PART I

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B. Capitalization and Indebtedness

     Not applicable.

C. Reason for the Offer and Use of Proceeds

     Not applicable.

D. Risk Factors

      Holders of our securities should note that investment in our securities involves risks and uncertainties that could affect our future business success or financial results. The following important factors, and those important factors described in other reports submitted to, or filed with, the Securities and Exchange Commission by our company, among other factors, could adversely affect our results of operations and could cause our results of operations to differ materially from those expressed in any forward-looking statements made by, or on behalf of, our company:

Risks Relating to Our Company

We recorded gross, operating and net losses in 2001, 2002 and 2003. Continued losses could materially adversely affect the value of your investment.

     The severe and protracted semiconductor industry downturn that began in the second half of 2000 continued throughout 2001, 2002 and the first half of 2003, with a continued drop in demand and general decline in the average selling prices of our products. For 2001, we realized a net loss of NT$866 million. For 2002, we recorded a net loss of NT$11,357 million. Net sales revenues declined by 24.2% compared to 2001, and our cost of goods sold, a substantial portion of which consists of fixed costs such as depreciation and amortization, exceeded our net sales revenue. Although our net sales revenues in 2003 increased compared to 2002, our cost of goods sold continued to exceed our net sales revenue in 2003. For 2003, we recorded a gross loss of NT$2,942 million (US$86.5 million), an operating loss of NT$7,684 million (US$226.1 million) and a net loss of NT$8,198 million (US$241.2 million). We cannot assure you that we will not continue to incur gross, operating and net losses for the full year 2004.

     Primarily as a result of the net losses we incurred and unrealized losses on long-term investments of NT$540 million in 2001, and NT$331 million in 2002 which was partially offset by an unrealized gain of NT$977 million (US$28.8 million) in 2003, shareholders’ equity declined by 3.2% in 2001, 30% in 2002, and a further 3.2% in 2003, to NT$29,248 million (US$860.5 million) as of December 31, 2003.

     In addition, we cannot assure you that these losses will not continue or increase. If we continue to record losses, the value of your investment may be materially adversely affected.

We have limited liquidity and may be unable to repurchase our outstanding debt securities when requested by holders, pay certain other obligations as they become due or otherwise meet our working capital needs.

     We have a substantial amount of obligations that will or may come due within the next year, and we may not have sufficient funds to pay these obligations. These obligations include the potential mandatory redemption of some of our convertible bonds, payment of our short-term debt, payment of the current portion of our long-term debt, expenditures required under contractual obligations and the payment of the costs of the day-to-day operation of our business. See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources”.

     The holders of certain of our outstanding debt securities may require us to redeem all or a portion of their debt securities. In particular, as of December 31, 2003, we had outstanding US$90 million principal amount of zero coupon convertible bonds due February 10, 2008, which were redeemable at the option of the holders on February 10, 2004 and are redeemable on the same date each year thereafter until maturity, and US$169.2 million principal amount of 0.5% convertible bonds due February 7, 2007, which are redeemable at the option of the holders on August 9, 2004. On February 10, 2004, pursuant to the exercise of the option by holders of the bonds due February 10, 2008, we redeemed US$78.1 million aggregate principal amount of such bonds. In April 2004, we sold 13,125,000 global depositary shares, or GDSs, representing 525,000,000 new common shares, for cash to fund repayment of our debts and to acquire machinery and equipment. Had we not conducted this share offering, we would have had difficulty in meeting our bond redemption obligations in 2004. As of May 31, 2004, the balance of the outstanding bonds due February 10, 2008 was US$6.4 million (NT$218 million) and the aggregate principal amount of the outstanding bonds due February 7, 2007 was US$136.7 million NT$4,646 million). To the extent that the current price per share of the our shares remains below the adjusted conversion price, the likelihood increases

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that bondholders will elect to require us to redeem the bonds rather than convert.

     In addition to the convertible bonds discussed above, in 2004 we have been or will also be required to pay short-term debt and notes in the aggregate principal amount of approximately NT$2,748 million (US$80.8 million) and current portion of long-term debt and capital lease obligations in the aggregate principal amount of NT$11,164 million (US$328.4 million). In addition, we also have obligations under contracts, which we have entered into for goods and services and for other purposes, which require us to make minimum payments for our day-to-day business operations of approximately NT$18,476 million (US$543.6 million) in 2004.

     If our cash flow from operations and the proceeds of approximately US$173.25 million from our GDS offering in April 2004 are not sufficient, we may not be able to meet these payment obligations when due. At December 31, 2003, we had NT$10,649 million (US$313.3 million) of unrestricted cash and cash equivalents. We cannot assure you that we will be able to finance any of these payment obligations by using our current loan facilities or other means of financing. We have available to us a syndicated loan under which we may drawdown up to an additional principal amount of NT$5,390 million (US$158.6 million) as of May 31, 2004. However, we may only drawdown these amounts for the purchase of certain specified equipment, must still meet certain other conditions for drawdown and there is no assurance that we would be able to satisfy such conditions for new borrowings. We also cannot assure you that any alternate means of financing will be available to us on acceptable terms or at all. Further, our ability to repurchase the outstanding debt securities may also be limited by applicable law as well as the terms of our other outstanding indebtedness. See “— Restrictive covenants and broad default provisions in the agreements governing our existing debt may materially restrict our operations as well as adversely affect our liquidity, financial condition and results of operations”.

     Insufficient liquidity could materially restrict our operations, require us to reduce our budgeted capital expenditures and otherwise adversely affect our financial condition and results of operations. Borrowing funds, raising additional equity capital or converting long-term investments to liquid funds to meet our payment obligations and/or working capital requirements could adversely affect our financial condition or cause our shareholders to suffer dilution, and thereby adversely affect the price of our common shares, ADSs or GDSs. In addition, if we are or appear to be unable to make payments when due, we may be unable to continue operating, bankruptcy or insolvency proceedings could be commenced against us and, if this occurs, the value of our common shares, ADSs and GDSs would be materially impaired.

Restrictive covenants and broad default provisions in the agreements governing our existing debt may materially restrict our operations as well as adversely affect our liquidity, financial condition and results of operations.

     We are a party to numerous loan and other agreements relating to the incurrence of debt, many of which include restrictive covenants and broad default provisions. Our loan agreements contain covenants that require us to maintain specified debt to equity ratio and ratio of current assets to current liabilities. In November 2003, we sold 475,000,000 new common shares for cash to increase shareholders’ equity pursuant to a share offering in Taiwan. Had we not conducted this share offering, we would have had difficulty in meeting the debt to equity ratio contained in our loan covenants as of the end of 2003. We may need to issue additional shares, ADSs or GDSs to increase shareholders’ equity, and we cannot assure you that we will be successful in selling all or any of such common shares, ADSs or GDSs. If we continue to incur losses, resulting in an erosion of our shareholders’ equity, and are unable to raise additional equity funding or renegotiate the terms of our loan agreements, we may be in default of financial covenants in the future. Such a default or defaults would seriously impair our ability to secure debt financing, and could require us to delay or cancel capital expansion plans, dispose of assets or take other steps to meet the financial ratios. Defaults or potential defaults in our financial covenants could also impair our ability to raise additional equity capital.

     In general, covenants in the agreements governing our existing debt, and debt we may incur in the future, may materially restrict our operations, including our ability to incur debt, repurchase our outstanding debt securities, pay dividends, make certain investments and payments and encumber or dispose of assets. A default under one agreement may also trigger cross-defaults under our other agreements. In the event of default, we may not be able to cure the default or obtain a waiver on a timely basis, and our operations could be significantly disrupted or harmed. An event of default under any agreement governing our existing or future debt, if not cured or waived, could have a material adverse effect on our liquidity, financial condition and results of operations and could seriously impair our ability to secure debt financing.

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We are vulnerable to cyclical downturns in the semiconductor industry, and our business, financial condition and results of operations may suffer in future downturns.

     The semiconductor industry is highly cyclical. Economic downturns historically have caused reduced product demand, rapid declines in product prices, low capacity utilization and production over-capacity. Since the second half of 2000, the semiconductor industry has been adversely affected by the sudden and rapid decline in worldwide demand for electronic products such as personal computers, computer peripherals, consumer electronics and other communications devices. As such, electronics systems and applications companies have drastically reduced their orders for semiconductor devices to avoid further inventory accumulation. The severe and protracted downturn throughout 2001, 2002 and the first half of 2003 has resulted in a serious deterioration in the average selling prices of, as well as demand for, most of our products and materially adversely affected our operating results and financial condition. Although conditions in the semiconductor industry have improved since the third quarter of 2003, we cannot predict whether this improvement will continue. Even after the industry recovers, our product prices, sales volumes and margins may continue to be adversely affected during future cyclical downturns and our business, financial condition and results of operations may suffer accordingly.

Our results of operations fluctuate significantly, which may affect the value of your investment

     Our historical net sales revenue and other results of operations have varied, at times significantly, from quarter —to quarter and from year —to year. For example, we had net income under ROC GAAP of NT$10,613 million in 2000, a net loss of NT$866 million in 2001, a net loss of NT$11,357 million in 2002 and a net loss of NT$8,198 million (US$241.2 million) in 2003. Our future net sales revenue, gross profit (loss), operating income, net income (loss) and more generally, our business and results of operations, may vary significantly due to a combination of many factors, including:

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     Due to these factors and other risks, many of which are beyond our control, you should not rely on quarter-to-quarter or year-to-year comparisons to predict our future performance. Unfavorable changes in any of the above factors may materially and adversely affect our business and results of operations. In addition, it is possible that in some future periods our operating results may be below the expectations of public market analysts and investors, which may in turn cause the prices of our securities to fall.

If we continue to experience significant investment losses from our investments, our financial condition and results of operations may be adversely affected.

     We have made and expect to continue to make a series of equity joint venture and strategic investments in companies located in Taiwan and elsewhere principally related to the semiconductor industry. As a result of the market downturn in the second half of 2000, which continued throughout 2001, 2002 and the first half of 2003, many of our invested companies experienced significant declines in their operating results. This in turn caused us to incur substantial investment losses as well as a reduction in the value of our equity interests in these companies. We incurred a net investment loss from our investments of NT$780 million in 2001, NT$415 million in 2002 and NT$825 million (US$24.3 million) in 2003. Any further significant losses from our investments in the future may materially and adversely affect our financial condition and results of operations.

As we depend on Mask ROM sales for a substantial portion of our revenue, a significant decrease in Mask ROM sales could result in the loss of a significant portion of our revenue.

     In 2001, 2002 and 2003, our Mask ROM net sales were NT$12,309 million, NT$7,575 million and NT$7,463 million (US$219.6 million), respectively, or 56.6%, 45.9% and 42.1%, respectively, of our net sales revenue in those periods. Historically, most of our Mask ROM products have been used in video game cartridges. Competing technological alternatives, such as CD-ROMs, DVD-ROMs, magnetic disks and telephone-linked and internet databases, have been adopted by some video game machine producers for some applications. For example, Nintendo, which is our largest customer, began marketing in September 2001 a new game platform that utilizes a DVD-ROM-based storage system. Nintendo is one of our major customers and accounted for 61.8%, 43.7% and 46.6% of our net Mask ROM sales in 2001, 2002 and 2003, respectively.

     We are seeking to sustain our Mask ROM sales volume by diversifying our customer base to include telecommunications, handheld computing and information devices and office automation equipment manufacturers and expanding the base of devices that may use Mask ROM. We cannot assure you, however, that these initiatives will be successful.

     Further, there has been an overall shrinkage of the Mask ROM market as products move away from using Mask ROM technologies to competing technologies, in particular Flash. We also expect that our Mask ROM sales will continue to decline for the foreseeable future, although we believe that due to our market position we will continue to be one of the major providers of Mask ROM products.

     Any significant reduction in the use of Mask ROMs in the video game manufacturing industry and generally will significantly reduce our revenue and adversely affect our business, financial condition and results of operations.

Our results of operations may continue to be adversely affected by the writedown of inventory resulting from an industry downturn.

     Historically, companies in the semiconductor industry have expanded aggressively during periods of increased demand. As a result, periods of excess capacity, overproduction, inventory buildup, rapid declines in average selling prices and technological obsolescence in the semiconductor industry have frequently followed periods of increased demand. The semiconductor industry experienced deteriorating market conditions from the end of 2000 through the first half of 2003. This decline resulted in an increase in our inventory levels, a decline in average selling prices for our products and a corresponding decrease in the stated value of our inventories. Although conditions in the semiconductor industry have improved since the third quarter of 2003, we cannot predict whether this improvement will continue. In addition, seasonal fluctuations in the demand for our products requires a seasonal buildup in our inventory, which increases our risk of inventory loss due to obsolescence.

     Although we recorded an inventory loss reversal of NT$1,185 million (US$34.9 million) in 2003, we recorded inventory losses of NT$2,929 million in 2002 and NT$2,587 million in 2001. We may be required to provide for inventory loss

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or provide a significant write-down of our inventory due to inventory obsolescence and price declines in future periods if market conditions do not continue to improve. Furthermore, due to the cyclical nature of the semiconductor industry, we cannot assure you that we will be able to maintain our inventories at a satisfactory level or that we will not incur additional losses on inventories in the future.

Financial forecasts and internally prepared financial information published by us from time to time pursuant to Taiwan Securities and Futures Commission reporting requirements may be inaccurate and incomplete.

     Since 1993, the Taiwan Securities and Futures Commission requires ROC companies that meet certain statutory criteria to publish financial forecasts and to report to the Taiwan Securities and Futures Commission certain internally prepared unaudited unconsolidated financial information regarding such companies during the prior fiscal year. We have met the statutory criteria in each of the years beginning in 1995 and, accordingly, have complied with this reporting requirement. We intend to continue to comply with this requirement whenever necessary.

     The unaudited unconsolidated information we publish in response to this requirement is not given the same scrutiny to which we subject our quarterly, semi-annual and annual financial statements. Furthermore, as this information is neither audited nor consolidated, it may vary materially from our audited consolidated financial statements for the same period.

     In addition, the financial forecasts published by us from time to time pursuant to these requirements are based upon a number of estimates and assumptions regarding our industry, investments and general market, political and economic conditions, many of which are beyond our control, and are inherently subject to significant uncertainties and contingencies. We do not undertake any obligation to update these forecasts, except as required by applicable laws and regulations. We urge you not to rely on these forecasts.

A decrease in demand for consumer electronics, computer and computer peripheral and other communications products may significantly decrease the average selling prices for our products and reduce our revenue and operating results.

     A significant percentage of our net sales revenue (our gross sales revenue less sales returns and discounts) is derived from customers who use our products for consumer electronics, computers and computer peripherals and other communications products. A significant decrease in the demand for consumer electronics, computers and computer peripherals and other communications products due to cyclicality or the non-acceptance of our customers’ products in the market, may decrease the demand for our products and could adversely affect our results of operations. Worldwide demand for consumer electronic products experienced a rapid and sudden decline between the second half of 2000 and the first half of 2003. In particular, declining average selling prices of these products have resulted in significant downward pressure on the prices of our products that are used in these products during that period. If the average selling prices for these products decrease again, the average selling prices for our products will also decrease and our revenue and operating results will suffer.

If we cannot compete successfully in our industry, we may lose customers and our revenue may decrease.

     The semiconductor industry is highly competitive. We compete with major international semiconductor companies, including Intel Corporation (“Intel”), Atmel Corporation (“Atmel”), Sharp Corporation (“Sharp”), Fujitsu AMD Semiconductor Ltd. (“FASL”), STMicroelectronics NV (“STMicroelectronics”), Renesas Technology Corporation (“Renesas”), Silicon Storage Technology, Inc. (“SST”), Hynix Semiconductor Inc. (“Hynix”), Toshiba Corporation (“Toshiba”), Oki Semiconductor Co. (“Oki”) and various other industry participants. Many of our competitors have greater access to capital and technology and have substantially greater production, research and development, sales and marketing and other resources than we do. As a result, these companies may be able to compete more aggressively over a longer period of time than our company.

     The principal elements of competition in our industry include:

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     Moreover, since the basic manufacturing processes for the production of volatile and nonvolatile memory chips are similar, manufacturers of volatile memory products may migrate into our nonvolatile memory markets, which would create additional competition. Many of our competitors have shown a willingness to quickly and sharply reduce prices in order to maintain high capacity utilization in their facilities during periods of reduced demand. Any renewed erosion in the prices for our products could cause our profits to decrease and have a material adverse effect on our financial condition and results of operations.

Due to our high percentage of fixed costs, we will not be profitable if we are unable to achieve relatively high capacity utilization rates.

     Our operations are characterized by relatively high fixed costs, such as depreciation, and we expect this to continue. Our profitability depends not only on absolute pricing levels for our products, but also on utilization rates for our equipment, commonly referred to as “capacity utilization rates”. In particular, increases or decreases in our capacity utilization rates can have a significant effect on gross margins since per-unit costs generally decrease as fixed costs are allocated over a larger number of units. In periods of low demand, we experience relatively low capacity utilization rates in our operations, which lead to reduced margins during such periods, which occurred in 2001, 2002 and the first half of 2003. Although our capacity utilization rates have improved recently, we cannot assure you that we will be able to achieve or maintain profitability if we cannot consistently achieve or maintain relatively high capacity utilization rates. Furthermore, high capacity utilization rates in the absence of high demand could result in inventory buildup and obsolescence, which may result in write-downs of inventory.

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

     Our customers generally place purchase orders between one to two months before the desired shipment date, and our contracts with customers generally do not require minimum purchases of our products. Due to the cyclical nature of the semiconductor industry, our customers’ purchase orders have varied significantly from period — to period, and it is difficult to forecast future order quantities. As a result, we do not typically operate with any significant backlog. The lack of significant backlog makes it difficult for us to forecast our revenues, plan our production and allocate resources for future periods. Moreover, our expense levels are based in part on our expectations of future revenue and we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls. We cannot assure you that any of our customers will continue to place orders with us in the future and at the same level as in prior periods. We also cannot assure you that the volume of our customers’ orders will be consistent with our expectations when we plan our expenditures for raw materials, components, labor and equipment.

We intend to increase our manufacturing capacity in Flash products, which may expose our business and operations to additional risks that may adversely affect our financial condition and results of operations.

     We intend to increase our manufacturing capacity in Flash products in order to capitalize on the growing demand for these products. The Flash products market is dominated by large players, including FASL, Intel, Sharp and STMicroelectronics, all of which may have greater financial and other resources than our company. As of December 31, 2001, 2002 and 2003, Flash products accounted for 54.5%, 66.6% and 58.4% of our product inventory, respectively. If we allocate resources and manufacturing capacity to Flash products but are unable to compete effectively in the Flash products market, our business and operating results will suffer. Moreover, any inventory loss from Flash products may adversely affect our financial condition and results of operations.

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Any delay or reduction in orders by Nintendo or the loss of Nintendo as a customer could result in the loss of a significant portion of our revenue.

     In 2001, 2002 and 2003, our net sales to Megachips Corporation (“Megachips”), which resells our products to Nintendo, aggregated NT$8,390 million, NT$5,646 million and NT$3,510 million (US$103.3 million), respectively, or 38.6%, 34.2%, and 19.8%, respectively, of our net sales revenue in those periods. Nintendo may not continue to place orders with us in the future at the same levels as in prior periods or at all. The loss of Nintendo as a customer, delayed or reduced orders by Nintendo, decreases in product prices or significant changes in delivery schedules to Nintendo could materially and adversely affect our business, financial condition and results of operations. In addition, any negative development in the relationship between us and Megachips or the relationship between Nintendo and Megachips could harm our sales to Nintendo.

     Nintendo faces competitive pressure in the electronics entertainment market, which is characterized by frequent new product introductions and rapidly shifting consumer preferences. Nintendo’s current game platform, the Game Cube, utilizes a DVD-ROM-based storage system, which is different from Mask ROM-based cartridges that were used in Nintendo’s previous game platforms. This game platform came to market in Japan in September 2001, in the United States in November 2001 and in Europe in May 2002. As a result, we have been shifting our production toward the output of Mask ROMs for Nintendo’s Game Boy series of handheld gaming devices and other semiconductor solutions for the Game Cube and related accessories. However, sales to Nintendo for Game Boy may not compensate for the loss of Mask ROM sales for Nintendo’s console-card game platform, and in fact did not in 2002 or in 2003. Further, Nintendo’s Game Boy platform is expected to face competition with the planned roll out of Sony’s PSP portable gaming device at the end of 2004. In addition, unit sales volumes or prices of Mask ROMs and other products sold through Megachips to Nintendo may fluctuate significantly depending on the products offered by Nintendo and its need for our products. If we cannot successfully market and sell our Mask ROM products for inclusion in other devices such as game cartridges used in Nintendo’s Game Boy Advance devices, if Nintendo delays or reduces its orders from us or if we cannot replace Nintendo with a customer purchasing our products at similar levels, our sales may decline significantly and our business, financial condition and results of operations will be adversely affected.

If we are unable to successfully execute or integrate our new organizational and business unit structure, our operations and future operating results may be adversely affected.

     In 2003, we reorganized our existing organizational and business unit structure (which was organized on the basis of memory products, SMS products and services, and multimedia products) into two main strategic business groups. However, we may not be able to effectively and efficiently assimilate our business, operations and personnel under the new organizational and business unit structure, and may experience disruption to our business and encounter difficulty in implementing effective operational, management and financial information systems. Moreover, we cannot assure you that our new organizational and business unit structure will be compatible with our existing business model. Any failure to successfully execute or integrate our new organizational and business unit structure may adversely affect our operations and future operating results.

We depend on select personnel and could be affected by the loss of their services.

     We depend on the continued service of our executive officers and skilled technical and other personnel. Our business could suffer if we lose the services of any of these personnel and cannot adequately replace them. At present, there is a shortage in Taiwan of persons with the special technical skill set we require. Further, although some of these personnel have entered into employment agreements with us, most of these employment agreements do not specify the duration of employment. Therefore, the relevant personnel may, subject to the terms of the relevant agreements, terminate such agreements at any time. We are not insured against the loss of any of our personnel. When we commence operations at Fab III, we may be required to substantially increase the number of these employees and there is intense competition for their services in the semiconductor industry. We may not be able to either retain our present personnel or attract additional qualified personnel as and when needed. In addition, we may need to increase employee compensation levels in order to attract and retain our existing officers and employees and the additional personnel that we may require in the future. Moreover, in order to attract and retain personnel, we must devote significant resources to training and benefits. These benefits have historically and may in the future include bonuses in the form of our common shares or otherwise based on the performance of our stock.

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Because of the highly cyclical nature of our industry, our capital requirements are difficult to plan. If we cannot obtain additional capital when we need it, our growth prospects and future operating results may be adversely affected.

     Our capital requirements are difficult to plan in our highly cyclical and rapidly changing industry. We will need capital to fund the expansion of our facilities as well as research and development activities in order to remain competitive. We believe that our existing cash and cash equivalents, short-term investments, expected cash flow from operations and existing credit lines under our short-term loan facilities will be sufficient to meet our capital expenditures, working capital, cash obligations under our existing debt and lease arrangements, and other requirements for at least the next twelve months. However, future capacity expansions or market or other developments may cause us to require additional funds. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including:

     If we are unable to obtain external financing in a timely manner, on acceptable terms or at all, we may be unable to implement our expansion plans or conduct planned research and development and develop new products and our growth prospects and future operating results may decline.

If needed cash resources are unavailable to us, we will be unable to implement successfully our research and development plans.

     To keep up with the rapid pace of technological change and to develop attractive and cost-effective products, we need to invest significantly in research and development. We may not be able to generate cash flow from operations in sufficient amounts to allow us to maintain our planned level of spending on research and development. Any failure to maintain adequate research and development spending could reduce our competitiveness and jeopardize our long-term prospects.

If we are unable to manage our expansion effectively, our growth prospects may be limited and our future operating results may be affected.

     We have significantly expanded our operations in recent years, and expect to continue to expand our operations in the future. Rapid expansion puts strain on our managerial, technical, financial, operational and other resources. As a result of our expansion, we have implemented and will continue to need to implement additional operational and financial controls and hire and train additional personnel. Any failure to manage our expansion effectively could lead to inefficiencies and redundancies and result in reduced growth prospects and operating results.

If we are unable to effectively manage seasonal fluctuations in the demand for our products, our business and operating results may be adversely affected.

     We have in the past experienced, and we expect to continue to experience, seasonal fluctuations in the demand for our products. In particular, we typically generate higher sales during the third and fourth quarters of the year. In anticipation of the higher demand in these quarters and to smooth out and manage rationally the use of our capacity over the course of the full year, we typically build up inventory in the first and second quarters of the year. However, if we are unable to increase our manufacturing capacity or build up inventory ahead of demand to meet seasonal or additional future demand on a timely basis, our customers may seek other manufacturing sources to meet their needs and our business and operating results may be adversely affected. In addition, if we are unable to effectively manage our manufacturing capacity during a seasonal downturn in demand or if we build up inventory in anticipation of demand that does not materialize, our results of operations would also be adversely affected.

Delays or other constraints in the expansion or construction of our fabrication plants could delay increases in our capacity, which may adversely affect our growth and prospects.

     We completed construction of Fab III in July 2002. However, due to the recent adverse market conditions that prevailed in the semiconductor industry, we expect full commencement of operations at Fab III to be delayed until 2005 or later. We are utilizing part of the space in Fab III to supplement production in Fab II. We could delay the commencement of full commercial operation of Fab III beyond 2005 if there is no significant sustained improvement in market conditions.

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     If we experience delays or other constraints in the expansion, construction or the commencement of full commercial operations of our fabrication plants, planned increases in our capacity could be delayed and our results of operations could be adversely affected.

Our revenues and operating results may decline if we are unable to obtain adequate supplies of raw materials in a timely manner and at a reasonable price.

     Our manufacturing operations require that we obtain adequate supplies of raw materials on a timely basis. Our primary raw materials include six-inch and eight-inch wafers, chemicals and gases and other inputs, which we purchase from a limited number of suppliers. In particular, wafer manufacturing capacity and supply in the Taiwan semiconductor industry have from time to time been, and in the future may be, in short supply, and our future growth will depend in large part on securing a continuous supply of six-inch and eight-inch wafers. We cannot assure you that we will be able to obtain adequate supplies of raw materials in a timely manner and at a reasonable price. Our revenue and operating results could decline if we are unable to obtain adequate supplies of high quality raw materials in a timely manner or if there are significant increases in the costs of raw materials that we could not pass on to our customers.

If we are unable to obtain additional equipment in a timely manner and at reasonable cost, our competitiveness and future operating results may be adversely affected.

     We expect to purchase a significant amount of additional equipment to expand our operations. In particular, our plans for the enhancement of Fab I and Fab II, as well as the commencement of full commercial operations of Fab III, will require additional advanced and expensive equipment. The market for our equipment is characterized, from time to time, by intense demand, limited supply and long delivery cycles. In addition, we do not have binding supply agreements with any of our suppliers and acquire our equipment on a purchase order basis, which exposes us to changing market conditions and other substantial risks. As a result, if we are unable to obtain equipment in a timely manner and at a reasonable cost, we may not be able to expand our manufacturing capacity and fulfill our customers’ orders, which could adversely affect our growth prospects as well as our financial condition and results of operations.

Derivative contracts may expose us to risks that may adversely affect our financial condition and results of operations.

     We enter into a variety of derivative transactions from time to time for both hedging and trading purposes. These derivative contracts may expose us to or increase our exposure to financial market risks, including foreign currency exchange rates, marketable securities prices (including those of our common shares and bonds) and changes in interest rates. Even when we enter into derivative contracts for hedging purposes, there may be imperfect correlation or even no correlation, between price movements of a derivative instrument and price movements of the underlying item being hedged, which will result in a less effective or ineffective hedge. Moreover, although successful hedging strategies could reduce our risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the hedged item, hedging strategies could also reduce our opportunity for gain by offsetting the positive effect of favorable price movements in the hedged item.

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

     We may also be required to pledge assets as collateral security, maintain segregated accounts or make margin payments when we take positions in derivative instruments involving obligations to third parties (i.e., derivative instruments other than purchased options). If we were to be unable to close out our positions in these derivative instruments, we may be required to continue to pledge such assets, maintain such accounts or make such payments until the positions expire or mature. Our ability to close out a position in a derivative instrument prior to its expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of counterparty to enter into a transaction closing out the position. We cannot assure you that we will be able to close out a derivative position at a time and price that is favorable to us.

     We are also exposed to the credit risk of the counterparties to our derivatives contracts. In particular, any failure by a counterparty to honor the terms of its derivatives contracts with us may adversely affect our financial condition and results of operations.

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We are vulnerable to natural disasters and other events beyond our control, which could severely disrupt the normal operation of our business and adversely affect our operating results.

     All of our existing manufacturing operations are in Hsinchu, Taiwan, which is vulnerable to natural disasters. Disruption of operations at our manufacturing facilities for any reason, including earthquakes, droughts, power outages, typhoons or other events beyond our control, would cause delays in shipments of our products, which could result in the loss of revenue and/or customers.

     Taiwan is also susceptible to earthquakes and has experienced severe earthquakes that caused significant property damage and loss of life, particularly in the central and eastern parts of Taiwan. These earthquakes damaged production facilities and equipment and adversely affected the operations of many companies involved in the semiconductor and other industries, including our company. Moreover, there were interruptions to our production schedule primarily as a result of power outages caused by these earthquakes.

     As a result of the rapid growth of the Taiwan semiconductor industry, which is primarily based in Hsinchu, there has been increased demand for water and electricity in that region. Any shortage of water or electricity could have a material and adverse effect on our operations. Many areas in Taiwan experienced a severe drought in 2002 causing Taiwan authorities to announce water-rationing measures in the northern parts of Taiwan. If a drought occurs again and authorities are unable to source water from alternative sources in sufficient quantities, we may be required to temporarily shut down or substantially reduce production at our facilities in the affected areas, which would seriously affect our operations.

     Many of our suppliers and customers and providers of semiconductor manufacturing services, including foundries, are located in Taiwan. If our customers are affected by an earthquake, a drought or other natural disasters, it could result in a decline in the demand for our products and services. If our suppliers and providers of semiconductor manufacturing services are affected, our production schedule could be interrupted or delayed. As a result, a major earthquake, drought or other natural disaster in Taiwan could severely disrupt the normal operation of business and have a material adverse effect on our financial condition and results of operations.

     While we maintain several insurance policies relating to our business, including business interruption insurance, we cannot assure you that the insurance coverage will be sufficient to protect us from potential losses resulting from natural disasters and other events beyond our control. In addition, we cannot assure you that the premium payable for these insurance policies upon renewal will not increase substantially, which may adversely affect our financial condition and results of operations. Furthermore, any failure or inability to obtain the necessary insurance coverage on a timely basis, or at all, may severely increase our operating risk.

We are subject to stringent environmental regulations and any violation could require us to pay significant fines, or result in a delay or interruption of our operations.

     We are subject to environmental regulations relating to our manufacturing processes, including the use, storage, discharge and disposal of chemical by-products of, and water used in, our production process. A failure or a claim that we have failed, to comply with these environmental regulations could result in the assessment of damages or imposition of significant fines, delays in our production and capacity expansion and negative publicity, all of which could harm our business. New regulations could also require us to acquire costly equipment or to incur other significant expenses. In addition, any failure by us to control the use of, or adequately restrict the discharge of, hazardous substances could subject us to future liabilities that may have a material adverse effect on our financial condition and results of operations.

New corporate governance legislation and regulations in the United States could increase the cost of compliance, while recent corporate scandals could increase the risks associated with non-compliance.

     As a result of recent corporate governance scandals in the United States and the legislative and litigation environment resulting from those scandals, the costs of being a public reporting company in the United States generally have increased and are expected to increase further in the near future as we implement measures to comply with applicable laws and regulations. New legislation, such as the Sarbanes-Oxley Act of 2002, will have the effect of increasing the burdens and potential liabilities of being a public reporting company in the United States. This and other proposed legislation may increase the fees of our professional advisors and our insurance premiums. Any failure to comply with these requirements will increase our exposure and the exposure of our chief executive officer and chief financial officer, to the risk of enforcement actions and litigation, and could cause our share price to fall.

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Any impairment charges required under U.S. GAAP may have a material adverse effect on our net income on a U.S. GAAP reconciled basis.

     Under currently effective U.S. GAAP, we are required to evaluate our equipment and other long-lived assets for impairment whenever there is an indication of impairment. If certain criteria are met, we are required to record an impairment charge. We can give no assurance that impairment charges will not be required in periods subsequent to December 31, 2003. We are currently not able to estimate the extent and timing of any goodwill impairment charge for future years. Please see note 20 to our consolidated financial statements for the years ended December 31, 2001, 2002 and 2003 included in this annual report for a discussion of the criteria that, if met, may require impairment charges.

     The determination of an impairment charge at any given time is based significantly on our expected results of operation over a number of years subsequent to that time. As a result, an impairment charge is more likely to occur during a period when our operating results are otherwise already depressed.

The differences between ROC GAAP and U.S. GAAP result in different amounts of net income under those standards, which makes evaluating our financial performance difficult.

     Our consolidated financial statements are prepared under ROC GAAP, which differ in many significant respects from U.S. GAAP. For example, ROC GAAP does not require the recognition of the value of shares distributed as bonuses to employees when calculating net income, and ROC GAAP and U.S. GAAP differ in some important respects in accounting for gains and losses on derivative financial instruments. Largely as a result of the differences in accounting for employee bonuses in the form of our common shares, derivative instruments and convertible debt securities with beneficial conversion features, we reported under U.S. GAAP net loss of NT$4,463 million in 2001, NT$13,841 million in 2002 and NT$8,877 million (US$261.2 million) in 2003, as compared to, under ROC GAAP, net loss of NT$866 million in 2001, NT$11,357 million in 2002 and NT$8,198 million (US$241.2 million) in 2003. See note 20 to our consolidated financial statements for the years ended December 31, 2001, 2002 and 2003 included in this annual report.

Risks Relating to Technology and Intellectual Property

Our return to profitability depends on our ability to respond to rapid technological changes in the semiconductor industry.

     The markets for semiconductors and electronic systems that use semiconductor products are subject to rapid technological change. This rapid change results in:

     Our success depends on our ability to improve and develop our core technologies in a rapidly changing technological environment. In particular, we expect that we will need to constantly offer more sophisticated technologies and processes in order to respond to competitive industry conditions and customer requirements. We cannot assure you, however, that we will be able to identify new product opportunities or to timely develop and successfully market new products. We may also experience delays in developing or achieving volume production of new products. Moreover, our new products may fail to gain market acceptance, and existing products may become obsolete. For example, our sales of Mask ROM products fell when Nintendo shifted to DVD-ROM technology in its newer products, and may continue to fall further as products move to competing technologies. If we fail to develop, or obtain access to, advances to technologies and processes, we may become less competitive and be unable to return to profitability.

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We depend on our technology partners to advance our portfolio of process technologies, and we may not be able to advance our portfolio of process technologies if our technology partners fail to advance their technology, if we fail to maintain our existing arrangements with our technology partners or if we are unable to enter into new arrangements with other technology providers.

     Enhancing our product design and manufacturing process technologies is critical to our ability to provide products and services for our customers. In particular, we have an internal research and development team focusing on developing new semiconductor manufacturing process technologies. We also depend on our technology arrangements with leading integrated device manufacturers and fabless semiconductor companies, consumer electronics and communications companies and other technology providers to advance our portfolio of process technologies. We believe these arrangements help reduce our development costs and capital expenditures and increase the capacity utilization rates in our fabrication plants. If we are unable to maintain successful technology arrangements on mutually beneficial economic terms, or are unable to enter into new technology arrangements with other leading semiconductor companies, electronics companies and other technology providers, we may not be able to continue providing our customers with leading-edge process technologies, which may adversely affect our competitiveness as well as our business and prospects.

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

     Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified to improve manufacturing yields and product performance. Impurities or other difficulties in the manufacturing process or defects with respect to equipment or supporting facilities can lower manufacturing yields, interrupt production or result in losses of products in process. As system complexity has increased and process technology has become more sophisticated, requirements for precision have become even more stringent. In particular, defective production can result from a number of factors, including:

     From time to time, we experience lower than anticipated production yields as a result of these factors, particularly in connection with the expansion of our capacity or changes in our processing methods. Our yield on new products is often lower as time is required for us to develop expertise and experience in producing these products. We typically sell our products on a per-die basis and lower yields can reduce the number of units we can sell, which causes our revenues and profits to suffer. If we fail to maintain high quality production standards and yields, our business and operating results may suffer and our customers may cancel their orders or return our products.

Our business depends in part on our ability to obtain and preserve intellectual property rights.

     Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our proprietary technology. We rely on patents, copyrights and trade secret protection rights to protect some of our proprietary technologies and products. We cannot assure you that these measures will provide meaningful protection of our intellectual property or commercial advantage. For example, our competitors may be able to use our technologies to develop similar or superior products, and we may not have sufficient financial resources to protect and enforce our rights. We intend to continue to file patent applications when appropriate to protect our proprietary technologies, but the process of seeking patent protection can be lengthy and expensive. In addition, patents may not be issued for pending or future applications. Furthermore, if patents are issued, they may be challenged, invalidated or circumvented. Moreover, the various countries in which we market our products may not protect our intellectual property rights to the same extent as does the United States. See “Item 5. Operating and Financial Review and Prospects — Research and Development, Patents and Licenses, etc. — Research and Development” and “— Intellectual Property”.

We may be subject to intellectual property rights disputes that could expose us to serious liabilities.

     The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. Our ability to compete successfully depends on our ability to operate without infringing the proprietary rights of others. We have no means of knowing what patent applications have been filed in the United States or elsewhere until the applications

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or resulting patent (if one is granted) are made available to the public. Because of the complexity of the technologies used and the multitude of patents, copyrights and other overlapping intellectual property rights, it is often difficult for semiconductor companies to determine infringement. We are currently involved in certain litigation matters involving patent infringement. See “Business — Legal Proceedings”. As is typical in the semiconductor industry, from time to time we receive communications from third parties asserting patents that cover certain of our technologies and alleging infringement of intellectual property rights. We expect to receive similar communications in the future. If a valid claim is made against us or our customers, we may be required to:

     We could be seriously harmed by any of these developments. Litigation, which could result in substantial costs to us and divert our resources, may also be necessary to enforce our patents or other intellectual property rights or to defend against claimed infringement of the rights of others. Our failure to obtain necessary licenses, the occurrence of patent infringement or other intellectual property litigation could seriously harm our company. In addition, although we have from time to time made a reserve in anticipation of royalty payments we may potentially be required to make in relation to any possible claims or allegations, we cannot assure you that we have made, or will continue to make, sufficient reserve for all claims and allegations against our company for any patent infringement. See “Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal Proceedings”.

Political and Economic Risks

Strained relations between the ROC and the People’s Republic of China could adversely affect our business and the market value of your investment.

     Our principal executive offices and most of our assets are located in, and most of our revenue is derived from, our operations in Taiwan. The ROC has a unique international political status. The People’s Republic of China asserts sovereignty over all of China, including Taiwan. The People’s Republic of China government does not recognize the legitimacy of the ROC government. Although significant economic and cultural relations have been established in recent years between the ROC and the People’s Republic of China, relations have often been strained and the People’s Republic of China government has indicated that it may use military force to gain control over Taiwan in some circumstances, such as the declaration of independence by the ROC. Relations between the ROC and the People’s Republic of China have been particularly strained in recent years. Recent speeches and statements by President Chen Shui-bian hinting at independence issues and reactions of Chinese officials to these speeches and statements have increased tensions between the ROC and the People’s Republic of China. Past developments in relations between the ROC and the People’s Republic of China have on occasion depressed the market price of the securities of ROC companies. Relations between the ROC and the People’s Republic of China and other factors affecting the political or economic conditions in Taiwan could have a material adverse effect on our financial condition and results of operations, as well as the market price and the liquidity of our securities.

Fluctuations in exchange rates could result in foreign exchange losses.

     Currently, the majority of our revenue is denominated in U.S. dollars and Japanese yen. Our costs of revenues and operating expenses, on the other hand, are incurred in several currencies, including NT dollars and U.S. dollars. In addition, a substantial portion of our capital expenditures has been and is expected to continue to be, primarily denominated in U.S. dollars and Japanese yen. Fluctuations in exchange rates, primarily among the U.S. dollar, the NT dollar and the Japanese yen, will affect our costs and operating margins. In addition, these fluctuations could result in exchange losses and increased costs in NT dollar and other local currency terms. Despite hedging and mitigating techniques implemented by us, fluctuations in exchange rates have affected, and may continue to affect, our financial condition and results of operations. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk — Foreign Currencies”.

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Disruptions in the international trading environment may significantly reduce our international sales and revenue.

     A substantial portion of our net sales revenue is derived from sales from Taiwan to customers located outside Taiwan. In 2001, 2002 and 2003, export sales from Taiwan to our customers outside Taiwan accounted for 73.7%, 82.5% and 67.9%, respectively, of our net sales revenue. We expect sales to customers outside Taiwan to continue to represent a significant portion of our net sales revenue. Accordingly, our financial condition and results of operations and the market price of our securities may be affected by changes in governmental policies, inflation, increasing interest rates, social instability and other political, economic or social developments in or affecting the countries in which we sell our products that are not within our control. As a result, our business will continue to be vulnerable to disruptions in the international trading environment, including adverse changes in foreign government regulations, political unrest and international economic downturns. These disruptions in the international trading environment affect the demand for our products and the terms upon which we sell our products overseas, which may significantly reduce our international sales and revenue.

The trading price of our common shares may be adversely affected by the general activities of the Taiwan Stock Exchange and the economic performance of Taiwan.

     Our common shares are listed on the Taiwan Stock Exchange. The trading price of our common shares may be affected by the general activities of the Taiwan Stock Exchange and the economic performance of Taiwan. The Taiwan Stock Exchange is smaller and, as a market, more volatile than the securities markets in the United States and a number of European countries. The Taiwan Stock Exchange has experienced substantial fluctuations in the prices and volumes of sales of listed securities, and there are currently limits on the range of daily price movements on the Taiwan Stock Exchange. In the past decade, the Taiwan Stock Exchange Index peaked at 10,202 in February 2000 and subsequently fell to a low of 3,446 in October 2001. During 2003, the Taiwan Stock Exchange Index peaked at 6,142 on November 5, 2003 and reached a low of 4,140 on April 28, 2003. During 2002 and 2003, daily closing prices of our common shares ranged from NT$32.7 per share on April 3, 2003 to NT$4.12 per share on May 22, 2003. On June 23, 2004, the Taiwan Stock Exchange Index closed at 5,729 and the daily closing value of our common shares was NT$10.4 per share. The Taiwan Stock Exchange is particularly volatile during times of political instability, such as when relations between Taiwan and the People’s Republic of China are strained. Moreover, the Taiwan Stock Exchange has experienced problems such as market manipulation, insider trading and payment defaults. The recurrence of these or similar problems could decrease the market prices and liquidity of our common shares, ADSs and GDSs.

     In response to past declines and volatility in the securities markets in Taiwan, and in line with similar activities by other countries in Asia, the government of the ROC formed the Stabilization Fund, which has purchased and may from time to time purchase shares of Taiwan companies to support these markets. In addition, other funds associated with the ROC government have in the past purchased, and may from time to time purchase, shares of Taiwan companies on the Taiwan Stock Exchange or other markets. In the future, market activity by government entities, or the perception that such activity is taking place, may take place or has ceased, may cause fluctuations in the market prices of our common shares, ADSs and GDSs.

Risks Relating to our Common Shares, ADSs and GDSs

We cannot assure you that the market for our common shares and ADSs will be active and liquid, and trading of our GDSs has been extremely illiquid.

     The average daily trading volumes for our common shares and ADSs have fluctuated greatly in the past. During 2003, the daily trading volume of our common shares ranged from approximately 217,633,760 to approximately 3,486,579. During the same period, the average daily trading volume of our ADSs ranged from approximately 255,632 to approximately 100. Since our GDSs began trading in April 2004, trading of our GDSs has been extremely illiquid, and underlying common shares have been withdrawn with respect to a very substantial majority of our GDSs. As of June 21, 2004, GDS holders representing over 95% of our GDSs issued in April 2004 have withdrawn from our GDS program and converted their GDSs to common shares. We cannot assure you that the liquidity of our common shares or ADSs will be maintained or enhanced and expect that trading in our GDSs will continue to be extremely illiquid. Market prices of technology companies’ shares have been and continue to be extremely volatile. As a result, volatility in the price of our common shares, ADSs and GDSs may be caused by factors outside of our control and may be unrelated or disproportionate to our operating results.

     In addition, the EU Transparency Obligations Directive is currently being finalized and may be implemented in Luxembourg, where our GDSs are listed, in a manner that is unduly burdensome for our company. In particular, we may be required to publish financial statements in the EU prepared in accordance with, or reconciled to, International Financial Reporting Standards. In such circumstances we may decide to seek an alternative listing for the GDSs on a stock exchange outside the European Union.

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Future sales of securities by our company or existing shareholders or future issuances of securities by our company may have a dilutive effect and decrease the value of your investment.

     The market price of our common shares and ADSs and GDSs could decline as a result of future sales of a large number of common shares, ADSs or GDSs or the perception that such sales could occur. If we or the holders of our common shares, ADSs or GDSs sell a large number of common shares, ADSs or GDSs, or the perception develops that such an event may occur, the market price for the common shares, ADSs or GDSs could be depressed. In particular, if cash flow from operations is insufficient to allow us to conduct our day-to-day operations or to redeem or otherwise repay our debt or if net losses reduce our equity near or below the minimum level stipulated in covenants under our bank loans, we may need to issue more common shares, ADSs or GDSs in the future, or the perception may arise that we need to do so.

     In addition, we plan to issue, from time to time, additional common shares in connection with employee compensation as well as to finance possible future investments or acquisitions. The issuance of additional shares may have a dilutive effect on other shareholders and may cause the price of our common shares, ADSs and GDSs to decrease. The conversion of our convertible bonds into common shares (and, where applicable, exercise of the right to deposit those common shares in exchange for ADSs or GDSs) may also have a dilutive effect. See “Item 6. Directors, Senior Management and Employees — E. Share Ownership — Share Option Plans” for a discussion of the share option plan that we have adopted for the benefit of all of our officers and employees and those of our subsidiaries.

ADS and GDS holders do not have the same voting rights as our common shareholders, which may affect the value of the ADSs and GDSs.

     The voting rights of ADS and GDS holders as to the common shares represented by the ADSs or GDSs are limited to the extent set forth in the relevant deposit agreement. With respect to matters other than the election of our directors or supervisors, ADS and GDS holders generally are not able to exercise voting rights on an individual basis. With respect to matters other than the election of our directors or supervisors, if holders representing 51% of the outstanding ADSs or GDSs, as the case may be, instruct the depositary to vote in a particular manner, the depositary will cause all common shares represented by the ADSs or GDSs to be voted in that manner. If the depositary does not receive instructions representing at least 51% of the outstanding ADSs or GDSs, as the case may be, to vote in a particular manner, ADS or GDS holders, as the case may be, will be deemed to have instructed the depositary to authorize all the common shares represented by their ADSs or GDSs to be voted at the discretion of our designated representative, which may not be in the interest of all ADS or GDSs holders.

     The ROC Company Law and our articles of incorporation provide that a shareholder has one vote for each common share. There is also cumulative voting for the election of directors and supervisors.

The rights of holders of our ADSs and GDSs to participate in our rights offerings may be limited, which may cause dilution to their holdings.

     We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the ADS deposit agreement, the depositary will not offer those rights to holders of ADSs unless both the rights and the underlying securities to be distributed to holders of ADSs are either registered under the U.S. Securities Act of 1933 (the “Securities Act”) or exempt from registration under the Securities Act. Under the GDS deposit agreement, the depositary will not offer those rights to holders of GDSs if it deems the distribution of rights to holders of GDSs not to be lawful and reasonably practicable. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. Accordingly, holders of our ADSs and GDSs may be unable to participate in our rights offerings and may experience dilution in their holdings.

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

     Our corporate affairs are governed by our articles of incorporation and by the laws governing Taiwanese corporations. The rights and responsibilities of our shareholders and members of our board of directors under Taiwan law are different from those that apply to a U.S. corporation. Therefore, our public shareholders may have more difficulty protecting their interests against certain actions of our management, members of our board of directors or controlling shareholders than they would as shareholders of a U.S. corporation.

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ADS and GDS holders may be required to appoint agents in Taiwan to handle various tax and administrative matters if they withdraw common shares from our ADS or GDS program and become shareholders, which may make share ownership burdensome.

     Non-ROC persons wishing to withdraw their common shares from our ADS or GDS program and become shareholders are required under current ROC laws and regulations to appoint a local agent or representative (a “Tax Guarantor”) in Taiwan for making tax payments on their behalf. A Tax Guarantor must meet certain qualifications set by the ROC Ministry of Finance and, upon appointment, becomes a guarantor of the holder’s ROC tax obligations. Holders wishing to repatriate profits derived from the sale of common shares or cash dividends or interest derived from any such common shares, will be generally required to submit evidence of appointment of a Tax Guarantor and the approval of the appointment by the ROC tax authorities. We cannot assure you that you will be able to appoint and obtain approval for a Tax Guarantor in a timely manner.

     Under ROC law and regulations, citizens of the People’s Republic of China are not permitted to hold our common shares.

     In addition, under current ROC law, such ADS or GDS holders will be required to appoint a local agent in Taiwan to, among other things, open a securities trading account with a local securities brokerage firm, remit funds and exercise shareholders’ rights. They must also appoint a local bank to act as custodian for handling confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting and declaration of information. In addition, they will be required to register with the Taiwan Stock Exchange for making investments in the ROC securities market (and if you are an offshore foreign institutional investor, to obtain the prior approval of the Central Bank of China) prior to withdrawing common shares. Without meeting these requirements, non-ROC persons will not be able to hold, subsequently sell or otherwise transfer our common shares on the Taiwan Stock Exchange.

Changes in exchange controls which restrict your ability to convert proceeds received from your ownership of ADSs or GDSs may have an adverse effect on the value of your investment.

     Under current ROC law, a holder of our ADSs or GDSs who withdraws and becomes a holder of our common shares may be required to obtain foreign exchange approval from the Central Bank of China on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights for new common shares. Although it is expected that the Central Bank of China will grant this approval as a routine matter, we cannot assure you that in the future any approval will be obtained in a timely manner, or at all.

     Furthermore, pursuant to the ROC Foreign Exchange Control Law, the Executive Yuan of the ROC government may, without prior notice but subject to subsequent legislative approval, impose foreign exchange controls in the event of, among others, a material change in international economic conditions. We cannot assure you that foreign exchange controls or other restrictions will not be introduced in the future.

When withdrawing the underlying common shares of the ADSs or GDSs, you may be required to provide certain information to us or the Depositary, and failure to provide such information may result in a delay of the withdrawal.

     When withdrawing the underlying common shares of ADSs or GDSs, you may be required to provide certain information to us or the depositary, including the name and nationality of the person to be registered as the shareholder, the number of common shares to be acquired by such person and the number of common shares acquired by such person in the past through the date of the withdrawal of the underlying common shares. Under applicable ROC laws, we are required to report to the ROC Securities and Futures Commission (the “ROC SFC”) if the person to be registered as a shareholder (i) is a “related party” of ours as defined in the ROC Statement of Financial Accounting Standard No. 6 or (ii) will hold, immediately following such withdrawal, more than 10% of the underlying common shares of the ADSs or GDSs. Failure to provide such information may cause the delay of such withdrawal of the underlying common shares.