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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  
 FORM 20-F o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the
fiscal year ended DECEMBER 31, 2004
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 0-27884 (CHINESE CHARACTER)  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
None
    
    Name of each exchange on which registered
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 
  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, 2004, 5,035,296,328 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 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
    
    
    3ltem 3. Key Information
    
    
    3ltem 4. Information on the Company
    
    
    19Item 5. Operating and Financial Review and Prospects
    
    
    36Item 6. Directors, Senior Management and Employees
    
    
    64Item 7. Major Shareholders and Related Party Transactions
    
    
    71Item 8. Financial Information
    
    
    73Item 9. The Offer and Listing
    
    
    77Item 10. Additional Information
    
    
    80Item 11. Quantitative and Qualitative Disclosure About Market Risk
    
    
    98Item 12. Description of Securities Other than Equity Securities
    
    
    100PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    101Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    101Item 15. Disclosure Controls and Procedures
    
    
    101Item 16A. Audit Committee Financial Expert
    
    
    101Item 16B. Code of Ethics
    
    
    101Item 16C. Principal Accountant Fees and Services
    
    
    101Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    102Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    102PART IIIItem 17.Financial Statements
    
    
    103Item 18.Financial Statements
    
    
    103Item 19.Exhibits
    
    
    103Appendix A  Glossary of Technical Terms
    
    
    A-1SignaturesEx-8.1 List of Subsidiaries of the CompanyEx-12.1 Certifications of our President pursuant to Section 302Ex-12.2 Certifications of our Associate Vice President, Finance Department, pursuant to Section 302Ex-13.1 Certifications of our President pursuant to Section 906Ex-13.2 Certifications of our Associate Vice President, Finance Department, pursuant to Section 906




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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 R.O.C. are to the island of Taiwan and other areas
under the effective control of the Republic of China. All references herein to the R.O.C.
Government and the R.O.C. 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 R.O.C. GAAP
and U.S. GAAP are to accounting principles generally accepted in the R.O.C. 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$ are to United States dollars
and references to New Taiwan dollars, N.T. dollars and NT$ 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 N.T.
dollars per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York
on December 31, 2004 of NT$31.74 = US$1.00. On June 20, 2005, the noon buying rate
between New Taiwan dollars and United States dollars was NT$31.37 = 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, 2002, 2003 and 2004, and
the selected balance sheet data as of December 31, 2003 and 2004 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, 2000 and
2001 and the selected balance sheet data as of December 31, 2000, 2001 and 2002 presented below are
derived from our audited financial statements not included in this annual report, which were also
prepared on a consolidated basis. Certain accounts in the selected balance sheet data as of
December 31, 2000, 2001, 2002 and 2003 have been reclassified to conform with the presentation of
the current period as of December 31, 2004. 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, 2002, 2003 and 2004 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 R.O.C. GAAP and R.O.C. reporting
practices. For a discussion of certain differences between R.O.C. GAAP and U.S. GAAP, see note 22
to our consolidated financial statements for the years ended December 31, 2002, 2003 and 2004
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 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2004(NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (US$)(in millions except per share and ADS data)Consolidated Income Statement Data:R.O.C. GAAPNet sales revenue
    
    
    33,493
    
    
    
    21,747
    
    
    
    16,492
    
    
    
    17,712
    
    
    
    23,380
    
    
    
    736.6Cost of goods sold
    
    
    (15,494
    )
    
    
    (11,674
    )
    
    
    (17,105
    )
    
    
    (20,657
    )
    
    
    (18,990
    )
    
    
    (598.3
    )Less: Unrealized profit as of December 31,
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    3
    
    
    
    (1
    )
    
    
    (<0.01
    )Realized gross profit (loss)
    
    
    17,999
    
    
    
    10,073
    
    
    
    (615
    )
    
    
    (2,942
    )
    
    
    4,388
    
    
    
    138.2Operating expenses
    
    
    (5,856
    )
    
    
    (6,557
    )
    
    
    (6,212
    )
    
    
    (4,742
    )
    
    
    (4,737
    )
    
    
    (149.2
    )Operating income (loss)
    
    
    12,143
    
    
    
    3,516
    
    
    
    (6,827
    )
    
    
    (7,684
    )
    
    
    (349
    )
    
    
    (11.0
    )Total other income
    
    
    945
    
    
    
    1,356
    
    
    
    466
    
    
    
    1,877
    
    
    
    1,619
    
    
    
    51.0Total other expenses
    
    
    (2,077
    )
    
    
    (4,795
    )
    
    
    (4,976
    )
    
    
    (2,370
    )
    
    
    (1,023
    )
    
    
    (32.2
    )Income (loss) before taxes and minority
interest
    
    
    11,011
    
    
    
    77
    
    
    
    (11,337
    )
    
    
    (8,177
    )
    
    
    247
    
    
    
    7.8Income tax benefit (expense)
    
    
    (398
    )
    
    
    (943
    )
    
    
    (20
    )
    
    
    (21
    )
    
    
    (35
    )
    
    
    (1.1
    )Income (loss) before minority interest
    
    
    10,613
    
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    212
    
    
    
    6.7Minority interest loss
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    5
    
    
    
    0.2Net Income (loss)
    
    
    10,613
    
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    218
    
    
    
    6.9Net income (loss) per share  basic (1)
    
    
    2.92
    
    
    
    (0.23
    )
    
    
    (3.10
    )
    
    
    (2.13
    )
    
    
    0.05
    
    
    
    <0.01Net income (loss) per share  diluted (1)
    
    
    2.91
    
    
    
    (0.23
    )
    
    
    (3.10
    )
    
    
    (2.13
    )
    
    
    0.04
    
    
    
    <0.01U.S. GAAPGross profit (loss)
    
    
    17,615
    
    
    
    6,598
    
    
    
    (4,018
    )
    
    
    (1,576
    )
    
    
    5,052
    
    
    
    159.2Operating income (loss)
    
    
    11,069
    
    
    
    (2,263
    )
    
    
    (10,186
    )
    
    
    (6,649
    )
    
    
    335
    
    
    
    10.6Net income (loss) before cumulative effect of change in
accounting principle in accordance with U.S. GAAP
    
    
    8,016
    
    
    
    (3,842
    )
    
    
    (13,841
    )
    
    
    (8,877
    )
    
    
    (429
    )
    
    
    (13.5
    )Basic net income (loss) per share before cumulative effect
of change in accounting principle in accordance with U.S.
GAAP
    
    
    2.31
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    (<0.01
    )
 - 3 -




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Year ended, and as of, December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2004(NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (US$)(in millions except per share and ADS data)Diluted net income (loss) per share before cumulative effect
of change in accounting principle in accordance with U.S.
GAAP
    
    
    2.26
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    (<0.01
    )Net income (loss) (2)
    
    
    8,016
    
    
    
    (4,463
    )
    
    
    (13,841
    )
    
    
    (8,877
    )
    
    
    (429
    )
    
    
    (13.5
    )Net income (loss) per share-basic (1) (3)
    
    
    2.31
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    (<0.01
    )Net income (loss) per share diluted (1)(3)
    
    
    2.26
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    (<0.01
    )Balance Sheet Data:R.O.C. GAAPTotal current assets
    
    
    29,027
    
    
    
    25,358
    
    
    
    21,301
    
    
    
    21,002
    
    
    
    21,706
    
    
    
    683.9Net property, plant and equipment
    
    
    38,006
    
    
    
    39,562
    
    
    
    40,029
    
    
    
    32,600
    
    
    
    27,993
    
    
    
    882.0Total assets
    
    
    72,025
    
    
    
    71,693
    
    
    
    67,450
    
    
    
    59,919
    
    
    
    54,396
    
    
    
    1,713.8Total current liabilities
    
    
    11,360
    
    
    
    9,016
    
    
    
    17,687
    
    
    
    18,717
    
    
    
    9,449
    
    
    
    297.7Long-term liabilities
    
    
    16,091
    
    
    
    19,533
    
    
    
    19,549
    
    
    
    11,954
    
    
    
    10,602
    
    
    
    334.0Total liabilities
    
    
    27,451
    
    
    
    28,549
    
    
    
    37,236
    
    
    
    30,671
    
    
    
    20,051
    
    
    
    631.7Total shareholders equity
    
    
    44,574
    
    
    
    43,144
    
    
    
    30,214
    
    
    
    29,248
    
    
    
    34,344
    
    
    
    1,082.0U.S. GAAPTotal current assets
    
    
    28,994
    
    
    
    26,646
    
    
    
    21,037
    
    
    
    21,398
    
    
    
    21,716
    
    
    
    684.2Total assets
    
    
    71,916
    
    
    
    72,979
    
    
    
    65,509
    
    
    
    59,200
    
    
    
    52,807
    
    
    
    1,663.7Total current liabilities
    
    
    13,999
    
    
    
    10,152
    
    
    
    18,127
    
    
    
    18,986
    
    
    
    9,445
    
    
    
    297.6Total liabilities
    
    
    30,085
    
    
    
    29,679
    
    
    
    37,158
    
    
    
    31,005
    
    
    
    20,047
    
    
    
    631.6Total shareholders equity
    
    
    41,831
    
    
    
    43,300
    
    
    
    28,351
    
    
    
    28,195
    
    
    
    32,760
    
    
    
    1,032.1Other Data:R.O.C. GAAPCapital expenditures
    
    
    11,803
    
    
    
    9,078
    
    
    
    8,975
    
    
    
    1,606
    
    
    
    2,554
    
    
    
    80.5Depreciation and amortization
    
    
    6,048
    
    
    
    8,006
    
    
    
    8,742
    
    
    
    9,287
    
    
    
    7,562
    
    
    
    238.3Net cash provided by operating activities
    
    
    15,697
    
    
    
    9,209
    
    
    
    217
    
    
    
    1,484
    
    
    
    5,987
    
    
    
    188.6Net income (loss) per ADS  basic
    
    
    29.2
    
    
    
    (2.3
    )
    
    
    (31.0
    )
    
    
    (21.3
    )
    
    
    0.50
    
    
    
    0.02Net income (loss) per ADS  diluted
    
    
    29.1
    
    
    
    (2.3
    )
    
    
    (31.0
    )
    
    
    (21.3
    )
    
    
    0.40
    
    
    
    0.01Number of common shares outstanding (weighted, as adjusted)
(4)
    
    
    3,631
    
    
    
    3,702
    
    
    
    3,667
    
    
    
    3,852
    
    
    
    4,835
    
    
    
    4,835Stock dividend per common share (5)
    
    
    13
    %
    
    
    30
    %
    
    
    10
    %
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Retroactively adjusted for all subsequent stock dividends and employee bonuses declared.(2)
    
    The difference between net income under R.O.C. GAAP and U.S. GAAP was largely derived from
different treatments under these two accounting principles with respect to employee bonus
shares, derivative contracts, plant capacity loss, other-than-temporary decline in value on
marketable securities, and convertible debt securities with beneficial conversion features.
The difference in accounting treatment with respect to employee bonus shares under the two
accounting principles resulted in an additional expense of NT$1,622 million in 2000, an
additional expense of NT$4,273 million in 2001, no additional expense or income in 2002 and
2003 and 2004. The differences of accounting treatment with respect to derivative contracts
under the two accounting principles resulted in additional expense of NT$898 million in 2000,
additional income of NT$228 million in 2001, additional income of NT$449 million in 2002,
additional expense of NT$386 million in 2003 and additional expense of NT$230 million
(US$7.2 million) in 2004. The difference in accounting treatment with respect to plant
capacity loss under the two accounting principles resulted in no additional expense or income
in 2000, an additional income of NT$528 million in 2001, an additional expense of NT$528
million in 2002, and additional income of NT$269 million in 2003, an additional expense of
NT$258 million in 2004. The difference in accounting treatment with respect to
other-than-temporary decline in value on marketable securities under the two accounting
principles resulted in an additional expense of NT$646 million in 2001, an additional expense
of NT$538 million in 2002, no additional expense or income in 2000 and 2003, and an additional
expense of NT$448 million in 2004. 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 2000, 2001, and 2002, an additional
expense of NT$617 million in 2003, an additional expense of NT$156 million in 2004.(3)
    
    Retroactively adjusted for all stock dividends declared. See note 22 to our consolidated
financial statements for the years ended December 31, 2002, 2003 and 2004 included in this
annual report and Item 5. Operating and Financial Review and Prospects  A. Operating Results
 U.S. GAAP Reconciliation. - 4 -




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(4)
    
    Common shares outstanding weighted, as adjusted for any employee share bonus and any
subsequent stock dividends declared.(5)
    
    The percentage of our stock dividend is determined by the number of common shares we
distributed to existing shareholders divided by the common shares outstanding immediately
prior to the share issuance. We did not distribute any cash dividends in any of the periods
presented. B. Capitalization and Indebtedness Not applicable. C. Reason for the Offer and Use of Proceeds Not applicable. D. Risk Factors Holders of our securities should note that investment in our securities involves risks and
uncertainties that could affect our future business success or financial results. The following
important factors, and those important factors described in other reports submitted to, or filed
with, the Securities and Exchange Commission by our company, among other factors, could adversely
affect our results of operations and could cause our results of operations to differ materially
from those expressed in any forward-looking statements made by, or on behalf of, our company: Risks Relating to Our Company We recorded gross, operating and net losses in 2002 and 2003. Future losses could materially
adversely affect the value of your investment. The semiconductor industry was in a severe and protracted downturn that began in the second
half of 2000 and continued through the first half of 2003, resulting in a drop in demand and
general decline in the average selling prices of our products. For 2002, we recorded a gross loss
of NT$615 million, an operating loss of NT$6,827 million and a net loss of NT$11,357 million.
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, an operating loss of NT$7,684 million and a net loss of NT$8,198 million. Although
conditions in the semiconductor industry improved between the third quarter of 2003 and the first
half of 2004, the industry is experiencing another downturn that began in the second half of 2004.
For 2004, we recorded gross profit of NT$4,388 million (US$138.2 million), an operating loss of
NT$349 million (US$11.0 million) and net income of NT$218 million (US$6.9 million). However, under
U.S. GAAP, we recorded net loss of NT$429 million (US$13.5 million) in 2004, as well as net losses
in 2002 and 2003. We cannot assure you that we will not incur gross, operating and net losses for
the full year 2005. Primarily as a result of the net losses we incurred and unrealized losses on long-term
investments of NT$331 million in 2002 and partially offset by an unrealized gain of NT$977 million
(US$28.8 million) in 2003, shareholders equity declined by 30% in 2002 and 3.2% in 2003.
Shareholders equity increased by 17.4% in 2004, to NT$34,345 million (US$1,082.1 million) as of
December 31, 2004. In addition, we cannot assure you that these losses will not occur again or increase. If we
record losses in the future, the value of your investment may be materially and 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
maturing of a portion of our long-term debt, 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. In 2005, we have been or will also be required to pay short-term debt and notes in the
aggregate principal amount of approximately NT$2,997 million (US$94.4 million) and repay the
principal and current portion of long-term debt and capital - 5 -




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lease obligations in the aggregate principal amount of NT$2,500 million (US$78.8 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$3,953 million (US$124.5 million) in 2005. If our cash flow from operations are not sufficient, we may not be able to meet these payment
obligations when due. At December 31, 2004, we had NT$10,116 million (US$318.7 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 short-term loan under which we may drawdown up to an additional principal amount
of NT$4,384 million (US$138.1 million) as of May 31, 2005. We cannot assure you that any alternate
means of financing, if necessary, 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, and in April 2004, we issued
13,125,000 GDS representing 525,000,000 new common shares. Had we not conducted the share and GDS
offerings, we would have had difficulty in meeting the debt to equity ratio contained in our loan
covenants as of the end of 2003 and 2004. 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. 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. Between the second half of 2000 and the first half of
2003, the semiconductor industry was 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 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 - 6 -




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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 improved between the third quarter of
2003 and the first half of 2004, the industry is experiencing another downturn that began in the
second half of 2004, and we cannot predict when or whether the industry will recover. Even if 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 a net loss
under R.O.C. GAAP of NT$11,357 million in 2002, a net loss of NT$8,198 million in 2003 and a net
income of NT$218 million (US$6.9 million) in 2004. 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. 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 market downturns, many of - 7 -




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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 (which include losses under
our equity derivative contract which had our common shares as the underlying reference securities)
and net loss from equity investments of NT$415 million in 2002, NT$825 million in 2003, and NT$155
million (US$4.9 million) in 2004. 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 and Flash sales for a substantial portion of our revenue, a significant
decrease in Mask ROM or Flash sales or average selling prices could result in the loss of a
significant portion of our revenue. In 2002, 2003 and 2004, our Mask ROM net sales were NT$7,575 million, NT$7,464 million and
NT$8,373 million (US$263.8 million), respectively, or 45.9%, 42.1% and 35.8%, respectively, of our
net sales revenue in those periods. In 2002, 2003 and 2004, our Flash net sales were NT$4,356
million, NT$5,810 million and NT$10,715 million (US$337.6 million), respectively, or 26.4%, 32.8%
and 45.8%, 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, migrated in 2001 to a game platform that
utilized a DVD-ROM-based storage system. Nintendo is one of our major customers and accounted for
43.9%, 48.8% and 56.2% of our net Mask ROM sales in 2002, 2003 and 2004, 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. The Code Flash products market, in which our Flash products compete, is dominated by large
players, including Spansion LLC. (Spansion, which is owned by AMD and Fujitsu), Intel Corporation
(Intel), Sharp Corporation (Sharp) and STMicroelectronics NV (STMicroelectronics), all of
which may have greater financial and other resources than our company. If we are unable to compete
effectively in the Code Flash products market, our business and operating results will suffer. In
addition, due to market conditions, average selling prices for our Flash products declined sharply
beginning in the third quarter of 2004 and continuing into 2005. We also do not produce Data Flash
products and thus do not benefit from the growth in the Data Flash market. Any significant reduction in the use of Mask ROMs in the video game manufacturing industry and
generally, and in the use of Code Flash 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 write-down 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 improved between the third quarter of 2003 and
the first half of 2004, the industry is experiencing another downturn that began in the second half
of 2004. 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 and spare parts loss reversal of NT$1,185 million in 2003
and NT$919 million (US$28.9 million) in 2004, we recorded inventory losses of NT$2,929 million in
2002. We may be required to provide for inventory loss 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. - 8 -




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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 R.O.C. 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 until 2004 and, accordingly, have complied with this reporting
requirement. In 2004, subsequent to a revision of the statutory criteria by Taiwan Securities and
Futures Commission, we did not meet the revised statutory criteria, and do not need to comply with
the requirement, with respect to 2005. 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. The industries in which the
manufacturers of these products operate are subject to rapid technological change, rapidly
evolving industry standards and downward pricing pressures. A significant decrease in the demand
for consumer electronics, computers and computer peripherals and other communications products due
to business cycles 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. Declining prices of
these products also result in significant downward pressure on the prices of our products that are
used in these products, which may cause the average selling prices for our products to decrease and
our revenue and operating results to 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, Atmel Corporation (Atmel), Sharp, Spansion,
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;
    
    available capacity;
    
    manufacturing capabilities and yields; - 9 -




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
    
    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.
This occurred in 2001, 2002, the first half of 2003 and the first quarter of 2005. Although our
capacity utilization rates improved in 2004, they declined again at the beginning of 2005, and 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. 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 2002, 2003 and 2004, our net sales to Megachips Corporation (Megachips), which resells
our products to Nintendo, aggregated NT$5,646 million, NT$4,257 million and NT$5,240 million
(US$165.1 million), respectively, or 34.2%, 24.0% and 22.4%, 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 introduced in 2001, 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. As a result, we have been shifting our production toward the output of
Mask ROMs for game cartridges used in Nintendos Game Boy and Dual Screen series of handheld gaming
devices and other semiconductor solutions for the Game Cube and related accessories. However, sales
to Nintendo for Game Boy and Dual Screen have not compensated fully for the loss of Mask ROM sales for
Nintendos console-card game platform. Further, Nintendos Dual Screen platform faces competition
from Sonys PSP portable gaming device. In addition, unit sales volumes or prices of Mask ROMs - 10 -




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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 and new Dual Screen devices introduced in December 2004, 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. 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.
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. 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. Rapid expansion puts strain on
our managerial, technical, financial, operational and other resources. As a result of our
expansion, we have implemented and may continue to - 11 -




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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. 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 from time to time to
continue to improve our technology and manufacturing processes. 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 and upgrade our technology in
a timely manner and at a reasonable cost, we may not be able to compete effectively and fulfill our
customers requirements, 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 may also be required to pledge assets as collateral security, maintain segregated accounts
or make margin payments when we take positions in derivative instruments involving obligations to
third parties (i.e., derivative instruments other than purchased options). If we were to be unable
to close out our positions in these derivative instruments, we may be required to continue to
pledge such assets, maintain such accounts or make such payments until the positions expire or
mature. Our ability to close out a position in a derivative instrument prior to its expiration or
maturity depends on the existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of a counterparty to enter into a - 12 -




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transaction closing out the position. We cannot assure you that we will be able to close out a
derivative position at a time and price that is favorable to us. We are also exposed to the credit risk of the counterparties to our derivatives contracts. In
particular, any failure by a counterparty to honor the terms of its derivatives contracts with us
may adversely affect our financial condition and results of operations. We are vulnerable to natural disasters and other events beyond our control, which could severely
disrupt the normal operation of our business and adversely affect our 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. 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 - 13 -




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charge. We can give no assurance that impairment charges will not be required in periods subsequent
to December 31, 2004. We are currently not able to estimate the extent and timing of any goodwill
impairment charge for future years. Please see note 22 to our consolidated financial statements for
the years ended December 31, 2002, 2003 and 2004 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. On July 1, 2004, the R.O.C. Accounting Research and Development Foundation issued
Statement of Financial Accounting Standards No. 35, Accounting for Impairment of Assets,
which is effective for financial statements for fiscal years ending on or after December 31,
2005. This statement requires that impairment loss should be recognized whenever events or
changes in circumstance indicate the carrying amount of an asset may be lesser than its
recoverable amount. We are currently evaluating the effect of the adoption of this statement. The differences between R.O.C. GAAP and U.S. GAAP result in different amounts of net income under
those standards, which makes evaluating our financial performance difficult. Our consolidated financial statements are prepared under R.O.C. GAAP, which differ in many
significant respects from U.S. GAAP. For example, R.O.C. GAAP does not require the recognition of
the value of shares distributed as bonuses to employees when calculating net income, and R.O.C.
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$13,841 million in
2002, NT$8,877 million in 2003 and NT$429 million (US$13.5 million) in 2004, as compared to, under
R.O.C. GAAP, net loss of NT$11,357 million in 2002 and NT$8,198 million in 2003 and net income of
NT$218 million (US$6.9 million) in 2004. See note 22 to our consolidated financial statements for
the years ended December 31, 2002, 2003 and 2004 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 gaming console 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. 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. - 14 -




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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 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. - 15 -




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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 R.O.C. 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 R.O.C. 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 R.O.C. government.
Although significant economic and cultural relations have been established in recent years between
the R.O.C. 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 R.O.C.. Relations
between the R.O.C. and the Peoples Republic of China have been particularly strained in recent
years. Occasional 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 R.O.C. and the Peoples Republic of China. In March 2005, the P.R.C. passed an
anti-secession law which sanctions the use of force against the R.O.C. if the R.O.C. formally
declares its independence. Past developments in relations between the R.O.C. and the Peoples
Republic of China have on occasion depressed the market price of the securities of R.O.C.
companies. Relations between the R.O.C. 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 N.T. 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 N.T. 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 N.T. dollar and other local currency terms.
Despite hedging and mitigating techniques implemented by us from time to time, fluctuations in
exchange rates have affected, and may continue to affect, our financial condition and results of
operations. See Item 11. Quantitative and Qualitative Disclosures About Market Risk  Foreign
Currencies. Disruptions in the international trading environment may significantly reduce our international
sales and revenue. A substantial portion of our net sales revenue is derived from sales from Taiwan to customers
located outside Taiwan. - 16 -




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In 2002, 2003 and 2004, export sales from Taiwan to our customers outside Taiwan accounted for
82.5%, 67.9% and 66.5%, 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 2004, the Taiwan Stock
Exchange Index peaked at 7,034.10 on March 4, 2004 and reached a low of 5,316.87 on August 4, 2004.
During 2004, daily closing prices of our common shares ranged from NT$16.8 per share on April 14,
2004 to NT$6.5 per share on November 2, 2004. On June 20, 2005, the Taiwan Stock Exchange Index
closed at 6,296.89 and the daily closing value of our common shares was NT$5.43 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 R.O.C. 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 R.O.C. 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 2004, the daily trading volume of our common shares ranged from approximately
361,521,000 to approximately 3,378,000. During the same period, the average daily trading volume of
our ADSs ranged from approximately 445,700 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 May 31, 2005, GDS holders
representing over 99% 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. - 17 -




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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 R.O.C. 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. ADS and GDS holders may be required to appoint agents in Taiwan to handle various tax and
administrative matters if - 18 -




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they withdraw common shares from our ADS or GDS program and become shareholders, which may make
share ownership burdensome. Non-R.O.C. persons wishing to withdraw their common shares from our ADS or GDS program and
become shareholders are required under current R.O.C. 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 R.O.C. Ministry of Finance and, upon
appointment, becomes a guarantor of the holders R.O.C. 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 R.O.C. 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 R.O.C. law and regulations, citizens of the Peoples Republic of China are not permitted
to hold our common shares. In addition, under current R.O.C. 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 R.O.C.
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-R.O.C. 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 R.O.C. 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 N.T. 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 R.O.C. Foreign Exchange Control Law, the Executive Yuan of the
R.O.C. 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 R.O.C. laws, we are required to report to the R.O.C.
Securities and Futures Commission (the R.O.C. SFC) if the person to be registered as a
shareholder (i) is a related party of ours as defined in the R.O.C. 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 - 19 -




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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. 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. Our products are primarily used in applications for the consumer electronics, computer and
communications industries. 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 ParkHsinchu, 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$8,975 million, NT$1,606 million and NT$2,554 million (US$80.5 million)
in 2002, 2003 and 2004, respectively. The following table sets forth our capital expenditures for
2002, 2003 and 2004. Year ended December 31,2002
    
    
    2003
    
    
    2004(NT$ million)
    
    
    (NT$ million)
    
    
    (NT$ million)Fab I
    
    
    370
    
    
    
    88
    
    
    
    358Fab II
    
    
    1,184
    
    
    
    228
    
    
    
    92Fab III
    
    
    4,720
    
    
    
    834
    
    
    
    1,652Others
    
    
    2,701
    
    
    
    456
    
    
    
    452Total
    
    
    8,975
    
    
    
    1,606
    
    
    
    2,554
 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 2004, our capital expenditures consisted primarily of residual payments following the
completion of the construction of the shell of Fab III and investments to expand the SLC capacity
of Fab I under our Evergreen plan for Fab - 20 -




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I. We do not have any current plans to invest in twelve-inch equipment to complete and
commence full commercial operations at Fab III. However, 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 2005. 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. 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, in 2003 we 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. We have entered into a joint research initiative
with IBM and Infineon Technologies to explore a new form of computer memory called phase-change
memory, which stores data by changing the state of a special material from an amorphous to a
crystalline structure. In connection with our reorganization, we spun off Magic Pixel Inc. and MaxNova Inc. 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 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 spun off companies. 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 develop the market for one-time programmable memory
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. We have developed, and began to ship from the end of 2004, one-time programmable memory
products based on 2 bit per cell NBit technology, which we term as XtraROM. Our XtraROM can be
electrically programmed in a similar manner to EPROMs, which allows our customer turnaround time to
be reduced from weeks for Mask ROM to a few days for XtraROM. At the same time, the cost of XtraROM
is fairly similar to Mask ROM. We believe that this ability to reduce customer turnaround times
with minimal difference in cost provides us with a significant competitive advantage. We are also
developing 4 bit per cell NBit technology. If we are successful, we believe that one-time
programmable memory products based on 4 bit per cell NBit technology may become equal or lower in
cost than equivalent Mask ROM products. In the future, we expect Mask ROM and/or one-time programmable memory products, to continue to
play an important role in our business, and that XtraROM will progressively replace Mask ROM if we
are successful in developing - 21 -




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##### Table of Contents



one-time programmable memory products based on 4 bit per cell NBit technology. 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 and XtraROM, 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 Code Flash products using advanced
manufacturing processes, and reduce line widths and die sizes, to develop cost-effective solutions.
Our research efforts currently include the development of 0.13 micron process technology for Code
Flash products, as well as 0.13 micron and 0.09 micron process NBit based technology. We are also
seeking to shrink die sizes through redesigning our 0.15 micron Flash products. Leverage our competitilve 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, with particular focus on
developing solutions for cellular phones and portable LCD 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. Continue to upgrade our process technology and in-house manufacturing capabilities 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. 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 plan.
This allocates to Fab I manufacturing of products that do not require leading edge technologies,
such as certain of our SLC and SMS products, including high voltage, microelectronic-mechanical
system, or MEMS, LCD driver IC chipsets and embedded ROM products. - 22 -




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##### Table of Contents



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
a portion 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 Taiwan Semiconductor Manufacturing Company
Limited (TSMC) in Taiwan and Tower Semiconductor Limited (Tower Semiconductor) in Israel. Our Business Groups 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. Our Integrated Solution Group is responsible for providing value-added design services and
system-level platform solutions to our 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. 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 2002, 2003 and
2004: % of net sales revenueYear ended December 31,Product
    
    Characteristics
    
    Applications
    
    2002
    
    
    2003
    
    
    2004Microelectronics and Memory Solution Group:Mask ROM
    
    Not re-programmable
    
    Games, PDAs, word processors,
    
    
    45.9
    %
    
    
    42.1
    %
    
    
    35.8
    %printers, fax modems, VCDs,cellular phones, STBsFlash
    
    Re-programmable
    
    PDAs, digital cameras, STBs,
    
    
    26.4
    %
    
    
    32.8
    %
    
    
    45.8
    %within the
    
    Web TVs, DVD players, opticalapplication system
    
    disk drive productsEPROM
    
    Re-programmable
    
    Fax modems, VCDs, STBs
    
    
    3.6
    %
    
    
    1.7
    %
    
    
    0.7
    %outside theapplication systemusing industrialprocessorsSMS
    
    Value-added services
    
    Internet applications, CDs, DVDs,
    
    
    2.5
    %
    
    
    13.3
    %
    
    
    7.4
    %microcontrollers with embedded FlashtechnologyIntegrated Solution Group:SLC
    
    Highly integrated
    
    Cellular phones, flat panel
    
    
    17.6
    %
    
    
    7.3
    %
    
    
    7.6
    %system-on-a-chip
    
    displays, digital still cameras,solutions featuring
    
    smart cards, PDAs, electronicembedded Flash
    
    dictionaries, digital audiotechnology
    
    products
 - 23 -




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##### Table of Contents



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, as well as 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. 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. We have also developed, and began to ship from the end of 2004, 64Mb, 128Mb and 256 Mb
one-time programmable memory products based on 2 bit per cell NBit technology, which we term as
XtraROM. Our XtraROM can be electrically programmed in a similar manner to EPROMs, which allows our
customer turnaround time to be reduced from weeks for Mask ROM to a few days for XtraROM. In the
future, we expect that XtraROM will progressively replace Mask ROM if we are successful in
developing one-time programmable memory products based on 4 bit per cell NBit technology. The following table provides an overview of our principal Mask ROM and XtraROM products, and
the percentage of net Mask ROM and XtraROM sales revenue represented by these products in 2002,
2003 and 2004: % of our net Mask ROM andXtraROM salesYear ended December 31,Density
    
    Sample applications
    
    2002
    
    
    2003
    
    
    2004512 Mb(1)
    
    Games, entertainment
    
    
    0.1
    %
    
    
    0.7
    %
    
    
    3.9
    %256 Mb(1)
    
    Games, memory cards
    
    
    2.8
    %
    
    
    4.7
    %
    
    
    15.4
    %128 Mb(1)
    
    Games, PDAs
    
    
    12.9
    %
    
    
    28.7
    %
    
    
    32.7
    %64Mb
    
    Word processors, games, PDAs, STBs, databanks, printers
    
    
    36.9
    %
    
    
    38.5
    %
    
    
    21.4
    %32 Mb
    
    Games, DVDs, data communications
    
    
    25.4
    %
    
    
    15.3
    %
    
    

    13.0
    %16 Mb
    
    Games, word processors
    
    
    16.2
    %
    
    
    6.7
    %
    
    
    9.0
    %8 Mb
    
    Sound cards, data banks, BIOS, games, sound cards
    
    
    2.5
    %
    
    
    4.2
    %
    
    
    3.9
    %4 Mb
    
    PHSs, data banks, games
    
    
    3.1
    %
    
    
    0.9
    %
    
    
    0.4
    %Other
    
    Pages, data banks, STBs, BIOS, games, word processors, networking
    
    
    0.1
    %
    
    
    0.3
    %
    
    
    0.1
    %
 
 (1)
    
    Includes XtraROM products for 2004. Competition.The Mask ROM industry is highly competitive. Our major competitors include Oki,
NEC and Hynix. - 24 -




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##### Table of Contents



We believe that with our relative flexibility in adjusting our product mix and allocating our
capacity in Fab II, 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 cellular 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 in 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 used
in game cartridges for Nintendos handheld gaming devices. Sales of Mask ROM for use in Game Boy
Advance and Nintendo DS represented 46.0% of our Mask ROM revenue in 2004, compared to 48.0% 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 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 and thus has a higher latency
time. 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 mainstream ETOX (EPROM tunnel oxide) design, discussed below, which we believe hold more
potential in the longer term, we 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. In
the first quarter of 2005, we began to ship redesigned dies that are based on 0.15 micron process
technology but which have been reduced in size, allowing us to manufacture more dies per wafer. We
are in the process of developing an increase range of 0.15 micron process technology-based Flash
products with reduced die sizes. We previously also manufactured Flash products based on 0.15 micron process technology and
Renesas DINOR Flash design, but ceased to do so after August 2004 after the completion of our
contractual shipments to Renesas. Our research efforts currently include the development of 0.13 micron process technology for
NOR Flash products based on mainstream ETOX technology, and we seek to achieve this in 2006. We have also 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 - 25 -




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##### Table of Contents



N-ROM, which we also refer to as two bit per cell or NBit technology. See Item 5.
Operating and Financial Review and Prospects  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 achieved Flash
standard and introduced 64Mb Code Flash products based on two bit per cell and 0.25 micron process
technology in the second half of 2004. We are in the process of developing an increased range of
Code Flash products based on two bit per cell technology, and expect to introduce 0.15 micron
process technology NBit Code Flash products in the second half of 2005 Our research efforts
currently also include the development 0.13 and 0.09 micron process technology for NBit Code Flash
products and four bit per cell technology. 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 2002, 2003 and 2004: % of our net Flash memory salesYear ended December 31,Density
    
    Sample applications
    
    2002
    
    
    2003
    
    
    2004128 Mb
    
    Games
    
    
    
    
    
    
    0.3
    %
    
    
    0.5
    %64 Mb
    
    Games, printers, STBs
    
    
    5.6
    %
    
    
    14.9
    %
    
    
    5.3
    %32 Mb
    
    Printers, PDAs, digital still cameras, ADSL products
    
    
    12.9
    %
    
    
    14.2
    %
    
    
    18.7
    %16 Mb
    
    STBs, communication boxes, printers, musical devices,
    
    
    32.7
    %
    
    
    22.3
    %
    
    
    29.1
    %games, web TVs, cellular phones8 Mb
    
    DVD Players, STBs, ISDN boxes
    
    
    13.6
    %
    
    
    14.4
    %
    
    
    25.3
    %4 Mb
    
    BIOS, CD R/W drives, cable modems
    
    
    30.2
    %
    
    
    21.3
    %
    
    
    17.1
    %2 Mb
    
    BIOS, HDDs, CD R/W drives, communication boxes
    
    
    0.8
    %
    
    
    4.5
    %
    
    
    1.5
    %1 Mb
    
    BIOS, HDDs, games, DVD-ROM drives
    
    
    4.2
    %
    
    
    7.3
    %
    
    
    2.1
    %Other
    
    BIOS, HDDs, games
    
    
    
    
    
    
    0.9
    %
    
    
    0.3
    %
 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 for Code Flash
products, in which our Flash products compete, is dominated by Spansion, Intel, Sharp and
STMicroelectronics. Our global market share for Code Flash products have been increasing in recent
years. However, due to market conditions, average selling prices for our Flash products declined
sharply beginning in the third quarter of 2004 and continuing into 2005. We do not produce Data
Flash products and thus do not benefit from the growth in the Data Flash market. 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. 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. - 26 -




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##### Table of Contents



Our strategic manufacturing services enable us to leverage our competitive manufacturing
capability. With our extensive fab experience and advanced non-volatile memory technology, we seek
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. One of the responsibilities of our integrated solution
group is to coordinate and integrate our development efforts of our integrated solution group with
those of our subsidiaries and strategic investment entities by providing focus on identified
platforms. Some of our solutions have therefore been primarily or jointly developed by our
subsidiaries or strategic investments entities. For example, Magic Pixel, our previous subsidiary,
in which we still hold a 48.8% interest, developed some of our multimedia-related solutions, such
as digital still camera controllers, LCD controllers and camera phone controllers, and Biomorphic
Microsystems Corporation, one of our strategic investments, developed some of the integrated
circuit components in our CMOS sensor camera module used in cellular phones. In the past we had focused on the audio, video, communications and microcontrollers areas.
Subsequent to our reorganization in 2003, we identified two platforms in which we plan to focus
development of our solutions:  
    
    cellular phones-related solutions; and
    
    portable LCDs-related solutions. Cellular Phone-related Solutions Our cellular phone-related solutions include the following: Sound Generator Chip.We provide MIDI solutions for cellular handset customers, with
multi-voice polyphonic sound generators based on high-quality wavetable sound synthesizers that
provide enhanced ring-tone sound clarity. In 2004, we shipped 32-voice and 64-voice polyphonic
sound generator chips for use in cellular phones. Our 64-voice polyphonic sound generator chips
also include a MP3 decoder solution. Digital Still Camera Controller.We provide to our customers a digital still camera
controller that supports up to 16 million pixels, for use in digital cameras, including cellular
phone digital cameras. CMOS Sensor Camera Module.We provide to our customers highly integrated CMOS image sensors
and companion processor ICs for use in portable information appliances (such as cellular phones and
PDAs) and in digital cameras. We also offer compact modular solutions to our customers, including
support in hardware design and algorithm development for specific applications. In the second half
of 2005, we also expect to produce the entire camera module for use in cellular phones. SIM Card IC.Beginning in the second half of 2004, we began to ship limited volumes of SIM
card ICs to SIM card manufacturers. Portable LCD-related Solutions Our portable LCD-related solutions focus on small to medium size (up to around 10 inch) displays.
We produce LCD panel controllers, scalers or graphic controllers, and microcontrollers Other Solutions Other solutions that we had provided before the formation of our integrated solution group,
and continue to provide, include the following: - 27 -




---



##### Table of Contents




    
    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.
    
    Digital Answering Machine IC. Our solutions include integrated circuits for digital
answering machines. The most important technology in these integrated circuits is
digital signal processor technology, which is also necessary for applications in voice
messaging, cordless telephones and cellular telephones.
    
    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.
    
    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.
    
    Others. Clock generators, joystick controllers and wireless game controllers for Nintendo. 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 Customers The following table sets forth top customers (by sales) of our products by percentage of our
net sales revenue in 2002, 2003 and 2004 and the type of product purchased: % of net sales revenueYear ended December 31Customers
    
    2002
    
    
    2003
    
    
    2004
    
    
    Products purchased(%)Nintendo(1)
    
    
    34.2
    %
    
    
    24.0
    %
    
    
    22.4
    %
    
    Mask ROM, Flash, SLCHewlett Packard
    
    
    10.3
    %
    
    
    9.8
    %
    
    
    5.3
    %
    
    Mask ROM, FlashLG
    
    
    0.5
    %
    
    
    1.2
    %
    
    
    2.4
    %
    
    FlashShinco
    
    
    1.1
    %
    
    
    0.9
    %
    
    
    1.8
    %
    
    Flash, SLCRenesas(2)
    
    
    1.6
    %
    
    
    10.4
    %
    
    
    1.8
    %
    
    SMSDaiichi
    
    
    0.7
    %
    
    
    1.4
    %
    
    
    1.7
    %
    
    Mask ROM, FlashPhilips
    
    
    3.3
    %
    
    
    1.6
    %
    
    
    1.6
    %
    
    Flash, SLCLite-On
    
    
    0.1
    %
    
    
    0.8
    %
    
    
    1.4
    %
    
    FlashInventec
    
    
    2.5
    %
    
    
    2.2
    %
    
    
    1.4
    %
    
    Mask ROM, Flash, SLCCanon
    
    
    0.4
    %
    
    
    0.6
    %
    
    
    1.3
    %
    
    Mask ROM, Flash
 
 (1)
    
    Represents our sales to Megachips, which on-sells our products to Nintendo(2)
    
    The semiconductor operations of Mitsubishi Electric and Hitachi were transferred to
Renesas on April 1, 2003. Sales prior to the formation of Renesas reflect sales to
Mitsubishi Electric. Nintendo The percentage of our total net sales revenue derived from Megachips, which on-sells our
products to Nintendo, was - 28 -




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34.2% in 2002, 24.0% in 2003 and 22.4% in 2004. 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 and
Nintendo Dual Screen. 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 the Game Cube video game platform, which utilizes a
DVD-ROM-based storage system instead of the Mask ROM-based cartridges previously used in older
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 shifted
production towards the output of Mask ROMs used in game cartridges for Nintendos handheld gaming
devices, including Game Boy Advance, which was released in the spring of 2001, Game Boy Advance
Super, which was released in 2003, and Nintendo Dual Screen, which was released in December 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 lease agreement with Nintendo for the
use of manufacturing equipment with a cost of NT$1,751 million payable over a thirty-six month
period in monthly installments from July 31, 2002 to June 30, 2005. Title to the leased equipment
will be transferred to us at the end of the lease term. Hewlett Packard We are the main supplier of Mask ROMs to Hewlett-Packard, worlds largest manufacturer of
laser and inkjet printers, which require 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 to
Hewlett-Packard. The percentage of our total net sales revenue derived from Hewlett Packard was
10.3% in 2002, 9.8% in 2003 and 5.3% in 2004. LG Electronics Inc. We have been increasing our focus on the market in South Korea and developing our business
relationship with LG in recent years. We supply Mask ROM and Flash products to LG. The percentage
of our total net sales revenue from LG was 0.5% in 2002, 1.2% in 2003 and 2.4% in 2004. Renesas We previously manufactured Flash products based on 0.15 micron process technology and Renesas
DINOR Flash design for Renesas, but ceased to do so after August 2004 after the completion of our
contractual shipments to Renesas. Since August 2004, we have not sold any products to Renesas. 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: - 29 -




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Year ended December 31,Area
    
    2002
    
    
    2003
    
    
    2004(%)Japan
    
    
    48.4
    
    
    
    41.0
    
    
    
    35.8Taiwan
    
    
    17.5
    
    
    
    32.1
    
    
    
    33.5Hong Kong, Singapore and South Korea
    
    
    22.2
    
    
    
    19.7
    
    
    
    21.9United States
    
    
    9.8
    
    
    
    4.6
    
    
    
    4.2Europe and other
    
    
    2.1
    
    
    
    2.6
    
    
    
    4.6100.0
    
    
    
    100.0
    
    
    
    100.0
 We have relationships with over 180 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, Singapore and
Hong Kong. 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. 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. 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 R.O.C.
assembly subcontractors, or perform the work ourselves. In 2004, we sub-contracted over 80% 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, 2002, 2003 and 2004, and our expected capacity as of
December 31, 2005, which is subject to adjustment depending on market conditions and product mix: 2002
    
    
    2003
    
    
    2004
    
    
    2005(1)Fab I (six-inch wafers)
    
    
    35,000
    
    
    
    35,000
    
    
    
    34,000
    
    
    
    32,000Fab II (eight-inch wafers)
    
    
    40,000
    
    
    
    37,000
    
    
    
    44,000
    
    
    
    44,000
 
 (1)
    
    Planned capacity. Planned capacity for Fab I as of December 31, 2005 is expected to be
lower than capacity as of December 31, 2004 as a result of changes in product mix. 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 have allocated 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. - 30 -




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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 also converted a part of our Mask ROM manufacturing capacity in Fab
II to Flash manufacturing capacity in 2004. 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 then allows 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 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 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. - 31 -




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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, 2004, we employed 3,593 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. 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 4.9% in
2002, 5.2% in 2003 and 4.5% in 2004. 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
26.5% between December 31, 2002 and December 31, 2003. Between December 31, 2003 and December 31,
2004, prices for six-inch wafers and for eight-inch wafers both decreased on average by
approximately 7.5%. We obtain our wafer supplies principally from four suppliers, namely Toshiba Ceramics Co.,
Ltd., Sumitomo Corporation, Tokyo office, and Siltronic Japan Corporation, which are overseas
suppliers, and Taisil Electronic Materials Corp., an R.O.C. 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 - 32 -




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Water is critical in the production of semiconductors. We obtain our water supplies from a
state-owned water company. The R.O.C. 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 R.O.C. 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 construct a dam in Hsinchu in 2005 or 2006 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. 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 power supply systems 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 up to 2% 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
R.O.C. 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$425 million in installing pollution prevention equipment,
operation, waste treatment and pollutant composition in 2002, NT$267 million in 2003 and NT$110
million (US$3.5 million) in 2004. We dispatch some of our industrial waste solvents for disposal by
outside waste treatment companies approved by the R.O.C. Environmental Protection Administration.
Certain common waste gases are processed and disposed of by the Science Park environmental - 33 -




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cleaning team. In addition, we have also established environmental protection policies and
have put in place environmental management teams trained by the R.O.C. 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, 2004 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;
    
    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, 2004, these participations included:  
    
    Tower Semiconductor, Ltd. (Tower Semiconductor)  A 13.4% indirect interest in Tower
Semiconductor. Tower Semiconductor is an independent foundry manufacturer of
semiconductor integrated circuits on silicon wafers. As at December 31, 2004, we
beneficially owned 13.4% of the issued share capital of Tower Semiconductor. As at
December 31, 2004, Tower Semiconductor had a capital of US$533.8 million, net assets of
US$167.9 million and accumulated deficits of US$356.7 million. For the year ended
December 31, 2004, Tower Semiconductor recorded a net loss of US$137.8 million. As at
December 31, 2004, we held the shares of Tower Semiconductor at a value of NT$2,035
million (US$64.1 million). The shares of Tower Semiconductor held by us are fully
paid-up. For the year ended December 31, 2004, we did not receive any dividend on the
 shares of Tower Semiconductor. For the year ended December 31, 2004 there were no
inter-company loans between us and Tower Semiconductor.
    
    ProComm Inc.  A 38.4% direct equity interest in ProComm Inc. ProComm Inc. designs and
sells integrated chipsets and application-specific integrated circuits for applications
used in the wireless communications industry. We acquired our equity interest in
Prominent Communications Inc. in late 1999 as part of an arrangement to jointly develop
integrated circuits for 900MHz cordless telephones. Pursuant to a share swap transaction
agreed among Prominent Communications Inc., its shareholders and ProComm Inc. on
September 1, 2004, Procomm Inc. issued its own stock to shareholders of Prominent
Communications Inc. in exchange for shares of Prominent Communications Inc. Accordingly,
we received. 7,300,000 shares of Prominent Communications Inc. in exchange for 10,132,513
shares of ProComm Inc.
    
    Biomorphic Microsystems Corporation (BMC)  A 30.1% indirect equity interest in BMC.
BMC develops and - 34 -




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markets intelligent imaging sensors for digital cameras, automobiles and industrial
applications. Pursuant to a share swap transaction agreed among Biomorphic VLSI, Inc., its
shareholders, and BMC on May 14, 2004, BMC issued its own stock to shareholders of
Biomorphic VLSI, Inc. in exchange of Biomorphic VLSI, Inc.s stock. Accordingly, we
received 14,900,531 shares of BMC in exchange for 18,160,252 shares of Biomorphic VLSI,
Inc. We injected a further NT$65 million in capital into BMC through Rui Hon Investment
Ltd. and NT$43 million in capital into BMC through Hui Ying Investment Ltd on June 25,
2004. In addition, we disposed of 6,420,000 shares of BMC to other venture capital
investors in the second half of 2004.
    
    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. C. Organizational Structure The following table sets forth the identity of our subsidiaries and their jurisdictions of
incorporation as of December 31, 2004. Direct orTotal Paid-in
    
    IndirectJurisdiction of
    
    Capital of such
    
    EquityName of subsidiary
    
    Main business
    
    incorporation
    
    Entity
    
    InterestHui Ying Investment Ltd.
    
    Investment
    
    Taiwan, R.O.C.
    
    NT$500,000,000
    
    
    100
    %Run Hong Investment Ltd.
    
    Investment
    
    Taiwan, R.O.C.
    
    NT$500,000,000
    
    
    100
    %Kang Bao Investment Ltd.
    
    Investment
    
    Taiwan, R.O.C.
    
    NT$500,000,000
    
    
    100
    %Joyteck Co., Ltd.
    
    Systems Solutions
    
    Taiwan, R.O.C.
    
    NT$96,775,000
    
    
    87.98
    %Macronix America, Inc.
    
    Sales and marketing
    
    California, U.S.A.
    
    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, U.S.A.
    
    US$23,850,000
    
    
    100
    %Wedgewood International Ltd.
    
    Investment
    
    British Virgin Islands
    
    US$35,010,000
    
    
    100
    %Macronix Pte Ltd.
    
    Sales and marketing
    
    Singapore
    
    US$100,000
    
    
    100
    %MaxNova Inc.
    
    IC design
    
    Taiwan, R.O.C.
    
    NT$85,500,000
    
    
    85.5
    %Macronix Japan (Cayman Islands)
    
    Investment
    
    Cayman Islands
    
    US$500,000
    
    
    100
    %Macronix (Hong Kong) Co., Ltd.
    
    Sales and marketing
    
    Hong Kong
    
    US$2,500,000
    
    
    100
    %
 Macronix (BVI) Co., Ltd. (Macronix BVI) Macronix BVI is an investment holding company. As at December 31, 2004, we beneficially owned
100% of the issued share capital of Macronix BVI. As at December 31, 2004, Macronix BVI had a
capital of US$169.6 million, net assets of US$13.9 million and accumulated deficits of US$114.1
million. For the year ended December 31, 2004, Macronix BVI recorded a net loss of US$0.1 million. As at December 31, 2004, we held the shares of Macronix BVI at a value of US$13.9 million. The
shares of Macronix BVI held by us are fully paid-up. For the year ended December 31, 2004, we did
not receive any dividend on the shares of Macronix BVI. For the year ended December 31, 2004 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, 2004, we beneficially owned
100% of the issued share capital of Wedgewood. As at December 31, 2004, Wedgewood had a capital of
US$35.0 million, net assets with a negative value of US$62.2 million and accumulated deficits of
US$97.2 million. For the year ended December 31, 2004, Wedgewood recorded a net loss of US$2.0
million. As at December 31, 2004, we held the shares of Wedgewood at a negative value of US$62.2
million. The shares of Wedgewood held by us are fully paid-up. For the year ended December 31,
2004, we did not receive any dividend on the shares of Wedgewood. For the year ended December 31,
2004 there were no inter-company loans between Wedgewood and us. - 35 -




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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 but is renewable at our option. 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 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 the shell 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 a portion
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
and also because we currently have sufficient capacity at Fab I and Fab II as a result of our
migration to decreased line-widths and die sizes which allow us to manufacture more dies per wafer,
we do not have any current plans to equip and commence operations at Fab III with twelve-inch
equipment until the market conditions improve or we require the additional capacity. 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 R.O.C. GAAP, which differ in certain
material respects from U.S. GAAP. See note22 to our consolidated financial statements for the years
ended December 31, 2002, 2003 and 2004 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. 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 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 a reversal of inventory and spare parts loss provision of NT$1,185
million in 2003. In 2003, net sales revenue - 36 -




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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 and an operating loss of
NT$7,684 million. In 2003, we recorded a net loss of NT$8,198 million. Although conditions in the semiconductor industry improved between the third quarter of 2003
and the first half of 2004, the industry is experiencing another downturn that began in the second
half of 2004 . We recorded a reversal of inventory and spare parts loss provision of NT$919 million
(US$28.9 million) in 2004 and our net sales revenue increased by 32.0% in 2004 compared to the
2003, reflecting the recovery that continued during the first half of 2004. We had realized
gross profit of NT$4,388 million (US$138.2 million), an operating loss of NT$349 million (US$11.0
million) and net income of NT$218 million (US$6.9 million). 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 50%, 64%, 65%, and 57% in 2002, approximately 49%, 64%, 89% and 89% in
2003 and approximately 91%, 100%, 103% and 88% in 2004. Our capacity utilization for the first
quarter of 2005 was 53%. We cannot assure you that our capacity utilization rates will not decline
in the future. Nintendo continued to be our single largest customer in 2002, 2003 and 2004. 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, 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 shifted production towards
the output of Mask ROMs used in game cartridges for Nintendos handheld gaming devices, including
Game Boy Advance, which was released in the spring of 2001, Game Boy Advance Super, which was
released in 2003, and Nintendo Dual Screen, which was released in December 2004. In addition, we
currently supply other accessories for the Game Cube video game platform. Our sales of Mask ROMs to
Nintendo in 2002, 2003 and 2004 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, 2004, 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 - 37 -




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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. For the full year 2004, average selling prices for Mask ROM products decreased slightly while prices for Flash products increased,
although due to market conditions, average selling prices for our Flash products declined sharply
beginning in the third quarter of 2004 and continuing into 2005. 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 31,2002
    
    
    2003
    
    
    2004(NT$ per die)Mask ROM
    
    
    54.8
    
    
    
    56.9
    
    
    
    54.2Flash Memory
    
    
    49.0
    
    
    
    40.8
    
    
    
    45.8
 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 31,2002
    
    
    2003
    
    
    2004(Mb per die)Mask ROM(1)
    
    
    39.4
    
    
    
    61.5
    
    
    
    75.3Flash Memory
    
    
    9.5
    
    
    
    11.4
    
    
    
    11.7
 
 (1)
    
    The significant increase in megabit per die for Mask ROM products from 2002 to 2004
resulted from the increase in demand for high-density Mask ROM products in 2003 and 2004. 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 and an operating loss of
NT$7,684 million. In 2004, our cost of goods sold was lower than our net sales revenue, which
resulted in a realized a gross profit of NT$4,388 million (US$138.2 million) and an operating loss
of NT$349 million (US$11.0 million). - 38 -




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Capital Expenditures and 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. In 2003, depreciation and
amortization increased by 6.2% from NT$8,742 million in 2002 to NT$9,287 million due to the capital
expansion program at Fab II and the commencement of depreciation at Fab III. The level of our
depreciation expense peaked in 2003. In 2004, depreciation and amortization decreased by 18.6%
from NT$9,287 million in 2003 to NT$7,562 million (US$238.3 million). Although we anticipate that
our depreciation expense will continue to decrease in 2005, our
future depreciation expense will depend on our capital expenditure program. In 2002, 2003 and 2004, our depreciation expense was NT$8,107 million, NT$8,615 million and
NT$7,092 million (US$223.4 million), and represented 49.2%, 48.6% and 30.3% of net sales revenue,
respectively. In 2003, the decrease in depreciation expense as a percentage of net sales revenue
despite the increase in depreciation expenses reflected the increase in net sales revenue. In
2004, the decrease in depreciation expense as a percentage of net sales revenue reflected the
decrease in depreciation expenses and 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, the first half of 2003 and the second half of 2004, 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. Adverse
market conditions in the semiconductor industry between the second half of 2000
and the first half of 2003 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 and spare parts 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 and spare parts loss provision of NT$919 million (US$28.9 million)
in 2004 and NT$1,185 million in 2003 due to improving market conditions, compared to an inventory
and spare parts loss provision of NT$2,929 million for the year ended December 31, 2002. Research and Development We believe that research and development is critical to our future success. We incurred
expenses of NT$3,806 million in 2002, NT$2,738 million in 2003 and NT$2,577 million (US$81.2
million) in 2004 on research and development, or 23.1%, 15.5% and 11.0% 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 Our 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 - 39 -




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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 of 2002. We began mass production using 0.15 micron process technology for Flash in
the second quarter of 2003. We expect to migrate to 0.13 micron process technology for Flash
products produced at Fab II in 2006. 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
10.8% to 430,672 wafers in 2002
from 482,836 wafers in 2001. In 2003, our wafer production increased
10.7% to 476,729 wafers. In
2004, our wafer production increased 34.4% to 640,548 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 TSMC and Tower Semiconductor. We also have increased our overall
manufacturing capacity through the enhancement of Fab I and Fab II. In July 2002, we completed construction of the shell of Fab III In addition. Although we
currently are utilizing a portion of the space in Fab III to increase our production capacity at
Fab II using 8 inch wafers, due to the adverse market conditions currently prevailing in the
semiconductor industry and also because we currently have sufficient capacity at Fab I and Fab II
as a result of our migration to decreased line-widths and die sizes which allow us to manufacture
more dies per wafer, we do not have any current plans to equip and commence operations at Fab III
with twelve-inch equipment until the market conditions improve or we require the additional
capacity. The following table sets forth our wafer production (eight-inch equivalents) by product for
each of the periods indicated: Year ended December 31,2002
    
    
    2003
    
    
    2004(number of
    
    
    (% of total
    
    
    (number of
    
    
    (% of total
    
    
    (number of
    
    
    (% of totalwafers)
    
    
    production)
    
    
    wafers)
    
    
    production)
    
    
    wafers)
    
    
    production)Mask ROM
    
    
    173,253
    
    
    
    40.2
    
    
    
    188,356
    
    
    
    39.5
    
    
    
    233,750
    
    
    
    36.5Flash
    
    
    207,820
    
    
    
    48.3
    
    
    
    190,174
    
    
    
    39.9
    
    
    
    298,513
    
    
    
    46.6EPROM
    
    
    12,767
    
    
    
    2.9
    
    
    
    2,996
    
    
    
    0.6
    
    
    
    1,107
    
    
    
    0.2SMS
    
    
    18,800
    
    
    
    4.4
    
    
    
    78,537
    
    
    
    16.5
    
    
    
    86,925
    
    
    
    13.6SLC(1)
    
    
    18,032
    
    
    
    4.2
    
    
    
    16,666
    
    
    
    3.5
    
    
    
    20,253
    
    
    
    3.1Total
    
    
    430,672
    
    
    
    100.0
    
    
    
    476,729
    
    
    
    100.0
    
    
    
    640,548
    
    
    
    100.0
 
 (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;
    
    Singapore and Hong Kong;
    
    the United States; and
    
    Europe. - 40 -




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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: Year ended December 31,(1)2002
    
    
    2003
    
    
    2004(millions
    
    
    (% of total net sales
    
    
    (millions
    
    
    (% of total net
    
    
    (millions
    
    
    (% of total netin NT$)
    
    
    revenue)
    
    
    in NT$)
    
    
    sales revenue)
    
    
    in NT$)
    
    
    sales revenue)Japan
    
    
    7,983
    
    
    
    48.4
    
    
    
    7,269
    
    
    
    41.0
    
    
    
    8,364
    
    
    
    35.8Taiwan
    
    
    2,891
    
    
    
    17.5
    
    
    
    5,679
    
    
    
    32.1
    
    
    
    7,839
    
    
    
    33.5Singapore
and Hong Kong
    
    
    3,656
    
    
    
    22.2
    
    
    
    3,487
    
    
    
    19.7
    
    
    
    5,119
    
    
    
    21.9United States
    
    
    1,617
    
    
    
    9.8
    
    
    
    823
    
    
    
    4.6
    
    
    
    981
    
    
    
    4.2Europe
    
    
    345
    
    
    
    2.1
    
    
    
    454
    
    
    
    2.6
    
    
    
    1,077
    
    
    
    4.6Total
    
    
    16,492
    
    
    
    100.0
    
    
    
    17,712
    
    
    
    100.0
    
    
    
    23,380
    
    
    
    100.0
 
 (1)
    
    See note 22 to our consolidated financial statements for the years ended December 31, 2002,
2003 and 2004 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 N.T. dollars, and our sales to other
countries are generally denominated in U.S. dollars. In 2002, 2003 and 2004, 99.2%, 96.3% and
96.2%, respectively, of our net sales revenue was denominated in currencies other than N.T.
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 R.O.C. GAAP. We also
provide a reconciliation from our R.O.C. GAAP financial statements to U.S. GAAP in note 22 to our
consolidated financial statements for the years ended December 31, 2002, 2003 and 2004. 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, and accordingly, we record a provision for this potential
obsolescence. 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 and spare parts loss provision under R.O.C.
GAAP of NT$2,929 million in 2002 due to obsolete or slow moving items. We recorded a reversal of
inventory and spare parts loss provision of NT$1,185 million in 2003 and NT$919 million (US$28.9
million) in 2004 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. - 41 -




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This derivative contract, as
amended, expired and was fully settled on May 5, 2005. We received or paid the benefit or
obligation represented by the fair market value of our share price in N.T. dollars divided by the
then prevailing exchange rates between the N.T. 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 R.O.C. 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 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, 2004.
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 R.O.C. GAAP, our income tax expense is recorded based on calculations using the
statutory tax rate of each entitys jurisdiction of incorporation. As of December 31, 2004, our
deferred tax assets consisted principally of investment credits that expire between 2005 and 2008
and loss carry-forwards that expire in 2006 and 2007. See note 22 to our consolidated financial
statements for the years ended December 31, 2002, 2003 and 2004. 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 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, 2004, our
deferred tax assets exceeded our deferred tax liabilities by NT$8,739 million (US$275.3 million),
and we recorded a valuation allowance of NT$6,843 million (US$215.6 million) against our tax assets
resulting in net deferred tax assets of NT$1,896 million (US$59.7 million). Cost Method Investments Under R.O.C. 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, 2004, we recorded a cumulative unrealized loss of
NT$1,352 million (US$42.6 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 31,2002
    
    
    2003
    
    
    2004Sales revenue
    
    
    100.9
    
    
    
    102.0
    
    
    
    100.5Less: Sales returns
    
    
    (0.2
    )
    
    
    (1.8
    )
    
    
    (0.1
    )Sales discounts
    
    
    (0.7
    )
    
    
    (0.2
    )
    
    
    (0.4
    )Net sales revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0MMSG:Mask ROM
    
    
    45.9
    
    
    
    42.1
    
    
    
    35.8Flash
    
    
    26.4
    
    
    
    32.8
    
    
    
    45.8EPROM
    
    
    3.6
    
    
    
    1.7
    
    
    
    0.7SMS
    
    
    2.5
    
    
    
    13.3
    
    
    
    7.4
 - 42 -




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Year ended December 31,2002
    
    
    2003
    
    
    2004ISG:SLC
    
    
    17.6
    
    
    
    7.3
    
    
    
    7.7Other(1)
    
    
    4.0
    
    
    
    2.8
    
    
    
    2.6Cost of goods sold
    
    
    (103.7
    )
    
    
    (116.6
    )
    
    
    (81.2
    )Gross profit (loss)
    
    
    (3.7
    )
    
    
    (16.6
    )
    
    
    18.8Operating expensesSelling expenses
    
    
    (3.5
    )
    
    
    (3.2
    )
    
    
    (3.1
    )Administrative expenses
    
    
    (11.1
    )
    
    
    (8.1
    )
    
    
    (6.1
    )Research and development expenses
    
    
    (23.1
    )
    
    
    (15.5
    )
    
    
    (11.0
    )Total operating expenses
    
    
    (37.7
    )
    
    
    (26.8
    )
    
    
    (20.2
    )Operating income (loss)
    
    
    (41.4
    )
    
    
    (43.4
    )
    
    
    (1.4
    )Non-operating income
    
    
    2.8
    
    
    
    10.6
    
    
    
    6.9Non-operating expenses
    
    
    (30.2
    )
    
    
    (13.4
    )
    
    
    (4.4
    )Income (loss) before taxes and minority interest
    
    
    (68.8
    )
    
    
    (46.2
    )
    
    
    1.1Income tax benefit (provision)
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (0.2
    )Minority interest
    
    
    *
    
    
    
    *
    
    
    
    *Net income (loss)
    
    
    (68.9
    )
    
    
    (46.3
    )
    
    
    0.9
 
 (1)
    
    Other sales revenue includes royalty revenues, masking charges, profit-sharing revenues and
other operating revenues.*
    
    Less than 0.1%. Year Ended December 31, 2004 compared to Year Ended December 31, 2003 Net Sales Revenue.Our total net sales revenue increased 32.0% to NT$23,380 million (US$736.6
million) in 2004 from NT$17,712 million in 2003. This increase was primarily due to increases in
sales revenue of Mask ROM, Flash and SLC, which were partially offset by the decreases in sales
revenue of SMS and EPROM. Our net sales revenue from Mask ROM products increased 12.2% to NT$8,373 million (US$263.8
million) in 2004 from NT$7,464 million in 2003. This increase was primarily due to an increase in
sales volumes of Mask ROM products in 2004, which was partially offset by a decrease in the average
selling prices for Mask ROM products. Sales volume increased to 152.4 million dies in 2004 compared
to 128 million dies in 2003 as a result of a general industry upturn in the first half of 2004 as
well as shipments for game cartridges for Nintendos new portable dual screen devices that began in
the fourth quarter of 2004. The average selling prices for Mask ROM products decreased to NT$54.2
per die in 2004 from NT$56.9 per die in 2003, principally as a result of decreasing prices per Mb
of Mask ROM products in line with general industry trends, partially offset by increased sales of
high-density Mask ROM products. The proportion of our net sales revenue from
Mask ROM products decreased to 35.8% in 2004 from 42.1% in 2003, primarily due to the increase
in Flash sales. Our net sales revenue from Flash products increased 84.4% to NT$10,715 million (US$337.6
million) in 2004 from NT$5,810 million in 2003. This increase was primarily due to an increase in
the sales volume of our Flash products as well as our average selling prices. Sales volume
increased to 235.9 million dies in 2004 compared to 115.1 million dies in 2003 due to an increased
demand for Flash products used in optical disk drives and DVD players which arose as a result of
our successful penetration into the markets for these products in 2004, as well increased demand
for Flash products used in printers, ADSL modems and other consumer applications. Average selling
prices for Flash products increased to NT$45.8 per die in 2004 from NT$40.8 per die in 2003,
principally as a result of strong demand for Flash products in the first half of 2004. The
proportion of our net sales revenue from Flash products increased to 45.8% in 2004 from 32.8% in
2003. Our net sales revenue from EPROM products decreased 46.4% to NT$162.6 million (US$5.1 million)
in 2004 from NT$304 million in 2003. This decrease was primarily due to the continued migration
from EPROM products to Flash products by our customers. Sales volume decreased to 13.0 million dies
in 2004 compared to 15.9 million dies in 2003 as a result of the decline in demand from our
customers. The average selling prices for EPROM products decreased to NT$12.5 per die in 2004 from
NT$19.2 per die in 2003, 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 0.7% in 2004 from 1.7% in
2003. Our net sales revenue from SMS products decreased 25.6% to NT$1,733 million (US$54.6 million)
in 2004 from NT$2,328 million in 2003. This decrease was mainly due to the expiration of our
agreement to provide manufacturing services to Renesas. The proportion of our net sales revenue
from our SMS products decreased to 7.4% in 2004 from 13.1% in 2003. Our net sales revenue from SLC products increased 35.6% to NT$1,787 million (US$56.3 million)
in 2004 from NT$1,318 million in 2003. This increase was principally due to the general industry
upturn in 2004. The proportion of our net sales revenue from our SLC products increased to 7.6% in
2004 from 7.4% in 2003. - 43 -




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##### Table of Contents



Other sales revenue includes royalty revenues, masking charges, profit-sharing revenues and
other operating revenues. Other sales revenue increased 25.0% to NT$610 million (US$19.2 million)
in 2004 from NT$488 million in 2003. This increase was primarily due to increases in masking
charges and other operating revenue. The proportion of our net sales revenue from others decreased
to 2.6% in 2004 from 2.8% in 2003. Cost of Goods Sold and Gross Profit (Loss).Cost of goods sold decreased 8.1% to NT$18,990
million (US$598.3 million) in 2004 from NT$20,657 million in 2003. This decrease was primarily due
to the technology migration to smaller line-widths which resulted in more dies per wafer and lower
manufacturing costs per unit, and a 17.7% decrease in depreciation expense. As a result of the foregoing, our realized gross profit (loss) changed to a realized gross
profit of NT$4,388 million (US$138.3 million) in 2004 from a realized gross loss of NT$2,945
million in 2003. We had a positive gross margin of 18.8% in 2004 compared to a negative gross
margin of 16.6% in 2003. Operating Expenses.Total operating expenses decreased slightly by 0.1% to NT$4,737 million
(US$149.2 million) in 2004 from NT$4,742 million in 2003. This decrease was primarily due to a
decrease in research and development expenses and a slight decrease in administrative expenses,
partially offset by an increase in selling expenses. Research and development expenses decreased
5.9% to NT$2,577 million (US$81.2 million) in 2004 from NT$2,738 million in 2003, due to our
strategic policy of integrating our resources and streamlining the number of research and
development projects. Administrative expenses decreased slightly by 0.8% to NT$1,431 million
(US$45.1 million) in 2004 from NT$1,443 million in 2003. Selling expenses increased 29.9% to
NT$729 million (US$23.0 million) in 2004 compared to NT$561 million in 2003, due to increased
sales. Operating Loss.As a result of the foregoing, our operating loss decreased 95.4% to NT$349
million (US$11.0 million) in 2004 from NT$7,684 million in 2003. Non-Operating Income.Non-operating income decreased 13.7% to NT$1,619 million (US$51.0
million) in 2004 from NT$1,877 million in 2003. This decrease was primarily due to recording a
foreign exchange loss in 2004 compared to a foreign exchange gain in 2003 and a decrease in
reversal of inventory and spare parts loss provision, partially offset by an increase in gain on
disposal of long-term investments and others. We recorded a foreign exchange loss of NT$154
million (US$4.9 million) in 2004, principally as a result of the appreciation of the NT$ against
the U.S. dollar and Japanese yen,
compared to a foreign exchange gain of NT$375 million in 2003. Reversal of inventory and
spare parts loss provision decreased 22.4% to NT$919 million (US$28.9 million) in 2004 from
NT$1,185 million in 2003, due to decreased sales out of inventory that was written off for
obsolescence in prior periods. Gain on disposal of long-term investments increased 485.9% to NT$375
million (US$11.8 million) in 2004 from NT$64 million in 2003, primarily due to the disposal of a
portion of our investments in in Biomorphic and Chipbond in 2004, and
in Powertech in 2004 following its IPO in 2003. Others increased 92.6% to NT$192 million (US$6.1 million) in 2004 from NT$100 million in
2003, primarily due to a NT$63 million debt extinguishment gain in connection with our repurchase
and cancellation in 2004 of US$169.1 million of our 0.5% convertible bonds due February 7, 2007 and
dividend income of NT$24 million (US$0.8 million) in 2004 compared to nil in 2003. Non-Operating Expenses.Non-operating expenses decreased 56.8% to NT$1,023 million (US$32.2
million) in 2004 from NT$2,370 million in 2003. This decrease was primarily due to decreases in net
investment loss, loss on allowance for prepaid expenses, interest expense and others, partially
offset by recording a foreign exchange loss in 2004 compared to a foreign exchange gain in 2003.
Net investment loss decreased 92.4% to NT$56 million (US$1.8 million) in 2004 from NT$737 million
in 2003, because we had no significant additional losses in 2004 under our equity derivative
contract which had our common shares as the underlying reference securities, as the trading price
of our common shares stabilized in 2004, whereas our net investment loss in 2003 was primarily due
to a loss under the same equity derivative contract, as a result of a significant decline in the trading price of our common
shares in 2003, offset by a NT$178 million reversal of estimated SAR expenses that we had
recognized previously. Loss on allowance for prepaid expenses decreased 100.0% to nil in 2004 from
NT$335 million in 2003, due to reserves for unused prepaid credit for wafer production in 2003
compared to no loss in 2004. Interest expense decreased 36.5% to NT$684 million (US$21.6 million)
in 2004 from NT$1,078 million in 2003, due to the decrease of our outstanding convertible bonds in
2004. Others decreased 77.3% to NT$30 million (US$0.9 million) in 2004 from NT$132 million in
2003, primarily due to decreases in the depreciation of the idle assets and losses from the
obsolescence of the idle assets. We recorded a foreign exchange loss of NT$154 million (US$4.9
million) in 2004, principally as a result of the appreciation of N.T. dollars to U.S. dollars and
Japanese Yen as well as because our average net assets in U.S. dollars and Japanese Yen were
greater than our liabilities in those foreign currencies, compared to a foreign exchange gain of
NT$375 million in 2003. - 44 -




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Income Tax Expense.Total income tax expense increased 66.7% to NT$35 million (US$1.1
million) in 2004 from NT$21 million in 2003. This increase resulted primarily from tax expenses
paid by Macronix (America) and Macronix HK, our subsidiaries, as a result of increased profits. Net Income (Loss).As a result of the foregoing, we recorded net income of NT$218 million
(US$6.9 million) in 2004 compared to net loss of NT$8,198 million in 2003. 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 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 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 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 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 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 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 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 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 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 Flashthat our Flash - 45 -




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##### Table of Contents



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 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 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 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 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 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 in 2003 from NT$6,827 million in 2002. Non-Operating Income.Non-operating income increased 302.8% to NT$1,877 million in 2003 from
NT$466 million in 2002. This increase was primarily due to recording a reversal of inventory and
spare parts loss provision and an increase in foreign exchange gains, which were partially offset
by a decrease in interest income and other income. We recorded a reversal of inventory and spare
parts loss provision of NT$1,185 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 in 2003, principally as a result of the
appreciation of the N.T. 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 in 2003 from NT$217 million in 2002, primarily
due to declining interest rates. Other income decreased 54.3% to NT$100 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 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, compared to
an inventory loss provision of NT$2,929 million in 2002. Our foreign exchange gains were NT$375
million in 2003, compared to foreign exchange losses of NT$321 million in 2002. Interest expense
decreased 12.9% to NT$1,078 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 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 in 2003 from NT$274 million in 2002 primarily
due to a loss in 2003 under our equity derivative contract which had our common shares as the
underlying reference securities, as a result of a significant decline in the trading price of our
common shares in 2003, offset by a NT$178 million reversal of estimated SAR expenses that we had
recognized previously. We recorded a loss on allowance for prepaid expenses of NT$335 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 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 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 in
2003 from NT$11,357 million in 2002. - 46 -




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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
0.05% in 2002, 2.48% in 2003 and 7.21% in 2004. Taxation Our facilities, Fab I, II and III, are located in the Science Park. We enjoy preferential tax
treatment in some respects under the R.O.C. Statute for the Establishment and Administration of
Science Park (referred to in this section as the Science Park regulations). 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. Due to our net losses in 2002, 2003, we did not receive a benefit from
this exemption for such years. Under the Statute for Upgrading Industries, we are also entitled to other tax incentives
generally available to R.O.C. 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$318 million of investment credits in 2002, none in 2003 and none in 2004. As of
December 31, 2004, unused investment credits available to reduce future tax payments amounted to
NT$3,531 million (US$111.2 million), which expire between the period 2005 and 2008. Net operating losses may be carried forward for a period of five years. As of December 31,
2004, loss carryforwards available to reduce future taxable income totaled NT$13,940 million
(US$439.2 million) of which NT$5,433 million (US$171.2 million) expire in 2006 and NT$8,508 million
(US$268.0 million) expire in 2007. See note 22 to our consolidated financial statements for the
years ended December 31, 2002, 2003 and 2004 included in this annual report. In 2002, we recorded a tax provision of NT$2,740 million, which relates primarily to deferred
tax assets that, based on our estimates, will not be realized. We recorded an additional tax
provision of NT$1,256 million in 2003 and NT$1,349 million (US$42.5 million) in 2004. - 47 -




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##### Table of Contents



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 2002 through 2004. The portion of
the contract with a reference to foreign currency exchange rates expired in May 2003. We extended
the portion of the contract with a reference to our common shares as the underlying reference
securities until May 2005. As at December 31, 2004, the underlying reference securities was
53,253,964 of our common shares, the carrying amount of this contract was a receivable of US$1.7
million (NT$54 million) and the fair value of this contract was a receivable of US$1.4 million
(NT$44 million). Our additional loss under this contract in 2004 was US$0.3 million (NT$10
million), and total accumulated loss under this contract as of December 31, 2004 was US$60.6
million (NT$1,922 million). Between March 17, 2005 and April 28, 2005, we reduced the number of
common shares which formed the underlying reference securities for the contract to nil, and we
settled the contract on May 5, 2005. Our additional loss under the contract in 2005 up to the date
of settlement of the contract was US$4.4 million (NT$140 million). See note 21 to our consolidated
financial statements for the years ended December 31, 2002, 2003 and 2004 included in this annual
report and Item 11. Quantitative and Qualitative Disclosures About Market Risk and notes 21 and
22 to our consolidated financial statements for the years ended December 31, 2002, 2003 and 2004
included in this annual report. U.S. GAAP Reconciliation General Our consolidated financial statements are prepared in accordance with R.O.C. 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 R.O.C. GAAP and U.S.
GAAP: Year ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    2004(NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (US$)(in millions)Net income (loss) in accordance with:R.O.C. GAAP
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    218
    
    
    
    6.9U.S. GAAP
    
    
    (13,841
    )
    
    
    (8,877
    )
    
    
    (429
    )
    
    
    (13.5
    )
 Year ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    2004(NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (US$)(in millions)Shareholders equity in accordance with:R.O.C. GAAP
    
    
    30,214
    
    
    
    29,248
    
    
    
    34,345
    
    
    
    1,082.1U.S. GAAP
    
    
    28,351
    
    
    
    28,195
    
    
    
    32,760
    
    
    
    1,032.1
 Note 22 to our consolidated financial statements for the years ended December 31, 2002,
2003 and 2004 included in this annual report provides a description of the principal differences
between R.O.C. 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. We had a gross loss in accordance with U.S. GAAP of NT$4,018 million in 2002, NT$1,577 million
in 2003 and gross profit of NT$5,052 million (US$159.2 million) in 2004. Under U.S. GAAP, we had
negative gross margin of 24.4% in 2002, 8.9% in 2003 and positive gross margin of 21.61% in 2004.
Under U.S. GAAP we had an operating loss of NT$10,186 million in 2002, NT$6,649 million in 2003 and
operating profit of NT$335 million (US$10.6 million) in 2004. Differences between R.O.C. GAAP and U.S. GAAP, which have an effect on our net income or loss
as reported under R.O.C. GAAP, relate to:  
    
    plant capacity expense variances;
    
    income taxes; - 48 -




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
    
    additional pension gain on an actuarial basis;
    
    marketable securities;
    
    amortization of goodwill;
    
    derivative financial instruments;
    
    compensation expense pertaining to stock performance-based employee bonuses; and
    
    convertible debt securities with beneficial conversion features. Gross Profit (Loss) and Operating Income (Loss) R.O.C. 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 Under R.O.C. GAAP, all plant capacity expense variances may either be charged to
the statement of operations or allocated between cost of goods sold and inventory using an
appropriate allocation method. Our policy is to expense such variances. Under U.S. GAAP, such plant capacity variances may only be allocated between cost of goods
sold and inventory. This may also result in additional inventory allowances. Income Taxes Our undistributed earnings generated after 1997 are subject to a 10% tax in compliance with
the R.O.C. Income Tax Law. Under R.O.C. 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 R.O.C. GAAP, the criteria used in the determination of the valuation allowance is less
stringent than under U.S. GAAP. Under U.S. 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 U.S. GAAP as of December 31, 2002, 2003 and 2004 were NT$7,836 million, NT$8,305 million and
NT$10,302,448 (US$324,589), respectively. Pension Expense Prior to 1996, in accordance with R.O.C. 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 R.O.C. 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 R.O.C.
listed company, including our company, was required, beginning in 1996, to accrue its un-funded or
under-funded 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 22 to our consolidated financial statements for the years ended December 31, 2002, 2003 and
2004 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 2002, NT$3 million in 2003 and NT$3 million (US$0.1 million) in 2004. - 49 -




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Marketable Securities Under R.O.C. 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 R.O.C. 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 R.O.C. 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 outstanding put options and 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 U.S. GAAP prior to January 1,
2001). In addition, R.O.C. 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 U.S. 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
21.f). Differences between R.O.C. GAAP and U.S. GAAP in accounting for derivative financial
instruments are detailed below:  (i)
    
    Options contracts  Under R.O.C. GAAP, gains and losses on option contracts are recognized upon exercise.
Unrealized gains and losses are not required to be recorded in the financial statements.
However, effective the quarter ended December 31, 2004, in accordance with No. 32 ruling
issued by Accounting Research and Development Foundation in 2005, The Accounting Treatment
of Foreign Exchange Option Contract Before the Effectiveness of Financial Accounting
Standards No. 34, outstanding put options at balance sheet date shall be accounted for at
their fair values with the differences included in the current net income. This change in
accounting principles did not have significant impact on the Companys financial statements.  For periods prior to January 1, 2001, U.S. GAAP requires that unrealized gains and losses on
option contracts that do not qualify as hedges be recorded in the statement of operations.
The majority of option contracts entered into by the Company for hedging purposes, did not
qualify as hedges for financial reporting purposes and accordingly have been carried in the
financial statements at fair value.  (ii)
    
    Structured deposits  Under R.O.C. GAAP, the respective interest on the deposits is accrued. The gains and losses
arising from the settlement of the contracts are dealt with in the statement of operations.
Unrealized gains and losses are not recognized. - 50 -




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For periods prior to January 1, 2001, under U.S. GAAP, the option element of these contracts
is measured at fair value and is recognized on the balance sheet, subsequent changes in the
fair value of the option are recognized in earnings in the period of change. 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 11, the
Company repurchased and redeemed certain convertible bonds that included such embedded derivatives.
Under U.S. GAAP, for the years ended December 31, 2003 and 2004 the related extinguishment losses
were NT$9,833 and NT$11,733 (US$370), respectively. 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 21 and 22 to our
consolidated financial statements for the years ended December 31, 2002, 2003 and 2004 included in
this annual report. After application of these principles, our net loss for U.S. GAAP purposes decreased by NT$449
million in 2002, increased by NT$386 million in 2003 and decreased by NT$230 million (US$7.2
million) in 2004. 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 R.O.C. GAAP basis, we recorded an increase in income adjustment of NT$93
million in 2002 and nil for 2003 and 2004 for this plan under U.S. GAAP. Unlike U.S. GAAP, R.O.C.
GAAP has no specific accounting provisions for stock appreciation rights plans. For R.O.C. 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 - 51 -




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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 a reversal of compensation expense for the stock appreciation
rights under R.O.C. GAAP of NT$93 million in 2002 and nil in 2003 and 2004. Purchase and Sale of Our Own Shares Under R.O.C. 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. We had nil gain or loss in 2002, 2003 and 2004 on the purchase and sale of our common
shares for R.O.C. GAAP purposes. Investment in Equity Investees Under R.O.C. 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 R.O.C. 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$3,444 million in 2002, NT$2,535 million in 2003 and NT$2,418 million (US$76.2 million) in
2004. 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 R.O.C. GAAP to adjust
earnings per share arising from the bonus element of a rights issue. Under R.O.C. 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 R.O.C. 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 - 52 -




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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 U.S. 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 R.O.C. GAAP, under the approval of shareholders, a company may reclassify its additional
paid-in capital account to cover up its accumulated deficit. Under U.S. GAAP, according to SAB Topic 5S, the SEC staff believes a deficit reclassification
of any nature is considered to be quasi-reorganization. As such, a company may not reclassify or
eliminate a deficit in retained earnings unless all requisite conditions for a quasi-reorganization
are satisfied. We reclassified NT$2,630,621 of our additional paid-in capital to the accumulated
deficit account for the year ended December 31, 2003. Under U.S. GAAP, this reclassification is eliminated. Convertible Debt Securities with Beneficial Conversion Feature Under R.O.C. 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 U.S. GAAP, in accordance with EITF 00-27 Application of EITF98-5 Accounting for
Convertible Securities with Beneficial Conversion Features (EITF 00-27), convertible securities
with beneficial conversion features or contingently adjustable conversion ratios are recognized and
measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to
additional paid-in capital. The amount to be allocated should be calculated at the commitment date
as the difference between the conversion price and the fair value of the common stock into which
the security is convertible, multiplied by the number of shares into which the security is
convertible. The resulting discount on the convertible security is accreted, as interest expense,
from the date the beneficial conversion feature is fixed to the stated redemption date. New Accounting Pronouncements U.S. GAAP In January 2003, the FASB issued Interpretation No. 46, or FIN 46, Consolidation of Variable
Interest Entities (FIN 46), which requires the consolidation of certain entities considered to
be variable interest entities (VIEs). An entity is considered to be a VIE when it has equity
investors who lack the characteristics of having a controlling financial interest, or its capital
is insufficient to permit it to finance its activities without additional subordinated financial
support. Consolidation of a VIE by an investor is required when it is determined that the investor
will absorb a majority of the VIEs expected losses or residual returns if they occur. In December
2003, the FASB published a revision to FIN 46 (FIN 46R) to clarify some of the provisions of the
interpretation and to exempt certain entities from its requirements. We adopted FIN 46R for the
year ended December 31, 2004. We did not have VIE for the year ended December 31, 2004. In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force
(EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. The Issues objective is to provide guidance for identifying
other-than-temporarily impaired investments. EITF 03-1 also provides new disclosure requirements
for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued a
FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the measurement and
recognition guidance in EITF 03-1 until further notice. The disclosure requirements of EITF 03-1
are effective for fiscal years ending after June 15, 2004. Once the FASB reaches a final decision
on the measurement and recognition provisions, we will evaluate the impact of the adoption of the
accounting provisions of EITF 03-1. - 53 -




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In November 2004, FASB issued FASB Statement No. 151, which amends the guidance in ARB No.
43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of so abnormal. In
addition, this Statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The provisions of this
Statement shall be effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years
beginning after the date this Statement is issued. The provisions of this Statement shall be
applied prospectively. We expect to adopt Statement No. 151 on January 1, 2006. The adoption of
this Statement is expected to increase cost of goods sold and reduce inventory balance on a U.S.
GAAP basis. On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be
adopted no later than January 1, 2006. Early adoption will be permitted in periods in which
financial statements have not yet been issued. We expect to adopt Statement 123(R) on January 1,
2006. Statement 123(R) permits public companies to adopt its requirements using one of two methods: A modified prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of Statement 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of Statement 123(R) that remain unvested on the
effective date. A modified retrospective method which includes the requirements of the modified prospective
method described above, but also permits entities to restate based on the amounts previously
recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption. We are currently evaluating the above methods of adoption. As permitted by Statement 123, the company currently accounts for share-based payments to
employees using Opinion 25s intrinsic value method. Accordingly, the adoption of Statement
123(R)s fair value method will have a significant impact on our result of operations, although it
will have no impact on our overall financial position. Had the company adopted Statement 123(R) in
prior periods, the impact of that standard would have approximated the impact of Statement 123 as
described in the disclosure of pro forma net income and earnings per share in Note 14 to our
consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, an
amendment of APB Opinion No.29. APB Opinion No. 29, Accounting for Non-monetary Transactions,
is based on the principle that exchanges of non-monetary assets should be measured based on the
fair value of the assets exchanged. SFAS No. 153 amends APB Opinion No. 29, eliminating the
exception to fair value accounting for non-monetary exchanges of similar productive assets and
replaces it with a general exception to fair value accounting for non-monetary exchanges that do
not have commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The statement is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect this
statement to have a material impact on the financial condition or results of operation. R.O.C. GAAP On December 25, 2003, the R.O.C. Accounting Research and Development Foundation issued
Statement of Financial Accounting Standards No. 34, Accounting for Financial Instruments, which
is effective for financial statements with fiscal years ending on or after December 31, 2006.
Early adoption of this statement is not allowed. This Statement requires that all financial
instruments, excluding certain financial instruments specified in this statement, as either
trading, available-for-sale or held-to-maturity. Debt securities owned with positive intent and
ability to hold to maturity are classified as held-to-maturity securities and reported at
amortized cost. Debt and equity securities that are purchased and traded for - 54 -




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short-term profit are classified as trading securities and reported at fair value, with unrealized holding gains and
losses reported as part of net income. Debt and equity securities not classified as either
held-to-maturity or trading are classified as available-for-sale securities, which should be
reported at fair value, with unrealized gains and losses reported as a separate component of stockholders equity. In addition, all derivatives are required to be reported
at fair value. The Company is currently evaluating the effect of the adoption of this statement. On July 1, 2004, the R.O.C. Accounting Research and Development Foundation issued Statement
of Financial Accounting Standards No. 35, Accounting for Impairment of Assets, which is
effective for financial statements with fiscal years ending on or after December 31, 2005. This
statement requires that impairment loss should be recognized whenever events or changes in
circumstance indicate the carrying amount of an asset may be lesser than its recoverable amount.
The Company is currently evaluating the effect of the adoption of this statement. On December 9, 2004, the R.O.C. Accounting Research and Development Foundation issued the
third revision for Statement of Financial Accounting Standards No. 5, Accounting for Long-Term
Equity Investment, which is effective for financial statements with fiscal years beginning on or
after January 1, 2005. This revision of the statement requires that operating losses of investee
evaluated under equity method be allocated between controlling and non-controlling interest until
those losses exceed the non-controlling interests investment. In that event, the excess of any
further losses are charged to the controlling interest except to the extent that the minority
interest has a binding obligation to, and is able to undertake the losses. The Company does not
expect this statement to have a material impact on the financial condition or results of
operation. On December 9, 2004, the R.O.C. Accounting Research and Development Foundation issued the
first revision for Statement of Financial Accounting Standards No. 7, Consolidated Financial
Statements, which is effective for financial statements with fiscal years beginning on or after
January 1, 2005. This revision of the statement requires the Company to consolidate all investees
under the control of the Company. Control is not only presumed when the parent company owns over
50% of voting rights of the investee but also evidenced by control under certain situations
specified in this revised statement. In addition, the threshold for the determination of whether
to consolidate an investee was revoked. Before the adoption of the revised statement, the Company
was not required to file consolidated financial statements to SFC in Taiwan, as none of the
investees of the Company pass the threshold for consolidation. However, after the adoption of this
revised statement, the Company will be required to file the consolidated financial statements to
SFC in Taiwan for the six-month periods ended June 30, 2005. 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$5,987 million (US$188.6 million) in 2004,
compared to NT$1,484 million in 2003 and NT$217 million in 2002. The improvement in operating cash
flows in 2004 compared to 2003 and 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 2004 included depreciation and amortization of NT$7,562 million
(US$238.3 million) and a reversal of inventory and spare parts loss provision of NT$919 million
(US$28.9 million) and a gain on disposal of long-term investments of NT$375 million (US$11.8
million). Net changes in our operating assets and liabilities which affected our net cash provided
by operating activities in 2004 primarily included net decrease in accrued expenses of NT$300
million (US$9.4 million), net decrease in notes and accounts payable of NT$270 million (US$8.5
million) and net decreases in interest payable of debentures of NT$337 million (US$10.6 million). - 55 -




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Our non-cash adjustments in 2003 included depreciation and amortization of NT$9,287 million
and an inventory and spare parts loss provision reversal of NT$1,185 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, net increase in notes and accounts payable of NT$569 million and net decreases in interest payable
of debentures of NT$990 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. Net cash used in investing activities was NT$3,629 million (US$114.3 million) in 2004. The
most significant components of these investing activities were the payment of NT$2,769 million
(US$87.2 million) for the purchase of property, plant and equipment and additions to intangible assets of NT$533 million (US$16.8 million). Net cash used in
investing activities was NT$423 million in 2003. The most significant components of these investing
activities were the payment of NT$2,616 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
relating to a sinking fund for our convertible bonds that matured in May 2003. Net cash used in
investing activities was NT$11,543 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. Our net cash used in financing activities was NT$2,951 million (US$93.0 million) in 2004. This
amount primarily reflected the net decrease in long-term debt and capital lease obligations of
NT$8,823 million (US$278.0 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
issuance of common shares of NT$5,566 million (US$175.4 million) and the net increase short-term
debt and short-term notes of NT$377 million (US$11.9 million). Our net cash provided by financing
activities was NT$2,199 million in 2003. This amount primarily reflected the issuance of common
shares of NT$3,823 million and the net increase short-term debt and short-term notes of NT$625
million, partially offset by the net decrease in long-term debt and capital lease obligations of
NT$2,366 million as a result of conversions to equity, open market repurchases and redemptions at
the option of holders of our convertible bonds. 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. As of December 31, 2004, our primary sources of liquidity were NT$10,116 million (US$318.7
million) of cash and cash equivalents and NT$918 million (US$28.9 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, 2004, we had total short-term debt of NT$2,897 million (US$91.3 million).
All of our short-term loans are letter of credit or working capital facilities due within 180 days
at variable interest rates. The short-term debt includes a foreign facility of US$68.8 million
(NT$2,183 million) and JPY$42,500 (NT$13 million). The weighted average interest rate of the
short-term debt was 2.81% as of December 31, 2004. Our unused short-term lines of credit with
terms of 180 days (including unused letters of credit) amounted to NT$5,424 million (US$170.9
million) as of December 31, 2004. See note 8 to our consolidated financial statements for the years
ended December 31, 2002, 2003 and 2004 included in this annual report. As of December 31, 2004, we had total short-term notes outstanding of NT$99 million (US$3.1
million) with an interest rate of 1.43%. We had unused short-term lines of credit for short-term
notes of NT$80,000 (US$2.5 million) as of December 31, 2004. See notes 8 and 9 to our consolidated
financial statements for the years ended December 31, 2002, 2003 and 2004 included in this annual
report. Capital Resources and Capital Expenditures As of December 31, 2004, our long-term liabilities consisted primarily of long-term debt, net
of the current portion, of NT$10,313 million (US$324.9 million). The long-term debt was provided
pursuant to seven different facilities with R.O.C. banks and financial institutions and four
corporate bonds and debentures. The long-term bank loans carry variable interest rates that ranged
between 0.50% and 5.26% per annum as of December 31, 2004, mature between 2005 and 2016 and, in - 56 -




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general, require payments of principal and interest on either a quarterly or monthly basis
throughout the remainder of their terms. See note 11 to our consolidated financial statements for
the years ended December 31, 2002, 2003 and 2004 included in this annual report. As of December 31, 2004, the maturity schedule of our existing long-term debt is as follows: Period
    
    NT$ in millionsJanuary 1, 2005  December 31, 2005
    
    
    2,196January 1, 2006  December 31, 2006
    
    
    4,624January 1, 2007  December 31, 2007
    
    
    2,295January 1, 2008  December 31, 2008
    
    
    1,480January 1, 2009  December 31, 2009
    
    
    1,480After December 31, 2010
    
    
    433Total
    
    
    12,510
 Primarily as a result of net losses that we incurred of NT$11,357 million, common stock
repurchased of NT$1,046 million and unrealized losses on long-term investments of NT$331 million in
2002, shareholders equity declined by 30% to NT$30,214 million in 2002. In 2003, primarily as a
result of net losses of NT$8,198 million, partially offset by stock issued for cash of NT$3,823
million, conversion of convertible debentures of NT$2,454 million and unrealized gains on long-term
investments of NT$977 million, shareholders equity declined by 3.2% in 2003. In 2004, primarily
as a result of issuance of global depositary shares of NT$5,566 million (US$175.4 million) and
conversion of convertible debentures of NT$759 million (US$23.9 million), partially offset by
unrealized losses on long-term investments of NT$1,350 million (US$42.5 million), shareholders
equity increased by 17.4% in 2004 to NT$34,345 million (US$1,082.1 million) as of December 31,
2004. 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, and in April 2004, we issued 13,125,000 GDS representing 525,000,000 new common
shares. If we had not raised that additional equity in the share and GDS offerings, we may not have
been able to meet the financial ratios in our loan agreements as of December 31, 2003 and 2004. 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 R.O.C. 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, 2004 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, 2004 was US$0.1 million (NT$3 million).
As of May 31, 2005, the outstanding principal amount of the bonds was US$0.1 million
(NT$3 million); - 57 -




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
    
    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, 2004 was US$6.4 million (NT$203 million). As of May 31, 2005,
these bonds have been fully repaid.;
    
    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, 2004 was NT$209.2
million. As of May 31, 2005, the outstanding principal amount of the
debentures was NT$209.2 million (US$6.6 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. 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, 2005. Among our total long-term debt as of December 31, 2004 of 12,509 million (US$394 million), a
total of NT$10,536 million (US$310.0 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, 2004, we had
aggregate lease obligations of US$9.6million (NT$303 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, as of December 31, 2004 we had obligations with respect to our
equity derivative contract that, as amended, expired in May 2005. As at December 31, 2004, the
underlying reference securities was 53,253,964 of our common shares, the carrying amount of this
contract was a receivable of US$1.7 million (NT$54 million) and the fair value of this contract was
a receivable of US$1.4 million (NT$44 million). Our additional loss under this contract in 2004 was
US$0.3 million (NT$10 million) and total accumulated loss under this contract as of December 31,
2004 was US$60.6 million (NT$1,922 million). Between March 17, 2005 and April 28, 2005, we reduced
the number of common shares which formed the underlying reference securities for the contract to
nil, and we settled the contract on May 5, 2005. Our additional loss under the contract in 2005 up
to the date of settlement of the contract was US$4.4 million (NT$140 million). See note 21 to our
consolidated financial statements for the years ended December 31, 2002, 2003 and 2004 included in
this annual report. 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$8,975 million in 2002, NT$1,606 in 2003 and NT$2,554 million (US$80.5 million)
in 2004. The following table sets forth our principal capital expenditures incurred in 2002, 2003
and 2004: Year ended December 31,2002
    
    
    2003
    
    
    2004(NT$ million)
    
    
    (NT$ million)
    
    
    (NT$ million)Fab I
    
    
    370
    
    
    
    88
    
    
    
    358Fab II.
    
    
    1,184
    
    
    
    228
    
    
    
    92Fab III
    
    
    4,720
    
    
    
    834
    
    
    
    1,652Others.
    
    
    2,701
    
    
    
    456
    
    
    
    452Total
    
    
    8,975
    
    
    
    1,606
    
    
    
    2,554
 - 58 -




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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. In 2004, our capital expenditures consisted
primarily of residual payments following the completion of the construction of the shell of Fab III
and investments to expand the SLC capacity of Fab I under our Evergreen plan for Fab I. We have budgeted capital expenditures of approximately NT$2,378 million for 2005, 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 2005
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. Contractual Obligations The following table sets forth information on our material contractual obligated payments for
the periods indicated as at December 31, 2004: Payments Due by PeriodJanuary 1,
    
    
    January 1,
    
    
    January 1,2005 to
    
    
    2006 to
    
    
    2009 toDecember 31,
    
    
    December 31,
    
    
    December 31,Total
    
    
    2005
    
    
    2008
    
    
    2010
    
    
    Thereafter(in millions of NT$)Long-term debt
    
    
    12,510
    
    
    
    2,196
    
    
    
    8,400
    
    
    
    1549
    
    
    
    365Capital lease obligations (1)
    
    
    303
    
    
    
    303
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations(2)
    
    
    785
    
    
    
    101
    
    
    
    232
    
    
    
    136
    
    
    
    316Letters of credit
    
    
    285
    
    
    
    285
    
    
    
    
    
    
    
    
    
    
    
    Construction and equipment
purchase obligations(3)
    
    
    2,149
    
    
    
    2,149
    
    
    
    
    
    
    
    
    
    
    
    License fees(3) (4)
    
    
    726
    
    
    
    345
    
    
    
    381
    
    
    
    
    
    
    
    Other long-term liabilities(4)
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    279Total
    
    
    17,037
    
    
    
    5,379
    
    
    
    9,013
    
    
    
    1,685
    
    
    
    960
 
 (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 18c and 18d to our consolidated financial
statements.(3)
    
    We cannot forecast the time of cash-out of our construction and equipment purchase
obligations and license fees become due.(4)
    
    License fees above reflect the fixed amount of royalty payments. See note 18e to 18h 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. - 59 -




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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$3,806 million in 2002, NT$2,738 million in 2003 and NT$2,577 million (US$81.2
million) in 2004 on research and development, or 23.1%, 15.5% and 11.0% of net sales revenue in
those periods, respectively. On an R.O.C. 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. As of December 31, 2004, we had 455 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 the development of 0.13 micron process technology for
NOR Flash products based on mainstream ETOX (EPROM tunnel oxide) technology, 0.13 micron and 0.09
micron process technology based on NBit based technology, as well as four bit per cell technology.
We have also entered into a joint research initiative with IBM and Infineon Technologies to explore
a new form of computer memory called phase-change memory, which stores data by changing the state
of a special material from an amorphous to a crystalline structure. 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;  a new low pin-count design for 64Mb products;  2Mb to 64Mb ROM mutlimedia card;  16/32/64Mb one-time programmable multimedia card;  64/128/256Mb SD ROM card; and  64/128/256Mb memory stick ROM card. Flash    a 256Mb data storage/code storage Flash product;  a 1.8 volt low voltage, synchronous, read-while-write product for portable
devices and mobile internet appliance applications;  a monochip design which combines Flash and multiple time programmable
devices that optimizes data storage and code storage by using two-bit per cell
technology;  extend the capacity of SPI products by using two-bit per cell technology; - 60 -




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
    a 0.13 micron cost-effective two-bit per cell manufacturing technology; and
    a 0.13 micron high endurance ETOX cost-effective manufacturing technology. SLC  
    a 64-voice polyphonic sound generator for cellular phone ring tones;
    an audio control chip featuring long-time recording;
    custom-made control chips for educational devices and language learning machines;
    a custom-made broadband bridge chip, wireless game controller, frequency
generator, and high definition television display controller for video game platforms;
    a new architecture for the provision of data storage for SOC devices;
    provide intellectual property libraries and design services on single
voltage embedded Flash compilers, embedded mix signal devices, logic devices and
SRAM/ROM memory devices for SOC development of audio compact disc, general positioning
system, internet appliance, LCD monitor and educational and learning systems
applications;
    develop embedded EEPROM intellectual property for smart card applications;
    introduce low-end derivative processes for consumer products; and
    develop a GSM base band chipset and module, which is a digital signal
processor and controller, for wireless communication applications. Intellectual Property 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, 2004, we had a total of
634 U.S., 843 R.O.C., 22 Chinese, 14
Japanese and 33 European patents for products and technology developed through our own efforts or
joint research and development efforts with other companies. As of
December 31, 2004, we had over 1,500 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 nine types of trademarks including MXIC, Macronix, MX and MTP
EPROM. As of December 31, 2004, we had a total of 123 trademark registrations granted and 57
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 - 61 -




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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 2 bit per cell
N-ROM technology. In 2004, pursuant to an addendum, Saifun extended the license to include 4 bit
per cell N-ROM technology. The license is effective for the duration of the Saifun patents and
thereafter shall continue on a year-to-year basis unless either party provides 12 months notice of
its intent not to renew. Under the license agreement, we are required to pay specified fixed
license fees as well as running royalties based on specified percentages of net sales from
products relying on the licensed technology. We are also required to make available to Saifun a
portion of our manufacturing capacity. Under our agreement with Saifun, we were required to reach
qualification of certain products and achieve certain net sales for those products between 2002 and
2004, failing which Saifun would be entitled to terminate the license agreement. Although we failed
to reach certain targets in 2002, 2003 and 2004, Saifun has not indicated its intention to exercise
its right to terminate the agreement. Payments under license or cross-license agreements amounted to NT$777 million in 2002, NT$192
million in 2003 and NT$132 million (US $4.2 million) in 2004. 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$34 million in 2002,
NT$20 million in 2003 and NT$28 million (US$0.9 million) in 2004. 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 saw
the 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. The recovery was carried through to the
first half of 2004. Beginning in the second half of 2004, the semiconductor industry experienced
another downturn which continued into 2005, with average selling prices, particularly Flash
products, declining. 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 - 62 -




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decreasing size, which is expected to drive innovation and
product volume growth. For example, next generation cellular 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 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, - 63 -




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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. 
 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 May 30, 2005. 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
    
    AgeMiin Wu (1)
    
    President,
    
    September 1, 1989,
    
    
    56Executive Director and
    
    November 25, 1989 andChairman
    
    March 7, 2005Ding-Hua
Hu (1)(2)
    
    Executive Director
    
    November 25, 1989
    
    
    64H. C. Chen (3)
    
    Executive Director
    
    July 18, 1992
    
    
    66Y.S.Chuang(4)
    
    Director
    
    June 18, 2004
    
    
    69Takata Akira (5)
    
    Director
    
    May 12, 2005
    
    
    48Dang-Hsing Yiu
    
    Director and
    
    June 5, 1995
    
    
    52Senior Vice President of
    
    March 14, 2003Integrated Solution GroupC.Y. Lu
    
    Director and
    
    April 18, 2003
    
    
    54Senior Vice President ofMicroelectronics and
    
    March 14, 2003Memory Solution GroupSimon Wang
    
    Director and Vice President
    
    June 18, 2004 and February 1, 2001
    
    
    50J.P. Peng (6)
    
    Director and Vice President
    
    June 18, 2004 and February 1, 2001
    
    
    49Raymond S. Mak
    
    Director and Vice President
    
    June 29, 1998 and September 18,
1995
    
    
    54C.L. Liu
    
    Independent Director
    
    June 27, 2003
    
    
    70Simon M. Sze
    
    Independent Director
    
    June 27, 2003
    
    
    70Cheng Yi Fang
    
    Independent Director
    
    April 19, 2001
    
    
    63Roger Chu(4)
    
    Supervisor
    
    July 18, 1992
    
    
    57Ping Tien Wu
    
    Supervisor
    
    November 27, 1993
    
    
    63J.D. Lee (5)
    
    Supervisor
    
    June 18, 2004
    
    
    46Paul Yeh
    
    Associate Vice President
ofFinance Center
    
    July 1, 2001
    
    
    48
 
 (1)
    
    Mr. Wu succeeded Dr. Hu as the chairman, and Dr. Hu resigned from the chairmanship,
effective March 7, 2005.(2)
    
    Nominee of Champion Investment Corporation(3)
    
    Nominee of Hung Chih Investment Corporation(4)
    
    Nominee of Delta Electronics Ltd.(5)
    
    Nominee of Shun Ying Investment(6)
    
    Nominee of Hui Ying Investment, Ltd. - 64 -




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Miin Wusucceeded Dr. Hu as our chairman on March 7, 2005. He is also our president. Mr. Wu
has been one of our executive officers since our inception in 1989. He is also the chairman of
Magic Pixel Inc. and MaxNova Inc., spin-offs of our company. He had 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. Ding-Hua Huis an executive director and has been our director since our inception in 1989,
and our chairman since our inception in 1989 until March 7, 2005. 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. 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 in Taiwan. Y.S. Chuang has been a director since 2004. He was previously also the president of Nanyang
Technology Corporation. He received a M.S. degree in electronic engineering from the University of
Texas. Takata Akirahas been a director since 2005. He has been an employee of MegaChips Corporation
since 1990 and is currently an officer in its China business division. He received a B.S. degree
in electronics engineering from Osaka University, Japan. Dang-Hsing Yiuhas been a director since 1995 and our
senior vice president of our Integrated Solution Group since 2003. Mr. Yiu has been an executive
officer of our company since 1990 and was previously our chief
operating officer. 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 and our senior vice president of our Microelectronics and Memory Solution Group
since 2003. He was previously our chief technology officer. Mr. Lu
is also the chairman 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. Simon Wanghas been a vice president since 1991 and a director since 2004. He received a
Ph.D. in chemical engineering from Columbia University. 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. 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. 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. - 65 -




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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. B. Compensation The following table sets forth cash remuneration paid to our current directors, supervisors
and executive officers in 2004: TotalName
    
    Position with our Company in 2004
    
    Compensation(thousands of NT$)Ding-Hua Hu (1)
    
    Executive Director and Chairman
    
    
    47Miin Wu (2)
    
    Executive Director and President
    
    
    5,644Dang-Hsing Yiu
    
    Director and Senior Vice President
of Integrated Solution GroupRaymond S. Mak
    
    Director and Vice PresidentSimon Wang
    
    Director and Vice PresidentJ.P. Peng
    
    Director and Vice PresidentC.Y. Lu
    
    Director and Senior Vice President
of Microelectronics and Memory Solution Group
    
    
    18,370
    (3)H.C. Chen
    
    Executive Director
    
    
    113Y.S. Tan (4)
    
    Director
    
    
    51An Chuang (4)
    
    Director
    
    
    51Ing-Jiunn Hai (4)
    
    Director
    
    
    51Y.S. Chuang (5)
    
    Director
    
    
    60C.L. Liu
    
    Independent Director
    
    
    100Simon M. Sze
    
    Independent Director
    
    
    100Ping Tien Wu
    
    Supervisor
    
    
    100Roger Chu (6)
    
    Supervisor
    
    
    100J. D. Lee
    
    Supervisor
    
    
    53Cheng Yi Fang (7)
    
    Supervisor and Independent Director
    
    
    100
 
 (1)
    
    Resigned from the chairmanship, effective March 7, 2005.(2)
    
    Succeeded to the chairmanship, effective March 7, 2005.(3)
    
    Total compensation for Dang-Hsing Yiu, Raymond S. Mak, Simon Wang, J.P. Peng, and C.Y. Lu.(4)
    
    Resigned as director, effective June 18, 2004.(5)
    
    Resigned as director, effective January 17, 2005.(6)
    
    Resigned as supervisor, effective January 17, 2005.(7)
    
    Resigned as supervisor and re-elected as independent director, effective June 18, 2004. According to our Articles, we may distribute 2.0% of distributable earnings to our directors
and supervisors as - 66 -




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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, 2004, 134,821,770 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 86,746,964 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 20, 2005, our board
of directors was composed of 12 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 R.O.C. 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 in 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. 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 Ying Investment, Ltd was previously appointed as a
director on April 19, 2001 and re-elected as a director on June 18, 2004. Hui Ying Investment, Ltd
appointed J.P. Peng as a representative on May 12, 2005. We currently have three independent directors, namely, Mr. Liu, Mr. Sze and Mr. Fang. Audit Committee We established an Audit Committee on October 27, 2004. We currently have three members in our
audit committee who are independent directors, namely, Mr. Cheng Yi Fang, Mr. C.L. Liu and Mr.
Simon M. Sze. R.O.C. law does not require us to have an audit committee. As R.O.C. law requires our
Board of Directors to be responsible for the appointment, termination, compensation and oversight
of our auditors, our audit committee is responsible for, among other matters, recommending to our
Board of Directors with respect to such matters and evaluating and nominating suitable auditors. We currently do not have a remuneration committee or compensation committee, although we are
in the process of evaluating our current governance structures. Difference between NASDAQ Requirements and Home Country Practices In general, corporate governance principles for Taiwanese companies are set forth in the
Company Act of the Republic of China, or R.O.C. Company Act, the R.O.C. Securities and Exchange Act
and, to the extent they are listed on the Taiwan Stock Exchange, listing rules of the Taiwan Stock
Exchange. Corporate governance principles under provisions of R.O.C. law may differ in significant
ways to corporate governance standards for U.S. NASDAQ-listed companies. Under - 67 -




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NASD Marketplace Rule 4350(a)(1), foreign private issuers are permitted to follow certain home
country corporate governance practices in lieu of the requirements of Rule 4350. The following are
the requirements of Rule 4350 we do not follow and the home country practices we follow. Under the Rule 4350(c)(1), beginning from July 31, 2005, a majority of the board of directors
must comprise of independent directors. We currently have three independent directors out of a
total of 13 directors on our board, and have no plans to have a majority of independent directors
as we are not required to do so under R.O.C. requirements. Rule 4350(c)(3) requires that, beginning from July 31, 2005, the compensation of the chief
executive officer of a company must be determined, or recommended to the board, either by a
majority of the independent director or an independent compensation committee. We currently follow
the practice under R.O.C. Company Act, which requires that the compensation of directors be
approved by shareholders. In addition, we also follow Article 29 of the R.O.C. Company Act, which
provides that the compensation of executive officers of the company shall be decided by resolutions
adopted by the majority of the board at a meeting satisfying a quorum of more than one-half of the
directors. Under Rule 4350(c)(4), beginning from July 31, 2005, director nominees must either be
selected, or recommended for the Boards selection, either by a majority of the independent
directors or an independent nominations committee. The R.O.C. Company Act expressly grants the
power of nomination to the shareholders, as well as to the board of directors. Under the R.O.C.
Company Act and the interpretations thereof, candidates to serve as directors are nominated either
by the board of directors prior to the shareholders meeting or by the shareholders during the
election of the director. In addition, the Legislative Yuan of the R.O.C. has approved an amendment
to the R.O.C. Company Act specially granting director nomination powers to holders of at least one
percent of the total issued and outstanding shares of the company. Therefore, the requirement of a
nominations committee is in conflict with the R.O.C. Company Act. We currently follow the home
country practice. Under Rule 4350(i)(1)(A), each issuer shall require shareholder approval when a stock option
or purchase plan is to be established or materially amended or other equity compensation
arrangement made or materially amended, pursuant to which stock may be acquired by officers,
directors, employees, or consultants. Under the corresponding domestic requirements in the R.O.C.
Company Act and the R.O.C. Securities and Exchange Act, shareholders approval is required for the
distribution of employee bonuses in the form of stock, while the board of director has authority,
subject to the approval of the R.O.C. SFB, to approve employee stock option plans and to grant
options to employees pursuant to such plans. We follow the home country practice. R.O.C. law
provides for specific safeguards on employee stock option grants. Options granted under the plans
are subject to certain statutory volume limitations. Under the R.O.C. Company Act, the directors of
a company may not receive stock options because they are not considered employees of the company. D. Employees As of December 31, 2004, we employed 3,593 full time employees, of whom 590 were executive
officers and administrators, 1,562 were engineers and technicians and 1,441 were operators of
machinery and equipment. Of all our operators, we employed 218 persons from outside Taiwan that are
based in Taiwan. Approximately 51.4% of our employees as of that date had undergraduate or college
degrees, including approximately 1.4% who possessed doctoral degrees and approximately 20.1% who
held masters degrees. As of December 31, 2004, the average age of our employees was 31.5 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
    
    2002
    
    
    2003
    
    
    2004Executive and Senior Managers
    
    
    299
    
    
    
    278
    
    
    
    313Supporting Staff and Administrators
    
    
    204
    
    
    
    173
    
    
    
    277Engineers and Technicians
    
    
    1,830
    
    
    
    1,503
    
    
    
    1,562OperationsLocal
    
    
    1,279
    
    
    
    1,299
    
    
    
    1,223Overseas
    
    
    180
    
    
    
    181
    
    
    
    218Total
    
    
    3,792
    
    
    
    3,434
    
    
    
    3,593
 Our future success will depend, in part, on our ability to continue to attract and retain
highly qualified technical, - 68 -




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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 R.O.C. origin working in the
United States to emigrate back to Taiwan but this success may not continue. In 2003 and 2004, 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 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 May 30, 2005. Shares owned bySpouses and minorShare Ownership
    
    
    childrenNumber
    
    
    
    
    
    
    Number ofTitle
    
    Name
    
    of Shares
    
    
    Percentage
    
    
    Shares
    
    
    PercentageChairman, Executive Director and President
    
    Miin Wu (1)
    
    
    30,932,711
    
    
    
    0.61
    %
    
    
    
    
    
    
    Executive Director
    
    Ding-Hua Hu (2)
    
    
    4,000,283
    
    
    
    0.08
    %
    
    
    4,928,066
    
    
    
    0.10
    %Executive Director
    
    H. C. Chen (3)
    
    
    4,328,906
    
    
    
    0.09
    %
    
    
    2,494,000
    
    
    
    0.05
    %Director
    
    Y.S. Chuang (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Director and
Senior Vice President of Integrated
Solution Group
    
    Dang-Hsing Yiu
    
    
    19,172,119
    
    
    
    0.38
    %
    
    
    2,115,701
    
    
    
    0.04
    %Director and
Senior Vice President of
Microelectronics and Memory Solution
Group
    
    C.Y. Lu
    
    
    2,325,224
    
    
    
    0.05
    %
    
    
    
    
    
    
    Director and Vice President
    
    Raymond S. Mak
    
    
    6,930,638
    
    
    
    0.14
    %
    
    
    
    
    
    
    Director and Vice President
    
    Simon Wang
    
    
    6,334,252
    
    
    
    0.13
    %
    
    
    521,200
    
    
    
    0.01
    %Director and Vice President
    
    J.P. Peng (5)
    
    
    7,043,767
    
    
    
    0.14
    %
    
    
    2,509,300
    
    
    
    0.05
    %Director
    
    Takata Akira (6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Independent Director
    
    C.L. Liu
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Independent Director
    
    Simon M. Sze
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Independent Director
    
    Cheng Yi Fang
    
    
    1,086,739
    
    
    
    0.02
    %
    
    
    360,895
    
    
    
    0.01
    %Supervisor
    
    Roger Chu(4)
    
    
    50,877
    
    
    
    <0.01
    %
    
    
    35,521
    
    
    
    <0.01
    %Supervisor
    
    Ping Tien Wu
    
    
    198,489
    
    
    
    <0.01
    %
    
    
    
    
    
    
    Supervisor
    
    J.D. Lee (6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Associate Vice President, Finance Center
    
    Paul Yeh
    
    
    8,546,102
    
    
    
    0.17
    %
    
    
    43,060
    
    
    
    <0.01
    %
 
 (1)
    
    Succeeded to the chairmanship, effective March 7, 2005.(2)
    
    Nominee of Champion Investment Corporation.
Resigned from the chairmanship, effective March 7,
2005.(3)
    
    Nominee of Hung Chih Investment Corporation.(4)
    
    Nominee of Delta Electronics Ltd. Mr. Chuang and Mr. Chu resigned as director and supervisor,
respectively, effective January 17, 2005.(5)
    
    Nominee of Hui Yin Investment Corporation.(6)
    
    Nominee of Shun Yin Investment. - 69 -




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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% 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 R.O.C. 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 and 2004 for this plan under U.S. GAAP. Unlike U.S. GAAP, R.O.C. GAAP has no
specific accounting provisions for stock appreciation rights plans. For R.O.C. 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 a reversal of compensation expense for the stock appreciation rights under R.O.C. GAAP
of NT$20.9 million in 2002 and nil in 2003 and 2004. See Item 5. Operating and Financial Review
and Prospects  Operating Results  U.S. GAAP Reconciliation  Stock Performance-Based Employee
Bonus Plan. Share Option Plans Our board of directors approved five share option plan on November 29, 2001, April 24, 2002,
April 7, 2003, March 11, 2004 and March 7, 2005, which were approved by the R.O.C. SFC on December
20, 2001, May 23, 2002, April 24, 2003, March 30, 2004 and March 7, 2005, 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 share option plan of November 29, 2001, we granted 71,768,500, 560,000, 1,507,000
and 6,164,500 share options at initial exercise prices of NT$25.1, NT$24.5, NT$11.5 and NT$11.7 on
January 16, 2002, May 6, 2002, October 1, 2002 and December 16, 2002, respectively. As of December
31, 2004, we had 132,000 and 331,000 outstanding share options
at exercise prices of NT$11.1 and NT$11.3, respectively, under the share option plan of
November 29, 2001. - 70 -




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Under share option plan of April 24, 2002, we granted 150,000,000, 10,284,500 and 2,753,500
share options at initial exercise prices of NT$11.5, NT$11.7 and NT$9.35 on October 1, 2002,
December 16, 2002 and April 7, 2003, respectively. As of December 31, 2004, we had 94,519,900,
4,895,000 and 2,024,500 outstanding share options at exercise prices of NT$11.1, NT$11.3 and
NT$9.2, respectively, under the share option plan of April 24, 2002. Under the share option plan of April 7, 2003, we granted 126,000,000, 67,212,000, 829,000,
685,000, 785,000 and 749,000 share options at initial exercise prices of NT$7.75, NT$7.75, NT$9.1,
NT$13.15, NT$12.3 and NT$14.1 on June 13, 2003, June 13, 2003, November 4, 2003, March 11, 2004,
March 30, 2004 and April 27, 2004, respectively. As of December 31, 2004, we had 96,810,818,
52,948,000, 579,000, 408,000, 758,000 and 749,000 outstanding share options at exercise prices of
NT$7.75, NT$7.75, NT$9.0, NT$12.9, NT$12.2 and NT$14.1, respectively, under the share option plan
of April 7, 2003. Under the share option plan of March 11, 2004, we granted 176,972,000, 4,919,000, 2,176,000,
5,015,500 and 4,466,000 share options at initial exercise prices of NT$14.55, NT$14.1, NT$11.0,
NT$9.25 and NT$7.05 on April 9, 2004, April 27, 2004, June 2, 2004, August 11, 2004 and October 27,
2004, respectively. As of December 31, 2004, we had 164,270,500, 3,522,000, 2,037,000, 4,432,500
and 4,361,000 outstanding share options at exercise prices of NT$14.55, NT$14.1, NT$11.0, NT$9.25
and NT$7.05, respectively, under the share option plan of March 11, 2004. Under the share option plan of March 7, 2005, we authorized the grant of a total of
200,000,000 share options at exercise prices to be determined by our Chairman provided that such
exercise prices shall not be lower than the closing price of our shares on the issuance day. 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 R.O.C. SFC regulates the terms of our stock options and each of our stock option plans
must be approved by the R.O.C. SFC. Current R.O.C. 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 R.O.C. SFC regulations, and our board of directors approve each stock
option plan before it is submitted to the R.O.C. SFC for approval. 
 Item 7. Major Shareholders and Related Party Transactions A. Major Shareholders The following table sets forth certain information, as of March 31, 2005, 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 March 31, 2005, no
shareholder beneficially owned 5% or more of our common shares. Percentage of totalNumber of
    
    
    outstandingName of Shareholder
    
    common shares
    
    
    common sharesNational Stabilization Fund
    
    
    65,777,140
    
    
    
    1.31
    %Credit Suisse First Boston
    
    
    55,991,197
    
    
    
    1.11
    %Delta Electronics, Ltd.(1)
    
    
    40,877,400
    
    
    
    0.81
    %Kuo Hua Life Insurance Co., Ltd.
    
    
    40,173,620
    
    
    
    0.80
    %Director, supervisors and executive officers as a group(2)
    
    
    109,217,532
    
    
    
    2.17
    %
 
 (1)
    
    Resigned from board of directors & supervisors effective January 17, 2005.(2)
    
    Includes no shares held by entities, officers of which currently serve on our board of
directors. - 71 -




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##### Table of Contents



B. Related Party Transactions Members
of our board of directors and our executive officers also serve or have served as directors of companies with
which we do business. These individuals include Mr. Miin Wu, who serves as a director of Tower
Semiconductor, Mr. C.Y. Lu, who serves as the chairman of Ardentec
Corporation (Ardentec) and Mr. Paul Yeh, who previously
served as a director of Powertech. 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
Ardentec. For services performed by Powertech, we incurred manufacturing processing charges of
NT$173 million in 2002, NT$211 million in 2003 and nil in 2004. For services performed by
Ardentec, we incurred manufacturing processing charges of NT$241 million in 2002, NT$130 million
in 2003 and NT$260 million (US$8.2 million) in 2004. We purchase industrial gases from United
Industry Gas. We incurred NT$110 million in 2002, NT$100 million in 2003 and NT$100 million (US$3.2
million) in 2004, 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 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 from Tower Semiconductor totaled NT$136 million in 2002, NT$37 million in
2003 and NT$20 million (US$0.6 million) in 2004. 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 was 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 were US$20 million for the initial closing and US$11
million at each subsequent closing. Under the 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. 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. 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. Pursuant to the amended agreement, in May 2003, we paid US$3.6 million for the
purchase of 1,206,839 shares. In August 2003, we paid a further US$0.7 million to for the purchase
of a further 228,646 shares at US$2.98 per share. In November 2003, under a further amendment,
among other things, we waived all terms of Tower Semiconductors milestones, agreed to advance the
remaining portion of the fifth and final purchase obligation, agreed not to use wafer credits until
January 1, 2007 except with respect to purchase orders issued before the date of the amendment and
obtained an option to convert credits we would otherwise have been able to utilize into shares of
Tower Semiconductor. Under the November 2003 amendment, the unconverted wafer credits accrue
interest at an agreed rate through December 31, 2007 and the aggregate principal amount of the
unconverted credits will be repaid in one lump sum on December 31, 2007. We also agreed not to sell
our shares in Tower Semiconductor until January 29, 2006, except that we may sell 30% of the Tower
Semiconductor shares we held as of January 29, 2004. In December 2003, we paid a further US$2.3
million for the purchase of a further 777,295 shares at US$2.98 per share. We paid the balance of
the - 72 -




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##### Table of Contents



fifth and final purchase obligation of US$4.4 million in December 2003 for the purchase of
628,611 shares at US$7.0 per share which we received in January 2004. Our payments to Tower Semiconductor, as of December 10, 2003 when the balance of the fifth and
final purchase obligation was paid, totaled US$78.3 million, and of this the total share purchase
consideration is US$64.2 million. At December 31, 2004, our credit account balance was US$14.1 million, and we owned 8,773,395,
or approximately 13.35%, of Tower Semiconductors outstanding shares. As of December 2003 and 2004,
we provided an allowance of US$9.7 million for such prepaid credit account after assessing an
impairment. Our average purchase price per share as of December 31, 2004 was US$7.31, which is
somewhat higher than the fair market values due to the minimum per share price in the original
agreement. Until the establishment of our audit committee, our board of directors as well as our
supervisors historically reviewed and approved related party transactions, consistent with R.O.C.
laws and practices. Since its establishment on February 24, 2005, our audit committee approves all
related party transactions. 
 Item 8. Financial Information A. Consolidated Statements and Other Financial Information The selected income statement data for the years ended December 31, 2002, 2003 and 2004, and
the selected balance sheet data as of December 31, 2003 and 2004 presented below are derived from
our audited financial statements included in this annual report, which were prepared on a
consolidated basis. The selected income statement data for the years ended December 31, 2000 and
2001 and the selected balance sheet data as of December 31, 2000, 2001 and 2002 presented below are
derived from our audited financial statements not included in this annual report, which were also
prepared on a consolidated basis. Certain accounts in the selected balance sheet data as of
December 31, 2000, 2001, 2002 and 2003 have been reclassified to conform with the presentation of
the current period as of December 31, 2004. We publish our financial statements in New Taiwan dollars, the lawful currency of Taiwan. All
references in this annual report to United States dollars, U.S. dollars and US$ are to United
States dollars and references to New Taiwan dollars, N.T. 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 N.T. dollars per U.S. dollar as certified for customs purposes by the Federal Reserve
Bank of New York on December 31, 2004 of NT$31.74 = US$1.00. On June 20, 2005, the noon buying rate
between New Taiwan dollars and United States dollars was NT$31.37 = 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 R.O.C. GAAP and R.O.C. reporting practices. For a
discussion of certain differences between R.O.C. GAAP and U.S. GAAP, see note 22 to our
consolidated financial statements for the years ended December 31, 2002, 2003 and 2004 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,(in millions except per share and ADS data)2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2004(NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (US$)Consolidated Income Statement Data:R.O.C. GAAPNet sales revenue
    
    
    33,493
    
    
    
    21,747
    
    
    
    16,492
    
    
    
    17,712
    
    
    
    23,380
    
    
    
    736.6Cost of goods sold
    
    
    (15,494
    )
    
    
    (11,674
    )
    
    
    (17,105
    )
    
    
    (20,657
    )
    
    
    (18,990
    )
    
    
    (598.3
    )Less: Unrealized profit as of
December 31
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    3
    
    
    
    (1
    )
    
    
    (<0.01
    )Realized gross profit (loss)
    
    
    17,999
    
    
    
    10,073
    
    
    
    (615
    )
    
    
    (2,942
    )
    
    
    4,388
    
    
    
    138.2Operating expenses
    
    
    (5,856
    )
    
    
    (6,557
    )
    
    
    (6,212
    )
    
    
    (4,742
    )
    
    
    (4,737
    )
    
    
    (149.2
    )Operating income (loss)
    
    
    12,143
    
    
    
    3,516
    
    
    
    (6,827
    )
    
    
    (7,684
    )
    
    
    (349
    )
    
    
    (11.0
    )Total other income
    
    
    945
    
    
    
    1,356
    
    
    
    466
    
    
    
    1,877
    
    
    
    1,619
    
    
    
    51.0Total other expenses
    
    
    (2,077
    )
    
    
    (4,795
    )
    
    
    (4,976
    )
    
    
    (2,370
    )
    
    
    (1,023
    )
    
    
    (32.2
    )
 - 73 -




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##### Table of Contents



Year ended, and as of, December 31,(in millions except per share and ADS data)2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2004(NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (US$)Income (loss) before taxes and
minority interest
    
    
    11,011
    
    
    
    77
    
    
    
    (11,337
    )
    
    
    (8,177
    )
    
    
    247
    
    
    
    7.8Income tax benefit (expense)
    
    
    (398
    )
    
    
    (943
    )
    
    
    (20
    )
    
    
    (21
    )
    
    
    (35
    )
    
    
    (1.1
    )Income (loss) before minority interest
    
    
    10,613
    
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    212
    
    
    
    6.7Minority interest loss
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    5
    
    
    
    0.2Net Income (loss)
    
    
    10,613
    
    
    
    (866
    )
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    218
    
    
    
    6.9Net income (loss) per share  basic (1)
    
    
    2.92
    
    
    
    (0.23
    )
    
    
    (3.10
    )
    
    
    (2.13
    )
    
    
    0.05
    
    
    
    <0.01Net income (loss) per share  diluted (1)
    
    
    2.91
    
    
    
    (0.23
    )
    
    
    (3.10
    )
    
    
    (2.13
    )
    
    
    0.04
    
    
    
    <0.01U.S. GAAPGross profit (loss)
    
    
    17,615
    
    
    
    6,598
    
    
    
    (4,018
    )
    
    
    (1,576
    )
    
    
    5,052
    
    
    
    159.2Operating income (loss)
    
    
    11,069
    
    
    
    (2,263
    )
    
    
    (10,186
    )
    
    
    (6,649
    )
    
    
    335
    
    
    
    10.6Net income (loss) before cumulative effect of change in
accounting principle in accordance with U.S. GAAP
    
    
    8,016
    
    
    
    (3,842
    )
    
    
    (13,841
    )
    
    
    (8,877
    )
    
    
    (429
    )
    
    
    (13.5
    )Basic net income (loss) per share before cumulative effect of
change in accounting principle in accordance with U.S. GAAP
    
    
    2.31
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    (<0.01
    )Diluted net income (loss) per share before cumulative
effect of change in accounting principle in accordance
with U.S. GAAP
    
    
    2.26
    
    
    
    (1.04
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    (<0.01
    )Net income (loss) (2)
    
    
    8,016
    
    
    
    (4,463
    )
    
    
    (13,841
    )
    
    
    (8,876
    )
    
    
    (429
    )
    
    
    (13.5
    )Net income (loss) per share-basic (1) (3)
    
    
    2.31
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    (<0.01
    )Net income (loss) per share diluted (1)(3)
    
    
    2.26
    
    
    
    (1.21
    )
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    (<0.01
    )Balance Sheet Data:R.O.C. GAAPTotal current assets
    
    
    29,027
    
    
    
    25,358
    
    
    
    21,301
    
    
    
    21,002
    
    
    
    21,706
    
    
    
    683.9Net property, plant and equipment
    
    
    38,006
    
    
    
    39,562
    
    
    
    40,029
    
    
    
    32,600
    
    
    
    27,993
    
    
    
    882.0Total assets
    
    
    72,025
    
    
    
    71,693
    
    
    
    67,450
    
    
    
    59,.919
    
    
    
    54,396
    
    
    
    1,713.8Total current liabilities
    
    
    11,360
    
    
    
    9,016
    
    
    
    17,687
    
    
    
    18,717
    
    
    
    9,449
    
    
    
    297.7Long-term liabilities
    
    
    16,091
    
    
    
    19,533
    
    
    
    19,549
    
    
    
    11,954
    
    
    
    10,602
    
    
    
    334.0Total liabilities
    
    
    27,451
    
    
    
    28,549
    
    
    
    37,236
    
    
    
    30,671
    
    
    
    20,051
    
    
    
    631.7Total shareholders equity
    
    
    44,574
    
    
    
    43,144
    
    
    
    30,214
    
    
    
    29,248
    
    
    
    34,344
    
    
    
    1,082.0U.S. GAAPTotal current assets
    
    
    28,994
    
    
    
    26,646
    
    
    
    21,037
    
    
    
    21,398
    
    
    
    21,716
    
    
    
    684.2Total assets
    
    
    71,916
    
    
    
    72,979
    
    
    
    65,509
    
    
    
    59,200
    
    
    
    52,807
    
    
    
    1,663.7Total current liabilities
    
    
    13,999
    
    
    
    10,152
    
    
    
    18,127
    
    
    
    18,986
    
    
    
    9,445
    
    
    
    297.6Total liabilities
    
    
    30,085
    
    
    
    29,679
    
    
    
    37,158
    
    
    
    31,005
    
    
    
    20,047
    
    
    
    631.6Total shareholders equity
    
    
    41,831
    
    
    
    43,300
    
    
    
    28,351
    
    
    
    28,195
    
    
    
    32,760
    
    
    
    1,032.1Other Data:R.O.C. GAAPCapital expenditures
    
    
    11,803
    
    
    
    9,078
    
    
    
    8,975
    
    
    
    1,606
    
    
    
    2,554
    
    
    
    80.5Depreciation and amortization
    
    
    6,048
    
    
    
    8,006
    
    
    
    8,742
    
    
    
    9,287
    
    
    
    7,562
    
    
    
    238.3Net cash provided by operating activities
    
    
    15,697
    
    
    
    9,209
    
    
    
    217
    
    
    
    1,484
    
    
    
    5,987
    
    
    
    188.6Net income (loss) per ADS  basic
    
    
    29.2
    
    
    
    (2.3
    )
    
    
    (31.0
    )
    
    
    (21.3
    )
    
    
    0.50
    
    
    
    0.02Net income (loss) per ADS  diluted
    
    
    29.1
    
    
    
    (2.3
    )
    
    
    (31.0
    )
    
    
    (21.3
    )
    
    
    0.40
    
    
    
    0.01Number of common shares outstanding (weighted, as adjusted)
(4)
    
    
    3,631
    
    
    
    3,702
    
    
    
    3,667
    
    
    
    3,852
    
    
    
    4,835
    
    
    
    4,835Stock dividend per common share (5)
    
    
    13
    %
    
    
    30
    %
    
    
    10
    %
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Retroactively adjusted for all subsequent stock dividends and employee bonuses declared.(2)
    
    The difference between net income under R.O.C. GAAP and U.S. GAAP was largely derived from
different treatments under these two accounting principles with respect to employee bonus
shares, derivative contracts, plant capacity loss, other-than-temporary decline in value on
marketable securities, and convertible debt securities with beneficial conversion features.
The difference in accounting treatment with respect to employee bonus shares under the two
accounting principles resulted in an additional expense of NT$1,622 million in 2000, an
additional expense of NT$4,273 million in 2001, no additional expense or income in 2002 and
2003 and 2004. The differences of accounting treatment with respect to derivative contracts
under the two accounting principles resulted in additional expense of NT$898 million in 2000,
additional income of NT$228 million in 2001, additional income of NT$449 million in 2002,
additional expense of NT$386 million in 2003 and additional expense of NT$230 million
(US$7.2 million) in 2004. The difference in accounting treatment with respect to plant
capacity loss under the two accounting principles resulted in no additional expense or - 74 -




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income in 2000, an additional income of NT$528 million in 2001, an additional expense of NT$528
million in 2002, and additional income of NT$269 million in 2003, an additional expense of
NT$258 million in 2004. The difference in accounting treatment with respect to
other-than-temporary decline in value on marketable securities under the two accounting
principles resulted in an additional expense of NT$646 million in 2001, an additional expense of
NT$538 million in 2002, no additional expense or income in 2000 and 2003, and an additional
expense of NT$448 million in 2004. 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 2000, 2001, and 2002, an additional
expense of NT$617 million in 2003, an additional expense of NT$156 million in 2004.(3)
    
    Retroactively adjusted for all stock dividends declared. See note 22 to our consolidated
financial statements for the years ended December 31, 2002, 2003 and 2004 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 82%, 68% and 66% of total net sales for the years ended
December 31, 2002, 2003 and 2004, respectively. See note 20 to our consolidated financial
statements for the years ended December 31, 2002, 2003 and 2004 included in this annual report. Export sales from the R.O.C. are as follows: For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(in thousands)Japan
    
    
    7,983,215
    
    
    
    7,269,548
    
    
    
    8,363,806
    
    
    
    263,510Singapore and Hong Kong
    
    
    3,656,167
    
    
    
    3,487,250
    
    
    
    5,119,396
    
    
    
    161,292United States
    
    
    1,616,837
    
    
    
    823,145
    
    
    
    980,911
    
    
    
    30,904Europe
    
    
    345,226
    
    
    
    453,641
    
    
    
    1,077,416
    
    
    
    33,945Total
    
    

    13,601,445
    
    
    
    12,033,584
    
    
    
    15,541,521
    
    
    
    489,651
 Dividend Policy We generally are not permitted under R.O.C. 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). R.O.C. 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. 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
March 7, 2005. No annual dividend was declared at our annual general meeting of shareholders held
on May 25, 2005. For information relating to R.O.C. withholding taxes payable on dividends, see Item 10.
Additional Information  E. Taxation  R.O.C. Taxation. - 75 -




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##### Table of Contents



Legal Proceedings 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. On
September 9, 2004, Atmel and Macronix America reached a settlement under which neither party will
incur any monetary liability under the claims, and each party will bear its own costs of
litigation. Accordingly, the parties claims have been dismissed. As is the case with many companies in the semiconductor industry, we from time to time receive
communications from third parties asserting certain patents to our products. We have entered into
discussions with some of these third parties as to their respective positions and the terms of any
possible licenses. We could incur significant costs with respect to the defense of the claims 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$360 million in 2002, NT$196 million in 2003 and NT$94
million (US$3 million) in 2004. As of December 31, 2004, the outstanding balance of this reserve
was NT$684 million (US$21.5 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. On August 19, 2004, the court
granted the motion to dismiss. On December 27, 2004, one of the plaintiffs appealed, and on March
15, 2005, the defendants filed a reply. 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, 2004. 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, 2002, 2003
and 2004 included in this annual report. - 76 -




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##### Table of Contents



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 daily tradingvolume (in thousands
    
    
    Nasdaq CompositeClosing Price Per ADS(1)
    
    
    of ADSs)
    
    
    IndexHigh
    
    
    Low
    
    
    
    
    
    
    High
    
    
    Low(US$)
    
    
    (US$)2000
    
    
    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
    
    
    
    1,114.112003
    
    
    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
    
    
    
    1,832.252004
    
    
    5.13
    
    
    
    2.00
    
    
    
    16.957
    
    
    
    2,178.34
    
    
    
    1,752.49First Quarter
    
    
    3.90
    
    
    
    2.39
    
    
    
    28.233
    
    
    
    2,153.83
    
    
    
    1,901.80Second Quarter
    
    
    5.13
    
    
    
    2.85
    
    
    
    17.245
    
    
    
    2,079.12
    
    
    
    1,876.64Third Quarter
    
    
    3.25
    
    
    
    2.20
    
    
    
    13.010
    
    
    
    2,015.55
    
    
    
    1,752.49Fourth Quarter
    
    
    2.54
    
    
    
    2.00
    
    
    
    19.492
    
    
    
    2,178.34
    
    
    
    1,903.02December
    
    
    2.54
    
    
    
    2.01
    
    
    
    12.882
    
    
    
    2,178.34
    
    
    
    2,114.662005January
    
    
    2.22
    
    
    
    1.68
    
    
    
    12.688
    
    
    
    2,152.15
    
    
    
    2,008.70February
    
    
    1.93
    
    
    
    1.70
    
    
    
    16.222
    
    
    
    2,089.21
    
    
    
    2,030.32March
    
    
    1.88
    
    
    
    1.30
    
    
    
    10.370
    
    
    
    2,090.21
    
    
    
    1,973.88April
    
    
    1.46
    
    
    
    1.24
    
    
    
    4.630
    
    
    
    2,018.79
    
    
    
    1,904.18May
    
    
    1.50
    
    
    
    1.28
    
    
    
    9.149
    
    
    
    2,075.73
    
    
    
    1,928.65June (through June 20)
    
    
    1.75
    
    
    
    1.58
    
    
    
    4.13
    
    
    
    2,097.80
    
    
    
    2,060.18
 
 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. Average dailytrading volume(in thousands of
    
    
    Luxembourg StockClosing Price Per GDS(1)
    
    
    GDSs)(1)
    
    
    Exchange IndexHigh
    
    
    Low
    
    
    
    
    
    
    High
    
    
    Low(US$)
    
    
    (US$)2004 (from April 5)
    
    
    20.90
    
    
    
    8.35
    
    
    
    0
    
    
    
    1,755.617
    
    
    
    1,187.557Second Quarter (from April 5)
    
    
    20.90
    
    
    
    13.05
    
    
    
    0
    
    
    
    1,321.192
    
    
    
    1,187.557Third Quarter
    
    
    12.47
    
    
    
    8.80
    
    
    
    0
    
    
    
    1,368.093
    
    
    
    1,243.330Fourth Quarter
    
    
    9.20
    
    
    
    8.35
    
    
    
    0
    
    
    
    1,755.617
    
    
    
    1,378.589December
    
    
    9.20
    
    
    
    8.75
    
    
    
    0
    
    
    
    1,755.617
    
    
    
    1,630.0132005January
    
    
    8.00
    
    
    
    8.00
    
    
    
    0
    
    
    
    1,740.980
    
    
    
    1,666.638February
    
    
    7.80
    
    
    
    7.60
    
    
    
    0
    
    
    
    1,822.656
    
    
    
    1,709.821March
    
    
    6.70
    
    
    
    5.25
    
    
    
    0
    
    
    
    1,857.081
    
    
    
    1,727.522April
    
    
    6.00
    
    
    
    5.70
    
    
    
    0
    
    
    
    1,771.441
    
    
    
    1,688.899May
    
    
    6.20
    
    
    
    6.00
    
    
    
    0
    
    
    
    1,708.512
    
    
    
    1,636.296June (through June 20)
    
    
    6.50
    
    
    
    6.50
    
    
    
    0
    
    
    
    1,680.338
    
    
    
    1,620.948
 
 Source: Bloomberg L.P. - 77 -




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##### Table of Contents



(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 volume(in thousands of
    
    
    Taiwan Stock ExchangeClosing Price Per Share(1)
    
    
    shares)
    
    
    IndexHigh
    
    
    Low
    
    
    
    
    
    
    High
    
    
    Low(NT$)
    
    
    (NT$)2000
    
    
    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
    
    
    
    3,8502003
    
    
    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
    
    
    
    5,5822004
    
    
    16.80
    
    
    
    6.50
    
    
    
    63,187
    
    
    
    7,034.10
    
    
    
    5,482.96First Quarter
    
    
    13.45
    
    
    
    7.75
    
    
    
    91,570
    
    
    
    7,034.10
    
    
    
    6,041.56Second Quarter
    
    
    16.80
    
    
    
    9.90
    
    
    
    101,000
    
    
    
    6,880.18
    
    
    
    5,482.96Third Quarter
    
    
    11.00
    
    
    
    7.65
    
    
    
    31,133
    
    
    
    5,970.18
    
    
    
    5,316.87Fourth Quarter
    
    
    8.40
    
    
    
    6.50
    
    
    
    29,048
    
    
    
    6,139.69
    
    
    
    5,656.17December
    
    
    8.20
    
    
    
    6.90
    
    
    
    37,685
    
    
    
    6,139.69
    
    
    
    5,798.622005January
    
    
    7.30
    
    
    
    5.50
    
    
    
    29,746
    
    
    
    6,143.12
    
    
    
    5,771.48February
    
    
    6.50
    
    
    
    5.80
    
    
    
    29,026
    
    
    
    6,207.83
    
    
    
    5,981.54March
    
    
    6.10
    
    
    
    3.91
    
    
    
    37,913
    
    
    
    6,259.69
    
    
    
    5,957.98April
    
    
    5.03
    
    
    
    4.05
    
    
    
    39,192
    
    
    
    6,028.75
    
    
    
    5,715.16May
    
    
    5.06
    
    
    
    4.60
    
    
    
    28,691
    
    
    
    6,011.56
    
    
    
    5,803.68June (through June 20)
    
    
    5.43
    
    
    
    5.03
    
    
    
    41,361
    
    
    
    6,296.89
    
    
    
    5,971.62
 
 Source: Bloomberg L.P.  (1)
    
    As adjusted retroactively by Bloomberg L.P. to give effect to stock dividends paid in the
periods indicated. The Taiwan Stock Exchange 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, 2005, a total of 5,035,296,328 of our common shares were outstanding.
Holders of common shares that are not R.O.C. persons are required to hold these common shares
through a brokerage or custodial account in the R.O.C.. 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 R.O.C. persons. As of May 31, 2005, 20,563,153 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, 2005, 2,056,315.3 ADSs, representing 20,563,153
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, 2005, 3,100,000 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,
2005, 775,000 GDSs, representing 3,100,000 common shares, were held of record by Cede & Co. - 78 -




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##### Table of Contents



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 697 as of December 31, 2004. As of December 31, 2004,
the market capitalization of companies listed on the Taiwan Stock Exchange was NT$13,989 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. 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, 2004, 466 companies had listed
equity securities on the GreTai Securities Market and the total market capitalization of those
companies was approximately NT$1,123 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. - 79 -




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##### Table of Contents



The following table shows for the periods indicated information relating to the Taiwan Stock
Exchange Index. Number of listed
    
    
    
    
    
    
    
    
    
    
    Index atcompanies at
    
    
    Index
    
    
    Index
    
    
    periodPeriod ended December 31,
    
    the period end
    
    
    high
    
    
    low
    
    
    end1990
    
    
    199
    
    
    
    12,495
    
    
    
    2,560
    
    
    
    4,5301991
    
    
    221
    
    
    
    6,305
    
    
    
    3,316
    
    
    
    4,6011992
    
    
    256
    
    
    
    5,392
    
    
    
    3,328
    
    
    
    3,3771993
    
    
    285
    
    
    
    6,071
    
    
    
    3,136
    
    
    
    6,0711994
    
    
    313
    
    
    
    7,184
    
    
    
    5,195
    
    
    
    7,1251995
    
    
    347
    
    
    
    7,051
    
    
    
    4,503
    
    
    
    5,1741996
    
    
    375
    
    
    
    6,983
    
    
    
    4,690
    
    
    
    6,9341997
    
    
    404
    
    
    
    10,117
    
    
    
    6,820
    
    
    
    8,1871998
    
    
    437
    
    
    
    9,277
    
    
    
    6,251
    
    
    
    6,4181999
    
    
    462
    
    
    
    8,609
    
    
    
    5,475
    
    
    
    8,4492000
    
    
    474
    
    
    
    10,202
    
    
    
    8,350
    
    
    
    8,8432001
    
    
    584
    
    
    
    5,551
    
    
    
    4,647
    
    
    
    5,5512002
    
    
    638
    
    
    
    6,462
    
    
    
    3,850
    
    
    
    4,4522003
    
    
    669
    
    
    
    6,142
    
    
    
    4,140
    
    
    
    5,8912004
    
    
    697
    
    
    
    7,034
    
    
    
    5,317
    
    
    
    6,140
 
 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. 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 - 80 -




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##### Table of Contents



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 R.O.C. Company Law, the R.O.C. 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 3⁄4 D. Risk Factors 3⁄4 Risks Relating to our Common Shares
and our ADSs for a description of certain differences and 3⁄4Voting 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 20, 2005. As of
May 31, 2005, 5,035,296,328 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, 2005, 20,563,153 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, 2005, 2,056,315.3 ADSs, representing 20,563,153 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, 2005, 3,100,000 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, 2005, 77,500 GDSs, representing 3,100,000 common shares, were held
of record by Cede & Co. The R.O.C. Company Law, the R.O.C. Statute for Establishment and Administration of Science
Park and the R.O.C. 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 R.O.C. Securities and Futures Commission and the R.O.C. Ministry
of Economic Affairs or the Hsinchu Science Park Administration, as applicable. Increase in Capital; Delivery of Certificates We are required under R.O.C. law to file an amendment to our corporate registration within 15
days after the capital increase record date. Under the R.O.C. 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 Park Administration of
our amendment to our corporate registration. An amendment to the R.O.C. Company Law was passed by the R.O.C. Legislative Yuan on October
25, 2001 and became effective on November 14, 2001. Under the amended R.O.C. 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. - 81 -




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Dividends and Distributions Except in limited circumstances, we are not permitted under the R.O.C. 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 R.O.C.
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 2002, 2003 and 2004, we did not distribute any
employee bonuses. The number of common shares issued as a bonus is obtained by dividing the total
nominal N.T. dollar amount of the bonus by the par value of our common shares, or NT$10 per share.
Subject to compliance with the above requirements, we may pay dividends or make other distributions
from our earnings and reserves as permitted by R.O.C. Company Law. At our annual ordinary meeting of shareholders, our board of directors submits for shareholder
approval our consolidated financial statements for the preceding year and the proposal of the board
of directors for the distribution of dividends and bonuses from our net income, subject to
compliance with the requirements described above, for the preceding year. All of our common shares
outstanding and fully paid as of the relevant record date are entitled to share equally in any
approved dividend or other distribution. In addition to permitting dividends to be paid out of net income if we do not have losses, the
R.O.C. 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 R.O.C. taxes on dividends and distributions, see Item 10 3⁄4
Additional Information 3⁄4 E. Taxation 3⁄4 R.O.C. Taxation. Preemptive Rights and Issues of Additional Common Shares According to the R.O.C. 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 R.O.C. 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 R.O.C. 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
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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 R.O.C. 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 R.O.C. Company Law, the R.O.C. Statute for Establishment and Administration of
Science Park and the R.O.C. 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 R.O.C. laws and regulations with regard our shareholder
meetings. Voting Rights Under the R.O.C. Company Law, a shareholder has one vote for each common share. Except as
otherwise provided by law, a resolution may be adopted by the holders of a simple majority of the
common shares represented at the shareholders meeting. At least a majority of the holders of the
total issued and outstanding common shares must be present at the meeting for the resolution to be
binding. The election of directors and supervisors at a shareholders meeting is by means of
cumulative voting unless the articles of incorporation provide otherwise. Ballots for the election
of directors are cast separately from those for the election of supervisors. Candidates for the
offices of director and supervisor may be nominated at the shareholders meeting at which ballots
for the election are cast. The R.O.C. 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. - 83 -




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Holders of ADSs will not have the right to exercise voting rights with respect to the common shares
represented thereby, except as described in 3⁄4Voting Rights of ADS Holders. Other Rights of Shareholders Under the R.O.C. 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 R.O.C. 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 R.O.C. 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 R.O.C. 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 R.O.C. 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 R.O.C. 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 R.O.C. Securities and Exchange Law, we may, in accordance with R.O.C. 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; - 84 -




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
    
    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
R.O.C. 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 R.O.C. Company Law. Transfer Restrictions The R.O.C. 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). 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
R.O.C. 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 3⁄4 B. Memorandum and Articles of Association
3⁄4 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 R.O.C. Company
Law, a shareholders voting rights attaching to shareholdings in a R.O.C. 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 - 85 -




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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 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 R.O.C. 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. - 86 -




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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, GDSs holders
representing over 95% of the GDSs issued in April 2004 have withdrawn from our GDSs program and
converted their GDSs to common shares. 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
R.O.C. 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 - 87 -




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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. 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
R.O.C. law. See Item 3. Key Information 3⁄4 D. Risk Factors  Risks Related to our Common
Shares, ADSs and GDSs  ADS and GDS holders do not have the same - 88 -




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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 3⁄4
B. Memorandum and Articles of Association 3⁄4 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 R.O.C. Company
Law, a shareholders voting rights attaching to shareholdings in a R.O.C. 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. 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 - 89 -




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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 R.O.C. 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. D. Exchange Controls Foreign Exchange Set forth below are the period-end noon buying rates in effect between the N.T. dollar and the
U.S. dollar, expressed in N.T. dollars per U.S. dollar, for the periods indicated. Period-End
    
    NT$ per US$1.001999:
    
    
    31.392000:
    
    
    33.172001
    
    
    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
    
    
    33.992004:First Quarter
    
    
    33.00Second Quarter
    
    
    33.66Third Quarter
    
    
    33.99Fourth Quarter
    
    
    31.742005:January
    
    
    31.71February
    
    
    31.06March
    
    
    31.46April
    
    
    31.23May
    
    
    31.26June (through June 20)
    
    
    31.37
 
 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 - 90 -




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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. E. Taxation R.O.C. Taxation General The following summary addresses the principal R.O.C. 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-R.O.C. Holder). As used in the preceding sentence, a
non-resident individual (a Non-R.O.C. Individual) is a foreign national individual who is not
physically present in the R.O.C. 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-R.O.C. Entity) is a
corporation or a non-corporate body that is organized under the laws of a jurisdiction other than
the R.O.C. for profit-making purposes and does not have a fixed place of business or other
permanent establishment in the R.O.C.. 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- R.O.C. Holder in respect of our shares represented by ADSs and GDSs are
subject to R.O.C. 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 R.O.C. withholding tax. Sale. Transfers of ADSs and GDSs are not subject to R.O.C. securities transaction tax. Gains
on sale of ADSs and GDSs are not subject to R.O.C. income tax. Common Shares Dividends.Dividends (whether in cash or stock) declared by us out of retained earnings and
distributed to a Non-R.O.C. Holder in respect of common shares are subject to R.O.C. 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
R.O.C. 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 R.O.C. companies are exempt from income
tax. This exemption applies to capital gains derived from the sale of common shares. - 91 -




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Preemptive Rights.Distributions of statutory subscription rights for the common shares in
compliance with the R.O.C. Company Law are not subject to R.O.C. 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-R.O.C. Entity
Holders and (ii) 35% of gains realized by Non-R.O.C. Individual Holders. Subject to compliance with
R.O.C. 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 R.O.C. inheritance tax is payable on any property situated within the R.O.C. of a deceased
Non-R.O.C. Individual, and R.O.C. gift tax is payable on any property situated within the R.O.C.
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 R.O.C. inheritance and gift tax law, bonds
and shares issued by R.O.C. companies are deemed situated within the R.O.C. 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 R.O.C.. At present, the R.O.C.
has income tax treaties with Australia, Gambia, Indonesia, Malaysia, Macedonia, the Netherlands,
New Zealand, Singapore, South Africa, Swaziland, United Kingdom and Vietnam which limit the rate of
withholding tax on dividends or interest paid with respect to shares or bonds in R.O.C. companies
to residents of these countries. It is unclear whether a Non-R.O.C. 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 R.O.C. 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-R.O.C. 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 it does not address the tax treatment under
applicable state or local tax laws or the laws of any jurisdiction other than the United States.
This discussion is of a general nature only and is not intended to be, and should not be construed
to be, legal or tax advice to any prospective investor and no representation with respect to the
tax consequences to any particular investor is made. - 92 -




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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;
    
    persons who actually and constructively own less than 10% of our voting stock.
    
    tax-exempt organizations;
    
    persons liable for the 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;
    
    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;
and
    
    in part, on representations by the depositary, and assumes that each
obligation under the applicable deposit - 93 -




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agreement and any related agreements will be performed in accordance with their terms. As used in this discussion, the term United States Holder means a beneficial owner of ADSs,
GDSs or common shares that holds the ADSs, GDSs or common shares as capital assets and that is:  
    
    an individual who is a citizen or resident of the United States;
    
    a corporation (or other entity treated as a corporation) organized under
the laws of the United States or any State or the District of Columbia (a U.S.
Corporation);
    
    an estate the income of which is subject to United States federal income
taxation regardless of its source;
    
    a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States persons
have the authority to control all substantial decisions of the trust; or
    
    a trust that has a valid election in effect under applicable United States
Treasury regulations to be treated as a United States person. 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 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. Exchanges of common shares for
ADSs or GDSs, and ADSs and GDSs for common shares, will not be subject to United States federal
income tax, and a holders tax basis and holding period in the ADSs, GDSs or common shares received
in the exchange will be the same as its basis and holding period in the ADSs, GDSs or common
shares, as the case may be, given up in the exchange. Taxation of Dividends Subject to the discussion under Passive Foreign Investment Company Status below,
distributions in respect of ADSs, GDSs and 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. 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 the distribution 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 such excess
exceeds the United States Holders tax basis, as capital gain. Any such distributions in excess of
our current and accumulated earnings - 94 -




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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. Taxation of Sales or Other Dispositions Subject to the discussion under  Passive Foreign Investment Company Status below, a United
States Holder will recognize capital gain or loss for United States federal income tax purposes on
a sale or other disposition of ADSs, 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, GDSs or common shares and, if they were
received in an exchange, the holding period of the ADSs, GDSs or common shares for which they were
exchanged. 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 should not currently be
treated as a PFIC for United States federal income tax purposes, 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 the Company is or becomes a PFIC, a United States Holder would be treated as realizing gain
from the sale or disposition of the Shares and certain excess distributions ratably over such
holders holding period for the Shares and would - 95 -




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be taxed at the highest tax rate in effect for each such year to which the gain or excess
distribution was allocated, together with an interest charge on the tax attributable to each such
year. An election may be available to avoid these adverse tax consequences but only if (i) the
United States Holder may and does elect to annually mark-to-market the Shares or (ii) the United
States Holder elects to include in income annually its share of the income and gain of the Company
and we satisfy certain reporting requirements. We have not determined whether we will undertake
the necessary measures to be able to satisfy the requirements for the election in clause (ii), in
the event we are treated as a PFIC. Should the Company ever be classified as a PFIC, United States Holders are advised to consult
their tax advisors concerning the United States federal income tax consequences of holding the
Shares and of making the mark-to-market election. A United States Holder who owns Shares during
any year that the Company is a PFIC must file with the IRS Form 8621. 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) 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 (iii) 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. A
Non-United States Holder that is also a corporation for United States federal income tax purposes
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)
with respect to income that is subject to United States federal income taxation on a net basis. 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 States Internal Revenue Service. A backup
withholding tax at a rate of 28% 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. 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. - 96 -




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United States Federal Income Taxation of Non-United States Holders Subject to the discussion of United States backup withholding tax below, a Non-United States
Holder of ADSs, 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 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. - 97 -




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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, 2004 is based on the official
exchange rate as determined by the Bank of Taiwan, being NT$3.118 = JPY1.00.
    
    The exchange rates for U.S. dollars as at December 31, 2004 is based on the official
exchange rate as determined by the Bank of Taiwan being NT$31.74 = US$1.00.
    
    Interest rates are derived from the prevailing interest rate swap market in the
respective currencies as at December 31, 2004. 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 1,2005 to
    
    
    2006 to
    
    
    2007 to
    
    
    2008 to
    
    
    2009 toDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    
    
    
    
    
    
    
    
    Fair value2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    Total(2)(3)
    
    
    December 31, 2004(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
    
    
    1.1184Others
    
    
    36,052
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,052
    
    
    
    36,052Rate sensitive
liabilitiesLong term debtUnsecured 0.5%
convertible debentures
due 2007(1)
    
    
    3,533
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,533
    
    
    
    3,812Zero coupon convertible
debentures due
2007(2)
    
    
    223,323
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    223,323
    
    
    
    229,599Zero coupon convertible
debentures due
2008(3)
    
    
    210,237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210,237
    
    
    
    211,437US$ debtVariable rate
    
    
    31,710
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,710
    
    
    
    31,710Average interest rate
    
    
    3.03
    %
    
    
    1.90
    %NT$ debtFixed rate
    
    
    
    
    
    
    3,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000,000
    
    
    
    3,033,097Average interest rate
    
    
    
    
    
    
    3.3
    %Variable rate
    
    
    1,727,666
    
    
    
    1,624,186
    
    
    
    2,294,986
    
    
    
    1,480,386
    
    
    
    1,480,386
    
    
    
    433,094
    
    
    
    9,040,704
    
    
    
    9,040,704Average interest rate
    
    
    3.0
    %
    
    
    3.3
    %
    
    
    3.03
    %
    
    
    3.03
    %
    
    
    3.03
    %
    
    
    4.59
    %
 
 (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. - 98 -




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Foreign Currencies A significant portion of our revenues are denominated in currencies other than the N.T.
dollar. As of December 31, 2004, most of our accounts payable and payables for purchases of capital
goods were denominated in currencies other than the N.T. dollar, primarily in U.S. dollars and
Japanese yen. In addition, as of December 31, 2004, most of our long-term debts were in U.S.
dollars, including the long-term debentures. To protect against reductions in value and volatility
of future cash flows caused by changes in foreign exchange rates, we utilize derivative financial
instruments to hedge our currency exposure. These hedging transactions are designed to reduce, but
do not eliminate, the impact of foreign currency exchange rate movements. Our policy is to account
for these contracts on a hedge accounting basis. Most of our sales are denominated in U.S. dollars and Japanese yen and our debts are in U.S.
dollars. An appreciation of the Japanese yen against the N.T. dollar would result in a foreign
exchange gain to us from our underlying sales. However, a depreciation of the Japanese yen against
the N.T. dollar would result in a foreign exchange loss to us. Conversely, an appreciation of the
U.S. dollar against the N.T. dollar would result in a foreign exchange loss to us, while a
depreciation of the U.S. dollar against the N.T. 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
N.T. dollar functional currency and the outstanding forward foreign exchange, cross currency
interest rate swap and option contracts as of December 31, 2004 by expected year of maturity. Expected MaturityJanuary 1,
    
    
    January 1,
    
    
    January 1,
    
    
    January 1,
    
    
    January 1,2005 to
    
    
    2006 to
    
    
    2007 to
    
    
    2008 to
    
    
    2009 toDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    
    
    
    
    
    
    
    
    Fair value2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    Total
    
    
    December 31, 2004(NT$ in thousands)Liabilities
denominated in
foreign currenciesUSD(1)
    
    
    541,496
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    541,496Financial instruments
(with barrier)Options Sell
USD call
    
    
    50,550
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,550
    
    
    
    (166
    )Sell USD Put
    
    
    47,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,700Average strike price
    
    
    @32.75Financial instruments
(no barrier)forward sell USD
    
    
    192,398
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192,398
    
    
    
    1,479Average strike price
    
    
    @32.066CCSSell JPY/Buy
USDBuy USD
    
    
    N/ASell JPY
    
    
    N/ADCD
    
    
    N/A
 
 (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. - 99 -




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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, expired on May 5, 2005. Under the contract, if the share price
was 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 was settled was based
on U.S. dollars, and our share price were converted into U.S. dollars using prevailing N.T. dollars
to U.S. dollars exchange rates in order to determine the settlement amount. The predetermined
contract price was US$1.37 per share. As of December 31, 2004, the underlying reference securities
was 53,253,964 of our common shares. As of December 31, 2004, our share price of NT$7.24 per share
converted into U.S. dollars at the then prevailing rate of US$1=NT$31.74 was US$0.23 per share. As
at December 31, 2004, the carrying amount of this contract was a receivable of US$1.7 million
(NT$54 million) and the fair value of this contract was a receivable of US$1.4 million (NT$44
million). Our additional loss under this contract in 2004 was US$0.3 million (NT$10 million) and
total accumulated loss under this contract as of December 31, 2004 was US$60.6 million (NT$1,922
million). Between March 17, 2005 and April 28, 2005, we reduced the number of common shares which
formed the underlying reference securities for the contract to nil, and we settled the contract on
May 5, 2005. Our additional loss under the contract in 2005 up to the date of settlement of the
contract was US$4.4 million (NT$140 million). See Item 5. Operating and Financial Review and
Prospects  Operating Results  Equity Derivative Contracts and note 21 to our consolidated
financial statements for the years ended December 31, 2002, 2003 and 2004 included in this annual
report. 
 Item 
12.Description of Securities Other than Equity Securities Not applicable. - 100 -




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PART II 
 Item 13. Default, Dividend Arrearages and Delinquencies As of December 31, 2004, 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, 2004, although we are constantly engaged in the process of improving these
controls and procedures. During 2004, 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 Our Board of Directors has not yet determined if any member of our audit committee qualifies
as an Audit Committee Financial Expert. Our Board of Directors has not made such a determination as
yet because Nasdaq and SEC rules only require us to have an audit committee consisting of at least
three independent directors by July 31, 2005. 
 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, 2003 and 2004. 2003
    
    
    2004(in thousands of NT$)Audit fees
    
    
    14,971
    
    
    
    10,511Audit-related fees
    
    
    3,770
    
    
    
    4,028Tax fees
    
    
    2,562
    
    
    
    3,115Others
    
    
    1,005
    
    
    
    555Total
    
    
    22,308
    
    
    
    18,209
 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 R.O.C. Securities and Futures Commission and other reviews in
connection with ADS, GDS, convertible bond and 20-F filings. - 101 -




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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. 
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not applicable. - 102 -




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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-75 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)(1).8.1
    
    List of subsidiaries of the Company*.12.1
    
    Certifications of our President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*12.2
    
    Certifications of our Associate Vice President, Finance Department, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.*13.1
    
    Certifications of our President pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*13.2
    
    Certifications of our Associate Vice President, Finance Department, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*14.1
    
    Amended and Restated Deposit Agreement, dated as of February 7, 2002, among the Company,
The Bank of New York, as depositary, and Holders from time to time of American Depositary
Receipts issued thereunder, including the form of American Depositary
Receipt(2).14.2
    
    Indenture, dated as of February 10, 2003, by and between the Company and The Bank of New
York, as trustee(3).14.3
    
    Land Lease Agreement, dated as of March 3, 1990, by and between the Company and the
Hsinchu Science-Based Industrial Park Administration, in relation to Office Building and
Fab I Site(4).14.4
    
    Land Lease Agreement, dated as of August 1, 1994, by and between the Company and the
Hsinchu Science-Based Industrial Park Administration, in relation to Auxiliary Vehicular
Facilities(5).14.5
    
    Land Lease Agreement, dated as of January 1, 1994, by and between the Company and the
Hsinchu Science-Based Industrial Park Administration, in relation to Back-End Operation
Plant(6).14.6
    
    Land Lease Agreement, dated as of June 1, 1995, by and between the Company and the Hsinchu
Science-Based Industrial Park Administration, in relation to Fab II and Fab III Site
(7).14.7
    
    Indenture, dated as of February 7, 2002, by and between the Company and The Bank of New
York, as trustee(8).14.8
    
    Summary of terms and conditions of domestic convertible bonds issued December 12, 2002
(English summary)(9).14.9
    
    Deposit Agreement, dated as of April 5, 2004, among the Company, Citibank, N.A., as
depositary,
 - 103 -




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ExhibitNumber
    
    Descriptionand Holders from time to time of Global Depositary Receipts issued thereunder,
including the form of Global Depositary Receipt(10).
 
 *
    
    Filed with this Form 20-F.(1)
    
    Incorporated by reference to Exhibit 3.1 to the Companys Form 20-F filed with the Commission
on June 29, 2004.(2)
    
    Incorporated by reference to Exhibit 3(a) to the Companys Registration Statement on Form F-6
(File No. 333-8602) filed with the Commission on February 7, 2002.(3)
    
    Incorporated by reference to Exhibit 10.2 to the Companys Form 20-F filed with the
Commission on July 1, 2003.(4)
    
    Incorporated by reference to Exhibit 10.6 to the Companys Registration Statement on Form F-1
(File No. 333-1870) filed with the Commission on March 1, 1996.(5)
    
    Incorporated by reference to Exhibit 10.7 to the Companys Registration Statement on Form F-1
(File No. 333-1870) filed with the Commission on March 1, 1996.(6)
    
    Incorporated by reference to Exhibit 10.8 to the Companys Registration Statement on Form F-1
(File No. 333-1870) filed with the Commission on March 1, 1996.(7)
    
    Incorporated by reference to Exhibit 10.9 to the Companys Registration Statement on Form F-1
(File No. 333-1870) filed with the Commission on March 1, 1996.(8)
    
    Incorporated by reference to Exhibit 10.9 to the Companys Form 20-F filed with the
Commission on July 1, 2002.(9)
    
    Incorporated by reference to Exhibit 10.10 to the Companys Form 20-F filed with the
Commission on July 1, 2003.(10)
    
    Incorporated by reference to Exhibit 14.9 to the Companys Form 20-F filed with the
Commission on June 29, 2004. - 104 -




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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.
A device which incorporates Flash memory on which other devices rely for access to a computerEmbedded Flash
controller
    
    system. A disk controller, for example, controls access to one or more disk drives, managing
physical and logical access to the drive or drives.EPROM
    
    Erasable Programmable ROM. Nonvolatile memory which can be reprogrammed by removing the device
from the system, erasing the data through exposure to ultraviolet light and reprogramming and
reinstalling the device in the system.EEPROM
    
    Electrically Erasable Programmable ROM. Similar to EPROM, except that it can be erased
electronically before being reprogrammed.
 A-1




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##### Table of Contents



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.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.
 A-2




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##### Table of Contents



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 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.
 A-3




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##### Table of Contents



Volatile memory
    
    Memory products which lose their data content when the power supply is switched off.Wafer
    
    Thin, round, flat piece of silicon that is the base of most integrated circuits.
 A-4




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##### Table of Contents



Signatures The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and
that it has duly caused and authorized the undersigned to sign this annual report on its behalf. MACRONIX INTERNATIONAL CO., LTD.(Registrant)Date:
    
    June 30,2005
    
    
    
    By:
    
    /s/Miin WuName: Miin WuTitle: President




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##### Table of Contents



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(8).
 
 *
    
    Filed with this Form 20-F.




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##### Table of Contents



(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.(9)
    
    Incorporated by reference to Exhibit 14.9 to the Companys Form 20-F filed with the
Commission on June 29, 2004.




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements of Macronix International Co., Ltd. and its Subsidiaries Independent Auditors Report
    
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2004
    
    
    F-3Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2004
    
    
    F-5Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2004
    
    
    F-6Consolidated Statements of Shareholders Equity for each of
the three years in the period ended December 31, 2004
    
    
    F-8Notes to Consolidated Financial Statements
    
    
    F-9
 F - 1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm 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, 2003 and 2004, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three years in the period ended December 31,
2004. 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 the 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. We were not engaged to perform an
audit of the Companys internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and 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,
2003 and 2004, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2004, 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 22 to the consolidated
financial statements). DIWAN, ERNST & YOUNG
CERTIFIED PUBLIC ACCOUNTANTS Taipei, Taiwan, R.O.C.
May 11, 2005 F - 2




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##### Table of Contents



MACRONIX INTERNATIONAL
CO., LTD.
 
 CONSOLIDATED BALANCE
SHEETS
 December 31, 2003
and 2004
 (Amounts in thousands
except share and per share data)
 December 31,ASSETS
    
    Notes
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Current assetsCash and cash equivalents
    
    
    3
    
    
    
    10,648,514
    
    
    
    10,115,688
    
    
    
    318,705Restricted investments-current
    
    
    11
    
    
    
    1,829,534
    
    
    
    2,429,606
    
    
    
    76,547Short-term investments
    
    
    4
    
    
    
    849,436
    
    
    
    918,040
    
    
    
    28,924Notes and accounts receivable (net)
    
    
    5
    
    
    
    2,769,652
    
    
    
    2,553,510
    
    
    
    80,451Receivables from related parties
    
    
    17
    
    
    
    58,264
    
    
    
    132,286
    
    
    
    4,168Inventories (net)
    
    
    6
    
    
    
    4,094,890
    
    
    
    4,826,241
    
    
    
    152,055Deferred income taxes (net)
    
    
    16
    
    
    
    104,812
    
    
    
    18,951
    
    
    
    597Prepaid expenses
    
    
    
    
    
    
    420,381
    
    
    
    496,326
    
    
    
    15,637Others
    
    
    
    
    
    
    226,498
    
    
    
    215,622
    
    
    
    6,793Total current assets
    
    
    
    
    
    
    21,001,981
    
    
    
    21,706,270
    
    
    
    683,877Property, plant and equipment
    
    
    10,18Land
    
    
    
    
    
    
    1,337,942
    
    
    
    1,288,720
    
    
    
    40,602Buildings
    
    
    
    
    
    
    23,554,857
    
    
    
    23,666,553
    
    
    
    745,638Production equipment
    
    
    
    
    
    
    45,315,031
    
    
    
    46,438,058
    
    
    
    1,463,077Research and development equipment
    
    
    
    
    
    
    1,901,837
    
    
    
    1,187,554
    
    
    
    37,415Office furniture and equipment
    
    
    
    
    
    
    968,713
    
    
    
    900,149
    
    
    
    28,360Leased equipment
    
    
    
    
    
    
    1,750,658
    
    
    
    1,754,540
    
    
    
    55,279Construction in progress and prepaid equipment
    
    
    
    
    
    
    423,336
    
    
    
    2,130,130
    
    
    
    67,112Total property, plant and equipment
    
    
    
    
    
    
    75,252,374
    
    
    
    77,365,704
    
    
    
    2,437,483Less: Accumulated depreciation
    
    
    
    
    
    
    (42,652,848
    )
    
    
    (49,372,239
    )
    
    
    (1,555,521
    )Net property, plant and equipment
    
    
    
    
    
    
    32,599,526
    
    
    
    27,993,465
    
    
    
    881,962Deferred income taxes (net)
    
    
    16
    
    
    
    1,793,402
    
    
    
    1,877,349
    
    
    
    59,148Intangible assets (net)
    
    
    
    
    
    
    931,506
    
    
    
    928,015
    
    
    
    29,238Long-term equity investments
    
    
    7
    
    
    
    3,056,722
    
    
    
    1,620,465
    
    
    
    51,054Restricted investments-non-current
    
    
    10
    
    
    
    254,775
    
    
    
    
    
    
    
    Refundable deposits
    
    
    
    
    
    
    26,408
    
    
    
    87,620
    
    
    
    2,761Other assets
    
    
    
    
    
    
    254,377
    
    
    
    182,492
    
    
    
    5,750Total assets
    
    
    
    
    
    
    59,918,697
    
    
    
    54,395,676
    
    
    
    1,713,790
 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, 2003 and 2004
 (Amounts in thousands except share and per share data)
 December 31,LIABILITIES
& SHAREHOLDERS   EQUITY
    
    Notes
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Current liabilitiesShort-term debts
    
    
    8
    
    
    
    2,748,446
    
    
    
    2,896,854
    
    
    
    91,268Short-term notes
    
    
    9
    
    
    
    
    
    
    
    99,924
    
    
    
    3,148Current portion of capital lease obligations
    
    
    10
    
    
    
    633,444
    
    
    
    303,446
    
    
    
    9,560Current portion of long-term debts
    
    
    11
    
    
    
    10,530,297
    
    
    
    2,196,469
    
    
    
    69,202Notes and accounts payable
    
    
    
    
    
    
    1,955,297
    
    
    
    1,685,279
    
    
    
    53,096Payables to related parties
    
    
    17
    
    
    
    103,570
    
    
    
    42,776
    
    
    
    1,348Payables to equipment suppliers
    
    
    
    
    
    
    541,755
    
    
    
    327,314
    
    
    
    10,312Accrued expenses
    
    
    
    
    
    
    1,930,116
    
    
    
    1,630,357
    
    
    
    51,366Income taxes payable
    
    
    16
    
    
    
    220,926
    
    
    
    197,218
    
    
    
    6,214Others
    
    
    
    
    
    
    53,053
    
    
    
    69,523
    
    
    
    2,191Total current liabilities
    
    
    
    
    
    
    18,716,904
    
    
    
    9,449,160
    
    
    
    297,705Long-term liabilitiesCapital lease obligations, less current portion
    
    
    10
    
    
    
    325,073
    
    
    
    
    
    
    
    Long-term debts, less current portion
    
    
    11
    
    
    
    11,328,780
    
    
    
    10,313,038
    
    
    
    324,922Accrued pension cost
    
    
    12
    
    
    
    191,763
    
    
    
    278,656
    
    
    
    8,779Other liabilities
    
    
    
    
    
    
    143
    
    
    
    349
    
    
    
    11Minority interest
    
    
    
    
    
    
    108,500
    
    
    
    9,800
    
    
    
    309Total liabilities
    
    
    
    
    
    
    30,671,163
    
    
    
    20,051,003
    
    
    
    631,726Commitments and contingencies
    
    
    18Shareholders equity
    
    
    13Common shares NT$10 par value, authorized
6,550,000,000 shares as of December 31,
2003 and 2004, and issued 4,402,758,305
and 5,035,296,328 shares as of December 31,
2003 and 2004, respectively.
    
    
    
    
    
    
    44,027,583
    
    
    
    50,352,963
    
    
    
    1,586,420Common stock to be registered
    
    
    
    
    
    
    274,936
    
    
    
    
    
    
    
    Additional paid-in capital
    
    
    
    
    
    
    
    
    
    
    315,704
    
    
    
    9,947Capital reserve
    
    
    
    
    
    
    7,931
    
    
    
    39,945
    
    
    
    1,259Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated deficits
    
    
    
    
    
    
    (14,062,333
    )
    
    
    (13,886,018
    )
    
    
    (437,493
    )Unrealized losses on long-term investments
    
    
    
    
    
    
    (1,859
    )
    
    
    (1,351,527
    )
    
    
    (42,581
    )Cumulative translation adjustments
    
    
    
    
    
    
    189,712
    
    
    
    62,042
    
    
    
    1,955Treasury stock
    
    
    15
    
    
    
    (1,188,436
    )
    
    
    (1,188,436
    )
    
    
    (37,443
    )Total shareholders equity
    
    
    
    
    
    
    29,247,534
    
    
    
    34,344,673
    
    
    
    1,082,064Total liabilities and shareholders equity
    
    
    
    
    
    
    59,918,697
    
    
    
    54,395,676
    
    
    
    1,713,790
 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, 2002, 2003 and 2004
 (Amounts in thousands except share and per share data)
 For the year ended December 31,Notes
    
    
    2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Sales revenue
    
    
    
    
    
    
    16,647,525
    
    
    
    18,058,229
    
    
    
    23,499,507
    
    
    
    740,375Less: Sales returns
    
    
    
    
    
    
    (42,650
    )
    
    
    (313,544
    )
    
    
    (30,453
    )
    
    
    (959
    )Sales discounts
    
    
    
    
    
    
    (112,411
    )
    
    
    (32,498
    )
    
    
    (89,331
    )
    
    
    (2,814
    )Net sales revenue
    
    
    
    
    
    
    16,492,464
    
    
    
    17,712,187
    
    
    
    23,379,723
    
    
    
    736,602Cost of goods sold
    
    
    
    
    
    
    (17,104,860
    )
    
    
    (20,656,731
    )
    
    
    (18,990,296
    )
    
    
    (598,308
    )Gross profit (loss)
    
    
    
    
    
    
    (612,396
    )
    
    
    (2,944,544
    )
    
    
    4,389,427
    
    
    
    138,294Less:Unrealized profit
    
    
    
    
    
    
    (2,895
    )
    
    
    2,895
    
    
    
    (1,451
    )
    
    
    (46
    )Realized gross profit (loss)
    
    
    
    
    
    
    (615,291
    )
    
    
    (2,941,649
    )
    
    
    4,387,976
    
    
    
    138,248Operating expensesSelling expenses
    
    
    
    
    
    
    (567,660
    )
    
    
    (560,660
    )
    
    
    (729,246
    )
    
    
    (22,976
    )Administrative expenses
    
    
    
    
    
    
    (1,838,025
    )
    
    
    (1,443,449
    )
    
    
    (1,430,617
    )
    
    
    (45,073
    )Research and development expenses
    
    
    
    
    
    
    (3,805,742
    )
    
    
    (2,738,231
    )
    
    
    (2,576,801
    )
    
    
    (81,185
    )Total operating expenses
    
    
    
    
    
    
    (6,211,427
    )
    
    
    (4,742,340
    )
    
    
    (4,736,664
    )
    
    
    (149,234
    )Operating income (loss)
    
    
    
    
    
    
    (6,826,718
    )
    
    
    (7,683,989
    )
    
    
    (348,688
    )
    
    
    (10,986
    )Non-operating incomeResearch and development subsidies
    
    
    
    
    
    
    2,286
    
    
    
    5,125
    
    
    
    18,125
    
    
    
    571Interest income
    
    
    
    
    
    
    216,937
    
    
    
    103,847
    
    
    
    101,646
    
    
    
    3,202Foreign exchange gain
    
    
    
    
    
    
    
    
    
    
    375,087
    
    
    
    
    
    
    
    Gain on disposal of property, plant and equipment
    
    
    
    
    
    
    252
    
    
    
    308
    
    
    
    3,408
    
    
    
    107Gain on disposal of long-term investments
    
    
    
    
    
    
    27,791
    
    
    
    63,565
    
    
    
    374,806
    
    
    
    11,809Net gain on short-term investments
    
    
    
    
    
    
    
    
    
    
    43,591
    
    
    
    10,209
    
    
    
    322Reversal of inventory and spare parts loss provision
    
    
    
    
    
    
    
    
    
    
    1,185,227
    
    
    
    918,545
    
    
    
    28,940Others
    
    
    
    
    
    
    218,622
    
    
    
    99,834
    
    
    
    192,309
    
    
    
    6,059Total other income
    
    
    
    
    
    
    465,888
    
    
    
    1,876,584
    
    
    
    1,619,048
    
    
    
    51,010Non-operating expensesInterest expense
    
    
    
    
    
    
    (1,237,902
    )
    
    
    (1,077,898
    )
    
    
    (684,105
    )
    
    
    (21,553
    )Foreign exchange losses
    
    
    
    
    
    
    (321,266
    )
    
    
    
    
    
    
    (154,023
    )
    
    
    (4,853
    )Inventory and spare parts loss provision
    
    
    
    
    
    
    (2,929,284
    )
    
    
    
    
    
    
    
    
    
    
    Loss on disposal of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss from equity investment
    
    
    
    
    
    
    (141,077
    )
    
    
    (87,219
    )
    
    
    (99,073
    )
    
    
    (3,121
    )Net investment loss
    
    
    
    
    
    
    (273,865
    )
    
    
    (737,382
    )
    
    
    (56,218
    )
    
    
    (1,771
    )Loss on allowance for prepaid expenses
    
    
    
    
    
    
    
    
    
    
    (334,971
    )
    
    
    
    
    
    
    Others
    
    
    
    
    
    
    (72,897
    )
    
    
    (132,162
    )
    
    
    (29,801
    )
    
    
    (939
    )Total other expenses
    
    
    
    
    
    
    (4,976,291
    )
    
    
    (2,369,632
    )
    
    
    (1,023,220
    )
    
    
    (32,237
    )Income (loss) before taxes and minority interest
    
    
    
    
    
    
    (11,337,121
    )
    
    
    (8,177,037
    )
    
    
    247,140
    
    
    
    7,787Income tax expense
    
    
    16
    
    
    
    (19,898
    )
    
    
    (21,027
    )
    
    
    (34,781
    )
    
    
    (1,096
    )Income (loss) before minority interest
    
    
    
    
    
    
    (11,357,019
    )
    
    
    (8,198,064
    )
    
    
    212,359
    
    
    
    6,691Minority interest loss
    
    
    
    
    
    
    356
    
    
    
    319
    
    
    
    5,333
    
    
    
    168Net income (loss)
    
    
    
    
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    6,859Earnings Per Common Share:
    
    
    2Net income (loss) per common share  basic
    
    
    
    
    
    NT$
    (3.10
    )
    
    NT$
    (2.13
    )
    
    NT$
    0.05
    
    
    US$
    0.00Net income (loss) per common share  diluted
    
    
    
    
    
    NT$
    (3.10
    )
    
    NT$
    (2.13
    )
    
    NT$
    0.04
    
    
    US$
    0.00Pro-forma data: assuming that the Companys shares
    
    
    2owned by subsidiaries were not treated as treasury stockNet income (loss)
    
    
    
    
    
    
    (11,426,697
    )
    
    
    (8,222,374
    )
    
    
    221,787
    
    
    
    6,988Net income (loss) per common share  basic
    
    
    
    
    

    NT$
    (3.11
    )
    
    NT$
    (2.13
    )
    

    NT$
    0.05
    
    

    US$
    0.00Net income (loss) per common share  diluted
    
    
    
    
    

 NT$
    (3.11
    )
    
    NT$
    (2.13
    )
    

    NT$
    0.05
    
    

    US$
    0.00
 See accompanying notes to consolidated financial statements. F - 5




---



##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the years ended December 31, 2002, 2003 and 2004
 (Amounts in thousands except share and per share data)
 For
the years ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Cash flows from operating activities:Net income (loss)
    
    
    
    
    
    
    
    
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    6,859Adjustments to reconcile net income (loss) to net cash provided by
operating activities :Depreciation
    
    
    
    
    
    
    
    
    
    
    8,107,296
    
    
    
    8,614,734
    
    
    
    7,092,077
    
    
    
    223,443Amortization
    
    
    
    
    
    
    
    
    
    
    634,805
    
    
    
    672,277
    
    
    
    470,083
    
    
    
    14,810Depreciation and market-value decline on idle assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,530
    
    
    
    
    
    
    
    Loss on allowance for prepaid expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    334,971
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    9,058
    
    
    
    48,143
    
    
    
    1,914
    
    
    
    60Gain on disposal of long-term investments
    
    
    
    
    
    
    
    
    
    
    (27,791
    )
    
    
    (63,565
    )
    
    
    (374,806
    )
    
    
    (11,809
    )Net loss (net gain) on short-term investments
    
    
    
    
    
    
    
    
    
    
    4,631
    
    
    
    (43,591
    )
    
    
    (10,209
    )
    
    
    (322
    )Change in valuation allowance of accounts receivable and other receivable
    
    
    
    
    
    
    
    
    
    
    14,918
    
    
    
    (33,059
    )
    
    
    (238
    )
    
    
    (7
    )Inventory and spare parts provision (reversal)
    
    
    
    
    
    
    
    
    
    
    2,929,284
    
    
    
    (1,185,227
    )
    
    
    (918,545
    )
    
    
    (28,940
    )Net loss from equity investment
    
    
    
    
    
    
    
    
    
    
    141,077
    
    
    
    87,219
    
    
    
    99,073
    
    
    
    3,121Write off on long term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,344
    
    
    
    1,586Net gain (loss) on disposal of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    (252
    )
    
    
    (308
    )
    
    
    (3,408
    )
    
    
    (107
    )Net changes in operating assets and liabilitiesNotes and accounts receivable
    
    
    
    
    
    
    
    
    
    
    (328,028
    )
    
    
    (56,457
    )
    
    
    151,459
    
    
    
    4,772Receivable from related parties
    
    
    
    
    
    
    
    
    
    
    (77,858
    )
    
    
    (12,137
    )
    
    
    (27,016
    )
    
    
    (851
    )Inventories
    
    
    
    
    
    
    
    
    
    
    (767,482
    )
    
    
    2,268,453
    
    
    
    191,223
    
    
    
    6,025Other current assets
    
    
    
    
    
    
    
    
    
    
    156,736
    
    
    
    135,347
    
    
    
    12,000
    
    
    
    378Prepaid expenses
    
    
    
    
    
    
    
    
    
    
    (44,670
    )
    
    
    92,071
    
    
    
    (81,366
    )
    
    
    (2,564
    )Notes and accounts payable
    
    
    
    
    
    
    
    
    
    
    290,357
    
    
    
    569,471
    
    
    
    (270,018
    )
    
    
    (8,507
    )Payables to related parties
    
    
    
    
    
    
    
    
    
    
    23,632
    
    
    
    (53,239
    )
    
    
    (60,794
    )
    
    
    (1,915
    )Accrued expenses
    
    
    
    
    
    
    
    
    
    
    3,775
    
    
    
    (416,501
    )
    
    
    (299,759
    )
    
    
    (9,444
    )Income taxes payable
    
    
    
    
    
    
    
    
    
    
    (99,519
    )
    
    
    (83,518
    )
    
    
    (23,708
    )
    
    
    (747
    )Other current liabilities
    
    
    
    
    
    
    
    
    
    
    338,086
    
    
    
    (381,938
    )
    
    
    20,470
    
    
    
    645Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accrued pension cost
    
    
    
    
    
    
    
    
    
    
    80,661
    
    
    
    86,569
    
    
    
    86,893
    
    
    
    2,738Interest payable of debentures
    
    
    
    
    
    
    
    
    
    
    184,993
    
    
    
    (989,775
    )
    
    
    (336,725
    )
    
    
    (10,609
    )Net cash provided by operating activities
    
    
    
    
    
    
    
    
    
    
    217,046
    
    
    
    1,483,725
    
    
    
    5,986,636
    
    
    
    188,615Cash flows from investing activities:Decrease (increase) in restricted investments
    
    
    
    
    
    
    
    
    
    
    (1,856,396
    )
    
    
    1,527,888
    
    
    
    (345,297
    )
    
    
    (10,879
    )Payments for purchase of marketable securities
    
    
    
    
    
    
    
    
    
    
    (7,691,078
    )
    
    
    (10,077,010
    )
    
    
    (21,961,161
    )
    
    
    (691,908
    )Proceeds from disposal of marketable securities
    
    
    
    
    
    
    
    
    
    
    7,661,859
    
    
    
    10,455,091
    
    
    
    21,911,781
    
    
    
    690,352Payments for purchase of other financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (173,730
    )
    
    
    (101,280
    )
    
    
    (3,191
    )Proceeds from disposal of other financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,730
    
    
    
    101,280
    
    
    
    3,191Additions to long-term equity investments
    
    
    
    
    
    
    
    
    
    
    (762,940
    )
    
    
    (542,451
    )
    
    
    (278,694
    )
    
    
    (8,781
    )Proceeds from disposals of long-term equity
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,113
    
    
    
    463,051
    
    
    
    14,589Payments for purchase of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    (8,433,728
    )
    
    
    (2,616,208
    )
    
    
    (2,768,934
    )
    
    
    (87,238
    )Proceeds from disposals of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    6,023
    
    
    
    6,979
    
    
    
    3,680
    
    
    
    116Refundable deposits
    
    
    
    
    
    
    
    
    
    
    (254,480
    )
    
    
    893,434
    
    
    
    (161,182
    )
    
    
    (5,078
    )Other assets
    
    
    
    
    
    
    
    
    
    
    224,815
    
    
    
    39,678
    
    
    
    40,575
    
    
    
    1,278Additions to intangible assets
    
    
    
    
    
    
    
    
    
    
    (436,686
    )
    
    
    (235,463
    )
    
    
    (532,968
    )
    
    
    (16,792
    )Proceeds from disposals of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    454
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (11,542,611
    )
    
    
    (423,495
    )
    
    
    (3,629,149
    )
    
    
    (114,341
    )
 See accompanying notes to consolidated financial statements. F - 6




---



##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS - (Continued)
 For the years ended December 31, 2002, 2003 and 2004
 (Amounts in thousands except share and per share data)
 For the years ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Cash flows from financing activities:Net increase in short-term debts
    
    
    1,425,201
    
    
    
    624,815
    
    
    
    276,663
    
    
    
    8,717Net increase in short-term notes
    
    
    
    
    
    
    
    
    
    
    99,924
    
    
    
    3,148(Additions) deductions to other liabilities  refundable deposits
    
    
    60
    
    
    
    (5
    )
    
    
    206
    
    
    
    7Proceeds from long-term debts
    
    
    12,080,534
    
    
    
    5,835,305
    
    
    
    1,950,000
    
    
    
    61,437Repayments of long-term debts and capital lease obligations
    
    
    (6,287,456
    )
    
    
    (8,201,614
    )
    
    
    (10,773,284
    )
    
    
    (339,422
    )Distribution of directors and supervisors remuneration
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock repurchased
    
    
    (1,046,071
    )
    
    
    
    
    
    
    
    
    
    
    Common stock issued
    
    
    
    
    
    
    3,822,504
    
    
    
    5,565,704
    
    
    
    175,353Minority interest
    
    
    788
    
    
    
    117,712
    
    
    
    (69,867
    )
    
    
    (2,201
    )Net cash provided by (used in) financing activities
    
    
    6,173,056
    
    
    
    2,198,717
    
    
    
    (2,950,654
    )
    
    
    (92,961
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (14,084
    )
    
    
    (4,794
    )
    
    
    60,341
    
    
    
    1,901(5,166,593
    )
    
    
    3,254,153
    
    
    
    (532,826
    )
    
    
    (16,786
    )Cash and cash equivalents at the beginning of the period
    
    
    12,560,954
    
    
    
    7,394,361
    
    
    
    10,648,514
    
    
    
    335,491Cash and cash equivalents at the end of the period
    
    
    7,394,361
    
    
    
    10,648,514
    
    
    
    10,115,688
    
    
    
    318,705Supplemental disclosures of cash flow information:Interest paid during the period
    
    
    1,176,317
    
    
    
    998,922
    
    
    
    735,529
    
    
    
    23,174Income tax paid during the period
    
    
    152,985
    
    
    
    35,064
    
    
    
    65,261
    
    
    
    2,056Non-cash activities:Current portion of long-term debts and capital lease obligations
transferred to current liabilities
    
    
    9,347,417
    
    
    
    11,163,741
    
    
    
    2,499,915
    
    
    
    78,762Payments for purchases of property, plant and equipment:Payable to equipment suppliers (beginning balance)
    
    
    1,010,363
    
    
    
    1,551,915
    
    
    
    541,755
    
    
    
    17,068Add: Purchases of property, plant and equipment
    
    
    8,975,280
    
    
    
    1,606,048
    
    
    
    2,554,493
    
    
    
    80,482Less: Payable to equipment suppliers (ending balance)
    
    
    (1,551,915
    )
    
    
    (541,755
    )
    
    
    (327,314
    )
    
    
    (10,312
    )Payments for purchases of property, plant and equipment
    
    
    8,433,728
    
    
    
    2,616,208
    
    
    
    2,768,934
    
    
    
    87,238Convertible bonds converted to common stock and
accumulated deficit
    
    
    
    
    
    
    2,453,866
    
    
    
    759,067
    
    
    
    23,915
 See accompanying notes to consolidated financial statements. F - 7




---



##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD. 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the years ended December 31, 2002, 2003 and 2004
(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, 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
    )
    
    
    29,247,534Issuance of common shares for
Global Depositary Shares
    
    
    5,250,000
    
    
    
    
    
    
    
    315,704
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,565,704Conversion of convertible debentures
    
    
    1,075,380
    
    
    
    (274,936
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,377
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    759,067Adjustments of capital reserve from equity investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,014Unrealized losses on long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,349,668
    )
    
    
    
    
    
    
    
    
    
    
    (1,349,668
    )Net income, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217,692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217,692Cumulative translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (127,670
    )
    
    
    
    
    
    
    (127,670
    )Balance as of December 31, 2004
    
    
    50,352,963
    
    
    
    
    
    
    
    315,704
    
    
    
    39,945
    
    
    
    
    
    
    
    
    
    
    
    (13,886,018
    )
    
    
    (1,351,527
    )
    
    
    62,042
    
    
    
    (1,188,436
    )
    
    
    34,344,673Balance as of December 31, 2004 (US$)
    
    
    1,586,420
    
    
    
    
    
    
    
    9,947
    
    
    
    1,259
    
    
    
    
    
    
    
    
    
    
    
    (437,493
    )
    
    
    (42,581
    )
    
    
    1,955
    
    
    
    (37,443
    )
    
    
    1,082,064
 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 BusinessThe Company

Macronix International Co., Ltd. was incorporated in the Hsinchu Science Park (HSP), Taiwan,
under the laws of the Republic of China (the R.O.C.) 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., Kang Bao Investment, Ltd., Run Hong
Investment, Ltd., MaxNova Inc., and Macronix (Hong Kong) Co., Ltd. In addition, the five
wholly-owned subsidiaries of Macronix (B.V.I.) Co., Ltd including Wedgewood International
Ltd., New Trend Technology Inc., Macronix Europe N.V., Macronix Japan (Cayman Islands) and
Macronix Pte. Ltd. and Hui Ying Investment, Ltd.s 69.8% owned subsidiary, Joyteck Co., Ltd.
which was 18.18% owned by Macronix International Co., Ltd., are also included in the
consolidated financial statements of Macronix International Co., Ltd.As Macronix International Co., Ltd. didnt own over 50% of Magic Pixel Inc.s shares in year
2004, Magic Pixel Inc. wasnt included in the consolidated financial statements for the year
ended December 31, 2004. Prior years comparative consolidated financial statements were not
retroactively restated due to immaterial effect to the Company.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 PoliciesGenerally Accepted Accounting Principles

The consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the Republic of China (R.O.C. GAAP).Use of Estimates
The preparation of the consolidated financial statements in conformity with R.O.C. 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 or less 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 TranslationThe Companys Taiwan entities maintain their accounting records in New Taiwan dollars (N.T.
dollars or NT$), the national currency of the R.O.C. Transactions denominated in foreign
currencies are recorded in N.T. dollars using the exchange rates in effect at the date of the
transactions. Assets and liabilities denominated in foreign currencies are translated into
N.T. 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 N.T. 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 contractsA 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 contractsAt 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.c.
    
    Cross currency and interest rate swapsCross 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. 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)  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 depositsA 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 instrumentsThe Company has entered into other derivative financial instruments for hedging purposes.
Other derivative financial instruments are accounted for as described in note 21.  Information Expressed in U.S. DollarsThe financial statements are stated in N.T. dollars, the national currency of the R.O.C.
Translation of N.T. dollar amounts into U.S. dollar amounts is included solely for the
convenience of the readers and has been made at the rate of NT$31.74 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, 2004). No representation is made that the
N.T. dollar amounts could have been, or could be, converted into U.S. dollars at that or any
other rate.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.InventoriesInventories 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. A slow-moving reserve is provided based upon inventory aging.Long-Term InvestmentsLong-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 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)  reserve are required when holding percentage changes due to un-proportional subscription to
investees 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.Unrealized intercompany gains and losses arising from downstream transactions with investees
accounted for under the equity method are eliminated in accordance with the Companys
ownership percentage, while those from transactions with majority-owned or substantively
controlled subsidiaries are eliminated entirely. Unrealized intercompany gains and losses
arising from upstream with investees accounted for under the equity method are eliminated in
accordance with the Companys ownership percentage.When a long-term investment is disposed of, the difference between the selling price and book
value of such investments is treated as a disposal gain or loss. In addition, the related
additional paid-in capital is proportionally adjusted and recognized as a gain or loss.Under equity method, the Company recognized its investees losses only to the extent the
Companys long-term investment on that investee reaches zero. However, if the Company
intends to provide further financial support for the investee company, then the Company
shall continue to recognize investment losses in proportion to the stock ownership
percentage. Such credit long-term investment balance shall first offset the advance (if
any) the Company made to the investee company, the remaining shall be recorded under
other liabilities.Allowance for Doubtful AccountsThe 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 EquipmentProperty, 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 fixtures
    
    
    1 to 18
    
    yearsLeased equipment
    
    
    
    
    (note)
  Note: lesser of 5 years or life of lease.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 held for non-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 agreementsProvided 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 AssetsIntangible 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 intangible assets amounted to
NT$2,288,639, NT$2,960,916, NT$3,428,971 (US$108,033) as of December 31, 2002, 2003, and 2004,
respectively.Employee Retirement BenefitsThe 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 R.O.C., 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, R.O.C. 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 TaxesThe 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 R.O.C.. The 10% tax on undistributed earnings is
recorded as an expense at the time the shareholders resolve that 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 BondsThe 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 RecognitionRevenue is recognized in accordance with R.O.C. Statement of Financial Accounting Standards
No. 32, Accounting for Revenue Recognition. The statement requires that Revenues being
recognized upon shipment or as services are rendered when title has been transferred,
collectibility is reasonably assured and acceptance provisions criteria are satisfied. An
accrual for estimated returns, computed primarily on the basis of historical experience, is
recorded at the time when revenues are recognized.Employee BonusesAmounts 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. 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)  Research and Development SubsidiesGovernment subsidies for research and development are recorded as non-operating income in the
period the qualifying research and development activities are undertaken.Minority InterestsMinority 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 ShareIn accordance with R.O.C. Statement of Financial Accounting Standard No.24, Earnings per
Share, the Company presents basic earnings per share if a simple capital structure exists; or
both basic earnings per share and diluted earnings per share if a complex capital structure
exists. Basic earnings per share is equal to the net income (loss) attributable to common
stock divided by the weighted-average number of common shares. When calculating diluted
earnings per share, the numerator 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 31,2002
    
    
    2003
    
    
    2004Numbers of common shares outstanding as of January 1
    
    
    3,359,342,613
    
    
    
    3,691,276,875
    
    
    
    4,430,251,943Weighted-average number of repurchased stock
    
    
    (26,205,248
    )
    
    
    (40,000,000
    )
    
    
    (40,000,000
    )Stock dividends on July 13, 2002
    
    
    333,313,737
    
    
    
    Issuance of 475,000,000 common shares for cash
on November 11, 2003
    
    
    
    
    
    
    66,369,863Bonds converted to common shares for the year ended
December 31, 2003
    
    
    
    
    
    
    134,088,222Add: retroactive adjustment for bonus element
included in the rights offering on November 3, 2003
(0.1688%)
    
    
    6,188,969
    
    
    
    6,388,732Issuance of 525,000,000 common shares for Global
Depositary Shares on April 5, 2004
    
    
    
    
    
    
    
    
    
    
    388,729,508Bonds converted to common shares for the year ended
December 31, 2004 (80,044,385 shares)
    
    
    
    
    
    
    
    
    
    
    61,669,886Subtotal
    
    
    3,672,640,071
    
    
    
    3,858,123,692
    
    
    
    4,840,651,337Less: treasury stock owned by subsidiaries
    

    
    (6,023,152
    )
    
    
    (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
    
    
    3,666,606,752
    
    
    
    3,852,090,373
    
    
    
    4,834,628,185Potential common shares:Dilutive effect of employee stock options
    
    
    
    
    
    
    
    
    
    
    32,379,507Dilutive weighted average number of shares
    
    
    3,666,606,752
    
    
    
    3,852,090,373
    
    
    
    4,867,007,692
 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 31,2002
    
    
    2003
    
    
    2004Basic EPS:Net income (loss) available to common share holders
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )
    
    
    217,692Weighted average common shares outstanding
    
    
    3,666,606,752
    
    
    
    3,852,090,373
    
    
    
    4,834,628,185Basic EPS
    
    
    (3.10
    )
    
    
    (2.13
    )
    
    
    0.05Diluted EPS:Net income (loss) available to common share holders
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )
    
    
    217,692Income impact of assumed exercise of stock options
    
    
    
    
    
    
    
    
    
    
    Net income (loss) available to common shares plus
assumed conversions
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )
    
    
    217,692Weighted average common shares outstanding
    
    
    3,666,606,752
    
    
    
    3,852,090,373
    
    
    
    4,834,628,185Weighted average assumed exercise of stock options
    
    
    
    
    
    
    
    
    
    
    32,379,507Adjusted weighted average shares
    
    
    3,666,606,752
    
    
    
    3,852,090,373
    
    
    
    4,867,007,692Diluted EPS
    
    
    (3.10
    )
    
    
    (2.13
    )
    
    
    0.04
  The diluted earnings per share calculation excludes the statement of operations impact of
NT$413,809, NT$240,708 and NT$88,181 (US$2,778) related to the assumed conversion of
convertible bonds into 374,454,410 weighted average shares, 659,968,955 weighted average shares and 61,094,172 weighted average shares for years 2002, 2003 and 2004 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 for year 2003 due to the
anti-dilutive effect.Pro-forma data:Assuming that the Companys shares owned by its subsidiaries were not treated as treasury
stock for the years 2003 and 2004, the net income (loss) and earning (loss) per share would be
as follows: For the year ended December 31,2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Net income (loss)
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    6,859Unrealized short-term
investment income (loss)
    
    
    (24,629
    )
    
    
    4,095
    
    
    
    129Net income (loss) (pro-forma)
    
    
    (8,222,374
    )
    
    
    221,787
    
    
    
    6,988
 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) Amount (numerator)
    
    
    Shares
    
    
    Net loss per shareEPS (pro-forma)
    
    Before tax
    
    
    After tax
    
    
    (denominator)
    
    
    Before tax
    
    
    After taxFor the year ended
December 31, 2003:Basic EPSNet loss (Note)
    
    $
    (8,222,374
    )
    
    $
    (8,222,374
    )
    
    
    3,858,123,692
    
    
    $
    (2.13
    )
    
    $
    (2.13
    )For the year ended
December 31, 2004:Basic EPSNet income
    
    $
    221,787
    
    
    $
    221,787
    
    
    
    4,840,651,337
    
    
    $
    0.05
    
    
    $
    0.05Diluted effect:Employee stock
options
    
    
    
    
    
    
    
    
    
    
    32,379,507Net income
    
    $
    221,787
    
    
    $
    221,787
    
    
    
    4,873,030,844
    
    
    $
    0.05
    
    
    $
    0.05
  (Note) Diluted EPS equaled to basic EPS as the potential common shares would have
anti-diluted effect on the Companys net loss for the year ended December 31, 2003.Treasury StockIn accordance with the R.O.C. 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.Compensating Employees Stock Option PlanEffective from January 1, 2004, the Company adopted intrinsic value method for its
compensating employees stock option plans. Under the method, the excess of the market price
over exercise price at the plan date is adjusted under shareholders equity and expensed over
grantees service periods. Disclosure of pro forma information for net income and earnings per
share using fair value method is required.Reason and Effect of a Change in Accounting PoliciesEffective from January 1, 2004, the Company adopted accounting treatment for employees stock
option plans required by Taiwan Securities and Future Commission. Such adoption does not
impact the Companys net income and shareholders equity for the year ended December 31, 2004.
Please refer to note 14 for information of pro forma net income and earning per share.3.
    
    Cash and Cash Equivalents As of December 31,2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Petty cash
    
    
    7,726
    
    
    
    600
    
    
    
    19Checking and savings accounts
    
    
    2,374,912
    
    
    
    1,948,043
    
    
    
    61,375Time deposits
    
    
    6,803,685
    
    
    
    112,139
    
    
    
    3,533Cash equivalents
    
    
    1,462,191
    
    
    
    8,054,906
    
    
    
    253,778Total
    
    
    10,648,514
    
    
    
    10,115,688
    
    
    
    318,705
 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) 4. Short-Term Investments As of December 31,2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Mutual funds
    
    
    871,095
    
    
    
    901,871
    
    
    
    28,414Equity securities
    
    
    
    
    
    
    16,169
    
    
    
    510Total
    
    
    871,095
    
    
    
    918,040
    
    
    
    28,924Less: Allowance for market value decline
    
    
    (21,659
    )
    
    
    
    
    
    
    Net
    
    
    849,436
    
    
    
    918,040
    
    
    
    28,924
 5. Notes and Accounts Receivable (Net) As of December 31,2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Notes receivable
    
    
    161,098
    
    
    
    100,008
    
    
    
    3,152Accounts receivable
    
    
    2,723,361
    
    
    
    2,615,335
    
    
    
    82,398Total
    
    
    2,884,459
    
    
    
    2,715,343
    
    
    
    85,550Less: Allowance for doubtful accounts
    
    
    (114,807
    )
    
    
    (161,833
    )
    
    
    (5,099
    )Net
    
    
    2,769,652
    
    
    
    2,553,510
    
    
    
    80,451
 6. Inventories (Net) As of December 31,2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Merchandise
    
    
    291,992
    
    
    
    232,339
    
    
    
    7,320Finished goods
    
    
    2,043,723
    
    
    
    2,389,000
    
    
    
    75,268Work in process
    
    
    5,815,498
    
    
    
    5,217,347
    
    
    
    164,378Raw materials
    
    
    180,287
    
    
    
    150,159
    
    
    
    4,730Supplies
    
    
    112,721
    
    
    
    79,287
    
    
    
    2,498Others
    
    
    30,688
    
    
    
    324
    
    
    
    10Total
    
    
    8,474,909
    
    
    
    8,068,456
    
    
    
    254,204Less: Allowance for market
value decline and obsolescence
    
    
    (4,380,019
    )
    
    
    (3,242,215
    )
    
    
    (102,149
    )Net
    
    
    4,094,890
    
    
    
    4,826,241
    
    
    
    152,055
 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)  The insurance coverage for inventories amounted to NT$5,135,785 and NT$ 6,032,985 (US$190,075)
as of December 31, 2003 and 2004, respectively.7.
    
    Long-Term Equity Investments As of December 31, 2003PercentShares
    
    
    NT$
    
    
    ownedAccounted for under cost method:Chantek Electronic Co., Ltd. **
    
    
    2,395,209
    
    
    
    
    
    
    
    4.35
    %United Industrial Gases Co., Ltd.
    
    
    5,274,212
    
    
    
    58,500
    
    
    
    3.31
    %Quality Test System Inc.
    
    
    4,538,333
    
    
    
    
    
    
    
    14.64
    %Chien Cheng Venture Capital Co., Ltd.
    
    
    8,000,000
    
    
    
    80,000
    
    
    
    15.38
    %Honbond Venture Capital Co., Ltd.
    
    
    12,000,000
    
    
    
    120,000
    
    
    
    15.00
    %Ardentec Corp.
    
    
    26,637,878
    
    
    
    264,004
    
    
    
    11.65
    %Powertech Co., Ltd.**
    
    
    7,109,786
    
    
    
    76,213
    
    
    
    2.72
    %Taiwan Mask Corp.**
    
    
    806
    
    
    
    81
    
    
    
    
    *Chipbond Technology Corp.**
    
    
    6,681,450
    
    
    
    103,778
    
    
    
    4.78
    %Pico Netics Inc.
    
    
    1,000,000
    
    
    
    30,573
    
    
    
    2.45
    %Global Strategic Investment Fund
    
    
    2,000,000
    
    
    
    67,940
    
    
    
    2.52
    %FueTrek Co., Ltd.
    
    
    480
    
    
    
    42,126
    
    
    
    17.65
    %Tower Semiconductor Ltd.**
    
    
    8,144,784
    
    
    
    2,030,227
    
    
    
    15.75
    %Subtotal
    
    
    
    
    
    
    2,873,442Less: Allowance for market value decline
    
    
    
    
    
    
    (1,859
    )Net
    
    
    
    
    
    
    2,871,583Accounted for under equity method:Prominent Communications, Inc.
    
    
    7,300,000
    
    
    
    20,961
    
    
    

    35.23
    %Biomorphic VLSI Inc.
    
    
    15,910,252
    
    
    
    
    
    
    
    46.51
    %Raio Electronic Co. Ltd.
    
    
    2,523,210
    
    
    
    14,700
    
    
    
    26.28
    %Subtotal
    
    
    
    
    
    
    35,661Prepaid Investment:Tower Semiconductor Ltd.
    
    
    
    
    
    
    149,478Total
    
    
    
    
    
    
    3,056,722
 
 *Less than 0.01%
**Publicly traded. As of December 31, 2004PercentShares
    
    
    NT$
    
    
    US$
    
    
    ownedAccounted for under cost method:United Industrial Gases Co., Ltd.
    
    
    5,274,212
    
    
    
    58,500
    
    
    
    1,843
    
    
    
    3.24
    %Quality Test System Inc.
    
    
    4,538,333
    
    
    
    
    
    
    
    
    
    
    
    14.64
    %
 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) As of December 31, 2004PercentShares
    
    
    NT$
    
    
    US$
    
    
    ownedChien Cheng Venture Capital Co., Ltd.
    
    
    8,000,000
    
    
    
    80,000
    
    
    
    2,520
    
    
    
    15.38
    %Honbond Venture Capital Co., Ltd.
    
    
    12,000,000
    
    
    
    120,000
    
    
    
    3,781
    
    
    
    15.00
    %Ardentec Corp.
    
    
    30,148,752
    
    
    
    309,064
    
    
    
    9,737
    
    
    
    10.64
    %Powertech Co., Ltd.**
    
    
    3,694,000
    
    
    
    34,433
    
    
    
    1,085
    
    
    
    1.09
    %Chipbond Technology Corp.**
    
    
    4,749,765
    
    
    
    56,122
    
    
    
    1,768
    
    
    
    2.77
    %Pico Netics Inc.
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    2.35
    %Global Strategic Investment Fund
    
    
    2,000,000
    
    
    
    63,420
    
    
    
    1,998
    
    
    
    2.52
    %FueTrek Co., Ltd.
    
    
    480
    
    
    
    39,324
    
    
    
    1,239
    
    
    
    16.22
    %Tower Semiconductor Ltd.**
    
    
    8,773,395
    
    
    
    2,034,691
    
    
    
    64,105
    
    
    
    13.35
    %Subtotal
    
    
    
    
    
    
    2,795,554
    
    
    
    88,076Less: Allowance for market value decline
    
    
    
    
    
    
    (1,351,527
    )
    
    
    (42,581
    )Net
    
    
    
    
    
    
    1,444,027
    
    
    
    45,495Accounted for under equity method:Magic Pixel Inc.
    
    
    9,264,000
    
    
    
    95,032
    
    
    
    2,994
    
    
    
    48.76
    %Biomorphic Microsystems Corporation
    
    
    14,524,521
    
    
    
    76,180
    
    
    
    2,400
    
    
    
    30.08
    %Raio Electronic Co. Ltd.
    
    
    2,523,210
    
    
    
    
    
    
    
    
    
    
    
    26.28
    %Procomm Inc.
    
    
    10,132,513
    
    
    
    
    
    
    
    
    
    
    
    38.38
    %Xinmax Technology Development
    
    
    
    
    
    
    5,226
    
    
    
    165
    
    
    
    45.00
    %Subtotal
    
    
    
    
    
    
    176,438
    
    
    
    5,559Total
    
    
    
    
    
    
    1,620,465
    
    
    
    51,054
 
 **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) 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. Such investment was
reclassified to short-term investment in 2004 because of the change in the Companys holding
purpose. Chipbond Technology Inc.s shares commenced trading on GreTai Securities Market (GTSM) in
2002. The Company was required by GTSM to deposit 5,574,000 shares with book value of
NT$87,657, as the Company represented on Chipbonds Board. Under GTSMs regulation, such
deposit shall not be transferred or pledged. For the year ended December 31, 2003, no
deposited shares have been withdrawn. For the year ended December 31, 2004, 1,487,000 shares
had been withdrawn. As of December 31, 2003 and 2004, 5,574,000 shares and 4,087,000 shares,
with book value of NT$87,657 and NT$59,697 remained deposited, respectively. Powertech Technology Inc. went public on GTSM in 2003. The Company, representing on
Powertechs Board, was required by GTSM to deposit 6,771,225 shares. Under GTSMs regulation,
such deposit shall not be transferred or pledged. For the year ended December 31, 2003, no
deposited shares have been withdrawn. For the year ended December 31, 2004, 3,077,225, shares
had been withdrawn. As of December 31, 2003 and 2004, 6,771,225 shares and 3,694,000 shares,
with book value of NT$72,584 and NT$34,433 remained deposited, respectively. Promiment Communications Inc. (PCI), its shareholders, and Procomm Inc. agreed on a share
exchange agreement on September 1, 2004. Under the agreement, Procomm Inc. issued its own
stock to owners of PCI in exchange of PCIs stock. Accordingly, the Company received
10,132,513 shares of Procomms stock for 7,300,000 shares of PCIs stock. The transaction is
considered a reorganization under common control and had no impact on the Companys financial
statements. Biomorphic VLSI, Inc., its shareholders, and Biomorphic Microsystems Corporation agreed on a
share exchange agreement on May 14, 2004. Under the agreement, Biomorphic Microsystems
Corporation issued its own stock to owners of Biomorphic VLSI, Inc. in exchange of Biomorphic
VLSI, Inc.s stock. According, the Company received 14,900,531 shares of Biomorphic
Microsystems Corporations stock for 18,160,252 shares of Biomorphic VLSI, Inc.s stock. The
transaction is considered a reorganization under common control and had no impact on the
Companys financial statements. Except for those shares compulsorily deposited, no other long-term equity investments were
pledged or restricted as of December 31, 2003 and 2004. 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)  8.
    
    Short-Term Debts As of December 31,2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Letter of credit loans within 180
days at variable interest rates
    
    
    114,649
    
    
    
    342,282
    
    
    
    10,784Working capital loans due within 180
days at variable interest rates
    
    
    2,633,797
    
    
    
    2,554,572
    
    
    
    80,484Total
    
    
    2,748,446
    
    
    
    2,896,854
    
    
    
    91,268
  The weighted average interest rate of the short-term debts was 2.085% and 2.81% as of December
31, 2003 and 2004, respectively.The short-term debt includes a foreign currency facility of US$60,125 (NT$2,043,649) as of
December 31, 2003, and US$68,830(NT$2,182,587) and JPY$42,500 (NT$13,145) as of December 31,
2004.The Companys unused short-term lines of credit with terms of 180 days (including unused
letters of credit) amounted to NT$6,521,020 and NT$5,424,345(US$170,899) as of December 31,
2003 and 2004, respectively.9.
    
    Short-Term Notes As of December 31, 2004Item
    
    Interest
    
    
    Period
    
    
    NT$
    
    
    US$Commercial Papers
    
    
    1.43463
    %
    
    
    2004.10.29~2005.1.21
    
    
    
    100,000
    
    
    
    3,150Less : Discount
    
    
    
    
    
    
    
    
    
    
    (76
    )
    
    
    (2
    )Net
    
    
    
    
    
    
    
    
    
    
    99,924
    
    
    
    3,148
  There were no short-term notes outstanding as of December 31, 2003.The Companys unused short-term lines of credit for short-term notes amounted to NT$400,000
and NT$80,000 (US$2,520) as of December 31, 2003 and 2004, respectively.There were no assets pledged as collateral for short-term notes.10.
    
    Capital Lease ObligationsIn 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 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)  Company. Accumulated depreciation of assets under capital leases amounted to NT$598,178 and
NT$890,653 (US$28,061) as of December 31, 2003 and 2004, respectively.Future lease obligations resulting from the leases with Nintendo as of December 31, 2004 are
as follows: Year
    
    NT$
    
    
    US$2005
    
    
    306,533
    
    
    
    9,657Less: unrealized interest expense
    
    
    (3,087
    )
    
    
    (97
    )Current portion of lease obligations
    
    
    303,446
    
    
    
    9,560
 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)  11.
    
    Long-Term Debts Interest
    
    
    BalanceAs of December 31,
    
    
    As of December 31,2003
    
    
    2004
    
    
    2003
    
    
    2004%
    
    
    %
    
    
    NT$
    
    
    NT$
    
    
    US$SecuredMedium term loans from one bank, repayable in 8
semi-annual installments from May 2001 to
November 2004 with variable interest rates
    
    
    3.519
    
    
    
    
    
    
    
    25,400
    
    
    
    Medium term loan from one bank, repayable in
full at maturity with variable interest
rates
    
    
    
    
    
    
    1.50
    
    
    
    
    
    
    
    800,000
    
    
    
    25,205SB 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
    
    
    
    94,518Medium term loans from one bank, repayable in
96 monthly installments from May 1999 to April
2007 with variable interest rates
    
    
    4.35
    
    
    
    4.45
    
    
    
    146,000
    
    
    
    102,200
    
    
    
    3,220Medium term loan from 14 banks, repayable in 19
quarterly installments from July 1999 to
December 2005 with variable interest rates
    
    
    1.872~3.940
    
    
    
    2.684~4.040
    
    
    
    1,418,483
    
    
    
    41,070
    
    
    
    1,294Medium term loan from 20 banks, repayable in 10
semi-annual installments from March 2005 to
September 2009 with variable interest rates
    
    
    2.548
    
    
    
    2.579
    
    
    
    5,910,000
    
    
    
    7,060,000
    
    
    
    222,432Medium term loan from one bank, repayable in
156 monthly installments from May 2003 to April
2016 with variable interest rates
    
    
    4.35
    
    
    
    4.45
    
    
    
    843,410
    
    
    
    775,024
    
    
    
    24,418Medium term loan from one bank, repayable in 17
quarterly installments from April 2002 to April
2006 with variable interest rates
    
    
    5.155
    
    
    
    5.255
    
    
    
    188,240
    
    
    
    94,120
    
    
    
    2,965Medium 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
    
    
    
    300,000
    
    
    
    200,000
    
    
    
    6,301UnsecuredECB IV Debentures, 5-year unsecured convertible
debentures puttable in August 2004
    
    
    0.50
    
    
    
    0.50
    
    
    
    5,748,539
    
    
    
    3,171
    
    
    
    100DCB I Debentures, 5-year unsecured convertible
debentures puttable in December
2005
    
    
    
    
    
    
    
    
    
    
    766,900
    
    
    
    209,200
    
    
    
    6,591ECB V Debentures, 5-year unsecured convertible
debentures puttable in February 2004
    
    
    
    
    
    
    
    
    
    
    3,057,300
    
    
    
    202,944
    
    
    
    6,39421,404,272
    
    
    
    12,487,729
    
    
    
    393,438Add: Reserve for redemption of convertible bonds
    
    
    
    
    
    
    
    
    
    
    454,805
    
    
    
    21,778
    
    
    
    686Less: Current portion
    
    
    
    
    
    
    
    
    
    
    (10,530,297
    )
    
    
    (2,196,469
    )
    
    
    (69,202
    )Net
    
    
    
    
    
    
    
    
    
    
    11,328,780
    
    
    
    10,313,038
    
    
    
    324,922
  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%. SB II was guaranteed by 20
banks in total of NT$3,099,000. The interest expense is repayable annually while the bonds
will be paid in full at maturity.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, 2004, 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 debentures may be redeemed is August
9, 2004. As of December 31, 2004, the Company repurchased and canceled USD$169,124 of the
bonds from the market. For the year ended December 31, 2004, the related debt extinguishment
gain of NT$63,070 was recorded under non-operating income.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 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)  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, 2004, the conversion price was NT$8.7. As of December 31, 2004, an aggregate principal
amount of NT$2,990,800 (US$94,228) 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$230,266 (US$7,255).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, 2004, 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. As of December 31, 2004, and
aggregate principal amount of US$78,100 has been redeemed under the request of bondholders,
while US$5,500 of the bonds has been converted.The above long-term debt outstanding as of December 31, 2004, excluding the convertible
debentures, comprised of US dollar denominated debt of US$1,000 (NT$31,710) and NT dollar 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)  denominated debt of NT$9,040,704 (US$284,836).Maturity of existing long-term debt for the 5 years succeeding December 31, 2004 are as
follows: Years
    
    NT$
    
    
    US$2005
    
    
    2,196,469
    
    
    
    69,2022006
    
    
    4,624,186
    
    
    
    145,6902007
    
    
    2,294,986
    
    
    
    72,3062008
    
    
    1,480,386
    
    
    
    46,6412009
    
    
    1,480,386
    
    
    
    46,641After 2009
    
    
    433,094
    
    
    
    13,645Total
    
    
    12,509,507
    
    
    
    394,125
  Certain debt agreements, entered into by the Company with several banks including Chaio Tung
Bank, require the Company to issue additional common shares for cash when the Companys debt
to equity ratio is greater than 1.2, or when the Companys current ratio exceeds 1.0.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, 2003 and 2004 are as follows: As of December 31,Accounts
    
    2003
    
    
    2004NT$
    
    NT$
    
    US$Restricted investments-current
    
    
    1,829,534
    
    
    
    2,429,606
    
    
    
    76,547Restricted investments-non-current
    
    
    254,775
    
    
    
    
    
    
    
    Property, plant and equipment
    
    
    15,882,664
    
    
    
    15,644,550
    
    
    
    492,897Total
    
    
    17,966,973
    
    
    
    18,074,156
    
    
    
    569,444
 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)  12.
    
    Retirement Pension PlanIn 1990, the Company enacted provisions for employees retirement. The provisions state that
employees are entitled to 2 base points for every year of service for the first 15 years and 1
base point for every additional year of service up to a maximum of 45 base points. Employee
pension obligation is computed based on years of service and average salaries or wages for the
6 months prior to approved retirement. Prior to May 1996, the Company made a monthly
contribution equal to 2% of the wages and salaries to the pension fund maintained with the
Central Trust of China. On the basis of an actuarial report, the monthly contribution in May
1996 was changed to 5% of the wages and salaries paid. However, effective from January 1,
2002, the monthly contribution rate was changed back to 2%. Contributions to the fund are
deposited in the Employees Retirement Fund Committees name.In August 1999, the Company revised its pension plan to allow 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 31,2002
    
    
    2003
    
    
    2004Discount rate
    
    
    4.0
    %
    
    
    3.5
    %
    
    
    3.5
    %Rate of increase in future compensation levels
    
    
    3.5
    %
    
    
    3.0
    %
    
    
    3.0
    %Expected long-term rate of return on plan assets
    
    
    4.0
    %
    
    
    3.5
    %
    
    
    3.5
    %
 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)  The funded status of the Companys pension plan as of December 31, 2003 and 2004 is as
follows: As of December 31,2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Pension obligationVested benefit obligation
    
    
    (205
    )
    
    
    
    
    
    
    Non-vested benefit obligation
    
    
    (497,500
    )
    
    
    (649,133
    )
    
    
    (20,452
    )Accumulated benefit obligation
    
    
    (497,705
    )
    
    
    (649,133
    )
    
    
    (20,452
    )Effect of future payment increases
    
    
    (372,790
    )
    
    
    (428,184
    )
    
    
    (13,490
    )Projected benefit obligation
    
    
    (870,495
    )
    
    
    (1,077,317
    )
    
    
    (33,942
    )Plan assets at fair value
    
    
    636,655
    
    
    
    679,505
    
    
    
    21,408Projected benefit obligation in excess of plan assets
    
    
    (233,840
    )
    
    
    (397,812
    )
    
    
    (12,534
    )Unrecognized net transition obligation
    
    
    53,697
    
    
    
    49,475
    
    
    
    1,559Unrecognized prior service cost
    
    
    26,806
    
    
    
    25,504
    
    
    
    804Unrecognized net loss (gain)
    
    
    (38,426
    )
    
    
    38,396
    
    
    
    1,210Other
    
    
    
    
    
    
    5,781
    
    
    
    182Accrued pension cost
    
    
    (191,763
    )
    
    
    (278,656
    )
    
    
    (8,779
    )
  The components of 2002, 2003 and 2004 net pension costs are as follows: For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Service cost
    
    
    114,324
    
    
    
    118,257
    
    
    
    119,969
    
    
    
    3,780Interest cost
    
    
    30,577
    
    
    
    26,963
    
    
    
    30,326
    
    
    
    955Expected return on plan assets
    
    
    (25,010
    )
    
    
    (24,483
    )
    
    
    (22,906
    )
    
    
    (722
    )Amortization of prior service
costs and unrecognized net
transition
    
    
    4,394
    
    
    
    4,394
    
    
    
    4,394
    
    
    
    139Net pension cost
    
    
    124,285
    
    
    
    125,131
    
    
    
    131,783
    
    
    
    4,152
 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)  Additional pension disclosures: As of December 31,2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Benefit obligation at January 1
    
    
    764,627
    
    
    
    870,495
    
    
    
    27,425Service cost
    
    
    118,257
    
    
    
    119,969
    
    
    
    3,780Interest cost
    
    
    26,963
    
    
    
    30,326
    
    
    
    955Paid to retirees
    
    
    
    
    
    
    (3,324
    )
    
    
    (104
    )Increase in unrecognized actuarial (gain) loss
    
    
    
    
    
    
    
    
    
    
    Increase in unrecognized transition cost
    
    
    1,130
    
    
    
    
    
    
    
    Increase in unrecognized actuarial (gain) loss
    
    
    (40,482
    )
    
    
    61,643
    
    
    
    1,942Others
    
    
    
    
    
    
    (1,792
    )
    
    
    (56
    )Benefit obligation December 31
    
    
    870,495
    
    
    
    1,077,317
    
    
    
    33,942Change in plan assetsFair value of plan assets at the beginning of the period
    
    
    589,501
    
    
    
    636,062
    
    
    
    20,040Actual return on plan assets
    
    
    8,592
    
    
    
    7,727
    
    
    
    243Contributions
    
    
    38,562
    
    
    
    39,040
    
    
    
    1,229Paid to retirees
    
    
    
    
    
    
    (3,324
    )
    
    
    (104
    )Fair value of plan assets at December 31
    
    
    636,655
    
    
    
    679,505
    
    
    
    21,408
  The Company used a December 31 measurement date for its plan.The plan assets consist of one category being deposits with the Central Trust of China
governed by R.O.C. government.According to R.O.C. Labor Law, the Company is required to make all contributions to the
pension plan to deposits with the Central Trust of China with no exceptions. The Company used
the 15-year R.O.C. government bond yield to determine the overall expected long-term
rate-of-return-on-assets because the Company expects the deposits long-term rate of return
to approximate to the ROC government bond yield.The Company expects to contribute NT$40,211 to its pension plan in 2005.Future benefit payments expected to be paid from the pension plan are as follows: Years ended December 31
    
    Expected benefit payments2005
    
    
    5,5612006
    
    
    11,2332007
    
    
    7,9612008
    
    
    16,8572009
    
    
    20,9872010-2014
    
    
    179,395
 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)  13.
    
    Shareholders EquityCommon Shares
As of January 1, 2003, the Companys authorized and issued common shares amounted to
NT$53,500,000 and NT$36,912,769, divided into 5,350,000,000 (including 450,000,000 shares and
1,200,000,000 shares reserved for future exercise of stock options and conversion of
convertible bonds, respectively) and 3,691,276,875 shares at par value of NT$10, respectively.Up to December 31, 2004, 328,078,360 common shares and
15,941,093 common shares were issued for
conversion of unsecured domestic convertible bonds (CB I) and unsecured overseas convertible
bonds (ECBV), respectively.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$3,852,250 on November 11, 2003. The authorization has been registered.On June 27, 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 Depositary Shares (GDS). Each GDS
represents 40 common shares. The GDS offering was listed on Luxembourg Stock Exchange on April
5, 2004 and issued at a premium of NT10.87317 per common share. After April 13, 2004, GDS
holders may elect to convert GDS into common shares. Registration has been completed.As of December 31, 2004, the Companys authorized and issued common shares amounted to
NT$65,500,000 and NT$50,352,963, divided into 6,550,000,000 shares (including 650,000,000 and
864,703,672 shares reserved for future exercise of employee stock options and conversion of
convertible bonds, respectively) and 5,035,296,328 shares at par of NT$10, respectively.As of December 31, 2004, 8,804,000 and 23,432,153 common shares in the forms of 220,100 GDS
and 2,343,215 ADS, respectively, were traded on Luxembourg Stock Market and NASDAQ Stock
Market, respectively.The Company issued 331,934,262, 738,975,068 and 605,044,385 commons shares in 2002, 2003
and 2004, respectively.The Company has four stock option plans (2001 plan, 2002 plan, 2003 plan and 2004
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,
200,000,000 shares and 200,000,000 shares under 2001 plan, 2002 plan, 2003 plan and 2004 plan,
respectively.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. 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)  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.Capital reserveAccording to the ROC Company Law, the capital reserve can only be used for offseting
accumulated deficits or distribution of stock dividends. The Company cannot use the 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 the 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 the capital reserve of NT$2,630,621 to offset its accumulated deficits.Income distributionsThe 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; andc.   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.Information related to the distributions of the remuneration for directors and supervisors and
employees bonuses is as follows: 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)  a.   No distribution in 2003 due to the Companys accumulated deficits;b.   Information related to employees bonuses and remuneration for directors and
supervisors services, approved by the Board of Directors and the Shareholders Annual
General Meetings, is accessible on the website of Taiwan Stock Exchange Corporation.The discounts of NT$185,884 and NT$41,377 for shares issued for the conversion of CB I for the
year ended December 31, 2003 and 2004, respectively, as well as the discounts of NT$927,496
for new shares offering in November 2003 were charged against retained earnings.14.
    
    Employee Stock Option PlansThe Company has four employee stock option plans (2001 plan, 2002 plan, 2003 plan and
2004 plan) that grant options to qualified employees for
purchase of the Companys common shares at pre-determined prices on grant dates. Such options are exercisable after two years
and will be expired after six years from the grant date. The Company was authorized to grant
options for up to 80,000,000 shares, 170,000,000 shares, 200,000,000 shares and 200,000,000
shares under the 2001 plan, 2002 plan, 2003 plan and 2004 plan, respectively. As of December
31, 2004, none of the employees stock options has been exercised.The Company will issue additional common shares for the exercised stock options under the 2001
plan, 2002 plan, 2003 plan and 2004 plan. Unless granted stock options were revoked for
illegal acts or violation of the Companys Code of Conducts, the options are exercisable for
up to 50%, 75% and 100% after two years, three years, and four years from the grant date,
respectively. Information with respect to each stock option plan is as follows (YY/MM/DD):a.   2001 plan Outstanding
    
    
    
    Earliest
    
    
    
    
    
    
    
    
    Exercise
    

    
    
    2004 MarketTotal Units
    
    
    
    Shares
    
    
    
    Units
    
    
    
    Exercisable
    
    
    
    Expiration
    
    
    
    Price
    
    
    
    PriceGrant Dates
    
    
    Issued
    
    
    
    Exercisable
    
    
    
    (Note 1)
    
    
    
    Dates
    
    
    
    Dates
    
    
    
    (Note 2)
    
    
    
    High
    
    
    
    Low2002.01.16
    
    
    
    71,768,500
    
    
    
    
    71,768,500
    
    
    
    
    
    
    
    
    
    2004.01.16
    
    
    
    
    2008.01.15
    
    
    
    
    20.10
    
    
    
    
    16.80
    
    
    
    
    6.502002.05.06
    
    
    
    560,000
    
    
    
    
    560,000
    
    
    
    
    
    
    
    
    
    2004.05.06
    
    
    
    
    2008.05.05
    
    
    
    
    19.80
    
    
    
    
    16.80
    
    
    
    
    6.502002.10.01
    
    
    
    1,507,000
    
    
    
    
    1,507,000
    
    
    
    
    132,000
    
    
    
    
    2004.10.01
    
    
    
    
    2008.09.30
    
    
    
    
    11.10
    
    
    
    
    16.80
    
    
    
    
    6.502002.12.16
    
    
    
    6,164,500
    
    
    
    
    6,164,500
    
    
    
    
    331,000
    
    
    
    
    2004.12.16
    
    
    
    
    2008.12.15
    
    
    
    
    11.30
    
    
    
    
    16.80
    
    
    
    
    6.50Total
    
    
    
    80,000,000
    
    
    
    
    80,000,000
    
    
    
    
    463,000
    
    
    
    Total options authorized : 80, 000,000
  b.   2002 plan Outstanding
    
    
    
    Earliest
    
    
    
    
    
    
    
    
    ExerciseTotal Units
    
    
    
    Shares
    
    
    
    Units
    
    
    
    Exercisable
    
    
    
    Expiration
    
    
    
    Price
    
    
    
    2004 Market PriceGrant Dates
    
    
    Issued
    
    
    
    Exercisable
    
    
    
    (Note 1)
    
    
    
    Dates
    
    
    
    Dates
    
    
    
    (Note 2)
    
    
    
    High
    
    
    
    Low2002.10.01
    
    
    
    150,000,000
    
    
    
    
    150,000,000
    
    
    
    
    94,519,900
    
    
    
    
    2004.10.01
    
    
    
    
    2008.09.30
    
    
    
    
    11.10
    
    
    
    
    16.80
    
    
    
    
    6.502002.12.16
    
    
    
    10,284,500
    
    
    
    
    10,284,500
    
    
    
    
    4,895,000
    
    
    
    
    2004.12.16
    
    
    
    
    2008.12.15
    
    
    
    
    11.30
    
    
    
    
    16.80
    
    
    
    
    6.502003.04.07
    
    
    
    2,753,500
    
    
    
    
    2,753,500
    
    
    
    
    2,024,500
    
    
    
    
    2005.04.07
    
    
    
    
    2009.04.06
    
    
    
    
    9.20
    
    
    
    
    16.80
    
    
    
    
    6.50Total
    
    
    
    163,038,000
    
    
    
    
    163,038,000
    
    
    
    
    101,439,400
    
    
    
    Total options authorized : 170,000,000
  c.   2003 plan Outstanding
    
    
    
    Earliest
    
    
    
    
    
    
    
    
    ExerciseTotal Units
    
    
    
    Shares
    
    
    
    Units
    
    
    
    Exercisable
    
    
    
    Expiration
    
    
    
    Price
    
    
    
    2004 Market PriceGrant Dates
    
    
    Issued
    
    
    
    Exercisable
    
    
    
    (Note 1)
    
    
    
    Dates
    
    
    
    Dates
    
    
    
    (Note 2)
    
    
    
    High
    
    
    
    Low2003.06.13
    
    
    
    193,212,000
    
    
    
    
    193,212,000
    
    
    
    
    149,758,818
    
    
    
    
    2005.06.13
    
    
    
    
    2009.06.12
    
    
    
    
    7.75
    
    
    
    
    16.80
    
    
    
    
    6.502003.11.04
    
    
    
    829,000
    
    
    
    
    829,000
    
    
    
    
    579,000
    
    
    
    
    2005.11.04
    
    
    
    
    2009.11.03
    
    
    
    
    9.00
    
    
    
    
    16.80
    
    
    
    
    6.50
 F - 34




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##### Table of Contents



Outstanding
    
    
    
    Earliest
    
    
    
    
    
    
    
    
    ExerciseTotal Units
    
    
    
    Shares
    
    
    
    Units
    
    
    
    Exercisable
    
    
    
    Expiration
    
    
    
    Price
    
    
    
    2004 Market PriceGrant Dates
    
    
    Issued
    
    
    
    Exercisable
    
    
    
    (Note 1)
    
    
    
    Dates
    
    
    
    Dates
    
    
    
    (Note 2)
    
    
    
    High
    
    
    
    Low2004.03.11
    
    
    
    685,000
    
    
    
    
    685,000
    
    
    
    
    408,000
    
    
    
    
    2006.03.11
    
    
    
    
    2010.03.10
    
    
    
    
    12.90
    
    
    
    
    16.80
    
    
    
    
    6.502004.03.30
    
    
    
    785,000
    
    
    
    
    785,000
    
    
    
    
    758,000
    
    
    
    
    2006.03.30
    
    
    
    
    2010.03.29
    
    
    
    
    12.20
    
    
    
    
    16.80
    
    
    
    
    6.502004.04.27
    
    
    
    749,000
    
    
    
    
    749,000
    
    
    
    
    749,000

    
    
    
    
    2006.04.27
    
    
    
    
    2010.04.26
    
    
    
    
    14.10
    
    
    
    
    16.80
    
    
    
    
    6.50Total
    
    
    
    196,260,000
    
    
    
    
    196,260,000
    
    
    
    
    152,252,818
    
    
    
    Total options authorized : 200,000,000
  d.   2004 plan Outstanding
    
    
    
    Earliest
    
    
    
    
    
    
    
    
    ExerciseTotal Units
    
    
    
    Shares
    
    
    
    Units
    
    
    
    Exercisable
    
    
    
    Expiration
    
    
    
    Price
    
    
    
    2004 Market PriceGrant Dates
    
    
    Issued
    
    
    
    Exercisable
    
    
    
    (Note 1)
    
    
    
    Dates
    
    
    
    Dates
    
    
    
    (Note 2)
    
    
    
    High
    
    
    
    Low2004.04.09
    
    
    
    176,972,000
    
    
    
    
    176,972,000
    
    
    
    
    164,270,500
    
    
    
    
    2006.04.09
    
    
    
    
    2010.04.08
    
    
    
    
    14.55
    
    
    
    
    16.80
    
    
    
    
    6.502004.04.27
    
    
    
    4,919,000
    
    
    
    
    4,919,000
    
    
    
    
    3,522,000
    
    
    
    
    2006.04.27
    
    
    
    
    2010.04.26
    
    
    
    
    14.10
    
    
    
    
    16.80
    
    
    
    
    6.502004.06.02
    
    
    
    2,176,000
    
    
    
    
    2,176,000
    
    
    
    
    2,037,000
    
    
    
    
    2006.06.02
    
    
    
    
    2010.06.01
    
    
    
    
    11.00
    
    
    
    
    16.80
    
    
    
    
    6.502004.08.11
    
    
    
    5,015,500
    
    
    
    
    5,015,500
    
    
    
    
    4,432,500
    
    
    
    
    2006.08.11
    
    
    
    
    2010.08.10
    
    
    
    
    9.25
    
    
    
    
    16.80
    
    
    
    
    6.502004.10.27
    
    
    
    4,466,000
    
    
    
    
    4,466,000
    
    
    
    
    4,361,000
    
    
    
    
    2006.10.27
    
    
    
    
    2010.10.26
    
    
    
    
    7.05
    
    
    
    
    16.80
    
    
    
    
    6.50Total
    
    
    
    193,548,500
    
    
    
    
    193,548,500
    
    
    
    
    178,623,000
    
    
    
    Total options authorized : 200,000,000
  (Note 1) As of December 31, 2004, none of the employees stock options has been
exercised. Outstanding units were lesser than those issued due to waiver or employees
departure.(Note 2) Exercise prices are subject to adjustments in the event that changes occur to the
capital structure.All options under 2001 and 2002 plans were granted to qualified employees before April 7,
2003, with the exception of 6,962,000 expired units. In addition, options under 2003 plans
were all granted to qualified employees before April 27, 2004, with the exception of 3,740,000
expired units. Grants dated after January 1, 2004 under 2003 and 2004 stock option plans were
accounted for under intrinsic value method required by Taiwan Securities and Future
Commission. As of December 31, 2004, information relating to the compensating stock options
granted in 2004 was as follows: EarliestTotal Units
    
    
    
    Outstanding
    
    
    
    Exercisable
    
    
    
    ExercisableGrant Dates
    
    
    Issued
    
    
    
    Units
    
    
    
    Shares
    
    
    
    Dates
    
    
    
    Exercise Price2004.03.11
    
    
    
    685,000
    
    
    
    
    408,000
    
    
    
    
    408,000
    
    
    
    
    2006.03.11
    
    
    
    
    12.902004.03.30
    
    
    
    785,000
    
    
    
    
    758,000
    
    
    
    
    758,000
    
    
    
    
    2006.03.30
    
    
    
    
    12.202004.04.09
    
    
    
    176,972,000
    
    
    
    
    164,270,500
    
    
    
    
    164,270,500
    
    
    
    
    2006.04.09
    
    
    
    
    14.552004.04.27
    
    
    
    5,668,000
    
    
    
    
    4,271,000
    
    
    
    
    4,271,000
    
    
    
    
    2006.04.27
    
    
    
    
    14.102004.06.02
    
    
    
    2,176,000
    
    
    
    
    2,037,000
    
    
    
    
    2,037,000
    
    
    
    
    2006.06.02
    
    
    
    
    11.002004.08.11
    
    
    
    5,015,500
    
    
    
    
    4,432,500
    
    
    
    
    4,432,500
    
    
    
    
    2006.08.11
    
    
    
    
    9.252004.10.27
    
    
    
    4,466,000
    
    
    
    
    4,361,000
    
    
    
    
    4,361,000
    
    
    
    
    2006.10.27
    
    
    
    
    7.05
  For the year ended December 31, 2004, no compensation expense was recognized as exercise
prices were higher than or equal to market prices of the underlying stocks on the grant dates.
Pro forma information under fair value method using Black-Schole Options Pricing Model is as
follows: 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) Volatility factors for
    
    
    Risk-free
    
    
    Weighted-averageGrant Date
    
    
    Fair Value (NT$)
    
    
    Dividend Yield
    
    
    expected market price
    
    
    Interest Rate
    
    
    Expected life2004.03.11
    
    
    
    6.08
    
    
    
    
    0
    %
    
    
    
    56.20
    %
    
    
    
    1.55
    %
    
    
    
    4.382004.03.30
    
    
    
    5.68
    
    
    
    
    0
    %
    
    
    
    56.10
    %
    
    
    
    1.55
    %
    
    
    
    4.382004.04.09
    
    
    
    6.77
    
    
    
    
    0
    %
    
    
    
    56.60
    %
    
    
    
    1.55
    %
    
    
    
    4.382004.04.27
    
    
    
    6.64
    
    
    
    
    0
    %
    
    
    
    57.50
    %
    
    
    
    1.55
    %
    
    
    
    4.382004.06.02
    
    
    
    5.17
    
    
    
    
    0
    %
    
    
    
    57.40
    %
    
    
    
    1.55
    %
    
    
    
    4.382004.08.11
    
    
    
    4.32
    
    
    
    
    0
    %
    
    
    
    56.90
    %
    
    
    
    1.55
    %
    
    
    
    4.382004.10.27
    
    
    
    2.96
    
    
    
    
    0
    %
    
    
    
    55.00
    %
    
    
    
    1.68
    %
    
    
    
    4.38
 For the year ended December 31, 2004, the compensation expense recognized under fair value
method would have been NT$338,091. The Companys pro-forma information is set forth as
follows : For the year ended December 31, 2004Basic Earnings Per Share
    
    
    Diluted Earnings Per ShareNet income-as reported
    
    $
    217,692
    
    
    $
    217,692Earnings per share-as reported
    
    $
    0.05
    
    
    $
    0.05Net loss-pro forma
    
    $
    (120,399
    )
    
    $
    (120,399
    )Earnings per share-pro forma
    
    $
    (0.02
    )
    
    $
    (0.02
    )
  15.
    
    Treasury StockOn 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,
2003 and 2004 were as follows : January 1, 2003
    
    
    Additions
    
    
    Disposals
    
    
    December 31, 2003Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Selling
    
    
    Shares
    
    
    Amount
    
    
    MarketSubsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    price
    
    
    
    
    
    
    
    
    
    
    ValueHui Ying
Investment, Ltd.
    
    
    6,023,152
    
    
    
    142,365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,023,152
    
    
    
    142,365
    
    
    
    47,703
 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, 2004
    
    
    Additions
    
    
    Disposals
    
    
    December 31, 2004Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Selling
    
    
    Shares
    
    
    Amount
    
    
    MarketSubsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    price
    
    
    
    
    
    
    
    
    
    
    ValueHui Ying
Investment, Ltd.
    
    
    6,023,152
    
    
    
    142,365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,023,152
    
    
    
    142,365
    
    
    
    43,608
 As of December 31, 2002, 2003 and 2004, the Companys treasury stock was as follows: As of December 31,2002
    
    
    2003
    
    
    2004NT$
    
    NT$
    
    NT$
    
    US$Shares owned by Subsidiary
    
    
    142,365
    
    
    
    142,365
    
    
    
    142,365
    
    
    
    4,485Shares repurchased
    
    
    1,046,071
    
    
    
    1,046,071
    
    
    
    1,046,071
    
    
    
    32,957Total
    
    
    1,188,436
    
    
    
    1,188,436
    
    
    
    1,188,436
    
    
    
    37,442
  16.
    
    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 HCSP.
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 HSP 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, 2004 unused tax credits available to reduce future taxable income amounted
to NT$3,530,772 (US$111,240). The available tax credit in each year is limited to 50% of the
corporate tax payable in that year, except in the last of such five-year period when there is
no such limit. As of December 31, 2004, the Company had available the following amounts of tax
credits: Expiration Years
    
    NT$
    
    
    US$2005
    
    
    1,192,770
    
    
    
    37,5792006
    
    
    1,359,358
    
    
    
    42,8282007
    
    
    588,746
    
    
    
    18,5492008
    
    
    389,898
    
    
    
    12,284Total
    
    
    3,530,772
    
    
    
    111,240
 Under the rules of the ROC Income Tax Law, operating losses can be carried forward for five
years. As of December 31, 2004, the Company had the following
unutilized loss carry-forwards: Expiration Years
    
    NT$
    
    
    US$2006
    
    
    5,432,814
    
    
    
    171,1662007
    
    
    8,507,626
    
    
    
    268,041Total
    
    
    13,940,440
    
    
    
    439,207
 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) 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 31,2002
    
    
    2003
    
    
    2004NT$
    
    NT$
    
    NT$
    
    US$Current
    
    
    10,840
    
    
    
    (27,116
    )
    
    
    32,867
    
    
    
    1,036Deferred
    
    
    9,058
    
    
    
    48,143
    
    
    
    1,914
    
    
    
    60Total
    
    
    19,898
    
    
    
    21,027
    
    
    
    34,781
    
    
    
    1,096
 The reconciliation of book income tax expense (benefit) to income tax expense (benefit)
recorded is summarized below: For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    NT$
    
    NT$
    
    US$Expected income tax expense (benefit)
    
    
    (2,834,280
    )
    
    
    (2,044,259
    )
    
    
    61,785
    
    
    
    1,947Undistributed earnings tax
    
    
    318,378
    
    
    
    
    
    
    
    
    
    
    
    Investment credits (earned) expired
    
    
    (1,405,069
    )
    
    
    829,546
    
    
    
    (294,120
    )
    
    
    (9,267
    )Change in valuation allowance
    
    
    2,740,289
    
    
    
    1,256,140
    
    
    
    1,349,198
    
    
    
    42,508Permanent differences
    
    
    122,200
    
    
    
    317,135
    
    
    
    43,884
    
    
    
    1,383Effect of rate change
    
    
    1,066,033
    
    
    
    (373,681
    )
    
    
    (1,156,129
    )
    
    
    (36,425
    )Others
    
    
    12,347
    
    
    
    36,146
    
    
    
    30,163
    
    
    
    950Income tax expense
    
    
    19,898
    
    
    
    21,027
    
    
    
    34,781
    
    
    
    1,096
 Components of deferred income tax assets and liabilities: As of December 31,2003
    
    
    2004NT$
    
    NT$
    
    US$Deferred tax liabilitiesTax depreciation in excess of book depreciation
    
    
    645,242
    
    
    
    282,970
    
    
    
    8,915Unrealized foreign exchange gains
    
    
    20,060
    
    
    
    
    
    
    
    Total deferred tax liabilities
    
    
    665,302
    
    
    
    282,970
    
    
    
    8,915Deferred tax assetsInvestment credits
    
    
    3,236,652
    
    
    
    3,530,772
    
    
    
    111,240Inventory provision
    
    
    341,352
    
    
    
    804,719
    
    
    
    25,353Bad debt allowance
    
    
    10,955
    
    
    
    33,979
    
    
    
    1,071Unrealized royalty expense
    
    
    52,348
    
    
    
    175,443
    
    
    
    5,528Unrealized attorney fee
    
    
    5,463
    
    
    
    
    
    
    
    Book amortization in excess of tax amortization
    
    
    4,125
    
    
    
    2,194
    
    
    
    69Unrealized market value decline on idle asset
    
    
    3,865
    
    
    
    
    
    
    
    
 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) As of December 31,2003
    
    
    2004NT$
    
    NT$
    
    US$Unrealized foreign exchange loss
    
    
    450
    
    
    
    82,619
    
    
    
    2,603Loss carryforwards
    
    
    3,638,085
    
    
    
    3,485,110
    
    
    
    109,802Unrealized pension expense
    
    
    16,862
    
    
    
    39,635
    
    
    
    1,249Unrealized equity investment loss
    
    
    659,851
    
    
    
    819,931
    
    
    
    25,833Unrealized interest expense
    
    
    13,541
    
    
    
    15,093
    
    
    
    476Unrealized production variance
    
    
    73,787
    
    
    
    8,711
    
    
    
    274Others
    
    
    
    
    
    
    24,082
    
    
    
    759Total deferred tax assets
    
    
    8,057,336
    
    
    
    9,022,288
    
    
    
    284,257Valuation allowance
    
    
    (5,493,820
    )
    
    
    (6,843,018
    )
    
    
    (215,597
    )Net deferred tax assets
    
    
    2,563,516
    
    
    
    2,179,270
    
    
    
    68,660Total net deferred tax assets
    
    
    1,898,214
    
    
    
    1,896,300
    
    
    
    59,745Net deferred tax assets-current
    
    
    104,812
    
    
    
    18,951
    
    
    
    597Net deferred tax assets-non-current
    
    
    1,793,402
    
    
    
    1,877,349
    
    
    
    59,148Total net deferred tax assets
    
    
    1,898,214
    
    
    
    1,896,300
    
    
    
    59,745
  17.
    
    Related Party Transactions a. Related Parties and Relationships Related parties
    
    RelationshipsBiomorphic VLSI. Inc. (Biomorphic)
    
    The Companys equity investee
as of December 31, 2003.Biomorphic Microsystems Corporation (BC)
    
    The Companys equity investee.Procomm Inc. (Procomm)
    
    The Companys equity investee.Magic Pixel Inc. (MPI)
    
    The Companys equity investee.Xinmax Technology Development Co., Ltd.
(Xinmax)
    
    The Companys equity investee.Prominent Communications, Inc. (PCI)
    
    The Companys equity investee
as of December 31, 2003.United Industry Gases Co., Ltd. (UIG)
    
    The Company was UIGs
supervisor prior to June 18,
2004.Powertech Technology, Inc. (Powertech)
    
    The Company was represented on
Powertechs Board of Directors

prior to June 18, 2004.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.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 Companys chairman is this
foundations president.
 b. Major transactions with related parties (a). Sales to related parties were as follows: 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) For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    NT$
    
    NT$
    
    US$BC
    
    
    
    
    
    
    
    
    
    
    239,748
    
    
    
    7,553MPI
    
    
    
    
    
    
    
    
    
    
    175,894
    
    
    
    5,542Raio
    
    
    158,194
    
    
    
    174,466
    
    
    
    18,065
    
    
    
    569Biomorphic
    
    
    15,298
    
    
    
    45,953
    
    
    
    2
    
    
    
    FueTrek
    
    
    
    
    
    
    5,591
    
    
    
    11,674
    
    
    
    368PCI
    
    
    155,923
    
    
    
    341
    
    
    
    428
    
    
    
    14Others
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    Total
    

    
    329,415
    
    
    
    226,351
    
    
    
    445,820
    
    
    
    14,046
 Sales prices to PCI, BC, Biomorphic, FueTrek and Raio are not comparable with
those of regular customers because the Company is the sole provider
for them. Sales to
MPI are priced at a markup on the unit cost, which is not applicable to those to other
customers. The payment term with the related parties is between 45 to 60 days, similar to
that with regular customers. (b).
    
    Manufacturing processing charges to related parties for the years ended
December 31, 2002, 2003 and 2004 are summarized as follows:
 December 31,2002
    
    
    2003
    
    
    2004NT$
    
    NT$
    
    NT$
    
    US$Powertech
    
    
    172,778
    
    
    
    211,188
    
    
    
    
    
    
    
    Ardentec
    
    
    240,686
    
    
    
    130,270
    
    
    
    260,199
    
    
    
    8,198Total
    
    
    413,464
    
    
    
    341,458
    
    
    
    260,199
    
    
    
    8,198
 Such charges form a part of cost of goods sold. (c).
    
    The Company purchased industrial gases from UIG totaling NT$109,940, and
NT$100,016 for the years ended December 31, 2002 and 2003, respectively. Such
purchases were included in cost of goods sold.(d).
    
    For the years ended December 31, 2002, 2003 and 2004, the Company purchased
wafers from Tower totaling NT$136,047, NT$36,600 and NT$19,959(US$629). 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
(NT$1,396,592), of which US$21,349 (NT$677,617) was reserved as prepaid credit for
future wafer purchase. In September 2001, the Company utilized US$16 million (NT$509
million) of its prepaid credit account to purchase 1,255,848 Tower shares for US$12.75
(NT$405) per share. Moreover, as stated in 18.K, 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 and 2004, the prepaid account
 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) amounted to US$14,138. However, the Company provided an allowance of US$9,738 (NT$309,084) for such
prepaid credit after assessing an impairment. (e).
    
    Merchandise purchased from related parties are as follows:
 For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    NT$
    
    NT$
    
    US$Raio
    
    
    13,863
    
    
    
    3,257
    
    
    
    1,570
    
    
    
    49PCI
    
    
    404,717
    
    
    
    63,798
    
    
    
    
    
    
    
    Biomorphic
    
    
    46,716
    
    
    
    53,935
    
    
    
    
    
    
    
    Total
    
    
    465,296
    
    
    
    120,990
    
    
    
    1,570
    
    
    
    49
 (f).
    
    Operating leases to related parties were as follows:
 For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    NT$
    
    NT$
    
    US$MPI
    
    
    
    
    
    
    
    
    
    
    3,835
    
    
    
    121Raio
    
    
    1,510
    
    
    
    587
    
    
    
    1,295
    
    
    
    41Total
    
    
    1,510
    
    
    
    587
    
    
    
    5,130
    
    
    
    162
 The lease income from the related parties was charged monthly and recorded as other
income under non-operating income. (g).
    
    The Company entered into IP license agreements with FueTrek in 2002 and 2004
and obtained related technology. The contractual amount of NT$13,502 (JPY45,800) has
been paid in full as of December 31, 2004, and was recorded as deferred charges and
amortized over the contract terms. The Company has started mass-production of the
licensed product, while sales are insignificant.(h).
    
    The Company donated NT$2,000, NT$22,360 and NT$16,300(US$514) to Macronix
Education Foundation for the years ended December 31, 2002, 2003 and 2004.(i).
    
    For the year ended December 31, 2004, the amount of research and development
expenses paid to MPI was NT$64,188 (US$2,022).(j).
    
    Accounts receivable from related parties as of December 31, 2003 and 2004
were as follows:
 As of December 31,2003
    
    
    2004NT$
    
    NT$
    
    US$BC
    
    
    
    
    
    
    95,443
    
    
    
    3,007MPI
    
    
    
    
    
    
    29,447
    
    
    
    928FueTrek
    
    
    
    
    
    
    4,836
    
    
    
    152Procomm
    
    
    
    
    
    
    4,125
    
    
    
    130Raio
    
    
    49,216
    
    
    
    1,879
    
    
    
    59
 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) As of December 31,2003
    
    
    2004NT$
    
    NT$
    
    US$Biomorphic
    
    
    45,910
    
    
    
    
    
    
    
    UIG
    
    
    11,347
    
    
    
    
    
    
    
    PCI
    
    
    1,305
    
    
    
    
    
    
    
    Others
    
    
    936
    
    
    
    
    
    
    
    Total
    
    
    108,714
    
    
    
    135,730
    
    
    
    4,276Less: Allowance for doubtful accounts
    
    
    (50,450
    )
    
    
    (3,444
    )
    
    
    (108
    )Net
    
    
    58,264
    
    
    
    132,286
    
    
    
    4,168
 (k).
    
    Payables to related parties as of December 31, 2003 and 2004 were as follows:
 As of December 31,2003
    
    
    2004NT$
    
    NT$
    
    US$Ardentec
    
    
    13,890
    
    
    
    38,335
    
    
    
    1,208MPI
    
    
    
    
    
    
    2,898
    
    
    
    92Tower
    
    
    378
    
    
    
    1,364
    
    
    
    43PCI
    
    
    
    
    
    
    107
    
    
    
    3Powertech
    
    
    56,623
    
    
    
    
    
    
    
    UIG
    
    
    29,929
    
    
    
    
    
    
    
    Biomorphic
    
    
    2,718
    
    
    
    
    
    
    
    Others
    
    
    32
    
    
    
    72
    
    
    
    2Total
    
    
    103,570
    
    
    
    42,776
    
    
    
    1,348
 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)  18.
    
    Commitments and Contingencies The Companys commitments and contingencies, not included in the financial statements, as of
December 31, 2004 were as follows:  a.
    
    Letters of credit issued for future deliveries of inventories and equipment
amounted to NT$285,468 (US$8,994).b.
    
    The Companys significant construction and machinery contracts totaled
approximately NT$1,254,661 (US$39,529). As of December 31, 2004, the Company has paid
NT$1,217,598 (US$38,362) pursuant to these contracts.c.
    
    Operating Leases:The land on which the Companys buildings are located is leased from the HCSP.
The lease term is from 1990 to 2022 and is renewable at the Companys option.Future minimum payments under these irrevocable operating leases as of December 31, 2004
were as follows: Operating LeasesNT$
    
    US$2005
    
    
    72,275
    
    
    
    2,2772006
    
    
    72,275
    
    
    
    2,2772007
    
    
    72,275
    
    
    
    2,2772008
    
    
    72,275
    
    
    
    2,2772009
    
    
    72,275
    
    
    
    2,277Thereafter
    
    
    380,297
    
    
    
    11,982Total minimum lease payments
    
    
    741,672
    
    
    
    23,367
  Rental expenses under the operating leases amounted to NT$67,770, NT$70,160 and NT$73,221
(US$2,307) for the years ended December 31, 2002, 2003 and 2004, respectively.d.
    
    The Company entered into an operating lease agreement of US$2,608 for R&D software.
The lease term is from 2003 to 2006. The lease obligations shall be paid annually in four
installments, starting from November 31, 2003 to October 31, 2006. As of December 31,
2004, the Company has paid US$1,230 (NT$39,040) pursuant to the agreements. Future
irrevocable payments are US$901 (NT$28,598) and US$477 (NT$15,140) for 2005 and 2006,
respectively.e.
    
    The license fees for the products license agreements entered into by the Company
with A company and B company totally amounted to US$46,000 (NT$1,460,040). As of December
31, 2004, the Company has paid US$36,000 (NT$1,142,640) pursuant to the agreements.
Future irrevocable payment in total is US$10,000 (NT$317,400).f.
    
    The license fee for the products license agreement entered into by the Company and
C company totaled US$2,907 (NT$92,268). As of December 31, 2004, the Company has paid
US$2,024 (NT$64,242) pursuant to the agreement. Future running royalties will be charged
based on percentage of net sales from licensed products as determined under the
agreement. Future irrevocable payment in total is US$883 (NT$28,026). No royalties were
paid for the year ended December 31, 2004, as licensed products had not been
commercialized.g.
    
    The Company entered into a technology agreement with D company. As of December 31,
2004, the fixed license fees for the technology agreement have been fully paid.
Additional running royalties will be charged based on percentage of net sales from the
licensed products pursuant to the agreement. According to the agreement, the Company is
required to prepay US$24,000 (NT$761,760) of running royalties. As of December 31, 2004,
US$21,000 (NT$666,540) has been paid. Future irrevocable payment in total is US$3,000
(NT$95,220). Unused running royalties estimated by the Company was NT$616,322
(US$19,418), of which NT$146,447(US$4,614) was recorded under prepaid expenses, while
NT$469,875 (US$14,804) was under deferred charges.h.
    
    In 2004, the Company entered into two addendums to the technology agreement stated
in (g) above with D company. As of December 31, 2004, the fixed license fees of US$9,000
(NT$285,660) in accordance with the addendums have not been paid yet. Nonetheless, the
Company has accrued USD$920 (NT$29,201) of license fees as of December 31, 2004. No
running royalties, charged based on percentages of net sales from licensed products as
determined under the addendums, were paid for the year ended December 31, 2004 as licensed
products had not been commercialized.i.
    
    In August 1997, Atmel Corporation (Atmel) filed a complaint against MXA for 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)  infringement of Atmels patents No. 096 and 747. MXA applied for Motion for Summary
Judgement 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 had
sought a ruling of invalidity of the 747 patent due to incorrect inventorship, and kept
awaiting the Courts decision. On May 14, 2003, the Court granted the Companys Motion
for Summary Judgement of invalidity of the 747 patent due to nonjoinder of co-inventor.
Specifically, the Courts Order found that all claims of the 747 patent were invalid for
nonjoinder of a co-inventor. The Court has also granted the Companys Motion for Summary
Judgement against three of the four asserted claims of the 096 patent, leaving only one
claim to be litigated on the 096 patent. Both parties applied for summary judgment for
infringement of the 096 patent. On February 23, 2004, the court revoked both parties
summary judgments as the evidence was insufficient. However, the courts explanation of
inventorship was in favor of MXA. On April 16, 2004, MXA applied Renewed Motion for
Summary Judgment of Non-infringement according to the court explanation of the patents
scope. After Atmel applied the counterplea on May 26, 2004, MXA replied to Atmel
counterplea on June 18, 2004. On September 9, 2004, Atmel and MXA reached a settlement
that both parties agree to withdraw from the issue with no claim of loss reimbursement.
The Court dismissed the case accordingly.j.
    
    On April 1, 2002, certain shareholders of Tower Semiconductor Ltd. (Tower) filed a
lawsuit in U.S., naming Tower, several shareholders (including the Company), and Board
members (including Miin Wu, one of the Board member and the President of the Company) as
defendants, alleging the defendants for violation of U.S. Securities Exchange Act of 1934
Section 14(a), Section 20(a) and Rule 14a-9. The Court overruled the alleging in August
19, 2004. One of the shareholders has further appealed. The Company believes it has
meritorious defense to the case.k.
    
    The Company entered into an agreement with Tower Semiconductor Ltd. (Tower), an
Israeli public company whose shares are quoted on the NASDAQ 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$2,381 million) in Tower. Following an initial payment of US$20 million (NT$635
million) for 866,551 shares (US$11,215 or NT$355,964) and US$8,785 (NT$278,836) 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 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) 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$398,781) 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$508,221) of its prepaid credit
account to purchase 1,255,848 Tower shares at US$12.75 (NT$405) per share. On March 22, 2002, an amendment to the above-mentioned share purchase agreements was
implemented. According to this amendment, the Company is required to make the third and
fourth milestone payments no later than April 2002 and October 2002, respectively, without
regard to whether each milestone is achieved. For 60% of each of the third and fourth
milestone payment, Tower is required to issue shares based on the average closing price of
Towers shares on the NASDAQ in the 30 trading days preceding the date of payments,
provided, however, the average price per share shall not exceed US$12.50. (NT$397) For the
remaining 40%, Tower is required to increase the Companys prepayment account. Accordingly,
the Company made the third and the forth milestone payment on April 23 and October 1, 2002,
respectively. For these payments, the Company acquired 1,071,497 and 1,344,829 of Towers
shares, respectively, at US$6.16 (NT$196) and US$4.908 (NT$156) per share, respectively, and
aggregately increased its prepaid credit account by US$8,800. In addition, the Company
participated in Towers shares offering on October 21, 2002 and acquired 660,000 shares at
US$5 (NT$159) 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$349,140) 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$209,484) 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$139,656) will be due five business days after
Tower has raised additional funds equal to approximately US$22,000 (NT$698,280), referred to
as the Minimum Financing. In addition, under the terms of the amendment, the Company is
granted an option to convert all or a portion of its unused prepaid credit account
associated with the fourth milestone payment in the aggregate amount of NT$304,524 into
Towers unregistered shares based on the average closing price of Towers common shares
during the 30 consecutive days preceding December 31, 2005. On May 16, 2003, the Company
paid US$3,600 (NT$114,264) for the first installment, obtaining 1,206,839 shares of Towers
at the price of US$2.983 (NT$95) per share. There was US$3,000 (NT$95,220) of the first
installment remained unpaid as of June 30, 2003. 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) 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$234,876), (b) defer the use of the Companys wafer credits in Tower, and (c)
extend the lock-up period for the Companys Tower shares. Specifically,  (a)
    
    The Company agreed to waive all terms of Towers milestones and advance
to Tower in one aggregate lump sum the remaining portion of the first installment
(US$3,000 or NT$95,220) and the entire second installment (US$4,400 or NT$139,656).
With respect to the remaining portion of the first installment, the Company will be
issued non-assessable ordinary shares equivalent to the aggregate of its remaining
portion of the first installment divided by US$2.983 (NT$95). With respect to the
second installment, the Company will be issued non-assessable ordinary shares equal
to the second installment divided by the price per share in a certain public
offering, provided, however, that such public offering is not consummated within 180
days from the date of the amendment, the Company will be issued non-assessable
ordinary shares equal to the second installment divided by the average trading price
for Towers shares during the 15 consecutive trading days preceding the payment of
the second installment.(b)
    
    The Company agreed not to use wafer credits until January 1, 2007, except
with respect to purchase orders issued before the date of the amendment utilizing
wafer credits. However, the amendment provides an option for the Company to convert
credits it would have otherwise been able to utilize per quarter into non-assessable
ordinary shares of Tower. Unconverted credits will accrue interest at a rate per
annum equal to three-month LIBOR plus 2.5% through December 31, 2007. Interest
payments will be made quarterly and the aggregate principal amount of the
unconverted credits will be repaid in one lump sum on December 31, 2007.(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$139,656). As of December 31, 2004, the Company owned approximately 13.35 % of Towers shares and
held NT$480,265 or about US$14,138 of prepaid credit account. As of December 31, 2003 and
2004, the Company provided an allowance of US$9,738 (NT$309,084) for such prepaid credit
account after assessing an impairment.  19.
    
    Other Disclosures a. Property, plant and equipment Total capitalized interest amounted to NT$363,670, NT$79,114 and NT$32,467(US$1,023) for the years
ended December 31, 2002, 2003 and 2004, respectively. The insurance coverage for property, plant and equipment amounted to NT$60,128,403, 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)  NT$60,701,821 and NT$58,910,730 (US$1,856,041) as of December 31, 2002, 2003 and 2004,
respectively.The depreciation expenses of idle assets for the years ended December 31, 2002, 2003 and
2004 were NT$0, NT$49,868 and NT$0, 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, 2003 and 2004 amounted to NT$91,530 and NT$0, respectively. Such depreciation
was recorded under non-operating expenses.b.
    
    Royalty RevenueRoyalty revenue earned amounted to NT$34,462, NT$19,683 and NT$27,813 (US$876) for the
years ended December 31, 2002, 2003 and 2004, respectively.c.
    
    Significant Subsequent EventsUS$6,400 of ECBV has been redeemed from the open market upon bond holders request from
January 1, 2005 to February 10, 2005.On January 28, 2005, 4,428,500 units of stock options with the exercise price at NT$7.05
have been issued.The derivative contract relating to the five options as disclosed in 21.f. was
subsequently settled on May 5, 2005.d.
    
    OtherCertain accounts in the financial statements of the Company as of December 31, 2002, 2003
and 2004 have been reclassified to conform with the presentation of the current period.  20.
    
    Segment Information 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 inter-segment 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
directly used in or identified to segment operations. F - 47




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(Amounts in thousands except share, per share, and percentage data) The geographic distributions of the Companys identifiable assets, operating income and
revenues are summarized in the following tables. 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
    
    
    65,651,260
    
    
    
    309,266
    
    
    
    4,531,545
    
    
    
    (3,041,646
    )
    
    
    67,450,425Capital expenditures
    
    
    8,971,409
    
    
    
    
    
    
    
    3,871
    
    
    
    
    
    
    
    8,975,280Depreciation and amortization
    
    
    8,731,930
    
    
    
    4,774
    
    
    
    5,397
    
    
    
    
    
    
    
    8,742,101
 F - 48




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##### Table of Contents

\

MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(Amounts in thousands except share, per share, and percentage data) 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
    
    
    57,769,932
    
    
    
    6,037,777
    
    
    
    251,063
    
    
    
    (4,140,075
    )
    
    
    59,918,697Capital 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
 2004
    
    Domestic
    
    
    USA
    
    

    Others
    
    
    Elimination
    
    
    ConsolidatedNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$Sales to unaffiliated customers
    
    
    18,485,417
    
    
    
    1,235,772
    
    
    
    3,658,534
    
    
    
    
    
    
    
    23,379,723Sales between geographic areas
    
    
    4,515,956
    
    
    
    13,398
    
    
    
    395
    
    
    
    (4,529,749
    )
    
    
    Net Sales
    
    
    23,001,373
    
    
    
    1,249,170
    
    
    
    3,658,929
    
    
    
    (4,529,749
    )
    
    
    23,379,723Operating income (loss),
including other expenses
    
    
    561,410
    
    
    
    (31,468
    )
    
    
    200,186
    
    
    
    99,471
    
    
    
    829,599Interest revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,646Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (684,105
    )Income before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247,140Tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,781
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,333Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217,692Identifiable assets
    
    
    52,401,768
    
    
    
    1,019,047
    
    
    
    3,473,306
    
    
    
    (2,498,445
    )
    
    
    54,395,676Capital expenditures
    
    
    2,551,655
    
    
    
    765
    
    
    
    2,073
    
    
    
    
    
    
    
    2,554,493Depreciation and amortization
    
    
    7,557,032
    
    
    
    2,358
    
    
    
    5,204
    
    
    
    (2,434
    )
    
    
    7,562,160
 Major customers Revenues from customers representing over 10% of total net sales are as follows: For the year ended December 31,Customers
    
    2002
    
    
    2003
    
    
    2004NT$
    
    
    %
    
    
    NT$
    
    
    %
    
    
    NT$
    
    
    %
    
    
    US$Nintendo
    
    
    5,646,469
    
    
    
    34.24
    
    
    
    4,256,764
    
    
    
    24.03
    
    
    
    5,239,963
    
    
    
    22.41
    
    
    
    165,090Mitsubishi
    
    (Note
    )
    
    (Note
    )
    
    
    1,841,889
    
    
    
    10.40
    
    
    (Note
    )
    
    (Note
    )
    
    (Note
    )HP
    
    
    1,691,841
    
    
    
    10.26
    
    
    
    1,739,782
    
    
    
    9.82
    
    
    (Note
    )
    
    (Note
    )
    
    (Note
    )Total
    
    
    7,338,310
    
    
    
    44.50
    
    
    
    7,838,435
    
    
    
    44.25
    
    
    
    5,239,963
    
    
    
    22.41
    
    
    
    165,090
 Note: Not major customer in respective years. Exports The Companys export sales accounted for 82%, 68% and 66% of total net sales for the years
ended December 31, 2002, 2003 and 2004, 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) Export sales from the R.O.C. are as follows: For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Japan
    
    
    7,983,215
    
    
    
    7,269,548
    
    
    
    8,363,806
    
    
    
    263,510Singapore and Hong Kong
    
    
    3,656,167
    
    
    
    3,487,250
    
    
    
    5,119,396
    
    
    
    161,292United States
    
    
    1,616,837
    
    
    
    823,145
    
    
    
    980,911
    
    
    
    30,904Europe
    
    
    345,226
    
    
    
    453,641
    
    
    
    1,077,416
    
    
    
    33,945Total
    
    
    13,601,445
    
    
    
    12,033,584
    
    
    
    15,541,529
    
    
    
    489,651
 Products The Companys principal products and services consist of memory products, SOC products and
services, and multimedia products. The following table sets forth the amounts of total net
sales revenue from external customers represented by these products for the years ended on
December 31, 2002, 2003 and 2004: For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$ROM
    
    
    7,574,989
    
    
    
    7,463,464
    
    
    
    8,372,758
    
    
    
    263,792Flash
    
    
    4,355,660
    
    
    
    5,810,494
    
    
    
    10,714,857
    
    
    
    337,582SMS*
    
    
    410,662
    
    
    
    2,359,687
    
    
    
    1,732,539
    
    
    
    54,586SLC**
    
    
    2,894,427
    
    
    
    1,286,807
    
    
    
    1,786,711
    
    
    
    56,292EPROM
    
    
    592,079
    
    
    
    303,519
    
    
    
    162,573
    
    
    
    5,122Others
    
    
    664,647
    
    
    
    488,216
    
    
    
    610,285
    
    
    
    19,228Total net sales revenue
    
    
    16,492,464
    
    
    
    17,712,187
    
    
    
    23,379,723
    
    
    
    736,602
 
 *
    
    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 - 50



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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(Amounts in thousands except share, per share, and percentage data)  21.
    
    Financial InstrumentsThe Companys derivative financial instruments are entered into for hedging and trading
purposes. The purposes of forward exchange contracts, option contracts and cross currency
swaps for hedging purpose were to hedge exchange rate risks resulting from assets,
liabilities or commitments denominated in foreign currency. The Companys hedging
strategies were to mitigate into market price risks. Derivative financial instruments
selected for hedging purposes are reviewed and anti-co-related with the fluctuation of
the fair value of derivatives hedges. Derivatives are evaluated periodically. In
addition, the primary purposes of holding structured deposit contracts are to earn higher
interest revenue within a fixed range of foreign exchange rates, while premium received
from written option contracts is offset by that paid for purchased option contracts. To
mitigate the credit risk associated with financial instruments, all the counter-parties
of the contracts entered into by the Company are reputable global financial institutions.
Foreign exchange gains (losses) from derivatives for the years ended December 31, 2002,
2003 and 2004 amounted to NT$(69,557), NT$236 and NT$(13,442), respectively. Gains and
losses related to option contracts are dealt with in the statement of operations upon
exercise. The outstanding financial instrument positions, identified for hedging or
trading purposes, as of December 31, 2002, 2003 and 2004 are as follows:  a.
    
    Foreign currency forward contractsForward exchange contracts receivable and payable are reported under current assets or
liabilities on a net basis if right of offset exists. As of December 31, 2004, the balance
was as follows: Contract ReceivableForward contracts receivable
    
    $
    192,398Forward contracts payable
    
    
    (190,260
    )Premium
    
    
    304Forward contracts receivable (payable)-net
    
    $
    2,442
  The net balance of forward contracts was included under other receivables.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 U.S. 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 U.S. dollars which
bear interest at floating three-month SIBOR, the Company entered into cross currency and
interest rate swaps which effectively converted the debts into Japanese Yen F - 51




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MACRONIX INTERNATIONAL CO., LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DRAFT)- (continued)(Amounts in thousands except share, per share, and percentage data)  and the floating interest rate into a fixed interest rate. Since most of the Companys
receivables are denominated in Japanese Yen, the conversion from U.S. dollar to Japanese
Yen mitigates the foreign exchange exposure.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.e.
    
    The estimated fair values of the Companys financial instruments were as follows:  On balance sheet: As of December 31,2003
    
    
    2004Carrying amount
    
    
    Fair value
    
    
    Carrying amount
    
    
    Fair valueNT$
    
    
    NT$
    
    
    NT$
    
    
    US$
    
    
    NT$
    
    
    US$Cash and cash equivalents
    
    
    10,648,514
    
    
    
    10,648,514
    
    
    
    10,115,688
    
    
    
    318,705
    
    
    
    10,115,688
    
    
    
    318,705Short-term investments
    
    
    849,436
    
    
    
    853,776
    
    
    
    918,040
    
    
    
    28,924
    
    
    
    934,197
    
    
    
    29,433Long-term equity
investments
    
    
    3,056,722
    
    
    
    3,459,420
    
    
    
    1,620,465
    
    
    
    51,054
    
    
    
    2,036,402
    
    
    
    64,340Short-term debts and notes
    
    
    (2,748,446
    )
    
    
    (2,748,446
    )
    
    
    (2,996,778
    )
    
    
    (94,416
    )
    
    
    (2,996,778
    )
    
    
    (94,416
    )Long-term debts
(including current
portion)
    
    
    (21,859,077
    )
    
    
    (22,062,438
    )
    
    
    (12,509,507
    )
    
    
    (394,125
    )
    
    
    (12,550,359
    )
    
    
    (395,411
    )Equity contract
    
    
    (298,116
    )
    
    
    (310,845
    )
    
    
    53,938
    
    
    
    1,699
    
    
    
    43,883
    
    
    
    1,381Forward
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,477
    
    
    
    47Option
    
    
    
    
    
    
    (4,839
    )
    
    
    
    
    
    
    
    
    
    
    (165
    )
    
    
    (5
    )
  f.
    
    Derivative contracts relating to convertible debenturesOn May 5, 1998, the Company issued convertible debentures in an aggregate principal amount
of US$150,000 (NT$4,761,000), which were privately placed with a financial institution. A
wholly-owned subsidiary (the Subsidiary) of the Company subsequently entered into a call
option contract with the financial institution, the underlying reference being the
convertible debentures. The terms of the contract provided that the notional amount of
US$150,000 (NT$4,761,000) is divided into fifteen options and the Subsidiary is entitled to
exercise the options separately, at the discretion of the Subsidiary during the life of the
contract, but at a minimum number of two and a maximum number fifteen. The Company
simultaneously entered into currency swaps, based on the notional amount of the debt,
converting Japanese Yen 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$417,286). The
related settlement gain was US$1,207 (NT$38,310). 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)   In June 2000, the Company entered into a contract with a financial institution for the
settlement of five options relating to a zero coupon convertible debenture due 2003 with the
underlying reference being 47,727,535 of the Companys common shares. The contract, as
amended, expires in May 2003. However, in April 2003, the Company extended the contract to
May 2004,which was subsequently extended to May 2005. As of December 31, 2004, the
remaining underlying reference was 53,253,964 of the Companys common shares. If the share
price was lower than the predetermined contract price, then the Company would pay the
difference between the two amounts to the financial institution. The contract rate at which
the contract is settled is based on U.S. dollars, and the Companys share price is converted
into U.S. dollars using current N.T. dollars to U.S. dollars exchange rates in order to
determine the settlement amount. The predetermined contract price and the share price
converted into U.S. dollars using current exchange rate were US$1.37 (NT$43) and US$0.23
(NT$7) per share, respectively. The carrying amount of this contract as of December 31, 2004
was a receivable of US$1.7 million (NT$54 million), while the fair value was a receivable of
US$1.4 million (NT$44 million). In entering into financial instruments, the Company is subject to credit, price, liquidity
and cash flow risks as discussed below. Credit risk Credit risk relates to the extent to which failures by counter-parties to discharge their
obligations could reduce the amount of future cash flows from financial assets on hand as at
the balance sheet date. The Company minimizes exposure to credit risk by only dealing with
reputable banks. The notional amounts of the financial instruments as of December 31, 2003 and 2004 were as
follows (amounts in thousands): December 31,Financial instruments
    
    2003
    
    
    2004Options purchase for hedging purpose
    
    ¥
    1,597,500US$
    15,000Options written for trading purpose
    
    ¥
    2,396,250
    
    
    US$
    1,500US$
    22,500
    
    
    NT$
    47,700Forward
    
    
    
    
    
    US$
    6,000
 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) 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. 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. No significant cash flow risks are expected as the exchange rates on the forward contracts
are fixed. The Company expects insignificant liquidity risk from structured deposits as the
Company has and expects to have sufficient Japanese Yen and US dollar assets to meet the
cash requirement. 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 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) 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 - 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)  22.
    
    Reconciliation to Accounting Principles Generally Accepted in the United States of AmericaThe Companys financial statements have been prepared in accordance with R.O.C. GAAP. R.O.C.
GAAP varies in certain significant respects from U.S. GAAP. Differences, which have a
significant effect on the Companys consolidated results of operations and shareholders
equity, are as follows:  a.
    
    Employee BonusesUnder R.O.C. GAAP, the employee bonuses and the remuneration to directors and supervisors,
paid in accordance with the provisions of the Companys articles of incorporation
applicable to the distribution of earnings, are recorded as an appropriation from retained
earnings in the period shareholder approval is obtained for the distribution of the
Companys earnings. If the employee bonuses are settled through the issuance of common
shares of the Company, the amount transferred from retained earnings is based on the par
value of the common shares issued. The remuneration to directors and supervisors may not be
settled through the issuance of common shares.U.S. GAAP requires that such bonuses and remuneration to employees, directors and
supervisors be recorded as compensation expense in the period to which they relate. In
addition, if the employee bonuses are paid in the form of common shares, the fair value of
the shares issued is used to determine the amount of the expense. However, since the form
of the payment of the compensation expense is only determinable at the annual shareholders
meeting, which is generally after the issuance of the Companys annual financial
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 BenefitsAs permitted under R.O.C. 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 U.S. 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 variancesAs permitted under R.O.C. GAAP, all plant capacity expense variances can either be charged
to the statement of operations or allocated between cost of goods sold and inventory using
an appropriate allocation method. The Companys policy is to expense such variances.Under U.S. GAAP, such plant capacity variances can only be allocated between cost of goods
sold and inventory. This may also result in additional inventory allowances by NT$740,416
and NT$24,823 as of December 31, 2003 and 2004, respectively. 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)  d.
    
    Marketable SecuritiesUnder R.O.C. 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 R.O.C. 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 U.S. 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 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.  Under U.S. GAAP, available-for-sale securities as of December 31, 2003 and 2004 are as follows: As of December 31,2003
    
    
    2004Market value
    
    
    Cost
    
    
    Market value
    
    
    CostNT$
    
    
    NT$
    
    
    NT$
    
    
    US$
    
    
    NT$
    
    
    US$Classified as
current assets:Open-end mutual
funds, marketable
securities
    
    
    853,776
    
    
    
    871,095
    
    
    
    904,190
    
    
    
    28,487
    
    
    
    901,871
    
    
    
    28,415Equity securities
    
    
    
    
    
    
    
    
    
    
    31,660
    
    
    
    998
    
    
    
    16,169
    
    
    
    509Sub-total
    
    
    853,776
    
    
    
    871,095
    
    
    
    935,850
    
    
    
    29,485
    
    
    
    918,040
    
    
    
    28,924Classified as
non-current:Equity securities
    
    
    2,894,513
    
    
    
    1,026,593
    
    
    
    1,049,921
    
    
    
    33,079
    
    
    
    719,296
    
    
    
    22,662
  Realized gains from sale of securities classified as available-for-sale for the years ended
December 31, 2002, 2003 and 2004 were NT$6,778, NT$111,957 and NT$243,497 (US$7,672),
respectively. For the purpose of determining realized gains and losses, the cost of securities
sold was based on specific identification. During 2002, 2003, and 2004, an other-than-temporary decline in value of NT$538,151, NT$0 and
NT$447,995(US$14,115) was recognized, respectively, under U.S. GAAP for the Companys investment
in Tower. At December 31, 2004, the price of Towers shares was US$2.26 per share compared with
the average cost of US$2.26 per share. 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) The following table shows the gross unrealized losses and fair value of the Companys investment
with unrealized losses that are not deemed to be other-than-temporary impaired, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2004: Less Than 12 Months
    
    
    12 Months or Greater
    
    
    TotalDescription of Securities
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesClassified as current assets:Open-end mutual fund
marketable securities
    
    
    89,246
    
    
    
    2,918
    
    
    
    
    
    
    
    
    
    
    
    89,246
    
    
    
    2,918
 Approximately 50% of the unrealized loss came from a mutual fund which the market value
subsequently recovered in January 2005 and exceeded the Companys cost. The remaining unrealized
losses represents a decline in value of less than 2% of the original cost of the mutual funds
for a duration of 6 months. The Company evaluated the near-term prospects of these mutual funds
in relation to the severity and duration of the impairment. Based on that evaluation and the
Companys ability and intent to hold these investments for a reasonable period of time
sufficient for a forecasted recovery of fair value, the Company does not consider these
investments to be other-than-temporarily impaired at December 31, 2004. The aggregate cost of the Companys cost method investments totaled NT$670,308 at December 31,
2004 and were not evaluated for impairment because (a) the Company did not estimate the fair
value of those investments in accordance with paragraphs 14 and 15 of Statement 107 and (b) the
Company did not identify any events or changes in circumstances that may have had a significant
adverse effect on the fair value of those investments.  e.
    
    Derivative Financial Instruments Under R.O.C. 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 outstanding put options and
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 U.S. GAAP
prior to January 1, 2001). In addition, R.O.C. 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 U.S. 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 21.f). Differences between R.O.C. GAAP and U.S. GAAP in accounting for
derivative financial instruments are detailed below: F - 58




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(Amounts in thousands except share, per share, and percentage data)  (i).
    
    Options contractsUnder R.O.C. GAAP, gains and losses on option contracts are recognized upon exercise.
Unrealized gains and losses are not required to be recorded in the financial statements.
However, effective the quarter ended December 31, 2004, in accordance with Ruling No. 32,
The Accounting Treatment of Foreign Exchange Option Contracts Before the
Effectiveness of Financial Accounting Standards No. 34, issued by the Accounting Research
and Development Foundation of the ROC in 2005, outstanding put options at the
balance sheet date are accounted for at their fair values with the differences included in
the current net income. This change in accounting principles did not have significant impact
on the Companys financial statements.For periods prior to January 1, 2001, U.S. GAAP requires that unrealized gains and losses on
option contracts that do not qualify as hedges be recorded in the statement of operations.
The majority of option contracts entered into by the Company for hedging purposes, did not
qualify as hedges for financial reporting purposes and accordingly have been carried in the
financial statements at fair value.(ii).
    
    Structured depositsUnder R.O.C. GAAP, the respective interest on the deposits is accrued. The gains and losses
arising from the settlement of the contracts are dealt with in the statement of operations.
Unrealized gains and losses are not recognized.For periods prior to January 1, 2001, under U.S. GAAP, the option element of these contracts
is measured at fair value and is recognized on the balance sheet, subsequent changes in the
fair value of the option are recognized in earnings in the period of change.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. 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 11, the Company repurchased and redeemed certain convertible
bonds that included such embedded derivatives. Under U.S. GAAP, for the years ended December
31, 2003 and 2004 the related extinguishment losses were NT$9,833 and NT$11,733 (US$370),
respectively.f.
    
    Stock Appreciation Rights R.O.C. GAAP has no specific accounting provisions for Stock Appreciation Rights (SAR) F - 59




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(Amounts in thousands except share, per share, and percentage data) 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 R.O.C. GAAP purposes by correlating the number of shares in the SAR plan that have vested with a number of shares referenced in the derivative
contract. The Company records gains or losses on the portion of the derivative contract related
to the SAR plan based on the difference between the strike price in the derivative contract and
the employees exercise price. Under R.O.C. GAAP basis the derivative contract related to the
SARs in now accounted for as a derivative contract not held for hedging and that therefore the
U.S. GAAP differences for derivatives now include any differences related to the SAR contract. U.S. GAAP requires the Company to account for its stock appreciation rights granted to employees
in accordance with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees. Under APB 25, the Company recognizes compensation expense for the plan
based on the amount by which the quoted market value of the shares of the Companys stock
covered by the grant exceeds the exercise price of the rights. Compensation is accrued as a
charge to expense over the vesting period based on current market values of the SAR at the end
of each period. As of December 31, 2003, all shares under SAR totaling 72,208,948 were expired
and cancelled.  g.
    
    Employee Stock Options Under ROC GAAP, there were no specific regulations with respect to the accounting for stock
options prior to 2004. 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. The Company has elected intrinsic value method
in 2004 for purpose of accounting for its employee stock options. Under U.S. 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. Refer to Note 14 for the shares granted and the exercise prices under 2001 plan, 2002 plan, 2003
plan and 2004 plan. 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 F - 60




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(Amounts in thousands except share, per share, and percentage data) Black-Scholes option pricing model with the following weighted-average assumptions,
respectively: risk-free interest rate of 1.55%~1.68%; dividend yield of 0.00%; volatility
factors of the expected market price of the Companys common stock ranging from 0.55 to 0.575;
and a weighted-average expected life of the option of 4.38 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 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Net income (loss), as
reported under US GAAP
    
    
    (13,840,747
    )
    
    
    (8,876,618
    )
    
    
    (428,768
    )
    
    
    (13,509
    )Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards
    
    
    (379,539
    )
    
    
    (84,913
    )
    
    
    (338,091
    )
    
    
    (10,652
    )Pro forma net income (loss)
    
    
    (14,220,286
    )
    
    
    (8,961,531
    )
    
    
    (766,859
    )
    
    
    (24,161
    )
 Earnings (loss) per share (in dollars) For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Basic  as reported
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    
    *Diluted  as reported
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    
    *Basic  pro forma
    
    
    (3.84
    )
    
    
    (2.30
    )
    
    
    (0.16
    )
    
    
    
    *Diluted  pro forma
    
    
    (3.84
    )
    
    
    (2.30
    )
    
    
    (0.16
    )
    
    
    
    *
 
 *
    
    Less than 0.01 A summary of the Companys stock option activity and related information for the years ended
December 31, 2003 and 2004 is as follows: As of December 31, 2003
    
    
    As of December 31, 2004Options
    
    
    Weighted-Average
    
    
    Options
    
    
    Weighted-Average(in thousand)
    
    
    Exercise Price
    
    
    (in thousand)
    
    
    Exercise PriceOutstanding-beginning of year
    
    
    239,685
    
    
    
    NT$     14.91
    
    
    
    290,300
    
    
    
    9.31Granted
    
    
    196,794
    
    
    
    7.78
    
    
    
    195,768
    
    
    
    14.18Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (146,179
    )
    
    
    16.40
    
    
    
    (53,289
    )
    
    
    10.83Outstanding-end of year
    
    
    290,300
    
    
    
    9.31
    
    
    
    432,779
    
    
    
    11.21
 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) Weighted-average fair value of options granted for the year ended December 31, 2003 and
2004 was NT$4.48 and NT$6.59 per unit. The weighted average remaining contractual life of those
options for the year ended December 31, 2003 and 2004 is 5.17 years and 5.29 years.  h.
    
    Purchase and Sale of the Companys Own Shares Under R.O.C. 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. U.S. GAAP requires that if the Company acquires shares of its own capital stock for purposes
other than retirement, the cost of the acquired stock should be shown separately as a deduction
from the total of capital stock, additional paid-in capital, and retained earnings, or accorded
the accounting treatment appropriate for retired stock. Gains on sales of the repurchased
stock not previously accounted for as constructively retired should be credited to additional
paid-in capital; losses should be charged to additional paid-in capital to the extent that
previous net gains from sales or retirements of the same class of stock are included therein,
otherwise the losses are charged to retained earnings.  i.
    
    Gross Profit and Operating Income Government subsidies for research and development, inventory loss provision and the reversal of
bad debt expense are presented below the operating income subtotal in the statement of
operations as permitted under R.O.C. GAAP. Under U.S. 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.  j.
    
    Investment in Equity Investees Under R.O.C. 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 investment.  k.
    
    Income Tax Undistributed earnings generated after 1997 are subject to a 10% tax in compliance with the
Income Tax Law of the R.O.C.. Under R.O.C. GAAP the 10% tax on undistributed earnings is
recorded as an expense at the time shareholders resolve that its earnings shall be retained.
Under U.S. 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. 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) Under R.O.C. GAAP, a valuation allowance determined is less stringent than under U.S. GAAP. Under U.S. GAAP, if a company has experienced cumulative losses in recent years, it is not
generally able to consider subjective projections of future operating profits for the purpose of
determining the valuation allowance for deferred income tax assets. A valuation allowance is
provided on deferred tax assets to the extent that it is not more likely than not that such
deferred tax assets will be realized. Under USGAAP, the Companys valuation allowance for
deferred tax assets amounted to NT$8,305,012 and NT$10,302,448 (US$324,589) as of December 31,
2003 and 2004.  l.
    
    Research and Development Expense On a R.O.C. GAAP basis, royalty expense for the Company is included in research and development
expense. On a U.S. GAAP basis, royalty expense for the Company is included in selling expense or
administrative expense depending on the nature of the expense. Accordingly, on a U.S. GAAP
basis, research and development expenses were NT$3,443,456 in 2002, NT$2,535,259 in 2003, and
NT$2,418,208 (US$76,188) in 2004, respectively.  m.
    
    Reclassification of Capital Account to Accumulated Deficit Under R.O.C. GAAP, under the approval of shareholders, a company may reclassify its additional
paid-in capital account to cover up its accumulated deficit. Under U.S. GAAP, according to SAB Topic 5S, the SEC staff believes a deficit reclassification of
any nature is considered to be quasi-reorganization. As such, a company may not reclassify or
eliminate a deficit in retained earnings unless all requisite conditions for a
quasi-reorganization are satisfied. For the year ended December 31, 2003, the Company
reclassified NT$2,630,621 of its additional paid-in capital to accumulated deficit account.
Under U.S. GAAP, this reclassification is eliminated.  n.
    
    Convertible Debt Securities with Beneficial Conversion Feature Under R.O.C. GAAP, there are no specific regulations with respect to the accounting for
beneficial conversion features embedded in convertible securities. Under U.S. GAAP, in accordance with EITF 00-27 Application of EITF98-5 Accounting for
Convertible Securities with Beneficial Conversion Features (EITF 00-27), convertible securities
with beneficial conversion features or contingently adjustable conversion ratios are recognized
and measured by allocating a portion of the proceeds equal to the intrinsic value of that
feature to additional paid-in capital. The amount to be allocated should be calculated at the
commitment date as the difference between the conversion price and the fair value of the common
stock into which the security is convertible, multiplied by the number of shares into which the
security is convertible. The resulting discount on the convertible security is accreted, as
interest expense, from the date the beneficial conversion feature is fixed to the stated
redemption date.  o.
    
    Goodwill Under R.O.C. GAAP, goodwill is the excess of the investment cost over the fair value of acquired
net assets. Goodwill is capitalized and amortized to the income statement over five to twenty
years. F - 63




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(Amounts in thousands except share, per share, and percentage data) Under U.S. GAAP, goodwill acquired after June 30, 2001 shall not be amortized. Instead, it shall
be tested for impairment at reporting unit level at least annually. Goodwill acquired before
June 30, 2001 should be amortized through December 31, 2001 over its estimated useful life but
not exceeding 40 years. Effective January 1, 2002, all goodwill are subject non-amortization
provision as described above.  p.
    
    Rights Issues and Earnings Per Share Under R.O.C. 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 U.S. 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. Under R.O.C. GAAP, earnings per share is retroactively adjusted for shares issued for employee
bonuses. Under U.S. GAAP, shares issued for employee bonuses will affect the current periods
earnings per share only. 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) The number of weighted average shares outstanding under U.S. GAAP is presented below: For the year ended December 31,2002
    
    
    2003
    
    
    2004Number of common shares outstanding on
January 1
    
    
    3,359,342,613
    
    
    
    3,691,276,875
    
    
    
    4,430,251,943Weighted average number of treasury stock
    
    
    (32,228,400
    )
    
    
    (46,023,152
    )
    
    
    (46,023,152
    )Capital reserve transferred to common
stock (10%)
    
    
    333,313,737
    
    
    
    
    
    
    
    Bonds converted to common for the years
ended December 31, 2003 (263,975,068
shares)
    
    
    
    
    
    
    134,088,222
    
    
    
    Issuance of common shares for cash on
November 11, 2003 (475,000,000
shares*51/365)
    
    
    
    
    
    
    66,369,863
    
    
    
    Issuance of 525,000,000 common shares
for Global Depositary Shares on April 5,
2004
    
    
    
    
    
    
    
    
    
    
    388,729,508Bonds converted to common shares for the
year ended December 31, 2004 (80,044,385
shares)
    
    
    
    
    
    
    
    
    
    
    61,669,886Add: retroactive adjustment for bonus
element included in the rights offering
on November 3, 2003 (1.2462%)
    
    
    45,616,253
    
    
    
    47,098,159
    
    
    
    Basic and dilutive weighted-average
number of shares
    
    
    3,706,044,203
    
    
    
    3,892,809,967
    
    
    
    4,834,628,185
 q.Classification of Allowance for Prepayments and Long-lived Assets to be
Abandoned Under R.O.C. GAAP, except for bad debt allowance, allowance for assets is classified as
non-operating expenses. Under U.S. GAAP, allowance for prepayment and impairment of long-lived assets to be abandoned
are classified as operating expenses. Net income (loss) for U.S. GAAP purposes is reconciled as follows: For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Net income (loss) as reported under ROC GAAP
    
    
    (11,356,663
    )
    
    
    (8,197,745
    )
    
    
    217,692
    
    
    
    6,859(a) Additional pension gain on an actuarial
basis
    
    
    2,696
    
    
    
    2,696
    
    
    
    2,696
    
    
    
    85(b) Plant capacity loss.
    
    
    (527,987
    )
    
    
    268,671
    
    
    
    (257,565
    )
    
    
    (8,115
    )(c) (i)Unrealized (losses) gains on marketable
securities
    
    
    (16,516
    )
    
    
    4,444
    
    
    
    (21,659
    )
    
    
    (682
    )(ii)Other-than-temporary decline in value
on marketable securities
    
    
    (538,151
    )
    
    
    
    
    

    
    (447,995
    )
    
    
    (14,115
    )(d) Derivative financial instruments:(i) Net gains (losses) on derivative
financial instruments held for trading
purposes
    
    
    449,041
    
    
    
    (611,359
    )
    
    
    229,867
    
    
    
    7,242(ii) Gain on embedded derivative in share
purchase agreement
    
    
    
    
    
    
    225,753
    
    
    
    
    
    
    
    (e) Compensation cost recognized for stock
appreciation rights (Note I)
    
    
    93,190
    
    
    
    
    
    
    
    
    
    
    
    
 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 the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(f) Adjustment for taxes
    
    
    (1,946,357
    )
    
    
    48,143
    
    
    
    1,914
    
    
    
    60(g) Convertible debt securities with beneficial
conversion feature
    
    
    
    
    
    
    (617,221
    )
    
    
    (155,746
    )
    
    
    (4,907
    )(h) Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    2,028
    
    
    
    64Net income (loss) in accordance with U.S.
GAAP
    
    
    (13,840,747
    )
    
    
    (8,876,618
    )
    
    
    (428,768
    )
    
    
    (13,509
    )Other comprehensive income:Unrealized gains (losses) on
available-for-sale securities
    
    
    (20,511
    )
    
    
    1,642,167
    
    
    
    (1,519,910
    )
    
    
    (47,886
    )Change in translation adjustment
    
    
    (53,125
    )
    
    
    (30,182
    )
    
    
    (127,670
    )
    
    
    (4,022
    )Reclassification adjustment for realized
gains (losses) on available-for-sale
securities
    
    
    11,715
    
    
    
    19,318
    
    
    
    243,497
    
    
    
    7,672Comprehensive income (loss) in accordance
with US GAAP
    
    
    (13,902,668
    )
    
    
    (7,245,315
    )
    
    
    (1,832,851
    )
    
    
    (57,745
    )
 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) For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Per share amounts:Basic net income (loss) per share
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    
    *Diluted net income (loss) per share.
    
    
    (3.73
    )
    
    
    (2.28
    )
    
    
    (0.09
    )
    
    
    
    *
    The diluted earnings per share calculation excludes the statement of operations impact of
NT$413,809, NT$240,708 and NT$88,181 (US$2,778) related to the assumed conversion of
convertible bonds into 374,454,410 weighted average shares, 659,968,955 weighted average shares
and 61,094,172 weighted average shares for years 2002, 2003 and 2004 respectively. In addition,
1,996,820 and 32,379,507 weighted average shares assumed exercise of stock options for year
2003 and 2004 respectively were also excluded in the diluted earnings per share calculation.
The impact of the assumed conversion and exercise of stock options has been excluded for year
2003 and 2004 due to the anti-dilutive effect.  Note I:
    
    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 were expired and 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 - 67




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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 U.S. GAAP purposes is reconciled as follows: For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Gross profit (loss) as reported
under R.O.C. GAAP
    
    
    (615,291
    )
    
    
    (2,941,649
    )
    
    
    4,387,976
    
    
    
    138,248Inventory loss (provision) reversal
    
    
    (2,929,284
    )
    
    
    1,185,227
    
    
    
    918,545
    
    
    
    28,940Compensation cost recognized for
stock appreciation rights
    
    
    51,627
    
    
    
    
    
    
    
    
    
    
    
    Pension gain on actuarial basis
    
    
    2,696
    
    
    
    2,696
    
    
    
    2,696
    
    
    
    85Depreciation of idle assets
    
    
    
    
    
    
    (49,869
    )
    
    
    
    
    
    
    Impairment of idle assets
    
    
    
    
    
    
    (41,661
    )
    
    
    
    
    
    
    Plant capacity loss
    
    
    (527,987
    )
    
    
    268,671
    
    
    
    (257,565
    )
    
    
    (8,115
    )Gross profit (loss) in accordance
with U.S. GAAP
    
    
    (4,018,239
    )
    
    
    (1,576,585
    )
    
    
    5,051,652
    
    
    
    159,158
 Operating income (loss) for U.S. GAAP purposes is reconciled as follows: For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Operating income (loss) as
reported under R.O.C. GAAP
    
    
    (6,826,718
    )
    
    
    (7,683,989
    )
    
    
    (348,688
    )
    
    
    (10,986
    )Compensation cost recognized for
stock appreciation rights
    
    
    93,190
    
    
    
    
    
    
    
    Pension gain on actuarial basis
    
    
    2,696
    
    
    
    2,696
    
    
    
    2,696
    
    
    
    85Government subsidy
    
    
    2,286
    
    
    
    5,125
    
    
    
    18,125
    
    
    
    571Allowance for prepaid expenses
    
    
    
    
    
    
    (334,971
    )
    
    
    
    
    
    
    Depreciation of idle assets
    
    
    
    
    
    
    (49,869
    )
    
    
    
    
    
    
    Impairment of idle assets
    
    
    
    
    
    
    (41,661
    )
    
    
    
    
    
    
    Inventory loss (provision) reversal
    
    
    (2,929,284
    )
    
    
    1,185,227
    
    
    
    918,545
    
    
    
    28,940Amortization of Goodwill
    
    
    
    
    
    
    
    
    
    
    2,028
    
    
    
    64Plant capacity loss
    
    
    (527,987
    )
    
    
    268,671
    
    
    
    (257,565
    )
    
    
    (8,115
    )Operating income (loss) in
accordance with U.S. GAAP
    
    
    (10,185,817
    )
    
    
    (6,648,771
    )
    
    
    335,141
    
    
    
    10,559
 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) Shareholders equity for U.S. GAAP purposes is reconciled as follows: As of December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Shareholders equity as
reported under R.O.C.
GAAP
    
    
    30,214,293
    
    
    
    29,247,534
    
    
    
    34,344,673
    
    
    
    1,082,064(a) Compensation cost
recognized for stock
appreciation rights
    
    
    942,703
    
    
    
    
    
    
    
    
    
    
    
    (b) Accrual for pension
costs under actuarial
method
    
    
    (37,735
    )
    
    
    (35,039
    )
    
    
    (32,343
    )
    
    
    (1,019
    )(c) Net unrealized gain
(loss) on
available-for-sale
securities
    
    
    (224,047
    )
    
    
    682,837
    
    
    
    294,013
    
    
    
    9,263(d) Net loss on
derivative financial
instruments
    
    
    (597,224
    )
    
    
    (265,880
    )
    
    
    (36,013
    )
    
    
    (1,135
    )(e) Goodwill on investment
    
    
    (356
    )
    
    
    (356
    )
    
    
    2,028
    
    
    
    64(f) Additional tax on
undistributed earnings
    
    
    (1,946,357
    )
    
    
    (1,898,214
    )
    
    
    (1,896,300
    )
    
    
    (59,745
    )(g) Plant capacity loss
    
    
    
    
    
    
    268,671
    
    
    
    11,106
    
    
    
    350(h) Convertible debt
securities with
beneficial conversion
feature
    
    
    
    
    
    
    195,449
    
    
    
    72,466
    
    
    
    2,282Shareholders equity in
accordance with U.S. GAAP
    
    
    28,351,277
    
    
    
    28,195,002
    
    
    
    32,759,630
    
    
    
    1,032,124
 Shareholders equity consists of the following: As of December 31,2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Common shares
    
    
    44,027,583
    
    
    
    50,352,963
    
    
    
    1,586,420Subscriptions received
    
    
    274,936
    
    
    
    
    
    
    
    Additional paid-in capital
    
    
    14,616,667
    
    
    
    14,963,703
    
    
    
    471,446Accumulated deficits
    
    
    (31,356,226
    )
    
    
    (31,762,382
    )
    
    
    (1,000,705
    )Accumulated other comprehensive income
    
    
    1,814,560
    
    
    
    410,477
    
    
    
    12,932Treasury stock
    
    
    (1,205,131
    )
    
    
    (1,205,131
    )
    
    
    (37,969
    )Reserves
    
    
    22,613
    
    
    
    
    
    
    
    28,195,002
    
    
    
    32,759,630
    
    
    
    1,032,124
 Accumulated other comprehensive income consists of the following: As of December 31,2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Unrealized gains (losses) on marketable securities
    
    
    1,624,848
    
    
    
    348,435
    
    
    
    10,977Cumulative translation adjustments
    
    
    189,712
    
    
    
    62,042
    
    
    
    1,955Total
    
    
    1,814,560
    
    
    
    410,477
    
    
    
    12,932
 Domestic and international components of pre-tax income (loss) are as follows: 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) For the year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Domestic
    
    
    (10,708,768
    )
    
    
    (7,636,349
    )
    
    
    (43,782
    )
    
    
    (1,379
    )International
    
    
    (1,166,080
    )
    
    
    (1,267,704
    )
    
    
    (357,452
    )
    
    
    (11,262
    )Total
    
    
    (11,874,848
    )
    
    
    (8,904,053
    )
    
    
    (401,234
    )
    
    
    (12,641
    )
 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 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Expected income tax expense (benefit)
    
    
    (2,968,712
    )
    
    
    (2,226,013
    )
    
    
    (100,309
    )
    
    
    (3,160
    )Additional income tax due to different
enacted tax rate under U.S.GAAP
    
    
    (758,975
    )
    
    
    674,687
    
    
    
    (587,498
    )
    
    
    (18,510
    )Additional income tax assessed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax exemption
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax credit forfeited (earned)
    
    
    (1,405,069
    )
    
    
    829,546
    
    
    
    (294,120
    )
    
    
    (9,267
    )Change in valuation allowance
    
    
    6,052,085
    
    
    
    468,595
    
    
    
    1,997,992
    
    
    
    62,949Net loss (gain) on long-term equity investment
    
    
    122,200
    
    
    
    317,135
    
    
    
    43,884
    
    
    
    1,383Non-deductible employee bonus
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-taxable net (gains) losses on financial
instruments
    
    
    (112,260
    )
    
    
    250,707
    
    
    
    98,883
    
    
    
    3,115Non-deductible compensation cost recognized
for stock appreciation rights
    
    
    (23,298
    )
    
    
    
    
    
    
    
    
    
    
    Effect of rate change
    
    
    1,066,033
    
    
    
    (373,681
    )
    
    
    (1,156,129
    )
    
    
    (36,425
    )Impact of industrial park reduced tax rates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Others, net
    
    
    (5,749
    )
    
    
    31,908
    
    
    
    30,164
    
    
    
    951Income tax expense (benefit)
    
    
    1,966,255
    
    
    
    (27,116
    )
    
    
    32,867
    
    
    
    1,036
 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)  Concentration of RiskThe 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 22.67% and 30.15% of the
Companys total net sales, respectively, for the period ended December 31, 2004. The Companys
sales are primarily denominated in currencies other than N.T. Dollars, primarily U.S. 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 R.O.C. 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, 2003 and 2004, the
three largest accounts receivable balances amounted NT$1,164,757 and NT$1,010,033
(US$31,822), 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 - 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)  Valuation and Qualifying AccountsThe following table summarizes the changes in the allowance for accounts and notes receivable
(including related party receivable), inventory and royalty accruals: At December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Allowance for doubtful accounts:Balance as at beginning of period
    
    
    196,016
    
    
    
    210,883
    
    
    
    165,257
    
    
    
    5,206Bad debt expense (reversal)
    
    
    14,918
    
    
    
    (33,059
    )
    
    
    787
    
    
    
    25Bad debts written off
    
    
    (51
    )
    
    
    (12,567
    )
    
    
    
    
    
    
    Other adjustments
    
    
    
    
    
    
    
    
    
    
    (767
    )
    
    
    (24
    )Balance at the end of the year
    
    
    210,883
    
    
    
    165,257
    
    
    
    165,277
    
    
    
    5,207Allowance for inventory losses:Balance as at beginning of period
    
    
    3,243,666
    
    
    
    5,751,735
    
    
    
    4,380,019
    
    
    
    137,997Amount expensed during the
period (reversal)
    
    
    2,929,384
    
    
    
    (1,185,227
    )
    
    
    (923,686
    )
    
    
    (29,102
    )Write-off of inventories
    
    
    (421,315
    )
    
    
    (186,489
    )
    
    
    (211,092
    )
    
    
    (6,651
    )Other adjustments
    
    
    
    
    
    
    
    
    
    
    (3,026
    )
    
    
    (95
    )Balance at the end of the year
    
    
    5,751,735
    
    
    
    4,380,019
    
    
    
    3,242,215
    
    
    
    102,149Royalty accruals:Balance as at beginning of period
    
    
    852,367
    
    
    
    672,604
    
    
    
    675,457
    
    
    
    21,281Amount expensed during the period
    
    
    596,825
    
    
    
    195,000
    
    
    
    140,468
    
    
    
    4,426Payments made during the period
    
    
    (776,588
    )
    
    
    (192,147
    )
    
    
    (132,007
    )
    
    
    (4,159
    )Balance at the end of the year
    
    
    672,604
    
    
    
    675,457
    
    
    
    683,918
    
    
    
    21,548
  23.
    
    Summarized Financial Information of Equity InvesteesThe following table presents summarized financial information in accordance with U.S. GAAP for
equity investees with an ownership percentage between 20-50% as of December 31, 2003 and 2004
and for the years ended December 31, 2002, 2003 and 2004: At December 31,2003
    
    
    2004NT$
    
    
    NT$
    
    
    US$Current assets
    
    
    215,390
    
    
    
    435,455
    
    
    
    13,719Non-current assets
    
    
    46,820
    
    
    
    85,088
    
    
    
    2,681Current liabilities
    
    
    176,643
    
    
    
    167,460
    
    
    
    5,276Non-current liabilities
    
    
    326
    
    
    
    18,423
    
    
    
    580Total shareholders equity
    
    
    85,241
    
    
    
    334,660
    
    
    
    10,544
 Year ended December 31,2002
    
    
    2003
    
    
    2004NT$
    
    
    NT$
    
    
    NT$
    
    
    US$Net sales
    
    
    669,073
    
    
    
    311,391
    
    
    
    466,717
    
    
    
    14,704Sales less cost of sales
    
    
    204,681
    
    
    
    38,969
    
    
    
    158,614
    
    
    
    4,997Net income (loss)
    
    
    (191,905
    )
    
    
    (284,591
    )
    
    
    (154,804
    )
    
    
    (4,877
    )
 F - 72




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MACRONIX INTERNATIONAL CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(Amounts in thousands except share, per share, and percentage data)  24.
    
    New Accounting PronouncementsU.S. GAAPIn January 2003, the FASB issued Interpretation No. 46, or FIN 46, Consolidation of Variable
Interest Entities (FIN 46), which requires the consolidation of certain entities considered
to be variable interest entities (VIEs). An entity is considered to be a VIE when it has
equity investors who lack the characteristics of having a controlling financial interest, or
its capital is insufficient to permit it to finance its activities without additional
subordinated financial support. Consolidation of a VIE by an investor is required when it is
determined that the investor will absorb a majority of the VIEs expected losses or residual
returns if they occur. In December 2003, the FASB published a revision to FIN 46 (FIN 46R) to
clarify some of the provisions of the interpretation and to exempt certain entities from its
requirements. The Company adopted FIN 46R for the year ended December 31, 2004. The Company
did not have VIE for the year ended December 31, 2004.In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force (EITF)
Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The Issues objective is to provide guidance for identifying
other-than-temporarily impaired investments. EITF 03-1 also provides new disclosure
requirements for investments that are deemed to be temporarily impaired. In September 2004, the
FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the
measurement and recognition guidance in EITF 03-1 until further notice. The disclosure
requirements of EITF 03-1 are effective for fiscal years ending after June 15, 2004. Once the
FASB reaches a final decision on the measurement and recognition provisions, the company will
evaluate the impact of the adoption of the accounting provisions of EITF 03-1.In November 2004, FASB issued FASB Statement No. 151, which amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). This Statement requires that
those items be recognized as current-period charges regardless of whether they meet the
criterion of so abnormal. In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of this Statement shall be effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted
for inventory costs incurred during fiscal years beginning after the date this Statement is
issued. The provisions of this Statement shall be applied prospectively. We expect to adopt
Statement No. 151 on January 1, 2006. The adoption of this Statement is expected to increase
cost of goods sold and reduce inventory balance on a USGAAP basis.On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement
No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion 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)  No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement
of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described
in Statement 123. However, Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an alternative.Statement 123(R) must be adopted no later than January 1, 2006. Early adoption will be
permitted in periods in which financial statements have not yet been issued. We expect to
adopt Statement 123(R) on January 1, 2006.Statement 123(R) permits public companies to adopt its requirements using one of two methods:A modified prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of Statement 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of Statement 123 for all
awards granted to employees prior to the effective date of Statement 123(R) that remain
unvested on the effective date.A modified retrospective method which includes the requirements of the modified prospective
method described above, but also permits entities to restate based on the amounts previously
recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year of adoption.We are currently evaluating the above methods of adoption.As permitted by Statement 123, the company currently accounts for share-based payments to
employees using Opinion 25s intrinsic value method. Accordingly, the adoption of Statement
123(R)s fair value method will have a significant impact on our result of operations, although
it will have no impact on our overall financial position. Had the company adopted Statement
123(R) in prior periods, the impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma net income and earnings per share in
Note 14 to our consolidated financial statements.In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment
of APB Opinion No.29. APB Opinion No.29, Accounting for Nonmonetary Transactions, is based
on the principle that exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged. SFAS No. 153 amends APB Opinion No. 29, eliminating the
exception to fair value accounting for nonmonetary exchanges of similar productive assets and
replaces it with a general exception to fair value accounting for nonmonetary exchanges that do
not have commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The statement is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not
expect this statement to have a material impact on the financial condition or results of
operation.R.O.C. GAAPIn December 25, 2003, the R.O.C. Accounting Research and Development Foundation issued F - 74




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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)  Statement of Financial Accounting Standards No. 34, Accounting for Financial Instruments,
which is effective for financial statements with fiscal years ending on or after December 31,
2006. Early adoption of this statement is not allowed. This Statement requires that all
financial instruments, excluding certain financial instruments specified in this statement, as
either trading, available-for-sale or held-to-maturity. Debt securities owned with positive
intent and ability to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost. Debt and equity securities that are purchased and traded for
short-term profit are classified as trading securities and reported at fair value, with
unrealized holding gains and losses reported as part of net income. Debt and equity securities
not classified as either held-to-maturity or trading are classified as available-for-sale
securities, which should be reported at fair value, with unrealized gains and losses reported as
a separate component of stockholders equity. In addition, all derivatives are required to be
reported at fair value. The Company is currently evaluating the effect of the adoption of this
statement.In July 1, 2004, the R.O.C. Accounting Research and Development Foundation issued Statement of
Financial Accounting Standards No. 35, Accounting for Impairment of Assets, which is effective
for financial statements with fiscal years ending on or after December 31, 2005. This statement
requires that impairment loss should be recognized whenever events or changes in circumstance
indicate the carrying amount of an asset may be lesser than its recoverable amount. The Company
is currently evaluating the effect of the adoption of this statement.In December 9, 2004, the R.O.C. Accounting Research and Development Foundation issued the third
revision for Statement of Financial Accounting Standards No. 5, Accounting for Long-Term Equity
Investment, which is effective for financial statements with fiscal years beginning on or after
January 1, 2005. This revision of the statement requires that operating losses of investee
evaluated under equity method be allocated between controlling and non-controlling interest
until those losses exceed the non-controlling interests investment. In that event, the excess
of any further losses are charged to the controlling interest except to the extent that the
minority interest has a binding obligation to, and is able to undertake the losses. The Company
does not expect this statement to have a material impact on the financial condition or results
of operation.In December 9, 2004, the R.O.C. Accounting Research and Development Foundation issued the first
revision for Statement of Financial Accounting Standards No. 7, Consolidated Financial
Statements, which is effective for financial statements with fiscal years beginning on or after
January 1, 2005. This revision of the statement requires the Company to consolidate all
investees under the control of the Company. Control is not only presumed when the parent company
owns over 50% of voting rights of the investee but also evidenced by control under certain
situations specified in this revised statement. In addition, the threshold for the determination
of whether to consolidate an investee was revoked. Before the adoption of the revised statement,
the Company was not required to file consolidated financial statements to SFC in Taiwan, as none
of the investees of the Company pass the threshold for consolidation. However, after the
adoption of this revised statement, the Company will be required to file the consolidated
financial statements to SFC in Taiwan for the six-month periods ended June 30, 2005. F - 75