##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 Commission file number 0-27884
 
 (Exact name of Registrant as specified in its charter)
 MACRONIX INTERNATIONAL CO., LTD.
 Republic of China   No. 16 Li-Hsin Road
Science Park
Hsinchu, Taiwan, Republic of China
 
  Title of each class
    
    Name of each exchange on which registeredAmerican Depositary Shares representing Common Shares
    
    NASDAQ Global Select MarketCommon Shares, par value NT$10 per share**     Not for trading in the United States, but only in connection with the registration of the American Depositary Shares.
 
   
   As of December 31, 2006, 2,916,157,808 Common Shares were outstanding.
 þ o
 o þ
  þ o
  þ o o
  o þ
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TABLE OF CONTENTS
 Supplemental Information and Exchange Rates
    
    
    3Cautionary Statement
    
    
    3PART IItem 1. Identity of Directors, Senior Management and Advisers
    
    
    4Item 2. Offer Statistics and Expected Timetable
    
    
    4Item 3. Key Information
    
    
    4Item 4. Information on the Company
    
    
    20Item 4A. Unresolved Staff Comments
    
    
    35Item 5. Operating and Financial Review and Prospects
    
    
    35Item 6. Directors, Senior Management and Employees
    
    
    60Item 7. Major Shareholders and Related Party Transactions
    
    
    68Item 8. Financial Information
    
    
    70Item 9. The Offer and Listing
    
    
    73Item 10. Additional Information
    
    
    76Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    89Item 12. Description of Securities Other than Equity Securities
    
    
    91PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    91Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    91Item 15. Controls and Procedures
    
    
    91Item 16A. Audit Committee Financial Expert
    
    
    94Item 16B. Code of Ethics
    
    
    94Item 16C. Principal Accountant Fees and Services
    
    
    94Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    95Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    95PART IIIItem 17. Financial Statements
    
    
    95Item 18. Financial Statements
    
    
    95Item 19. Exhibits
    
    
    95Appendix A
 Glossary of Technical Terms
    
    
    A-1SignaturesEX-1.1 ARTICLES OF INCORPORATIONEX-8.1 LIST OF SUBSIDIARIESEX-11.1 CODE OF BUSINESS CONDUCT AND ETHICSEX-12.1 CERTIFICATION OF PRESIDENT TO SECTION 302EX-12.2 CERTIFICATION OF FINANCE DEPARTMENT TO SECTION 302EX-13.1 CERTIFICATION OF PRESIDENT TO SECTION 1350EX-13.2 CERTIFICATION OF FINANCE DEPARTMENT TO SECTION 1350
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SUPPLEMENTAL INFORMATION AND EXCHANGE RATES
    
 CAUTIONARY STATEMENT
  
    
    industry and product pricing trends;
    
    developments in technology affecting the market acceptance and competitiveness of our products;
    
    applications for our products;
    
    competition from other industry participants;
    
    pricing levels of our and our competitors products;
    
    our development and marketing of new products;
    
    our development and maintenance of relationships with our customers and strategic partners;
    
    the expansion and enhancement of our manufacturing capacity;
    
    our development of new process technologies;
    
    our ability to obtain funding for our capital expenditure plans;
    
    economic, political and financial developments in the markets for our products;
    
    our ability to obtain the necessary raw materials and the prices for these materials; and
    
    our ability to attract and retain qualified personnel.
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
    
    our dependence on frequent introduction of new services and technologies based on the latest developments;
    
    the intensely competitive semiconductor industry;
    
    risks associated with international business activities;
    
    our dependence on key personnel;
    
    natural disasters, such as earthquakes, which are beyond our control;
    
    general economic and political conditions, including those related to the semiconductor industry;
    
    possible disruptions in commercial activities caused by natural and human-induced disasters, including
terrorist activity and armed conflict, that may reduce end-user purchases relative to expectations and
orders;
    
    fluctuations in foreign currency exchange rates;
    
    additional disclosures we make in our previous and future Form 20-F annual reports and Form 6-K periodic
reports to the Securities and Exchange Commission; and
    
    those other risks identified in Item 3. Key Information  D. Risk Factors of this annual report.
  
 PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 A. Selected Financial Data
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Year ended, and as of, December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2006(NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (NT$)
    
    
    (US$)(in millions except per share and ADS data)Consolidated Income Statement
Data:R.O.C. GAAPNet sales
    
    
    16,492
    
    
    
    17,712
    
    
    
    23,380
    
    
    
    18,908
    
    
    
    23,513
    
    
    
    721.5Cost of sales
    
    
    (17,105
    )
    
    
    (20,657
    )
    
    
    (18,990
    )
    
    
    (18,666
    )
    
    
    (15,985
    )
    
    
    (490.5
    )Realized gross profit (loss)
    
    
    (615
    )
    
    
    (2,942
    )
    
    
    4,388
    
    
    
    242
    
    
    
    7,529
    
    
    
    231.0Operating expenses
    
    
    (6,212
    )
    
    
    (4,742
    )
    
    
    (4,737
    )
    
    
    (5,116
    )
    
    
    (5,654
    )
    
    
    (173.5
    )Income (loss) from operations
    
    
    (6,827
    )
    
    
    (7,684
    )
    
    
    (349
    )
    
    
    (4,875
    )
    
    
    1,875
    
    
    
    57.5Income (loss) before taxes
and minority interest
    
    
    (11,337
    )
    
    
    (8,177
    )
    
    
    247
    
    
    
    (6,882
    )
    
    
    1,987
    
    
    
    61.0Income tax benefit (expense)
    
    
    (20
    )
    
    
    (21
    )
    
    
    (35
    )
    
    
    (215
    )
    
    
    (4
    )
    
    
    (0.1
    )Income (loss) before
minority interest
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    212
    
    
    
    (7,098
    )
    
    
    1,983
    
    
    
    60.8Minority interest loss
    
    
    0.4
    
    
    
    0.3
    
    
    
    5
    
    
    
    70
    
    
    
    51
    
    
    
    1.6Net income (loss)
attributable to shareholders
of the parent
    
    
    (11,357
    )
    
    
    (8,198
    )
    
    
    218
    
    
    
    (7,027
    )
    
    
    2,034
    
    
    
    62.4Net income (loss) per share
- basic (1)
    
    
    (5.32
    )
    
    
    (3.65
    )
    
    
    0.08
    
    
    
    (2.41
    )
    
    
    0.70
    
    
    
    0.02Net income (loss) per share
- diluted (1)
    
    
    (5.32
    )
    
    
    (3.65
    )
    
    
    0.08
    
    
    
    (2.41
    )
    
    
    0.70
    
    
    
    0.02U.S. GAAPNet sales
    
    
    16,492
    
    
    
    17,712
    
    
    
    23,380
    
    
    
    18,875
    
    
    
    23,401
    
    
    
    718.1Cost of sales
    
    
    (20,510
    )
    
    
    (19,288
    )
    
    
    (18,328
    )
    
    
    (18,187
    )
    
    
    (17,046
    )
    
    
    (523.0
    )Gross profit (loss)
    
    
    (4,018
    )
    
    
    (1,576
    )
    
    
    5,052
    
    
    
    688
    
    
    
    6,355
    
    
    
    195.1Operating expenses
    
    
    (6,168
    )
    
    
    (5,038
    )
    
    
    (4,717
    )
    
    
    (5,044
    )
    
    
    (5,967
    )
    
    
    (183.1
    )Income (loss) from operations
    
    
    (10,186
    )
    
    
    (6,614
    )
    
    
    335
    
    
    
    (4,356
    )
    
    
    389
    
    
    
    11.9Net income (loss)
    
    
    (13,674
    )
    
    
    (8,027
    )
    
    
    (469
    )
    
    
    (4,636
    )
    
    
    636
    
    
    
    19.5Net income (loss) per share
- basic (1)
    
    
    (6.39
    )
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    0.22
    
    
    
    0.01Net income (loss) per share
- diluted (1)
    
    
    (6.39
    )
    
    
    (3.53
    )
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    0.22
    
    
    
    0.01Balance Sheet Data:R.O.C. GAAPTotal current assets
    
    
    21,301
    
    
    
    21,002
    
    
    
    21,706
    
    
    
    20,027
    
    
    
    21,935
    
    
    
    673.1Total assets
    
    
    67,450
    
    
    
    59,919
    
    
    
    54,396
    
    
    
    45,604
    
    
    
    40,208
    
    
    
    1,233.8Total current liabilities
    
    
    17,687
    
    
    
    18,717
    
    
    
    9,449
    
    
    
    10,692
    
    
    
    7,026
    
    
    
    215.6Total liabilities
    
    
    37,236
    
    
    
    30,671
    
    
    
    20,051
    
    
    
    16,844
    
    
    
    8,997
    
    
    
    276.1Capital stock
    
    
    36,913
    
    
    
    44,303
    
    
    
    50,353
    
    
    
    49,953
    
    
    
    29,162
    
    
    
    894.8Shareholders equity
attributable to shareholders
of the parent
    
    
    30,214
    
    
    
    29,248
    
    
    
    34,344
    
    
    
    28,558
    
    
    
    31,195
    
    
    
    957.2U.S. GAAPTotal current assets
    
    
    21,037
    
    
    
    21,398
    
    
    
    21,716
    
    
    
    19,832
    
    
    
    21,837
    
    
    
    670.1Total assets
    
    
    65,509
    
    
    
    59,200
    
    
    
    52,807
    
    
    
    46,220
    
    
    
    38,912
    
    
    
    1,194.0Total current liabilities
    
    
    18,127
    
    
    
    18,986
    
    
    
    9,445
    
    
    
    10,699
    
    
    
    7,450
    
    
    
    228.6Total liabilities
    
    
    36,991
    
    
    
    31,051
    
    
    
    20,052
    
    
    
    16,877
    
    
    
    9,241
    
    
    
    285.6Capital stock
    
    
    16,118
    
    
    
    23,508
    
    
    
    29,558
    
    
    
    29,158
    
    
    
    29,162
    
    
    
    894.8Total shareholders equity
    
    
    28,518
    
    
    
    28,149
    
    
    
    32,755
    
    
    
    29,264
    
    
    
    29,654
    
    
    
    909.9Other Financial Data:R.O.C. GAAPDepreciation and amortization
    
    
    8,742
    
    
    
    9,287
    
    
    
    7,562
    
    
    
    7,253
    
    
    
    5,545
    
    
    
    170.1Net cash provided by
operating activities
    
    
    217
    
    
    
    1,484
    
    
    
    5,981
    
    
    
    4,327
    
    
    
    6,489
    
    
    
    198.9Net income (loss) per ADS -
basic
    
    
    (53.2
    )
    
    
    (36.5
    )
    
    
    0.80
    
    
    
    (24.1
    )
    
    
    6.98
    
    
    
    0.21Net income (loss) per ADS -
diluted
    
    
    (53.2
    )
    
    
    (36.5
    )
    
    
    0.80
    
    
    
    (24.1
    )
    
    
    6.98
    
    
    
    0.21Number of common shares
outstanding (weighted, as
adjusted) (1)
    
    
    2,140
    
    
    
    2,272
    
    
    
    2,822
    
    
    
    2,912
    
    
    
    2,912
    
    
    
    2,912Capital expenditures
    
    
    8,975
    
    
    
    1,606
    
    
    
    2,554
    
    
    
    1,595
    
    
    
    2,471
    
    
    
    75.8Stock dividend per common share
(2)(3)
    
    
    10
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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(1)
    
    Retroactively adjusted for our capital reduction in 2006. See
notes 22 and 28 to our consolidated financial statements for the
years ended December 31, 2004, 2005 and 2006 included in this
annual report.(2)
    
    Stock dividend per common share reflects stock dividend declared
and issued within each year and is calculated 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.(3)
    
    Our shareholders approved the appropriation of 2006 retained earnings
at the general shareholders meeting held on June 29, 2007,
which was the same as had been proposed by
the board of directors on April 3, 2007. See note 18 to our
consolidated financial statements for the years ended December
31, 2004, 2005 and 2006 included in this annual report. Exchange Rates
   NT dollars per U.S. dollarAverage(1)
    
    High
    
    Low
    
    Period-End2002
    
    
    34.53
    
    
    
    35.16
    
    
    
    32.85
    
    
    
    34.702003
    
    
    34.41
    
    
    
    34.98
    
    
    
    33.72
    
    
    
    33.992004
    
    
    33.37
    
    
    
    34.16
    
    
    
    31.74
    
    
    
    31.742005
    
    
    32.16
    
    
    
    33.77
    
    
    
    30.65
    
    
    
    32.802006
    
    
    32.51
    
    
    
    33.31
    
    
    
    31.28
    
    
    
    32.59January 2007
    
    
    32.77
    
    
    
    32.99
    
    
    
    32.38
    
    
    
    32.95February 2007
    
    
    32.97
    
    
    
    33.08
    
    
    
    32.86
    
    
    
    32.98March 2007
    
    
    33.01
    
    
    
    33.13
    
    
    
    32.84
    
    
    
    33.01April 2007
    
    
    33.15
    
    
    
    33.33
    
    
    
    33.05
    
    
    
    33.33May 2007
    
    
    33.28
    
    
    
    33.41
    
    
    
    32.97
    
    
    
    33.09June 2007
    
    
    32.97
    
    
    
    33.18
    
    
    
    32.74
    
    
    
    32.83
 
 (1)
    
    Annual averages calculated from month-end rates.  B. Capitalization and Indebtedness
  C. Reason for the Offer and Use of Proceeds
  D. Risk Factors
 Holders of our securities should note that investment in our securities involves risks and
uncertainties that could affect our future business success or financial results. The following
important factors, and those important factors described in other reports submitted to, or filed
with, the Securities and Exchange Commission by our company, among other factors, could adversely affect
our results of operations and could cause our results of operations to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, our company:
 Risks Relating to Our Company
 We recorded gross, operating and net losses in 2003 and operating and net losses in 2005. Future
losses could materially adversely affect the value of your investment.
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Increasing concentration of sales to Nintendo means that any delay or reduction in orders by
Nintendo or the loss of Nintendo as a customer could result in the loss of a significant portion of
our revenue.
  We have limited liquidity and may be unable to repurchase our outstanding debt securities when
requested by holders, pay certain other obligations as they become due or otherwise meet our
working capital needs.
    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.
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Our revenues and operating results may decline if we are unable to obtain adequate supplies of raw
materials in a timely manner and at a reasonable price.
  We are vulnerable to cyclical downturns in the semiconductor industry, and our business, financial
condition and results of operations may suffer in future downturns.
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Our results of operations fluctuate significantly, which may affect the value of your investment
  
    
    changes in general economic and business conditions;
    
    the cyclical nature of both the semiconductor industry and the markets served by our customers;
    
    seasonality in demand for our customers products;
    
    changes in demand for our products and our customers products;
    
    technology development of our products and competing products;
    
    changes in the average selling prices of our products;
    
    inventory obsolescence;
    
    our customers adjustments in their inventory;
    
    the loss of or reduction of sales to a key customer or the postponement or cancellation of an order from a key customer;
    
    our ability to obtain adequate labor, equipment, components, raw materials, electricity, water and other required
production inputs on a timely and cost-efficient basis;
    
    capital expenditures and production uncertainties relating to the roll-out of new facilities;
    
    our ability to achieve target production yields, especially for new products;
    
    our ability to accurately predict customer demand, as we must commit to significant capital expenditures in
anticipation of future orders;
    
    changes in our business strategy or technology roadmap;
    
    natural disasters, such as fires, droughts, floods and earthquakes, or industrial accidents;
    
    the long lead times in securing a qualification from our customers;
    
    currency and interest rate fluctuations that may not be fully hedged; and
    
    technological changes.
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If we continue to experience significant investment losses from our investments, our financial
condition and results of operations may be adversely affected.
  As we depend on ROM and Flash sales for a substantial portion of our revenue, a significant
decrease in ROM or Flash sales or average selling prices could result in the loss of a
significant portion of our revenue.
     A decrease in demand for consumer electronics, computer and computer peripheral and other
communications products may significantly decrease the average selling prices for our products and
reduce our revenue and operating results.
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If we cannot compete successfully in our industry, we may lose customers and our revenue may
decrease.
   
    
    technological expertise and technical competence;
    
    time-to-market;
    
    ability to obtain raw materials and components on a timely and cost-effective basis;
    
    research and development capabilities and plans;
    
    available capacity;
    
    manufacturing capabilities and yields;
    
    customer service; and
    
    price.
  Due to our high percentage of fixed costs, we will not be profitable if we are unable to achieve
relatively high capacity utilization rates.
  Our customers generally do not place purchase orders in advance, which makes it difficult for us to
predict our future revenues, adjust production costs and allocate capacity efficiently and on a
timely basis.
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We depend on select personnel and could be affected by the loss of their services.
  Because of the highly cyclical nature of our industry, our capital requirements are difficult to
plan. If we cannot obtain additional capital when we need it, our growth prospects and future
operating results may be adversely affected.
  
    
    our future financial condition, results of operations and cash flows;
    
    our stock price and credit rating;
    
    general market conditions for financing activities by semiconductor companies; and
    
    economic, political and other conditions in Taiwan and elsewhere.
  If we are unable to manage our expansion effectively, our growth prospects may be limited and our
future operating results may be affected.
  If we are unable to effectively manage seasonal fluctuations in the demand for our products, our
business and operating results may be adversely affected.
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If we are unable to obtain additional equipment in a timely manner and at reasonable cost, our
competitiveness and future operating results may be adversely affected.
  If needed cash resources are unavailable to us, we will be unable to implement successfully our
research and development plans.
  We are vulnerable to natural disasters and other events beyond our control, which could severely
disrupt the normal operation of our business and adversely affect our operating results.
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We are subject to stringent environmental regulations and any violation could require us to pay
significant fines, or result in a delay or interruption of our operations.
  If we restate our financial statements again in the future, we could experience a loss in investor
confidence in the reliability of our financial statements, which could negatively impact the market
price of our common shares, ADSs and GDSs.
  Any failure to achieve and maintain effective internal controls could have a material adverse
effect on our business, results of operations and the market price of our common shares, ADSs and
GDSs.
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Risks Relating to Technology and Intellectual Property
 Our return to profitability depends on our ability to respond to rapid technological changes in the
semiconductor industry.
  
    
    introduction of new and increasingly complex and powerful products;
    
    rapidly evolving industry standards;
    
    rapid and significant product price declines;
 
    
    rapid product obsolescence; and
    
    introduction of competing technologies and solutions.
  We depend on our technology partners to advance our portfolio of process technologies, and we may
not be able to advance our portfolio of process technologies if our technology partners fail to
advance their technology, if we fail to maintain our existing arrangements with our technology
partners or if we are unable to enter into new arrangements with other technology providers.
  Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities and
other disruptions that can significantly increase our costs and delay product shipments to our
customers.
  
    
    the cleanliness of the manufacturing environment;
    
    human error;
    
    equipment malfunction;
    
    use of defective raw materials; and
    
    inadequate testing.
  Our business depends in part on our ability to obtain and preserve intellectual property rights.
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We may be subject to intellectual property rights disputes that could expose us to serious
liabilities.
   
    
    discontinue using process technologies which could cause us to stop manufacturing particular semiconductors;
    
    pay substantial monetary damages:
    
    seek to develop non-infringing technologies, which may not be feasible; or
    
    seek to acquire licenses to the infringed technology which may not be available on reasonable commercial terms, or at all.
  Political and Economic Risks
 Strained relations between the R.O.C. and the P.R.C. could adversely affect our business and the
market value of your investment.
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Fluctuations in exchange rates could result in foreign exchange losses.
  Disruptions in the international trading environment may significantly reduce our international
sales and revenue.
  The trading price of our common shares may be adversely affected by the general activities of the
Taiwan Stock Exchange and the economic performance of Taiwan.
   Risks Relating to our Common Shares, ADSs and GDSs
 The market for
our common shares and ADSs may be inactive and illiquid, and
trading of our GDSs has been extremely illiquid, which may affect the value of our common shares,
ADSs and GDSs.
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Future sales of securities by our company or existing shareholders or future issuances of
securities by our company may have a dilutive effect and decrease the value of your investment.
   ADS and GDS holders do not have the same voting rights as our common shareholders, which may affect
the value of the ADSs and GDSs.
   The rights of holders of our ADSs and GDSs to participate in our rights offerings may be limited,
which may cause dilution to their holdings.
  18




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##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



Capital Expenditures
  Year ended December 31,2004
    
    
    2005
    
    
    2006(NT$
    
    
    (NT$
    
    
    (NT$million)
    
    
    million)
    
    
    million)Fab I
    
    
    358
    
    
    
    134
    
    
    
    242Fab II
    
    
    92
    
    
    
    875
    
    
    
    2,083Fab III*
    
    
    1,652
    
    
    
    0
    
    
    
    0Others
    
    
    452
    
    
    
    586
    
    
    
    146Total
    
    
    2,554
    
    
    
    1,595
    
    
    
    2,471
 
 *
    
    Note: Fab III was sold in 2006 to Powerchip Semiconductor Corp.   B. Business Overview
 Our Strategy
   Maintain our leadership in Mask ROM and develop the market for one-time programmable memory
products
    21




---



##### Table of Contents



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




---



##### Table of Contents



Our Products and Services
  % of net sales revenueYear ended December 31,Product
    
    Characteristics
    
    Applications
    
    2004
    
    2005
    
    2006Microelectronics and Memory
Solution Group:ROM
    
    Not re-programmable
    
    Games, PDAs, word processors,
printers, fax modems, VCDs,
cellular phones, STBs, copy
machines, GPS
    
    
    35.8
    
    
    
    46.1
    
    
    
    43.3Flash
    
    Re-programmable
within the
application system
    
    PDAs, digital cameras, STBs, Web
TVs, DVD players, optical disk
drive products Fax modems, VCDs
    
    
    45.8
    
    
    
    36.3
    
    
    
    36.0EPROM
    
    Re-programmable
outside the
application system
using industrial
processors
    
    STBs, Internet applications, CDs
    
    
    0.7
    
    
    
    0.1
    
    
    
    0.1SMS
    
    Value-added services
    
    DVDs, microcontrollers with
embedded Flash technology, LCD
monitors
    
    
    7.4
    
    
    
    8.8
    
    
    
    11.0Integrated Solution Group:SLC
    
    Highly integrated
system- on-a-chip
solutions featuring
embedded Flash
technology
    
    Cellular phones, flat panel
displays, digital still cameras,
smart cards, PDAs, electronic
dictionaries, digital audio products
    
    
    7.6
    
    
    
    6.3
    
    
    
    6.3
 Microelectronics and Memory Solution Group
 ROMs
  Applications.
    23




---



##### Table of Contents



% of our net Mask ROM andXtraROM salesYear ended December 31,Density
    
    Sample applications
    
    2004
    
    2005
    
    2006512 Mb(1)
    
    Games, entertainment
    
    
    3.9
    
    
    
    17.0
    
    
    
    32.0256 Mb(1)
    
    Games, memory cards
    
    
    15.4
    
    
    
    23.6
    
    
    
    30.5128 Mb(1)
    
    Games, PDAs
    
    
    32.7
    
    
    
    19.0
    
    
    
    10.364Mb
    
    Word processors, games, PDAs, STBs, databanks, printers
    
    
    21.4
    
    
    
    23.3
    
    
    
    15.032 Mb
    
    Games, DVDs, data communications
    
    
    13.0
    
    
    
    9.0
    
    
    
    5.916 Mb
    
    Games, word processors
    
    
    9.0
    
    
    
    5.1
    
    
    
    2.58 Mb
    
    Sound cards, data banks, BIOS, games, sound cards
    
    
    3.9
    
    
    
    2.3
    
    
    
    1.34 Mb
    
    PHSs, data banks, games
    
    
    0.4
    
    
    
    0.6
    
    
    
    1.4Other
    
    Pages, data banks, STBs, BIOS, games, word processors, networking
    
    
    0.1
    
    
    
    0.1
    
    
    
    1.1
 
 (1)
    
    Includes XtraROM products. Competition.
    Flash
  Applications.
 24




---



##### Table of Contents



% of our net Flash memory salesYear ended December 31,Density
    
    Sample applications
    
    2004
    
    2005
    
    2006256 Mb
    
    Games
    
    
    
    
    
    
    0.3
    
    
    
    2.8128 Mb
    
    Games
    
    
    0.5
    
    
    
    0.7
    
    
    
    1.264 Mb
    
    Games, printers, STBs
    
    
    5.3
    
    
    
    11.1
    
    
    
    10.132 Mb
    
    Printers, PDAs, digital still cameras, ADSL products
    
    
    18.7
    
    
    
    24.1
    
    
    
    26.016 Mb
    
    STBs, communication boxes, printers, musical
devices, games, web TVs, cellular phones
    
    
    29.1
    
    
    
    31.2
    
    
    
    33.88 Mb
    
    DVD Players, STBs, ISDN boxes
    
    
    25.3
    
    
    
    17.4
    
    
    
    11.34 Mb
    
    BIOS, CD R/W drives, cable modems
    
    
    17.1
    
    
    
    11.8
    
    
    
    8.22 Mb
    
    BIOS, HDDs, CD R/W drives, communication boxes
    
    
    1.5
    
    
    
    2.0
    
    
    
    2.81 Mb
    
    BIOS, HDDs, games, DVD-ROM drives
    
    
    2.1
    
    
    
    1.1
    
    
    
    3.2Other
    
    BIOS, HDDs, games
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.6
 Competition.
 EPROM
 Applications.
 25




---



##### Table of Contents



Competition.
 Strategic Manufacturing Services
  Competition.
 Integrated Solution Group / Wholly-Owned Subsidiary Companies
   
    
    cellular phone-related solutions; and
    
    portable LCD-related solutions.
 Cellular Phone-related Solutions
  Sound Generator Chip.
 Digital Still Camera Controller.
 26




---



##### Table of Contents



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




---



##### Table of Contents



% of net sales revenueYear ended December 31Customers
    
    2004
    
    2005
    
    2006
    
    Products purchasedNINTENDO
    
    
    22.4
    
    
    
    29.2
    
    
    
    34.1
    
    
    ROM, Flash, SLCLG
    
    
    3.4
    
    
    
    5.0
    
    
    
    5.6
    
    
    ROM, FlashHIMAX
    
    
    0.2
    
    
    
    3.7
    
    
    
    5.2
    
    
    Flash, SMSHP
    
    
    5.3
    
    
    
    4.1
    
    
    
    4.4
    
    
    ROM, FlashSAMSUNG
    
    
    1.0
    
    
    
    1.1
    
    
    
    2.4
    
    
    Flash, ROM, SLCSUNPLUS
    
    
    0.2
    
    
    
    1.3
    
    
    
    2.0
    
    
    ROM, SMSHONFFUJIN
    
    
    0.7
    
    
    
    1.8
    
    
    
    1.9
    
    
    FlashASUSTEK
    
    
    0.7
    
    
    
    1.3
    
    
    
    1.6
    
    
    Flash, SLCSONIX
    
    
    0.6
    
    
    
    1.0
    
    
    
    1.4
    
    
    Flash, ROM, SLCSONY
    
    
    1.0
    
    
    
    2.2
    
    
    
    1.4
    
    
    ROM, Flash
 Nintendo
    LG Electronics Inc.
  HIMAX
  Hewlett Packard
  Sales and Marketing
  Year ended December 31,Area
    
    2004
    
    2005
    
    2006(%)Japan
    
    
    35.8
    
    
    
    40.8
    
    
    
    42.1Taiwan
    
    
    33.5
    
    
    
    29.8
    
    
    
    31.5Hong Kong, the P.R.C., Singapore and South Korea
    
    
    21.9
    
    
    
    21.6
    
    
    
    19.6United States
    
    
    4.2
    
    
    
    3.3
    
    
    
    1.4Europe and other
    
    
    4.6
    
    
    
    4.5
    
    
    
    5.4100.0
    
    
    
    100.0
    
    
    
    100.0
 28




---



##### Table of Contents



Manufacturing and Quality Control
 Manufacturing
   2004
    
    2005
    
    2006
    
    2007Fab I (six-inch wafers)
    
    
    34,000
    
    
    
    32,000
    
    
    
    33,000
    
    
    
    35,000Fab II (eight-inch wafers)
    
    
    44,000
    
    
    
    44,000
    
    
    
    49,000
    
    
    
    49,000
    29




---



##### Table of Contents



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




---



##### Table of Contents



Raw Materials
   Silicon Wafers
   Chemicals
  Water
  31




---



##### Table of Contents



Electricity
   Backlog and Order Process
   Environmental Matters
    32




---



##### Table of Contents



Insurance
  
    
    property damage all-risk insurance on our fixed assets, equipment and inventory;
    
    business interruption insurance;
    
    third-party liability insurance to cover claims in respect of personal injury or property damage arising from accidents;
    
    directors and officers liability insurance;
    
    fidelity bond insurance on all employees, providing coverage against losses due to employee fraud or dishonesty;
    
    marine cargo insurance;
    
    employee group insurance;
    
    employer liability insurance; and
    
    construction all-risk coverage.
  Strategic Investments
  
    
    Tower Semiconductor, Ltd. (Tower Semiconductor)  An 8.7% indirect
interest in Tower Semiconductor. Tower Semiconductor is an independent
foundry manufacturer of semiconductor integrated circuits on silicon
wafers. As at December 31, 2006, Tower Semiconductor had a capital of
US$588.8 million, net assets of US$133 million and accumulated
deficits of US$646.7 million. For the year ended December 31, 2006,
Tower Semiconductor recorded a net loss of US$86.9 million. As of
December 31, 2006, we held the shares of Tower Semiconductor at a book
value of NT$489 million (US$15.0 million). The shares of Tower
Semiconductor held by us are fully paid-up. For the year ended
December 31, 2006, we did not receive any dividend on the shares of
Tower Semiconductor. For the year ended December 31, 2006 there were
no inter-company loans between us and Tower Semiconductor.
    
    Magic Pixel Inc.  A 44.9% direct and indirect equity interest in
Magic Pixel Inc., which focuses on IC design of video and related
products. Our shareholding was diluted in 2003 from 100% as a result
of a private placement of shares by Magic Pixel Inc. to its employees.
    
    Ardentec Corporation  An 8.2% direct interest in Ardentec
Corporation. Ardentec provides semiconductor testing solutions in
memory, logic, and mixed-signal ICs to integrated device manufacturers
(IDMs), pure play wafer foundry companies, and fabless design
companies. The primary service focus at Ardentec is on wafer test.
 33




---



##### Table of Contents



C. Organizational Structure
  Direct orIndirectJurisdiction of
    
    EquityName of subsidiary
    
    Main business
    
    incorporation
    
    Interest (1)Hui Ying Investment Ltd.
    
    Investment
    
    Taiwan, R.O.C.
    
    
    100
    %Run Hong Investment Ltd.
    
    Investment
    
    Taiwan, R.O.C.
    
    
    100
    %Macronix America, Inc.
    
    Sales and marketing
    
    California, U.S.A.
    
    
    100
    %Macronix Europe N.V.
    
    Sales and marketing
    
    Belgium
    
    
    100
    %Macronix (B.V.I.) Co., Ltd.
    
    Investment
    
    British Virgin Islands
    
    
    100
    %New Trend Technology Inc.
    
    IC design
    
    California, U.S.A.
    
    
    100
    %Macronix Pte Ltd.
    
    Sales and marketing
    
    Singapore
    
    
    100
    %MaxNova Inc.
    
    IC design
    
    Taiwan, R.O.C.
    
    
    92.26
    %Macronix Japan (Cayman Islands)
    
    Investment
    
    Cayman Islands
    
    
    100
    %Macronix (Hong Kong) Co., Ltd.
    
    Sales and marketing
    
    Hong Kong
    
    
    100
    %Macronix Microelectronics (Suzhou) Co., Ltd
    
    System Solution
    
    Suzhou China
    
    
    100
    %Biomorphic Microsystems Corporation
    
    IC design
    
    Taiwan, R.O.C
    
    
    54.77
    %MaxRise Inc.
    
    IC design
    
    Taiwan, R.O.C
    
    
    100
    %Modiotek Co.,Ltd.
    
    IC design
    
    Taiwan, R.O.C
    
    
    100
    %Infomax Communication Co.,Ltd.
    
    IC design
    
    Taiwan, R.O.C
    
    
    100
    %Mxtran Inc.
    
    IC design
    
    Taiwan, R.O.C
    
    
    100
    %Gateway Silicon Inc.
    
    IC design
    
    Taiwan, R.O.C
    
    
    100
    %
 
 (1)
    
    Direct or indirect equity interest is the same as proportion of voting power held. D. Property, Plant and Equipment
    34




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##### Table of Contents



Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
 The following discussion and analysis should be read in conjunction with our audited
consolidated financial statements and the related notes included in this annual report. These
financial statements have been prepared in accordance with R.O.C. GAAP, which differ in certain
material respects from U.S. GAAP. See note 28 to our consolidated financial statements for the
years ended December 31, 2004, 2005 and 2006 included in this annual report and  Results of
Operations  U.S. GAAP Reconciliation.
 Overview
 General
       35




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##### Table of Contents



Sales Revenue
   Product Pricing Trends
    Year ended December 312004
    
    2005
    
    2006(NT$ per die)ROM
    
    
    54.2
    
    
    
    50.3
    
    
    
    55.5Flash
    
    
    45.8
    
    
    
    25.7
    
    
    
    26.4
  Year ended December 312004
    
    2005
    
    2006(Mb per die)ROM (1)
    
    
    75.3
    
    
    
    114.3
    
    
    
    185.2Flash
    
    
    11.7
    
    
    
    14.4
    
    
    
    16.7
 
 (1)
    
    The significant increase in megabit per die for ROM products
from 2004 to 2006 resulted from the increase in demand for
high-density ROM products. 36




---



##### Table of Contents



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




---



##### Table of Contents



Research and Development
  Cost Reduction Initiatives
  Production Capacity
    Year ended December 31,2004
    
    2005
    
    2006(number of
    
    (% of total
    
    (number of
    
    (% of total
    
    (number of
    
    (% of totalwafers)
    
    production)
    
    wafers)
    
    production)
    
    wafers)
    
    production)ROM
    
    
    236,722
    
    
    
    37.0
    
    
    
    303,605
    
    
    
    48.1
    
    
    
    394,029
    
    
    
    50.8Flash
    
    
    288,747
    
    
    
    45.0
    
    
    
    192,536
    
    
    
    30.5
    
    
    
    180,512
    
    
    
    23.3EPROM
    
    
    1,013
    
    
    
    0.2
    
    
    
    1,319
    
    
    
    0.2
    
    
    
    576
    
    
    
    0.1SMS
    
    
    69,734
    
    
    
    10.9
    
    
    
    114,149
    
    
    
    18.1
    
    
    
    191,557
    
    
    
    24.7SLC (1)
    
    
    44,332
    
    
    
    6.9
    
    
    
    19,855
    
    
    
    3.1
    
    
    
    8,904
    
    
    
    1.1Total
    
    
    640,548
    
    
    
    100.0
    
    
    
    631,464
    
    
    
    100.0
    
    
    
    775,578
    
    
    
    100.0
 38




---



##### Table of Contents



(1)
    
    Yields of dies per wafer vary with each type of logic product
manufactured by us and a change in product mix may cause
variations in both wafer production and dies per wafer. Geographic Markets
  
    
    Japan;
    
    Taiwan;
    
    Singapore and Hong Kong;
    
    the United States; and
    
    Europe.
  Year ended December 31 (1)2004
    
    2005
    
    2006(millions
    
    (% of total net sales
    
    (millions
    
    (% of total net
    
    (millions
    
    (% of total netin NT$)
    
    revenue)
    
    in NT$)
    
    sales revenue)
    
    in NT$)
    
    sales revenue)Japan
    
    
    8,364
    
    
    
    35.8
    
    
    
    7,707
    
    
    
    40.8
    
    
    
    9,907
    
    
    
    42.1Taiwan
    
    
    7,839
    
    
    
    33.5
    
    
    
    5,636
    
    
    
    29.8
    
    
    
    7,409
    
    
    
    31.5Singapore and Hong Kong
    
    
    5,119
    
    
    
    21.9
    
    
    
    4,076
    
    
    
    21.6
    
    
    
    4,611
    
    
    
    19.6United States
    
    
    981
    
    
    
    4.2
    
    
    
    629
    
    
    
    3.3
    
    
    
    329
    
    
    
    1.4Europe
    
    
    1,077
    
    
    
    4.6
    
    
    
    860
    
    
    
    4.5
    
    
    
    1,257
    
    
    
    5.4Total
    
    
    23,380
    
    
    
    100.0
    
    
    
    18,908
    
    
    
    100.0
    
    
    
    23,513
    
    
    
    100.0
 
 (1)
    
    See note 27 to our consolidated financial statements for the
years ended December 31, 2004, 2005 and 2006 for a discussion of
our export sales. The numbers in this table do not represent
sales by shipping destination or by end customer origin.  Critical Accounting Policies
   39




---



##### Table of Contents



Allowances for doubtful accounts
   Inventory valuation
  Revenue Recognition and Allowance for Sales Returns and Others
   Net Deferred Tax Assets
  40




---



##### Table of Contents



Results of Operations
  Year ended December 31,2004
    
    2005
    
    2006Sales revenue
    
    
    100.5
    
    
    
    100.4
    
    
    
    100.7Less: Sales returns
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (0.2
    )Sales discounts
    
    
    (0.4
    )
    
    
    (0.1
    )
    
    
    (0.5
    )Net sales revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0MMSG:ROM
    
    
    35.8
    
    
    
    46.1
    
    
    
    43.3Flash
    
    
    45.8
    
    
    
    36.3
    
    
    
    36.0EPROM
    
    
    0.7
    
    
    
    0.1
    
    
    
    0.1SMS
    
    
    7.4
    
    
    
    8.8
    
    
    
    11.0ISG:SLC
    
    
    7.7
    
    
    
    6.3
    
    
    
    6.3Other(1)
    
    
    2.6
    
    
    
    2.4
    
    
    
    3.3Cost of goods sold
    
    
    (81.2
    )
    
    
    (98.7
    )
    
    
    (68.0
    )Gross profit (loss)
    
    
    18.8
    
    
    
    1.3
    
    
    
    32.0Operating expensesSelling expenses
    
    
    (3.1
    )
    
    
    (3.7
    )
    
    
    (3.3
    )Administrative expenses
    
    
    (6.1
    )
    
    
    (6.9
    )
    
    
    (6.2
    )Research and development expenses
    
    
    (11.0
    )
    
    
    (16.5
    )
    
    
    (14.6
    )Total operating expenses
    
    
    (20.2
    )
    
    
    (27.1
    )
    
    
    (24.1
    )Operating income (loss)
    
    
    (1.4
    )
    
    
    (25.8
    )
    
    
    7.9Non-operating income
    
    
    6.9
    
    
    
    6.3
    
    
    
    3.0Non-operating expenses
    
    
    (4.4
    )
    
    
    (16.9
    )
    
    
    (2.5
    )Income (loss) before taxes and minority interest
    
    
    1.1
    
    
    
    (36.4
    )
    
    
    8.4Income tax benefit (provision)
    
    
    (0.2
    )
    
    
    (1.1
    )
    
    
    
    *Net income (loss)
    
    
    0.9
    
    
    
    (37.5
    )
    
    
    8.4
 
 (1)
    
    Other sales revenue includes royalty revenues, masking charges,
profit-sharing revenues and other operating revenues.
Profit-sharing revenues are revenues from other companies which
manufactured and sold products using a patent or technology that
was researched and developed cooperatively by those companies and
us.*
    
    Less than 0.1%. Year Ended December 31, 2006 compared to Year Ended December 31, 2005
 Net Sales Revenue.
   41




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##### Table of Contents



Cost of Goods Sold and Gross Profit (Loss).
  Operating Expenses.
 Operating Income (Loss).
 Non-Operating Income.
 Non-Operating Expenses.
 Income Tax Expense.
 Net Income (Loss).
 Year Ended December 31, 2005 compared to Year Ended December 31, 2004
 Net Sales Revenue.
  42




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##### Table of Contents



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




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##### Table of Contents



Inflation
  Taxation
    44




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##### Table of Contents



Equity Derivative Contracts
  U.S. GAAP Reconciliation
 General
  Year ended December 31,2004
    
    2005
    
    2006
    
    2006(NT$)
    
    (NT$)
    
    (NT$)
    
    (US$)(in millions)Net income (loss) in accordance with:R.O.C. GAAP
    
    
    218
    
    
    
    (7,027
    )
    
    
    2,034
    
    
    
    62.4U.S. GAAP
    
    
    (469
    )
    
    
    (4,636
    )
    
    
    636
    
    
    
    19.5
 Year ended December 31,2004
    
    2005
    
    2006
    
    2006(NT$)
    
    (NT$)
    
    (NT$)
    
    (US$)(in millions)Shareholders equity in accordance with:R.O.C. GAAP
    
    
    34,345
    
    
    
    28,558
    
    
    
    31,195
    
    
    
    957.2U.S. GAAP
    
    
    32,755
    
    
    
    29,264
    
    
    
    29,654
    
    
    
    909.9
   45




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##### Table of Contents




    
    plant capacity expense variances;
    
    income taxes;
    
    pension expense;
    
    marketable securities;
    
    investments in equity investees;
    
    goodwill;
    
    research and development expenses;
    
    compensated absences;
    
    derivative financial instruments;
    
    employee stock options;
    
    employee bonuses and remunerations to directors and supervisors; and
    
    convertible debt securities with beneficial conversion features.
 Gross Profit (Loss) and Operating Income (Loss)
  Plant Capacity Expense Variances
   Income Taxes
  46




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##### Table of Contents



Pension Expense
    Marketable Securities
    Investments in Equity Investees
  47




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##### Table of Contents



Goodwill
   Research and Development Expenses
  Compensated absences
  Derivative Financial Instruments
   (i)
    
    Options contractsPrior to January 1, 2006, gains and losses on option contracts
were recognized upon exercise. Unrealized gains and losses were
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 the R.O.C Accounting
Research and Development Foundation in 2005, The Accounting
Treatment of Foreign Exchange Option Contract Before the
Effectiveness of Statement 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.(ii)
    
    Forward contractsPrior to January 1, 2006, the receivables or payables arising
from forward contracts were restated using the prevailing
exchange rates with the resulting differences credited or
charged to income. In addition, the receivables and payables
related to forward contracts were netted with the resulting
amount presented as either an asset or a liability.(iii)
    
    Structured depositsPrior to January 1, 2006, the respective interest on the
deposits was accrued. The gains and losses arising from the
settlement of the contracts were dealt with in the statement of
operations. Unrealized gains and losses were not recognized.
 48




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##### Table of Contents



Employee Stock Options
      49




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##### Table of Contents



Employee Bonuses and Remunerations to Directors and Supervisors
   Earnings Per Share
   Reclassification of Capital Account to Accumulated Deficit
   Convertible Debt Securities with Beneficial Conversion Feature
    50




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##### Table of Contents



New Accounting Pronouncements
   51




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##### Table of Contents



Liquidity and Capital Resources
         52




---



##### Table of Contents



Capital Resources and Capital Expenditures
   Period
    
    NT$ in millionsJanuary 1, 2007  December 31, 2007
    
    
    1,051January 1, 2008  December 31, 2008
    
    
    864January 1, 2009  December 31, 2009
    
    
    294January 1, 2010  December 31, 2010
    
    
    68January 1, 2011  December 31, 2011
    
    
    69After December 31, 2011
    
    
    296Total
    
    
    2,642
 53




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54




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##### Table of Contents



Year ended December 31,2004
    
    2005
    
    2006(NT$ million)
    
    (NT$ million)
    
    (NT$ million)Fab I
    
    
    358
    
    
    
    134
    
    
    
    242Fab II
    
    
    92
    
    
    
    875
    
    
    
    2,083Fab III*
    
    
    1,652
    
    
    
    0
    
    
    
    0Others
    
    
    452
    
    
    
    586
    
    
    
    146Total
    
    
    2,554
    
    
    
    1,595
    
    
    
    2,471
 
 *
    
    Fab III was sold in 2006 to Power Semiconductor Corporation.     55




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##### Table of Contents



Contractual Obligations
  Payments Due by PeriodJanuary 1,
    
    January 1,
    
    January 1,2007 to
    
    2008 to
    
    2010 to
    
    January 1,December 31,
    
    December 31,
    
    December 31,
    
    2012 andTotal
    
    2007
    
    2009
    
    2011
    
    thereafter(in millions of NT$)Long-term debt (1)
    
    
    2,642
    
    
    
    1,051
    
    
    
    1,158
    
    
    
    137
    
    
    
    296Operating lease obligations (2)
    
    
    427
    
    
    
    63
    
    
    
    128
    
    
    
    109
    
    
    
    127Construction and equipment purchase obligations (3)
    
    
    2,378
    
    
    
    2,378License fees (4)
    
    
    352
    
    
    
    352Other long-term liabilities (5)
    
    
    379
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    379Total
    
    
    6,178
    
    
    
    3,844
    
    
    
    1,286
    
    
    
    246
    
    
    
    802
 
 (1)
    
    Includes loan payable without interest payments.(2)
    
    Operating lease obligations represent our commitments for leases
relating to property and research and development software. See
note 25c to our consolidated financial statements.(3)
    
    We cannot forecast the time of payment of our construction and
equipment purchase obligations become due
because it takes a period of time to check and receive the
construction and equipment.(4)
    
    License fees above reflect the fixed amount of royalty payments and exclude payments that vary based
upon our net sales of certain products and our sales volume of
certain other products.
See notes 25f to 25h to our consolidated financial statements.(5)
    
    Other long-term liabilities include accrued pension cost, credit
balances of long-term investments and guarantee deposits. Commitments and Contingencies
  Off-balance Sheet Arrangements
  Research and Development
   56




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##### Table of Contents



New Product Development
  ROM
 
    
    new 64/128/256/1G Mb product designs for NDS;
    
    introduce cost-effective two-bit per cell manufacturing technology; and
    
    a new low pin-count design for 64Mb products.
 Flash
 
    
    a 256Mb data storage/code storage Flash product;
    
    a 1.8 volt low voltage, synchronous, read-while-write product for portable devices and mobile internet appliance applications;
    
    a monochip design which combines Flash and multiple time programmable devices that optimizes data storage and code storage by
using two-bit per cell technology;
    
    extend the capacity of SPI products by using two-bit per cell technology;
    
    a 0.13 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;
 57




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##### Table of Contents




    
    custom-made control chips for educational devices and language learning machines;
    
    a custom-made broadband bridge chip, wireless game controller, frequency
generator, and high definition television display controller for video game
platforms;
    
    a new architecture for the provision of data storage for SOC devices;
    
    provide intellectual property libraries and design services on single voltage
embedded Flash compilers, embedded mix signal devices, logic devices and
SRAM/ROM memory devices for SOC development of audio compact disc, general
positioning system, internet appliance, LCD monitor and educational and learning
systems applications;
    
    develop embedded EEPROM intellectual property for smart card applications;
    
    introduce low-end derivative processes for consumer products; and
    
    develop a GSM base band chipset and module, which is a digital signal processor
and controller, for wireless communication applications.
 Intellectual Property
     58




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Industry Trend
 General
    Semiconductor Products
   Memory Products.
   59




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##### Table of Contents



Logic Products.
  System-on-a-chip.
  
 Item 6. Directors, Senior Management and Employees
 A. Directors and Senior Management
  60




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##### Table of Contents



Name
    
    Position with Our Company
    
    Date of Initial Appointment
    
    AgeMiin Wu
    
    President, Director and Chairman
    
    September 1, 1989, June 29, 2007 and March 7,
2005
    
    
    58Champion Investment Co., Ltd. (1)
    
    Director
    
    June 29, 2007H. C. Chen (2)
    
    Director
    
    June 29, 2007
    
    
    68Takata Akira (3)
    
    Director
    
    May 12, 2005
    
    
    49Dang-Hsing Yiu
    
    Director, Senior Vice President
and Conglomerate Marketing Officer
    
    June 5, 1995
March 14, 2003
January 10, 2007
    
    
    54C.Y. Lu
    
    Director and Senior Vice President of Microelectronics
and Memory Solution Group
    
    April 18, 2003
March 14, 2003
    
    
    56Hui Ying Investment Ltd. (1)
    
    Director
    
    June 29, 2007J.P. Peng (5)
    
    Director
    
    June 18, 2004
    
    
    51Yu Liang Chen (4)
    
    Director
    
    June 29, 2007W. S. Pan
    
    Director and Vice President
    
    June 29, 2007 and January 10, 2007
    
    
    50F. L. Ni
    
    Director and Vice President
    
    June 29, 2007 and July 25, 2006
    
    
    48Cheng Yi Fang
    
    Director
    
    June 29, 2007
    
    
    65Chiang Kao
    
    Independent Director
    
    June 29, 2007Yan-Kuin Su
    
    Independent Director
    
    June 29, 2007Duh Kung Tsai
    
    Independent Director
    
    June 29, 2007Chow Fang Chen
    
    Supervisor
    
    June 29, 2007Ping Tien Wu
    
    Supervisor
    
    November 27, 1993
    
    
    65Gueimin Lee
    
    Supervisor
    
    June 29, 2007C. P. Wang (5)
    
    Supervisor
    
    June 29, 2007Rich Liu
    
    Vice President
    
    January 10, 2007
    
    
    62Paul
Yeh
    
    Associate Vice President of Finance
Center
    
    July 1, 2001
    
    
    50
 
 (1)
    
    Under the R.O.C. Company Act, companies may hold director
positions directly. Following our general shareholders meeting on June 29, 2007, these companies have not yet named
individual representatives or nominees, if they intend to do so.(2)
    
    Nominee of Hung Chih Investment Corporation(3)
    
    Nominee of Shun Ying Investment(4)
    
    Nominee of Li-Hsin Investment Corporation(5)
    
    Nominee of NewSoft Technology Corporation Miin Wu
 H.C. Chen
 Takata Akira
 61




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##### Table of Contents



Dang-Hsing Yiu
 C.Y. Lu
 J.P. Peng
 Yu Liang Chen
 Cheng Yi Fang
 Chiang Kao
 Yan Kuin Su
 Duh Kung Tsai
 Chow Fang Chen
 Ping Tien Wu
 Gueimin Lee
 C. P. Wang
    Paul Yeh
 -
  62




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##### Table of Contents



B. Compensation
  (thousands of NT$)DeferredCompensation
    
    
    Compensation
    
    
    PensionName
    
    Related position with our Company in 2006
    
    Paid
    
    
    Accrued
    
    
    AccruedMiin Wu
    
    Executive Director
    
    
    113
    
    
    
    25,929
    (1)Ding-Hua Hu (5)
    
    Executive Director
    
    
    113H.C. Chen
    
    Executive Director
    
    
    113Yaou-Dong Wang
    
    Director
    
    
    100J.P. Peng
    
    Director
    
    
    100C.Y. Lu
    
    Director
    
    
    100Dang-Hsing Yiu
    
    Director
    
    
    100Raymond S. Mak
    
    Director
    
    
    100Akira Takata
    
    Director
    
    
    100C.L. Liu (5)
    
    Independent Director / Executive Director
    
    
    700Simon M. Sze (5)
    
    Independent Director
    
    
    700Cheng Yi Fang
    
    Independent Director
    
    
    700Ping Tien Wu
    
    Independent Supervisor
    
    
    700J. D. Lee (5)
    
    Supervisor
    
    
    100Miin Wu
    
    Chairman and President
    
    
    54,265
    (2)
    
    
    8,540
    (2)
    
    
    1,890
    (2)C.Y. Lu
    
    Senior Vice PresidentDang-Hsing Yiu
    
    Senior Vice PresidentRaymond S. Mak (5)
    
    Vice PresidentF.L. Ni (4)
    
    Vice PresidentYaou-Dong Wang (3)
    
    Vice PresidentJ.P. Peng
    
    Vice President
 
 (1)
    
    Total compensation reserved from earnings distribution for all the directors and supervisors(2)
    
    Total compensation for Miin Wu, C.Y. Lu, Dang-Hsing Yiu, Raymond S. Mak, F.L. Ni, Yaou-Dong
Wang and J.P. Peng in their senior management capacities.(3)
    
    Yaou-Dong Wang resigned as vice president, effective June 27, 2006(4)
    
    F.L. Ni succeeded as vice president, effective July 25, 2006(5)
    
    Effective June 29, 2007, these individuals no longer serve as our directors, supervisors or executive officers    C. Board Practices
     63




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Audit Committee
   Difference between NASDAQ Requirements and Home Country Practices
      D. Employees
  64




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##### Table of Contents



Year ended December 31,Position
    
    2004
    
    2005
    
    2006Executive and Senior Managers
    
    
    313
    
    
    
    325
    
    
    
    324Supporting Staff and Administrators
    
    
    277
    
    
    
    264
    
    
    
    265Engineers and Technicians
    
    
    1,562
    
    
    
    1,531
    
    
    
    1,578OperationsLocal
    
    
    1,223
    
    
    
    1,178
    
    
    
    1,207Overseas
    
    
    218
    
    
    
    231
    
    
    
    222Total
    
    
    3,593
    
    
    
    3,529
    
    
    
    3,596
    65




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##### Table of Contents



E. Share Ownership
  Shares owned bySpouses and minorShare Ownership(5)
    
    
    childrenNumber
    
    
    
    
    
    
    Number ofTitle
    
    Name
    
    of Shares
    
    
    Percentage
    
    
    Shares
    
    
    PercentageExecutive Director, Chairman and President
    
    Miin Wu
    
    
    18,075,841
    
    
    
    0.62
    %
    
    
    
    
    
    
    Executive Director
    
    Ding-Hua Hu (5)
    
    
    2,334,854
    
    
    
    0.08
    %
    
    
    
    
    
    
    Executive Director
    
    H. C. Chen (1)
    
    
    603,647
    
    
    
    0.02
    %
    
    
    
    
    
    
    Director, Senior Vice President and
Conglomerate Marketing Officer
    
    Dang-Hsing Yiu
    
    
    10,090,724
    
    
    
    0.35
    %
    
    
    2,335,263
    
    
    
    0.08
    %Director and Senior Vice President of
Microelectronics and Memory Solution
Group
    
    C.Y. Lu
    
    
    1,357,264
    
    
    
    0.05
    %
    
    
    
    
    
    
    Director and Vice President
    
    Raymond S. Mak (5)
    
    
    4,045,506
    
    
    
    0.14
    %
    
    
    
    
    
    
    Director and,Vice President
    
    Yaou Dong Wang (4)
    
    
    3,288,788
    
    
    
    0.11
    %
    
    
    712,829
    
    
    
    0.02
    %Director and Vice President
    
    J.P. Peng (2)
    
    
    3,515,795
    
    
    
    0.12
    %
    
    
    
    
    
    
    Director
    
    Akira Takata (3)
    
    
    70,074,805
    
    
    
    2.40
    %
    
    
    
    
    
    
    Independent Director
    
    C.L. Liu (5)
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    Independent Director
    
    Simon M. Sze (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Independent Director
    
    Cheng Yi Fang
    
    
    634,344
    
    
    
    0.02
    %
    
    
    210,659
    
    
    
    0.01
    %Independent Supervisor
    
    Ping Tien Wu
    
    
    115,860
    
    
    
    
    
    
    
    
    
    
    
    Supervisor
    
    J.D. Lee (3)(5)
    
    
    70,074,805
    
    
    
    2.40
    %
    
    
    
    
    
    
    Vice President
    
    F.L. Ni
    
    
    1,134,889
    
    
    
    0.04
    %
    
    
    611,537
    
    
    
    0.02
    %Vice President
    
    Rich Liu
    
    
    145,753
    
    
    
    <0.01
    %
    
    
    
    
    
    
    Vice President
    
    W.S. Pan
    
    
    11,644
    
    
    
    <0.01
    %
    
    
    
    
    
    
    Associate Vice President, Finance Center
    
    Paul Yeh
    
    
    3,623,418
    
    
    
    0.12
    %
    
    
    25,134
    
    
    
    <0.01
    %
 
 (1)
    
    Nominee of Hung Chih Investment Corporation.(2)
    
    Nominee of Hui Yin Investment Corporation. Mr. Peng resigned as
Vice President effective January 10, 2007(3)
    
    Nominee of Shun Yin Investment Co., Ltd.(4)
    
    Mr. Wang resigned as Vice President effective June 26, 2006(5)
    
    Effective June 29, 2007, these individuals no longer
serve as our directors, supervisors or executive officers(6)
    
    The shareholders who are directors or senior management have the
same voting rights as the other shareholders. 66




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F. Stock Option Plans
       67




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##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions
 A. Major Shareholders
  Percentage oftotalNumber of
    
    outstandingName of Shareholder
    
    common shares
    
    common sharesPowerchip Semiconductor Corp
    
    
    176,167,345
    
    
    
    6.04
    %Shun Yin Investment Co., Ltd.
    
    
    70,074,805
    
    
    
    2.40
    %JPMorgan Chase Bank N.A. Taipei Branch in custody for Stichting Pensioenfonds ABP.
    
    
    68,215,476
    
    
    
    2.34
    %Kuo Hwa Life Insurance Co., Ltd.
    
    
    50,783,767
    
    
    
    1.74
    %National Stabilization Fund
    
    
    33,175,004
    
    
    
    1.14
    %
     68




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##### Table of Contents



B. Related Party Transactions
     69




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##### Table of Contents



Item 8. Financial Information
 A. Consolidated Statements and Other Financial Information
  70




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Dividend Policy
  71




---



##### Table of Contents



Legal Proceedings
  TM
  B. Significant Changes
  
 72




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##### Table of Contents



Item 9. The Offer and Listing
 A. Offer and Listing Details
  Average dailytradingvolume (inthousandsClosing Price Per ADS(1)
    
    of ADSs)(1)High
    
    Low(US$)
    
    (US$)2002
    
    
    14.64
    
    
    
    4.88
    
    
    
    31.1272003
    
    
    6.34
    
    
    
    2.18
    
    
    
    15.4672004
    
    
    9.85
    
    
    
    3.43
    
    
    
    9.8682005
    
    
    3.84
    
    
    
    1.59
    
    
    
    6.175First Quarter
    
    
    3.84
    
    
    
    2.23
    
    
    
    7.881Second Quarter
    
    
    3.48
    
    
    
    2.14
    
    
    
    3.599Third Quarter
    
    
    3.63
    
    
    
    1.71
    
    
    
    5.186Fourth Quarter
    
    
    2.74
    
    
    
    1.59
    
    
    
    8.1442006
    
    
    5.01
    
    
    
    1.73
    
    
    
    9.405First Quarter
    
    
    3.44
    
    
    
    2.04
    
    
    
    6.368Second Quarter
    
    
    3.35
    
    
    
    1.73
    
    
    
    8.093Third Quarter
    
    
    3.35
    
    
    
    2.40
    
    
    
    10.144Fourth Quarter
    
    
    5.01
    
    
    
    3.09
    
    
    
    12.9692007January
    
    
    4.48
    
    
    
    3.86
    
    
    
    10.422February
    
    
    4.05
    
    
    
    3.55
    
    
    
    12.605March
    
    
    4.37
    
    
    
    3.81
    
    
    
    11.551April
    
    
    4.20
    
    
    
    4.02
    
    
    
    6.261May
    
    
    4.20
    
    
    
    4.01
    
    
    
    13.269June
    
    
    4.79
    
    
    
    4.07
    
    
    
    9.846
 
 Source: Bloomberg L.P.(1)
    
    As adjusted retroactively by Bloomberg L.P. to give effect to stock dividends paid and reverse stock split in the periods indicated. 73




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Averagedailytradingvolume(inthousands ofClosing Price Per GDS(1)(2)
    
    GDSs)(1 )(2)High
    
    Low(US$)
    
    (US$)2004
    
    
    20.9
    
    
    
    8.35
    
    
    
    02005
    
    
    8.00
    
    
    
    3.80
    
    
    
    0First Quarter
    
    
    8.00
    
    
    
    5.25
    
    
    
    0Second Quarter
    
    
    7.50
    
    
    
    5.70
    
    
    
    0Third Quarter
    
    
    7.80
    
    
    
    3.80
    
    
    
    0Fourth Quarter
    
    
    6.39
    
    
    
    4.25
    
    
    
    02006
    
    
    18.05
    
    
    
    4.67
    
    
    
    0First Quarter
    
    
    7.11
    
    
    
    4.67
    
    
    
    0Second Quarter
    
    
    5.37
    
    
    
    5.11
    
    
    
    0Third Quarter
    
    
    
    
    
    
    
    
    
    
    0Fourth Quarter
    
    
    18.05
    
    
    
    15.75
    
    
    
    02007January
    
    
    16.91
    
    
    
    15.27
    
    
    
    0February
    
    
    16.38
    
    
    
    15.77
    
    
    
    0March
    
    
    16.88
    
    
    
    14.98
    
    
    
    0April
    
    
    16.92
    
    
    
    16.1
    
    
    
    0May
    
    
    16.95
    
    
    
    16.33
    
    
    
    0June
    
    
    19.39
    
    
    
    16.53
    
    
    
    0
 
 Source: Bloomberg L.P.(1)
    
    Average includes only days in which GDSs were traded.(2)
    
    As adjusted retroactively by Bloomberg L.P. to give effect to stock dividends paid and reverse stock split in the periods indicated.  74




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Average dailytrading volume(in thousands ofClosing Price Per Share (1)
    
    shares)High
    
    Low(NT$)
    
    (NT$)2002
    
    
    51.24
    
    
    
    16.79
    
    
    
    34,1492003
    
    
    22.53
    
    
    
    7.06
    
    
    
    25,5562004
    
    
    28.78
    
    
    
    11.48
    
    
    
    35,8772005
    
    
    12.51
    
    
    
    5.29
    
    
    
    19,258First Quarter
    
    
    12.51
    
    
    
    7.50
    
    
    
    19,094Second Quarter
    
    
    10.96
    
    
    
    7.16
    
    
    
    22,619Third Quarter
    
    
    10.88
    
    
    
    5.29
    
    
    
    16,588Fourth Quarter
    
    
    9.20
    
    
    
    5.50
    
    
    
    18,7252006
    
    
    15.05
    
    
    
    6.60
    
    
    
    21,230First Quarter
    
    
    10.43
    
    
    
    6.60
    
    
    
    20,334Second Quarter
    
    
    10.15
    
    
    
    7.08
    
    
    
    21,402Third Quarter
    
    
    10.60
    
    
    
    8.55
    
    
    
    18.116Fourth Quarter
    
    
    15.05
    
    
    
    10.10
    
    
    
    25,125December
    
    
    14.55
    
    
    
    13.50
    
    
    
    21,6432007January
    
    
    14.60
    
    
    
    12.60
    
    
    
    19,614February
    
    
    13.95
    
    
    
    13.20
    
    
    
    10,077March
    
    
    14.85
    
    
    
    12.70
    
    
    
    22,067April
    
    
    14.55
    
    
    
    13.50
    
    
    
    13,036May
    
    
    14.50
    
    
    
    13.70
    
    
    
    13,765June
    
    
    16.60
    
    
    
    13.90
    
    
    
    42,097
 
 Source: Bloomberg L.P.(1)
    
    As adjusted retroactively by Bloomberg L.P. to give effect to stock dividends paid and reverse stock split in the periods indicated.  75




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B. Plan of distribution
  C. Markets
  D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  
 Item 10. Additional Information
 A. Share Capital
  B. Memorandum and Articles of Association
 Description of Our Common Shares
   76




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General
     
    
    the approval of the board of directors;
    
    an amendment to the articles of incorporation (which requires shareholder approval) if the original paid-in share capital plus the number of the shares to be converted from the convertible bonds or exercised from bonds with warrants, or to be exercised from employee options, or the number of any new shares issued, exceeds the number of shares specified in the articles of incorporation; and
    
    the approval of the R.O.C. Securities and Futures Bureau and the R.O.C. Ministry of Economic Affairs or the Hsinchu Science Park Administration, as applicable.
 Increase in Capital; Delivery of Certificates
   
    
    issue multiple share certificates and deliver them to shareholders;
    
    issue a single share certificate representing the total number of new shares and deposit the certificate with the Taiwan Securities Central Depositary Co., Ltd. (the Central Depositary); or
    
    register the new shares with the Central Depositary in lieu of issuing share certificates.
 Dividends and Distributions
  77




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
    
    85% as a dividend to shareholders; and
    
    15% for bonuses to employees.
      Preemptive Rights and Issues of Additional Common Shares
   78




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##### Table of Contents



Meetings of Shareholders
   Voting Rights
   
    
    any amendment to the articles of incorporation, which is required, among other things, for any increase in authorized share capital;
    
    entering into, modification or termination of any contracts for lease of a companys business in whole, or for entrusted business, or for regular joint operation with others;
    
    the dissolution, amalgamation or spin-off of a company;
    
    the removing of directors or supervisors;
    
    the transfer of the whole or an important part of a companys business or properties;
    
    the taking over of the whole of the business or properties of any other company which would have a significant impact on the acquiring companys operations; or
    
    the distribution of any share dividend.
   Other Rights of Shareholders
  79




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##### Table of Contents



Register of Shareholders and Record Dates
    Annual Financial Statements
  Acquisition of Common Shares by our Company
   
    
    for share transfer to our employees;
    
    for the delivery of shares following the conversion or exercise of bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants issued by us; and
    
    for maintaining our credit and our shareholders equity, except that the shares so purchased shall be cancelled thereafter.
  80




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Liquidation Rights
  Transfer Restrictions
  Voting Rights of ADS Holders
      81




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##### Table of Contents



C. Material Contracts
  Asset Purchase Agreement by and among Macronix International Co., Ltd. and Powerchip Semiconductor
Corp., dated as of June 30, 2006
  82




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##### Table of Contents



D. Exchange Controls
 Foreign Exchange
    83




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##### Table of Contents



E. Taxation
 R.O.C. Taxation
 General
   ADSs and GDSs
 Dividends.
 Sale
 Common Shares
 Dividends.
  Sale.
  Preemptive Rights.
 Inheritance Tax and Gift Tax
  84




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##### Table of Contents



Tax Treaties
   United States Federal Income Taxation
 General
   
    
    dealers in securities or currencies;
    
    traders in securities who elect to use a mark-to-market method of accounting for their securities holdings;
    
    banks;
    
    financial institutions;
    
    insurance companies;
    
    regulated investment companies;
    
    real estate investment trusts;
    
    persons who own or are deemed to own at least 10% of our voting stock.
    
    tax-exempt organizations;
    
    persons liable for the alternative minimum tax;
 85




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
    
    persons who hold ADSs, GDSs or common shares as part of a hedging, integrated or conversion transaction, constructive sale or straddle;
    
    persons who are citizens or residents of a possession or territory of the United States;
    
    persons who hold ADSs, GDSs or common shares pursuant to certain retirement plans;
    
    persons who receive ADSs, GDSs or common shares as compensation for services;
    
    persons whose functional currency is not the U.S. dollar; or
    
    partners in a partnership that holds ADSs, GDSs or common shares.
  
    
    on the federal income tax laws of the United States as in effect on the date of this annual report, including the Internal Revenue Code of 1986, as amended (the Code), judicial decisions, administrative pronouncements and Treasury regulations, changes to any of which after the date of this annual report could apply on a retroactive basis and affect the tax consequences described in this annual report; and
    
    in part, on representations by the depositary, and assumes that each obligation under the applicable deposit agreement and any related agreements will be performed in accordance with their terms.
  
    
    an individual who is a citizen or resident of the United States;
    
    a corporation (or other entity treated as a corporation) organized under the laws of the United States or any State or the District of Columbia (a U.S. Corporation);
    
    an estate the income of which is subject to United States federal income taxation regardless of its source;
    
    a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust; or
    
    a trust that has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.
    ADSs, GDSs and Common Shares
  86




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Taxation of Dividends
     Taxation of Sales or Other Dispositions
  87




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##### Table of Contents



United States Federal Income Taxation of Non-United States Holders
  United States Backup Withholding Tax and Information Reporting
  88




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##### Table of Contents



F. Dividends and Paying Agents
  G. Statement by Experts
  H. Documents on Display
   I. Subsidiary Information
  
 Item 11. Quantitative and Qualitative Disclosures About Market Risk
  
    
    The exchange rates for Japanese yen as at December 31, 2006 is based on the official exchange rate as determined by the Bank of Taiwan, being NT$0.2741 = JPY1.00.
    
    The exchange rates for U.S. dollars as at December 31, 2006 is based on the official exchange rate as determined by the Bank of Taiwan being NT$32.595 = US$1.00.
    
    Interest rates are derived from the prevailing interest rate swap market in the respective currencies as at December 31, 2006.
 Interest Rates
   89




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Principal (notional) amount by expected maturity for non-trading purposes
 Expected MaturityJanuary 1,
    
    January 1,
    
    January 1,
    
    January 1,2007 to
    
    2008 to
    
    2009 to
    
    2010 to
    
    After
    
    
    
    
    
    Fair valueDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    January 1,
    
    
    
    
    
    December 31,NT$ in million
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Total
    
    2006Rate sensitive assetsCashVariable rate
    
    
    3,871
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,871
    
    
    
    3,871Average interest rate
    
    
    0.165
    %Fixed rate
    
    
    8,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,100
    
    
    
    8,100Average interest rate
    
    
    1.59
    %Restricted deposit
    
    
    1,281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,281
    
    
    
    1,281Fixed rate
    
    
    1.37
    %Rate sensitive liabilitiesShort term debt
    
    
    1,306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,306
    
    
    
    1,306Variable rate
    
    
    1.68
    %Long term debt
Variable rate
    
    
    1,051
    
    
    
    864
    
    
    
    294
    
    
    
    68
    
    
    
    365
    
    
    
    2,642
    
    
    
    2,642Average interest rate
    
    
    2.40
    %
    
    
    2.99
    %
    
    
    3.03
    %
    
    
    3.28
    %
    
    
    3.28
    %
 Foreign Currencies
    90




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##### Table of Contents



Item 12. Description of Securities Other than Equity Securities
  
 PART II
 
 Item 13. Default, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
  
 Item 15. Controls and Procedures
 Disclosure Controls and Procedures
  Managements Annual Report on Internal Control over Financial Reporting.
         91




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Attestation Report of the Independent Registered Public Accounting Firm
 Internal Control Integrated Framework
     
    
    Controls over the processes and procedures related to the reconciliation between Republic
of China (R.O.C.) GAAP and U.S. GAAP was identified as a material weakness, which results from
a deficiency in the operation of internal controls. Specifically, the Company did not obtain
an actuarial report prepared in accordance with Statement of Financial Accounting Standards
No. 87 Employers Accounting for Pensions and did not recognize a curtailment loss in 2005 in
connection with the transfer of plan participants to a new plan established under the New
Pension Act of R.O.C. in accordance with U.S. GAAP. The Company concluded that there is no
need for restatement for this prior year error based on materiality analysis in accordance
with Staff Accounting Bulletin No. 99, and recorded an adjustment to pension liability in the
fourth quarter of fiscal 2006. The Company also did not obtain sufficient information to
determine the fair value of identifiable intangible assets acquired in September 2005 and did
not adequately record the purchase price allocation for intangible assets and goodwill under
U.S. GAAP. The Company wrote off all of the goodwill and intangible assets associated with
the 2005 acquisition in 2006, and the impact of this operating deficiency could potentially
impact the classification between amortization and impairment in the 2006 income statement
under U.S. GAAP.This material weakness could potentially cause the Companys consolidated financial statements
to have (a) errors in reconciliations of net income and shareholders equity from R.O.C GAAP to
U.S. GAAP and (b) errors in the required U.S. GAAP disclosures.
  92




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Internal Control Integrated Framework Internal Control Integrated
Framework
  
 Changes in Internal Control over Financial Reporting
  
    
    segregated the functions of accounting and financial analysis, defined the related responsibilities and communicated internal control roles and responsibilities across the organization;
    
    established a process to review significant transactions for differences between R.O.C. GAAP and U.S. GAAP so that they can be appropriately reported under U.S. GAAP and
    
    continued to enhance documentation, communication and periodic review of our accounting policies and procedures to evaluate proper conformity with U.S. GAAP financial reporting requirements.
  93




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Item 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
   
 Item 16C. Principal Accountant Fees and Services
  2005
    
    
    2006(in thousands of NT$)Audit fees(1)
    
    
    10,202
    
    
    
    33,299Audit-related fees
    
    
    571
    
    
    
    308Tax fees
    
    
    1,989
    
    
    
    3,486Others
    
    
    1,910
    
    
    
    1,477Total
    
    
    14,672
    
    
    
    38,570
  (1)
    
    Audit fees for 2006 include audit fees incurred to comply
with Section 404 of the Sarbanes-Oxley Act of 2002 and audit
fees for 2005 paid in 2006 because of a change in estimate. Audit-related Fees
  Tax Fees
  Others
  Pre-Approval of Services
  94




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Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
 ExhibitNumber
    
    Description1.1
    
    Articles of Incorporation of the Company (English translation).*2a.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)8.1
    
    List of subsidiaries of the Company.*11.1
    
    Code of Business Conduct and Ethics.*12.1
    
    Certification of our President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*12.2
    
    Certification of our Associate Vice President, Finance Department, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*13.1
    
    Certification 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
    
    Certification 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.*
 
 *
    
    Filed with this Form 20-F.(1)
    
    Incorporated by reference to Exhibit 3(a) to the Companys Registration Statement on Form F-6 (File No. 333-8602) filed with the Commission on February 1, 2002.
 95




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Signatures
  MACRONIX INTERNATIONAL CO., LTD.
(Registrant)Date: July 2, 2007
    By:
    /s/ Miin WuName:
    Miin WuTitle:
    President A-1




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Consolidated Financial Statements of Macronix International Co., Ltd. and SubsidiariesReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Income
    
    
    F-5Consolidated Statements of Changes In Shareholders Equity
    
    
    F-6Consolidated Statements of Cash Flows
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-9
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      Internal Control-Integrated
Framework
 /s/ Deloitte & Touche
  
 Report of Independent Registered Public Accounting Firm
 
     ERNST & YOUNG
CERTIFIED PUBLIC ACCOUNTANTS
 
 F-2




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MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2006
(In Thousands of New Taiwan Dollars, Except Par Value)
 December 31Notes
    
    
    2005
    
    
    2006NT$000
    
    
    NT$000
    
    
    US$000ASSETSCURRENT ASSETSCash and cash equivalents
    
    
    5
    
    
    
    11,133,620
    
    
    
    11,970,905
    
    
    
    367,318Available-for-sale financial assets
    
    
    4,6,26
    
    
    
    
    
    
    
    788,093
    
    
    
    24,182Notes and accounts receivable, net
    
    
    7
    
    
    
    2,014,888
    
    
    
    2,108,258
    
    
    
    64,690Receivables from related parties, net
    
    
    23
    
    
    
    698,663
    
    
    
    836,409
    
    
    
    25,665Other receivables, net
    
    
    23
    
    
    
    177,674
    
    
    
    296,906
    
    
    
    9,110Inventories, net
    
    
    8
    
    
    
    3,589,445
    
    
    
    4,131,245
    
    
    
    126,764Restricted assets
    
    
    24
    
    
    
    1,928,913
    
    
    
    1,281,360
    
    
    
    39,318Deferred income tax assets, net
    
    
    21
    
    
    
    19,494
    
    
    
    77,584
    
    
    
    2,381Other current assets
    
    
    
    
    
    
    464,723
    
    
    
    444,337
    
    
    
    13,634Total current assets
    
    
    
    
    
    
    20,027,420
    
    
    
    21,935,097
    
    
    
    673,062LONG-TERM INVESTMENTS
    
    
    4,6,9,10,11,26Investments accounted for using equity
method
    
    
    
    
    
    
    
    
    
    
    139,982
    
    
    
    4,295Prepayments for long-term investments
    
    
    
    
    
    
    32,850
    
    
    
    
    
    
    
    Financial assets at fair value through
profit or loss
    
    
    
    
    
    
    
    
    
    
    37,484
    
    
    
    1,150Available-for-sale financial assets
    
    
    
    
    
    
    869,703
    
    
    
    1,433,497
    
    
    
    43,986Financial assets carried at cost
    
    
    
    
    
    
    324,200
    
    
    
    298,690
    
    
    
    9,165Total long-term investments
    
    
    
    
    
    
    1,226,753
    
    
    
    1,909,653
    
    
    
    58,596PROPERTY, PLANT AND EQUIPMENT
    
    
    12,24Land
    
    
    
    
    
    
    598,076
    
    
    
    598,076
    
    
    
    18,352Buildings and structures
    
    
    
    
    
    
    15,833,841
    
    
    
    15,961,310
    
    
    
    489,761Machinery and equipment
    
    
    
    
    
    
    49,780,215
    
    
    
    49,447,947
    
    
    
    1,517,274Research and development equipment
    
    
    
    
    
    
    2,388,842
    
    
    
    2,450,612
    
    
    
    75,195Transportation equipment
    
    
    
    
    
    
    29,074
    
    
    
    29,044
    
    
    
    891Leasehold improvements
    
    
    
    
    
    
    20,551
    
    
    
    25,589
    
    
    
    785Miscellaneous equipment
    
    
    
    
    
    
    857,766
    
    
    
    842,049
    
    
    
    25,838Total property, plant and equipment
    
    
    
    
    
    
    69,508,365
    
    
    
    69,354,627
    
    
    
    2,128,096Less: Accumulated depreciation
    
    
    
    
    
    
    53,591,454
    
    
    
    57,141,926
    
    
    
    1,753,358Accumulated impairment loss
    
    
    
    
    
    
    
    
    
    
    1,910
    
    
    
    59Construction in progress and prepayments
for equipment
    
    
    
    
    
    
    285,338
    
    
    
    1,573,257
    
    
    
    48,274Net property, plant and equipment
    
    
    
    
    
    
    16,202,249
    
    
    
    13,784,048
    
    
    
    422,953INTANGIBLE ASSETSDeferred charges, net
    
    
    
    
    
    
    689,644
    
    
    
    566,490
    
    
    
    17,383Software, net
    
    
    
    
    
    
    92,289
    
    
    
    77,537
    
    
    
    2,379Goodwill
    
    
    
    
    
    
    28,077
    
    
    
    
    
    
    
    Net intangible assets
    
    
    
    
    
    
    810,010
    
    
    
    644,027
    
    
    
    19,762OTHER ASSETSDeferred income tax assets, net
    
    
    21
    
    
    
    1,679,447
    
    
    
    1,547,129
    
    
    
    47,473Idle assets, net
    
    
    
    
    
    
    314,802
    
    
    
    312,358
    
    
    
    9,584Assets to be disposed of by sale, net
    
    
    12,24
    
    
    
    5,300,000
    
    
    
    
    
    
    
    Other assets
    
    
    24
    
    
    
    43,738
    
    
    
    75,967
    
    
    
    2,331Total other assets
    
    
    
    
    
    
    7,337,987
    
    
    
    1,935,454
    
    
    
    59,388TOTAL
    
    
    
    
    
    
    45,604,419
    
    
    
    40,208,279
    
    
    
    1,233,761
 The accompanying notes are an integral part of the consolidated financial statements.
 F-3




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-(Continued)
December 31, 2005 and 2006
(In Thousands of New Taiwan Dollars, Except Par Value)
 December 31Notes
    
    
    2005
    
    
    2006NT$000
    
    
    NT$000
    
    
    US$000LIABILITIES & SHAREHOLDERS EQUITYCURRENT LIABILITIESShort-term bank loans
    
    
    13
    
    
    
    1,893,754
    
    
    
    1,305,907
    
    
    
    40,071Notes and accounts payable
    
    
    
    
    
    
    1,931,183
    
    
    
    1,834,914
    
    
    
    56,303Payables to related parties
    
    
    23
    
    
    
    79,413
    
    
    
    88,602
    
    
    
    2,719Income tax payable
    
    
    21
    
    
    
    205,158
    
    
    
    144,019
    
    
    
    4,419Accrued expenses
    
    
    14
    
    
    
    1,695,446
    
    
    
    1,936,445
    
    
    
    59,418Current portion of bonds payable
    
    
    15 26
    
    
    
    3,000,000
    
    
    
    
    
    
    
    Current portion of long-term bank loans
    
    
    16 26
    
    
    
    1,635,295
    
    
    
    1,050,428
    
    
    
    32,232Other current liabilities
    
    
    
    
    
    
    252,068
    
    
    
    665,503
    
    
    
    20,420Total current liabilities
    
    
    
    
    
    
    10,692,317
    
    
    
    7,025,818
    
    
    
    215,582LONG-TERM LIABILITIESLong-term bank loans, net of current portion
    
    
    16 26
    
    
    
    5,777,743
    
    
    
    1,591,315
    
    
    
    48,828OTHER LIABILITIESAccrued pension cost
    
    
    17
    
    
    
    343,640
    
    
    
    335,501
    
    
    
    10,295Credit balance of long-term equity investments
    
    
    9
    
    
    
    29,838
    
    
    
    31,471
    
    
    
    966Others
    
    
    
    
    
    
    143
    
    
    
    12,478
    
    
    
    383Total other liabilities
    
    
    
    
    
    
    373,621
    
    
    
    379,450
    
    
    
    11,643Total liabilities
    
    
    
    
    
    
    16,843,681
    
    
    
    8,996,583
    
    
    
    276,053EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENTCapital stock, $10 per value
Authorized - 6,550,000 thousand shares
Issued - 2,916,158 thousand shares in 2006;
4,995,296 thousand shares in 2005
    
    
    18 19
    
    
    
    49,952,963
    
    
    
    29,161,578
    
    
    
    894,801Capital Surplus
    
    
    18 19Long-term investments
    
    
    
    
    
    
    57,990
    
    
    
    51,343
    
    
    
    1,575Employee stock options
    
    
    
    
    
    
    
    
    
    
    736
    
    
    
    23Retained earnings (accumulated deficit)
    
    
    18
    
    
    
    (21,388,090
    )
    
    
    1,440,510
    
    
    
    44,201Other adjustmentsUnrealized gain on financial instruments
    
    
    4
    
    
    
    
    
    
    
    598,451
    
    
    
    18,363Cumulative translation adjustments
    
    
    
    
    
    
    77,902
    
    
    
    84,412
    
    
    
    2,590Treasury stock (at cost) -
    
    
    203,516 thousand shares in 2006 and 6,023
thousand shares in 2005
    
    
    
    
    
    
    (142,365
    )
    
    
    (142,365
    )
    
    
    (4,368
    )Total equity attributable to shareholders
of the parent
    
    
    
    
    
    
    28,558,400
    
    
    
    31,194,665
    
    
    
    957,185MINORITY INTERESTS
    
    
    
    
    
    
    202,338
    
    
    
    17,031
    
    
    
    523Total shareholders equity
    
    
    
    
    
    
    28,760,738
    
    
    
    31,211,696
    
    
    
    957,708TOTAL
    
    
    
    
    
    
    45,604,419
    
    
    
    40,208,279
    
    
    
    1,233,761
 The accompanying notes are an integral part of the consolidated financial statements.
 F-4




---



##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2004, 2005 and 2006
(In Thousands of New Taiwan Dollars, Except Earnings (Loss) Per Share)
 For the year ended December 31Notes
    
    
    2004
    
    
    2005
    
    
    2006NT$000
    
    
    NT$000
    
    
    NT$000
    
    
    US$000Net sales
    
    
    23
    
    
    
    23,379,723
    
    
    
    18,908,136
    
    
    
    23,513,236
    
    
    
    721,486Cost of sales
    
    
    23
    
    
    
    (18,990,296
    )
    
    
    (18,666,372
    )
    
    
    (15,984,414
    )
    
    
    (490,470
    )Gross profit
    
    
    
    
    
    
    4,389,427
    
    
    
    241,764
    
    
    
    7,528,822
    
    
    
    231,016Realized (unrealized) profit from intercompany transactions
    
    
    
    
    
    
    (1,451
    )
    
    
    
    
    
    
    548
    
    
    
    17Realized gross profit
    
    
    
    
    
    
    4,387,976
    
    
    
    241,764
    
    
    
    7,529,370
    
    
    
    231,033Operating expenses
    
    
    23Sales and marketing
    
    
    
    
    
    
    (729,246
    )
    
    
    (699,370
    )
    
    
    (769,785
    )
    
    
    (23,620
    )General and administrative
    
    
    
    
    
    
    (1,430,617
    )
    
    
    (1,307,283
    )
    
    
    (1,445,611
    )
    
    
    (44,358
    )Research and development
expenses
    
    
    
    
    
    
    (2,576,801
    )
    
    
    (3,109,670
    )
    
    
    (3,439,266
    )
    
    
    (105,531
    )Total operating
expenses
    
    
    
    
    
    
    (4,736,664
    )
    
    
    (5,116,323
    )
    
    
    (5,654,662
    )
    
    
    (173,509
    )Income (loss) from
operations
    
    
    
    
    
    
    (348,688
    )
    
    
    (4,874,559
    )
    
    
    1,874,708
    
    
    
    57,524Non-operating income and
gainsResearch and development
subsidies
    
    
    
    
    
    
    18,125
    
    
    
    21,918
    
    
    
    3,759
    
    
    
    115Interest income
    
    
    26
    
    
    
    101,646
    
    
    
    99,860
    
    
    
    160,082
    
    
    
    4,912Dividend income
    
    
    
    
    
    
    23,589
    
    
    
    36,852
    
    
    
    38,366
    
    
    
    1,177Reversal of allowance for
doubtful accounts
    
    
    7
    
    
    
    6,119
    
    
    
    50,712
    
    
    
    
    
    
    
    Foreign exchange gain, net
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    6,796
    
    
    
    209Gain on disposal of
property, plant, equipment
and others
    
    
    
    
    
    
    3,408
    
    
    
    396
    
    
    
    154,568
    
    
    
    4,743Gain on settlement and
disposal of financial
instruments, net
    
    
    4, 26
    
    
    
    371,573
    
    
    
    398,263
    
    
    
    180,238
    
    
    
    5,530Reversal of inventory and
spare parts loss provision, net
    
    
    8
    
    
    
    918,545
    
    
    
    476,780
    
    
    
    
    
    
    
    Others
    
    
    
    
    
    
    162,601
    
    
    
    121,222
    
    
    
    163,025
    
    
    
    5,003Total non-operating
income and gains
    
    
    
    
    
    
    1,605,606
    
    
    
    1,206,003
    
    
    
    706,834
    
    
    
    21,689Non-operating expenses and
lossesInterest expense
    
    
    12
    
    
    
    (684,105
    )
    
    
    (377,261
    )
    
    
    (286,207
    )
    
    
    (8,782
    )Foreign exchange loss, net
    
    
    4, 26
    
    
    
    (140,581
    )
    
    
    (97,456
    )
    
    
    
    
    
    
    Loss on
inventory and spare parts valuation and obsolescence, net
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (3,481
    )
    
    
    (107
    )Equity in losses of equity
method investees
    
    
    9
    
    
    
    (99,073
    )
    
    
    (89,525
    )
    
    
    (5,270
    )
    
    
    (162
    )Other-than-temporary
impairment loss on
available-for-sale
financial asset
    
    
    6
    
    
    
    (56,218
    )
    
    
    (1,536,483
    )
    
    
    
    
    
    
    Loss on impairment of assets
    
    
    4
    
    
    
    
    
    
    
    (905,658
    )
    
    
    (94,068
    )
    
    
    (2,886
    )Loss on allowance for other
current assets
    
    
    7
    
    
    
    
    
    
    
    (141,711
    )
    
    
    
    
    
    
    Others
    
    
    
    
    
    
    (29,801
    )
    
    
    (65,472
    )
    
    
    (205,438
    )
    
    
    (6,304
    )Total non-operating
expenses and losses
    
    
    
    
    
    
    (1,009,778
    )
    
    
    (3,213,566
    )
    
    
    (594,464
    )
    
    
    (18,241
    )Income (loss) before
income tax
    
    
    
    
    
    
    247,140
    
    
    
    (6,882,122
    )
    
    
    1,987,078
    
    
    
    60,972Income tax expense
    
    
    21
    
    
    
    (34,781
    )
    
    
    (215,414
    )
    
    
    (3,669
    )
    
    
    (113
    )Net income (loss)
    
    
    
    
    
    
    212,359
    
    
    
    (7,097,536
    )
    
    
    1,983,409
    
    
    
    60,859ATTRIBUTABLE TO:Shareholders of the parent
    
    
    
    
    
    
    217,692
    
    
    
    (7,027,189
    )
    
    
    2,034,048
    
    
    
    62,413Minority interests
    
    
    
    
    
    
    (5,333
    )
    
    
    (70,347
    )
    
    
    (50,639
    )
    
    
    (1,554
    )212,359
    
    
    
    (7,097,536
    )
    
    
    1,983,409
    
    
    
    60,859Earnings (Loss) Per Share:
    
    
    22Income (loss) before income tax
per share  basic
    
    
    
    
    
    NT$
    0.08
    
    
    NT$
    (2.34
    )
    
    NT$
    0.70
    
    
    US$
    0.02Net income (loss) per share  basic
    
    
    
    
    
    NT$
    0.08
    
    
    NT$
    (2.41
    )
    
    NT$
    0.70
    
    
    US$
    0.02Income (loss) before income tax
per share  diluted
    
    
    
    
    
    NT$
    0.08
    
    
    NT$
    (2.34
    )
    
    NT$
    0.70
    
    
    US$
    0.02Net income (loss) per share  diluted
    
    
    
    
    
    NT$
    0.08
    
    
    NT$
    (2.41
    )
    
    NT$
    0.70
    
    
    US$
    0.02
 The accompanying notes are an integral part of the consolidated financial statements.
 F-5




---



##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 For the years ended December 31, 2004, 2005 and 2006
 (In Thousands of New Taiwan Dollars)
 Equity Attributable to Shareholders of the ParentOther AdjustmentsRetained
    
    
    Unrealized
    
    
    UnrealizedCapital Stock
    
    
    
    
    
    
    Capital Surplus
    
    
    
    
    
    
    Earnings
    
    
    Loss on
    
    
    Gain on
    
    
    Cumulative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalShares
    
    
    
    
    
    
    Capital Stock
    
    
    Additional Paid-in
    
    
    Long-term
    
    
    Employee
    
    
    (Accumulated
    
    
    Long-Term
    
    
    Financial
    
    
    Translation
    
    
    
    
    
    
    
    
    
    
    Minority
    
    
    Shareholders(in thousands)
    
    
    Amount
    
    
    to be Registered
    
    
    Capital
    
    
    Investments
    
    
    Stock Options
    
    
    Deficit)
    
    
    Investments
    
    
    Instruments
    
    
    Adjustments
    
    
    Treasury Stock
    
    
    Total
    
    
    Interests
    
    
    EquityBALANCE, JANUARY 1,
2004
    
    
    4,402,758
    
    
    $
    44,027,583
    
    
    $
    274,936
    
    
    $
    
    
    
    $
    7,931
    
    
    $
    
    
    
    $
    (14,062,333
    )
    
    $
    (1,859
    )
    
    $
    
    
    
    $
    189,712
    
    
    $
    (1,188,436
    )
    
    $
    29,247,534
    
    
    $
    108,500
    
    
    $
    29,356,034Issuance of common
shares for Global
Depositary Shares
    
    
    525,000
    
    
    
    5,250,000
    
    
    
    
    
    
    
    315,704
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,565,704
    
    
    
    
    
    
    
    5,565,704Conversion of
convertible
debentures
    
    
    107,538
    
    
    
    1,075,380
    
    
    
    (274,936
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,377
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    759,067
    
    
    
    
    
    
    
    759,067Adjustment of
capital surplus of
equity method
investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,014
    
    
    
    
    
    
    
    32,014Unrealized losses
on long-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,349,668
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,349,668
    )
    
    
    
    
    
    
    (1,349,668
    )Net income in 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217,692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217,692
    
    
    
    (5,333
    )
    
    
    212,359Translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (127,670
    )
    
    
    
    
    
    
    (127,670
    )
    
    
    
    
    
    
    (127,670
    )Decrease in
minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93,367
    )
    
    
    (93,367
    )BALANCE, DECEMBER
31, 2004
    
    
    5,035,296
    
    
    
    50,352,963
    
    
    
    
    
    
    
    315,704
    
    
    
    39,945
    
    
    
    
    
    
    
    (13,886,018
    )
    
    
    (1,351,527
    )
    
    
    
    
    
    
    62,042
    
    
    
    (1,188,436
    )
    
    
    34,344,673
    
    
    
    9,800
    
    
    
    34,354,473Capital surplus
transferred to
offset accumulated
deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (315,704
    )
    
    
    
    
    
    
    
    
    
    
    315,704
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancellation of
treasury stock
    
    
    (40,000
    )
    
    
    (400,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (646,071
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,046,071
    
    
    
    
    
    
    
    
    
    
    
    Adjustment arising
from changes in
percentage of
ownership in
investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144,516
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144,516
    )
    
    
    
    
    
    
    (144,516
    )Adjustment of
capital surplus of
equity method
investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,045
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,045
    
    
    
    709
    
    
    
    18,754Net loss in 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,027,189
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,027,189
    )
    
    
    (70,347
    )
    
    
    (7,097,536
    )Unrealized loss on
long-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,956
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,956
    )
    
    
    
    
    
    
    (4,956
    )Other-than-temporary
impairment loss on
available-for-sale
financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,356,483
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,356,483
    
    
    
    
    
    
    
    1,356,483Translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,860
    
    
    
    
    
    
    
    15,860
    
    
    
    2
    
    
    
    15,862Increase in
minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    262,174
    
    
    
    262,174BALANCE, DECEMBER
31, 2005
    
    
    4,995,296
    
    
    
    49,952,963
    
    
    
    
    
    
    
    
    
    
    
    57,990
    
    
    
    
    
    
    
    (21,388,090
    )
    
    
    
    
    
    
    
    
    
    
    77,902
    
    
    
    (142,365
    )
    
    
    28,558,400
    
    
    
    202,338
    
    
    
    28,760,738Adjustment arising
from initial
adoption of SFAS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    636,491
    
    
    
    
    
    
    
    
    
    
    
    636,491
    
    
    
    
    
    
    
    636,491Cancellation of
common shares to
offset accumulated
deficit
    
    
    (2,079,474
    )
    
    
    (20,794,745
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,794,745
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common
shares
    
    
    100
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (193
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    807
    
    
    
    
    
    
    
    807Issuance of stock
from exercising
stock options
    
    
    236
    
    
    
    2,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,096
    
    
    
    
    
    
    
    3,096Adjustment arising
from changes in
percentage of
ownership in
investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,647
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,647
    )
    
    
    (670
    )
    
    
    (7,317
    )Net income in 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,034,048
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,034,048
    
    
    
    (50,639
    )
    
    
    1,983,409Valuation loss on
available-for-sale
financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71,036
    )
    
    
    
    
    
    
    
    
    
    
    (71,036
    )
    
    
    
    
    
    
    (71,036
    )Equity in
valuation gain on
available-for-sale
financial assets of
equity method
investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,996
    
    
    
    
    
    
    
    
    
    
    
    32,996
    
    
    
    
    
    
    
    32,996Translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,510
    
    
    
    
    
    
    
    6,510
    
    
    
    33
    
    
    
    6,543Decrease in
minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134,031
    )
    
    
    (134,031
    )BALANCE, DECEMBER
31, 2006
    
    
    2,916,158
    
    
    $
    29,161,578
    
    
    $
    
    
    
    $
    
    
    
    $
    51,343
    
    
    $
    736
    
    
    $
    1,440,510
    
    
    $
    
    
    
    $
    598,451
    
    
    $
    84,412
    
    
    $
    (142,365
    )
    
    $
    31,194,665
    
    
    $
    17,031
    
    
    $
    31,211,696
 F-6




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the years ended December 31, 2004, 2005 and 2006
 (In Thousands of New Taiwan Dollars)
 2004
    
    
    2005
    
    
    2006NT$000
    
    
    NT$000
    
    
    NT$000
    
    
    US$000CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss) attributable to shareholders of the parent
    
    $
    217,692
    
    
    $
    (7,027,189
    )
    
    $
    2,034,048
    
    
    $
    62,413Net loss attributable to minority interests
    
    
    (5,333
    )
    
    
    (70,347
    )
    
    
    (50,639
    )
    
    
    (1,554
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation
    
    
    7,092,077
    
    
    
    6,740,549
    
    
    
    5,259,684
    
    
    
    161,390Amortization
    
    
    470,083
    
    
    
    511,984
    
    
    
    285,490
    
    
    
    8,760Reversal of allowance for doubtful accounts
    
    
    (238
    )
    
    
    (49,886
    )
    
    
    (9,050
    )
    
    
    (278
    )Reversal of inventory loss provision
    
    
    (918,545
    )
    
    
    (476,780
    )
    
    
    (1,304
    )
    
    
    (40
    )Loss on impairment of assets
    
    
    
    
    
    
    905,658
    
    
    
    94,068
    
    
    
    2,886Gain on disposal of financial instruments, net
    
    
    (385,015
    )
    
    
    (389,202
    )
    
    
    (177,825
    )
    
    
    (5,456
    )Equity in losses (earnings) of equity method investees,
net
    
    
    99,073
    
    
    
    89,525
    
    
    
    (28,525
    )
    
    
    (875
    )Other-than-temporary impairment loss on
available-for-sale financial asset
    
    
    50,344
    
    
    
    1,536,483
    
    
    
    
    
    
    
    Gain on disposal of property, plant, equipment and others
    
    
    (3,408
    )
    
    
    (396
    )
    
    
    (154,634
    )
    
    
    (4,745
    )Valuation loss on financial instruments
    
    
    
    
    
    
    
    
    
    
    (4,878
    )
    
    
    (150
    )Realized profit from intercompany transactions
    
    
    
    
    
    
    
    
    
    
    (548
    )
    
    
    (17
    )Valuation loss on other current assets
    
    
    
    
    
    
    141,711
    
    
    
    
    
    
    
    Accrued redemption premium of convertible bonds
    
    
    (336,725
    )
    
    
    (21,778
    )
    
    
    
    
    
    
    Deferred income tax
    
    
    1,914
    
    
    
    198,039
    
    
    
    74,228
    
    
    
    2,278Net changes in operating assets and liabilities:Notes and accounts receivable
    
    
    151,459
    
    
    
    626,157
    
    
    
    (109,376
    )
    
    
    (3,356
    )Receivable from related parties
    
    
    (27,016
    )
    
    
    (547,106
    )
    
    
    (120,294
    )
    
    
    (3,691
    )Other receivables
    
    
    (4,268
    )
    
    
    26,122
    
    
    
    (109,170
    )
    
    
    (3,350
    )Inventories
    
    
    191,223
    
    
    
    1,654,614
    
    
    
    (534,506
    )
    
    
    (16,401
    )Other current assets
    
    
    (65,098
    )
    
    
    23,675
    
    
    
    (51,685
    )
    
    
    (1,585
    )Notes and accounts payable
    
    
    (270,018
    )
    
    
    245,904
    
    
    
    (96,269
    )
    
    
    (2,954
    )Payable to related parties
    
    
    (60,794
    )
    
    
    36,638
    
    
    
    (2,940
    )
    
    
    (90
    )Income tax payable
    
    
    (23,708
    )
    
    
    7,940
    
    
    
    (61,060
    )
    
    
    (1,874
    )Accrued expenses
    
    
    (299,759
    )
    
    
    36,938
    
    
    
    253,262
    
    
    
    7,771Other current liabilities
    
    
    20,470
    
    
    
    34,587
    
    
    
    7,691
    
    
    
    236Accrued pension cost
    
    
    86,893
    
    
    
    93,136
    
    
    
    (6,554
    )
    
    
    (201
    )Net cash provided by operating activities
    
    
    5,981,303
    
    
    
    4,326,976
    
    
    
    6,489,214
    
    
    
    199,117CASH FLOWS FROM INVESTING ACTIVITIES:Decrease (increase) in restricted assets
    
    
    (345,297
    )
    
    
    358,349
    
    
    
    611,478
    
    
    
    18,763Acquisitions of available-for-sale financial assets
    
    
    (22,062,441
    )
    
    
    (11,467,983
    )
    
    
    (7,248,375
    )
    
    
    (222,411
    )Proceeds from disposal of investments accounted for using
equity method
    
    
    463,051
    
    
    
    175,705
    
    
    
    
    
    
    
    Acquisitions of investments accounted for using equity method
    
    
    (278,694
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from disposal of available-for-sale financial assets
    
    
    22,013,061
    
    
    
    12,995,611
    
    
    
    6,667,973
    
    
    
    204,602Liquidation proceeds from equity method investee
    
    
    
    
    
    
    
    
    
    
    436
    
    
    
    13Acquisitions of property, plant and equipment
    
    
    (2,768,934
    )
    
    
    (1,774,419
    )
    
    
    (2,470,772
    )
    
    
    (75,814
    )Proceeds from disposal of property, plant and equipment
    
    
    3,680
    
    
    
    3,186
    
    
    
    175,508
    
    
    
    5,385Increase in intangible assets
    
    
    (532,968
    )
    
    
    (187,977
    )
    
    
    (124,759
    )
    
    
    (3,828
    )Proceeds from disposal of assets to be disposed of by sale
    
    
    
    
    
    
    
    
    
    
    5,300,000
    
    
    
    162,627Decrease (increase) in refundable deposits
    
    
    (161,182
    )
    
    
    71,636
    
    
    
    (8,111
    )
    
    
    (249
    )Decrease (increase) in other assets
    
    
    40,575
    
    
    
    (44,507
    )
    
    
    8,058
    
    
    
    247
 The accompanying notes are an integral part of the consolidated financial statements.
 F-7




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
For the years ended December 31, 2004, 2005 and 2006
(In Thousands of New Taiwan Dollars)
 2004
    
    
    2005
    
    
    2006NT$000
    
    
    NT$000
    
    
    NT$000
    
    
    US$000Net cash provided by (used in) investing activities
    
    
    (3,629,149
    )
    
    
    129,601
    
    
    
    2,911,436
    
    
    
    89,335CASH FLOWS FROM FINANCING ACTIVITIES:Increase (decrease) in short-term bank loans
    
    
    276,663
    
    
    
    (1,069,733
    )
    
    
    (587,847
    )
    
    
    (18,038
    )Increase (decrease) in short-term notes payable
    
    
    99,924
    
    
    
    (99,924
    )
    
    
    
    
    
    
    Decrease in capital lease obligations
    
    
    (655,071
    )
    
    
    (303,446
    )
    
    
    
    
    
    
    Decrease in bonds payable
    
    
    (8,409,094
    )
    
    
    (415,315
    )
    
    
    (3,000,000
    )
    
    
    (92,053
    )Increase (decrease) in long-term bank loans
    
    
    240,881
    
    
    
    (1,659,376
    )
    
    
    (4,771,295
    )
    
    
    (146,404
    )Increase (decrease) in guarantee deposits
    
    
    206
    
    
    
    (206
    )
    
    
    6,620
    
    
    
    203Proceeds from exercise of employee stock options
    
    
    
    
    
    
    
    
    
    
    3,096
    
    
    
    95Proceeds from issuance of common shares
    
    
    5,565,704
    
    
    
    
    
    
    
    807
    
    
    
    26Increase (decrease) in minority interests
    
    
    (64,534
    )
    
    
    152,417
    
    
    
    (43,818
    )
    
    
    (1,345
    )Net cash used in financing activities
    
    
    (2,945,321
    )
    
    
    (3,395,583
    )
    
    
    (8,392,437
    )
    
    
    (257,516
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
    
    60,341
    
    
    
    (43,062
    )
    
    
    12,350
    
    
    
    379EFFECT OF EXCLUSION FOR CONSOLIDATION OF CERTAIN SUBSIDIARIES
    
    
    
    
    
    
    
    
    
    
    (183,278
    )
    
    
    (5,624
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (532,826
    )
    
    
    1,017,932
    
    
    
    837,285
    
    
    
    25,691CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    10,648,514
    
    
    
    10,115,688
    
    
    
    11,133,620
    
    
    
    341,627CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    10,115,688
    
    
    $
    11,133,620
    
    
    $
    11,970,905
    
    
    $
    367,318SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid (excluding capitalized interest)
    
    $
    735,529
    
    
    $
    385,154
    
    
    $
    327,200
    
    
    $
    10,040Income tax paid
    
    $
    65,261
    
    
    $
    21,770
    
    
    $
    11,984
    
    
    $
    368NON-CASH INVESTING AND FINANCING ACTIVITIES:Current portion of bonds payable
    
    $
    437,093
    
    
    $
    3,000,000
    
    
    $
    
    
    
    $
    Current portion of long-term bank loans
    
    $
    2,062,822
    
    
    $
    1,635,295
    
    
    $
    1,050,428
    
    
    $
    32,232INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMSAcquisitions of property, plant and equipment
    
    $
    2,554,493
    
    
    $
    1,595,063
    
    
    $
    2,871,080
    
    
    $
    88,097Net decrease (increase) in payables to contractors and
equipment suppliers
    
    
    214,441
    
    
    
    179,356
    
    
    
    (400,308
    )
    
    
    (12,283
    )Cash paid
    
    $
    2,768,934
    
    
    $
    1,774,419
    
    
    $
    2,470,772
    
    
    $
    75,814
 The accompanying notes are an integral part of the consolidated financial statements.
 F-8




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##### Table of Contents



MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise)
 1.
    
    GENERALMacronix International Co., Ltd. (MXIC) , a Republic of China (R.O.C) corporation, was
incorporated in the Hsinchu Science Park (HSP), Taiwan on December 9, 1989. MXIC operates
principally as a designer, manufacturer and supplier of integrated circuits and memory chips.
MXIC also performs design, research and development, consultation, and trade of relevant
products.MXICs shares have been listed on the Taiwan Stock Exchange (TSE) since March 15, 1995. MXIC
has listed a portion of its shares on the NASDAQ Stock Market in the form of American Depositary
Shares (ADSs) since May 1996 and on the Luxembourg Stock Exchange in the form of Global
Depositary Shares (GDSs) since April 2004.As of December 31, 2006, MXIC had direct and indirect majority ownership in the following
subsidiaries: MaxNova Inc. (MaxNova), Run Hong Investment, Ltd. (Run Hong), Hui Ying Investment,
Ltd. (Hui Ying), InfoMax communication Co., Ltd. (InfoMax), MoDioTek Co., Ltd. (MoDioTek),
Mxtran Inc. (Mxtran), Gateway Silicon Inc. (Gateway), MaxRise Inc. (MaxRise), Macronix America
Inc. (MXA), Macronix (BVI) Co., Ltd. (MXBVI), Joyteck Co., Ltd (Joyteck), Biomorphic
Microsystems Corporation (BMC), BM Chip Design Private Limited (BM), Biomorphic VLSI, Inc.
(Biomorphic VLSI), Macronix (Hong Kong) Co., Ltd. (MXHK), Macronix Japan (Cayman Islands) Ltd.
(MXJ), Macronix Pte. Ltd. (MPL), Macronix Europe NV. (MXE), New Trend Technology Inc. (NTTI) and
Macronix Microelectronics (Suzhou) Co., Ltd. (MXSU).As of December 31, 2006, the Company paid NT$549,000 thousand to establish a new
subsidiary, Cheetah Preparatory (Cheetach) whose incorporation process has not been completed
yet.The following diagram presents the relationship and ownership percentage between MXIC and
its consolidated subsidiaries as of December 31, 2006. Please refer to Note 2 for information
related to the main operations of these subsidiaries.
 
 As of December 31, 2006 and 2005, MXIC and its subsidiaries had 4,116 and 4,000 employees,
respectively.
 F-9




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##### Table of Contents



2.
    
    SIGNIFICANT ACCOUNTING POLICIESThe financial statements are presented in conformity with the Guidelines Governing the
Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines
Governing Business Accounting, and accounting principles generally accepted in the R.O.C. Under
those guidelines, laws and principles, MXIC and its subsidiaries should make certain estimates
and assumptions that could affect the amounts of allowance for doubtful accounts, allowance for
sales discounts, allowance for loss on inventories, depreciation of property, plant and
equipment, amortization of deferred charges, loss on asset impairment, and pension expense.
Actual results may differ from those estimates.Significant accounting policies are summarized as follows:Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of all directly and
indirectly majority owned subsidiaries of MXIC, and the accounts of investees in which MXICs
ownership percentage is less than 50% but over which MXIC has a controlling interest. All
significant intercompany balances and transactions are eliminated upon consolidation.The consolidated entities were as follows:
 Percentage of Ownership atDecember 31,
    
    December 31,Name of Investor
    
    Name of Investee
    
    Main Business
    
    2006
    
    2005
    
    NoteMXIC and Hui   Ying
    
    MaxNova
    
    Research, development, design, manufacturing and sales of memory system and ASIC memory products
    
    
    92.26
    %
    
    
    85.50
    %
    
    MXIC
    
    Run Hong
    
    Holding company
    
    
    100.00
    %
    
    
    100.00
    %
    
    MXIC
    
    Kang Bao investments, Ltd. (Kang Bao)
    
    Holding company
    
    
    
    
    
    
    100.00
    %
    
    
    1MXIC
    
    Hui Ying
    
    Holding company
    
    
    100.00
    %
    
    
    100.00
    %
    
     MXIC
    
    Gateway
    
    IC design
    
    
    100.00
    %
    
    
    
    
    
    
    4MXIC
    
    MoDioTek
    
    Research, development, design, manufacturing and sales of the mobile audio chip and solutions
    
    
    100.00
    %
    
    
    
    
    
    
    4MXIC
    
    InfoMax
    
    Research, development, design, manufacturing and sales of the baseband and analog chips
    
    
    100.00
    %
    
    
    
    
    
    
    4MXIC
    
    Mxtran
    
    Research, development, design, manufacturing and sales of the Combi-SIM IC
    
    
    100.00
    %
    
    
    
    
    
    
    4MXIC
    
    MaxRise
    
    IC design, Research, development, design, manufacturing and sales of digital TV receivable chips
    
    
    100.00
    %
    
    
    
    
    
    
    4MXIC
    
    MXA
    
    Sales and marketing
    
    
    100.00
    %
    
    
    100.00
    %
    
     MXIC
    
    Cheetah
    
    Wafer foundry
    
    
    100.00
    %
    
    
    
    
    
    
    4
  F-10




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##### Table of Contents



Percentage of Ownership atDecember 31,
    
    December 31,Name of Investor
    
    Name of Investee
    
    Main Business
    
    2006
    
    2005
    
    NoteMXIC and Run Hong
    
    MXBVI
    
    Holding company
    
    
    100.00
    %
    
    
    100.00
    %
    
    MXIC and Hui Ying
    
    Joyteck
    
    Research, development, design, manufacturing and sales of the software and hardware of handheld device products
    
    
    87.98
    %
    
    
    87.98
    %
    
    
    2MXIC and Run Hong
    
    Magic Pixel Inc. (Magic Pixel)
    
    Research, development, design, manufacturing and sales of digital skill camera controller IC and flat panel display controller IC
    
    
    44.91
    %
    
    
    44.91
    %
    
    
    3Run Hong and Hui Ying
    
    BMC
    
    Research, development, design, manufacturing and sales of digital skill camera CMOS Sensor
    
    
    54.77
    %
    
    
    54.77
    %
    
    BMC
    
    Biomorphic VLSI
    
    IC design
    
    
    100.00
    %
    
    
    100.00
    %
    
    BMC
    
    BM
    
    IC design
    
    
    97.75
    %
    
    
    97.75
    %
    
    MXBVI
    
    MXJ
    
    Sales and marketing
    
    
    100.00
    %
    
    
    100.00
    %
    
    MXBVI
    
    NTTI
    
    IC design
    
    
    100.00
    %
    
    
    100.00
    %
    
    MXBVI
    
    MXHK
    
    Sales and marketing
    
    
    100.00
    %
    
    
    100.00
    %
    
    MXBVI
    
    MXE
    
    Sales and marketing
    
    
    100.00
    %
    
    
    100.00
    %
    
    MXBVI
    
    MPL
    
    Sales and marketing
    
    
    100.00
    %
    
    
    100.00
    %
    
    MXBVI
    
    MXSU
    
    Design, development and testing of integrated circuit system and software.
    
    
    100.00
    %
    
    
    100.00
    %
    
    
  Note 1:
    
    To streamline MXICs investment structure, Kang Bao was merged
into Run Hong based on its carrying value, and the merger was
accounted for as a statutory merger on March 1, 2006.
 Note 2:
    
    Joyteck was not included as a consolidated entity, due to the fact
that its liquidation started from May 2006. Its total assets were
about 0.005% of the total consolidated assets.
 Note 3:
    
    MXIC held a majority of director seats of Magic Pixels Board of
Directors and included the accounts of Magic Pixel in its 2005
consolidated financial statements. In December 2006, Magic Pixel
increased its board seats and diluted MXICs control over the
Board of Directors. Because MXIC no longer had control over Magic
Pixel, it did not include the accounts of Magic Pixel in its 2006
consolidated financial statements. The investment income
recognized for Magic Pixel and Run Hong was NT$33,795 thousand for the year
ended December 31, 2006.
 Note 4:
    
    Established in 2006.
   Use of Estimates
  Classification of Current and Noncurrent Assets and Liabilities
  F-11




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##### Table of Contents



Cash EquivalentsCommercial papers and repurchase agreements collateralized by bonds acquired with maturities of
less than three months from the date of purchase are classified as cash equivalents. The
carrying amount approximates fair value.Financial Assets/Liabilities at Fair Value through Profit or LossFinancial instruments at fair value through profit or loss have two categories: (1) held for
trading and (2) designated on initial recognition as at fair value through profit or loss.
These financial instruments are initially recognized at fair value plus transaction costs that
are directly attributable to the acquisition. When subsequently remeasured at fair value,
changes in fair value are recognized in earnings. A regular way purchase or sale of financial
assets is accounted for using settlement date accounting.Derivatives that do not meet the criteria for hedge accounting are treated as financial assets
or liabilities held for trading. When the fair value is a positive amount, the derivative is
treated as a financial asset; when the fair value is a negative amount, the derivative is
treated as a financial liability.Fair value is determined as follows: Foreign publicly-traded bonds  closing prices at the end
of the year, and derivatives  determined using valuation techniques incorporating estimates
and assumptions that are consistent with prevailing market conditions.Available-for-sale Financial AssetsAvailable-for-sale financial assets are initially recognized at fair value plus transaction
costs that are directly attributable to the acquisition. Changes in fair value from subsequent
remeasurement are reported as a separate component of shareholders equity. The corresponding
accumulated gains or losses are recognized in earnings when the financial asset is derecognized
from the balance sheet. A regular way purchase or sale of financial assets is accounted for
using trade date accounting.Fair values of open-end mutual funds and publicly traded stocks are determined using the net
assets value and the closing price at the end of the year, respectively.Cash dividends are recognized as investment income upon resolution of shareholders of an
investee but are accounted for as a reduction to the original cost of investment if such
dividends are declared on the earnings of the investees attributable to periods prior to the
purchase of the investment. Stock dividends are recorded as an increase in the number of shares
held and do not affect investment income. The cost per share is recalculated based on the new
total number of shares.If there is objective evidence which indicates that a financial asset is impaired, a loss is
recognized. If, in a subsequent period, the amount of the impairment loss decreases, for equity
securities, the previously recognized impairment loss is reversed to the extent of the decrease
and recorded as an adjustment to shareholders equity.Revenue Recognition and Allowance for Sales Returns and OthersThe Company complies with R.O.C. Statement of Financial Accounting Standards (SFAS) No. 32,
Accounting for Revenue Recognition, which requires that the Company recognize sales revenue
when evidence of an arrangement exists, shipment is made, price is fixed or determinable, and
collectibility is reasonably assured. Delivery is considered to have occurred when title and
risk of loss have transferred to the customer. Sales prices are determined using the fair market
value considering the related sales discounts agreed between the Company and its customers.Sales to customers and distributors generally do not contain rights of return, price protection
privileges or other forms of compensation. Payments are typically due 45 days to 90 days after
legal title to the products is passed to the customers and distributors. Delivery terms are
typically F.O.B. shipping point.In some circumstances, the sales to distributors contain rights of return and price protection
clauses. In the circumstance when the rights of return exist, the Company recognizes revenue
when the Company can reasonably estimates returns. In the circumstance when the sales to
distributors contain price protection clauses, the Company recognizes revenue when the future
price changes can be reasonably estimated. To the extent that these criteria are not met, sales
revenue is deferred until the distributor sells the merchandise or the rights of return and the
price protection privileges lapse, whichever occurs first.The Company records provisions for estimated sales returns and other allowances in the period
the related revenue is recorded. Provisions for estimated sales returns and other allowances are
generally made based upon historical experience, managements judgment, and any known factors
that would significantly affect the allowance. The Companys management periodically reviews the
adequacy of the percentages used. Due to the nature of estimation, the actual sales returns and
allowances could be significantly different from the Companys estimates. When the actual
returns and allowances are greater than the Companys estimates on returns and allowances, the
Company records additional provisions for sales returns and allowances, which would have a
negative effect on the Companys net sales and gross margin.
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Allowance for Doubtful AccountsAn allowance for doubtful accounts is provided based on a review of the collectibility of
accounts receivable. The Company determines the amount of allowance for doubtful accounts by
examining the aging analysis of outstanding accounts receivable and current trends in the credit
quality of its customers as well as its internal credit policies.InventoriesInventories are stated at the lower of cost or market value. Inventories are recorded at
standard cost and adjusted to the approximate weighted-average cost at the balance sheet date.
Market value represents replacement cost for raw materials and supplies and net realizable value
for work in process, finished goods and merchandise. Estimated losses on scrap and slow-moving
items are recognized and included in the allowance for losses.Investments Accounted for Using Equity MethodInvestments in companies wherein the Company holds over 20% ownership or exercises significant
influence over the operating and financial policy decisions are accounted for using the equity
method. The Companys share of the net income or net loss of an investee is recognized in the
equity in earnings/losses of equity method investees  account. The difference, if any,
between the cost of investment and the Companys proportionate share of the investees equity
was previously amortized by the straight-line method over five years, with the amortization
recorded in the equity in earnings/losses of equity method investees  account. Effective
January 1, 2006, pursuant to the revised R.O.C. SFAS No. 5, Long-term Investments in Equity
Securities (SFAS No. 5), investment premiums, representing goodwill, are no longer being
amortized; while investment discounts continue to be amortized over the remaining periods.If an investee issues additional shares and the Company subscribes for these shares at a
percentage different from its current ownership percentage in the investee, the resulting
difference in the Companys equity in the investees net assets is recorded as an adjustment to
capital surplus as well as to the long-term investments. Any decrease in the Companys equity
in the investees net assets is debited to capital surplus; if the capital surplus from
long-term investments is not sufficient, the shortfall is changed to unappropriate retained
earnings.On the balance sheet date, the Company evaluates equity method investments for any impairment.
An impairment loss is recognized and charged to earnings if the carrying amount of an investment
as of the balance sheet date exceeds the expected recoverable amount. Investments for which the
Company has significant influence over investees are tested for impairment separately at their
carrying amounts.If the investment in an investee and any advances to the investee have been reduced to zero, the
Company will discontinue recognizing investment loss. But if (a) the Company guarantees the
investees obligations or commits to provide financial support to the investee or (b) if there
is sufficient indication of the short-term operation recovery in the investee, the Company will
continue to recognize investment loss. Any credit balance of long-term investments is deducted
from advances to the investee, with any remaining credit balance reclassified to other
liabilities in the balance sheets.Gains or losses on sales from the Company to equity method investees are deferred in proportion
to the Companys ownership percentage in the investees until such gains or losses are realized
through transactions with third parties. The entire amount of the gains or losses on sales to
investees over which the Company has a controlling interest is deferred until such gains or
losses are realized through subsequent sales of the related products to third parties. Gains or
losses on sales from equity method investees to the Company are deferred in proportion to the
Companys ownership percentages in the investees until they are realized through transactions
with third parties. Gains or losses on sales between equity method investees are deferred in
proportion to the Companys weighted-average ownership percentages in the investees that record
gains or losses until such gains or losses are realized through transactions with third parties.
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Financial Assets Carried at CostInvestments without quoted market prices in an active market and whose fair value cannot be
reliably measured, such as non-publicly traded stocks, are carried at their original cost. The
accounting treatment for cash and stock dividends arising from financial assets carried at cost
is the same as that for available-for-sale financial assets.If there is objective evidence of asset impairment, a irreversible loss is recognized.Property, Plant and EquipmentProperty, plant and equipment are stated at cost less accumulated depreciation and accumulated
impairment loss. Significant additions, renewals, betterments and interest expense incurred
during the construction period are capitalized, while maintenance and repairs are expensed
currently.Depreciation is calculated using the straight-line method over service lives which are initially
estimated as follows: buildings and structures, 5 to 20 years; machinery and equipment, 5 years;
research and development equipment, 3 to 5 years; transportation equipment, 5 years; leasehold
improvements, 2 to 13 years; miscellaneous equipment, 2 to 6 years. Properties still in use
beyond their initially estimated service lives are further depreciated over the newly estimated
service lives.Upon sale or disposal of property, plant and equipment, the related cost and accumulated
depreciation and accumulated impairment loss are deducted from the corresponding accounts, with
any gain or loss credited or charged to non-operating gains or losses in the period of sale or
disposal.Intangible AssetsIssuance costs of convertible bonds are amortized using the straight-line method over the period
from the issuance date to the date holders may request the Company to buy back the bonds.
Software and technology license fees are amortized using the straight-line method over 1 to
5 years or the contract term.Idle AssetsLand and equipment held for non-operating purposes are reclassified to idle assets, and the
related cost, accumulated depreciation and accumulated impairment loss are removed from
their respective accounts. Idle assets are valued at the lower of net realizable value or
book value.Asset ImpairmentIf equity-method investments, property, plant and equipment, intangible assets, deferred charges
and assets to be disposed of by sale are assessed for impairment on the balance sheet date and
the carrying amount of an asset exceeds its recoverable amount, the excess is recognized as a
loss. If the recoverable amount increases in a future period, the subsequent reversal of the
impairment loss is recognized as a gain. However, the increased carrying amount of an asset due
to reversal of an impairment loss should not exceed the carrying amount that would have been
determined (net of depreciation and amortization), had no impairment loss been recognized for
the asset in prior years. In addition, any impairment loss on goodwill should not be reversed.Pension CostsFor employees participating in defined contribution pension plans, pension costs are
recorded based on the actual contributions made to employees individual pension accounts during
service periods. For employees participating in defined benefit pension plans, pension costs
are recorded based on actuarial calculations.
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Convertible BondsConvertible bonds are recognized as liabilities at the issue price. The redemption premium is
recognized as a liability by the interest method during the period from the date of issuance to
the date holders may request the Company to buy back the bonds.The conversion of convertible bonds is accounted for by the carrying value method. Upon
conversion of bonds payable, the related unamortized premium (discount), issuance costs, accrued
redemption premium and the principal amount of the bonds are removed from the accounts. Under
this method, because of convertible bonds and related accounts are transferred to capital stock
and capital surplus, and no gain or loss is recorded.Employee Stock OptionsCompensatory employee stock options that are granted or amended on or after January 1, 2004 must
be accounted for in accordance with the interpretations issued by the Accounting Research and
Development Foundation (ARDF) of the R.O.C. The Company uses the intrinsic value method to
determine compensation cost, which is recognized over the employee vesting periods.Treasury StockThe reacquisition of issued stock is accounted for by the cost method. Under this method, the
reacquisition cost is debited to the treasury stock account. Treasury stock is shown as a
deduction to arrive at shareholders equity. If treasury shares are reissued at a price in
excess of the acquisition cost, the excess is credited to capital surplus from treasury stock
transactions. If the treasury shares are reissued at less than acquisition cost, the deficiency
is treated first as a reduction to any capital surplus from treasury stock transactions. If the
balance in capital surplus from treasury stock transactions is insufficient to absorb the
deficiency, the remainder is recorded as a reduction to retained earnings.When the treasury shares are retired, the capital stock and additional paid-in capital based on
the existing equity are debited pro rata. If the treasury shares are retired at a price lower
than their par value and additional paid-in capital, the deficiency is debited to capital
surplus from treasury stock transactions. If the treasury shares are retired at a price in
excess of their par value and additional paid-in capital, the excess is credited to capital
surplus from treasury stock transactions. If the balance in capital surplus from treasury stock
transactions is insufficient to absorb the deficiency, the shortfall is recorded as a reduction
to retained earnings.The Companys stock held by subsidiaries is treated as treasury stock and reclassified from
investments accounted for using equity method to treasury stock. The gains resulted from
disposal of the treasury stock held by the subsidiaries and cash dividends received by the
subsidiaries from the Company are recorded under capital surplus from treasury stock
transactions.Research and Development Costs and SubsidiesResearch and development costs are charged to expenses as incurred. Government subsidies for
research and development are recorded as non-operating income in the period the qualifying
research and development activities are undertaken.Bonuses to Employees, Directors and SupervisorsAmounts distributed to employees, directors and supervisors pursuant to the MXICs Articles of
Incorporation 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.Income TaxThe Company applies an intra-period allocation for its income tax. Deferred income tax assets
and liabilities are recognized for tax effects of temporary differences and unused tax credits.
Valuation allowances are provided to the extent, if any, that it is more likely than not that
deferred income tax assets will not be realized. A deferred tax asset or liability is
classified as current or non-current in accordance with the classification of its related asset
or liability. However, if a deferred tax asset or liability does not relate to an asset or
liability in the financial statements, it is classified as either current or non-current based
on the expected length of time before it is realized or settled.Any tax credits arising from purchases of machinery, equipment and technology, research and
development expenditures, personnel training, and investments in important technology-based
enterprises are recognized using the flow-through method.Adjustments of prior years tax liabilities are added to or deducted from the current periods
tax provision.Income tax on unappropriated earnings (excluding earnings from foreign consolidated
subsidiaries) at a rate of 10% is expensed in the year of shareholder approval which is the year
subsequent to the year the earnings are generated.The R.O.C. government enacted the Alternative Minimum Tax Act (the AMT Act), which became
effective on January 1, 2006. The alternative minimum tax (AMT) imposed under the AMT Act is a
supplemental tax levied at a rate of 10% which is payable if the income tax payable determined
pursuant to the Income Tax Law is below the minimum amount prescribed under the AMT Act. The
taxable income for calculating the AMT includes most of the income that is exempted from income
tax under various laws and statutes. The Company has considered the impact of the AMT Act in
the determination of its tax liabilities.
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Concentration of Credit 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 accounted
for 22.67%, 29.15% and 34.12% of the Companys total net sales for the years ended December 31,
2004, 2005 and 2006. The Companys largest three customers accounted for 30.15%, 38.24% and
44.92% of the Companys total net sales for the years ended December 31, 2004, 2005 and 2006.
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, 2005 and 2006, the three
largest accounts receivable balances totaled NT$1,245,117 thousand and NT$1,147,561 thousand,
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
90 days.Earnings Per ShareThe Company complies with the R.O.C. SFAS No. 24, Earnings per Share, which requires that the
Company disclose basic earnings per share if the capital structure is simple; otherwise, the
Company is required to disclose both the basic earnings per share and diluted earnings per share
when the capital structure is complicated. Basic earnings per share is equal to the net income
(loss) attributable to the shareholders of MXIC divided by the weighted-average number of common shares outstanding in each period. Dilutive earnings per share is equal to the net income (loss)
of MXIC adjusted for dividends, interest expenses and other income and expenses related to
dilutive potential common shares, divided by the weighted-average number of outstanding common
shares and dilutive potential common shares.Foreign-currency Transactions and Translation of Foreign-currency Financial StatementsR.O.C. SFAS No. 14, Accounting for Foreign-currency Translation applies to foreign
subsidiaries that use the local currency as their functional currency. The financial
statements of foreign subsidiaries are translated into New Taiwan dollars at the following
exchange rates: Assets and liabilities  spot rates at year-end; shareholders equity -
historical rates; income and expenses  average rates during the year. The resulting
translation adjustments are recorded as a separate component of shareholders equity.Foreign-currency transactions, except derivative transactions, are recorded in New Taiwan
dollars at the rates of exchange in effect when the transactions occur. Gains or losses caused
by the application of prevailing foreign exchange rates when cash in foreign currency is
converted into New Taiwan dollars or when foreign-currency receivables and payables are settled,
are credited or charged to income in the period of conversion or settlement. The balances of
non-monetary foreign-currency assets and liabilities recognized at fair value as of the balance
sheet date (such as equity instruments) are adjusted to reflect the prevailing exchange rates,
and the resulting exchange differences are recorded as follows: (a) for those whose changes in
fair value are recognized as adjustments to shareholders equity  as translation adjustments
under shareholders equity; (b) for those whose changes in fair value are recognized in profit
or loss  as current earnings. Non-monetary foreign-currency assets carried at cost are measured
at historical exchange rates of transaction dates.At year-end, the balances of foreign-currency investments accounted for using equity method are
restated at prevailing exchange rates and the resulting differences are recorded as cumulative
translation adjustments under shareholders equity.The Company uses average rates quoted by banks with which the Company conducts business as the
prevailing exchange rates.
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Recent Accounting PronouncementsIn July 2006, the ARDF issued R.O.C. SFAS No. 37, Accounting for Intangible Assets, which is
to be applied by the Company on January 1, 2007. The standard provides guidance on initial
recognition and measurement, amortization, presentation and disclosure of intangible assets. An
intangible asset should be measured initially at cost. For an intangible asset of a finite
useful life, the carrying amount should be amortized over its useful life. On the other hand,
for an intangible asset with an indefinite useful life, the carrying amount should not be
amortized. Intangible assets should be evaluated for impairment at least annually as required by
R.O.C. SFAS No.35, Accounting for Impairment of Assets. Upon adoption of the standard on
January 1, 2007, the Company expects no significant impact on its current accounting treatment.In November 2006, the ARDF issued R.O.C. SFAS No. 38, Accounting for Non-current Assets
Held-for-sale and Discontinued Operations, which is to be applied by the Company on January 1,
2007. Under R.O.C. SFAS No.38, assets classified as held-for-sale should be measured at the
lower of carrying amount or fair value and cease to be depreciated or amortized. Any impairment
loss should be recognized in current earnings. Assets classified as held-for-sale should be
presented separately on the balance sheet. R.O.C. SFAS No.38 also requires the Company to
disclose information of discontinued operations separately on the statements of income and cash
flows or in a footnote. Upon adoption of the standard on January 1, 2007, the Company expects no
significant impact on its current accounting treatment.In March 2007, the ARDF issued an interpretation which requires R.O.C. companies to recognize
compensation expenses for bonuses paid to employees, directors and supervisors beginning January
1, 2008. Such bonuses are currently recorded as an appropriation of earnings under R.O.C. GAAP.
On March 30, 2007, the R.O.C. Financial Supervisory Commission also issued an interpretation
which requires that bonuses granted to employees, directors and supervisors in the form of shares be valued at fair market value for purposes of recognizing compensation expenses. While
definitive implementing accounting pronouncements have not yet been issued, the Company
currently expects a significant increase in total compensation expenses upon adoption of the
aforementioned interpretations on January 1, 2008.Reclassification of AccountsCertain accounts in the consolidated financial statements as of and for the years ended December
31, 2004 and 2005 have been reclassified to conform with the consolidated financial statements
as of and for the year ended December 31, 2006.3.
    
    INFORMATION EXPRESSED IN U.S. DOLLARSThe Company expresses its consolidated financial statements in New Taiwan (N.T.) dollars.
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$32.59 to US$1.00 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 29, 2006. No representation is made that the N.T. dollar
amounts have been, could have been, or could be in the future converted into U.S. dollars at that
or any other rate.4.
    
    ACCOUNTING CHANGESOn January 1, 2006, the Company adopted R.O.C. SFAS No. 34, Accounting for Financial
Instruments (SFAS No. 34) and SFAS No. 36, Disclosure and Presentation for Financial
Instruments.
 a.
    
    Effect of adopting the newly released SFASsThe Company had categorized its financial assets and liabilities (including derivatives) upon
initial adoption of the newly released SFASs. The adjustment of NT$636,491 thousand made to
the carrying amount of those categorized as available-for-sale financial assets was
recognized as an adjustment to shareholders equity.The effect of adopting the newly released SFASs is summarized as follows:
 Recognized asa Separate Component ofShareholders EquityNT$000Available-for-sale financial assets
    
    
    $  636,491
 Such a change in accounting principle had neither a material effect on the consolidated
financial statements as of and for the year ended December 31, 2006 nor a cumulative effect
of a change in accounting principle.
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b.
    
    ReclassificationsUpon the adoption of SFAS No. 34, certain accounts in the consolidated financial statements
as of and for the year ended December 31, 2005 were reclassified to conform with the
consolidated financial statements as of and for the year ended December 31, 2006. The
previously issued consolidated financial statements as of and for the year ended December 31,
2005 were not required to be retroactively restated.Certain accounting policies prior to the adoption of the newly released SFASs are summarized
as follows:
 1)
    
    Short-term investmentsShort-term investments that were publicly-traded, easily converted to cash, and not
acquired for the purpose of controlling the investees or establishing close business
relationship with the investees were carried at the lower of cost or market value at the
balance sheet date, with any decline in value charged to current income. The market value
of publicly-traded stocks was determined using the average-closing prices for the last
month of the period.2)
    
    Long-term investmentsInvestments for which the Company does not exercise significant influence over the
investees were accounted for by the cost method. Long-term investments in publicly traded
securities were carried at the lower of cost or market value, with the decline in value
charged to shareholders equity.3)
    
    Forward exchange contractsForward exchange contracts entered into for hedging purposes were recorded at spot rates
on contract dates. The foreign-currency amount of each contract multiplied by the
difference between the spot rate on the contract date and the contracted forward rate was
amortized over the contract period. On the balance sheet date, gains or losses resulting
from restatement of the foreign-currency receivables or payables using prevailing exchange
rates were credited or charged to income.The receivables or payables arising from forward contracts outstanding as of the balance
sheet date were netted out, with the net receivable or payable presented as an asset or a
liability.
 The reclassifications of the whole or a part of certain account balances as of or for the
year ended December 31, 2005 are summarized as follows:
 Before ReclassificationAccount
    
    AmountNT$000Long-term investments accounted for
using cost method
    
    $
    1,193,903Foreign exchange gains, net
    
    
    9,061
 After ReclassificationAccount
    
    AmountNT$000Available-for-sale financial assets
    
    $
    869,703Financial assets carried at cost
    
    
    324,200Gain on settlement and disposal of
financial instruments, net
    
    
    9,061
 Effective January 1, 2006, the Company adopted the newly revised R.O.C. SFAS No. 1, Summary of
Generally Accepted Accounting Principles, SFAS No. 5, Long-term Investments in Equity
Securities and SFAS No. 25, Business Combinations -Accounting Treatment under Purchase
Method, which prescribe that investment premiums, representing goodwill, be assessed for
impairment at least on an annual basis instead of being amortized. This accounting change had
neither a material effect on the Companys consolidated financial statements as of and for the
year ended December 31, 2006 nor a cumulative effect of a change in accounting principle.
 In July 2004, the ADRF issued R.O.C. SFAS No.35 Accounting for Impairment of Assets, which
applied to the Company on January 1, 2005. For all assets, excluding certain assets specified by
SFAS No.35, the Company is required to evaluate long-lived assets for any indication of
impairment. If there is an indication that an asset may be impaired, the Company is required to
estimate the recoverable amount of assets and to record an impairment loss when the carrying
amount is less than the recoverable amount of the assets. A subsequent reversal of an impairment
loss is allowed if the recoverable amount increases. The Company is also required to evaluate
goodwill for impairment on an annual basis. The reversal of an impairment loss for goodwill is not
allowed. The adoption of SFAS No.35 resulted in decreases in goodwill, idle assets, and assets to
be disposed of by sale of NT$3,679 thousand, NT$391,497 thousand, and NT$510,482 thousand,
respectively. To summarize, the adoption of SFAS No.35 resulted in increases in consolidated net
loss and loss per share for the year ended December 31, 2005 of NT$905,658 thousand and NT$0.31,
respectively.In December 2004, the ARDF revised R.O.C. SFAS No.7, Consolidated Financial Statements, which
requires that the accounts of investees over which the Company has control be included in the
consolidated financial statements. Beginning January 1, 2005, the Company consolidated the
accounts of MPI as the Company held a majority of seats of the board of director of MPI. However,
the Company lost control over MPI in December 2006. Accordingly, the consolidated financial
statements for the year ended December 31, 2006 included only the result of operation for the year
ended December 31, 2006 but not the financial position as of December 31, 2006.
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5.
    
    CASH AND CASH EQUIVALENTS
 December 312005
    
    2006NT$000
    
    NT$000Petty cash
    
    
    1,418
    
    
    
    1,264Checking and savings accounts
    
    
    7,114,644
    
    
    
    3,869,477Time deposits
    
    
    2,910,775
    
    
    
    7,797,066Cash equivalents  repurchase agreements collateralized by bonds
    
    
    1,106,783
    
    
    
    303,09811,133,620
    
    
    
    11,970,905
 6.
    
    AVAILABLE-FOR-SALE FINANCIAL ASSETS
 December 312005
    
    2006NT$000
    
    NT$000Publicly-traded stocks
    
    
    298,991
    
    
    
    944,489Repurchase agreements collateralized by government bonds
    
    
    
    
    
    
    555,000Foreign publicly-traded stocks  US$15,003 thousand in 2006
and US$17,373 thousand in 2005
    
    
    570,712
    
    
    
    489,008Open-end mutual funds
    
    
    
    
    
    
    233,093869,703
    
    
    
    2,221,590Less: Noncurrent Assets
    
    
    869,703
    
    
    
    1,433,497
    
    
    
    788,093
 One of the investments in public-traded stocks is investment in Ardentec Corporations
shares which have been traded on the R.O.C. GreTai Securities Market (GTSM) since 2005. As of
December 31, 2006, MXIC was required to deposit 12,514 thousand Ardentec common shares with a
carrying amount of NT$334,750 thousand with the GTSM as MXIC is a corporate director of
Ardentec. Under GTSM regulation, such deposited shares shall not be transferred or pledged.During the year ended December 31, 2005, the Company recognized a NT$1,536,483 thousand
(US$47,709 thousand) other-than-temporary impairment loss for its investment in the foreign
publicly-traded stocks of Tower Semiconductor Ltd. (Tower), an Israeli public company whose
shares are quoted on the NASDAQ, due to a prolonged decline in market price of Towers shares.
As of December 31, 2005 and 2006, the carrying amount of the Companys investment in Tower was
NT$540,583 thousand (US$16,456 thousand) and NT$489,008 thousand (US$15,003 thousand) ,
respectively.7.
    
    NOTES AND ACCOUNTS RECEIVABLE, NET
 December 312005
    
    2006NT$000
    
    NT$000Notes receivable
    
    
    6,028
    
    
    
    660Accounts receivable
    
    
    2,101,617
    
    
    
    2,223,156Less  allowance for doubtful accounts
    
    
    83,999
    
    
    
    82,254Less  allowance for sales returns and discounts
    
    
    8,758
    
    
    
    33,3042,008,860
    
    
    
    2,107,5982,014,888
    
    
    
    2,108,258
  Years Ended December 312004
    
    
    2005
    
    
    2006NT$000
    
    
    NT$000
    
    
    NT$000Balance at the beginning of the year
    
    $
    496,224
    
    
    $
    474,519
    
    
    $
    580,352Addition (reversal)
    
    
    1,069
    
    
    
    91,137
    
    
    
    (8,379
    )Write off
    
    
    
    
    
    
    
    
    
    
    (105
    )Other adjustments
    
    
    (22,774
    )
    
    
    14,695
    

    
    
    (4,989
    )Balance at the end of the year
    
    $
    474,519
    
    
    $
    580,352
    
    
    $
    566,879
 The summary of the changes in the allowance for sales returns and discounts:
 Years Ended December 312004
    
    
    2005
    
    
    2006NT$000
    
    
    NT$000
    
    
    NT$000Balance at the beginning of the year
    
    $
    
    
    
    $
    
    
    
    $
    8,758Sales returns and discounts
    
    
    
    
    
    
    8,758
    
    
    
    24,546Balance at the end of the year
    
    $
    
    
    
    $
    8,758
    
    
    $
    33,304
 F-19




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##### Table of Contents



8.
    
    INVENTORIES, NET
 December 312005
    
    
    2006NT$000
    
    
    NT$000Finished goods and merchandise
    
    
    1,900,883
    
    
    
    1,745,289Work in process
    
    
    3,926,882
    
    
    
    4,083,667Raw materials
    
    
    220,930
    
    
    
    455,033Supplies
    
    
    119,124
    
    
    
    127,8136,167,819
    
    
    
    6,411,802Less  allowance for inventory losses
    
    
    2,578,374
    
    
    
    2,280,5573,589,445
    
    
    
    4,131,245
 The
summary of changes in allowance for inventory and spare parts losses:
 Years Ended December 312004
    
    
    2005
    
    
    2006NT$000
    
    
    NT$000
    
    
    NT$000Balance at the beginning of the year
    
    $
    4,438,108
    
    
    $
    3,305,444
    
    
    $
    2,651,894Reversal
    
    
    (918,545
    )
    
    
    (476,780
    )
    
    
    3,481Write-off
    
    
    (211,092
    )
    
    
    (316,067
    )
    
    
    (276,780
    )Change in consolidated entities
    
    
    
    
    
    
    135,772
    
    
    
    (14,874
    )Other adjustments
    
    
    (3,027
    )
    
    
    3,525
    
    
    
    (384
    )Balance at the end of the year
    
    $
    3,305,444
    
    
    $
    2,651,894
    
    
    $
    2,363,337
 9.
    
    INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD
 December 312005
    
    2006% of
    
    
    
    
    
    % ofCarrying
    
    Owner-
    
    Carrying
    
    Owner-Amount
    
    ship
    
    Amount
    
    shipNT$000
    
    
    
    
    
    NT$000Magic Pixel
    
    
    
    
    
    
    
    
    
    
    139,982
    
    
    
    44.91Prepayment for long-term investment
    
    
    32,850
    
    
    
    
    
    
    
    
    
    
    
    32,850
    
    
    
    
    
    
    
    139,982Credit balance of long-term equity
investment (other liability)Procomm Inc.
    
    
    29,838
    
    
    
    38.38
    
    
    
    25,038
    
    
    
    38.38Joyteck
    
    
    
    
    
    
    
    
    
    
    6,433
    
    
    
    87.9829,838
    
    
    
    
    
    
    
    31,471
  F-20




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##### Table of Contents



10.
    
    FINANCIAL ASSETS/LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
 December 312005
    
    2006NT$000
    
    NT$000Financial assets designated at fair value through profit or loss-foreign
publicly-traded convertible bonds
    
    
    
    
    
    
    37,484
 The above investment is the convertible bonds of Tower which are listed for trade on the
NASDAQ. The bonds bear annual interest at the rate of 5% and are convertible into Towers
ordinary shares at US$1.10 per share. The conversion price is subject to downward adjustment
under certain circumstances. Tower may at its option announce early redemption of the bond,
provided by that the outstanding aggregate balance of principal on account of bond is equal to
or less than US$500 thousand. The principal of the bonds, together with accrued interest, will
be payable by Tower in one installment on January 12, 2012. Net gain arising from financial
assets designated at fair value through profit and loss for the year ended December 31, 2006 was
NT$4,878 thousand.11.
    
    FINANCIAL ASSETS CARRIED AT COST
 December 312005
    
    2006NT$000
    
    NT$000Non-publicly traded stocks
    
    
    324,200
    
    
    
    298,690
 The above investments did not have quoted market prices in an active market and its fair value
could not be determined using valuation techniques. Therefore, these equity securities were
carried at cost.
 12.
    
    PROPERTY, PLANT AND EQUIPMENTAccumulated depreciation consisted of:
 December 312005
    
    2006NT$000
    
    NT$000Buildings and structures
    
    
    9,638,577
    
    
    
    10,611,131Machinery and equipment
    
    
    42,201,769
    
    
    
    44,567,590Research and development equipment
    
    
    1,035,072
    
    
    
    1,209,342Transportation equipment
    
    
    20,609
    
    
    
    20,847Leasehold improvement
    
    
    6,554
    
    
    
    38,985Miscellaneous equipment
    
    
    688,873
    
    
    
    694,03153,591,454
    
    
    
    57,141,926
   Years Ended December 312004
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000Total interest (before deducting capitalized interest)
    
    
    716,572
    
    
    
    458,005
    
    
    
    327,837Capitalized interest
    
    
    32,467
    
    
    
    80,744
    
    
    
    41,630Capitalized interest rate
    
    
    3.81
    %
    
    
    3.05
    %
    
    
    3.60
    %
 On June 30, 2006, MXIC entered into the agreement to sell Fab III to Powerchip Semiconductor
Corporation (Powerchip) at the selling price of NT$5,300,000 thousand. As of December 31, 2006,
the entire selling price has been paid by Powerchip.
 F-21




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##### Table of Contents



13.
    
    SHORT-TERM BANK LOANS
 December 312005
    
    2006NT$000
    
    NT$000Credit loans: Interest rate ranged from 1.85%-6.75% in 2006 and
1.70%~4.08% in 2005
    
    
    137,921
    
    
    
    249,838Guaranteed loans: Interest rate ranged from 1.03%-1.94% in 2006 and
2.41%~5.87% in 2005
    
    
    1,755,833
    
    
    
    1,056,0691,893,754
    
    
    
    1,305,907
 14.
    
    ACCRUED EXPENSES  ACCRUED ROYALTY
 Years Ended December 312004
    
    
    2005
    
    
    2006NT$000
    
    
    NT$000
    
    
    NT$000Balance at the beginning of the year
    
    $
    675,457
    
    
    $
    683,918
    
    
    $
    612,474Amount expensed
    
    
    140,468
    
    
    
    218,051
    
    
    
    75,357Payment made
    
    
    (132,007
    )
    
    
    (289,495
    )
    
    
    (48,550
    )Balance at the end of the year
    
    $
    683,918
    
    
    $
    612,474
    
    
    $
    639,281
 15.
    
    BONDS PAYABLEOn October 29, 2001, MXIC issued NT$3,000,000 thousand of five-year
secured debentures (Secured II) due in November 2006 with a stated
interest rate of 3.3%. Secured II was guaranteed by 17 banks. The
interest expense was repayable annually. The bonds were paid in full
at maturity.
 F-22




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##### Table of Contents



16.
    
    LONG-TERM BANK LOANS
 December 312005
    
    2006NT$000
    
    NT$000Syndicated bank loans:Repayable semi-annually from March 2005 in 10 installments; the amount
had been fully repaid by October 2006, with annual floating interest
at 2.66% in 2005
    
    
    5,648,000
    
    
    
    Medium to long-term secured loan:Repayable by June 2007, with annual floating interest at 2.20% and
1.75% in 2006 and 2005, respectively
    
    
    800,000
    
    
    
    800,000Repayable monthly from May 2003 to May 2016; with annual floating
interest at 3.28% and 3.47% in 2006 and 2005, respectively
    
    
    706,638
    
    
    
    638,254Repayable semi-annually from June 2003 to October 2006 in 8
installments; with annual floating interest at 2.92% in 2005
    
    
    100,000
    
    
    
    Repayable monthly from May 1999 to April 2007; with annual floating
interest at 3.28% and 3.47% in 2006 and 2005, respectively
    
    
    58,400
    
    
    
    14,600Repayable quarterly from December 2006 to December 2008 in 9
installments; with annual floating interest at 2.88% and 2.81% in 2006
and 2005, respectively (Note)
    
    
    100,000
    
    
    
    88,889Repayable quarterly from April 2007 to April 2009 in 9 installments;
with annual floating interest at 2.87% (Note)
    
    
    
    
    
    
    200,000Repayable quarterly from May 2007 to November 2009 in 11 installments;
with annual floating interest at 2.75% (Note)
    
    
    
    
    
    
    100,000Repayable on January 2008 with annual floating interest at 2.69% (Note)
    
    
    
    
    
    
    100,000Repayable on September 2008 with annual floating interest at 3.10%
(Note)
    
    
    
    
    
    
    300,000Repayable quarterly from September 2007 to December 2009 in 10
installments; with annual floating interest at 3.33%
    
    
    
    
    
    
    100,000Repayable quarterly from January 2008 to October 2009 in 8
installments; with annual floating interest at 2.91%
    
    
    
    
    
    
    300,0007,413,038
    
    
    
    2,641,743Less  current portion
    
    
    1,635,295
    
    
    
    1,050,4285,777,743
    
    
    
    1,591,315
 Note:
    
    The loan agreements require, among others, the maintenance of certain financial ratios
based on annual financial statements as shown in Note 25(d).
  Year of payment
    
    NT$0002007
    
    
    1,050,4282008
    
    
    863,8292009
    
    
    294,3842010
    
    
    68,3852011
    
    
    68,3852012 and thereafter
    
    
    296,332Total
    
    
    2,641,743
 F-23




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##### Table of Contents



17.
    
    PENSION PLANSThe Labor Pension Act (the Act) took effect on July 1, 2005,
and this pension mechanism is deemed a defined contribution plan.
The employees who were subject to the Labor Standards Act prior
to the enforcement of this Act may choose to participate in the
pension mechanism under this Act or may continue to participate
in the pension mechanism under the Labor Standards Act. For
those employees who participated in the Labor Standards Act prior
to July 1, 2005 and still work for the same company after July 1,
2005 and choose to participate in the pension mechanism under
this Act, their seniority as of July 1, 2005 shall be retained.
Under the Act, the rate of contribution by an employer to
employees personal pension accounts should not be less than 6%
of each employees monthly salary or wage. Starting from July 1,
2005, the Company has made monthly contributions to employees
personal pension accounts and recognized pension costs of $56,372
thousand and $124,045 thousand for the years ended December 31,
2005 and 2006, respectively.The pension plan under the Labor Standards Law is a defined
benefit pension plan. Under this pension plan, an employee
should receive a lump sum payment of retirement benefits equal to
two base units for each year of service in the first 15 years,
with each year of service exceeding 15 years entitled to only 1
unit of base wage; the maximum is 45 units. Benefit payments are
calculated on the basis of years of employment and the average
monthly basic compensation for the last six months prior to
retirement. The Companys annual contribution to the pension
fund is at 2% of employee salaries. The funds are deposited in
the Central Trust of China, a government-designated custodian of
pension funds, and are managed by the Pension Fund Administration
Committee.The changes in benefit obligation and plan assets for the years ended December 31, 2004, 2005 and
2006 were listed as follows:
 2004
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000Benefit obligationProjected benefit obligation at beginning of the year
    
    
    870,495
    
    
    
    1,077,317
    
    
    
    1,066,014Service cost
    
    
    119,969
    
    
    
    83,782
    
    
    
    25,950Interest cost
    
    
    30,326
    
    
    
    37,281
    
    
    
    24,807Unrecognized actuarial loss (gain)
    
    
    61,643
    
    
    
    (135,411
    )
    
    
    (110,649
    )Benefit paid to retirees
    
    
    (3,324
    )
    
    
    (1,965
    )
    
    
    (18,752
    )Others
    
    
    (1,792
    )
    
    
    5,010
    
    
    
    (5,183
    )Projected benefit obligation at end of the year
    
    
    1,077,317
    
    
    
    1,066,014
    
    
    
    982,187Plan assetsPlan assets at beginning of the year
    
    
    636,062
    
    
    
    679,505
    
    
    
    729,640Actual return on plan assets
    
    
    7,727
    
    
    
    10,075
    
    
    
    18,641Employers Contributions
    
    
    39,040
    
    
    
    42,025
    
    
    
    35,756Benefit paid to retirees
    
    
    (3,324
    )
    
    
    (1,965
    )
    
    
    (18,752
    )Others
    
    
    
    
    
    
    
    
    
    
    (2,485
    )Plan assets at end of the year
    
    
    679,505
    
    
    
    729,640
    
    
    
    762,800
 F-24




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##### Table of Contents



2005
    
    2006NT$000
    
    NT$000Benefit obligationVested benefit obligation
    
    
    666
    
    
    
    1,799Nonvested benefit obligation
    
    
    650,144
    
    
    
    603,858Accumulated benefit obligation
    
    
    650,810
    
    
    
    605,657Additional benefits based on future salaries
    
    
    415,204
    
    
    
    376,530Projected benefit obligation
    
    
    1,066,014
    
    
    
    982,187Fair value of plan assets
    
    
    (729,640
    )
    
    
    (762,800
    )Funded status
    
    
    336,374
    
    
    
    219,387Unrecognized prior service costs
    
    
    (24,202
    )
    
    
    (22,900
    )Unrecognized net transition obligation
    
    
    (47,363
    )
    
    
    (43,291
    )Unrecognized actuarial gain
    
    
    78,831
    
    
    
    184,835Accrued pension cost
    
    
    343,640
    
    
    
    338,031Vested benefits
    
    
    720
    
    
    
    1,799
  2004
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000Service costs
    
    
    119,969
    
    
    
    83,782
    
    
    
    25,950Interest costs
    
    
    30,326
    
    
    
    37,281
    
    
    
    24,807Expected return on plan assets
    
    
    (22,906
    )
    
    
    (22,990
    )
    
    
    (18,887
    )Amortization
    
    
    4,394
    
    
    
    4,469
    
    
    
    439Net periodic pension costs
    
    
    131,783
    
    
    
    102,542
    
    
    
    32,309
  2004
    
    2005
    
    2006Discount rate used in determining present values
    
    
    3.5
    %
    
    
    2.5%-3.75
    %
    
    
    2.5
    %Future salary increase rate
    
    
    3.0
    %
    
    
    3.0
    %
    
    
    3.0
    %Expected long-term rate of return on plan assets
    
    
    3.5
    %
    
    
    2.5%-2.75
    %
    
    
    2.5
    %
  Years ended December 31
    
    NT$0002007
    
    
    3,2912008
    
    
    8,4732009
    
    
    10,2562010
    
    
    6,0192011
    
    
    7,4242012-2016
    
    
    117,665
 The Company expects to contribute NT$34,453 thousand to the pension funds in 2007.
 F-25




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##### Table of Contents



18.
    
    SHAREHOLDERS EQUITYCommon Stocks
       Capital Surplus
   Retained Earnings Distribution and Dividends Policy
       Appropriation of Earnings
    
    Dividends Per ShareNT$000
    
    NT$Offset a deficit
    
    
    593,344
    
    
    
    Legal capital reserve
    
    
    144,051
    
    
    
    Remuneration to directors and supervisors
    
    
    25,929
    
    
    
    Employees profit sharing in cash
    
    
    92,639
    
    
    
    Employees profit sharing in stock
    
    
    92,639
    
    
    
    Cash dividends to common shareholders
    
    
    524,955
    
    
    
    0.18Stock dividends to common shareholders
    
    
    524,955
    
    
    
    0.18
  F-26




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##### Table of Contents



19.
    
    EMPLOYEE STOCK OPTION PLANSMXICMXIC has five employee stock option plans (2001 plan, 2002 plan, 2003 plan, 2004 plan and 2005 Plan) approved by
the R.O.C. Securities and Futures Bureau (SFB) to grant options up to 80,000,000 units, 170,000,000 units, 200,000,000
units, 200,000,000 units and 200,000,000 units, respectively. Each stock option may subscribe for one common stock share
by the delivery of new common stock of MXIC. The contractual term of the options is six years subsequent to the grant
dates and exercisable at certain percentages subsequent to the second anniversary of the grant date. The requisite service
period under these stock option plans is 4 years, which is the same as the vesting period. Based on the vesting schedule,
50% of the options granted vest two years after the date of grant, 25% of the options granted vest three years after the
date of grant, and the remaining 25% of the options granted vest four years after the date of grant. If employment is
terminated voluntarily by an employee or by the Company, any vested options must be exercised within 30 days from the
employment termination date. The options are granted at the exercise price equal to the higher of closing price of MXICs
common shares listed on the Taiwan Stock Exchange (TSE) or MXICs net asset value per common share on the grant date.
Exercise price is subject to adjustments for changes of capital structure in accordance with the plans.Information with respect to MXICs each stock option plan is as follows:
  2001 plan
    
    2002 plan
    
    2003 plan
    
    2004 planWeighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    ExerciseOutstanding
    
    Price
    
    Outstanding
    
    Prices
    
    Outstanding
    
    Prices
    
    Outstanding
    
    PriceStock
    
    (NT$/
    
    Stock
    
    (NT$/
    
    Stock
    
    (NT$/
    
    Stock
    
    (NT$/Year ended December 31, 2004
    
    Option
    
    Per Share)
    
    Option
    
    Per Share)
    
    Option
    
    Per Share)
    
    Option
    
    Per Share)Beginning balance
    
    
    880
    
    
    $
    19.34
    
    
    
    120,684
    
    
    $
    18.96
    
    
    
    168,736
    
    
    $
    13.31
    
    
    
    193,549
    
    
    $
    24.28Options granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,219
    
    
    
    8.17
    
    
    
    
    
    
    
    Options canceled
    
    
    (417
    )
    
    
    19.39
    
    
    
    (19,245
    )
    
    
    18.99
    
    
    
    (18,702
    )
    
    
    13.45
    
    
    
    (14,926
    )
    
    
    24.33Ending balance
    
    
    463
    
    
    
    19.29
    
    
    
    101,439
    
    
    
    18.96
    
    
    
    152,253
    
    
    
    13.42
    
    
    
    178,623
    
    
    
    24.28
  2001 plan
    
    2002 plan
    
    2003 plan
    
    2004 plan
    
    2005 planWeighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    ExerciseOutstanding
    
    Prices
    
    Outstanding
    
    Price
    
    Outstanding
    
    Prices
    
    Outstanding
    
    Prices
    
    Outstanding
    
    PriceYear ended
    
    Stock
    
    (NT$/
    
    Stock
    
    (NT$/
    
    Stock
    
    (NT$/
    
    Stock
    
    (NT$/
    
    Stock
    
    (NT$/December 31, 2005
    
    Option
    
    Per Share)
    
    Option
    
    Per Share)
    
    Option
    
    Per Share)
    
    Option
    
    Per Share)
    
    Option
    
    Per Share)Beginning balance
    
    
    463
    
    
    $
    19.29
    
    
    
    101,439
    
    
    $
    18.96
    
    
    
    152,253
    
    
    $
    13.42
    
    
    
    178,623
    
    
    $
    24.28
    
    
    
    
    
    
    $
    Options granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,601
    
    
    
    12.04
    
    
    
    199,309
    
    
    
    10.00Options canceled
    
    
    (134
    )
    
    
    19.34
    
    
    
    (8,201
    )
    
    
    18.95
    
    
    
    (11,234
    )
    
    
    13.53
    
    
    
    (16,279
    )
    
    
    23.22
    
    
    
    (3,277
    )
    
    
    10.00Ending balance
    
    
    329
    
    
    
    19.26
    
    
    
    93,238
    
    
    
    18.96
    
    
    
    141,019
    
    
    
    13.41
    
    
    
    167,945
    
    
    
    23.97
    
    
    
    196,032
    
    
    
    10.00
 F-27




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##### Table of Contents



2001 plan
    
    2002 plan
    
    2003 plan
    
    2004 plan
    
    2005 planWeighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    ExerciseOutstanding
    
    Prices
    
    Outstanding
    
    Price
    
    Outstanding
    
    Prices
    
    Outstanding
    
    Prices
    
    Outstanding
    
    PriceYear ended
    
    Stock
    
    (NT$/
    
    Stock
    
    (NT$/
    
    Stock
    
    (NT$/
    
    Stock
    
    (NT$/
    
    Stock
    
    (NT$/December 31, 2006
    
    Option
    
    Per Share)
    
    Option
    
    Per Share)
    
    Option
    
    Per Share)
    
    Option
    
    Per Share)
    
    Option
    
    Per Share)Beginning balance
    
    
    329
    
    
    $
    19.26
    
    
    
    93,238
    
    
    $
    18.96
    
    
    
    141,019
    
    
    $
    13.41
    
    
    
    167,945
    
    
    $
    23.97
    
    
    
    196,032
    
    
    $
    10.00Options granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    691
    
    
    
    9.80Options exercise
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (343
    )
    
    
    13.30
    
    
    
    (62
    )
    
    
    12.10
    
    
    
    
    
    
    
    Options canceled
    
    
    (139
    )
    
    
    19.36
    
    
    
    (17,232
    )
    
    
    18.98
    
    
    
    (21,734
    )
    
    
    13.40
    
    
    
    (34,776
    )
    
    
    23.54
    
    
    
    (35,179
    )
    
    
    10.00Ending balance
    
    
    190
    
    
    
    19.20
    
    
    
    76,006
    
    
    
    18.95
    
    
    
    118,942
    
    
    
    13.42
    
    
    
    133,107
    
    
    
    24.09
    
    
    
    161,544
    
    
    
    10.00
    Options Issued on or After January 1, 2004and Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    Remaining
    
    Average
    
    Number
    
    AverageExercise Price
    
    Outstanding
    
    Contractual
    
    Exercise Price
    
    Exercisable
    
    Exercise Price(NT$/Per Share)
    
    (Thousand)
    
    Life (in Years)
    
    (NT$/Per Share)
    
    (Thousand)
    
    (NT$/Per Share)$22.1
    
    
    348
    
    
    
    3.19
    
    
    $
    22.1
    
    
    
    203
    
    
    $
    22.120.9
    
    
    335
    
    
    
    3.24
    
    
    
    20.9
    
    
    
    196
    
    
    
    20.924.9
    
    
    121,403
    
    
    
    3.27
    
    
    
    24.9
    
    
    
    70,941
    
    
    
    24.924.2
    
    
    2,595
    
    
    
    3.32
    
    
    
    24.2
    
    
    
    1,512
    
    
    
    24.218.8
    
    
    1,375
    
    
    
    3.42
    
    
    
    18.8
    
    
    
    805
    
    
    
    18.815.8
    
    
    2,725
    
    
    
    3.61
    
    
    
    15.8
    
    
    
    1,595
    
    
    
    15.812.1
    
    
    2,399
    
    
    
    3.82
    
    
    
    12.1
    
    
    
    1,397
    
    
    
    12.112.1
    
    
    2,791
    
    
    
    4.08
    
    
    
    12.1
    
    
    
    1,626
    
    
    
    12.111.8
    
    
    500
    
    
    
    4.18
    
    
    
    11.8
    
    
    
    292
    
    
    
    11.810.0
    
    
    152,954
    
    
    
    4.60
    
    
    
    10.0
    
    
    
    89,325
    
    
    
    10.010.0
    
    
    5,794
    
    
    
    4.66
    
    
    
    10.0
    
    
    
    3,377
    
    
    
    10.010.0
    
    
    2,237
    
    
    
    4.82
    
    
    
    10.0
    
    
    
    1,300
    
    
    
    10.09.8
    
    
    559
    
    
    
    5.10
    
    
    
    9.8
    
    
    
    326
    
    
    
    9.8296,015
    
    
    
    
    
    
    
    
    
    
    
    172,895
  F-28




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##### Table of Contents



BMC
    Year ended December 31, 2004
    
    Year ended December 31, 2005
    
    Year ended December 31, 2006Number of
    
    Weighted-Average
    
    Number of
    
    Weighted-Average
    
    Number of
    
    Weighted-AverageOutstanding
    
    Exercise Prices
    
    Outstanding
    
    Exercise Prices
    
    Outstanding
    
    Exercise PricesStock Option
    
    (NT$/ Per Share)
    
    Stock Option
    
    (NT$/ Per Share)
    
    Stock Option
    
    (NT$/ Per Share)Beginning balance
    
    
    
    
    
    
    
    
    
    
    660
    
    
    $
    12.00
    
    
    
    1,714
    
    
    $
    10.77Options granted
    
    
    660
    
    
    $
    12.00
    
    
    
    1,054
    
    
    
    10.00
    
    
    
    
    
    
    
    Options canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( 1,411
    )
    
    
    10.75Ending balance
    
    
    660
    
    
    
    12.00
    
    
    
    1,714
    
    
    
    10.77
    
    
    
    303
    
    
    
    10.77
  Options Issued on or After January 1,2004 and Outstanding
    
    
    
    
    
    Options ExercisableWeighted-Average
    
    Weighted-
    
    
    
    
    
    Weighted-Range of
    
    Number of
    
    Remaining
    
    Average
    
    Number of
    
    AverageExercise
    
    Options
    
    Contractual
    
    Exercise
    
    Options
    
    ExercisePrice (NT$)
    
    (Thousands)
    
    Life (Years)
    
    Price (NT$)
    
    (Thousands)
    
    Price (NT$)$12
    
    
    130
    
    
    
    3.57
    
    
    $
    12
    
    
    
    130
    
    
    $
    12$10
    
    
    173
    
    
    
    4.94
    
    
    
    10
    
    
    
    173
    
    
    
    10303
    
    
    
    
    
    
    
    
    
    
    
    303
  F-29




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##### Table of Contents



Magic Pixel
    Year ended December 31, 2004
    
    Year ended December 31, 2005Number of
    
    Weighted-Average
    
    Number of
    
    Weighted-AverageOutstanding
    
    Exercise Prices
    
    Outstanding
    
    Exercise PricesStock Option
    
    (NT$/ Per Share)
    
    Stock Option
    
    (NT$/ Per Share)(Thousand)
    
    
    
    
    
    (Thousand)Beginning balance
    
    
    
    
    
    
    
    
    
    
    347
    
    
    $
    11Options granted
    
    
    347
    
    
    $
    11
    
    
    
    653
    
    
    
    11Options exercised
    
    
    
    
    
    
    
    
    
    
    (900
    )
    
    
    11Options canceled
    
    
    
    
    
    
    
    
    
    
    (100
    )
    
    
    11Ending balance
    
    
    347
    
    
    
    11
    
    
    
    
  Years Ended December 31MXIC
    
    2004
    
    
    2005
    
    
    2006Black-Scholes modelMethod:Assumptions:Risk-free interest rate
    
    
    1.55%~2.25
    %
    
    
    1.55%~2.25
    %
    
    
    1.55%~2.25
    %Expected life (in years)
    
    
    4.38
    
    
    
    4.38
    
    
    
    4.38Expected volatility
    
    
    52.60%~57.50
    %
    
    
    52.10%~57.50
    %
    
    
    51.16%~57.50
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Fair value per option (NT$/per unit)
    
    $
    6.59
    
    
    $
    2.55
    
    
    $
    1.96
 F-30




---



##### Table of Contents



Years Ended December 31BMC
    
    2004
    
    2005
    
    2006Black-Scholes modelMethod:Assumptions:Risk-free interest rate
    
    
    1.55%~2.10
    %
    
    
    1.55%~2.10
    %
    
    
    1.55%~2.10
    %Expected life (in years)
    
    
    4.38
    
    
    
    4.38
    
    
    
    4.38Expected volatility
    
    
    
    
    
    
    
    
    
    
    Expected dividend yield
    
    
    -%~4.88
    %
    
    
    -%~4.88
    %
    
    
    -%~4.88
    %Fair value per option (NT$/per unit)
    
    $
    1.88~$8.07
    
    
    $
    1.88~$8.07
    
    
    $
    1.88~$8.07
 Years Ended December 31Magic Pixel
    
    2004
    
    
    2005Black-Scholes modelMethod:Assumptions:Risk-free interest rate
    
    
    0.99%~1.15
    %
    
    
    0.99%~1.15
    %Expected life (in years)
    
    
    0.25
    
    
    
    0.25Expected volatility
    
    
    
    
    
    
    Expected dividend yield
    
    
    
    
    
    
    Fair value per option (NT$/per unit)
    
    
    
    
    
    
    
 Years Ended December 312004
    
    
    2005
    
    
    2006Net income (loss) attributable to
shareholders of the parent : NT$000Net income (loss) as reported
    
    $
    217,692
    
    
    $
    (7,027,189
    )
    
    $
    2,034,048Pro forma net income (loss)
    
    $
    (120,399
    )
    
    $
    (7,540,850
    )
    
    $
    1,680,806Consolidated earnings per share (EPS, NT$):Basic EPS as reported
    
    $
    0.08
    
    
    $
    (2.41
    )
    
    $
    0.70Pro forma basic EPS
    
    $
    (0.04
    )
    
    $
    (2.59
    )
    
    $
    0.58Diluted EPS as reported
    
    $
    0.08
    
    
    $
    (2.41
    )
    
    $
    0.70Pro forma diluted EPS
    
    $
    (0.04
    )
    
    $
    (2.59
    )
    
    $
    0.58
 F-31




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##### Table of Contents



20.
    
    TREASURY STOCK
 (Shares in Thousands)
 Beginning
    
    
    
    
    
    EndingPurpose of Purchase
    
    Shares
    
    Decrease
    
    SharesYear ended December 31, 2004Repurchase under share buyback plan
    
    
    40,000
    
    
    
    
    
    
    
    40,000Parent company stock held by subsidiary (Note)
    
    
    6,023
    
    
    
    
    
    
    
    6,02346,023
    
    
    
    
    
    
    
    46,023Year ended December 31, 2005Cancellation of shares
    
    
    40,000
    
    
    
    40,000
    
    
    
    Parent company stock held by subsidiary (Note)
    
    
    6,023
    
    
    
    
    
    
    
    6,02346,023
    
    
    
    40,000
    
    
    
    6,023Year ended December 31, 2006Parent company stock held by subsidiary (Note)
    
    
    6,023
    
    
    
    2,507
    
    
    
    3,516
   Shares
    
    
    OriginalMXIC
    
    (Thousand)
    
    
    Carrying Value
    
    
    Market ValueNT$000
    
    
    NT$000December 31, 2005Hui Ying
    
    
    6,023
    
    
    $
    142,365
    
    
    $
    27,036December 31, 2006Hui Ying
    
    
    3,516
    
    
    $
    142,365
    
    
    $
    49,573
 F-32




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##### Table of Contents



Under the regulation of the SFB, a corporation should acquire no more than 10% of all its
issued shares. The corporation should not pledge treasury shares and should not exercise
shareholders rights on these shares before their transfer. In addition, the aggregate
reacquisition cost should not exceed the combined balance of the retained earnings and certain
capital surpluses. However, the subsidiaries holding the Companys issued shares retain
shareholders rights and privileges on these shares, except that, starting on June 22, 2005,
under the revised Company Law, the holders, majority-owned subsidiaries holding the Companys
shares are no longer entitled to the right to vote.21.
    
    INCOME TAX
 a.
    
    A reconciliation of income tax expense based on income before income tax at statutory
rate and income tax currently payable was as follows:
 Years Ended December 312004
    
    
    2005
    
    
    2006NT$000
    
    
    NT$000
    
    
    NT$000Income tax expense based on income (loss) before income tax at
statutory rate
    
    $
    89,229
    
    
    $
    (1,689,805
    )
    
    $
    428,542Tax effect of the following:Permanent differences
    
    
    43,884
    
    
    
    (118,687
    )
    
    
    74,229Temporary differences
    
    
    57,373
    
    
    
    1,171,494
    
    
    
    208,656Operating loss carry forwards
    
    
    (155,680
    )
    
    
    
    
    
    
    (812,818
    )Investment tax credits
    
    
    
    
    
    
    
    
    
    
    (3,134
    )AMT
    
    
    
    
    
    
    
    
    
    
    1,122Income tax currently payable
    
    $
    34,806
    
    
    $
    (636,998
    )
    
    $
    (103,403
    )b. Income tax expense consisted of the following:Income tax currently payable
    
    $
    34,806
    
    
    $
    37,741
    
    
    $
    9,144Adjustment for prior year income tax
    
    
    (24,372
    )
    
    
    72
    
    
    
    (68,024
    )Net change in deferred income tax assets:Operating loss carry forwards
    
    
    165,890
    
    
    
    (896,634
    )
    
    
    927,532Investment tax credits
    
    
    (294,120
    )
    
    
    569,048
    
    
    
    305,348Temporary differences
    
    
    (1,552,862
    )
    
    
    (770,465
    )
    
    
    214,289Net change in valuation allowance
    
    
    1,705,439
    
    
    
    1,275,652
    
    
    
    (1,384,620
    )Income tax expense
    
    $
    34,781
    
    
    $
    215,414
    
    
    $
    3,669
 F-33




---



##### Table of Contents



c.
    
    Net deferred income tax assets consisted of the following:
 December 312005
    
    
    2006NT$000
    
    
    NT$000Current deferred income tax assetsLoss carryforwards
    
    $
    
    
    
    $
    714,996Investment tax credits
    
    
    1,361,171
    
    
    
    588,746Temporary differences
    
    
    1,293,780
    
    
    
    849,0532,654,951
    
    
    
    2,152,795Valuation allowance
    
    
    (2,635,457
    )
    
    
    (2,075,211
    )$
    19,494
    
    
    $
    77,584Non-current deferred income tax assetsLoss carryforwards
    
    $
    4,441,098
    
    
    $
    2,762,543Investment tax credits
    
    
    1,642,420
    
    
    
    2,038,307Temporary differences
    
    
    1,775,056
    
    
    
    1,982,8447,858,574
    
    
    
    6,783,694Valuation allowance
    
    
    (6,179,127
    )
    
    
    (5,236,565
    )$
    1,679,447
    
    
    $
    1,547,129
 d.
    
    The Integrated Income Tax information
 December 312005
    
    
    2006NT$000
    
    
    NT$000The balance of imputation tax credits account
    
    $
    118,259
    
    
    $
    127,004
     F-34




---



##### Table of Contents



e.
    
    As of December 31, 2006, the Companys tax credits and loss carryforwards were as follows:
 Total
    
    
    RemainingRegulatory Basis of
    
    
    
    Creditable
    
    
    Creditable
    
    
    ExpiryTax Credits
    
    Items
    
    Amounts
    
    
    Amounts
    
    
    YearNT$000
    
    
    NT$000Income Tax Law
    
    Loss carryforwards
    
    $
    1,508,170
    
    
    $
    714,996
    
    
    
    20072,122,699
    
    
    
    2,122,699
    
    
    
    200860,997
    
    
    
    60,997
    
    
    
    2009536,731
    
    
    
    536,731
    
    
    
    201042,116
    
    
    
    42,116
    
    
    
    2011$
    4,270,713
    
    
    $
    3,477,539Statute for Upgrading
    
    Purchase of machinery
    
    $
    529,731
    
    
    $
    
    
    
    
    2006Industries
    
    equipment
    
    
    56,386
    
    
    
    56,386
    
    
    
    2007223,209
    
    
    
    223,209
    
    
    
    200823,496
    
    
    
    23,496
    
    
    
    200979,767
    
    
    
    79,767
    
    
    
    2010$
    912,589
    
    
    $
    382,858Statute for Upgrading
    
    Research and development
    
    $
    829,046
    
    
    $
    
    
    
    
    2006Industries
    
    expenditures
    
    
    531,996
    
    
    
    531,996
    
    
    
    2007328,087
    
    
    
    328,087
    
    
    
    2008996,721
    
    
    
    996,721
    
    
    
    2009386,539
    
    
    
    386,539
    
    
    
    2010$
    3,072,389
    
    
    $
    2,243,343Statute for Upgrading
    
    Stockholders investment
    
    $
    580
    
    
    $
    
    
    
    
    2006Industries
    
    expenditure
    
    
    364
    
    
    
    364
    
    
    
    2007488
    
    
    
    488
    
    
    
    2008$
    1,432
    
    
    $
    852
  F-35




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##### Table of Contents



22. CONSOLIDATED EARNINGS PER SHARE
 Amounts (Numerator)
    
    
    Number of
    
    
    EPS (NT$)Before
    
    
    After
    
    
    Shares
    
    
    Before
    
    
    AfterIncome Tax
    
    
    Income Tax
    
    
    (Denominator)
    
    
    Income
    
    
    IncomeNT$000
    
    
    NT$000
    
    
    (in Thousands)
    
    
    Tax
    
    
    TaxYear ended December 31, 2004Consolidated basic EPSIncome available to common shareholders of the
parent
    
    $
    217,692
    
    
    $
    217,692
    
    
    
    2,822,038
    
    
    $
    0.08
    
    
    $
    0.08Consolidated diluted EPSIncome available to common shareholders of the
parent
    
    $
    217,692
    
    
    $
    217,692
    
    
    
    2,840,938
    
    
    $
    0.08
    
    
    $
    0.08Year ended December 31, 2005Consolidated basic and diluted EPSLoss available to common shareholders of the parent
    
    $
    (6,829,227
    )
    
    $
    (7,027,189
    )
    
    
    2,912,306
    
    
    $
    (2.34
    )
    
    $
    (2.41
    )Year ended December 31, 2006Consolidated basic and diluted EPSIncome available to common shareholders of the
parent
    
    $
    2,029,620
    
    
    $
    2,034,048
    
    
    
    2,912,409
    
    
    $
    0.70
    
    
    $
    0.70
  F-36




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##### Table of Contents



23. RELATED PARTY TRANSACTIONS
   Related Parties
    
    RelationshipProcomm Inc. (Procomm)
    
    Equity investeeTower Semiconductor Ltd. (Tower)
    
    MXBVI served as its board of directorArdentec Corporation (Ardentec)
    
    MXIC served as its board of directorMacronix Education Foundation (MXIC Education)
    
    Same chairman with MXICMegaChips Corporation (MegaChips)
    
    Its subsidiary served as the Companys Board of DirectorMegaChips LSI Solutions Inc. (MegaChips LSI)
    
    Subsidiary of MegaChipsMegaChips (Hong Kong) Ltd. (MegaChips HK)
    
    Subsidiary of MegaChips LSIMegaChips LSI Solutions Inc. Taiwan Branch
(MegaChips LSI Taiwan Branch)
    
    Taiwan Branch of MegaChipsMagic Pixel
    
    Equity investee (Magic Pixel was a
subsidiary from January 2005 to
December 2006)BMC
    
    Equity investee (BMC was a equity
investee before September 2005)
  1)
    
    Sales to related parties were as follows:
 Years Ended December 312004
    
    
    2005
    
    
    2006Amount
    
    
    % of
    
    
    Amount
    
    
    % of
    
    
    Amount
    
    
    % ofRelated Parties
    
    NT$000
    
    
    Net Sales
    
    
    NT$000
    
    
    Net Sales
    
    
    NT$000
    
    
    Net SalesMegaChips LSI
    
    $
    
    
    
    
    
    
    
    $
    5,620,371
    
    
    
    30
    
    
    $
    8,087,808
    
    
    
    34MegaChips LSI Taiwan Branch
    
    
    
    
    
    
    
    
    
    
    165,617
    
    
    
    1
    
    
    
    277,600
    
    
    
    1MegaChips HK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,638
    
    
    
    1MegaChips
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112,853
    
    
    
    1BMC
    
    
    239,748
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Magic Pixel
    
    
    175,894
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Others
    
    
    30,178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    $
    445,820
    
    
    
    2
    
    
    $
    5,785,988
    
    
    
    31
    
    
    $
    8,628,942
    
    
    
    37
   2)
    
    Purchases
 Years Ended December 312004
    
    
    2005
    
    
    2006% of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    % ofAmount
    
    
    Net
    
    
    Amount
    
    
    % of
    
    
    Amount
    
    
    NetRelated Parties
    
    NT$000
    
    
    Purchases
    
    
    NT$000
    
    
    Net Purchases
    
    
    NT$000
    
    
    PurchasesTower
    
    $
    19,959
    
    
    
    
    
    
    $
    188,562
    
    
    
    3
    
    
    $
    507,370
    
    
    
    8MegaChips LSI Taiwan Branch
    
    
    
    
    
    
    
    
    
    
    53,380
    
    
    
    1
    
    
    
    2,560
    
    
    
    Other
    
    
    1,570
    
    
    
    
    
    
    
    4,781
    
    
    
    
    
    
    
    1,404
    
    
    
    $
    21,529
    
    
    
    
    
    
    $
    246,723
    
    
    
    4
    
    
    $
    511,334
    
    
    
    8
  F-37




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##### Table of Contents



Years Ended December 312004
    
    
    2005
    
    
    2006Amount
    
    
    
    
    
    
    Amount
    
    
    
    
    
    
    AmountRelated Parties
    
    NT$000
    
    
    %
    
    
    NT$000
    
    
    %
    
    
    NT$000
    
    
    %Ardentec
    
    $
    260,199
    
    
    
    1
    
    
    $
    218,274
    
    
    
    1
    
    
    $
    74,688
    
    
    
    
  Years Ended December 312004
    
    
    2005
    
    
    2006Amount
    
    
    
    
    
    
    Amount
    
    
    
    
    
    
    AmountRelated Parties
    
    NT$000
    
    
    %
    
    
    NT$000
    
    
    %
    
    
    NT$000
    
    
    %Tower
    
    $
    213
    
    
    
    
    
    
    $
    43,832
    
    
    
    1
    
    
    $
    78,053
    
    
    
    2Procomm
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,375
    
    
    
    MXIC Education
    
    
    16,300
    
    
    
    
    
    
    
    10,166
    
    
    
    
    
    
    
    9,000
    
    
    
    Others
    
    
    
    
    
    
    
    
    
    
    5,295
    
    
    
    
    
    
    
    10,813
    
    
    
    $
    16,513
    
    
    
    
    
    
    $
    59,293
    
    
    
    1
    
    
    $
    113,241
    
    
    
    2
  December 312005
    
    
    2006Amount
    
    
    
    
    
    
    AmountRelated Parties
    
    NT$000
    
    
    %
    
    
    NT$000
    
    
    %MegaChips LSI
    
    $
    570,814
    
    
    
    82
    
    
    $
    712,837
    
    
    
    85Tower
    
    
    4,440
    
    
    
    1
    
    
    
    96,425
    
    
    
    11MegaChips HK
    
    
    
    
    
    
    
    
    
    
    65,953
    
    
    
    8Magic Pixel
    
    
    
    
    
    
    
    
    
    
    59,653
    
    
    
    7MegaChips LSI Taiwan Branch
    
    
    126,876
    
    
    
    18
    
    
    
    
    
    
    
    Procomm
    
    
    17,722
    
    
    
    3
    
    
    
    
    
    
    
    Others
    
    
    3,641
    
    
    
    
    
    
    
    21,496
    
    
    
    3723,493
    
    
    
    104
    
    
    
    956,364
    
    
    
    114Less: Allowance for doubtful accounts
    
    
    24,830
    
    
    
    4
    
    
    
    119,955
    
    
    
    14Net
    
    $
    698,663
    
    
    
    100
    
    
    $
    836,409
    
    
    
    100
 F-38




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##### Table of Contents



December 312005
    
    
    2006Amount
    
    
    
    
    
    
    AmountRelated Parties
    
    NT$000
    
    
    %
    
    
    NT$000
    
    
    %MegaChips LSI
    
    $
    49,911
    
    
    
    28
    
    
    $
    2,244
    
    
    
    1Less: Allowance for doubtful accounts
    
    
    11,532
    
    
    
    6
    
    
    
    269
    
    
    
    Net
    
    $
    38,379
    
    
    
    22
    
    
    $
    1,975
    
    
    
    1
   December 312005
    
    
    2006Amount
    
    
    
    
    
    
    AmountRelated Parties
    
    NT$000
    
    
    %
    
    
    NT$000
    
    
    %Tower
    
    $
    56,701
    
    
    
    71
    
    
    $
    64,531
    
    
    
    73Magic Pixel
    
    
    
    
    
    
    
    
    
    
    18,797
    
    
    
    21Ardentec
    
    
    16,298
    
    
    
    21
    
    
    
    5,274
    
    
    
    6Others
    
    
    6,414
    
    
    
    8
    
    
    
    
    
    
    
    Total
    
    $
    79,413
    
    
    
    100
    
    
    $
    88,602
    
    
    
    100
 24. PLEDGED OR MORTGAGED ASSETS
  December 312005
    
    
    2006NT$000
    
    
    NT$000Pledged time deposits  current (classified as restricted assets-current)
    
    $
    1,928,913
    
    
    $
    1,281,360Property, plant and equipment  net
    
    
    6,656,690
    
    
    
    1,898,334Pledged time deposits  non-current (classified as other assets  other)
    
    
    
    
    
    
    36,075Assets to be disposed of by sale
    
    
    4,939,213
    
    
    
    $
    13,524,816
    
    
    $
    3,215,769
 F-39




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##### Table of Contents



25. SIGNIFICANT COMMITMENTS AND CONTINGENCIES
  a.
    
    The MXICs significant construction and machinery contracts totaled approximately
NT$2,935,745 thousand. As of December 31, 2006, MXIC has paid NT$557,963 thousand pursuant
to these contracts. Future irrevocable payment in total is NT$2,377,782 thousand.b.
    
    As of December 31, 2006, amounts available under unused letters of credit were
approximately NT$265,053 thousand.c.
    
    The land on which MXIC is located was leased from the Hsinchu Science-Based Industrial
Park Administration under renewable operating lease agreements. The lease term is from
1990 to 2020. In addition, the offices on which MXA and MXE are located were leased by
operating lease. These leases will expire in 2012 and 2013.
 
 Future minimum annual rentals under the operating leases are as follows:
 Year
    
    AmountNT$0002007
    
    $
    63,1442008
    
    
    63,7212009
    
    
    64,3372010
    
    
    55,6592011
    
    
    53,1912012-2020
    
    
    126,563$
    426,615
 Rental expenses under the operating lease were NT$73,221 thousand, NT$78,627 thousand and NT$62,909 thousand for the years ended December 31, 2004, 2005 and 2006, respectively.d.
    
    Certain debt agreements, entered into by the Company with several banks including
Taishin Bank, require the Companys debt to equity ratio should be under 1.2, and the
Companys current ratio should be greater than 1.0, otherwise the loan will be due
immediately. The medium-term loan with one bank, requires MXICs debt ratio should be
under 1.0 and the net asset value should be greater than NT$25,000,000 thousand as
determined by the semi-annual and annual audited financial statements, otherwise the bank
will re-examine MXICs credit line. The medium-term loan with one of the banks, requires
MXICs debt ratio to be under 1.2 on a semi-annual and annual basis as determined by the
audited financial statements, otherwise the loan will be due immediately. As of December
31, 2006, MXIC is in compliance with the foregoing covenants.e.
    
    MXIC and Company C entered into the product license agreement. The total license fee
was US$2,907 thousand. As of December 31, 2006, the Company has paid the total license
fee in full pursuant to the agreement. Future running royalties will be charged based on
percentage of net sales from licensed products as determined under the aforementioned
agreement. For the year ended December 31, 2006, no royalty was paid to Company C as the
licensed products had not been commercialized.f.
    
    MXIC entered into a technology agreement with D Company. As of December 31, 2006, 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, MXIC prepaid US$24,000 thousand of
royalties, the remaining royalties as of December 31, 2006 were NT$612,521 thousand, of
which NT$118,651 thousand was recorded under other current assets, while NT$493,870 thousand
was under deferred charges.
 F-40




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##### Table of Contents



g.
    
    In 2004, MXIC entered into two addendums to the technology agreement stated in (f)
above with D Company. The fixed license fee for the addendums to the technology agreement
totaled US$7,500 thousand. As of December 31, 2006, US$1,250 thousand has been paid.
Running royalties, charged based on a percentage of net sales from licensed products as
determined under the addendums, were not paid for the year ended December 31, 2006 and 2005
as licensed products had not been commercialized.h.
    
    MXIC entered into a technology development agreement and a foundry service agreement
with E Company in June 2006, the term of the agreement is five and seven years,
respectively, from the technology development commencement date (but no later than July
2007). MXIC paid E Company NT$200,000 thousand in April 2007.i.
    
    According to the Share Purchase Agreement and Purchase Obligation Agreement between
Tower and the Company, from 2001 to 2004, a portion of the purchase price was allocated to
prepaid wafer credit account consisting of a credit balance in favor of the Company. The
balance of prepaid account is increased if the Companys contracted purchase price of
Towers shares exceeds the market price. Such prepayments can be used for future purchases
of wafers, additional shares of Tower and as an offset to royalty payments. According to
the 2003 and 2006 Amendments, the Company agreed not to use the prepaid wafer credits for
future purchase of wafers from Tower (unconverted wafer credit) during the period prior to
December 31, 2009. The unconverted wafer credits are classified as part of accounts
receivable and are payable by Tower on or prior to December 31, 2009 with interest payable
at agreed interest rate at each quarter. As of December 31, 2006, the Company owned
approximately 8.71% of Towers shares with a carrying amount of
NT$460,825 thousand and the
balance of converted wafer credit was NT$96,425 thousand (US$2,958 thousand) and the
remaining prepaid wafer credit was NT$364,400 thousand (US$11,180 thousand) (classified as
other current assets) with a full allowance and an impairment loss provided for each
account.j.
    
    On March 7, 2006, Spansion, Inc. filed an action against MXIC and MXA in the U.S.
District Court for the Northern District of California. The original complaint asserted
causes of action for false advertising, trademark dilution and unfair competition. On May
19, 2006, Spansion filed a First Amended Complaint alleging an additional claim for
copyright infringement. All claims asserted by Spansion arose out of the comparative
advertising and marketing of the Macronix NBitTM flash memory chips. On June 5,
2006, MXIC and MXA filed answers to the First Amended Complaint denying the allegations of
the First Amended Complaint and asserting a number of affirmative defenses. A case
management conference was held on June 13, 2006, and the trial date was set for June 18,
2007. On March 9, 2007, MXIC and MXA and Spansion agreed to settle the present lawsuit and
filed the stipulation of dismissal with prejudice. On March 30,
2007, the Court ordered that the present lawsuit be dismissed with
prejudice, and the file closed.
 
 26. DISCLOSURES FOR FINANCIAL INSTRUMENTS
  December 312005
    
    2006Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair ValueNT$000
    
    NT$000
    
    NT$000
    
    NT$000Nonderivative financial instrumentsAssetsAvailable-for-sale financial
Assets (including current
portion)
    
    $
    869,703
    
    
    $
    2,140,059
    
    
    $
    2,221,590
    
    
    $
    2,221,590Investments accounted for using
equity method (including credit
balance of long-term
investment)
    
    
    (29,838
    )
    
    
    
    
    
    
    108,511
    
    
    
    Financial assets at fair value
through profit or loss
    
    
    
    
    
    
    
    
    
    
    37,484
    
    
    
    37,484Financial assets carried at cost
    
    
    324,200
    
    
    
    
    
    
    
    298,690
    
    
    
    LiabilitiesBonds payable (including current
portions)
    
    
    3,000,000
    
    
    
    3,038,616
    
    
    
    
    
    
    
    Long-term bank loans (including
current portion)
    
    
    7,413,038
    
    
    
    7,413,038
    
    
    
    2,614,743
    
    
    
    2,641,743
 F-41




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##### Table of Contents



b.
    
    Methods and assumptions for the fair values of financial instruments
 1)
    
    The above financial instruments do not include cash and cash equivalents, notes
and accounts receivable, other receivables, short-term bank loans, notes and accounts
payable. The carrying amounts of aforementioned instruments reported in the balance
sheets approximate their fair values.2)
    
    Fair values of financial assets at fair value through profit or loss were based
on their quoted market price.3)
    
    Fair value of available-for-sale financial assets were based on their quoted
market prices. The government bonds under resell agreement were determined using
valuation techniques to estimate the fair values.
 4)
    
    The prices of equity-method investments and financial assets carried at cost are not
immediately available, their fair value are determined using valuation technique
incorporating estimates and assumptions that are consistent with prevailing market
cautions.
 5)
    
    Fair value of long-term bank loans is estimated using discounted cash flow
analysis, based on the Companys current incremental borrowing rates for borrowings with
similar types (similar maturity dates). The fair value of long-term bank loans with
floating interest rates is equivalent to their carrying value. Fair value of
convertible bonds payable is based on quoted market prices, others are determined using
the present value of forecasted cash flows.
 c.
    
    As of December 31, 2005 and 2006, financial assets (liabilities) exposed to fair value
interest rate risk and cash flow interest rate risks were as follows:
 December 312005
    
    2006NT$000
    
    NT$000Fair value interest rate riskFinancial assets
    
    $
    5,936,208
    
    
    $
    9,972,634Financial liabilities
    
    
    (3,000,000
    )
    
    
    Cash flow interest rate riskFinancial assets
    
    
    7,124,907
    
    
    
    3,869,442Financial liabilities
    
    
    (9,306,792
    )
    
    
    (3,947,650
    )
 d.
    
    Interest income (expenses), for the years ended December 31, 2005 and 2006, arising
from the financial assets (liabilities), excluding those at fair value through profit and
loss, were as follows:
 Years Ended December 312005
    
    2006NT$000
    
    NT$000Total interest income
    
    $
    99,860
    
    
    $
    160,082Total interest expenses (Including capitalized amount)
    
    
    458,005
    
    
    
    327,837
 e.
    
    The Company entered into derivative contracts for the years ended December 31, 2004,
2005 and 2006 to hedge its exposures to fluctuations of exchange rates for its
foreign-currency transactions. The strategy is to hedge most of the market price or cash
flow risks.The net exchange gains (losses) from financial instruments held for trading for the years
ended December 31, 2004, 2005 and 2006 are NT$(13,442) thousand, NT$9,061 thousand and
NT$2,413 thousand, respectively.f.
    
    Financial risks
 1)
    
    Market price risk. The financial instruments held by the Company are exposed to
interest rate, foreign exchange rate and price risks.2)
    
    Credit risk. Credit risk represents the positive net settlement amount of those
contracts with positive fair value on the balance sheet date. The positive net
settlement amount represents the loss incurred by the Company if the counter-parties
breached the contracts. The banks, which are the counter-parties to the foregoing
derivative financial instruments, are reputable financial institutions. Management
believes its exposure related to the potential default by those counter-parties is low.3)
    
    Liquidity. Investment in financial assets carried at cost do not have an active
market, thus, the liquidity risk of those investment is material. The Company has
sufficient working capital to meet the above cash demand.4)
    
    The cash flow risk of interest rate. The Company is exposed to the long-term
bank loans with floating interest rate.
 F-42




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##### Table of Contents



27. SEGMENT FINANCIAL INFORMATION
 a.
    
    Industry financial information:The Company operates principally as a designer, manufacturer and supplier of integrated
circuits and memory chips. The Company is also engaged in design, research and development,
consultation, and trade of relevant products. The Companys chief operating decision maker is
the Chief Executive Officer, who reviews consolidated results of manufacturing operations
when making decisions about allocating resources and assessing performance of the Company.
The Company believes it operates in one segment, and all financial segment information can be
found in the consolidated financial statements.
 b.
    
    Geographic information:
 Adjustments andAsia and Others
    
    
    Taiwan
    
    
    Elimination
    
    
    ConsolidatedNT$000
    
    
    NT$000
    
    
    NT$000
    
    
    NT$0002004Sales to other than consolidated
entities
    
    $
    4,894,306
    
    
    $
    18,485,417
    
    
    $
    
    
    
    $
    23,379,723Sales among consolidated
entities
    
    
    13,793
    
    
    
    4,515,956
    
    
    
    (4,529,749
    )
    
    
    Total sales
    
    $
    4,908,099
    
    
    $
    23,001,373
    
    
    $
    (4,529,749
    )
    
    $
    23,379,723Income (loss) from operations
    
    $
    115,174
    
    
    $
    (488,239
    )
    
    $
    24,377
    
    
    $
    (348,688
    )Non-operating income and
gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,605,606Non-operating expenses and
losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,009,778
    )Income before income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    247,140Identifiable assets
    
    $
    1,399,242
    
    
    $
    34,752,637
    
    
    $
    (434,345
    )
    
    $
    35,717,534Available-for-sale financial
assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    918,040Long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,620,465General assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,139,637Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54,395,676
 Adjustments andAsia and Others
    
    
    Taiwan
    
    
    Elimination
    
    
    ConsolidatedNT$000
    
    
    NT$000
    
    
    NT$000
    
    
    NT$0002005Sales to other than consolidated
entities
    
    $
    3,467,871
    
    
    $
    15,440,265
    
    
    $
    
    
    
    $
    18,908,136Sales among consolidated
entities
    
    
    
    
    
    
    3,417,261
    
    
    
    (3,417,261
    )
    
    
    Total sales
    
    $
    3,467,871
    
    
    $
    18,857,526
    
    
    $
    (3,417,261
    )
    
    $
    18,908,136Income (loss) from operations
    
    $
    3,264
    
    
    $
    (4,987,306
    )
    
    $
    109,483
    
    
    $
    (4,874,559
    )Non-operating income and
gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,206,003Non-operating expenses and
losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,213,566
    )Loss before income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (6,882,122
    )Identifiable assets
    
    $
    1,354,511
    
    
    $
    21,877,133
    
    
    $
    (548,725
    )
    
    $
    22,682,919Long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,226,753General assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,694,747Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    45,604,419
 F-43




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##### Table of Contents



Adjustments andAsia and Others
    
    
    Taiwan
    
    
    Elimination
    
    
    ConsolidatedNT$000
    
    
    NT$000
    
    
    NT$000
    
    
    NT$0002006Sales to other than consolidated
entities
    
    $
    3,042,355
    
    
    $
    20,470,881
    
    
    $
    
    
    
    $
    23,513,236Sales among consolidated
entities
    
    
    
    
    
    
    3,236,326
    
    
    
    (3,236,326
    )
    
    
    Total sales
    
    $
    3,042,355
    
    
    $
    23,707,207
    
    
    $
    (3,236,326
    )
    
    $
    23,513,236Income (loss) from operations
    
    $
    (7,100
    )
    
    $
    1,774,000
    
    
    $
    (107,808
    )
    
    $
    1,874,708Non-operating income and
gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    706,834Non-operating expenses and
losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (594,464
    )Income before income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,987,078Identifiable assets
    
    $
    671,179
    
    
    $
    20,932,138
    
    
    $
    (446,451
    )
    
    $
    21,156,866Available-for-sale financial
assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    788,093Long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,909,653General assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,353,667Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    40,208,279
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##### Table of Contents



c.
    
    Net sales by areas:
 Years Ended December 31Area
    
    2004
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000Taiwan
    
    
    7,838,194
    
    
    
    5,607,298
    
    
    
    7,408,561Japan
    
    
    8,363,806
    
    
    
    7,706,521
    
    
    
    9,906,848Singapore, Hong Kong and South
Korea
    
    
    5,119,396
    
    
    
    4,076,395
    
    
    
    4,611,123United States
    
    
    980,911
    
    
    
    629,235
    
    
    
    329,125Europe
    
    
    1,077,416
    
    
    
    888,687
    
    
    
    1,257,579Total
    
    
    23,379,723
    
    
    
    18,908,136
    
    
    
    23,513,236
 The net sales by areas information is based on the customers bill-to location.
  Years Ended December 312004
    
    
    2005
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %NT$000
    
    
    
    
    
    
    NT$000
    
    
    
    
    
    
    NT$000Nintendo
    
    $
    5,239,963
    
    
    
    22
    
    
    $
    5,511,176
    
    
    
    29
    
    
    $
    8,023,750
    
    
    
    34
    Years Ended December 312004
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000ROM
    
    
    8,372,758
    
    
    
    8,712,060
    
    
    
    10,183,280Flash
    
    
    10,714,857
    
    
    
    6,870,378
    
    
    
    8,461,904SMS*
    
    
    1,732,539
    
    
    
    1,661,678
    
    
    
    2,576,270SLC**
    
    
    1,786,711
    
    
    
    1,191,553
    
    
    
    1,491,273EPROM
    
    
    162,573
    
    
    
    16,883
    
    
    
    14,203Others
    
    
    610,285
    
    
    
    455,584
    
    
    
    786,306Total net sales
    
    
    23,379,723
    
    
    
    18,908,136
    
    
    
    23,513,236
 
 *
    
    SMS (Strategic Manufacturing Service) refers to value added service of memory and wafer manufacturing to strategic alliance.**
    
    SLC (Systematic Logic Chip) refers to Logic and Core SOC products. F-45




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28.
    
    Summary of Significant Differences between
Accounting Principles Followed by the
Company and Accounting Principles
Generally Accepted in the United States of
AmericaThe accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the Republic of China (R.O.C. GAAP), which differ
in the following respects from accounting principles generally
accepted in the United States of America (U.S. GAAP):a.
    
    Reclassification of time depositsUnder R.O.C. GAAP, cash and cash equivalents include time deposits
regardless of original maturity. Under U.S. GAAP, cash
equivalents are short-term, highly liquid investments that are
readily convertible to cash with original maturities of 3 months
or less. Therefore, time deposits with original maturities of
more than 3 months would not be considered cash and cash
equivalents under U.S. GAAP. As of December 31, 2005 and 2006,
time deposits with original maturities of more than 3 months
amounted to NT$1,520 million and NT$1,141 million,
respectively, and were classified as short-term investment.b.
    
    Marketable securitiesUnder R.O.C. GAAP, prior to January 1, 2006, marketable
securities were carried at the lower of aggregate cost or market
value, and debt securities were carried at cost, with only
unrealized losses recognized. Effective January 1, 2006, the
Company adopted R.O.C. SFAS No. 34, Financial Instruments:
Recognition and Measurement, and No. 36, Financial Instruments:
Disclosure and Presentation. Financial instrument including debt
securities and equity securities are categorized as financial
assets or liabilities at fair value through profit or loss
(FVTPL), available-for-sale (AFS) or held-to-maturity (HTM)
securities. FVTPL has two sub-categories, financial assets
designated on initial recognition as one to be measured at fair
value, and those that are classified as held for trading, which
are also measured at fair value with fair value changes
recognized in profit and loss. Except for financial assets
designated on initial recognition as one to be measured at fair
value, these classifications are similar to those required by
U.S. GAAP Statement of Financial Accounting Standard (U.S. SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity
Securities.Under U.S. SFAS No.115, debt and equity securities that have
readily determinable fair values are classified as either trading
or available-for-sale. Debt securities that the Company has the
positive intent and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost. Debt and equity
securities that are bought and traded for short-term profit are
classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held-to-maturity or trading are
classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders equity; however,
unrealized losses relating to declines in fair value deemed to be
other-than-temporary are recorded in earnings for both
available-for-sales and held- to-maturity securities. The Company
did not have any investments classified as trading or
held-to-maturity securities during the periods presented.For investment in foreign public-traded convertible bonds classified
as financial assets designated at fair value through profit or loss
under R.O.C. GAAP, it is accounted for as a hybrid financial
instrument and remeasured at fair value at the balance sheet date
and any gain or loss is charged to income under U.S. SFAS No.155,
Accounting for Certain Hybrid Financial Instruments  An Amendment
of SFAS No.133 and 140.Upon adoption of R.O.C. SFAS No. 34 and No. 36, the Company adjusted
the carrying value of the marketable securities categorized as
available-for-sale, which were carried at the lower of aggregate
cost or market with unrealized losses included in earnings, to fair
market value on January 1, 2006, therefore unrealized gains and
losses included in shareholders equity associated with
available-for-sale marketable securities acquired prior to January
1, 2006 under R.O.C. GAAP would be different from that under U.S.
GAAP.c.
    
    Equity-method investeesThe Companys proportionate share of the income (loss) from an
equity-method investee may differ if the equity-method investees
net income (loss) under R.O.C. GAAP differs from that under U.S.
GAAP. Such differences between R.O.C. GAAP and U.S. GAAP would
result in adjustments to investments accounted for using equity
method and the equity in earnings (losses) of equity method
investee recorded in net income.d.
    
    Presentation of minority interestsUnder R.O.C. GAAP SFAS No. 7, Consolidated Financial Statements, minority interests
are recorded as a component of total equity, and accordingly, profit or loss for the period does not include
an adjustment for profit or loss for the period attributable to minority interests.Under U.S. GAAP, minority interests are reported outside of shareholders equity and minority interest in the consolidated
statement of income is an adjustment to U.S. GAAP net income or loss.
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e.
    
    Business combinationUnder R.O.C. SFAS No. 5, Accounting for Equity Investments,
when an investor purchased newly issued shares from an investee
such that its holding interest on the investee increases after the
purchase, the investor shall record the difference between net
assets acquired and consideration paid as an adjustment to capital
surplus or retained earnings. When allocating net assets acquired,
R.O.C. GAAP did not provide guidance over recognition of
intangible assets.Under U.S. SFAS No. 141, Business Combinations (U.S. SFAS No.
141), such newly acquired shares which increase the investors
holding interest percentage is considered a step acquisition which
requires a purchase price allocation for each individual
acquisition. Goodwill arises when purchase consideration exceeds
net assets acquired. In addition, U.S. GAAP requires that
intangible assets be recorded apart from goodwill if they meet one
of the criteria established in U.S. SFAS No. 141 (i.e., either the
contractual-legal criterion or the separability criterion).In September 2005, the Company purchased additional shares from
its equity investee, BMC, and increased its holding interest on
BMC from 30.08% to 54.77%. The transaction leads to an adjustment
to capital surplus and retained earnings of NT$147,894 thousand
under R.O.C. GAAP.Under U.S. GAAP, the Company recognized the difference between the
purchase price and the fair value of the assets acquired,
including identifiable assets, and liabilities assumed of BMC as
goodwill. The Companys management is responsible for the
determination of the fair value of the assets acquired, including
identifiable intangible assets, and liabilities assumed of BMC. In
determining such fair values, management considered a number of
factors, including valuation reports by third parties. The amount
of purchase price allocated to the goodwill is NT$147,894
thousand. Pursuant to U.S. SFAS No. 141, goodwill arising from
purchase business combinations are not amortized but are tested
for impairment.f.
    
    Goodwill impairmentUnder R.O.C. GAAP, prior to January 1, 2005, the Company recorded
the excess of the purchase price over the fair value of net
tangible assets acquired as goodwill and amortizes the goodwill
over 5 to 20 years. Effective January 1, 2005, the Company adopted
R.O.C. SFAS No. 35, Accounting for Impairment of Asset which
required the Company to evaluate impairment of an asset group,
including goodwill allocated to such group. An amount of NT$2,028
thousand was recorded as goodwill amortization by the Company
under R.O.C. GAAP. Effective January 1, 2006, pursuant to the
newly revised SFAS No. 25, Business Combinations  Accounting
Treatment under Purchase Method (R.O.C. SFAS No. 25), goodwill is
no longer amortized and instead is tested for impairment annually.
If an event occurs or circumstances change which indicates that
the fair value of goodwill is more likely than not below its
carrying amount, an impairment loss is recognized.Under U.S. GAAP, effective January 1, 2002, the Company adopted
U.S. SFAS No. 142, Goodwill and Other Intangible Assets, (U.S.
SFAS No. 142) and ceased amortization of goodwill which assessed
for impairment annually or more frequently if impairment
indicators arise. U.S. SFAS No. 142 requires that all goodwill be
assigned to one or more reporting units as of the acquisition
date. For R.O.C. GAAP and U.S. GAAP purpose, the Company has
determined that BMC as a separate reporting unit from the Company
for purposes of testing goodwill for impairment. BMC was tested
for impairment in the fourth quarter of 2006. Due to the lost of
its major customer and continuing losses from operations, the
Company concluded that the goodwill was impaired as of December
31, 2006. An impairment loss of NT$147,894 thousand was recognized
in the BMC reporting unit.g.
    
    Impairment of long-lived assetsUnder R.O.C. GAAP, for purposes of evaluating the recoverability
of long-lived assets, assets purchased for use in the business but
subsequently determined to have no use were written down to fair
value and recorded as either idle assets or assets held for
disposition. Under R.O.C. SFAS No. 35, effective January 1, 2005
the Company is required to recognize an impairment loss when there
is an indication that the carrying amount of an asset or an asset
group is not recoverable from the expected future cash flows.
However, if the recoverable amount increases in a future period, the amount previously recognized as impairment
would be reversed and recognized as a gain. The adjusted amount
may not exceed the carrying amount that would have been
determined, net of depreciation, as if no impairment loss had been
recognized. In addition, R.O.C. SFAS No. 35 requires an asset to
be assessed for impairment individually when an indication of
impairment exists for the individual asset.Under U.S. SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, (U.S. SFAS No. 144) an impairment
loss is recognized when the carrying amount of an asset or a group
of assets is not recoverable from the expected undiscounted future
cash flows and an impairment loss is measured as the difference
between fair value and carrying amount of the asset or group of
assets. The impairment losses are recorded in current period
earnings and cannot be reversed subsequently. Effectively January
1, 2002, long-lived assets (excluding goodwill and other
indefinite-lived assets) held and used by the Company are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. U.S. SFAS No. 144 requires a company to group its
assets at the lowest level of identifiable cash flows for
determining possible impairment.In 2005, the Company had two assets where indicators of impairment
exist and were required to be assessed for impairment
individually, and the Company wrote-off a total of NT$901,806
thousand impairment loss under R.O.C. GAAP. Under U.S. GAAP such
assets were either grouped or considered entity-wide assets and
were evaluated for impairment as part of the group compared with
the groups expected future cash flows. No impairment under U.S.
GAAP is required and the Company reversed the impairment loss
under U.S. GAAP. Subsequently, the Company reclassified one of the
two assets as held-for-sale in 2006 when criteria required by
paragraph 30 of U.S. SFAS No. 144 were all met. As such, the
Company recognized NT$510,482 thousand as impairment loss under
U.S. GAAP which was the same amount of impairment loss recognized
under R.O.C. GAAP in 2005.
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h.
    
    Pension benefitsIn 1996, the Company adopted R.O.C. SFAS No. 18 that is similar in
many respects to U.S. SFAS No. 87, Employers Accounting for
Pensions. R.O.C. SFAS No. 18 does not require a company to
recognize the over-funded or under-funded status of a defined
benefit pension plan as an asset or liability in the statement of
financial position.U.S. SFAS No. 87, Employers Accounting for Pensions
requires the Company to determine the accumulated pension
obligation and the pension expense on an actuarial basis.
Accordingly, due to the difference in the dates of adoption, the
actuarial computation for unrecognized net transition obligation
and related amortization under R.O.C. GAAP would be different from
that under U.S. GAAP.The Labor Pension Act of R.O.C (the Act), which adopts a defined
contribution plan, became effective on July 1, 2005. In accordance
with the Act, employees may choose to elect either the Act, by
retaining their seniority before the enforcement of the Act, or
the pension mechanism of the Labor Standards Law which provides a
defined benefit plan. Under R.O.C. GAAP, this change would not
meet the definition of curtailment described in R.O.C. SFAS No.
18. However, the Company must accelerate the recognition of net
transition obligation and prior service cost as a curtailment loss
according to U.S. SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits. NT$23,237 thousand of the curtailment
loss which should have been recorded in 2005 was recorded at the
beginning of 2006 and was deemed as immaterial for both periods if
recorded correctly.Effective December 31, 2006, the Company adopted U.S. SFAS No.
158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, (U.S. SFAS No. 158), which requires
employers to recognize the over-funded or under-funded status of a
defined benefit pension plan as an asset or liability in its
statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through
comprehensive income. U.S. SFAS No. 158 defines the funded status
of a benefit plan as the difference between the fair value of the
plan assets and the projected benefit obligation. Previously
unrecognized items such as gains or losses, prior service costs
and net transition assets or obligations will be recognized in
other comprehensive income and will be subsequently recognized
through net periodic benefit cost pursuant to the provisions of
U.S. SFAS No. 87. The Company fully recognized the funded status
of its defined benefit pension plan. Upon adoption of U.S. SFAS
No. 158, the Company recognized an increase to accumulated other
comprehensive income of NT$120,712 thousand as of December 31,
2006.i.
    
    Derivative Financial instrumentsUnder R.O.C. GAAP, prior to January 1, 2006, the receivables or
payables arising from forward contracts were restated using the
prevailing exchange rates with the resulting differences credited
or charged to income. In addition, the receivables and payables
related to forward contracts were netted with the resulting amount
presented as either an asset or a liability. The receivables and
payables arising from currency option contracts entered into with
the same counter party were netted with the resulting amount
presented as either an asset or a liability. The notional amounts
of currency option contracts were not recognized as an asset or a
liability on contract dates. The premiums paid or received for the
options bought or written was amortized and charged to income on a
straight-line basis over the term of the related contract. Any
resulting gain or loss upon settlement was credited or charged to
income in the year of settlement. Unrealized gains and losses were
not recorded in the financial statements. Effective January 1,
2006, the Company adopted R.O.C. SFAS No. 34, Financial
Instruments: Recognition and Measurement, and derivatives that do
not qualify for hedge accounting are recorded as financial assets
or liabilities at FVTPL and measured at fair value as described
in Note 2.Under U.S. GAAP, derivative instruments are accounted for in
accordance with U.S. SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (U.S. SFAS No. 133) as
amended, and require all entities to recognize derivative
instruments as assets and liabilities on the balance sheet at fair
value. If certain conditions are met, entities may elect to
designate a derivative instrument as a hedging instrument. The
derivative instruments used by the Company do not qualify for
hedge accounting under U.S. SFAS No.133. Therefore, under U.S.
GAAP, derivatives have historically been, and continue to be,
recorded on the balance sheet at fair value, with the changes in
fair values recognized in earnings.
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j.
    
    Convertible bondsUnder R.O.C. GAAP, when convertible bonds are issued, the entire
instrument is recorded as a liability at an amount equal to the
proceeds received. Any discount or premium to the par value of the
convertible bond is amortized to the statement of income by using
the effective interest rate method. If the convertible bonds
contain a redemption premium above its par value amount, the
excess is accrued, using the effective interest rate method, over
the period to redemption as a charge to interest expense. Upon
conversion, the carrying value of the bond is credited to common
stock at its par value and the difference between the carrying
value of the bond and the par value of stock is recorded to
capital stock and capital surplus. No gain or loss is recognized.
Effective January 1, 2006, R.O.C. SFAS No. 34 and R.O.C. SFAS No. 36,
Financial Statement Presentation and Disclosure of Financial
Instruments (R.O.C. SFAS No. 36) require derivatives embedded in
hybrid instrument, if not clearly and closely related to the host
contract, to be bifurcated and accounted for at fair value.The Company issued certain convertible debt instruments that
contained embedded derivatives based upon the features set in the
convertible bond contracts. Under R.O.C. GAAP, before January 1,
2006, there is no accounting guidance specific to the embedded
derivatives and beneficial conversion features. The Company
accounted for the convertible bonds with the aforementioned features
in the manner similar to the conventional bonds without the
aforementioned features.Under U.S. GAAP, the Company considered whether the convertible
bonds contain embedded derivative features using the guidance
provided in U.S. SFAS No. 133. Convertible bonds with premium put
options contain embedded derivatives subject to bifurcation in
accordance with EITF 85-29 Convertible Bond with a Premium Put.To the extent that the embedded derivates are determined to exist,
the embedded derivatives are bifurcated and accounted for in
accordance with U.S. SFAS No. 133. If there are no embedded
derivatives present, the Company then considers whether there are
beneficial conversion features. To the extent the beneficial
conversion features exist, the Company would account for the
beneficial conversion features in accordance with EITF 98-5
Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios and EITF
00-27 Application of Issue No. 98-5 to Certain Convertible
Instruments(EITF 00-27).Under U.S. GAAP, in accordance with EITF 00-27, convertible
securities with beneficial conversion features or contingently
adjustable conversion ratios are recognized and measured by
allocating a portion of the proceeds equal to the intrinsic value of
that feature to additional paid-in capital. The amount to be
allocated should be calculated at the commitment date as the
difference between the conversion price and the fair value of the
common stock into which the security is convertible, multiplied by
the number of shares into which the security is convertible. The
resulting discount on the convertible security is accreted, as
interest expense, from the date the beneficial conversion feature is
fixed to the stated redemption date.All convertible bonds outstanding as of December 31, 2005 contained
embedded derivatives features that require bifurcation in accordance
with U.S. SFAS No. 133 and the Company bifurcated the embedded
derivatives from the host contracts for these convertible bonds. The
host bond contract was then accreted from the initial amount to the
maturity amount over the period from the date of issuance to the
maturity date using the effective interest method. The net
adjustment between R.O.C. GAAP and U.S. GAAP represents 1) change in
fair value of embedded derivatives, and 2) difference between
accretion period under both GAAP, and premium or discounts subject
to accretion under both GAAP.
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k.
    
    Stock-based compensationEffective January 1, 2006, the Company adopted the fair value
recognition provisions on U.S. SFAS No.123 (revised 2004),
Share-Based Payment ( U.S. SFAS No.123R), and the modified
prospective transition method and therefore has not restated the
results for prior periods. Under the transition method,
stock-based compensation expense for the year ended December 31,
2006 includes compensation expense for all unvested stock-based
compensation awards granted prior to January 1, 2006 that are
expected to vest, based on the grant date fair value estimated in
accordance with the original provision of U.S. SFAS No.123,
Accounting for Stock-Based Compensation ( U.S. SFAS No.123 ).
Upon an employees termination, unvested awards are forfeited,
which affects the quantity of options to be included in the
calculation of stock-based compensation expense. Forfeitures do
not include vested options that expire unexercised. Stock-based
compensation expense for all stock-based compensation awards
granted after January 1, 2006 is based on the grant-date fair
value estimate in accordance with the provisions of U.S. SFAS No.
123R. The Company recognizes these compensation costs using the
graded vesting method over the requisite service period of the
award, which is generally the option vesting term of four years.
Prior to the adoption of U.S. SFAS No.123R, the Company recognized
stock-based compensation expense in accordance with U.S.
Accounting Principles Board ( APB ) Opinion No.25, Accounting
for Stock Issued to Employees (APB 25 ). See Note 30c for
additional stock-based compensation disclosures.Under R.O.C. GAAP, employee stock option plans that are amended or
have options granted on or after January 1, 2004 must be accounted
for by the interpretations issued by the Accounting Research and
Development Foundation in Taiwan (ARDF). The Company adopted the
intrinsic value method and any compensation expense determined
using this method is recognized over the vesting period. No
stock-based compensation expense was recognized under R.O.C. GAAP
for the years ended December 31, 2004, 2005 and 2006.All of the Companys stock option plans include a provision
for a reduction in the exercise price in the event the Company
issues additional common shares or issues ADSs at a price lower
than the exercise price of a granted stock option. Under APB 25
and its related interpretations, the plans are deemed as variable
plan and the Company is required to record compensation expense
over the vesting period based on the difference between the
exercise price and the current market price at the end of each
period. As the Companys stock options had been out-of-money after
being granted through the end of 2005 before APB 25 was replaced
by U.S. SFAS No. 123R, the compensation expense remained zero
under APB 25.
 
 l.
    
    Treasury stockU.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 charged to the stock account when the reacquired shares have being retired. 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.Under R.O.C. GAAP, the net gains or losses resulting from the
purchase and sale of the Companys own shares for trading purposes
are recorded as non-operating income or losses in the statements
of operations. Effective January 1, 2002, purchases or sales of
the Companys own shares are treated as treasury stock
transactions with the same requirements under U.S. GAAP. However,
due to the timing difference on adoption, the carrying value of
the treasury stock under R.O.C. GAAP is different from that under
U.S. GAAP.m.
    
    Reclassification of Capital Account to Accumulated DeficitUnder R.O.C. GAAP, under the approval of shareholders, a company
may reclassify its additional paid-in capital account to
accumulated deficit.Under U.S. GAAP, according to SAB Topic 5S, the SEC staff believes
a deficit reclassification of any nature is considered to be
quasi-reorganization. As such, a company may not reclassify or
eliminate a deficit in retained earnings unless all requisite
conditions for a quasi-reorganization are satisfied. For the year
ended December 31, 2005, the Company reclassified NT$315,704
thousand of its additional paid-in capital to accumulated deficit
account. Under U.S. GAAP, this reclassification is reversed.
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n.
    
    Earnings per shareUnder R.O.C. GAAP, earning per share is calculated as described in Note 2 and Note 22.Under U.S. GAAP, earnings per share is calculated by dividing net income by the
weighted-average number of shares outstanding in each period, adjusted retroactively
for any stock dividends and stock splits issued subsequently. Other shares issued
from un-appropriated earnings, such as stock bonus to employees, are included in the
calculation of weighted-average number of shares outstanding from the date of
occurrence. Earnings per equivalent American Depositary Share (ADS) is calculated
by multiplying earnings per share by 10 since one ADS represents 10 common shares.Under R.O.C. GAAP and U.S. GAAP, outstanding stock options are included in the
diluted EPS calculation using the treasury stock method if the inclusion of such
would be dilutive. However, U.S. SFAS No. 128, Earnings per share provides
guidance on applying the treasury stock method for equity instruments granted in
share-based payment transactions in determining diluted earnings per share. In
applying the treasury stock method, the assumed proceeds shall be the sum of (a) the
exercise price, (b) the amount of compensation cost attributed to future services and
not yet recognized, and (c) the amount of excess tax benefits that would be credited
to additional paid-in capital assuming exercise of the options. Therefore, the number
of shares included in the denominator of the diluted EPS calculation under U.S. GAAP
would be different from that under R.O.C. GAAP.In addition, under R.O.C. GAAP, the number of common shares outstanding as of
December 31, 2004 and 2005 were retroactively adjusted beginning in 2006 as a result
of the capital reduction that occurred on February 16, 2006. Under U.S. GAAP, as
discussed in Note 28 v., the impact of the capital reduction on the number of common shares outstanding was previously retroactively adjusted beginning in 2005.
Therefore, the impact of the capital reduction on earnings per share was reversed for
the years ended December 31, 2004 and 2005 which resulted in U.S. GAAP based earnings
per share of NT$(0.17) and NT$(1.59) for the years ended December 31, 2004 and 2005,
respectively. Earnings per share for the year ended December 31,
2006 is NT$0.22
under U.S. GAAP.The number of weighted average shares outstanding under U.S. GAAP is presented below:
 For the year ended December 312004
    
    
    2005
    
    
    2006Number of common shares outstanding on January 1
    
    
    2,585,997,762
    
    
    
    2,939,170,325
    
    
    
    2,915,821,786Weighted average number of treasury stock
    
    
    (3,515,795
    )
    
    
    (3,515,795
    )
    
    
    (3,515,795
    )Cancellation of treasury stock on August 8, 2005
    
    
    (23,348,539
    )
    
    
    (23,348,539
    )
    
    
    Issuance of common shares for exercises of employees
stock options for the year ended December 31, 2006
    
    
    
    
    
    
    
    
    
    
    15,465Issuance of common shares for cash on February 17, 2006
(100,000 shares*318/365)
    
    
    
    
    
    
    
    
    
    
    87,123Issuance of 525,000,000 common shares for Global
Depositary Shares on April 5, 2004
    
    
    226,906,653
    
    
    
    
    
    
    
    Bonds converted to common shares for the year ended
December 31, 2004 (80,044,385 shares)
    
    
    35,997,545
    
    
    
    
    
    
    
    Basic and dilutive weighted-average number of shares
    
    
    2,822,037,626
    
    
    
    2,912,305,991
    
    
    
    2,912,408,579
 
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o.
    
    Plant capacity variancesAs permitted under R.O.C. GAAP, all plant capacity expense
variances can either be charged to the statement of income or
allocated between cost of goods sold and inventory using an
appropriate allocation method. The Companys policy is to report
such variances in the statement of income.Under U.S. GAAP, such plant capacity variances can only be
allocated between cost of goods sold and inventory. This has
resulted in a increase (decrease) of inventory allowances by
NT$24,823 thousand, NT$28,144 thousand and NT$(48,288) thousand as
of December 31, 2004, 2005 and 2006, respectively.p.
    
    Gross profit and operating incomeUnder R.O.C. GAAP, a number of operating income/expense and
manufacturing expense items are presented under the non-operating
income/expenses in the statement of income, including the
government subsidies for research and development, gain or loss on
disposal of property, plant and equipment, inventory loss
provision, allowance for prepaid expenses, reimbursement to
customers, income from sale of scraped inventory and the reversal
of allowance for doubtful accounts. Under U.S. GAAP, the
government subsidies for research and development, allowance for
prepaid expenses and the reversal of bad debt expense are included
in operating income. The inventory loss provisions, reimbursement
to customers and income from sale of scraped inventory are
included in the gross profit.q.
    
    Bonuses to employees, directors and supervisorsUnder 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 stock, the market
value of the MXICs common stock at the date when criteria for a
grant date is met in accordance with U.S. SFAS No. 123R is used to
determine the amount of the compensation 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 statement, 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 criteria for a grant date is met.r.
    
    Research and Development ExpenseUnder R.O.C. GAAP, the Company recorded royalty expenses as the
research and development expense in operating expenses. Under U.S.
GAAP, the Company stated the royalty expenses as selling expenses,
administrative expenses and manufacturing cost, based upon the
nature of the royalty expenses. Accordingly, U.S. GAAP basis
research and development expenses were NT$2,418,208 thousand,
NT$2,784,483 thousand and NT$3,251,261 thousand in 2004, 2005 and
2006.s.
    
    10% tax on undistributed earningsUnder R.O.C. Tax Law, the undistributed earnings generated after
1997 are subject to a 10% tax. Under R.O.C. GAAP, the Company
recorded the 10% tax on undistributed earnings in the year of
shareholders approval on the retained earnings.Starting from 2002, the American Institute of Certified Public
Accountants International Practices Task Force (the Task Force)
concluded that, in accordance with Emerging Issues Task Force
(EITF) 95-10, Accounting for Tax Credits Related to Dividends
in Accordance with U.S. SFAS No. 109, the 10% tax on
undistributed earnings shall be accrued during the period the
earnings arise and adjusted to the extent that distributions are
approved by the shareholders. Under U.S. GAAP, there was no effect
on the income tax expense for the years ended December 31, 2004
and 2005 as the Company had net losses for tax purposes in both
years. However, an amount of additional income tax expense of
NT$107,995 thousand for 2006 undistributed earnings was accrued
for the year ended December 31, 2006.In addition, the basis of 10% undistributed earnings tax was
amended from tax-basis undistributed earnings to book-basis
undistributed earnings in May 2006. As such, the tax rate applied
to temporary difference has been changed. The deferred income tax
assets/liabilities were computed based on a tax rate of 25% in
2004 and 2005, and, in 2006, the tax rate is changed to either
22.5% or 32.5% being applied to temporary differences as result of
differences between tax-basis and book-basis or temporary
difference as result of GAAP differences, respectively.
 F-52




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t.
    
    Valuation allowance for deferred tax assetsUnder R.O.C. GAAP, a company can determine its valuation allowance
for deferred tax assets only based on projections of future
operating profits. Under U.S. GAAP, if a company has experienced
cumulative losses in recent years, it is not generally able to
consider 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. MXIC began recording
operating income from the second quarter of 2006 and the
management believes 2007 operating income will be greater than
2006. As such, under R.O.C. GAAP, MXIC released a portion of its
valuation allowance in 2006. For U.S. GAAP, MXIC considered and
wighted positive and negative evidence and determined that no
valuation allowance would be released in 2006. Under U.S. GAAP,
the Companys valuation allowance for deferred tax assets was
NT$12,096,447 thousand and NT$8,365,594 thousand as of December
31, 2005 and 2006, respectively.u.
    
    Consolidated entitiesR.O.C. SFAS No.7, Consolidated Financial Statements, which
requires that the accompanying consolidated financial statements
include the accounts of all directly and indirectly majority owned
subsidiaries of MXIC, and the accounts of investees in which
MXICs ownership percentage is less than 50% but which MXIC has a
controlling interest. Such controlling interest can be
established by the companys majority representation in the Board
of Directors even if a company does not have a controlling
financial interest through direct or indirect ownership of a
majority voting interests.Under U.S. GAAP, a company is required to consolidate all
investees in which a company has a controlling financial interest
through direct or indirect ownership of a majority voting
interest. A company would not have a controlling financial
interest in its investee by majority representation in the Board
of Directors alone. Magic Pixel Inc. was consolidated by the
Company in 2005 under R.O.C. GAAP. The Company did not have a
controlling financial interest in Magic Pixel Inc. and was not
consolidated under U.S. GAAP. The deconsolidation of Magic Pixel
Inc. resulted in a reduction in cash and cash equivalents of
NT$183,278 thousand and revenues of NT$33,699 thousand in 2005.
However, in December 2006, the Company lost majority
representation in the Board of Directors of Magic Pixel Inc., and
accordingly the R.O.C. GAAP consolidated financial statements as
of and for the year ended December 31, 2006 included only the
operation result but not financial position of Magic Pixel Inc. as
of and for the year ended December 31, 2006.In December 2003, U.S. FASB released Interpretation No. 46R,
Consolidation of Variable Interest Entities  an Interpretation
of Accounting Research Bulletin (ARB) No. 51 (FIN46 R) which
requires that all primary beneficiaries of Variable Interest
Entities (VIE) consolidate that entity. FIN46R is effective
immediately for VIEs created after December 15, 2003 and to VIEs
in which an enterprise obtains an interest after that date. Upon
the adoption of FIN 46R, the Company performed its analysis and
there is no variable interest entities identified for as defined
by FIN 46R. Accordingly, there was no significant effect on the
consolidated financial statements upon the adoption of FIN 46R.v.
    
    Change in capital structureUnder R.O.C. GAAP, a company is not required to retroactively
adjust its shares for capital reduction, except for purpose of EPS
calculation.Under U.S. GAAP, SEC Topic 4C requires the effect of a capital
structure change to a stock dividend, stock split or reverse split
which occurs after the date of the latest reported balance sheet
but before the release of the financial statements be given
retroactive effect in the balance sheet.As disclosed in Note 18, on February 16, 2006, the Company
cancelled 2,079 million common shares proportionately amongst
existing shareholders. The cancellation is effectively a reverse
stock split and accordingly has been given retroactive effect in
the balance sheet under U.S. GAAP. The number of common shares
outstanding under U.S. GAAP amounted to 2,939,170,325,
2,915,821,786 and 2,916,157,808 shares in 2004, 2005 and 2006,
respectively.w.
    
    Compensated absencesUnder R.O.C. GAAP, a company is not required to accrue for unused
vacation at the end of each year. However, under U.S. GAAP,
compensated absences must be accrued based on the liability for
employees rights to receive compensation for future absences when
the following criteria being met,
 (1)
    
    The employers obligation relating to employees rights to
receive compensation for future absences is attributable to
employees services already rendered,(2)
    
    the obligation relates to the rights that vest or accumulated,(3)
    
    payment of the compensation is probable, and(4)
    
    the amount can be reasonably estimated.
 F-53




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##### Table of Contents



Years ended December 312004
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000
    
    US$000Net income (loss) attributable to
shareholders of the parent under R.O.C.
GAAP
    
    
    217,692
    
    
    
    (7,027,189
    )
    
    
    2,034,048
    
    
    
    62,413Adjustments:Amortization of net transition obligation
of a defined benefit plan
    
    
    2,696
    
    
    
    2,696
    
    
    
    3,917
    
    
    
    120Curtailment loss
    
    
    
    
    
    
    
    
    
    
    (23,237
    )
    
    
    (713
    )Plant capacity variance
    
    
    (257,565
    )
    
    
    368
    
    
    
    (91,279
    )
    
    
    (2,801
    )Unrealized losses on marketable securities
    
    
    (21,659
    )
    
    
    
    
    
    
    
    
    
    
    Other-than-temporary decline in value on
marketable securities
    
    
    (447,995
    )
    
    
    1,325,640
    
    
    
    
    
    
    
    Derivative financial instrument:Net gains (losses) on derivative
financial instruments, including
embedded derivatives in convertible
bonds
    
    
    34,005
    
    
    
    (31,879
    )
    
    
    
    
    
    
    10% tax on undistributed earnings
    
    
    
    
    
    
    
    
    
    
    (107,995
    )
    
    
    (3,314
    )Accrued compensated absences
    
    
    
    
    
    
    (4,356
    )
    
    
    (65,589
    )
    
    
    (2,013
    )Impairment loss of long-live assets
recognized in different period as a
result of GAAP differences
    
    
    
    
    
    
    901,806
    
    
    
    (510,482
    )
    
    
    (15,664
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (148,625
    )
    
    
    (4,560
    )Net effect on capitalization of royalty
expenses
    
    
    
    
    
    
    
    
    
    
    20,764
    
    
    
    637Accrual for employee bonuses and
remuneration to directors and supervisors
    
    
    
    
    
    
    
    
    
    
    (205,252
    )
    
    
    (6,298
    )U.S. GAAP adjustments on equity method
investees
    
    
    
    
    
    
    
    
    
    
    (5,614
    )
    
    
    (172
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    (363,906
    )
    
    
    (11,166
    )Reversal of amortization of goodwill
under R.O.C. GAAP
    
    
    2,028
    
    
    
    
    
    
    
    
    
    
    
    Reversal of credit balance of long-term
equity investment
    
    
    
    
    
    
    
    
    
    
    25,038
    
    
    
    768Income tax effect of U.S. GAAP adjustments
    
    
    1,914
    
    
    
    197,359
    
    
    
    74,228
    
    
    
    2,278Net income (loss) based on U.S. GAAP
    
    
    (468,884
    )
    
    
    (4,635,555
    )
    
    
    636,016
    
    
    
    19,515Other comprehensive income:Unrealized gains (losses) on
available-for-sale securities
    
    
    (1,276,413
    )
    
    
    1,149,766
    
    
    
    (819,442
    )
    
    
    (25,144
    )Change in translation adjustment
    
    
    (127,670
    )
    
    
    (26,516
    )
    
    
    62,554
    
    
    
    1,920Comprehensive income (loss) based on
U.S. GAAP
    
    
    (1,872,967
    )
    
    
    (3,512,305
    )
    
    
    (120,872
    )
    
    
    (3,709
    )
 F-54




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##### Table of Contents



2004
    
    2005
    
    2006NT$
    
    NT$
    
    NT$
    
    US$Basic net income (loss) per share
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    0.22
    
    
    
    0.01Diluted net income (loss) per share
    
    
    (0.17
    )
    
    
    (1.59
    )
    
    
    0.22
    
    
    
    0.01
   For the year ended December 312004
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000
    
    US$000Gross profit based on R.O.C. GAAP
    
    
    4,387,976
    
    
    
    241,764
    
    
    
    7,529,370
    
    
    
    231,033Reclassification of non-operating
incomes or losses
    
    
    918,545
    
    
    
    478,129
    
    
    
    (83,193
    )
    
    
    (2,553
    )Amortization of net transition
obligation of a defined benefit plan
    
    
    2,696
    
    
    
    2,696
    
    
    
    3,917
    
    
    
    120Curtailment loss
    
    
    
    
    
    
    
    
    
    
    (8,574
    )
    
    
    (263
    )Impairment loss of long-lived assets
recognized in different period as a
result of GAAP differences
    
    
    
    
    
    
    
    
    
    
    (510,482
    )
    
    
    (15,664
    )Accrued compensated absences
    
    
    
    
    
    
    (3,652
    )
    
    
    (19,385
    )
    
    
    (595
    )Deconsolidation of Magic Pixel Inc.
    
    
    
    
    
    
    (31,797
    )
    
    
    (285,369
    )
    
    
    (8,756
    )Accrual for employee bonuses and
remuneration to directors and
supervisors
    
    
    
    
    
    
    
    
    
    
    (59,061
    )
    
    
    (1,812
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    (119,854
    )
    
    
    (3,677
    )Plant capacity variance
    
    
    (257,565
    )
    
    
    368
    
    
    
    (91,279
    )
    
    
    (2,801
    )Gross profit based on U.S. GAAP
    
    
    5,051,652
    
    
    
    687,508
    
    
    
    6,356,090
    
    
    
    195,032
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##### Table of Contents



Years ended December 312004
    
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000
    
    US$000Operating income (losses) based on R.O.C.
GAAP
    
    
    (348,688
    )
    
    
    (4,874,559
    )
    
    
    1,874,708
    
    
    
    57,524Amortization of net transition obligation of a
defined benefit plan
    
    
    2,696
    
    
    
    2,696
    
    
    
    3,917
    
    
    
    120Curtailment loss
    
    
    
    
    
    
    
    
    
    
    (23,237
    )
    
    
    (713
    )An impairment loss provided for other current
assets
    
    
    
    
    
    
    (141,711
    )
    
    
    
    
    
    
    Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (148,625
    )
    
    
    (4,560
    )Net effect on capitalization of royalty expenses
    
    
    
    
    
    
    
    
    
    
    20,764
    
    
    
    637Impairment loss of long-lived assets recognized
in different period as a result of GAAP
differences
    
    
    
    
    
    
    
    
    
    
    (510,482
    )
    
    
    (15,664
    )Accrued employee bonuses and remuneration to
directors and supervisors
    
    
    
    
    
    
    
    
    
    
    (205,252
    )
    
    
    (6,298
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    (363,906
    )
    
    
    (11,166
    )Accrued compensated absences
    
    
    
    
    
    
    (4,356
    )
    
    
    (65,589
    )
    
    
    (2,013
    )Deconsolidation of Magical Pixel Inc.
    
    
    
    
    
    
    69,740
    
    
    
    (94,558
    )
    
    
    (2,901
    )Plant capacity variance
    
    
    (257,565
    )
    
    
    368
    
    
    
    (91,279
    )
    
    
    (2,801
    )Reclassification of non-operating income(loss)
to operating income (loss)
    
    
    938,698
    
    
    
    591,460
    
    
    
    (7,189
    )
    
    
    (221
    )Operating income (losses) based on U.S.
GAAP
    
    
    335,141
    
    
    
    (4,356,362
    )
    
    
    389,272
    
    
    
    11,945
  As of December 312004
    
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000
    
    US$000Shareholders equityEquity attributable to shareholders of the
parent based on R.O.C. GAAP
    
    
    34,344,673
    
    
    
    28,558,400
    
    
    
    31,194,665
    
    
    
    957,185Amortization of net transition obligation of a
defined benefit plan
    
    
    (32,343
    )
    
    
    (29,647
    )
    
    
    (25,730
    )
    
    
    (790
    )Curtailment loss
    
    
    
    
    
    
    
    
    
    
    (23,237
    )
    
    
    (713
    )Adjustment of accumulated other comprehensive
income under U.S. SFAS No. 158
    
    
    
    
    
    
    
    
    
    
    120,712
    
    
    
    3,704Net unrealized losses on available-for-sale
securities
    
    
    294,013
    
    
    
    1,375,517
    
    
    
    
    
    
    
    Net losses on derivative financial instruments,
including embedded derivatives in convertible
bonds
    
    
    (31,881
    )
    
    
    
    
    
    
    
    
    
    
    Reversal of goodwill amortization under R.O.C.
GAAP
    
    
    2,028
    
    
    
    2,028
    
    
    
    1,298
    
    
    
    40Recognition of goodwill from acquisition of
subsidiaries
    
    
    
    
    
    
    147,894
    
    
    
    6,137
    
    
    
    188Income tax effect of U.S. GAAP adjustments
    
    
    (1,896,300
    )
    
    
    (1,698,941
    )
    
    
    (1,624,713
    )
    
    
    (49,853
    )10% tax on undistributed earnings
    
    
    
    
    
    
    
    
    
    
    (107,995
    )
    
    
    (3,314
    )Plant capacity variance
    
    
    11,106
    
    
    
    11,475
    
    
    
    (79,804
    )
    
    
    (2,449
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    22,844
    
    
    
    701Net effect on capitalization of royalty expenses
    
    
    
    
    
    
    
    
    
    
    20,764
    
    
    
    637Accrued compensated absences
    
    
    
    
    
    
    (4,356
    )
    
    
    (69,945
    )
    
    
    (2,146
    )Accrued employee bonuses and remuneration to
directors and supervisors
    
    
    
    
    
    
    
    
    
    
    (205,252
    )
    
    
    (6,298
    )Investment income recognized under equity method
    
    
    
    
    
    
    
    
    
    
    (5,614
    )
    
    
    596Impairment loss of long-lived assets recognized
in different period as a result of GAAP
differences
    
    
    
    
    
    
    901,806
    
    
    
    404,992
    
    
    
    12,426Reversal of credit balance of long-term equity
investment
    
    
    
    
    
    
    
    
    
    
    25,038
    
    
    
    768Shareholders equity based on U.S. GAAP
    
    
    32,755,058
    
    
    
    29,264,176
    
    
    
    29,654,160
    
    
    
    909,916
 F-56




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##### Table of Contents



As of December 312005
    
    2006NT$000
    
    NT$000
    
    US$000Common shares
    
    
    29,158,218
    
    
    
    29,161,578
    
    
    
    894,801Additional paid-in capital
    
    
    14,003,985
    
    
    
    14,390,962
    
    
    
    441,576Accumulated deficit
    
    
    (15,272,695
    )
    
    
    (14,636,872
    )
    
    
    (449,122
    )Accumulated other comprehensive income
    
    
    1,533,728
    
    
    
    897,552
    
    
    
    27,541Treasury stock
    
    
    (159,060
    )
    
    
    (159,060
    )
    
    
    (4,880
    )Total of shareholders equity based on U.S. GAAP
    
    
    29,264,176
    
    
    
    29,654,160
    
    
    
    909,916
  As of December 312005
    
    2006NT$000
    
    NT$000
    
    US$000Unrealized gain (losses) on marketable securities
    
    
    1,498,202
    
    
    
    678,760
    
    
    
    20,827Adjustment for adoption of U.S. SFAS No. 158
    
    
    
    
    
    
    120,712
    
    
    
    3,704Cumulative translation adjustments
    
    
    35,526
    
    
    
    98,080
    
    
    
    3,010Total
    
    
    1,533,728
    
    
    
    897,552
    
    
    
    27,541
  Years ended December 312004
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000
    
    US$000Domestic
    
    
    (83,898
    )
    
    
    (4,089,772
    )
    
    
    420,757
    
    
    
    12,910International
    
    
    (357,452
    )
    
    
    (554,896
    )
    
    
    169,816
    
    
    
    5,211Total
    
    
    (441,350
    )
    
    
    (4,644,668
    )
    
    
    590,573
    
    
    
    18,121
  Years ended December 312004
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000
    
    US$000Expected income tax expense (benefit)
    
    
    42,459
    
    
    
    (1,588,535
    )
    
    
    113,462
    
    
    
    3,481Additional income tax due to different
tax rate under U.S. GAAP and effects of
rate changes
    
    
    (1,638,533
    )
    
    
    (806,027
    )
    
    
    2,486,294
    
    
    
    76,290Tax credit forfeited (earned)
    
    
    (294,120
    )
    
    
    611,131
    
    
    
    1,232,880
    
    
    
    37,830Change in valuation allowance
    
    
    1,997,992
    
    
    
    1,793,997
    
    
    
    (3,730,851
    )
    
    
    (114,478
    )Others
    
    
    (74,931
    )
    
    
    7,488
    
    
    
    (68,026
    )
    
    
    (2,087
    )Income tax expense
    
    
    32,867
    
    
    
    18,054
    
    
    
    33,759
    
    
    
    1,036
  F-57




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##### Table of Contents



29
    
    Summarized Financial Information of Equity-Method InvesteesThe following table presents summarized financial information in
accordance with U.S. GAAP for equity-method investees with an
ownership percentage between 20-50% as of December 31, 2005 and
2006 and for the years ended December 31, 2004, 2005 and 2006:
 Years ended December 312004
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000
    
    US$000Current assets
    
    
    435,455
    
    
    
    211,515
    
    
    
    385,281
    
    
    
    11,822Non-current assets
    
    
    85,088
    
    
    
    58,102
    
    
    
    40,730
    
    
    
    1,250Current liabilities
    
    
    167,460
    
    
    
    87,097
    
    
    
    132,189
    
    
    
    4,056Non-current liabilities
    
    
    18,423
    
    
    
    1,690
    
    
    
    933
    
    
    
    29Total shareholders equity
    
    
    334,660
    
    
    
    180,830
    
    
    
    292,889
    
    
    
    8,987
 Years ended December 312004
    
    2005
    
    2006NT$000
    
    NT$000
    
    NT$000
    
    US$000Net sales
    
    
    466,717
    
    
    
    209,908
    
    
    
    717,023
    
    
    
    22,001Gross profit
    
    
    158,614
    
    
    
    78,062
    
    
    
    308,825
    
    
    
    9,476Net income (loss)
    
    
    (154,804
    )
    
    
    (116,445
    )
    
    
    79,312
    
    
    
    2,434
 30. Additional Disclosures
 a.
    
    New Accounting Pronouncements
 U.S. GAAP
      F-58




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b.
    
    Marketable securitiesUnder U.S. GAAP, the available-for-sale securities as of December 31, 2005 and 2006 were as follows:
 As of December 312005
    
    2006Market value
    
    Cost
    
    Market value
    
    CostNT$000
    
    NT$000
    
    NT$000
    
    US$000
    
    NT$000
    
    US$000Classified as AFS current:Bond funds
    
    
    
    
    
    
    
    
    
    
    215,113
    
    
    
    6,601
    
    
    
    213,034
    
    
    
    6,537Government Bonds with Repurchase
Agreements
    
    
    
    
    
    
    
    
    
    
    555,000
    
    
    
    17,030
    
    
    
    555,000
    
    
    
    17,030Stock funds
    
    
    
    
    
    
    
    
    
    
    17,980
    
    
    
    552
    
    
    
    20,020
    
    
    
    614Subtotal
    
    
    
    
    
    
    
    
    
    
    788,093
    
    
    
    24,183
    
    
    
    788,054
    
    
    
    24,181Classified as AFS non-current:Publicly-traded common stock
    
    
    2,245,220
    
    
    
    747,019
    
    
    
    1,433,497
    
    
    
    43,986
    
    
    
    754,776
    
    
    
    23,160
 As of December 31, 2005 and 2006, available-for-sale securities of the Company were as follows:
 2005Gross
    
    Gross
    
    EstimatedAdjusted
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueNT$
    
    NT$
    
    NT$
    
    NT$(In Thousands)Publicly-traded common stocks
    
    
    747,019
    
    
    
    1,498,201
    
    
    
    
    
    
    
    2,245,220
 2006Gross
    
    Gross
    
    EstimatedAdjusted
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueNT$
    
    NT$
    
    NT$
    
    NT$(In Thousands)Bond funds
    
    
    213,034
    
    
    
    2,079
    
    
    
    
    
    
    
    215,113Government Bonds with Repurchase Agreements
    
    
    555,000
    
    
    
    
    
    
    
    
    
    
    
    555,000Stock funds
    
    
    20,020
    
    
    
    
    
    
    
    (2,040
    )
    
    
    17,980Publicly-traded common stocks
    
    
    754,776
    
    
    
    678,721
    
    
    
    
    
    
    
    1,433,497Total
    
    
    1,542,830
    
    
    
    680,800
    
    
    
    (2,040
    )
    
    
    2,221,590
   F-59




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##### Table of Contents



Less than 12 months
    
    12 months or more
    
    TotalFair value
    
    Unrealized loss
    
    Fair value
    
    Unrealized loss
    
    Fair value
    
    Unrealized lossNT$000
    
    NT$000
    
    NT$000
    
    NT$000
    
    NT$000
    
    NT$000Classified as AFS-current:Bond funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Government Bonds with
Repurchase Agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock funds
    
    
    17,980
    
    
    
    (2,040
    )
    
    
    
    
    
    
    
    
    
    
    17,980
    
    
    
    (2,040
    )Classified as AFS-non-current:Publicly-traded common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The gross unrealized losses related to stock funds were due to
changes in fair market value. The company believes that none of the
unrealized losses represented an other-than-temporary impairment
based on its evaluation of available evidence as of December 31,
2006.As of December 31, 2005, the market price of Tower of US$1.45 was
significantly below the Companys average cost basis of US$2.26 for
a prolonged period of time without indicators of a near-term
recovery. Accordingly, the Company concluded the decline in the
market value of Towers shares was other-than-temporary. On a U.S.
GAAP basis, an impairment charge of NT$210,843 thousand (US$6,428
thousand) was recognized, based on the difference between Towers
market price of US$1.45 per share and average cost of Towers share
of US$2.26 per share on December 31, 2005. An other-than-temporary
impairment from decline in the market value of Towers shares of
NT$447,995 thousand was recognized in 2004.The aggregate carrying amount of the Companys cost method
investments totaled NT$298,690 thousand as of December 31, 2006 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.c.
    
    Stock-based compensationEffective January 1, 2006, the Company adopted the fair value recognition provisions of U.S. SFAS
No. 123 (revised 2004), Share-Based Payment (U.S. SFAS No. 123R), using the modified prospective
transition method and therefore has not restated the results for prior periods. Under the transition
method, stock-based compensation expense for the year ended December 31, 2006 includes compensation
expense for all unvested stock-based compensation awards granted prior to January 1, 2006 that are
expected to vest, based on the grant date fair value estimated in accordance with the original
provision of U.S. SFAS No. 123, Accounting for Stock-Based Compensation (U.S. SFAS No. 123).
Upon an employees termination, unvested awards are forfeited, which affects the quantity of options
to be included in the calculation of stock-based compensation expense. Forfeitures do not include
vested options that expire unexercised. Stock-based compensation expense for all stock-based
compensation awards granted after January 1, 2006 is based on the grant-date fair value estimate in
accordance with the provisions of U.S. SFAS No. 123R. The Company recognizes these compensation
costs using the graded vesting method over the requisite service period of the award, which is
generally the option vesting term of four years. Prior to the adoption of SFAS No. 123R, the Company
accounted for awards granted under the intrinsic value method prescribed by U.S. Accounting
Principle Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees, and provided the
required pro forma disclosures prescribed by U.S. SFAS No. 123. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB No. 107) regarding the SECs interpretation of U.S. SFAS No. 123R
and the value of share-based payments for public companies. The Company has applied the provisions
of SAB No. 107 in its adoption of SFAS No. 123R. No cumulative effect adjustment resulted from the
adoption of U.S. SFAS No. 123R since the Company accounted for awards granted under the intrinsic
value method and no amounts were recorded in the financial statements prior to January 1, 2006.Total compensation cost resulting from the adoption of U.S. SFAS No. 123R was NT$386,750 thousand,
including NT$22,844 thousand capitalized as part of the cost of inventory. Accordingly, income
before income tax and net income for the year ended December 31, 2006 were NT$363,906 thousand lower
than if the Company had continued to account for stock-based compensation under APB No. 25. The
impact on both basic and diluted earnings per share for the year ended December 31, 2006 was a
decrease of NT$0.12. The pro forma tables reflect net income and basic and diluted net earnings per
share for the years ended December 31, 2004 and 2005 in accordance with the fair value method
provision of U.S. SFAS No. 123 are as follows:
 Years ended December 312004
    
    2005NT$000
    
    NT$000Net loss under U.S. GAAP
    
    
    (468,884
    )
    
    
    (4,635,555
    )Less: stock-based compensation expense
    
    
    (338,091
    )
    
    
    (513,301
    )Pro forma net loss
    
    
    (806,975
    )
    
    
    (5,148,856
    )
 F-60




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##### Table of Contents



Years ended December 312004
    
    2005NT$
    
    NT$Earnings per share:As reported under US GAAPBasic EPS
    
    
    (0.17
    )
    
    
    (1.59
    )Diluted EPS
    
    
    (0.17
    )
    
    
    (1.59
    )Pro formaBasic EPS
    
    
    (0.29
    )
    
    
    (1.77
    )Diluted EPS
    
    
    (0.29
    )
    
    
    (1.77
    )
   The weighted average remaining contractual term and aggregate intrinsic value of options under the
foregoing plans as of December 31, 2006 were as follows:
 Weighted-AverageRemainingWeighted-Average
    
    Contractual
    
    AggregateExercise Price
    
    Term
    
    Intrinsic ValueNT$
    
    In Years
    
    NT$000MXIC:Options outstanding
    
    

    16.05
    
    
    
    3.3
    
    
    
    448,146Vested or expected to vest
    
    

    16.58
    
    
    
    3.1
    
    
    
    297,146Options exercisable
    
    

    18.34
    
    
    
    2.5
    
    
    
    42,358BMC:Options outstanding
    
    

    10.86
    
    
    
    4.3
    
    
    
    Vested or expected to vest
    
    

    11.46
    
    
    
    3.9
    
    
    
    Options exercisable
    
    

    12
    
    
    
    3.6
    
    
    
    
 As of December 31, 2006, the number of vested or
expected to vest options was 420,502 thousand units for MXIC, and 60
thousand units for BMC.The aggregate intrinsic value in the table above represents the total
pre-tax intrinsic value (the difference between MXICs stock closing
price on the last trading date of the year ended December 31, 2006
and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all
option holders exercised their options on December 31, 2006.Total intrinsic value of options exercised in the years ended
December 31, 2004, 2005 and 2006 was zero, zero and NT$223 thousand,
respectively. As of December 31, 2006, there was NT$264,225 thousand of
total unrecognized compensation expense related to non-vested
share-based compensation arrangement granted under the plan is
expected to be recognized over a weighted-average period of 1.86 years.
The cash received from exercise of share options was zero, zero and
NT$3,096 thousand for the years ended December 31, 2004, 2005 and 2006,
respectively.
 F-61




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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.
 A-1




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##### Table of Contents



DSP
    
    Digital Signal Processor. A type of integrated
circuit that processes and manipulates digital
information after it has been converted from an
analog source. DSPs are parallel processors used
for high complexity, high-speed real-time
computations in a wide variety of applications,
including digital cell telephone systems and
data compression systems.Embedded Flash  controller
    
    A device which incorporates Flash memory on
which other devices rely for access to a
computer system. A disk controller, for example,
controls access to one or more disk drives,
managing physical and logical access to the
drive or drives.EPROM
    
    Erasable Programmable ROM. Nonvolatile memory
which can be reprogrammed by removing the device
from the system, erasing the data through
exposure to ultraviolet light and reprogramming
and reinstalling the device in the system.EEPROM
    
    Electrically Erasable Programmable ROM. Similar
to EPROM, except that it can be erased
electronically before being reprogrammed.Ethernet
    
    A type of LAN.Flash Memory
    
    A type of non-volatile memory, similar to an
EEPROM in tint it is erasable and
reprogrammable. The difference is that it can be
erased and reprogrammed in the electronic system
into which the Flash memory chip has been
incorporated.GPS
    
    Global Positioning Satellite System. A network
of satellites that provides precise location
determination to receivers.GSM
    
    Global System for Mobile Communications. A
standard for digital mobile telephone networks.GUI
    
    Graphics User Interface. An interface which
allows operation of a computer by manipulating
graphical icons and windows (usually by pointing
and clicking a mouse) rather than using text
commands.HDD
    
    Hard Disk Drive. An electro-mechanical device
that records data onto spinning rigid magnetic
disks in discrete data blocks each of which can
be randomly accessed. The primary mass storage
device of a computer.
 A-2




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##### Table of Contents



Integrated Circuit
    
    A combination of two or more transistors on a base
material, usually silicon. All semiconductor chips,
including memory chips and logic chips, are just very
complicated integrated circuits with thousands of transistors.LAN
    
    Local Area Network. A short distance network designed
to connect computers within a localized environment to
enable the sharing of databases and other
communications.LCD
    
    Liquid Crystal Display. A type of display that uses a
liquid compound with a polar molecular structure,
sandwiched between two transparent electrodes. When an
electric field is applied, the molecules align with the
light passing through it. A polarized filter laminated
over the electrodes can selectively turn on a cell or
a pixel, containing the liquid crystal material,
turning it dark.Logic Product
    
    A product that contains digital integrated circuits
that process, rather than store, information.Mask
    
    A piece of glass on which an integrated circuits
circuitry design is laid out. Integrated circuits may
require up to 20 different layers of design each with
its own Mask. In the integrated circuit production
process a light shines through the Mask leaving an
image of the design on the wafer.Mb
    
    Mega Bit. One million (or 1,048,576) bits as a unit of
data size or memory capacity.Memory
    
    A group of integrated circuits that a computer uses to
store data and programs, such as ROM, RAM, DRAM and
SRAM.MHz
    
    Megahertz. One million cycles per second. Typically
measures the clock speed of microprocessors.Micron
    
    1/25,000 of an inch. Circuitry on an integrated circuit
typically follows lines that are less than one micron
wide.Motherboard
    
    The main piece of circuitry inside a personal computer.MP3
    
    Motion Picture Experts Group-I, Audio Layer 3. A
digital data compression and storage technology for
music.NAND circuit
    
    Not AND. A logic circuit whose output signal is a
logical 1 if any of its input signals is a logical 0
and the output signal of which is a logical 0 if all of
its input signals are logical 1s.Nonvolatile memory
    
    Memory products which retain their data content without the need for constant power supply.NOR circuit
    
    Not OR. A logic circuit in which an output signal
appears only when a signal is absent from all of its
input gates.OR circuit
    
    A logic circuit in which the output signal is a logical
1 if any one or more of its input signals is a logical
1.PAC
    
    Paired Array Contact.PCMCIA cards
    
    Personal computer cards, standardized by Personal
Computer Memory Card International of San Jose,
California or credit card sized, removable modules for
portable computers.
 A-3




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##### Table of Contents



PDA
    
    Personal Digital Assistant. A hand-held multifunctional minicomputer used for,
among other things, word processing, name card retention and appointment
calendars.PHS
    
    Personal Hand Set. A lower capability but less expensive mobile telephone
communications system currently achieving substantial consumer acceptance in
Japan.PROM
    
    Programmable Read-Only Memory. Similar to ROM in that once programmed it can be
read only and not changed. Programmable ROM enables customers to program the
integrated circuits themselves, rather than it being programmed when it is
manufactured. The programming is possible because of a series of fuses in the
circuitry that can be selectively blown to create a unique type of data.RAM
    
    Random Access Memory. A type of volatile memory, forming the main memory of a
computer where applications and files are run.ROM
    
    Read-Only Memory. Memory that is programmed by the manufacturer and cannot be
changed. Typically, ROM is used to provide start-up data when a computer is
first turned on.Semiconductor
    
    A material with electrical conducting properties in between those of metals and
insulators. (Metals always conduct and insulators never conduct, but
semiconductors sometimes conduct.) Essentially, semiconductors transmit
electricity only under certain circumstances, such as when given a positive or
electric charge. Therefore, a semiconductors ability to conduct can be turned
on or off by manipulating those charges and this allows the semiconductor to
act as an electric switch. The most common semiconductor material is silicon,
used as the base of most semiconductor chips today because it is relatively
inexpensive and easy to create.SMIF Box System
    
    Standard Mechanical Interface Box System. A system which links process
microenvironments so that a wafer is never exposed to room air. With a SMIF Box
System, traditional environmental conditions are replaced with a
microenvironment that can be pressurized with air or nitrogen to keep out room
air.SRAM
    
    Static Random Access Memory. A type of volatile memory product that is used in
electronic systems to store data and program instructions. Unlike the more
common DRAM, it does not need to be refreshed.STB
    
    Set top box. A device to differentiate signals from television and multimedia
service providers.SXGA
    
    Super Extended Graphics Array. An enhanced set of Video Graphics Array
standards that is capable of displaying an image ranging from 768 x 1024 pixels
to 1024 x 1280 pixels.Transistor
    
    An individual circuit that can amplify or switch electric current. This is the
building block of all integrated circuits and semiconductors.VCD
    
    Video Compact Disk.Volatile memory
    
    Memory products which lose their data content when the power supply is switched
off.Wafer
    
    Thin, round, flat piece of silicon that is the base of most integrated circuits.
 A-4




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description1.1
    
    
    Articles of Incorporation of the Company (English translation).*2a.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)8.1
    
    
    List of subsidiaries of the Company.*11.1
    
    
    Code of Business Conduct and Ethics.*12.1
    
    
    Certification of our President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*12.2
    
    
    Certification of our Associate Vice President, Finance Department, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.*13.1
    
    
    Certification 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
    
    
    Certification 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.*
 
 *
    
    Filed with this Form 20-F.(1)
    
    Incorporated by reference to Exhibit 3(a) to the Companys Registration Statement on Form F-6 (File No.
333-8602) filed with the Commission on February 7, 2002.