordance with:ROC GAAP
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    (241.2
    )U.S. GAAP
    
    
    (4,463
    )
    
    
    (13,841
    )
    
    
    (8,877
    )
    
    
    (261.2
    )
 Year ended December 31,2001
    
    2002
    
    2003
    
    2003(NT$)
    
    (NT$)
    
    (NT$)
    
    (US$)(in millions)Shareholders equity in accordance with:ROC GAAP
    
    
    43,144
    
    
    
    30,214
    
    
    
    29,248
    
    
    
    860.5U.S. GAAP
    
    
    43,300
    
    
    
    28,351
    
    
    
    28,195
    
    
    
    829.5
 Note 20 to our consolidated financial statements for the years ended
December 31, 2001, 2002 and 2003 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$6,598 million in
2001. We had a gross loss in accordance with U.S. GAAP of NT$4,018 million in
2002 and NT$1,577 million (US$46.4 million) in 2003. Under U.S. GAAP, our gross - 50 -




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profit margin in 2001 was 30.3%, and we had negative gross margin of 24.4% in
2002 and 8.90% in 2003. Under U.S. GAAP we had an operating loss of NT$2,263
million in 2001, NT$10,186 million in 2002 and NT$6,649 million (US$195.6
million) in 2003. 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;
    
    marketable securities;
    
    derivative financial instruments;
    
    compensation expense pertaining to stock performance-based employee bonuses; and
    
    convertible debt securities with beneficial conversion features. 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 financial statements for the years ended December 31, 2001, 2002
and 2003 included in this annual report. Additional compensation expense in the amount of NT$4,273 million in 2001,
and nil for 2002 and 2003 were 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, allowance for prepayments and long-lived assets to be
abandoned 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, allowance
for prepayments and long-lived assets to be abandoned 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. - 51 -




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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. Under ROC GAAP, the criteria used in the determination of the valuation
allowance is less stringent than under US GAAP. Under US GAAP, if a company has
experienced cumulative losses in recent years, it is not generally able to
consider more subjective projections of future operating profits for the
purpose of determining the valuation allowance for deferred income tax assets.
A valuation allowance is provided on deferred tax assets to the extent that it
is not more likely than not that such deferred tax assets will be realized.
The valuation allowance that we recorded under US GAAP as of December 31, 2002
and 2003 were NT$7,836 million and NT$8,305 million (US$244.3 million). 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, 2001, 2002 and 2003 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 reduced net loss before taxes
under U.S. GAAP by NT$3 million in 2001, NT$3 million in 2002 and NT$3 million
(US$0.1 million) in 2003. 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 - 52 -




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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 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. We have 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. We
have 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. In
addition, for our share purchase agreement with Tower, we have also bifurcated
the derivative embedded in the agreement. 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, 2001, 2002 and 2003 included in
this annual report. After application of these principles, our net loss for U.S. GAAP purposes
decreased by NT$228 million in 2001 and NT$449 million in 2002, and increased
by NT$386 million (US$11.3 million) in 2003. 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, rights to receive
cash bonuses with respect to 72,208,948 shares were outstanding under the plan,
of which all were vested. In April 2003, all remaining rights to receive cash
bonuses under the plan, with respect to 72,208,948 shares, expired and were
cancelled. 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. Due to the reversal of compensation expense accrued on an
ROC GAAP basis, we recorded an increase in income adjustment of NT$496 million
in 2001, NT$93 million in 2002 and nil for 2003 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 rights vest.
When the rights vest, 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 - 53 -




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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$345 million in 2001, a reversal of compensation expense of
NT$20.9 million in 2002 and nil in 2003. 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 a loss of NT$17 million in 2001 and nil gain or loss in 2002 and
2003 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$3,335 million in 2001, NT$3,444 million in 2002 and NT$2,535 million
(US$74.6 million) in 2003. 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. Employee Stock Options Under ROC GAAP, there were no specific regulations with respect to the
accounting for stock options prior to 2004. Accordingly, we elected not to
account for stock options in the financial statements. Effective from January
1, 2004, companies are required to use either the fair value method or the
intrinsic value method to account for its stock options. Under the fair value
method, stock options are stated on the fair value calculated by pricing models
such as Black-Scholes or binomial model. Under the intrinsic value method,
stock options are recorded by the excess of the market price of the underlying
shares at the grant date over the exercise price of the stock option. The fair
value method is encouraged but not required. If the - 54 -




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intrinsic value is used, companies are required to disclose pro-forma net
income and earnings per share assuming the fair value method is used. Under
US GAAP, we elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for our 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 our employee stock options
equals the market price of the underlying stock on the date of grant, we are
not required to recognize any compensation expense. Reclassification of Capital Account to Accumulated Deficit Under ROC GAAP, under the approval of shareholders, a company may
reclassify its additional paid-in capital account to cover up its accumulated
deficit. Under US GAAP, according to SAB Topic 5S, the SEC staff believes a deficit
reclassification of any nature is considered to be quasi-reorganization. As
such, a company may not reclassify or eliminate a deficit in retained earnings
unless all requisite conditions for a quasi-reorganization are satisfied. We
reclassified NT$2,630,621 of our additional paid-in capital to the accumulated
deficit account. Under US GAAP, this reclassification is eliminated. Convertible Debt Securities with Beneficial Conversion Feature Under ROC GAAP, there are no specific regulations with respect to the
accounting for beneficial conversion features embedded in convertible
securities. Accordingly, we elected not to account for beneficial conversion
features in the financial statements. Under US GAAP, in accordance with EITF 00-27 Application of EITF98-5
Accounting for Convertible Securities with Beneficial Conversion Features
(EITF 00-27), convertible securities with beneficial conversion features or
contingently adjustable conversion ratios are recognized and measured by
allocating a portion of the proceeds equal to the intrinsic value of that
feature to additional paid-in capital. The amount to be allocated should be
calculated at the commitment date as the difference between the conversion
price and the fair value of the common stock into which the security is
convertible, multiplied by the number of shares into which the security is
convertible. The resulting discount on the convertible security is accreted, as
interest expense, from the date the beneficial conversion feature is fixed to
the stated redemption date. New Accounting Pronouncements 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. For variable interests in entities commonly referred to as special
purpose entities, implementation of this statement was required by January 1,
2004. For all other variable interest entities, implementation is required by
December 31, 2004. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The adoption of SFAS No. 149 in July 2003 did not have a
significant impact on our financial statements. In May 2003, the 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 - 55 -




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instruments entered into or
modified after May 31, 2003, and otherwise effective for all
existing financial instruments, except for minority interest in
limited-life entities beginning of the first interim period beginning after June 15,
2003. Certain provisions of this statement relating to noncontrolling interests
in limited-life subsidiaries were deferred indefinitely. We continue to monitor
the deferral status of SFAS 150. 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. In December 2003, the Securities and
Exchange Commission issued Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition, which codifies and rescinds certain sections of SAB No. 101,
Revenue Recognition, in order to make this interpretive guidance consistent
with EITF No. 00-21. We are currently in the process of evaluating any effect
the adoption of EITF No. 00-21 will have on our consolidated financial position
and results of operations. In July 2003, the EITF reached a consensus on Issue 03-5, Applicability
of AICPA Statement of Position 97-2 (SOP 97-2) to Non-Software Deliverables
(EITF 03-5). The consensus was reached that SOP 97-2 is applicable to
non-software deliverables if they are included in an arrangement that contains
software that is essential to the non-software deliverables functionality.
This consensus applied to our financial year beginning October 1, 2003. The
consensus did not have significant impact on our financial statements. Liquidity and Capital Resources We have historically financed our business with cash flow from operations,
short-term and long-term debt (including debt convertible into our common
shares) and 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. We cannot give any assurances that we will be able to secure
financing on satisfactory terms, or at all. Our net cash provided by operating activities was NT$2,317 million
(US$68.2 million) in 2003, compared to NT$271 million in 2002. The improvement
in operating cash flows in 2003 compared to 2002 was primarily due to the lower
net loss after taking into account non-cash adjustments and net changes in
operating assets and liabilities. Our non-cash adjustments in 2003 included depreciation and amortization of
NT$9,287 million (US$273.2 million) and an inventory loss provision reversal of
NT$1,185 million (US$34.9 million). Net changes in our operating assets and
liabilities which affected our net cash provided by operating activities in
2003 primarily included net decreases in inventories of NT$2,268 million
(US$66.7 million), net increase in notes and accounts payable of NT$569 million
(US$16.7 million) and net decreases in interest payable of debentures of
NT$990 million (US$29.1 million). Our non-cash adjustments in 2002 included depreciation and amortization of
NT$8,742 million and an inventory loss provision of NT$2,929 million. Net
changes in our operating assets and liabilities which affected our net cash
provided by operating activities in 2002 primarily included net increases in
inventories of NT$767 million, net increases in current liabilities of NT$338
million and net increases in notes and accounts receivables of NT$328 million.
The increase in depreciation and amortization in 2003 was due to our capital
expansion program at Fab II and commencement of depreciation at Fab III in July
2002. - 56 -




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Net cash provided by operating activities was NT$9,399 million in 2001,
after adjusting for, among other things, depreciation and amortization of
NT$8,006 million and inventory loss provision of NT$2,587 million. Net changes
in our operating assets and liabilities which affected our net cash provided by
operating activities in 2001 primarily included net increases in inventories of
NT$4,598 million, net decreases in other current liabilities of NT$196 million
and net decreases in notes and accounts receivables of NT$3,026 million. Net cash used in investing activities was NT$1,257 million (US$37.0
million) in 2003. The most significant components of these investing activities
were the payment of NT$2,616 million (US$77.0 million) for the purchase of
property, plant and equipment relating to the construction of Fab III and
decreases in restricted investments of NT$1,528 million (US$45.0 million)
relating to a sinking fund for our convertible bonds that matured in May 2003.
Net cash used in investing activities was NT$11,596 million in 2002. The most
significant components of these investing activities were the payment of
NT$8,434 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. 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, addition to other liabilities of NT$1,722 million, and
additions to long-term investments of NT$1,492 million. Our net cash provided by financing activities was NT$2,199 million
(US$64.7 million) in 2003. This amount primarily reflected the net decrease in
long-term debt and capital lease obligations of NT$2,366 million (US$69.6
million) as a result of conversions to equity, open market repurchases and
redemptions at the option of holders of our convertible bonds. This was
partially offset by the net increase short-term debt and short-term notes of
NT$625 million (US$18.4 million). Our net cash provided by financing activities
amounted to NT$6,173 million in 2002. This amount primarily reflected the net
increases in short-term debt of NT$1,425 million and long-term debt and capital
lease obligations of NT$5,793 million, partially offset by repurchases of
common shares of NT$1,046 million. Net cash provided by financing activities
amounted to NT$1,771 million in 2001. This amount primarily reflected the net
increase in long-term debt and capital lease obligations of NT$2,814 million,
partially offset by the net decrease in short-term debt of NT$853 million. As of December 31, 2003, our primary sources of liquidity were NT$10,649
million (US$313.3 million) of cash and cash equivalents and NT$849 million
(US$25.0 million) of short-term investments. Our short-term investments
primarily consisted of investments in bond funds denominated in New Taiwan
dollars. As of December 31, 2003, we had total short-term lines of credit of
NT$9,269 million (US$272.7 million), of which we had borrowed NT$2,748 million
(US$80.9 million). The interest rate for borrowings under these facilities
ranged from 1.33% to 2.75% per year as of December 31, 2003. 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. See note 8 to our
consolidated financial statements for the years ended December 31, 2001, 2002
and 2003 included in this annual report. Capital Resources and Capital Expenditures Our long-term liabilities consist primarily of long-term debt and capital
lease obligations. As of December 31, 2003, we had aggregate long-term debt,
net of the current portion, of NT$11,329 million (US$333.3 million). The
long-term debt was provided pursuant to eight different facilities with ROC
banks and financial institutions and four corporate bonds and debentures. The
long-term bank loans carry variable interest rates that ranged between 1.872%
and 5.155% per annum as of December 31, 2003, mature between 2004 and 2016 and,
in general, require payments of principal and interest on either a quarterly or
monthly basis throughout the remainder of their terms. See note 10 to our
consolidated financial statements for the years ended December 31, 2001, 2002
and 2003 included in this annual report. As of December 31, 2003, the maturity schedule of our existing long-term
debt is as follows: Period
    
    NT$ in millionsJanuary 1,
2004  December 31, 2004
    
    
    10,530January 1,
2005  December 31, 2005
    
    
    2,736January 1,
2006  December 31, 2006
    
    
    4,394January 1,
2007  December 31, 2007
    
    
    1,265January 1,
2008  December 31, 2008
    
    
    1,250After December 31, 2008
    
    
    1,683Total
    
    
    21,859
 - 57 -




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Primarily as a result of net losses that we incurred of NT$866 million in 2001,
NT$11,357 million in 2002 and NT$8,198 million (US$241.2 million) in 2003, and
unrealized losses on long-term investments of NT$540 million in 2001 and NT$331
million in 2002, shareholders equity declined by 3.2% in 2001, by 30% in 2002,
and by 3.2% in 2003 to NT$29,248 million (US$860.5 million) as of December 31,
2003. 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. We may be unable to meet the
specified debt to equity ratios unless we are able to raise additional equity
funding. In November 2003, we sold 475,000,000 new common shares for cash
pursuant to a share offering in Taiwan. If we had not raised this additional
equity in the share offering, we may not have been able to meet the financial
ratios in our loan agreements as of December 31, 2003. We may need to issue additional shares in the future to further increase
shareholders equity, and we cannot assure you that we will be successful in
selling all or any of such common shares. If we continue to have losses and 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 or defaults 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. On March 31, 2004, we announced a proposed increase in our issued share
capital for the issue of up to 1,300,000,000 common shares. From time to time,
we may offer and issue rights or overseas depositary receipts. The size and the
price range of any proposed issue will be determined by our board of directors
upon approval by the ROC SFC. In addition, 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 as of December 31, 2003 were the following
convertible bonds and debentures, all of which are convertible into common
shares (or ADSs for the 0.5% convertible bonds due February 7, 2007) in
accordance with their terms:  
    
    US$169.2 million principal amount of 0.5% convertible bonds due
February 7, 2007, issued in February 2002 and redeemable at the option
of the holders in August 2004. The outstanding principal amount as of
December 31, 2003 was US$169.2 million (NT$5,749 million). Due to
repurchases by us in the open market, as of May 31, 2004, the
outstanding principal amount of the bonds was US$136.7 million (NT$4,646
million);
    
    US$90 million principal amount of zero coupon convertible bonds due
February 10, 2008, issued in February and March 2003 and redeemable at
the option of the holders annually each February. The outstanding
principal amount as of December 31, 2003 was US$90 million
(NT$3,057 million). On February 10, 2004, pursuant to the exercise of an option by
holders of the bonds, we redeemed US$78.1 million aggregate principal
amount of such bonds. As of May 31, 2004, the outstanding principal
amount of the bonds was US$6.4 million (NT$218 million);
    
    NT$3,200 million principal amount of domestic zero coupon convertible
debentures due December 11, 2007, issued in December 2002 and redeemable
at the option of the holders in December 2005 and December 2006. Due to
repurchases by us in the open market, the outstanding principal amount
of the debentures as of December 31, 2003 was NT$767 million (US$22.6
million), and the outstanding principal amount of the debentures as of
May 31, 2004, was NT$239 million (US$7.0 million). In April 2004, we sold 13,125,000 GDSs, representing 525,000,000 new
common shares, for net proceeds of approximately US$173.25 million, to fund
bond redemptions and for our capital expenditures. We issued approximately NT$3.0 billion principal amount of secured
corporate bonds in Taiwan in the months of October and November 2001 due in
October 2006 to fund the construction of Fab III, as well as the purchase of
machinery and equipment and other capital expenditures. - 58 -




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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$6,610 million (US$194.5
million) of the syndicated loan as of May 31, 2004. We may only drawdown these
amounts only for the purchase of certain specified equipment. In addition, we
had another syndicated loan with an outstanding principal amount of NT$5,390
million (US$158.6 million) as of May 31, 2004, which we are not able to make
additional draw downs from in the future. Among our total long-term debt as of December 31, 2003 of NT$21,859
million (US$643.1 million), a total of NT$12,286 million (US$361.5 million) was
secured by our assets, principally property, plant and equipment. In the third quarter of 2001, we entered into a capital equipment lease
agreement with Nintendo for the use of certain manufacturing equipment in the
amount of US$75 million, payable in 36 monthly installments between July 31,
2002 to June 30, 2005. As of December 31, 2003, we had aggregate lease
obligations of US$28.2 million (NT$959 million) under the Nintendo lease. The
lease term is from July 31, 2001 to June 30, 2005, and title to the leased
equipment will be transferred to us at the end of the lease term. In addition to the foregoing, we may have obligations with respect to our
equity derivative contract that, as amended, expires in May 2005. We may
roll-over, contract or settle these potential obligations, including by using
US$44.2 million (NT$1,531 million) already deposited with a financial
institution as collateral for our exposure under this contract. We are unable
to withdraw the deposited amount to utilize for other purposes until the
contract is settled. As of December 31, 2003, we also had US$20 million
deposited with the financial institution for our exposure under this contract.
With respect to the US$20 million deposit, we are able to withdraw the
deposited amount to utilize for other purposes if our share price is above a
certain percentage of the exercise price of the contract. As of
May 31, 2004, the balance of the deposit was US$5 million. 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$9,078 million
in 2001, NT$8,975 million in 2002 and NT$1,606 (US$47.3 million) in 2003. The
following table sets forth our principal capital expenditures incurred in 2001,
2002 and 2003: Year ended December 31,2001
    
    2002
    
    2003(NT$ million)
    
    (NT$ million)
    
    (NT$ million)Fab I
    
    
    609
    
    
    
    370
    
    
    
    88Fab II
    
    
    2,915
    
    
    
    1,184
    
    
    
    228Fab III
    
    
    3,726
    
    
    
    4,720
    
    
    
    834Others
    
    
    1,828
    
    
    
    2,701
    
    
    
    456Total
    
    
    9,078
    
    
    
    8,975
    
    
    
    1,606
 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. In 2003, our capital expenditures consisted mainly
of residual payments following the completion of the construction of Fab III
and our upgrade of Fab II. We have budgeted capital expenditures of approximately NT$732 million for
2004, primarily to purchase machinery and equipment to change our product mix
to produce more Flash products as well as for ongoing upgrading of our
facilities. We intend to fund these capital expenditures for 2004 from our cash
flows from operations. 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. In order to commence commercial operations for our Fab III, we will
require funding for our capital expenditures for equipment, which we expect we
will obtain 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. - 59 -




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Contractual Obligations The following table sets forth information on our material contractual
obligated payments for the periods indicated as at December 31, 2003: Payments Due by PeriodJanuary 1,
    
    January 1,
    
    January 1,2004 to
    
    2005 to
    
    2008 toDecember 31,
    
    December 31,
    
    December 31,Total
    
    2004
    
    2007
    
    2009
    
    Thereafter(in millions of NT$)Long-term debt
    
    
    21,859
    
    
    
    10,530
    
    
    
    8,395
    
    
    
    2,501
    
    
    
    433Capital lease obligations (1)
    
    
    958
    
    
    
    633
    
    
    
    325
    
    
    
    
    
    
    
    Operating lease obligations(2)
    
    
    756
    
    
    
    95
    
    
    
    240
    
    
    
    129
    
    
    
    292Letters of credit
    
    
    306
    
    
    
    306
    
    
    
    
    
    
    
    
    
    
    
    Construction and equipment
purchase obligations(3)
    
    
    2,183
    
    
    
    2,183
    
    
    
    
    
    
    
    
    
    
    
    License fees(3)(4)
    
    
    884
    
    
    
    544
    
    
    
    340
    
    
    
    
    
    
    
    Other long-term liabilities(5)
    
    
    192
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192Total
    
    
    27,138
    
    
    
    14,291
    
    
    
    9,300
    
    
    
    2,630
    
    
    
    917
   (1)
    
    Capital lease obligations represent our commitments for leases of
equipment.(2)
    
    Operating lease obligations represent our commitments for leases relating
to property and research and development software. See note 16c and 16d to
our consolidated financial statements.(3)
    
    We cannot forecast the time at which our construction and equipment
purchase obligations and certain of our license fees become due.(4)
    
    License fees include the fixed amount of royalty
payments. See note 16e and 16f to our consolidated financial statements.(5)
    
    Other long-term liabilities include accrued
pension cost and other liabilities  refundable
deposits. Commitments and Contingencies 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. Off-balance Sheet Arrangements There are no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues, or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors. Research and Development We believe that research and development is critical to our future
success. We incurred expenses of NT$3,825 million in 2001, NT$3,806 million in
2002 and NT$2,738 million (US$80.6 million) in 2003 on research and
development, or 17.6%, 23.1% and 15.5% of net sales revenue in those periods,
respectively. On an ROC GAAP basis, royalty payments are included in research
and development expense. Our reorganization in 2003 enabled us to consolidate our research and
development efforts and reduce the total number of projects by approximately
two-thirds, to focus on those with strategic significance to us. As a result,
we have, beginning in 2003, reduced our level of research and development
expenditures. - 60 -




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As of December 31, 2003, we had 432 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. Our research efforts in the memory area
presently include development of Flash memory based on Nbit technology, the
development of 0.13 micron process technology for the manufacture of Mask ROM
and the joint development of 0.13 micron process technology with Renesas based
on its DINOR Flash design. 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
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; 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. SMS  
    
    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. - 61 -




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SLC  
    
    a 64-voice polyphonic sound generator for cellular phone ring tones;
    
    an audio control chip featuring long-time recording;
    
    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
    
    a new architecture for the provision of data storage for SOC devices;
    
    provide intellectual property libraries and design services on single
voltage embedded Flash compilers, embedded mix signal devices, logic
devices and SRAM/ROM memory devices for SOC development of audio compact
disc, general positioning system, internet appliance, LCD monitor and
educational and learning systems applications;
    
    develop embedded EEPROM intellectual property for smart card applications;
    
    introduce low-end derivative processes for consumer products; and
    
    develop a GSM base band chipset and module, which is a digital signal
processor and controller, for wireless communication applications. Intellectual Property 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 own patents for a number of processes relating to our Mask ROM,
Flash, EPROM and SLC products in various countries, including the United States
and Taiwan. As of December 31, 2003, we had a total of 471 U.S., 650 ROC, 4
Chinese, 14 Japanese and 26 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 2022. As of
December 31, 2003, we had over 1,900 patent applications pending in various
jurisdictions, including the United States, Taiwan, China, Japan and Europe. We
intend to continue to seek patent protection on significant new inventions. We have registered 18 types of trademarks including MXIC, Macronix,
MX and MTP EPROM. As of December 31, 2003, we had a total of 107 trademark
registrations granted and 20 applications pending in various jurisdictions
including Australia, China, the European Union, India, Japan, Korea, Singapore,
Taiwan and the United States. As is the case with many companies in the semiconductor industry, we have
from time to time experienced incidents of infringement of our intellectual
property rights and illegal copies of our products, including some
incorporating our trademarks. None of these, however, have 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 counsels to review and document our own patent
monitoring and enforcement process. 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. We have entered into patent license or cross-license agreements with
companies such as IBM, AT&T Corporation (AT&T) and Agere Systems Inc.
(Agere). We have also entered into an agreement with Saifun that provides us with a
non-exclusive, non-transferable, worldwide license to develop and manufacture
products based on its N-ROM technology. The license is effective for the
duration of the Saifun patents and thereafter shall continue on a year-to-year
basis. Payments under license or cross-license agreements amounted to NT$176
million in 2001, NT$777 million in 2002 and NT$192 million (US$5.7 million) in
2003. - 62 -




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We license the manufacturing technology underlying a variety of our memory
products, including Mask ROM devices, to third parties. We earned in royalties
approximately NT$77 million in 2001, NT$34 million in 2002 and NT$20 million
(US$0.6 million) in 2003. Industry Trend General Semiconductor integrated circuits, or ICs, are critical components used in
a wide and growing array of electronic systems. In recent years, semiconductor
performance has improved markedly and the size and cost of ICs have decreased.
As a result, ICs have expanded from their original primary application in
computers to other applications, including consumer electronics,
telecommunications systems, automation and control systems and security
systems. As a result of increasing applications for semiconductor ICs as well
as the increasing value of semiconductors used in electronic systems, the
semiconductor market has grown at a faster rate than the electronic system
industry. The semiconductor industry has been cyclical, with periods of growth being
followed by downturns due to global economic growth trends, inventory
adjustments as well as periodic mismatches between semiconductor demand and
manufacturing capacity. The semiconductor industry commenced a recovery in
1999, after a down cycle in the late 1990s, and recorded a 37% year on year
growth in 2000. Since the beginning of 2001, however, as demand from the
computing and communications sectors declined, the industry experienced excess
capacity, overproduction, significant inventory buildup and consequent
decreases in average selling prices. In 2002, while unit volume shipments grew
in the first half, in part due to inventory replenishment, IC unit volume
growth was weaker in the second half of the year. Beginning in mid-2003, the
industry has seen what are believed to be initial signs of recovery, with
increased IC demand and, for certain products, a slowdown and even a reversal
of the decline in average selling prices. Historically, semiconductor ICs were principally used in the computing
industry. However, future growth of the semiconductor industry is expected to
be driven by increasing semiconductor content in consumer electronic
applications as well as in the communications industry. These applications
could include wireless or handheld devices, DVD players, flat panel digital
televisions, digital cameras, MP3 digital audio players, video game consoles
for internet games, electronic dictionaries and electronic books. These new
applications typically require semiconductors of increasing power and
decreasing size, which is expected to drive innovation and product volume
growth. For example, next generation mobile phone handsets increasingly have
features that support more data processing applications, multimedia
applications and internet applications, and these applications are likely to
drive the consumption of high performance logic and memory products, such as
high-density Mask ROM and Flash products. Semiconductor Products Semiconductors may be classified based on the type of technology used:
analog, digital or mixed signal. 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 more 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. Nonvolatile memories are typically used to store program instructions that
control the operation of microprocessors and electronic systems. There are four
major 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. Measured by cost per Mb, Mask ROM is
the least expensive and the most cost-effective nonvolatile memory currently
produced. Mask ROM is widely applied - 63 -




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in the video game and printer applications given its non-erasable nature
and inexpensive unit cost. Long-term proliferation of new consumer electronic
products, such as electronic books, electronic dictionaries and multimedia
cards for third generation phone applications, is expected to 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. EEPROM, or electronically erasable programmable ROM, devices, can be
electronically altered while remaining in the system. This allows system
manufacturers to reprogram efficiently in the system to achieve several
important advantages in terms of cost, speed, customization and data storage
functions. However, EEPROM has remained considerably more expensive than EPROM
for a given amount of storage capacity, commonly referred to as density. As a
result, its 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. With Flash ICs, 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. As Flash products
continue to improve in performance and decrease in cost, the applications for
Flash products are expected to expand rapidly. Flash demand has increased
significantly in recent years, driven by growing usage in cellular phones,
VCD/DVD players, digital television recorders, digital still cameras 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). 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. Many electronic system makers therefore prefer to incorporate application
specific integrated circuits, or ASICs, which are custom-designed
semiconductors, into their products. These devices include a broad range of
full-custom, semi-custom and application-specific standard product logic
devices, which have been developed specifically for direct use into a wide
variety of applications. Compared to memory products, logic devices are much
more differentiated and dependent upon intellectual property and advanced
product design skills. 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 ICs. SOC
products 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 growing shift in 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, which is expected to continue
to drive the demands for SOC solutions. - 64 -




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##### Table of Contents



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, his position with us, the date of his initial appointment
and his age as of June 19, 2004. 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
    
    AgeDing-Hua Hu(1)
    
    Executive Director and
Chairman
    
    November 25, 1989
    
    
    62Miin Wu
    
    Executive Director and
President
    
    November 25, 1989 and September 1,
1989
    
    
    55H.C. Chen(2)
    
    Executive Director
    
    July 18, 1992
    
    
    65Dang-Hsing Yiu
    
    Director and Chief
Operating Officer
    
    June 5, 1995 and June 29, 1998
    
    
    51C.Y. Lu
    
    Director and Chief
Technology Officer
    
    April 18, 2003 and October 1, 1999
    
    
    53Raymond S. Mak
    
    Director and Vice President
    
    June 29, 1998 and September 1, 1995
    
    
    53Simon Wang
    
    Director and Vice President
    
    June 18, 2004 and February 1, 2001
    
    
    49J.P. Peng(3)
    
    Director and Vice President
    
    June 18, 2004 and February 1, 2001
    
    
    48C.L. Liu
    
    Independent Director
    
    June 27, 2003
    
    
    69Simon M. Sze
    
    Independent Director
    
    June 27, 2003
    
    
    67Cheng Yi Fang
    
    Independent Director
    
    June 18, 2004
    
    
    62Y.S. Chung(4)
    
    Director
    
    June 18, 2004
    
    
    68Hui Yin Investment
Ltd.
    
    Director
    
    April 19, 2001
    
    Roger Chu(4)
    
    Supervisor
    
    July 18, 1992
    
    
    56Ping Tien Wu
    
    Supervisor
    
    November 27, 1993
    
    
    62J.D. Lee(3)
    
    Supervisor
    
    June 18, 2004
    
    
    46Paul Yeh
    
    Associate Vice President - Finance Center
    
    July 1, 2001
    
    
    47
   (1)
    
    Nominee of Champion Investment Corporation.(2)
    
    Nominee of Hung Chih Investment Corporation.(3)
    
    Nominee of Shun Yin Investment Corporation.(4)
    
    Nominee of Delta Electronics 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
Venture Capital, a shareholder of our company. Dr. Hu has additionally served
as the chairman of AVID Electronics Corporation as well as a director of ZYXEL
Communication Corporation, Weltrend Semiconductors Inc., United Integrated
Services Co., Ltd. and Fulbond Holdings Limited. 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 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. 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. - 65 -




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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. Simon Wanghas been a vice president since 1991 and a director since 2004.
He received a Ph.D. in chemical engineering from the University of Columbia. J.P. Penghas been a vice president since 1991 and a director since 2004.
He received a M.S. degree in electrical engineering from the University of
Iowa. C.L. Liuhas been a director since 2003. He has been the president and
professor of computer science at National Tsing Hua University in Taiwan since
1998. He also has been the associate provost of the University of Illinois at
Urbana-Champaign since 1995. Mr. Liu received a Ph.D. in electrical engineering
from the Massachusetts Institute of Technology. Simon M. Szehas been a director since 2003. He worked with Bell
Laboratory from 1963 to 1989. Currently, he is UMC chair professor, professor
of NCTU and president of National Nano Device Laboratory. Mr. Sze received a
Ph.D. in electrical engineering from Stanford University. Cheng Yi Fanghas been a director since 2004. 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. Y.S. Chunghas been a director since 2004. He is also the president of
Nanyang Technology Corporation. He received a M.S. degree in electronic
engineering from the University of Texas. Hui
Yin Investment Ltd., appointed as a director on April 19,
2001, has not
yet appointed a representative. 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. 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. J.D. Lee has been supervisor since 2004. He is also president of Chien
Kung Venture Capital, Chien Cheng Venture Capital and Hon Pang Venture Capital.
He received a B.S. degree in industrial management from the National Taiwan
Institute of Technology. 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 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. - 66 -




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B.
    
    Compensation The following table sets forth cash remuneration paid to our current
directors, supervisors and executive officers in 2003: TotalName
    
    Position with our Company in 2003
    
    compensation(NT$)Ding-Hua Hu
    
    Executive Director and Chairman
    
    
    1,802,000Miin Wu
    
    Executive Director and President
    
    
    4,264,000H.C. Chen
    
    Executive Director
    
    
    112,800An Cheng(1)
    
    Director
    
    
    99,600Ing-Jiunn Hai(1)
    
    Director
    
    
    99,600Hong-Hui Chen(1)
    
    Director
    
    
    86,000Dang-Hsing Yiu
    
    Director and Chief Operating Officer
    
    
    3,601,000C.Y. Lu
    
    Director and Chief Technology Officer
    
    
    2,643,000Y. S. Tan(1)
    
    Director and Vice President
    
    
    1,689,000Raymond S. Mak
    
    Director and Vice President
    
    
    510,000C.L. Liu
    
    Independent Director
    
    
    50,900Simon M. Sze
    
    Independent Director
    
    
    50,900Fuja Shone(2)
    
    Director
    
    
    914,000Wen-Lung Lee(3)
    
    Supervisor
    
    
    99,600Roger Chu
    
    Supervisor
    
    
    99,600Ping Tien Wu
    
    Supervisor
    
    
    99,600Cheng Yi Fang
    
    Supervisor
    
    
    99,600Paul Yeh
    
    Associate Vice President in charge of Finance Center
    
    
    2,181,000Total
    
    
    
    
    
    
    18,502,200
   (1)
    
    Term as director ended on June 18, 2004 with election of new directors.(2)
    
    Resigned from office effective April 18, 2003.(3)
    
    Resigned from office effective November 11, 2003. According to our Articles, we may distribute 2.0% of distributable
earnings to our directors and supervisors as compensation. In the event that a
director or supervisor serves as a representative of a legal entity, such
compensation is paid to the legal entity. We pay our executive officers monthly
salaries, including our Chairman, in addition to employee bonuses. As of December 31, 2003, 72,819,145 shares were held by directors,
supervisors and executive officers. In addition, the president, vice-president,
executive directors, and the associate vice president of the finance center
combined, held options to purchase up to 10,672,559 shares of the company.
There have been no loans or advances made by us or any of our subsidiaries to,
or guarantees given by us or any of our subsidiaries in relation to loans or
advances received by, the directors, supervisors and executive officers. We are
not involved in any unusual transactions (such as purchases outside normal
activities, acquisitions or disposals of assets) with any of our directors,
supervisors or executive officers. All material transactions between the company and its directors,
supervisors and executive officers are described in Item 7. Major Shareholders
and Related Party Transactions  B. Related Party Transactions.  C.
    
    Board Practices Our shareholders elect the members of our board of directors. As of June
19, 2004, our board of directors is currently composed of 13 directors, three
of whom are members of our executive director committee and three of whom are
independent directors. 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
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. All of our directors were elected or re-elected on June 18, 2004 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
three supervisors, each of whom were elected or re-elected on
June 18, 2004 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. - 67 -




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Certain of our directors and supervisors serve in their capacity as
representatives of the corporate entities who hold the board or supervisor
seats and do not serve in their individual capacity. Consequently, if any of
these individuals withdraws, dies or otherwise becomes unable to serve, the
corporate entity he or she represents has the ability to replace that person
with a different representative of its choice. Hui Yin Investment Ltd.,
appointed as a director on April 19, 2001, has not yet appointed a representative. We currently have three independent directors initially elected or
re-elected on June 18, 2004, namely, Mr. Liu, Mr. Sze
and Mr. Fang. We are required under Nasdaq rules to have a
majority independent board and an audit committee consisting of at
least three independent directors by July 31, 2005, and
currently rely on this extended deadline for foreign private issuers.
We believe that our independent directors substantially comply with
applicable criteria for determining independence, although our board
of directors has not affirmatively made such determination. We intend
that our board of directors will make an affirmative determination
with regard to the independence of our audit committee members on or
before the date it sets up an audit committee. Board Committees We have not established an Audit Committee, and are in the process of
evaluating our current governance structures and audit committee requirements
under both local and U.S. laws and regulations. ROC law does not require us to
have an audit committee, and we had previously, since we were listed on Nasdaq
in 1996, obtained an exemption from Nasdaq from its requirement to have an
audit committee. We intend, however, to fully comply with all applicable SEC
rules and regulations and Nasdaq requirements regarding the need for, and
composition of, an audit committee. We are required under Nasdaq rules to set
up an audit committee by July 31, 2005. Prior to forming an audit committee,
our board of directors and supervisors are responsible for performing the
functions that our audit committee will, upon establishment, perform. We currently do not have a remuneration committee or compensation
committee, although we are in the process of evaluating our current governance
structures.  D.
    
    Employees As of December 31, 2003, we employed 3,434 full time employees, of whom
451 were executive officers and administrators, 1,503 were engineers and
technicians and 1,480 were operators of machinery and equipment. Of all our
operators, we employed 181 persons from outside Taiwan that are based in
Taiwan. Approximately 26.3% of our employees as of that date had undergraduate
degrees, including approximately 1.2% who possessed doctoral degrees and
approximately 20.6% who held masters degrees. As of December 31, 2003, the
average age of our employees was 31.3 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
    
    2001
    
    2002
    
    2003Executive and Senior Managers
    
    
    245
    
    
    
    299
    
    
    
    278Supporting Staff and Administrators
    
    
    537
    
    
    
    204
    
    
    
    173Engineers and Technicians
    
    
    1,424
    
    
    
    1,830
    
    
    
    1,503OperationsLocal
    
    
    1,332
    
    
    
    1,279
    
    
    
    1,299Overseas
    
    
    182
    
    
    
    180
    
    
    
    181Total
    
    
    3,720
    
    
    
    3,792
    
    
    
    3,434
 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 in Taiwan 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. In 2003, we also recruited a number of design engineers in
Korea and our subsidiary in the United States recruited a number design
engineers in the United States, to partially replace a number of engineers who
had left. 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.
We also have an employee pension plan under - 68 -




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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 consisting of five management representatives
and 10 employee representatives to manage and administer the fund. We 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 June 19, 2004. Shares owned bySpouses and minorShare Ownership
    
    childrenNumber
    
    
    
    
    
    Number ofTitle
    
    Name
    
    of Shares
    
    Percentage
    
    Shares
    
    PercentageExecutive Director and
Chairman
    
    Ding-Hua Hu(1)
    
    
    4,000,283
    
    
    
    0.08
    %
    
    
    4,928,066
    
    
    
    0.10
    %Executive Director and
President
    
    Miin Wu
    
    
    30,932,711
    
    
    
    0.62
    %
    
    
    
    
    
    
    0.00
    %Executive Director
    
    H. C. Chen(2)
    
    
    4,328,906
    
    
    
    0.10
    %
    
    
    2,494,000
    
    
    
    0.05
    %Director and Chief
Operating Officer
    
    Dang-Hsing Yiu
    
    
    19,172,119
    
    
    
    0.38
    %
    
    
    2,115,701
    
    
    
    0.04
    %Director and Chief
Technology Officer
    
    C.Y. Lu
    
    
    2,345,224
    
    
    
    0.05
    %
    
    
    
    
    
    
    0.00
    %Director and Vice President
    
    Raymond S. Mak
    
    
    6,930,638
    
    
    
    0.16
    %
    
    
    
    
    
    
    0.00
    %Director and Vice President
    
    Simon Wang
    
    
    6,495,252
    
    
    
    0.13
    %
    
    
    396,200
    
    
    
    0.01
    %Director and Vice President
    
    J.P. Peng(3)
    
    
    7,070,767
    
    
    
    0.14
    %
    
    
    2,509,300
    
    
    
    0.05
    %Independent Director
    
    C.L. Liu
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Independent Director
    
    Simon M. Sze
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Independent Director
    
    Cheng Yi Fang
    
    
    1,086,739
    
    
    
    0.02
    %
    
    
    360,895
    
    
    
    0.01
    %Director
    
    Y.S. Chung(4)
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Director
    
    Hui Yin Investment Ltd.
    
    
    6,023,152
    
    
    
    0.12
    %
    
    
    
    
    
    
    0.00
    %Supervisor
    
    Roger Chu(4)
    
    
    50,877
    
    
    
    0.00
    %
    
    
    35,521
    
    
    
    0.00
    %Supervisor
    
    Ping Tien Wu
    
    
    198,489
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Supervisor
    
    J.D. Lee(3)
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Associate Vice President,
Finance Center
    
    Paul Yeh
    
    
    9,149,102
    
    
    
    0.18
    %
    
    
    43,060
    
    
    
    0.00
    %
   (1)
    
    Nominee of Champion Investment Corporation.(2)
    
    Nominee of Hung Chih Investment Corporation.(3)
    
    Nominee of Shun Yin Investment Ltd.(4)
    
    Nominee of Delta Electronics Ltd.  F.
    
    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 were 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,
another 25% on August 1, 2001 and the remaining 50% on August 1, 2002. In April
2002, our board of directors approved an amendment to the plan, changing the
vesting date for the final 25% - 69 -




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to August 1, 2002 from March 31, 2003. These rights to receive cash
bonuses were forfeited for employees who discontinued their employment before
the scheduled vesting dates. 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, rights to receive
cash bonuses with respect to 72,208,948 shares were outstanding under the plan,
of which all were vested. In April 2003, all remaining rights to receive cash
bonuses under the plan, with respect to 72,208,948 shares, expired and were
cancelled. 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, NT$93 million in 2002 and nil for 2003 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
rights vest. 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 (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$345 million in 2001, a reversal of compensation expense of
NT$20.9 million in 2002 and nil in 2003. See Item 5. Operating and Financial
Review and Prospects  Operating Results  U.S. GAAP Reconciliation  Stock
Performance-Based Employee Bonus Plan. Share Option Plans We adopted four share option plans on November 29, 2001, April 24, 2002,
April 7, 2003 and March 11, 2004, 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 or not
less than 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. There are no special senior management options. The
options held by our directors, supervisors and executive officers bear the same
conditions as the ones received by our employees. In addition, only directors
and executive officers who are also hired as employees can be granted options
pursuant to the share option plans. 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,
1,507,000 and 6,164,500 share options at exercise prices of NT$21.2, NT$20.8,
NT$11.1 and NT$11.3 on January 16, 2002, May 6, 2002, October 1, 2002 and
December 16, 2002, respectively. Under the April 2002 share option plan, we
granted 150,000,000, 10,284,500 and 2,753,500 share options at exercises prices
of NT$11.1, NT$11.3 and NT$9.35 on October 1, 2002, December 16, 2002 and April
7, 2003, respectively. Under the April 2003 share option plan, we granted
126,000,000, 67,212,000 and 829,000 share options at exercise prices of
NT$7.75, NT$7.75 and NT$9.00 on June 13, 2003, June 13, 2003 and November 4,
2003, respectively. Under the March 2004 share option plan, we granted
176,972,000, 4,919,000 and 2,176,000 share options at exercise prices of
NT$14.55, NT$14.1 and NT$11.0 on April 9, 2004, April 27, 2004 and June 2,
2004, respectively. We are authorized to issue an aggregate of 200,000,000
under the March 2004 share option plan. As discussed above, we have already
issued an aggregate of 184,067,000 share options under the March 2004 share
option plan and may issue the remaining 15,933,000 share options from time to
time until March 30, 2005. - 70 -




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Our Articles of Incorporation set out the total number of authorized
shares reserved for grants for employee share options. In June 2003, a two-thirds supermajority of our stockholders
approved an increase of total number of authorized shares reserved for grants
for employee share options from 450 million common shares to 650 million common
shares. On June 18, 2004, a two-thirds supermajority of our stockholders
approved a further increase of the total number of authorized shares reserved
for grants for employee share options to 800 million shares. The ROC SFC regulates the terms of our stock options and each of our stock
option plans must be approved by the ROC SFC. Current ROC SFC regulations
require, among other things, the exercise price to be not less than the
reported closing price of our common shares traded on the Taiwan Stock Exchange
on the date the options are granted, the options to be exercisable beginning
two years after the options are granted in accordance with the plan, and the
options to be valid for a maximum period of 10 years. Therefore the terms of
our stock option plans are largely determined by prevailing ROC SFC
regulations, and our board of directors approve each stock option plan before
it is submitted to the ROC SFC for approval. 
 Item 7. Major Shareholders and Related Party Transactions  A.
    
    Major Shareholders The following table sets forth certain information, as of April 20, 2004,
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. To our knowledge, as of April 20, 2004, no shareholder beneficially
owned 5% or more of our common shares. Percentage of totalNumber of
    
    outstandingName of Shareholder
    
    common shares
    
    common sharesCitigroup Capital Asia Limited (as representative of GDS holders)
    
    
    130,934,000
    
    
    
    2.62
    %Kuo Hua Life Insurance Co., Ltd.
    
    
    78,995,620
    
    
    
    1.57
    %National Stabilization Fund
    
    
    65,777,140
    
    
    
    1.31
    %Delta Electronics, Ltd.(1)
    
    
    61,335,400
    
    
    
    1.22
    %Credit Suisse First Boston
    
    
    53,261,197
    
    
    
    1.06
    %Director, supervisors and executive officers as a group(2)
    
    
    148,888,977
    
    
    
    2.98
    %
   (1)
    
    Delta Electronics nominated one of our current directors and one of our
current supervisors.(2)
    
    Includes no shares held by entities, 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. Miin Wu, who serves as a director of Tower Semiconductor,
Mr. Yen Hie Chao, who previously served as a supervisor of United Industry Gas
Co., Ltd. and our former director Mr. Jon Ten Chung, who serves as a director
of Fuetrek. 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 Chantek, and we incurred
manufacturing processing charges of NT$104 million in 2001 for services
performed by Chantek. For services performed by Powertech, we incurred
manufacturing processing charges of NT$106 million in 2001, NT$173 million in
2002 and NT$211 million (US$6.2 million) in 2003. For services performed by
Ardentech, we incurred manufacturing processing charges of NT$108 million in
2001, NT$241 million in 2002 and NT$130 million (US$3.8 million) in 2003. We
purchase industrial gases from United Industry Gas. We incurred NT$119 million
in 2001, NT$110 million in 2002 and NT$100 million (US$2.9 million) in 2003, in
charges for industrial gases provided by United Industry Gas. In August 2000, we entered into a five-year manufacturing and technology
cooperation agreement with Tower Semiconductor, an Israeli company, whereby
Tower Semiconductor will provide silicon wafer manufacturing processing
services that can employ Tower Semiconductors microFLASH technology. This
technology is based on proprietary technology licensed from Saifun, an Israeli
integrated circuit design company. We also have entered into a separate
agreement - 71 -




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with Saifun that provides us with rights to develop and manufacture
certain products related to the microFLASH 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. Wafer purchases in
2001 totalled NT$157 million, in 2002 totalled NT$136 million and in 2003
totalled NT$37 million (US$1.1 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 Semiconductor, together with a foundry agreement. Under the agreements,
we are entitled to appoint one member of Tower Semiconductors board of
directors and to a guaranteed portion of the wafer manufacturing capacity of
Tower Semiconductor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 Semiconductor 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 Semiconductor. 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 Semiconductor 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 Semiconductor investors reached an
agreement with Tower Semiconductor 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 Semiconductor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. We and the other investors
have paid the balance of the fifth and final purchase obligation, which was
US$4.4 million in our case. Our payments to Tower Semiconductor, as December 10, 2003, total US$78.3
million, and of this the total share purchase consideration is US$64.2 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 Semiconductors shares (not including
purchases under the original purchase commitments) or royalty payments. At December 31, 2003, our credit account balance was US$14.1 million, and
we owned approximately 15.8% of Tower Semiconductors outstanding shares. Our
average purchase price per share is US$7.88, which is somewhat higher than the
fair market values due to the minimum per share price in the original
agreement. Our board of directors as well as our supervisors have historically
reviewed and approved related party transactions, consistent with ROC laws and
practices, and currently continue to do so. Under Nasdaqs Marketplace Rule
4350(h), which became effective on January 15, 2004, the audit committee or
another independent body of the board of directors of listed issuers is
required to approve all related party transactions. We have obtained an
exemption from Nasdaq from compliance with the requirement to have our audit
committee approve all related party transactions until we appoint an audit
committee, which we are required to do so on or before July 31, 2005 under
Nasdaq rules. We have not appointed an audit committee as of the date of this
annual report. 
 Item 8. Financial Information  A.
    
    Consolidated Statements and Other Financial Information The selected income statement data for the years ended December 31, 2001,
2002 and 2003, and the selected balance sheet data as of December 31, 2002 and
2003 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 - 72 -




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December 31, 1999 and 2000 and the selected balance sheet data as of December
31, 1999, 2000 and 2001 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, 2003 of
NT$33.99 = US$1.00. On June 23, 2003, the noon buying rate between New Taiwan
dollars and United States dollars was NT$33.79 = 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, 2001,
2002 and 2003 included in this annual report and Item 5. Operating and
Financial Review and Prospects  A. Operating Results  U.S. GAAP
Reconciliation. - 73 -




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Year ended, and as of, December 31,(in millions except per share and ADS data)1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(NT$)
    
    (NT$)
    
    (NT$)
    
    (NT$)
    
    (NT$)
    
    (US$)Consolidated Income Statement Data:ROC GAAPNet sales revenue
    
    
    16,957
    
    
    
    33,493
    
    
    
    21,747
    
    
    
    16,492
    
    
    
    17,712
    
    
    
    521.1Cost of goods sold
    
    
    (12,124
    )
    
    
    (15,494
    )
    
    
    (11,674
    )
    
    
    (17,105
    )
    
    
    (20,657
    )
    
    
    (607.7
    )Less: Unrealized profit as of December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    3
    
    
    
    Realized gross profit (loss)
    
    
    4,833
    
    
    
    17,999
    
    
    
    10,073
    
    
    
    (615
    )
    
    
    (2,942
    )
    
    
    (86.6
    )Operating expenses
    
    
    (3,258
    )
    
    
    (5,856
    )
    
    
    (6,557
    )
    
    
    (6,212
    )
    
    
    (4,742
    )
    
    
    (139.5
    )Operating income (loss)
    
    
    1,575
    
    
    
    12,143
    
    
    
    3,516
    
    
    
    (6,827
    )
    
    
    (7,684
    )
    
    
    (226.1
    )Total other income
    
    
    846
    
    
    
    945
    
    
    
    1,356
    
    
    
    466
    
    
    
    1,877
    
    
    
    55.2Total other expenses
    
    
    (1,830
    )
    
    
    (2,077
    )
    
    
    (4,795
    )
    
    
    (4,976
    )
    
    
    (2,370
    )
    
    
    (69.7
    )Income (loss) before taxes and minority interest
    
    
    591
    
    
    
    11,011
    
    
    
    77
    
    
    
    (11,337
    )
    
    
    (8,177
    )
    
    
    (240.6
    )Income tax benefit (expense)
    
    
    316
    
    
    
    (398
    )
    
    
    (943
    )
    
    
    (20
    )
    
    
    (21
    )
    
    
    (0.6
    )Income (loss) before minority interest
    
    
    907
    
    
    
    10,613
    
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    (241.2
    )Minority interest loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    Net Income (loss)
    
    
    907
    
    
    
    10,613
    
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    (241.2
    )Net income (loss) per share  basic (1)
    
    
    0.27
    
    
    
    2.92
    
    
    
    (0.23
    )
    
    
    (3.10
    )
    
    
    (2.13
    )
    
    
    (0.06
    )Net income (loss) per share  diluted (1)
    
    
    0.27
    
    
    
    2.91
    
    
    
    (0.23
    )
    
    
    (3.10
    )
    
    
    (2.13
    )
    
    
    (0.06
    )U.S. GAAPGross profit (loss)
    
    
    4,558
    
    
    
    17,615
    
    
    
    6,598
    
    
    
    (4,018
    )
    
    
    (1,576
    )
    
    
    (46.3
    )Operating income (loss)
    
    
    1,237
    
    
    
    11,069
    
    
    
    (2,263
    )
    
    
    (10,186
    )
    
    
    (6,649
    )
    
    
    (195.6
    )Net income (loss) before cumulative effect of
change in accounting principle in accordance
with U.S. GAAP
    
    
    1,861
    
    
    
    8,016
    
    
    
    (3,842
    )
    
    
    (13,841
    )
    
    
    (8,877
    )
    
    
    (261.2
    )Basic net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP
    
    
    0.57
    
    
    
    2.31
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )Diluted net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP
    
    
    0.57
    
    
    
    2.26
    
    
    
    (1.04
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )Net income (loss) (2)
    
    
    1,861
    
    
    
    8,016
    
    
    
    (4,463
    )
    
    
    (13,841
    )
    
    
    (8,877
    )
    
    
    (261.2
    )Net income (loss) per share  basic (1) (3)
    
    
    0.57
    
    
    
    2.31
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )Net income (loss) per share  diluted (1)(3)
    
    
    0.57
    
    
    
    2.26
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )Balance Sheet Data:ROC GAAPTotal current assets
    
    
    14,303
    
    
    
    29,027
    
    
    
    25,358
    
    
    
    21,301
    
    
    
    21,002
    
    
    
    617.9Net property, plant and equipment
    
    
    32,028
    
    
    
    38,006
    
    
    
    39,562
    
    
    
    40,029
    
    
    
    32,600
    
    
    
    959.1Total assets
    
    
    51,197
    
    
    
    72,451
    
    
    
    72,309
    
    
    
    68,120
    
    
    
    61,422
    
    
    
    1807.1Total current liabilities
    
    
    8,868
    
    
    
    11,786
    
    
    
    9,632
    
    
    
    18,357
    
    
    
    20,220
    
    
    
    594.9Long-term liabilities
    
    
    15,946
    
    
    
    16,091
    
    
    
    19,533
    
    
    
    19,549
    
    
    
    11,954
    
    
    
    351.7Total liabilities
    
    
    24,814
    
    
    
    27,877
    
    
    
    29,165
    
    
    
    37,906
    
    
    
    32,174
    
    
    
    946.6Total shareholders equity
    
    
    26,383
    
    
    
    44,574
    
    
    
    43,144
    
    
    
    30,214
    
    
    
    29,248
    
    
    
    860.5U.S. GAAPTotal shareholders equity
    
    
    26,433
    
    
    
    41,831
    
    
    
    43,300
    
    
    
    28,351
    
    
    
    28,195
    
    
    
    829.5Other Data:ROC GAAPCapital expenditures
    
    
    8,129
    
    
    
    11,803
    
    
    
    9,078
    
    
    
    8,975
    
    
    
    1,606
    
    
    
    47.2Depreciation and amortization
    
    
    4,855
    
    
    
    6,048
    
    
    
    8,006
    
    
    
    8,742
    
    
    
    9,287
    
    
    
    273.2Net cash provided by operating activities
    
    
    5,062
    
    
    
    16,123
    
    
    
    9,399
    
    
    
    271
    
    
    
    2,317
    
    
    
    68.2Net income (loss) per ADS  basic
    
    
    2.7
    
    
    
    29.2
    
    
    
    (2.3
    )
    
    
    (31.0
    )
    
    
    (21.3
    )
    
    
    (0.6
    )Net income (loss) per ADS  diluted
    
    
    2.7
    
    
    
    29.1
    
    
    
    (2.3
    )
    
    
    (31.0
    )
    
    
    (21.3
    )
    
    
    (0.6
    )Number of common shares outstanding (weighted,
as adjusted) (4)
    
    
    3,321
    
    
    
    3,631
    
    
    
    3,702
    
    
    
    3,667
    
    
    
    3,852
    
    
    
    113.3Stock dividend per common share (5)
    
    
    10
    %
    
    
    13
    %
    
    
    30
    %
    
    
    10
    %
    
    
    
    
    
    
    U.S. GAAPTotal current assets
    
    
    14,588
    
    
    
    28,994
    
    
    
    26,646
    
    
    
    21,037
    
    
    
    21,398
    
    
    
    629.5Total assets
    
    
    51,578
    
    
    
    72,342
    
    
    
    73,595
    
    
    
    66,179
    
    
    
    60,703
    
    
    
    1785.9Total current liabilities
    
    
    8,886
    
    
    
    14,425
    
    
    
    10,768
    
    
    
    18,797
    
    
    
    20,489
    
    
    
    602.8
 - 74 -




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Year ended, and as of, December 31,(in millions except per share and ADS data)1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(NT$)
    
    (NT$)
    
    (NT$)
    
    (NT$)
    
    (NT$)
    
    (US$)Total liabilities
    
    
    25,145
    
    
    
    30,511
    
    
    
    30,295
    
    
    
    37,828
    
    
    
    32,508
    
    
    
    956.4
   (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, derivative
contracts and convertible debt securities with beneficial conversion features.
The difference in accounting treatment with respect to employee bonus
shares under the two accounting principles resulted in 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 no additional
expense or income in 2002 and 2003. The differences of accounting
treatment with respect to derivative contracts under the two accounting
principles resulted in an increased income of NT$1,301 million in 1999, an
additional expense of NT$898 million in 2000, an additional income of
NT$228 million in 2001, an additional income of NT$449 million in 2002 and
an additional expense of NT$386 million (US$11.3 million)
in 2003. The difference in accounting treatment with respect to convertible debt
securities with beneficial conversion features under the two accounting
principles resulted in no additional expense or income in 1999 to 2002, and an
additional expense of NT$617 million (US$18.2 million) in 2003.(3)
    
    Retroactively adjusted for all stock dividends declared. See note 20 to
our consolidated financial statements for the years ended December 31,
2001, 2002 and 2003 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%, 82% and 68% of total net sales for the
years ended December 31, 2001, 2002 and 2003, respectively. See note 18 to our
consolidated financial statements for the years ended December 31, 2001, 2002
and 2003 included in this annual report. Export sales from the ROC are as follows: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$(in thousands)Japan
    
    
    10,892,506
    
    
    
    7,983,215
    
    
    
    7,269,548
    
    
    
    213,873Singapore and Hong Kong
    
    
    2,702,321
    
    
    
    3,656,167
    
    
    
    3,487,250
    
    
    
    102,596United States
    
    
    1,808,299
    
    
    
    1,616,837
    
    
    
    823,145
    
    
    
    24,217Europe
    
    
    633,198
    
    
    
    345,226
    
    
    
    453,641
    
    
    
    13,347Total
    
    
    16,036,324
    
    
    
    13,601,445
    
    
    
    12,033,584
    
    
    
    354,033
 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 may be 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 may be distributed in the form of cash. All or part of
the dividends to shareholders may be reserved at the relevant annual
shareholders meeting as retained earnings for distribution in later years. - 75 -




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See Item 10  Additional Information  B. Memorandum and Articles of
Association  Description of Our Common Shares  Dividends and Distributions. 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 was
determined by the board of directors at a meeting that was held on April 30,
2004. No annual dividend was declared at our annual general meeting of
shareholders held on June 18, 2004. For information relating to ROC withholding taxes payable on dividends,
see Item 10. Additional Information  E. Taxation  ROC Taxation. Legal Proceedings On February 18, 1997, Atmel filed an action against us and two other
semiconductor manufacturers with the International Trade Commission (ITC),
alleging a violation of Section 337 of the 1930 Tariff Act for infringement of
the U.S. Patent No. 4,451,903 (the 903 patent) owned or controlled by Atmel.
On June 1, 2001, the ITC issued a Notice of Final Determination in our favor,
and on July 26, 2001, the ITC denied Atmels petition for reconsideration.
Atmel did not appeal the Notice of Final Determination with the United States
Court of Appeals for the Federal Circuit before the required deadline, and so
it is bound by the ITCs finding that we did not infringe the 903 patent or
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
that 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 the court issued an order on May 14, 2003
granting Macronix Americas motion for summary judgment of invalidity of the
747 patent. 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
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. On September 19, 2003, the parties
filed cross-motions for summary judgment on the issue of infringement of the
remaining claim of the 096 patent, and the court held a hearing on November 7,
2003. In its summary judgment order dated February 23, 2004, the court issued
a claim construction on the disputed term of the claim, but denied both
parties motions without prejudice due to an inadequate factual background to
decide the motions. Under the courts claim construction in the February 23,
2004 order, Macronix America filed a renewed motion for summary judgment of
non-infringement on April 16, 2004. Atmel filed its opposition on May 26,
2004. Macronix America filed its reply on June 18, 2004. The court has
scheduled a hearing for July 30, 2004. 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 the litigation. If we are found to have infringed
Atmels patents, Atmel has requested injunctive relief to prohibit Macronix
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.
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 - 76 -




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defense of the claims that 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$490 million in 2001, NT$360 million in
2002 and NT$196 million (US$5.5 million) in 2003. As of December 31, 2003, the
outstanding balance of this reserve was NT$675 million (US$19.9 million). On July 9, 2003 we learned from Tower Semiconductor that a shareholders
class action was filed on behalf of a class consisting of the ordinary
shareholders of Tower Semiconductor at the close of business in the United
States on April 1, 2002. This case was filed in the United States District
Court for the Southern District of New York against Tower Semiconductor and its
major corporate shareholders, including, us, and against directors of Tower
Semiconductor, including Miin Wu, our president and CEO. The lawsuit alleges
violation of section 14(a) and 20(a) of the Security Exchange Act of 1934, as
amended, and Rule 14a-9 promulgated thereunder. The lawsuit alleges that Tower
Semiconductor and its directors made false and misleading statements and
omissions in a proxy solicitation to Tower Semiconductors shareholders
regarding a proposed amendment to a contract between Tower Semiconductor and
its major shareholders, including us. The plaintiffs are seeking unspecified
damages and attorneys and experts fee and expenses. On January 30, 2004, the
defendants filed with the court a
motion to dismiss the action. On April 20, 2004, the Plaintiffs filed a
memorandum in opposition to defendants motion to dismiss. On May 24, 2004, the
defendants filed a reply memorandum to further support defendants motion to
dismiss the plaintiffs complaint. 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. Item 5. Operating and Financial Review and Prospects  E. Research and
Development, Patents and Licenses, etc.  Intellectual Property.  B.
    
    Significant Changes Except as otherwise noted, no significant changes have occurred since
December 31, 2003. 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, 2001, 2002
and 2003 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. Average dailytrading volume(in thousands ofClosing Price Per ADS(1)
    
    ADSs)
    
    Nasdaq Composite IndexHigh
    
    Low
    
    
    
    
    
    High
    
    Low(US$)
    
    (US$)1999
    
    
    11.95
    
    
    
    4.11
    
    
    
    11.789
    
    
    
    4,069.31
    
    
    
    2,208.052000
    
    
    22.76
    
    
    
    8.01
    
    
    
    107.092
    
    
    
    5,048.62
    
    
    
    2,332.782001
    
    
    12.70
    
    
    
    3.86
    
    
    
    64.705
    
    
    
    2,859.15
    
    
    
    1,423.192002
    
    
    8.55
    
    
    
    2.73
    
    
    
    53.248
    
    
    
    2,059.38
    
    
    
    1,114.11First Quarter
    
    
    8.09
    
    
    
    6.18
    
    
    
    75.64
    
    
    
    2,059.38
    
    
    
    1,716.24Second Quarter
    
    
    8.55
    
    
    
    5.31
    
    
    
    40.851
    
    
    
    1,862.62
    
    
    
    1,423.99Third Quarter
    
    
    4.92
    
    
    
    3.00
    
    
    
    45.848
    
    
    
    1,448.36
    
    
    
    1,172.06Fourth Quarter
    
    
    4.09
    
    
    
    2.73
    
    
    
    52.361
    
    
    
    1,487.94
    
    
    
    1,114.112003
    
    
    3.65
    
    
    
    1.20
    
    
    
    26.498
    
    
    
    2,009.88
    
    
    
    1,271.47First Quarter
    
    
    3.65
    
    
    
    2.55
    
    
    
    16.036
    
    
    
    1,460.99
    
    
    
    1,271.47Second Quarter
    
    
    2.70
    
    
    
    1.20
    
    
    
    51.385
    
    
    
    1,677.14
    
    
    
    1,348.30Third Quarter
    
    
    2.91
    
    
    
    2.19
    
    
    
    29.817
    
    
    
    1,909.55
    
    
    
    1,640.13Fourth Quarter
    
    
    3.17
    
    
    
    2.10
    
    
    
    16.749
    
    
    
    1,976.37
    
    
    
    1,832.25December
    
    
    2.54
    
    
    
    2.10
    
    
    
    10.717
    
    
    
    2,009.88
    
    
    
    1,904.652004January
    
    
    2.69
    
    
    
    2.39
    
    
    
    21.045
    
    
    
    2,153.83
    
    
    
    2,006.68February
    
    
    3.12
    
    
    
    2.50
    
    
    
    33.994
    
    
    
    2,089.66
    
    
    
    2,005.44March
    
    
    3.90
    
    
    
    3.07
    
    
    
    29.556
    
    
    
    2,057.80
    
    
    
    1,901.80April
    
    
    5.13
    
    
    
    3.45
    
    
    
    35.775
    
    
    
    2,079.12
    
    
    
    1,920.15May
    
    
    3.70
    
    
    
    3.03
    
    
    
    8.244
    
    
    
    1,986.74
    
    
    
    1,876.64June (through June 23)
    
    
    3.52
    
    
    
    2.85
    
    
    
    3.757
    
    
    
    2,023.53
    
    
    
    1,960.26
   Source: Bloomberg L.P.  (1)
    
    As adjusted retroactively by Bloomberg L.P. to give effect to stock
dividends paid in the periods indicated. Each GDS represents 40 of our common shares. Our GDSs have been listed on
the Luxembourg Stock Exchange since April 5, 2004. The table below presents,
for the periods indicated, the high and low closing prices on the Luxembourg
Stock Exchange for our outstanding GDSs. - 77 -




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Average dailytrading volume(in thousands of
    
    Luxembourg StockClosing Price Per GDS(1)
    
    GDSs)(1)
    
    Exchange IndexHigh
    
    Low
    
    
    
    
    
    High
    
    Low(US$)
    
    (US$)2004April (from April 5)
    
    
    19.80
    
    
    
    13.60
    
    
    
    251.256
    
    
    
    2,079.12
    
    
    
    1,920.15May
    
    
    14.63
    
    
    
    11.00
    
    
    
    25.100
    
    
    
    1,986.74
    
    
    
    1,876.64June (through June 23)
    
    
    14.00
    
    
    
    12.20
    
    
    
    32.500
    
    
    
    2,023.53
    
    
    
    1,960.26
   Source: Bloomberg L.P.  (1)
    
    Average includes only days in which GDSs were traded. 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. Average dailytrading volumeClosing Price
    
    (in thousands of
    
    Taiwan StockPer Share(1)
    
    shares)
    
    Exchange IndexHigh
    
    Low
    
    
    
    
    
    High
    
    Low(NT$)
    
    (NT$)1999
    
    
    41.5
    
    
    
    13.9
    
    
    
    55,173
    
    
    
    8,609
    
    
    
    5,4752000
    
    
    76.2
    
    
    
    26.6
    
    
    
    54,549
    
    
    
    10,202
    
    
    
    4,6152001
    
    
    29.9
    
    
    
    16.0
    
    
    
    83,825
    
    
    
    5,551
    
    
    
    3,4462002
    
    
    32.7
    
    
    
    9.2
    
    
    
    55,503
    
    
    
    6,462
    
    
    
    3,850First Quarter
    
    
    31.5
    
    
    
    24.7
    
    
    
    91,149
    
    
    
    6,243
    
    
    
    5,488Second Quarter
    
    
    32.7
    
    
    
    18.7
    
    
    
    37,731
    
    
    
    6,462
    
    
    
    5,072Third Quarter
    
    
    18.0
    
    
    
    10.5
    
    
    
    29,608
    
    
    
    5,417
    
    
    
    4,186Fourth Quarter
    
    
    14.6
    
    
    
    9.2
    
    
    
    68,462
    
    
    
    4,824
    
    
    
    3,8502003
    
    
    12.8
    
    
    
    4.1
    
    
    
    43,983
    
    
    
    6,142
    
    
    
    4,140First Quarter
    
    
    12.8
    
    
    
    8.8
    
    
    
    32,568
    
    
    
    5,079
    
    
    
    4,260Second Quarter
    
    
    9.6
    
    
    
    4.1
    
    
    
    50,876
    
    
    
    5,049
    
    
    
    4,140Third Quarter
    
    
    10.5
    
    
    
    7.6
    
    
    
    46,987
    
    
    
    5,758
    
    
    
    5,018Fourth Quarter
    
    
    10.2
    
    
    
    7.2
    
    
    
    44,134
    
    
    
    6,142
    
    
    
    5,582December
    
    
    8.6
    
    
    
    7.2
    
    
    
    28,939
    
    
    
    5,924
    
    
    
    5,7522004January
    
    
    9.3
    
    
    
    8.0
    
    
    
    53,560
    
    
    
    6,386
    
    
    
    6,042February
    
    
    10.7
    
    
    
    8.6
    
    
    
    97,284
    
    
    
    6,751
    
    
    
    6,241March
    
    
    13.1
    
    
    
    10.4
    
    
    
    110,905
    
    
    
    7,034
    
    
    
    6,133April
    
    
    16.8
    
    
    
    12.0
    
    
    
    193,979
    
    
    
    6,880
    
    
    
    6,118May
    
    
    12.4
    
    
    
    9.9
    
    
    
    64,986
    
    
    
    6,188
    
    
    
    5,483June (through June 23)
    
    
    12.1
    
    
    
    10.1
    
    
    
    41,062
    
    
    
    5,987
    
    
    
    5,557
   Source: Bloomberg L.P.  (1)
    
    As adjusted retroactively by Bloomberg L.P. to give effect to stock
dividends paid in the periods indicated. - 78 -




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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, 2004, a total of 5,003,704,439 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, 2004, 16,965,153 common shares were registered in
the name of nominees of The Bank of New York, the depositary under the ADS
deposit agreement. The Bank of New York has advised us that, as of May 31,
2004, 1,696,515.3 ADSs, representing 16,965,153 common shares, were held of
record by Cede & Co. and seven other U.S. persons. We have no further
information as to common shares of our company held, or beneficially owned, by
U.S. persons. As of May 31, 2004, 24,430,000 common shares were registered in the
name of a nominee of Citibank, N.A., the depositary under the GDS deposit
agreement. Citibank, N.A. has advised us that, as of May 31, 2004, 610,750
GDSs, representing 24,430,000 common shares, were held of record by Cede & Co. The Taiwan Stock Exchange In 1961, the Securities and Futures Commission, working together with
private interests, 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 669 as of December 31, 2003. As of December 31, 2003, the market
capitalization of companies listed on the Taiwan Stock Exchange was NT$12,868
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, five foreign issuers have listed their equity
securities on the Taiwan Stock Exchange through the use of depositary receipts
in accordance with these regulations. The Taiwan Stock Exchange requirements for listing are based on the
following company attributes:  
    
    shareholder diversification;
    
    length of time in business;
    
    amount of paid-in capital; and
    
    profitability. - 79 -




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However, special listing criteria apply to technology companies, key
businesses engaging in national economic development and private enterprises
participating in major national public construction project under the
encouragement of the government. 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, 2003, 423 companies had listed
equity securities on the GreTai Securities Market and the total market
capitalization of those companies was approximately NT$1,201 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 shares in 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 oflistedcompanies at
    
    Index
    
    Index
    
    Index atPeriod ended December 31,
    
    the period end
    
    high
    
    low
    
    period end1990
    
    
    199
    
    
    
    12,495
    
    
    
    2,560
    
    
    
    4,5301991
    
    
    221
    
    
    
    6,305
    
    
    
    3,316
    
    
    
    4,6011992
    
    
    256
    
    
    
    5,392
    
    
    
    3,328
    
    
    
    3,3771993
    
    
    285
    
    
    
    6,071
    
    
    
    3,136
    
    
    
    6,0711994
    
    
    313
    
    
    
    7,184
    
    
    
    5,195
    
    
    
    7,1251995
    
    
    347
    
    
    
    7,051
    
    
    
    4,503
    
    
    
    5,1741996
    
    
    375
    
    
    
    6,983
    
    
    
    4,690
    
    
    
    6,9341997
    
    
    404
    
    
    
    10,117
    
    
    
    6,820
    
    
    
    8,1871998
    
    
    437
    
    
    
    9,277
    
    
    
    6,251
    
    
    
    6,4181999
    
    
    462
    
    
    
    8,609
    
    
    
    5,475
    
    
    
    8,4492000
    
    
    474
    
    
    
    10,202
    
    
    
    8,350
    
    
    
    8,8432001
    
    
    584
    
    
    
    5,551
    
    
    
    4,647
    
    
    
    5,5512002
    
    
    638
    
    
    
    6,462
    
    
    
    3,850
    
    
    
    4,4522003
    
    
    669
    
    
    
    6,142
    
    
    
    4,140
    
    
    
    5,891
   Sources: Status of Securities Listed on Taiwan Stock Exchange. 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. - 80 -




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##### Table of Contents



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 An English translation of our Articles of Incorporation is filed herewith
as Exhibit 3.1. 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 and Voting
Rights of ADS Holders. General Our
authorized capital is NT$80 billion, divided into eight billion
shares, including up to 800 million shares reserved for the exercise of
employee stock options as of June 18, 2004. As of May 31, 2004, 5,003,704,439
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, 2004, 16,965,153 common shares underlying ADSs were held in
the name of nominees 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, 2004,
1,696,515.3 ADSs, representing 16,965,153 common shares, were held of record by
Cede & Co. and seven registered holders. We have no further information as to
our common shares held, or beneficially owned, by U.S. persons. As
of May 31, 2004, 24,430,000 common shares underlying GDSs were registered in the name of a nominee of Citibank, N.A., the depositary under the
GDS deposit agreement. Citibank, N.A. has advised us that, as of May 31, 2004,
610,750 GDSs, representing 24,430,000 common shares, were held of record by
Cede & Co. 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. -81-




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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 2001, we distributed approximately 145 million
common shares in the form of employee bonuses. In 2002 and 2003, 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, 2001, 2002
and 2003 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. -82-




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##### Table of Contents



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 Park and the ROC Securities and
Exchange Law, upon the terms as our board of directors may determine. 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. We had previously, since we were listed on Nasdaq in 1996, obtained an
exemption from Nasdaq from its requirement to solicit proxies and to provide
proxy statements for all meetings of shareholders. We comply with the
applicable ROC laws and regulations with regard our shareholder meetings. 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. -83-




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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. Holders of ADSs will not have the right to exercise voting rights with respect
to the common shares represented thereby, except as described in Voting
Rights of ADS Holders. 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 or
the method of resolution 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 -84-




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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 for distribution of
dividends, bonuses or other benefits. 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). -85-




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Voting Rights of ADS Holders ADS holders may direct the exercise of voting rights with respect to the
Common Shares represented by ADSs only in accordance with the provisions of the
deposit agreement and applicable ROC law. See Item 3. Key Information  D.
Risk Factors  Risks Related to our Common Shares, ADSs and GDSs  ADS and GDS
holders do not have the same voting rights as our common shareholders, which
may affect the value of the ADSs and GDSs. If an ADS holder wishes to
withdraw its Common Shares, the ADS holder must appoint a local agent and open
a securities trading account with a local brokerage firm. Even if the ADS
holder does all this, however, the ADS holder might not know about the meeting
early enough in advance to withdraw the shares or the ADS holder may not have
enough time to register the Common Shares for voting purposes before the
shareholder register is closed. See Item 10. Additional Information  B.
Memorandum and Articles of Association  Description of Our Common Shares 
Meetings of Shareholders and  Register of Shareholders and Record Dates. Except as described below, ADS holders will not be able to exercise voting
rights attaching to the Common Shares represented by the ADSs on an individual
basis. According to the ROC Company Law, a shareholders voting rights
attaching to shareholdings in a ROC company must, as to all matters subject to
a vote of shareholders (other than the election of directors and supervisors),
be exercised as to all shares held by the shareholder in the same manner.
Accordingly, the voting rights attaching to the Common Shares represented by
ADSs must be exercised as to all matters subject to a vote of shareholders by
the depositary or its nominee, who represents all holders of ADSs, collectively
in the same manner, except in the case of an election of directors and
supervisors. Directors and supervisors are elected by cumulative voting. In the deposit agreement, ADS holders appointed the depositary as their
representative to exercise the voting rights with respect to the Common Shares
represented by their ADSs. We will provide the depositary with copies (including English
translations) of notices of meetings of our shareholders and the agenda of
these meetings. These materials will contain an indication of the number of
directors or supervisors to be elected if an election of directors or
supervisors is to be held at the meeting. The depositary will also mail to ADS
holders a voting instruction form. In order to be valid, the holder of ADSs
must complete, sign and return to the depositary the voting instruction form by
a date specified by the depositary. The number of directors or supervisors to
be elected may change after the depositary has mailed the voting instruction
form to ADS holders. If a change were to occur, the depositary would be unable
to follow each ADS holders exact voting instructions and may calculate such
ADS holders votes according to procedures not inconsistent with the provisions
of the deposit agreement. We cannot assure ADS holders that they will receive the materials in time
to ensure that they can instruct the depositary to vote the Common Shares
represented by their ADSs. In addition, the depositary and its agents are not
responsible for failing to carry out voting instructions or for the manner of
carrying out voting instructions if such act or failure to act is in good
faith. This means that ADS holders may not be able to exercise their right to
vote and there may be nothing ADS holders can do if the Common Shares
represented by their ADSs are not voted as they requested. Subject to the provisions described in the second succeeding paragraph,
which will apply to the election of directors and supervisors, if persons
together holding at least 51% of the ADSs outstanding at the relevant record
date instruct the depositary to vote in the same manner in respect of one or
more resolutions to be proposed at the meeting (other than the election of
directors or supervisors), the depositary will notify the instructions to our
president, or if he is no longer an officer or director of our company, then
the Chairman of our board of directors (the designated representative), or
such person as he may designate. The depositary will appoint the president or
his designated person to serve as the ADS holders designated representative
and that of the depositarys or its nominee. The designated representative
will attend the meeting and vote all the Common Shares represented by ADSs in
the manner so instructed. If, for any reason, the depositary has not by the date specified by it
received instructions from persons together holding at least 51% of all the
ADSs outstanding at the relevant record date to vote in the same manner in
respect of any resolution specified in the agenda for a meeting (other than the
election of directors or supervisors), then ADS holders will be deemed to have
instructed the depositary or its nominee to authorize and appoint the
designated representative as the ADS holders representative and that of the
depositarys or its nominee to attend the meeting and vote all the Common
Shares represented by all ADSs as the designated representative deems
appropriate with respect to the resolution or resolutions, which may not be in
the best interests of ADS holders. However, no authorization will be given
with respect to any matter as to which the designated representative informs
the depositary that he does not wish to be so authorized, in which event the -86-




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depositary will not vote at the relevant meeting. The depositary will,
however, take such action as is necessary to cause all the Common Shares
represented by ADSs to be counted for the purpose of satisfying applicable
quorum requirements. The depositary will notify the designated representative of the
instructions for the election of directors and supervisors received from ADS
holders and appoint the designated representative as the ADS holders
representative and that of the depositarys or its nominee to attend any
meeting and vote the Common Shares represented by ADSs as to which the
depositary has received instructions from ADS holders for the election of
directors and supervisors, subject to any restrictions imposed by ROC law and
our articles of incorporation. If, by the date specified by the depositary,
ADS holders have not delivered instructions to the depositary, ADS holders will
be deemed to have instructed the depositary to authorize and appoint the
designated representative as the ADS holders representative and that of the
depositarys or its nominee to attend the meeting and vote, at his sole
discretion, all the Common Shares represented by ADSs as to which the
depositary has not received instructions from ADS holders for the election of
directors and supervisors as the designated representative deems appropriate,
which may not be in the best interests of ADS holders. However, no
authorization will be given with respect to any election of directors or
supervisors as to which the designated representative informs the depositary
that he does not wish to be so authorized, in which event the depositary will
attend such meeting and will vote those Common Shares represented by the ADSs
as to which it has received instructions from ADS holders for the election of
directors and supervisors in the manner so instructed. The depositary will not
vote at the relevant meeting any Common Shares represented by ADSs, as to which
the depositary has not received instructions from ADS holders for the election
of directors any supervisors but will take such action as is necessary to cause
all the Common Shares represented by ADSs to be counted for the purpose of
satisfying applicable quorum requirements. By continuing to hold ADSs or any interest in the ADSs, ADS holders will
be deemed to have agreed to the voting provisions set forth in the deposit
agreement, as these provisions maybe amended from time to time.  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. Indenture for Zero Coupon Convertible Bonds Due February 10, 2008 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, 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 Zero Coupon Convertible Bonds Due December 12, 2007 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. GDS Deposit Agreement Dated April 5, 2004 In April 2004, we sold 13,125,000 GDSs, representing 525,000,000 new
common shares. The offering price for the GDSs was US$13.20 per GDS and net
proceeds were approximately US$173.25 million. The GDSs are listed on the
Luxembourg Stock Exchange plc. Our GDSs are not fungible with our ADSs, and
each GDS represents 40 of our common shares. As of June 21,
2004, GDS holders representing over 95% of the GDSs issued in
April 2004 have withdrawn from our GDSs program and converted
their GDSs to common shares. -87-




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The GDSs are subject to the terms and conditions set forth in the deposit
agreement dated April 5, 2004 entered into between us and Citibank, N.A., in
its capacity as depositary, which is included as Exhibit 14.9 hereto. We have undertaken in the deposit agreement to use our best endeavors to
maintain, so long as any GDS is outstanding, a listing for the GDSs on the
Luxembourg Stock Exchange. In the event that the listing on the Luxembourg
Stock Exchange is not maintained, we have undertaken in the deposit agreement
to use our best endeavors with the reasonable assistance of the depositary
(provided at our expense) to obtain and maintain a listing of the GDSs on any
other internationally recognized stock exchange in Europe. The deposit agreement and the GDSs are governed by, and shall be construed
in accordance with, English law except that the certifications set forth in
Schedule 3 to the deposit agreement and any provisions relating thereto shall
be governed by and construed in accordance with the laws of the State of New
York and any United States Federal Court sitting in the Borough of Manhattan,
New York City. The rights and obligations attaching to the Deposited Shares
(as defined in the deposit agreement) and Certificates of Payment (as defined
in the deposit agreement) will be governed by ROC law. Holders of GDSs are not party to the deposit agreement and thus, under
English Law, have no contractual rights against, or obligations to, us or the
depositary. However, the Deed Poll executed by us in favor of the holders
provides that, if we fail to perform the obligations imposed on us by certain
specified provisions of the deposit agreement, any holder may enforce the
relevant provisions of the deposit agreement as if it were a party to the
deposit agreement and was the Depositary in respect of that number of
Deposited Shares to which the GDSs of which he is the holder relate. The
depositary is under no duty to enforce any of the provisions of the deposit
agreement on behalf of any holder of a GDS or any other person. Set forth below is a summary of certain provisions of the deposit
agreement relating to rights of GDS holders, which are subject to the detailed
provisions of the deposit agreement. Terms used in this summary and not
defined herein but which are defined in the deposit agreement have the meanings
ascribed to them in the deposit agreement. Rights Issues If and whenever we announce our intention to distribute rights to the
holders of our common shares to subscribe for or to acquire our common shares,
securities or other assets, the depositary will give notice to GDS holders of
such offer or invitation, specifying the manner by which and time during which
holders may request the depositary to exercise such rights as provided below
or, if such be the case, specifying details of how the depositary proposes to
distribute the rights or the proceeds of any sale thereof. The depositary will
deal with such rights in the manner described below:  (1)
    
    if and to the extent that the depositary shall, at its discretion,
deem it to be lawful and reasonably practicable, the depositary shall
make arrangements whereby the GDS holders may, upon payment of the
subscription price together with such fees, taxes, duties, charges,
costs and expenses as may be required under the deposit agreement and
completion of such undertakings, declarations, certifications and other
documents as the depositary may reasonably require, request the
depositary to exercise such rights on their behalf with respect to the
deposited common shares and to distribute the common shares, securities
or other assets so subscribed or acquired to the holders entitled
thereto by an increase in the numbers of GDSs corresponding to the
Master GDS (as defined in the deposit agreement) or an issue of
certificates in definitive registered form in respect of GDSs, according
to the manner in which the holders hold their GDSs; or(2)
    
    if and to the extent that the depositary shall at its discretion,
deem it to be lawful and reasonably practicable, the depositary will
distribute such rights to the holders entitled thereto in such manner as
the depositary may at its discretion determine; or(3)
    
    if and to the extent that the depositary deems any such arrangement
and distribution as is referred to in paragraphs (1) and (2) above to
all or any holders not to be lawful and reasonably practicable
(including, without limitation, due to the fractions which would
otherwise result or to any requirement that we, the Custodian (as
defined in the deposit agreement) or the depositary withhold an amount
on account of taxes or other governmental charges) or to be unlawful,
the depositary will, provided that holders have not taken up rights
through the depositary as provided in (1) above, sell such rights
(either by public or private sale and otherwise at its discretion
subject to all applicable laws and regulations) and distribute the net
proceeds of such sale as a cash distribution pursuant to the deposit
agreement to the holders entitled thereto. If the depositary is unable
to sell such rights, it will allow such rights to lapse. -88-




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We have agreed in the deposit agreement that we will, unless prohibited by
applicable law or regulation, give our
consent to, and if requested use all reasonable endeavors (subject to the
next paragraph) to facilitate, any such distribution, sale or subscription by
the depositary or the holders, as the case may be, pursuant to certain
provisions of the deposit agreement (including the obtaining of legal opinions
from counsel reasonably satisfactory to the Depositary concerning such matters
as the Depositary may reasonably specify). If we notify the depositary that registration is required in any
jurisdiction under any applicable law of the rights, securities or other
property to be distributed under certain provisions of the deposit agreement or
the securities to which such rights relate in order for us to offer such rights
or distribute such securities or other property to the GDS holders or owners of
GDSs and to sell the securities corresponding to such rights, the depositary
will not offer such rights or distribute such securities or other property to
the GDS holders or sell such securities unless and until we procure the receipt
by the depositary of an opinion from counsel reasonably satisfactory to the
depositary and us that a registration statement is in effect or that the
offering and sale of such rights or securities to such GDS holders or owners of
GDSs are exempt from registration under the provisions of such law. Neither we
nor the depositary shall be liable to register such rights, securities or other
property or the securities to which such rights relate and they shall not be
liable for any losses, damages or expenses resulting from any failure to do so. If at the time of the offering of any rights, at its discretion, the
depositary shall be satisfied that it is not lawful or reasonably practicable
(for reasons outside its control) to dispose of the rights in any manner
provided in paragraphs (1), (2) and (3) above, the depositary shall permit the
rights to lapse. The depositary will not be responsible for any failure to
determine that it may be lawful or feasible to make such rights available to
GDS holders or owners of GDSs in general or to any GDS holder or owner of a GDS
or GDS holders or owners of GDSs in particular. See
Item 3. Key Information  D. Risk Factors  Risks Related to our
Common Shares, ADSs and GDSs  The rights of holders of our ADSs and GDSs to
participate in our rights offerings may be limited, which may cause dilution to
their holdings. Voting Rights of GDS Holders GDS holders may direct the exercise of voting rights with respect to the
our common shares represented by GDSs only in accordance with the provisions of
the deposit agreement and applicable ROC law. See Item 3. Key Information 
D. Risk Factors  Risks Related to our Common Shares, ADSs and GDSs  ADS and
GDS holders do not have the same voting rights as our common shareholders,
which may affect the value of the ADSs and GDSs. If a GDS holder wishes to
withdraw its common shares, the GDS holder must appoint a local agent and open
a securities trading account with a local brokerage firm. Even if the GDS
holder does all this, however, the GDS holder might not know about the meeting
early enough in advance to withdraw the shares or the GDS holder may not have
enough time to register the common shares for voting purposes before the
shareholder register is closed. See Item 10. Additional Information  B.
Memorandum and Articles of Association  Description of Our Common Shares 
Meetings of Shareholders and  Register of Shareholders and Record Dates. Except as described below, GDS holders will not be able to exercise voting
rights attaching to our common shares represented by the GDSs on an individual
basis. According to the ROC Company Law, a shareholders voting rights
attaching to shareholdings in a ROC company must, as to all matters subject to
a vote of shareholders (other than the election of directors and supervisors),
be exercised as to all shares held by the shareholder in the same manner.
Accordingly, the voting rights attaching to the common shares represented by
GDSs must be exercised as to all matters subject to a vote of shareholders by
the depositary or its nominee, who represents all holders of GDSs, collectively
in the same manner, except in the case of an election of directors and
supervisors. Directors and supervisors are elected by cumulative voting. In the deposit agreement, GDS holders appointed the depositary as their
representative to exercise the voting rights with respect to the common shares
represented by their GDSs. We will provide the depositary with copies (including English
translations) of notices of meetings of our shareholders and the agenda of
these meetings. These materials will contain an indication of the number of
directors or supervisors to be elected if an election of directors or
supervisors is to be held at the meeting. The depositary will also mail to GDS
holders a voting instruction form. In order to be valid, the holder of GDSs
must complete, sign and return to the depositary the voting instruction form by
a date specified by the depositary. The number of directors or supervisors to
be elected may change after the depositary has mailed the voting instruction
form to GDS holders. If a change were to occur, the depositary would be unable
to follow each GDS holders exact voting instructions and may calculate such
GDS holders votes according to procedures not inconsistent with the provisions
of the deposit agreement. -89-




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We cannot assure GDS holders that they will receive the materials in time
to ensure that they can instruct the depositary to vote the common shares
represented by their GDSs. In addition, the depositary and its agents are not
responsible for failing to carry out voting instructions or for the manner of
carrying out voting instructions if such act or failure to act is in good
faith. This means that GDS holders may not be able to exercise their right to
vote and there may be nothing GDS holders can do if the common shares
represented by their GDSs are not voted as they requested. Subject to the provisions described in the second succeeding paragraph,
which will apply to the election of directors and supervisors, if persons
together holding at least 51% of the GDSs outstanding at the relevant record
date instruct the depositary to vote in the same manner in respect of one or
more resolutions to be proposed at the meeting (other than the election of
directors or supervisors), the depositary will notify the instructions to our
president, or if he is no longer an officer or director of our company, then
the Chairman of our board of directors (the designated
representative), or
such person as he may designate. The depositary will appoint the president or
his designated person to serve as the GDS holders designated representative
and that of the depositarys or its nominee. The designated representative
will attend the meeting and vote all the common shares represented by GDSs in
the manner so instructed. If, for any reason (other than failure by us to supply the notice of the
shareholders meeting to the depositary within the requisite time period
provided in the deposit agreement), the depositary has not by the date
specified by it received instructions from persons together holding at least
51% of all the GDSs outstanding at the relevant record date to vote in the same
manner in respect of any resolution specified in the agenda for a meeting
(other than the election of directors or supervisors), then GDS holders will be
deemed to have instructed the depositary or its nominee to authorize and
appoint the designated representative as the GDS holders representative and
that of the depositarys or its nominee to attend the meeting and vote, at his
sole discretion, all the common shares represented by all GDSs as the
designated representative deems appropriate with respect to the resolution or
resolutions, which may not be in the best interests of GDS holders. However,
no authorization will be given with respect to any matter as to which the
designated representative informs the depositary that he does not wish to be so
authorized, in which event the depositary will not vote at the relevant
meeting. The depositary will, however, take such action as is necessary to
cause all the common shares represented by GDSs to be counted for the purpose
of satisfying applicable quorum requirements. The depositary will notify the designated representative of the
instructions for the election of directors and supervisors received from GDS
holders and appoint the designated representative as the GDS holders
representative and that of the depositarys or its nominee to attend any
meeting and vote the common shares represented by GDSs as to which the
depositary has received instructions from GDS holders for the election of
directors and supervisors, subject to any restrictions imposed by ROC law and
our articles of incorporation. If, by the date specified by the depositary,
GDS holders have not delivered instructions to the depositary, GDS holders will
be deemed to have instructed the depositary to authorize and appoint the
designated representative as the GDS holders representative and that of the
depositarys or its nominee to attend the meeting and vote, at his sole
discretion, all the common shares represented by GDSs as to which the
depositary has not received instructions from GDS holders for the election of
directors and supervisors, which may not be in the best interests of GDS
holders. However, no authorization will be given with respect to any election
of directors or supervisors as to which the designated representative informs
the depositary that he does not wish to be so authorized, in which event the
depositary will attend such meeting and will vote those common shares
represented by the GDSs as to which it has received instructions from GDS
holders for the election of directors and supervisors in the manner so
instructed. The depositary will not vote at the relevant meeting any common
shares represented by GDSs, as to which the depositary has not received
instructions from GDS holders for the election of directors any supervisors but
will take such action as is necessary to cause all the common shares
represented by GDSs to be counted for the purpose of satisfying applicable
quorum requirements. By continuing to hold GDSs, GDS holders will be deemed to have agreed to
the voting provisions set forth in the deposit agreement, as these provisions
maybe amended from time to time. -90-




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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$1.001998:
    
    
    32.271999:
    
    
    31.392000:
    
    
    33.172001:First Quarter
    
    
    32.85Second Quarter
    
    
    34.48Third Quarter
    
    
    34.56Fourth Quarter
    
    
    35.002002:First Quarter
    
    
    35.00Second Quarter
    
    
    33.46Third Quarter
    
    
    34.92Fourth Quarter
    
    
    34.702003:First Quarter
    
    
    34.72Second Quarter
    
    
    34.61Third Quarter
    
    
    33.78Fourth Quarter
    
    
    33.992004January
    
    
    33.39February
    
    
    33.28March
    
    
    33.00April
    
    
    33.27May
    
    
    33.36June (through June 23)
    
    
    33.79
   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. 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, a Taiwan company
and a resident individual 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. Furthermore, any
remittance of foreign currency into Taiwan by a Taiwan company or a resident
individual in a year will be offset by the amount remitted out of Taiwan by
such company or individual (as applicable) within its annual quota and will not
use up its annual inward remittance quota to the extent of such offset. These
limits apply to remittances involving a conversion between 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. -91-




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E.
    
    Taxation ROC Taxation General The following summary addresses the principal ROC tax consequences of the
ownership and disposition of common shares, ADSs or GDSs 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, ADSs or GDSs 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 and GDS HOLDERS AND COMMON SHARE HOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISERS CONCERNING THE TAX CONSEQUENCES OF OWNING THE ADSs, GDSs OR COMMON
SHARES IN TAIWAN AND ANY OTHER RELEVANT TAXING JURISDICTION TO WHICH THEY ARE
SUBJECT. ADSs and GDSs 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 and GDSs 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 and GDSs are not subject to ROC securities
transaction tax. Gains on sale of ADSs and GDSs are not subject to ROC income
tax. Common Shares Dividends.Dividends (whether in cash or stock) 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 stock dividends 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 ADSs or GDSs 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, -92-




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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 to
residents of these countries. 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. 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, GDSs or common shares, but it does
not purport to be a comprehensive description of all of the United States
federal income tax considerations that may be relevant to a decision to
purchase, own, or dispose of the ADSs, GDSs 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, GDSs or 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, GDSs or common shares as part of a
hedging, integrated or conversion transaction, constructive sale or
straddle;
    
    persons who are citizens or residents of a possession or territory of the United States;
    
    persons who hold ADSs, GDSs or common shares pursuant to certain retirement plans;
    
    persons who receive ADSs, GDSs or common shares as compensation for services; -93-




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
    
    persons whose functional currency is not the U.S. dollar; or
    
    partners in a partnership that holds ADSs, GDSs 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 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, GDSs or 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, GDSs 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, GDSs or
common shares that is not a United States Holder as defined above. HOLDERS OF ADSs, GDSs 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, GDSs 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, GDSs 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
GDSs and exchanges of common shares for ADSs or GDSs, and ADSs and GDSs for -94-




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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 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 and GDSs, 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 and GDSs. A
non-corporate United States Holder of ADSs and GDSs 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 and GDSs under
section 1(h) of the Code if the United States Holder has held the ADSs or GDSs
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 or GDSs 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 GDSs 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 and GDSs, 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, GDSs 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 and GDSs, 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 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, ADSs and GDSs. 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 -95-




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income tax purposes on a sale or other disposition of ADSs, GDSs or common
shares in an amount equal to the difference between the United States Holders
adjusted basis in the ADSs, GDSs 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, GDSs or common shares for
more than one year at the time of the sale or exchange. The holding period of
the ADSs, GDSs or common shares will include the holding period of 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, ADSs or GDSs. 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, GDSs 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, GDSs 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, GDSs 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, GDSs or common
shares during the three preceding taxable years or, if shorter, the United
States Holders holding period for the ADSs, GDSs or the common shares (which
would include the holding period of bonds converted into such ADSs or common
shares). Under the PFIC rules, if no special election is made:  
    
    the gain or excess distribution would be allocated ratably over
the United States 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. -96-




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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, existing ADSs are listed on Nasdaq and existing GDSs are listed
on the Luxembourg Stock Exchange and also quoted on the International Order
Book of the London Stock Exchange plc. Nasdaq is a qualified exchange for
purposes of marketable stock and the mark-to-market election, but the Taiwan
Stock Exchange and the Luxembourg 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, the
GDSs listed on the Luxembourg Stock Exchange and the common shares listed on
the Taiwan Stock Exchange would need to be regularly traded on such exchanges
in order for the ADSs, GDSs 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. 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, GDSs or common shares will not be subject to
United States federal income or withholding tax on distributions on a common
share, ADS or GDS or gains realized on the sale of ADSs, GDSs 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 ADSs, GDSs 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, GDSs or common shares maybe subject to information reporting to
the United -97-




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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. This backup withholding rate was 30% for payments made in
2003, but has been 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  Judiciary Plaza
450 Fifth Street, N.W.
Room 1024
Washington, D. C. 20549 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 for Japanese yen as at December 31, 2003 is based
on the official exchange rate as determined by the Bank of Taiwan, being
NT$0.3178 = JPY1.00. -98-




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##### Table of Contents




    
    The exchange rates for U.S. dollars as at December 31, 2003 is based
on the official exchange rate as determined by the Bank of Taiwan being
NT$33.97 = US$1.00.
    
    Interest rates are derived from the prevailing interest rate swap
market in the respective currencies as at December 31, 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.  Principal (notional) amount by expected maturity for non-trading purposes Expected MaturityJanuary 1,
    
    January 1,
    
    January 1,
    
    January 1,
    
    January 1,2004 to
    
    2005 to
    
    2006 to
    
    2007 to
    
    2008 to
    
    
    
    
    
    
    
    
    
    Fair valueDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    
    
    
    
    
    
    
    
    December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total(2)(3)
    
    2003(Amount in thousands of NT$, except interest rates)Rate sensitive assetsCashVariable rate
    
    
    2,333,732
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,333,732
    
    
    
    2,333,732Average interest rate
    
    
    0.0954
    %Fixed rate
    
    
    10,363,039
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,363,039
    
    
    
    10,363,039Average interest rate
    
    
    1.1184
    %Others
    
    
    36,052
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,052
    
    
    
    36,052Rate
sensitive liabilitiesLong term debtUnsecured 0.5%
convertible debentures
due 2007(1)
    
    
    6,170,381
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,170,381
    
    
    
    6,268,335Zero coupon convertible
debentures due
2007(2)
    
    
    
    
    
    
    792,915
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    792,915
    
    
    
    790,977Zero coupon convertible
debentures due
2008(3)
    
    
    2,653,057
    
    
    
    411,191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,064,248
    
    
    
    3,064,248US$ debtVariable rate
    
    
    1,140,033
    
    
    
    33,970
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,174,003
    
    
    
    1,174,003Average interest rate
    
    
    1.90
    %
    
    
    1.90
    %NT$ debtFixed rate
    
    
    
    
    
    
    
    
    
    
    3,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000,000
    
    
    
    3,107,345Average interest rate
    
    
    
    
    
    
    
    
    
    
    3.30
    %Variable rate
    
    
    566,826
    
    
    
    1,497,666
    
    
    
    1,394,186
    
    
    
    1,264,986
    
    
    
    1,250,386
    
    
    
    1,683,482
    
    
    
    7,657,530
    
    
    
    7,657,530Average interest rate
    
    
    3.07
    %
    
    
    3.07
    %
    
    
    3.07
    %
    
    
    3.07
    %
    
    
    3.07
    %
    
    
    3.07
    %
   (1)
    
    In February 2002, we issued US$169.2 million aggregate principal amount
of our unsecured 0.5% convertible debentures due 2007.(2)
    
    In December 2002, we issued zero coupon convertible debentures in the
amount of NT$3.2 billion due 2007.(3)
    
    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. Foreign Currencies A significant portion of our revenues are denominated in currencies other
than the NT dollar. As of December 31, 2003, 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, 2003, 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 -99-




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##### Table of Contents



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 U.S. dollars and 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. 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, 2003 by expected year of maturity. Expected
MaturityJanuary 1,
    
    January 1,
    
    January 1,
    
    January 1,
    
    January 1,2004 to
    
    2005 to
    
    2006 to
    
    2007 to
    
    2008 to
    
    
    
    
    
    
    
    
    
    Fair valueDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    
    
    
    
    
    
    
    
    December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    2003(NT$ in thousands)Liabilities
denominated in
foreign currenciesUS$(1)
    
    
    11,411,563
    
    
    
    770,233
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,181,797Financial instruments
(with barrier)Sell JPY/Buy US$
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,552Sell JPY
    
    
    507,686
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    507,686Buy USD
    
    
    509,550
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    509,550Average strike price
    
    
    @106.50Financial instruments
(no barrier)Sell JPY/Buy US$
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,391
    )Sell JPY
    
    
    761,528
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    761,528Buy USD
    
    
    764,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    764,325Average strike price
    
    
    @106.50
   (1)
    
    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. -100-




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##### Table of Contents



Market Price Sensitivity Analysis Equity Contract On May 5, 1998, we issued zero coupon 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, with 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.
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, and the carrying amount
had a negative fair value of US$10.3 million. In May 2003, we settled the
contract with respect to the remaining eight options by paying US$13.1 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 and in connection with our stock appreciation rights plan,
with the underlying reference being 47,727,535 of our common shares. The
contract, as amended, expires on May 5, 2005. As of December 31, 2003, the
remaining underlying reference was 53,253,964 of our common shares. Under the
contract, if the share price is less 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 on US dollars, and
our share price is converted into US dollars using prevailing NT dollars to US
dollars exchange rates in order to determine the settlement amount. The
predetermined contract price was US$1.37 per share. As of December 31, 2003, our share price of NT$7.92 per share converted into US
dollars at the then prevailing rate of US$1=NT$33.97 was US$0.23 per
share. The carrying amount of this
contract as of December 31, 2003 was a loss of US$60.3 million (NT$2,050
million) while the fair value was a loss of US$60.7 million (NT$2,062 million).
In April 2003, when we previously extended this contract to May 2004, 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$9.5 per share at
that time. See Item 5. Operating and Financial Review and Prospects 
Operating Results  Equity Derivative Contracts and notes 19 and 20 to our
consolidated financial statements for the years ended December 31, 2001, 2002
and 2003 included in this annual report. 
 Item 12. Description of Securities Other than Equity Securities Not applicable. -101-




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##### Table of Contents



PART II 
 Item 13. Default, Dividend Arrearages and Delinquencies As of December 31, 2003, 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, our chief
executive officer and chief financial officer, concluded that our disclosure
controls and procedures were effective as of December 31, 2003, although we are
constantly engaged in the process of improving these controls and procedures. During 2003, no change to our internal control over financial reporting
occurred that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. 
 Item 16A. Audit Committee Financial Expert We have not appointed an audit committee as of the date of this annual report. 
 Item 16B. Code of Ethics On June 2, 2004, we adopted a Code of Business Conduct and Ethics for our
employees, including our chief executive officer, associate vice president of
finance center who acts as our chief accounting officer and other persons
performing similar functions. We will provide to any person without charge, upon request, a copy of our
Code of Business Conduct and Ethics. Any request should be made to our Investor
Relations Department at No. 16 Li-Hsin Road, Science Park, Hsinchu, Taiwan,
Republic of China. 
 Item 16C. Principal Accountant Fees and Services The table below summarizes the fees that we were billed for services
provided by Diwan, Ernst & Young and its affiliates for the years ended
December 31, 2002 and 2003. 2002
    
    2003(in thousands of NT$)Audit fees
    
    
    11,596
    
    
    
    14,971Audit-related fees
    
    
    398
    
    
    
    3,770Tax fees
    
    
    3,057
    
    
    
    2,562Others
    
    
    2,189
    
    
    
    1,005Total
    
    
    17,240
    
    
    
    22,308
 Audit-related Fees Services provided consist of assurance and related services that are
reasonably related to the performance of the audit or review of our financial
statements and are not included under Audit fees. The services for the fees
disclosed under this category include royalty audits and review of certain
regulatory filings with the ROC Securities and Futures Commission and other
reviews in connection with ADS, GDS and convertible bond offerings. -102-




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##### Table of Contents



Tax Fees This category consists of professional services for tax compliance and tax
advice. The services for the fees disclosed under this category include tax
return preparation and technical tax advice. Others This category consists primarily of fees for non-audit and non-tax fees,
such as annual report filing fees and business certification service fees. Pre-Approval of Services Prior to forming an audit committee, our board of directors is responsible
for the oversight of our independent accountants work. The policy of our board
of directors is to pre-approve all audit and non-audit services provided by
Diwan, Ernst & Young, including audit services, audit-related services, tax
services and other services, as described above. 
 Item 16D. Exemptions from the Listing Standards for Audit Committees Not applicable. However, see Item 6. Directors, Senior Management and
Employees  C. Board Practices. 
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not applicable. -103-




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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-83 for year-end financial statements. 
 Item 19. Exhibits ExhibitNumber
    
    Description2b.1
    
    
    The Company hereby agrees to furnish to the Securities and
Exchange Commission, upon request, copies of instruments defining
the rights of holders of long-term debt of the Company and its
subsidiaries.3.1
    
    
    Articles of Incorporation of the Company (English translation)*.8.1
    
    
    List of subsidiaries of the Company*.12.1
    
    
    Certifications of our President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*12.2
    
    
    Certifications of our Associate Vice President, Finance
Department, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*13.1
    
    
    Certifications of our President pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*13.2
    
    
    Certifications of our Associate Vice President, Finance
Department, pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*14.1
    
    
    Amended and Restated Deposit Agreement, dated as of February 7,
2002, among the Company, The Bank of New York, as depositary, and
Holders from time to time of American Depositary Receipts issued
thereunder, including the form of American Depositary Receipt(1).14.2
    
    
    Indenture, dated as of February 10, 2003, by and between the
Company and The Bank of New York, as trustee(2).14.3
    
    
    Land Lease Agreement, dated as of March 3, 1990, by and between
the Company and the Hsinchu Science-Based Industrial Park
Administration, in relation to Office Building and Fab I Site(3).14.4
    
    
    Land Lease Agreement, dated as of August 1, 1994, by and between
the Company and the Hsinchu Science-Based Industrial Park
Administration, in relation to Auxiliary Vehicular Facilities(4).14.5
    
    
    Land Lease Agreement, dated as of January 1, 1994, by and between
the Company and the Hsinchu Science-Based Industrial Park
Administration, in relation to Back-End Operation Plant(5).14.6
    
    
    Land Lease Agreement, dated as of June 1, 1995, by and between the
Company and the Hsinchu Science-Based Industrial Park
Administration, in relation to Fab II and Fab III Site(6).14.7
    
    
    Indenture, dated as of February 7, 2002, by and between the
Company and The Bank of New York, as trustee(7).
 -104-




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##### Table of Contents



ExhibitNumber
    
    Description14.8
    
    
    Summary of terms and conditions of domestic convertible bonds
issued December 12, 2002 (English summary)(8).14.9
    
    
    Deposit Agreement, dated as of April 5, 2004, among the Company,
Citibank, N.A., as depositary, and Holders from time to time of
Global Depositary Receipts issued thereunder, including the form
of Global Depositary Receipt*.
   *
    
    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 10.2 to the Companys Form 20-F
filed with the Commission on July 1, 2003.(3)
    
    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.(4)
    
    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.(5)
    
    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.(6)
    
    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.(7)
    
    Incorporated by reference to Exhibit 10.9 to the Companys Form 20-F
filed with the Commission on July 1, 2002.(8)
    
    Incorporated by reference to Exhibit 10.10 to the Companys Form 20-F
filed with the Commission on July 1, 2003. -105-




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements of Macronix International Co., Ltd. and its SubsidiariesReport
of Independent Auditors
    
    
    F-2Consolidated
Balance Sheets as of December 31, 2002 and 2003
    
    
    F-3Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2003
    
    
    F-5Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2003
    
    
    F-6Consolidated Statements of Shareholders Equity for each of
the three years in the period ended December 31, 2003
    
    
    F-8Notes
to Consolidated Financial Statements
    
    
    F-9
 F - 1




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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS To the Board of Directors, Supervisors, and Shareholders
of Macronix International Co., Ltd. We have audited the accompanying consolidated balance sheets of Macronix
International Co., Ltd. as of December 31, 2002 and 2003, and the related
consolidated statements of operations, shareholders equity, and cash flows
for each of the three years in the period ended December 31, 2003. 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 Republic of China and the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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, 2002 and 2003, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the Republic of China, which
differ in certain respects from accounting principles generally accepted in
the United States of America (see note 20 to the consolidated financial
statements). 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. DIWAN, ERNST & YOUNG
CERTIFIED PUBLIC ACCOUNTANTS Taipei, Taiwan, R.O.C.
April 5, 2004 F - 2




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
CONSOLIDATED BALANCE SHEETS December 31, 2002 and 2003
(Amounts in thousands except share and per share data) December 31,ASSETS
    
    Notes
    
    2002
    
    2003NT$
    
    NT$
    
    US$Current assetsCash and cash equivalents
    
    
    3
    
    
    
    7,394,361
    
    
    
    10,648,514
    
    
    
    313,284Restricted investments-current
    
    
    10
    
    
    
    3,351,572
    
    
    
    1,829,534
    
    
    
    53,826Short-term investments
    
    
    4
    
    
    
    1,185,324
    
    
    
    849,436
    
    
    
    24,991Notes and accounts receivable (net)
    
    
    5
    
    
    
    2,619,259
    
    
    
    2,769,652
    
    
    
    81,484Receivables from related parties
    
    
    15
    
    
    
    90,934
    
    
    
    58,264
    
    
    
    1,714Inventories (net)
    
    
    6
    
    
    
    5,140,820
    
    
    
    4,094,890
    
    
    
    120,473Deferred income taxes (net)
    
    
    14
    
    
    
    495,112
    
    
    
    104,812
    
    
    
    3,083Prepaid expenses
    
    
    
    
    
    
    647,807
    
    
    
    420,381
    
    
    
    12,368Others
    
    
    
    
    
    
    375,425
    
    
    
    226,498
    
    
    
    6,664Total current assets
    
    
    
    
    
    
    21,300,614
    
    
    
    21,001,981
    
    
    
    617,887Property, plant and equipment
    
    
    10,16Land
    
    
    
    
    
    
    1,354,931
    
    
    
    1,337,942
    
    
    
    39,363Buildings
    
    
    
    
    
    
    18,315,334
    
    
    
    23,554,857
    
    
    
    692,994Production equipment
    
    
    
    
    
    
    42,937,505
    
    
    
    45,315,031
    
    
    
    1,333,187Research and development equipment
    
    
    
    
    
    
    1,518,588
    
    
    
    1,901,837
    
    
    
    55,953Office furniture and equipment
    
    
    
    
    
    
    940,814
    
    
    
    968,713
    
    
    
    28,500Leased equipment
    
    
    
    
    
    
    1,750,658
    
    
    
    1,750,658
    
    
    
    51,505Construction in progress and
prepaid equipment
    
    
    
    
    
    
    7,534,791
    
    
    
    423,336
    
    
    
    12,455Total property, plant and equipment
    
    
    
    
    
    
    74,352,621
    
    
    
    75,252,374
    
    
    
    2,213,957Less: Accumulated depreciation
    
    
    
    
    
    
    (34,323,303
    )
    
    
    (42,652,848
    )
    
    
    (1,254,865
    )Net property, plant and equipment
    
    
    
    
    
    
    40,029,318
    
    
    
    32,599,526
    
    
    
    959,092Deferred income taxes (net)
    
    
    14
    
    
    
    1,451,245
    
    
    
    1,793,402
    
    
    
    52,763Intangible assets (net)
    
    
    
    
    
    
    1,051,228
    
    
    
    931,506
    
    
    
    27,405Long-term equity investments
    
    
    7
    
    
    
    1,827,089
    
    
    
    3,056,722
    
    
    
    89,930Restricted investments-non-current
    
    
    10
    
    
    
    260,625
    
    
    
    254,775
    
    
    
    7,496Refundable deposits
    
    
    
    
    
    
    1,589,478
    
    
    
    1,529,464
    
    
    
    44,997Other assets
    
    
    
    
    
    
    610,464
    
    
    
    254,377
    
    
    
    7,484Total assets
    
    
    
    
    
    
    68,120,061
    
    
    
    61,421,753
    
    
    
    1,807,054
 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, 2002 and 2003
(Amounts in thousands except share and per share data) December 31,LIABILITIES & SHAREHOLDERS EQUITY
    
    Notes
    
    2002
    
    2003NT$
    
    NT$
    
    US$Current liabilitiesShort-term debts
    
    
    8
    
    
    
    2,159,151
    
    
    
    2,748,446
    
    
    
    80,860Current portion of capital lease obligations
    
    
    9
    
    
    
    625,989
    
    
    
    633,444
    
    
    
    18,636Current portion of long-term debts
    
    
    10
    
    
    
    8,721,428
    
    
    
    10,530,297
    
    
    
    309,806Notes and accounts payable
    
    
    
    
    
    
    1,385,826
    
    
    
    1,955,297
    
    
    
    57,526Payables to related parties
    
    
    15
    
    
    
    156,809
    
    
    
    103,570
    
    
    
    3,047Payables to equipment suppliers
    
    
    
    
    
    
    1,551,915
    
    
    
    541,755
    
    
    
    15,939Accrued expenses
    
    
    
    
    
    
    3,016,253
    
    
    
    3,433,172
    
    
    
    101,005Income taxes payable
    
    
    14
    
    
    
    304,444
    
    
    
    220,926
    
    
    
    6,500Others
    
    
    
    
    
    
    434,991
    
    
    
    53,053
    
    
    
    1,561Total current liabilities
    
    
    
    
    
    
    18,356,806
    
    
    
    20,219,960
    
    
    
    594,880Long-term liabilitiesCapital lease obligations, less current portion
    
    
    9
    
    
    
    980,525
    
    
    
    325,073
    
    
    
    9,564Long-term debts, less current portion
    
    
    10
    
    
    
    18,358,201
    
    
    
    11,328,780
    
    
    
    333,297Accrued pension cost
    
    
    11
    
    
    
    105,194
    
    
    
    191,763
    
    
    
    5,642Other liabilities
    
    
    
    
    
    
    104,253
    
    
    
    143
    
    
    
    4Minority interest
    
    
    
    
    
    
    788
    
    
    
    108,500
    
    
    
    3,192Total liabilities
    
    
    
    
    
    
    37,905,767
    
    
    
    32,174,219
    
    
    
    946,579Commitments and contingencies
    
    
    16Shareholders equity
    
    
    12Common shares NT$10 par value, authorized
5,350,000,000 and 6,550,000,000 shares as of
December 31, 2002 and 2003, and issued
3,691,276,875 and 4,402,758,305 shares as of
December 31, 2002 and 2003, respectively.
    
    
    
    
    
    
    36,912,769
    
    
    
    44,027,583
    
    
    
    1,295,310Common stock to be registered
    
    
    
    
    
    
    
    
    
    
    274,936
    
    
    
    8,089Additional paid-in capital
    
    
    
    
    
    
    2,630,621
    
    
    
    
    
    
    
    Capital reserve
    
    
    
    
    
    
    356
    
    
    
    7,931
    
    
    
    234Legal reserve
    
    
    
    
    
    
    1,708,689
    
    
    
    
    
    
    
    Special reserve
    
    
    
    
    
    
    378,657
    
    
    
    
    
    
    
    Accumulated deficits
    
    
    
    
    
    
    (9,469,175
    )
    
    
    (14,062,333
    )
    
    
    (413,720
    )Unrealized losses on long-term investments
    
    
    
    
    
    
    (979,081
    )
    
    
    (1,859
    )
    
    
    (55
    )Cumulative translation adjustments
    
    
    
    
    
    
    219,894
    
    
    
    189,712
    
    
    
    5,581Treasury stock
    
    
    13
    
    
    
    (1,188,436
    )
    
    
    (1,188,436
    )
    
    
    (34,964
    )Total shareholders equity
    
    
    
    
    
    
    30,214,294
    
    
    
    29,247,534
    
    
    
    860,475Total liabilities and shareholders equity
    
    
    
    
    
    
    68,120,061
    
    
    
    61,421,753
    
    
    
    1,807,054
 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, 2001, 2002 and 2003
(Amounts in thousands except share and per share data) For the year ended December 31,Notes
    
    2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Sales revenue
    
    
    
    
    
    
    22,036,281
    
    
    
    16,647,525
    
    
    
    18,058,229
    
    
    
    531,281Less: Sales returns
    
    
    
    
    
    
    (208,920
    )
    
    
    (42,650
    )
    
    
    (313,544
    )
    
    
    (9,225
    )Sales discounts
    
    
    
    
    
    
    (80,131
    )
    
    
    (112,411
    )
    
    
    (32,498
    )
    
    
    (956
    )Net sales revenue
    
    
    
    
    
    
    21,747,230
    
    
    
    16,492,464
    
    
    
    17,712,187
    
    
    
    521,100Cost of goods sold
    
    
    
    
    
    
    (11,674,103
    )
    
    
    (17,104,860
    )
    
    
    (20,656,731
    )
    
    
    (607,730
    )Gross profit (loss)
    
    
    
    
    
    
    10,073,127
    
    
    
    (612,396
    )
    
    
    (2,944,544
    )
    
    
    (86,630
    )Less: Unrealized profit
    
    
    
    
    
    
    
    
    
    
    (2,895
    )
    
    
    2,895
    
    
    
    85Realized gross profit (loss)
    
    
    
    
    
    
    10,073,127
    
    
    
    (615,291
    )
    
    
    (2,941,649
    )
    
    
    (86,545
    )Operating expensesSelling expenses
    
    
    
    
    
    
    (611,406
    )
    
    
    (567,660
    )
    
    
    (560,660
    )
    
    
    (16,495
    )Administrative expenses
    
    
    
    
    
    
    (2,120,718
    )
    
    
    (1,838,025
    )
    
    
    (1,443,449
    )
    
    
    (42,467
    )Research and development expenses
    
    
    
    
    
    
    (3,825,049
    )
    
    
    (3,805,742
    )
    
    
    (2,738,231
    )
    
    
    (80,560
    )Total operating expenses
    
    
    
    
    
    
    (6,557,173
    )
    
    
    (6,211,427
    )
    
    
    (4,742,340
    )
    
    
    (139,522
    )Operating income (loss)
    
    
    
    
    
    
    3,515,954
    
    
    
    (6,826,718
    )
    
    
    (7,683,989
    )
    
    
    (226,067
    )Non-operating incomeResearch and development subsidies
    
    
    
    
    
    
    1,389
    
    
    
    2,286
    
    
    
    5,125
    
    
    
    151Interest income
    
    
    
    
    
    
    495,611
    
    
    
    216,937
    
    
    
    103,847
    
    
    
    3,055Foreign exchange gain
    
    
    
    
    
    
    453,965
    
    
    
    
    
    
    
    375,087
    
    
    
    11,035Gain on disposal of property, plant and equipment
    
    
    
    
    
    
    21,284
    
    
    
    252
    
    
    
    308
    
    
    
    9Gain on disposal of long-term investments
    
    
    
    
    
    
    
    
    
    
    27,791
    
    
    
    63,565
    
    
    
    1,870Net gain on short-term investments
    
    
    
    
    
    
    75,582
    
    
    
    
    
    
    
    43,591
    
    
    
    1,283Reversal of inventory loss provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,185,227
    
    
    
    34,870Others
    
    
    
    
    
    
    308,108
    
    
    
    218,622
    
    
    
    99,834
    
    
    
    2,937Total other income
    
    
    
    
    
    
    1,355,939
    
    
    
    465,888
    
    
    
    1,876,584
    
    
    
    55,210Non-operating expensesInterest expense
    
    
    
    
    
    
    (1,173,312
    )
    
    
    (1,237,902
    )
    
    
    (1,077,898
    )
    
    
    (31,712
    )Foreign exchange losses
    
    
    
    
    
    
    
    
    
    
    (321,266
    )
    
    
    
    
    
    
    Inventory loss provision
    
    
    
    
    
    
    (2,586,505
    )
    
    
    (2,929,284
    )
    
    
    
    
    
    
    Loss on disposal of property, plant and equipment
    
    
    
    
    
    
    (7,262
    )
    
    
    
    
    
    
    
    
    
    
    Net loss from equity investment
    
    
    
    
    
    
    (395,088
    )
    
    
    (141,077
    )
    
    
    (87,219
    )
    
    
    (2,566
    )Net investment loss
    
    
    
    
    
    
    (384,438
    )
    
    
    (273,865
    )
    
    
    (737,382
    )
    
    
    (21,694
    )Loss on allowance for prepaid expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (334,971
    )
    
    
    (9,855
    )Others
    
    
    
    
    
    
    (248,273
    )
    
    
    (72,897
    )
    
    
    (132,162
    )
    
    
    (3,888
    )Total other expenses
    
    
    
    
    
    
    (4,794,878
    )
    
    
    (4,976,291
    )
    
    
    (2,369,632
    )
    
    
    (69,715
    )Income (loss) before taxes and minority interest
    
    
    
    
    
    
    77,015
    
    
    
    (11,337,121
    )
    
    
    (8,177,037
    )
    
    
    (240,572
    )Income tax expense
    
    
    14
    
    
    
    (943,495
    )
    
    
    (19,898
    )
    
    
    (21,027
    )
    
    
    (619
    )Income (loss) before minority interest
    
    
    
    
    
    
    (866,480
    )
    
    
    (11,357,019
    )
    
    
    (8,198,064
    )
    
    
    (241,191
    )Minority interest loss
    
    
    
    
    
    
    
    
    
    
    356
    
    
    
    319
    
    
    
    10Net income (loss)
    
    
    
    
    
    
    (866,480
    )
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )
    
    
    (241,181
    )Earnings Per Common Share:
    
    
    2Net income (loss) per common share  basic
    
    
    
    
    
    (NT$0.23)
    
    (NT$3.10)
    
    (NT$2.13)
    
    (US$0.06)Net income (loss) per common share  diluted
    
    
    
    
    
    (NT$0.23)
    
    (NT$3.10)
    
    (NT$2.13)
    
    (US$0.06)Pro-forma
data: assuming that the Companys shares owned by subsidiaries were not treated as treasury stock
    
    
    2Net loss
    
    
    
    
    
    
    
    
    
    
    (11,426,697
    )
    
    
    (8,222,374
    )
    
    
    (241,906
    )Net loss per common share  basic
    
    
    
    
    
    
    
    
    
    (NT$3.11)
    
    (NT$2.13)
    
    (US$0.06)
 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, 2001, 2002 and 2003
(Amounts in thousands except share and per share data) For the years ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Cash flows from operating activities:Net income (loss)
    
    
    (866,480
    )
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )
    
    
    (241,181
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities :Depreciation
    
    
    7,443,341
    
    
    
    8,107,296
    
    
    
    8,614,734
    
    
    
    253,449Amortization
    
    
    562,415
    
    
    
    634,805
    
    
    
    672,277
    
    
    
    19,779Depreciation and market-value decline on idle assets
    
    
    
    
    
    
    
    
    
    
    91,530
    
    
    
    2,693Loss on allowance for prepaid expenses
    
    
    
    
    
    
    
    
    
    
    334,971
    
    
    
    9,855Deferred income taxes
    
    
    849,259
    
    
    
    9,058
    
    
    
    48,143
    
    
    
    1,416Gain on disposal of long-term investments
    
    
    
    
    
    
    (27,791
    )
    
    
    (63,565
    )
    
    
    (1,870
    )Net loss (net gain) on short-term investments
    
    
    (6,446
    )
    
    
    4,631
    
    
    
    (43,591
    )
    
    
    (1,283
    )Allowance (reversal of allowance) for bad debts
    
    
    9,431
    
    
    
    14,918
    
    
    
    (33,059
    )
    
    
    (973
    )Inventory provision (reversal)
    
    
    2,586,505
    
    
    
    2,929,284
    
    
    
    (1,185,227
    )
    
    
    (34,870
    )Net loss from equity investment
    
    
    395,088
    
    
    
    141,077
    
    
    
    87,219
    
    
    
    2,566Write off on long term investments
    
    
    384,438
    
    
    
    
    
    
    
    
    
    
    
    Net gain (loss) on disposal of property, plant and equipment
    
    
    (14,022
    )
    
    
    (252
    )
    
    
    (308
    )
    
    
    (9
    )Net changes in operating assets and liabilitiesNotes and accounts receivable
    
    
    3,025,761
    
    
    
    (328,028
    )
    
    
    (56,457
    )
    
    
    (1,661
    )Receivable from related parties
    
    
    (20,076
    )
    
    
    (77,858
    )
    
    
    (12,137
    )
    
    
    (357
    )Inventories
    
    
    (4,597,771
    )
    
    
    (767,482
    )
    
    
    2,268,453
    
    
    
    66,739Other current assets
    
    
    130,454
    
    
    
    156,736
    
    
    
    135,347
    
    
    
    3,982Prepaid expenses
    
    
    (163,946
    )
    
    
    (44,670
    )
    
    
    92,071
    
    
    
    2,709Notes and accounts payable
    
    
    (555,561
    )
    
    
    290,357
    
    
    
    569,471
    
    
    
    16,754Payables to related parties
    
    
    (172,956
    )
    
    
    23,632
    
    
    
    (53,239
    )
    
    
    (1,566
    )Accrued expenses
    
    
    335,752
    
    
    
    57,616
    
    
    
    416,919
    
    
    
    12,266Income taxes payable
    
    
    (294,655
    )
    
    
    (99,519
    )
    
    
    (83,518
    )
    
    
    (2,457
    )Other current liabilities
    
    
    (196,083
    )
    
    
    338,086
    
    
    
    (381,938
    )
    
    
    (11,237
    )Other liabilities
    
    
    (404
    )
    
    
    
    
    
    
    
    
    
    
    Accrued pension cost
    
    
    3,265
    
    
    
    80,661
    
    
    
    86,569
    
    
    
    2,547Interest payable of debentures
    
    
    561,649
    
    
    
    184,993
    
    
    
    (989,775
    )
    
    
    (29,119
    )Net cash provided by operating activities
    
    
    9,398,958
    
    
    
    270,887
    
    
    
    2,317,145
    
    
    
    68,172Cash flows from investing activities:Decrease (increase) in restricted investments
    
    
    182,000
    
    
    
    (1,856,396
    )
    
    
    1,527,888
    
    
    
    44,951Payments for purchase of marketable securities
    
    
    (10,091,281
    )
    
    
    (7,691,078
    )
    
    
    (10,077,010
    )
    
    
    (296,470
    )Proceeds from disposal of marketable securities
    
    
    9,164,765
    
    
    
    7,661,859
    
    
    
    10,455,091
    
    
    
    307,593Payments for purchase of other financial assets
    
    
    
    
    
    
    
    
    
    
    (173,730
    )
    
    
    (5,111
    )Proceeds from disposal of other financial assets
    
    
    
    
    
    
    
    
    
    
    173,730
    
    
    
    5,111Additions to long-term equity investments
    
    
    (1,492,004
    )
    
    
    (762,940
    )
    
    
    (542,451
    )
    
    
    (15,959
    )Proceeds
from disposals of long-term equity investments
    
    
    3,038
    
    
    
    
    
    
    
    124,113
    
    
    
    3,651Payments for purchase of property, plant and equipment
    
    
    (9,432,281
    )
    
    
    (8,433,728
    )
    
    
    (2,616,208
    )
    
    
    (76,970
    )Proceeds from disposals of property, plant and equipment
    
    
    92,658
    
    
    
    6,023
    
    
    
    6,979
    
    
    
    205Refundable deposits
    
    
    (51,246
    )
    
    
    (308,321
    )
    
    
    60,014
    
    
    
    1,766Other assets
    
    
    (353,985
    )
    
    
    224,815
    
    
    
    39,678
    
    
    
    1,167Additions to intangible assets
    
    
    (635,249
    )
    
    
    (436,686
    )
    
    
    (235,463
    )
    
    
    (6,927
    )Proceeds from disposals of intangible assets
    
    
    
    
    
    
    
    
    
    
    454
    
    
    
    14(Additions) deductions to other liabilities  refundable deposits
    
    
    (1,721,801
    )
    
    
    60
    
    
    
    (5
    )
    
    
    Net cash used in investing activities
    
    
    (14,335,386
    )
    
    
    (11,596,392
    )
    
    
    (1,256,920
    )
    
    
    (36,979
    )
 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, 2001, 2002 and 2003
(Amounts in thousands except share and per share data) For the years ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Cash flows from financing activities:Proceeds from short-term debts
    
    
    5,025,485
    
    
    
    12,559,352
    
    
    
    7,656,139
    
    
    
    225,247Repayments of short-term debts
    
    
    (5,878,037
    )
    
    
    (11,134,151
    )
    
    
    (7,031,324
    )
    
    
    (206,864
    )Proceeds from short-term notes
    
    
    2,600,000
    
    
    
    4,630,000
    
    
    
    300,000
    
    
    
    8,826Repayments of short-term notes
    
    
    (2,600,000
    )
    
    
    (4,630,000
    )
    
    
    (300,000
    )
    
    
    (8,826
    )Proceeds from long-term debts and capital lease obligations
    
    
    6,862,783
    
    
    
    12,080,534
    
    
    
    5,835,305
    
    
    
    171,677Repayments of long-term debts and capital lease obligations
    
    
    (4,048,757
    )
    
    
    (6,287,456
    )
    
    
    (8,201,614
    )
    
    
    (241,295
    )Distribution of directors and supervisors remuneration
    
    
    (190,148
    )
    
    
    
    
    
    
    
    
    
    
    Common stock repurchased
    
    
    
    
    
    
    (1,046,071
    )
    
    
    
    
    
    
    Common stock issued
    
    
    
    
    
    
    
    
    
    
    3,822,504
    
    
    
    112,460Minority interest
    
    
    
    
    
    
    788
    
    
    
    117,712
    
    
    
    3,462Net cash provided by financing activities
    
    
    1,771,326
    
    
    
    6,172,996
    
    
    
    2,198,722
    
    
    
    64,687Effect of exchange rate changes on cash and cash equivalents
    
    
    164,162
    
    
    
    (14,084
    )
    
    
    (4,794
    )
    
    
    (141
    )(3,000,940
    )
    
    
    (5,166,593
    )
    
    
    3,254,153
    
    
    
    95,739Cash and cash equivalents at the beginning of the period
    
    
    15,561,894
    
    
    
    12,560,954
    
    
    
    7,394,361
    
    
    
    217,545Cash and cash equivalents at the end of the period
    
    
    12,560,954
    
    
    
    7,394,361
    
    
    
    10,648,514
    
    
    
    313,284Supplemental disclosures of cash flow information:Interest paid during the period
    
    
    1,157,978
    
    
    
    1,176,317
    
    
    
    998,922
    
    
    
    29,389Income tax paid during the period
    
    
    568,013
    
    
    
    152,985
    
    
    
    35,064
    
    
    
    1,032Non-cash activities:Current portion of long-term debts and capital lease obligations
transferred to current liabilities
    
    
    3,199,654
    
    
    
    9,347,417
    
    
    
    11,163,741
    
    
    
    328,442Payments for purchases of property, plant and equipment:Payable to equipment suppliers (beginning balance)
    
    
    1,364,891
    
    
    
    1,010,363
    
    
    
    1,551,915
    
    
    
    45,658Add: Purchases of property, plant and equipment
    
    
    9,077,753
    
    
    
    8,975,280
    
    
    
    1,606,048
    
    
    
    47,251Less: Payable to equipment suppliers (ending balance)
    
    
    (1,010,363
    )
    
    
    (1,551,915
    )
    
    
    (541,755
    )
    
    
    (15,939
    )Payments for purchases of property, plant and equipment
    
    
    9,432,281
    
    
    
    8,433,728
    
    
    
    2,616,208
    
    
    
    76,970Convertible bonds converted to common stock and
accumulated deficit
    
    
    
    
    
    
    
    
    
    
    2,453,866
    
    
    
    72,194
 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, 2001, 2002 and 2003
(Amounts in thousands except share and per share data) Additional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized lossesCommon
    
    Common stock
    
    paid-in
    
    Capital
    
    Legal
    
    Special
    
    Retained earnings
    
    on long-term
    
    Translation
    
    Treasuryshares
    
    to be registered
    
    capital
    
    reserve
    
    reserve
    
    reserve
    
    (accumulated deficit)
    
    investments
    
    adjustments
    
    stock
    
    TotalNT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$Balance as of December 31, 2000
    
    
    24,744,091
    
    
    
    
    
    
    
    8,424,373
    
    
    
    16,360
    
    
    
    647,015
    
    
    
    
    
    
    
    10,743,013
    
    
    
    (107,300
    )
    
    
    105,875
    
    
    
    
    
    
    
    44,573,427Appropriation and distribution of 2000 retained earnings:Special reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,425
    
    
    
    (1,425
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,060,038
    
    
    
    
    
    
    
    (1,060,038
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock dividends
    
    
    8,849,335
    
    
    
    
    
    
    
    (2,474,409
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (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
    
    
    
    
    
    
    
    167,144Balance as of December 31, 2001
    
    
    33,593,426
    
    
    
    
    
    
    
    5,949,964
    
    
    
    16,360
    
    
    
    1,707,053
    
    
    
    1,425
    
    
    
    2,249,996
    
    
    
    (647,618
    )
    
    
    273,019
    
    
    
    
    
    
    
    43,143,625Appropriation and distribution of 2001 retained earnings:Special reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    377,232
    
    
    
    (377,232
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,360
    )
    
    
    1,636
    
    
    
    
    
    
    
    14,724
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional
paid-in capital transferred to common stock (3,319,342,620 shares)
    
    
    3,319,343
    
    
    
    
    
    
    
    (3,319,343
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustments of capital reserve from equity investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    356
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    356Unrealized losses on long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (331,463
    )
    
    
    
    
    
    
    
    
    
    
    (331,463
    )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
    
    
    36,912,769
    
    
    
    
    
    
    
    2,630,621
    
    
    
    356
    
    
    
    1,708,689
    
    
    
    378,657
    
    
    
    (9,469,175
    )
    
    
    (979,081
    )
    
    
    219,894
    
    
    
    (1,188,436
    )
    
    
    30,214,294Additional paid-in capital used to cover accumulated deficits
    
    
    
    
    
    
    
    
    
    
    (2,630,621
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,630,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Legal reserve used to cover accumulated deficits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,708,689
    )
    
    
    
    
    
    
    1,708,689
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special reserve used to cover accumulated deficits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (378,657
    )
    
    
    378,657
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock issuance for cash
    
    
    4,750,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (927,496
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,822,504Conversion of convertible debentures
    
    
    2,364,814
    
    
    
    274,936
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (185,884
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,453,866Adjustments of capital reserve from equity investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,575Unrealized gains on long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    977,222
    
    
    
    
    
    
    
    
    
    
    
    977,222Net loss, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,197,745
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,197,745
    )Cumulative translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,182
    )
    
    
    
    
    
    
    (30,182
    )Balance as of December 31, 2003
    
    
    44,027,583
    
    
    
    274,936
    
    
    
    
    
    
    
    7,931
    
    
    
    
    
    
    
    
    
    
    
    (14,062,333
    )
    
    
    (1,859
    )
    
    
    189,712
    
    
    
    (1,188,436
    )
    
    
    29,247,534Balance as of December 31, 2003 (US$)
    
    
    1,295,310
    
    
    
    8,089
    
    
    
    
    
    
    
    234
    
    
    
    
    
    
    
    
    
    
    
    (413,720
    )
    
    
    (55
    )
    
    
    5,581
    
    
    
    (34,964
    )
    
    
    860,475
 F - 8




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share, per share, and percentage data)  1.
    
    Organization and Business  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
over-50%-percentage owned subsidiaries of Macronix International Co., Ltd.
include Macronix America, Inc. (MXA), Macronix (B.V.I.) Co. Ltd., Hui
Ying Investment, Ltd., Magic Pixel Inc., Kang Bao Investment, Ltd., Run
Hong Investment, Ltd., MaxNova Inc., and Macronix (Hong Kong) Co., Ltd. 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 Hui Ying Investment, Ltd.s 87.98%
owned subsidiary, Joytech Technology Co., are also included in the
consolidated financial statements of Macronix International Co., Ltd.
Macronix International Co., Ltd. and their direct and indirect subsidiaries
are hereinafter collectively referred to as the Company or Macronix.
All significant inter-company balances and transactions have been
eliminated in connection with the preparation of the consolidated financial
statements of the Company.  2.
    
    Summary of Significant Accounting Policies  Generally Accepted Accounting Principles
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the Republic of China (ROC
GAAP).Use of Estimates
The preparation of the consolidated 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.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 with three months are considered
to be cash equivalents. F - 9




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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)  Foreign Currency Translation
The Companys Taiwan entities maintain their 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 exchange rates in effect at the balance sheet date.
Revenue and expense accounts are translated using a weighted average
exchange rate for the relevant 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.  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 recorded in the statement of
operations upon exercise in the periods in which such options are
exercised. F - 10




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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  Cross currency and interest rate swaps are entered into to hedge currency
positions and interest rate variations related to foreign currency debts
with floating interest rates. The difference between the spot rate at the
contract date and the contracted forward rate is amortized over the life
of the contract. 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 such gains or losses
occur.The gain or loss resulting from the difference between the related
floating rate interest and fixed rate interest at the balance sheet date
is recorded in the statement of operations for the period ending on such
balance sheet date. The realized gains and losses upon settlement are
recorded in the statement of operations.  d. Structured deposits  A structured deposit represents a deposit with an embedded currency
option placed with a financial institution to earn higher interest
income. At maturity the financial institution that accepts the deposit
has an option to pay the remittance and the pre-determined accrued
interest in the original currency or in an alternative currency based on
the terms of the structured deposit contract.The amount of the pre-determined interest is accrued. The realized and
unrealized gains and losses arising from the currency portion of the
contracts are recorded in the statement of operations for the relevant
period at the balance sheet date and at maturity, as the case may be.  e. Other derivative financial instruments  The Company has entered into other derivative financial instruments for
hedging purposes. Other derivative financial instruments are accounted
for as described in note 19.  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 and has been made at the
rate of NT$33.99 to US$1(on the basis of the 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, 2003). 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. 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)  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.  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. 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 of inventory.  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. Adjustments to capital reserve is
required when holding percentage changes due to unproportional subscription
to investees new shares issued. If capital reserve is insufficient,
retained earning is adjusted. 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.The unrealized profits and losses from intercompany transactions between
the investor company and investee company during the period are eliminated
based on the investors percentage ownership interest in the investee.  Allowance for Doubtful Accounts
The allowance for doubtful accounts is provided based on the Companys
collectibility and aging analysis of notes and accounts receivable and
other receivables. 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 calculated on a straight-line basis over the
following useful lives: Buildings
    
    
    5 to 20 yearsProduction equipment
    
    
    1 to 5 yearsResearch and development equipment
    
    
    1 to 5 yearsOffice furniture and equipment
    
    
    1 to 10 yearsLeased equipment
    
    
    5 years
  Properties still used in operations beyond their original estimated
service lives are further depreciated over their newly estimated service
lives.Improvements and replacements are capitalized and depreciated over their
estimated useful lives while ordinary repairs and maintenance are expensed
as incurred. Gains and losses resulting from the disposal of property,
plant and equipment are presented under non-operating income or expenses.
Interest incurred with respect to the additions of property, plant and
equipment is capitalized until those assets are ready for use.Equipment not held for operating purposes is transferred to the account of
idle assets based on the lower of net realizable value or book value.
Depreciation derived from idle assets is recorded under non-operating
expenses.  Lease agreements
Provided a lease agreement meets the capitalization criteria, the present
value of the minimum lease payments net of executory costs is 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. 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)  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 related
contracts lives and life of the bonds, respectively. Computer software is
amortized over one to three years, while other intangible assets are
amortized over one to five years. Accumulated amortization of intangibles
amounted to NT$1,653,834, NT$2,288,639, NT$2,960,916 (US$87,111) as of
December 31, 2001, 2002 and 2003, respectively.  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 its wages
and salaries paid. 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 this committees
name. Accordingly, 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 a straight-line basis over the employees average remaining service
period of about twenty-five years. 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)  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 its the Companys 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 in the year that such expenditures, training and
investment occur.  Convertible Bonds
The interest-premium of puttable convertible bonds, which is the difference
between the specified put price and the par value, is amortized using the
interest method and is recognized as a liability over the period from the
issuance date of the bonds to the expiry date of the put option. If the
bondholder does not exercise the put option, the interest-premium, which
has been recognized as a liability, is amortized over the period from the
expiry date to the maturity date using the interest method. However, if at
the expiry date the market value of the common stock under conversion
exceeds the put price, the interest-premium should be credited to
additional paid-in capital.The cost of issuing convertible bonds is recorded as a deferred asset and
is amortized over the period from the issuance date of the convertible
bonds and the expiry date of the put option.When bondholders exercise their conversion rights, the book value of
convertible bonds is credited to common stock at an amount equal to the par
value of the common stock and the excess is credited to capital reserve; no
gain or loss is recognized on bond conversion.  Revenue Recognition
Revenue is recognized when it becomes realized or realizable. Revenue from
the sale of products is recognized when ownership of the product 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. 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)  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 calculated based on the par
value of the common shares issued.  Research and Development Subsidies
Government subsidies for research and development are recorded as
non-operating income in the period the qualifying research and development
activities are undertaken.Minority Interests
Minority interest in the 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 ROC. 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 includes or adds back
potential common stock dividends, interest and other conversion revenues
(expenses). The denominator includes all potentially dilutive common shares. 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 weighted average numbers of outstanding common shares for the
calculation of basic earnings per share are computed as follows: For the year ended December 31,2001
    
    2002
    
    2003Numbers of common shares
outstanding as of January 1
    
    
    2,474,409,144
    
    
    
    3,359,342,613
    
    
    
    3,691,276,875Weighted-average number of
repurchased stock
    
    
    
    
    
    
    (26,205,248
    )
    
    
    (40,000,000
    )Stock dividend and transfer of
capital reserve to capital on May
28, 2001(30%)
    
    
    742,322,744
    
    
    
    
    
    
    
    Employee bonus transferred to
capital on May 28, 2001
    
    
    142,610,725
    
    
    
    
    
    
    
    Stock dividends on July 13, 2002
    
    
    
    
    
    
    333,313,737
    
    
    
    Weighted average effect of 2002
stock dividend
    
    
    335,934,261
    
    
    
    
    
    
    
    Issuance of common
shares for cash on
November 11, 2003
    
    
    
    
    
    
    
    
    
    
    66,369,863Bonds converted to
common shares for
the year ended
December 31, 2003
    
    
    
    
    
    
    
    
    
    
    134,088,222Add: retroactive
adjustment for
bonus element
included in the
rights offering on
November 3, 2003
(0.1688%)
    
    
    6,237,627
    
    
    
    6,188,969
    
    
    
    6,388,732Subtotal
    
    
    3,701,514,501
    
    
    
    3,672,640,071
    
    
    
    3,858,123,692Less: treasury
stock owned by
subsidiaries
    
    
    
    
    
    
    (6,023,152
    )
    
    
    (6,023,152
    )Retroactive
adjustment of
treasury stock
owned by the
subsidiary for
bonus element
included in the
rights offering on
November 11, 2003
    
    
    
    
    
    
    (10,167
    )
    
    
    (10,167
    )Weighted-average number of shares
    
    
    3,701,514,501
    
    
    
    3,666,606,752
    
    
    
    3,852,090,373
 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)  Basic and diluted earnings per share (the EPS) are calculated as follows: For the year ended December 31,2001
    
    2002
    
    2003Basic EPS:Net loss available to common share holders
    
    
    (866,480
    )
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )Weighted average common shares outstanding
    
    
    3,701,514,501
    
    
    
    3,666,606,752
    
    
    
    3,852,090,373Basic EPS
    
    
    (0.23
    )
    
    
    (3.10
    )
    
    
    (2.13
    )Diluted EPS:Net loss available to common share holders
    
    
    (866,480
    )
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )Income impact of assumed exercise of stock options
    
    
    
    
    
    
    
    
    
    
    Income impact of assumed conversion of
convertible bonds
    
    
    
    
    
    
    
    
    
    
    Net loss available to common shares plus assumed
conversions
    
    
    (866,480
    )
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )Weighted average common shares outstanding
    
    
    3,701,514,501
    
    
    
    3,666,606,752
    
    
    
    3,852,090,373Weighted average assumed exercise of stock options
    
    
    
    
    
    
    
    
    
    
    Weighted average assumed conversion of
convertible bonds
    
    
    
    
    
    
    
    
    
    
    Adjusted weighted average shares
    
    
    3,701,514,501
    
    
    
    3,666,606,752
    
    
    
    3,852,090,373Diluted EPS
    
    
    (0.23
    )
    
    
    (3.10
    )
    
    
    (2.13
    )
  The diluted earnings per share calculation excludes the statement of
operations impact of NT$433,525, NT$413,809 and NT$240,708 related to the
assumed conversion of convertible bonds into 210,301,619 weighted
average shares, 374,454,410 weighted average shares and 659,968,955 weighted
average shares for years 2001, 2002 and 2003, respectively. In addition,
1,996,820 weighted average shares assumed exercise of stock options for
year 2003 were also excluded in the diluted earnings per share calculation.
The impact of the assumed conversion and exercise of stock options has been
excluded due to the anti-dilutive effect. 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)  Pro-forma data:Assuming that the Companys shares owned by its subsidiaries were not
treated as treasury stock for the years 2002 and 2003, the net loss and
loss per share would be as follows: For the year ended December 31,2002
    
    2003NT$
    
    NT$
    
    US$Net loss
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )
    
    
    (241,181
    )Unrealized short-term investment loss
    
    
    (70,034
    )
    
    
    (24,629
    )
    
    
    (725
    )Net loss (pro-forma)
    
    
    (11,426,697
    )
    
    
    (8,222,374
    )
    
    
    (241,906
    )
 Amount (numerator)
    
    Shares
    
    Net loss per shareBasic EPS (pro-forma)
    
    Before tax
    
    After tax
    
    (denominator)
    
    Before tax
    
    After taxYear 2002:Net loss
    
    $
    (11,426,697
    )
    
    $
    (11,426,697
    )
    
    
    3,672,640,071
    
    
    $
    (3.11
    )
    
    $
    (3.11
    )Year 2003:Net loss
    
    $
    (8,222,374
    )
    
    $
    (8,222,374
    )
    
    
    3,858,123,692
    
    
    $
    (2.13
    )
    
    $
    (2.13
    )
  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 are treated as treasury stock.
Retroactive adjustments were not required.  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 by NT$70,034 and
NT$24,629 for the years ended December 31, 2002, and 2003, respectively,
and loss per share by NT$ 0.01 and NT$0.00 for the years ended December
31, 2002, and 2003, respectively. Long-term equity investments and
shareholders equity both decreased by NT$142,365 as of December 31, 2002
and 2003. 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)  3.
    
    Cash and Cash Equivalents As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Petty cash
    
    
    3,363
    
    
    
    7,726
    
    
    
    227Checking and savings accounts
    
    
    5,812,797
    
    
    
    2,374,912
    
    
    
    69,871Time deposits
    
    
    1,025,330
    
    
    
    6,803,685
    
    
    
    200,167Cash equivalents
    
    
    552,871
    
    
    
    1,462,191
    
    
    
    43,019Total
    
    
    7,394,361
    
    
    
    10,648,514
    
    
    
    313,284
  4.
    
    Short-Term Investments As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Mutual funds
    
    
    1,202,539
    
    
    
    871,095
    
    
    
    25,628Less: Allowance for market value decline
    
    
    (17,215
    )
    
    
    (21,659
    )
    
    
    (637
    )Net
    
    
    1,185,324
    
    
    
    849,436
    
    
    
    24,991
  5.
    
    Notes and Accounts Receivable (Net) As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Notes receivable
    
    
    95,947
    
    
    
    161,098
    
    
    
    4,740Accounts receivable
    
    
    2,727,195
    
    
    
    2,723,361
    
    
    
    80,122Total
    
    
    2,823,142
    
    
    
    2,888,459
    
    
    
    84,862Less: Allowance for doubtful accounts
    
    
    (203,883
    )
    
    
    (114,807
    )
    
    
    (3,378
    )Net
    
    
    2,619,259
    
    
    
    2,769,652
    
    
    
    81,484
 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)  6.
    
    Inventories (Net) As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Merchandise
    
    
    82,102
    
    
    
    291,992
    
    
    
    8,591Finished goods
    
    
    2,422,366
    
    
    
    2,043,723
    
    
    
    60,127Work in process
    
    
    8,038,534
    
    
    
    5,815,498
    
    
    
    171,094Raw materials
    
    
    229,586
    
    
    
    180,287
    
    
    
    5,304Supplies
    
    
    119,484
    
    
    
    112,721
    
    
    
    3,316Others
    
    
    483
    
    
    
    30,688
    
    
    
    903Total
    
    
    10,892,555
    
    
    
    8,474,909
    
    
    
    249,335Less: Allowance for market value decline and
obsolescence
    
    
    (5,751,735
    )
    
    
    (4,380,019
    )
    
    
    (128,862
    )Net
    
    
    5,140,820
    
    
    
    4,094,890
    
    
    
    120,473
  The insurance coverage for inventories amounted to NT$6,700,681 and
NT$5,135,785 (US$151,097) as of December 31, 2002 and 2003, respectively. 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)  7.
    
    Long-Term Equity Investments As of December 31, 2002PercentAccounted for under cost method:
    
    Shares
    
    NT$
    
    OwnedChantek Electronic Co., Ltd.**
    
    
    15,211,746
    
    
    
    
    
    
    
    4.35
    %United Industrial Gases Co., Ltd.
    
    
    5,274,212
    
    
    
    58,500
    
    
    
    3.38
    %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.
    
    
    7,386,225
    
    
    
    83,135
    
    
    
    2.99
    %Taiwan Mask Corp.**
    
    
    806
    
    
    
    81
    
    
    
    
    *Chipbond Technology Corp.**
    
    
    10,028,450
    
    
    
    158,302
    
    
    
    7.17
    %Pico Netics Inc.
    
    
    1,000,000
    
    
    
    31,275
    
    
    
    4.16
    %Global Strategic Investment Fund
    
    
    2,000,000
    
    
    
    69,500
    
    
    
    2.52
    %FueTrek Co., Ltd.
    
    
    480
    
    
    
    43,094
    
    
    
    17.65
    %Tower Semiconductor Ltd.**
    
    
    5,932,105
    
    
    
    1,847,480
    
    
    
    13.66
    %Subtotal
    
    
    
    
    
    
    2,608,867Less: Allowance for market value
decline
    
    
    
    
    
    
    (979,081
    )Net
    
    
    
    
    
    
    1,629,786Accounted for under equity method:Caesar Technology, Inc.
    
    
    74,129,603
    
    
    
    
    
    
    
    29.65
    %Prominent Communications, Inc.
    
    
    7,300,000
    
    
    
    65,864
    
    
    
    35.23
    %Biomorphic VLSI Inc.
    
    
    4,660,252
    
    
    
    
    
    
    
    35.08
    %Raio Electronic Co. Ltd.
    
    
    3,140,000
    
    
    
    11,439
    
    
    
    28.04
    %Subtotal
    
    
    
    
    
    
    77,303Prepaid InvestmentHonbond Venture Capital Co., Ltd.
    
    
    
    
    
    
    120,000
    
    
    
    15.00
    %Total
    
    
    
    
    
    
    1,827,089*Less than 0.01%**Publicly traded
 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) As of December 31, 2003PercentShares
    
    NT$
    
    US$
    
    ownedAccounted for under cost method:Chantek Electronic Co., Ltd.**
    
    
    2,395,209
    
    
    
    
    
    
    
    
    
    
    
    4.35
    %United Industrial Gases Co., Ltd.
    
    
    5,274,212
    
    
    
    58,500
    
    
    
    1,721
    
    
    
    3.31
    %Quality Test System Inc.
    
    
    4,538,333
    
    
    
    
    
    
    
    
    
    
    
    14.64
    %Chien Cheng Venture Capital Co., Ltd.
    
    
    8,000,000
    
    
    
    80,000
    
    
    
    2,354
    
    
    
    15.38
    %Honbond Venture Capital Co., Ltd.
    
    
    12,000,000
    
    
    
    120,000
    
    
    
    3,531
    
    
    
    15.00
    %Ardentec Corp.
    
    
    26,637,878
    
    
    
    264,004
    
    
    
    7,767
    
    
    
    11.65
    %Powertech Co. Ltd.**
    
    
    7,109,786
    
    
    
    76,213
    
    
    
    2,242
    
    
    
    2.72
    %Taiwan Mask Corp.**
    
    
    806
    
    
    
    81
    
    
    
    2
    
    
    
    
    *Chipbond Technology Corp.**
    
    
    6,681,450
    
    
    
    103,778
    
    
    
    3,053
    
    
    
    4.78
    %Pico Netics Inc.
    
    
    1,000,000
    
    
    
    30,573
    
    
    
    900
    
    
    
    2.45
    %Global Strategic Investment Fund
    
    
    2,000,000
    
    
    
    67,940
    
    
    
    1,999
    
    
    
    2.52
    %FueTrek Co., Ltd.
    
    
    480
    
    
    
    42,126
    
    
    
    1,239
    
    
    
    17.65
    %Tower Semiconductor Ltd.**
    
    
    8,144,784
    
    
    
    2,030,227
    
    
    
    59,730
    
    
    
    15.75
    %Subtotal
    
    
    
    
    
    
    2,873,442
    
    
    
    84,538Less: Allowance for market value
decline
    
    
    
    
    
    
    (1,859
    )
    
    
    (55
    )Net
    
    
    
    
    
    
    2,871,583
    
    
    
    84,483Accounted for under equity method:Prominent Communications, Inc.
    
    
    7,300,000
    
    
    
    20,961
    
    
    
    617
    
    
    
    35.23
    %Biomorphic VLSI Inc.
    
    
    15,910,252
    
    
    
    
    
    
    
    
    
    
    
    46.51
    %Raio Electronic Co. Ltd.
    
    
    2,523,210
    
    
    
    14,700
    
    
    
    432
    
    
    
    26.28
    %Subtotal
    
    
    
    
    
    
    35,661
    
    
    
    1,049Prepaid Investment:Tower Semiconductor Ltd.
    
    
    
    
    
    
    149,478
    
    
    
    4,398Total
    
    
    
    
    
    
    3,056,722
    
    
    
    89,930*Less than 0.01%**Publicly traded.
  The Companys investments in Chantek Electronic Co., Ltd., Taiwan Mask
Corp., Chipbond Technology Corp., Tower Semiconductor Ltd. and Powertech
Co., Ltd. are classified as marketable equity securities and accounted for
at the lower of cost or market.Chantek Electronic Co., Ltd. reduced its paid-in capital by 84.25% on
August 21, 2003, which accounted for the decrease of 12,816,537 shares
owned by the Company. 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)  The Company recognized long-term equity investment losses for Biomorphic
VLSI, Inc. by NT$74,637, NT$117,494 and NT$32,577 (USD$958) for the years
ended December 31, 2001, 2002 and 2003, respectively. As of December 31,
2002 and 2003, the Companys investments in Biomorphic VLSI, Inc. amounted
to (NT$104,105) and NT$ 0, respectively. The Company recorded the credit
equity investment under other liabilities.Chipbond Technology Inc.s and Powertech Technology Inc.s shares
commenced trading in GreTai Securities Exchange in 2002 and 2003,
respectively. The Company, being the director of both companies, deposited
5,574,000 shares and 6,771,225 shares with book value of NT$87,657 and
NT$72,584, respectively, in Taiwan Securities Central Depository Co. As of
December 31, 2003, no deposited shares have been withdrawn.Except for those shares compulsorily deposited, no other long-term
equity investments were pledged or restricted as of December 31, 2002 and
2003.8.
    
    Short-Term Debts As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Letter of credit loans within 180
days at variable interest rates
    
    
    696,176
    
    
    
    114,649
    
    
    
    3,373Working capital loans due within 180
days at variable interest rates
    
    
    1,462,975
    
    
    
    2,633,797
    
    
    
    77,487Total
    
    
    2,159,151
    
    
    
    2,748,446
    
    
    
    80,860
  The weighted average interest rate of the short-term debts was 2.32%
and 2.085% as of December 31, 2002 and 2003, respectively.The short-term debt includes a foreign currency facility of US$42,100
(NT$1,430,979), and US$60,125 (NT$2,043,649) as of December 31, 2002 and
2003, respectively.The Companys unused short-term lines of credit with terms of 180 days
(including unused letters of credit) amounted to NT$15,124,176 and
NT$6,521,020 (US$191,851) as of December 31, 2002 and 2003, respectively. 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)  9.
    
    Capital Lease ObligationsThe 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, repayable in 24 quarterly installments from May 31,1999. The
ownership of the equipment will be transferred to the Company upon the
expiration of the agreement. Cost of the equipment amounted to NT$24,946.
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. which
required the Company to pay NT$3,215 to acquire the ownership of the
equipment, and Caesar Technology to 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 must be
unconditionally transferred to the Company.Future lease obligations resulting from the leases with Nintendo as
of December 31, 2003 are as follows: Year
    
    NT$
    
    US$2004
    
    
    656,760
    
    
    
    19,322Less: unrealized interest expense
    
    
    (23,316
    )
    
    
    (686
    )Current portion
    
    
    633,444
    
    
    
    18,6362005
    
    
    328,380
    
    
    
    9,661Less: unrealized interest expense
    
    
    (3,307
    )
    
    
    (97
    )Lease obligations  long-term
    
    
    325,073
    
    
    
    9,564Total lease obligations
    
    
    958,517
    
    
    
    28,200
  Accumulated depreciation of assets under capital leases amounted to
NT$306,402 and NT$598,178 (US$17,599) as of December 31, 2002 and 2003,
respectively. 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)  10.
    
    Long-Term Debts Interest
    
    BalanceAs of December 31,
    
    As of December 31,2002
    
    2003
    
    2002
    
    2003Secured
    
    %
    
    %
    
    NT$
    
    NT$
    
    US$Medium term loans
from one bank,
repayable in 8
semi-annual
installments from
May 2001 to November
2004 with variable
interest
rates
    
    
    3.00~6.70
    
    
    
    3.519
    
    
    
    200,000
    
    
    
    25,400
    
    
    
    747Loan from one bank,
repayable in 21
quarterly
installments from
May 1998 to May 2003
with variable
interest
rates
    
    
    5.64
    
    
    
    
    
    
    
    38,000
    
    
    
    
    
    
    
    SB II Debentures,
5-year secured
debentures repayable
in full at maturity
in October 2006 with
interest paid
annually at a fixed
interest
rate
    
    
    3.30
    
    
    
    3.30
    
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    88,261Medium term loans
from one bank,
repayable in 96
monthly installments
from May 1999 to
April 2007 with
variable interest
rates
    
    
    5.695
    
    
    
    4.35
    
    
    
    189,800
    
    
    
    146,000
    
    
    
    4,295Medium term loan
from 14 banks,
repayable in 19
quarterly
installments from
July 1999 to
December 2005 with
variable interest
rates
    
    
    2.525~5.635
    
    
    
    1.872~3.940
    
    
    
    3,181,570
    
    
    
    1,418,483
    
    
    
    41,732Medium term loan
from 20 banks,
repayable in 10
semi-annual
installments from
March 2005 to
September 2009 with
variable interest
rates
    
    
    2.854
    
    
    
    2.548
    
    
    
    3,000,000
    
    
    
    5,910,000
    
    
    
    173,875Medium term loan
from one bank,
repayable in 156
monthly installments
from May 2003 to
April 2016 with
variable interest
rates
    
    
    5.695
    
    
    
    4.35
    
    
    
    889,000
    
    
    
    843,410
    
    
    
    24,814ECB II Debentures, 5
year secured
convertible
debentures due May
5, 2003
    
    
    
    
    
    
    
    
    
    
    2,780,000
    
    
    
    
    
    
    
    Medium term loan
from one bank,
repayable in 17
quarterly
installments from
April 2002 to April
2006 with variable
interest
rates
    
    
    5.365
    
    
    
    5.155
    
    
    
    329,410
    
    
    
    188,240
    
    
    
    5,538Medium term loan
from one bank,
repayable in 8
semi-annual
installments from
June 2003 to
December 2006 with
variable interest
rates
    
    
    5.025
    
    
    
    5.025
    
    
    
    400,000
    
    
    
    300,000
    
    
    
    8,826UnsecuredECB III Debentures,
5-year unsecured
convertible
debentures due
February 1,
2005
    
    
    1.00
    
    
    
    1.00
    
    
    
    2,505,370
    
    
    
    
    
    
    
    ECB IV Debentures,
5-year unsecured
convertible
debentures puttable
in August
2004
    
    
    0.50
    
    
    
    0.50
    
    
    
    5,880,534
    
    
    
    5,748,539
    
    
    
    169,125DCB I Debentures,
5-year unsecured
convertible
debentures puttable
in December
2005
    
    
    
    
    
    
    
    
    
    
    3,200,000
    
    
    
    766,900
    
    
    
    22,563ECB V Debentures,
5-year unsecured
convertible
debentures puttable
in February
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,057,300
    
    
    
    89,94725,593,684
    
    
    
    21,404,272
    
    
    
    629,723Add: Interest payable
    
    
    
    
    
    
    
    
    
    
    1,485,945
    
    
    
    454,805
    
    
    
    13,380Less: Current portion
    
    
    
    
    
    
    
    
    
    
    (8,721,428
    )
    
    
    (10,530,297
    )
    
    
    (309,806
    )Net
    
    
    
    
    
    
    
    
    
    
    18,358,201
    
    
    
    11,328,780
    
    
    
    333,297
  On October 29, 2001, the Company issued NT$3,000,000 of five-year secured
debentures (SB II), due in October 2006 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. 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)  The non-interest bearing 5-year secured convertible debentures (ECB II)
due May 2003 were convertible at the option of the holder into the
Companys common stock at an initial conversion price of NT$53.728 per
share. However, the conversion price was subject to adjustments in the
event that certain changes occur to the Companys capital structure. The
convertible debentures were 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 would have applied
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 was 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$3,528,298). As of April 22, 2003, an aggregate principal amount of
US$70,000 (NT$2,379,300) of the debentures had been converted. In addition,
with the resolution of the board of directors, the Company repurchased the
residual outstanding bonds, in the aggregate principal amount of US$80,000
(NT$2,719,200), from the market. The related debt extinguishment loss of
NT$22,765 (NT$773,782) from the above repurchase was included in other
expense account.The 1% 5-year unsecured convertible debentures (ECB III) due February
2005 are convertible at the option of the holder into the Companys common
stock at an initial conversion price of NT$69 per share. However, the
conversion price is subject to adjustments in the event that certain
changes occur to the Companys capital structure. The convertible
debentures are redeemable at par at maturity or at the option of
bondholders at 121.422% of par on February 1, 2003. In 2000, an aggregate
principal amount of US$41,078 (NT$1,396,241) of the bonds was converted. No
bond was converted in any periods thereafter. In 2002 and the first half of
2003, the Company repurchased US$86,825 (NT$2,951,182) and US$61,277
(NT$2,082,805), respectively, of the bonds from the market that resulted in
a debt extinguishment loss of NT$45,144 (NT$1,534,445) and NT$12,275
(NT$417,227), respectively. In addition, upon the request of bondholders,
the Company has redeemed an aggregate principal amount of US$10,820
(NT$367,772) of the debentures during the same period that resulted in a
gain of NT$2,442 (NT$83,004). Debt extinguishment gain and loss are
recorded under other expense account.The 0.5% 5-year unsecured convertible debentures due February 2007 (ECB
IV) 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. However, the
conversion price is subject to adjustments in the events that certain
changes occur to the Companys capital structure. At December 31, 2003, the
split adjusted conversion price was NT$28.2329 per share. The holders of
these convertible debentures have the ability to mandatorily redeem the
debentures at predetermined amounts. The amount for which the debentures
may be redeemed varies depending on the date in which the holder elects to
require redemption. The date at which 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)  debentures may be redeemed is August 9, 2004. If all of the bonds are
redeemed on this date, the Company would be required to pay approximately
NT$6,203,175 (US$182,500).The non-interest bearing 5-year unsecured convertible debentures (DCB I)
due December 2007 are convertible at the option of the holder into the
Companys common stock at the conversion price. The initial conversion
price was NT$11. The conversion price is subject to adjustment when there
is an increase in the Companys common shares (including capitalization by
cash injection, capitalization of retained earnings, capitalization of
common reserve, capitalization of employee bonus, merger, subdivision of
Companys outstanding shares and issuance of overseas depository receipts),
except when the common shares are issued due to the conversion of
securities with common share conversion right or warrant, in accordance
with the following formula:NCP=OCP*[N+(PPS*NIS/CPN)]/[N+NIS
NCP=Conversion Price After Adjustment
OCP= Conversion Price Before Adjustment
PPS= Price Per Share
NIS=Number of Newly Issued Shares
N=Number of Shares Outstanding
CPN=Conversion Price Before Adjustment  In addition to the adjustment stated above, the conversion price is
also subject to reset on each dividend ex-right date or June 27 (the
Reference Date), if no dividend is announce in the year. The reset
conversion is determined by the 101% of the lower of the average of the
closing price of the Companys shares for the consecutive 10, 15 or 20
trading days prior to the Reference Date. However, the reset price shall
not be lower than 80% of the initial conversion price. On June 27, 2003,
the conversion price was reset to NT$8.8. As of December 31, 2003, the
conversion price was NT$8.7. As of December 31, 2003, an aggregate
principal amount of NT$2,433,100 (US$71,583) of these debentures has been
converted. The holders of these convertible debentures have the ability to
mandatorily redeem the debentures at predetermined amounts. The amount for
which the debentures may be redeemed varies depending on the date in which
the holder elects to require redemption. The periods at which debentures
may be redeemed are from November 13, 2005 to December 11, 2005 and from
November 13, 2006 to December 11, 2006. The earliest date at which the
bonds may be redeemed is November 13, 2005. If all of the bonds are
redeemed on this date, the Company would be required to pay approximately
NT$844,127 (US$24,835). 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)  The non-interest bearing 5-year unsecured convertible debentures (ECB V)
due February 2008 are convertible at the option of the holder into the
Companys common stock at the initial conversion price of NT$12.06. As of
December 31, 2003, the conversion price was NT$11.9584 per share. However,
the conversion price is subject to an adjustment (in the manner set forth in
the Indenture) upon the occurrence of certain events set out in the
Indenture, including, among other things, the declaration of dividend in
common shares, subdivisions, consolidations, and the issue of common shares
in cash. The holders of these convertible debentures have the ability to
mandatorily redeem the debentures at predetermined amounts. The amount for
which the debentures may be redeemed varies depending on the date in which
the holder elects to require redemption. The dates at which debentures may
be redeemed are February 10, 2004, February 10, 2005, February 10, 2006 and
February 10, 2007. The earliest date at which the bonds may be redeemed is
February 10, 2004. If all of the bonds are redeemed on this date, the
Company would be required to pay approximately NT$3,064,245 (US$90,151). As
of January 9, 2004 (the last day that the bondholders can make the request
of early redemption), bondholders have requested the Company to redeem the
debentures in an aggregate principal amount of US$78,100 (NT$2,653,057),
which was reclassified into current portion of debentures.The above long-term debt, outstanding as of December 31, 2003, excluding convertible debentures,
comprises of US dollar denominated debt of US$34,560 (NT$1,174,003)
and NT dollar denominated debt of NT$7,657,530. 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)  Maturity of existing long-term debt for the 5 years succeeding December 31,
2003 are as follows: Years
    
    NT$
    
    US$2004
    
    
    10,530,297
    
    
    
    309,8062005
    
    
    2,735,742
    
    
    
    80,4872006
    
    
    4,394,185
    
    
    
    129,2792007
    
    
    1,264,986
    
    
    
    37,2162008
    
    
    1,250,386
    
    
    
    36,787After 2008
    
    
    1,683,481
    
    
    
    49,528Total
    
    
    21,859,077
    
    
    
    643,103
  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. In
addition, one 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, deposit for technology with government,
compensated deposits, secured loans and capital leases as of December 31,
2002 and 2003 are as follows: As of December 31,Accounts
    
    2002
    
    2003NT$
    
    NT$
    
    US$Restricted investments-current
    
    
    3,351,572
    
    
    
    1,829,534
    
    
    
    53,826Restricted investments-non-current
    
    
    260,625
    
    
    
    254,775
    
    
    
    7,496Property, plant and equipment
    
    
    14,986,581
    
    
    
    15,882,664
    
    
    
    467,275Total
    
    
    18,598,778
    
    
    
    17,966,973
    
    
    
    528,597
 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)  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 (each base
point equal to one month salary). 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 (the Fund). 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. The Fund
is administered by a pension fund monitoring committee (the Committee) and
is entrusted to the Central Trust of China in the Committees name. Under
ROC regulation, government authority will then collect the Fund as a Labor
Retirement Fund and determine the assets allocation and investment policy.In August 1999, the Company revised its pension plan to allow for early
retirement under certain conditions. This required the Company to record
prior service costs in the amount of NT$32,557 which the Company amortizes
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: For the year ended December 31,2001
    
    2002
    
    2003Discount rate
    
    
    5.0
    %
    
    
    4.0
    %
    
    
    3.5
    %Rate of increase in future compensation levels
    
    
    4.5
    %
    
    
    3.5
    %
    
    
    3.0
    %Expected long-term rate of return on plan assets
    
    
    5.0
    %
    
    
    4.0
    %
    
    
    3.5
    %
 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 funded status of the Companys pension plan as of December 31, 2002 and
2003 is as follows: As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Pension obligationVested benefit obligation
    
    
    
    
    
    
    (205
    )
    
    
    (6
    )Non-vested benefit obligation
    
    
    (397,536
    )
    
    
    (497,500
    )
    
    
    (14,637
    )Accumulated benefit obligation
    
    
    (397,536
    )
    
    
    (497,705
    )
    
    
    (14,643
    )Effect of future payment increases
    
    
    (367,091
    )
    
    
    (372,790
    )
    
    
    (10,968
    )Projected benefit obligation
    
    
    (764,627
    )
    
    
    (870,495
    )
    
    
    (25,611
    )Plan assets at fair value
    
    
    589,501
    
    
    
    636,655
    
    
    
    18,731Projected benefit obligation in excess of plan assets
    
    
    (175,126
    )
    
    
    (233,840
    )
    
    
    (6,880
    )Unrecognized net transition obligation
    
    
    55,659
    
    
    
    53,697
    
    
    
    1,580Unrecognized prior service cost
    
    
    28,108
    
    
    
    26,806
    
    
    
    789Unrecognized net loss (gain)
    
    
    (13,835
    )
    
    
    (38,426
    )
    
    
    (1,131
    )Accrued pension cost
    
    
    (105,194
    )
    
    
    (191,763
    )
    
    
    (5,642
    )
  The components of 2001, 2002 and 2003 net pension costs are as follows: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Service cost
    
    
    100,021
    
    
    
    114,324
    
    
    
    118,257
    
    
    
    3,479Interest cost
    
    
    25,349
    
    
    
    30,577
    
    
    
    26,963
    
    
    
    793Expected return on plan assets
    
    
    (28,193
    )
    
    
    (25,010
    )
    
    
    (24,483
    )
    
    
    (720
    )Amortization of prior service costs
    
    
    1,487
    
    
    
    4,394
    
    
    
    4,394
    
    
    
    129Net pension cost
    
    
    98,664
    
    
    
    124,285
    
    
    
    125,131
    
    
    
    3,681
  The Company used a December 31 measurement date for its plan.The Company used the 15-year ROC government bond yield to determine the
overall expected long-term return-of-return-on-assets assumption.The Company expected to contribute NT$41,265 to its pension plan in 2004. 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)  Additional pension disclosures: As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Benefit obligation at January 1
    
    
    681,330
    
    
    
    764,627
    
    
    
    22,496Service cost
    
    
    114,324
    
    
    
    118,257
    
    
    
    3,479Interest cost
    
    
    30,577
    
    
    
    26,963
    
    
    
    793Paid to retirees
    
    
    (1,532
    )
    
    
    
    
    
    
    Increase in unrecognized transition cost
    
    
    
    
    
    
    1,130
    
    
    
    33Increase in unrecognized actuarial (gain) loss
    
    
    (60,072
    )
    
    
    (40,482
    )
    
    
    (1,191
    )Benefit obligation December 31
    
    
    764,627
    
    
    
    870,495
    
    
    
    25,610Change in
plan assetsFair value of plan assets at the beginning of the period
    
    
    535,118
    
    
    
    589,501
    
    
    
    17,343Actual return on plan assets
    
    
    12,639
    
    
    
    8,592
    
    
    
    253Contributions
    
    
    43,624
    
    
    
    38,562
    
    
    
    1,135Paid to retirees
    
    
    (1,532
    )
    
    
    
    
    
    
    Other adjustments
    
    
    (348
    )
    
    
    
    
    
    
    Fair value of plan assets at December 31
    
    
    589,501
    
    
    
    636,655
    
    
    
    18,731
  12.
    
    Shareholders EquityCommon 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.On April 19, 2001, the Companys shareholders approved a resolution 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 approved a resolution that fixed the ex-right date at May 28,
2001. The Companys shareholders also approved a resolution to issue
142,610,725 common shares in settlement of the 2000 employee bonus. 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)  On May 30, 2002, the Companys shareholders approved a resolution at 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
approved a resolution to declare a 10% stock dividend, which resulted in
the issuance of 331,934,262 common shares.  For the year ended December 31, 2003, unsecured domestic convertible bonds
totaling NT$2,453,866 (principal amount of NT$2,433,100 plus interest
payable of NT$41,365, offset by deferred issuance cost of NT$20,599) were
converted into the Companys common shares which resulted in the issuance
of 263,975,068 additional shares of which 27,493,638 shares remained
unregistered and were recorded under common stock to be registered
account.  On June 27, 2003, the Companys shareholders approved a resolution at
the annual meeting to increase the authorized share capital to
NT$65,500,000, divided into 6,550,000,000 shares (including 650,000,000
and 1,120,650,500 shares reserved for future exercise of stock options and
conversion of convertible bonds, respectively). The increase in authorized
capital has been registered.  On November 4, 2003, the Companys board of directors approved a
resolution of a rights offering for the issuance of 475,000,000
common shares at NT$8.11 per share for a total consideration of
NT$3,822,504 (deducting issuance cost of NT$29,746) on November 11, 2003.
New shares have been registered.  As of December 31, 2003, the Companys authorized and issued common shares
amounted to NT$65,500,000 and NT$44,027,583, divided into 6,550,000,000
(including 650,000,000 and 972,241,695 shares reserved for future exercise
of stock options and conversion of convertible bonds, respectively) and
4,402,758,305 shares at NT$10 par value, respectively.  The Company has three stock option plans (2001 plan, 2002 plan and
2003 plan) that provide for the granting of options to qualified
employees for the purchase of the Companys common shares at the market
price of the grant date. Stock options expire six years from their grant
date 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,
170,000,000 shares and 200,000,000 shares under 2001 plan, 2002 plan and
2003 plan, respectively. 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)  Legal Reserve
According to the ROC Company Law, 10% of the Companys net income, after
deducting previous years losses, if any, must be set aside 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 in the form
of a stock dividend.  On June 27, 2003, the Companys shareholders resolved in the annual meeting
to use the legal reserve of NT$1,708,689 to offset its accumulated deficit.  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 arose.  On June 27, 2003, the Companys shareholders resolved in the annual meeting
to use the special reserve of NT$378,657 to offset its accumulated
deficits.  Additional paid-in capital and Capital reserve
According to the ROC Company Law, additional paid-in capital and capital
reserve can only be used for offsetting accumulated deficits or
distribution of stock dividends. The Company cannot use additional paid-in
capital or capital reserve to offset accumulated deficits unless the legal
reserve is insufficient for offsetting such deficits.  On May 31, 2002, the Companys shareholders approved a resolution at the
annual meeting to transfer capital reserve of NT$16,360 resulting from
disposal of property, plant and equipment back to retained earnings.  On June 27, 2003, the Companys shareholders approved a resolution at the
annual meeting to use additional paid-in capital of NT$2,630,621 to offset
its accumulated deficits. F - 35




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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)  Income distributions
The Companys articles of incorporation, revised on May 3, 2000, provide
that 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 cannot exceed 10% of the Companys issued stock. Total
repurchased amounts also cannot exceed the sum of retained earnings and
the realized capital reserve. In April 2002, the Securities and Forwards
Commission approved the Companys plan to repurchase stock. The maximum
amount approved for repurchase was NT$9,546,141.In accordance with the Stock Exchange Regulations of Taiwan, treasury
stock cannot be pledged, voted or be eligible to receive
dividends.Effective from January 1, 2002, the Companys shares owned by its
subsidiaries were treated as treasury stock. The shares owned by the
Companys subsidiary for the year ended December 31, 2002 and 2003 were as
follows: F-36




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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) January 1, 2002
    
    Additions
    
    Disposals
    
    December 31, 2002Subsidiary
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Selling price
    
    Shares
    
    Amount
    
    Marke Value(note)Hui Ying Investment, Ltd.
    
    
    5,475,593
    
    
    
    142,365
    
    
    
    547,559
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,023,152
    
    
    
    142,365
    
    
    
    72,332
 January 1, 2003
    
    Additions
    
    Disposals
    
    December 31, 2003Subsidiary
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Selling price
    
    Shares
    
    Amount
    
    Market ValueHui Ying
Investment, Ltd.
    
    
    6,023,152
    
    
    
    142,365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,023,152
    
    
    
    142,365
    
    
    
    47,703
  Note: Hui Ying Investment, Ltd. received a stock dividend of
547,559 shares from the Company in 2002.As of December 31, 2001, 2002 and 2003, the Companys treasury stock was as
follows: As of December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Shares owned by Subsidiary
    
    
    
    
    
    
    142,365
    
    
    
    142,365
    
    
    
    4,188Shares repurchased
    
    
    
    
    
    
    1,046,071
    
    
    
    1,046,071
    
    
    
    30,776Total
    
    
    
    
    
    
    1,188,436
    
    
    
    1,188,436
    
    
    
    34,964
  14.
    
    Income Taxes  The statutory tax rate is 25%. The Company is entitled to a four-year
income tax exemption period on income generated from the cost of 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 the 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 run from January 1, 2001 to
December 31, 2004.As of December 31, 2003 unused investment credits available to reduce
future taxable income amounted to NT$3,236,652 (US$95,224). The available
investment credit in each year is limited to 50% of the corporate tax
payable in that year, except in the last of such five F-37




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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)  year period when there is no such limit. As of December 31, 2003, the
Company had available the following amounts of investment credits: Expiration Years
    
    NT$
    
    US$2004
    
    
    134,441
    
    
    
    3,9552005
    
    
    1,192,770
    
    
    
    35,0922006
    
    
    1,359,358
    
    
    
    39,9932007
    
    
    550,083
    
    
    
    16,184Total
    
    
    3,236,652
    
    
    
    95,224
  Under the rules of the ROC Income Tax Law, operating losses can be carried
forward for five years. As of December 31, 2003, the Company had unutilized
loss carryforwards of NT$14,603,999 (US$429,656), of which NT$6,044,712
expire in 2007 and NT$8,559,287 expire in 2008.The components of income tax expense (benefit) and deferred income tax
assets and liabilities are as follows:Components of income tax expense (benefit): As of December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Current
    
    
    94,236
    
    
    
    10,840
    
    
    
    (27,116
    )
    
    
    (798
    )Deferred
    
    
    849,259
    
    
    
    9,058
    
    
    
    48,143
    
    
    
    1,417Total
    
    
    943,495
    
    
    
    19,898
    
    
    
    21,027
    
    
    
    619
  The reconciliation of book income tax expense (benefit) to income tax
expense (benefit) recorded is summarized below: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Expected income tax expense (benefit)
    
    
    19,254
    
    
    
    (2,834,280
    )
    
    
    (2,044,259
    )
    
    
    (60,143
    )Undistributed earnings tax
    
    
    465,488
    
    
    
    318,378
    
    
    
    
    
    
    
    Additional tax assessment
    
    
    58,879
    
    
    
    
    
    
    
    
    
    
    
    Effect of tax exempt earnings
    
    
    (256,260
    )
    
    
    
    
    
    
    
    
    
    
    Investment credits (earned) expired
    
    
    (920,993
    )
    
    
    (1,405,069
    )
    
    
    829,546
    
    
    
    24,406
 F-38




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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) Change in valuation allowance
    
    
    1,255,102
    
    
    
    2,740,289
    
    
    
    1,256,140
    
    
    
    37,143Net (gain) loss on non-taxable securities
    
    
    (20,466
    )
    
    
    122,200
    
    
    
    317,135
    
    
    
    9,026Effect of rate change
    
    
    
    
    
    
    1,066,033
    
    
    
    (373,681
    )
    
    
    (10,963
    )Impact of industrial park reduced tax rates
    
    
    317,936
    
    
    
    
    
    
    
    
    
    
    
    Others
    
    
    24,555
    
    
    
    12,347
    
    
    
    36,146
    
    
    
    1,150Income tax expense
    
    
    943,495
    
    
    
    19,898
    
    
    
    21,027
    
    
    
    619
  Components of deferred income tax assets and liabilities: As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Deferred tax liabilitiesTax depreciation in excess of book depreciation
    
    
    253,074
    
    
    
    645,242
    
    
    
    18,984Unrealized foreign exchange gains
    
    
    11,853
    
    
    
    20,060
    
    
    
    590Others
    
    
    48
    
    
    
    
    
    
    
    Total deferred tax liabilities
    
    
    264,975
    
    
    
    665,302
    
    
    
    19,574Deferred tax assetsInvestment credits
    
    
    4,066,198
    
    
    
    3,236,652
    
    
    
    95,224Inventory provision
    
    
    444,135
    
    
    
    341,352
    
    
    
    10,043Bad debt allowance
    
    
    13,710
    
    
    
    10,955
    
    
    
    322Unrealized royalty expense
    
    
    52,127
    
    
    
    52,348
    
    
    
    1,540Unrealized attorney fee
    
    
    
    
    
    
    5,463
    
    
    
    161Book amortization in excess of tax amortization
    
    
    
    
    
    
    4,125
    
    
    
    121Unrealized market value decline on idle asset
    
    
    
    
    
    
    3,865
    
    
    
    114Unrealized foreign exchange loss
    
    
    45,900
    
    
    
    450
    
    
    
    13Loss carryforwards
    
    
    1,511,178
    
    
    
    3,638,085
    
    
    
    107,034Unrealized pension expense
    
    
    
    
    
    
    16,862
    
    
    
    496Unrealized equity investment loss
    
    
    198,591
    
    
    
    659,851
    
    
    
    19,413Unrealized interest expense
    
    
    
    
    
    
    13,541
    
    
    
    398Unrealized production variance
    
    
    117,173
    
    
    
    73,787
    
    
    
    2,171Total deferred tax assets
    
    
    6,449,012
    
    
    
    8,057,336
    
    
    
    237,050Valuation allowance
    
    
    (4,237,680
    )
    
    
    (5,493,820
    )
    
    
    (161,630
    )Net deferred tax assets
    
    
    2,211,332
    
    
    
    2,563,516
    
    
    
    75,420Total net deferred tax assets
    
    
    1,946,357
    
    
    
    1,898,214
    
    
    
    55,846Net deferred tax assets-current
    
    
    495,112
    
    
    
    104,812
    
    
    
    3,083Net deferred tax assets-non-current
    
    
    1,451,245
    
    
    
    1,793,402
    
    
    
    52,763Total net deferred tax assets
    
    
    1,946,357
    
    
    
    1,898,214
    
    
    
    55,846
 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)  15.
    
    Related Party Transactionsa. Related Parties and Relationships Related parties
    
    RelationshipsCaesar Technology, Inc. (Caesar)
    
    The Companys equity investee. (note)Biomorphic VLSI. Inc. (Biomorphic)
    
    The Companys equity investee.Prominent Communications, Inc. (PCI)
    
    The Companys equity investee.Chantek Electronic Co., Ltd. (Chantek)
    
    The Company was represented on
Chanteks Board of Directors before
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.Ardentec Corporation (Ardentec)
    
    The Company is represented on
Ardentec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
before November 26, 2002.FueTrek Co., Ltd. (FueTrek)
    
    The Company is represented on
FueTreks board of directors.Raio Technology Co., Ltd. (Raio)
    
    The Companys equity investee.Macronix Education Foundation
    
    The president is the same.
  Note: Caesar Technology Inc. applied for formal compulsory
liquidation in January 2002 and completed the liquidation process on
May 10, 2003. 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)  b.
    
    Major transactions with related partiesSales to related parties were as follows: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Raio
    
    
    88,721
    
    
    
    158,194
    
    
    
    174,466
    
    
    
    5,133Biomorphic
    
    
    9,749
    
    
    
    15,298
    
    
    
    45,953
    
    
    
    1,352FueTrek
    
    
    
    
    
    
    
    
    
    
    5,591
    
    
    
    164PCI
    
    
    
    
    
    
    155,923
    
    
    
    341
    
    
    
    10Total
    
    
    98,470
    
    
    
    329,415
    
    
    
    226,351
    
    
    
    6,659
  Sales prices to PCI, Biomorphic, FueTrek and Raio are not
comparable with those of regular customers because the Company is
the sole provider for them.The payment term with the related parties is between 30 to 60
days, similar to that with regular customers.(a)
    
    Manufacturing processing charges to related parties for
the years ended December 31, 2001, 2002 and 2003, are summarized
as follows: December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Powertech
    
    
    106,263
    
    
    
    172,778
    
    
    
    211,188
    
    
    
    6,213Ardentec
    
    
    108,329
    
    
    
    240,686
    
    
    
    130,270
    
    
    
    3,833Caesar
    
    
    240,003
    
    
    
    
    
    
    
    
    
    
    
    Chantek
    
    
    103,873
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    558,468
    
    
    
    413,464
    
    
    
    341,458
    
    
    
    10,046
  Such charges form a part of cost of goods sold.(b)
    
    The Company purchased industrial gases from UIG totaling
NT$119,137, NT$109,940 and NT$100,016 (US$2,943) for the years
ended December 31, 2001, 2002 and 2003, respectively. Such
purchases are included in cost of goods sold. 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)  (c)
    
    For the years ended December 31, 2001, 2002 and 2003, the
Company purchased wafers from Tower totaling NT$157,263,
NT$136,047 and NT$36,600 (US$1,077). Such purchases are included
in cost of goods sold. In 2001, the initial investment and the
first and the second milestone payment were undertaken to a total
amount of US$44,001, of which US$21,349 was reserved as prepaid
credit for future wafer purchase. 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.h, 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 prepaid
credit account by US$8,800 (NT$299,112. As of December 31, 2003,
the prepaid account amounted to NT$480,265 (US$14,138). However,
the Company provided an allowance of NT$334,971 (US$9,855) for
such prepaid credit after assessing an impairment.(d)
    
    Merchandise purchased from related parties are as
follows: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$PCI
    
    
    232
    
    
    
    404,717
    
    
    
    63,798
    
    
    
    1,877Biomorphic
    
    
    3,300
    
    
    
    46,716
    
    
    
    53,935
    
    
    
    1,587Raio
    
    
    2,653
    
    
    
    13,863
    
    
    
    3,257
    
    
    
    96Total
    
    
    6,185
    
    
    
    465,296
    
    
    
    120,990
    
    
    
    3,560
  (e)
    
    The leasing income from Raio for the years ended December
31, 2001, 2002 and 2003 amounted NT$0, NT$1,510 and NT$587,
respectively. Such income was charged monthly and was recorded as
other income under non-operating income.(f)
    
    The Company entered into an IP license agreement with
FueTrek in 2002 and paid in full in the amount of NT$10,050
(JPY34,300) as of December 31, 2003. The Company recorded such amount as a deferred asset and
amortized it over the contract term.(g)
    
    The Company donated NT$117,000, NT$2,000 and NT$22,360
(US$658) to Macronix Education Foundation for the years ended
December 31, 2001, 2002 and 2003. 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)  (h)
    
    Refer to note 9 with regard to information about the
Companys capital lease agreement with Caesar.(i)
    
    Accounts receivable from related parties as of December
31, 2002 and 2003 were as follows: As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Raio
    
    
    27,498
    
    
    
    49,216
    
    
    
    1,448Biomorphic
    
    
    15,999
    
    
    
    45,910
    
    
    
    1,351UIG
    
    
    21,200
    
    
    
    11,347
    
    
    
    334PCI
    
    
    33,237
    
    
    
    1,305
    
    
    
    38Others
    
    
    
    
    
    
    936
    
    
    
    27Total
    
    
    97,934
    
    
    
    108,714
    
    
    
    3,198Less: Allowance for doubtful accounts
    
    
    (7,000
    )
    
    
    (50,450
    )
    
    
    (1,484
    )Net
    
    
    90,934
    
    
    
    58,264
    
    
    
    1,714
  (j)
    
    Payables to related parties as of December 31, 2002 and
2003 were as follows: As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Powertech
    
    
    60,292
    
    
    
    56,623
    
    
    
    1,666UIG
    
    
    8,517
    
    
    
    29,929
    
    
    
    880Ardentec
    
    
    31,255
    
    
    
    13,890
    
    
    
    409Biomorphic
    
    
    
    
    
    
    2,718
    
    
    
    80Tower
    
    
    17,070
    
    
    
    378
    
    
    
    11PCI
    
    
    32,091
    
    
    
    
    
    
    
    Others
    
    
    7,584
    
    
    
    32
    
    
    
    1Total
    
    
    156,809
    
    
    
    103,570
    
    
    
    3,047
 F-43




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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)
    
    Loans Year ending December 31, 2001Maximum balance
    
    Ending balance
    
    Interest rate
    
    Interest expenseAmount
    
    MonthChiao Tung
    
    $
    6,275,370
    
    
    March
    
    $
    5,052,036
    
    
    
    1.5%-7.79
    %
    
    $
    337,381
 Year ending December 31, 2002Maximum balance
    
    Ending balance
    
    Interest rate
    
    Interest expenseAmount
    
    MonthChiao Tung
    
    $
    6,440,948
    
    
    November
    
    $
    6,424,108
    
    
    
    2.09%-5.92
    %
    
    $
    170,071
 Year ending December 31, 2003Chiao Tung
    
    Not a related party
  (l)
    
    The Company guaranteed the loan to Biomorphic up to
US$4,000. Such loan matured on July 14, 2003. As of December 31,
2002 and 2003, the guarantee under such loan were US$3,400 and
US$0, respectively.  16.
    
    Commitments and Contingencies
The Companys commitments and contingencies, not included in the financial
statements, as of December 31, 2003 were as follows:  a.
    
    Letters of credit issued for future deliveries of inventories
and equipment amounted to NT$306,208 (US$9,009).b.
    
    The Companys significant construction and machinery contracts
totaled approximately NT$9,022,739 (US$265,453). As of December 31,
2003, the Company has paid NT$6,839,544 (US$201,222) pursuant to these
contracts. F-44




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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.
    
    Operating Leases:The land on which the Companys buildings are located is
leased from the HSIP. The lease term is from 1990 to 2020 and is
renewable at the Companys option.Future minimum payments under these irrevocable operating leases as of
December 31, 2003 were as follows: Operating LeasesNT$
    
    US$2004
    
    
    64,384
    
    
    
    1,8942005
    
    
    64,384
    
    
    
    1,8942006
    
    
    64,384
    
    
    
    1,8942007
    
    
    64,384
    
    
    
    1,8942008
    
    
    64,384
    
    
    
    1,894Thereafter
    
    
    356,171
    
    
    
    10,480Total minimum lease payments
    
    
    678,091
    
    
    
    19,950
  Rental expenses under the operating leases amounted to NT$71,746,
NT$72,796 and NT$74,290 (US$2,186) for the years ended December
31, 2001, 2002 and 2003, respectively.d.
    
    The Company entered into an operating lease agreement of
US$2,608 (NT$88,646) for R&D software. The lease term is from 2003 to
2006. The lease obligations shall be paid annually in four
installments, starting from November 31, 2003 to October 31, 2006. As
of December 31, 2003, the Company has paid US$329 (NT$11,183)
pursuant to the agreements. Future irrevocable payments are
US$901(NT$30,625), US$901 (NT$30,625) and US$477 (NT$16,213) for
2004, 2005 and 2006, respectively.e.
    
    The license fees from products license agreements entered into
by the Company with IBM and AGERE totally amounted to US$46,000
(NT$1,563,540). As of December 31, 2003, the Company has paid
US$31,000 (NT$1,053,690) pursuant to the agreements.f.
    
    The Company entered into a technology agreement. As of December
31, 2003, fixed license fee has been fully paid, while running
royalties will be charged based on the percentages of the net sales
from the licensed products pursuant to the agreement. According to
the agreement, the Company is required to prepay USD14,000
(NT$475,860) of running royalties in 2003 and 2004. As of December
31, 2003, USD F-45




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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)  3,000 (NT$101,970) has been paid, while USD 11,000
(NT$373,890), of which USD 3,000 (NT$101,970) guaranteed by standby
letters of credits, remained unpaid.g.
    
    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 an alleged violation of
Atmels patent No. 903. On June 1, 2001, the ITC issued a Notice of
Final Determination, ruling 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 a complaint against MXA for infringement
of Atmels patents No. 096 and 747. MXA applied for summary judgment
for both patents. On January 14, 2002, the Court issued an order
denying Atmels motion to correct inventorship of the 747 patent.
Based on that order, MXA has sought a ruling of invalidity of the 747
patent due to incorrect inventorship, and is awaiting the Courts
decision. On May 14, 2003, the Court granted the Companys motion for
summary judgment of invalidity of the 747 patent due to nonjoinder of
co-inventor. Specifically, the Courts Order found that all claims of
the 747 patent are invalid for nonjoinder of a co-inventor. The Court
has also granted the Companys motion for summary judgment against
three of the four asserted claims of the 096 patent, leaving only one
claim to be litigated on the 096 patent. Both parties applied for
summary judgment for infringement of the 096 patent. In light of the
results to date, the Company believes that there will be no
significant impact on its operations or financial position related to
this dispute.On July 9, 2003, the Company learned from Tower Semiconductor Ltd.
(Tower) that a shareholders class action was filed on behalf of a class
consisting of the ordinary shareholders of Tower at the close of business in
the United States on April 1, 2002. This case was filed in the United States
District Court for the Southern District of New York against Tower and its
major corporate shareholders, including the Company, and against directors of
Tower, including Miin Wu, the Companys president and CEO. The lawsuit alleges
violation of section 14(a) and 20(a) of the Security Exchange Act of 1934, as
amended, and Rule 14a-9
promulgated thereunder. The lawsuit alleges that Tower and its directors
made false and misleading statements and omissions in a proxy solicitation to
Towers shareholders regarding a proposed amendment to a contract between Tower
and its major shareholders, including the Company. The plaintiffs are seeking
unspecified damages and attorneys and experts fee and expenses. On January
30, 2004, the defendants filed with the court a
motion to dismiss the action. The management considers the outcome of any
judgment on the lawsuit with respect to the Company to be quite uncertain and
any expenditure from the lawsuit is not estimable. Consequently, no provision
has been made for any expenses that may arise from the class action lawsuit.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-46




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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)  h.
    
    The Company entered into an agreement with Tower Semiconductor
Ltd. (Tower), an Israeli public company whose shares are quoted on
the NASDAQ National Market, 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, the Company entered into
share purchase agreements in December 2000 with Tower whereby the
Company agreed to invest US$75 million (NT$2,549 million) in Tower.
Following an initial payment of US$20 million for 866,551 shares
(US$11,215) (NT$381,198) and US$8,785 (NT$298,602) of prepaid credits
made in January 2001, upon completion by Tower of certain milestones
specified in the agreement, payments to Tower are made in five equal
installments of US$11 million each. Upon satisfaction of each
milestone, the Company is required to purchase 733,380 shares of
Tower. Payments for the first milestone and the second milestone were
made in March and April 2001, respectively. The Company acquired a
total of 733,380 shares and increased its prepaid credit account by
US$12,564 (NT$427,050) with the first two payments. The prepaid credit
account is held on deposit with Tower. Pursuant to the terms
applicable to the credits issued in connection with the various
milestone payments, the prepaid credit account may be applied against
wafer purchases by 7.5% to 15% of each wafer purchase amount. In
addition, this account may in certain circumstances be applied towards
the purchase of additional unregistered ordinary shares or credited
against other amounts payable by the Company to Tower, including
certain payments to be made by the Company and Tower
Company under the SCM Waiver Agreement dated December 12, 2000 between
the Company and Tower.In September 2001, in connection with Towers financial restructuring,
the Company (together with the other wafer producers) exchanged
US$16,012 (NT$544,248) of its prepaid credit account to purchase
1,255,848 Tower shares at US$12.75 per share.On March 22, 2002, an amendment to the above-mentioned share purchase
agreements was implemented. According to this amendment, the Company
is required to make the F-47




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data)  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,
and aggregately increased its prepaid credit account by US$8,800. In
addition, the Company participated in Towers shares offering on
October 21, 2002 and acquired 660,000 shares at US$5 per share.In February 2003, the board of Tower agreed to further amend the shares purchase agreement.
The terms of the amendment require the payment of US$11,000 (NT$373,890) for the fifth and also the final
milestone and this payment will be made in two installments. The first
installment of approximately US$6,600 (NT$224,334) will be due five
business days after the amendment is approved by Tower, the Company
and certain shareholders of Tower; the second installment of
approximately US$4,400 (NT$149,556) will be due five business days
after Tower has raised additional funds equal to approximately
US$22,000 (NT$747,780), referred to as the Minimum Financing. In
addition, under the terms of the amendment, the Company is granted an
option to convert all or a portion of its unused prepaid credit
account associated with the fourth milestone payment in the aggregate
amount of NT$304,524 (US$8,959) into Towers unregistered shares based
on the average closing price of Towers common shares during the 30
consecutive days preceding December 31, 2005. On May 16, 2003, the Company paid
US$3,600 (NT$122,364) for the first installment, obtaining 1,206,839 shares of Towers at the price of US$2.983 per share. There was
US$3,000 (NT$101,970) of the first installment that remained unpaid as
of June 30, 2003.In November 2003, the Company agreed to amend the shares purchase
agreement with Tower to, among other things, (a) advance the entire
amount of the remaining fifth milestone payment of US$7,400
(NT$251,526), (b) defer the use of the Companys wafer credits in
Tower, and (c) extend the lock-up period for the Companys Tower shares.
Specifically,  (a)
    
    The Company agreed to waive all terms of Towers milestones and advance to Tower in one aggregate lump sum the
remaining portion of the first installment (US$3,000)(NT$101,970)
and the entire second installment (US$4,400) (NT$149,556). With
respect to the remaining portion of the first installment, the
Company will be issued non-assessable ordinary shares equivalent
to the aggregate of its remaining portion of the first
installment divided by US$2.983. With respect to the F-48




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data)  second
installment, the Company will be issued non-assessable ordinary shares equal to the second installment divided by the price per
share in a certain public offering, provided, however, that such
public offering is not consummated within 180 days from the date
of the amendment, the Company will be issued non-assessable
ordinary shares equal to the second installment divided by the
average trading price for Towers shares during the 15
consecutive trading days preceding the payment of the second
installment.(b)
    
    The Company agreed not to use wafer credits until
January 1, 2007, except with respect to purchase orders issued
before the date of the amendment utilizing wafer credits.
However, the amendment provides an option for the Company to
convert credits it would have otherwise been able to utilize per
quarter into non-assessable ordinary shares of Tower. Unconverted
credits will accrue interest at a rate per annum equal to
three-month LIBOR plus 2.5% through December 31, 2007. Interest
payments will be made quarterly and the aggregate principal
amount of the unconverted credits will be repaid in one lump sum
on December 31, 2007.(c)
    
    The Company agreed not to sell the Tower shares until
January 29, 2006, except the Company may sell 30% of the Tower shares held by it as of January 29, 2004.  In December 2003, the Company advanced to Tower the remaining portion
of the fifth milestone payment in the amount of US$4,400 (NT$149,556).As of December 31, 2003, the Company owned approximately 15.75 % of
Towers shares and held NT$480,265 or about US$14,138 of prepaid
credit account. In December 2003, the Company provided an allowance of
NT$330,982 (US$9,738) for the entire prepaid credit except for
prepaid credit related to the final milestone of NT$373,914(US$11,001)
because of the Companys uncertainty towards 1) wafer purchases from
Tower; and 2) the circumstances which would allow the prepaid credit
to be applied towards the purchase of unregistered Tower shares being
met.  17.
    
    Other Disclosures  a       Property, plant and equipmentTotal capitalized interest amounted to NT$153,373, NT$363,670 and
NT$79,114 (US$2,328) for the years ended December 31, 2001, 2002 and
2003, respectively.The insurance coverage for property, plant and equipment amounted to
NT$59,526,195, NT$60,128,403 and NT$60,701,821 (US$1,785,873) as of
December 31, 2001, 2002 and 2003, respectively. 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 depreciation expenses of idle assets for the years ended December
31, 2001, 2002 and 2003 were NT$0, NT$0 and NT$49,868, respectively. The
Company recognized a disposal loss of NT$41,662 for certain idle assets
as such assets were in the process of disposition in late 2003.
Depreciation and market value decline on idle assets for the years ended
December 31, 2002 and 2003 amounted to NT$0 and NT$91,530 (US$2,693),
respectively. Such depreciation was recorded under non-operating
expenses.b       Royalty RevenueRoyalty revenue earned amounted to NT$76,759, NT$34,462, NT$19,683
(US$579) for the years ended December 31, 2001, 2002 and 2003,
respectively.c       Significant Subsequent EventsThe Company granted 685,000 units and 785,000 units of 2003 stock
option plan on March 11, 2004 and March 30, 2004 at exercise price of
NT$13.15 and NT$12.30, 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.In the first quarter of 2004, NT$393,800 (US$11,586) of unsecured
domestic convertible debentures were converted into the Companys common shares,
which resulted in the issuance of 45,264,278 additional common shares.(Unaudited) In the first quarter of 2004, US$1,100 of ECB V debentures
were converted into the Companys common shares, which resulted in the
issuance of 3,188,218 additional common shares.In the first quarter of 2004, the Company withdrew NT$700,000
(US$20,594) from the syndicated loan with Chiao Tung Bank.On March 30, 2004, the Companys 2004 stock option plan was authorized
by the Securities and Futures Commission (SFC) to grant up to
200,000,000 units from March 31, 2004 to March 31, 2005. 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)  On November 17, 2003, the Board of Directors approved a resolution to
issue 525,000,000 common shares with NT$ 10 at par by means of
13,125,000 global deposit shares. The application of this GDR offering
was authorized by the SFC on January 30, 2004. Such offering was
completed on April 5, 2004. Main terms of such offering are as follows:  i)
    
    Offering amount: US$ 173,250.ii)
    
    Number of global depositary shares (GDS) offered:
13,125,000 GDSs, representing 525,000,000 common shares.iii)
    
    GDS: common share ratio: 1: 40iv)
    
    Offering price per GDS: US$ 13.20, representing NT$10.9 per
common share.v)
    
    Listing place: Luxembourg Stock Exchange  d     Information on Investments in Mainland ChinaOn February 17, 2003, the Company was approved by MOEA to invest up to US$ 210 (NT$7,138) in Mainland China.
As of December 31, 2003, no investment has been made yete     OtherCertain accounts in the financial statements of the Company as of
December 31, 2000, 2001 and 2002 have been reclassified to conform with
the presentation of the current period.  18.
    
    Segment Informationa)    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
consists of 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 tables. 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) 2001
    
    Domestic
    
    USA
    
    Others
    
    Elimination
    
    ConsolidatedNT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$Sales to unaffiliated customers
    
    
    19,315,375
    
    
    
    1,625,430
    
    
    
    806,425
    
    
    
    
    
    
    
    21,747,230Sales between geographic areas
    
    
    2,045,346
    
    
    
    73,754
    
    
    
    
    
    
    
    (2,119,100
    )
    
    
    Net Sales
    
    
    21,360,721
    
    
    
    1,699,184
    
    
    
    806,425
    
    
    
    (2,119,100
    )
    
    
    21,747,230Operating income (loss),
including other expenses
    
    
    567,227
    
    
    
    (156,008
    )
    
    
    19,402
    
    
    
    324,095
    
    
    
    754,716Interest revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    495,611Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,173,312
    )Income before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,015Tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (943,495
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (866,480
    )Identifiable assets
    
    
    71,978,632
    
    
    
    4,076,899
    
    
    
    212,175
    
    
    
    (3,958,924
    )
    
    
    72,308,782Capital expenditures
    
    
    8,294,353
    
    
    
    777,500
    
    
    
    5,900
    
    
    
    
    
    
    
    9,077,753Depreciation and amortization
    
    
    7,996,672
    
    
    
    5,237
    
    
    
    3,847
    
    
    
    
    
    
    
    8,005,756
 2002
    
    Domestic
    
    USA
    
    Others
    
    Elimination
    
    ConsolidatedNT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$Sales to unaffiliated customers
    
    
    14,686,242
    
    
    
    1,378,719
    
    
    
    427,503
    
    
    
    
    
    
    
    16,492,464Sales 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
    )
    
    
    16,492,464Operating income (loss),
including other expenses
    
    
    (10,467,666
    )
    
    
    (1,110,247
    )
    
    
    (1,212
    )
    
    
    1,262,969
    
    
    
    (10,316,156
    )Interest revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    216,937Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,237,902
    )Income before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,337,121
    )Tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,898
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    356Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,356,663
    )Identifiable assets
    
    
    66,320,896
    
    
    
    309,266
    
    
    
    4,531,545
    
    
    
    (3,041,646
    )
    
    
    68,120,061Capital expenditures
    
    
    8,971,409
    
    
    
    
    
    
    
    3,871
    
    
    
    
    
    
    
    8,975,280Depreciation and amortization
    
    
    8,731,930
    
    
    
    4,774
    
    
    
    5,397
    
    
    
    
    
    
    
    8,742,101
 F-52




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data) 2003
    
    Domestic
    
    USA
    
    Others
    
    Elimination
    
    ConsolidatedNT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$Sales to unaffiliated customers
    
    
    15,799,829
    
    
    
    824,254
    
    
    
    1,088,104
    
    
    
    
    
    
    
    17,712,187Sales between geographic areas
    
    
    1,782,732
    
    
    
    273,133
    
    
    
    118,614
    
    
    
    (2,174,479
    )
    
    
    Net Sales
    
    
    17,582,561
    
    
    
    1,097,387
    
    
    
    1,206,718
    
    
    
    (2,174,479
    )
    
    
    17,712,187Operating income (loss),
including other expenses
    
    
    (7,289,636
    )
    
    
    (1,221,898
    )
    
    
    23,435
    
    
    
    1,285,113
    
    
    
    (7,202,986
    )Interest revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,847Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,077,898
    )Income before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,177,037
    )Tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,027
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,197,745
    )Identifiable assets
    
    
    59,272,988
    
    
    
    6,037,777
    
    
    
    251,063
    
    
    
    (4,140,075
    )
    
    
    61,421,753Capital expenditures
    
    
    1,598,526
    
    
    
    2,226
    
    
    
    5,296
    
    
    
    
    
    
    
    1,606,048Depreciation and amortization
    
    
    9,278,878
    
    
    
    3,344
    
    
    
    7,209
    
    
    
    (2,420
    )
    
    
    9,287,011
  Major customersRevenues from customers representing over 10% of total net sales are as
follows: For the year ended December 31,Customers
    
    2001
    
    2002
    
    2003NT$
    
    %
    
    NT$
    
    %
    
    NT$
    
    %
    
    US$Nintendo
    
    
    8,389,547
    
    
    
    38.58
    
    
    
    5,646,469
    
    
    
    34.24
    
    
    
    3,509,988
    
    
    
    19.82
    
    
    
    103,265Mitsubishi
    
    
    2,556,151
    
    
    
    11.75
    
    
    
    379,982
    
    
    
    2.30
    
    
    
    1,841,889
    
    
    
    10.40
    
    
    
    54,189HP
    
    
    1,364,785
    
    
    
    6.28
    
    
    
    1,691,841
    
    
    
    10.26
    
    
    
    1,739,782
    
    
    
    9.82
    
    
    
    51,185Total
    
    
    12,310,483
    
    
    
    56.61
    
    
    
    7,718,292
    
    
    
    46.80
    
    
    
    7,091,659
    
    
    
    40.04
    
    
    
    208,639
  ExportsThe Companys export sales accounted for 74%, 82% and 68 % of total net
sales for the years ended December 31, 2001, 2002 and 2003, respectively. F-53




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data)  Export sales from the ROC are as follows: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Japan
    
    
    10,892,506
    
    
    
    7,983,215
    
    
    
    7,269,548
    
    
    
    213,873Singapore and Hong Kong
    
    
    2,702,321
    
    
    
    3,656,167
    
    
    
    3,487,250
    
    
    
    102,596United States
    
    
    1,808,299
    
    
    
    1,616,837
    
    
    
    823,145
    
    
    
    24,217Europe
    
    
    633,198
    
    
    
    345,226
    
    
    
    453,641
    
    
    
    13,347Total
    
    
    16,036,324
    
    
    
    13,601,445
    
    
    
    12,033,584
    
    
    
    354,033
  ProductsThe 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 for the years ended on December 31, 2001,
2002 and 2003: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$ROM
    
    
    12,308,932
    
    
    
    7,574,989
    
    
    
    7,463,464
    
    
    
    219,578Flash
    
    
    3,044,612
    
    
    
    4,355,660
    
    
    
    5,810,494
    
    
    
    170,947SMS*
    
    
    2,783,645
    
    
    
    410,662
    
    
    
    2,359,687
    
    
    
    69,423SLC**
    
    
    2,000,745
    
    
    
    2,894,427
    
    
    
    1,286,807
    
    
    
    37,858EPROM
    
    
    978,625
    
    
    
    592,079
    
    
    
    303,519
    
    
    
    8,930Others
    
    
    630,671
    
    
    
    664,647
    
    
    
    488,216
    
    
    
    14,364Total net sales revenue
    
    
    21,747,230
    
    
    
    16,492,464
    
    
    
    17,712,187
    
    
    
    521,100
  *
    
    SMS (Strategic Manufacturing Service) refers to value added service
of memory and wafer manufacturing to strategic alliance.**
    
    SLC (Systematic Logic Chip) refers Logic and Core SOC products. F-54




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data)  19.
    
    Financial InstrumentsSignificant 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 dollars, primarily in US dollars and Japanese Yen.
As of December 31, 2003, approximately 46.62% of the Companys
long-term debt was in US dollars and approximately 31.59% 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.The Company also entered into certain derivative contracts for
hedging 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 for hedging or trading purposes, as of December 31, 2001,
2002 and 2003 are as follows:  a.
    
    Foreign currency forward contractsThe table below summarizes by major currency the notional amounts of
forward exchange contracts in NT dollars. Foreign currency amounts are
translated at rates current at the reporting date. The buy amounts
represent the NT dollar equivalent of commitments to purchase foreign
currencies, and the sell amounts represent the NT dollar equivalent of
commitments to sell foreign currencies. Most of the Companys foreign
exchange forward contracts matured in 2002, and were entered into for the
purposes of hedging the foreign exchange exposures arising from the
Companys assets and liabilities. As of December 31, 2002 and 2003,
there were no outstanding foreign exchange forward contracts. Net
exchange gains (losses) related to foreign currency forward contracts for
the years ended December 31, 2001, 2002 and 2003 were NT$47,821,
NT$(30,612) and NT$311 (US$9), respectively. As of December 31,2001
    
    2002
    
    2003Buy
    
    Sell
    
    Buy
    
    Sell
    
    Buy
    
    SellUS dollar
    
    
    314,550
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Japanese Yen
    
    
    
    
    
    
    333,660
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 F-55




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data)  b.
    
    Option contractsThe 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.c.
    
    Cross currency and interest rate swapsTo hedge against certain of the Companys long-term debts denominated in
US dollars which bear interest at floating three-month SIBOR (Singapore
Inter Bank Offered Rate), 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 depositsThe Company entered into certain structured deposits, or dual currency
deposits, to earn higher interest rates, but they 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
hedging purposes. F-56




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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.
    
    The estimated fair values of the Companys financial instruments were as
follows:On balance sheet: As of December 31,2002
    
    2003Carrying amount
    
    Fair value
    
    Carrying amount
    
    Fair valueNT$
    
    NT$
    
    NT$
    
    US$
    
    NT$
    
    US$Cash and cash equivalents
    
    
    7,394,361
    
    
    
    7,394,361
    
    
    
    10,648,514
    
    
    
    313,284
    
    
    
    10,648,514
    
    
    
    313,284Short-term investments
    
    
    1,185,324
    
    
    
    1,187,125
    
    
    
    849,436
    
    
    
    24,991
    
    
    
    853,776
    
    
    
    25,118Long-term equity investments
    
    
    1,827,089
    
    
    
    1,838,860
    
    
    
    3,056,722
    
    
    
    89,930
    
    
    
    3,459,420
    
    
    
    101,778Short-term debts and notes
    
    
    (2,159,151
    )
    
    
    (2,159,151
    )
    
    
    (2,748,446
    )
    
    
    (80,860
    )
    
    
    (2,748,446
    )
    
    
    (80,860
    )Long-term debts (including
current portion)
    
    
    (27,079,629
    )
    
    
    (27,360,152
    )
    
    
    (21,859,077
    )
    
    
    (643,103
    )
    
    
    (22,062,438
    )
    
    
    (649,086
    )Cross currency interest rate
    
    
    20,425
    
    
    
    20,895
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity contract
    
    
    (1,385,110
    )
    
    
    (1,887,620
    )
    
    
    (2,049,767
    )
    
    
    (60,305
    )
    
    
    (2,061,527
    )
    
    
    (60,651
    )Derivative related to the 8
options
    
    
    (359,181
    )
    
    
    (504,333
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Option
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,839
    )
    
    
    (142
    )
  f.
    
    Derivative contracts relating to convertible debentures.On May 5, 1998, the Company issued convertible debentures in an aggregate
principal amount of 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. In
April 2003, the Company settled the remaining eight options by paying
US$13,147 (NT$446,867). The related settlement gain was US$1,207
(NT$41,026). F-57




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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 June 2000, the Company entered into a contract with a financial
institution for the settlement of five options relating to a zero coupon
convertible debenture due 2003 with the underlying reference being
47,727,535 of the Companys common shares. The contract, as amended,
expires in May 2003. However, in April 2003, the Company extended the
contract to May 2004. As of December 31, 2003, the remaining underlying
reference was 53,253,964 of the Companys common shares. If the share
price is lower than the predetermined contract price, then the Company
would pay the difference between the two amounts to the financial
institution. The contract rate at which the contract is settled is based
on 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 predetermined contract price and the
share price converted into US dollars using current exchange rate were
US$1.37 and US$0.23 per share, respectively. The carrying amount of this
contract as of December 31, 2003 was a loss of US$60,305 (NT$2,049,767) ,
while the fair value was a loss of US$60,651 (NT$2,061,527). The Company
maintained a deposit of US$44,246 (NT$1,530,922) in that financial
institution. Such deposit is maintained exclusively for the future
settlement of the contract.Under the SAR I 15,638,207 shares and SAR II 18,723,829 shares vested in
2002 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, was NT$502,510. The Company recorded this additional obligation in
2003.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 riskCredit 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 F-58




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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 balance sheet date. The Company minimizes exposure to credit risk by
only dealing with reputable banks.The notional amounts of the financial instruments as of December 31, 2002
and 2003 were as follows (amounts in thousands): December 31,Financial instruments
    
    2002
    
    2003Written options-hedging
    
    
    
    
    
    ¥
    1,597,500USD
    15,000Purchased options-hedging
    
    
    
    
    
    ¥
    2,396,250USD
    22,500Cross currency interest rate swaps-hedging
    
    US$
    4,000
    
    
    
    Call options relating to convertible debentures
    
    US$
    80,000
    
    
    
    
 F-59




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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)  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; 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. The contract was settled in April 2003.  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. F - 60




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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 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.  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. F - 61




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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 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 AmericaThe 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:  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. F - 62




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data)  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.  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 also resulted in
additional inventory allowances of NT$1,511,910 and NT$740,416 as of
December 31, 2002 and 2003, respectively. F - 63




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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.  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.  Under US GAAP, available-for-sale securities as of December 31, 2002 and 2003
are as follows: As of December 31,2002
    
    2003Market value
    
    Cost
    
    Market value
    
    CostNT$
    
    NT$
    
    NT$
    
    US$
    
    NT$
    
    US$Classified as
current assets:Open-end mutual
funds, marketable
securities
    
    
    1,187,125
    
    
    
    1,202,539
    
    
    
    853,776
    
    
    
    25,118
    
    
    
    871,095
    
    
    
    25,628Classified as
non-current:Equity securities
    
    
    800,934
    
    
    
    822,157
    
    
    
    2,894,513
    
    
    
    85,158
    
    
    
    1,026,593
    
    
    
    30,203
  Realized gains from sale of securities classified as available-for-sale for
the years ended December 31, 2001, 2002 and 2003 were NT$42,697, NT$6,778,
NT$111,957 (US$3,294), respectively. For the purpose of determining realized
gains and losses, the cost of securities sold was based on specific
identification. F - 64




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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)  During 2001, 2002 and 2003, an other-than-temporary decline in value of
NT$645,556, NT$538,151, and NT$0 was recognized, respectively, under US GAAP
for the Companys investment in Tower. At December 31, 2003, the price of
Towers shares was US$ 7.89 per share compared with the average cost to the
Company of US$3.06 per share.e.
    
    Derivative Financial InstrumentsUnder 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.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 20.f).
Differences between ROC GAAP and US GAAP in accounting for derivative
financial instruments are detailed below:  (i).
    
    Options contractsUnder 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 depositsUnder 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. F-65




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data)  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.  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. In addition, as discussed in note
12, the Company repurchased and redeemed certain convertible bonds that
included such embedded derivatives. Under US GAAP, the related extinguishment
losses for the year ended December 31, 2002 and 2003 were NT$6,716 and
NT$9,833, respectively. In addition, for the Companys share purchase
agreement with Tower, the Company has also bifurcated the derivative embedded
in the agreement.f.
    
    Stock Appreciation RightsROC 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. See also note 20f. F-66




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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. As of December 31, 2003,
all shares under SAR totaling 72,208,948 were expired and cancelled.g.
    
    Employee Stock OptionsUnder ROC GAAP, there were no specific regulations with respect to the
accounting for stock options prior to 2004. Accordingly, the Company elected
not to account for stock options in the financial statements. Effective from
January 1, 2004, the Company is required to use either the fair value method
or the intrinsic value method to account for its stock options. Under the
fair value method, stock options are stated on the fair value calculated by
pricing models such as Black-Scholes or binomial model. Under the intrinsic
value method, stock options are recorded by the excess of the market price of
the underlying shares at the grant date over the exercise price of the stock
option. The fair value method is encouraged but not required. If the
intrinsic value is used, the Company is required to disclose pro-forma net
income and earnings per share assuming the fair value method is used.Under US GAAP, 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. The Company
used APB 25 to account for its stock options.Under the 2001 plan, 2002 plan and 2003 plan (as discussed in Note 12), the
Company granted 71,768,500 shares, 560,000 shares, 151,507,000 shares,
16,449,000 shares, 2,753,500 shares, 193,212,000 shares and 829,000 shares to
its employees on January 16, 2002, May 6, 2002, October 1, 2002, December 16,
2002, April 7, 2003, June 13, 2003, and November 4, 2003, respectively, at
exercise prices of NT$21.2, NT$20.8, NT$11.1, NT$11.3, NT$9.2, NT$7.75 and
NT$9.0, 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. F-67




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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)  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 1.74%; dividend yield of 0.00%; volatility factors
of the expected market price of the Companys common stock ranging from 0.536
to 0.597; and a weighted-average expected life of the option of 4.4 years.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.There was no compensation recorded related to the options under APB 25
because all of the options exercise prices are equal to the market price at
the grant date.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: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Net income (loss), as
reported under US GAAP
    
    
    (4,462,878
    )
    
    
    (13,840,747
    )
    
    
    (8,876,618
    )
    
    
    (261,154
    )Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards
    
    
    
    
    
    
    (379,539
    )
    
    
    (84,913
    )
    
    
    (2,498
    )Pro forma net income (loss)
    
    
    (4,462,878
    )
    
    
    (14,220,286
    )
    
    
    (8,961,531
    )
    
    
    (263,652
    )
  Earnings (loss) per share (in dollars) For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Basic  as reported
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )Diluted  as reported
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )
 F-68




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data) For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Basic  pro forma
    
    
    (1.21
    )
    
    
    (3.84
    )
    
    
    (2.30
    )
    
    
    (0.07
    )Diluted  pro forma
    
    
    (1.21
    )
    
    
    (3.84
    )
    
    
    (2.30
    )
    
    
    (0.07
    )
  A summary of the Companys stock option activity and related information for
the years ended December 31, 2002 and 2003 is as follows: As of December 31, 2002
    
    As of December 31, 2003Options
    
    Weighted-Average
    
    Options
    
    Weighted-Average(in thousand)
    
    Exercise Price
    
    (in thousand)
    
    Exercise PriceOutstanding-beginning of year
    
    
    
    
    
    
    
    
    
    
    239,685
    
    
    NT$
    14.91Granted
    
    
    239,685
    
    
    
    14.91
    
    
    
    196,794
    
    
    
    7.78Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    (146,179
    )
    
    
    16.40Outstanding-end of year
    
    
    239,685
    
    
    
    14.91
    
    
    
    290,300
    
    
    
    9.31
  Weighted-average fair value of options granted for the year ended December
31, 2002 and 2003 was NT$7.20 per unit and NT$4.48 per unit. The weighted
average remaining contractual life of those options for the year ended
December 31, 2002 and 2003 is 5.54 years and 5.17 years.h.
    
    Purchase and Sale of the Companys Own SharesUnder 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 IncomeGovernment 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. F-69




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data)  j.
    
    Investment in Equity InvesteesUnder 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.k.
    
    Income TaxUndistributed 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.Under ROC GAAP, the criteria used in the determination of the valuation
allowance is less stringent than under US GAAP.Under US GAAP, if a company has experienced cumulative losses in recent
years, it is not generally able to consider more subjective projections of
future operating profits for the purpose of determining the valuation
allowance for deferred income tax assets. A valuation allowance is provided
on deferred tax assets to the extent that it is not more likely than not
that such deferred tax assets will be realized. Under US GAAP, the Companys
valuation allowance for deferred tax assets amounted to NT$7,835,861 and
NT$8,305,012 (US$244,337) as of December 31, 2002 and 2003.l.
    
    Research and Development ExpenseOn 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, F-70




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data)  on a U.S. GAAP basis, research and development expenses were NT$3,335,049 in
2001, NT$3,443,456 in 2002, and NT$2,535,259(US$74,588) in 2003,
respectively.m.
    
    Reclassification of Capital Account to Accumulated DeficitUnder ROC GAAP, under the approval of shareholders, a company may reclassify
its additional paid-in capital account to cover up its accumulated deficit.Under US GAAP, according to SAB Topic 5S, the SEC staff believes a deficit
reclassification of any nature is considered to be quasi-reorganization. As
such, a company may not reclassify or eliminate a deficit in retained
earnings unless all requisite conditions for a quasi-reorganization are
satisfied. The Company reclassified NT$2,630,621 of its additional paid-in
capital to accumulated deficit account. Under US GAAP, this reclassification
is eliminated.n.
    
    Convertible Debt Securities with Beneficial Conversion FeatureUnder ROC GAAP, there are no specific regulations with respect to the
accounting for beneficial conversion features embedded in convertible
securities. Accordingly, the Company elected not to account for beneficial
conversion features in the financial statements.Under US GAAP, in accordance with EITF 00-27 Application of EITF98-5
Accounting for Convertible Securities with Beneficial Conversion Features
(EITF 00-27), convertible securities with beneficial conversion features or
contingently adjustable conversion ratios are recognized and measured by
allocating a portion of the proceeds equal to the intrinsic value of that
feature to additional paid-in capital. The amount to be allocated should be
calculated at the commitment date as the difference between the conversion
price and the fair value of the common stock into which the security is
convertible, multiplied by the number of shares into which the security is
convertible. The resulting discount on the convertible security is accreted,
as interest expense, from the date the beneficial conversion feature is fixed
to the stated redemption date.o.
    
    Rights Issues and Earnings Per ShareUnder ROC GAAP, if a rights issue that is offered to employees contains a
bonus element, basic and diluted EPS shall be adjusted retroactively for the
bonus element for all periods presented. However, under US GAAP, such
retroactive adjustment is required for all rights issue containing bonus
element, regardless whether the rights issuance is offered to employees or
existing shareholders. 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)  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. 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)  The number of weighted average shares outstanding under US GAAP is presented
below: For the year ended December 31,2001
    
    2002
    
    2003Number of common shares outstanding on January 1
    
    
    2,474,409,144
    
    
    
    3,359,342,613
    
    
    
    3,691,276,875Stock 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
    
    
    
    
    
    
    
    
    
    
    Weighted average number of treasury stock
    
    
    
    
    
    
    (32,228,400
    )
    
    
    (46,023,152
    )Capital reserve transferred to common stock (10%)
    
    
    
    
    
    
    333,313,737
    
    
    
    Bonds converted to common for the years endedDecember 31, 2003 (263,975,068 shares)
    
    
    
    
    
    
    
    
    
    
    134,088,222Issuance of common shares for cash on November
11, 2003 (475,000,000 shares*51/365)
    
    
    
    
    
    
    
    
    
    
    66,369,863Weighted average effect of 2002 stock dividend
    
    
    330,151,689
    
    
    
    
    
    
    
    Add: retroactive adjustment for bonus element
included in the rights offering on November 3,
2003 (1.2462%)
    
    
    45,257,854
    
    
    
    45,616,253
    
    
    
    47,098,159Weighted-average number of shares
    
    
    3,676,926,437
    
    
    
    3,706,044,203
    
    
    
    3,892,809,967
  P.
    
    Classification of Allowance for Prepayments and Long-lived Assets to be Abandoned Under ROC GAAP, except for bad debt allowance, allowance for assets is
classified as non-operating expenses.  Under US GAAP, allowance for prepayment and impairment of long-lived assets
to be abandoned are classified as operating expenses. 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)  Net income (loss) for US GAAP purposes is reconciled as follows: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Net income (loss) as reported under ROC GAAP
    
    
    (866,480
    )
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )
    
    
    (241,181
    )(a) Compensation expense relating to employee bonuses and
remuneration to directors and supervisors (Note
I)
    
    
    (4,272,717
    )
    
    
    
    
    
    
    
    
    
    
    (b) Additional pension gain on an actuarial basis
    
    
    2,696
    
    
    
    2,696
    
    
    
    2,696
    
    
    
    79(c) Plant capacity loss
    
    
    527,987
    
    
    
    (527,987
    )
    
    
    268,671
    
    
    
    7,904(d)(i) Unrealized (losses) gains on marketable
securities
    
    
    33,731
    
    
    
    (16,516
    )
    
    
    4,444
    
    
    
    131(d)(ii) Other-than-temporary decline in value on
marketable securities
    
    
    (645,556
    )
    
    
    (538,151
    )
    
    
    
    
    
    
    (e) Derivative financial instruments:(i) Net gains (losses) on derivative financial
instruments held for trading purposes
    
    
    227,908
    
    
    
    449,041
    
    
    
    (611,359
    )
    
    
    (17,986
    )(iii) Gain on derivative embedded in share purchase
agreement
    
    
    
    
    
    
    
    
    
    
    225,753
    
    
    
    6,642(f) Compensation cost recognized for stock appreciation
rights (Note II)
    
    
    496,347
    
    
    
    93,190
    
    
    
    
    
    
    
    (h) Purchase and sale of the Companys own
shares
    
    
    16,695
    
    
    
    
    
    
    
    
    
    
    
    (j) Investment in equity investees
    
    
    (29,484
    )
    
    
    
    
    
    
    
    
    
    
    (k) Adjustment for taxes
    
    
    666,498
    
    
    
    (1,946,357
    )
    
    
    48,143
    
    
    
    1,416(n)Convertible debt securities with beneficial conversion
feature
    
    
    
    
    
    
    
    
    
    
    (617,221
    )
    
    
    (18,159
    )Tax effect on the above reconciled items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) before cumulative effect of a change in
accounting principle in accordance with US
GAAP
    
    
    (3,842,375
    )
    
    
    (13,840,747
    )
    
    
    (8,876,618
    )
    
    
    (261,154
    )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
    
    
    (4,462,878
    )
    
    
    (13,840,747
    )
    
    
    (8,876,618
    )
    
    
    (261,154
    )Other comprehensive income:Unrealized gains (losses) on available-for-sale
securities
    
    
    (27,767
    )
    
    
    (20,511
    )
    
    
    1,642,167
    
    
    
    48,313Change in translation adjustment
    
    
    167,144
    
    
    
    (53,125
    )
    
    
    (30,182
    )
    
    
    (888
    )Reclassification adjustment for realized gains (losses)
on available-for-sale securities
    
    
    112,749
    
    
    
    11,715
    
    
    
    19,318
    
    
    
    569Comprehensive income (loss) in accordance with US
GAAP
    
    
    (4,210,752
    )
    
    
    (13,902,668
    )
    
    
    (7,245,315
    )
    
    
    (213,160
    )
 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) For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Per share amounts:Basic net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP
    
    
    (1.04
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )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
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )Diluted net income (loss) per share before
cumulative effect of change in accounting
principle in accordance with U.S. GAAP
    
    
    (1.04
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )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.
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.07
    )
  The diluted earnings per share calculation excludes the statement of operations
impact of NT$433,525, NT$413,809, and NT$240,708 related to the assumed
conversion of convertible bonds into 210,301,619, 374,454,410 and 659,968,955
weighted average shares for years 2002 and 2003, respectively. In addition,
1,996,820 weighted average shares assumed exercise of stock options for year
2003 were also excluded in the diluted earnings per share calculation. The
impact of the assumed conversion and exercise of stock options 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 $4,272,717,
nil, nil was reflected in the statement of operations under US GAAP for
the years ended December 31, 2001, 2002 and 2003, respectively.  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 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)  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. In April 2003, all the 72,208,948 shares
expired and were cancelled.  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.  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. F-76




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data)  Gross profit (loss) for US GAAP purposes is reconciled as follows: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Gross profit (loss) as reported
under ROC GAAP
    
    
    10,073,127
    
    
    
    (615,291
    )
    
    
    (2,941,649
    )
    
    
    (86,545
    )Inventory loss (provision) reversal
    
    
    (2,586,505
    )
    
    
    (2,929,284
    )
    
    
    1,185,227
    
    
    
    34,870Compensation expense relating to
employee bonuses and remuneration
of directors and supervisors (cost
of goods sold)
    
    
    (1,606,114
    )
    
    
    
    
    
    
    
    
    
    
    Compensation cost recognized for
stock appreciation rights
    
    
    186,577
    
    
    
    51,627
    
    
    
    
    
    
    
    Pension gain on actuarial basis
    
    
    2,696
    
    
    
    2,696
    
    
    
    2,696
    
    
    
    80Depreciation of idle assets
    
    
    
    
    
    
    
    
    
    
    (49,869
    )
    
    
    (1,467
    )Impairment of idle assets
    
    
    
    
    
    
    
    
    
    
    (41,661
    )
    
    
    (1,226
    )Plant capacity loss
    
    
    527,987
    
    
    
    (527,987
    )
    
    
    268,671
    
    
    
    7,904Gross profit (loss) in accordance
with US GAAP
    
    
    6,597,768
    
    
    
    (4,018,239
    )
    
    
    (1,576,585
    )
    
    
    (46,384
    )
  Operating income (loss) for US GAAP purposes is reconciled as follows: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Operating income (loss) as
reported under ROC GAAP
    
    
    3,515,954
    
    
    
    (6,826,718
    )
    
    
    (7,683,989
    )
    
    
    (226,067
    )Compensation cost recognized for
stock appreciation rights
    
    
    496,347
    
    
    
    93,190
    
    
    
    
    
    
    
    Compensation expense relating to
employee bonuses and remuneration
of directors and supervisors
    
    
    (4,272,717
    )
    
    
    
    
    
    
    
    
    
    
    Pension gain on actuarial basis
    
    
    2,696
    
    
    
    2,696
    
    
    
    2,696
    
    
    
    80Government subsidy
    
    
    
    
    
    
    2,286
    
    
    
    5,125
    
    
    
    151Reversal of allowance for bad debt
    
    
    54,810
    
    
    
    
    
    
    
    
    
    
    
    Allowance for prepaid expenses
    
    
    
    
    
    
    
    
    
    
    (334,971
    )
    
    
    (9,855
    )Depreciation of idle assets
    
    
    
    
    
    
    
    
    
    
    (49,869
    )
    
    
    (1,467
    )Impairment of idle assets
    
    
    
    
    
    
    
    
    
    
    (41,661
    )
    
    
    (1,226
    )Inventory loss provision and
research and development
subsidies
    
    
    (2,587,894
    )
    
    
    (2,929,284
    )
    
    
    1,185,227
    
    
    
    34,870Plant capacity loss
    
    
    527,987
    
    
    
    (527,987
    )
    
    
    268,671
    
    
    
    7,904Operating income (loss) in
accordance with US GAAP
    
    
    (2,262,817
    )
    
    
    (10,185,817
    )
    
    
    (6,648,771
    )
    
    
    (195,610
    )
 F-77




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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: As of December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Shareholders equity as reported under
ROC GAAP
    
    
    43,143,625
    
    
    
    30,214,293
    
    
    
    29,247,534
    
    
    
    860,475(a) Compensation cost recognized for
stock appreciation rights
    
    
    849,513
    
    
    
    942,703
    
    
    
    
    
    
    
    (b) Accrual for pension costs under
actuarial method
    
    
    (40,431
    )
    
    
    (37,735
    )
    
    
    (35,039
    )
    
    
    (1,031
    )(c) Net unrealized gain (loss) on
available-for-sale securities
    
    
    7,951
    
    
    
    (224,047
    )
    
    
    682,837
    
    
    
    20,089(d) Net loss on derivative financial
instruments
    
    
    (1,046,265
    )
    
    
    (597,224
    )
    
    
    (265,880
    )
    
    
    (7,822
    )(e) Compensation expense relating to
employee bonuses and remuneration of
directors and supervisors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (f) Treasury stock
    
    
    (142,365
    )
    
    
    
    
    
    
    
    
    
    
    (g) Goodwill on investment
    
    
    
    
    
    
    (356
    )
    
    
    (356
    )
    
    
    (10
    )(h) Additional valuation allowance of tax
    
    
    
    
    
    
    (1,946,357
    )
    
    
    (1,898,214
    )
    
    
    (55,846
    )(i) Plant capacity loss
    
    
    527,987
    
    
    
    
    
    
    
    268,671
    
    
    
    7,904(n) Convertible debt securities with
beneficial conversion feature
    
    
    
    
    
    
    
    
    
    
    195,449
    
    
    
    5,750Shareholders equity in accordance with
US GAAP
    
    
    43,300,015
    
    
    
    28,351,277
    
    
    
    28,195,002
    
    
    
    829,509
  Shareholders equity consists of the following: As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Common shares
    
    
    36,912,769
    
    
    
    44,027,583
    
    
    
    1,295,310Subscriptions received
    
    
    
    
    
    
    274,936
    
    
    
    8,089Additional paid-in capital
    
    
    13,989,882
    
    
    
    14,616,667
    
    
    
    430,028Accumulated deficits
    
    
    (23,639,458
    )
    
    
    (31,356,226
    )
    
    
    (922,513
    )Accumulated other comprehensive income
    
    
    183,257
    
    
    
    1,814,560
    
    
    
    53,385Treasury stock
    
    
    (1,205,131
    )
    
    
    (1,205,131
    )
    
    
    (35,455
    )Reserves
    
    
    2,109,958
    
    
    
    22,613
    
    
    
    66528,351,277
    
    
    
    28,195,002
    
    
    
    829,509
 F-78




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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: As of December 31,2002
    
    2003NT$
    
    NT$
    
    US$Unrealized gains (losses) on marketable securities
    
    
    (36,636
    )
    
    
    1,624,848
    
    
    
    47,804Cumulative translation adjustments
    
    
    219,893
    
    
    
    189,712
    
    
    
    5,581Total
    
    
    183,257
    
    
    
    1,814,560
    
    
    
    53,385
  Domestic and international components of pre-tax income (loss) are as follows: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Domestic
    
    
    (3,964,937
    )
    
    
    (10,708,768
    )
    
    
    (7,636,349
    )
    
    
    (224,665
    )International
    
    
    (220,944
    )
    
    
    (1,166,080
    )
    
    
    (1,267,704
    )
    
    
    (37,296
    )Total
    
    
    (4,185,881
    )
    
    
    (11,874,848
    )
    
    
    (8,904,053
    )
    
    
    (261,961
    )
  A reconciliation of the significant differences between the expected income tax
expense (benefit) and the income tax expense (benefit) is as follows: For the year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Expected income tax expense (benefit)
    
    
    (1,046,470
    )
    
    
    (2,968,712
    )
    
    
    (2,226,013
    )
    
    
    (65,490
    )Additional income tax due to different
enacted tax rate under U.S. GAAP
    
    
    (710,771
    )
    
    
    (758,975
    )
    
    
    674,687
    
    
    
    19,850Additional income tax assessed
    
    
    58,879
    
    
    
    
    
    
    
    
    
    
    
    Tax exemption
    
    
    (256,260
    )
    
    
    
    
    
    
    
    
    
    
    Investment credit forfeited (earned)
    
    
    (920,993
    )
    
    
    (1,405,069
    )
    
    
    829,546
    
    
    
    24,405Change in valuation allowance
    
    
    1,783,776
    
    
    
    6,052,085
    
    
    
    468,595
    
    
    
    13,786Net loss (gain) on long-term equity investment
    
    
    (20,466
    )
    
    
    122,200
    
    
    
    317,135
    
    
    
    9,330Non-deductible employee bonus
    
    
    1,068,179
    
    
    
    
    
    
    
    
    
    
    
    Non-taxable net (gains) losses on financial
instruments
    
    
    98,149
    
    
    
    (112,260
    )
    
    
    250,707
    
    
    
    7,376Non-deductible compensation cost recognized
for stock appreciation rights
    
    
    (124,087
    )
    
    
    (23,298
    )
    
    
    
    
    
    
    Effect of rate change
    
    
    
    
    
    
    1,066,033
    
    
    
    (373,681
    )
    
    
    (10,994
    )Impact of industrial park reduced tax rates
    
    
    329,430
    
    
    
    
    
    
    
    
    
    
    
    Others, net
    
    
    17,631
    
    
    
    (5,749
    )
    
    
    31,908
    
    
    
    939Income tax expense (benefit)
    
    
    276,997
    
    
    
    1,966,255
    
    
    
    (27,116
    )
    
    
    (798
    )
  The tax exemption for 2002 had no impact on earnings per share. F-79




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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 Flash. The Companys other products include SLC,
logic products and wafers. The Company distributes its products on a global
basis but mainly to customers in Asia. The Companys largest customer,
Nintendo, and the Companys largest three customers accounted for 40.04% and
58.00% of the Companys total net sales, respectively, for the period ended
December 31, 2003. 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, 2002 and 2003, the three largest accounts receivable
balances amounted NT$1,558,152 and NT$1,164,757 (US$34,268), 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-80




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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 under ROC GAAP: At December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Allowance for doubtful accounts:Balance as at beginning of period
    
    
    284,403
    
    
    
    196,016
    
    
    
    210,883
    
    
    
    6,204Bad debt expense (reversal)
    
    
    9,431
    
    
    
    14,918
    
    
    
    (33,059
    )
    
    
    (973
    )Bad debts written off
    
    
    (97,818
    )
    
    
    (51
    )
    
    
    (12,567
    )
    
    
    (370
    )Balance at the end of the year
    
    
    196,016
    
    
    
    210,883
    
    
    
    165,257
    
    
    
    4,861Allowance for inventory losses:Balance as at beginning of period
    
    
    1,054,883
    
    
    
    3,243,666
    
    
    
    5,751,735
    
    
    
    169,218Amount expensed during the
period (reversal)
    
    
    2,586,505
    
    
    
    2,929,384
    
    
    
    (1,185,227
    )
    
    
    (34,870
    )Write-off of inventories
    
    
    (397,722
    )
    
    
    (421,315
    )
    
    
    (186,489
    )
    
    
    (5,486
    )Balance at the end of the year
    
    
    3,243,666
    
    
    
    5,751,735
    
    
    
    4,380,019
    
    
    
    128,862Royalty accruals:Balance as at beginning of period
    
    
    538,007
    
    
    
    852,367
    
    
    
    672,604
    
    
    
    19,788Amount expensed during the period
    
    
    490,000
    
    
    
    596,825
    
    
    
    195,000
    
    
    
    5,737Payments made during the period
    
    
    (175,640
    )
    
    
    (776,588
    )
    
    
    (192,147
    )
    
    
    (5,653
    )Balance at the end of the year
    
    
    852,367
    
    
    
    672,604
    
    
    
    675,457
    
    
    
    19,872
  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, 2002, and 2003 and for the years ended December 31, 2001, 2002 and 2003. At December 31,2002
    
    2003NT$
    
    NT$
    
    US$Current assets
    
    
    350,816
    
    
    
    215,390
    
    
    
    6,337Non-current assets
    
    
    66,645
    
    
    
    46,820
    
    
    
    1,377Current liabilities
    
    
    322,471
    
    
    
    176,643
    
    
    
    5,197Non-current liabilities
    
    
    452
    
    
    
    326
    
    
    
    9Total shareholders equity
    
    
    94,538
    
    
    
    85,241
    
    
    
    2,508
 F-81




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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) Year ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$Net sales
    
    
    511,359
    
    
    
    669,073
    
    
    
    311,391
    
    
    
    9,161Sales less cost of sales
    
    
    (307,529
    )
    
    
    204,681
    
    
    
    38,969
    
    
    
    1,146Net income (loss)
    
    
    (1,027,095
    )
    
    
    (191,905
    )
    
    
    (284,591
    )
    
    
    (8,373
    )
  At December 31, 2003, 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$ 2,282
(US$67). Such difference is amortized over 3-5 years from the date of
the investment.  22.
    
    New Accounting Pronouncements 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. For variable interests in entities commonly
referred to as special purpose entities, implementation of this statement
is required by January 1, 2004. And for all other variable interest
entities, implementation is required by December 31, 2004.In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS No. 149 in July 2003
did not have a significant impact on the Companys financial statements.  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 F-82




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Amounts in thousands except share, per share, and percentage data)  Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise effective for all existing financial
instruments, except for minority interests in limited-life entities,
beginning of the first interim period beginning after June 15, 2003.
Certain provisions of this statement relating to noncontrolling interests
in limited-life subsidiaries were deferred indefinitely. The Company
continues to monitor the deferral status of SFAS 150.  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. In
December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin, or SAB, No. 104, Revenue Recognition, which codifies
and rescinds certain sections of SAB No. 101, Revenue Recognition, in
order to make this interpretive guidance consistent with EITF No. 00-21.
The Company is currently in the process of evaluating any effect the
adoption of EITF No. 00-21 will have on its consolidated financial position
and results of operations.  In July 2003, the EITF reached a consensus on Issue 03-5, Applicability of
AICPA Statement of Position 97-2 (SOP 97-2) to Non-Software Deliverables
(EITF 03-5). The consensus was reached that SOP 97-2 is applicable to
non-software deliverables if they are included in an arrangement that
contains software that is essential to the non-software deliverables
functionality. This consensus applied to Companys financial year beginning
October 1, 2003. The consensus did not have significant impact on the
Companys financial statements. F-83




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##### Table of Contents



APPENDIX A GLOSSARY OF TECHNICAL TERMS AND circuit
    
    A circuit which has two or more input signal gates and which delivers an output
only if and when every input signal gate is energized simultaneously.ASIC
    
    Application Specific Integrated Circuit. A custom designed integrated circuit that
performs specific functions which would otherwise require a number of commodity
integrated circuits to perform. The use of an ASIC in place of a conventional
integrated circuit reduces product size and cost and also improves reliability.ASSP
    
    Application Specific Standard Product. A standard integrated circuit designed for a
specific product or application, such as a VCR or microwave.ATA
    
    AT attachment, or Advanced Technology Attachment. The specification for an
Integrated Device Electronics interface which is a type of hardware interface
widely used to connect various peripheral devices to a personal computer.BIOS
    
    Basic Input Output System. This software controls the basic power-up functioning of
a computer system.CD-ROM
    
    Compact Disc used for data storage on a read-only basis.CD-R/W
    
    CD-recordable and rewritable. Originally called CD-erasable, CD-RW can be erased
and new information can be re-recorded onto the same physical location on the disc
by a CD-RW recorder.DAM
    
    Digital Answering Machine.Die
    
    A piece of a semiconductor wafer containing the circuitry of a single chip.DINOR
    
    Divided bit-line NOR Mitsubishi-patented Flash architecture used in its Flash
memory product line. DINOR offers the high-speed random-access capability of the
NOR architecture, without NORs over-erase problems or the need to set all bits to
zero before erase. It also offers the high-density and single power-supply
characteristics of the NAND Flash architecture. Programming occurs at a lower
threshold voltage than erase in the DINOR Flash architecture, the opposite of the
NOR architecture.DRAM
    
    Dynamic Random Access Memory. A type of volatile memory product that is used in
electronic systems to store data and program instructions. It is the most common
type of RAM and must be refreshed with electricity thousands of times per second or
else it will fade away.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
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electronically before being reprogrammed.Ethernet
    
    A type of LAN.Flash Memory
    
    A type of non-volatile memory, similar to an EEPROM in tint it is erasable and
reprogrammable. The difference is that it can be erased and reprogrammed in the
electronic system into which the Flash memory chip has been incorporated.GPS
    
    Global Positioning Satellite System. A network of satellites that provides precise
location determination to receivers.GSM
    
    Global System for Mobile Communications. A standard for digital mobile telephone
networks.GUI
    
    Graphics User Interface. An interface which allows operation of a computer by
manipulating graphical icons and windows (usually by pointing and clicking a mouse)
rather than using text commands.HDD
    
    Hard Disk Drive. An electro-mechanical device that records data onto spinning rigid
magnetic disks in discrete data blocks each of which can be randomly accessed. The
primary mass storage device of a computer.Integrated Circuit
    
    A combination of two or more transistors on a base material, usually silicon. All
semiconductor chips, including memory chips and logic chips, are just very
complicated integrated circuits with thousands of transistors.LAN
    
    Local Area Network. A short distance network designed to connect computers within a
localized environment to enable the sharing of databases and other communications.LCD
    
    Liquid Crystal Display. A type of display that uses a liquid compound with a polar
molecular structure, sandwiched between two transparent electrodes. When an
electric field is applied, the molecules align with the light passing through it. A
polarized filter laminated over the electrodes can selectively turn on a cell or
a pixel, containing the liquid crystal material, turning it dark.Logic Product
    
    A product that contains digital integrated circuits that process, rather than
store, information.Mask
    
    A piece of glass on which an integrated circuits circuitry design is laid out.
Integrated circuits may require up to 20 different layers of design each with its
own Mask. In the integrated circuit production process a light shines through the
Mask leaving an image of the design on the wafer.Mb
    
    Mega Bit. One million (or 1,048,576) bits as a unit of data size or memory capacity.Memory
    
    A group of integrated circuits that a computer uses to store data and programs,
such as ROM, RAM, DRAM and SRAM.MHz
    
    Megahertz. One million cycles per second. Typically measures the clock speed of
microprocessors.Micron
    
    1/25,000 of an inch. Circuitry on an integrated circuit typically follows lines
that are less than one micron wide.Motherboard
    
    The main piece of circuitry inside a personal computer.MP3
    
    Motion Picture Experts Group-I, Audio Layer 3. A digital data compression and
storage technology for music.
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NAND circuit
    
    Not AND. A logic circuit whose output signal is a logical 1 if any of its input
signals is a logical 0 and the output signal of which is a logical 0 if all of its
input signals are logical 1s.Nonvolatile memory
    
    Memory products which retain their data content without the need for constant power
supply.NOR circuit
    
    Not OR. A logic circuit in which an output signal appears only when a signal is
absent from all of its input gates.OR circuit
    
    A logic circuit in which the output signal is a logical 1 if any one or more of its
input signals is a logical 1.PAC
    
    Paired Array Contact.PCMCIA cards
    
    Personal computer cards, standardized by Personal Computer Memory Card
International of San Jose, California or credit card sized, removable modules for
portable computers.PDA
    
    Personal Digital Assistant. A hand-held multifunctional minicomputer used for,
among other things, word processing, name card retention and appointment calendars.PHS
    
    Personal Hand Set. A lower capability but less expensive mobile telephone
communications system currently achieving substantial consumer acceptance in Japan.PROM
    
    Programmable Read-Only Memory. Similar to ROM in that once programmed it can be
read only and not changed. Programmable ROM enables customers to program the
integrated circuits themselves, rather than it being programmed when it is
manufactured. The programming is possible because of a series of fuses in the
circuitry that can be selectively blown to create a unique type of data.RAM
    
    Random Access Memory. A type of volatile memory, forming the main memory of a
computer where applications and files are run.ROM
    
    Read-Only Memory. Memory that is programmed by the manufacturer and cannot be
changed. Typically, ROM is used to provide start-up data when a computer is first
turned on.Semiconductor
    
    A material with electrical conducting properties in between those of metals and
insulators. (Metals always conduct and insulators never conduct, but semiconductors
sometimes conduct.) Essentially, semiconductors transmit electricity only under
certain circumstances, such as when given a positive or electric charge. Therefore,
a semiconductors ability to conduct can be turned on or off by manipulating those
charges and this allows the semiconductor to act as an electric switch. The most
common semiconductor material is silicon, used as the base of most semiconductor
chips today because it is relatively inexpensive and easy to create.SMIF Box System
    
    Standard Mechanical Interface Box System. A system which links process
microenvironments so that a wafer is never exposed to room air. With a SMIF Box
System, traditional environmental conditions are replaced with a microenvironment
that can be pressurized with air or nitrogen to keep out room air.SRAM
    
    Static Random Access Memory. A type of volatile memory product that is used in
electronic systems to store data and program instructions. Unlike the more common
DRAM, it does not need to be refreshed.STB
    
    Set top box. A device to differentiate signals from television and multimedia
service providers.SXGA
    
    Super Extended Graphics Array. An enhanced set of Video Graphics Array standards
that is
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capable of displaying an image ranging from 768 x 1024 pixels to 1024 x
1280 pixels.Transistor
    
    An individual circuit that can amplify or switch electric current. This is the
building block of all integrated circuits and semiconductors.VCD
    
    Video Compact Disk.Volatile memory
    
    Memory products which lose their data content when the power supply is switched off.Wafer
    
    Thin, round, flat piece of silicon that is the base of most integrated circuits.
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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 29, 2004
    By:
    /s/ Miin WuName:
    Miin WuTitle:
    President




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

Indenture, dated as of February 7, 2002, by and between the Company and The Bank of New York, as trustee(7).14.8
    
    
    Summary of terms and conditions of domestic convertible bonds
issued December 12, 2002 (English summary)(8).14.9
    
    
    Deposit Agreement, dated as of April 5, 2004, among the Company,
Citibank, N.A., as depositary, and Holders from time to time of
Global Depositary Receipts issued thereunder,
including the form
of Global Depositary Receipt*.




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*
    
    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 10.2 to the Companys Form 20-F
filed with the Commission on July 1, 2003.(3)
    
    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.(4)
    
    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.(5)
    
    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.(6)
    
    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.(7)
    
    Incorporated by reference to Exhibit 10.9 to the Companys Form 20-F
filed with the Commission on July 1, 2002.(8)
    
    Incorporated by reference to Exhibit 10.10 to the Companys Form 20-F
filed with the Commission on July 1, 2003.