---

---

UNITED
  STATES


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
|x  | ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 
|   | 1934                                                                                        
|   | For
      the fiscal year ended December 31, 2002                                           
|OR
|o  | TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT
|   | OF
      1934                                                                               




(Exact
  name of Registrant as specified in its charter)


|AU
      OPTRONICS CORP.                              | TAIWAN,
      REPUBLIC OF CHINA                      
|----------------------------------------------------- | -----------------------------------------------------
|(Translation
      of Registrants name into English) | (Jurisdiction
      of incorporation or organization)

1
  LI-HSIN ROAD, 2


SCIENCE-BASED
  INDUSTRIAL PARK


HSINCHU,
  TAIWAN 
  REPUBLIC OF CHINA


(Address
  of principal executive offices)


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

|Title
      of each class                      | Name
      of each exchange on which registered
|---------------------------------------------- | -----------------------------------------------
|Common
      Shares of par value NT$10.00 each | The
      New York Stock Exchange, Inc.*       

*
  Not for trading, but only in connection with the listing on
  the New York Stock Exchange, Inc. of American Depositary Shares
  representing such Common
  Shares

Securities
  registered or to be registered pursuant to Section 12(g) of
  the Act:None

Securities
  for which there is a reporting obligation pursuant to Section
  15(d) of the Act:None

Indicate
  the number of outstanding shares of each of the issuers
  classes of capital or common stock as of the close of the period
  covered by the annual report:4,024,194,453
  Common Shares and 101,265 Entitlement Certificates

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

YesÖNo ___

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

Item
  17ÖItem 18 ___

---

---

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TABLE
  OF CONTENTS

---

|                                                                    |                                                                                          | Page | 
|------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---- | 
|                                                                    |                                                                                          |      | 
|                                                                    |                                                                                          |      | 
|SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS             | 2                                                                                        |     
|PART
      I                                                        |                                                                                          | 3    | 
|Item
      1. Identity of Directors, Senior Management and Advisers | 3                                                                                        |     
|Item
      2. Offer Statistics and Expected Timetable               | 3                                                                                        |     
|Item
      3. Key Information                                       | 3                                                                                        |     
|                                                                    | SELECTED
      FINANCIAL DATA                                                            | 3    | 
|                                                                    | CURRENCY
      TRANSLATIONS AND EXCHANGE RATE                                            | 6    | 
|                                                                    | CAPITALIZATION
      AND INDEBTEDNESS                                                    | 6    | 
|                                                                    | REASON
      FOR THE OFFER AND USE OF PROCEEDS                                           | 6    | 
|                                                                    | RISK
      FACTORS                                                                       | 7    | 
|Item
      4.                                                       | Information
      on the Company                                                         | 22   | 
|                                                                    | HISTORY
      AND DEVELOPMENT OF THE COMPANY                                             | 22   | 
|                                                                    | BUSINESS
      OVERVIEW                                                                  | 23   | 
|                                                                    | ORGANIZATIONAL
      STRUCTURE                                                           | 33   | 
|                                                                    | PROPERTY,
      PLANTS AND EQUIPMENT                                                     | 34   | 
|Item
      5.                                                       | OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS                                       | 35   | 
|                                                                    | OPERATING
      RESULTS AND TREND INFORMATION                                            | 35   | 
|                                                                    | RESEARCH
      AND DEVELOPMENT                                                           | 54   | 
|Item
      6.                                                       | Directors,
      Senior Management and Employees                                         | 55   | 
|                                                                    | DIRECTORS
      AND SENIOR MANAGEMENT                                                    | 55   | 
|                                                                    | COMPENSATION                                                                             | 57   | 
|                                                                    | EMPLOYEES                                                                                | 57   | 
|                                                                    | SHARE
      OWNERSHIP                                                                    | 58   | 
|Item
      7.                                                       | Major
      Shareholders                                                                 | 58   | 
|                                                                    | MAJOR
      SHAREHOLDERS                                                                 | 58   | 
|                                                                    | RELATED
      PARTY TRANSACTIONS                                                         | 59   | 
|Item
      8.                                                       | Financial
      Information                                                              | 62   | 
|                                                                    | CONSOLIDATED
      STATEMENTS AND OTHER FINANCIAL INFORMATION                            | 62   | 
|                                                                    | LEGAL
      PROCEEDINGS                                                                  | 62   | 
|                                                                    | DIVIDENDS
      AND DIVIDEND POLICY                                                      | 62   | 
|                                                                    | SIGNIFICANT
      CHANGES                                                                | 63   | 
|Item
      9.                                                       | Listing
      Details                                                                    | 63   | 
|                                                                    | MARKET
      PRICE INFORMATION AND MARKETS                                               | 63   | 
|Item
      10.                                                      | Additional
      Information                                                             | 64   | 
|                                                                    | ARTICLES
      OF INCORPORATION                                                          | 64   | 
|                                                                    | MATERIAL
      CONTRACTS                                                                 | 69   | 
|                                                                    | EXCHANGE
      CONTROLS                                                                  | 70   | 
|                                                                    | TAXATION                                                                                 | 70   | 
|                                                                    | DOCUMENTS
      ON DISPLAY                                                               | 76   | 
|Item
      11.                                                      | Quantitative
      and Qualitative Disclosures About Market Risk                         | 76   | 
|Item
      12.                                                      | Description
      of Securities Other Than Equity Securities                             | 78   | 
|PART
      II                                                       |                                                                                          | 78   | 
|Item
      13.                                                      | Defaults,
      Dividend Arrearages and Delinquencies                                    | 78   | 
|Item
      14.                                                      | Material
      Modifications to the Rights of Security Holders and Use
      of Proceeds | 78   | 
|Item
      15.                                                      | Controls
      and Procedures                                                            | 78   | 
|PART
      III                                                      |                                                                                          | 78   | 
|Item
      17.                                                      | Financial
      Statements                                                               | 78   | 
|Item
      18.                                                      | Financial
      Statements                                                               | 79   | 
|Item
      19.                                                      | Exhibits                                                                                 | 79   | 

---

SPECIAL
  NOTE REGARDING FORWARD-LOOKING STATEMENTS

This
  annual report on Form 20-F contains forward-looking statements
  within the meaning of Section 27A of the Securities Act of 1933
  and Section 21E of the Securities Exchange Act of 1934. Although
  these forward-looking statements, which may include statements
  regarding our future results of operations, financial condition,
  or business prospects, are based on our own information and
  information from other sources we believe to be reliable, you
  should not place undue reliance on these forward-looking statements,
  which apply only as of the date of this annual report. Our actual
  results of operations, financial condition or business prospects
  may differ materially from those expressed or implied in these
  forward-looking statements for a variety of reasons, including,
  among other things, the cyclical nature of our industry, our
  dependence on introducing new products on a timely basis, our
  dependence on growth in the demand for our products, our ability
  to compete effectively, our ability to successfully expand our
  capacity, our dependence on key personnel, general economic
  and political conditions, including those related to the TFT-LCD
  industry, possible disruptions in commercial activities caused
  by natural and human-induced disasters, including terrorist
  activity and armed conflict, fluctuations in foreign currency
  exchange rates, and other factors. For a discussion of these
  risks and other factors, please see Item 3. Key InformationRisk
  Factors.

2

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PART
  I

Item
  1. Identity of Directors, Senior Management and Advisers

Not
  applicable.

Item
  2. Offer Statistics and Expected Timetable

Not
  applicable.

Item
  3. Key Information

SELECTED
  FINANCIAL DATA

The
  selected statement of operations data for the years ended December
  31, 2000, 2001 and 2002 and selected balance sheet data as of
  December 31, 2001 and 2002 set forth below have been derived
  from our audited consolidated financial statements included
  herein. The selected statement of operations data for the years
  ended December 31, 1998 and 1999, and the selected balance sheet
  data as of December 31, 1998 and 1999, have been derived from
  our unaudited financial statements that have not been included
  herein. The selected balance sheet data as of December 31, 2000
  have been derived from our audited financial statements that
  have not been included herein. Our consolidated financial statements
  as of December 31, 2001 and 2002, and for the years ended December
  31, 2000, 2001 and 2002 have been audited by KPMG, independent
  accountants, whose report thereon, which is based partially
  on the report of other auditors, is included herein. The selected
  financial and operating data set forth below should be read
  in conjunction with Item 5. Operating and Financial Review
  and Prospects and the consolidated financial statements
  and the notes to those statements included herein.

On
  September 1, 2001, we completed a merger through which Unipac
  Optoelectronics Corporation (Unipac), an affiliate
  of United Microelectronics Corporation, merged into Acer Display
  Technology, Inc. (Acer Display). Upon consumption
  of the merger, the company was renamed "AU Optronics Corp."
  Our consolidated financial statements are prepared and presented
  in accordance with ROC GAAP. Under ROC GAAP, the merger of Unipac
  into Acer Display has been accounted for under the pooling-of-interests
  method of accounting, whereby the historical financial statements
  of the previously separate companies for periods prior to the
  merger have been restated on a combined basis. As a result,
  unless otherwise indicated, our operational and financial data,
  under ROC GAAP, presented herein for periods or dates prior
  to September 1, 2001 represent the combined operational and
  financial data of Acer Display and Unipac. In contrast, under
  US GAAP, the merger of Unipac into Acer Display has been accounted
  for as the acquisition of Unipac by Acer Display under the purchase
  method of accounting, whereby our cost of acquiring Unipac was
  measured by the market value of the shares we issued to Unipac
  shareholders in connection with the merger. Such acquisition
  cost has been allocated to the assets of Unipac we acquired
  and the liabilities of Unipac we assumed, based on their fair
  value as of September 1, 2001. Our financial data, under US
  GAAP, presented herein for periods or as of dates prior to September
  1, 2001, do not include the financial data of Unipac.

For
  a discussion of significant differences between ROC GAAP and
  US GAAP as they relate to us, and the effects of such differences
  on net income (loss) for the years ended December 31, 2001 and
  2002, and stockholders equity as of December 31, 2001
  and 2002, see note 26 to our consolidated financial statements.
  In addition, our consolidated financial statements prepared
  and presented in accordance with US GAAP as of December 31,
  2001 and 2002, and for the years ended December 31, 2001 and
  2002, have been included in note 26 to the consolidated financial
  statements.

The
  table below sets forth certain financial data under ROC GAAP
  for the periods and as of the dates indicated. As more fully
  discussed above in the second paragraph of this section, such
  data have been prepared under the pooling-of-interests method
  of accounting under ROC GAAP, whereby the financial data of
  both Ac er Display and Unipac for the periods and as of the
  dates prior to September 1, 2001, the date of the completion
  of our merger with Unipac, have been restated on a combined
  basis. The combined operational and financial data of our company
  presented herein do not purport to be indicative of what our
  actual operational and financial results would have been if
  our merger with Unipac had actually taken place on January 1,
  2000 or 2001, respectively, for the purpose of presenting our
  statement of operations, statement of changes in stockholders
  equity and statement of cash flows data for the years ended
  December 31, 2000 and 2001, respectively, or if our merger with
  Unipac had actually taken place as of December 31, 2001 for
  the purpose of presenting our balance sheet data as of December
  31, 2001.

3





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| | Year
      Ended and as of December 31,                                            
| | -----------------------------------------------------------------------------------
| |                                                                                    
| | 1998                                                                               
| |                                                                                    
| | NT$                                                                                
| | (in
      millions, except percentages and per common share and per
      ADS data)

|Statement
      of Operations Data:               |          |    |           |    |           |   |           |    |           |   |         |  
|------------------------------------------------- | -------- | -- | --------- | -- | --------- | - | --------- | -- | --------- | - | ------- | -
|ROC
      GAAP                                    |          |    |           |    |           |   |           |    |           |   |         |  
|Net
      sales                                   | 734.8    |    | 5,816.5   |    | 25,583.2  |   | 37,588.6  |    | 75,689.2  |   | 2,181.2 |  
|Cost
      of goods sold                          | 1,153.3  |    | 4,775.1   |    | 20,737.5  |   | 40,373.6  |    | 63,606.2  |   | 1,833.0 |  
|                                                  |          |    |           |    |           |   |           |    |           |   |         |  
|Gross
      profit (loss)                         | (418.5   | )  | 1,041.4   |    | 4,845.7   |   | (2,785.0  | )  | 12,083.0  |   | 348.2   |  
|Operating
      expenses                          | 708.8    |    | 1,957.9   |    | 3,724.2   |   | 3,505.7   |    | 4,369.1   |   | 125.9   |  
|                                                  |          |    |           |    |           |   |           |    |           |   |         |  
|Operating
      income (loss)                     | (1,127.3 | )  | (916.5    | )  | 1,121.5   |   | (6,290.7  | )  | 7,713.9   |   | 222.3   |  
|Non-operating
      income                        | 463.9    |    | 571.8     |    | 1,640.2   |   | 704.0     |    | 541.8     |   | 15.6    |  
|Non-operating
      expenses and losses           | 77.3     |    | 305.2     |    | 825.3     |   | 1,157.8   |    | 2,232.9   |   | 64.3    |  
|                                                  |          |    |           |    |           |   |           |    |           |   |         |  
|Income
      (loss) before income tax             | (740.7   | )  | (649.9    | )  | 1,936.4   |   | (6,744.5  | )  | 6,022.8   |   | 173.6   |  
|Income
      tax benefit (expense)                | 120.5    |    | 1,267.8   |    | 926.3     |   | 34.3      |    | (0.1      | ) | -       |  
|                                                  |          |    |           |    |           |   |           |    |           |   |         |  
|Net
      income (loss)                           | (620.2   | )  | 617.9     |    | 2,862.7   |   | (6,710.2  | )  | 6,022.7   |   | 173.6   |  
|                                                  |          |    |           |    |           |   |           |    |           |   |         |  
|Weighted
      average shares outstanding        |          |    |           |    |           |   |           |    |           |   |         |  
|Basic                                             | 798.8    |    | 1,769.5   |    | 2,384.9   |   | 2,870.0   |    | 3,639.8   |   | 3,639.8 |  
|Weighted
      average shares outstanding        |          |    |           |    |           |   |           |    |           |   |         |  
|Diluted                                           | 798.8    |    | 1,769.5   |    | 2,384.9   |   | 2,870.0   |    | 3,894.8   |   | 3,894.8 |  
|Earnings
      (loss) per share Basic            | (0.78    | )  | 0.35      |    | 1.20      |   | (2.34     | )  | 1.65      |   | 0.05    |  
|Earnings
      (loss) per share Diluted          | (0.78    | )  | 0.35      |    | 1.20      |   | (2.34     | )  | 1.58      |   | 0.05    |  
|Earnings
      (loss) per ADS equivalent Basic   | (7.76    | )  | 3.49      |    | 12.00     |   | (23.38    | )  | 16.54     |   | 0.48    |  
|Earnings
      (loss) per ADS equivalent Diluted | (7.76    | )  | 3.49      |    | 12.00     |   | (23.38    | )  | 15.79     |   | 0.46    |  
|Balance
      Sheet Data:                         |          |    |           |    |           |   |           |    |           |   |         |  
|ROC
      GAAP                                    |          |    |           |    |           |   |           |    |           |   |         |  
|Current
      assets                              | 10,187.4 |    | 18,736.6  |    | 19,221.0  |   | 30,515.7  |    | 49,830.0  |   | 1,436.0 |  
|Long-term
      investments                       |         |    | 631.0     |    | 50.9      |   | 48.6      |    | 84.3      |   | 2.4     |  
|Property,
      plant and equipment               | 6,526.8  |    | 29,498.1  |    | 60,695.4  |   | 65,669.6  |    | 71,045.3  |   | 2,047.4 |  
|Intangible
      assets                           | 1,415.3  |    | 3,537.1   |    | 3,618.4   |   | 3,069.6   |    | 2,984.5   |   | 86.0    |  
|Other
      assets                                | 407.6    |    | 3,629.0   |    | 3,821.2   |   | 4,096.9   |    | 5,227.3   |   | 150.7   |  
|Total
      assets                                | 18,537.0 |    | 56,031.8  |    | 87,406.9  |   | 103,400.4 |    | 129,171.4 |   | 3,722.5 |  
|Current
      liabilities                         | 1,258.9  |    | 6,008.7   |    | 14,707.5  |   | 19,495.4  |    | 25,204.3  |   | 726.3   |  
|Long-term
      liabilities                       | 357.8    |    | 10,094.8  |    | 29,818.4  |   | 39,877.8  |    | 26,027.6  |   | 750.1   |  
|Other
      liabilities                           | 20.2     |    | 27.0      |    | 115.8     |   | 79.9      |    | 111.4     |   | 3.2     |  
|Total
      liabilities                           | 1,636.9  |    | 16,130.5  |    | 44,641.7  |   | 59,453.1  |    | 51,343.4  |   | 1,479.6 |  
|Capital
      stock                               | 11,832.7 |    | 23,849.5  |    | 23,849.5  |   | 29,705.8  |    | 40,243.0  |   | 1,159.7 |  
|Cash
      dividend                               | 0.0      |    | 0.0       |    | 0.0       |   | 0.0       |    | 0.0       |   | 0.0     |  
|Total
      stockholders equity                  | 16,900.2 |    | 39,901.3  |    | 42,765.2  |   | 43,947.3  |    | 77,828.0  |   | 2,242.9 |  
|Other
      Financial Data:                       |          |    |           |    |           |   |           |    |           |   |         |  
|ROC
      GAAP                                    |          |    |           |    |           |   |           |    |           |   |         |  
|Gross
      margin                                | (57.0    | )% | 17.9      | %  | 18.9      | % | (7.4      | )% | 16.0      | % | 16.0    | %
|Operating
      margin                            | (153.4   | )% | (15.8     | )% | 4.4       | % | (16.7     | )% | 10.2      | % | 10.2    | %
|Net
      margin                                  | (84.4    | )% | 10.6      | %  | 11.2      | % | (17.9     | )% | 8.0       | % | 8.0     | %
|Capital
      expenditures                        | 4,314.6  |    | 22,008.2  |    | 36,901.6  |   | 13,987.3  |    | 18,035.3  |   | 519.7   |  
|Depreciation
      and amortization               | 406.1    |    | 1,555.2   |    | 5,741.3   |   | 8,880.3   |    | 12,989.9  |   | 374.4   |  
|Cash
      flows from operating activities        | (505.3   | )  | (205.0    | )  | 2,796.5   |   | 1,215.8   |    | 20,821.7  |   | 600.1   |  
|Cash
      flows from investing activities        | (6,887.3 | )  | (27,225.1 | )  | (36,652.1 | ) | (15,299.5 | )  | (18,125.0 | ) | (522.3  | )
|Cash
      flows from financing activities        | 9,324.0  |    | 32,329.2  |    | 27,471.8  |   | 16,779.5  |    | 16,754.3  |   | 482.8   |  

4





---



The
  table below sets forth certain financial data under US GAAP
  for the periods and as of the dates indicated. As more fully
  discussed above in the second paragraph of this section, such
  data have been prepared under the purchase method of accounting
  under US GAAP, whereby only the financial data of Acer Display
  are presented for the periods and as of the dates prior to September
  1, 2001, the date of the completion of our merger with Unipac.

| | Year
      Ended and as of December 31,                                             | 
| | ----------------------------------------------------------------------------------- | 
| |                                                                                     | 
| | 2000                                                                                | 
| |                                                                                     | 
| | NT$                                                                                 | 
| |                                                                                     | 
| | (in
      millions, except percentages and per common share and per
      ADS data) | 

|                                                    |           |   |           |    |           |   |         |  
|--------------------------------------------------- | --------- | - | --------- | -- | --------- | - | ------- | -
|Statement
      of Operations Data:                 |           |   |           |    |           |   |         |  
|US
      GAAP                                       |           |   |           |    |           |   |         |  
|Net
      sales                                     | 14,839.8  |   | 28,513.4  |    | 75,689.2  |   | 2,181.2 |  
|Cost
      of goods sold                            | 12,562.8  |   | 31,491.1  |    | 66,197.1  |   | 1,907.7 |  
|                                                    |           |   |           |    |           |   |         |  
|Gross
      profit (loss)                           | 2,277.0   |   | (2,977.7  | )  | 9,492.1   |   | 273.5   |  
|Operating
      expenses                            | 1,507.9   |   | 1,670.5   |    | 3,678.7   |   | 106.0   |  
|                                                    |           |   |           |    |           |   |         |  
|Operating
      income (loss)                       | 769.1     |   | (4,648.2  | )  | 5,813.4   |   | 167.5   |  
|Non-operating
      income                          | 289.9     |   | 408.1     |    | 705.4     |   | 20.3    |  
|Non-operating
      expenses and losses(1)          | 405.0     |   | 1,100.5   |    | 1,367.9   |   | 39.4    |  
|                                                    |           |   |           |    |           |   |         |  
|Income
      (loss) before income tax               | 654.0     |   | (5,340.6  | )  | 5,150.9   |   | 148.4   |  
|Income
      tax provision                          | -         |   | 0.3       |    | 212.0     |   | 6.1     |  
|                                                    |           |   |           |    |           |   |         |  
|Net
      income (loss)                             | 654.0     |   | (5,340.9  | )  | 4,938.9   |   | 142.3   |  
|                                                    |           |   |           |    |           |   |         |  
|Weighted
      average shares outstanding  Basic   | 1,100.0   |   | 1,791.8   |    | 3,639.8   |   | 3,639.8 |  
|Weighted
      average shares outstanding  Diluted | 1,100.0   |   | 1,791.8   |    | 3,894.8   |   | 3,894.8 |  
|Earnings
      (loss) per shareBasic               | 0.59      |   | (2.98     | )  | 1.36      |   | 0.04    |  
|Earnings
      (loss) per shareDiluted             | 0.59      |   | (2.98     | )  | 1.32      |   | 0.04    |  
|Earnings
      (loss) per ADS equivalentBasic      | 5.95      |   | (29.81    | )  | 13.57     |   | 0.39    |  
|Earnings
      (loss) per ADS equivalentDiluted    | 5.95      |   | (29.81    | )  | 13.16     |   | 0.38    |  
|Balance
      Sheet Data:                           |           |   |           |    |           |   |         |  
|US
      GAAP                                       |           |   |           |    |           |   |         |  
|Current
      assets                                | 7,992.2   |   | 30,955.9  |    | 48,967.9  |   | 1,411.2 |  
|Investments
      in equity-method investees        | -         |   | 117.2     |    | 73.4      |   | 2.1     |  
|Property,
      plant and equipment                 | 31,681.9  |   | 65,592.0  |    | 72,195.3  |   | 2,080.6 |  
|Goodwill                                            | -         |   | 11,599.7  |    | 11,599.7  |   | 334.3   |  
|Other
      intangible assets  net                 | 2,444.6   |   | 10,416.1  |    | 9,281.4   |   | 267.5   |  
|Other
      assets                                  | 948.5     |   | 1,333.3   |    | 1,413.7   |   | 40.7    |  
|Total
      assets                                  | 43,067.2  |   | 120,014.2 |    | 143,531.4 |   | 4,136.4 |  
|Current
      liabilities                           | 5,502.1   |   | 19,676.4  |    | 25,789.5  |   | 743.2   |  
|Long-term
      borrowings                          | 16,627.6  |   | 39,054.8  |    | 25,959.1  |   | 748.1   |  
|Other
      liabilities                             | 65.8      |   | 1,144.7   |    | 1,190.6   |   | 34.3    |  
|Total
      liabilities                             | 22,195.5  |   | 59,875.9  |    | 52,939.2  |   | 1,525.6 |  
|Total
      stockholders equity                    | 20,871.7  |   | 60,138.3  |    | 90,592.2  |   | 2,610.8 |  
|Other
      Financial Data:                         |           |   |           |    |           |   |         |  
|US
      GAAP                                       |           |   |           |    |           |   |         |  
|Gross
      margin(2)                               | 15.3      | % | (10.4     | )% | 12.5      | % | 12.5    | %
|Operating
      margin(3)                           | 5.2       | % | (16.3     | )% | 7.7       | % | 7.7     | %
|Net
      margin(4)                                 | 4.4       | % | (18.7     | )% | 6.5       | % | 6.5     | %
|Capital
      expenditures                          | 18,140.2  |   | 8,311.5   |    | 18,035.3  |   | 519.7   |  
|Depreciation
      and amortization                 | 3,285.3   |   | 6,649.6   |    | 14,614.0  |   | 421.2   |  
|Cash
      flows from operating activities          | 2,342.2   |   | 503.1     |    | 21,227.5  |   | 611.7   |  
|Cash
      flows from investing activities          | (19,602.9 | ) | (8,067.7  | )  | (18,549.9 | ) | (534.6  | )
|Cash
      flows from financing activities          | 15,234.2  |   | 12,986.3  |    | 16,773.4  |   | 483.4   |  

|   
|---
|(1)
|(2)
|(3)
|(4)

5

---

|                                                                 | Year
      Ended and as of December 31,      |  
|---------------------------------------------------------------- | -------------------------------------------- | -
|                                                                 |                                              |  
|                                                                 | 2000                                         |  
|                                                                 |                                              |  
|                                                                 | **(in
      thousands, except percentages)** |  
|Operational
      Data:                                          |                                              |  
|Large-size
      panels shipped(1)                               | 1,786.1                                      |  
|Percent
      of net sales accounted for by large-size panels(1) | 81.0                                         | %
|Small-
      to medium-size panels shipped(2)                    | 4,255.2                                      |  

|   
|---
|(1)
|(2)

CURRENCY
  TRANSLATIONS AND EXCHANGE RATE

We
  publish our financial statements in NT dollars, the lawful currency
  of the Republic of China. This annual report contains translations
  of NT dollar amounts into U.S. dollars at specific rates solely
  for the convenience of the reader. For convenience only and
  unless otherwise noted, all translations from NT dollars to
  U.S. dollars and from U.S. dollars to NT dollars herein were
  made at a rate of NT$34.70 to US$1.00, the noon buying rate
  in effect as of December 31, 2002. No representation is made
  that the NT dollar or U.S. dollar amounts referred to herein
  could have been or could be converted into U.S. dollars or NT
  dollars, as the case may be, at any particular rate or at all.
  On June 16, 2003, the noon buying rate was NT$34.60 to US$1.00.

Fluctuations
  in the exchange rate between NT dollars and U.S. dollars will
  affect the U.S. dollar equivalent of the NT dollar price of
  our shares on the Taiwan Stock Exchange and, as a result, will
  likely affect the market price of the ADSs. These fluctuations
  will also affect the U.S. dollar conversion by the depositary
  of cash dividends paid in NT dollars on, and the NT dollar proceeds
  received by the depositary from any sale of, our shares represented
  by ADSs.

The
  following table sets forth, for the periods indicated, information
  concerning the number of NT dollars for which one U.S. dollar
  could be exchanged based on the noon buying rate for cable transfers
  in NT dollars as certified for customs purposes by the Federal
  Reserve Bank of New York.

|                           |  | NT
      dollars per U.S. dollar Noon Buying Rate |       |    
|-------------------------- |  | ------------------------------------------------- | ----- | ---
|                           |  |                                                   |       |    
|                           |  | Average                                           | High  | Low
|                           |  |                                                   |       |    
|                           |  | (of
      month endrates)                         |       |    
|1998                       |  | NT$                                               | 33.50 | NT$
|1999                       |  |                                                   | 32.28 |    
|2000                       |  |                                                   | 31.37 |    
|2001                       |  |                                                   | 33.91 |    
|2002                       |  |                                                   | 34.55 |    
|December
      2002        |  |                                                   | 34.80 |    
|2003                       |  |                                                   |       |    
|January                    |  |                                                   | 34.57 |    
|February                   |  |                                                   | 34.73 |    
|March                      |  |                                                   | 34.72 |    
|April                      |  |                                                   | 34.82 |    
|May                        |  |                                                   | 34.70 |    
|June
      (until June 16) |  |                                                   | 34.68 |    

CAPITALIZATION
  AND INDEBTEDNESS

Not
  applicable.

REASON
  FOR THE OFFER AND USE OF PROCEEDS

Not
  applicable.

6

---

RISK
  FACTORS

Risks
  Relating to Our Financial Condition, Our Business and the Industry

> The
>     industry in which we operate is cyclical. As a result, price
>     fluctuations in response to supply and demand imbalances could
>     harm our operating results.

The
  TFT-LCD industry in general has been characterized by cyclical
  market conditions. The industry has been subject to significant
  and rapid downturns, which have been reflected in the past by
  the excess of supply growth over demand growth, causing sharp
  declines in prices. Commencing in the second half of 2000, intense
  competition in the TF T-LCD industry worldwide, due principally
  to the substantial addition of new fabs by most major manufacturers
  in Taiwan, Korea and Japan, including our company, resulted
  in declines in the average selling prices of many of our products.
  As a result, we experienced substantial downward pricing pressure
  on our large-size panels. The average selling prices of our
  large-size panels decreased by 40.1% between 2000 and 2001.
  From the first half of 2002, expectation for strong demands
  for TFT-LCD panels resulted in panel price recovery in the TFT-LCD
  industry. The average selling prices of our large-size panels
  increased by 21.5% between the fourth quarter of 2001 and the
  first quarter of 2002 and further increased by 13.9% between
  the first quarter and the second quarter of 2002. However, the
  significant increase in the average selling prices of large-size
  panels in the first half of 2002 led to a slowdown in demand
  growth in the second half of 2002, which in turn resulted in
  an oversupply in the market and caused sharp declines in prices
  in that period. As a result, the average selling prices of our
  large-size panels decreased by 13.0% between the second quarter
  and the third quarter of 2002 and further decreased by 21.7%
  between the third quarter and the fourth quarter of 2002. Capacity
  expansion currently being undertaken or anticipated in the TFT-LCD
  industry could lead to a future period or periods of general
  excess capacity in the industry. We cannot assure you that any
  future downturns resulting from such excess capacity or other
  factors affecting the industry will not be severe or that any
  such downturn would not seriously harm our business, financial
  condition and results of operations.

TFT-LCD
  prices worldwide generally fluctuate in response to imbalances
  in supply and demand. Accordingly, our ability to maintain or
  increase our revenues will be highly dependent upon our ability
  to maintain market share, increase unit sales of existing products,
  and introduce and sell new products, which compensate for the
  anticipated fluctuation and long-term declines in the average
  selling prices of our existing products. During periods of oversupply,
  we may price our panels below cost and incur a loss to maintain
  our market share. As a result, our gross margins and profits
  will be negatively affected unless we are able to introduce
  new products with higher margins or reduce our cost per panel
  to offset declines in average selling prices. We cannot assure
  you that we will be able to maintain or expand market share,
  increase unit sales, and introduce and sell new products, to
  the extent necessary to compensate for market oversupply.

> We
>     had a net loss for 2001. Although we were profitable in 2002,
>     if we are not profitable in 2003 and beyond, the value of
>     your investment may be negatively affected.

We
  experienced a net loss in 2001 due principally to a decline
  in the average selling prices of our products caused by the
  oversupply of TFT-LCD panels in the market. The decline in average
  selling prices resulted in a decrease in our gross margins.
  We expect that average selling prices for many of our existing
  products will continue to decline over the long term. If we
  are not able to reduce our costs of manufacturing these panels
  to offset such declines in average selling prices, our gross
  margin will continue to decline, which could seriously harm
  our business and reduce the value of your investment. No assurances
  can be given that we will be profitable in 2003 or beyond.

Our
  future net sales, gross profit and operating income may vary
  significantly due to a combination of factors, including, but
  not limited to:

- Our
    ability to develop and introduce new products to meet customers
    needs.Our
    inability to develop or introduce new products may hurt our
    competitive position because our customers may choose t o
    source more advanced products from our competitors.
- Our
    ability to develop or acquire and implement new manufacturing
    process and product technologies.If we are unable to successfully implement
    new manufacturing process and product technologies in a timely
    manner, our competitors may seize new opportunities in new
    markets.

7

---

- Our
    ability to control our fixed and variable costs.Increased
    fixed or variable costs may reduce our profitability and adversely
    affect our results of operations.
- Changes
    in our product mix or those of our customers.When
    our customers or we discontinue or add a product that we are
    unable to produce, our operating results usually fluctuate.
- Lower
    than expected demand growth for TFT-LCD panels resulting in
    oversupply in the market.When
    oversupply occurs, we may reduce the volume of our production
    or the price of our panels to maintain the level of our capacity
    utilization.
    Our
      operating results fluctuate from quarter to quarter, which
      makes it difficult to predict our future performance.

Our
  results of operations have varied significantly in the past
  and may fluctuate significantly from quarter to quarter in the
  future due to a number of factors, many of which are beyond
  our control. Our business and operations may be negatively affected
  by:

- the
    cyclical nature of both the TFT-LCD industry and the markets
    served by our customers;
- the
    speed at which we expand our production capacity;
- access
    to raw materials and components, equipment, electricity, water
    and other required utilities on a timely and economical basis;
- technological
    changes;
- the
    loss of a key customer or the postponement of orders from
    a key customer;
- changes
    in end users spending patterns;
- the
    rescheduling and cancellation of large orders;
- our
    customers adjustments in their inventory; and
- natural
    disasters, such as typhoons, fires and earthquakes, and industrial
    accidents.

Due
  to the factors noted above and other risks discussed in this
  section, many of which are beyond our control, you should not
  rely on quarter-to-quarter comparisons to predict our future
  performance. Unfavorable changes in any of the above factors
  may seriously harm our business, financial condition and results
  of operations. In addition, our operating results may be below
  the expectations of public market analysts and investors in
  some future periods, which may result in a decline in the price
  of the ADSs or Shares.

> Our
>     financial condition may be adversely affected if we cannot
>     introduce new prod ucts on a timely basis or if our new products
>     do not gain market acceptance.

Early
  product development by itself cannot guarantee the success of
  a new product. Success also depends on other factors such as
  product acceptance by the market. For example, although TFT-LCD
  technology was initially introduced commercially about ten years
  ago, this technology began to receive wide market acceptance
  only in the last few years, especially in the consumer electronics
  sector. New products are developed in anticipation of future
  demand. Our delay in the development of commercially successful
  products with anticipated technological advancement may adversely
  affect our business. We cannot assure you that the launch of
  any new product will be successful, or that we will be able
  to produce sufficient quantities of these products to meet market
  demand.

We
  plan to continue to expand our operations to meet the growing
  needs of high-growth applications in consumer electronics, LCD
  televisions and other markets as demand develops. Because these
  products, such as mobile phones, personal digital assistants,
  digital cameras and LCD televisions, are expected to be marketed
  to a diversified group of end-users with demands for different
  specifications, functions and prices, we have developed different
  marketing strategies to promote our panels for these products.
  We cannot assure you that our expansion

8

---

strategy
  for these panels will be successful. If we fail to successfully
  market panels for these products, our results of operations
  would be adversely affected.

> A
>     downturn in the demand for notebook computers or a further
>     decrease in the average selling prices of our products used
>     in notebook computers may severely affect our results of operations.

A
  significant percentage of our net sales is derived from customers
  who use our TFT-LCD panels in their notebook computers. In 2000,
  2001 and 2002, 78.6%, 45.2% and 29.6%, respectively, of our net sales
  were attributable to panels for notebook computers. Any significant
  decrease in the demand for notebook computers may therefore reduce
  the demand for our panels and would have an adverse effect on our
  results of operations. The demand for notebook computers may be affected
  by various reasons, including the slowdown in information technology
  spending by corporations due to the general slowdown in the global
  economy. The notebook computer industry grew at a lower than expected
  rate in 2001 and 2002. This lower than expected growth contributed
  to the downward pressure on the average selling prices of panels
  for notebook computers. Any further decrease in the average selling
  prices of our products used in notebook computers may reduce our
  net sales and materially and adversely affect our results of operations.

> Our
>     net sales and operating results may suffer if the rate of
>     substitution by end-users purchasing TFT-LCD monitors to replace
>     cathode ray tube monitors is lower than expected or if brand
>     companies change their bundling policy.

In
  addition to the general demand for notebook and desktop computers,
  demand for our products is affected by a number of factors,
  including the rate of substitution by end-users and the bundling
  policy of brand companies. We believe that a significant percentage
  of our net sales is, and will continue to be, derived from end-users
  purchasing TFT-LCD monitors to replace their existing cathode
  ray tube monitors. The rate of substitution of TFT-LCD monitors
  for cathode ray tube monitors may be affected by the slowdown
  in information technology spending by corporations due to the
  general slowdown in the global economy. In addition, some brand
  companies sell their computer products bundled with TFT-LCD
  monitors, which also increases the demand of our TFT-LCD panels.
  As a result, if the rate of substitution of TFT-LCD panels for
  cathode ray tube monitors is lower than expected or if brand
  companies change their bundling policy, such factors may have
  an adverse effect on our net revenues and results of operations.

> If
>     end-users do not purchase LCD televisions to replace traditional
>     cathode ray tube television, or if the volume of their purchases
>     is less than our expectations, our net sales may not grow
>     at the rate we expect and our operating results may suffer.

We
  commenced commercial production of display panels for LCD televisions
  in the fourth quarter of 2002. As end-users may find LCD televisions
  attractive to them due to the compact size of LCD televisions as
  compared to traditional cathode ray tube televisions, we believe
  that a substantial portion of our sales growth will be derived from
  end-users who purchase LCD televisions to replace their traditional
  cathode ray tube televisions, or end-users who purchase LCD televisions
  as second televisions. We have installed, and we expect to continue
  to install, capacity in anticipation of increased LCD television
  demand generated by this trend toward the market acceptance of LCD
  televisions. As a result, if end-users purchase LCD televisions at
  a lower rate than expected, we will not be able to maintain high
  utilization rate of the capacity installed or allocated to manufacture
  panels for LCD televisions. In addition, we may face downward pricing
  pressures on our TFT-LCD products due to the over-production of such
  products by utilizing excess capacity, which may have an adverse
  effect on our operating results.

> If
>     we are unable to maintain high capacity utilization rates,
>     our profitability will be adversely affected.

High
  capacity utilization allows us to allocate fixed costs over
  a greater number of panels produced. Increases or decreases
  in capacity utilization rates can have a significant effect
  on our gross margin. Accordingly, our ability to maintain or
  enhance our gross margins will continue to depend, in part,
  on maintaining high capacity utilization rates. In turn, our
  ability to maintain high capacity utilization will depend on
  the demand for our products and our ability to offer products
  that meet our customers requirements at competitive prices.

Although
  we are currently maintaining a high utilization rate of our
  capacity, operating at near full capacity, our operating results
  in the past have been negatively affected by low capacity utilization.
  We cannot assure you that we

9

---

will
  be able to maintain high capacity utilization rates. If demand
  for our products does not meet our expectations, our capacity
  utilization would decrease and our gross margins would suffer.

> We
>     depend on a small number of customers for a substantial portion
>     of our net sales and a loss of any one of these customers
>     would result in the loss of a significant portion of our net
>     sales.

We
  are dependent on a small group of customers for a substantial
  portion of our business. In 2000, 2001 and 2002, 68.7%, 62.1%
  and 54.0% of our net sales, respectively, was derived from sales
  to our top ten customers in those years. In addition, some customers
  individually accounted for more than 10% of our net sales for
  each of the last three years. In 2000, Acer Inc., IBM Corporation
  and Matsushita accounted for 14.5%, 10.3% and 10.2% of our net
  sales, respectively. In 2001, BenQ Corporation accounted for
  17.8% of our net sales. In 2002, BenQ Corporation, together
  with its subsidiary BenQ (IT), accounted for 20.8% of our net
  sales. As some of our major customers are brand companies which
  also provide original equipment manufacturing services for other
  brand companies, such as BenQ Corporation, our panels shipped
  to those customers include both panels ordered for their own
  account as well as panels ordered by or on behalf of their brand
  company customers.

In
  recent years, our largest customers have varied due to changes
  in our product mix. We expect that we will continue to depend
  on a relatively limited number of customers for a significant
  portion of our net sales and may continue to experience fluctuations
  in the percentage shares of our sales among our largest customers
  as we periodically adjust our product mix. Our ability to maintain
  close and satisfactory relationships with our customers is important
  to the ongoing success and profitability of our business. If
  any of our significant customers reduces, delays or cancels
  its orders, our business would be seriously harmed because each
  one of these customers accounts for a significant portion of
  our net sales. Similarly, our failure to manufacture sufficient
  quantities of panels to meet the demands of these customers
  may cause us to lose customers and our business may suffer as
  a result.

> Our
>     customers generally do not place purchase orders far in advance,
>     which makes it difficult for us to predict our future revenues,
>     adjust production costs and allocate capacity efficiently
>     on a timely basis.

Our
  customers generally provide rolling forecasts four to six months
  in advance of, and do not place firm purchase orders until one
  month before, expected shipment date. In addition, due to the
  cyclical nature of the TFT-LCD industry, our customers
  purchase orders have varied significantly from period to period.
  As a result, we do not typically operate with any significant
  backlog. The lack of significant backlog makes it difficult
  for us to forecast our revenues in future periods. Moreover,
  we incur expenses based in part on our expectations of future
  sales, and we may be unable to adjust production costs or allocate
  production capacity in a timely manner to compensate for shortfalls
  in sales. We expect that, in the future, our sales in any quarter
  will continue to be substantially dependent upon purchase orders
  received in that quarter. Our lack of flexibility to adjust
  production costs or to allocate production capacity quickly
  to respond to the demand for our products may affect our ability
  to maximize operating results, which may result in a negative
  impact on the value of your investment.

> If
>     capital resources required for our expansion plans are not
>     available, we may be unable to successfully implement our
>     business strategy.

Historically,
  we have been able to finance our capital expenditures through
  the issuance of equity securities, long-term borrowings, and
  the issuance of convertible and other debt securities. Our ability
  to expand will continue to be largely dependent on our ability
  to obtain external funding. We expect to make substantial capital
  expenditures in connection with the expansion of our production
  capacity, including investments in 2003 and 2004 in the ramp
  up of two new fifth-generation fabs, our L8A fab with input
  substrate size of 1,100 x 1,250 millimeters, and L8B fab with
  input substrate size of 1,100 x 1,300 millimeters, the establishment
  of color filter production facilities housed at our L8B fab,
  the establishment of the new TFT-LCD flat panel research and
  development center, AU Technology Center, and the establishment
  of a sixth- or seventh-generation fab. These capital expenditures
  will be made well in advance of any additional sales to be generated
  from these expenditures. We may incur operating losses if we
  do not have the capital resources to complete our expansion
  plans or if our actual expenditures exceed our planned expenditures
  for a variety of reasons, including changes in:

- our
    growth plan;
- manufacturing
    process and product technologies;

10

---

- market
    conditions;
- prices
    of equipment; and
- interest
    rates.

We
  cannot assure you that any required additional financing will
  be available to us on satisfactory terms, if at all. If adequate
  funds are not available on satisfactory terms, we may be forced
  to curtail our expansion plans, which could result in a loss
  of customers, restrain our ability to successfully implement
  our business strategy and limit the growth of our business.

> We
>     operate in a highly competitive environment and we may not
>     be able to sustain our current market position if we fail
>     to compete successfully.

The
  markets for our products in Taiwan and abroad are highly competitive.
  We experience pressure on our prices and profit margins, due
  largely to additional industry capacity from competitors in
  Taiwan, Korea and Japan. The ability to manufacture on a large
  scale with greater cost efficiencies is a competitive advantage
  in our industry. Some of our competitors have greater access
  to capital and substantially greater production, research and
  development, intellectual property, marketing and other resources
  than we do. Some of our competitors have announced their plans
  to develop, and have already invested substantial resources
  in, fifth-generation capacity. They may be able to introduce
  products manufactured using such capacity in advance of our
  companys schedule. In addition, some of our larger competitors
  have more extensive intellectual property portfolios than ours,
  which they may use to their advantage when negotiating cross-licensing
  agreements for technologies. As a result, these companies may
  be able to compete more aggressively over a longer period of
  time than we can.

The
  principal elements of competition in the TFT-LCD industry include:

- price;
- product
    features and quality;
- customer
    service, including product design support;
- research
    and development; and
- time-to-market.

Our
  ability to compete successfully in the TFT-LCD industry also
  depends on factors partially outside of our control, including
  industry and general economic conditions.

> If
>     brand companies do not continue to outsource the manufacturing
>     of their products to original equipment manufacturing service
>     providers with production operations in Taiwan or the Peoples
>     Republic of China , our sales could be adversely affected.

In
  recent years, brand companies have increasingly outsourced the
  manufacturing of their products to original equipment manufacturing
  service providers in Taiwan, or such providers with part or
  all of their production operations in the Peoples Republic
  of China. We believe that we have benefited from this outsourcing
  trend in large part due to our production locations in both
  Taiwan and the Peoples Republic of China, which has allowed
  us to better coordinate our production and services with our
  customers requirements, especially in the areas of delivery
  time and product design support. There can be no assurance that
  this outsourcing trend will continue. If brand companies do
  not continue to outsource the manufacturing of their products
  to original equipment manufacturing service providers with their
  production operations in Taiwan or the Peoples Republic
  of China, our sales and operating results will suffer.

> If
>     we are unable to manage our growth effectively, our business
>     could be negatively affected.

We
  have experienced, and expect to continue to experience, growth
  in the scope and complexity of our operations and in the number
  of our employees. For example, we are currently devoting significant
  resources in the ramp up of our new fifth-generation fab, our
  L8A fab, the construction of another new fifth-generation fab,
  our L8B

11

---

fab
  and the establishment of AU Technology Center. This growth may be
  strained by our existing managerial, financial and other resources.
  In order to manage our growth, we must continue to implement additional
  operating and financial controls and hire and train additional personnel
  for these functions. We cannot assure you that we will be able to
  do so in the future, and our failure to do so could jeopardize our
  expansion plans and seriously harm our operations.

> The
>     loss of any key management personnel or the undue distraction
>     of any of these personnel may disrupt our business.

Our
  success depends largely upon the continued services of key senior
  management, including our Chairman, President and Chief Executive
  Officer. We do not carry key person life insurance on any of
  our senior management personnel. If we lose the services of
  key senior management personnel, it would be very difficult
  to find and integrate replacement personnel in a timely manner
  or at all, which would seriously harm our business.

In
  addition, our continuing growth will, to a large extent, depend
  on the attention of key management personnel to our companys
  daily affairs. For the foreseeable future, we expect that Mr.
  Kuen-Yao (K.Y.) Lees time will be divided between serving
  as Chairman and Chief Executive Officer of our company and Chairman,
  President and Chief Executive Officer of BenQ Corporation. If
  Mr. Lee is not able to devote enough time to our company, our
  operations and the value of or ADSs may be negatively affected.

> We
>     depend on our technical personnel, including research and
>     development and other personnel, and the inability to attract
>     and retain such personnel would jeopardize our operations
>     and expansion plans.

Our
  success depends on our ability to attract and retain skilled
  employees, particularly engineering and technical personnel
  in research and development and manufacturing processing areas.
  We are currently establishing a new TFT-LCD flat panel research
  and development center, AU Technology Center, in Hsinchu Science-Based
  Industrial Park. The research center plans to house eight to
  sixteen research labs and training facilities, which is targeted
  for completion by third quarter of 2004. Without sufficient
  number of skilled employees, our operations would suffer, resulting
  in the deterioration in production quality. Competition for
  qualified technical personnel and operators in Taiwan is intense
  and the replacement of skilled employees is difficult. We may
  encounter this problem in the future, as we require increased
  number of skilled employees for our expansion. If we are unable
  to attract and retain our technical personnel and other employees,
  this may adversely affect our business and our operating efficiency
  would deteriorate.

> Potential
>     conflicts of interest with BenQ Corporation and United Microelectronics
>     Corporation may cause us to lose opportunities to expand and
>     improve our operations.

As
  of December 31, 2002, BenQ Corporation owned 14.8% of our outstanding
  shares, and four of our directors and one of our supervisors are
  representatives of BenQ Corporation. See Item 7. Major Shareholders
  and Related Party Transactions. Since BenQ Corporation, together
  with its subsidiary BenQ (IT), are currently the largest customer
  for our products, its substantial interest in our company may lead
  to conflicts of interest in our sales decisions or allocations. In
  addition, because four of our directors are representatives of BenQ
  Corporation, and Mr. Kuen-Yao (K.Y.) Lee, our Chairman and Chief
  Executive Officer, is also Chairman, President and Chief Executive
  Officer of BenQ Corporation, conflicts of interest between their
  duties to BenQ Corporation and us may arise. See  The
  loss of any key management personnel or the undue distraction of
  any of these personnel may disrupt our business. In addition,
  as of December 31, 2002, United Microelectronics Corporation owned
  11.4% of our outstanding shares. See Item 7. Major Shareholders
   Related Party Transactions. Three of our directors and
  one of our supervisors are representatives of United Microelectronics
  Corporation. Since United Microelectronics Corporation also owns
  a 25.8% equity interest in Novatek Corporation, which is one of our
  suppliers of driver integrated circuit components, United Microelectronics
  Corporations substantial interest in our company may lead to
  conflicts of interest in our purchasing decisions or allocations.
  In addition, because three of our directors are representatives of
  United Microelectronics Corporation, conflicts of interest between
  their duties to United Microelectronics Corporation and us may arise.

We
  cannot assure you that, when conflicts of interest arise with
  respect to representatives of either BenQ Corporation or United
  Microelectronics Corporation, our interested directors will
  act completely in our interest or that conflicts of interest
  will be resolved in our favor. These conflicts may result in
  lost corporate opportunities,

12

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including
  opportunities that are never brought to our attention, or actions
  that may prevent us from taking advantage of opportunities to
  expand and improve our operations.

> The
>     differences between Taiwan and U.S. accounting standards resulted
>     in different amounts of our net income (loss) under those
>     standards, which makes evaluating our financial performance
>     difficult.

Our
  consolidated financial statements are prepared and presented
  under ROC GAAP, which differ in many respects from US GAAP.
  For example, under ROC GAAP, the merger of Unipac into Acer
  Display has been accounted for under the pooling-of-interests
  method of accounting, whereby the historical financial statements
  of the previously separate companies for periods prior to the
  merger have been restated on a combined basis. In contrast,
  under US GAAP, the merger of Unipac into Acer Display has been
  accounted for as the acquisition of Unipac by Acer Display under
  the purchase method of accounting. Under purchase accounting,
  the cost of the acquired entity is measured based on the fair
  value of the securities issued and is allocated to the assets
  acquired and liabilities assumed based on their fair values
  at the date of acquisition. As a result, our financial data
  under US GAAP include the results of operations of Unipac only
  from September 1, 2001, the date of acquisition. In addition,
  ROC GAAP does not require the recognition of the value of shares
  distributed as bonuses to employees when calculating net income.
  We generated a net loss of NT$5,340.9 million in 2001 and net
  income of NT$4,938.9 million (US$142.3 million) in 2002 under
  US GAAP, compared to a net loss of NT$6,710.2 million in 2001
  and net income of NT$6,022.7 million (US$173.6 million) in
  2002 under ROC GAAP.

Risks
  Relating to Manufacturing

> Our
>     manufacturing processes are highly complex, costly and potentially
>     vulnerable to disruptions that can significantly increase
>     our costs and delay product shipments to our customers.

Our
  manufacturing processes are highly complex, require advanced
  and costly equipment and are periodically modified to improve
  manufacturing yields and production efficiency. We face the
  risk of production difficulties from time to time that could
  cause delivery delays and reduced yields. These production difficulties
  include capacity constraints, construction delays, difficulties
  in upgrading or expanding existing facilities, difficulties
  in changing our manufacturing technology and delays in the delivery
  or relocation of specialized equipment. We may encounter many
  of these difficulties in connection with the planned construction
  of, and a ramp up of production capacity for, our fifth-generation
  fabs or higher-generation fabs. We may also encounter these
  difficulties in connection with the establishment of our in-house
  color filter production facilities as well as the adoption of
  new manufacturing process technologies, such as technologies
  utilizing low temperature poly-silicon, or LTPS, technologies
  in our L3 fab. We cannot assure you that we will be able to
  complete our fifth-generation fabs without material delays or
  difficulties, or that we will not encounter these manufacturing
  difficulties in the future.

> If
>     we are unable to obtain raw materials and components in suitable
>     quantity and quality from our suppliers, our production schedules
>     would be delayed and we may lose customers.

Raw
  material and component costs accounted for the majority of our
  cost of goods sold for each of 2000, 2001 and 2002. We must
  obtain sufficient quantities of high quality raw materials and
  components at acceptable prices and in a timely manner. We source
  most of our raw materials and components, including critical
  materials like color filters, driver integrated circuits, cold
  cathode fluorescent lamp, or CCFL, and backlight units, polarizer
  and glass substrates, from a limited group of suppliers, both
  foreign and domestic. In 2001, we experienced a shortage of
  glass substrates due to the closure of the production facility
  at one of our two major suppliers of glass substrates. In addition,
  based on announced plans for new TFT-LCD production capacity
  worldwide, there could be a shortage in the supply of color
  filters, glass substrates and CCFL in the second half of 2003
  or beyond. Our operations would be adversely affected if we
  cannot obtain raw materials and components in sufficient quantity.We may also experience
  difficulties in sourcing adequate supplies for our operations
  if there is a ramp up of production capacity by TFT-LCD manufacturers,
  including our company, without a corresponding increase in the
  supply of raw materials and components.

Although
  local suppliers of raw materials and components provided approximately
  63.2% of our raw materials and components in 2002, we are dependent
  on supplies of many major raw materials and components from
  suppliers in Japan. We cannot assure you that we will be able
  to obtain sufficient quantities of raw materials and components
  and other supplies of an acceptable quality in the future. Our
  inability to obtain high-quality raw materials and

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components
  in a timely and cost-effective manner would cause us to delay
  our production and delivery schedules, which may result in the
  loss of our customers and revenues.

> If
>     we are unable to obtain equipment from our suppliers, we may
>     be forced to delay our expansion plans.

We
  have purchased, and expect to purchase, a substantial portion
  of our equipment from foreign suppliers, especially for our
  planned fifth-generation fab, L8B fab. From time to time, increased
  demand for new equipment may cause lead times to extend beyond
  those normally required by equipment vendors. For example, in
  the past, increased demand for equipment caused some equipment
  suppliers to only partially satisfy our equipment orders in
  the normal time frame. The unavailability of equipment, delays
  in the delivery of equipment, or the delivery of equipment that
  does not meet our specifications, could delay implementation
  of our expansion plans and impair our ability to meet customer
  orders. If we are unable to implement our expansion plans on
  schedule or in line with customer expectations, our business
  may suffer.

> If
>     we are unable to successfully manufacture our products within
>     the acceptable range of quality, our results of operations
>     will suffer.

TFT-LCD
  manufacturing processes are complex and involve a number of
  precise steps. Defective production can result from a number
  of factors, including:

- the
    level of contaminants in the manufacturing environment;
- human
    error;
- equipment
    malfunction;
- use
    of substandard raw materials and components; and
- inadequate
    sample testing.

From
  time to time, we have experienced, and may in the future experience,
  lower than anticipated production yields as a result of the
  above factors, particularly in connection with the expansion
  of our capacity or change in our manufacturing processes. In
  addition, our yield on new products will be lower than average
  as we develop the necessary expertise and experience to produce
  those products. If we fail to maintain high production yield
  and high quality production standards, our reputation may suffer
  and our customers may cancel their orders or return our panels
  for rework, which will negatively affect our results of operations.

> If
>     we violate environmental regulations, we may be subject to
>     fines or restrictions that could cause our operations to be
>     delayed or interrupted and our business to suffer.

Our
  operations can expose us to the risk of environmental claims that
  could result in damages or fines imposed against us. We must comply
  with regulations relating to storage, handling, generation, treatment,
  emission, release, discharge and disposal of certain materials and
  wastes resulting from our manufacturing processes. In December, 2002
  and March 2001, we incurred small fines for non-compliance with a
  waste storage-labeling requirement. In addition, at the end of 1999,
  we incurred a small fine when our L5 fab increased its waste volume
  by expanding production, resulting in a waste volume in excess of
  the volume permitted under its original permit.

Future
  changes to existing environmental regulations or unknown contamination
  of our sites, including contamination by prior owners and operators
  of our sites, may give rise to additional compliance costs or
  potential exposure to liability for environmental claims that
  may seriously affect our business, financial condition and results
  of operations.

Risks
  Relating to Our Technologies and Intellectual Property

> If
>     we cannot successfully introduce, develop or acquire advanced
>     technologies, our profitability may suffer.

Technology
  and industry standards in the TFT-LCD industry evolve quickly,
  resulting in steep price declines in the advanced stages of
  a products life cycle. To remain competitive, we must
  continually develop or acquire advanced manufacturing process
  technologies and build next generation fabs to lower production
  costs and enable

14

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timely
  release of new products. In addition, we expect to utilize more
  advanced technologies, such as organic light-emitting diode,
  or OLED, LTPS and plasma display to develop advanced products.
  Our ability to manufacture products by utilizing more advanced
  manufacturing process technologies to increase production yields
  will be critical to our sustained competitiveness. We plan to
  invest a substantial amount of capital, and have committed significant
  management and research and development resources, to develop
  our fifth-generation production capacity and AU Technology Center,
  our new TFT-LCD flat panel research and development center.
  However, we cannot assure you that we will be successful in
  completing the development of this fifth-generation production
  capacity or AU Technology Center, or that we will be able to
  build them without material delays or at the expected costs.
  If we fail to do so, our results of operations and financial
  condition may be materially and adversely affected. We also
  cannot assure you that there will be no material delays in connection
  with our efforts to develop new technology and manufacture more
  technologically advanced products. If we fail to develop or
  make advancements in product technologies or manufacturing process
  technologies on a timely basis, we may become less competitive.

> If
>     we lose the support of our technology partners or the legal
>     rights to use our licensed manufacturing process or product
>     technologies, our business may suffer.

Enhancing
  our manufacturing process and product technologies is critical
  to our ability to provide high quality products to our customers
  at competitive prices. We intend to continue to advance our
  manufacturing process and product technologies through internal
  research and development and licensing from other companies.
  We currently have licensing arrangements with IBM, Matsushita,
  Fujitsu and Fujitsu Display Technologies Corporation, or FDTC,
  for product and manufacturing process technologies used to produce
  a substantial amount of our TFT-LCD panels. These agreements
  are for terms of five to seven years. In March 2003, we also
  established a joint research and development program with FDTC
  to develop the product and manufacturing process technologies
  for TFT-LCD panels. If we are unable to renew our technology
  licensing or joint research and development arrangements with
  IBM, Matsushita, Fujitsu or FDTC on mutually beneficial economic
  terms, we may lose the legal protection to use certain of the
  processes and designs we employ to manufacture our products.
  Similarly, if we cannot license or otherwise acquire or develop
  new manufacturing process and product technologies that are
  critical to the development of our business or products, we
  may lose important customers because we are unable to continue
  providing our customers with products based on leading-edge
  manufacturing process and product technologies.

We
  have entered into patent and intellectual property license agreements
  that require periodic royalty payments. In the future, we may
  need to obtain additional patent licenses or renew existing
  license agreements. We cannot assure you that these license
  agreements can be obtained or renewed on acceptable terms. If
  not, our business and future operating results could be materially
  and adversely affected.

> Disputes
>     over intellectual property rights could be costly and deprive
>     us of the technology to stay competitive.

As
  technology is an integral part of our manufacturing process
  and product, we have, in the past, received communications alleging
  that our products or processes infringe product or manufacturing
  process technology rights held by others, and expect to continue
  to receive such communications.

We
  were involved in a patent infringement dispute with Sharp Corporation.
  Sharp claimed that five of its patents had been infringed upon by
  Unipacs production of four TFT-LCD models. In November 2000,
  Sharp made a criminal complaint against certain officers of Unipac
  with the Public Prosecutors Office in the Hsinchu District
  Court, naming Mr. Ing-Dar Liu, the Chairman of Unipac and the former
  Vice Chairman of our company, as defendant. On January 23, 2003,
  the Public Prosecutor discharged the criminal complaint against Mr.
  Liu due to a change under the ROC Patent Law pursuant to which patent
  infringement is no longer a criminal offense. As of the date of this
  annual report, neither Sharp nor any third party has brought any
  civil or criminal action against either Unipac, Acer Display or our
  company in connection with the alleged patent infringement described
  above.

We
  are currently involved in a patent infringement dispute with Semiconductor
  Energy Laboratory Co., Ltd. In June 2002, Semiconductor Energy filed
  a complaint in the Northern District of California alleging that
  we had infringed its patents in our production of TFT-LCD panels,
  seeking unspecified monetary damages, including punitive damages,
  and an injunction against the further production or sale of our TFT-LCD
  products. We intend to defend the case vigorously. The litigation
  is currently in the late stages of discovery.

We
  have no means of knowing what patent applications have been
  filed in the United States or elsewhere until they are granted.
  If any third party were to make valid intellectual property
  infringement claims against our customers or us, we may be required
  to:

15

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- discontinue
    using disputed manufacturing process technologies;
- 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 commercially reasonable terms, if at all.

If
  our products or manufacturing processes are found to infringe
  third-party rights, we may be subject to significant liabilities
  and be required to change our manufacturing processes or products.
  This could restrict us from making, using, selling or exporting
  some of our products, which could in turn materially and adversely
  affect our business and financial condition. In addition, any
  litigation, whether to enforce our patents or other intellectual
  property rights or to defend ourselves against claims that we
  have infringed the intellectual property rights of others, could
  materially and adversely affect our results of operations because
  of the management attention required and legal costs incurred.

In
  addition, we have acquired patents and trademarks to protect
  some of our proprietary technologies and products. We cannot
  assure you that these measures will provide meaningful protection
  of our intellectual property rights. For example, our competitors
  may be able to develop similar or superior products, or we may
  not have sufficient financial and legal resources to protect
  and enforce our rights.

Political,
  Geographical and Economic Risks

> The
>     outbreak of Severe Acute Respiratory Syndrome, or SARS, in
>     the Peoples Republic of China, Hong Kong, Singapore,
>     Taiwan and certain other countries may have an adverse effect
>     on the economies and financial markets of certain Asian countries
>     and may adversely affect our results of operations.

Beginning in March 2003, Guangdong Province of China, Hong Kong,
  Singapore and certain other Asian countries encountered an outbreak
  of SARS, a highly contagious form of atypical pneumonia. Since
  April 2003, the outbreak of SARS has spread to certain other
  regions, including Taiwan. Although as of the date hereof the
  SARS outbreak seems to be under control, no assurances can be
  given that a recurrence of the outbreak would not occur. While
  the long-term impact of the SARS outbreak is unclear at this
  time, the outbreak of SARS may have an adverse effect on the
  economy conditions of certain countries in Asia. Each of the
  governments of Hong Kong, Singapore and Taiwan has revised downward
  its gross domestic product growth forecasts for 2003 due to
  SARS. As a result, the economic fallout of the SARS outbreak
  may result in a decrease in the demand for our TFT-LCD products,
  or a decrease in information technology spending. In addition,
  our production operations and that of our suppliers or customers
  may be seriously interrupted due to the SARS outbreak or the
  measures taken by the government of the Republic of China, Hong
  Kong, the People's Republic of China or other countries against
  SARS, which would have an adverse affect on our results of operations.

> Due
>     to the location of our operations in Taiwan and the Peoples
>     Republic of China, we and many of our customers and suppliers
>     are vulnerable to natural disasters and other events outside
>     of our control, which may seriously disrupt our operations.

Most
  of our existing manufacturing operations, and the operations
  of many of our customers and suppliers, are located in Taiwan,
  which is vulnerable to natural disasters. In 2002, approximately
  52.7% of our net sales was derived from Taiwan-based customers.
  In addition, we have expanded our module-assembly operations
  to the Peoples Republic of China since July 2002. Our
  module-assembly operations in the Peoples Republic of
  China, and the operations of many of our customers and suppliers
  in that area, may also be vulnerable to natural disasters. As
  a result of this geographic concentration, disruption of operations
  at our fabs or the facilities of our customers and suppliers
  for any reason, including work stoppages, power outages or water
  supply shortages, fire, typhoons,

16

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earthquakes
  or other natural disasters, could cause delays in production
  and shipments of our products. This could lead our customers
  to obtain products from other sources.

For
  instance, our operations stopped completely for five days in
  September 1999, largely because of a power outage caused by
  a severe earthquake. After the stoppage, it took us several
  days to ramp up to full operations. Shortages or suspension
  of power supplies have occasionally occurred, and have disrupted
  our operations. The occurrence of power outage in the future
  could seriously hurt our business.

Our
  manufacturing processes require a substantial amount of water.
  Although currently more than 70% of the water used in production
  process is recycled, our production operations may be seriously
  disrupted by water shortage. For instance, the Hsinchu area,
  where three out of our five fabs are located, experienced a
  drought in 2002. The Taiwan authorities have implemented water-rationing
  measures, including sourcing water from alternative sources,
  and therefore we did not encounter water shortage in that year.
  We may encounter a drought in both Hsinchu and Taoyuan area
  in the future, where most of our production operations are located.
  If another drought were to occur and we or the authorities were
  unable to source water from alternative sources in sufficient
  quantity, we may be required to temporarily shut down or substantially
  reduce the operations of these fabs, which would seriously affect
  our operations. In addition, even if we were able to source
  water from alternative sources, our reliance on supplemental
  water supplies would increase our operating costs. Furthermore,
  the disruption of operations at our customers facilities
  could lead to reduced demand for our products. The occurrence
  of any of these events in the future could adversely affect
  our business.

> We
>     have made investments, and are exploring the possibility of
>     expanding our businesses and operations to, or making additional
>     investments in, the Peoples Republic of China, which
>     may expose us to additional political, regulatory, economic
>     and foreign investment risks.

Many
  of our customers and competitors have expanded their businesses
  and operations to the Peoples Republic of China. In order
  to remain cost competitive and to take advantage of the developing
  mainland China market, as permitted by Republic of China regulations
  governing investment in the Peoples Republic of China
  by Republic of China companies, we established two module assembly
  facilities, our S1 and S2 fabs, in Suzhou, Jiangsu Province
  of the Peoples Republic of China, and commenced mass production
  at such fabs since July 2002. Module assembly involves connecting
  components to the previously fabricated glass panel. We may
  further explore the possibility of investing in other businesses
  or operations in the Peoples Republic of China as and
  when we are legally permitted to do so. Currently, the Republic
  of China laws and regulations permit investment in module-assembly
  operations in the Peoples Republic of China but do not
  permit investments in array and cell operations. The array process
  is the first step of the manufacturing process and involves
  fabricating transistors on the back substrate, while the cell
  process is the second step and involves the filling of liquid
  crystal and joining the arrayed back substrate and the front
  substrate with a color filter. We do not know when or if such
  Republic of China laws and regulations governing investment
  in the Peoples Republic of China will be amended,and
  we cannot assure you that any such amendments to those regulations
  will permit us to invest in operations involving array and cell
  processes in the Peoples Republic of China. Our businesses
  and operations and our future expansion or investment plans
  in the Peoples Republic of China are subject, to a significant
  degree, to the political and economic situation, regulatory
  control and general legal developments in the Peoples
  Republic of China and other foreign investment risks. In addition,
  our businesses and operations in the Peoples Republic
  of China and our future expansion or investment plans could
  be adversely affected if relations between the Peoples
  Republic of China and the Republic of China deteriorate.

> Disruptions
>     in Taiwans political environment could seriously harm
>     our business and the market price of our shares and ADSs.

Most
  of our assets and operations are located in Taiwan and about
  half of our net sales are derived from customers in Taiwan.
  Accordingly, our business and financial condition may be affected
  by changes in local governmental policies, and political and
  social instability.

Taiwan
  has a unique international political status. The government
  of the Peoples Republic of China asserts sovereignty over
  mainland China and Taiwan, and does not recognize the legitimacy
  of the government of the Republic of China. The government of
  the Peoples Republic of China has indicated that it may
  use military force to gain control over Taiwan if Taiwan declares
  independence or a foreign power interferes in Taiwans
  domestic affairs.

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Relations
  between Taiwan and the Peoples Republic of China and other
  factors affecting Taiwans political environment could
  affect our business.

> If
>     economic conditions in Taiwan deteriorate, our current business
>     and future growth would be materially and adversely affected.

In
  recent years, the currencies of many East Asian countries, including
  Taiwan, have experienced considerable volatility and depreciation.
  The Central Bank of China, which is the central bank of Taiwan,
  has from time to time intervened in the foreign exchange market
  to minimize the fluctuation of the U.S. dollar/NT dollar exchange
  rate and to prevent significant decline in the value of the
  New Taiwan dollar. New Taiwan dollars have depreciated against
  U.S. dollars from US$1.00 = NT$27.52 on January 2, 1997 to US$1.00
  = NT$34.59 on June 20, 2003, based on the noon buying rates
  published by the Federal Reserve Bank of New York.

In
  addition, the banking and financial sectors in Taiwan has been
  seriously harmed by the general economic downturn in Asia and
  Taiwan, which has caused a depressed property market, and an
  increase in the number of companies filing for corporate reorganization
  and bankruptcy protection. As a result, financial institutions
  are more cautious in providing credit for businesses in Taiwan.
  We cannot assure you that we will continue to have access to
  credit at commercially reasonable rates of interest or at all.

> The
>     market value of our ADSs may fluctuate due to the volatility
>     of the Republic of China securities market.

The
  trading price of our ADSs may be affected by the trading price
  of our shares on the Taiwan StockExchange.
  The Taiwan Stock Exchange is smaller and more volatile than
  the securities markets in the United States. The Taiwan Stock
  Exchange has experienced substantial fluctuations in the prices
  and volumes of trading of securities. In the past decade, the
  Taiwan Stock Exchange Capitalization Weighted Stock Index peaked
  at 12,495.34 in February 1990 and subsequently fell to a low
  of 2,560.47 in October 1990. On March 13, 2000, the Taiwan Stock

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Exchange
  Capitalization Weighted Stock Index experienced a 617-point
  drop, which represented the single largest decrease in the Taiwan
  Stock Exchange Capitalization Weighted Stock Index in its history.
  The Taiwan Stock Exchange Capitalization Weighted Stock Index
  experienced a 17.1% increase in 2001 and a 19.8% decrease in
  2002. During the period from January 1, 2002 to December 31,
  2002, the Taiwan Stock Exchange Capitalization Weighted Stock
  Index peaked at 6,462.30 on April 22, 2002, and reached a low
  of 3,850.04 on October 11, 2002. Over the same period, daily
  closing values of our shares ranged from NT$61.5 per share to
  NT$16.0 per share. On June 27, 2003, the Taiwan Stock Exchange
  Capitalization Weighted Stock Index closed at 4,877.90, and
  the closing value of our shares was NT$23.70
  per share.

The
  Taiwan Stock Exchange is particularly volatile during times
  of political instability including when relations between Taiwan
  and the Peoples Republic of China are strained. Several
  investment funds affiliated with the Taiwan government have
  also from time to time purchased securities from the Taiwan
  Stock Exchange to support the trading level of the Taiwan Stock
  Exchange. Moreover, the Taiwan Stock Exchange has experienced
  problems including market manipulation, insider trading and
  settlement defaults. The recurrence of these or similar problems
  could have adverse effect on the market price and liquidity
  of our shares and ADSs.

> If
>     New Taiwan dollars or other currencies in which our sales,
>     raw materials and components and capital expenditures are
>     denominated fluctuate significantly against U.S. dollars or
>     Japanese yen, our profitability may be seriously affected.

We
  have significant foreign currency exposure, and are affected
  by fluctuations in exchange rates among the U.S. dollar, the
  Japanese yen, the New Taiwan dollar and other currencies. Our
  sales, raw materials and components and capital expenditures
  are denominated in U.S. dollars, Japanese yen and New Taiwan
  dollars in varying amounts. For example, in 2002, approximately
  88.1% of our net sales was denominated in U.S. dollars. During
  the same period, approximately 66.9%, 24.5% and 8.6% of our
  cost of goods sold, mainly raw material and component costs,
  were denominated in New Taiwan dollars, Japanese yen and U.S.
  dollars, respectively. In addition, in 2002, approximately 16.9%,
  58.7% and 21.9% of our total capital expenditures, mainly for
  the purchase of equipment, were denominated in New Taiwan dollars,
  Japanese yen and U.S. dollars, respectively. From time to time,
  we enter into forward foreign currency contracts to hedge our
  foreign currency exposure, but we cannot assure you that we
  will be fully protected against exchange rate fluctuations.

> Disruptions
>     in the international trading environment may seriously decrease
>     our international sales.

A
  substantial portion of our net sales is derived from sales to
  customers located outside of Taiwan. In 2000, 2001 and 2002,
  sales to our overseas customers accounted for 29.0%, 23.7% and
  47.3%, respectively, of our net sales. In addition, the majority
  of our sales to customers in Taiwan are made to original equipment
  manufacturing service provider customers that use our display
  panels in the products that they manufacture on a contract basis
  for brand companies worldwide. We expect sales to customers
  outside of Taiwan to continue to represent a significant portion
  of our net sales. As a result, our business will continue to
  be vulnerable to disruptions in the international trading environment,
  including adverse changes in foreign government regulations,
  political unrest and international economic downturns. These
  disruptions in the international trading environment may affect
  the demand for our products and change the terms upon which
  we sell our products overseas, which could seriously decrease
  our international sales.

Risks
  Related to Our ADSs and Our Trading Market

> The
>     market value of the ADSs may fluctuate due to the volatility
>     of the securities markets.

The
  securities markets in the United States and other countries
  have experienced significant price and volume fluctuations.
  Volatility in the price of our ADSs may be caused by factors
  outside of our control and may be unrelated to, or disproportionate
  to changes in, our operating results. In the past, following
  periods of volatility in the market price of a public companys
  securities, securities class action litigation has often been
  instituted against that company. Litigation of this kind could
  result in substantial costs and a diversion of our managements
  attention and resources.

> The
>     liquidity and value of our ADSs may be affected by the withdrawal
>     of our shares from our ADS facility.

Although
  ADS holders are entitled to withdraw the shares underlying the
  ADSs from the depositary, Republic of China law requires that
  the shares be held in an account in the Republic of China or
  sold for the benefit of the

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holder
  on the Taiwan Stock Exchange. In connection with any withdrawal
  of shares from our ADS facility, the ADSs evidencing these shares
  will be cancelled. Unless additional ADSs are issued, the effect
  of withdrawals will be to reduce the number of outstanding ADSs
  and, if a significant number of withdrawals are affected, to
  reduce the liquidity of the ADSs. We cannot assure you that
  the depositary will be able to arrange for a sale of deposited
  shares in a timely manner or at a specified price, particularly
  during periods of illiquidity or volatility with respect to
  our shares.

> Restrictions
>     on the ability to deposit our shares into our ADS facility
>     may adversely affect the liquidity and price of our ADSs.

The
  ability to deposit shares into our ADS facility is restricted
  by Republic of China law. A significant number of withdrawals
  of shares underlying our ADSs would reduce the liquidity of
  the ADSs by reducing the number of ADSs outstanding. As a result,
  the prevailing market price of our ADSs may differ from the
  prevailing market price of our shares on the Taiwan Stock Exchange.
  Under current Republic of China law, no person or entity, including
  you and us, may deposit our shares in our ADS facility without
  specific approval of the Securities and Futures Commission of
  the Republic of China, unless:

- we
    pay stock dividends on our shares;
- we
    make free distribution of shares;
- the
    ADS holders exercise preemptive rights in the event of capital
    increases for cash. The depositary will not offer the ADS
    holders these rights unless both the distribution of the rights
    and the underlying shares to all our ADS holders are either
    registered under the Securities Act or exempt from registration
    under the Securities Act; or
- the
    investors purchase our shares, directly or through the depositary,
    on the Taiwan Stock Exchange, and deliver our shares to the
    custodian for deposit into our ADS facility, or our existing
    shareholders deliver our shares to the custodian for deposit
    into our ADS facility. The depositary may issue ADSs against
    the deposit of those shares only if the total number of ADSs
    outstanding following the deposit will not exceed the number
    of ADSs previously approved by the Securities and Futures
    Commission of the Republic of China, plus any ADSs issued
    pursuant to the events described in the first three bulleted
    points above.
    The
      ADS holders will not have the same voting rights as our
      shareholders, which may affect the value of ADSs.

The
  ADS holders voting rights as to the shares represented
  by such holders ADSs are governed by the deposit agreement.
  The ADS holders will not be able to exercise voting rights on
  an individual basis. If holders representing at least 51% of
  the ADSs outstanding at the relevant record date instruct the
  depositary to vote in the same manner regarding a resolution,
  including the election of directors and supervisors, the depositary
  will cause all shares represented by the ADSs to be voted in
  that manner. If, at the relevant record date, the depositary
  does not receive instructions representing at least 51% of the
  ADSs outstanding to vote in the same manner for any resolution,
  including the election of directors and supervisors, the ADS
  holders will be deemed to have instructed the depositary or
  its nominee to authorize all the shares represented by the ADS
  holders ADSs to be voted at the discretion of our Chairman
  or his designee, which may not be in the ADS holders interest.

> The
>     ADS holders right to participate in our rights offerings
>     would be limited, which would cause dilution to the ADS holders
>     holdings.

We
  may from time to time distribute rights to our shareholders,
  including rights to acquire our securities. Under the deposit
  agreement, the depositary will not offer the ADS holders those
  rights unless both the distribution of the rights and the underlying
  securities to all our ADS holders are either registered under
  the Securities Act or exempt from registration under the Securities
  Act. Although we may be eligible to take advantage of certain
  exemptions under the Securities Act available to certain foreign
  issuers for rights offerings, we can give no assurances that
  we will be able to establish an exemption from registration
  under the Securities Act, and we are under no obligation to
  file a registration statement for any of these rights. Accordingly,
  the ADS holders may be unable to participate in our rights offerings
  and may experience dilution of the ADS holders holdings.

20

---

> Our
>     issuance of stock bonuses to employees may likely have a dilutive
>     effect on the ADSs.

Similar
  to other Republic of China technology companies, from time to
  time we may issue bonuses in the form of shares, valued at par,
  under the Republic of China Company Law and our articles of
  incorporation. Because these shares are issued at par value,
  the issuance of these shares may have a dilutive effect on the
  ADSs.

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

Our
  corporate affairs are governed by our articles of incorporation
  and by the laws governing Republic of China corporations. The
  rights and responsibilities of our shareholders and members
  of our board of directors under Republic of China law are different
  from those that apply to a U.S. corporation. Directors of Republic
  of China corporations are required to conduct business faithfully
  and act with the care of good administrators. However, the duty
  of care as required of an Republic of China corporations
  directors may not be the same as the fiduciary duty of a director
  of a U.S. corporation. In addition, controlling shareholders
  of U.S. corporations owe fiduciary duties to minority shareholders,
  while controlling shareholders in Republic of China corporations
  do not. The Republic of China Company Law also requires that
  a shareholder continuously hold at least 3% of our issued and
  outstanding shares for at least a year in order to request that
  a supervisor institute an action against a director on the company's
  behalf. Therefore, our public shareholders may have more difficulty
  protecting their interests against actions of our management,
  members of our board of directors or controlling shareholders
  than they would as shareholders of a U.S. corporation.

> Future
>     sales of securities by us, our executive officers, directors,
>     supervisors or existing shareholders may hurt the price of
>     our ADSs.

The
  market price of our ADSs could decline as a result of sales
  of ADSs or shares or the perception that these sales could occur.
  Without giving effect to the conversion into shares of any of
  our outstanding convertible bonds due 2008, as of March 31,
  2003, we had an aggregate of 4,025,865,331shares, including
  our shares and entitlement certificates, issued and outstanding,
  which were be freely tradable, except for 190,641,363 shares
  which were subject to lock-up limitations imposed by the Taiwan
  Stock Exchange. Beginning in February 2002, our outstanding
  convertible bonds became eligible for conversion into 632,911,392
  of our shares, of which bondholders had exercised their conversion
  rights to receive 555,283,724 of our shares, including our common
  shares and entitlement certificates, as of March 31, 2003. If
  we, our executive officers, directors, supervisors or our shareholders,
  sell ADSs or shares, the market price for our shares or ADSs
  could decline. Future sales, or the perception of future sales,
  of ADSs or shares by us, our executive officers, directors,
  supervisors or existing shareholders could cause the market
  price of our ADSs to decline.

> You
>     should read the entire annual report carefully and should
>     not consider any particular statement in this annual report
>     or in published news reports or any published financial projections
>     without carefully considering the risks and other information
>     contained in this annual report.

In
  late April 2002, we released financial projections in Taiwan
  as required to comply with applicable Republic of China regulatory
  requirements. Among other things, these financial projections
  stated that we expect our net sales, operating income and net
  income for 2002 under ROC GAAP to be NT$93.0 billion, NT$16.1
  billion and NT$14.3 billion, respectively. As a result of the
  slower than expected recovery in the information technology
  industry, slowing customer demand and deteriorating prices environment,
  our net income for the nine months ended September 30, 2002
  fell by 28% below previously released financial projection.
  The revised financial projections were released on October 23,
  2002. These projections were prepared by us based on projected
  market demand and price trends for our products, our projected
  production capacity, projected costs of raw materials and components
  and other relevant factors in effect as of or prior to the date
  of these projections, many of which factors are beyond our control.
  These projections were intended to comply with applicable Republic
  of China regulatory requirements and not to provide any assurance
  of our actual operating results in any given period of time.

The
  projections described above were based upon a number of estimates
  and assumptions and are inherently subject to significant uncertainties
  and contingencies, including the timing and cost of the completion
  of our capacity expansion, the volume and size of our customer
  orders, our market penetration, competition and economic and
  market conditions. These projections have been prepared by,
  and are the responsibility of, our management. These projections
  were not prepared with a view toward compliance with published
  guidelines of the United States

21

---

Securities
  and Exchange Commission, the American Institute of Certified
  Public Accountants or generally accepted accounting principles
  and, accordingly, you should not rely on this information. No
  independent accountant has examined or compiled these projections
  for purposes of their inclusion in an annual report to be provided
  to investors in the United States. The independent accountants
  reports included in this annual report relate only to our historical
  financial information and that of Unipac and do not extend to
  the projections described above. Projections are forward-looking
  statements that are necessarily speculative in nature, and it
  can be expected that one or more of the estimates on which the
  projections were based will not materialize or will vary significantly
  from actual results, and such variances will likely increase
  over time. You should not regard the inclusion of the projections
  described above as a representation by us or any other person
  that these projections or the assumptions underlying the projections
  will be achieved. For these reasons, you should only consider
  these projections after carefully evaluating all of the information
  in this annual report, including the risks described in this
  section and throughout this annual report.

> You
>     may not be able to enforce a judgment of a foreign court against
>     us.

We
  are a company limited by shares and incorporated under the Republic
  of China Company Law. All of our directors, supervisors and
  executive officers, and some of the experts named herein, are
  residents of Taiwan. As a result, it may not be possible for
  holders of our shares or ADSs to effect service of process upon
  us or those persons within the United States, or to enforce
  against us or them judgments obtained both in and outside the
  United States courts, including those predicated upon the civil
  liability provisions of the federal securities laws of the United
  States. There is doubt as to the enforceability in the Republic
  of China, either in original actions or in actions for enforcement
  of judgments of United States courts, of civil liabilities predicated
  on the United States federal securities laws.

Item
  4. Information on the Company.

HISTORY
  AND DEVELOPMENT OF THE COMPANY

Our
  legal and commercial name is AU Optronics Corp. We were incorporated
  as Acer Display Technology, Inc. under the laws of the Republic
  of China as a company limited by shares in 1996. The shares
  of Acer Display were listed on the Taiwan Stock Exchange on
  September 8, 2000. As more fully described herein, our former
  name was Acer Display Technology, Inc. On May 22, 2001, we changed
  our name to AU Optronics Corp., and on September 1, 2001, we
  completed a merger with Unipac Optoelectronics Corporation.

Our
  principal executive offices are located at No. 1, Li-Hsin Road
  2, Science-Based Industrial Park, Hsinchu, Taiwan, Republic
  of China and our telephone number is 886-3-563-2939. Our agent
  for service in the United States is CT Corporation System, 111
  Eighth Avenue, New York, New York 10011 and our agents
  telephone number is 212-894-8940.

Our
  ADSs have been listed on the New York Stock Exchange since May
  29, 2002.

22

---

BUSINESS
  OVERVIEW

Introduction

We
  manufacture and assemble TFT-LCD panels. Our products are used
  in computers, consumer electronics products and LCD televisions.
  We began commercial production of small- to medium-size panels
  in 1994 and large-size panels in 1999. We have expanded our
  capacity significantly since 1999 and we manufactured and assembled
  our panels at four fabs and three module assembly facilities
  as of December 31, 2002. In March 2003, we commenced commercial
  production at a new fifth-generation fab production facility,
  our L8A fab, and we expect to commence commercial production
  at another fifth-generation fab, our L8B fab, by the second
  quarter of 2004.

To
  enhance our manufacturing process and product technologies,
  we continue to seek opportunities to work closely with other
  leading TFT-LCD developers or manufacturers with advanced TFT-LCD
  product or manufacturing process technologies. For example,
  in March 2003, we established a joint research and development
  program with FDTC, a subsidiary of Fujitsu focusing on the development
  and manufacture of TFT-LCD panels, for the joint development
  of the product and manufacturing process technologies for TFT-LCD
  panels. We also invested in 20% of the outstanding shares of
  FDTC at the aggregate price of approximately ¥1.5 billion.

Strategy

Our
  goal is to strengthen our position as a leading manufacturer
  of flat panel displays. In order to achieve this objective,
  we will focus our efforts on implementing the following strategies:

> Continue
>     to Develop TFT-LCD and Other Flat Panel Display Technologies

We
  strive to be a leading manufacturer of flat panel displays to
  our customers for diverse applications and using a range of
  technologies. We currently manufacture most of our panels using
  amorphous silicon (a-Si) TFT-LCD technology, which is currently
  the most commonly used technology for flat panel displays. We
  are also developing alternative flat panel display technologies
  such as LTPS, OLED and plasma display. In the third quarter
  of 2001, we converted our L1 fab into a research and development
  facility focusing on the development of alternative flat panel
  display technologies. We plan to commence commercial production
  of display panels using LTPS process technology in 2003.

> Invest
>     in Advanced Production Facilities to Meet Demand and Enhance
>     Economies of Scale

We
  intend to continue to invest in advanced production facilities.
  We commenced commercial production at one of our fifth-generation
  fabs, our L8A fab, in March 2003. We are currently in the process
  of constructing another fifth-generation fab, our L8B fab, and
  expect to commence commercial production at such fab by the
  second quarter of 2004. The L8A and L8B fabs are designed to
  process substrates that are more than twice as large as those
  processed at fourth-generation fabs, such as our L6 fab. These
  new fabs will enable us to cut substantially more panels per
  substrate or to cut panels more efficiently for applications
  that require larger panels. As a result, we expect that, upon
  the completion of the ramp up process, our L8A and L8B fabs,
  with estimated substrate input capacity of 1.44 million substrates
  per year, will enable us to produce computer display panels
  at lower cost and also to take advantage of the potential growth
  in the LCD television market.

> Build
>     on Our Range of Products to Strengthen Our Current Market
>     Position and Enter New Markets

We
  plan to build on our range of products to expand sales in our
  current markets and enter new markets as they emerge. We can
  more efficiently utilize our different fabs, as we try to use
  each fab for the production of only those panel sizes for which
  it is particularly well suited. We are also able to reduce our
  exposure to the fluctuations in prices by leveraging our presence
  in the different market segments for large-size panels and small-
  to medium-size panels. We expect to continue to expand our product
  range as we plan to enter new markets for large-size panels,
  such as LCD televisions, and new markets for small- to medium-size
  panels, such as mobile phones, electronic books, portable games
  and digital photo albums.

23

---

> Invest
>     in Research and Development

We
  intend to continue to invest in research and development aimed
  at enhancing our manufacturing processes to improve production
  efficiency, increase production yields and lower costs, as well
  as improving our product quality and performance and introducing
  new products.

In
  November 2002, we announced a plan to establish a dedicated
  TFT-LCD flat panel research and development center, AU Technology
  Center, which is expected to be completed by the third quarter
  of 2004. Research activities at AU Technology Center will initially
  be divided into several general segments, including advanced
  technology development in OLED, LTPS and plasma display. In
  addition to new product development and module processing, AU
  Technology Center will also devote substantial efforts to improving
  current TFT-LCD panel product and manufacturing process technologies.
  Upon completion, we intend to fully integrate our research and
  development resources at AU Technology Center in order to achieve
  optimal efficiency and advanced technology development. While
  we expect that we will continue to derive the majority of our
  revenues from TFT-LCD panels, we intend to introduce panels
  using other technologies, depending on market demand and the
  progress of our research and development efforts.

> Emphasize
>     Customer Service

We
  work closely with our customers at several levels, involving
  senior management, marketing staff and customer engineers, research
  and development staff, and engineers at our fabs. We cooperate
  with our customers in their product development and work jointly
  with them, including at their premises, to design TFT-LCD panels
  tailored to their specific requirements. We intend to continue
  to emphasize customer service, and continue to have close interaction
  with our customers in order to strengthen our relationships
  with them and enhance our competitiveness.

> Focus
>     on Cost Reduction

We
  will continue to focus on our cost reduction efforts by:

- Establishing
    Inhouse Capabilities For Certain Key Components.
    We intend to develop in-house capabilities for certain key
    components for the manufacture of TFT-LCD panels. We are currently
    in the process of establishing color filter production facilities
    housed at our new L8B fab to meet part of the demand in such
    component at our two fifth-generation fabs and other existing
    fabs. We believe that by establishing our own raw material
    and component supply capability, we are able to obtain key
    materials when shortage occurs in the industry as well as
    substantially reduce our costs relating to raw materials and
    components.
- Increasing
    Purchases of TFT-LCD Raw Materials and Components from Local
    Suppliers.
    We intend to increase the purchase of TFT-LCD raw materials
    and components from suppliers near our production facilities
    in Taiwan and the Peoples Republic of China. We believe
    that by increasing the proportion of our raw materials and
    components sourced locally, we can reduce our costs relating
    to raw materials and components and shorten our delivery time.
- Moving
    Labor-intensive Operations to Lower-cost Regions.
    We commenced module-assembly operations in Suzhou in the Peoples
    Republic of China for the module assembly of panels in July
    of 2002, with a monthly capacity of 375,000 large-size panels
    and 750,000 small- to medium-size panels at the end of 2002.
    We expect our module-assembly operations in Suzhou to help
    reduce our labor costs per panel.
- Improving
    Our Manufacturing Processes and Product Design.
    We plan to continue to focus on improving our manufacturing
    processes to lower our costs. For example, we aim to reduce
    the number of steps in our manufacturing processes and reduce
    the number of components used in our panels by integrating
    some of these components through new product design and technologies.

Principal
  Products

We
  manufacture a wide range of TFT-LCD display panels for the following
  principal product categories:

- Computer
    products,
    which typically utilize large-size
    display panels ranging from 8.4 inches to larger than 20 inches,
    primarily for use in notebook computers and desktop monitors.

24

---

- Consumer
    electronics products,
    which typically utilize small- to medium- size display panels
    ranging from 1.5 inches to 7 inches for use in products such
    as digital cameras, digital camcorders, mobile phones, car television
    monitors, car navigation systems and personal digital assistants,
    portable televisions and portable DVD players.
- LCD
    television,which
    typically utilize large-size display panels of 15 inches or above.
    We commenced the production of display panels for LCD television
    from the fourth quarter of 2002.

We
  design and manufacture our display panels to address specific
  needs of the end-products in which they are used, including
  thinness, light weight, resolution, color quality, brightness,
  low power consumption, touch panel features, fast response time
  and wide viewing angles. For example, it is more important for
  notebook computer displays to be lightweight and thin, and to
  have low power consumption, while desktop monitors require high
  brightness and wider viewing angles.

The
  following table sets forth our production volume by product
  category for the periods indicated:

|                                    | **Year
      Ended December 31,** | 
|----------------------------------- | --------------------------------- | 
|                                    |                                   | 
|                                    | 2000                              | 
|                                    |                                   | 
|                                    | (panels
      in thousands)       | 
|Computer
      Products             |                                   | 
|Notebook
      Computers            | 1,755.4                           | 
|Desktop
      Monitors              | 30.7                              | 
|                                    |                                   | 
|Total
      for Computer Products   | 1,786.1                           | 
|                                    |                                   | 
|Consumer
      Electronics Products | 4,255.2                           | 
|                                    |                                   | 
|LCD
      Television                |                                  | 
|                                    |                                   | 
|Total                               | 6,041.3                           | 
|                                    |                                   | 

The
  following table sets forth our net sales by product category
  for the periods indicated:

|                                    | **Year
      Ended December 31,** | 
|----------------------------------- | --------------------------------- | 
|                                    |                                   | 
|                                    | 2000                              | 
|                                    |                                   | 
|                                    | NT$                               | 
|                                    | (in
      millions)               | 
|Computer
      Products             |                                   | 
|Notebook
      Computers            | 20,096.9                          | 
|Desktop
      Monitors              | 623.5                             | 
|                                    |                                   | 
|Total
      for Computer Products   | 20,720.4                          | 
|                                    |                                   | 
|Consumer
      Electronics Products | 4,284.8                           | 
|                                    |                                   | 
|LCD
      Television                |                                  | 
|                                    |                                   | 
|Other(1
      )                     | 578.0                             | 
|                                    |                                   | 
|Total                               | 25,583.2                          | 
|                                    |                                   | 



---

Computer
  Products

Notebook
  Computers.
  In 2000, 2001 and 2002, our panels for notebook computers accounted
  for 78.6%, 45.2% and 29.6%, respectively, of our net sales.

The
  size of mainstream panels for notebooks changes as the generation
  of TFT-LCD production technology migrates. We typically increase
  our production of mainstream panels for notebooks one to two quarters
  ahead of product migration trend. Starting from 1999, the mainstream
  panels for notebooks have migrated into 13.3-inch panels. As a result,
  our 13.3-inch notebook computer panels accounted for a significant
  portion of our notebook computer panel sales in 2000. In 2001, the
  mainstream panels for notebooks started to migrate into larger 14.1-inch
  panels. In response to the changing demand, we increased our production
  of 14.1-inch panels in early 2001. In 2002, our 14.1-inch notebook
  computer panels accounted for a significant portion of our notebook
  computer panel sales. We expect the mainstream panels for notebooks
  will migrate to 15-inch in 2003 and therefore we have significantly
  increased the production of our 15-inch panels since 2002. We expect
  that our sales of notebook computer panels, particularly sales of
  15-inch panels, will continue to increase in 2003.

25

---

In
  2002, unit sales of our panels for notebook computers was approximately
  3.1 million, of which approximately 91.8% was accounted for
  by panels with sizes ranging from 14.1-inch to 15-inch and above.
  In 2002, our net sales accounted for by panels for notebook
  computers was approximately NT$22.4 billion, of which approximately
  94.0% was accounted for by panels with sizes ranging from 14.1-inch
  to 15-inch and above.

Desktop
  Monitors.
  We started commercial production of desktop monitor display
  panels in the first quarter of 2000. Our sales of desktop monitor
  panels, as a percentage of our net sales, increased from 40.0%
  in 2001 to 58.7% in 2002. We expect that our sales of desktop
  monitor panels will continue to grow in 2003, primarily as a
  result of our capacity expansion and rapid demand growth due
  to the trend toward the use of TFT-LCD monitors.

The
  mainstream size of desktop monitors changes as the generation of
  TFT-LCD technology migrates. The mainstream panels for desktop monitors
  are 15-inch panels in 2002 and we expect 17-inch panels will gradually
  become mainstream panels for desktop monitors in 2003. In 2002, our
  unit sales of our panels for desktop monitors was approximately 5.2
  million, of which approximately 99.9% was accounted for by 15-inch
  panels and 17-inch panels. In 2002, our net sales accounted for by
  panels for desktop monitors was approximately NT$44.4 billion, of
  which approximately 99.9% was accounted for by 15-inch panels and
  17-inch panels.

> Consumer
>     Electronics Products

Our
  TFT-LCD display panels for the small- to medium-size consumer electronics
  products consist of display panels ranging from 1.5 inches to 7 inches
  in size, for products including digital cameras, camcorders, car
  televisions, car navigation systems, portable DVD players and televisions.
  Our sales of panels for consumer electronics products as a percentage
  of our total sales has decreased from 16.7% in 2000 to 11.4% in 2001
  and to 8.9% in 2002, primarily due to the increase in the sales of
  our large-size panels. The markets for our consumer electronics are
  typically more stable and less cyclical than the markets for our
  computer products because of the high level of our involvement in
  the design process of our customers and the customized nature of
  consumer electronics display panels.

We
  plan to expand our consumer electronics product range to include
  panels for use in such as mobile phones and mobile computing
  devices like webpads, electronic books and digital photo albums,
  as well as increase our production of existing products, such
  as panels for portable DVD players.

> LCD
>     Television

Our
  panels for LCD televisions consist of display panels with panel size
  of 15 inches or above . We commenced commercial production of display
  panels for LCD televisions with panels ranging from 15 inches to
  20 inches in the fourth quarter of 2002. We expect to commence trial
  production of 26-inch display panels for LCD televisions in the third
  quarter of 2003. We expect that our sales of panels for LCD televisions
  will continue to grow in 2003, primarily as a result of our capacity
  expansion at our fifth-generation fabs and rapid demand growth due
  to the trend toward the market acceptance of LCD televisions.

Customers,
  Sales and Marketing

We
  sell our panels primarily to original equipment manufacturing
  service providers. Some of these companies include BenQ, Compal,
  Lite-On Technology, Proview and Sampo. BenQ, formerly known
  as Acer Communications and Multimedia, is a shareholder of our
  company, holding 14.8% of our outstanding shares as of December
  31, 2002. These original equipment manufacturing service providers,
  most of whose production operations are located in Taiwan and
  the Peoples Republic of China, use our display panels
  in the products they manufacture on a contract basis for
  brand companies. Our major original equipment manufacturing
  service provider customers accounted for 43.7% of our sales
  in 2002. We also sell our products to some brand companies on
  a direct shipment basis. In addition, we sell some of our panels
  to component manufacturers of consumer electronics products.

The
  following table sets forth the geographic breakdown of our net
  sales by the location of our customers placing orders for the
  periods indicated:

26

---

|                    | Year
      Ended December 31,              | 
|------------------- | ------------------------------------------ | 
|                    |                                            | 
|                    | 2000                                       | 
|                    |                                            | 
|Region              | Net
      Sales                            | 
|                    |                                            | 
|                    | (in
      NT$millions, except percentages) | 
|Taiwan              | 18,165                                     | 
|Japan               | 4,066                                      | 
|Asia(1)             | 1,080                                      | 
|Europe              | 314                                        | 
|United
      States | 1,954                                      | 
|Others              | 4                                          | 
|                    |                                            | 
|Total               | 25,583                                     | 
|                    |                                            | 



---

Our
  sales in Taiwan, as set forth in the table above, represent
  a major portion of our net sales for the past three years. The
  majority of these sales were made to original equipment manufacturing
  service providers who use our display panels in the products
  they manufacture on a contract basis for brand companies worldwide.

> Computer
>     Products

Notebook
  Computers.
  We sell our notebook computer display panels primarily to original
  equipment manufacturing service providers with production operations
  in Taiwan and the Peoples Republic of China, that design
  and manufacture notebook computers based on the specifications
  of their brand customers. Some of our original equipment manufacturing
  service provider customers include Arima, Compal and Wistron
  Infocomm. We market our panels to, and negotiate prices with,
  both our original equipment manufacturing service provider customers
  and their brand customers, as display panels often constitute
  a significant part of the end product. Furthermore, due to the
  need to manufacture notebook computer panels to meet particular
  customer specifications, we are generally involved in the design
  process for the notebook computers, and brand customers typically
  qualify our production facilities and often specify our panels
  to their original equipment manufacturing service providers.

Desktop
  Monitors.
  We sell our display panels for desktop monitors through sales
  channels similar to those for notebook computers. We supply
  desktop monitor display panels primarily to original equipment
  manufacturing service providers such as BenQ, Lite-On Technology,
  Proview and Sampo.

> Consumer
>     Electronics Products

We
  sell almost all of our panels for digital cameras and camcorders
  to brand companies based in Japan. We sell our panels for car
  televisions primarily to component manufacturers for automotive
  audio and video products based in the United States. We have
  recently begun to sell our display panels for portable DVD players
  primarily to original equipment manufacturing service providers
  and component manufacturers, most of which are located in Taiwan,
  the Peoples Republic of China and other Asian countries.

> LCD
>     Televisions

We
  commenced in the fourth quarter of 2002 to sell panels for LCD
  televisions, primarily to brand companies based in Taiwan.

Although
  we are not dependent on any single customer, a significant portion
  of our net sales is attributable to a small number of our customers.
  In 2000, 2001 and 2002, our five largest customers accounted
  for 47.6%, 41.6% and 39.3%, respectively, of our net sales.
  In addition, some customers individually accounted for more
  than 10% of our net sales for each of the last three years.
  In 2000, Acer Inc., IBM and Matsushita accounted for 14.5%,
  10.3% and 10.2% of our net sales, respectively. In 2001, BenQ
  Corporation accounted for 17.8% of our net sales. In 2002, BenQ
  Corporation, including its subsidiary BenQ (IT), accounted for
  20.8% of our net sales. As BenQ Corporation is a brand company
  which also provides original equipment manufacturing services
  for its brand company customers, our panels shipped to BenQ
  Corporation include both panels ordered on its own account as
  well as panels ordered by or on behalf of its brand company
  customers.

We
  focus our sales activities on a number of large customers with
  whom we seek to build close relationships. We serve key customers
  by appointing a sales manager as a point person for these major
  accounts. Each product

27

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category
  has its own sales and marketing division, and is further subdivided
  into smaller teams dedicated to each of our major customers.
  Each dedicated customer team is headed by an account manager
  who is primarily responsible for our relationship with that
  specific customer.

We
  do not typically enter into long-term contracts with our customers.
  However, most of our customers provide us each month with four
  to six months non-binding rolling forecasts, and typically place
  purchase orders one month before expected shipment date. We
  generally provide a limited warranty to our customers, including
  the provision of replacement parts and after-sale service for
  our products. In connection with these warranty policies, based
  on our historical experience, we have set aside, and plan to
  continue to set aside, an amount as a reserve to cover these
  warranty obligations. As of December 31, 2002, we had reserved
  NT$122.0 million (US$3.5 million) for these purposes. In addition,
  we are required under several of our sales contracts to provide
  replacement parts for our products, at agreed prices, for a
  specified period of time.

The
  pricing of our panels takes into account the prevailing market
  conditions, in addition to the complexity of the product, the
  order size, the strength and history of our relationship with
  the customer and our capacity utilization. See Item 5.
  Operating and Financial Review and Prospects Description
  of Certain Statement of Operations Items  Net Sales.
  Purchase prices and payment terms for our sales to related parties
  are not significantly different from those for other suppliers.
  Our credit policy for sales to related parties and other customers
  typically requires payment within 30 to 60 days. The average
  collection days extended for sales to our customers for the
  years ended December 31, 2000, 2001 and 2002, were 33 days,
  59 days and 46 days, respectively. We have not experienced any
  material problems relating to customer payments.

The
  TFT-LCD Manufacturing Process

The
  basic structure of a TFT-LCD panel may be thought of as two
  glass substrates sandwiching a layer of liquid crystal. The
  front glass substrate is fitted with a color filter, while the
  back glass substrate has transistors fabricated on it. A light
  source is located at the back of the panel and is called a backlight
  unit.

The
  manufacturing process consists of hundreds of steps, but may
  be divided into three primary steps. The first step is the array
  process, which involves fabricating transistors on the back
  substrate using film deposition, lithography and etching. The
  array process is similar to the semiconductor manufacturing
  process, except that transistors are fabricated on a glass substrate
  instead of a silicon wafer. The second step is the cell process,
  which joins the array back substrate and the front color filter
  substrate. The space between the two substrates is filled with
  liquid crystal. The third step is the module assembly process,
  which involves connecting additional components, such as driver
  integrated circuits and backlight units, to the fabricated glass
  panel.

The
  array and cell processes are capital-intensive and require highly
  automated production equipment. TFT-LCD manufacturers typically design
  their own fabs and purchase production equipment from various suppliers,
  most of which are based in Japan. Each TFT-LCD manufacturer combines
  various equipment according to its manufacturing process technologies
  to form a TFT-LCD fab. In addition to developing our own manufacturing
  process technologies, we also license such technologies from other
  companies, such as IBM, Matsushita and FDTC. We have automated our
  array and cell processes, with the exception of some steps in the
  cell process, such as panel inspection, panel baking, and injection
  of liquid crystal. In contrast to the array and cell processes, the
  module-assembly process is highly labor-intensive as it involves
  manual labor to assemble the pieces. We started to move a substantial
  portion of our module-assembly process to the Peoples Republic
  of China since the completion of our two module-assembly facilities,
  namely our S1 and S2 fabs, in Suzhou in July 2002, as part of our
  efforts to reduce our labor costs.

Raw
  Materials and Components and Suppliers

Our
  manufacturing operations require adequate supplies of high-quality
  raw materials and components on a timely basis. We purchase
  our raw materials and components based on forecasts from our
  customers as well as our own assessments of our customers
  needs. Our forecasts are generally made three months in advance
  and updated monthly. We source most of our raw materials and
  components, including critical materials such as glass substrates,
  color filters, backlight units and driver integrated circuits,
  from a limited group of suppliers. In order to reduce our raw
  material and component costs and our dependence on any one supplier,
  we generally purchase our raw materials and components from
  multiple sources.

28

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Set
  forth below are our major suppliers of key raw materials and
  components:

|                       |                       |                     |            |                       | Driver    
|---------------------- | --------------------- | ------------------- | ---------- | --------------------- | ----------
|                       |                       |                     |            |                       | Integrated
|Glass
      Substrates | Liquid
      Crystals | Color
      Filters | Polarizers | Backlight
      Units | Circuits  
|                       |                       |                     |            |                       |           

|Corning
      Taiwan (T)(1)     | Merck
      (J)         | Cando
      (T)    | Nitto
      Denko (T) | Coretronic
      (T)   | Matsushita
      (J)
|------------------------------- | ----------------------- | ------------------ | --------------------- | ---------------------- | --------------------
|NH
      Technoglass (J)(2)     | Nichimen
      Corp.(J) | Dai
      Nippon   | Optimax
      (T)     | Helix
      Technology | NEC
      (J)       
|Nippon
      Electric Glass (T) |                         | Printing
      (J) |                       | (T)                    | Novatek
      (T)   
|                                |                         | Toppan
      (J)   |                       | Radiant
      (T)      | Toshiba
      (J)   

|                                           
|-------------------------------------------
|(1)
      T signifies a Taiwan company.  
|(2)
      J signifies a Japanese company.

Although,
  in limited instances, we have prepaid suppliers to ensure a
  stable supply of necessary raw materials and components, we
  do not generally enter into contracts with our suppliers. We
  use a large amount of water and electricity in our manufacturing
  process. We obtain water supplies from government-owned entities
  and recycle more than 70% of the water that we use in production.
  We use electricity supplied by Taiwan Power Corporation. We
  maintain back-up generators that provide electricity in case
  of power interruptions, which we have experienced from time
  to time. In September 1999, a power outage caused by a large
  earthquake resulted in a suspension of production at our fabs
  for five days. Except for this power outage, power interruptions
  in general have not materially affected our production processes.

Equipment
  and Suppliers

We
  depend on a limited number of equipment manufacturers that make
  and sell the equipment that we use in our manufacturing processes.
  Our manufacturing processes depend on the quality and technological
  capacity of our equipment. We purchase equipment that is tailored
  to our specific requirements for our manufacturing processes.
  The principal types of equipment we use to manufacture TFT-LCD
  panels include chemical vapor deposition equipment, steppers,
  developers and coaters.

We
  expect to make significant purchases of equipment in 2003 to
  implement our capacity expansion and technology advancement
  plans. See Item 5. Operating and Financial Review and
  Prospects  Liquidity and Capital Resources. We purchase
  equipment from a small number of qualified vendors to assure
  consistent quality and performance. We typically order equipment
  four to twelve months or longer in advance of our planned installation.

Competition

The
  TFT-LCD industry is highly competitive. Most of our competitors operate
  fabs in Korea, Taiwan and Japan. We believe that there are no TFT-LCD
  fabs in the United States or Europe. Our principal competitors are:

- LG.Philips
    LCD and Samsung Electronics, in Korea;
- Chi
    Mei Optoelectronics, Chunghwa Picture Tubes, Hannstar Display
    and Quanta Display, in Taiwan; and
- Hitachi,
    Tottori Sanyo, Sharp and Toshiba Matsushita Display Technology
    Co., Ltd., in Japan.

The
  principal elements of competition for customers in the TFT-LCD
  market include:

- price;
- product
    features and quality;
- customer
    service, including product design support;
- research
    and development; and

29

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- time-to-market.

Quality
  Control

We
  have implemented quality inspection and testing procedures at
  all of our fabs and module-assembly facilities. Our quality
  control procedures include statistical process control, which
  involves sampling measurements to monitor and control the production
  processes. We perform outgoing quality control based on sampling
  plans, ongoing reliability tests covering a wide range of application
  conditions, in-process quality control to prevent potential
  quality deviations, and other programs designed for process
  measurement and improvement, reduction of manufacturing costs,
  maintenance of on-time delivery, increasing in-process yields
  and improving field reliability of our products. If a problem
  is detected, we take containment actions, conduct defect analyses
  to identify the cause of the problem, and take appropriate corrective
  and preventive actions.

We
  visually inspect and test all completed display panels to ensure
  that production standards are met. To ensure the effective and
  consistent application of our quality control procedures, we
  provide quality control training to all of our production line
  employees according to a certification system depending on the
  particular level of the skills and knowledge required.

We
  also perform quality control procedures for the raw materials
  and components that we purchase. These procedures include testing
  samples for large batches, obtaining vendor testing reports
  and testing to ensure compatibility with other raw materials
  and components, as well as vendor qualification and vendor rating.

Our
  quality control programs have received accredited International
  Organization of Standards ISO 9001 certifications, as well as
  qualifications from our customers. In addition, most of our
  facilities have been certified as meeting the International
  Organization of Standards ISO-14001 environmental protection
  standards, with certification for our M3 fab and L8B fab pending.
  The International Organization of Standards certification process
  involves subjecting our manufacturing processes and quality
  management systems to semi-annual reviews and observation for
  various periods. International Organization of Standards certification
  is required by certain European countries in connection with
  sales of industrial products in those countries. We believe
  that certification also provides independent verification to
  our customers regarding the quality control employed in our
  manufacturing and assembly processes.

Intellectual
  Property

We
  currently hold a total of 193 patents, including 138 in Taiwan
  and 45 in the United States. These include patents for TFT-LCD
  manufacturing processes and products. These patents will expire
  at various dates from 2009 through 2020. We also have a total
  of 392 pending patent applications in Taiwan, 137 in the United
  States and 252 in other jurisdictions, including the Peoples
  Republic of China, Japan and Korea. In addition, we are in the
  process of registering AU Optronics as trademarks
  and service marks in Taiwan and the Peoples Republic of
  China.

License
  from Matsushita for Amorphous Silicon TFT-LCDs.
  Unipac entered into a five -year Technology Assistance and Patent
  License Agreement with Matsushita as of October 30, 1998, which
  provides for the nontransferable and nonexclusive license and
  technical support to manufacture TFT-LCD panels between 13.3
  inches and 19.0 inches in size at our L1 and L2 fabs. The agreement
  provides for a fixed license fee, and, subject to a maximum
  payment requirement, ongoing royalty payments at a percentage
  of the sales of the panels we manufacture using the licensed
  technology. Currently, we pay royalties for production of 13.3
  -inch and 14.1-inch TFT-LCD panels manufactured at our L2 fab.
  This agreement may be terminated by Matsushita with a written
  notice following certain events, which includes the dissolution
  of Unipac following the merger. To date, Matsushita has not
  served such a written notice on us although the merger might
  have triggered Matsushitas termination right under the
  agreement. In connection with the merger, Matsushita verbally
  agreed that we would succeed to the rights and obligations of
  Unipac under the agreement, and that it would execute an amended
  license agreement with us, which we expect will be substantially
  similar to the 1998 agreement. We are currently in discussions
  with Matsushita regarding the terms of an amended license agreement.
  Under the terms of the current agreement, we have a right to
  renew our license upon the termination or expiration of the
  license, subject to commercially reasonable consideration. If
  we fail to reach an agreement with Matsushita on the terms of
  the renewal, we are entitled to a grace period of three years
  during which we can continue using the license while proceeding
  with negotiation efforts for the license renewal.

30

---

Licenses
  from IBM for Amorphous Silicon TFT-LCDs.
  We entered into license agreements with IBM as of March 12,
  1998, and August 1, 1999, which provide for nonexclusive and
  nontransferable licenses for IBMs third-generation TFT-LCD
  manufacturing process technology and its amorphous silicon TFT-LCD
  enabling technology until March 12, 2005, and technical support
  until March 12, 2000. The agreements provide for a fixed license
  fee, and ongoing royalty payments at a percentage of the sales
  of the panels we manufacture using the licensed technology.
  Currently, we pay IBM ongoing royalties for panels manufactured
  at our L5 and L6 fabs. Furthermore, we are obligated to license
  to IBM any improvements and know-how that we develop from the
  licensed technology. In connection with the merger, we executed
  assignments with IBM, dated September 1, 2001, to assign all
  rights of Acer Display under the licenses to AU Optronics.

License
  from FDTC for Amorphous Silicon TFT-LCDs.We
  entered into a license agreement with FDTC effective as of March
  31, 2003, which provides for the nontransferable and nonexclusive
  license and technical support to manufacture all of our TFT-LCD
  panels at all our facilities. The agreement provides for an
  initial license fee and fixed royalty payments to be paid for
  each of the first four consecutive 12 months following the effective
  date of this agreement. Each party agrees to review and discuss
  in good faith terms and conditions of this agreement after the
  fourth anniversary of this agreement.

In
  2000, 2001 and 2002, our running royalty expenses to the companies
  from which we license intellectual property were NT$139.7 million,
  NT$297.6 million and NT$229.4 million, respectively, which
  accounted for 0.5%, 0.8% and 0.3%, respectively of our net sales.
  We expect that our royalty expenses relating to intellectual
  property licenses will increase in the future due to increases
  in unit sales. We intend to continue to file patent applications,
  where appropriate, to protect our proprietary technologies.
  We may find it necessary to enforce our patents or other intellectual
  property rights or defend ourselves against claimed infringement
  of the rights of others through litigation, which could result
  in substantial cost and diversion of our resources. We may suffer
  legal liabilities and damages if we infringe product or process
  technology rights held by others.

We
  require all of our employees to sign an employment agreement
  which prohibits the disclosure of any of our trade secrets and
  proprietary technologies and also require technical personnel
  to assign to us any inventions they develop that are related
  to our business.

Insurance

We
  maintain insurance policies on our production facilities, buildings,
  machinery and inventories covering property damage and damage due
  to fire, earthquakes, floods, and other natural and accidental perils.
  Our property insurance covers replacement costs for our assets. As
  of December 31, 2002, our insurance also included protection from
  covered losses, including property damage up to maximum coverage
  of NT$5,144.8 million (US$148.3 million) for all of our inventories
  and NT$82,568.0 million (US$2,379.5 million) for our equipment and
  facilities. In addition, as of December 31, 2002, we had insurance
  coverage for business interruptions in the aggregate amount of NT$10,500.0
  million (US$302.6 million). See Item 3. Key Information 
  Risk Factors  Due to the location of our operations in Taiwan
  and the People's Republic of China, we and many of our customers
  and suppliers are vulnerable to natural disasters and other events
  outside our control, which may seriously disrupt our operations.

We
  also maintain insurance policies, including director and officer
  liability insurance, employee group health insurance, travel
  and life insurances, employer liability insurance, general liability
  insurance, and policies that provide coverage for risks during
  the shipment of goods and equipment, as well as during equipment
  installation at our fabs.

We
  are not involved in any litigation, arbitration or administrative
  proceedings relating to claims that we believe would have a
  material adverse effect on our financial condition and results
  of operations. See Item 8. Financial Information 
  Legal Proceedings.

Environmental
  Matters

Our
  manufacturing processes involve the use of hazardous materials
  and generate a significant amount of waste products, including
  wastewater, liquid waste products and hazardous gases, which
  are strictly monitored by the local environmental protection
  bureau. To meet Republic of China environmental standards, we
  employ various types of pollution control equipment for the
  treatment of hazardous gases, liquid waste, solid waste and
  the treatment of

31

---

wastewater
  and chemicals in our fabs. We control exhaust gas and wastewater
  on-site. The solid and liquid wastes are treated by subcontracting
  with third parties off-site to meet pollution control requirements.

We
  incurred small fines in December 2002 and March 2001 for non-compliance
  with a waste storage-labeling requirement. In addition, at the
  end of 1999, we incurred a small fine when our L5 fab increased
  its waste volume by expanding production, resulting in waste
  volume in excess of the volume permitted under its original
  permit. Following this occurrence, we have taken the necessary
  steps to obtain the appropriate permit and believe that we are
  in compliance with the existing environmental laws and regulations
  in Taiwan. In addition, we have obtained all governmental approvals
  necessary for the expansion of our L5 and L6 fabs.

32

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ORGANIZATIONAL
  STRUCTURE

The
  following chart illustrates our corporate structure and effective
  ownership interest in each of our principal operating subsidiaries
  and affiliates as of December 31, 2002. The following chart
  does not include wholly-owned intermediate holding companies.



The
  following table sets forth summary information for our subsidiaries
  as of December 31, 2002.

|Subsidiary                                | Main
      Activities                                                                                                                  | Jurisdiction
      of
      Incorporation | Total
      Paid-
      in Capital |                       | Percentage
      of
      Our Ownership
      Interest |         | Percentage
      of
      Our Voting
      Power |        
|----------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ---------------------------------- | --------------------- | ------------------------------------------------------ | ------- | ------------------------------------------------ | -------
|                                          |                                                                                                                                        |                                           |                                    |                       |                                                        |         |                                                  |        
|AU
      Optronics (L) Corp.              | Holding
      company for AU Optronics Corporation
      America, AU Optronics (Suzhou) Corp. and AU
      Optronics Corporation Japan | Malaysia                                  | NT$                                | 1,744.3
      million |                                                        | 100%    |                                                  | 100%   
|                                          |                                                                                                                                        |                                           |                                    |                       |                                                        |         |                                                  |        
|AU
      Optronics Corporation America    | Sale
      service in the United States                                                                                                | United
      States                       | NT$                                | 31.2
      million    |                                                        | 100%(1) |                                                  | 100%(1)
|                                          |                                                                                                                                        |                                           |                                    |                       |                                                        |         |                                                  |        
|AU
      Optronics (Suzhou) Corp.         | Assembly
      of TFT-LCD modules in the Peoples 
      Republic of China                                                             | Peoples
      Republic of
      China    | NT$                                | 1,706.2
      million |                                                        | 100%(1) |                                                  | 100%(1)
|                                          |                                                                                                                                        |                                           |                                    |                       |                                                        |         |                                                  |        
|AU
      OptronicsCorporation
      Japan | Sale
      service in Japan                                                                                                            | Japan                                     | NT$                                | 5.6
      million     |                                                        | 100%(1) |                                                  | 100%(1)
|                                          |                                                                                                                                        |                                           |                                    |                       |                                                        |         |                                                  |        
|Konly
      Venture Corp.                 | Venture
      capital investment                                                                                                       | Republic
      of China                   | NT$                                | 200.0
      million   |                                                        | 100%    |                                                  | 100%   
|                                          |                                                                                                                                        |                                           |                                    |                       |                                                        |         |                                                  |        



---

33

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PROPERTY,
  PLANTS AND EQUIPMENT

> Current
>     Facilities

As
  of December 31, 2002, we manufactured our products at four large
  fabs located in Taiwan and three module-assembly facilities,
  one located in Taiwan and two located in Suzhou, PRC. In March
  2003, we commenced commercial production at our new fifth-generation
  fab, our L8A fab. We believe that, as a result of having five
  large fabs, we are able to produce a large number of panels
  with various panel sizes. For example, our L6 fab can cut either
  six 15-inch panels, four 17-inch panels, four 19-inch panels
  or four 20-inch panels per substrate, while our L2, L3 and L5
  fabs can cut either six 14.1-inch panels, four 15-inch panels
  or four 17-inch panels per substrate. As a result, we typically
  use our L6 fab to produce 15-inch, 19-inch and 20.1-inch panels,
  while we use our L2 and L3 fabs to produce small- to medium-size
  panels and 14.1-inch and 17-inch panels, in order to optimize
  our production efficiency.

In
  the third quarter of 2001, we converted our L1 fab into a research
  and development facility focusing on developing alternative
  flat panel display technologies, including LTPS and OLED.

The following table sets forth the size, primary use and capacity
  of our fabs, research and development facility, and module-assembly
  facilities, and indicates whether such facilities, including
  land and buildings, are owned or leased. All land in the Hsinchu
  Science-Based Industrial Park is leased from the Republic of
  China government.

|Location                                                                                                                            | BuildingSize(in
      squaremeters) |  | Input
      SubstrateSize
      (inmillimeters)
      /CommercialProductionDate | Installed
      Capacityas ofDecember 31, 2002(in input substratespermonth)      | Primary
      Size of PanelsProduced or OtherActivity                       | Owned
      or Leased                                                                | 
|----------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- |  | ------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | 
|                                                                                                                                    |                                     |  |                                                                                 |                                                                                  |                                                                             |                                                                                      | 
|L1,
      No. 3, Industry E. Rd.
         3,
      Science-Based Industrial Park,
         Hsinchu,
      Taiwan, Republic of China | 15,569                              |  | 320x400/April
      1994                                                        | Converted
      to research
      and development
      facility in October 2001 | Research
      and
      development for LTPS
      and OLED                | ·
      Land is leased
      (expires in December 2020)                              | 
|                                                                                                                                    |                                     |  |                                                                                 |                                                                                  |                                                                             |                                                                                      | 
|L2,
      No. 5, Li-Hsin Rd. 6 Science-
         Based
      Industrial Park, Hsinchu,
         Taiwan,
      Republic of China     | 69,647                              |  | 610x720/December
      1999                                                     | 45,000                                                                           | 1.5-inch
      to 10-inch,
      14.1-inch and 17-inch
      TFT-LCD panels | ·
      Building is owned
      · Land is leased (expires in 
        December 2020) | 
|                                                                                                                                    |                                     |  |                                                                                 |                                                                                  |                                                                             |                                                                                      | 
|L3,
      No. 1, Li-Hsin Rd.
         2,
      Science-Based Industrial Park,
         Hsinchu,
      Taiwan, Republic of China     | 102,311                             |  | 610x720/November
      2000                                                     | 35,000                                                                           | 14.1-inch
      and 17-inch
      TFT-LCD panels                            | ·
      Building is owned
      · Land is leased (expires in 
        December 2020) | 
|                                                                                                                                    |                                     |  |                                                                                 |                                                                                  |                                                                             |                                                                                      | 
|L5,
      No. 23, Li-Hsin Rd.
         Science-Based
      Industrial Park,
         Hsinchu,
      Taiwan, Republic of China       | 105,127                             |  | 600x720/July
      1999                                                         | 60,000                                                                           | 15-inch
      to 17-inch TFT-
      LCD panels                              | ·
      Building is owned
      · Land is leased (expires in
        January 2017)   | 
|                                                                                                                                    |                                     |  |                                                                                 |                                                                                  |                                                                             |                                                                                      | 
|L6,
      No. 1, Xinhe Rd., Aspire Park,
         325,
      Lungtan, Taoyuan, Taiwan,
         Republic
      of China             | 210,852                             |  | 680x880/February
      2001                                                     | 60,000                                                                           | 15-inch
      to 20.1-inch
      TFT-LCD panels                             | ·
      Building is owned
      · Land is leased 
        (expires in January 2015)  | 
|                                                                                                                                    |                                     |  |                                                                                 |                                                                                  |                                                                             |                                                                                      | 
|M1,
      No. 1, Xinhe Rd., Aspire Park,
         325,
      Lungtan, Taoyuan, Taiwan,
         Republic
      of China             | 39,826                              |  | March
      2001                                                                | N/A                                                                              | Module
      and component assembly                                         | ·
      Building is owned
      · See L6(1)                                          | 
|                                                                                                                                    |                                     |  |                                                                                 |                                                                                  |                                                                             |                                                                                      | 
|L8A,
      No. 1, Xinhe Rd., Aspire Park,
         325,
      Lungtan, Taoyuan, Taiwan,
         Republic
      of China            | 27,300                              |  | 1,100x1,250/March
      2003                                                    |                                                                                 | 15-inch
      and 17-inch and 
      larger TFT-LCD panels                  | ·
      See L6(1)                                                                    | 
|                                                                                                                                    |                                     |  |                                                                                 |                                                                                  |                                                                             |                                                                                      | 
|S1,
      No. 398, Suhong Zhong Road,
         Suzhou
      Industrial Park, Suzhou,
         China                                 | 63,233                              |  | May
      2002                                                                  | N/A                                                                              | Module
      and component
      assembly                                   | ·
      Land is leased
        (expires in 2051)                                     | 
|                                                                                                                                    |                                     |  |                                                                                 |                                                                                  |                                                                             |                                                                                      | 
|S2,
      No. 398, Suhong Zhong Road,
         Suzhou
      Industrial Park, Suzhou, China                                          | 31,145                              |  | May
      2002                                                                  | N/A                                                                              | Module
      and component assembly                                         | ·
      Building is owned
      · See S1                                             | 
|                                                                                                                                    |                                     |  |                                                                                 |                                                                                  |                                                                             |                                                                                      | 
|                                                                                                                                    |                                     |  |                                                                                 |                                                                                  |                                                                             |                                                                                      | 
|(1)
      M1 is located within our L6 fab, L8A shares the building
      with L6.                                                   |                                     |  |                                                                                 |                                                                                 

Leases
  for L1, L2, L3 and L5 Facilities.
  We have four separate leases with Hsinchu Science-Based Industrial
  Park
  Administration that govern our L1, L2, L3 and L5 facilities,
  respectively:

34

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- The
    term of each of the current L1, L2 and L3 leases began on
    September 1, 2001 and will expire on December 31, 2020.
- The
    term of the current L5 lease began on January 6, 1997 and
    will expire on January 5, 2017.

Lease
  for L6, L8A and M1 Facilities.
  We have a lease with Min Tour Inc. that governs our L6, L8A
  and M1 facilities. The term of the lease began on February 1,
  2000 and will expire on January 31, 2015.

Lease
  for S1 and S2 Facilities. We have a lease
  with China-Singapore Suzhou Industrial Park Development Co.,
  Ltd. that governs our S1 and S2 facilities. The term of the
  lease began on September 25, 2001 and will expire on September
  24, 2051.

> Expansion
>     Projects

Two
  New Fifth-Generation Fabs.
  In addition to expanding our existing fabs, we continue to establish
  advanced production facilities to meet demand and enhance economies
  of scale, such as our two new fifth-generation fabs, our L8A
  and L8B fabs. We commenced commercial production at our L8A
  fab in March 2003. We are currently in the process of constructing
  our L8B fab and expect to commence commercial production at
  such fab by the second quarter of 2004. The L8A and L8B fabs
  are designed to process substrates that are more than twice
  as large as those processed at a fourth-generation fab, such
  as our L6 fab. These new fabs will enable us to cut substantially
  more panels per substrate or to cut panels more efficiently
  for applications that require larger panels. Upon the completion
  of the ramp up process, these two fifth-generation fabs are
  expected to have a substrate input capacity of approximately
  1.44 million substrates per year.

In
  order to improve our cost structure by building our own raw
  material and component production capability, we are currently
  in the process of establishing color filter production facilities
  housed at our new L8B fab, in order to meet part of the demand
  in such component at our two fifth-generation fabs and other
  existing fabs. We expect to commence mass production of color
  filters at such facilities by the end of 2003.

As
  of March 31, 2003, we had invested a total of NT$8.8 billion
  (US$253.6 million) in our L8A fab and L8B fab, including the
  color filter production facilities housed at the L8B fab. We
  expect to invest an additional NT$54.0 billion (US$1.6 billion)
  in order to complete these expansion projects. We expect to
  finance these expansion projects with the proceeds of the offering
  of ADSs we received in May 2002, long-term debts and the funds
  generated from cash flow from operations .

New
  Research and Development Center.In
  November 2002, we announced a plan to establish a dedicated
  TFT-LCD flat panel research and development center, AU Technology
  Center, which is targeted for completion by the third quarter
  of 2004. Research activities at AU Technology Center will initially
  be divided into several general segments, including advanced
  technology development in OLED, LTPS and plasma display. In
  addition to new product development and module processing, AU
  Technology Center will also devote substantial efforts to improving
  current TFT-LCD panel product and manufacturing process technologies.
  Upon completion, AU Technology Center will fully integrate our
  research and development resources in achieving optimal efficiency
  and advanced technology development. While we expect that we
  will continue to derive the majority of our revenues from TFT-LCD
  panels, we intend to introduce panels using other technologies,
  depending on market demand and the progress of our research
  and development efforts.

As
  of March 31, 2003, we had invested a total of NT$9.0 million
  (US$0.3 million) in AU Technology Center, and we expect to invest
  additional NT$1,200 million in order to complete the construction
  of AU Technology Center. We expect to finance the completion
  of AU Technology Center with funds generated through cash flow
  from operations.

ITEM
  5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

OPERATING
  RESULTS AND TREND INFORMATION

Overview

The
  TFT-LCD industry has been characterized by cyclical market conditions,
  primarily as a result of the imbalance of supply of and demand
  for TFT-LCD panels, which have been reflected in the past by
  the fluctuations

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in
  the average selling prices of TFT-LCD panels. For example, in
  the second half of 2000, intense competition in the TFT-LCD
  industry worldwide, due principally to the substantial addition
  of new fabs by most major manufacturers in Taiwan, Korea and
  Japan, including our company, resulted in declines in the average
  selling prices of many of our products. As a result, we experienced
  substantial downward pricing pressure on large-size panels.
  The average selling prices of our large-size panels decreased
  by 40.1% between 2000 and 2001. From the first half of 2002,
  however, expectation for strong demands for TFT-LCD panels resulted
  in panel price recovery in the TFT-LCD industry. The average
  selling prices of our large -size panels increased by 21.5%
  between the fourth quarter of 2001 and the first quarter of
  2002 and further increased by 13.9% between the first quarter
  and the second quarter of 2002. However, lower than expected
  demand growth for TFT-LCD panels in the second half of 2002
  led to oversupply in the market, causing sharp declines in prices
  again in that period. As a result, the average selling prices
  of our large-size panels decreased by 13.0% between the second
  quarter and the third quarter of 2002 and further decreased
  by 21.7% between the third quarter and the fourth quarter of
  2002.

Our
  revenues depend substantially on the average selling prices
  of our panels and are affected by fluctuations in those prices.
  The average selling prices of our large-size panels increased
  by 15.6% between 2001 and 2002. The increases in the average
  selling prices of our panels and decreases in depreciation and
  amortization expenses and other fixed costs associated with
  the expansion of our production capacity on a per panel basis
  contributed to the increase in our gross margins from (7.4)%
  in 2001 to 16.0% in 2002. We believe that the recent increase
  in the average selling prices has resulted from the relative
  shortage of supply, compared to the demand for TFT-LCD panels.
  However, in response to the supply shortage, TFT-LCD manufacturers,
  including our company, may expand their capacity. If such expansion
  in capacity is not matched by an increase in demand, it could
  lead to overcapacity and declines in the average selling prices
  of our panels in the future. In addition, regardless of whether
  capacity is expanded, we expect that average selling prices
  for our existing product lines will eventually decline as the
  cost of manufacturing TFT-LCD panels declines.

Production
  Capacity

We
  measure the capacity of a fab in terms of the number of mainstream
  panels we could produce if all of the substrates at the fab
  were cut to produce such panels. The standard mainstream panel
  was 15-inch panel prior to 2002 and 17-inch panel since 2003.
  We refer to this unit of measurement as the 15-inch or 17-inch
  panel equivalent. We had reached an annual capacity of approximately
  11.0 million 15-inch panel equivalents, or 9.6 million 17-inch
  panel equivalents, as of December 31, 2002. However, the actual
  panels shipped will vary from time to time due to the utilization
  rate of our production facilities and the change of our product
  mix reflecting market conditions. We increased our annual substrate
  capacity to approximately 2.4 million substrates as of December
  31, 2002.

As
  a result of economies of scale resulting from a substantial
  increase in our production, our cost of goods sold per large-size
  panel decreased by 18.2% between 2000 and 2001 and by 14.1%
  between 2001 and 2002. As we made significant investments in
  2001 and 2002, our total depreciation and amortization expenses
  increased significantly. While in the case of full utilization
  of our production facilities, depreciation and amortization
  expenses divided by the total number of large-size panels shipped
  should decrease resulting from a substantial increase in our
  production of large-size panels. However, our depreciation and
  amortization expenses divided by the total number of large-size
  panels shipped increased from NT$1,366.6 (US$39.0) in the fourth
  quarter of 2001 to NT$1,604.5 (US$46.2) in the fourth quarter
  of 2002, due primarily to a lower utilization rate of our production
  facilities in 2002 as demand for TFT-LCD panels declined in
  the second half of 2002.

Fab
  Construction and Ramp Up Process

Once
  the design of a new fab is completed, it typically takes five
  to eight quarters before the fab commences commercial production,
  during which time we construct the building, install the machinery
  and equipment and conduct trial production at the fab. It then
  takes an additional two to three quarters for the fab to be
  in a position to produce at the installed capacity and with
  high production yield, where production yield is the number
  of good panels produced expressed as a percentage of the total
  number of panels produced. This process is commonly referred
  to as ramp up. At the beginning of the ramp up process,
  fixed costs, such as depreciation and amortization, labor, general
  and administrative and other expenses, are relatively high on
  a per panel basis, primarily as a result of the low output.
  Variable costs, particularly raw material and component costs,
  are also relatively high on a per panel basis since production
  yield is typically low in the early stages of a fabs ramp
  up, leading to greater wastage of raw materials and components.
  Generally, as a fab completes the ramp up process, its production
  reaches

36

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close
  to its installed capacity, leading to lower fixed costs per
  panel as a result of higher output, and lower raw material and
  component costs per panel as a result of higher production yield.

We
  typically construct our new fabs in phases in order to allocate
  our aggregate capital expenditure across a greater period of
  time. As a result, the installed capacity in the early phases
  of production at a new fab is typically lower than the maximum
  capacity that can be installed at a fab. For example, in the
  third quarter of 1999, we commenced construction of the first
  phase of our L6 fab, our largest fab in operation. We began
  commercial operations at L6 in the first quarter of 2001 and
  reached full commercial production in the fourth quarter of
  2001, when this fab started processing substrates equal to its
  installed capacity of 35,000 substrates per month. We completed
  the second phase of our L6 fab to increase its installed capacity
  from 35,000 to 60,000 substrates per month. As of December 31,
  2002, we had invested a total of NT$18,772 million (US$541.0
  million) in our L6 fab.

Product
  Mix

Our
  product mix affects our sales and profitability, as the prices
  and costs of different size panels may vary significantly. The
  larger panel sizes command higher prices, but also have higher
  manufacturing costs. In 2002, the trend toward notebook computers
  with bigger screens and the substantial increase in demand for
  TFT-LCD panels for desktop monitors due to the substitution
  effect led us to change our product mix to include more 14.1-inch
  and 15-inch panels and fewer 13.3 -inch panels for notebook
  computers and more 15-inch and 17-inch panels for desktop monitors.
  The completion of the ramp up process at our L6 fab, which enabled
  us to produce 15-inch panels at lower cost, also contributed
  to the change in our product mix. We periodically review and
  adjust our product mix based on the demand for, and profitability
  of, each panel size.

Critical
  Accounting Policies and Estimates

Preparation
  of our consolidated financial statements requires us to make
  estimates and judgments that affect the amounts of our assets,
  liabilities, revenues and expenses. We continually evaluate
  these estimates, including those related to allowances for doubtful
  accounts, inventories, useful lives of properties, consolidated
  debits, income tax valuation allowances, pension plans and the
  fair value of financial instruments. We base our estimates on
  historical experience and other assumptions, which we believe
  to be reasonable under the circumstances. Actual results may
  differ from these estimates under different assumptions and
  conditions. We have identified below the accounting policies
  that are critical to our consolidated financial statements.

> Revenue
>     Recognition

Revenue
  is recognized when title to the products and risk of ownership
  are transferred to the customers, which occurs principally at
  the time of shipment. Customers
  have the right to return purchased products within 20 days after
  delivery for replacement if the products have an unacceptable
  number of defects in accordance with our specified, objective
  inspection standards. We continuously evaluate whether our products
  meet these inspection standards and can reliably estimate sales
  returns expected to result from customer inspections. As a result,
  we account for the estimated costs associated with the returns
  as a provision for warranty costs.

> Analysis
>     of Long-Lived Assets

We
  review our long-lived assets and certain identifiable intangible
  assets, including purchased intangible assets for impairment,
  whenever we feel that events or changes in circumstances indicate
  that the carrying amounts of these assets may not be recoverable.
  We measure recoverability of our assets to be held and used
  by comparing the carrying amount of an asset to the fair value
  of the asset. If we consider our assets to be impaired, the
  impairment we would recognize is measured by the amount by which
  the carrying amount of the assets exceeds the fair value of
  the assets. Furthermore, assets to be disposed of are reported
  at the lower of the carrying amount or fair value, less cost
  to sell.

> Provision
>     for Accounts Receivable

We
  evaluate our outstanding accounts receivable balance on a monthly
  basis for collectibility purposes. Our evaluation includes an
  analysis of the number of days outstanding for each outstanding
  accounts receivable account. When appropriate, we provide a
  provision that is based on the number of days for which the
  account has been

37

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outstanding.
  The provision provided on each aged account is based on our
  average historical loss experience over the prior two years.

> Provision
>     for Inventory Obsolescence

Provisions
  for inventory obsolescence and devaluation are recorded when
  we determine that the fair values of inventories are less than
  their cost basis, which may be affected by the number of months
  inventory items that remain unsold. Additionally, our analysis
  of our provision for obsolete and devalued inventory is partially
  based upon forecasts of demand for our products and any change
  to these forecasts.

Description
  of Certain Statement of Operations Items

> Net
>     Sales

We
  generate our sales primarily from manufacturing and selling
  TFT-LCD panels. We manufacture TFT-LCDs for computer products
  and consumer electronics products. In 2002, we shipped 9.1 million
  panels for small- to medium-size panels and 8.3 million panels
  for large-size panels. Our large-size panels accounted for 88.3%
  of our net sales in 2002. Although we expect to
  continue to derive a majority of our revenues from the sales
  of panels for computer products, we intend to increase our focus
  on sales of panels for consumer electronics products.

The
  pricing of our panels takes into account the prevailing market
  conditions, in addition to the complexity of the product, the
  order size, the strength and history of our relationship with
  the customer, and our capacity utilization. For most of our
  large-size panels, which are relatively standardized, such as
  15-inch panels for desktop monitors, we determine our prices
  primarily in accordance with global supply and demand conditions.
  For small- to medium-size panels, which require a high level
  of customer involvement in the design process, we determine
  our prices based on negotiations with our customers with reference
  to current market prices.

Net
  sales are recognized when title to the products and risk of
  ownership are transferred to the buyer, which is primarily at
  the time of shipment. We generally bill our customers at the
  time of shipment, with varying terms of credit, generally not
  exceeding 60 days from the time of billing. In connection with
  the sales of our products, we do not accept non-monetary consideration.

Given
  our long-term relationships with most of our customers, and
  the level of related historical sales volumes, we have not experienced
  a high degree of losses on uncollectible accounts receivable
  accounts.

> Cost
>     of Goods Sold

Our
  cost of goods sold consists principally of:

- costs
    of raw materials and components, such as color filters, driver
    integrated circuits, backlight units, glass substrates, polarizers,
    printed circuit board assemblies and liquid crystal;
- overhead
    costs, such as depreciation and maintenance of production equipment,
    indirect material costs, indirect labor costs, utilities, amortization
    of ongoing royalty payments under technology license agreements,
    insurance and rental expenses; and
- direct
    labor costs.

Under US GAAP, the amortization of the fixed license and patent
  fees under our technology license agreements, which we treat
  as a research and development expense under ROC GAAP, is included
  as part of our cost of goods sold. See note 26 to the consolidated
  financial statements.

We
  have continued to undertake efforts to reduce our raw material
  and component costs in an effort to partially offset the impact
  of the declining average selling prices of our panels on our
  gross margins. These cost reduction efforts include:

- negotiating
    better pricing terms with our suppliers, including quantity
    discounts;

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- finding
    alternative, less expensive sources of raw materials and components,
    especially by sourcing locally near our production facilities
    in Taiwan and the Peoples Republic of China;
- moving
    labor-intensive operations to lower-cost regions;
- deploying
    more advanced product design and manufacturing process technologies;
    and
- improving
    our production processes.

See
  Item 4. Information on the Company Our Strategy
  Focus on Cost Reduction.

We
  have substantially reduced our raw material and component costs
  on a per panel basis. For example, our raw material and component
  costs per panel for panels for computer products decreased by
  16.4% between 2001 and 2002. However, our raw material and component
  costs as a percentage of total cost of goods sold remained at
  a stable level, primarily due to the reduction in fixed costs
  per panel as a percentage of cost of goods sold. We expect that
  raw material and component costs will continue to decline on
  a per panel basis in absolute terms, but will constitute a
  larger percentage of our cost of goods sold as we increase our
  production.

Due
  to our substantial investments in capacity over the past three
  years, depreciation and amortization expenses have increased
  significantly. However, our depreciation and amortization expenses
  on a per panel basis have decreased significantly over the same
  period as a result of the increase of production efficiency,
  which was primarily due to the migration toward advanced production
  facilities. As a percentage of cost of goods sold, depreciation
  and amortization expenses decreased from 27.7% in 2000 to 22.0%
  in 2001, and decreased to 20.4% in 2002. We expect depreciation
  and amortization costs as a percentage of total cost of goods
  sold to continue to decline in 2003 as a result of the increase
  of production efficiency as a result of the migration toward
  advanced production facilities. In absolute terms, however,
  we expect depreciation and amortization expenses to increase
  in 2003 as we make further investments to expand our capacity.

> Operating
>     Expenses

Our
  operating expenses have increased significantly over the past
  few years as we have increased our production and capacity.
  However, on a per panel basis, operating expenses have decreased.

Our
  operating expenses consist of the following:

Selling
  Expenses.
  Selling expenses consist primarily of selling commissions, salaries
  and related personnel expenses and other marketing expenses.
  In addition, our selling expenses include an estimate based
  on our historical experience of our obligations under warranty
  policies to provide, among other things, replacement parts and
  after-sale services for our products. We expect that our selling
  expenses will increase as we seek to further expand our unit
  sales and customer base.

Administrative
  Expenses.
  Administrative expenses consist primarily of salaries for our
  executive, administrative, finance and human resource personnel,
  fees for professional services, and the cost of computers to
  support our operations. In addition, before we commence commercial
  production at a particular fab, we account for all production-related
  costs, including direct labor costs and overhead costs, as administrative
  expenses. After the commencement of commercial production, these
  expenses are accounted for as our cost of goods sold. We expect
  our administrative expenses to grow as we expect to hire additional
  supporting staff in conjunction with our growth.

Research
  and Development Expenses.
  Research and development expenses consist primarily of salaries,
  bonuses and related costs for product and technology development,
  amortization of fixed license fees under technology license
  agreements, and depreciation and maintenance on the equipment
  and various materials used in our research and development processes.
  We expect our research and development expenses to grow as we
  hire additional staff and purchase additional equipment for
  research and development purposes. Under US GAAP, the amortization
  of the fixed license fees and ongoing royalty payments under
  our technology license agreements have been included as part
  of our cost of goods sold. See note 26 to the consolidated financial
  statements.

We
  believe that our operating expenses will increase as our operations
  continue to grow. However, we expect our operating expenses
  to decrease on a per panel basis as a result of our increased
  production capacity.

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Results
  of Operations

The
  following table sets forth certain of our results of operations
  data as a percentage of our net sales for the periods indicated:

|                                        | Year
      Ended December 31, |  
|--------------------------------------- | ----------------------------- | -
|                                        |                               |  
|                                        | 2000                          |  
|                                        |                               |  
|                                        | %                             |  
|Net
      sales                         | 100.0                         |  
|Cost
      of goods sold                | 81.1                          |  
|                                        |                               |  
|Gross
      profit (loss)               | 18.9                          |  
|Operating
      expenses:               | 14.5                          |  
|Selling
      expenses                  | 1.7                           |  
|Administrative
      expenses           | 6.6                           |  
|Research
      and development expenses | 6.2                           |  
|Operating
      income (loss)           | 4.4                           |  
|                                        |                               |  
|Investment
      income                 | 3.3                           |  
|Net
      non-operating income (loss)   | (0.1                          | )
|                                        |                               |  
|Income
      (loss) before income tax   | 7.6                           |  
|Income
      tax benefit (expenses)     | 3.6                           |  
|                                        |                               |  
|Net
      income (loss)                 | 11.2                          |  
|                                        |                               |  

For
  the Years Ended December 31, 2002 and 2001

> Net
>     Sales

Our
  net sales increased by 101.4% from NT$37,588.6 million in 2001 to
  NT$75,689.2 million (US$2,181.2 million) in 2002. This increase was
  primarily due to significant increases in the average selling prices
  and unit sales for our large -size panels in the first half of 2002,
  partially offset by a decrease in average selling prices and unit
  sales in the second half of 2002. The increases in both average selling
  prices and unit sales of large-size panels in the first half of 2002
  were due primarily to market expectations of strong demand in the
  end use market for TFT-LCD panels in 2002. The decline in the average
  selling prices and unit sales of our large-size panels in the second
  half of 2002 were due primarily to oversupply of large-size panels
  in the market as a result of lower than expected demand growth for
  TFT-LCD panels and inventory build-up in that period.

> Cost
>     of Goods Sold

Our
  cost of goods sold increased by 57.5% from NT$40,373.6 million
  in 2001 to NT$63,606.2 million (US$1,833.0 million) in 2002.
  As a percentage of net sales, cost of goods sold decreased from
  107.4% in 2001 to 84.0% in 2002. We significantly reduced our
  cost of goods sold per panel for computer products as a result
  of lower raw material and component costs and lower fixed costs
  per panel, primarily due to the improved production efficiency and
  enlarged economies of scale achieved by capacity expansions.
  Our raw material and component costs per panel for computer
  products decreased by 16.4% between 2001 and 2002. Our depreciation
  and amortization expenses increased from NT$8,880.3 million
  in 2001 to NT$12,989.9 million (US$374.3 million) in 2002,
  primarily due to the additional purchase of equipment for the
  manufacturing of panels for computer products, mainly at our
  L6 fabs. However, our depreciation and amortization expenses
  divided by the total number of large-size panels sold decreased
  from NT$3,214.4 in 2000 to NT$1,927.8 in 2001, and to NT$1,561.0
  (US$45.0) in 2002, and our depreciation and amortization expenses
  decreased as a percentage of cost of goods sold from 22.0% in
  2001 to 20.4% in 2002, due to an increase in our production.

> Gross
>     Profit (Loss) and Gross Margin

We
  recorded a gross loss of NT$2,785.0 million in 2001 and recognized
  gross profit of NT$12,083.0 million (US$348.2 million) in 2002,
  due principally to a substantial decline in the cost of goods
  sold and an increase in the average selling prices of most of
  our large-size panels.

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> Operating
>     Expenses

Operating
  expenses increased by 24.6% from NT$3,505.7 million in 2001
  to NT$4,369.1 million (US$125.9 million) in 2002. As a percentage
  of net sales, our operating expenses decreased from 9.3% to
  5.8%, primarily due to increased sales of our panels.

Selling
  Expenses.
  Selling expenses increased by 16.5% from NT$446.2 million in
  2001 to NT$520.0 million (US$15.0 million) in 2002, primarily
  due to increases in transportation costs, selling commissions
  and promotion expenses as a result of increased sales in 2002.
  As a percentage of net sales, our selling expenses decreased
  from 1.2% in 2001 to 0.7% in 2002.

Administrative
  Expenses.
  Administrative expenses increased by 34.3% from NT$1,203.4 million
  in 2001 to NT$1,616.0 million (US$46.6 million) in 2002, primarily
  due to the production-related costs, including direct labor costs
  and overhead costs, at our L8A fab and module-assembly fabs in Suzhou
  prior to the commercial production at such fabs. As a percentage
  of our net sales, our administrative expenses decreased from 3.2%
  in 2001 to 2.1% in 2002, due primarily to the economies of scale.

Research
  and Development Expenses.
  Research and development expenses increased by 20.3% from NT$1,856.1
  million in 2001 to NT$2,233.1 million (US$64.3 million) in 2002,
  primarily due to an increase in depreciation expenses for research
  and development equipment in connection with the development
  of new technologies, an increase in the cost of raw materials
  and components relating to research and development activities
  and an increase in additional expenses for research and development
  personnel due to additional hiring and salary level increases.
  Research and development expenses as a percentage of our net
  sales decreased from 4.9% in 2001 to 3.0% in 2002 as our net
  sales increased by 101.4% in that period.

> Operating
>     Income (Loss) and Operating Margin

We
  generated an operating loss of NT$6,290.7 million in 2001, compared
  to operating income of NT$7,713.9 million (US$223.3 million)
  in 2002, and our operating margin increased from (16.7)% in
  2001 to 10.2% in 2002. These increases were primarily due to
  an increase in the average selling prices of most of our panels
  due to strong market demands and a reduction in our cost of
  goods sold per panel.

> Net
>     Non-Operating Income (Loss)

Net
  non-operating loss increased by 272.6% from NT$453.9 million
  in 2001 to NT$1,691.1 million (US$48.7 million) in 2002 primarily
  due toan
  investment loss of NT$650.6 million and a net exchange loss
  of NT$210.8 million in 2002. The investment loss was primarily
  due to the write-off of our short-term investment in PixTech
  in the amount of NT$523.7 million in 2002. The net exchange
  loss was primarily due to the depreciation of US dollar against
  NT dollar in the second quarter of 2002.

> Net
>     Income (Loss)

As a result of the foregoing, we generated a net loss of NT$6,710.2
  million in 2001, compared to net income of NT$6,022.7 million
  (US$173.6 million) for 2002.

For
  the Years Ended December 31, 2000 and 2001

> Net
>     Sales

Our
  net sales increased by 46.9% from NT$25,583.2 million in 2000
  to NT$37,588.6 million in 2001. This increase was primarily
  due to significant increases in unit sales of our large-size
  panels as a result of our increased capacity. The unit sales
  of our large-size panels increased by 155.6 % from 1.8 million
  in 2000 to 4.6 million in 2001. The increases in our net sales,
  attributable to increases in unit sales of our large-size panels,
  were partially offset by declines in average selling prices
  of most of our large-size panels. The average selling price
  of large-size panels declined by 40.1% from 2001 to 2000, primarily
  due to the growth of supply at a more rapid rate than demand
  during the first three quarters of 2001 and reflecting the declining
  costs of production per panel.

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> Cost
>     of Goods Sold

Our
  cost of goods sold increased by 94.7% from NT$20,737.5 million in
  2000 to NT$40,373.6 million in 2001. As a percentage of net sales,
  cost of goods sold increased from 81.1% in 2000 to 107.4% in 2001.
  However, we significantly reduced our cost of goods sold per large-size
  panel, due to lower raw material and component costs and lower fixed
  costs per large-size panel primarily due to the increase in the number
  of panels sold. Our raw material and component costs per panel for
  large-size panels decreased by 0.3% between 2000 and 2001.Our depreciation and
  amortization expenses increased from NT$5,741.3 million in 2000 to
  NT$8,880.3 million in 2001, primarily due to the additional purchase
  of equipment for the manufacturing of large-size panels at our L3
  and L6 fabs. Our depreciation and amortization expenses, however,
  decreased as a percentage of cost of goods sold from 27.7% in 2000
  to 22.0% in 2001, due to an increase in our production.

> Gross
>     Profit (Loss) and Gross Margin

We
  recognized a gross profit of NT$4,845.7 million in 2000 and recorded
  a gross loss of NT$2,785.0 million in 2001, due principally
  to the substantial declines in the average selling prices of
  most of our large-size panels, partially offset by a decrease
  in the cost of goods sold per panel.

> Operating
>     Expenses

Operating
  expenses decreased by 5.9% from NT$3,724.2 million in 2000 to
  NT$3,505.7 million in 2001. As a percentage of net sales, our
  operating expenses decreased from 14.5% to 9.3%, primarily due
  to increased sales of our panels.

Selling
  Expenses.
  Selling expenses increased by 0.9% from NT$442.1 million in
  2000 to NT$446.2 million in 2001, primarily due to increases
  in transportation costs, selling commissions and promotion expenses
  as a result of increased sales in 2001. As a percentage of net
  sales, our selling expenses decreased from 1.7% in 2000 and
  1.2% in 2001.

Administrative
  Expenses.
  Administrative expenses decreased by 28.5% from NT$1,683.3 million
  in 2000 to NT$1,203.4 million in 2001, primarily due to the
  commencement of the production at our L3 fab in November 2000
  and at our L6 fab in February 2001. Before we commenced commercial
  production at our L3 and L6 fabs, we accounted for all production-related
  costs at these fabs, including direct labor costs and overhead
  costs, as administrative expenses. As a result of the timing
  for commencement of commercial production at these two fabs,
  the substantial majority of such costs were reflected in our
  administrative expenses for 2000, when these administrative
  expenses for L3 and L6 totaled NT$416.6 million. In 2001, following
  the commencement of commercial operations at our L3 fab, these
  administrative expenses decreased to NT$143.3 million as they
  related solely to our L6 fab. As a percentage of our net sales,
  our administrative expenses decreased from 6.6% in 2000 to 3.2%
  in 2001.



Research
  and Development Expenses.
  Research and development expenses increased by 16.1% from NT$1,598.8
  million in 2000 to NT$1,856.1 million in 2001, primarily due
  to an increase in amortization expenses, an increase in depreciation
  expenses for research and development equipment in connection
  with the development of new technologies, such as LTPS, OLED
  and plasma display, and an increase in salary expenses for research
  and development personnel due to additional hiring and salary
  level increases. Research and development expenses as a percentage
  of our net sales decreased from 6.2% in 2000 to 4.9% in 2001.

Operating
  Income (Loss) and Operating Margin



We
  generated operating income of NT$1,121.5 million in 2000, compared
  to an operating loss of NT$6,290.7 million in 2001, and our
  operating margin decreased from 4.4% in 2000 to (16.7)% in 2001.
  These decreases were primarily due to the substantial decline
  in the average selling prices of most of our panels in the first
  three quarters of 2001.

> Net
>   Non-Operating Income (Loss)

We
  generated net non-operating income of NT$814.9 million in 2000,
  compared to a net non-operating loss of NT$453.8 million in
  2001. The difference was primarily due to:

42

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- an
    increase in interest expense and a decrease in interest income
    in the aggregate amount of NT$631.8 million, due to increased
    long-term borrowings and a decrease in cash and cash equivalents;
    and
- a
    decrease in investment gain of NT$835.4 million, resulting
    primarily from an investment gain realized in 2000 in connection
    with the sale of an investment in Nippon Foundry Incorporated.
    Net
      Income (Loss)

For
  the reasons set forth above, we generated net income of NT$2,862.7
  million for 2000, compared to a net loss of NT$6,710.2 million
  in 2001.

Liquidity
  and Capital Resources

We
  need cash primarily for capacity expansion and working capital.
  Although we have historically been able to satisfy our working
  capital needs from cash flow from operations, our ability to
  expand our capacity has been largely dependent upon, and to
  a certain extent will continue to depend upon, our ability to
  finance these activities through the issuance of equity securities,
  long-term borrowings and the issuance of convertible and other
  debt securities. If adequate funds are not available, whether
  on satisfactory terms or at all, we may be forced to curtail
  our expansion plans. Our ability to meet our working capital
  needs from cash flow from operations will be affected by the
  demand for our products, which in turn may be affected by several
  factors. Many of these factors are outside of our control, such
  as economic downturns and declines in the average selling prices
  of our products caused by oversupply in the market. The average
  selling prices of our existing product lines are reasonably
  likely to be subject to further downward pressure in the future.
  To the extent that we do not generate sufficient cash flow from
  our operations to meet our cash requirements, we may rely on
  external borrowings and securities offerings. Other than as
  described in Off-Balance Sheet Arrangements,
  we have not historically relied, and we do not plan to rely
  in the foreseeable future, on off-balance sheet financing arrangements
  to finance our operations or expansion.

As
  of December 31, 2002, our primary source of liquidity was NT$25,957.2
  million (US$748.0 million) of cash and cash equivalents and
  NT$3,231.8 million (US$93.1 million) of short-term investments.
  As of December 31, 2002, we had total availability under existing
  short-term lines of credit and trade facilities of NT$13,774.0
  million (US$396.9 million) available from more than 30 domestic
  and foreign financial institutions, of which we had borrowed
  NT$770.4 million (US$22.2 million) as of December 31, 2002.
  All of our short-term loans are revolving facilities with a
  term of one year, which may be extended for terms of one year
  each with lender consent. We are subject to restrictions on
  the sale, lease, transfer or other disposal of our assets under
  some of our short-term loan facilities. Our obligations under
  our short-term loan are unsecured. We believe that our existing
  credit lines under our short-term loan, together with cash generated
  from our operations, are sufficient to finance our current working
  capital needs.

As
  of December 31, 2002, we had outstanding long-term borrowings
  of NT$28,353.2 million (US$817.1 million) owed to financial
  institutions. The interest rates of these long-term borrowings
  are variable rates, which as of December 31, 2002 ranged between
  2.89% and 5.02% per year.

In
  November 2001, we issued NT$10,000.0 million of convertible
  bonds. These bonds have a stated interest rate of 2.0% and an
  effective interest rate of 4.50%, and are convertible into our
  shares. These bonds, which are scheduled to mature in November
  2008, are convertible at the option of the bondholders beginning
  in February 2002, and are redeemable by us under certain circumstances
  beginning in November 2002. The terms of the bonds also provide
  for early redemption at the option of the bondholders in October
  2005 and October 2006. These convertible bonds have not received
  any credit rating. As of December 31, 2002, bondholders had
  exercised conversion rights to receive 553,714,100 of our shares.

In
  August 1999, we issued NT$1,500 million of secured bonds. These
  bonds have a stated interest rate of 6.05%, and are scheduled
  to mature in August 2004. We are obligated to repay the principal
  amount of these bonds in six semi-annual installments each in
  the amount of NT$250 million, commencing on February 26, 2002.
  In November 1999, we issued NT$1,500 million of secured bonds.
  These bonds have a stated interest rate of 5.85%, and are scheduled
  to mature in November 2004. We are obligated to repay the principal
  amount of these bonds in six equal semi-annual installments,
  each in the amount of NT$250 million, commencing on May 7, 2002.

In
  September 1998, we established a long-term facility with an
  aggregate initial commitment amount ofNT$7,000.0
  million and a term of 5.5 years for the issuance of commercial
  paper. Since March 1999, we have had at

43

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all
  times outstanding commercial paper issued under this facility
  in an aggregate principal amount equal to the initial commitment
  amount, with revolving maturities of up to 180 days and effective
  interest rates of 1.45% as of December 31, 2002. The commitment
  amount will be reduced by repayments in five equal semi-annual
  installments, each in the amount of NT$1.4 billion starting
  on March 18, 2002. Our repayment of the borrowings will reduce
  the commitment amount under this commercial paper facility by
  the amount of our repayment. Our repayment obligations under
  this commercial paper facility are guaranteed by a syndicate
  of commercial banks in Taiwan pursuant to the terms of this
  commercial paper facility. This commercial paper facility has
  not received any credit rating. As of December 31, 2002, we
  had outstanding borrowings under this facility in the amount
  of NT$3,887.6 million (US$112.0 million).

Our
  asset pledged as collateral, including building, machinery and
  equipment, amounted to NT$39,571.5 million (US$1,140.4 million)
  as of December 31, 2002, to secure our obligations under the
  long-term borrowings and bonds and commercial paper issued.

Set
  forth below are the aggregate amounts, as of December 31, 2002,
  of our future cash payment obligations under our existing debt
  and lease arrangements.

|                                         | Due
      by Payments Period | 
|---------------------------------------- | ---------------------------- | 
|                                         |                              | 
|Contractual
      Obligations            | Total                        | 
|                                         |                              | 
|                                         | NT$                          | 
|                                         | (in
      millions)          | 
|Short-term
      borrowings              | 770.4                        | 
|                                         |                              | 
|Long-term
      debt(1)                  | 34,232.9                     | 
|Lease
      obligations(2)               | 2,458.8                      | 
|                                         |                              | 
|Total
      contractual cash obligations | 37,462.1                     | 
|                                         |                              | 

|   
|---
|(1)
|(2)

In
  addition to the contractual obligations set forth above, we also
  have continuing obligations to make cash royalty payments under our
  technology license agreements, the amount of which are determined
  based on net sales of our panels. We have already begun to place
  orders related to the installation of machinery and equipment at
  our new fifth-generation fabs, our L8A and L8B fabs, together with
  the color filter production facilities housed at the L8B fab. As
  of December 31, 2002, we had made commitments of approximately NT$24.3
  billion (US$700.3 million), primarily relating to the fifth-generation
  fabs and color filter production, which commitments may be cancelled
  subject to the payment of certain penalties.

We
  have not entered into any financial guarantees or similar commitments
  to guarantee the payment obligations of third parties. In addition,
  we do not have any written options on non financial assets.
  Our long-term loan and commercial paper facilities and lease
  agreements include certain provisions that would trigger a requirement
  for early payment. Under the terms of our credit facilities
  for long-term borrowings, we are required to comply with financial
  covenants, including current ratio and debt-equity ratio and
  other technical requirements. Our debt under these facilities
  may be accelerated if there is a default, including defaults
  triggered by failure to comply with these financial covenants
  and other technical requirements.

Net
  cash provided by operating activities amounted to NT$2,755.7
  million in 2000, NT$1,215.8 million in 2001 and NT$20,821.7
  million (US$600.0 million) in 2002. Our depreciation and amortization
  was NT$5,741.3 million in 2000, NT$8,880.3 million in 2001 and
  NT$12,989.9 million (US$374.3 million) in 2002. The increases
  in our notes and accounts payable was NT$1,084.6 million in
  2000, NT$7,339.7 million in 2001 and NT$1,322.0 million (US$38.1
  million) in 2002. The increases in depreciation and amortization
  were primarily due to increased capital investment for the expansion
  of our production capacity. See  Results of Operations.
  Our depreciation and amortization and increases in our notes
  and accounts payable were partially offset by increases in notes
  and accounts receivable of NT$1,418.6 million in 2000, NT$5,930.2
  million in 2001 and NT$1,203.9 million (US$34.7 million) in
  2002 and increases in inventories of NT$5,269.3 million in 2000
  and NT$2,124.2 million in 2001. Notes and accounts receivable
  increased significantly in 2001 from NT$3,031.3 million in 2000
  to NT$9,021.7 million in 2001, due to increased sales in 2001
  of NT$12,005.4 million over sales from 2000.

44

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Net
  cash used for investing activities was NT$36,652.1 million in
  2000, NT$15,299.5 million in 2001 and NT$18,125.0 million (US$522.3
  million) in 2002. Net cash used for investing activities primarily
  reflected capital expenditures for property, plant and equipment
  of NT$36,901.6 million in 2000, NT$13,987.3 million in 2001
  and NT$18,035.3 million (US$519.7 million) in 2002. These capital
  expenditures were primarily funded with net cash provided by
  financing activities, primarily from long-term bank borrowings
  and the issuance of shares.

Cash
  provided by financing activities totaled NT$27,512.7 million
  in 2000. In 2001, cash provided by financing activities was
  NT$16,779.5 million, reflecting primarily our issuance of NT$10.0
  billion of convertible bonds, share issuances totaling NT$7.9
  billion and borrowings of NT$4,270.1 million under long-term
  loans, partially offset by our repayment of short-term loans
  of NT$5,291.0 million. In 2002, cash provided by financing activities
  was NT$16,754.3 million (US$482.8 million), reflecting primarily
  our share issuance totaling NT$19,170.3 million (US$552.5 million),
  partially offset by our repayment of long-term loans and convertible
  bonds of NT$5,104.1 million (US$147.1 million).

We
  have made, and expect to continue to make, substantial capital
  expenditures in connection with the expansion of our production
  capacity. Substantially all of our investments in capital expenditures
  are located in Taiwan and the Peoples Republic of China.
  The table below sets forth our principal capital expenditures,
  paid or committed, for the periods indicated.

|                                  | 2000                |  | 2001     |  | 2002     | 
|--------------------------------- | ------------------- |  | -------- |  | -------- | 
|                                  |                     |  |          |  |          | 
|                                  | NT$                 |  | NT$      |  | NT$      | 
|                                  | (in
      millions) | 
|Equipment
      purchases         | 31,606.7            |  | 11,264.8 |  | 16,715.1 | 
|Land
      and building purchases | 4,528.2             |  | 1,513.8  |  | 1,874.5  | 

We
  are sometimes required to prepay our purchases of land and equipment.
  Prepayments for purchases of land are the result of a standard
  processing procedure by the Republic of China government related
  to the transfer of legal title. As of December 31, 2001 and
  2002, our prepayments for purchases of land amounted to NT$88
  million and NT$30 million, respectively. Prepayments for purchases
  of equipment result from contractual agreements involving down
  payments to suppliers when the equipment is ordered by us. As
  of December 31, 2001 and 2002, prepayments for purchases of
  equipment amounted to NT$8,815 million and NT$10,055 million,
  respectively.

For
  the year ended December 31, 2002, our capital expenditures amounted
  to NT$18,589.6 million (US$535.7 million), primarily to purchase
  equipment to build our fifth-generation fabs, including the color
  filter production facilities housed at our L8B fab, expand our existing
  fabs and expand our module-assembly operations. As of April 21, 2003,
  we estimated our capital expenditures to be approximately NT$37,769
  million (US$1,088.4 million) for 2003, primarily to purchase equipment
  to build our fifth-generation fabs, including the color filter production
  facilities at our L8B fab, expand our existing fabs and expand our
  module assembly operations. We may adjust the amount of our capital
  expenditures upward or downward based on cash flow from operations,
  the progress of our expansion plans, and market conditions. We believe
  that our existing cash, cash equivalents, short-term investments
  and expected cash flow from operations, will be sufficient to meet
  our capital expenditure, working capital, cash obligations under
  our existing debt and lease arrangements, and other requirements
  for at least the next twelve months. We frequently need to invest
  in new capacity to improve our economies of scale and reduce our
  production costs, which may require us to raise additional capital.
  We cannot assure you that we will be able to raise additional capital
  should it become necessary on terms acceptable to us or at all. The
  sale of additional equity or equity-linked securities may result
  in additional dilution to our shareholders.

Off-Balance
  Sheet Arrangements

We
  have, from time to time, entered into non-derivative financial
  instruments, including letters of credit to finance or secure
  our purchase payment obligations. As of December 31, 2002, we
  had off-balance sheet outstanding letters of credit of US$18.8
  million and JPY724.2 million. We also provided an off-balance
  sheet guarantee of NT$30.1 million as of December 31, 2002 in
  connection with a research and development grant from the Republic
  of China Ministry of Economic Affairs. See note 23 to our consolidated
  financial statements included elsewhere in this annual report.
  In addition, we have entered into interest rate swap transactions
  to hedge our interest rate exposure arising out of our commercial
  paper facility, and foreign currency forward contracts to hedge
  our existing assets and liabilities denominated in foreign currencies
  and identifiable foreign currency purchase commitments.

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Transactions
  with Related Parties

We
  have not extended any loans or credit to any of our directors,
  supervisors or executive officers, and we have not provided
  guarantees for borrowings by any of these persons. We have not
  entered into any fee-paying contract with any of these persons
  for such person to provide services not within such person's
  capacity as a director, supervisor or executive officer of the
  company.

We
  have, from time to time, purchased raw materials and components
  and sold our panels to our affiliated companies. We believe
  that these transactions with related parties have been conducted
  on arms-length terms, or on terms more favorable to us
  than arms- length terms. See Item 4. Information
  on the CompanyBusiness Overview  Customers, Sales
  and Marketing and Item 7. Major Shareholders
  Related Party Transactions. Given the nature of our business,
  it is not practical for us to review many of these related party
  transactions on a day-to-day basis. However, at the meeting
  of our board of directors on April 11, 2002, we adopted an amended
  related party transactions policy which requires, among other
  things:

- pre-approval
    by a majority vote of disinterested directors of each sale
    to, or purchase of raw materials and components from, a related
    party that is in the ordinary course of our business, which
    transaction involves a transaction amount in excess of 5%
    of our net sales or raw material and component purchases,
    as the case may be, for the previous three months on an unconsolidated
    basis, provided that any series of similar transactions with
    the same related party that collectively exceeds 40% of our
    net sales or raw material and component purchases, as the
    case may be, for the previous three months on an unconsolidated
    basis shall also require pre-approval;
- periodic
    review by our board of directors of other related party transactions
    in the ordinary course of business;
- pre-approval
    by a majority vote of disinterested directors of related party
    transactions not in the ordinary course of business and not
    otherwise specified in our related party transaction policy;
    and
- refusal
    of any interested director from consideration of matters involving
    the company he represents or with respect to which the director
    might have a conflict of interest.

Inflation

The
  inflation rate in Taiwan was 1.26% in 2000, 0.01% in 2001 and
  (0.2)% in 2002. We do not believe that inflation in Taiwan has
  had a material impact on our results of operations.

Taxation

The
  corporate income tax rate in Taiwan that applies to us is 25%.
  Until January 20, 2001, the corporate income tax rate in Taiwan
  that applied to us was 20% for our production located in the
  Hsinchu Science-Based Industrial Park and 25% for our production
  located elsewhere in Taiwan. However, we did not generate any
  income in any year except 2000 and 2002. In 2000, although we
  generated income before tax, we applied certain loss carryforwards
  that we accumulated from previous years to offset the tax liability
  to which we could otherwise have been subject. As a result,
  we did not incur any income tax expense during any of our fiscal
  years.

> Recognition
>     of Deferred Tax Assets

Our
  valuation allowance provided on deferred tax assets is calculated
  differently under ROC GAAP, compared to US GAAP. This difference
  has a significant impact on us because we have a significant
  amount of deferred tax assets as a result of the various tax
  credits available to us under Republic of China governmental
  tax incentive programs and net operating loss carryforwards.
  The net deferred income tax assets we are able to recognize
  under ROC GAAP as of December 31, 2002 amounted to NT$2,522.0
  million (US$72.7 million). This recognition of net deferred
  tax assets under ROC GAAP resulted primarily from the projection
  of income before tax for the year ended December 31, 2003. If
  we do not achieve the projection of income before tax for 2003,
  the amount of the deferred tax assets recognized may be significantly
  reduced.

46

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> Tax
>     Exemptions

Based
  on our status as a company engaged in the TFT-LCD business in
  Taiwan, all income attributable to the use of equipment that
  we purchase, in part or in whole, with proceeds we raise through
  share offerings, may be exempted from corporate income tax in
  Taiwan if our shareholders determine to allow us, instead of
  the shareholders themselves, to use these tax exemptions. In
  addition, income attributable to the use of equipment that we
  purchase, in whole or in part, with retained earnings that we
  capitalize, may be exempted from corporate income tax in Taiwan.
  These exemptions typically apply for four or five consecutive
  years, commencing in a year to be designated by us within two
  years following the commencement of commercial production using
  such equipment. We set forth below certain information with
  respect to our tax exemptions:

- Share
    offering in 1993 by Unipac for the purchase of equipment used at
    our L1 fab.
- This
      tax exemption period commenced in 2000 and will expire in 2003.
- Share
    offerings in 1999 by Unipac for the purchase of equipment used
    at our L2 and L3 fabs, and share offering in 1999 by Acer Display
    for the purchase of equipment used at our L6 fab.
- The
      tax exemption period relating to our L2 fab commenced in 2002
      and will expire in 2005.
- The
      tax exemption period relating to the equipment purchased for
      our L3 fab is four years.
- The
      tax exemption period relating to our L6 fab will commence in
      2005 and expire in 2009.
- Share
    offering in 1996 by Acer Display for the purchase of equipment
    used at our L5 fab.
- The
      tax exemption period will commence in 2003 and will expire in
      2007.
- Share
    offerings in 2001 for the purchase of equipment used at our L6
    fab.
- The
      tax exemption period is five years.
- We
      have not yet designated the year from which we will use this
      tax exemption.
- Capitalization
    of retained earnings in 2001 for the purchase of equipment used
    at our L1 and L5 fabs.
- The
      tax exemption period is five years for L1 fab and L5 fab.
- We
      have not yet designated the year from which we will use this
      tax exemption.
- Issuance
    of ADS in 2002 for the purchase of equipment used at our L8 fab.
- The
      tax exemption period is five years for L8 fab.
- We
      have not yet designated the year from which we will use this
      tax exemption.

If we make a qualified rights offering, our shareholders will
  be entitled, pursuant to a majority vote at a shareholders
  meeting held within two years after the rights offering, to
  elect to receive a tax credit for themselves of up to 10% (which
  percentage will be decreased by 1% every two years from 2000)
  of their subscription amount against taxes payable within five
  years after expiration of the first three years of investment,
  during which period such shareholders are required to hold onto
  their investment in order to utilize the tax credit. Except
  for the last year of that period, the tax credit deductible
  shall not exceed 50% of the total income tax payable by such
  shareholder in a particular year. Even if the shareholders elect
  to receive the shareholders tax credit, it is unlikely
  that ADS holders would be able to benefit from such tax credits.
  The Republic of China statute governing this tax credit does
  not expressly prohibit holders of ADSs from benefiting from
  such tax credit. However, in practice, even if an ADS holder
  may have other Republic of China sources of income against which
  to use the tax credit, ADS holders would not be able to prove
  that they meet the holding requirement necessary to claim the
  tax credit.

47

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> Loss
>     Carryforwards

We
  may use the loss carryforwards in the amount of NT$5,239.4 million
  that we generated in 1999 and 2001 to offset any taxable income
  generated by the end of 2006. As of December 31, 2002, we have
  used all such loss carryforwards to offset our taxable income
  generated in 2002.

> Tax
>     Credits

We
  also benefit from tax credits that we may apply to reduce our
  tax liabilities. We received tax credits at a rate of 10% of
  the purchase price in connection with our purchase of imported
  equipment and at a rate of 20% of the purchase price in connection
  with our purchase of locally manufactured equipment. As a result
  of the Republic of China becoming a member of the World Trade
  Organization, the Republic of China Ministry of Economic Affairs
  has amended the tax credit rules in April 2002 to adopt a tax
  credit at a rate of 13% to be applied to the purchase of equipment,
  regardless of the location of production of the equipment. As
  of December 31, 2002, we had accumulated NT$7,251 million (US$209.0
  million) of these tax credits. These tax credits are expected
  to expire four years from the end of the year in which we received
  the equipment. As of December 31, 2002, NT$1,787 million (US$
  51.5 million), NT$2,830 million (US$81.6 million), NT$1,102
  million (US$31.8 million) and NT$1,532 million (US$44.1 million)
  of these tax credits are expected to expire in 2003, 2004, 2005
  and 2006, respectively.

We
  also benefit from other tax credits of up to 35% of research
  and development and employee training expenses. If the amount
  of these expenses that we incur in any year exceeds the average
  of such expenses for the proceeding two years, an additional
  50% of the excess amount may be included in the applicable tax
  credit for such year. As of December 31, 2002, we had accumulated
  NT$666.0 million (US$19.2 million) of these tax credits. These
  tax credits are expected to expire after four years from the
  year expenses are incurred. As of December 31, 2002, NT$117
  million (US$3.4 million), NT$315 million (US$9.1 million) and
  NT$234 million (US$6.7 million) of these tax credits are expected
  to expire in 2003, 2004 and 2005, respectively.

> Tax
>     on Retained Earnings

In
  1997, the Republic of China Income Tax Law was amended to integrate
  the corporate income tax and shareholder dividend tax. Under the
  amendment, after-tax earnings generated from January 1, 1998 and
  not distributed to shareholders as dividends in the following year
  will be assessed a 10% retained earnings tax. See Item 10.
  Additional Information  Taxtion  Republic of China Tax
  Considerations  Tax Reform. As a result, if we do not
  distribute as dividends in any year all of our annual retained earnings
  generated in the preceding year, our applicable corporate income
  tax rate may exceed 25% for such year.

US
  GAAP Reconciliation Analysis

Our
  consolidated financial statements are prepared in accordance
  with ROC GAAP, which differs in many material respects from
  US GAAP. Such significant differences include, among other things,
  the accounting for our business combination with Unipac under
  the pooling-of-interests method of accounting under ROC GAAP,
  compared to the purchase method of accounting under US GAAP,
  and differences in the accounting for the beneficial conversion
  feature of our convertible bonds, compensation costs, derivative
  financial instruments, income taxes, depreciation of property,
  plant and equipment, and marketable securities and equity-investment
  securities, as well as additional disclosures required by US
  GAAP. Please see note 26 to our consolidated financial statements
  included elsewhere in the annual report for further discussion
  and quantification of these and other differences. The condensed
  consolidated balance sheets and statements of operations presented
  below have been prepared in accordance with US GAAP, which financial
  data have been derived from our US GAAP consolidated balance
  sheets and statements of operations appearing in note 26 to
  our consolidated financial statements appearing elsewhere in
  this annual report.

48

.

---

US
  GAAP Condensed Financial Data

|                                                                          | As
      of, or for the Year Ended,
      December 31, | 
|------------------------------------------------------------------------- | ------------------------------------------------------ | 
|                                                                          |                                                        | 
|                                                                          | 2000                                                   | 
|                                                                          |                                                        | 
|                                                                          | NT$                                                    | 
|                                                                          | (in
      millions, except per share data)             | 
|Statement
      of Operations Data:                                       |                                                        | 
|Net
      sales                                                           | 14,839.8                                               | 
|Cost
      of goods sold                                                  | 12,562.8                                               | 
|                                                                          |                                                        | 
|Gross
      profit (loss)                                                 | 2,277.0                                                | 
|                                                                          |                                                        | 
|Operating
      expenses:                                                 |                                                        | 
|Selling                                                                   | 278.3                                                  | 
|General
      and administrative                                          | 847.3                                                  | 
|Research
      and development                                            | 382.3                                                  | 
|                                                                          |                                                        | 
|                                                                          | 1,507.9                                                | 
|                                                                          |                                                        | 
|Operating
      income (loss)                                             | 769.1                                                  | 
|Non-operating
      income                                                | 289.9                                                  | 
|Non-operating
      expenses and losses                                   | 405.0                                                  | 
|Income
      tax provision                                                | -                                                      | 
|Cumulative
      effect of accounting changes, net of tax                 | -                                                      | 
|                                                                          |                                                        | 
|Net
      income (loss)                                                   | 654.0                                                  | 
|                                                                          |                                                        | 
|Weighted
      average shares outstanding  Basic                         | 1,100.0                                                | 
|Weighted
      average shares outstanding  Diluted                       | 1,100.0                                                | 
|Earnings
      (loss) per share Basic                                    | 0.59                                                   | 
|Earnings
      (loss) per share Diluted                                  | 0.59                                                   | 
|Earnings
      (loss) per ADS equivalent Basic                           | 5.95                                                   | 
|Earnings
      (loss) per ADS equivalent Diluted                         | 5.95                                                   | 
|Balance
      Sheet Data:                                                 |                                                        | 
|Current
      assets:                                                     |                                                        | 
|Cash
      and cash equivalents                                           | 1,069.5                                                | 
|Securities
      available for sale                                       | 1,567.4                                                | 
|Notes
      and accounts receivable, net                                  | 1,399.9                                                | 
|Receivables
      from related parties, net                               | 367.1                                                  | 
|Inventories                                                               | 3,087.2                                                | 
|Prepaid
      expenses and other current assets                           | 501.1                                                  | 
|                                                                          |                                                        | 
|Total
      current assets                                                | 7,992.2                                                | 
|                                                                          |                                                        | 
|Investments
      in equity-method investees                              | -                                                      | 
|                                                                          |                                                        | 
|Net
      property, plant and equipment                                   | 31,681.9                                               | 
|                                                                          |                                                        | 
|Intangible
      assets:                                                  |                                                        | 
|Goodwill                                                                  | -                                                      | 
|Other
      tangible assets, net                                          | 2,444.6                                                | 
|                                                                          |                                                        | 
|                                                                          | 2,444.6                                                | 
|Other
      assets                                                        | 948.5                                                  | 
|                                                                          |                                                        | 
|Total
      assets                                                        | 43,067.2                                               | 
|                                                                          |                                                        | 
|Current
      liabilities:                                                |                                                        | 
|Short-term
      borrowings and current installments of long-term         | 2,097.5                                                | 
|borrowings
      and commercial paper                                     |                                                        | 
|Accounts
      payable including related parties and accounts payable for | 1,892.6                                                | 
|equipment
      and construction in progress                              |                                                        | 
|Accrued
      expenses and other current liabilities                      | 1,512.0                                                | 
|                                                                          |                                                        | 
|Total
      current liabilities                                           | 5,502.1                                                | 
|Long-term
      borrowings                                                | 16,627.6                                               | 
|Other
      liabilities                                                   | 65.8                                                   | 
|                                                                          |                                                        | 
|Total
      liabilities                                                   | 22,195.5                                               | 
|                                                                          |                                                        | 
|Total
      stockholders equity                                          | 20,871.1                                               | 
|                                                                          |                                                        | 
|Total
      liabilities and stockholders equity                          | 43,067.2                                               | 
|                                                                          |                                                        | 

The
  principal differences between ROC GAAP and US GAAP, as they
  relate to our statements of operations and stockholders
  equity, are the accounting for: (1) our merger with Unipac,
  (2) the beneficial conversion feature of our convertible bonds,
  (3) compensation costs, (4) derivative financial instruments,
  (5) income taxes, (6) depreciation of property, plant and equipment
  and (7) investment securities.

49

---

> Business
>     Combination

We
  completed our merger with Unipac on September 1, 2001 through
  the issuance of 1,512,281,607 of our shares in exchange for
  all of the outstanding shares of Unipac. Under ROC GAAP, the
  merger was accounted for using the pooling-of-interests method
  and, accordingly, all of our consolidated financial statements
  for prior periods included in this annual report have been restated
  to include the results of operations, financial position and
  cash flows of Unipac. Further, according to the Republic of
  China Company Law, the excess of Unipacs net assets over
  the par value of our common shares issued for completion of
  the merger has been appropriated from unappropriated earnings
  and recorded as capital surplus. Under US GAAP, the merger has
  been accounted for as the acquisition of Unipac, using the purchase
  method of accounting. Under purchase accounting, the aggregate
  purchase price of NT$39,636.9 million was calculated as the
  market value of our shares issued and this amount was allocated
  to the assets acquired and liabilities assumed based on their
  respective fair values. The market value of our shares was based
  on the average market price of our shares over the five -day
  period before and after the terms of the acquisition were agreed
  upon and announced. Our management is responsible for the determination
  of the fair value of the assets acquired, including identifiable
  intangible assets, and liabilities assumed of Unipac. In determining
  such fair values, management considered a number of factors,
  including valuation reports by third parties. Based on the results
  of these valuations and our best estimates of fair value, we
  allocated the purchase price to the assets acquired and the
  liabilities assumed in accordance with US GAAP. The difference
  between the purchase price and the fair value of the net assets
  that we acquired, including identifiable intangible assets,
  has been recorded as goodwill. The financial results of Unipac
  prior to the acquisition date of September 1, 2001 have been
  excluded from our US GAAP results of operations.

We
  recorded NT$8,730.4 million of acquired intangible assets as
  part of the purchase price for Unipac, of which NT$53.5 million
  was assigned to in-process research and development assets that
  were then written off at the date of acquisition in accordance
  with Financial Accounting Standards Board, or FASB, Interpretation
  No. 4, Applicability of FASB Statement No. 2 to Business
  Combinations Accounted for by the Purchase Method. Those
  write-offs were included in research and development expenses
  in 2001. The remaining NT$8,676.9 million of acquired intangible
  assets have a weighted average useful life of approximately
  eighty-eight months and no estimated residual value. These intangible
  assets include large-size TFT-LCD product and manufacturing
  process technologies of NT$3,123.6 million and small- to medium-size
  TFT-LCD panel product and manufacturing process technologies
  of NT$5,553.3 million. The key technology for small and mid-size
  TFT-LCD production includes the technologies independently developed
  by Unipac and 13 related patents. The key technology for large-size
  TFT-LCD production includes the technologies jointly developed
  by Unipac and Matsushita, product technologies developed by
  Unipac and three related patents.

We
  also recorded NT$11,599.7 million in goodwill. In accordance
  with US GAAP Statement of Financial Accounting Standards, or
  SFAS, No. 141, Business Combinations, goodwill arising
  from a purchase accounting business combination consummated
  after June 30, 2001 is not amortized but is tested for impairment.
  Effective January 1, 2002, for US GAAP purposes, we adopted
  SFAS No. 142, Goodwill and Other Intangible Assets.
  As a result, we will test goodwill for impairment on at least
  an annual basis at the reporting unit level.

Under
  US GAAP, the difference in the carrying amount of our investment
  in PixTech, Inc. and PixTechs underlying net assets of
  NT$86.4 million that is equity-method goodwill is not amortized
  as it was acquired after June 30, 2001 as a result of the Unipac
  acquisition.

> Beneficial
>     Conversion Feature of Convertible Bonds

When
  we issued our convertible bonds in November 2001, ROC GAAP did
  not require us to recognize or account for any beneficial conversion
  feature embedded in the bonds. However, under US GAAP, the beneficial
  conversion feature should be recognized and measured by allocating
  a portion of the proceeds equal to the intrinsic value of that
  feature to capital surplus. The amount of the beneficial conversion
  feature was calculated at the commitment date as the difference
  between the conversion price and the fair value of our shares,
  multiplied by the number of shares into which the bonds are
  convertible. As a result of our allocating a portion of the
  proceeds equal to the intrinsic value of the beneficial conversion
  feature to capital surplus for US GAAP purposes, a discount
  on the bonds was recognized. The discount resulting from this
  allocation will be recognized as interest expense over the life
  of the bonds.

50

---

We
  reported the carrying amount of the convertible bonds of NT$1,206.0
  million (US$34.8 million) at December 31, 2002, and the related
  unamortized discount from the beneficial conversion feature
  was NT$80.9 million (US$2.3 million) on the same date. The
  effective interest rate of the bonds is approximately 6%.

> Compensation
>     Costs

Remuneration
  to Directors and Supervisors.
  Our articles of incorporation require a cash remuneration payment
  equal to 1% of our annual distributable earnings to our directors
  and supervisors. Under ROC GAAP, these payments are charged
  directly to retained earnings for the period during which our
  shareholders approve these payments. Under US GAAP, these cash
  payments have been recorded as compensation expense in the period
  when the related services are rendered.

Employee
  Bonuses.
  Certain of our employees are entitled to bonuses in accordance
  with our articles of incorporation, which specify a bonus amount
  ranging from 5% to 10% of our annual distributable earnings.
  Employee bonuses may be paid in cash, shares, or a combination
  of both. Under ROC GAAP, these bonuses are appropriated from
  retained earnings in the period our shareholders approval
  is obtained. If these employee bonuses are settled through the
  issuance of our shares, the amount charged against retained
  earnings is based on the par value of our shares issued.

Under
  US GAAP, the employee bonus expense is charged to income in
  the year during which services are provided. Shares we issue
  as part of these bonuses are recorded at fair value. Since the
  amount and form of the bonuses are not finally determinable
  until our s hareholders meeting in the following year,
  the total amount of these bonuses is initially accrued based
  on the minimum cash value to be paid. Any difference between
  the amount initially accrued and the fair value of these bonuses
  settled by the issuance of our shares is recognized in the
  year of approval by our shareholders.

> Derivative
>     Financial Instruments

We
  sell our products to customers worldwide and source a significant
  portion of our raw materials and components from suppliers outside
  Taiwan. This exposes us to changes in foreign currency exchange
  rates. We also have exposure to changes in interest rates that
  affect our cash flows on long-term borrowings. We use financial
  instruments, including derivatives such as foreign currency
  forward contracts and interest rate swaps, to reduce our foreign
  currency and interest rate exposure.

Under
  ROC GAAP, there are no specific rules related to accounting
  for derivative financial instruments and no criteria for hedge
  accounting. For ROC GAAP purposes, we record our interest rate
  swaps as hedge transactions, by recording the net receivable
  or payable each month related to these interest rate swap contracts,
  offsetting or adding to our interest expense of the related
  debt. For foreign currency forward contracts, we record unrealized
  gains or losses measured using the change in the spot rate of
  the contracts in our consolidated statements of operations if
  the contracts are used to hedge existing foreign currency denominated
  receivables and payables, or we defer recognition of unrealized
  gains or losses for those contracts hedging anticipated transactions
  that will be denominated in a foreign currency. The discount
  or premium on a forward contract is amortized into earnings
  over the life of the contract.

For
  US GAAP purposes, we adopted SFAS No. 133, Accounting
  for Derivative Instruments and Hedging Activities, as
  amended, as of January 1, 2001. In accordance with the related
  transition provisions of SFAS No. 133, we recorded an after-tax
  charge to earnings of NT$0.6 million, representing the cumulative
  effect of the adoption related to the foreign currency forward
  contracts for the year ended December 31, 2001. The after-tax
  earnings charge to the statements of operations had no material
  effect on our US GAAP earnings per share for the year ended
  December 31, 2001.

After
  our adoption of SFAS No. 133, as amended, none of our existing
  derivatives met the US GAAP hedge accounting criteria. As a
  result, all derivative contracts are recognized as either assets
  or liabilities and are measured at fair value at each balance
  sheet date. Changes in fair values of derivative instruments
  arising subsequent to the transition date amounted to a charge
  of NT$78.0 million and are included in other non-operating income
  for US GAAP purposes. In addition, we reclassified NT$9.4 million,
  net of tax, of the deferred losses from accumulated other comprehensive
  income into earnings from the interest rate swap contracts during
  2002. Changes in the fair

51

---

value
  of these derivatives in subsequent periods could result in increased
  volatility of our results of operations under US GAAP.

> Income
>     Taxes

Our
  valuation allowance provided on deferred tax assets is calculated
  differently under ROC GAAP, compared to US GAAP. This difference
  has a significant impact on us because we have a significant
  amount of potential deferred tax assets as a result of the various
  tax credits available to us under Republic of China governmental
  tax incentive programs and net operating loss carryforwards.
  See Item 10. Additional Information Taxation 
  Tax Credit for a discussion of different types of tax
  credits and benefits available to us. US GAAP requires more
  stringent criteria by which such valuation allowance is determined.
  Under US GAAP, cumulative losses in recent years are a significant
  piece of negative evidence that is difficult to overcome with
  projections of future taxable income for the purpose of determining
  the valuation allowance. The net deferred income tax assets
  we are able to recognize under ROC GAAP, as of December 31,
  2002 amounted to NT$2,522.0 million (US$72.7 million), compared
  to net deferred income tax liabilities of NT$857.9 (US$24.7
  million) under US GAAP. This recognition of net deferred tax
  assets under ROC GAAP resulted primarily from the projection
  of income before tax for the year ended December 31, 2003.

Under
  US GAAP, in assessing the realizability of deferred tax assets,
  we consider whether it is more likely than not that some portion
  or all of the deferred tax assets will not be realized. The
  ultimate realization of deferred tax assets is dependent upon
  the generation of future taxable income during the periods those
  temporary differences become deductible. We have considered
  the scheduled reversals of deferred tax liabilities in making
  this assessment, but we have not considered future projected
  taxable income due to the cumulative losses incurred in recent
  years.

> Depreciation
>     of Property, Plant and Equipment

Under
  ROC GAAP, we depreciate buildings over estimated lives of 20
  or 50 years based on guidance from the Republic of China Internal
  Revenue Code. Under US GAAP, buildings are depreciated over
  an estimated useful life of 20 years.

> Marketable
>     Securities and Equity-Method Investments

Under
  ROC GAAP, marketable equity securities are carried at the lower
  of aggregate cost or market. Under US GAAP, equity securities
  that have readily determinable fair values are classified as
  either trading, available-for-sale or held-to-maturity securities.
  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.
  Equity securities not classified as trading securities 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 other comprehensive income.
  Under US GAAP, the unrealized holding gain on available-for-sale
  securities amounted to NT$692.7 million and NT$(1,751.2) million
  (US$(50.5) million) at December 31, 2001 and 2002, respectively.

We
  held a 21% ownership interest in PixTech as of December 31,
  2002. Under ROC GAAP, because we do not intend to hold this
  interest in PixTechs stock for the long term, our investment
  in PixTech is recorded as a short-term investment and accounted
  for at the lower of aggregate cost or fair value, with changes
  in fair value being reported in the consolidated statements
  of operations. Under US GAAP, our investment in PixTech is accounted
  for under the equity method. PixTech filed a petition for bankruptcy
  on April 12, 2002 and therefore we wrote-off our short-term
  investment in PixTech in 2002 so that the carrying value of
  such investment was nil as of December 31, 2002.

We
  held a 41% ownership interest in Patentop Ltd. as of December
  31, 2002. As permitted under ROC GAAP, we recognize our equity
  in income (loss) of Patentop in the following year on a one
  year lag basis. Under US GAAP, we recognize our equity in the
  income (loss) of Patentop and PixTech in the current year.

Recent
  US GAAP Accounting Pronouncements

We
  believe that there are no recent accounting pronouncements under
  ROC GAAP that would have a significant impact on our results
  of operations. Set forth below is a summary of recent accounting
  pronouncements under US GAAP.

52

---

In
  June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
  Retirement Obligations". SFAS No. 143 requires that legal obligations
  associated with the retirement of tangible long-lived assets
  be recorded as a liability and measured at fair value when those
  obligations are incurred if an estimate of fair value is possible.
  When a company initially recognizes a liability for an asset
  retirement obligation, it must capitalize the cost by recognizing
  an increase in the carrying amount of the related long-lived
  asset. We adopted SFAS No. 143 on January 1, 2003 and the adoption
  did not have a material effect on the results of operations
  and financial position.

In
  April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
  Statements No. 4, 44 and 64, Amendment of FASB Statement No.
  13, and Technical Corrections". SFAS No. 145 provides for the
  rescission of several previously issued accounting standards,
  new accounting guidance for the accounting for certain lease
  modifications and various technical corrections that are not
  substantive in nature to existing pronouncements. We adopted
  SFAS No. 145 on January 1, 2003, except for the provisions relating
  to the amendment of SFAS No.13, which was adopted for transactions
  occurring subsequent to May 15, 2002. The adoption of SFAS No.
  145 did not have a material impact on our consolidated
  financial statements.

In
  June 2002, the FASB issued SFAS No. 146, Accounting for
  Costs Associated with Exit or Disposal Activities. SFAS
  No. 146 addresses financial accounting and reporting for costs
  associated with exit or disposal activities and nullifies Emerging
  Issues Task Force (EITF) Issue 94-3, "Liability Recognition
  for Certain Employee Termination Benefits and Other Costs to
  Exit an Activity (Including Certain Costs Incurred in a Restructuring)".
  This statement requires recognition of a liability for a cost
  associated with an exit or disposal activity when the liability
  is incurred, as opposed to when the entity commits to an exit
  plan under EITF No. 94-3. The provisions of this statement are
  effective for exit or disposal activities that are initiated
  after December 31, 2002, with early application encouraged.
  The adoption of SFAS No. 146 has not had a material effect on
  our consolidated financial statements.

In
  November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting
  and Disclosure Requirements for Guarantees, Including Indirect
  Guarantees of Indebtedness to Others, an interpretation of FASB
  Statements No. 5, 57 and 107 and a rescission of FASB Interpretation
  No. 34". This Interpretation elaborates on the disclosures to
  be made by a guarantor in its interim and annual financial statements
  about its obligations under guarantees issued. The Interpretation
  also clarifies that a guarantor is required to recognize, at
  inception of a guarantee, a liability for the fair value of
  the obligation undertaken. The initial recognition and measurement
  provisions of the Interpretation are applicable to guarantees
  issued or modified after December 31, 2002 and have not had
  a material effect on our consolidated financial statements.
  The disclosure requirements are effective for financial statements
  of interim or annual periods ending after December 15, 2002.

In
  January 2003, the FASB issued FIN No. 46, "Consolidation of
  Variable Interest Entities, an interpretation of ARB No. 51".
  This Interpretation addresses the consolidation by business
  enterprises of variable interest entities as defined in the
  Interpretation. The Interpretation applies immediately to variable
  interests in variable interest entities created after January
  31, 2003, and to variable interests in variable interest entities
  obtained after January 31, 2003. For nonpublic enterprises with
  a variable interest in a variable interest entity created before
  February 1, 2003, the Interpretation is applied to the enterprise
  no later than the end of the first annual reporting period beginning
  after June 15, 2003. The application of this Interpretation
  is not expected to have a material effect on our consolidated
  financial statements. The Interpretation requires certain disclosures
  in financial statements issued after January 31, 2003 if it
  is reasonably possible that variable interest entities will
  be consolidated or their information will be disclosed information
  when the Interpretation becomes effective.

In
  December 2002, the FASB issued SFAS No. 148, Accounting for
  Stock-Based Compensation - Transition and Disclosure, an amendment
  of FASB Statement No. 123. This Statement amends FASB Statement
  No. 123, Accounting for Stock-Based Compensation, to provide
  alternative methods of transition for a voluntary change to
  the fair value method of accounting for stock-based employee
  compensation. In addition, this Statement amends the disclosure
  requirements of Statement No. 123 to require prominent disclosures
  in both annual and interim financial statements. Certain of
  the disclosure modifications are required for fiscal years ending
  after December 15, 2002. We currently have no outstanding stock-based
  compensation plans.

In
  April 2003, the FASB issued SFAS 149, Amendment of Statement
  133 on Derivative Instruments and Hedging Activities. SFAS 149
  amends and clarifies financial accounting and reporting for
  derivative

53

---

instruments,
  including certain derivative instruments embedded in other contracts
  (collectively referred to as derivatives) and for hedging activities
  under SFAS 133, "Accounting for Derivative Instruments and Hedging
  Activities". SFAS 149 is effective for contracts entered into
  or modified after June 30, 2003, and for hedging relationships
  designated after June 30, 2003. All provisions of SFAS 149 will
  be applied prospectively. Management believes the adoption of
  SFAS 149 will not have a material effect on our financial position
  or results of operations.

In
  May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
  Instruments with Characteristics of Both Liabilities and Equity.
  SFAS 150 establishes standards for the classification and measurement
  of certain financial instruments with characteristics of both
  liabilities and equity, and requires the classification of a
  financial instrument that is within its scope as a liability
  (or an asset in some circumstances). SFAS 150 is effective for
  financial instruments entered into or modified after May 31,
  2003, and otherwise is effective at the beginning of the first
  interim period beginning after June 15, 2003. Management believes
  the adoption of SFAS 150 will not have a material effect on
  our financial position or results of operations.

RESEARCH
  AND DEVELOPMENT

The
  TFT-LCD industry is characterized by rapid technological changes.
  We incurred research and development costs of NT$1,598.8 million,
  NT$1,856.1 million and NT$2,233.1 million (US$64.4 million)
  in 2000, 2001 and 2002, respectively, which represented 6.3%,
  4.9% and 3.0%, respectively, of our net sales.

Our
  research and development activities are principally directed
  toward advancing our manufacturing process technologies and
  product development, including improving the features of our
  products and working jointly with our customers to design products
  that are tailored to their specific requirements. We have a
  product development team dedicated to each of our primary product
  categories, including notebook computers, desktop monitors and
  consumer electronics. Each of these teams focuses on development
  of our existing products for its respective markets. To support
  our fabs, we maintain a centralized research and development
  team that works to improve our manufacturing processes, as well
  as a team of technical support personnel that focuses on computer
  integrated manufacturing. We also have three research and development
  teams that are dedicated to the development of LTPS, OLED and
  plasma display technologies, respectively. Monetary incentives
  are provided to our employees if research projects result in
  successful patents. As of December 31, 2002, we employed approximately
  470 research and development engineers in our company.

We
  plan to continue to increase our spending on research and development
  with the goal of improving our TFT-LCD manufacturing process
  and developing new TFT-LCD products such as high-resolution
  17-inch panels for desktop monitors and 20.1-inch panels for
  televisions. We are also developing alternative technologies
  such as LTPS, OLED and plasma display. In the third quarter
  of 2001, we converted our L1 fab to a research and development
  facility focused on the development of LTPS and OLED technologies.
  In particular, we are developing color active-matrix OLED technology
  for small- to medium-size panels, which we expect to be utilized
  in products such as mobile phones and personal digital assistants.

In
  November 2002, we announced a plan to establish a dedicated
  TFT-LCD flat panel research and development center, AU Technology
  Center, which is targeted for completion by the third quarter
  of 2004. Research activities at AU Technology Center will initially
  be divided in several general segments, including advance technology
  development in OLED, LTPS and plasma display. In addition to
  new product development and module processing, AU Technology
  Center will also devote substantial efforts in improving current
  TFT-LCD panel product and manufacturing process technologies.
  Upon completion, AU Technology Center will fully integrate our
  research and development resources in achieving optimal efficiency
  and advanced technology development. As of March 31, 2003, we
  had invested a total of NT$9.0 million (US$0.3 million) in
  AU Technology Center, and we expect to invest additional NT$1,200 million
in order to complete the construction of AU Technology
  Center.

54

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Item
  6. Directors, Senior Management and Employees.

DIRECTORS
  AND SENIOR MANAGEMENT

Directors
  and Supervisors

The following table sets forth information regarding all of our directors
  and supervisors as of May 30, 2003. The business address of
  all of our directors and supervisors is the companys principal
  executive office.

|Name                           | Age |  | Position   |  | Term
      Expires |  | Years
      with
      Us |  | Principal
      Business Activities Performed
      Outside Our Company                                                                                                                                                            
|------------------------------ | --- |  | ---------- |  | ------------------ |  | ------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                               |     |  |            |  |                    |  |                           |  |                                                                                                                                                                                                                                    
|Kuen-Yao
      (K.Y.) Lee(1)   | 51  |  | Chairman   |  | 2004               |  | 7                         |  | Chairman,
      President and Chief ExecutiveOfficer of BenQ Corporation;
      
      Chairman of Darfon Electronics Corp.; and 
      Director of Gallant Precision Machining Co., Ltd. and
      Bri-Link Technologies Co., Ltd.
|Hong-Jen
      Wu(2)           | 51  |  | Director   |  | 2004               |  | 2                         |  | Director
      and general manager of Quality Assurance Department of
      United Microelectronics Corporation                                                                                                                    
|Hsi-Hua
      Sheaffer Lee(1)  | 48  |  | Director   |  | 2004               |  | 7                         |  | Vice
      President of BenQ Corporation and Director of AVID Electronics
      Corporation                                                                                                                                        
|Hsuan
      Bin (H.B.) Chen(1) | 52  |  | Director   |  | 2004               |  | 6                         |  | Director
      of Topro Technology, Inc.                                                                                                                                                                                           
|Po-Yen
      Lu(1)             | 52  |  | Director   |  | 2004               |  | 6                         |  | None                                                                                                                                                                                                                               
|Hui
      Hsiung(2)            | 49  |  | Director   |  | 2004               |  | 7                         |  | None                                                                                                                                                                                                                               
|Cheng-Chien
      Chien(2)     | 47  |  | Director   |  | 2004               |  | 2                         |  | Division
      Director of the Finance Division of United
      Microelectronics Corporation; 
      Director of SerComm Corporation; 
      and Supervisor of Unimicron Technology Corp.                                          
|Tze-Kaing
      Yang(3)        | 49  |  | Director   |  | 2004               |  | 2                         |  | Director
      of Far EasTone Telecommunication and
      China Steel Corporation                                                                                                                                                  
|Ko-Yung
      (Eric) Yu(1)     | 47  |  | Supervisor |  | 2004               |  | 7                         |  | Chief
      Financial Officer of BenQ Corporation;
      Director of Acer Media Technology, Inc.; and
      Supervisor of Darfon Elcronics Corp.                                                                                   
|Chun
      Kuan(2)(4)          | 41  |  | Supervisor |  | 2004               |  | -                         |  | Director
      of Accounting Division of United
      Microelectronics Corporation                                                                                                                                                 
|                               |     |  |            |  |                    |  |                           |  |                                                                                                                                                                                                                                    

|   
|---
|(1)
|(2)
|(3)
|(4)

Kuen-Yao
  (K.Y.) Leehas been the Chairman of our company since 1996 and a Director
  of our company since 1996. Mr. Lee received his Bachelors
  degree in Electrical Engineering from the National Taiwan University
  in Taiwan in 1974 and his Master of Business Administration
  from the International Institute for Management Development
  in Switzerland in 1990.

Hong-Jen
  Wuhas
  been a Director of our company since 2001. He was the Director
  and general manager of Quality Assurance Department of United
  Microelectronics Corporation since 1980. He received a Bachelors
  degree in Chemical Engineering from the National Taiwan University
  in Taiwan in 1974 and a Masters degree in Chemical Engineering
  from the National Taiwan University in 1976.

Hsi-Hua
  Sheaffer Leehas been a Director of our company since 1996. Mr. Lee has also
  been a Vice President of BenQ Corporation since August 1994.
  He received a Bachelors degree in Electrical Engineering
  from the National Cheng Kung University in Taiwan in 1978.

Hsuan
  Bin (H.B.) Chenhas been a Director of our company since 1998. In addition,
  Mr. Chen has been our President and Chief Operating Officer
  since 1997. Mr. Chen received his Bachelors degree in
  Communications Engineering from the National Chiao Tung University
  in Taiwan in 1975. Mr. Chen worked for Acer Technologies Sdn.
  Bhd. in Malaysia from 1992 to 1997 before he joined Acer Display
  in 1997.

Po-Yen
  Luhas been a Director of our company since 2001. Mr. Lu is also
  an Executive Vice President of our company in charge of all
  operating units of our company. He received a Bachelors
  degree in Chemical Engineering from the National Taiwan University
  in Taiwan in 1974 and a Ph.D. degree in Chemical Engineering
  from University of Illinois in Urbana-Champaign in 1982. Before
  he joined our company in 1997, Mr. Lu worked for Gould Labs
  from 1978 to 1980, Bell Lab as Technical Manager from 1982 to
  1995, and Electronics Research &

55

---

Service
  Organization, Industrial Technology Research Institute as a
  Deputy Director of Display R&D from 1995 to 1997.

Hui
  Hsiunghas been a Director of our company since early 2002. Mr. Hsiung
  joined our company in 1996 as Director of the Research and Development
  Department, and from 1997 to 1999 served in positions in the
  companys Marketing & Sales Division. Mr. Hsiung was
  a Director of Acer Display from April 1999 to August 2001. Since
  June 2002, Mr. Hsiung also served as our Executive Vice President
  in charge of all business units of our company. He received
  a Bachelors degree in Physics from the National Taiwan
  University in Taiwan in 1975 and a Ph.D. degree in Physics from
  the University of California, Berkeley in 1985.

Cheng-Chien
  Chienhas been a Director of our company since early 2002. Mr. Chien
  has been the Finance Director of United Microelectronics Corporation
  since January 2000. He received a Bachelors degree in
  Business Administration from Fong Chia University in Taiwan
  in 1979 and a Master of Business Administration degree from
  Saginaw Valley State University in 1993.

Tze-Kaing
  Yanghas been a Director of our company since 2003. Mr. Yang has
  also been a president of CDIB Equity Inc. since January 2002.
  He received a Ph.D. degree in Business Administration from National
  Chengchi University in 1987.

Ko-Yung
  (Eric) Yuhas been a Supervisor of our company since 1996. Mr. Yu was
  the Controller of Acer Peripherals, Inc. from 1996 to 1999.
  Thereafter, Mr. Yu was the Chief Financial Officer of Acer Communications
  and Multimedia Inc. from November 1999 to December 2001, and
  has served as a Vice President and the Chief Financial Officer
  of BenQ Corporation since January 2002. He received a Bachelors
  degree in Accounting from Fu Jen Catholic University in Taiwan
  in 1980 and a Master of Business Administration degree from
  the Strathclyde Graduate Business School in United Kingdom in
  1995.

Chun
  Kuanwas appointed by United Microelectronics Corporation as our
  Supervisor, which was effective on May 30, 2003. Mr. Kuan has
  served as the director of Accounting Division of United Microelectronics
  Corporation since 2001. He received a Master of Business Administration
  degree from the Southern New Hampshire University in 1992.

Executive
  Officers

The
  following table sets forth information regarding all of our executive
  officers as of March 31, 2003.

|Name                        | Age | Position                                                     | Years
      with Us | 
|--------------------------- | --- | ------------------------------------------------------------ | ------------------- | 
|                            |     |                                                              |                     | 
|Kuen-Yao
      (K.Y.) Lee   | 51  | Chairman
      and Chief Executive Officer                   | 7                   | 
|Hsuan
      Bin (H.B.) Chen | 52  | President
      and Chief Operating Officer                  | 6                   | 
|Po-Yen
      Lu             | 52  | Executive
      Vice President                               | 6                   | 
|Hui
      Hsiung            | 49  | Executive
      Vice President                               | 7                   | 
|Max
      Weishun Cheng     | 40  | Chief
      Financial Officer; Chief Accounting Officer; and | 5                   | 
|                            |     | Controller                                                   |                     | 

Kuen-Yao
  (K.Y.) Lee.
  See  Directors and Supervisors.

Hsuan
  Bin (H.B.) Chen.
  See  Directors and Supervisors.

Po-Yen
  Lu.
  See  Directors and Supervisors.

Hui Hsiung.
  See  Directors and Supervisors.

Max
  Weishun Chenghas been our Chief Financial Officer, Chief Accounting Officer
  and Controller since 1998. He graduated from Fu Jen Catholic
  University in Taiwan with a Bachelors degree in Business
  Administration in 1985 and Northern Illinois University with
  a Masters degree in Accounting in 1990. Before he joined
  our company in 1998, Mr. Cheng served as the Controller of Acer
  Technologies Sdn. Bhd. from 1995 to 1998.

56

---

Audit
  Committee

The
  audit committee has responsibility for, among other things,
  monitoring the integrity of our financial reporting process
  and internal controls, monitoring the independence of our independent
  auditors and our officers performing internal audit functions
  and providing an avenue of communication between the auditors,
  management, the officers performing internal audit functions
  and the board of directors. The audit committee comprises two
  of our Directors and two of our Supervisors. The audit committee
  must meet at least once annually and more frequently as circumstances
  dictate. The audit committee must meet at least once annually
  with management officers performing internal audit functions,
  independent auditors and as a committee to discuss any matters
  that the audit committee or each of these groups believes should
  be discussed.

COMPENSATION

According
  to our articles of incorporation, we may distribute 1% of distributable
  earnings in cash to our directors and supervisors as compensation
  after the distribution of 5% to 10% of our distributable earnings
  to employees as bonuses. In the event that a director or supervisor
  serves as a representative of a legal entity, such compensation is
  paid to the legal entity. We pay our executive officers monthly salaries,
  in addition to employee bonuses. See Item 10. Additional Information
   Articles of Incorporation  Dividends andDistributions.
  We did not pay compensation to our directors and supervisors for
  their services rendered in 2001 due to our net loss in that year.
  The aggregate compensation paid in 2002 to our executive officers
  for their services was approximately NT$11.7 million (US$0.3 million).

Pension
  Plan

We
  have a defined benefit pension plan covering our regular employees.
  Retirement benefits are based on length of service and average
  salaries or wages in the last six months before retirement.
  We make monthly contributions, at 2.0% of salaries and wages,
  to a pension fund that is deposited in the name of, and administered
  by, the employees pension plan committee. Our accrued
  pension cost as of December 31, 2002 was NT$62.0 million (US$1.8
  million). See note 16 of notes to consolidated financial statements.

EMPLOYEES

Employees

The
  following table provides a breakdown of our employees by function
  as of December 31, 2000, 2001 and 2002.

|                                                       | As
      of December 31, | 
|------------------------------------------------------ | ------------------------ | 
|                                                       |                          | 
|Function                                               | 2000                     | 
|                                                       |                          | 
|Production                                             | 3,461                    | 
|Technical(1)                                           | 1,497                    | 
|Sales
      and Marketing                              | 64                       | 
|Management
      and Administration                    | 288                      | 
|                                                       |                          | 
|Total                                                  | 5,310                    | 
|                                                       |                          | 
|                                                       |                          | 
|(1)
      Includes research and development personnel. |                          | 

The
  following table provides a breakdown of our employees by geographic
  location as of December 31, 2000, 2001
  and 2002.

|                                                                  | As
      of December 31, | 
|----------------------------------------------------------------- | ------------------------ | 
|                                                                  |                          | 
|Location                                                          | 2000                     | 
|                                                                  |                          | 
|Taiwan(1)                                                         | 5,310                    | 
|Suzhou,
      Jiangsu Province, the Peoples Republic of China(2) | -                        | 
|Others                                                            | -                        | 
|                                                                  |                          | 
|Total                                                             | 5,310                    | 
|                                                                  |                          | 

|   
|---
|(1)
|(2)

57

---

Employee
  salaries are reviewed and adjusted annually, while performance
  appraisals are conducted semi-annually. Salaries are adjusted
  based on inflation and individual performance. As an incentive,
  discretionary cash bonuses may be paid based on the performance
  of individuals. In addition, Republic of China law generally
  requires that our employees in Taiwan be given preemptive rights
  to subscribe for between 10% and 15% of any of our rights issues
  or share offerings.

Our
  employees in Taiwan participate in our profit distribution under
  our articles of incorporation. Employees in Taiwan are entitled
  to receive bonus shares, cash or a combination of bonus shares
  and cash, based on a percentage of our allocable surplus income.
  The amount allocated in shares was paid by valuing the shares
  at their par value, or NT$10.00 per share, and was paid to our
  employees in Taiwan based on individual performance and job
  seniority. We did not allocate any such amount for employees
  in Taiwan in 2002 for work performed in 2001 due to our net
  loss in 2001.

The
  Hsinchu Science-Based Park Administration offers a variety of
  employee-related services, including medical examinations, health
  insurance, career planning advice and other services for our
  employees in Taiwan. In addition to the services provided by
  the Hsinchu Science-Based Park Administration, we have established
  a welfare committee, a pension fund committee, and other employee
  committees and a variety of employee benefit programs.

We
  do not have an employee option plan as of December 31, 2002. We
  do not have any collective bargaining arrangement with our employees.
  We consider our relations with our employees to be good.

SHARE
  OWNERSHIP

None
  of our Directors, Supervisors or executive officers owned more
  than 1% of our shares as of March 31, 2003.

The
  table below sets forth the share ownership, as of March 31,
  2003, of the legal entities represented by our directors and
  supervisors.

|Name                                         | Number
      of
      Shares Owned |  | Percentage
      of
      Shares Owned(2)
|-------------------------------------------- | ---------------------------------- |  | -----------------------------------------
|                                             |                                    |  |                                          
|BenQ
      Corporation                       | 596,254,368                        |  | 14.8                                     
|United
      Microelectronics Corporation(1) | 455,276,250                        |  | 11.3%                                    
|CDIB
      Equity Inc.                       | 1,041,280                          |  | 0.03%                                    

|   
|---
|(1)
|(2)

Item
  7. Major Shareholders.

MAJOR
  SHAREHOLDERS

As
  of March 31, 2003, BenQ Corporation owned a 14.8% equity interest
  in our company, and four of our Directors and one of our Supervisors
  are representatives of BenQ Corporation. Since BenQ Corporation
  is currently the largest customer for our products, its substantial
  interest in our company may lead to conflicts of interest in
  our sales decisions or allocations. In addition, because four
  of our Directors are representatives of BenQ Corporation, and
  Mr. Kuen-Yao (K.Y.) Lee, our Chairman and Chief Executive Officer,
  is the Chairman, President and Chief Executive Officer of BenQ
  Corporation, conflicts of interest between their duties to BenQ
  Corporation and our company may arise.

In
  addition, as of March 31, 2003, United Microelectronics Corporation
  owned a 11.3% equity interest in our company, and three of our
  Directors and one of our Supervisors are representatives of
  United Microelectronics Corporation. Since United Microelectronics
  Corporation also owns a 25.8% equity interest in Novatek Corporation,
  which is one of our suppliers of driver integrated circuit components,
  United Microelectronics Corporations substantial interest
  in our company may lead to conflicts of interest in our purchasing
  decisions or allocations. In addition, because three of our
  Directors are representatives of United Microelectronics Corporation,
  conflicts of interest between their duties to United Microelectronics
  Corporation and us may arise.

58

---

There
  have been no changes in our major shareholders or significant
  changes in the amount of shares each major shareholder holds
  since March 31, 2003.

The
  following table sets forth information known to us with respect
  to the beneficial ownership of our shares as of March 31, 2003,
  the most recent practicable date, by (1) each shareholder known
  by us to beneficially own more than 5% of our shares and (2)
  all directors, supervisors and executive officers as a group.

|Name
      of Beneficial Owner                                                                                                                                             | Number
      of
      SharesBeneficially
      Owned |     | Percentage
      of SharesBeneficially
      Owned |   | Percentage
      of SharesBeneficially
      Owned(Fully
      Diluted)(1) |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | --- | -------------------------------------------------- | - | -------------------------------------------------------------------------- | ----
|                                                                                                                                                                           |                                                      |     |                                                    |   |                                                                            |     
|BenQ
      Corporation(2)(3)
         157,
      Shan-Ying Road, Gueishan, Taoyuan 333,
         Taiwan,
      Republic of China                                           | 596,254,368                                          |     | 14.8                                               | % |                                                                            | 14.5
|                                                                                                                                                                           |                                                      |     |                                                    |   |                                                                            |     
|United
      Microelectronics Corporation(4)
         No.
      3 Lee-Hsing Road II, Science-Based Industrial
         Park,
      Hsinchu City, Taiwan, Republic of China | 455,276,250                                          | (5) | 11.3                                               | % |                                                                            | 11.1
|                                                                                                                                                                           |                                                      |     |                                                    |   |                                                                            |     
|Representatives
      of directors and supervisors, and
         executive
      officers as a group                                                                       |                                                      |     |                                                    |   |                                                                            |     
|                                                                                                                                                                           | 14,161,307                                           |     | 0.4                                                | % |                                                                            | 0.3 

|   
|---
|(1)
|(2)
|(3 
|(4)

None
  of our major shareholders have different voting rights from
  those of our other shareholders. To the best of our knowledge,
  we are not directly or indirectly controlled by another corporation,
  by any foreign government, or any other natural or legal person,
  severally or jointly.

We
  are not aware of any arrangement that may at a subsequent date
  result in a change of control of our company.

As
  of March 31, 2003, approximately 4,025.8 million of our shares
  were outstanding. We believe that, of such shares, approximately
  82.7 million were held by approximately 1,559 holders in the
  United States.

RELATED
  PARTY TRANSACTIONS

BenQ
  Corporation and Related Companies

> BenQ
>     Corporation

BenQ
  Corporation is one of our major shareholders, owning a 14.8%
  equity interest in our company as of March 31, 2003. In addition,
  four of our eight Directors and one of our two Supervisors are
  legal representatives of BenQ Corporation.

We
  sell desktop monitor display panels to BenQ Corporation. We
  generated net sales to BenQ Corporation in the amount of NT$884.1
  million in 2000, NT$6,696.4 million in 2001 and NT$5,823.4
  million (US$167.8 million) in 2002, and our receivables from
  these sales were NT$197.6 million as of December 31, 2000 and NT$1,983.1
  million as of December 31, 2001.

We
  also purchase printed circuit boards from BenQ Corporation.
  Our purchases from BenQ Corporation amounted to NT$111.6 million
  in 2000 and NT$1,106.1 million in 2001 and NT$1,177.0 million
  (US$33.92 million) in 2002. We acquired TFT-LCD monitors, projectors
  and mobile phones from BenQ Corporation for use in our business.
  We paid BenQ Corporation NT$24.5 million in 2000 and NT$7.2
  million in 2001 in connection with these purchases.

> BenQ
>     I.T. Co., Ltd. (BQS)

BQS,
  an affiliate of our company, was 100% owned by BenQ Corporation
  as of December 31, 2002. We sell notebook computer display
  panels to BQS. We generated net sales to BQS in the amount of
  NT$9,922.9

59

---

million
  (US$286.0 million) in 2002, and our receivables from these
  sales was NT$3,083.7 million (US$87.6 million) as of December
  31, 2002.

> BenQ
>     Mexicana S.A. De C.V. (BQX)

BQX,
  an affiliate of our company, was 84.5% owned by BenQ Corporation
  as of December 31, 2002. We sell notebook computer display panels
  to BQX. We generated net sales to BQX in the amount of NT$721.6
  million (US$20.8 million) in 2002, and our receivables from
  these sales was NT$157.9 million (US$4.6 million) as of December
  31, 2002.

> Acer
>     Inc.

Acer
  Inc. is our affiliate, owning a 20.5% equity interest in BenQ
  Corporation as of December 31, 2002. We sell notebook computer
  display panels to Acer Inc. We generated net sales to Acer Inc.
  in the amount of NT$3,714.9 million in 2000, NT$1,480.0 million
  in 2001 and NT$853.7 million (US$24.6 million) in 2002. Our
  receivables from these sales were NT$174.7 million at December
  31, 2000, NT$7.4 million as of December 31, 2001 and NT$219.0 million
  (US$6.3 million) as of December 31, 2002.

Acer
  Inc. also provided us with market promotion services in 2000
  for a fee of NT$51.9 million, which was paid by us in 2001.

> Wistron
>     Corp.

Wistron
  Corp., an affiliate of our company, was 37.8% owned by Acer
  Inc. as of December 31, 2002. We sell notebook computer display
  panels to Wistron. We generated net sales to Wistron in the
  amount of NT$1,017.7 million (US$29.3 million) in 2002.

> Aopen
>     Inc.

Aopen
  Inc., an affiliate of our company, was 34.8% owned by Wistron
  Corp. as of December 31, 2002. We sell notebook computer display
  panels to Aopen. We generated net sales to Aopen in the amount
  of NT$301.6 million (US$8.7 million) in 2002.

> Wistron
>     Infocomm (Philippines) Corp.

Wistron
  Infocomm (Philippines) Corp., an affiliate of our company, was
  100.0% owned by Wistron Corp. as of December 31, 2002. We sell
  notebook computer display panels to Wistron. We generated net
  sales to Wistron Infocomm (Philippines) Corp. in the amount
  of NT$89.8 million in 2000, NT$1,399.8 million in 2001 and NT$2,104.3
  million (US$60.6 million) in 2002, and our receivables from
  these sales were NT$84.9 million, NT$332.9 million and NT$35.6
  million (US$1.0 million) as of December 31, 2000, 2001 and 2002,
  respectively.

> Acer
>     Sertek Inc.

Acer
  Sertek Inc., an affiliate of our company, was 28.9% owned by
  Acer Inc. before the merger with Acer Inc. in March 2002. We
  acquired personal computers and accessories for office use from
  Acer Sertek Inc. In connection with these purchases, we paid
  Acer Sertek NT$57.1 million in 2000 and NT$32.1 million in 2001.

> Min
>     Tour Inc.

Min
  Tour, Inc., an affiliate of our company, was 100.0% owned by
  Acer Inc. as of December 31, 2002. In 2000, we entered into
  lease agreements with Min Tour for land, building, dormitory
  and equipment. We paid Min Tour related rent and administration
  fees in the amount of NT$54.5 million in 2000, NT$62.7 million
  in 2001 and NT$67.2 million (US$1.9 million) in 2002. As security
  for our obligations under these agreements, we made refundable
  deposits, the outstanding balance of which amounted to NT$840.0
  million as of December 31, 2000, NT$867.0 million as of December
  31, 2001 and NT$867.0 million (US$25.0 million) in 2002.

60

---

United
  Microelectronics Corporation and Related Companies

> United
>     Microelectronics Corporation

United
  Microelectronics is one of our major shareholders, owning an
  11.3% equity interest in our company as of March 31, 2003. In
  addition, three of our eight Directors and one of our two Supervisors
  are legal representatives of United Microelectronics.

We
  also purchased processed wafers from United Microelectronics.
  Our purchases from United Microelectronics amounted to NT$40.8
  million in 2000.

We
  acquired plant and equipment in 2001 from United Microelectronics.
  In connection with these purchases, we paid United Microelectronics
  NT$0.3 million in 2001. Beginning in 1990, Unipac entered into
  lease agreements with United Microelectronics for land, building,
  dormitory and equipment. We paid United Microelectronics related
  rent in the amount of NT$65.9 million in 2000, NT$65.2 million
  in 2001 and NT$41.4 million (US$1.2 million) in 2002. As security
  for our obligations under these agreements, we made refundable
  deposits of NT$0.2 million in 2000 and NT$0.2 million in 2001.

> Novatek
>     Microelectronics Corp.

Novatek
  Microelectronics Corp., an affiliate of our company, was 25.8%
  owned by United Microelectronics as of December 31, 2002. We
  purchase driver integrated circuits from Novatek Microelectronics.
  Our purchases from Novatek Microelectronics amounted to NT$498.3
  million in 2000, NT$734.3 million in 2001 and NT$2,370.3 million
  (US$68.3 million) in 2002.

> Faraday
>     Technology Corp.

Faraday
  Technology Corp., an affiliate of our company, was 19.7% owned
  by United Microelectronics as of December 31, 2002. We purchase
  application specific integrated circuits from Faraday Technology.
  Our purchases from Faraday Technology amounted to NT$128.8 million
  in 2000, NT$100.7 million in 2001 and NT$144.7 million (US$4.2
  million) in 2002.

Applied
  Component Technology Corp.

Applied
  Component Technology Corp., an affiliate of our company, was 23.7%
  owned by United Microelectronics Corporation as of December 31, 2002.
  We sell TFT-LCD panels to Applied ComponentTechnology.
  We generated net sales to Applied Component Technology in the amount
  of NT$114.8 million in 2001 and NT$747.6 million (US$21.5 million)
  in 2002. Our receivables from sales to Applied Component Technology
  were NT$2.7 million as of December 31, 2000, NT$89.7 million at December
  31, 2001 and NT$65.3 million (US$1.9 million) at December 31, 2002.

Unimicron
  Technology Corp.

Unimicron
  Technology Corp. (formerly known as World Wiser Electronics
  Inc.), an affiliate of our company, was 23.8% owned by United
  Microelectronics Corporation as of December 31, 2002. We purchase
  printed circuit boards from Unimicron Technology Corp. Our purchases
  from Unimicron Technology amounted to NT$2.8 million in 2000
  and NT$76.3 million in 2001.

Chiao
  Tung Bank Co., Ltd.

As
  of December 31, 2002, Chiao Tung Bank owned a 1.5% equity interest
  in our company. Our loans from Chiao Tung Bank are summarized
  as follows:

|                                             |  |   |                       |  |                     |  |                      |  |                         |  |                        | 
|-------------------------------------------- |  | - | --------------------- |  | ------------------- |  | -------------------- |  | ----------------------- |  | ---------------------- | 
|                                             |  |   |                       |  |                     |  |                      |  |                         |  |                        | 
|Year                                         |  |   | Maximum
      Balance |  | Interest
      Rate |  | Ending
      Balance |  | Interest
      Expenses |  | Interest
      Payable | 
|                                             |  |   |                       |  |                     |  |                      |  |                         |  |                        | 
|(in
      NT$millions, except interest rate)
|2002                                         |  |   |                      |  |                    |  |                     |  |                        |  |                       | 
|2001                                         |  | $ | 331.8                 |  | Floating
      rate |  |                     |  | 4.9                     |  |                       | 
|2000                                         |  | $ | 412.4                 |  | Floating
      rate |  | 331.8                |  | 10.7                    |  | 0.2                    | 

61

---

From
  time to time, we also enter into short-term credit facilities
  with Chiao Tung Bank. As of December 31, 2002, we had no outstanding
  short-term borrowings owed to Chiao Tung Bank.

Item
  8. Financial Information.

CONSOLIDATED
  STATEMENTS AND OTHER FINANCIAL INFORMATION

Consolidated
  financial statements are set forth under Item 17. Financial
  Statements.

LEGAL
  PROCEEDINGS

In
  November 2000, Sharp Corporation notified Unipac, along with several
  other Taiwan TFT-LCD manufacturers, of Sharps claim that certain
  of its patents had been infringed. Sharp claimed in its formal notice
  to Unipac that five of Sharps patents had been infringed by
  Unipacs production of four TFT-LCD models. Subsequently, Sharp
  made a criminal complaint against certain officers of Unipac with
  the Public Prosecutors Office in the Hsinchu District Court,
  naming Mr. Ing-Dar Liu, who was the Chairman of Unipac and former
  Vice Chairman of our company, as a defendant. On January 23, 2003,
  the Public Prosecutor discharged the criminal complaint against Mr.
  Liu due to a change under the ROC Patent Law pursuant to which patent
  infringement is no longer a criminal offense.As
  of the date of this annual report, neither Sharp nor any third party
  has brought any civil or criminal action against either Unipac, Acer
  Display or our company in connection with the alleged patent infringement
  described above. We do not believe that any of the five patents that
  are the subject of Sharps complaint is material to our current
  operations.

We
  are currently involved in a patent infringement dispute with Semiconductor
  Energy Laboratory Co., Ltd. In June 2002, Semiconductor Energy filed
  a complaint in the Northern District of California alleging that
  we had infringed its patents in our production of TFT-LCD panels,
  seeking unspecified monetary damages, including punitive damages,
  and an injunction against the further production or sale of our TFT-LCD
  products. We intend to defend the case vigorously. The litigation
  is currently in the late stages of discovery.

DIVIDENDS
  AND DIVIDEND POLICY

The
  following table sets forth as a percentage the stock dividends
  per share paid during 2001 on the shares outstanding on the
  relevant record date for each of Acer Display and Unipac. Other
  than in 2001, neither company had previously paid any stock
  dividends. In addition, neither company had previously paid
  any cash dividends.

|Dividend
      Paid in 2001              | StockDividend
      PerShare(1) | Dividend
      Payment
      Date | Total
      Number of
      Shares
      Issued as
      Stock
      Dividend(2) |  | Aggregate
      Stock Dividend
      Amount |  | Outstanding
      Shares as of
      August 31,
      2001(4) | 
|---------------------------------------- | ------------------------------- | --------------------------------- | -------------------------------------------------------------------------------- |  | ------------------------------------------- |  | ------------------------------------------------------------- | 
|                                         |                                 |                                   |                                                                                  |  |                                             |  |                                                               | 
|                                         |                                 |                                   |                                                                                  |  | NT$(3)                                      |  | US$                                                           | 
|                                         |                                 |                                   | (in
      thousands)                                                             |  | (in
      thousands)                        |  |                                                               | 
|Acer
      Display Technology, Inc.      | 1.60                            | September
      3, 2001           | 208,300                                                                          |  | 2,083,000                                   |  | 59,514                                                        | 
|                                         |                                 |                                   |                                                                                  |  |                                             |  |                                                               | 
|Unipac
      Optoelectronics Corporation | 1.42                            | July
      9, 2001                | 227,120                                                                          |  | 2,271,200                                   |  | 64,891                                                        | 

|   
|---
|(1)
|(2)
|(3)
|(4)

No
  cash or stock dividends were distributed for the year 2001 due
  to our net loss in that year. Our Board of Directors recommended
  cash dividends of NT$0.5 and stock dividends of NT$0.5 per share
  for the year 2002 at a meeting held on March 6, 2003, which
  was approved by our shareholders at a shareholders meeting
  held on May 29, 2003.

Our
  articles of incorporation provide that the cash portion of any
  dividend shall generally not be less than 10% of the annual
  dividend. However, the ratio for cash dividend may be adjusted
  in accordance with actual earnings and

62

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operation
  conditions. The form, frequency and amount of future dividends
  will depend upon our earnings, cash flow, financial condition,
  reinvestment opportunities and other factors.

We
  are generally not permitted under the Republic of China Company
  Law to distribute dividends or to make any other distributions
  to shareholders for any fiscal year in which we have no earnings.
  Our articles of incorporation provide that we shall allocate
  10% of our earnings as a legal reserve in a fiscal year after:

- payment
    of all income taxes; and
- deduction
    of any past losses.

When
  we make an earnings distribution, it is made in the following
  manner:

- 5%
    to 10% of the remainder is distributable as bonus for employees;
- no
    more than 1% of the remainder as remuneration of directors
    and supervisors; and
- all
    or a portion of the balance as dividend and bonus to our shareholders.

In
  addition to permitting dividends to be paid out of accumulated earnings
  after deducting losses, we are permitted under the Republic of China
  Company Law to make distributions to our shareholders of additional
  shares by capitalizing reserves, including the legal reserve. However,
  the capitalized portion payable out of our legal reserve is limited
  to 50% of the total accumulated legal reserve, and only if and to
  the extent the accumulated legal reserve exceeds 50% of our paid-in
  capital. See Item 10. Additional Information  Articles
  of Incorporation  Dividends and Distributions.

The
  holders of ADSs will be entitled to receive dividends to the
  same extent as the holders of our shares, subject to the terms
  of the deposit agreement.

Any
  cash dividends will be paid to the depositary in New Taiwan
  dollars and, after deduction of any applicable Republic of China
  taxes and fees and expenses of the depositary and custodian,
  except as otherwise provided in the deposit agreement, will
  be converted by the depositary into U.S. dollars and paid to
  the holders of ADSs. Whenever the depositary receives any free
  distribution of shares, including stock dividends, on any ADSs
  that the holders of ADSs hold, the depositary may, and will
  if we so instruct, deliver to the holders of ADSs additional
  ADSs which represent the number of shares received in the free
  distribution, after deduction of applicable taxes and the fees
  and expenses of the depositary and the custodian. If additional
  ADSs are not so delivered, each ADS that the holders of ADSs
  hold shall represent its proportionate interest in the additional
  shares distributed.

For
  information relating to Taiwans withholding taxes payable on
  dividends, see Item 10. Additional Information  Taxation
   Republic of China Tax Considerations  Dividends.

SIGNIFICANT
  CHANGES

Other
  than those changes disclosed in Legal Proceedings
  above, we have not experienced any significant changes since
  the date of the annual financial statements.

Item
  9. Listing Details.

MARKET
  PRICE INFORMATION AND MARKETS

Our
  shares have been listed on the Taiwan Stock Exchange since September
  8, 2000 under the number 2409. The ADSs have been
  listed on the New York Stock Exchange under the symbol AUO
  since May 23, 2002. The table below sets forth, for the periods
  indicated, the high and low closing prices and the average daily
  volume of trading activity on the Taiwan Stock Exchange for
  the shares and the high and low closing prices and the average
  daily volume of trading activity on the New York Exchange for
  the shares represented by ADSs.

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|                                       | Taiwan
      Stock Exchange          |  | New
      York Stock Exchange(1) | 
|-------------------------------------- | ------------------------------------ |  | -------------------------------- | 
|                                       |                                      |  |                                  | 
|                                       | Closing
      Price per 
      Share |  |                                  | 
|                                       |                                      |  |                                  | 
|                                       | High                                 |  | Low                              | 
|                                       |                                      |  |                                  | 
|                                       | (NT$)                                |  | (NT$)                            | 
|2000:                                  |                                      |  |                                  | 
|Third
      Quarter (from September 8) | 70.50                                |  | 46.30                            | 
|Fourth
      Quarter                   | 47.50                                |  | 19.50                            | 
|2001:                                  |                                      |  |                                  | 
|First
      Quarter                    | 37.00                                |  | 20.70                            | 
|Second
      Quarter                   | 40.90                                |  | 30.40                            | 
|Third
      Quarter                    | 31.90                                |  | 13.90                            | 
|Fourth
      Quarter                   | 37.40                                |  | 11.95                            | 
|2002:                                  |                                      |  |                                  | 
|First
      Quarter                    | 61.50                                |  | 34.80                            | 
|Second
      Quarter                   | 56.50                                |  | 31.50                            | 
|Third
      Quarter                    | 37.00                                |  | 18.80                            | 
|Fourth
      Quarter                   | 26.30                                |  | 16.00                            | 
|October                                | 21.90                                |  | 16.00                            | 
|November                               | 26.30                                |  | 22.60                            | 
|December                               | 25.30                                |  | 19.00                            | 
|2003:                                  |                                      |  |                                  | 
|First
      Quarter                    | 25.10                                |  | 19.20                            | 
|January                                | 25.10                                |  | 21.20                            | 
|February                               | 24.50                                |  | 22.00                            | 
|March                                  | 23.30                                |  | 19.20                            | 
|Second
      Quarter (through June 26) | 25.70                                |  | 17.70                            | 
|April                                  | 21.30                                |  | 17.70                            | 
|May                                    | 21.80                                |  | 17.70                            | 
|June
      (through June 26)           | 25.70                                |  | 23.00                            | 



---

Item
  10. Additional Information.

ARTICLES
  OF INCORPORATION

The
  following statements summarize the material elements of our
  capital structure and the more important rights and privileges
  of our shareholders conferred by Taiwan law and our Articles
  of Incorporation.

Objects
  and Purpose

The
  scope or our business as set forth in Article 2 of our Articles
  of Incorporation, includes the research, development, production,
  manufacturing and sale of the following products: plasma display
  and related systems, liquid crystal display and related systems,
  OLED and related systems, amorphous silicon photo sensor device
  parts and components, thin film photo diode sensor device parts
  and components, thin film transistor photo sensor device parts
  and components, touch imaging sensors, full color active-matrix
  flat panel displays, field emission displays, single crystal
  liquid crystal displays, original equipment manufacturing for
  amorphous silicon thin film transistor process and flat panel
  display modules, original design manufacturing and original
  equipment manufacturing business for flat panel display modules
  and the simultaneous operation of a trade business relating
  to our business.

Directors

Our
  articles of incorporation provide that our board of directors
  is elected by our shareholders, and is responsible for the management
  of our business. Currently, our board of directors is composed
  of eight Directors, while our articles of incorporation provide
  that we may have from seven to nine directors. The Chairman
  of our board is elected by our Directors. The Chairman presides
  at all meetings of our board of directors, and also has the
  authority to represent our company. The term of office for our
  Directors is three years. In addition, under our articles of
  incorporation, our shareholders shall elect three Supervisors.
  The duties of the Supervisors include, among other things, investigating
  our condition, reviewing internal audit reports, inspecting
  our corporate records, calling our shareholders meetings,
  representing us in negotiations with our Directors and notifying,
  when appropriate, our board of directors to cease acting in
  contravention of applicable law or regulation or in contravention
  of our articles

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of
  incorporation. The term of office for our Supervisors is three
  years. Our Supervisors cannot concurrently serve as our Directors
  or officers. The election of our Directors and Supervisors by
  our shareholders may be conducted by means of cumulative voting
  or other voting mechanics, if any, adopted in our articles of
  incorporation. Pursuant to the Republic of China Company Law,
  the election of our Directors and Supervisors is currently conducted
  by means of cumulative voting, as our articles of incorporation
  do not adopt another voting mechanism. The next election for
  all of the Directors and Supervisors is expected to be held
  in late 2004. Pursuant to the Republic of China Company Law,
  a person may serve as a director or supervisor in his or her
  personal capacity or as the representative of another legal
  entity. A legal entity that owns our shares may be elected as
  a Director or Supervisor, in which case a natural person must
  be designated to act as the legal entitys representative.
  A legal entity that is our shareholder may designate its representative
  to be elected as our Director or Supervisor on its behalf. In
  the event several representatives are designated by the same
  legal entity, any or all of them may be elected. A natural person
  who serves as the representative of a legal entity as a director
  or supervisor may be removed or replaced at any time at the
  discretion of such legal entity, and the replacement director
  or supervisor may serve the remainder of the term of office
  of the replaced director or supervisor. Currently, all of our
  Directors and Supervisors are representatives of other legal
  entities, as shown in Item 6.  Directors, Senior
  Management and Employees  Directors and Senior Management
   Directors and Supervisors.

Shares

As
  of May 29, 2003, our authorized share capital was NT$58 billion,
  divided into 5.8 billion shares, of which 100 million shares
  are reserved for the purposes of issuance of employee stock
  option, and 4,025,865,331 shares were issued and outstanding.
  In November 2001, we issued NT$10,000 million principal amount
  of convertible bonds, which became eligible in February 2002
  for conversion into approximately 632,911,392 shares. As of
  March 31, 2003, bondholders of our convertible bonds had exercised
  conversion rights to receive 555,283,724 of our shares, including
  our shares and entitlement certificates.

All
  shares presently issued are fully paid and in registered form,
  and existing shareholders are not obligated to contribute additional
  capital. The shares underlying your ADSs, when issued, will
  be fully paid, in registered form and will not be obligated
  by any capital calls.

New
  Shares and Preemptive Rights

Except
  for new shares issued for conversion of convertible bonds or
  new shares issued upon exercise of employee stock option, new
  shares may only be issued with the prior approval of our board
  of directors. If our issuance of any new shares will result
  in any change in our authorized share capital, we are required
  under Republic of China law to amend our articles of incorporation
  and obtain approval of our shareholders in a shareholders
  meeting. We must also obtain the approval of, or submit a registration
  to, the Securities and Futures Commission and the Hsinchu Science-Based
  Industrial Park Administration Bureau, as applicable. Generally,
  when a company issues capital stock for cash, 10% to 15% of
  the issue must be offered to its employees. In addition, if
  a public company intends to offer new shares for cash, at least
  10% of the issue must also be offered to the public. This percentage
  can be increased by a resolution passed at a shareholders
  meeting, which will reduce the number of new shares in which
  existing shareholders may have preemptive rights. Unless the
  percentage of the shares offered to the public is increased
  by a resolution, existing shareholders of the company have a
  preemptive right to acquire the remaining 75% to 80% of the
  issue in proportion to their existing shareholdings.

Under
  current Republic of China law, whenever we issue shares for
  cash, we will deliver one or more certificates of payment evidencing
  the aggregate number of shares to the subscriber. Each certificate
  of payment will represent the irrevocable right to receive the
  relevant number of shares after all required Republic of China
  share issuance procedures have been complied with. We are required
  under Republic of China law to file an amendment to our corporate
  registration within 15 days after we receive the proceeds of
  an offering. Under the Republic of China Securities and Exchange
  Law and applicable regulations, we are required to deliver physical
  share certificates to the relevant subscribers within 30 days
  after receiving approval from the applicable Republic of China
  governmental authorities of our amendment to our corporate registration.
  It will take approximately 45 days after this offering for us
  to issue physical share certificates to the ADS custodian in
  exchange for any certificate of payment held in our ADS facility.

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Shareholders
  and Record Date

We
  only recognize persons registered in our register as our shareholders.
  The Republic of China Company Law permits us, by giving advance
  public notice, to set a record date and close the register of
  shareholders for a specified period in order to determine the
  shareholders or pledgees that are entitled to certain rights
  pertaining to our shares by giving advance public notice. Under
  the Republic of China Company Law, our register of shareholders
  should be closed for a period of sixty days before each ordinary
  meeting of shareholders, thirty days before each extraordinary
  meeting of shareholders and five days immediately before each
  record date.

Transfer
  of Shares

Under
  the Republic of China Company Law, shares are transferred by
  endorsement and delivery of the related share certificates.
  In addition, transferees must have their names and addresses
  registered on our register in order to assert shareholders
  rights against us. Our shareholders are required to file their
  specimen seals with our share registrar, SinoPac Securities
  Corporation. The settlement of trading of our shares on the
  Taiwan Stock Exchange will be carried out on the book-entry
  system maintained by Taiwan Securities Central Depository Co.,
  Ltd.

Shareholders
  Meetings

We
  are required to hold an annual ordinary shareholders meeting
  once every calendar year, generally within six months after
  the end of each fiscal year. Our Directors may convene an extraordinary
  meeting whenever they think fit, and they must do so if requested
  in writing by shareholders holding not less than 3% of our paid-in
  share capital who have held their shares for more than a year.
  In addition, any of our Supervisors may convene a shareholders
  meeting under certain circumstances. For a public company in
  Taiwan, such as our company, at least 15 days advance
  written notice must be given of every extraordinary shareholders
  meeting and at least 30 days advance written notice must
  be given of every annual ordinary shareholders meeting.
  Unless otherwise required by law or by our articles of incorporation,
  voting for an ordinary resolution requires an affirmative vote
  of a simple majority of those present and voting. A distribution
  of cash dividends would be an example of an act requiring an
  ordinary resolution. A special resolution may be adopted in
  a meeting of shareholders convened with a quorum of holders
  of at least two-thirds of our total outstanding shares at which
  the holders of at least a majority of our shares represented
  at the meeting vote in favor thereof. A special resolution is
  necessary for various matters under Republic of China law, including:

- any
    amendment to our articles of incorporation;
- our
    dissolution or consolidation;
- transfers
    of a substantial part of our business or properties;
- mergers
    and acquisitions which would have a significant impact on
    our operations; or
- the
    distribution of any stock dividend.

However,
  in the case of a public company such as our company, the special
  resolution may be adopted by holders of at least two-thirds
  of the shares represented at a meeting of shareholders at which
  holders of at least a majority of the total outstanding shares
  are present.

Voting
  Rights

Except
  for treasury shares, our articles of incorporation provide that
  a holder of our shares has one vote for each share held at shareholders
  meetings; provided that the votes of a holder of more than 3%
  of our total outstanding and issued shares are required to be
  diluted by a factor of 1% with respect to the portion of shares
  held in excess of 3%, which we refer to as the dilution provision.
  The dilution provision was, prior to November 14, 2001, required
  by the Republic of China Company Law to be included in our articles
  of incorporation. However, the Republic of China Company Law
  was amended, effective from November 14, 2001, to eliminate
  the requirement for the dilution provision. Our shareholders
  approved such an amendment to our articles of incorporation
  at our shareholders meeting held on May 21, 2002. There
  is cumulative voting for the election of Directors and Supervisors.
  In all other matters, shareholders must cast all their votes
  in the same direction on any resolution.

66

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Our
  shareholders may be represented at an ordinary or extraordinary
  shareholders meeting by proxy if a valid proxy form is
  delivered to us five days before the commencement of the ordinary
  or extraordinary shareholders meeting. Voting rights attached
  to our shares that are exercised by our shareholders proxy
  are subject to Republic of China proxy regulations. Any shareholder
  who has a personal interest in a matter to be discussed at our
  shareholders meeting, the outcome of which may impair
  our interests, is not permitted to vote or exercise voting rights
  nor vote or exercise voting rights on behalf of another shareholder
  on such matter.

You
  will not be able to exercise voting rights on the shares underlying
  your ADSs on an individual basis.

Dividends
  and Distributions

We
  may distribute dividends in any year in which we have accumulated
  earnings. Before distributing a dividend to shareholders following
  the end of a fiscal year, we must recover any past losses, pay
  all outstanding taxes, and set aside in a legal reserve 10%
  of our net income for that fiscal year until our legal reserve
  equals our paid-in capital.

At
  the shareholders annual ordinary meeting, our board of
  directors submits to the shareholders for approval proposals
  for the distribution of a dividend or the making of any other
  distribution to shareholders from our accumulated earnings or
  reserves for the preceding fiscal year. Dividends may be distributed
  either in cash or in shares. Our Articles of Incorporation provide
  that the cash portion of any dividend shall generally not be
  less than 10% of the annual dividend. However, the ratio for
  cash dividend may be adjusted in accordance with actual earnings
  and operation conditions. Dividends are paid proportionately
  to shareholders as listed on the register of shareholders on
  the relevant record date.

Our
  articles of incorporation provide that we shall allocate 10%
  of our earnings as a legal reserve in a fiscal year after:

- payment
    of all income taxes; and
- deduction
    of any past losses.

When
  we make an earnings distribution, it is made in the following
  manner:

- 5%
    to 10% of the remainder is distributable as bonus for employees;
- no
    more than 1% of the remainder as remuneration of directors
    and supervisors; and
- all
    or a portion of the balance as dividend and bonus to our shareholders.

In
  addition to permitting dividends to be paid out of accumulated
  earnings after deducting losses, we are permitted under the
  Republic of China Company Law to make distributions to our shareholders
  of additional shares by capitalizing reserves, including the
  legal reserve. However, the capitalized portion payable out
  of our legal reserve is limited to 50% of the total accumulated
  legal reserve, and only if and to the extent the accumulated
  legal reserve exceeds 50% of our paid-in capital.

For
  information on the dividends paid by us in recent years, see Item
  8. Financial Information  Dividends and Dividend Policy.
  For information as to Taiwan taxes on dividends and distributions,
  see  Taxation  Republic of China Tax Considerations
   Dividends.

Acquisition
  of Shares by Our Company

Pursuant
  to an amendment to the Securities and Exchange Law which took effect
  on July 21, 2000, we may, by a board resolution adopted by majority
  consent at a meeting with two-thirds of our directors present, purchase
  our shares on the Taiwan Stock Exchange or by a tender offer, in
  accordance with the procedures prescribed by the Securities and Futures
  Commission, for the following purposes:

- to
    transfer shares to our employees;
- to
    convert bonds with warrants, preferred shares with warrants,
    convertible bonds, convertible preferred shares or certificates
    of warrants issued by our company into shares; and

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- if
    necessary, to maintain our credit and our shareholders
    equity; provided that the shares so purchased shall be cancelled
    thereafter.

We
  are not allowed to purchase more than 10% of our aggregate issued
  and outstanding shares. In addition, we may not spend more than
  the aggregate amount of our retained earnings, the premium from
  issuing stock and the realized portion of the capital reserve
  to purchase our shares.

We
  may not pledge or hypothecate any purchased shares. In addition,
  we may not exercise any shareholders rights attaching
  to such shares. In the event that we purchase our shares on
  the Taiwan Stock Exchange, our affiliates, Directors, Supervisors,
  officers and their respective spouses and minor children and/or
  nominees are prohibited from selling any of our shares during
  the period in which we purchase our shares.

According
  to the Republic of China Company Law, as amended and effective
  from November 14, 2001, an entity, referred to as a controlled
  entity, in which our company directly or indirectly owns more
  than 50% of the voting shares or paid-in capital, may not purchase
  our shares. Also, if our company and a controlled entity jointly
  own, directly or indirectly, more than 50% of the voting shares
  or paid-in capital of another entity, referred to as a third
  entity, the third entity may not purchase shares in either our
  company or a controlled entity. This restriction does not, however,
  affect any of our shares acquired by a controlled entity or
  a third entity prior to November 14, 2001.

On
  October 14, 2002, our board of directors approved a buyback
  program for market repurchases of up to 10 million shares during
  the period between October 15, 2002 and December 14, 2002 at
  the target purchase price of between NT$15 and NT$20 per share,
  with a view to awarding the shares to our employees in the future
  as stock bonuses. We did not make any repurchases under this
  buyback program. On December 16, 2002, our board of directors
  approved another buyback program for market repurchases of up
  to 20 million shares during the period between December 17,
  2002 and February 16, 2003 at the target price of between NT$17.5
  and NT$23.5 per share for the same purpose. We repurchased an
  aggregate of 12 million shares at an average purchase price
  of NT$20.9 per share, or an aggregate purchase price of NT$250.8
  million, under this buyback program.

Liquidation
  Rights

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

Rights
  to Bring Shareholder Suits

Under
  the Republic of China Company Law, a shareholder may bring suit
  against us in the following events:

- Within
    30 days from the date on which a shareholders resolution
    is adopted, a shareholder may file a lawsuit to annul a shareholders
    resolution if the procedure for convening a shareholders
    meeting or the method of resolution violates any law or regulation
    or our articles of incorporation.
- If
    the substance of a resolution adopted at a shareholders
    meeting contradicts any applicable law or regulation or our
    articles of incorporation, a shareholder may bring a suit
    to determine the validity of such resolution.

Shareholders
  may bring suit against our Directors and Supervisors under the
  following circumstances:

- Shareholders
    who have continuously held 3% or more of the total number
    of issued and outstanding shares for a period of one year
    or longer may request in writing that a supervisor institute
    an action against a director on our behalf. In case the supervisor
    fails to institute an action within 30 days after receiving
    such request, the shareholders may institute an action on
    our behalf. In the event that shareholders institute an action,
    a court may, upon application of the defendant, order such
    shareholders to furnish appropriate security.
- In
    the event that any Director, Supervisor, officer or shareholder
    holds more than 10% of our issued and outstanding shares and
    their respective spouse and minor children and/or nominees
    sells shares within

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six
  months after the acquisition of such shares, or repurchases
  the shares within six months after the sale, we may make a claim
  for recovery of any profits realized from the sale and purchase.
  If our board of directors or our supervisors fail to make a
  claim for recovery, any shareholder may request that our board
  of directors or our s upervisors exercise the right of claim
  within 30 days. After such 30-day period, such requesting shareholder
  will have the right to make a claim for such recovery on our
  behalf. Our directors and supervisors will be jointly and severally
  liable for damages suffered by us as a result of their failure
  to exercise the right of claim.

Financial
  Statements

For
  a period of at least ten days before our annual shareholders
  meeting, we must make available our annual financial statements
  at our principal offices in Hsinchu, Taiwan and our share register
  in Taipei, for inspection by our shareholders.

Transfer
  Restrictions

Our
  directors, supervisors, officers and shareholders holding more
  than 10% of our issued and outstanding shares, which we refer
  to as insiders, are required to report any changes in their
  shareholding to us on a monthly basis. No insider is permitted
  to sell shares on the Taiwan Stock Exchange for six months from
  the date on which the relevant person becomes an insider. In
  addition, the number of shares that insiders can sell or transfer
  on the Taiwan Stock Exchange on a daily basis is limited by
  Republic of China law. Furthermore, insiders may sell or transfer
  our shares on the Taiwan Stock Exchange only after reporting
  to the Securities and Futures Commission at least three days
  before the transfer, provided that such reporting is not required
  if the number of shares transferred does not exceed 10,000.

Other
  Rights of Shareholders

Under
  the Republic of China Company Law, dissenting shareholde rs
  are entitled to appraisal rights in the event of a spin-off
  or a merger and various other major corporate actions. Dissenting
  shareholders may request us to redeem their shares at a fair
  price to be determined by mutual agreement. If no agreement
  can be reached, the valuation will be determined by a court
  order. Dissenting shareholders may exercise their appraisal
  rights by notifying us before the related shareholders
  meeting or by raising and registering their dissent at the shareholders
  meeting.

One or more shareholders who have held more than 3% of the issued
  and outstanding shares for over a year may require a supervisor
  to bring a derivative action against a director for the directors
  liability to our company resulting from the directors
  unlawful actions or failure to act.

Transfer
  Agent and Registrar

The
  transfer agent and registrar for our shares is SinoPac Securities
  Corporation, 3rd Floor, 53, Po Ai Road, Taipei, Taiwan; telephone
  number: 886-2-2381 6288. The transfer agent and registrar for
  our ADS is Citibank, N.A., 111, Wall Street, 20th Floor, New
  York, New York 10005, USA; telephone number: 1-877-248-4237.

MATERIAL
  CONTRACTS

Merger
  Agreement between Acer Display and Unipac Optoelectronics Corporation.We were incorporated as Acer Display Technology,
  Inc. in 1996. On April 9, 2001, Acer Display Technology, Inc.
  and Unipac Optoelectronics Corporation entered into a merger
  agreement, under which the parties thereto agreed that Unipac
  Optoelectronics Corporation will merge into Acer Display through
  a share exchange, and Acer Display will change its name to AU
  Optronics. Under this agreement, 0.8607 shares of AU Optronics
  Corp. shares was issued in exchange for each share of Unipac
  1,757,120,000 common shares outstanding.

License
  from FDTC for Amorphous Silicon TFT-LCDs.We
  entered into a license agreement with FDTC effective as of March
  31, 2003, which provides for the nontransferable and nonexclusive
  license and technical support to manufacture all of our TFT-LCD
  panels at all our facilities. The agreement provides for an
  initial license fee and fixed royalty payments to be paid for
  each of the first four consecutive 12 months following the effective
  date of this agreement. Each party agrees to review and discuss
  in good faith terms and conditions of this agreement after the
  fourth anniversary of this agreement.

69

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EXCHANGE
  CONTROLS

We
  have extracted from publicly available documents the information
  presented in this section. Please note that citizens of the
  Peoples Republic of China and entities organized in the
  Peoples Republic of China are subject to special Republic
  of China laws, rules and regulations, which are not discussed
  in this section.

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

Aside
  from trade-related foreign exchange transactions, Taiwan companies
  and residents may remit to and from Taiwan foreign currencies
  of up to US$50 million and US$5 million, each calendar year.
  A requirement is also imposed on all private enterprises to
  report all medium- and long-term foreign debt with the Central
  Bank of China.

In
  addition, a foreign person without an alien resident card or
  an unrecognized foreign entity may remit to and from Taiwan
  foreign currencies of up to US$100,000 per remittance if required
  documentation is provided to Taiwan authorities. This limit
  applies only to remittances involving a conversion between NT
  dollars and U.S. dollars or other foreign currencies.

TAXATION

Republic
  of China Tax Considerations

The
  following summarizes the principal Taiwan tax consequences of
  owning and disposing of ADSs and shares if you are not a resident
  of Taiwan.You
  will be considered a non-resident of Taiwan for the purposes
  of this section if:

- you
    are an individual and you are not physically present in Taiwan
    for 183 days or more during any calendar year; or
- you
    are an entity and you are organized under the laws of a jurisdiction
    other than Taiwan and have no fixed place of business or other
    permanent establishment in Taiwan.

You
  should consult your own tax advisors concerning the tax consequences
  of owning ADSs or shares in Taiwan and any other relevant taxing
  jurisdiction to which you are subject.

> Dividends

Dividends,
  whether in cash or shares, declared by us out of retained earnings
  and paid out to a holder that is not a Taiwan resident in respect
  of shares represented by ADSs or shares are subject to Taiwan
  withholding tax. The current rate of withholding for non-residents
  is 20% of the amount of the distribution, in the case of cash
  dividends, or of the par value of the shares distributed in
  the case of stock dividends. As discussed below in 
  Tax Reform, our after-tax earnings will be subject to
  an undistributed retained earnings tax. To the extent dividends
  are paid out of retained earnings that have been subject to
  the retained earnings tax, the amount of such tax will be used
  by us to offset a non-residents withholding tax liability
  on such dividend. Consequently, the effective rate of withholding
  on dividends paid out of retained earnings previously subject
  to the retained earnings tax will be less than 20%. There is
  no withholding tax with respect to stock dividends declared
  out of our capital reserves.

> Capital
>     Gains

Gains
  realized on Taiwan securities transactions in Taiwan are exempt
  from Taiwan income tax. In addition, transfers of ADSs by non-resident
  holders are not regarded as sales of Taiwan securities and,
  as a result, any gains on such transactions are currently not
  subject to Taiwan income tax.

70

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> Securities
>     Transaction Tax

The
  Taiwan government imposes a securities transaction tax that
  will apply to sales of shares, but not to sales of ADSs. The
  transaction tax is payable by the seller for the sale of shares
  and is equal to 0.3% of the sales proceeds.

> Estate
>     and Gift Tax

Republic
  of China estate tax is payable on any property within the Republic
  of China of a deceased who is an individual, and Republic of
  China gift tax is payable on any property within the Republic
  of China donated by any such person. Estate tax is currently
  payable at rates ranging from 2% of the first NT$600,000 to
  50% of amounts over NT$100,000,000. Gift tax is payable at rates
  ranging from 4% of the first NT$600,000 to 50% of amounts over
  NT$45,000,000. Under Republic of China estate and gift tax laws,
  shares issued by Republic of China companies are deemed located
  in the Republic of China regardless of the location of the holder.
  There is no tax ruling as to whether or not ADSs will be deemed
  assets located in the Republic of China for the purpose o f
  Republic of China gift and estate taxes.

> Preemptive
>     Rights

Distributions
  of statutory preemptive rights for shares in compliance with
  the Republic of China Company Law are not subject to Taiwan
  tax. Proceeds derived from sales of statutory preemptive rights
  evidenced by securities by a non-resident are exempted from
  income tax, but may be subject to Taiwan securities transaction
  tax, currently at the rate of 0.3% of the gross amount received.
  Proceeds derived from sales of statutory preemptive rights that
  are not evidenced by securities are subject to income tax at
  the rate of:

- 25%
    of the gains realized for non-Taiwan entities; and
- 35%
    of the gains realized for non-Taiwan individuals.

We
  have the sole discretion to determine whether statutory preemptive
  rights are evidenced by securities or not.

> Tax
>     Reform

The
  Republic of China Income Tax Laws were amended in 1997 to integrate
  the corporate income tax and the shareholder dividend tax with
  the goal of eliminating the double taxation effect.

Under
  such amendment, we are subject to a 10% retained earnings tax
  on our after-tax earnings generated after January 1, 1998 that
  are not distributed in the following year. The retained earnings
  tax so paid will further reduce the retained earnings available
  for future distribution. When we declare dividends out of those
  retained earnings, a maximum amount of up to 10% of the declared
  dividends will be credited against the 20% withholding tax imposed
  on the non-resident holders of our ADS or shares.

> Tax
>     Treaty

Taiwan
  does not have an income tax treaty with the United States. Taiwan
  has double tax treaties with Indonesia, Singapore, South Africa,
  Australia, Netherlands, Vietnam, New Zealand, Malaysia, Macedonia,
  Swaziland, Gambia and United Kingdom, which may limit the rate
  of Taiwan withholding tax on dividends paid with respect to
  shares. It is unclear whether if you hold ADSs, you will be
  considered to hold shares for the purposes of these treaties.
  Accordingly, if you may otherwise be entitled to the benefits
  of an income tax treaty, you should consult your tax advisors
  concerning your eligibility for the benefits with respect to
  ADSs.

United
  States Federal Income Tax Considerations for United States Holders

The
  following is a discussion of the material United States federal
  income tax consequences of the ownership and disposition of
  our shares or ADSs. The discussion set forth below applies to
  beneficial owners of our shares or ADSs that purchase such shares
  or ADSs that hold the shares or ADSs as capital assets under
  the United States Internal Revenue Code and that are United
  States persons that do not have a fixed place of business or
  other

71

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permanent
  establishment in Taiwan and are not physically present in Taiwan
  for 183 days or more within a calendar year. You are a United
  States person if for United States federal income tax purposes
  you are:

- an
    individual who is a citizen or resident of the United States;
- a
    corporation or other entity taxable as a corporation created
    or organized in or under the laws of the United States or
    any political subdivision thereof; or
- an
    estate or trust the income of which is subject to United States
    federal income taxation regardless of its source.

This
  summary is based on current law, which is subject to change,
  perhaps retroactively. In addition, it is based in part on representations
  by the depositary and assumes that each obligation under the
  deposit agreement and any related agreement will be performed
  in accordance with its terms. This summary does not contain
  a detailed description of all the United States federal income
  tax consequences to you in light of your particular circumstances.
  In addition, it does not represent a detailed description of
  the United States federal income tax consequences applicable
  to you if you are subject to special treatment under the United
  States federal income tax laws, including if you are:

- a
    dealer in securities or currencies;
- a
    trader in securities if you elect to use a mark-to-market
    method of accounting for your securities holdings;
- a
    financial institution or an insurance company;
- a
    tax-exempt organization;
- a
    regulated investment company;
- a
    real estate investment trust;
- a partnership
    or other entity treated as a partnership for United States
    federal income tax purposes;
- a
    person liable for alternative minimum tax;
- a
    person holding shares or ADSs as part of a hedging, integrated
    or conversion transaction, constructive sale or straddle;
- a
    person owning, or treated as owning, 10% or more of our voting
    stock; or
- a
    United States person whose functional currency
    is not the United States dollar.

If
  a partnership holds our shares or ADSs, the tax treatment of
  a partner will depend upon the status of the partner and the
  activities of the partnership. If you are a partner of a partnership
  holding our shares or ADSs, you are urged to consult your tax
  advisor.

You
  are urged to consult your tax advisor concerning the particular
  United States federal income tax consequences to you of the
  ownership and disposition of the shares or ADSs, as well as
  the consequences to you arising under the laws of any other
  taxing jurisdiction.

For
  United States federal income tax purposes, a United States person
  who is the beneficial owner of an ADS will be treated as the
  owner of the shares underlying its ADS, and a United States
  person who is the beneficial

72

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owner
  of a certificate of payment ADS will be treated as the owner
  of the certificate of payment underlying its certificate of
  payment ADS. However, the United States Treasury has expressed
  concerns that parties involved in transactions in which depositary
  shares are pre-released may be taking actions that are inconsistent
  with the claiming of foreign tax credits by the holders of ADSs.
  Accordingly, the analysis of the creditability of Taiwan taxes
  described below could be affected by future actions that may
  be taken by the United States Treasury. Deposits or withdrawals
  of shares actually or constructively by United States persons
  for ADSs will not be subject to United States federal income
  tax.

> Taxation
>     of Dividends

Distributions
  of shares you receive on your shares or ADSs, including amounts
  withheld in respect of Taiwan withholding taxes, will generally
  be treated as dividend income to you if the distributions are
  made from our current and accumulated earnings and profits (as
  calculated according to United States federal income tax principles).
  Dividend income will be includible in your gross income as ordinary
  income on the day you receive it, which in the case of an ADS
  will be the date received by the depositary. In determining
  the amounts withheld in respect of Taiwanese taxes, any reduction
  of the amount withheld on account of a Taiwanese credit in respect
  of the 10% retained earnings tax imposed on us is not considered
  a withholding tax and will not be treated as distributed to
  you or creditable by you against your United States federal
  income tax. You will not be entitled to claim a dividends received
  deduction with respect to distributions you receive from us.

The
  amount of any dividend paid in NT dollars will equal the United
  States dollar value of the NT dollars you receive, calculated
  by reference to the exchange rate in effect on the date you
  receive the dividend, which in the case of an ADS will be the
  date received by the depositary, regardless of whether the NT
  dollars are converted into United States dollars. Any gain or
  loss you realize if you subsequently sell or otherwise dispose
  of the NT dollars will be ordinary income or loss from sources
  within the United States for foreign tax credit limitation purposes.

Subject
  to limitations under the Internal Revenue Code, you may be entitled
  to a credit against your United States federal income taxes
  for the net amount of any Taiwan taxes that are withheld from
  dividend distributions made to you. The limitation on foreign
  taxes eligible for credit is calculated separately with respect
  to specific classes of income. For this purpose, dividends we
  pay with respect to shares or ADSs will be considered passive
  income or, for certain holders, financial services
  income. The rules governing the foreign tax credit are
  complex. We therefore urge you to consult your tax advisors
  regarding the availability of the foreign tax credit under your
  particular circumstances.

Under recently
enacted legislation, dividends received by noncorporate holders of our Shares or
ADSs may be subject to U.S. federal income tax at lower rates than other types of
ordinary income if certain conditions are met. You should consult your own tax
advisor regarding the application of this new legislation to your particular
circumstances.

It
  is possible that pro rata distributions of shares to all shareholders
  may be made in a manner that is not subject to United States
  federal income tax. Such distribution will not give rise to
  U.S. federal income tax against which the Taiwan withholding
  tax imposed on these distributions may be credited. Any Taiwan
  tax of this nature will only be creditable against your United
  States federal income tax liability with respect to income in
  the general limitation income class and not passive
  income or financial services income, subject
  to applicable limitations and restrictions.

73

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> Taxation
>     of Capital Gains

When
  you sell or otherwise dispose of your shares or ADSs, you will
  recognize capital gain or loss in an amount equal to the difference
  between the United States dollar value of the amount realized
  for the shares or ADSs and your adjusted tax basis in the shares
  or ADSs, determined in United States dollars. For foreign tax
  credit limitation purposes, such gain or loss will, subject
  to exceptions, be treated as United States source. If you are
  an individual, and the shares or ADSs being sold or otherwise
  disposed of have been held for more than one year, your gain
  recognized will be eligible for reduced rates of taxation, depending
  on your holding period. Your ability to deduct capital losses
  is subject to limitations.

If
  you pay any Taiwan securities transaction tax, such tax is not
  treated as an income tax for United States federal income tax
  purposes, and therefore will not be a creditable foreign tax
  for United States federal income tax purposes. However, subject
  to limitations under the Internal Revenue Code, such tax may
  be deductible. You are urged to consult your tax advisors regarding
  the United States federal income tax consequences of these taxes.

> Passive
>     Foreign Investment Company

We
  believe that we will not be considered a passive foreign investment company (PFIC)
  for United States federal income tax purposes for 2002. However, since PFIC status depends
  upon the composition of our income and assets and the market value of our assets
  (including, among others, goodwill) from time to time, there can be no assurance that we will
  not be considered a PFIC for any taxable year. If we were treated as a PFIC for any taxable year
  during which you held our Shares or ADSs, certain adverse consequences could apply to
  you.

74

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Information
  Reporting and Backup Withholding

Unless
  you are an exempt recipient such as a corporation, information
  reporting will apply to dividends in respect of the shares or
  ADSs and to the proceeds from the sale of your shares or ADSs
  paid within the United States (and in some cases, outside of
  the United States). Additionally, if you fail to provide your
  taxpayer

75

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identification
  number, or fail either to report in full dividend and interest
  income or to make the necessary certifications, you will be
  subject to backup withholding.

Any
  amounts withheld under the backup withholding rules will be
  allowed as a refund or a credit against your United States federal
  income tax liability, provided you furnish the required information
  to the Internal Revenue Service.

DOCUMENTS
  ON DISPLAY

It
  is possible to read and copy documents referred to in this annual
  report that have been filed with the SEC at the SECs public
  reference rooms in Washington, D.C., New York and Chicago, Illinois.
  Please call the SEC at 1-800-SEC-0330 for further information
  on the reference rooms.

Item
  11. Quantitative and Qualitative Disclosures About Market Risk.

Market
  Risks

Market
  risk is the risk of loss related to adverse changes in market
  prices, including interest rates and foreign exchange rates,
  of financial instruments. We are exposed to various types of
  market risks, including changes in interest rates and foreign
  currency exchange rates, in the ordinary course of business.

We
  use financial instruments, including variable rate debt and
  swap and foreign currency forward contracts, to finance our
  operations and to manage risks associated with our interest
  rate and foreign currency exposures, through a controlled program
  of risk management in accordance with established policies.
  We have used, and intend to continue to use, derivative financial
  instruments only for hedging purposes. These policies are reviewed
  and approved by our board of directors. Our treasury operations
  are subject to the review of our internal audit department,
  which review is submitted for our Supervisors review on
  a quarterly basis.

As
  of December 31, 2002, we had U.S. dollar- and Japanese yen-denominated
  savings accounts of US$18.7 million and ¥2,641.7 million,
  respectively. We also had certificates of deposit denominated
  in U.S. dollars in the amount of US$99.1 million. Since export
  sales are primarily conducted in U.S. dollars, we had U.S. dollar-denominated
  accounts receivable of US$267.1 million as of December 31, 2002,
  which represents 91% of the total accounts receivable balance.
  We also had Japanese yen-denominated accounts receivable of
  ¥280.3 million attributable to our Japanese operations as
  of December 31, 2002, which represents 0.8% of the total accounts
  receivable balance. In addition, we had U.S. dollar- and Japanese
  yen-denominated accounts payable of US$84.4 million and ¥14,231.3
  million, relating to our overseas vendors.

Our
  primary market risk exposures relate to interest rate movements
  on borrowings and exchange rate movements on foreign currency-denominated
  accounts receivable and capital expenditures relating to equipment
  used in our manufacturing processes and purchased primarily
  from Japan. The fair value of forward exchange contracts and
  interest rate swaps has been determined by obtaining the estimated
  amount from our bankers that would be received/(paid) to terminate
  the contracts.

> Interest
>     Rate Risk

Our
  exposure to market risk for changes in interest rates relates
  primarily to our long-term debt obligations. We incur debt obligations
  primarily to support general corporate purposes, including capital
  expenditures and working capital needs. We use interest rate
  swaps to modify our exposure to interest rate movements and
  reduce borrowing costs. Interest rate swaps limit the risks
  of fluctuating interest rates by allowing us to convert a portion
  of the interest on our borrowings from a variable rate to a
  fixed rate.

As
  of December 31, 2002, we had four outstanding interest rate
  swap agreements with three major international financial institutions,
  having a total notional principal amount of NT$1,800 million.

The
  table below provides information about our derivative financial
  instruments and other financial instruments that are sensitive
  to changes in interest rates, including interest rate swaps,
  debt obligations and certain assets. For debt obligations, the
  table sets forth principal cash flows and related weighted average
  interest rates by expected maturity dates. For interest rate
  swaps, the table presents notional amounts and weighted average
  interest rates by contractual maturity dates. Notional amounts
  are used to calculate the contractual payments to be exchanged
  under a

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contract.
  Weighted average variable rates are based on implied forward
  rates in the yield curve at the reporting date. The information
  is presented in the currencies in which the instruments are
  denominated. We do not have any capital lease obligations.

|                                       |  | Expected
      Maturity Dates |   | Fair
      Value at
      December 31, |  
|-------------------------------------- |  | ----------------------------- | - | -------------------------------------- | -
|                                       |  |                               |   |                                        |  
|                                       |  | 2002                          |   | 2003                                   |  
|                                       |  |                               |   |                                        |  
|                                       |  | (in
      thousands)          |  
|Assets                                 |  |                               |   |                                        |  
|Certificates
      of Deposit:         |  |                               |   |                                        |  
|Fixed
      rate (US$)                 |  | 24,010                        |   | 99,090                                 |  
|Average
      interest rate            |  | 1.44                          | % | 1.144                                  | %
|Fixed
      rate (NT$)                 |  | 3,549,542                     |   | 17,399,649                             |  
|Average
      interest rate            |  | 2.24                          | % | 1.436                                  | %
|Fixed
      rate (JP¥)                 |  |                              |   | 249,633                                |  
|Average
      interest rate            |  |                              |   | 0.03                                   | %
|Liabilities                            |  |                               |   |                                        |  
|Bonds:                                 |  |                               |   |                                        |  
|Unsecured
      convertible(NT$)       |  |                              |   |                                       |  
|Fixed
      rate                       |  |                              |   |                                       |  
|Secured
      (NT$)                    |  | 1,008,000                     |   | 996,000                                |  
|Fixed
      rate                       |  | 5.95                          | % | 5.95                                   | %
|Secured
      Long-term Loans:         |  |                               |   |                                        |  
|Variable
      rate (NT$)              |  | 3,796,110                     |   | 8,530,000                              |  
|Average
      interest rate            |  | 2.96                          | % | 1.70                                   | %
|Interest
      Rate Swaps(1):          |  |                               |   |                                        |  
|Variable
      to fixed
         (NT$) |  | 1,500,000                     |   |                                       |  
|Receive
      rate(2)                  |  | 2.392                         | % |                                       |  
|Pay
      rate                         |  | 6.16                          | % |                                       |  
|Variable
      to fixed  (NT$)         |  |                              |   |                                       |  
|Receive
      rate(2)                  |  |                              |   |                                       |  
|Pay
      rate                         |  |                              |   |                                       |  

|   
|---
|(1)
|(2)

> Foreign
>     Currency Risk

The
  primary foreign currencies to which we are exposed are the Japanese
  yen and the U.S. dollar. We enter into short-term, forward exchange
  contracts to hedge the impact of foreign currency fluctuations
  on certain underlying assets, liabilities, and firm commitments
  for purchasing raw materials and components and capital expenditures
  denominated in U.S. dollars. The purpose of entering into these
  hedges is to minimize the impact of foreign currency fluctuations
  on the results of operations. Gains and losses on foreign currency
  contracts and foreign currency denominated liabilities are recorded
  in the period of the exchange rate changes, while gain and loss
  on foreign currency contracts that hedge foreign currency commitments
  are deferred until the commitments are realized. The contracts
  have maturity dates that do not exceed three months.

The
  table below sets forth our outstanding foreign currency forward
  contracts as of December 31, 2002:

|Contracts
      to sell US$/Buy NT$:          |                         |  |                  | 
|--------------------------------------------- | ----------------------- |  | ---------------- | 
|Aggregate
      contract amount               |                         |  | US$388,000,000   | 
|Average
      contractual exchange rate       | NT$34.708
      per US$ | 
|Contracts
      to sell NT$/Buy Japanese yen: |                         |  |                  | 
|Aggregate
      contract amount               |                         |  | NT$2,977,245,000 | 
|Average
      contractual exchange rate       | JPY0.2835
      per NT$ | 
|Contracts
      to sell RMB/Buy Japanese yen: |                         |  |                  | 
|Aggregate
      contract amount               | RMB42,000,000           | 
|Average
      contractual exchange rate       | JPY0.0708
      per RMB | 

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|Contracts
      to sell US$/Buy Japanese yen: |                          |               | 
|--------------------------------------------- | ------------------------ | ------------- | 
|Aggregate
      contract amount               |                          | US$30,000,000 | 
|Average
      contractual exchange rate       | JPY119.234
      per US$ |              
|                                              |                          |               | 
|Fair
      value of all forward contracts     |                          | NT$81,558,000 | 

Item
  12. Description of Securities Other Than Equity Securities.

Not
  applicable.

PART
  II

Item
  13. Defaults, Dividend Arrearages and Delinquencies.

Not
  applicable.

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

None.

Item
  15. Controls and Procedures.

Within
  90 days prior to the date of this annual report, we, under the
  supervision and with the participation of our management, including
  the Chief Executive Officer and the Chief Financial Officer,
  performed an evaluation of the effectiveness of our disclosure
  controls and procedures. Based on this evaluation, our Chief
  Executive Officer and Chief Financial Officer concluded that
  our disclosure controls and procedures are effective for gathering,
  analyzing and disclosing the information we are required to
  disclose in this annual report we file under the Securities
  Exchange Act of 1934, within the time periods specified in the
  SECs rules and forms. Our management necessarily applied
  its judgment in assessing the costs and benefits of such controls
  and procedures, which by their nature can provide only reasonable
  assurance regarding managements control objectives.

There
  have been no significant changes in our internal controls or
  other factors that could significantly affect internal controls
  subsequent to the date of their evaluation.

PART
  III

Item
  17. Financial Statements.

The
  consolidated financial statements of the Company and the report
  thereon by its independent auditors listed below are attached
  hereto as follows:

|(a) | Independent
      Auditors Report of the Company and subsidiaries dated January
      23, 2003 (except for note 27 which is as of March 27, 2003) (F-1).               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Consolidated
      Balance Sheets of the Company and subsidiaries as of December
      31, 2001 and 2002 (F-2).                                                         
|(c) | Consolidated
      Statements of Income of the Company and subsidiaries for the
      years ended December 31, 2000, 2001 and 2002 (F-4).                               
|(d) | Consolidated
      Statements of Changes in Stockholders Equity of the Company
      and subsidiaries for the years ended December 31, 2000, 2001
      and 2002 (F-5).
|(e) | Consolidated
      Statements of Cash Flows of the Company and subsidiaries for
      the years ended December 31, 2000, 2001 and 2002 (F-6).                           
|(f) | Notes
      to Consolidated Financial Statements of the Company and subsidiaries
      (F-7).                                                                           

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Item
  18. Financial Statements.

The
  Company has elected to provide financial statements for fiscal
  year 2002 and the related information pursuant to Item 17 in
  lieu of Item 18.

Item
  19. Exhibits.

|1. | (a)  | Articles
      of Incorporation (in Chinese, with English translation).                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | (a)  | Deposit Agreement among AU Optronics Corp., Citibank, N.A.
      as depositary, and Holders and Beneficial Owners of American
      depositary shares evidenced by American depositary receipts
      issued thereunder, including the form of American depositary
      receipt (incorporated herein by reference to Exhibit (a)
      of the registrants Registration Statement on Form
      F-6 as confidentially submitted to the Commission on April
      8, 2002).
|   | (b)  | U.S.
      Underwriting Agreement , dated May 23, 2002, between AU
      Optronics Corp. and several U.S. Underwriters, for whom
      the U.S. Representatives are acting as representatives,
      250,000,000 Common Shares in the form of ADSs.                                                                                                                                                                                                                        
|   | (c)  | International
      Underwriting Agreement, dated May 23, 2002, between AU Optronics
      Co rp. and several International Underwriters, for whom
      the International Representatives are acting as representatives,
      250,000,000 Common Shares in the form of ADSs.                                                                                                                                                                                             
|4. | (a)  | Merger
      Agreement, dated April 9, 2001, by and between Acer Display
      Technology, Inc. and Unipac Optoelectronics Corporation,
      as amended (in Chinese, with English translation) (incorporated
      herein by reference to Exhibit 2.1 to the Companys
      Registration Statement on Form F-1 as submitted to the Commission
      on May 1, 2002).                                                                                                     
|   | (b)  | License
      Agreement, dated March 12, 1998, by and between International
      Business Machines Corporation and Acer Display Technology,
      Inc. (incorporated herein by reference to Exhibit 10.1 to
      the Companys Registration Statement on Form F-1 as
      submitted to the Commission on May 1, 2002).                                                                                                                                                  
|   | (c)  | Assignment
      Agreement, dated September 1, 2001, assigning License Agreement
      dated March 12, 1998 to AU Optronics Corp. (incorporated
      herein by reference to Exhibit 10.2 to the Companys
      Registration Statement on Form F-1 as submitted to the Commission
      on May 1, 2002).                                                                                                                                                                  
|   | (d)  | License
      Agreement, dated August 1, 1999, by and between International
      Business MachinesCorporation and Acer Display Technology, Inc.
      (incorporated herein by reference to Exhibit 10.3 to the
      Companys Registration Statement on Form F-1 as submitted
      to the Commission on May 1, 2002).                                                                                                                                                   
|   | (e)  | Assignment
      Agreement, dated September 1, 2001, assigning License Agreement
      dated August 1, 1999 to AU Optronics Corp. (incorporated
      herein by reference to Exhibit 10.4 to the Companys
      Registration Statement on Form F-1 as submitted to the Commission
      on May 1, 2002).                                                                                                                                                                  
|   | (f)  | Technology
      Assistance and Patent License Agreement by and between Matsushita
      Electric Industrial Co., Ltd. and Unipac Optoelectronics
      Corporation, for ASTLCD, dated October 30, 1998 (incorporated
      herein by reference to Exhibit 10.5 to the Companys
      Registration Statement on Form F-1 as submitted to the Commission
      on May 1, 2002).                                                                                            
|   | (g) | Patent
      and Technology License Agreement by and between FDTC and
      AU Optronics Corp., for TFT-LCD technologies, dated March
      31, 2003.                                                                                                                                                                                                                                                                                                                      
|   | (h) | Joint Research and Development and Cost Sharing Agreement
      by and between FDTC and AUOptronics Corp., for joint research and development
      of TFT-LCD technologies, dated March 10, 2003.                                                                                                                                                                                                                                                                         
|   | (i) | Stock
      Purchase Agreement by and among FDTC, Fujitsu and AU Optronics
      Corp., for purchase certain amount of stocks of FDTC, dated
      March 25, 2003.                                                                                                                                                                                                                                                                                                         
|79

---

|(j) | Lease
      Agreement with Hsin-Chu Science-Based Industrial Park Administration
      in relation to government-owned land located at Hsin-Chu
      Science-Based Industrial Park, No. 76-6 Small Section, Hsin-Chu,
      Taiwan, Republic of China, with respect to part of the site
      of Fab L1 (in Chinese, with English summary translation).                                                                                                                           
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(k) | Lease
      Agreement with Hsin-Chu Science-Based Industrial Park Administration
      in relation to government-owned land located at Hsin-Chu
      Science-Based Industrial Park, No. 77 Small Section, Hsin-Chu,
      Taiwan, Republic of China, with respect to part of the site
      of Fab L1 (in Chinese, with English summary translation).                                                                                                                             
|(l) | Lease
      Agreement with Hsin-Chu Science-Based Industrial Park Administration
      in relation to government-owned land located at Hsin-Chu
      Science-Based Industrial Park, Nos. 255-46 Gin-Shan Section,
      Hsin-Chu, Taiwan, Republic of China, the site of Fab L2
      (in Chinese, with English summary translation).                                                                                                                                             
|(m) | Lease
      Agreement with Hsin-Chu Science-Based Industrial Park Administration
      in relation to government-owned land located at Hsin-Chu
      Science-Based Industrial Park, Nos. 114-4 Gin-Shan Section,
      Hsin-Chu, Taiwan, Republic of China, the site of Fab L3
      (in Chinese, with English summary translation).                                                                                                                                              
|(n) | Lease
      Agreement with Hsin-Chu Science-Based Industrial Park Administration
      in relation to government-owned land located at Hsin-Chu
      Science-Based Industrial Park, Nos. 472 etc, Gin-Shan Section,
      Hsin-Chu, Taiwan, Republic of China, the site of Fab L5
      (in Chinese, with English summary translation).                                                                                                                                           
|(o) | Lease
      Agreement by and between Acer Display Technology, Inc. and
      Min-Tour Inc. for No. 1 Xinhe Road Aspire Park, 325 Lungtan,
      Taoyuan, Taiwan, Republic of China, the site of Fab L6 and
      Module Assembly Plant M1 (in Chinese, with English summary
      translation) (incorporated herein by reference to Exhibit
      10.12 to the Company's Registration Statement on Form F-1
      as submitted to the Commission on May 1, 2002).                  
|(p) | Lease
      Agreement by and between AU Optronics Corp. and United Microelectronics
      Corporation for No. 1, Gin-Shan Section 7 of Science-Based
      Industrial Park, Hsin-Chu, Taiwan, Republic of China, the
      site of Module Assembly Plant M2 (in Chinese, with English
      summary translation) (incorporated herein by reference to
      Exhibit 10.13 to the Company's Registration Statement on
      Form F-1 as submitted to the Commission on May 1, 2002).
|(q) | Lease
      Agreement by and between AU Optronics (Suzhou) Corp. and
      Chinese-Singapore Suzhou Industrial Park Development Co.,
      Ltd. for No. 398, Suhong Zhong Road, Suzhou Industrial Park,
      Suzhou, The Peoples Republic of China, the site of
      Module Assembly Plants S1 and S2 (in Chinese, with English
      summary translation).                                                                                                                     
|8.  | List
      of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|99. | Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                



---

The
  Company agrees to furnish to the Securities and Exchange Commission
  upon request a copy of any instrument that defines the rights
  of holders of long-term debt of the Company and its consolidated
  subsidiaries.

80

---

SIGNATURES

Pursuant
  to the requirements of Section 12 of the Securities Exchange
  Act of 1934, the registrant certifies that it meets all of the
  requirements for filing on Form 20-F and has duly caused this
  annual report to be signed on its behalf by the undersigned,
  thereunto duly authorized.

AU
        OPTRONICS CORP.By:
      /s/
        Kuen-Yao (K.Y.) LeeChief Executive Officer


Date:
  June 30, 2003

---

Certification

|I,
      Kuen-Yau (K.Y.) Lee, the Chief Executive Officer of AU Optronics
      Corp., or the registrant, certify that:
|-----------------------------------------------------------------------------------------------------------------------
|1.                                                                                                                     
|2.                                                                                                                     
|3.                                                                                                                     
|4.                                                                                                                     
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|5.                                                                                                                     
|                                                                                                                       
|                                                                                                                       
|6.                                                                                                                     

Date: June 30, 2003

By:
      /s/
        Kuen-Yau (K.Y.) LeeChief Executive Officer


---

Certification

|I,
      Max Weishun Cheng, the Chief Financial Officer of AU Optronics
      Corp., or the registrant, certify that:
|---------------------------------------------------------------------------------------------------------------------
|1.                                                                                                                   
|2.                                                                                                                   
|3.                                                                                                                   
|4.                                                                                                                   
|                                                                                                                     
|                                                                                                                     
|                                                                                                                     
|5.                                                                                                                   
|                                                                                                                     
|                                                                                                                     
|6.                                                                                                                   

Date:
  June 30,
  2003

By:
      /s/Max
        Weishun ChengMax
        Weishun Cheng


---

Independent
    Auditors Report  The Board
  of Directors
  AU Optronics Corp: We have
    audited the accompanying consolidated balance sheets of AU
    Optronics Corp. and subsidiaries as of December 31, 2001 and
    2002, and the related consolidated statements of operations,
    changes in stockholders equity and cash flows for each
    of the years in the three-year period ended December 31, 2002.
    These consolidated financial statements are the responsibility
    of the Companys management. Our responsibility is to
    express an opinion on these consolidated financial statements
    based on our audits. The consolidated
    financial statements of AU Optronics Corp. as of and for the
    year ended December 31, 2000, have been restated to reflect
    the pooling-of-interests transaction with Unipac Optoelectronics
    Corp. as described in note 3 to the consolidated financial
    statements. We did not audit the 2000 financial statements
    of Unipac Optoelectronics Corp., which statements reflect
    total assets constituting 48 % as of December 31, 2000 and
    total revenues constituting 42 % in 2000 of the related consolidated
    totals. Those statements were audited by other auditors whose
    report has been furnished to us, and our opinion, insofar
    as it relates to the amounts included for Unipac Optoelectronics
    Corp. as of and for the year ended December 31, 2000, is based
    solely on the report of the other auditors. We conducted
    our audits in accordance with auditing standards generally
    accepted in the United States of America. Those standards
    require that we plan and perform the audit to obtain reasonable
    assurance about whether the consolidated financial statements
    are free of material misstatement. An audit includes examining,
    on a test basis, evidence supporting the amounts and disclosures
    in the financial statements. An audit also includes assessing
    the accounting principles used and significant estimates made
    by management, as well as evaluating the overall financial
    statement presentation. We believe that our audits provide
    a reasonable basis for our opinion. In our
    opinion, based upon our audits and the report of the other
    auditors, the accompanying consolidated financial statements
    referred to in the first paragraph present fairly, in all
    material respects, the financial position of AU Optronics
    Corp. and subsidiaries as of December 31, 2001 and 2002, and
    the results of their operations and their cash flows for each
    of the years in the three-year period ended December 31, 2002,
    in conformity with accounting principles generally accepted
    in the Republic of China. The accompanying
    consolidated financial statements as of and for the year ended
    December 31, 2002, have been translated into United States
    dollars solely for the convenience of the readers. We have
    audited the translation and, in our opinion, the consolidated
    financial statements expressed in New Taiwan dollars have
    been translated into United States dollars on the basis set
    forth in note 2(v) to the consolidated financial statements. Generally
    accepted accounting principles in the Republic of China vary
    in certain significant respects from accounting principles
    generally accepted in the United States of America. Application
    of accounting principles generally accepted in the United
    States of America would have affected results of operations
    for each of the years in the three-year period ended December
    31, 2002, and stockholders equity as of December 31,
    2001 and 2002, to the extent summarized in note 26 to the
    consolidated financial statements. KPMG
    Certified Public Accountants Taipei,
    Taiwan
    (the Republic of China)January
    23, 2003, except for note 27 which is as of March 27, 2003


F-1

---

**AU
    OPTRONICS CORP. AND SUBSIDIARIES**
 **Consolidated
    Balance Sheets** December
    31, 2001 and 2002
    (Expressed in thousands of New Taiwan dollars and US dollars)
   2001
      2002NT$
      NT$
      US$**Assets****Current
          assets:**Cash
          and cash equivalents (note 4)
      
      6,496,268
      25,957,194
      748,047Short-term
          investments, net (note 5)
      
      5,026,543
      3,231,835
      93,136Notes
          and accounts receivable, net (note 6)
      
      6,592,977
      6,415,061
      184,872Receivables
          from related parties (note 21)
      
      2,428,680
      3,646,403
      105,084Inventories,
          net (note 7)
      
      9,035,995
      8,509,570
      245,232Prepayments
          and other current assets (notes 20 and 21)
      
      852,770
      1,396,120
      40,234Net
          deferred tax assets (note 18)
      
      82,468
      673,829
      19,419Total
          current assets
      
      30,515,701
      49,830,012
      1,436,024**Long-term
          investments** (note 8)
      
      48,581
      84,330
      2,430**Property,
          plant and equipment** (notes 9, 21 and 22):Land
      
      499,797
      199,176
      5,740Buildings
      
      10,493,783
      10,466,989
      301,642Machinery
          and equipment
      
      57,976,432
      70,940,502
      2,044,395Leasehold
          improvements and other equipment
      
      2,315,771
      3,208,361
      92,46071,285,783
      84,815,028
      2,444,237Less:
          accumulated depreciation and amortization
      
      (14,558,288)
      (25,666,631)
      (739,672)Construction
          in progress
      
      39,180
      1,811,779
      52,213Prepayment
          for purchases of land and equipment
      
      8,902,928
      10,085,107
      290,637Net
          property, plant and equipment
      
      65,669,603
      71,045,283
      2,047,415**Intangible
          assets** (note 23)
      
      3,069,633
      2,984,455
      86,007**Other
          assets:**Leased
          assets, net (note 9)
      
      -
      1,620,792
      46,709Net
          deferred tax assets (note 18)
      
      2,439,541
      1,848,180
      53,262Refundable
          deposits (note 21)
      
      894,077
      1,018,127
      29,341Deferred
          charges
      
      587,021
      642,374
      18,511Restricted
          cash in bank
      
      149,542
      52,200
      1,504Miscellaneous
          (note 22)
      
      26,696
      45,649
      1,316Total
          other assets
      
      4,096,877
      5,227,322
      150,643Total
          assets
      
      103,400,395
      129,171,402
      3,722,519


See accompanying
  notes to consolidated financial statements.

F-2

---

**AU
    OPTRONICS CORP. AND SUBSIDIARIES** **Consolidated
    Balance Sheets (continued)** December
    31, 2001 and 2002
    (Expressed in thousands of New Taiwan dollars and US dollars
    except par value)
  2001
      2002NT$
      NT$
      US$**Liabilities
          and Stockholders Equity****Current
          liabilities:**Short-term
          borrowings (note 10)
      
      2,095,008
      770,444
      22,203Commercial
          paper (note 11)
      
      449,321
      -
      -Accounts
          payable
      
      9,590,359
      11,131,568
      320,794Payables
          to related parties (note 21)
      
      493,407
      560,605
      16,156Current
          installments of long-term liabilities (notes 12, 13, 14 and
          22)
      
      4,804,110
      9,492,110
      273,548Accrued
          expenses and other current liabilities (note 20)
      
      1,390,467
      1,983,605
      57,164Equipment
          and construction in progress payable
      
      672,743
      1,265,983
      36,484**Total
          current liabilities**
      
      19,495,415
      25,204,315
      726,349Long-term
          liabilities:Long-term
          borrowings excluding current installments (notes 12 and 22)
      
      23,688,330
      22,457,152
      647,180Long-term
          commercial paper excluding current installments (notes 13
          and 22)
      
      4,168,654
      1,287,611
      37,107Bonds
          and convertible bonds payable excluding current installments
          (notes 14, 15 and 22)
      
      12,020,796
      2,282,882
      65,789**Total
          long-term liabilities**
      
      39,877,780
      26,027,645
      750,076Other
          liabilities:Accrued
          pension liabilities (note 16)
      
      77,294
      87,192
      2,513Guarantee
          deposits
      
      2,621
      24,206
      698Total
          other liabilities
      
      79,915
      111,398
      3,211Total
          liabilities
      
      59,453,110
      51,343,358
      1,479,636**Commitments
          and contingent liabilities**(note 23)**Stockholders
          equity**(note
          17)**:**Capital
          stock:Common
          stock, NT$10 par value
      
      29,705,816
      40,241,945
      1,159,710Certificates
          exchangeable for common stock
      
      -
      1,012
      2929,705,816
      40,242,957
      1,159,739Capital
          surplus
      
      17,998,396
      31,718,116
      914,067Retained
          earnings:Legal
          reserve
      
      232,014
      -
      -Unappropriated
          retained earnings (accumulated deficit)
      
      (3,997,843)
      6,022,669
      173,564(3,765,829)
      6,022,669
      173,564Cumulative
          translation adjustment
      
      8,902
      27,151
      782Treasury
          stock
      
      -
      (182,849)
      (5,269)**Total
          stockholders equity**
      
      43,947,285
      77,828,044
      2,242,883**Total
          Liabilities and Stockholders Equity**
      
      103,400,395
      129,171,402
      3,722,519


See accompanying
  notes to consolidated financial statements.

F-3

---

**AU
    OPTRONICS CORP. AND SUBSIDIARIES** **Consolidated
    Statements of Operations** **Years
    ended December 31, 2000, 2001 and 2002** **(Expressed
    in thousands of New Taiwan dollars and US dollars, 
    except for per share data)**  2000
      2001
      2002NT$
      NT$
      NT$
      US$**Net
          sales** (note 21)
      
      25,583,219
      37,588,625
      75,689,165
      2,181,244**Cost
          of goods sold** (note 21)
      
      20,737,513
      40,373,595
      63,606,190
      1,833,031**Gross
          profit (loss)**
      
      4,845,706
      (2,784,970)
      12,082,975
      348,213**Operating
          expenses** (notes 16, 21 and 23):Selling
      
      442,153
      446,233
      520,016
      14,986Administrative
      
      1,683,292
      1,203,355
      1,615,959
      46,569Research
          and development
      
      1,598,812
      1,856,087
      2,233,119
      64,3553,724,257
      3,505,675
      4,369,094
      125,910**Total
          operating income (loss)**
      
      1,121,449
      (6,290,645)
      7,713,881
      222,303**Non-operating
          income:**Interest
          income
      
      309,976
      82,480
      280,410
      8,081Gain
          on sale of short-term investments
      
      918,515
      8,761
      -
      -Foreign
          currency exchange gain, net (note 20)
      
      176,383
      484,165
      -
      -Other
          income (notes 21 and 23)
      
      235,327
      128,549
      261,409
      7,5331,640,201
      703,955
      541,819
      15,614**Non-operating
          expenses and losses:**Interest
          expense (notes 10 to 15, 20 and 21)
      
      716,508
      1,120,788
      1,231,514
      35,491Investment
          loss recognized by equity method (note 8)
      
      82,456
      8,059
      10,475
      302Short-term
          investment permanent impairment loss
      
      -
      -
      650,626
      18,750Foreign
          currency exchange loss, net (note 20)
      
      -
      -
      210,815
      6,075Other
          loss (note 21)
      
      26,301
      29,014
      129,510
      3,732825,265
      1,157,861
      2,232,940
      64,350**Income
          (loss) before income tax**
      
      1,936,385
      (6,744,551)
      6,022,760
      173,567**Income
          tax expense (benefit)**(note 18)
      
      (926,330)
      (34,321)
      91
      3**Net
          income (loss)**
      
      2,862,715
      (6,710,230)
      6,022,669
      173,564**Earnings
          per common share**(note 19):Basic
          earnings per common share
      
      1.20
      (2.34)
      1.65
      0.05Diluted
          earnings per common share
      
      1.20
      (2.34)
      1.58
      0.05


See accompanying
  notes to consolidated financial statements.

F-4

---

**AU
    OPTRONICS CORP. AND SUBSIDIARIES** **Consolidated
    Statements of Changes in Stockholders' Equity** Years
    ended December 31, 2000, 2001 and 2002
    (Expressed in thousands of New Taiwan dollars and shares)
  Capital
        Stock
      
      Retained
        EarningsCommon
        share
      Common
        stock
      Certificates
        exchange-
        able 
        for 
        common
        stock
      Capital
        surplus
      Legal
        reserve
      Unapprop-
        riated 
        earnings (accumulated deficit)
      Cumulative
        translation adjustment
      Treasury
        stock
      TotalBalance
          at January 1, 2000
      2,384,945
      23,849,451
      -
      15,500,681
      867
      550,303
      -
      -
      39,901,302Appropriation
          for legal reserve
      -
      -
      -
      -
      55,031
      (55,031)
      -
      -
      -Gain
          on disposal of property, plant and equipment transferred
          to capital surplus
      -
      -
      -
      53
      -
      (53)
      -
      -
      -Net
          income for 2000
      -
      -
      -
      -
      -
      2,862,715
      -
      -
      2,862,715Net
          income of Unipac transferred to capital surplus
      -
      -
      -
      1,101,502
      -
      (1,101,502)
      -
      -
      -Cumulative
          translation adjustment
      -
      -
      -
      -
      -
      -
      1,215
      -
      1,215Balance
          at December 31, 2000
      2,384,945
      23,849,451
      -
      16,602,236
      55,898
      2,256,432
      1,215
      -
      42,765,232Issuance
          of common stock for cash
      377,336
      3,773,365
      -
      4,126,635
      -
      -
      -
      -
      7,900,000Appropriation
          for legal reserve
      -
      -
      -
      -
      176,116
      (176,116)
      -
      -
      -Transfer
          of retained earnings to common stock
      137,500
      1,375,000
      -
      -
      -
      (1,375,000)
      -
      -
      -Transfer
          of employees profit sharing to common stock
      8,300
      83,000
      -
      -
      -
      (83,000)
      -
      -
      -Directors
          and supervisors remuneration
      -
      -
      -
      -
      -
      (8,303)
      -
      -
      (8,303)Transfer
          of capital surplus to common stock
      62,500
      625,000
      -
      (625,000)
      -
      -
      -
      -
      -Net
          loss for 2001
      -
      -
      -
      -
      -
      (6,710,230)
      -
      -
      (6,710,230)Net
          loss of Unipac transferred to capital surplus
      -
      -
      -
      (2,105,475)
      -
      2,098,374
      (2,937)
      -
      (10,038)Cumulative
          translation adjustment
      -
      -
      -
      -
      -
      -
      10,624
      -
      10,624Balance
          at December 31, 2001
      2,970,581
      29,705,816
      -
      17,998,396
      232,014
      (3,997,843)
      8,902
      -
      43,947,285Issuance
          of common stock for cash
      500,000
      5,000,000
      -
      14,170,256
      -
      -
      -
      -
      19,170,256Transfer
          of legal reserve to unappropriated earnings
      -
      -
      -
      -
      (232,014)
      232,014
      -
      -
      -Transfer
          of capital surplus to unappropriated earnings
      -
      -
      -
      (3,765,829)
      -
      3,765,829
      -
      -
      -Net
          income for 2002
      -
      -
      -
      -
      -
      6,022,669
      -
      -
      6,022,669Purchase
          of treasury stock
      -
      -
      -
      -
      -
      -
      -
      (182,849)
      (182,849)Cumulative
          translation adjustment
      -
      -
      -
      -
      -
      -
      18,249
      -
      18,249Convertible
          bonds converted to common stock
      553,613
      5,536,129
      1,012
      3,315,293
      -
      -
      -
      -
      8,852,434Balance
          at December 31, 2002
      4,024,194
      40,241,945
      1,012
      31,718,116
      -
      6,022,669
      27,151
      (182,849)
      77,828,044 See accompanying
    notes to consolidated financial statements. F-5      **AU
    OPTRONICS CORP. AND SUBSIDIARIES
    Consolidated Statements of Cash Flows
    Years ended December 31, 2000, 2001 and 2002
     (Expressed in thousands of New Taiwan dollars and US
    dollars)**  2000
      2001
      2002NT$
      NT$
      NT$
      US$**Cash
          flows from operating activities:**Net
          income (loss)
      
      2,862,715
      (6,710,230)
      6,022,669
      173,564Adjustments to reconcile
          net income (loss) to net cash provided by operating
          activities:Depreciation
      
      4,869,022
      7,826,561
      11,498,954
      331,382Amortization
          of intangible assets and deferred charges
      
      872,322
      1,053,761
      1,490,968
      42,967Provision
          for early redemption of convertible bonds and amortization
          of discount
                     for
          commercial paper
      
      (40,863)
      71,691
      114,548
      3,301Loss(gain)
          from disposal of property, plant and equipment
      
      5,047
      2,910
      (3,293)
      (95)Unrealized
          exchange loss (gain), net
      
      (44,677)
      (270,375)
      348,155
      10,033Provision
          for inventory devaluation
      
      72,735
      235,094
      -
      -Provision
          for allowance for doubtful accounts, sales returns and
          discounts
      
      8,616
      7,642
      32,420
      934Long-term
          investment loss under equity method
      
      82,456
      8,059
      10,475
      302Short-term
          investment permanent impairment loss
      
      -
      -
      650,626
      18,750Increase
          in notes and accounts receivable (including related
          parties)
      
      (1,418,570)
      (5,930,234)
      (1,203,910)
      (34,695)Decrease
          (increase) in inventories
      
      (5,269,277)
      (2,124,168)
      526,425
      15,171Increase
          in prepayments and other current assets
      
      (73,253)
      (157,868)
      (484,340)
      (13,958)Increase
          in deferred tax assets
      
      (929,195)
      (36,792)
      -
      -Increase
          in notes and accounts payable (including related parties)
      
      1,084,566
      7,339,717
      1,321,956
      38,097Increase
          (decrease) in accrued expenses and other current liabilities
      
      673,375
      (138,204)
      486,166
      14,011Increase
          in accrued pension liabilities
      
      640
      38,190
      9,898
      285**Net
          cash provided by operating activities**
      
      2,755,659
      1,215,754
      20,821,717
      600,049**Cash
          flows from investing activities:**Decrease
          (increase) in short-term investments
      
      226,552
      (786,502)
      1,144,082
      32,971Acquisition
          of property, plant and equipment
      
      (36,901,618)
      (13,987,290)
      (18,035,305)
      (519,749)Proceeds
          from disposal of property, plant and equipment
      
      926
      1,514
      78,719
      2,269Increase
          in long-term equity investments
      
      (49,658)
      -
      (46,586)
      (1,343)Decrease
          in restricted cash in bank
      
      1,996,855
      74,549
      97,342
      2,805Increase
          in intangible assets
      
      (913,147)
      (338,495)
      (840,787)
      (32,089)Increase
          in other assets
      
      (1,011,997)
      (263,257)
      (522,419)
      (7,197)**Net
          cash used in investing activities**
      
      (36,652,087)
      (15,299,481)
      (18,124,954)
      (522,333)**Cash
          flows from financing activities:**Increase
          (decrease) in short-term borrowings
      
      7,384,829
      (5,290,961)
      (1,815,517)
      (52,320)Increase
          (decrease) in guarantee deposits
      
      75,482
      (74,099)
      21,585
      622Increase
          (decrease) in long-term borrowings
      
      20,076,831
      4,270,091
      (439,178)
      (12,656)Purchase
          of treasury stock
      
      -
      -
      (182,849)
      (5,269)Issuance
          of common stock for cash
      
      -
      7,900,000
      19,170,256
      552,457Issuance
          of convertible bonds and bonds payable
      
      -
      10,000,000
      -
      -Bond
          issuance costs
      
      (24,450)
      (7,219)
      -
      -Directors
          and supervisors remuneration
      
      -
      (18,341)
      -
      -**Net
          cash provided by financing activities**
      
      27,512,692
      16,779,471
      16,754,297
      482,834**Effect
          of exchange rate change on cash**
      
      9,278
      5,205
      9,866
      284**Net
          increase (decrease) in cash and cash equivalents**
      
      (6,374,458)
      2,700,949
      19,460,926
      560,834**Cash
          and cash equivalents at beginning of year**
      
      10,169,777
      3,795,319
      6,496,268
      187,212Cash
          and cash equivalents at end of year
      
      3,795,319
      6,496,268
      25,957,194
      748,046Supplemental
          disclosures of cash flow information:Cash
          paid for interest expense
      $
      654,037
      1,079,709
      1,253,983
      36,138Cash
          paid for income taxes
      $
      10,350
      4,986
      19,343
      557Additions
          to property, plant and equipment:Increase
          in property, plant and equipment
      $
      36,134,960
      12,778,584
      18,589,628
      535,724Decrease
          (increase) in equipment acquisitions payable
      
      766,658
      1,208,706
      (554,323)
      (15,975)Cash
          paid
      $
      36,901,618
      13,987,290
      18,035,305
      519,749Supplementary
        disclosure of non-cash investing and financing activitiesConvertible
          bonds applying for conversion
      $
      -
      -
      8,852,434
      255,113 See accompanying
    notes to consolidated financial statements. F-6      AU
    OPTRONICS CORP. AND SUBSIDIARIES**** Notes
    to Consolidated Financial Statements
  (1)
      Organization
        and Principal ActivitiesAU
        Optronics Corp. (AU, formerly known as Acer
        Display Technology Inc.) was founded in the Hsinchu Science-based
        Industrial Park of the Republic of China on August 12,
        1996. AUs main activities are the research, development,
        production and sale of thin film transistor liquid crystal
        displays (TFT-LCDs), and other flat panel displays used
        in a wide variety of applications, including notebook
        personal computers, desktop monitors, televisions, personal
        digital assistants, car televisions, digital cameras and
        camcorders, car navigation systems and mobile phones.
        AU sells its products primarily in Asia and to a lesser
        extent, Europe and North America.AU
        Optronics (L) Corp. (AUL) is a wholly owned
        subsidiary of AU and was incorporated in September 2000.
        AUL is a holding company investing in the wholly owned
        foreign subsidiaries including AU Optronics Corporation
        America (AUA, formerly known as Acer Display
        Technology American Inc.), AU Optronics (Suzhou) Corp.
        (AUS) and AU Optronics Corporation Japan (AUJ).
        AUAs primary business activities include the sale
        of TFT-LCDs in the United States. AUS is primarily engaged
        in the assembly of TFT-LCD module products in Mainland
        China. AUJ is mainly engaged in the sale of TFT-LCDs and
        other flat-panel display modules in Japan.Konly
        Venture Corp. (Konly), a wholly owned subsidiary
        of AU, was incorporated in August 2002. Konly is an investment
        holding company for future investments AU plans to make
        in other similar technology companies.**(2)**
      **Summary
        of Significant Accounting Policies**(a)
      Accounting
        principles and consolidation policyThe
        consolidated financial statements include the accounts
        of AU and the aforementioned subsidiaries, hereinafter,
        referred to individually or collectively as the Company.The
        consolidated financial statements are prepared in accordance
        with accounting principles generally accepted in the Republic
        of China (ROC GAAP). These consolidated financial
        statements are not intended to present the financial position
        of the Company and the related results of operations and
        cash flows based on accounting principles and practices
        generally accepted in countries and jurisdictions other
        than the Republic of China.All
        significant inter-company balances and transactions are
        eliminated in the consolidated financial statements.  (Continued) F-7      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  (b)
      Revenue
        recognitionRevenue
        is recognized when title to the products and risk of ownership
        are transferred to the customers, which occurs principally
        at the time of shipment.Customers
        have the right to return purchased products within 20
        days after delivery for replacement if the products have
        an unacceptable number of defects in accordance with Company-specified,
        objective inspection standards. The Company continuously
        evaluates whether its products meet these inspection standards
        and can reliably estimate sales returns expected to result
        from customer inspections. As a result, the Company accounts
        for the estimated costs associated with the returns as
        a provision for warranty costs.(c)
      Use
        of estimatesThe
        preparation of the accompanying consolidated financial
        statements requires management to make estimates and assumptions
        that affect the reported amounts of assets and liabilities
        and disclosure of contingent assets and liabilities at
        the date of the consolidated financial statements and
        reported amounts of revenues and expenses during the reporting
        periods. Economic conditions and events could cause actual
        results to differ significantly from such management estimates.(d)
      Foreign
        currency transactions and translationAUs
        functional currency is the New Taiwan dollar. The Company
        and its subsidiaries record transactions in their respective
        local currencies. The translation from the applicable
        foreign currency assets and liabilities to the New Taiwan
        dollar is performed using exchange rates in effect at
        the balance sheet date except for stockholders equity,
        which is translated at historical exchange rates. Revenue
        and expense accounts are translated using average exchange
        rates during the year. Gains and losses resulting from
        such translations are recorded as a cumulative translation
        adjustment, a separate component of stockholders
        equity.Foreign
        currency transactions are recorded at the exchange rates
        prevailing at the transaction dates. At the balance sheet
        date, monetary assets and liabilities denominated in foreign
        currencies are translated using the exchange rates prevailing
        on that date. The resulting exchange gains or losses from
        settlement of such transactions or translations of monetary
        assets and liabilities are reflected in the accompanying
        consolidated statements of operations.(e)
      Cash
        equivalents and restricted cash in bankThe
        Company considers all highly liquid investments, such
        as investments in government bonds with repurchase agreements,
        with maturity of three months or less to be cash equivalents.
        Time deposits, which are provided as collateral, are classified
        as current assets or non-current assets depending on the
        term of the obligation secured by such collateral.  (Continued) F-8      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  (f)
      Short-term
        investmentsShort-term
        investments, which consist primarily of marketable securities
        such as publicly listed stock, open-end mutual funds,
        are recorded at cost when acquired and are stated at the
        lower of aggregate cost or fair value at the balance sheet
        date. The fair value of listed stocks is determined by
        the average closing prices during the last month prior
        to the balance sheet date. The fair value for open-end
        mutual funds is determined by their net asset value at
        the balance sheet date. The amount by which aggregate
        cost exceeds fair value is reported as a loss in the current
        year. In subsequent periods, recoveries of fair value
        are recognized as a gain to the extent that the fair value
        does not exceed the original aggregate cost of the investment.
        Valuation losses are recorded as non-operating expenses
        in the accompanying consolidated statements of operations.
        Losses doe to permanent impairment are charged to the
        statement of operations at the time the impairment occurs.
        Stock dividends are not treated as income, but as an increase
        in shares held.(g)
      Allowance
        for doubtful accounts and sales returns and discountsThe
        allowance for doubtful accounts is based on the age, credit
        quality and results of the Companys evaluation of
        collectibility of the outstanding balance of notes and
        accounts receivable. An allowance for sales returns and
        discount is based upon managements estimation of
        sales returns based upon actual experience and managements
        granting of sales discounts to certain customers subsequent
        to the initial sale of product.(h)
      InventoriesInventories
        are stated at the lower of cost or fair value. Cost is
        determined using the weighted-average method. The fair
        value of raw material is determined on the basis of replacement
        cost. Fair values of finished goods and work-in-process
        are determined on the basis of net realizable value. A
        provision for inventory obsolescence and devaluation is
        recorded when management determines that the fair valves
        of inventories are less than its cost basis. The provision
        is calculated based on the number of months inventory
        items remain unsold.(i)
      Long-term
        investmentsLong-term
        equity investments in which the Company owns less than
        20% of the investees voting shares or is not able
        to exercise significant influence over the investees
        operations and financial policies are accounted for by
        the cost method. If there is evidence indicating that
        a decline in the value of an investment is other than
        temporary, then the carrying amount of the investment
        is reduced to reflect its net realizable value. The related
        loss is recognized in the accompanying consolidated statements
        of operations.  (Continued) F-9      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  When the Company
        has significant influence over the operating, financial
        and dividend policies of investees or has the intention
        to hold the investment for a long term period, and owns
        between 20 and 50 percent of the investees voting
        shares, those investments are accounted for using the
        equity method. The difference between the acquisition
        cost and the net equity of the investee as of the acquisition
        date is deferred and amortized over fifteen years using
        the straight-line method, and the amortization is recorded
        as investment income (loss) in the accompanying consolidated
        statements of operations.If
        investees are unable to forward their audited financial
        statements in timely fashion, the Company recognizes the
        income (loss) of the investees in the following year.
        This time lag is consistent from period to period.Unrealized
        inter-company profits or losses resulting from transactions
        between the Company and an investee accounted for under
        the equity method are deferred. The profits or losses
        resulting from depreciated or amortized assets are recognized
        over the estimated economic lives of such assets. The
        profits or losses from other assets are recognized when
        realizedThe
        differences resulting from translation of the financial
        statements of the foreign investees accounted for under
        the equity method into New Taiwan dollars, net of the
        related tax effect, are recorded as cumulative translation
        adjustments, a separate component of stockholders
        equity.(j)
      Property,
        plant and equipmentProperty,
        plant and equipment are stated at acquisition cost. Excluding
        land, depreciation of property, plant and equipment is
        provided over the estimated useful lives of the respective
        assets using the straight-line method less any salvage
        value. The range of the estimated useful lives are as
        follows: buildings  20 to 50 years, machinery and
        equipment  3 to 10 years, leasehold improvement
         shorter of 5 years or the lease term, and other
        equipment  3 to 5 years. Interest costs related
        to the construction of property, plant and equipment are
        capitalized and included in the cost of the related asset.
        Property, plant and equipment leased to other parties
        under operating lease are classified as leased assets.Gains
        or losses on the disposal of property, plant and equipment
        are recorded as non-operating income or expenses in the
        accompanying consolidated statements of operations. Before
        December 27, 2001, any gains, net of related income taxes,
        were required to transfer from unappropriated earnings
        to capital surplus in the year of disposal in accordance
        with the Republic of China Company Law.  (Continued) F-10      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  (k)
      Impairment
        of long-lived assets and long-lived assets to be disposed
        ofLong-lived
        assets and certain identifiable intangible assets are
        reviewed for impairment whenever events or changes in
        circumstances indicate that the carrying amount of an
        asset may not be recoverable. Recoverability of assets
        to be held and used is measured by a comparison of the
        carrying amount of an asset to future net cash flows expected
        to be generated by the asset. If such assets are considered
        to be impaired, the impairment to be recognized is the
        amount by which the carrying amount of the assets exceeds
        the fair value of the assets. Assets to be disposed of
        are reported at the lower of the carrying amount or fair
        value less costs to sell.(l)
      Technology
        related feesThe
        costs incurred to license the product and process technology
        for TFT-LCDs and other flat-panel displays are capitalized
        and amortized over the respective contract period of three
        to fifteen years on a straight-line basis. The amortization
        of the technology fixed license fees is included in research
        and development expenses in the consolidated statements
        of operations. On-going royalty fees associated with product
        production and sales related to these licenses are included
        in costs of goods sold in the consolidated statements
        of operations.(m)
      Deferred
        chargesThe
        cost of software systems, electrical facility installation
        charges, syndicated loan and bond issuances are accounted
        for as deferred charges. The costs of the software systems
        are amortized over the estimated useful lives of three
        years on a straight-line basis, and electrical facility
        installation charges are amortized over the estimated
        useful lives of six years on a straight-line basis. The
        expenses associated with the syndicated loan are amortized
        over the term of the debt on a straight-line basis. The
        expenses associated with issuing bonds payable and convertible
        bonds are amortized by using the straight-line method
        over the period from the issuance date to the maturity
        date (five or seven years).(n)
      Convertible
        bondsThe
        Company issued convertible bonds, which provide for early
        redemption at the option of the Company or bondholders
        cash at a premium over par value. The excess of the stated
        redemption price over the par value is accrued as provision
        for early redemption during the redemption period, using
        the effective interest method. When the redemption right
        expires, the balance of the provision for early redemption
        is amortized over the period from the expiration date
        to the maturity date using the effective interest method.If
        the bondholders exercise their conversion right, the unamortized
        issuing costs, forfeited unpaid interest, provision for
        early redemption and par value of the extinguished bonds
        are transferred to stockholders equity. The excess
        of such amounts over the par value of the stock for conversion
        of the convertible bond is recorded as capital surplus
        in the accompanying consolidated balance sheets, and no
        gain or loss is recognized on bond conversion.  (Continued) F-11      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  (o)
      Employee
        retirement planThe
        Company has established an employee noncontributory, defined
        benefit retirement plan (the Plan) covering full-time
        employees in the Republic of China. In accordance with
        the Plan, employees are eligible for retirement or are
        required to retire after meeting certain age or service
        requirements. Payments of retirement benefits are based
        on years of service and the average salary for the six-month
        period before the employees retirement. Each employee
        earns two months of salary for the first fifteen years
        of service, and one month of salary for each year of service
        thereafter. The maximum retirement benefit is 45 months
        of salary. The Company contributes two percent of wages
        and salaries to a pension fund maintained with the Central
        Trust of China on a monthly basis. Retirement benefits
        are paid to eligible participants on a lump-sum basis
        upon retirement.The
        Company has adopted Republic of China Statement of Financial
        Accounting Standards (SFAS) No. 18, Accounting for
        Pensions, for its retirement plan. SFAS No. 18 requires
        the Company to perform an actuarial calculation on its
        pension obligation as of each fiscal year-end. Based on
        the actuarial calculation, the Company recognizes a minimum
        pension liability and net periodic pension costs covering
        the service lives of the retirement plan participants.AUL,
        AUA, AUS and AUJ have defined contribution retirement
        plans. Cash contributions to these plans are expensed
        as incurred, and amounted to NT$0 thousand; NT$1,281 thousand
        and NT$204 thousand for the years ended December 31, 2000,
        2001 and 2002, respectively.(p)
      Government
        grantsIncome
        from government grants for research and development is
        recognized as non-operating income in the accompanying
        consolidated statements of operations as qualifying expenditures
        are made and the grant income is realizable.(q)
      Income taxIncome
        taxes are accounted for under the asset and liability
        method. Deferred income taxes are determined based on
        differences between the financial statement and tax basis
        of assets and liabilities using enacted tax rates in effect
        during the years in which the differences are expected
        to reverse. The income tax effects resulting from taxable
        temporary differences are recognized as deferred income
        tax liabilities. The income tax effects resulting from
        deductible temporary differences, net operating loss carryforwards
        and income tax credits are recognized as deferred income
        tax assets. The realization of the deferred income tax
        assets is evaluated, and if it is considered more likely
        than not that the deferred tax assets will not be realized,
        a valuation allowance is recognized accordingly.  (Continued) F-12      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  Classification
        of the deferred income tax assets or liabilities as current
        or non-current is based on the classification of the related
        asset or liability. If the deferred income tax asset or
        liability is not directly related to a specific asset
        or liability, then the classification is based on the
        expected realization date of such deferred income tax
        asset or liabilityAccording
        to the Republic of China Income Tax Law, AUs undistributed
        income, if any, earned after December 31, 1997, is subject
        to an additional 10 percent retained earning tax. The
        surtax is charged to income tax expense after the appropriation
        of earnings is approved by the stockholders in the following
        year.(r)
      Investment
        tax creditIncome
        tax expense is reduced by investment tax credits in the
        year in which the credit arises.(s)
      Derivative
        financial instruments(i)
      Forward
        foreign currency exchange contractsForward
        foreign currency exchange contracts are purchased to hedge
        currency fluctuations affecting foreign currency transactions.
        These forward exchange contract receivables and payables
        are recorded at the spot rate at the date of inception.
        The discount or premium on a forward contract is included
        in determining net income over the life of the contract.
        Realized and unrealized gains or losses on these contracts
        resulting from actual settlement or balance sheet date
        translation are charged or credited to current operations.
        However, if the purpose of the contracts is to hedge the
        exchange risk of foreign currency commitments, the differences
        are deferred and recognized as an adjustment to the transaction
        price on the transaction date.(ii)
      Interest
        rate swapsThe
        Company enters into interest rate swap contracts to hedge
        changes in cash flows associated with existing variable
        rate long-term commercial paper. Under this interest rate
        swap contracts, the Company makes specified payments based
        on fixed interest rate and notional principal amounts
        and receives amounts based on variable rate of interest
        and notional principal. The net amounts received or paid
        under the contracts are reported as adjustments to interest
        expense on long-term commercial paper.(t)
      Treasury
        stockThe
        Company has adopted Republic of China SFAS No. 30, Accounting
        for Treasury Stock for treasury stock repurchased
        by the Company. SFAS No. 30 requires that treasury stock
        be accounted for under the cost method. The cost of treasury
        stock is shown as a deduction to stockholders equity,
        while any gain or loss of selling treasury stock is treated
        as an adjustment to capital surplus or retained earnings.  (Continued) F-13      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  (u)
      Earnings per common shareEarnings
        per share of common stock are computed based on the weighted-average
        number of common shares outstanding during the period.
        The Company issued convertible bonds in November 2001.
        Therefore, assuming the convertible bonds are converted
        to common stock, only basic earnings per share (EPS)
        will be disclosed if there is no dilutive effect. If there
        is a dilutive effect, both basic EPS and diluted EPS will
        be disclosed. EPS for prior periods has been retroactively
        adjusted to reflect the effects of stock issued from transactions
        involving recapitalization of capital surplus, retained
        earnings and employee bonuses.(v)
      Convenience
        translation into U.S. dollarsThe
        consolidated financial statements are stated in New Taiwan
        dollars. Translation of the 2002 New Taiwan dollar amounts
        into U.S. dollar amounts is included solely for the convenience
        of the readers, using the noon buying rate of the Federal
        Reserve Bank in New York on December 31, 2002, of NT$34.7
        to US$1. The convenience translations should not be construed
        as representations that the New Taiwan dollar amounts
        have been, could have been, or could in the future be
        converted into U.S. dollars at this rate or any other
        rate of exchange.**(3)**
      **Merger**On
        May 10, 2001, the Companys stockholders approved
        a proposal to merge with Unipac Optoelectronics Corp.
        (Unipac). Unipac was subsequently dissolved.Unipac
        was incorporated in the Hsinchu Science-based Industrial
        Park of the Republic of China on November 16, 1990, and
        commenced operations in January 1994. Unipac was principally
        engaged in the research, development, design, manufacture
        and sale of TFT-LCD and LCD modules used in wide variety
        of applications, including notebook, personal computers,
        desktop monitor, digital cameras and camcorders, car televisions,
        car navigation systems, personal digital assistants and
        internet appliances.On
        September 1, 2001, Unipac was merged with and into the
        Company in a transaction accounted for in accordance with
        the pooling-of-interests method of accounting. As a result,
        the consolidated financial statements for the periods
        presented have been restated to include the financial
        statement amounts of Unipac. Pursuant to the merger agreement,
        the Company issued 0.8607 shares of common stock in exchange
        for each share of Unipacs 1,757,120 thousand common
        shares outstanding. As of September 1, 2001, Unipac had
        NT$43,610 million in total assets, NT$21,339 million in
        total liabilities, and NT$22,271 million in stockholders
        equity.In
        accordance with ROC GAAP and Republic of China Company
        Law, the excess of Unipacs net assets over the par
        value of the Companys issued common stock issued
        in connection with the merger was appropriated from unappropriated
        earnings and accounted for as capital surplus. Due to
        the restatement of prior years financial statements,
        Unipacs accumulated losses as of December 31, 1999
        amounting to NT$1,452,666 thousand, and Unipacs
        net income (loss) for the year ended December 31, 2000
        and the period from January 1, 2001 to August 31, 2001
        amounting to NT$1,101,502 thousand and NT$(2,098,374)
        thousand, respectively, has been retroactively transferred
        to capital surplus.  (Continued) F-14      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  Restated
        consolidated financial statements of the Company combine
        the separate results of the Company and Unipac for the
        year ended December 31, 2000, and the eight months ended
        August 31, 2001. No adjustments were necessary to conform
        accounting policies of the entities. There were no intercompany
        transactions requiring elimination in any period presented.
        The following table shows the historical results of the
        Company and Unipac for the periods prior to the consummation
        of the merger.  Year
        ended 
        December 
        31, 2000
      Eight
        months
        ended 
        August 31, 
        2001NT$
      NT$(in
        thousands)
      (unaudited)Net
          salesAU,
          as previously reported
      
      
      14,839,840
      10,582,231Unipac,
          as previously reported
      
      
      10,743,379
      9,075,235Total
      
      
      25,583,219
      19,657,466Net
          income (loss)AU,
          as previously reported
      
      
      1,761,213
      (2,416,647)Unipac,
          as previously reported
      
      
      1,101,502
      (2,098,374)Total
      
      
      2,862,715
      (4,515,021)  **(4)**
      **Cash
        and Cash Equivalents**Cash
        and cash equivalents as of December 31, 2001 and 2002
        consisted of the following:  **December
        31,**2001
      2002NT$
      NT$
      US$(in
        thousands)Cash
          and bank deposits
      
      5,029,301
      22,850,349
      658,512Government
          bonds acquired under reverse repurchase agreements
      
      1,466,967
      3,106,845
      89,5356,496,268
      25,957,194
      748,047  (Continued) F-15      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  The
        Company purchases government bonds under agreements to
        resell substantially the same securities within 30 days
        of the repurchase agreements. These agreements represent
        short-term investments and are reflected as cash equivalents
        in the consolidated balance sheets. The Company may sell,
        loan or otherwise dispose of such securities to other
        parties in the normal course of operations provided that
        substantially the same securities are delivered to the
        counter parties as agreed.Reverse
        repurchase agreements averaged NT$751,618 thousand and
        NT$4,217,362 thousand during the years ended December
        31, 2001 and 2002, respectively. The maximum amount of
        such agreements outstanding at any month end was NT$2,689,886
        thousand and NT$8,255,308 thousand during the years ended
        December 31, 2001 and 2002, respectively. As of December
        31, 2001 and 2002, reverse repurchase agreements for NT$1,466,967
        thousand and NT$3,106,845 thousand were outstanding, respectively.
        The fair values of the securities held under these agreements
        as of December 31, 2001 and 2002 approximated their carrying
        amounts. None of the securities held under these agreements
        were sold or repledged during the years ended December
        31, 2001 and 2002.**(5)**
      **Short-term Investments**Short-term
        investments as of December 31, 2001 and 2002 consisted
        of the following:  **December 31,**2001
      2002NT$
      NT$
      US$(in
        thousands)Publicly
        listed stocks
      
      2,591,144
      1,824,030
      52,566Mutual
        funds
      
      2,435,399
      1,534,688
      44,227Less:
        allowance for decline in fair value
      
      -
      (126,883)
      (3,657)5,026,543
      3,231,835
      93,136Fair
        value
      
      5,507,748
      3,231,835
      93,136  **(6)**
      **Notes and Accounts Receivable**Notes
        and accounts receivable as of December 31, 2001 and 2002,
        consisted of the following:  December 31,2001
      2002NT$
      NT$
      US$(in
        thousands)Notes
          receivable
      
      2,173
      -
      -Accounts
          receivable
      
      6,681,281
      6,540,984
      188,501Less:
          Allowance for doubtful accounts and sales returns and
          discount
      
      (90,477)
      (125,923)
      (3,629)6,592,977
      6,415,061
      184,872  (Continued) F-16      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  **(7)**
      **Inventories**Components
        of inventories as of December 31, 2001 and 2002 consisted
        of the following:  **December 31,**2001
      2002NT$
      NT$
      US$(in
        thousands)Finished
        goods
      
      2,545,429
      3,224,519
      92,926Work
        in process
      
      4,478,583
      3,255,697
      93,824Raw
        materials and spare parts
      
      2,409,287
      2,423,645
      69,8459,433,299
      8,903,861
      256,595Less:
        provision for inventory obsolescence and devaluation
      
      (397,304)
      (394,291)
      (11,363)9,035,995
      8,509,570
      245,232Insurance
        coverage on inventories
      
      9,959,324
      5,144,805
      148,265  **(8)**
      **Long-term
        Investments**Long-term
        investments as of December 31, 2001 and 2002 consisted
        of the following:  **December 31,**2001
        **2002**Percentage
          
          of ownership
        Amount
        **Percentage
          
          of ownership**
        **Amount**NT$
        ****
        **NT$**
        **US$**(in
          thousands)Equity
          method:Patentop
          Ltd.
        41%
        48,581
        41%
        37,744
        1,088Cost
          method:Wellypower
          Optronic Corporation Ltd.
        
        -
        1.45%
        26,586
        766Promate
          Electronic Co., Ltd.
        
        -
        0.61%
        10,000
        288Darly3
          Venture Inc.
        
        -
        2.49%
        10,000
        288-
        
        46,586
        1,34248,581
        
        84,330
        2,430
  (Continued) F-17      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  In
        order to acquire the right to use TFT-LCD related products
        and process technology patents, the Company invested in
        Patentop Ltd. (Patentop) in July 2000. As Patentop was
        historically unable to forward its stand-alone audited
        financial statements in a timely fashion, the Company
        recognizes the income (loss) of the investee in the following
        year.The
        investment losses related to investment accounted for
        under the equity method were NT$82,456 thousands and NT$8,059
        thousand and NT$10,475 (US$302) thousand for the years
        ended December 31, 2000, 2001 and 2002, respectively.**(9)**
      **Leased
        Assets, Interest Capitalization and Insurance Coverage
        on Property, Plant and Equipment**The
        Company has leased the following assets to other unralted
        party at December 31, 2002.  December 31,2002NT$
      US$Cost:
      
      (in
        thousands)Land
      $
      478,214
      13,782Buildings
      
      544,421
      15,689Machinery
        and equipment and other equipment
      
      716,757
      20,6561,739,392
      50,127Less:
        accumulated depreciation
      
      (118,600)
      (3,418)$
      1,620,792
      46,709  For
        the years ended December 31, 2000, 2001 and 2002, the
        details of interest capitalized were as follows:  **For the year ended December 31,****2000**
      **2001**
      **2002**NT$
      NT$
      NT$
      US$(in
          thousands)Buildings
      
      6,539
      53,895
      2,353
      68Machinery
          and equipment
      
      404,895
      756,411
      205,044
      5,909Other
          equipment
      
      8,136
      -
      4,061
      117419,570
      810,306
      211,458
      6,094  The
        capitalization interest rates ranged from 4.83% to 6.36%,
        4.28% to 6.35% and 2.99% to 5.04% in 2000, 2001 and 2002,
        respectively.Insurance
        coverage on property, plant and equipment amounted to
        NT$73,351,000 thousand and NT$82,568,000 thousand as of
        December 31, 2001 and 2002, respectively.  (Continued) F-18      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  As
        of December 31, 2002, the Company bought land amounting
        to NT$39,180 thousand for a plant site. Because the title
        of the land is not allowed to transfer temporarily due
        to the nature of the land under the regulation, the Company
        has contracted with the landowner to specify the right
        and obligation and secure the ownership of the land.The
        property, plant and equipment were pledged as collateral
        against long-term borrowings (see note 22).**(10)**
      **Short-term
        Borrowings**Short-term
        borrowings are bank loans used for the purchase of raw
        materials and other routine business operations.As
        of December 31, 2001 and 2002, unused credit lines amounted
        to NT$3,505,000 thousand and NT$13,774,000 thousand, respectively.The
        interest rates on short-term borrowings outstanding as
        of December 31, 2001 and 2002 ranged from 0.63% to 3.5%
        and 0.02% to 1.75%, respectively.**(11)**
      **Commercial
        Paper**The
        components of commercial paper as of December 31, 2001
        are summarized as follows:  December
          31,2001NT$(in
          thousands)Commercial
          paper
      
      450,000Less:
          unamortized discount
      
      (679)449,321Maturity
          date
      
      January
          1, 2002 to January 25, 2002  The
        Company did not have commercial paper outstanding as of
        December 31, 2002.Weighted-average
        interest rate on commercial paper outstanding as of December
        31, 2001 was 2.67%.  (Continued) F-19      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  **(12)**
      **Long-term Borrowings**The
        components of long-term borrowings as of December 31,
        2001 and 2002, are summarized below:  ****
      ****
      ****
      **December 31,****Bank**
      **Purpose** ****
      **Term**
      **2001**
      **2002**NT$
      NT$
      US$(in
        thousands)International
        Commercial Bank of China
      Purchase
        of machinery and equipment
      From
        Dec. 21, 2000 through Dec. 21, 2007. Repayable in 10 semi-annual
        installments starting on June 22, 2003
      11,000,000
      11,000,000
      317,003International
        Commercial Bank of China
      Purchase
        of machinery, equipment and building
      From
        Dec. 23, 1999 through Dec. 23, 2005. Repayable in 9 semi-annual
        installments starting on Dec. 24, 2001
      3,984,440
      2,988,330
      86,119Chinatrust
        Commercial Bank
      Purchase
        of machinery, equipment and building
      From
        Sep. 21, 2000 through Sep. 21, 2007. Repayable in 10 semi-annual
        installments starting on Mar. 22, 2003
      9,700,000
      13,500,000
      389,049Industrial
        and Commercial Bank of China
      Purchase
        of machinery, equipment and building
      From
        June 11, 2002 through June 10, 2007. Repayable in 2 installments
        starting on June 10, 2006
      -
      117,564
      3,388Industrial
        and Commercial Bank of China
      Purchase
        of machinery, equipment and building
      From
        April 11,2002 through April 10, 2007.Repayable on April
        10, 2007.
      -
      243,524
      7,018Bank
        of China
      Purchase
        of machinery, equipment and building
      From
        Mar. 20, 2002 through Mar.19, 2007. Repayable in 5 semi-annual
        installments starting on Mar. 20, 2005
      -
      503,844
      14,520Less:
          current portion
      
      (996,110)
      (5,896,110)
      (169,917)23,688,330
      22,457,152
      647,180Unused
          available balance
      
      3,800,000
      16,625,000
      479,107  (Continued) F-20      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  The Company
        entered into syndication loan agreements with Chinatrust
        Commercial Bank and Intrnational Commercial Bank of China
        to obtain credit facilities, for building construction
        projects and the purchase of TFT-LCD production line related
        machinery and equipment. The commitment fee is charged
        per annum, payable quarterly, based on the committed-to-withdraw,
        but unborrowed balance, if any. No commitment fees were
        paid for the years ended December 31, 2001 and 2002. During
        the loan repayment period, the current ratio, debt-equity
        ratio, times interest earned, tangible assets ratio and
        other financial ratios of the Company must comply with
        certain restrictions as specified in the agreements. The
        Company has complied with the aforementioned debt covenants
        in 2001 and 2002.Interest
        rates on long-term borrowings outstanding as of December
        31, 2001 and 2002 ranged from 3.94% to 4.02% and 2.89%
        to 5.02%, respectively.As
        of December 31, 2002 long-term borrowings, long-term commercial
        paper, bonds payable and convertible bonds that will become
        due during the next five years and thereafter are as follows:  NT$(in
          thousands)2003
      9,492,1102004
      8,179,7222005
      6,097,6492006
      5,177,1142007
      6,573,160Total
      35,519,755  **(13)**
      **Long-Term
        Commercial Paper**  **December 31,****Financial
        Institution**
      **Repayment Term**
      
      2001
      2002NT$
      NT$
      US$(in
        thousands)Citibank
          N.A.
      From
          March 18, 1999 through September 18, 2004. Repayable
          in 5 semi-annual installments starting on March 18,
          2002
      
      7,000,000
      3,900,000
      112,392Less:
          unamortized discount
      
      (31,346)
      (12,389)
      (357)6,968,654
      3,887,611
      112,035Less:
          current portion
      
      (2,800,000)
      (2,600,000)
      (74,928)4,168,654
      1,287,611
      37,107  (Continued) F-21      AU
      OPTRONICS CORP. AND SUBSIDIARIES**Notes to Consolidated Financial Statements**
  The Company established
        a long-term commercial paper facility guaranteed by Citibank
        N.A. and twenty-two other banks (the Banks)
        on September 22, 1998, to obtain NT$7 billion in credit
        facilities for the purchase of TFT-LCD production line
        related machinery and equipment. The Company is permitted
        to revolve the long-term commercial paper in the term
        range of the above credit facility during the contract
        period. During the loan repayment period, the current
        ratio, debt-equity ratio, times interest earned and other
        financial ratios of the Company must comply with certain
        restrictions as specified in the agreement. The Company
        has complied with the aforementioned debt covenants in
        2001 and 2002. The Company issued the full amount of available
        commercial paper under this facility during 1999. The
        long-term commercial paper shall at all times rank pari
        passu with all other secured obligation of the Company.Interest
        rates on long-term commercial paper outstanding as of
        December 31, 2001 and 2002, were 2.28% and 1.45%, respectively.Machinery
        and equipment were pledged as collateral against long-term
        debt. (see note 22)**(14)**
      **Bonds
        Payable**Bonds
        payable at December 31, 2001 and 2002 consisted of the
        following:  **December 31,**2001
      2002NT$
      NT$
      US$(in
        thousands)Secured
        bonds payable
      
      3,000,000
      1,992,000
      57,406Less:
        current portion
      
      (1,008,000)
      (996,000)
      (28,703)1,992,000
      996,000
      28,703Interest
        payable
      
      44,225
      29,199
      841  The
        significant terms of secured bonds payable are as follows:  The first issuance
      The second issuancePar
          value
      NT$1,500,000
          thousand
      NT$1,500,000
          thousandIssue
          date
      August
          27, 1999
      November
          8, 1999Issue
          price
      At
          par value
      At
          par valueCoupon
          rate
      6.05%
      5.85%Duration
      August
          27, 1999-August 27, 2004
      November
          8, 1999 - November 8, 2004Guarantee
          institution
      International
          Commercial Bank of China and other thirteen banks
      International
          Commercial Bank of China and other thirteen banksRedemption
      Repayment
          every six months beginning at
          thirty months after issue date   (Continued) F-22      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  **(15)**
      **Convertible
        Bonds**  On
        November 19, 2001, the Company issued unsubordinated and
        unsecured convertible bonds at par value with a face value
        of NT$10,000 million. The components of convertible bonds
        payable as of December 31, 2001 and 2002, are summarized
        below:  **December
        31,****2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Bonds
        payable
      
      10,000,000
      
      1,251,300
      
      36,061Provision
        for early redemption
      
      28,796
      
      35,582
      
      1,025**10,028,796**
      ****
      **1,286,882**
      ****
      **37,086**  The
        significant terms of the convertible bonds are as follows:  (a)
      Coupon
        rate: 2%.  (b)
      Duration:
        seven years (November 19, 2001 to November 18, 2008).  (c)
      Status: the bonds constitute a direct, unconditional,
        unsubordinated and unsecured obligation of the Company.
        However, if the Company subsequently issues secured convertible
        bonds, the bonds shall rank *pari passu* with the
        subsequently issued secured convertible bonds and other
        secured obligations.  (d)
      Final redemption: unless previously redeemed at the option
        of the Company or the bondholders, or converted in accordance
        with the offering of the convertible bonds, the convertible
        bonds are to be redeemed at the outstanding principal
        amount on November 18, 2008.  (e)
      Redemption at the option of the Company:  1.
      On or after November 19, 2002, and up to forty days before
        the bonds maturity date if the closing price of
        the Companys common stock on the Taiwan Stock Exchange
        for a period of 30 consecutive trading days has been at
        least 150% of the conversion price in effect on each such
        trading day, the Company may redeem the convertible bonds
        at a redemption price based on a certain yield rate determined
        by the outstanding period. After November 19, 2002, and
        up to the date that the bond has been outstanding for
        four years, the yield rate will be 4%; if the bond has
        been outstanding more than four years but less than five
        years, the yield rate will be 4.5%; and if the bond has
        been outstanding over five years but less than forty days
        before the maturity date, the yield rate will be the coupon
        rate.  2.
      In the event that at least 90 percent of the principal
        amount of the convertible bonds originally outstanding
        has been either redeemed or converted.   (Continued) F-23      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (f)
      Redemption at the option of bondholders: the bondholders
        have the right to require the Company to repurchase the
        convertible bonds at a price equal to 108.49% and 113.68%
        of the unpaid principal amount together with unpaid interest
        on October 18, of 2005 and 2006, respectively.  (g)
      Terms
        of conversion:  1.
      Bondholders may elect to have the convertible bonds converted
        into a certificate for common stock of the Company from
        February 19, 2002, to November 8, 2008. The certificate
        may be converted into common stock of the Company on four
        dates of each year.  2.
      Conversion price: NT$15.8 per share of common stock on
        the issuance date. The conversion price is subject to
        adjustment for capital increases in order to protect the
        bondholders from dilution. In addition, from 2002 to 2007,
        the conversion price may be reset to 101% of the average
        share price, which is the lowest of the average share
        price over a 20 business-day period, a 15 business-day
        period and a 10 business-day period ending on the ex-dividend
        date of each year, or in the absence of a stock dividend,
        on June 28 of each year (such lowest price is referred
        to as the average share price). The conversion
        price is reset to the average share price if the latter
        is greater than 80% but less than 100% of the previous
        conversion price. If the average share price is less than
        80% of the previous conversion price, the new conversion
        price shall be 80% of the previous conversion price.  The
        effective interest rate on the convertible bonds as a
        result of the accretion of the provision for early redemption
        is 4.5%.  As
        of December 31, 2002, the total principal value of convertible
        bonds, which have been converted to common stock, totaled
        NT$8,748,700 thousand, which amounted to NT$5,537,141
        thousand in NT$10 par value common stock (including certificates
        exchangeable for common stock) and a premium amount of
        NT$3,315,293 thousand recorded as capital surplus.   (Continued) F-24      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (16)
      **Retirement
        Plan**  The
        following table sets forth the benefit obligation and
        accrued pension liabilities balance related to the Companys
        retirement plan in the Republic of China as of December
        31, 2001 and 2002:  **December
        31,****2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Benefit
        obligation:Vested
        benefit obligation
      
      -
      
      -
      
      -Non-vested
        benefit obligation
      
      (60,515
      )
      (100,932
      )
      (2,909
      )Accumulated
        benefit obligation
      
      (60,515
      )
      (100,932
      )
      (2,909
      )Additions
        based on future salaries
      
      (113,691
      )
      (197,811
      )
      (5,701
      )Projected
        benefit obligation
      
      (174,206
      )
      (298,743
      )
      (8,610
      )Fair
        value of plan assets
      
      102,927
      
      159,540
      
      4,598Funded
        status
      
      (71,279
      )
      (139,203
      )
      (4,012
      )Unrecognized
        pension loss (gain)
      
      (23,111
      )
      35,998
      
      1,037Unrecognized
        transitional asset
      
      17,096
      
      16,013
      
      462Accrued
        pension liabilities
      
      **(77,294**
      **)**
      **(87,192**
      **)**
      **2,513**  The
        components of net periodic pension cost for 2000, 2001
        and 2002 are summarized as follows:  **For
        the year ended December 31,****2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Service
        cost
      
      42,537
      
      71,022
      
      59,361
      
      1,711Interest
        cost
      
      6,545
      
      10,735
      
      7,839
      
      226Expected
        return on plan assets
      
      (2,242
      )
      (5,822
      )
      (4,086
      )
      (118
      )Amortization
      
      1,739
      
      5,069
      
      (689
      )
      (20
      )Loss
        from settlements-
      
      785
      
      -
      
      -Net
        pension cost
      
      **48,579**
      ****
      **81,789**
      ****
      **62,425**
      ****
      **1,799**  Significant
        actuarial assumptions used in the above calculations are
        summarized as follows:  **December
        31,****2000**
      ****
      **2001**
      
      **2002**Discount
        rate
      
      5.75%-6.00%
      
      4.50%
      
      3.75%Rate
        of increase in future compensation levels
      
      5.00%-7.00%
      
      5.00%
      
      5.00%Expected
        long-term rate of return on plan assets
      
      5.75%-6.00%
      
      4.50%
      
      3.75%   (Continued) F-25      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  At
        the time of the merger, the Company integrated the existing
        Unipacs defined benefit plan into the Companys
        defined benefit plan. Before the merger consummation,
        Unipac made a pension benefits settlement for all Unipacs
        employees by permanently removing the outstanding years
        of service that had been earned by all of Unipacs
        employees prior to the formation of Acer Display Technology
        Inc.s defined benefit plan in 1996. This pension
        settlement was calculated based on one month of salary
        for each year of settled service and the resulting cash
        payout was paid from the plans assets, resulting
        in a settlement loss of NT$785 thousand.  **(17)**
      **Stockholders
        Equity**  (a)
      Common stock and capital increase  The
        Republic of China GAAP and Company Law provides that capital
        is created from stock issuance and donated capital. Additionally,
        companies can transfer capital to common stock as a result
        of certain transactions involving employee bonuses, donated
        capital and premium on issuance of common stock.  Based
        on stockholder resolutions the Company increased its common
        stock through the issuance of 377,336 thousand shares
        for NT$7,900,000 thousand in 2001. In addition, pursuant
        to the Republic of China Company Law, in 2001 the Company
        also increased its common stock by NT$2,083,000 thousand
        through the transfer of capital surplus, retained earnings
        and employee bonuses of NT$625,000 thousand, NT$1,375,000
        thousand and NT$83,000 thousand, respectively.  On
        December 10, 2001, the Company issued 500 million shares
        of its common stock in the form of 50 million American
        Deposition Shares (ADSs). Each ADS represents
        the right to receive 10 shares of common stock. The public
        offering price per ADS is US$11.57. The stock issuances
        described above were authorized by and registered with
        the government authorities.  As
        of December 31, 2001 and 2002, the Companys authorized
        common stock, par value NT$10 per share, totaled NT$50,000,000
        thousand, and the issued and outstanding common stock
        amounted to NT$29,705,816 thousand and NT$40,242,957 thousand
        (including the certificates exchangeable for common stock
        of NT$1,012 thousand), respectively.   (Continued) F-26      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (b)
      Capital surplus  Pursuant
        to the Republic of China Company Law, the capital surplus
        has to be used to offset a deficit, and then the capital
        surplus resulting from the income derived from the issuance
        of new shares at a premium and from endowments received
        by the Company can be used to increase common stock. Furthermore,
        pursuant to the Securities & Futures Exchange Commission
        (SFC) Law Enforcement Rules, the total sum
        of capital surplus capitalized per annual may not exceed
        10 percent of the paid-in capital. Additionally, the capital
        surplus realized from a capital increase or other source,
        shall be capitalized only in the following fiscal year
        after being registered by the Company with the competent
        authority for approval.  Based
        on a stockholders resolution on May 21, 2002, the Company
        offset the accumulated deficit as of December 31, 2001,
        with the capital surplus resulting from gain on disposal
        of assets of NT$99 thousand, and the capital surplus resulting
        from Unipac merger of NT$3,765,730 thousand.  (c)
      Legal reserve  According
        to the Republic of China Company Law, the Company must
        retain 10 percent of its annual income as a legal reserve
        until such retention equals the amount of authorized common
        stock. The retention is accounted for by transfers to
        a legal reserve upon approval at the annual stockholders
        meeting. The legal reserve can only be used to offset
        an accumulated deficit and cannot be distributed as dividends.  Based
        on a stockholders resolution on May 21, 2002, the Company
        offset the accumulated deficit as of December 31, 2001,
        with the legal reserve of NT$232,014 thousand.  (d)
      Distribution of earnings and dividend policy  After
        establishing the legal and special reserves, earnings
        may be distributed in the following order in accordance
        with the Companys articles of incorporation:  (i)
      5 to 10 percent as employee bonuses  (ii)
      1
        percent as remuneration to directors and supervisors  (iii)
      the
        remainder, after retaining a certain portion for business
        consideration, as common stockholders dividends.  According
        to SFC regulations, when there is a deduction item in
        stockholders equity during the year, an amount equal
        to the deduction item before appropriation must be included
        as a special reserve within retained earnings. The special
        reserve will be available for dividend distribution only
        after the related stockholders equity deduction
        item has been reversed.  In
        2001, the Company did not distribute any employees
        bonuses and directors and supervisors remuneration.   (Continued) F-27      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (e)
      Treasury stock  Based
        on a board of directors resolution on December 16, 2002,
        the Company repurchased its own shares from Taiwan Securities
        Exchange for use as employee bonus shares in future periods.
        The Company owned treasury stock amounting to 9,041 thousand
        shares with a total cost of NT$182,849 thousand during
        the year ended December 31, 2002. None of the treasury
        stock has been disposed of or transferred to employees
        as of December 31, 2002.  The
        SFC regulations imposed to treasury stock transaction
        are as follows:  1.
      Total shares of treasury stock shall not exceed 10% of
        the Companys common stock issued.  2.
      Total treasury stock purchases shall not exceed sum of
        retained earnings and capital surplus derived from premiums
        on capital stock plus other realized capital surplus.  3.
      Treasury stock shall not be pledged, nor does it possess
        voting rights or receive dividends until it is disposed
        of or transferred to employees.  **(18)**
      **Income
        Taxes**  (a)
      The Company is authorized to be a Science-based
        industry and Important technology-based industry
        as defined by the Republic of China Statute for the Establishment
        and Administration of Science-based Industrial Park (the
        Statute). Commencing from January 20, 2001,
        the statutory tax rate of the Company was 25% due to the
        revision of the Statute. The Companys earnings were
        subject to an income tax rate of 20% before January 20,
        2001.  The
        Companys purchase of machinery through proceeds
        from common stock issuances met the prescribed criteria
        under the Statute and the Statute for Upgrading Industries.
        Following are the details of the Companys tax exemption
        approved by the Ministry of Finance:  **Year
        of
        investment**
      ****
      **Tax
        exemption
        products**
      ****
      **Tax
        exemption chosen**
      ****
      **Tax
        exemption
        period**1990
      
      TFT-LCD
      
      Tax
        exemption of the Companys L1 facilitycorporate
        income taxes for four years
      
      1997-20011993
      
      TFT-LCD
      
      Tax
        exemption of the Companys L1 facilitycorporate
        income taxes for four years
      
      2000-20031999
      
      TFT-LCD
      
      Tax
        exemption of the Companys L2 facilitycorporate
        income taxes for four years
      
      2002-20051996
      
      TFT-LCD
      
      Tax
        exemption of the Companys L5 facilitycorporate
        income taxes for five years
      
      2003-2007   (Continued) F-28      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (b)
      The components of income tax expense (benefit) are summarized
        as follows:  **For
        the year ended December 31,****2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Current
        income tax expense
      
      2,865
      
      2,471
      
      91
      
      3Deferred
        income tax benefit
      
      (929,195
      )
      (36,792
      )
      -
      
      -**(926,330**
      **)**
      **(34,321**
      **)**
      **91**
      ****
      **3**  The
        differences between income tax expense (benefit) based
        on the statutory income tax rate and the income tax expense
        (benefit) as reported in the accompanying consolidated
        statements of operations for 2000, 2001 and 2002 are summarized
        as follows:  **For
        the year ended December 31,****2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Expected
        income tax expense (benefit)
      
      387,277
      
      (1,686,138
      )
      1,505,680
      
      43,391Tax
        exemption
      
      (53,817
      )
      -
      
      (234,220
      )
      (6,750
      )Write-off
        of loss carryforwards before merger
      
      -
      
      884,193
      
      -
      
      -Investment
        tax credits
      
      (2,143,479
      )
      (3,034,847
      )
      (1,505,926
      )
      (43,398
      )Increase
        (decrease) in valuation allowance
      
      895,321
      
      3,808,557
      
      (100,509
      )
      (2,896
      )Write
        off of loss carry forwards-
      
      -
      
      311,383
      
      8,973Other
      
      (11,632
      )
      (6,086
      )
      23,683
      
      683Income
        tax expense (benefit)
      
      **(926,330**
      **)**
      **(34,321**
      **)**
      **91**
      ****
      **3**  Pursuant
        to Republic of China Income Tax Law, Unipacs loss
        carryforwards prior to the merger are not eligible for
        use by the Company after the merger. As a result, deferred
        tax assets related to the loss carryforwards that were
        previously recognized by Unipac were written off in 2001.   (Continued) F-29      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (c)
      The components of deferred income tax assets (liabilities)
        are summarized as follows:  **December
        31,****2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Current:Provision
        for inventory obsolescence
      
      99,326
      
      98,573
      
      2,841Unrealized
        foreign exchange loss (gain)
      
      (67,594
      )
      19,994
      
      576Unrealized
        loss and expenses
      
      49,736
      
      113,337
      
      3,266Investment
        tax credits
      
      146,181
      
      1,903,818
      
      54,865Other
      
      1,000
      
      -
      
      -228,649
      
      2,135,722
      
      61,548Valuation
        allowance
      
      (146,181
      )
      (1,461,893
      )
      (42,129
      )Net
        deferred tax assetscurrent
      
      **82,468**
      ****
      **673,829**
      ****
      **19,419**Non-current:Overseas
        investment loss under the equity method
      
      23,958
      
      227,414
      
      6,554Difference
        between the carrying amounts and the taxbasis
        of accumulated depreciation
      
      (548,280
      )
      (878,192
      )
      (25,308
      )Investment
        tax credits
      
      6,294,122
      
      6,012,431
      
      173,269Net
        operating loss carryforwards
      
      1,621,233
      
      -
      
      -Other
      
      -
      
      21,798
      
      6287,391,033
      
      5,383,451
      
      155,143Valuation
        allowance
      
      (4,951,492
      )
      (3,535,271
      )
      (101,881
      )Net
        deferred tax assetsnoncurrent
      
      2,439,541
      
      1,848,180
      
      53,262**2,522,009**
      ****
      **2,522,009**
      ****
      **72,681**Total
        gross deferred tax assets
      
      8,235,556
      
      8,397,365
      
      241,999Total
        gross deferred tax liabilities
      
      (615,874
      )
      (878,192
      )
      (25,308
      )Total
        valuation allowance
      
      (5,097,673
      )
      (4,997,164
      )
      (144,010
      )**2,522,009**
      ****
      **2,522,009**
      ****
      **72,681**   (Continued) F-30      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (d)
      According
        to the Statute for Upgrading Industries, the purchase
        of machinery for the automation of production and pollution
        control, expenditure for research and development and
        training of professional personnel entitles the Company
        to tax credits. This credit may be applied over a period
        of five years. The amount of the credit that may be applied
        in any year except the final year is limited to 50% of
        the income tax payable for that year. There is no limitation
        on the amount of investment tax credit that may be applied
        in the final year. As of December 31, 2002, the Companys
        remaining investment tax credits and their related expiration
        years were as follows:  **Year
        occurred**
      ****
      **Unused
        tax credits**
      ****
      **Expiration
        year****NT$**
      ****
      **NT$**(in
        thousands)1999
      
      1,903,818
      
      54,865
      
      20032000
      
      3,144,940
      
      90,632
      
      20042001
      
      1,335,688
      
      38,492
      
      20052002
      
      1,531,803
      
      44,145
      
      2006**7,916,249**
      ****
      **228,134**  (e)
      The tax authorities assessed Unipac additional income
        tax for 1995 in the amount of NT$11,223 thousand. The
        additional assessments were mainly due to different interpretations
        of inventory obsolescence losses. The Company disagreed
        with the assessments and subsequently filed tax appeals.
        The loss on inventory obsolescence was physically investigated
        by the Republic of China Customs and approved by the Administration
        Bureau of Science-based Industrial Park. As a result,
        the Company did not recognize the assessed additional
        income tax, and is awaiting a resolution of this appeal.  In
        addition, the 1997 and 1998 income tax returns have been
        assessed by the tax authorities for additional income
        tax payable of NT$7,326 thousand and NT$7,694 thousand,
        respectively. The additional assessments resulted from
        different recognition of the research and development
        subsidies. The Company disagreed with the assessments
        and subsequently filed tax appeals. The Company did not
        recognize the assessed additional income tax, and is awaiting
        a favorable resolution of these appeals.  As
        of December 31, 2002, the tax authorities had assessed
        the income tax returns of the Company and Unipac through
        1998.   (Continued) F-31      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (f)
      Information about the integrated income tax system  Beginning
        in 1998, an integrated income tax system was implemented
        in the Republic of China. Under the new tax system, the
        income tax paid at the corporate level can be used to
        offset the Republic of China resident stockholders
        individual income tax. The Company is required to establish
        an Imputation Credit Account (ICA) to maintain a record
        of the corporate income taxes paid and imputation credit
        that can be allocated to each stockholder. The credit
        available to the Republic of China resident stockholders
        is calculated by multiplying the dividend by the creditable
        ratio. The creditable ratio is calculated as the balance
        of the ICA divided by earnings retained by the Company
        since January 1, 1998.  Information
        related to the ICA is summarized below:  **December
        31,****2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Unappropriated
        earnings (accumulated deficits):Earned
        after January 1, 1998
      **(3,997,843**
      **)**
      **6,022,669**
      
      **173,564******
      
      ****ICA
        balance
      **1,068**
      
      **5,770**
      
      **166******
      
      ****Creditable
        ratio for earnings distribution to theRepublic
        of China resident stockholders
      **-**
      
      **0.10**
      **%******
      
      ****  **(19)**
      **Earnings
        Per Common Share**  Earnings
        per common share in 2000, 2001 and 2002 are computed as
        follows:  **For
        the year ended December 31,****2000**
      ****
      **2001**
      
      **2002****Pre-tax**
      ****
      **After
        tax**
      ****
      **Pre-tax**
      
      **After
        tax**
      
      **Pre-tax**
      ****
      **After
        tax**(in
        thousands)Basic
        earnings per share:Net
        income (loss)
      
      **1,936,385**
      ****
      **2,862,715**
      ****
      **(6,744,551**
      **)**
      **(6,710,230**
      **)**
      **6,022,760**
      ****
      **6,022,669**Weighted
        average number of sharesoutstanding
        (thousand shares):Shares
        of common stock at thebeginning
        of the year
      
      2,384,945
      
      2,384,945
      
      2,384,945
      
      2,384,945
      
      2,970,582
      
      2,970,582Issuance
        of common stock for cash
      
      -
      
      -
      
      283,002
      
      283,002
      
      291,667
      
      291,667Transfer
        of retained earningsto
        common stock
      
      -
      
      -
      
      202,051
      
      202,051
      
      -
      
      -Treasury
        stock
      
      -
      
      -
      
      -
      
      -
      
      (377
      )
      (377
      )Certificates
        exchangeable forcommon
        shares
      
      -
      
      -
      
      -
      
      -
      
      377,927
      
      377,927Weighted
        average number of sharesoutstanding
        during the year
      
      **2,384,945**
      ****
      **2,384,945**
      ****
      **2,869,998**
      ****
      **2,869,998**
      ****
      **3,639,799**
      ****
      **3,639,799**Basic
        earnings per share (NT$)
      
      **0.81**
      ****
      **1.20**
      ****
      **(2.35**
      **)**
      **(2.34**
      **)**
      **1.65**
      ****
      **1.65**   (Continued) F-32      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  **For
        the year endedDecember 31,****2002****Pre-tax**
      
      **After
        tax****(in
        thousands)**Diluted
        earnings per share:Net income
      6,022,760
      
      6,022,669Effects
        of potential common shares:Adjustment
        for interest ofconvertiblebonds
        payable
      170,825
      
      128,119**6,193,585**
      
      **6,150,788**Shares
        of common stock at thebeginning
        ofthe year
      2,970,582
      
      2,970,582Potential
        number of common shares assumedupon
        conversion of convertible bonds
      632,910
      
      632,910Issuance
        of common stock for cash
      291,667
      
      291,667Treasury
        stock
      (377
      )
      (377
      )Weighted
        average number of sharesoutstanding
        during the year
      **3,894,782**
      
      **3,894,782**Diluted
        earnings per share (NT$)
      **1.59**
      
      **1.58**  **(20)**
      **Financial
        Instruments**  (a)
      Non-derivative
        financial instruments  The
        Companys non-derivative financial assets include
        cash and cash equivalents, short-term investments, notes
        and accounts receivable, restricted cash in banks, receivables
        from related parties and long-term investments. The Companys
        non-derivative financial liabilities consist of short-term
        borrowings, long-term borrowings, bonds payable, commercial
        paper, convertible bonds payables, accounts payable, payables
        to related parties, and equipment and construction in
        progress payables.  As
        of December 31, 2001 and 2002, the carrying amounts of
        non-derivatives financial instruments that were not equal
        to their fair values were as follows:  **December
        31, 2001****Carrying****Fair
        value**
      
      **amount****NT$**
      
      **NT$**Assets:Short-term
        investments
      5,507,748
      
      5,026,543Liabilities:Bonds
        payable
      3,167,751
      
      3,000,000Convertible
        bond payable
      17,600,000
      
      10,028,796   (Continued) F-33      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  **December
        31, 2002****Fair
        value**
      
      **Carrying
        amount****NT$**
      
      **US$**
      
      **NT$**
      
      **US$**(in
        thousands)Assets:Short-term
        investments
      3,231,835
      
      93,136
      
      3,231,835
      
      93,136Liabilities:Bonds
        payable
      2,086,635
      
      60,134
      
      1,992,000
      
      57,406Convertible
        bond payable
      1,612,926
      
      46,482
      
      1,286,882
      
      37,086  The
        following methods and assumptions are used to estimate
        the fair value for each class of non-derivative financial
        instruments:  1.
      The carrying amounts of cash and cash equivalents, notes
        and accounts receivable, restricted cash in banks, accounts
        payable, payables to related parties, equipment and construction
        in progress payables and short-term borrowings approximate
        their fair value due to the short-term nature of these
        items.  2.
      The fair value of short-term investments is based on publicly
        quoted market prices.  3.
      It is not practicable to determine the fair value of long-term
        equity investments when these investments are not publicly
        traded. Refer to note 8 for information on the carrying
        amount.  4.
      Long-term borrowings and long-term commercial paper are
        issued at floating rates. The fair value approximates
        their carrying value. Refer to notes 12 and 13.  5.
      The fair value of bonds payable is based on the present
        value, which is forecasted and discounted using cash flows
        and interest rates of similar liabilities. The fair value
        of convertible bonds payable is based on publicly quoted
        market prices for the convertible bonds.   (Continued) F-34      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (b)
      Derivative
        financial instruments  1.
      Interest
        rate swaps  The
        Company has entered into interest rate swap transactions
        to hedge its exposure to changes in cash flows associated
        with rising interest rates on its floating rate long-term
        commercial paper. As of December 31, 2001 and 2002, interest
        rate swap contracts outstanding were as follows:  **December
        31, 2001****Fixed**
      
      **Variable****Notional**
      **interest**
      
      **interest
        rate****Bank**
      **Maturity**
      **amount**
      **rate
        paid**
      
      **received**
      
      **Fair
        value****NT$**
      
      
      
      
      **NT$**(in
        thousands)Citibank
        N.A.
      June
        17, 2002
      500,000
      6.25
      %
      2.392
      %
      (9,568
      )Chinatrust
      September
        17, 2002
      500,000
      6.25
      %
      2.392
      %
      (14,188
      )ABN
        Amro
      December
        17, 2002
      500,000
      5.98
      %
      2.392
      %
      (17,218
      )Citibank
        N.A.
      March
        17, 2004
      500,000
      5.65
      %
      2.392
      %
      (17,380
      )Chinatrust
      March
        17, 2004
      500,000
      5.75
      %
      2.392
      %
      (29,550
      )Chinatrust
      March
        17, 2004
      500,000
      5.96
      %
      2.392
      %
      (31,835
      )Chinatrust
      March
        17, 2004
      500,000
      6.08
      %
      2.392
      %
      (33,140
      )(152,879
      )  **December
        31, 2002****Fixed**
      
      **Variable****Notional**
      **interest**
      
      **interest
        rate****Bank**
      **Maturity**
      **amount**
      **rate
        paid**
      
      **received**
      
      **Fair
        value****NT$**
      
      
      
      
      **NT$**


(in
        thousands)Citibank
        N.A.
      March
        17, 2004
      300,000
      5.65
      %
      1.602
      %
      (9,061
      )Chinatrust
      March
        17, 2004
      500,000
      5.75
      %
      1.602
      %
      (25,825
      )Chinatrust
      March
        17, 2004
      500,000
      5.96
      %
      1.602
      %
      (27,122
      )Chinatrust
      March
        17, 2004
      500,000
      6.08
      %
      1.602
      %
      (27,863
      )(89,871
      )  These
        agreements require the Company to make periodic fixed
        rate payments while receiving periodic variable rate payments
        indexed to the 90-day Taipei Money Market Secondary middle
        rate at 11:00 am Taipei Time determined on a simple average
        of rates appearing on Telerate page 6165.  The
        additional interest expense as a result of these interest
        rate swap contracts for the years ended December 31, 2000,
        2001 and 2002 was NT$36,284 thousand, NT$63,930 thousand
        and NT$110,176 thousand, respectively.   (Continued) F-35      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  2.
      Foreign
        currency forward contracts  The
        Company used foreign currency forward contracts to hedge
        existing assets and liabilities denominated in foreign
        currencies and identifiable foreign currency purchase
        commitments. The counter parties of the Companys
        derivative contracts are reputable financial institutions.  As
        of December 31, 2001 and 2002, the details of foreign
        currency forward contracts outstanding were as follows:  **December
        31, 2001****Contract**
      
      
      
      **Maturity****Buy**
      **Sell**
      
      **amount**
      **Fair
        value**
      **Settlement
        date**
      
      **amount****US$**
      **NT$**(in
        thousands)NTD
      USD
      
      25,000
      (13,271)
      January
        25, 2002
      NTD
      861,452USD
      NTD
      
      19,000
      2,478
      January
        10,2002 -
      USD
      19,000January
        25, 2002YEN
      USD
      
      36,000
      (27,767)
      January
        10,2002 -
      YEN
      4,618,190January
        25, 2002**(38,560)****December
        31, 2002****Contract**
      
      
      
      **Maturity****Buy**
      **Sell**
      
      **amount**
      **Fair
        value**
      **Settlement
        date**
      
      **amount****NT$**(in
        thousands)NTD
      USD
      US$
      388,000
      (22,720)
      January
        10, 2003-
      NTD
      13,466,516April
        10, 2003YEN
      NTD
      NT$
      2,977,245
      102,505
      January
        24, 2003-
      YEN
      10,500,000February
        25, 2003YEN
      USD
      US$
      30,000
      5,581
      February
        10, 2003-
      YEN
      3,577,025February
        25, 2003YEN
      RMB
      RMB$
      42,000
      (3,808)
      January
        13, 2003
      YEN
      593,18781,558  The
        fair value of the derivative financial instruments is
        estimated based on quoted market prices from brokers or
        banks.  As
        of December 31, 2000, 2001 and 2002, the unrealized gain
        (loss) based on the spot rates of the above foreign currency
        forward contracts was NT$(662) thousand, NT$(59,009) thousand
        and NT$101,956 thousand, respectively. The realized gain
        (loss) resulting from foreign currency forward contracts
        was NT$(61,609) thousand, NT$11,343 thousand and NT$66,683
        thousand in 2000, 2001 and 2002, respectively.   (Continued) F-36      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements   The
        details of the above foreign currency forward contracts
        balance as of December 31, 2001 and 2002 is as follows:  **December
        31,****2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Foreign
        currency forward contracts receivable
      
      2,092,101
      
      17,758,830
      
      511,782Foreign
        currency forward contracts payable
      
      (2,134,939
      )
      (17,680,344
      )
      (509,520
      )Unamortized
        premium
      
      11,318
      
      12,727
      
      367Foreign
        currency forward contract receivable (payable), net
      
      **(31,520**
      **)**
      **91,213**
      ****
      **2,629**  (c)
      Credit and other risk relating to financial instruments  1.
      Credit risk related to non-derivative instruments  The
        Companys potential credit risk is derived primarily
        from cash in bank, short-term investments, and accounts
        receivable.  The
        Company maintains its cash and short-term investments
        with various reputable financial institutions. The Company
        performs periodic evaluations of the relative credit standing
        of these financial institutions and limits the amount
        of credit exposure with any one institution. As a result,
        the Company believes that there is a limited concentration
        of credit risk in cash and investments.  The
        majority of the Companys customers are in the notebook
        personal computer and LCD monitor industry. The Company
        continuously evaluates the credit quality of its customers.
        If necessary, the Company will require collateral from
        those customers. In addition, the Company evaluates the
        collectibility of trade receivables and provides adequate
        reserves for bad debts, if necessary. It is managements
        belief that there will be no significant losses due to
        concentration of credit.  2.
      Credit risk relating to derivative instruments  Credit
        risk represents the accounting loss that would be recognized
        at the reporting date if the counter parties failed to
        perform. Credit risk will increase as the derivative instruments
        become more profitable to the Company. The Company entered
        into the above derivative contracts with major international
        foreign banks or reputable local banks. The likelihood
        of default on the part of the banks is considered remote.   (Continued) F-37      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  3.
      Market price risk relating to derivative instruments  Market
        price risk represents the accounting loss that would be
        recognized at the reporting date for the derivative financial
        instruments due to the changes in market interest rates
        or foreign exchange rates. As the Companys derivative
        financial instruments are for hedging purposes, the gains
        or losses due to changes in interest rates or foreign
        exchange rates will be offset by the hedged items. As
        a result, market price risk is considered low.  4.
      Liquidity risk  Liquidity
        risk is the risk of being unable to settle the derivative
        contracts on schedule. The purpose of these instruments
        held by the Company is to manage and hedge changes in
        cash flows and risks associated with floating interest
        rate debt and foreign currency rates. There is no significant
        liquidity risk for the related cash flows.  The
        fair values of the financial instruments disclosed herein
        are not necessarily representative of the potential gain
        or loss that could be realized under current credit and
        market price risks. The Company does not believe a significant
        loss on the above financial derivative contracts will
        occur.  **(21)**
      **Related-party
        Transactions**  (a)
      Name and relationship  **Name
        of related party**
      ****
      **Relationship
        with the Company**BenQ
        Inc. (BenQ)
      
      Shareholder
        and represented on the Companys board of directors,
        formerly known as Acer Communications & Multimedia
        Inc.United
        Microelectronics Corp. (UMC)
      
      Shareholder
        and represented on the Companys board of directorsChiao
        Tung Bank Taiwan, Republic of China (CTB)
      
      Shareholder
        and represented on the Companys board of directors
        before May 16, 2002BenQ
        Mexican, S.A. De C. V. (BQX)
      
      Subsidiary
        of BenQBenQ
        (IT) Co., Ltd. Suzhou (BQS)
      
      Investee
        of BenQAcer
        Inc. (AI)
      
      Shareholder
        and represented on BenQs board of directorsAcer
        Sertek Inc. (Sertek)
      
      Investee
        of AI (On March 27, 2002, Sertek was merged with and into
        AI)Min
        Tour Inc. (MTI)
      
      Investee
        of AIWistron
        Corp. (Wistron)
      
      Subsidiary
        of AIWistron
        Infocomm (Philippines) Corp. (WPH)
      
      Subsidiary
        of Wistron   (Continued) F-38      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  **Name
        of related party**
      ****
      **Relationship
        with the Company**Aopen
        Inc. (Aopen)
      
      Investee
        of WistronFaraday
        Technology Corp. (Faraday)
      
      Investee
        of UMCNovatek
        Microelectronics Corp. (NVT)
      
      Investee
        of UMCApplied
        Component Technology Corp. (ACT)
      
      Investee
        of UMCUnimicron
        Technology Corp.(UTC, formerly known as World
        Wiser Electronics Inc.)
      
      Investee
        of UMC  (b)
      Significant transactions with related parties  1.
      Sales and trade receivables  Net
        sales to related parties were as follows:  **For
        the year ended December 31,****2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)BQS
      
      -
      
      -
      
      9,922,932
      
      285,963BenQ
      
      884,120
      
      6,696,443
      
      5,823,413
      
      167,822WPH
      
      89,776
      
      1,399,799
      
      2,104,295
      
      60,643Wistron
      
      -
      
      -
      
      1,017,734
      
      29,330AI
      
      3,714,850
      
      1,479,904
      
      853,692
      
      24,602ACT
      
      -
      
      114,757
      
      747,615
      
      21,545BQX
      
      -
      
      -
      
      721,631
      
      20,796Aopen
      
      -
      
      -
      
      301,573
      
      8,691Other
      
      4,992
      
      1,500
      
      533
      
      15**4,693,738**
      ****
      **9,692,403**
      ****
      **21,493,418**
      ****
      **619,407**  The
        credit policy for sales to related parties and other customers
        is letter of credit on 15 to 60 days and 30 to 60 days,
        respectively. The average collection days extended for
        sales to related parties for the years ended December
        31, 2000, 2001 and 2002 are 32 days, 52 days and 51 days,
        respectively, and for other customers are 33 days, 61
        days and 64 days, respectively. The product price and
        other terms for sales to related parties are similar to
        other unrelated customers.   (Continued) F-39      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  As
        of December 31, 2001 and 2002, receivables resulting from
        the above transactions were as follows:  **December
        31,****2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)BQS
      
      -
      
      3,038,663
      
      87,570BenQ
      
      1,983,056
      
      -
      
      -AI
      
      7,426
      
      218,994
      
      6,311BQX
      
      -
      
      157,866
      
      4,549WPH
      
      332,931
      
      35,584
      
      1,025ACT
      
      89,684
      
      65,292
      
      1,882Other
      
      215
      
      121,034
      
      3,488Less:
        allowance for doubtful accounts
      
      (8,285
      )
      (5,370
      )
      (155
      )**2,405,027**
      ****
      **3,632,063**
      ****
      **104,670**  2.
      Purchases  Purchases
        from related parties were as follows:  **For
        the year ended December 31,****2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)BenQ
      
      111,614
      
      1,106,116
      
      1,176,992
      
      33,919NVT
      
      498,317
      
      734,327
      
      2,370,324
      
      68,309Faraday
      
      128,753
      
      100,744
      
      144,707
      
      4,170UTC
      
      2,767
      
      76,319
      
      -
      
      -Others
      
      63,397
      
      3,184
      
      11,260
      
      325**804,848**
      ****
      **2,020,690**
      ****
      **3,703,283**
      ****
      **106,723**  The
        purchase prices and payment terms with these related parties
        were not materially different from those with other unrelated
        vendors. The payment period was both 30 to 120 days in
        2001 and 2002.   (Continued) F-40      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  3.
      Acquisition of property, plant and equipment  Acquisition
        of property, plant, equipment and computer software from
        related parties for the years ended December 31, 2000,
        2001 and 2002 was as follows:  **For
        the year ended December 31,****2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)BenQ
      
      24,516
      
      7,178
      
      -
      
      -AI
      
      -
      
      29,766
      
      38,331
      
      1,105Sertek
      
      57,138
      
      32,124
      
      -
      
      -Others
      
      292
      
      12,803
      
      34,345
      
      990**81,946**
      ****
      **81,871**
      ****
      **72,676**
      ****
      **2,095**  4.
      Sales of equipment  Sales
        of equipment to UMC for the year ended December 31, 2002,
        amounted to NT$44,448 thousand. The related loss amounted
        to NT$157 thousand, which was included in non-operating
        loss. As of December 31, 2002, the receivable resulting
        from the above transaction was NT$1,954 thousand.  5.
      Operating leases and refundable deposits  The
        Company entered into lease agreements for land, building,
        dormitory and equipment with related parties. The related
        rent expenses and administration fees for the years ended
        December 31, 2000, 2001 and 2002, were as follows:  **For
        the year ended December 31,****2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)UMC
      
      65,884
      
      65,186
      
      41,355
      
      1,192MTI
      
      54,488
      
      62,697
      
      67,207
      
      1,937Others
      
      10,335
      
      6,502
      
      482
      
      14**130,707**
      ****
      **134,385**
      ****
      **109,044**
      ****
      **3,143**   (Continued) F-41      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  As
        of December 31, 2001 and 2002, refundable deposits resulting
        from the above transactions were as follows:  **December
        31,****2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)MTI
      
      867,000
      
      867,000
      
      24,986Other
      
      208
      
      100
      
      3**867,208**
      ****
      **867,100**
      ****
      **24,989**  The
        Company leased part of its L5 facility to related parties.
        The rental income amounted to NT$6,166 thousand; NT$24,809
        thousand and NT$30,067 thousand for the years ended December
        31, 2000, 2001 and 2002, respectively. As of December
        31, 2001 and 2002, rental and other receivables, recorded
        as receivables, were NT$23,653 thousand and NT$12,386
        thousand, respectively.  6.
      Other  In
        2001, AI provided market promotion services to the Company
        for a fee (recorded as selling expense) in the amount
        of NT$51,948 thousand, which had been paid in full as
        of December 31, 2001.  Amounts
        paid to related parties for reimbursement of miscellaneous
        expenditures paid on behalf of the Company amounted to
        NT$40,825 thousand; NT$36,722 thousand and NT$48,061 thousand
        for the years ended December 31, 2000, 2001 and 2002,
        respectively.  As
        of December 31, 2001 and 2002, amounts due to related
        parties that resulted from the above purchases, acquisition
        of property, plant and equipment; lease agreements and
        operating expenses were as follows:  **December
        31,****2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)BenQ
      
      237,650
      
      40,152
      
      1,157NVT
      
      165,353
      
      473,144
      
      13,635WWEI
      
      34,895
      
      1,491
      
      43Others
      
      55,509
      
      45,818
      
      1,321**493,407**
      ****
      **560,605**
      ****
      **16,156**   (Continued) F-42      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  7.
      Financing  The
        Companys loans from CTB are summarized as follows:  **Year**
      ****
      **Maximum
        balance**
      ****
      **Interest
        rate**
      ****
      **Ending
        balance**
      ****
      **Interest
        expenses**
      ****
      **Interest
        payable******
      ****
      **NTS$**
      ****
      ****
      ****
      **NT$**
      ****
      **NT$**
      ****
      **NT$**(in
        thousands)**2001**
      ****
      **331,849**
      ****
      **Floating**
      ****
      **-**
      ****
      **4,880**
      ****
      **-**  (22)
      Pledged
        Assets  Assets
        pledged as collateral are summarized below:  ****
      **December
        31,******
      ****
      **Pledged
        assets**
      ****
      **Pledged
        to secure**
      ****
      **2001**
      ****
      **2002******
      ****
      ****
      ****
      ****
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Restricted
        cash in banks
      
      Oil
        purchase, customs duties and guarantees for foreign workers
      
      149,542
      
      52,200
      
      1,504Building
      
      Long-term
        borrowings
      
      2,408,471
      
      2,760,727
      
      79,560Machinery
        and equipment
      
      Long-term
        borrowings, commercial paper payable and bonds payable
      
      40,732,252
      
      36,810,785
      
      1,060,830**43,290,265**
      ****
      **39,623,712**
      ****
      **1,141,894**  (23)
      Commitments
        and Contingencies  (a)
      As of December 31, 2001 and 2002, the Company had the
        following outstanding letters of credit:  ****
      ****
      **December
        31,****Currency**
      ****
      **2001**
      ****
      **2002**(in
        thousands)USD
      
      5,925
      
      18,820JPY
      
      2,116,986
      
      724,191  The
        outstanding letters of credit facilitate the Companys
        purchase of machinery and equipment from foreign suppliers.
        The letters of credit are irrevocable and expire upon
        the Companys payment of the related obligations.   (Continued) F-43      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (b)
      Technical service agreements  (i)
      In accordance with a plasma display panel co-development
        agreement dated November 21, 1996, between the Company
        and the Industrial Technology Research Institute (ITRI),
        the Company is required to pay ITRI a fixed license fee
        and running royalty based on net sales for a five-year
        period from the start of contract. The fixed license fee
        was recorded as deferred technology royalty fee and is
        being amortized over the contract period of five years.
        This license expired in 2001 and has not been renewed.  (ii)
      The
        Company entered into TFT-LCD technical transfer and co-development
        agreements with IBM in March 1998 and August 1999. In
        accordance with the agreements, the Company is required
        to pay IBM a fixed license fee and a percentage of net
        sales as a running royalty starting from the commercial
        production date. The fixed license fee was recorded as
        deferred technology royalty fee and is being amortized
        over the period of the contracts. In September 2002, the
        Company paid IBM a one time additional fee of NT$837,402
        to replace all future royalty payments due under this
        agreement. This amount was capitalized and is being amortized
        over the remaining term of the related agreements.  (iii)
      The
        Company entered into a technical cooperation agreement
        with Matsushita Electric Industrial Co., Ltd. to manufacture
        TFT-LCD modules in October 1998. In accordance with the
        agreement, the Company paid a fixed license fee upon the
        effective date, and a percentage of net sales as a running
        royalty starting from the commercial production date.
        The fixed license fee was record as deferred technology
        license and patent fees, and is being amortized over the
        period of the contract.  (iv)
      In
        July 2000, the Company entered into a five-year product
        and process technology agreement for multi-domain vertical
        alignment technologies applicable to liquid crystal display
        modules with Fujitsu Limited. In accordance with the agreement,
        the Company paid Fujitsu Limited a fixed license fee and
        an ongoing percentage of net sales as running royalty
        of the licensed products. The fixed license fee was recorded
        as deferred fixed license and patent fees, and is being
        amortized over the contract period.  The
        details of the above capitalized technology fixed license
        and patents fees for product and process technology were
        as follows:  **December
        31,****2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Technology
        fixed license and patent fees
      
      5,081,757
      
      6,195,253
      
      178,537Less:
        accumulated amortization
      
      (2,012,124
      )
      (3,210,798
      )
      (92,530
      )**3,069,633**
      ****
      **2,984,455**
      ****
      **86,007**  Amortization
        of capitalized technology fixed license and patent fees
        amounted to NT$831,765 thousand, NT$887,351 thousand and
        NT$1,198,674 thousand in 2000, 2001 and 2002, respectively.   (Continued) F-44      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (c)
      Government grants  (i)
      The Company entered into an agreement on April 14, 2000,
        with the Ministry of Economic Affairs (MOEA)
        to obtain grants from MOEA for the 50" PDP Module
        Technology research and develop project from January
        1, 2000 to March 31, 2002. According to the agreement,
        the grants totaled NT$43,333 thousand. The Company has
        the legal ownership of the result from the project. For
        the years ended in December 31, 2000, 2001, and 2002,
        the grants from MOEA, recognized as non-operating income,
        amounted to NT$21,016, NT$16,738 thousand, and NT$5,579
        thousand, respectively. The Company provided an off-balance
        sheet guarantee of NT$43,333 thousand to guarantee the
        completion of the project as of December 31, 2001. The
        Company has completed the project in 2002.  (ii)
      The
        Company entered into an agreement in December 2002 with
        the MOEA to obtain grants from MOEA for the Full
        Color Active Matrix Organic Light Emitting Display Technology
        research and develop project from December 1, 2002 to
        May 31, 2004. According to the agreement, the grants totaled
        NT$25,100 thousand. The Company has the legal ownership
        of the result of the project. For the year ended in December
        31, 2002, the grant from MOEA, recognized as non-operating
        income, amounted to NT$1,560 thousand. The Company provided
        an off-balance-sheet guarantee of NT$30,120 thousand to
        guarantee the completion of the project as of December
        31, 2002.  (d)
      As of December 31, 2001 and 2002, outstanding commitments
        for purchase agreements for major machinery and equipment
        totaled NT$6,806,074 thousand and NT$24,264,403 thousand,
        respectively.  (e)
      Operating leases agreements  The
        Company entered into land lease agreements with Min Tour
        Inc. and the Science-based Industrial Park Administration
        Bureau for a period of 14 to 15 years and 20 years, respectively.
        In accordance with the lease agreements, rental payments
        are subject to adjustment 5 percent each year or as the
        government reappraises the land value, respectively.   (Continued) F-45      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  Future
        minimum lease payments as of December 31, 2002, under
        the existing non-cancelable agreements are:  **Years**
      **Minimum
        lease payments****NT$**
        (in thousands)2003
      149,1992004
      152,7282005
      156,4342006
      160,3252007
      164,411After
        2008
      1,675,662  Rental
        expense for operating leases amounted to NT$278,962 thousand,
        NT$264,798 thousand and NT$231,548 thousand in 2000, 2001
        and 2002, respectively.  (f)
      Litigation  (i)
      In November 2000, Sharp Corp. (Sharp) notified
        Unipac, along with several other Taiwan TFT-LCD manufactures,
        of Sharps claim that certain of its patents had
        been infringed. Sharp claimed in its formal notice to
        Unipac that five of Sharps Taiwan patents had been
        infringed by Unipacs production of four TFT-LCD
        modules. Subsequently, Sharp made a criminal complaint
        against certain officers of Unipac with the Public Prosecutors
        Office in the Hsin-Chu District Court, naming the Chairman
        of Unipac, as a defendant. As of January 23, 2003, the
        court had discharged the former Chairman of Unipac, and
        as for the other part of the investigation, the Public
        Prosecutors Office has not concluded the investigation.  The
        Company cannot predict the outcome of Sharps criminal
        complaint. Neither Sharp nor any third party has brought
        any civil or criminal action against the Company in connection
        with the claimed patent infringement described above.
        Management does not believe that any of the five patents
        that are the subject of Sharps complaint is material
        to the Companys current operations.  (ii)
      In
        June 2002, Semiconductor Energy Laboratory Co., Ltd. (SEL)
        notified the Company that the Companys manufacturing
        technologies had infringed its patents. On June 28, 2002,
        the Company received the official prosecution notice with
        SEL from the United States District Court of U.S.A. The
        Company is evaluating, analyzing and preparing the related
        documents for future investigation, and currently, the
        proceeding has not moved to the stage of discovery.  Management
        believe that the ultimate resolution of these above matters
        will not have a material effect on the Companys
        results of operations or financial position.   (Continued) F-46      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  To
        the Companys knowledge, there are no other asserted
        claims or litigation that could have or that have in the
        recent past, had any significant impact on its business
        results, financial situation, or ownership of assets and
        liabilities.  **(24)**
      **Segment
        Information**  (a)
      Industrial information  The
        Company consists of a single reportable operating segment,
        namely, the research, development, production and sale
        of TFT-LCDs, and other flat panel displays.  (b)
      Geographic information  Geographical
        breakdown of sales for the years ended December 31, 2000,
        2001 and 2002 are summarized as follows:  **For
        the year ended December 31,****2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Taiwan
      
      18,165,010
      
      28,685,638
      
      40,091,288
      
      1,155,369The
        Peoples Republic of China
      
      -
      
      636,084
      
      18,341,517
      
      528,574Other
        (individually less than 10% oftotal
        net sales)
      
      7,418,209
      
      8,266,903
      
      17,256,360
      
      497,301**25,583,219**
      ****
      **37,588,625**
      ****
      **75,689,165**
      ****
      **2,181,244**  Sales
        are attributed to countries based upon the origin of the
        sales.  The
        long-lived assets relating to above geographic areas were
        as follows:  **For
        the year ended December 31,****2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$**(in
        thousands)Taiwan
      
      64,313,291
      
      68,593,178
      
      72,983,829
      
      2,103,281The
        Peoples Republic of China
      
      -
      
      145,341
      
      2,663,249
      
      76,751Other
      
      636
      
      717
      
      3,452
      
      99**64,313,927**
      ****
      **68,739,236**
      ****
      **75,650,530**
      ****
      **2,180,131**   (Continued) F-47      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (c)
      Major customer information  For
        the years ended December 31, 2000, 2001 and 2002, sales
        to individual customers representing greater than 10 percent
        of consolidated revenues were as follows:  **For
        the year ended December 31,****2000**
      ****
      **2001**
      ****
      **2002****Amount**
      ****
      **%**
      ****
      **Amount**
      ****
      **%**
      ****
      **Amount**
      ****
      **%****NT$**
      ****
      ****
      ****
      **NT$**
      ****
      ****
      ****
      **NT$**
      ****
      **US$**
      ****
      ****(in
        thousands)AI
      
      3,714,850
      
      15
      
      1,479,904
      
      4
      
      853,692
      
      24,602
      
      1IBM
      
      2,640,969
      
      10
      
      218,666
      
      1
      
      
      
      
      
      BenQ
      
      884,120
      
      3
      
      6,696,443
      
      18
      
      5,823,413
      
      167,822
      
      8Matsushita
      
      2,607,025
      
      10
      
      1,545,958
      
      4
      
      1,308,517
      
      37,709
      
      2BQS
      
      
      
      
      
      
      
      
      
      9,922,932
      
      285,963
      
      13Total
        net sales to majorcustomers
      
      **9,846,964**
      ****
      **38**
      ****
      **9,940,971**
      ****
      **27**
      ****
      **17,908,554**
      ****
      **516,096**
      ****
      **24**  **(25)**
      **Reclassifications**  Certain
        amounts in the 2000 and 2001 financial statements have
        been reclassified to conform to the 2002 presentation
        for comparison purpose. These reclassifications do not
        have a significant impact on the consolidated financial
        statements.  **(26)**
      **Summary
        of Significant Differences Between Accounting Principles
        Followed by the Company and Accounting Principles Generally
        Accepted in the United States of America**  The
        accompanying consolidated financial statements have been
        prepared in conformity with accounting principles generally
        accepted in the Republic of China (ROC GAAP), which differ
        in certain material respects from accounting principles
        generally accepted in the United States of America (US
        GAAP). A discussion of the material differences between
        US GAAP and ROC GAAP as they apply to the Company is as
        follows:   (Continued) F-48      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (a)
      Business combination  The
        Company completed its merger with Unipac on September
        1, 2001 through the issuance of 1,512,281 thousand common
        shares in exchange for all of the outstanding shares of
        Unipac. Under ROC GAAP, the merger was accounted for using
        the pooling-of-interests method and, accordingly, all
        prior period consolidated financial statements of AU have
        been restated to include the results of operations, financial
        position and cash flows of Unipac. Further, according
        to Republic of China Company Law, the excess of Unipacs
        net assets over par value of the Companys issued
        common stock for completion of the merger has been appropriated
        from unappropriated earnings and recorded as capital surplus.
        Under US GAAP, the merger has been accounted for as the
        acquisition of Unipac by the Company using the purchase
        method of accounting. Under purchase accounting, the aggregate
        purchase price of NT$39,636,901 thousand was calculated
        based on the market value of the shares issued and such
        amount was allocated to the assets acquired and liabilities
        assumed based on their respective fair values. The market
        value of the shares was based on the average market price
        of the Companys common shares over the five-day
        period before and after the terms of the acquisition were
        agreed upon and announced. The difference between the
        purchase price and the fair value of the assets acquired,
        including identifiable intangible assets, and liabilities
        assumed of Unipac has been recorded as goodwill. The results
        of Unipac prior to the acquisition date of September 1,
        2001 are excluded from the US GAAP results of operations.  Unipac
        was involved in the design, production and marketing of
        both small-size and large-size TFT-LCD panels. Unipac
        had a stronger position in the small-size TFT-LCD panel
        market because, as an early entrant in the TFT-LCD industry,
        Unipac initially focused on small-size panels. After the
        merger, the Company will be the only TFT-LCD manufactures
        in Taiwan, and one of the few in the world, offer TFT-LCD
        panels in a fall range of product sizes. These factors
        contributed to the purchase price.  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 Unipac.
        In determining such fair values, management considered
        a number of factors, including valuation reports by third
        parties. The following table summarizes the fair value
        of the assets and liabilities of Unipac at the date of
        acquisition.   (Continued) F-49      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  **September
        1,** **2001**NT$
        (in thousands)Current
        assets
      
      10,566,296Long-term
        investments
      
      38,767Plant,
        property and equipment
      
      30,568,067Intangible
        assets
      
      8,730,382Goodwill
      
      11,599,692Other
        assets acquired
      
      443,961Total
        assets
      
      61,947,165Current
        liabilities
      
      2,763,917Long-term
        debt
      
      18,615,702Other
        liabilities
      
      930,645Total
        liabilities assumed
      
      22,310,264Net
        assets acquired
      
      **39,636,901**  Of
        the NT$8,730,382 thousand of acquired intangible assets,
        NT$53,450 thousand was assigned to in-process research
        and development assets that were written off at the date
        of acquisition in accordance with Financial Accounting
        Standard Board (FASB) Interpretation No. 4, Applicability
        of FASB Statement No. 2 to Business Combinations Accounted
        for by the Purchase Method. Those write-offs are
        included in research and development expenses. The remaining
        NT$8,676,932 thousand of acquired intangible assets has
        a weighted average useful life of approximately 88 months
        and no estimated residual value. Such intangible assets
        include large-size TFT-LCD panels product and process
        technology of NT$3,123,655 thousand and small and mid-size
        TFT-LCD panels product and process technology of
        NT$5,553,277 thousand. The key technology for small and
        mid-size TFT-LCD production includes the technologies
        independently developed by Unipac and 13 related patents.
        The key technology for large-size TFT-LCD production includes
        the technologies jointly developed by Unipac and Matsushita
        Electric, Industrial Co., Ltd., (Matsushita), product
        technologies developed by Unipac and the three related
        patents.  The
        fair value of Unipacs inventory (represented by
        estimated selling prices less the sum of costs of disposal
        and a reasonable profit allowance for the selling effort)
        was less than its carrying amount by approximately NT$387,901
        thousand at September 1, 2001. As a result, the amount
        allocated to Unipacs inventory in connection with
        the purchase price allocation performed under US GAAP
        was NT$387,901 thousand less than the carrying value of
        Unipacs inventory under ROC GAAP. The majority of
        the affected inventory was sold prior to December 31,
        2001, which resulted in lower cost of sales of NT$331,656
        thousand under US GAAP as compared to ROC GAAP for the
        year ended December 31, 2001. The remaining of the affected
        inventory was sold in 2002, which resulted in lower cost
        of sales of NT$56,245 thousand under US GAAP as compared
        to ROC GAAP.   (Continued) F-50      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  The
        following summarized, unaudited pro forma results of operations
        for the years ended December 31, 2000 and 2001 are presented
        as though the acquisition occurred at the beginning of
        the respective periods (dollars in thousands except per
        share amounts):  **For
        the year ended
        December 31,****2000**
      ****
      **2001**(in
        thousands)Net
        sales
      
      25,583,220
      
      37,588,625Net
        income (loss)
      
      628,999
      
      (8,279,909
      )Basic
        and diluted loss per share
      
      0.57
      
      (3.11
      )  The
        remaining purchase price of NT$11,599,692 thousand was
        allocated to goodwill. Pursuant to Statement of Financial
        Accounting Standards (SFAS) No. 141, Business Combinations,
        goodwill arising from purchase business combinations consummated
        after June 30, 2001 is not amortized but is tested for
        impairment. Amortization of goodwill is not deductible
        for tax purposes.  Effective
        January 1, 2002 for US GAAP purposes, the Company adopted
        SFAS No. 142, Goodwill and Other Intangible Assets.
        SFAS No. 142 classifies intangible assets into three categories:
        1) intangible assets with definite lives subject to amortization;
        2) intangible assets with indefinite lives not subject
        to amortization; and 3) goodwill. For intangible assets
        with definite lives, tests for impairment must be performed
        if conditions exist that indicate that the carrying value
        may not be recoverable. The Company has no intangible
        assets with indefinite lives. Goodwill is not amortized.  The
        Company performs tests of impairment of goodwill annually
        or more frequently if events or circumstances indicate
        it might be impaired. Such tests include comparing the
        fair value of the reporting unit with its carrying value,
        using different methodologies, including estimates of
        sales proceeds, appraisals, and market capitalization
        values. In 2002, the Company tested goodwill for impairment.
        Based on these assessments, the Company concluded that
        goodwill was not impaired.  The
        Companys product and process technology intangible
        assets are amortized over their useful lives. The Company
        reviews such product and process technology assets with
        definite lives for impairment to ensure they are appropriately
        valued if conditions exist that may indicate the carrying
        value may not be recoverable. Such conditions may include
        an economic downturn in a geographic region, or a change
        in the assessment of future operations.   (Continued) F-51      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (b)
      Compensation  (i)
      Remuneration to directors and supervisors  The
        Companys articles of incorporation, which specify
        a remuneration amount of 1% of annual distributable earnings
        to be paid to its directors and supervisors. Under ROC
        GAAP, such payments are charged directly to retained earnings
        in the period stockholders approve such payment. Under
        US GAAP, such cash payments should be recorded as compensation
        expense in the period when the related services are rendered.  (ii)
      Employee
        bonuses  Certain
        employees of the Company are entitled to bonuses in accordance
        with provisions of the Companys articles of incorporation,
        which specify a bonus amount ranging from 5 % to 10 %
        of annual distributable earnings. Employee bonuses may
        be paid in cash, shares, or a combination of both. Under
        ROC GAAP, such bonuses are appropriated from retained
        earnings in the period stockholders approval is
        obtained. If such employee bonuses are settled through
        the issuance of stock, the amount charged against retained
        earnings is based on the par value of the common shares
        issued. Under US GAAP, employee bonus expense is charged
        to income in the year services are provided. Shares to
        be issued as part of these bonuses are recorded at fair
        value. Since the amount and form of the bonuses are not
        finally determinable until the stockholders meeting
        in the subsequent year, the total amount of the bonus
        is initially accrued based on the minimum cash value to
        be paid. Any difference between the amount initially accrued
        and fair value of bonuses settled by the issuance of shares
        is recognized in the year of approval by the stockholders.  (c)
      Equity method investments  The
        Company held a 21% ownership interest in PixTech as of
        December 31, 2001 and 2002. Under ROC GAAP, because the
        Company had no intention to hold PixTechs stock
        for the long term, the investment in PixTech was recorded
        as a short-term investment and accounted for at the lower
        of aggregate cost or fair value with changes in fair value
        being reported in the consolidated statements of operations.
        Under US GAAP, the investment in PixTech was accounted
        for under the equity method.  In
        2002, the Company wrote off the value of its investment
        due to the other than temporary decline in investment
        value for both ROC GAAP and US GAAP. As a result, the
        December 31, 2002 US GAAP adjustment related to PixTech
        consists of the difference in the amount of the write
        off due to the different carrying amounts of this investment
        under both ROC GAAP and US GAAP.  As
        permitted under ROC GAAP, the Company recognizes its equity
        in income (loss) of Patentop in the following year on
        a one-year lag basis. Under US GAAP, the Company recognizes
        its equity in the income (loss) of Patentop and PixTech
        in the current year.   (Continued) F-52      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (d)
      Marketable securities  Under
        ROC GAAP, marketable equity securities are carried at
        the lower of aggregate cost or market. Under US GAAP,
        equity securities that have readily determinable fair
        values are to be classified as either trading, available-for-sale
        or held-to-maturity securities. 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. Equity
        securities not classified as trading securities 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 other
        comprehensive income. The Company had no trading portfolio
        as of December 31, 2001 and 2002.  (e)
      Provision for inventory obsolescence and devaluation  A
        provision for inventory obsolescence and devaluation is
        recorded when management determines that the market values
        of inventories are less than their cost basis. Under ROC
        GAAP, such provisions can be reversed in whole or in part
        if management further determines that the market values
        of inventories are greater than their cost basis. Under
        US GAAP, provisions for inventory obsolescence and devaluation
        become a permanent adjustment to the carrying amount of
        the specific inventory whose market values are less than
        their cost basis, as deemed by management. Obsolescence
        and devaluation provision adjustments are included as
        part of cost of goods sold under US GAAP, and cannot be
        reversed once they are recorded.  (f)
      Convertible bonds  When
        convertible bonds are issued, ROC GAAP does not recognize
        or account for any beneficial conversion feature embedded
        in the bonds. Under US GAAP, beneficial conversion features
        should be recognized and measured by allocating a portion
        of the proceeds equal to the intrinsic value of that feature
        to capital surplus. In connection with the Companys
        issuance of convertible bonds in November 2001, the amount
        of the beneficial conversion feature was calculated at
        the commitment date as the difference between the conversion
        price and the fair value of the common stock, multiplied
        by the number of shares into which the security is convertible.
        As a result of allocating a portion of the proceeds equal
        to the intrinsic value of the beneficial conversion feature
        to capital surplus, a discount on the bonds was recognized.
        The discount resulting from such allocation is recognized
        as interest expense over the life of the convertible debt.
        The face amount of the convertible bonds was NT$10,000,000
        thousand, and the discount recognized on the date of issuance
        resulting from the beneficial conversion feature was NT$886,076
        thousand. The effective interest rate of the bonds is
        approximately 6.0% and their carrying amount at December
        31, 2001 and 2002 under US GAAP was NT$9,156,713 thousand,
        and NT$1,205,996 thousand, respectively.   (Continued) F-53      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (g)
      Stock dividends  Under
        ROC GAAP, stock dividends are recorded at par value, with
        a charge to retained earnings. Under US GAAP, if the ratio
        of distribution is less than 25 % of the same class of
        shares outstanding, the fair value of the shares issued
        should be charged to retained earnings. The effect of
        this dividend would have decreased retained earnings and
        increased capital surplus for the year ended December
        31, 2001 and 2002, by NT$2,891,625 thousand and NT$0
        thousand, respectively.  (h)
      Pension benefits  Prior
        to January 1, 1998, the pension expense recorded by the
        Company in connection with its defined pension plan was
        based on contributions made by the Company to the pension
        plan as required by the Republic of China Labor standard
        Law. Effective from January 1, 1998, the Company adopted
        ROC GAAP SFAS No. 18, Accounting for Pension,
        which is similar in many respects to US GAAP SFAS Nos.
        87 and 88. Subsequent to January 1, 1998, net pension
        expense was recognized on an actuarially determined basis.
        Under US GAAP, the accumulated pension obligation and
        the pension expense is determined on an actuarial basis
        from the date the pension plan was started in 1996. There
        were no material differences between ROC GAAP and US GAAP
        related to pension accounting.  (i)
      Depreciation of property, plant and equipment  Under
        ROC GAAP, the Company depreciates buildings over their
        estimated lives of between 20 to 50 years based on guidance
        from the Republic of China Internal Revenue Code. Under
        US GAAP, buildings are depreciated over an estimated useful
        life of 20 years.  (j)
      Derivative financial instruments  The
        Company operates internationally, giving rise to exposure
        to changes in foreign currency exchange rates. The Company
        also has exposure to changes in interest rates that affect
        its cash flows on long-term debt. The Company uses financial
        instruments, including derivatives such as foreign currency
        forward contracts and interest rate swaps, to reduce this
        exposure. Under ROC GAAP, there are no specific rules
        related to accounting for derivative financial instruments,
        nor criteria for hedge accounting.   (Continued) F-54      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  Under
        US GAAP, prior to the adoption of SFAS No. 133, Accounting
        for Derivative Instruments and Hedging Activities,
        as amended, the Company recorded its interest rate swaps
        as hedge transactions by recording the net receivable
        or payable each month related to these interest rate swap
        contracts, offsetting and adding to interest expense of
        the related debts. For foreign currency forward contracts
        prior to the adoption of SFAS No. 133, as amended, the
        Company recorded unrealized gains or losses measured using
        the change in spot rate of the contract in the consolidated
        statements of operations if the contracts were used to
        hedge existing foreign currency denominated receivables
        and payables, or deferred recognition of unrealized gains
        or losses for those contracts hedging anticipated transactions
        that would be denominated in a foreign currency. The discount
        or premium on a forward contract was amortized into earnings
        over the life of the contract.  As
        a result of adopting SFAS No. 133, as amended, as of January
        1, 2001, and in accordance with the transition provisions,
        the Company recorded an after tax charge of NT$551 thousand
        representing the cumulative effect of the adoption related
        to the foreign currency forward contracts, and a cumulative
        after-tax adjustment to accumulated other comprehensive
        income of NT$30,937 thousand related to the interest rate
        swaps. Amounts expected to be reclassified to earnings
        over the next twelve months are not material. The after-tax
        charge to the statements of operations had no material
        effect on US GAAP basic EPS for the year ended December
        31, 2001.  After
        the adoption of SFAS No. 133, as amended, none of the
        Companys existing derivatives meet the US GAAP hedge
        accounting criteria. All derivative contracts are recognized
        as either assets or liabilities and are measured at fair
        value at each balance sheet date. Changes in fair values
        of derivative instruments arising subsequent to the transition
        date are recognized in earnings for US GAAP purposes.
        In addition, the Company reclassified NT$9,376 thousand,
        net of tax, of the deferred losses from accumulated other
        comprehensive income into earnings from the interest rate
        swap contracts in both 2001 and 2002. Changes in the fair
        value of these derivatives in subsequent periods could
        result in increased volatility of results of operations
        under US GAAP.  (k)
      Compensated absences  Under
        ROC GAAP, the Company is not required to accrue for unused
        vacation at the end of each year. However, under US GAAP,
        unused vacation that can be carried over to periods subsequent
        to that in which they are earned are accrued for at each
        balance sheet date.  (l)
      Research and development expense  For
        ROC GAAP, the amortization of the payment of the capitalized
        technology fixed license and patents fees for product
        and process technology is included in research and development
        expense. For US GAAP, this amortization expense is included
        in cost of goods sold.   (Continued) F-55      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (m)
      Operating leases  The
        Company entered into certain non-cancelable lease agreements
        with rental payments subject to escalation adjustments
        of 5 % each year. Under ROC GAAP, fixed escalation of
        rental payment are recognized as they become payable.
        Under US GAAP, fixed escalation of rental payments have
        been recognized on a straight-line basis over the lease
        term.  (n)
      Income tax  Under
        ROC GAAP, a valuation allowance is provided on deferred
        tax assets when they are not certain to be realized based
        on the projection of future taxable income. However, the
        criteria by which the need for a valuation allowance is
        determined is less stringent as compared to US GAAP. Under
        US GAAP, cumulative losses in recent years are a significant
        piece of negative evidence, which is difficult to overcome
        with projections of future taxable income for the purpose
        of determining the valuation allowance.  Under
        a revised ROC tax rule effective on January 1, 1998, an
        additional 10 percent corporate income tax will be assessed
        on taxable income but only to the extent such taxable
        income is not distributed before the end of the following
        year. As a result, from January 1, 1998 to January 20,
        2001, the undistributed income of the Company is subject
        to a corporate tax rate of 28 % and distributed income
        is taxed at 20 %. Commencing from January 20, 2001, the
        undistributed and distributed income is subject to a corporate
        tax rate of 32.5 % and 25 %, respectively. Under ROC GAAP,
        the 10 % tax on undistributed earnings is recognized as
        an expense at the date that stockholders resolve the amount
        of the earnings distribution. Under US GAAP, the Company
        measures its tax expense, including the tax effects of
        temporary differences, using the undistributed rate.  (o)
      Earnings (loss) per share  Under
        ROC GAAP, primary earnings (loss) per share (EPS) are
        calculated by dividing net income (loss) by the weighted-average
        number of shares outstanding during the year. Fully diluted
        EPS is calculated by taking primary EPS into consideration,
        plus additional common shares that would have been outstanding
        if the potential dilutive shares had been issued. Net
        income would also be adjusted for the interest derived
        from any underlying dilutive shares. The weighted-average
        outstanding shares are restated for stock dividends issued,
        and transfers from retained earnings or capital stock
        to common stock.  The
        EPS calculation of basic and diluted EPS under US GAAP
        is substantially the same as compared to the calculation
        under ROC GAAP. However, under US GAAP, the weighted-average
        outstanding shares would not have been restated for stock
        dividends issued, and transfers from retained earnings
        or capital surplus to common stock.  As
        a net loss has been reported in 2001, the dilutive effects
        of the Companys convertible bonds issued in November
        2001 have not been considered for purposes of calculating
        dilutive EPS.   (Continued) F-56      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (p)
      US GAAP reconciliations  1.
      Reconciliation of consolidated net income (loss)  **For
        the year ended December 31,****2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$****(in
        thousands except per share data)**Net
        income (loss), ROC GAAP
      
      2,862,715
      
      (6,710,230
      )
      6,022,669
      
      173,564US
        GAAP adjustments:(a)
      Reversal
        of pooling-of-interests method of accounting
      
      (1,101,502
      )
      2,098,374
      
      -
      
      -(a)
      Recognition
        of purchase method of accounting-
        Charge-off of IP R&D
      
      -
      
      (53,450
      )
      -
      
      --
        Amortization of intangible assets
      
      -
      
      (349,832
      )
      (1,049,496
      )
      (30,245
      )-
        Amortization of premium on bonds payable
      
      -
      
      23,883
      
      60,268
      
      1,737-
        Inventory
      
      -
      
      331,656
      
      56,245
      
      1,621-
        Depreciation
      
      -
      
      1,774
      
      (240,365
      )
      (6,927
      )(b)
      Compensation-
        Remuneration to directors and supervisors
      
      (8,303
      )
      -
      
      (54,204
      )
      (1,562
      )-
        Employee bonuses-
        Accrual
      
      (83,000
      )
      -
      
      (433,632
      )
      (12,497
      )-
        Adjustment to fair value
      
      -
      
      (174,549
      )
      -
      
      -(c)
      Investment
        loss on long-term investment equity method
      
      -
      
      (83,559
      )
      (79,731
      )
      (2,298
      )(d)
      Investment
        gain (loss) in marketable securities
      
      -
      
      (54,924
      )
      1,132,551
      
      32,638(e)
      Provision
        for inventory obsolescence and devaluation
      
      -
      
      -
      
      (33,945
      )
      (978
      )(f)
      Accretion
        of interest expense resulting from beneficialconversion
        feature of convertible bonds
      
      -
      
      (13,993
      )
      (106,454
      )
      (3,068
      )(i)
      Depreciation
        on property, plant and equipment
      
      (60,385
      )
      (141,722
      )
      (173,510
      )
      (5,000
      )(j)
      Derivative
        financial instruments recorded at fair value
      
      -
      
      (158,679
      )
      78,024
      
      2,249(j)
      Cumulative
        effect of change in accounting principle, net of tax
      
      -
      
      (551
      )
      -
      
      -(k)
      Compensated
        absences accrual
      
      -
      
      (33,462
      )
      (8,490
      )
      (245
      )(m)
      Escalation
        adjustment of rent expense
      
      (25,480
      )
      (21,646
      )
      (19,096
      )
      (550
      )(n)
      Valuation
        allowance for deferred tax assets
      
      (930,000
      )
      -
      
      -
      
      -Tax
        effect of US GAAP adjustment
      
      -
      
      -
      
      (211,952
      )
      (6,108
      )**Net
        income (loss), US GAAP**
      
      **654,045**
      ****
      **(5,340,910**
      **)**
      **4,938,882**
      ****
      **142,331**Basic
        earnings per share under US GAAP(in
        dollars)
      
      **0.59**
      ****
      **(2.98**
      **)**
      **1.36**
      ****
      **0.04**Diluted
        earnings per share under US GAAP(in
        dollars)
      
      **0.59**
      ****
      **(2.98**
      **)**
      **1.32**
      ****
      **0.04**Basic-Weighted-average
        number of shares outstanding (in thousands)
      
      **1,100,000**
      ****
      **1,791,755**
      ****
      **3,639,799**
      ****
      **3,639,799**Diluted-Weighted-average
        number of shares outstanding (in thousands)
      
      **1,100,000**
      ****
      **1,791,755**
      ****
      **3,894,782**
      ****
      **3,894,782**   (Continued) F-57      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  2.
      Reconciliation of consolidated stockholders equity  **For
        the year ended December 31,****2001**
      ****
      **2002****(in
        thousands)**
      
      **NT$**
      ****
      **NT$**
      ****
      **US$**Total
        stockholders equity, ROC GAAP
      
      43,947,285
      
      77,828,044
      
      2,242,883(a)
      
      Recognition
        of purchase method of accounting-
        Goodwill
      
      11,599,692
      
      11,599,692
      
      334,285-
        Intangible assets, net of amortization
      
      7,346,470
      
      6,296,974
      
      181,469-
        Other assets
      
      (151,802
      )
      (335,922
      )
      (9,680
      )-
        Other liabilities
      
      (1,474,541
      )
      (1,414,273
      )
      (40,757
      )(b)
      
      Compensation-
        Remuneration to directors and supervisors
      
      -
      
      (54,204
      )
      (1,562
      )-
        Employee bonuses-
        Accrual
      
      -
      
      (433,632
      )
      (12,497
      )(c)
      
      Investment
        loss on long-term investment-equity method
      
      (83,559
      )
      (163,290
      )
      (4,706
      )(e)
      
      Provision
        for inventory obsolescence and devaluation
      
      -
      
      (33,945
      )
      (978
      )(c)
      
      Decrease
        in cumulative translation adjustment
      
      (361
      )
      (134
      )
      (4
      )(d)
      
      Marketable
        securities
      
      567,611
      
      (47,902
      )
      (1,380
      )(f)
      
      Beneficial
        conversion feature of convertible bonds
      
      872,083
      
      80,887
      
      2,331(i)
      
      Property,
        plant and equipment
      
      (241,705
      )
      (415,215
      )
      (11,966
      )(j)
      
      Derivative
        financial instruments recorded at fair value
      
      (180,792
      )
      (93,393
      )
      (2,692
      )(k)
      
      Compensated
        absences accrual
      
      (33,462
      )
      (41,952
      )
      (1,209
      )(m)
      
      Escalation
        adjustment of rent expense
      
      (79,389
      )
      (98,485
      )
      (2,838
      )(n)
      
      Valuation
        allowance for deferred tax assets
      
      (1,869,051
      )
      (1,869,051
      )
      (53,863
      )Tax
        effect of US GAAP adjustments
      
      (80,164
      )
      (211,952
      )
      (6,108
      )**Total
        stockholders equity, US GAAP**
      ****
      **60,138,315**
      ****
      **90,592,247**
      ****
      **2,610,728**   (Continued) F-58      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (q)
      US GAAP Consolidated Financial Statements  Consolidated
    Balance Sheets December
    31, 2001 and 2002
    (Expressed in thousands of New Taiwan dollars and US dollars) **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$****Assets****Current
        assets:**Cash
        and cash equivalents
      
      6,496,268
      
      25,957,194
      
      748,046Securities
        available for sale
      
      5,536,869
      
      3,087,194
      
      88,968Notes
        and accounts receivable
      
      6,661,628
      
      6,415,061
      
      184,872Receivables
        from related parties
      
      2,428,680
      
      3,646,403
      
      105,084Inventories
      
      8,979,750
      
      8,475,625
      
      244,254Prepayments
        and other current assets
      
      852,770
      
      1,386,466
      
      39,956**Total
        current assets**
      
      30,955,965
      
      48,967,943
      
      1,411,180**Investments
        in equity-method investees**
      
      117,172
      
      73,422
      
      2,116**Property,
        plant and equipment:**Land
      
      554,214
      
      731,807
      
      21,090Buildings
      
      10,430,711
      
      10,948,338
      
      315,514Machinery
        and equipment
      
      52,347,481
      
      66,910,989
      
      1,928,271Leasehold
        improvements and other equipment
      
      2,488,274
      
      3,001,736
      
      86,50565,820,680
      
      81,592,870
      
      2,351,380Less:
        accumulated depreciation and amortization
      
      (8,905,656
      )
      (21,029,387
      )
      (606,034
      )Construction
        in progress
      
      39,180
      
      1,811,779
      
      52,213Prepayment
        for purchases of land and equipment
      
      8,637,826
      
      9,820,006
      
      282,997**Net
        property, plant and equipment**
      
      65,592,030
      
      72,195,268
      
      2,080,556**Intangible
        assets**Goodwill
      
      11,599,692
      
      11,599,692
      
      334,285Other
        intangible assets, net of accumulated amortization ofNT$1,907,716
        and NT$4,155,886 as of December 31, 2001and
        2002, respectively
      
      10,416,103
      
      9,281,429
      
      267,47622,015,795
      
      20,881,121
      
      601,761**Other
        assets**Refundable
        deposits
      
      894,077
      
      1,018,127
      
      29,341Restricted
        cash in bank
      
      149,542
      
      52,200
      
      1,504Deferred
        charges and other
      
      289,658
      
      343,321
      
      9,894**Total
        other assets**
      
      1,333,277
      
      1,413,648
      
      40,739**Total
        assets**
      ****
      **120,014,239**
      ****
      **143,531,402**
      ****
      **4,136,352**   (Continued) F-59      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  Consolidated
    Balance Sheets (continued) December
    31, 2001 and 2002
    (Expressed in thousands of New Taiwan dollars and US dollars
    except share data) **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$****Liabilities
        and Stockholders Equity****Current
        liabilities:**Short-term
        borrowings
      
      2,095,008
      
      770,444
      
      22,203Commercial
        paper
      
      449,321
      
      -
      
      -Accounts
        payable
      
      9,590,359
      
      11,131,568
      
      320,794Payables
        to related parties
      
      493,407
      
      560,605
      
      16,156Current
        installments of long-term borrowings
      
      4,864,378
      
      9,528,797
      
      274,605Accrued
        expenses and other current liabilities
      
      1,511,226
      
      2,532,039
      
      72,969Equipment
        and construction in progress payable
      
      672,743
      
      1,265,983
      
      36,484**Total
        current liabilities**
      
      19,676,442
      
      25,789,436
      
      743,211**Long-term
        borrowings:**Long-term
        borrowings, excluding current installments
      
      23,688,330
      
      22,457,152
      
      647,180Long-term
        issuance of commercial paper, excluding current installments
      
      4,168,654
      
      1,287,611
      
      37,107Bonds
        and convertible bonds payable, excluding current installments
      
      11,197,764
      
      2,214,360
      
      63,815**Total
        long-term borrowings**
      
      39,054,748
      
      25,959,123
      
      748,102**Other
        liabilities:**Deferred
        tax liabilities
      
      761,012
      
      857,864
      
      24,722Accrued
        pension liabilities
      
      110,271
      
      120,168
      
      3,463Other
      
      273,451
      
      212,564
      
      6,126**Total
        other liabilities**
      
      1,144,734
      
      1,190,596
      
      34,311**Total
        liabilities**
      
      59,875,924
      
      52,939,155
      
      1,525,624**Commitments
        and contingent liabilities****Stockholders
        equity:**Common
        stock, NT$10 par value; totaled 5 billion shares authorized;2,970,581
        thousand and 4,024,296 thousand shares issued and outstandingat
        December 31, 2001 and 2002, respectively
      
      29,705,816
      
      40,242,957
      
      1,159,740Additional
        paid in capital
      
      39,236,171
      
      52,351,313
      
      1,508,683Retained
        earnings:Legal
        reserve
      
      232,014
      
      -
      
      -Unappropriated
        retained earnings (accumulated deficits)
      
      (9,645,200
      )
      (708,475
      )
      (20,417
      )(9,413,186
      )
      (708,475
      )
      (20,417
      )Accumulated
        other comprehensive income (loss), net
      
      609,514
      
      (1,110,699
      )
      (32,009
      )Treasury
        stock at cost; 9,041 thousand shares in 2002
      
      -
      
      (182,849
      )
      (5,269
      )**Total
        stockholders equity**
      
      60,138,315
      
      90,592,247
      
      2,610,728**Total
        liabilities and stockholders equity**
      ****
      **120,014,239**
      ****
      **143,531,402**
      ****
      **4,136,352**   (Continued) F-60      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  Consolidated
    Statements of Operations Years
    ended December 31, 2000, 2001 and 2002 (Expressed
    in thousands of New Taiwan dollars and US dollars,
    except for share data) **2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$****Net
        sales**
      
      14,839,841
      
      28,513,390
      
      75,689,165
      
      2,181,244**Cost
        of goods sold**
      
      12,562,776
      
      31,491,129
      
      66,197,062
      
      1,907,696**Gross
        profit (loss)**
      
      2,277,065
      
      (2,977,739
      )
      9,492,103
      
      273,548**Operating
        expenses:**Selling
      
      278,320
      
      224,996
      
      537,361
      
      15,486General
        and administrative
      
      847,251
      
      811,778
      
      1,729,485
      
      49,841Research
        and development
      
      382,325
      
      633,714
      
      1,411,906
      
      40,6891,507,896
      
      1,670,488
      
      3,678,752
      
      106,016**Total
        operating income (loss)**
      
      769,169
      
      (4,648,227
      )
      5,813,351
      
      167,532**Non-operating
        income:**Interest
        income
      
      86,411
      
      53,527
      
      280,410
      
      8,081Gain
        on sale of investments
      
      43,296
      
      38,661
      
      56,997
      
      1,643Foreign
        currency exchange gain, net
      
      97,174
      
      315,934
      
      -
      
      -Other
        income
      
      62,974
      
      -
      
      368,074
      
      10,607289,855
      
      408,122
      
      705,481
      
      20,331**Non-operating
        expenses and losses:**Interest
        expense
      
      404,979
      
      827,298
      
      1,277,700
      
      36,821Investment
        loss recognized by equity method
      
      -
      
      83,559
      
      90,206
      
      2,600Derivative
        loss and other
      
      -
      
      189,078
      
      -
      
      -404,979
      
      1,099,935
      
      1,367,906
      
      39,421**Income
        (loss) before income tax and cumulative****effect
        of change in accounting principle**
      
      654,045
      
      (5,340,040
      )
      5,150,926
      
      148,442**Income
        tax provision**
      
      -
      
      319
      
      212,044
      
      6,111**Income
        (loss) before cumulative effect of change****in
        accounting principle**
      
      654,045
      
      (5,340,359
      )
      4,938,882
      
      142,331**Cumulative
        effect of accounting changes, net of tax**
      
      -
      
      (551
      )
      -
      
      -**Net
        income (loss)**
      
      **654,045**
      ****
      **(5,340,910**
      **)**
      **4,938,882**
      ****
      **142,331****Basic
        earnings (loss) per common share (in dollars):**
      
      **0.59**
      ****
      **(2.98**
      **)**
      **1.36**
      ****
      **0.04****Dilution
        effect of convertible bonds (in dollars)**
      
      **-**
      ****
      **-**
      ****
      **(0.04**
      **)**
      **-****Diluted
        earnings (loss) per common share (in dollars):**
      
      **0.59**
      ****
      **(2.98**
      **)**
      **1.32**
      ****
      **0.04****Weighted
        average common shares outstanding****(in
        thousands)**
      
      **1,100,000**
      ****
      **1,791,755**
      ****
      **3,639,799**
      ****
      **3,639,799****Dividends
        declared per common share (New Taiwan dollars)**
      
      1.60
      ****
      **-**
      ****
      **-**
      ****
      **-**   (Continued) F-61      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  Consolidated
    Statements of Comprehensive income
    Years ended December 31, 2001 and 2002
    (Expressed in thousands of New Taiwan dollars and US dollars) **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **US$**Net
        income (loss)
      
      (5,340,910
      )
      4,938,882
      
      142,331Other
        comprehensive income (loss) before tax:Unrealized
        holding gains (loss) on securitiesavailable-for-sale
      
      692,754
      
      (1,751,156
      )
      (50,466
      )Foreign
        currency cumulative translationadjustment
      
      7,325
      
      18,477
      
      532Reclassification
        adjustments for securities sold
      
      (40,482
      )
      (36,360
      )
      (1,048
      )Amortization
        of fair value adjustment of interestrate
        swap
      
      13,889
      
      13,889
      
      401Other
        comprehensive income before income taxesand
        cumulative effect of change in accountingprinciple
      
      673,486
      
      (1,755,150
      )
      (50,581
      )Income
        tax benefit (expense)
      
      (35,370
      )
      34,937
      
      1,007Other
        comprehensive income before cumulativeeffect
        of change in accounting principle
      
      638,116
      
      (1,720,213
      )
      (49,574
      )Cumulative
        effect of change in accountingprinciple,
        net of tax benefit
      
      (30,937
      )
      -
      
      -Other
        comprehensive income (loss)
      
      607,179
      
      (1,720,213
      )
      (49,574
      )Comprehensive
        income (loss)
      
      **(4,733,731**
      **)**
      **3,218,669**
      ****
      **92,757**   (Continued) F-62      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  Consolidated
    Statements of Changes in Stockholders Equity Years
    ended December 31, 2001 and 2002
    (Expressed in thousands of New Taiwan dollars and shares) ****
      ****
      **Capital
        Stock**
      ****
      **Retained
        earnings**
      ******Common
        shares
        (in
        thousands)**
      ****
      **Common
        stock**
      ****
      **Certificates
        exchangeable
        for common
        stock**
      ****
      **Additional
        paid-in
        capital**
      ****
      **Legal
        reserve**
      ****
      **Unapproap-
        riated
        earnings
        (accumulated
        deficits),
        net**
      ****
      **Accumulated
        other
        comprehen-
        sive income**
      ****
      **Treasury
        stock**
      ****
      **Total****Balance
        at January 1, 2001**
      
      1,100,000
      
      11,000,000
      
      -
      
      9,675,000
      
      55,898
      
      138,451
      
      2,335
      
      -
      
      20,871,684Issuance
        of common stock for cash
      
      150,000
      
      1,500,000
      
      -
      
      1,800,000
      
      -
      
      -
      
      -
      
      -
      
      3,300,000Appropriation
        for legal reserve
      
      -
      
      -
      
      -
      
      -
      
      176,116
      
      (176,116
      )
      -
      
      -
      
      -Stock
        dividend
      
      200,000
      
      2,000,000
      
      -
      
      2,266,625
      
      -
      
      (4,266,625
      )
      -
      
      -
      
      -Issuance
        of common stock-employeesprofit sharing
      
      8,300
      
      83,000
      
      -
      
      174,549
      
      -
      
      -
      
      -
      
      -
      
      257,549Common
        stock issued in connection withthe
        acquisition of Unipac
      
      1,512,281
      
      15,122,816
      
      -
      
      24,514,085
      
      -
      
      -
      
      -
      
      -
      
      39,636,901Beneficial
        conversion feature of convertiblebonds,
        net of tax
      
      -
      
      -
      
      -
      
      805,912
      
      -
      
      -
      
      -
      
      -
      
      805,912Net
        loss
      
      -
      
      -
      
      -
      
      -
      
      -
      
      (5,340,910
      )
      -
      
      -
      
      (5,340,910
      )Other
        comprehensive income, net of tax
      
      -
      
      -
      
      -
      
      -
      
      -
      
      -
      
      607,179
      
      -
      
      607,179**Balance
        at December 31, 2001**
      
      2,970,581
      
      29,705,816
      
      -
      
      39,236,171
      
      232,014
      
      (9,645,200
      )
      609,514
      
      -
      
      60,138,315Issuance
        of common stock for cash
      
      500,000
      
      5,000,000
      
      -
      
      14,170,256
      
      -
      
      -
      
      -
      
      -
      
      19,170,256Convertible
        bonds converted to commonstock
      
      553,613
      
      5,536,129
      
      1,012
      
      2,710,715
      
      -
      
      -
      
      -
      
      -
      
      8,247,856Transfer
        of legal reserve to unappropriatedearnings
      
      -
      
      -
      
      -
      
      -
      
      (232,014
      )
      232,014
      
      -
      
      -
      
      -Transfer
        of capital surplus tounappropriated
        earnings
      
      -
      
      -
      
      -
      
      (3,765,829
      )
      -
      
      3,765,829
      
      -
      
      -
      
      -Net
        income
      
      -
      
      -
      
      -
      
      -
      
      -
      
      4,938,882
      
      -
      
      -
      
      4,938,882Purchase
        of treasury stock
      
      -
      
      -
      
      -
      
      -
      
      -
      
      -
      
      -
      
      (182,849
      )
      (182,849
      )Other
        comprehensive income, net of tax
      
      -
      
      -
      
      -
      
      -
      
      -
      
      -
      
      (1,720,213
      )
      -
      
      (1,720,213
      )**Balance
        at December 31, 2002**
      ****
      **4,024,194**
      ****
      **40,241,945**
      ****
      **1,012**
      ****
      **52,351,313**
      ****
      **-**
      ****
      **(708,475**
      **)**
      **(1,110,699**
      **)**
      **(182,849**
      **)**
      **90,592,247**   (Continued) F-63      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  Consolidated
    Statements of Cash Flows
    Years ended December 31, 2000, 2001 and 2002
    (Expressed in thousands of New Taiwan dollars and US dollars) **2000**
      ****
      **2001**
      ****
      **2002****NT$**
      ****
      **NT$**
      ****
      **NT$**
      ****
      **US$****Cash
        flows from operating activities:**Net
        income (loss)
      
      654,045
      
      (5,340,910
      )
      4,938,882
      
      142,331Adjustments
        to reconcile net income (loss) to net cash provided byoperating
        activities:Cumulative
        effect of change in accounting principle, net of tax
      
      -
      
      551
      
      -
      
      -Depreciation
      
      2,567,523
      
      5,562,586
      
      11,912,829
      
      343,309Amortization
        of intangible assets, deferred charges and discounts
      
      717,778
      
      1,087,018
      
      2,701,198
      
      77,845Write-off
        of in-process research and development assets
      
      -
      
      53,450
      
      -
      
      -Gain
        on sale of investments and fixed assets
      
      (42,652
      )
      (38,661
      )
      (61,370
      )
      (1,769
      )Unrealized
        exchange loss (gain) - net
      
      (50,606
      )
      (270,375
      )
      348,155
      
      10,033Net
        change in fair value of derivative instruments
      
      -
      
      144,790
      
      (78,024
      )
      (2,249
      )Provision
        for inventory devaluation and doubtful account
      
      6,135
      
      204,105
      
      66,365
      
      1,913Non-cash
        compensation-employee bonuses
      
      -
      
      257,549
      
      433,632
      
      12,497Investment
        loss recognized by equity method
      
      -
      
      83,559
      
      90,206
      
      2,600Increase
        in notes and accounts receivable (including related parties)
      
      (515,123
      )
      (5,753,557
      )
      (1,203,910
      )
      (34,695
      )Decrease
        (increase) in inventories
      
      (1,796,711
      )
      (1,579,699
      )
      470,180
      
      13,550Decrease
        (increase) in prepayments and other current assets
      
      (362,769
      )
      21,078
      
      (484,340
      )
      (13,958
      )Increase
        in notes and accounts payable (including related parties)
      
      523,829
      
      6,922,932
      
      1,321,956
      
      38,097Increase
        (decrease) in accrued expenses and other current liabilities
      
      639,984
      
      (876,281
      )
      760,812
      
      21,925Increase
        in accrued pension liabilities and others
      
      799
      
      24,928
      
      10,973
      
      316**Net
        cash provided by operating activities**
      
      2,342,232
      
      503,063
      
      21,227,544
      
      611,745**Cash
        flows from investing activities:**Purchase
        of investment securities available for sale
      
      (12,488,783
      )
      (12,031,644
      )
      (9,500,815
      )
      (273,799
      )Proceeds
        from sales of securities available for sale
      
      12,465,482
      
      11,222,109
      
      10,219,973
      
      294,524Acquisition
        of property, plant and equipment
      
      (18,140,215
      )
      (8,311,482
      )
      (18,035,305
      )
      (519,749
      )Proceeds
        from disposal of long-term equity investment and fixed
        assets
      
      913
      
      3,445
      
      78,719
      
      2,269Increase
        (decrease) in restricted cash in bank
      
      (25,400
      )
      (103,642
      )
      97,342
      
      2,805Increase
        in intangible assets and deferred charges
      
      (550,449
      )
      (336,605
      )
      (1,239,156
      )
      (35,711
      )Decrease
        (increase) in refundable deposits
      
      (864,441
      )
      3,319
      
      (124,050
      )
      (3,575
      )Cash
        received from business acquisition
      
      -
      
      1,486,754
      
      -
      
      -Increase
        in long-term equity investment
      
      -
      
      -
      
      (46,586
      )
      (1,343
      )**Net
        cash used in investing activities**
      
      (19,602,893
      )
      (8,067,746
      )
      (18,549,878
      )
      (534,579
      )**Cash
        flows from financing activities:**Increase
        in short-term borrowings
      
      2,097,482
      
      23,484,669
      
      770,444
      
      22,203Repayment
        of short-term borrowings
      
      -
      
      (23,248,708
      )
      (2,585,961
      )
      (74,523
      )Increase
        (decrease) in guarantee deposit and others
      
      247
      
      (44,416
      )
      40,682
      
      1,172Increase
        in long-term borrowings
      
      13,161,655
      
      -
      
      4,664,932
      
      134,436Repayment
        of long-term borrowing
      
      -
      
      (498,060
      )
      (5,104,110
      )
      (147,093
      )Issuance
        of common stock for cash
      
      -
      
      3,300,000
      
      19,170,256
      
      552,457Issuance
        of bonds payable
      
      -
      
      10,000,000
      
      -
      
      -Purchase
        of treasury stock
      
      -
      
      -
      
      (182,849
      )
      (5,269
      )Bond
        issuance cost
      
      (25,230
      )
      (7,219
      )
      -
      
      -**Net
        cash provided by financing activities**
      
      15,234,154
      
      12,986,266
      
      16,773,394
      
      483,383**Effect
        of exchange rate change on cash**
      
      15,207
      
      5,205
      
      9,866
      
      285**Net
        increase (decrease) in cash and cash equivalents**
      
      (2,011,300
      )
      5,426,788
      
      19,460,926
      
      560,834**Cash
        and cash equivalents at beginning of year**
      
      3,080,780
      
      1,069,480
      
      6,496,268
      
      187,212**Cash
        and cash equivalents at end of year**
      
      **1,069,480**
      ****
      **6,496,268**
      ****
      **25,957,194**
      ****
      **748,046****Supplemental
        disclosures of cash flow information:**Cash
        paid for interest expenses
      
      **413,961**
      ****
      **843,061**
      ****
      **1,253,983**
      ****
      **36,138**Cash
        paid for income taxes
      
      **6,318**
      ****
      **786**
      ****
      **19,343**
      ****
      **557****Non-cash
        investing and financing activities:****Acquisition
        of business:**Fair
        value of assets acquired, other than cash
      
      -
      
      (60,460,411
      )
      -
      
      -Liabilities
        assumed
      
      -
      
      22,310,264
      
      -
      
      -Common
        stock issued
      
      -
      
      39,636,901
      
      -
      
      -Net
        cash received from acquired business
      
      **-**
      ****
      **1,486,754**
      ****
      **-**
      ****
      **-**Convertible
        bonds applying for conversion
      
      **-**
      ****
      **-**
      ****
      **8,247,856**
      ****
      **237,690**   (Continued) F-64      AU
    OPTRONICS CORP. AND SUBSIDIARIES Notes
    to Consolidated Financial Statements  (27)
      Subsequent
        Event  The
        Company signed a memorandum of understanding on January
        28, 2003 with Fujitsu Limited (Fujitsu) and Fujitsu Display
        Technologies Corporation (FDTC) on comprehensive collaboration
        in the Liquid Crystal Displays (LCDs) field. The collaboration,
        which has been approved by the boards of directors of
        both parties, covers a wide range of joint effort in R&D,
        technology, manufacturing capability and business development.
        The collaboration also includes an equity investment made
        by the Company in FDTC, in which the Company purchased
        a 20% equity stake in FDTC for NT$436,271 thousand. FDTC
        develops, manufactures and markets LCDs and was previously
        a wholly owned subsidiary of Fujitsu. The remaining 80%
        of FDTC is still owned by Fujitsu. In addition, the Company
        paid a fixed license fee in March 2003 and will be entitled
        to use FDTCs intellectual property, and advanced
        display technologies through cross licensing and other
        technology cooperation agreements in the near future.


F-65

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