with Saifun that provides us with rights to develop and manufacture certain products related to the microFLASH process technology. Under the agreement with Tower Semiconductor, Tower Semiconductor will be obligated to manufacture for us up to an agreed number of six-inch wafers per month upon receiving our orders. Due to the market conditions in 2001 and 2002, we have placed orders for less than the numbers of wafers that we could have required Tower Semiconductor to manufacture for us in those periods. Wafer purchases in 2001 totalled NT$157 million, in 2002 totalled NT$136 million and in 2003 totalled NT$37 million (US$1.1 million).

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

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

     In March 2003, we and other Tower Semiconductor investors reached an agreement with Tower Semiconductor to amend our obligations in relation to the fifth and final subsequent closing purchase obligation. Under the proposed amendment, we and the other investors will advance a total of US$24.6 million as a part of the fifth milestone payment, prior to Tower Semiconductor’s satisfaction of the conditions. Of this amount, we are obliged to pay US$6.6 million, for the purchase of shares at US$2.983 per share. As of May 2003, we have already paid US$3.6 million of this amount for the purchase of 1,206,839 shares, and a further US$3 million is outstanding. We and the other investors have paid the balance of the fifth and final purchase obligation, which was US$4.4 million in our case.

     Our payments to Tower Semiconductor, as December 10, 2003, total US$78.3 million, and of this the total share purchase consideration is US$64.2 million. Under the original share purchase agreement, the excess of our payment obligations over the total share purchase consideration is credited to a prepaid credit account. Amounts in the credit account may be applied to future purchases of wafers, purchases of Tower Semiconductor’s shares (not including purchases under the original purchase commitments) or royalty payments.

     At December 31, 2003, our credit account balance was US$14.1 million, and we owned approximately 15.8% of Tower Semiconductor’s outstanding shares. Our average purchase price per share is US$7.88, which is somewhat higher than the fair market values due to the minimum per share price in the original agreement.

     Our board of directors as well as our supervisors have historically reviewed and approved related party transactions, consistent with ROC laws and practices, and currently continue to do so. Under Nasdaq’s Marketplace Rule 4350(h), which became effective on January 15, 2004, the audit committee or another independent body of the board of directors of listed issuers is required to approve all related party transactions. We have obtained an exemption from Nasdaq from compliance with the requirement to have our audit committee approve all related party transactions until we appoint an audit committee, which we are required to do so on or before July 31, 2005 under Nasdaq rules. We have not appointed an audit committee as of the date of this annual report.

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

     We publish our financial statements in New Taiwan dollars, the lawful currency of Taiwan. All references in this annual report to “United States dollars”, “U.S. dollars” and “US$” are to United States dollars and references to “New Taiwan dollars”, “NT dollars” and “NT$” are to New Taiwan dollars. All translations from New Taiwan dollars to United States dollars were made, unless otherwise indicated, on the basis of the noon buying rate in The City of New York for cable transfers in NT dollars per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2003 of NT$33.99 = US$1.00. On June 23, 2003, the noon buying rate between New Taiwan dollars and United States dollars was NT$33.79 = US$1.00.

     The financial data set forth below should be read in conjunction with, and are qualified in their entirety by reference to, our financial statements and the related notes included in this annual report, and “Item 5. Operating and Financial Review and Prospects”. Our financial statements are prepared and presented in accordance with ROC GAAP and ROC reporting practices. For a discussion of certain differences between ROC GAAP and U.S. GAAP, see note 20 to our consolidated financial statements for the years ended December 31, 2001, 2002 and 2003 included in this annual report and “Item 5. Operating and Financial Review and Prospects — A. Operating Results — U.S. GAAP Reconciliation”.

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See “Item 10 — Additional Information — B. Memorandum and Articles of Association — Description of Our Common Shares — Dividends and Distributions”.

     Our shareholders on a dividend record date will be entitled to the full dividend declared without regard to any prior or subsequent transfer of these common shares. The record date for the annual shareholders’ meeting was determined by the board of directors at a meeting that was held on April 30, 2004. No annual dividend was declared at our annual general meeting of shareholders held on June 18, 2004.

     For information relating to ROC withholding taxes payable on dividends, see “Item 10. Additional Information — E. Taxation — ROC Taxation”.

Legal Proceedings

     On February 18, 1997, Atmel filed an action against us and two other semiconductor manufacturers with the International Trade Commission (“ITC”), alleging a violation of Section 337 of the 1930 Tariff Act for infringement of the U.S. Patent No. 4,451,903 (the “903 patent”) owned or controlled by Atmel. On June 1, 2001, the ITC issued a Notice of Final Determination in our favor, and on July 26, 2001, the ITC denied Atmel’s petition for reconsideration. Atmel did not appeal the Notice of Final Determination with the United States Court of Appeals for the Federal Circuit before the required deadline, and so it is bound by the ITC’s finding that we did not infringe the 903 patent or violate Section 337 of the Tariff Act.

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

     With respect to the 747 patent the court issued an order on May 14, 2003 granting Macronix America’s motion for summary judgment of invalidity of the 747 patent. Pursuant to this order, the court entered judgment in favor of Macronix America and against Atmel.

     With respect to the 096 patent, Macronix America filed a motion for summary judgment on November 15, 1999 for the invalidity of the 096 patent. On August 16, 2000, the court granted Macronix America’s motion for summary judgment against several independent claims of the 096 patent, leaving a single independent claim outstanding in the case. On September 19, 2003, the parties filed cross-motions for summary judgment on the issue of infringement of the remaining claim of the 096 patent, and the court held a hearing on November 7, 2003. In its summary judgment order dated February 23, 2004, the court issued a claim construction on the disputed term of the claim, but denied both parties’ motions without prejudice due to an inadequate factual background to decide the motions. Under the court’s claim construction in the February 23, 2004 order, Macronix America filed a renewed motion for summary judgment of non-infringement on April 16, 2004. Atmel filed its opposition on May 26, 2004. Macronix America filed its reply on June 18, 2004. The court has scheduled a hearing for July 30, 2004.

     Although we believe Atmel’s claims are unwarranted and we intend to continue to contest vigorously Atmel’s allegations, it is not possible to predict the outcome of the litigation. If we are found to have infringed Atmel’s patents, Atmel has requested injunctive relief to prohibit Macronix America from selling products violating Atmel’s patents and an award to Atmel of treble damages caused by the alleged infringements.

     On August 21, 2001, Agere, which was spun off by Lucent Technologies Inc. in March 2001, filed a complaint against us in the United States District Court for the Southern District of New York alleging, among other things, that certain royalty payments were overdue under a patent license agreement which we previously entered into with AT&T. AT&T subsequently transferred its right to receive royalties to Lucent. Agere claimed that the right to receive royalties under the agreement had been assigned to it as a result of internal reorganization, and that we owed them outstanding royalties and late fees for the period from January 1, 1999 to June 30, 2001. We filed a motion to dismiss Agere’s lawsuit because the dispute at issue arose out of a previous agreement that expressly provided that all disputes should be arbitrated. On February 11, 2002, the court granted our motion to compel arbitration and entered judgment dismissing the complaint. On February 19, 2002, Agere filed a demand for arbitration before the American Arbitration Association. After a period of negotiation, we executed a patent cross license agreement with Agere in January 2002 and the arbitration was settled and closed.

     As is the case with many companies in the semiconductor industry, we from time to time receive communications from third parties asserting certain patents to our products. We have entered into discussions with some of these third parties as to their respective positions and the terms of any possible licenses. We could incur significant costs with respect to the

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defense of the claims that could have a material adverse effect on our results of operations or financial condition. For royalty payments under the existing license agreements or the potential new patent license agreements, we have estimated the royalty budgets based on historical experiences and specific arrangements. The royalty accrual was NT$490 million in 2001, NT$360 million in 2002 and NT$196 million (US$5.5 million) in 2003. As of December 31, 2003, the outstanding balance of this reserve was NT$675 million (US$19.9 million).

     On July 9, 2003 we learned from Tower Semiconductor that a shareholders class action was filed on behalf of a class consisting of the ordinary shareholders of Tower Semiconductor at the close of business in the United States on April 1, 2002. This case was filed in the United States District Court for the Southern District of New York against Tower Semiconductor and its major corporate shareholders, including, us, and against directors of Tower Semiconductor, including Miin Wu, our president and CEO. The lawsuit alleges violation of section 14(a) and 20(a) of the Security Exchange Act of 1934, as amended, and Rule 14a-9 promulgated thereunder. The lawsuit alleges that Tower Semiconductor and its directors made false and misleading statements and omissions in a proxy solicitation to Tower Semiconductor’s shareholders regarding a proposed amendment to a contract between Tower Semiconductor and its major shareholders, including us. The plaintiffs are seeking unspecified damages and attorneys’ and experts’ fee and expenses. On January 30, 2004, the defendants filed with the court a motion to dismiss the action. On April 20, 2004, the Plaintiffs filed a memorandum in opposition to defendants’ motion to dismiss. On May 24, 2004, the defendants filed a reply memorandum to further support defendants’ motion to dismiss the plaintiffs’ complaint.

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

     Except as otherwise noted, no significant changes have occurred since December 31, 2003. See “Item 4. Information on the Company — History and Development of the Company — Recent Developments” and note 17c of our consolidated financial statements for the years ended December 31, 2001, 2002 and 2003 included in this annual report.