UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

o		Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

or

þ		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2005

or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                                          to                                         

or

o		Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of event requiring this shell company report                                         

Commission file number 1-14700

(Exact Name of Registrant as Specified in Its Charter)

Siliconware Precision Industries Co., Ltd.

(Translation of Registrant’s Name Into English)

Taiwan, Republic of China
(Jurisdiction of Incorporation or Organization)

No. 123, Sec. 3, Da Fong Road, Tantzu, Taichung, Taiwan, ROC
(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
None

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

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2005, 2,328,919,337 Common Shares were outstanding

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

     Yes þ No o

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

     Yes o No þ

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

     Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

     Large accelerated filer þ       Accelerated filer o      Non-accelerated filer o

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

     Item 17 o Item 18 þ

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

     Yes o No þ

 

 

SILICONWARE PRECISION INDUSTRIES CO., LTD.
FORM 20-F ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 2005

TABLE OF CONTENTS

		Page
Forward Looking Statements in This Annual Report May Not Be Accurate			1
PART I			2
Item 1. Identity of Directors, Senior Management and Advisers			2
Item 2. Offer Statistics and Expected Timetable			2
Item 3. Key Information			2
Item 4. Information on the Company			18
Item 4A. Unresolved Staff Comments			36
Item 5. Operating and Financial Review and Prospects			36
Item 6. Directors, Senior Management and Employees			58
Item 7. Major Shareholders and Related Party Transactions			63
Item 8. Financial Information			65
Item 9. The Offer and Listing			66
Item 10. Additional Information			68
Item 11. Quantitative and Qualitative Disclosures About Market Risk			81
Item 12. Description of Securities Other Than Equity Securities			82
PART II			83
Item 13. Defaults, Dividend Arrearages and Delinquencies			83
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			83
Item 15. Controls and Procedures			83
Item 16A. Audit Committee Financial Expert			83
Item 16B. Code of Ethics			83
Item 16C. Principal Accountant Fees and Services			84
Item 16D. Exemptions from the Listing Standards for Audit Committees			84
Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers			84
PART III			84
Item 17. Financial Statements			84
Item 18. Financial Statements			84
Item 19. Exhibit Index			86
EX-8.1 LIST OF SIGNIFICANT SUBSIDIARIES
EX-12.1 CERTIFICATION OF CEO PURSUANT TO SEC. 302
EX-12.2 CERTIFICATION OF CFO PURSUANT TO SEC. 302
EX-13.1 CERTIFICATION OF CEO PURSUANT TO SEC. 1350
EX-13.2 CERTIFICATION OF CFO PURSUANT TO SEC. 1350
EX-15.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Forward Looking Statements in This Annual Report May Not Be Accurate

     Our disclosure and analysis in this annual report contain or incorporate by reference some forward-looking statements. Our forward-looking statements contain information regarding, among other things, our financial condition, future expansion plans and business strategy. We have based these forward-looking statements on our current expectations and projections about future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Although we believe that these expectations and projections are reasonable, such forward-looking statements are inherently subject to risks, uncertainties and assumptions about us, including, among other things:

	•		the intensely competitive semiconductor and personal computer industries and markets;
	•		risks associated with international business activities;
	•		our dependence on key personnel;
	•		natural disasters, such as earthquakes and droughts, which are beyond our control;
	•		general economic and political conditions, including those related to the semiconductor and personal computer industries;
	•		possible disruptions in commercial activities caused by human-induced disasters, including terrorist activity and armed conflict, and outbreaks of contagious diseases, such as avian influenza which reduce end-user purchases relative to expectations and orders;
	•		fluctuations in foreign currency exchange rates;
	•		additional disclosures we make in our previous and future Form 20-F annual reports and Form 6-K periodic reports to the Securities and Exchange Commission, or the SEC; and
	•		those other risks identified in “Item 3. Key Information—D. Risk Factors” of this annual report.

     The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “shall” and similar expressions, as they relate to us, are intended to identify a number of these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur and our actual results could differ materially from those anticipated in these forward-looking statements.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

     Not applicable.

Item 2. Offer Statistics and Expected Timetable

     Not applicable.

Item 3. Key Information

     A. Selected Financial Data

     The selected financial data shown below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects,” and the financial statements and the notes to those statements included elsewhere in this annual report. The selected statement of income data for the years ended December 31, 2003, 2004 and 2005 and the selected balance sheet data as of December 31, 2004 and 2005 have been derived from our audited financial statements included elsewhere in this annual report. The selected statement of income data for the years ended December 31, 2001 and 2002 and the selected balance sheet data as of December 31, 2001, 2002 and 2003 have been derived from our audited financial statements not included in this annual report. The financial statements have been prepared and presented according to generally accepted accounting principles in the Republic of China, or ROC GAAP, which differ in many important respects from generally accepted accounting principles in the United States, or US GAAP. For a discussion of the material differences, see note 30 to our financial statements included elsewhere in this annual report. Some of our statement of income and balance sheet data items have been reconciled to US GAAP as shown below.

		Year Ended December 31,
		2001				2002				2003				2004				2005
		NT$				NT$				NT$				NT$				NT$				US$(6)
		(in millions, except earnings (loss) or dividends per share and per ADS data)
Income Statement Data:
ROC GAAP
Net operating revenues			16,530				22,299				27,411				35,252				43,488				1,326
Cost of goods sold			(15,109	)			(20,210	)			(23,298	)			(28,871	)			(33,960	)			(1,035	)
Gross profit			1,421				2,089				4,113				6,381				9,528				291
Operating expenses			(1,428	)			(1,542	)			(1,592	)			(2,048	)			(2,279	)			(70	)
Operating income			(7	)			547				2,521				4,333				7,249				221
Equity investment income (loss)(1)			(1,199	)			61				(533	)			308				448				14
Other non-operating income(1)			608				469				882				732				853				26
Other non-operating expenses			(884	)			(797	)			(667	)			(1,548	)			(941	)			(29	)
Income (loss) before income tax(1)			(1,482	)			280				2,203				3,825				7,609				232
Income tax benefit			283				145				636				457				(16	)			(0.5	)
Income from continuing operations			(1,183	)			425				2,839				4,282				7,593				231.5
Cumulative effects of changes in accounting principles			—				—				—				—				651				19.5
Net income (loss)(1)(2)			(1,183	)			425				2,839				4,282				8,244				251
Earnings (loss) per share(3)
Basic			(0.54	)			0.19				1.30				1.93				3.59				0.11
Diluted			(0.54	)			0.19				1.18				1.51				3.38				0.10
Shares used in per share calculation (average, as adjusted)(2)
Basic			2,195				2,169				2,182				2,216				2,294				2,294
Diluted			2,195				2,169				2,448				2,604				2,670				2,670
Earnings (loss) per ADS(3)

		Year Ended December 31,
		2001				2002				2003				2004				2005
		NT$				NT$				NT$				NT$				NT$				US$(6)
		(in millions, except earnings (loss) or dividends per share and per ADS data)
Basic			(2.70	)			0.95				6.50				9.65				17.95				0.55
Diluted			(2.70	)			0.95				5.90				7.55				16.90				0.52
Dividends per share(4)			1.45				—				—				1.35				1.55				0.05
ADSs used in per ADS calculation (average, as adjusted)(3)
Basic			439				434				436				443				459				459
Diluted			439				434				490				521				534				534
						(Restated)				(Restated)				(Restated)
US GAAP
Net income (loss)			(1,790	)			(169	)			3,097				3,671				3,971				121
Earnings (loss) per share(5)
Basic			(0.82	)			(0.08	)			1.42				1.65				1.74				0.05
Diluted			(0.82	)			(0.08	)			1.34				1.27				1.73				0.05
Shares used in per share calculation (average, as adjusted)(5)
Basic			2,176				2,169				2,182				2,225				2,277				2,277
Diluted			2,176				2,169				2,449				2,422				2,295				2,295
Earnings (loss) per ADS
Basic			(4.10	)			(0.40	)			7.10				8.25				8.70				0.27
Diluted			(4.10	)			(0.40	)			6.70				6.35				8.65				0.26
ADSs used in per ADS calculation (average, as adjusted)(5)
Basic			435				434				436				445				455				455
Diluted			435				434				514				484				459				459

		Year Ended December 31,
		2001				2002				2003				2004				2005
		NT$				NT$				NT$				NT$				NT$				US$(6)
		(in millions)
Other Data:
ROC GAAP
Capital expenditures			5,474				6,445				4,885				9,785				8,245				251
Depreciation and amortization			4,323				4,902				5,185				6,153				6,572				200

		As of December 31,
		2001				2002				2003				2004				2005
		NT$				NT$				NT$				NT$				NT$				US$(6)
		(in millions)
Balance Sheet Data:
ROC GAAP
Cash and cash equivalents			6,310				5,970				12,203				10,922				12,341				376
Working capital			6,176				6,856				4,766				13,492				15,475				472
Total assets			42,566				46,236				54,658				58,962				67,175				2,048
Short-term debt and current portion of long-term debt			2,667				2,968				10,342				4,013				1,885				57
Long-term debt			10,640				14,143				8,813				16,639				14,644				446
Total liabilities			16,519				20,057				24,960				25,469				26,350				803
Total stockholders’ equity			26,047				26,179				29,698				33,493				40,825				1,245
						(Restated)				(Restated)				(Restated)
US GAAP
Total assets			47,852				50,333				61,756				65,118				81,167				2,475
Total liabilities			16,517				20,017				25,419				26,020				29,776				908
Total stockholders’ equity			31,335				30,316				36,337				39,098				51,391				1,567

     Subsequent to the filing of our consolidated financial statements on Form 20-F for the year ended December 31, 2004, we determined that our accounting for the derivative instruments, embedded in our convertible bonds, was incorrect. The accounting for such embedded derivatives is described in note 30 to our financial statements included elsewhere in this annual report. We have corrected our US GAAP reconciliation for the years ended December 31, 2002, 2003 and 2004 accordingly. However, we discuss the results of restatement only for the years ended December 31, 2003 and 2004 in our financial statements. The effects of the amendments made for the year ended December 31, 2002 not included in note 30 are set out as below:

( in millions)		As reported				Restatement				As restated
Net income			(223	)			54				(169	)
Earnings(Loss) per share:
Basic			(0.11	)			0.03				(0.08	)
Diluted			(0.11	)			0.03				(0.08	)
Total assets			50,333				0				50,333
Total liabilities			20,071				(54	)			20,017
Total shareholders’ equity			30,262				54				30,316

Currency Translations and Exchange Rates

     We have translated certain New Taiwan dollars, or NT dollars, amounts included in this annual report into US dollars for the convenience of the readers. The rate we used for the translations was NT$32.80 = US$1.00, which was the noon buying rate announced by the Federal Reserve Bank of New York on December 30, 2005. The translation does not mean that NT dollars could actually be converted into US dollars at that rate. The following table shows the noon buying rates for NT dollars expressed in NT dollar per US$1.00.

Year Ended December 31,		Average(1)				High				Low				At Period-End
2001			33.91				35.13				32.23				35.00
2002			34.53				35.16				32.85				34.70
2003			34.41				34.98				33.72				33.99
2004			33.27				34.16				31.74				31.74
2005			32.16				33.77				30.65				32.80
October			33.47				33.77				33.19				33.55
November			33.58				33.71				33.39				33.51
December			33.29				33.56				32.80				32.80
2006
January			32.04				32.59				31.83				31.97
February			32.32				32.65				31.97				32.40
March			32.46				32.62				32.28				32.42
April			32.29				32.54				31.90				31.90
May			31.74				32.13				31.28				31.99
June (up to June 15, 2006)			32.31				32.62				32.02				32.53

     B. Capitalization and Indebtedness

     Not applicable.

     C. Reasons for the Offer and Use of Proceeds

     Not applicable.

     D. Risk Factors

     Our business and operations are subject to various risks, many of which are beyond our control. If any of the risks described below actually occurs, our services, financial condition or results of operations could be seriously harmed.

Risks Relating to Our Financial Condition and Business

     Our historical net operating revenues and results of operations have varied, at times significantly, from quarter to quarter. Our future net operating revenues, gross profit and operating income may vary significantly due to a combination of factors. These factors include:

•

our ability to develop and implement new technologies. If we are unable to successfully implement new technologies in a timely manner, our operating results could suffer because we would allow our competitors to seize the opportunities in developing new markets.

	•		changes in our product mix or our customers’ preferences. When we discontinue or add a product or when our customers’ demand change, our operating results usually fluctuate.
	•		changes in capacity utilization. When capacity utilization is low, such as in times of market downturns, we may need to adjust our product mix to respond to changes in demand and to adjust our prices sufficiently enough to maintain the level of our capacity utilization.

     Moreover, the growing demand for substrate packaging which uses higher-cost raw materials has caused the costs of production for semiconductor packaging to rise significantly. If our revenues do not grow and we are unable to reduce our expenses, our profitability will suffer.

     Because our services is, and will continue to be, dependent on the requirements of semiconductor companies for independent testing and assembly services, any downturn in the highly cyclical semiconductor industry may reduce demand for our services and adversely affect our results of operations. Variations in order levels from our customers and in service fee rates may result in volatility in our net operating revenues and earnings. The markets for semiconductors are also characterized by rapid technological change, evolving industry standards and periods of heightened competition. If demand for semiconductor capacity does not keep pace with the growth of supply, or further declines, our services would be subject to more intense competition and our results of operations may suffer because of the resulting downward pricing pressure and capacity underutilization. From the last quarter of 2000 to early 2003, we also experienced intense competition in the semiconductor industry worldwide and oversupply of packaging and testing capacities in the local market. This increased competition caused average selling prices of many of our semiconductor packages and testing services to decrease significantly. Downward pressure on average selling prices led to pressure on our gross margins which negatively affected our operating results. Future downturns in the semiconductor industry may be severe. In the event of any future downturn, our average selling prices may decline without a corresponding decrease in our high fixed costs. This could lead to a decline in our gross margin, which would seriously harm our services.

     The general recovery in the semiconductor industry since 2003 could be temporary and could be adversely affected by general economic uncertainties created by the possibility of future terrorist attacks, retaliatory actions, hostilities and outbreaks of contagious diseases. Since we cannot predict results for 2006 and subsequent periods with confidence at this time, we cannot assure you that our results would continue to improve; any unfavorable factors such as those described above could materially and adversely affect our results of operations.

     A significant percentage of our net operating revenues is derived from customers who use our manufacturing services to make semiconductors for personal computers. In 2003, 2004 and 2005, more than 40% of our net operating revenues were attributable to customers whose products are primarily used in personal computers or personal computer peripherals. Our results of operations were negatively affected in 2001 due to reduced demand for personal computer products as a result of the global economic downturn between late 2000 and 2002. However, our net operating revenues improved in 2002 and 2003 compared to 2001 due partially to increased demand for personal computers as market conditions in 2002 and 2003 have generally improved compared to 2001. Our net operating revenues increased in 2004 compared to 2003 and in 2005 compared to 2004 due in part to general improvement in the personal computer industry. Any future decrease in the demand for personal computers may decrease the demand for our services and would likely to seriously harm our operating results. In addition, the declining average selling price of personal computers has placed significant pressure on the price of the components that are used in these personal computers. We believe the average selling price of personal computers will continue to decrease, and the resulting pricing pressure on the semiconductor components we package and test may reduce our net operating revenues and reduce our gross profit margin significantly.

     Our customers generally do not place purchase orders far in advance, and our contracts with major domestic customers do not generally require minimum purchase of our products or services. In addition, our customers’ purchase orders have varied significantly from period to period because demand for their products is often volatile. As a result, we do not typically operate with any significant backlog. The lack of a significant backlog makes it difficult for us to forecast our net operating revenues in future periods and causes our operating results to fluctuate from period to period. 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. For example, in 1999 and early 2000, we incurred significant costs in expectation of strong demand in the semiconductor market, but this demand did not fully materialize because of the market downturn between late 2000 and early 2003. We expect that in the future our net operating revenues in any quarter will continue to be substantially dependent upon purchase orders received in that quarter. We cannot assure you that any of our customers will continue to place orders with us in the future at the same levels as in prior periods. We also cannot assure you that our customers’ orders will be consistent with our expectations when we made or will make the necessary investments in raw materials, labor and equipment.

     As of March 31, 2006, we owned 28.8% equity interest in ChipMOS, a provider of semiconductor packaging and testing services. If ChipMOS requires guarantees of its indebtedness to obtain financing, we and Mosel Vitelic Inc., or Mosel Vitelic, the other major investor in ChipMOS, are required under the joint venture agreement establishing ChipMOS to provide these guarantees in the ratios of 30% and 70%, respectively. Because ChipMOS did not provide its financial statements to us in time to enable us to recognize its financial results for 2002, prior to January 1, 2005, the Securities and Futures Bureau of the ROC, or the ROC SFB (the predecessor of the Financial Supervisory Commission of the ROC, or the ROC FSC), allows us to delay the recognition of the income (loss) of ChipMOS in our financial results until June 30 of the following year. Thus, we recorded no investment income or loss of ChipMOS in our financial results under ROC GAAP for 2002. The audited financial results of ChipMOS in 2002 were available to us in the first quarter of 2003, and we recorded an investment loss amounting to NT$366 million. This investment loss was included in our financial results for the three months ended March 31, 2003. If this investment loss had been included in our results for 2002, our net income for 2002 would have been decreased by the same amount. In 2003 and 2004, we also experienced similar delays in recognition of investment income. For the three months ended March 31, 2004, we recognized an investment income of NT$247 million from ChipMOS’s financial results in 2003. For the three months ended March 31, 2005, we recognized an investment income of NT$667 million from ChipMOS’s financial results in 2004. From January 1, 2005, we adopted the amended ROC Statement of Financial Accounting Standards No. 5, “Accounting for Long-term Equity Investment”, pursuant to which we ceased to defer the recognition of investment income of investees accounted for under the equity method until the subsequent year, and recognized investment income from all investees accounted for under the equity method based on investees’ audited financial statements for the same periods then ended. Under US GAAP, however, there is no provision that allows us to delay recognition of ChipMOS’s income or loss. In 2003, our investment loss from ChipMOS was NT$250 million under US GAAP. In 2004, our investment income from ChipMOS was NT$664 million under US GAAP. In 2005, our investment income from ChipMOS was NT$469 million (US$14.3 million) under US GAAP. We cannot assure you that ChipMOS will maintain its positive operating results in the future. A decline in the operating results of ChipMOS would reduce our participation in the memory chip package and testing market and adversely affect our non-operating income (loss) and net income (loss).

     As of March 31, 2006, we owned 28.8% equity interest in ChipMOS. Since ChipMOS is a provider of semiconductor packaging and testing services, our substantial interest in ChipMOS may lead to potential conflicts of interest in the expansion and development of the semiconductor packaging and testing markets. These conflicts may result in lost corporate opportunities or actions that may prevent us from taking advantage of opportunities to expand and improve our operations.

     In 2001, our capacity utilization rates were negatively affected by a general global economic downturn and decreased market demand in the semiconductor industry in general. As a result, our profitability suffered severely in 2001. From 2002 to 2005, our capacity utilization rates increased significantly due to improved demand for our products and services as market conditions from 2002 to 2005 have generally improved compared to 2001. We cannot assure you that we will be able to achieve or sustain a high utilization rate in the future. Nor can we assure you that declines in the semiconductor industry or other factors will not harm our capacity utilization or our profitability in the future.

     Given the high fixed costs of our services, high capacity utilization allows us to maintain higher gross margins because it allows us to allocate fixed costs over a greater number of units we package and test. Increases or decreases in capacity utilization rates can have a significant effect on our services. Accordingly, our ability to enhance our gross margins will depend, in part, on our ability to continue to increase our capacity utilization rates.

     In addition, in order to continue to increase or sustain our capacity utilization we must:

	•		ensure that our packaging and testing technologies meet our customers’ needs;
	•		install advanced equipment in anticipation of new business; and
	•		prevent disruption of operations due to fire, accidents, mechanical and technical failures, expansion, introduction of new packages or relocation of equipment.

     If demand for our services does not meet our expectations, our capacity utilization would decrease and our gross margins would suffer.

     We are dependent on a small group of customers for a substantial portion of our services. In 2003, 2004 and 2005, 66.8%, 64.8% and 62.6% of our net operating revenues, respectively, were derived from sales to our top ten customers. In 2005, our largest and second largest customers accounted for 11.0% and 10.0%, respectively, of our net operating revenues. We expect that we will continue to depend on a relatively limited number of customers for a significant portion of our net operating revenues because of the concentration of demand in the semiconductor industry for our products and services. Our ability to maintain close and satisfactory relationships with our customers is important to the ongoing success and profitability of our services. Few of our customers are presently obligated to purchase packaging or testing services or to provide us with binding forecasts of product purchases for any period. If any of our significant customers reduces, delays or cancels its orders, our services would be seriously harmed because each of these customers accounts for a significant portion of our net operating revenues.

     We have engaged in equipment and facilities expansion in recent years to upgrade our technology and equipment. Our business growth in the future will continue to require substantial capital expenditures to fund such equipment and facilities expansions. The growing demand for substrate products has and will continue to require significant capital expenditures on substrate packaging technology and equipment. In making these planned capital expenditures, we may need to obtain additional capital. In addition, we may be unable to accurately estimate the timing and amount of our capital requirements, which depend on a number of factors including demand for our services and availability of equipment and whether or when the market will recover. In addition, we cannot assure you that additional financing will be available on satisfactory terms to us, or at all, when we require additional financing. If we are unable to obtain the necessary capital resources or financing, we will not be able to achieve our future business growth.

     The independent semiconductor packaging and testing industry is very competitive. We face substantial competition from established packaging and testing companies, including Advanced Semiconductor Engineering, Inc. (Taiwan), ASE Test Limited (Taiwan and Malaysia), Amkor Technology Inc. (USA), ASAT, Ltd. (Hong Kong), STATS ChipPAC Ltd. (Singapore), Hana Microelectronics Public Co. Ltd. (Thailand), Astra International (Indonesia), Carsem Bhd. (Malaysia) and Shinko Electric Industries Co., Ltd. (Japan). We may face additional competition from new competitors in our industry in emerging countries, such as the People’s Republic of China, or the PRC, where demand is expected to grow for our products and services. To a lesser extent, we also compete with the internal packaging and testing capabilities of our customers who have in-house packaging and testing capabilities. Some of our competitors have greater resources in substrate technology. Some of our competitors have greater financial and other resources than we have, including established relationships with many large semiconductor companies which are our current or potential customers. These relationships and lengthy qualification periods required by most of our potential customers may prevent us from securing new customers.

     We depend on outsourcing of packaging and testing services by fabless semiconductor companies and integrated device manufacturers. In recent years, semiconductor companies have increasingly subcontracted parts of the semiconductor production process, including packaging and testing, to independent companies to reduce costs and shorten production cycles. However, we cannot assure you that the outsourcing trend will continue. If integrated device manufacturers become dissatisfied with the services of independent semiconductor packaging and testing companies, they may return to utilizing in-house packaging and testing capabilities. A reversal of, or slowdown in, the outsourcing trend would seriously harm our services and make it difficult for us to implement our growth plan in the future.

     We depend on Taiwan’s independent wafer foundries to source our sales orders. In recent years, more than half of our net operating revenues were derived from packaging and testing semiconductor wafers manufactured at Taiwan’s wafer foundries. If the demand for foundry services offered by Taiwan’s wafer foundries decreases for any reason, including shifts in demand for these services to wafer foundries in other countries, an important source of our sales would be lost and our profitability would suffer.

     We must obtain sufficient quantities of raw materials at acceptable prices in a timely manner. We source most of our raw materials, including critical materials like lead-frames and substrates, from a limited group of suppliers. We purchase all of our materials on a purchase order basis and have no long-term contracts with any of our suppliers. From time to time, suppliers have extended lead times or limited the supply of required materials to us because of supply capacity constraints during market upturns for the semiconductor industry. Consequently, we have experienced from time to time difficulty in obtaining acceptable quantities of raw materials on a timely basis. In addition, from time to time, we may reject materials that do not meet our specifications, resulting in declines in output or yield. We cannot assure you that we will be able to obtain in the future sufficient quantities of raw materials and other supplies of an acceptable quality. Our inability to obtain raw materials 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.

     We need to purchase new packaging and testing equipment if we decide to expand our operations in anticipation of a market recovery. 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 lead time frame during market upturns for the semiconductor industry. The unavailability of equipment or failures to deliver equipment could delay implementation of our future expansion plans and impair our ability to meet customer orders. If we are unable to implement our future expansion plans or meet customer orders, we could lose potential and existing customers. Generally, we do not enter into binding equipment purchase agreements and we acquire our equipment on a purchase order basis, which exposes us to substantial risks. For example, sudden changes in foreign currency exchange rates, particularly the US dollar and Japanese yen, could result in increased prices for equipment purchased by us, which could seriously harm our results of operations.

     We have in the past and again recently experienced growth in the scope and complexity of our operations and in the number of our employees. This growth has strained our managerial, financial, manufacturing and other resources. In order to manage our future growth, we must continue to implement additional operating and financial controls and hire and train additional personnel. We cannot assure you that we will be able to do so in the future, and our failure to do so could jeopardize our future expansion plans.

     Some of our customers and foreign competitors have expanded their operations to the PRC. In order to remain competitive and to position ourselves to gain market share, we are exploring potential opportunities for expansion to or investments in the PRC. In December 2001 and June 2004, we obtained foreign investment approval from the Investment Commission of the ROC Ministry of Economic Affairs to invest up to US$50 million in aggregate in Suzhou, PRC. We established a subsidiary named Siliconware Technology (Suzhou) Limited, and, as of March 31, 2006, we have invested a total of US$50 million in this subsidiary. We are in the stage of ramping up our facilities in Suzhou for the manufacturing of DRAM modules, flash memory cards, transistors and other electronic components. With this investment in the PRC, our financial condition, results of operations and future prospects are subject, to a significant degree, to the political and economic situation, regulatory control and general legal developments in the PRC and other foreign investment risks. In addition, these expansions or investments could be adversely affected if relations between the PRC and the ROC deteriorate.

     Our success depends upon the continued service of key senior management. Members of our senior management have served us for an average of over 10 years and have made substantial contributions to our growth. We do not have employment contracts with many of our senior management and none of our senior management is bound by any non- competition agreement. If we lose the services of key senior management we would be unable to find and integrate replacement personnel, which could adversely affect our services expansion.

     Our business depends on technology and, accordingly, our success depends on our ability to attract, retain and motivate highly skilled employees, particularly engineering and technical personnel. Without sufficient numbers of skilled employees, our operations would suffer, resulting in deteriorating ability to solve operating and other issues in a timely and effective manner. Competition for qualified engineering and technical employees in Taiwan is intense and replacement of qualified employees is difficult. If we are unable to attract, retain and motivate our technical personnel, our operations would be jeopardized and our operating efficiency would deteriorate.

     The semiconductor packaging and testing processes require the use of chemicals and gases which are regulated by the government. For example, liquid waste is produced when silicon wafers are diced into chips using diamond saws and cooled with running water. Liquid waste is also produced when lead-frames are plated onto wafer chips and cleansed with water. Moreover, excess material on leads and moldings are removed from packaged semiconductors in the trim and form process. Environmental claims or the failure to comply with any environmental regulations could result in damages or fines against us or suspension of production. We may be required by new regulations to acquire costly equipment or to incur other significant expenses. If we fail to control the use of hazardous substances, we could incur future liabilities, including clean up costs.

     Our operations and those of our customers and suppliers are particularly vulnerable to fires, earthquakes, typhoons, droughts, floods, power losses, and similar events. The occurrence of any of these events could interrupt services. For instance, our operations were interrupted for approximately ten days in September 1999 because of an earthquake. Our property and business interruption insurance did not cover all damages incurred during the interruption. Most recently, in November 2004, Taiwan experienced significant earthquakes registering up to 6.7 on the Richter scale. We did not experience any significant damage as a result of these earthquakes. We cannot guarantee that future earthquakes will not cause material damage to our facilities or property, including work in progress, or cause significant business interruptions. Although we maintain property and business interruption insurance for such risks, there is no guarantee that future damages or business loss from earthquakes will be covered by such insurance, that we will be able to collect from our insurance carriers, should we choose to claim under our insurance policies, or that such coverage will be sufficient.

     In addition, the production facilities of many of our suppliers and customers providers of complementary semiconductor manufacturing services, including foundries, are located in Taiwan. If our customers are affected, it could result in a decline in the demand for our testing and assembly services. If our suppliers and providers of complementary semiconductor manufacturing services are affected, our production schedule could be interrupted or delayed. As a result, a major earthquake, natural disaster or other disruptive event in Taiwan could severely disrupt the normal operation of business and have a material adverse effect on our financial condition and results of operations.

     A substantial portion of our net operating revenues is derived from sales to customers located outside of Taiwan. In 2003, 2004 and 2005, sales to our overseas customers accounted for 56.8%, 59.9% and 62.0%, respectively, of our net operating revenues. We expect sales to customers outside of Taiwan to continue to represent a significant portion of our net operating revenues. As a result, our services 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 change the terms upon which we sell our products overseas, which could seriously decrease our international sales.

     Our financial statements are prepared under ROC GAAP, which differ in many respects from US GAAP. For example, ROC GAAP does not require the recognition of the fair market value of shares distributed as bonuses to employees when calculating net income. Largely as a result of the differences in accounting for employee bonuses, equity investments and overseas convertible bonds, our net income in 2003, 2004 and 2005 under US GAAP was NT$3,097 million (restated), NT$3,671 million (restated) and NT$3,971 million (US$121 million), respectively, as compared to net income under ROC GAAP of NT$2,839 million, NT$4,282 million and NT$8,244 million (US$251 million), respectively.

     In addition, prior to January 1, 2005, the ROC SFB allowed us to delay recognition of investment income (loss) from certain of our investee companies in our financial results under the ROC GAAP until June 30 of the following year. Therefore, our financial results in 2004 may not contain investment income (loss) of certain investee companies in such year. After the adoption of amended ROC Statement of Financial Accounting Standard No. 5, “Accounting for Long-term Equity Investment” which became effective on January 1, 2005, we cease to delay recognizing investment income (loss) from certain investee companies accounted for under the equity method. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results-Delay in Recognition of Investment Income in Certain Investee Companies Accounted for under Equity Method.” Under US GAAP, however, there is no provision that allows us to delay recognition of our investment income from our investee companies.

     Under ROC GAAP, our overseas convertible bonds are recorded as a liability at an amount equal to the proceeds received. Any discount or premium to the par value of the overseas convertible bonds is amortized in the statement of operations by using the effective interest rate. However, under US GAAP, in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, our overseas convertible bonds issued in 2002 and 2004, with the feature of the combination of mutually exclusive conversion of the debt to equity or redemption at a multiple of the bonds par value, are required to be accounted for as embedded derivative instruments. The embedded derivatives separated from the book value of bonds are measured at fair value and changes in fair value are recognized as unrealized gain (loss) in the income statement for each accounting period. As a result, a meaningful year-to-year comparison of our financial results may not be performed. In addition, year-to-year comparison of our financial results under ROC GAAP may significantly differ from year-to-year comparison under US GAAP.

     We are subject to the reporting requirements of the SEC. The SEC, as directed by Section 404 of the U.S. Sarbanes-Oxley Act of 2002, adopted rules requiring U.S. public companies to include a report of management on the company’s internal control over financial reporting in its Annual Report on Form 10-K or Form 20-F, as the case may be, that contains an assessment by management of the effectiveness of the company’s internal control over financial reporting. In addition, the company’s independent registered public accountants must attest to and report on management’s assessment of the effectiveness of the company’s internal control over financial reporting. These requirements will first apply to our Annual Report on Form 20-F for the fiscal year ending on December 31, 2006.

     In the course of their audit, our independent auditors PricewaterhouseCoopers have identified certain deficiencies in our current internal accounting processes. While we have taken actions to address these deficiencies, additional measures may be necessary and these measures, along with other measures expected to be taken to improve our internal controls, may not be sufficient to address the issues identified by us or to ensure that our internal controls are effective. See “Item 15. Controls and Procedures”. Moreover, even if our management does conclude that our internal controls over financial reporting are effective, if our independent accountants are not satisfied with our internal controls, the level at which our controls are documented, designed, operated or reviewed, or if the independent accountants interpret the requirements, rules or regulations differently from us, they may decline to attest to our management’s assessment or may issue a report with adverse opinion. Any of these possible outcomes could result in a loss of investor confidence in the reliability of our financial statements, which could negatively impact the market price of our ADSs.

Risks Relating to Our Technologies

     The semiconductor packaging and testing industry is characterized by rapid increases in the diversity and complexity of semiconductor packaging and testing products. As a result, we expect that we will need to continue to develop and offer more advanced packaging and testing processes in order to respond to our customers’ requirements as industry conditions change. Developing and maintaining advanced packaging and testing processes requires significant research and development and capital expenditures.

     In addition, advances in technology typically lead to rapid and significant price erosion and decreased margins for older products and services and may cause our current products and services to become less competitive. Our failure to develop or obtain advanced packaging or testing designs will materially and adversely affect our product mix and would seriously harm our profitability.

     The semiconductor packaging and testing processes are complex and involve a number of precise steps. Defective packaging and testing can result from a number of factors, including:

	•		the level of contaminants in the manufacturing environment;
	•		human error;
	•		equipment malfunction;
	•		defective plating services;
	•		use of defective raw materials; and
	•		inadequate sample testing.

     From time to time, we expect to 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 processing methods. 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 quality production standards, our reputation may suffer and our customers may cancel their orders or ask for discount.

     We have licensed from Freescale Semiconductor Inc., or Freescale, formerly part of Motorola, Inc., or Motorola, the technology for ball grid array for which we make royalty payments based on the number of pads or balls used in our packages. We also implement new packages by entering into technology alliances and by licensing package technologies from certain technology companies. In April 2004, Motorola spun off its semiconductor package business into Freescale and assigned our agreement with Motorola to Freescale, and Freescale has assumed all of Motorola’s right, duties and obligations under the agreement.

     For 2003, 2004 and 2005, our royalty expenses were NT$161 million, NT$143 million and NT$195 million (US$5.9 million), respectively, which accounted for 0.6%, 0.4% and 0.4%, respectively, of our net operating revenues. There can be no assurance that third parties will continue to license advanced technologies to us on terms satisfactory or acceptable to us, or at all. In the event that we are unable to license advanced technologies from third parties, we may be required to develop such technologies internally. There can be no assurance that we will be able to develop such technologies internally.

     We may suffer legal liabilities and damages if we infringe on the proprietary rights of others or incur costs resulting from legal claims and adverse proceedings against us. Despite this, we have no means of knowing what patent applications have been filed in the United States or elsewhere until they are granted. The semiconductor packaging and testing industry is characterized by frequent litigation regarding patent and other intellectual property rights. If any third party were to make valid intellectual property infringement claims against us or our customers, we could be required to:

•

discontinue using disputed process technologies which would prevent us from offering some of our packaging and testing products;

	•		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.

     We could also be required to expend substantial resources to defend any claim alleging our infringement of patents or other intellectual property rights. If we fail to obtain necessary licenses or if litigation relating to patent infringement or other intellectual property matters occurs, it could seriously harm our company.

     In addition, we have acquired patents and trademarks to protect some of our proprietary technologies and products. We cannot assure you, however, that these measures will provide meaningful protection of our intellectual property. 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 and Economic Risks

     Our principal executive offices and substantially all of our assets are located in Taiwan. Accordingly, our services, financial condition and results of operations and the market price of our common shares and the ADSs may be affected by changes in Republic of China governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments in or affecting Taiwan which are outside of our control. Taiwan has a unique international political status. Since 1949, Taiwan and the Chinese mainland have been separately governed. The PRC claims that it is the sole government in China and that Taiwan is part of China. Although significant economic and cultural relations have been established during recent years between the ROC and the PRC, relations have often been strained. The PRC government has refused to renounce the use of military force to gain control over Taiwan and, in March 2005, further passed an Anti-Secession Law that authorizes non-peaceful means and other necessary measures should Taiwan move to gain independence from the PRC. Past developments in relations between the ROC and the PRC have on occasion depressed the market prices of the securities of companies in the ROC. In February 2006, the president of Taiwan suspended activities of the country’s National Unification Counsel, a committee established to assist Taiwan in its efforts to reunite with the PRC. Such suspension is commonly viewed as having a detrimental effect to reunification efforts between the two countries. Relations between the Republic of China and the PRC and other factors affecting military, political or economic conditions in Taiwan could materially and adversely affect our financial condition and results of operations, as well as the market price and the liquidity of our securities.

     Our shares are listed on the Taiwan Stock Exchange. The trading price of our ADSs may be affected by the trading price of our shares on the Taiwan Stock Exchange. The Taiwan Stock Exchange is a smaller market and, 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. On March 13, 2000, the Taiwan Stock Exchange Index experienced a 617-point drop, which represented the single largest decrease in the Taiwan Stock Exchange Index in its history. During 2005, the Taiwan Stock Exchange Index peaked at 6,575.53 on December 29, 2005, and reached a low of 5,632.97 on October 28, 2005. From January 2, 2005 to May 31, 2006, daily closing values of our shares ranged from NT$22.2 per share to NT$48.5 per share. The Taiwan Stock Exchange is particularly volatile during times of political instability including when relations between Taiwan and the PRC are strained. Moreover, the Taiwan Stock Exchange has experienced problems including market manipulation, insider trading and settlement defaults. The recurrence of these or similar problems could decrease the market price and liquidity of our shares and ADSs.

     The market price of the ADSs may also be affected by general trading activities on the U.S. stock exchanges, which have experienced significant price volatility with respect to shares of technology companies. Increases in interest rates and other general economic conditions may also have an effect on the market price of our ADSs. Daily closing values of our ADSs ranged from US$1.88 to US$7.95 between June 7, 2000, the date our ADSs were listed on NASDAQ, and May 31, 2006. Over the same period, the NASDAQ Composite Index ranged from 1,114.11 to 2,370.88.

     On May 30, 2006, the Taiwan Stock Exchange Index closed at 6,846.95, and the daily closing value of our shares was NT$41.0 per share.

     More than half of our net operating revenues are denominated in currencies other than NT dollars, primarily US dollars and Japanese Yen. On the other hand, more than half of our costs of direct labor, raw materials and overhead are incurred in NT dollars. We are affected by fluctuations in exchange rates among the US dollar, the Japanese Yen, the NT dollar and other currencies. Any significant fluctuation in exchange rates may be harmful to our financial condition. In addition, fluctuations in the exchange rate between the US dollar and the NT dollar will affect the US dollar value of the ADSs and the US dollar value of any cash dividends we pay, which could have a corresponding effect on the market price of the ADSs.

     Any future outbreak of contagious diseases, such as severe acute respiratory syndrome or avian influenza, may disrupt our ability to adequately staff our services, and may generally disrupt our operations. If any of our employees is suspected of having contracted any contagious disease, we may under certain circumstances be required to quarantine such employees and the affected areas of our premises. As a result, we may have to temporarily suspend part of or all of our operations. Furthermore, any future outbreak may restrict the level of economic activity in affected regions, including Taiwan, which may also adversely affect our services and prospects. As a result, we cannot assure you that any future outbreak of contagious diseases would not have a material adverse effect on our financial condition and results of operations.

     We have historically treated certain of our revenues as “service revenues” for the purpose of determining our value-added tax, or VAT, obligations. Service revenues have an applicable VAT rate of 0%. The relevant tax authority has determined that a certain amount of such revenues should be taxable and is currently in the process of assessing the aggregate amount of our VAT obligations. Although we believed that our VAT provisions of NT$468 million recorded as of December 31, 2004 were sufficient to cover the liability associated with the tax assessment, we recognized an additional VAT of NT$323 million as other loss in 2005. The total amount of NT$791 million was paid prior to March 31, 2006. We can provide no assurance that the amount of the final assessment will not adversely affect our profitability.

     In addition, according to the newly implemented Alternative Minimum Tax, or AMT, Act effective from January 1, 2006, a company will be subject to a 10% AMT if its annual income exceeds NT$2 million, and an individual will be subject to a 20% AMT if his/her annual income exceeds NT$6 million. The imposition of the AMT is designed to remedy the current excessive tax incentives for individuals and businesses. For businesses, the incomes which previously enjoyed tax-exemption privileges under relevant tax regulations, such as the Statute for Upgrading Industries will be subject to the new AMT system for the calculation of business taxpayers’ aggregate incomes. The AMT Act also provides that businesses already qualified for five-year tax exemption before December 31, 2005 may continue to enjoy tax incentives and not to be subject to AMT, so long as the construction of their investment projects breaks ground within one year and is completed within three years of the implementation of the AMT Act. Beginning in 2006, we expect to recognize an accrual tax liability as a result of the imposition of the AMT in accordance with the related AMT rules.

Risks Related to Ownership of Our Shares or ADSs

     The ability to deposit shares into our ADS program is restricted by ROC law. Under current ROC law, no person or entity, including you and us, may deposit shares into our ADS program without specific approval of the ROC Securities and Futures Bureau ( the “ROC SFB”) except for the deposit of the shares into our ADS program and for the issuance of additional ADSs in connection with:

	•		distribution of share dividends or free distribution of our shares;
	•		exercise of the preemptive rights of ADS holders applicable to the shares evidenced by ADSs in the event of capital increases for cash; or
	•		if permitted under the deposit agreement and the custody agreement, purchases of our shares in the domestic market in Taiwan by the investor directly or through the depositary or the surrender of shares under the possession of investors and then delivery of such shares to the custodian for deposit into our ADS program, subject to the following conditions: (a) the depositary may accept deposit of those shares and issue the corresponding number of ADSs with regard to such deposit only if the total number of ADSs outstanding after the deposit does not exceed the number of ADSs previously approved by ROC SFB, plus any ADSs issued pursuant to the events described in the above two bullet points; and (b) this deposit may only be made to the extent previously issued ADSs have been cancelled.

     As a result of the limited ability to deposit shares into our ADS program, the prevailing market price of our ADSs on the NASDAQ National Market, or NASDAQ, may differ from the prevailing market price of the equivalent number of our shares on the Taiwan Stock Exchange.

     Due to the amendment to the ROC Company Act and the amendment made to our articles of incorporation accordingly, except for treasury shares, each common share is generally entitled to one vote and no voting discount will be applied. However, except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. The voting rights attaching to the shares evidenced by our ADSs must be exercised as to all matters brought to a vote of shareholders collectively in the same manner.

     Moreover, holders of the ADSs do not have individual rights to propose any matter for shareholders’ votes at our shareholders’ meetings. However, holders of at least 51% of the ADS outstanding at the relevant record date may request the depositary to submit to us one proposal per year for consideration at our annual ordinary shareholders’ meeting, provided that such proposal meets certain submission criteria and limitations, including the language and the length of the proposal, the time of submission, the required certification or undertakings, and the attendance at the annual ordinary shareholders’ meeting. A qualified proposal so submitted by the depositary will still be subject to review by our board of directors and there is no assurance that the proposal will be accepted by our board of directors for inclusion in the agenda of our annual ordinary shareholders’ meeting. Furthermore, if we determine, at our discretion, that the proposal submitted by the depositary does not qualify, we have no obligation to notify the depositary or to allow the depositary to modify such proposal.

     Furthermore, if holders of 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 election of directors and/or supervisors, the depositary will appoint our Chairman, or his designee, to represent the ADS holders at the shareholders’ meetings and to vote the shares represented by the ADSs outstanding in the manner so instructed. If by the relevant record date the depositary has not received instructions from holders of ADSs holding at least 51% of the ADSs to vote in the same manner for any resolution, then the holders will be deemed to have instructed the depositary to authorize and appoint our Chairman, or his designee, to vote all the shares represented by ADSs at his sole discretion, which may not be in your interest.

     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 those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. 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 may be unable to participate in our rights offerings and may experience dilution in their holdings.

     Our corporate affairs are governed by our articles of incorporation and by laws governing ROC corporations. The rights of our shareholders to bring shareholders’ suits against us or our board of directors under ROC law are much more limited than those of the shareholders of U.S. corporations. Therefore, our public shareholders may have more difficulty protecting their interests in connection with actions taken by our management, members of our board of directors or controlling shareholders than they would as shareholders of a U.S. corporation. Please refer to “Item 10. Additional Information—B. Memorandum and Articles of Association” included elsewhere in this annual report for a detailed discussion of the rights of our shareholders to bring legal actions against us or our directors under ROC law.

     Non-ROC persons wishing to withdraw shares represented by their ADSs from our ADS program and hold our shares represented by those ADSs are required to appoint a local agent or representative with qualifications set forth by the ROC SFB to open a securities trading account with a local brokerage firm, pay ROC taxes, remit funds and exercise shareholders’ rights. In addition, the withdrawing holders are also required to appoint a custodian bank with qualifications set forth by the Ministry of Finance to hold the securities in safekeeping, make confirmations, settle trades and report all relevant information. Without making this appointment and opening of the accounts, the withdrawing holders would not be able to subsequently sell our shares withdrawn from a depositary receipt facility on the Taiwan Stock Exchange. Under ROC law and regulations, citizens of the PRC are not permitted to hold our shares or withdraw shares represented by ADSs from our ADS program.

     We are a company limited by shares incorporated under the ROC Company Act. Most of our assets and most of our directors, supervisors and executive officers and experts named in the registration statement are located in Taiwan. As a result, it may be difficult for you to enforce judgments obtained outside Taiwan upon us or such persons in Taiwan. Any judgment obtained against us in any court outside the ROC arising out of or relating to the ADSs will not be enforced by ROC courts if any of the following situations shall apply to such final judgment:

	•		the court rendering the judgment does not have jurisdiction over the subject matter according to ROC law;
	•		the judgment or the court procedures resulting in the judgment is contrary to the public order or good morals of the ROC;
	•		the judgment was rendered by default, except where the summons or order necessary for the commencement of the action was duly served on us within the jurisdiction of the court rendering the judgment within a reasonable period of time and in accordance with the laws and regulations of such jurisdiction, or with judicial assistance of the ROC; or
	•		judgments of ROC courts are not recognized and enforceable in the jurisdiction of the court rendering the judgment on a reciprocal basis.

     We do not believe we were a passive foreign investment company, or PFIC, for 2005 and do not expect to become one in the future, although there can be no assurance in this regard. Based upon the nature of our business activities, we may be classified as a PFIC, for U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, our U.S. investors may become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, for any taxable year we will be classified as a PFIC for U.S. tax purposes if either (i) 75% or more of our gross income in a taxable year is passive income or (ii) the average percentage of our assets (which includes cash) by value in a taxable year which produce or are held for the production of passive income is at least 50%. The calculation of the value of our assets will be based, in part, on the quarterly market value of our common and preferred shares, which is subject to change. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. See “Taxation — U.S. Federal Income Tax Considerations for U.S. Persons — Passive foreign investment companies.”

Item 4. Information on the Company

     A. History and Development of the Company

     Our legal and commercial name is Siliconware Precision Industries Co., Ltd. We were incorporated under the ROC Company Act as a company limited by shares on May 17, 1984 and our shares were listed on the Taiwan Stock Exchange in 1993. On June 7, 2000, we issued 30,000,000 ADSs, each representing five shares. Our ADSs have been listed on the NASDAQ National Market under the symbol “SPIL” since June 2, 2000. Our principal executive offices are located at No. 123, Sec. 3, Da Fong Road, Tantzu, Taichung, Taiwan, Republic of China, and our telephone number is 886-4-2534-1525. Our Internet website address is www.spil.com.tw.

     We are one of the world’s leading independent providers of semiconductor packaging and testing services. We offer a full range of both standard and customized packaging and testing solutions, including advanced lead-frame packages and substrate packages such as the flip-chip ball grid array, as well as testing for logic, mixed signal and embedded memory devices. We also offer our customers turnkey solutions from packaging and testing to direct shipment of semiconductor devices to end users designated by our customers.

     Our headquarters and packaging facilities are located in Taichung, Taiwan, where we had 3,961 wire bonders as of December 31, 2005. In addition, we had 273 testers in Hsinchu and Taichung, Taiwan as of the same date. Taiwan is home to the world’s largest independent wafer foundries and as such is home to one of the world’s leading suppliers of outsourcing semiconductor manufacturing. Our close proximity to and relationships with Taiwan’s leading wafer foundries allow us to benefit significantly from the trend towards outsourcing in the semiconductor industry and to quickly respond to our customers’ needs. Our location in Taiwan also enables our customers to secure seamless services within Taiwan for all of their manufacturing needs, thereby minimizing the time required to deliver finished semiconductor devices to the market.

     We provide packaging and testing services to more than 100 customers worldwide. For 2005, our top customers included the following leading semiconductor suppliers: ATI Technologies, Inc., Broadcom Corporation, Intel Corporation, LSI Logic Corporation, Marvell Semiconductor Inc., MediaTek, NVIDIA, SanDisk Corporation, VIA Technologies Inc. and Xilinx, Inc. We currently target customers in the personal computer, communications, consumer ICs and non-commodity memory semiconductor markets. We strive to provide the highest level of customer service to meet and anticipate our customers’ current and future requirements. We have established technical and sales teams near major customer facilities, including the Hsinchu Science Park, to work with our customers on developing and implementing new packaging and testing technologies as semiconductors become smaller and more sophisticated.

     Our objective is to be the leading worldwide, full service independent provider of semiconductor packaging and testing services. Key elements of our strategy include:

	•		providing a full range of packaging and testing services including turnkey capabilities to simplify our customers’ supply chain management;
	•		offering leading packaging and testing technology to attract and retain customers;
	•		focusing on customer service and working with our customers on developing and fulfilling their current and future semiconductor packaging and testing needs;
	•		leveraging our existing foundry relationships and Taiwan location to enable our customers to easily integrate all of their outsourced semiconductor manufacturing needs;
	•		diversifying and expanding our customer base geographically, by customer type and by end-market application to capitalize on growing markets including communications and increased outsourcing from vertically integrated semiconductor device manufacturers and systems original equipment manufacturers; and
	•		expanding in the PRC to remain competitive and position ourselves to achieve greater market share as some of our customers and foreign competitors have expanded their operations in the PRC.

     For information relating to our capital expenditure, see “¾ B. Business Overview ¾ Capital Expenditures and Divestitures”.

     B. Business Overview

Our Business

     We offer semiconductor packaging and testing services to the semiconductor industry for applications in communications, computing, consumer, automotive and industrial end markets. We offer full back-end turnkey services from wafer probe to final test and drop shipment. The services we offer are customized to the needs of our individual customers. In 2005, 87.3% of our net operating revenues were from packaging services and 12.7% of our net operating revenues were from testing and other services.

     The following table shows, for the periods indicated, the amount of our packaging and testing revenues by product type and the product’s revenues as a percentage of our total net operating revenues:

		Year Ended December 31,
		2003								2004								2005
		NT$				%				NT$				%				NT$				%
		(audited) (consolidated)
		(in millions, except for percentages)
Ball grid array packages			11,698				42.7				16,416				46.6				21,963				50.5
Quad flat packages			8,635				31.5				9,435				26.7				8,823				20.3
Small outline packages			3,160				11.5				3,800				10.8				3,911				9.0
Other packages			956				3.5				1,467				4.2				3,259				7.5
Total packaging revenues			24,449				89.2				31,118				88.3				37,956				87.3
Testing and other revenues			2,962				10.8				4,134				11.7				5,532				12.7
Total net operating revenues			27,411				100.0				35,252				100.0				43,488				100.0

     Because our services is, and will continue to be, dependent on the requirements of semiconductor companies for independent testing and assembly services, any downturn in the highly cyclical semiconductor industry may reduce demand for our services and adversely affect our results of operations. Our operations, however, are not subject to any clear seasonal effects.

Our Packaging Services

     We offer a broad range of package formats designed to provide our customers with a full array of packaging solutions. The packaging solutions we currently offer to our customers include lead-frame packages and substrate packages, which include ball grid array and module packages (incorporating multiple semiconductor chips) and flip-chip ball gird array packages. Our flip-chip ball grid array packages, which we began to offer in the first quarter of 2001, are based on the proprietary Flex-On-Cap wafer bumping and redistribution technologies we licensed from Flip Chip Technologies L.L.C., or Flip Chip. Semiconductor packaging serves to protect semiconductor chips, to facilitate their integration into electronic systems and to enable the dissipation of heat produced by the final product. The packaging process begins when patterned silicon wafers received from our customers are diced using diamond saws into separate die. Each die is attached to a lead-frame or substrate either directly in a substrate package or first to a die-attached pad in a lead-frame package, by silver paste made with epoxy resin. Leads on the lead-frame or substrate are then connected by extremely fine gold wires to the input/output terminals on the chip, using machines called wire bonders. Each chip is then encapsulated, generally in a plastic casing molded from a molding compound, with only the leads protruding from the finished casing. To complete the packaging process, excess molding compound is eliminated from the packaged semiconductor chip and the leads are trimmed and formed into various shapes.

     Semiconductor packages have evolved from lead-frame packages to substrate packages in response to the increasing demands of today’s high-performance electronics products. The differentiating characteristics of these packages include:

	•		the size of the package;
	•		the number of electrical connections the package can support; and
	•		the thermal and electrical requirements of the package.

     As modern applications for semiconductor devices require smaller chips, the size of packages has also decreased. In leading-edge packages, the size of the package is reduced to just slightly larger than the size of the individual chip itself through a process known as chip scale packaging.

     As semiconductor devices increase in complexity, the number of required electrical connections also increases. Our lead-frame products have electrical connections from the semiconductor device to the electronic product through leads on the perimeter of the package. Our substrate products have balls on the bottom of the package that create the electrical connections with the electronic system and can support larger numbers of electrical connections.

     New methods of packaging have also enhanced the thermal and electrical characteristics of semiconductor packages to meet the high-bandwidth, high-speed and high-power demands of modern semiconductor devices. Substrate packages with cavity design considerably enhance heat-dissipation without necessitating a change in the substrate or chip layout. Flip-chip packages enable direct interconnection from the chip to the substrate. Electrical connection is first deposited on one side of a chip; then, the chip is flipped onto the substrate. Flip-chip technology eliminates the need for wire bonding and provides superior electrical performances. Chip scale packages have been designed for devices which require reduced height, board space and weight by reducing the size of the package to be only slightly larger than the size of the die and are ideally suited for the latest generation of wireless and consumer electronics. Multi-chip module packages allow for the combination of multiple chips into a single packages, enabling increased application functionality while minimizing overall size.

     We price our packaging products on a per unit basis, taking into account the complexity of the product, the prevailing market conditions, the order size, the strength and history of our relationship with the customer and our capacity utilization at the time.

Lead-Frame Packages

     Lead-frame packages are the most widely used package category and are characterized by a semiconductor chip encapsulated in a plastic molding compound with metal leads on the perimeter. This package category has evolved from a design where the leads are plugged into holes on the circuit board to a design where the leads are soldered to the surface of the circuit board. Lead-frame packages are divided into two general types of packages: quad flat packages and small outline packages.

     To satisfy the demand for miniaturization of portable electronic products, we are developing increasingly smaller versions of lead-frame packages to keep pace with continually shrinking semiconductor device sizes. Our advanced lead-frame packages are similar in design to our older lead-frame packages. However, our advanced lead-frame packages generally are thinner and smaller, have more leads and have advanced thermal and electrical characteristics. As a result of continued product development, we offer lead-frame products with a wide range of lead counts and body sizes to satisfy variations in the size of customers’ semiconductor devices.

     The following diagram presents the basic component parts of a standard lead-frame package:

     The following tables present our standard quad flat packages and small outline packages, including the number of leads in each package, a description of each package and the end uses of each package.

Quad Flat Packages

Package		Lead-count		Major Applications		End Uses
Quad Flat Package		100-256		Package with leads on four sides designed for advanced processors, consumer and industrial controllers, digital signal processors and application specific integrated circuits		Desktop personal computers, consumer and industrial products, commercial and office equipment, automotive systems
Low-Profile Quad Flat Package		32-256		Low-profile and lightweight package designed for application specific integrated circuits, digital signal processors, microprocessors/controllers, graphic processors, gate arrays, static random access memory and personal computer chipsets		Wireless communication products, laptop computers, digital cameras, cordless/radiofrequency devices

Package		Lead-count		Major Applications		End Uses
Thin Quad Flat Package		44-176		Designed for lightweight, portable electronics requiring broad performance characteristics		Laptop computers, personal computers, disk drives, office equipment, audio and video products, wireless communication products
Very Thin Quad Flat Package		80-100		Designed for lightweight, portable electronics requiring low profile packages		Laptop computers, personal computers, disk drives, office equipment, audio, video products, wireless communication products
Quad Flat No-lead Package		5-88		Small and light package with improved thermal and electrical performance makes it suitable for wireless transmitters RF front end, hard disk devices and micro-controllers		Wireless communication products, disk drives, portable products, consumer products
Thin Quad Flat No-lead Package		48-56		This device offers similar features to those of Quad Flat No-lead Package, but can process smaller and lighter packages		Wireless communication products, disk drives, portable products, consumer products

Small Outline Packages

Package		Lead-count		Major Applications		End Uses
Plastic Dual In-line Package		14-42		General purpose plastic package used in consumer electronic products		Games, telephones, televisions, audioequipment, computer peripherals
Small Outline Package		24-44		Small lead-frame package designed for applications requiring reduced height		Pagers, cordless telephones, fax machines, copiers, printers, computer peripherals, audio and video products, automotive systems
Shrink Small Outline Package		24-70		Small lead-frame package designed for applications requiring reduced height		Pagers, cordless telephones, fax machines, copiers, printers, computer peripherals, audio and video products, automotive systems
Small Outline J-Bend Package		20-44		Package designed for memory and low pin-count applications		Consumer (audio/video/entertainment), communications (pagers/cordless phones), radiofrequency devices, cable TV, office appliances (fax/copiers/printers/personal computer peripherals)

Package		Lead-count		Major Applications		End Uses
Thin Small Outline Package I		28-56		Package designed for high-volume production of low-lead count memory devices including flash memory, static random access memory and dynamic random access memory		Laptop computers, personal computers, still and video cameras and standard connections for peripherals to computers
Very Thin Small Outline Package I		48-56		Package designed for a variety of applications where small sized memory devices are required, such as static random access memory, flash memory and electrically erasable programmable read-only-memory		Memory module, mobile phones, PDAs, laptop computers, and digital still cameras
Dual Die TSOP I		48-56		Package designed for a variety of applications where small sized memory devices are required, such as static random access memory, flash memory and electrically erasable programmable read-only-memory		Memory module, mobile phones, PDAs, laptop computers and digital still cameras
Thin Small Outline Package II		32-86		Smaller version of Thin Small Outline Package I designed for logic and analog devices and memory devices including flash memory, static random access memory, erasable and electrically erasable programmable read only memory, and dynamic random access memory		Disk drives, recordable optical disks, audio and video products, consumer electronics, communication products

Substrate Packages

     This category generally employs the ball grid array design which utilizes a plastic or tape laminate substrate rather than a lead-frame and places the electrical connections on the bottom of the package rather than around the perimeter.

     The ball grid array format was developed to address the need for higher lead counts required by advanced semiconductor devices. Benefits of ball grid array packaging over leaded packaging include:

	•		smaller size;
	•		greater pin count;
	•		greater reliability;
	•		better electrical signal integrity; and

•

easier attachment to a printed circuit board.

     As the number of leads surrounding the package increased, the proximity of the leads to one another became closer in an attempt to maintain the size of the package. The close proximity of one lead to another resulted in electrical shorting problems, and required the development of increasingly sophisticated and expensive techniques for producing circuit boards to accommodate the high number of leads.

     The ball grid array format solved this problem by effectively creating leads on the bottom of the package in the form of solder balls. These balls can be evenly distributed across the entire bottom surface of the package, allowing greater distance between the individual leads. For the highest lead count devices, the ball grid array configuration can be manufactured less expensively and requires less delicate handling at installation.

     The following diagram presents the basic component parts of a standard ball grid array packages:

     To address the electronics market demand for higher frequency, higher input/output, and better thermal performance, we have made efforts to develop high value-added advanced packaging technologies, such as flip-chip and wafer bumping technologies. In addition to the development of the 8-inch wafer bumping technology, in order to meet the trend of wafer size moving to 12-inch from 8-inch, we have successfully established the first 12-inch wafer bumping technology in the world. Flip-chip ball grid array is a high-end, high-growth product typically used in advanced semiconductor products such as microprocessor units, micro peripherals, field programmable gate arrays and application specific ICs. The flip-chip technology enables direct interconnection from the chip to the substrate, eliminates the need for wire bonding and provides superior electrical performance. We licensed the flip-chip assembly technology from Flip-Chip to enhance our assembly process capability in flip-chip products. We have also developed thin and small package, or CSPs, on flexible or rigid substrates as well as lead-frames, which are suitable for the portable consumer market. Furthermore, we have developed module packages, with multiple chips integrated into one package, in order to meet the growing demand for “system-in-package,” or SIP, for applications in personal computers, communications devices and consumer products.

     The following diagram presents the cross section of a flip-chip ball grid array package:

     The following table presents our substrate packages, including the number of leads and the description of and uses for each package format:

Package		Lead-count				Major Applications		End Uses
Flip-Chip Ball Grid Array		256-2,304				Much higher electrical performance than traditional ball grid array for modern, more demanding applications		Workstations, networking, graphics, application specific integrated circuits, personal digital assistants, processors
Chip Scale Package		36-591				Low cost solution for low input/output count suitable for semiconductors that require a smaller package size than plastic ball grid array		Memory, analog, flash memory, application specific integrated circuits, radio frequency devices, personal digital assistants, communications, mobile phones, laptop computers, sub-notebooks, wireless systems
Stacked-Die Chip Scale Package		21-400				Low cost solution for low		Memory, analog, flash

Package		Lead-count				Major Applications		End Uses
						input/output count suitable for semiconductors that require a smaller package size than plastic ball grid array. This device offers double memory capacity with increased device functionality while allowing manufacturers to maintain size reduction roadmaps		memory, application specific integrated circuits, radio frequency devices, personal digital assistants, communications, mobile phones, laptop computers, sub-notebooks, wireless systems
Ball Grid Array			119-1,156			Ball grid array package designed for applications which require high performance		Laptop computers, disk drives, video cameras, global positioning systems, wireless communication products, standard connections for peripherals to computers
Thermal Enhanced Ball Grid Array			241-1,521			Optimum low cost solution for high speed, high power applications with multiple routing layers for high performance applications		Application specific integrated circuits, microprocessors, gate arrays, personal digital assistants, communications, mobile phones, laptops, sub-notebooks, boards
Low Profile Ball Grid Array			144-352			Low-profile and light-weight package designed for applications which require high performance		Laptop computers, wireless communication products, computer peripherals
Land Grid Array			7-190			Land grid array package designed for applications which require high performance		Laptop computers, disk drives, video cameras, global positioning systems, wireless communication products, standard connections for peripherals to computers
Organic Leadless Chip Carrier			28-48			Package designed for CMOS image sensor chip, which offers small and light-weight for image applications		Mobile phones, PDAs, laptop computers, digital still cameras, personal computer cameras, toys, automobile, security and surveillance
Ceramic Leadless Chip Carrier			48			Offers similar feature as organic leadless chip carrier, but only using ceramic substrate material		Mobile phones, PDAs, laptop computers, digital still cameras, personal computer cameras, toys, automobile, security and surveillance

Package		Lead-count				Major Applications		End Uses
Organic Leadless Grid Array			28-48			Offers small and light-weight for image sensor applications and is made of organic substrate designed for better thermal performance		Mobile phones, PDAs, laptop computers, digital still cameras, personal computer cameras, toys, automobile, security and surveillance
CMOS Image Sensor Module			n/a			Offers manufacturing flexibility for customized solutions for image sensor applications that require short time-to-market		Mobile phones, PDAs, laptop computers, digital still cameras, personal computer cameras, toys, automobile, security and surveillance

Testing and Other Services

     Semiconductor testing measures and ensures the performance, functionality and reliability of a packaged semiconductor device. Testing semiconductor devices requires significant technical expertise and knowledge of the specific applications and functions of the device under testing. In addition to maintaining different types of advanced testing equipment which enable us to test a variety of semiconductor device functions, we work closely with our customers to develop and convert programs to test particular semiconductor products on multiple equipment platforms effectively. The cost of any specific test is dependent on the test time (usually measured in seconds) required to run a test which varies depending on the complexity of the semiconductor device and the customer’s specification with the percentage of fault coverage.

     We also conduct wafer probing and final testing of digital logic and mixed signal products. In addition, many of our customers request drop shipment of their tested integrated circuits directly to designated final destinations.

     Wafer Probing. Wafer probing is the step immediately before packaging of integrated circuits and involves sorting the processed wafer for defects to ensure that it meets customer acceptance criteria. Integrated circuits on an accepted wafer are then individually inspected visually under microscopes before packaging and final testing.

     Logic and Mixed Signal Final Testing. We conduct final testing of a wide variety of logic and mixed signal integrated circuits, including complex, high-performance, as well as lower-performance integrated circuits. High-performance products include personal computer-related components such as CPU chipsets and graphic processors, while major lower performance products include integrated circuits used in consumer electronics products.

     Other Testing Services. In addition to wafer probing and final testing services, we also provide “system-level testing” for testing products on motherboards with automatic load and unload features, “dynamic burn-in” service to screen out device infant mortality, “laser repair/laser trim” to modify device connection structure for specific product applications, “lead/ball scanner” to screen out abnormal products, including bent lead or ball defective devices from being shipped to end customers, “marking” to specify the unique customer logo and batch identification on product as for traceability and “tape and reel” to packing devices into one complete reel for surface mount operation.

     We offer drop shipment services by providing for shipment of integrated circuits directly to final destinations designated by our customers. Since drop shipment eliminates the additional step of inspection by the customer before shipment to the customer, quality of service is a key consideration. We believe that our ability to successfully execute our full range of services, including drop shipment services, is an important factor in maintaining existing customers as well as attracting new customers.

Customers

     We currently have more than 100 customers worldwide, and our customers include many of the largest semiconductor companies in the world. In 2003, 2004 and 2005, 48.7%, 45.0% and 42.3% of our net operating revenues were derived from sales to our top five customers, respectively, and 66.8%, 64.8% and 62.6% of our net operating revenues were derived from sales to our top ten customers, respectively. In 2005, our top two customers provided approximately 11.0% and 10.0%, respectively, of our net operating revenues. Our representative customers as of December 31, 2005 include ATI Technologies, Inc., Broadcom Corporation, Intel Corporation, LSI Logic Corporation, Marvell Semiconductor Inc., MediaTek, NVIDIA Corp., SanDisk Corporation, VIA Technologies Inc. and Xilinx, Inc.

     Industry-leading companies require early access to advanced packages because they manufacture products which have first-to-market technologies. Our close relationships with industry leading customers help us to further develop their technology and position us to benefit from the high unit volumes of these major semiconductor customers.

     Set forth below is a geographic breakdown of our net operating revenues for the periods presented below:

		Year Ended December 31,
		2003								2004								2005
		NT$				%				NT$				%				NT$				%
		(audited) (consolidated)
		(in millions, except for percentages)
Taiwan			11,875				43.3				14,127				40.1				16,544				38.0
U.S. and Canada			14,775				53.9				20,001				56.7				24,349				56.0
Others (1)			761				2.8				1,124				3.2				2,595				6.0

     Sales from outside of Taiwan accounted for 56.7%, 59.9% and 62.0% of our net operating revenues in 2003, 2004 and 2005, respectively. We primarily target U.S. and Canadian semiconductor companies that contract their wafer foundry services to major independent ROC foundries. Our U.S. and Canadian customers, including ATI Technologies, Inc. and NVIDIA Corp., are world-leading suppliers of graphic chipsets. Our U.S. customers mainly require quad flat packages and substrate packages. We also focus on marketing our packaging and testing services in Japan and expect sales to Japan to increase in the near future.

     We believe we have benefited from our location in Taiwan where outsourced semiconductor manufacturing infrastructure is well established. Our long-term relationships with two of the world’s largest independent wafer foundries are important to the continued growth of our services. The majority of the semiconductor devices we package and test have been manufactured in Taiwan’s leading wafer foundries. As these wafer foundries grow, we expect that their demand for our services will continue to grow. Moreover, we believe that we can leverage these relationships to jointly market seamless outsourced semiconductor manufacturing services from design to drop shipment and remain at the forefront in semiconductor technology. We also believe that our close proximity and close relationships to wafer foundries enables our customers to more efficiently manage their supply chains and find comprehensive solutions to their semiconductor needs.

     Due to the ever-changing technology and functionality of semiconductor chip design, customers requiring semiconductor packaging and testing services generally do not place purchase orders far in advance. However, we engage customers in advance of the placement of purchase orders based on each customer’s expected packaging and testing requirements. In addition, our customers generally agree to purchase from us any unused materials that we purchase to meet their forecasted demand. Although we have long-term sales relationships with a number of customers, our customers generally may cancel or reschedule orders without significant penalty. In the past, very few customers have cancelled firm orders for our packaging and testing services. This is due in part to the fact that firm orders usually immediately precede shipment of wafers to be packaged by us. Our customers do, however, routinely change their forecasts for future purchases from us, and we adjust our production plans accordingly. We do not maintain reserves for customer cancellations and variations in customer orders. Accordingly, our backlog as of any particular date may not be indicative of future sales.

     In addition, packaging and testing service customers generally require that our facilities undergo a stringent “qualification” process during which the customer evaluates our operations and production processes. The qualification process can take many weeks. Due to this lengthy qualification process, we believe semiconductor manufacturers are generally reluctant to switch semiconductor packaging and testing companies once these companies have been qualified. For test qualification, after we have been qualified by a customer and before the customer delivers semiconductors to us for testing in volume, a process known as “correlation” is undertaken. During the correlation process, the customer provides us with test criteria, information regarding process flow and sample semiconductors to be tested and either provides us with the test program or requests that we develop a new or conversion program. In some cases, the customer also provides us with a data log of results of any testing of the semiconductor that the customer may have conducted previously. The correlation process typically takes up to two weeks but can take longer depending on the requirements of the customer.

Sales and Marketing

     Our sales and marketing strategy is focused on providing high-quality advanced semiconductor device packaging and testing services, consistent on-time delivery and competitive pricing. We believe that this strategy is best implemented by servicing a select number of customers whom we consider to have a high level of anticipated growth. We work on a cooperative basis with these customers so that we can best meet their needs.

     We engage in semi-annual and quarterly reviews of all of our customers; we regularly collect data from different segments of the semiconductor industry and, when possible, we work closely with our customers to design and develop packaging and testing solutions for their new products. These “co-development” or “sponsorship” projects can be critical when customers seek large-scale, early market entry with a significant new product.

     Our sales and marketing efforts are primarily carried out by our sales team in Taichung and Hsinchu near many of Taiwan’s leading domestic semiconductor companies. In addition, our subsidiary Siliconware U.S.A., with sales offices in San Jose and Huntington Beach, California, Chelmsford, Massachusetts, Tempe, Arizona, and Lewisville, Texas, is responsible for our sales in the United States.

     We have signed annual or bi-annual contracts with our major domestic customers. These contracts normally provide that the quantities of products furnished by us are updated by the customer every month, generally through three-month non-binding rolling forecasts. We have such formal contracts with some of our overseas customers.

Quality Control

     We employ quality control procedures at every critical manufacturing stage, with the aim of identifying and solving problems at the earliest possible stage of the production process. Our quality control procedures include statistical process control, which involves sampling tests to control and monitor the production process. Such tests include optical scanning and reliability tests, which include temperature and humidity tests, pressure and stress tests and test for resistance to solvents. If a problem is detected, failure analysis will be used to determine the cause. Visual inspection and optical scanning are performed on all assembled semiconductor devices to test for lead coplanarity and integrity. Final products are tested on a sample basis for open shorts in wire connections. To ensure that our quality control procedures are effectively applied, production line employees are provided with periodic training.

     Our comprehensive quality control and environmental protection programs have received numerous accredited International Standards Organization certifications, including ISO 9002 in 1992, ISO 9001 in 1993, QS 9000 in 1999 and ISO 14001 in May 1999. We undergo periodic audits to maintain our ISO certifications. Although some semiconductor companies view the ISO certification as a basis for initiating contact with a potential subcontractor, they generally perform separate production and quality audits of the subcontractors themselves. We also received TS16949 certification for our quality control in August 2003 and OHSAS 18001 certification for safety and health management system in December 2004.

     As a result of our ongoing focus on quality, we achieved average quarterly packaging yields of 99.84% for lead frame base, 99.8% for substrate base, 99.7% for flip-chip and 99.8% for wafer bumping products in 2005. Packaging yield, which is the industry standard for measuring production yield, is equal to the number of integrated circuit packages that are shipped for packaging divided by the number of individual integrated circuits that are attached to lead-frames or substrates.

     As part of our overall focus on quality service, we also closely monitor our product delivery performance against scheduled delivery times.

Research and Development

     We focus our research and development efforts on developing new package designs and improving the efficiency and capabilities of our production process technologies. Production process enhancements include:

	•		reduction of the size and thickness of semiconductor device packages;
	•		increasing input/output density of semiconductor device packages;
	•		enhancement of the electrical, thermal and reliability performance of semiconductor device packages;
	•		reduction of spacing between leads;
	•		reduction of the height of gold wire used in the wire bonding process;
	•		increasing packaging yields;
	•		shortening cycle times; and
	•		investigating the use of new or replacement raw materials.

     We believe that technology development is one of the key success factors in the semiconductor packaging and testing industry. We work with our customers, equipment manufacturers and materials suppliers to develop advanced processing capabilities and materials for use in our production process. For example, we are currently conducting a research project with Kinsus Interconnect Technology Corp., a substrate developer in Taiwan, to develop the advanced flip-chip substrate technology. In addition, we and Sumitomo Bakelite Co., Ltd., a raw material supplier in Japan, are jointly developing low-cost and high-performance underfill materials. Moreover, we work with customers including Xilinx, Inc. early in the process of wafer design to ensure that their packaging needs are met and that our packaging products provide our customers with the flexibility they require when designing their products.

     Our research and development personnel are divided among our design department, characterization department and product development department. In addition, our quality assurance and manufacturing personnel also participate in research and development activities. In 2003, 2004 and 2005, our research and development expenses amounted to NT$559 million, NT$753 million and NT$858 million (US$26.2 million), respectively.

     We maintain laboratory facilities to analyze the characteristics of semiconductor device packages by computer simulation and verify their performance by measurement devices. The use of computer-aided engineering tools substantially reduces the time required to validate the proper function of packages, as compared to physical testing methods.

Supplies

     Our packaging operations require adequate supplies of materials and equipment on a timely basis. The principal raw materials used in packaging are lead-frames, substrate, gold wire and molding compound. We purchase materials based on customer forecasts and our customers are generally responsible for any unused materials in excess of the quantity that they indicated they would need.

     Our major suppliers of raw materials, including Phoenix Precision Technology Corp., Sumitomo Metal Mining Asia Pacific Pte Ltd., Sumitomo Bakelite (Taiwan) Co., Ltd., Kinsus Interconnect Technology Corp., Chang Wah Electromaterials Inc. and Nan Ya Printed Circuit Board Corp. are leading companies in the types of materials they supply. We work closely with them, provide them with rolling forecasts, weekly requirement schedules and update them on the status of our new products. Due to the growth of substrate packaging products that are sold, our raw material costs have also increased. For 2003, 2004 and 2005, our raw material costs were 52.9%, 54.7% and 56.0%, respectively, of cost of goods sold. We expect that raw materials will continue to constitute a significant portion of our cost of goods sold as demand for substrate packaging products continues to increase.

     We do not maintain large inventories of raw materials; we usually only maintain enough for one month’s production based upon regular estimates of orders from customers. Our principal suppliers usually dedicate portions of their inventories as reserves to meet our production requirements. Nevertheless, on occasion when customer orders have exceeded the supply of raw materials, we have typically been able to obtain extensions from our customers to allow sufficient supply to become available. Such arrangements help us remain cost competitive in today’s market. In the past, prices of our principal raw materials have not been volatile.

Equipment

     In addition to raw materials, the availability of packaging and testing equipment is critical to our services. We generally seek to maintain equipment from different suppliers with broad functionality and flexibility for different packaging types to enhance capacity utilization. We purchase packaging equipment from major international manufacturers, including Apic Yamada Corporation, Kulicke & Soffa Industries Inc., ASM Technology Singapore PTE LTD. and TOWA Corporation. As of December 31, 2005, we operated 3,961 wire bonders. We also had 273 testers in Taichung and Hsinchu, Taiwan. We must order equipment in advance of customer demand to expand our capacity, based on our expectation of future demand for our packaging and testing services.

     Testing equipment is one of the critical components of the wafer probing and device testing process. We generally seek to maintain testers from different vendors with similar functionality and the ability to test a variety of different semiconductors. In general, certain semiconductors can only be tested on a limited number of specially configured testers. Our major suppliers of testing equipment are Agilent Technologies, Inc., Advantest Taiwan Inc. and Teradyne Inc.

Competition

     We face substantial competition from established packaging and testing service providers, including companies with greater manufacturing, financial and other resources. These companies include Advanced Semiconductor Engineering, Inc. (Taiwan), ASE Test Limited (Taiwan and Malaysia), Amkor Technology Inc. (USA), ASAT, Ltd. (Hong Kong), STATS ChipPAC Ltd. (Singapore), Hana Microelectronics Public Co. Ltd. (Thailand), Astra International (Indonesia), Carsem Bhd. (Malaysia) and Shinko Electric Industries Co., Ltd. (Japan). These companies have also established relationships with many large semiconductor companies that are our current or potential customers. To a lesser extent, we also compete with the internal semiconductor packaging and testing capabilities of many of our customers.

     The principal elements of competition in the independent semiconductor packaging and testing market include:

	•		the breadth of package and test offerings;
	•		technical competence;
	•		manufacturing yields;
	•		manufacturing cycle times;

	•		customer service; and
	•		price.

     Integrated Device Makers, or IDMs, that use our services continually evaluate our performance against their own in-house testing and assembly capabilities. These IDMs may have access to more advanced technologies and greater financial and other resources than we do. We believe, however, that we can offer greater efficiency and lower costs while maintaining an equivalent or higher level of quality for three reasons:

	•		we offer a broader and more complex range of services as compared to the IDMs, which tend to focus their resources on improving their front-end operations;
	•		we generally have lower unit costs because of our higher utilization rates; and
	•		we offer a wider range of services in terms of complexity and technology.

Strategic Investments

     We, together with Siliconware Investment Company Ltd., our subsidiary, make equity joint ventures and strategic investments in companies located in Taiwan and the United States engaged in the semiconductor packaging and testing businesses. We believe that our participation in these companies allows us to enhance and complement our product offerings, secure access to raw materials and keep us up to date with technological changes in the semiconductor industry. We are able to maintain close relationships with these companies and influence strategic management decisions through representation on the boards of many of these companies. These participations include:

	•		ChipMOS. As of December 31, 2005, we held a 28.8% equity interest in ChipMOS, which is engaged in the business of semiconductor packaging and testing and LCD driver and IC manufacturing. We acquired this equity interest in 1997 as part of a joint-venture arrangement with Mosel Vitelic Inc., Mr. Frank Lee, one of our officers, is a director of ChipMOS.
	•		Sigurd Microelectronics Corp. As of December 31, 2005, we held, directly and indirectly, a 24.0% equity interest in Sigurd Microelectronics Corp. Sigurd provides lower-end packaging and testing services. Mr. Byron Chiang, one of our officers, is a director of Sigurd.
	•		Double Win Enterprise Co. Ltd. As of December 31, 2005, we held a 24.1% equity interest in Double Win Enterprise Co. Ltd., which is engaged in the business of printed circuit boards and surface mount technology. Mr. Frank Lee and Mr. Byron Chiang, two of our officers, are directors of Double Win Enterprise Co. Ltd. Mr. Chao-Hong Huang, one of our officers, is a supervisor of Double Win Enterprise Co. Ltd.
	•		Phoenix Precision Technology Corporation. As of December 31, 2005, we held, directly and indirectly, a 17.6% equity interest in Phoenix Precision, a supplier of semiconductor raw materials, including substrates. Mr. Bough Lin, our Chairman, Mr. Yen-Chun Chang, one of our directors, and Ms. Teresa Wang, one of our supervisors, are directors of Phoenix Precision. Ms. Teresa Wang is also the Chief Financial Officer of Phoenix Precision. Jerome Tsai, one of our directors, is supervisor of Phoenix Precision. Mr. Wen-Lung Cheng, one of our supervisors, is supervisor of Phoenix Precision.
	•		King Yuan Electronics Co., Ltd. As of December 31, 2005, we held a 8.8% equity interest in King Yuan, which is engaged in the business of semiconductor testing. Mr. Bough Lin, our Chairman, and Mr. Fu-Mei Tang, one of our supervisors, are directors of King Yuan.

     In May 2004, we sold all of our interest in Taiwan Hi-tech Corporation, a company engaged in the business of solder plating, for NT$100 million (US$3.1 million).

     In 2005, we sold all of our interest in ThaiLin Technology Corporation, which is engaged in the business of memory testing for NT$192 million (US$5.9 million).

     On March 1, 2005, Universal Communication Technology Inc., or Universal Communication, merged with Sigurd Microelectronics Corp. and Universal Communication was subsequently liquidated.

Intellectual Property

     As of December 31, 2005, we held 346 Taiwan patents and 238 U.S. patents and 41 PRC patents related to various semiconductor packaging technologies, including patents for improvements of thermal and electrical performance used in the semiconductor packaging process. As of December 31, 2005, we also had a total of 95 pending patent applications in the United States, 138 in Taiwan and 79 in the PRC. In addition, we had registered “SPIL” as a trademark and as a servicemark in Taiwan.

     We have licensed from Freescale, formerly part of Motorola, the technology for ball grid array for which we make royalty payments based upon the number of pads or balls used in our packages. This license will expire in December 2010. In April 2004, Motorola spun off its semiconductor package business into Freescale and assigned our agreement with Motorola to Freescale, and Freescale has assumed all of its right, duties and obligations under the agreement. We have also implemented new packages by entering into other technology alliances and by licensing leading-edge package technologies, including:

	•		Flip Chip’s Wafer Bumping and Redistribution technology, which enables us to form and/or redistribute bumps on the chip to make a silicon die, is able to be directly attached to the substrate using the aforementioned bumps rather than wire bonding. This license will expire in November 2014.
	•		Flip Chip’s flip-chip wafer Level CSP technology, which enables us to produce a chip scale package at the stage of wafer level. This license will expire in January 2011.
	•		FujiTsu Limited’s electroplating bumping technology which enables us to produce a bumped wafer with cost-effective, fine-pitch and high-reliability features instead of screen printing bump to meet current market requirements. This license will expire in December 2007.
	•		LSI Logic Corporation’s packaging technology pertaining to flip-chips, which offer us a cost-effective solution for high performance ASIC and system-on-chip, or SoC, designs. We acquired this license in August 2001. This license will expire in January 2010.
	•		Tessera, Inc.’s TCC technology which enables us to produce micro ball grid array products. This license will terminate at the expiration of the patent.
	•		ITRI’s electrical enchanced-PBGA technology which enables us to produce a high electrical performance packages by consolidated power ring and ground ring. The license will expire in Dec 2007.

     In 2003, 2004 and 2005, ongoing royalty expenses to the companies from which we license intellectual property were NT$161 million, NT$143 million and NT$195 million (US$5.9 million), respectively, which accounted for 0.6%, 0.4% and 0.4%, respectively, of our net operating revenues. With the increasing pace of technological change in the semiconductor industry, however, we expect that royalty expenses will increase in the future.

     We expect to continue to file patent applications where appropriate to protect our proprietary technologies. We may need to enforce our patents or other intellectual property rights or to defend ourselves against claimed infringement of the rights of others through litigation, which could result in substantial cost and diversion of our resources.

     Although we are not currently and have not been a party to any material litigation, the semiconductor industry is characterized by frequent claims regarding patent and other intellectual property rights. If a third party were to bring a valid legal claim against us, we could be required to:

	•		discontinue the use of disputed process technologies;
	•		pay substantial damages;
	•		develop non-infringing technologies; or
	•		acquire licenses to the technologies that we had allegedly infringed.

Environmental Matters

     The principal pollutants produced during semiconductor packaging are waste water and gases from the processes including solder plating, wafer grinding and die dicing. During these processes, waste water is produced when water is used to cool and rinse wafers while they are being diced and ground, or to rinse semiconductor chips when lead-frames are being plated.

     In addition, solid waste materials produced during the packaging process include scraps such as metal lead-frame, printed-circuit-board-like substrate and excess molding resin.

     As for the newly developed bumping process, waste water is produced when water is used to rinse wafers in the processes of etching and solder deposition. Gases come from the emissions of solvents that are used to clean wafers during the bumping process.

     To mitigate environmental claims, we maintain pollution control facilities in good conditions at all of our factories. We have installed various types of pollution control equipment dedicated to different properties of pollutants for the best treatment of gaseous waste and waste water in our facilities. As part of our pollution control programs, we also subcontract certain waste disposal and recycling work to suppliers qualified by the Environmental Protection Administration. Furthermore, we also actively monitor any changes in the international environmental requirements in the electronic and semiconductor industries. In order to respond quickly to such changes, we believe that we are in compliance with the existing environmental requirements of semiconductor industries and regulations in Taiwan in all respects

Insurance

     Our insurance policies on buildings, equipment and inventories cover damages due to natural disasters, excluding earthquakes. We maintain insurance policies on both our old and new production facilities in Taichung and Hsinchu, Taiwan and on inland transit of inventories. Our property insurance covers replacement costs for our assets. Our insurance also includes protection from losses caused by business interruption for seven to fourteen consecutive working days. As of December 31, 2005, we had a maximum coverage of NT$72,420 million (US$2,207.9 million) and other specified limits and exclusions.

     We also maintain insurance on the silicon wafers delivered to us. These insurance policies cover the risk of loss of the silicon wafers while they are in our possession or consigned by our customers and/or during inland transportation.

Employees

     See “Item 6. Directors, Senior Management and Employees — D. Employees” for certain information relating to our employees.

Capital Expenditures and Divestitures

     Our capital expenditures amounted to NT$4,885 million, NT$9,785 million and NT$8,245 million (US$251.4 million) in 2003, 2004 and 2005, respectively. Our initial budget for capital expenditures for 2006 is approximately US$373 million. We may adjust the amount of our capital expenditures upward or downward based on the progress of our capital projects, market conditions and our anticipation of future business outlook. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”

     We have made, and expect to continue to make, capital expenditures in connection with the expansion of our production capacity. The table below sets forth our principal capital expenditures, paid or committed, for the periods indicated.

		Year Ended December 31,
		2003				2004				2005
		NT$				NT$				NT$				US$
		(in millions)
Equipment purchases			4,627				8,777				7,673				234.0
Land and building construction and purchases			258				1,008				572				17.4

Litigation (Tessera issue)

     On March 1, 2006, we were notified of a civil lawsuit brought by Tessera Inc., a U.S. corporation, against us and our subsidiary, Siliconware USA, Inc. in the United States. Currently, we are unable to assess the potential liabilities arising out of this claim due to insufficient information provided in the scope of the infringement of patent rights caused by our services is specified in the bill of complaint. As such, we have not estimated or recognized any losses or expenses with regard to the lawsuit.

     C. Organizational Structure

     The following table sets forth certain information as of December 31, 2005 regarding certain companies in which we consolidated and the principal business of each such entity.

Total Paid-in

Direct/Indirect

Capital (1) of

Equity

Company

Main Activities

Location

Such Entity

Interest

(in millions)

SPIL (B.V.I.) Holding Limited

Investment activities

British Virgin Islands

US$

62.8

100.0

%

Siliconware Investment Company Ltd.

Investment activities

Taipei, Taiwan

NT$

1,770.0

100.0

%

Siliconware U.S.A. Inc.

Sales, solicitation, marketing and order collection ordering in North America

San Jose, CA, USA

US$

1.3

100.0

%

SPIL (Cayman) Holding Limited

Investment activities

Cayman Islands

US$

35.1

100.0

%

Siliconware Technology (Suzhou) Limited

Manufacturing of DRAM modules, flash memory cards, transistor and other electronic components

Suzhou, Jiangsu, China

US$

35.0

100.0

%

The following table sets forth certain information regarding our equity investees that are accounted for under equity method and cost method as of December 31, 2005.

						Total Paid-in		Direct/Indirect
						Capital(1) of		Equity
Company		Main Activities		Location		Such Entity		Interest
						(in millions)
ChipMOS Technologies Inc.		Testing and assembly of integrated circuits		Hsinchu, Taiwan		NT$8,934.4			28.8	%
Sigurd Microelectronics Corp		Testing and assembly of integrated circuits		Hsinchu, Taiwan		NT$1,857.6			24.0	%
Double Win Enterprise Co., Ltd		PCB, SMT process and hand insert		Taoyuan, Taiwan		NT$280.0			24.1	%
Phoenix Precision Technology Corp		Researching, developing, manufacturing and selling ball grid array substrate		Hsinchu, Taiwan		NT$5,793.9			17.6	%
King Yuan Electronics Co., Ltd.		IC testing		Hsinchu, Taiwan		NT$9,154.0			8.8	%

     D. Property, Plants and Equipment

     We provide packaging services through our three facilities in Taichung, Taiwan. In addition, we provide testing services through our facilities in Hsinchu and Taichung, Taiwan. We own all of our packaging and testing facilities.

     The following table shows the location, size and wire bonding or testing capacity of each of our facilities and the property on which each facility is located as of December 31, 2005.

Wire Bonding or

Facility

Location of Facility

Size of Facility

Size of Land(1)

Testing Capacity

(square meters)

(square meters)

Facility I

Taichung, Taiwan

6,755

7,881

1,900 wire bonders

Facility II

Taichung, Taiwan

81,146

26,246

418 wire bonders

Facility III

Taichung, Taiwan

134,620

39,455

113 testers, 1,643 wire bonders

Facility IV

Hsinchu, Taiwan

32,645

14,215

160 testers

     Our principal executive offices are located at Facility II in Taichung, Taiwan. Our research and development activities are also located at this facility. Facility III, which was completed in the second half of 2004, is used for testing and 12-inch wafer bumping and other assembly purposes.

     We also have plans to expand our operations to the PRC in anticipation of future market demand sourced from our existing and new customers based in China. Many of our customers and competitors have announced plans to begin operation in the PRC. We believe that, as a leading packaging and testing company, we are in a competitive position to gain a significant market share in this developing market. In December 2001 and June 2004, we obtained foreign investment approval from the Investment Commission of the ROC Ministry of Economic Affairs to invest up to US$50 million in aggregate in Suzhou, PRC. As of March 31, 2006, we had invested a total of US$50 million in this subsidiary. We are in the stage of ramping up our facilities in Suzhou for the manufacturing of DRAM modules, flash memory cards, transistors and other electronic components.

Item 4A. Unresolved Staff Comments

     We received comments from the Staff on September 23, 2005 on our annual report for the year ended December 31, 2005. All of these comments have been resolved, and we have restated certain US GAAP reconciliation footnotes in relation to derivative instruments for the years ended December 31, 2002, 2003 and 2004, and included such restatements in this annual report.

Item 5. Operating and Financial Review and Prospects

     Unless stated otherwise, the discussion and analysis of our financial condition and results of operations in this section apply to our financial information as prepared according to ROC GAAP. You should read the following discussion of our financial condition and results of operations together with the financial statements and the notes to these statements included in this annual report. Our financial statements are prepared according to ROC GAAP, which differ from US GAAP. For a discussion of the material differences, see note 30 to our financial statements included elsewhere in this annual report.

     A. Operating Results

Overview

     We are one of the world’s leading independent providers of semiconductor packaging services. We also provide semiconductor testing services to our customers. We offer a complete portfolio of packaging and testing solutions, including advanced lead-frame and substrate packages such as flip-chip ball grid packages, and testing services for logic, mixed signal and embedded memory devices. We also offer our customers complete turnkey solutions, including packaging, testing and direct shipment of semiconductor devices to end users designated by our customers.

     The semiconductor industry experienced moderate recovery in 2003, 2004 and 2005, and we recorded operating income of NT$2,521 million, NT$4,333 million and NT$7,249 million (US$221 million) in 2003, 2004 and 2005, respectively. Increases in our operating income were also attributable to increases in our offering more advanced packaging services and testing of high-performance semiconductor products.

     Intense competition in the semiconductor industry worldwide resulted in decreases in the average selling prices of our products. We expect that average selling prices for most of our semiconductor packages to continue to decline in the future. A decline in average selling prices of our semiconductor packages, coupled with high depreciation cost resulting from our purchase of additional equipment during the previous periods, if not offset by reductions in the other cost of producing those packages, would decrease our gross margins.

     To counter the effects of decreasing average selling prices, we will continue to attempt to:

	•		negotiate better pricing terms with our suppliers, including quantity discounts;
	•		find alternative, less expensive sources of raw materials;
	•		maximize production efficiency of our employees; and
	•		engage in utility conservation programs.

     We do not maintain reserves for cancellations or variations in customer orders.

Consolidation

     Under ROC GAAP prior to January 1, 2005, we were required to include in our consolidated financial statements direct and indirect subsidiaries with total assets or total operating revenues that individually comprised at least 10% of our total assets or total operating revenues. For subsidiaries that did not individually exceed such threshold, we calculated whether the aggregate of either the total assets or total operating revenues of such subsidiaries exceeded 30% of our respective non-consolidated amounts. Each of such subsidiaries was required to be consolidated only if its total assets or total operating revenues constituted at least 3% of our non-consolidated total assets or total operating revenues, respectively. However, effective January 1, 2005, the scope of consolidation has been expanded to include all investees that are not majority-owned, but over which we can exercise significant control. For each of 2003, 2004 and 2005, we consolidated five subsidiaries: Siliconware Investment Company Ltd., SPIL (B.V.I.) Holding Limited, Siliconware U.S.A. Inc., SPIL (Cayman) Holding Limited and Siliconware Technology (Suzhou) Limited, each in which we own a 100% equity interest.

     Upon adoption of the amended ROC GAAP Statement of Financial Accounting Standards, or ROC SFAS, No. 1 “Consolidated Financial Statements” and ROC SFAS No. 7, which became effective on January 1, 2005, we are required to prepare consolidated financial statements on a semiannual basis. Such consolidated financial statements should include all entities over which we hold more than 50% of voting shares or has effective control as defined under ROC SFAS No. 7.

Delay in Recognition of Investment Income in Certain Investee Companies Accounted for Under Equity Method

ChipMOS

     As of March 31, 2006, we owned a 28.8% equity interest in ChipMOS, a semiconductor packaging and testing and LCD driver integrated circuit manufacturing company, located in Hsinchu, Taiwan.

     We entered into a joint venture agreement with Mosel Vitelic in July 1997 to establish ChipMOS. We contributed NT$1,400 million in the form of cash and NT$100 million in the form of packaging technology know-how in exchange for a 30% equity interest in ChipMOS. Mosel Vitelic received a 48% interest in ChipMOS, and the remaining ownership interests in ChipMOS were allocated to several institutions and individuals selected by Mosel Vitelic. We are entitled to appoint two out of the seven-member board of directors of ChipMOS. Pursuant to the joint venture agreement, we are required to maintain a minimum 18% equity interest in ChipMOS for five years from the date of any initial public listing of ChipMOS. If ChipMOS requires guarantees of its indebtedness to obtain financing, we and Mosel Vitelic are required under the joint venture agreement to provide these guarantees in the ratios of 30% and 70%, respectively. As of December 31, 2005, we had not provided any guarantees with respect to ChipMOS’s indebtedness.

     The ROC SFB has allowed us to delay our recognition of investment income in certain investee companies accounted for under the equity method. In 2002, because ChipMOS did not provide its financial statements to us in time to enable us to recognize its financial results for such period, prior to January 1, 2005, we were permitted by the ROC SFB to delay the recognition of the investment loss of ChipMOS in our financial results until June 30 of the following year. As a result, we did not recognize investment loss of ChipMOS for 2002 in our financial results under ROC GAAP until the first quarter of 2003. For the first three months ended March 31, 2003, we recognized an investment loss amounting to NT$366 million for ChipMOS’s financial results in 2002. If this investment loss had been included in our results for 2002, our non-operating income, income before income tax and net income for 2002 would have been reduced by the same amount and our basic and diluted earnings (loss) per share in 2002 would have been reduced by NT$0.2. In 2003 and 2004, we also experienced delays in recognition of investment income. For the first three months ended March 31, 2004, we recognized an investment income of NT$247 million from ChipMOS’s financial results in 2003. From January 1, 2005, we adopted the amended ROC Statement of Financial Accounting Standards No. 5, “Accounting for Long-term Equity Investment”, pursuant to which we ceased to defer the recognition of investment income of investees accounted for under the equity method until the subsequent year and recognized investment income from all investees accounted for under the equity method based on investees’ audited financial statements for the corresponding periods. Therefore, for the three months ended March 31, 2005, we recorded our investment income of NT$667 million from ChipMOS in 2004 as cumulative effects of changes in accounting principles and recognized an investment income of NT$433 million from ChipMOS’s financial results in 2005.

     Under US GAAP, however, there is no provision that allows us to delay recognition of ChipMOS’s financial results. In 2003, 2004 and 2005, our investment income from ChipMOS were NT$250 million, NT$664 million and NT$469 million (US$14.3 million) under US GAAP. As a result, our financial results under US GAAP would not provide meaningful year-to-year comparison to our financial results under ROC GAAP.

Universal Communication

     Our investment income (loss) from Universal Communication Technology Inc., or Universal Communication, was accounted for under the cost method in 2001. In 2002, as a result of increasing our stake in Universal Communication from 16.2% to 42.8%, we changed our method of recognizing investment income (loss) from the cost method to the equity method. At the same time, we delayed the recognition of the income (loss) of Universal Communication until 2003 because we were not able to obtain the statements of Universal Communication for the same period of time and hence our financial results for 2002 do not reflect the performance of Universal Communication in 2002. In 2003, following the appointment of three directors to the board of Universal Communication, we are no longer eligible for a delay in recognition of investment income (loss) of this investee. For 2003, we recognized investment loss of Universal Communication of NT$47 million, which was based on the financial statements of the investee for the years ended December 31, 2002 and 2003 and in accordance with the preference of the preferred stock of Universal Communication. On March 1, 2005, Universal Communication merged with Sigurd Microelectronics Corp. and Universal Communication was subsequently liquidated.

Double Win and Taiwan High-tech

     Recognition of our investment income (loss) in Double Win Enterprise Co., Ltd. and Taiwan Hi-tech Corporation has consistently been recorded in the subsequent year on a delayed basis. Accordingly, the combined investment income of NT$3 million and NT$5 million from investments in these two companies for 2003 and 2004, respectively, and the combined investment loss of NT$17 million (US$0.5 million) for 2005 were based on the audited financial statements of the investee companies for 2002, 2003 and 2004, respectively.

CAESAR

     CAESAR was dissolved on December 26, 2001. At the time of its dissolution, we owned a 34.65% equity interest in CAESAR, the financial results of which were accounted for under the equity method. We incurred investment loss of NT$716 million for 2001 for CAESAR. Under ROC GAAP, we were required to recognize a one-time write-off of our investment loss on the day of dissolution subject to further write off or reversal, depending on the residual value of CAESAR upon the completion of the liquidation procedure, which was completed in 2003.

     Under US GAAP, we are required to review the carrying value of an asset for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. When such an event occurs, we estimate the future discounted cash flows expected to result from the use of the asset and our eventual disposition. If the discounted expected future cash flows are less than the carrying amount of the asset, an impairment loss is recognized. Accordingly, US GAAP has also required that an impairment review be performed for our investment in CAESAR in 2001 and an impairment loss could also be recognized for the amount not recoverable.

Change in Product Mix

     Beginning in 2004, our substrate packages accounted for a majority of our net operating revenues in relation to our packaging business. Our lead-frame products (including quad flat packages), which had been our major packaging products since January 1998, still account for a substantial percentage of our net operating revenues.

     The following table shows, for the periods indicated, the amount of our packaging and testing revenues by product type (which are more fully described in Item 4. “Information on the Company—B. Business Overview—Our Business”) and each product’s revenues as a percentage of our total net operating revenues:

		Year Ended December 31,
		2003								2004								2005
		NT$				%				NT$				%				NT$				%
		(audited) (consolidated)
		(in millions, except for percentages)
Ball grid array packages			11,698				42.7				16,416				46.6				21,963				50.5
Quad flat packages			8,635				31.5				9,435				26.7				8,823				20.3
Small outline packages			3,160				11.5				3,800				10.8				3,911				9.0
Other packages			956				3.5				1,467				4.2				3,259				7.5
Total packaging revenues			24,449				89.2				31,118				88.3				37,956				87.3
Testing and other revenues			2,962				10.8				4,134				11.7				5,532				12.7
Total net operating revenues			27,411				100.0				35,252				100.0				43,488				100.0

Expansion and Utilization Rate

     In 2000, we expanded our packaging capacity significantly, increasing the number of wire bonders to 1,829, and added testing capacity to our operations through our acquisition of Siliconware Corp., through which acquisition we acquired 140 testers. However, in 2001, our capacity utilization rate declined significantly due to a downturn in the semiconductor industry and, as a result, we expanded less aggressively than we did in 2000. Our wire bonders further increased to 2,869 as of December 31, 2003 from 2,481 as of December 31, 2002, whereas our number of testers remains nearly the same at 196 as of December 31, 2003, compared to 198 as of December 31, 2002. Our number of wire bonders and testers increased to 2,999 and 249, respectively as of December 31, 2004 and 3,961 and 273, respectively, as of December 31, 2005 as we continue to expand our capacity in order to meet increasing demand from our clients.

     Our operating results are affected by relatively high fixed costs. For example, a wire bonder typically costs between US$70,000 and US$75,000. As a result, capacity utilization rates can significantly affect margins as the unit cost of packaging and testing services generally decreases as fixed charges, including depreciation expenses on our equipment, are allocated over a larger number of units. Our utilization rates have varied from period to period as we have expanded our production capacity. We have been successful in minimizing the industry-wide fluctuation in capacity utilization rates by deploying flexible packaging equipment for use in the production of different packages and by utilizing our test equipment also for probing purposes. Our ability to maintain or enhance our margins will continue to depend in part on our ability to effectively manage capacity utilization rates. The capacity utilization of our facilities was 80%, 90% and 94% in 2003, 2004 and 2005, respectively.

Applications of Critical Accounting Policies

     The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this annual report, which have been prepared in accordance with ROC GAAP. ROC GAAP vary in certain significant respects from US GAAP. These differences and their effects on our financial statements are described in note 30 to our audited consolidated financial statements included in this annual report. The preparation of our audited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable and allowance for doubtful accounts, inventory, marketable securities, deferred tax asset valuation allowance, employee bonuses, impairment of long-lived assets and goodwill impairment. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates using different assumptions or conditions.

     We believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our audited consolidated financial statements.

Revenue Recognition

     We principally provide packaging and testing services of integrated circuits, which may be packaging only, test only or turnkey solutions. Revenues are recognized when services have been provided based on transaction terms and when collectibility is reasonably assured. If multiple services are negotiated in one contract, we recognize revenues based on their relative fair values when all of the revenue recognition criteria are met. As we are not engaged in product sales, we do not account for sales returns.

Accounts Receivable and Allowances for Doubtful Accounts

     The allowances for doubtful accounts are provided based on evaluations of collectibility, aging analyses of the accounts and the management’s judgment. A considerable amount of judgment is required in assessing the ultimate realization of these receivable including the current credit worthiness and the past collection history of each customer. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be recorded.

Inventory Reserves

     In general, raw materials are purchased based on the customers’ forecasted demand. If our customers change their forecasted requirements and we are unable to cancel our excess raw material orders, we would experience a build up in our raw material inventory. We could either seek to recover the cost of the materials from our customers or utilize the inventory in production. However, we may not be successful in recovering the cost from our customers or in using such excess inventory in production, which we would consider as part of our reserve estimate. Our reserve for excess and obsolete inventory is based on forecasted demand we receive from our customers. When a determination is made that the inventory would not be utilized in production, it is written off and disposed of. Actual demand may differ from our forecast and may result in additional reserve.

     We also recognize losses from declines in the market value of inventories. The market value of raw materials and supplies are determined on the basis of replacement cost. The market value of finished goods and work in progress are determined on the basis of net realizable value. If the market value of inventories further drops, additional loss may be recorded.

Impairment of Long-Lived Assets

     We review equity investments and other long-lived assets for the purpose of determining the amount of impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying value of a long-lived asset is considered impaired when the anticipated cash flows are less than the asset’s carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. The estimate of fair value is generally based on quoted market prices or on the best available information, including prices for similar assets and the results of using other valuation techniques.

     We evaluate our equity investments for impairment due to declines in the market value that are considered other than temporary. Such evaluations include an assessment of general economic and company-specific considerations, such as customer forecasts and regularly updated projections of operating results. In the event of a determination that a decline in market value is other than temporary, loss is recognized in the current year’s income. The evaluation of whether a decline in market value is other than temporary requires considerable management judgment. For an investee who resolves to liquidate or dissolve, a one-time write-off would be recorded to the extent that the estimated proceeds would be obtained and the amount of investment balance would not be recovered.

     Artest Corporation, an investee accounted for under the equity method, incurred significant losses since the dates of our investments and there is no indication of recovery in the near future. During 2003, we concluded that the impairment loss was other than temporary. Accordingly, in 2003, we recorded an impairment charge of NT$157 million on this long-term equity investment to write off the carrying value of the investment to its fair value. The amount of the write off is determined as follows: (1) whether there is a quoted market value to determine its fair value; and (2) based on our evaluation, whether the carrying value of the assets and liabilities of the investee approximated

its fair value. If the fair value of the investee was lower than its carrying value, additional impairment may be recorded. We further recorded an impairment charge of NT$8 million during 2004 on our long-term equity investment in Artest Corporation to write down the carrying value of the investment to fair value. As of December 31, 2005, the carrying amount of our investment in Artest Corporation was nil.

     In 2003, we also recognized an impairment charge of NT$132 million for packaging and testing assets to be disposed of to reduce the carrying value of the assets to their estimated fair value less cost of sale. The fair value of the assets to be disposed of was determined by the estimated net realizable value of the assets. We determined the estimated net realizable value of these assets to be disposed to be zero based on the condition and anticipated future cash flows. The impairment charge was mainly related to our decision to dispose certain machinery and equipment due to technology phase out and replacement in 2003.

     In 2004, we recognized an impairment charge of NT$461 million for packaging and testing assets to be disposed of to reduce the carrying value of the assets to their estimated fair value less cost of sale. The fair value of the assets to be disposed of was determined by the estimated net realizable value of the assets. We determined the estimated net realizable value of these assets to be disposed to be zero based on the condition and anticipated future cash flows of these assets. The impairment charge was mainly related to our decision to dispose certain machinery and equipments due to technology phase out and replacement in 2004.

     In 2005, we recognized an impairment charge of NT$69 million for packaging and testing assets to be disposed of to reduce the carrying value of the assets to their estimated fair value less cost of sale. The fair value of the assets to be disposed of was determined by the estimated net realizable value of the assets. We determined the estimated net realizable value of these assets to be disposed to be zero based on the condition and anticipated future cash flows of these assets. The impairment charge was mainly related to our decision to dispose certain machinery and equipments due to technology phase out and replacement in 2005.

Provision for Income Taxes and Deferred Tax Asset Valuation Allowances

     As of December 31, 2005, we had approximately NT$2,469 million (US$75.3 million) of net deferred tax assets related principally to investment tax credits that expire at various dates through 2008, the unrealized loss on long-term investments and loss carryforwards. Valuation allowance was provided to reduce the deferred tax assets to the amount that we believe is more likely than not to be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowances. In the event we determined that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to our deferred tax assets would increase income in the period such determination was made. Similarly, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment of our deferred tax assets would be charged to income in the period such determination was made.

Employee Bonuses

     Some of our employees are entitled to bonuses in accordance with applicable provisions of our articles of incorporation. Employee bonuses are determined at 10% of distributable retained earnings. Distributable retained earnings are calculated as retained earnings after various reserves are made in accordance with ROC law and our articles of incorporation and after appropriation for remuneration to directors are made. Employee bonuses may be granted in cash, shares or a combination of both. Under ROC GAAP, such bonuses are appropriated from retained earnings during the accounting period during which such shareholders’ approval is obtained. If such employee bonuses are settled through the issuance of our shares, the amount charged against retained earnings would be based on the par value of the common shares issued. Under US GAAP, the employee bonus expense is initially accrued at the end of the period when services are rendered, at 10% of the distributable retained earnings. When bonuses are approved by the shareholders in the subsequent year, an additional compensation expense is recorded for the difference between the par value and the fair market value of shares granted to employees.

Goodwill

     Goodwill arising from business combination is recognized under US GAAP as the difference between the fair market value of shares issued and the fair market value of net assets acquired. Effective January 1, 2002, SFAS No. 142 requires that we cease amortization of goodwill and perform an impairment review, at the “reporting unit” level, upon adoption and at least annually thereafter. Since we operate on an integrated basis, we have only one reporting unit. Based on the comparison of the fair value and carrying value of our company, we concluded that goodwill was not impaired as of the adoption of SFAS No. 142 and as of December 31, 2005.

Embedded Derivatives

     Under US GAAP, the convertible or exchangeable option embedded in investments in convertible bonds or exchangeable bonds is separated from the host and accounted for as though it was a discrete derivative instrument when the embedded derivative meets the definition of a derivative instrument under SFAS No. 133 and are not clearly and closely related to the economic characteristics and risks of the host contract. The derivative instrument is measured at fair value, with changes in the fair value reported in earnings.

     Under ROC GAAP, when an issuer issues convertible bonds, the entire instrument is recorded as a liability at an amount equal to the proceeds received. Any discount or premium to the par value of the convertible bond is amortized in the statement of operations by using the effective interest rate method. If the convertible bonds contain a redemption premium above their par value amount, the excess is accrued, using the effective interest rate method, over the period to redemption as a charge to interest expense. Upon conversion, the carrying value of the bond is credited to common stock at its par value and the difference between the carrying value of the bond and the par value of the stock is recorded to additional paid-in capital. No gain or loss is recognized.

     Under US GAAP, in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, the conversion feature embedded in a bond does not have to be separately accounted for as a derivative at fair value, if the feature is indexed only to the issuer’s own stock and would otherwise be classified in stockholders’ equity in the issuer’s statement of financial position (the “Scope Exception”).

     We issued US$200 million zero coupon convertible bonds on January 28, 2002 (the “2002 Bonds”). The 2002 Bonds are denominated in US dollars and allows the bondholders to redeem at 105.9185% of its par value on July 29, 2004. The premium put option is considered mutually exclusive with the conversion option and must be analyzed as one unit. Under US GAAP, the embedded feature with the combination of mutually exclusive feature would exclude the convertible bonds indexed only to the issuer’s own stock. Additionally, our 2002 Bonds allow the bondholders to convert their bonds into either our common shares which are traded on the Taiwan Stock Exchange (denominated in New Taiwan dollars) or into our ADSs which are traded on NASDAQ (denominated in US dollars). The conversion terms contain a fixed foreign exchange feature which determines the rate at which the bonds will be converted into our shares denominated in New Taiwan dollars. As a result, the combination of the conversion option and the fixed foreign exchange rate would also make the 2002 Bonds not only indexed to our own stock. Under SFAS 133, the compound embedded derivative would require to be fair valued. We had issued US$200 million zero coupon convertible bonds on February 5, 2004 (the “2004 Bonds”). Similar to the 2002 Bonds, the 2004 Bonds contain a foreign exchange element which allows the bondholders to convert into our shares denominated in New Taiwan dollars or ADS, and hence the compound derivative instrument requires to be fair valued under the same foregoing reason. We recognized interest expense arising from the amortization of bond discount and gain (loss) on subsequent conversion and/or buyback of convertible bonds.

     As of December 31, 2003, 2004 and 2005, the total amount of net gain (loss) recognized from applying derivative accounting amounting to NT$86.2 million, NT$(80.2) million and NT$(2,423) million (US$(73.9) million), respectively, based on the independent appraisal report.

Description of Revenue and Cost Items

Net Operating Revenues

     We generate our net operating revenues primarily from semiconductor packaging and testing operations. Net operating revenues from our semiconductor packaging activities consist of our service fees and the cost of raw materials we purchase to provide semiconductor packaging services. Our net operating revenues do not include the cost of semiconductors, which are our customers’ property.

     We price our packaging products on a per unit basis taking into account the complexity of the product, the prevailing market conditions, the order size, the strength and history of our relationship with the customer and our capacity utilization.

     We charge our testing services based on the specific test and the time, usually measured in seconds, to run a test, taking into account the complexity of the semiconductor device and the customer’s test program.

     We also generate net operating revenues from the provision of semiconductor turnkey services, which include packaging, testing and drop-shipment services.

     Net operating revenues are recognized when services are rendered and the payment is realized or realizable. Our customers are generally invoiced at the time services are rendered, with varying terms of credit between 30 and 90 days from the time of billing.

Cost of Goods Sold

     Our cost of goods sold consists principally of:

	•		cost of raw materials purchased for semiconductor packaging services;
	•		direct labor costs; and
	•		overhead including depreciation and maintenance of production equipment, indirect labor costs, indirect material costs, utilities and royalties.

     Due to the growth of substrate packaging products, our raw material costs as a percentage of total cost of goods sold have increased significantly because of high cost of substrate. For 2003, 2004 and 2005, our raw material costs were 52.9%, 54.7% and 56.0%, respectively, of our cost of goods sold. Due to our capacity expansion, depreciation expense has increased significantly. For 2003, 2004 and 2005, depreciation, included in overhead, amounted to NT$4,732 million, NT$5,364 million and NT5,680 million (US$173 million), respectively, and was approximately 20.4%, 18.8% and 16.7%, respectively, of our cost of goods sold. The increases in depreciation expenses in 2003, 2004 and 2005 were the result of putting into operation additional 388, 130, and 962 wire bonders during 2003, 2004 and 2005, respectively. Increasing depreciation expense increases our cost of goods sold and decreases our gross profit and gross margin. Although we may not expand our packaging capacity as aggressively as we did before the recent downturn in the semiconductor industry, we expect our depreciation costs to increase in absolute terms in the future.

Operating Expenses

     Our operating expenses consist of the following:

	•		Selling Expenses. Selling expenses consist primarily of salaries and related personnel expenses and other marketing expenses.
	•		General and Administrative Expenses. General and 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.

•

Research and Development Expenses. Research and development expenses consist primarily of salaries, bonuses and related costs for product and technology development, technology license fees allocated to research and development, and depreciation on and maintenance of 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.

Results of Operations

     The following table shows some of our results of operations data as a percentage of our net operating revenues for the periods indicated.

		Year Ended December 31,
		2003				2004				2005
		%				%				%
		(audited) (consolidated)
Net operating revenues			100.0				100.0				100.0
Cost of goods sold			85.0				81.9				78.1
Gross profit			15.0				18.1				21.9
Operating expenses:
Selling expenses			1.5				1.6				1.3
General and administrative expenses			2.3				2.1				1.9
Research and development expenses			2.0				2.1				2.0
Operating expenses			5.8				5.8				5.2
Operating income			9.2				12.3				16.7
Investment income (loss)			(1.9	)			0.9				1.0
Net non-operating income (loss)			0.8				(2.3	)			(0.2	)
Income before income tax and minority interest			8.1				10.9				17.5
Income tax benefit			2.3				1.3				—
Income from continuing operations			10.4				12.2				17.5
Cumulative effects of changes in accounting principle			—				—				1.5
Net income (loss)			10.4				12.2				19.0

2005 Compared to 2004

     Net operating revenues. Net operating revenues increased by 23.4% from NT$35,252 million in 2004 to NT$43,488 million (US$1,325.9 million) in 2005. Net operating revenues from our packaging business increased by 22.0% from 2004 to 2005, whereas net operating revenues from our testing and other services increased by 33.8% in the same periods. These increases were primarily due to the general growth in the semiconductor industry and the increase in demand for personal computers, mobile phones and wireless networks. Due to market competition, the prices of our package products generally declined during 2004 and 2005.

     Ball grid array package sales increased by 33.8% from NT$16,416 million in 2004 to NT$21,963 million (US$669.6 million) in 2005. The increase in ball grid array package sales was attributable to the increase in sales of higher-end assembly and wafer level packaging services. In 2005, ball grid array package products accounted for 50.5% of our net operating revenues, up from 46.6% in 2004.

     Quad flat package sales decreased by 6.5% from NT$9,435 million in 2004 to NT$8,823 million (US$269.0 million) in 2005. The increase in quad flat package sales was attributable to increase in unit sales of quad flat package products, which increased by 5.7% from 692.9 million units in 2004 to 732.5 million units in 2005. In 2005, quad flat package products accounted for 20.3% of our net operating revenues, down from 26.7% in 2004.

     Small outline package sales increased by 2.9% from NT$3,800 million in 2004 to NT$3,911 million (US$119.2 million) in 2005. The increase in our small outline package sales was attributable to increase in unit sales of small outline package products, which increased by2.6% from 633.4 million units in 2004 to 650.1 million units in 2005. In 2005, small outline package products accounted for 9.0% of our net operating revenues, down from 10.8% in 2004.

     Gross profit and gross margin. Our gross profit increased by 49.3% from NT$6,381 million in 2004 to NT$9,528 million (US$290.5 million) in 2005. Our gross margin (gross profit as a percentage of net operating revenues) increased from 18.1% in 2004 to 21.9% in 2005. Our cost of goods sold increased by 17.6% from NT$28,871 million in 2004 to NT$33,960 million (US$1,035.4 million) in 2005, primarily due to a greater emphasis on higher quality package and testing services as well as a continuing environment of rising variable costs such as for raw materials (in particular, the cost of substrate), labor and overhead. The increases in gross profit and gross margin were primarily due to higher equipment utilization, depreciation savings and cost control measures.

     Operating expenses. Operating expenses increased by 11.3% from NT$2,048 million in 2004 to NT$2,279 million (US$69.5 million) in 2005. Operating expenses as a percentage of net operating revenues decreased from 5.8% in 2004 to 5.2% in 2005.

	•		Selling expenses. Selling expenses increased by 3.1% from NT$549 million in 2004 to NT$566 million (US$17.3 million) in 2005 mainly due to an increase in salaries.
	•		General and administrative expenses. General and administrative expenses increased by 14.6% from NT$747 million in 2004 to NT$856 million (US$26.1 million) in 2005 due primary to increased salaries paid to administrative personnel.
	•		Research and development expenses. Research and development expenses increased by 13.9% from NT$753 million in 2004 to NT$858 million (US$26.2 million) in 2005 due to increased salaries paid to R&D personnel and cost for developing new products.

     Operating income and operating margin. We recorded an operating income of NT$4,333 million and an operating margin of 12.3% (operating income as a percentage of net operating revenues) in 2004 and generated operating income of NT$7,249 million (US$221.0 million) and operating margin of 16.7% in 2005. The increase in operating margin was primarily due to an increase of gross margin.

     Net non-operating income (loss). Our net non-operating income (loss) increased from NT$(508) million in 2004 to NT$360 million in 2005. The increase in net non-operating income was primarily due to lower other non-operating loss and an increase in investment income. The decrease in other non-operating loss in 2005 was due to a decrease in the provision for the estimated liabilities arising in connection with our VAT-related tax assessment from NT$468 million in 2004 to NT$323 million in 2005 and a decrease in the recognition of impairment loss on idle property, plants and equipment from NT$461 million in 2004 to NT$69 million in 2005. The increase in investment income was due to our investment in ChipMOS. For 2005, we recognized an investment income of NT$433 million (US$13.2 million) from ChipMOS’s financial results in 2005, whereas for the three months ended March 31, 2004, we recognized an investment income of NT$247 million from ChipMOS’s financial results in 2003. If the investment loss and gain were recorded in their respective years, our net operating loss would have been different.

     Cumulative effects of changes in accounting principles. From January 1, 2005, we ceased to defer the recognition of investment income of investees accounted for under the equity method. We recognized an investment income of NT$668 million (US$20.4 million) from ChipMOS’s 2004 financial results and an investment loss of NT$17 million (US$0.5 million) from Double Win’s 2004 financial results as cumulative effects of changes of accounting principles of total NT$651 million (US$19.8 million) in 2005.

     Income tax (expense) benefit. We recognized an income tax benefit of NT$457 million primarily due to investment tax credits, the unrealized loss on long-term investments and loss carryforward in 2004. We recognized an income tax expense of NT$16 million (US$0.5 million) primarily due to a large increase of income from continuing operations before tax and a decrease of the investment tax credits available for us in 2005. A valuation allowance has been provided against the deferred tax assets to the extent that the tax benefit will more likely than not be realized.

     Net income (loss). As a result of the factors discussed above, we recorded a net income of NT$4,282 million in 2004, compared with a net income of NT$8,244 million (US$251.3 million) in 2005.

2004 Compared to 2003

     Net operating revenues. Net operating revenues increased by 28.6% from NT$27,411 million in 2003 to NT$35,252 million in 2004. Net operating revenues from our packaging business increased by 27.3% from 2003 to 2004, whereas net operating revenues from our testing and other services increased by 39.6% in the same periods. These increases were primarily due to the general growth in the semiconductor industry and the increase in demand for personal computers, mobile phones and wireless networks. Due to market competition, the prices of our package products generally declined during 2003 and 2004.

     Ball grid array package sales increased by 40.3% from NT$11,698 million in 2003 to NT$16,416 million in 2004. The increase in ball grid array package sales was attributable to the increase in unit sales of ball grid array package products, which increased by 11.2% from 221.5 million units in 2003 to 246.3 million units in 2004. In 2004, ball grid array package products accounted for 46.6% of our net operating revenues, up from 42.7% in 2003.

     Quad flat package sales increased by 9.3% from NT$8,635 million in 2003 to NT$9,436 million in 2004. The increase in quad flat package sales was attributable to increase in unit sales of quad flat package products, which increased by 29.2% from 536.1 million units in 2003 to 692.9 million units in 2004. In 2004, quad flat package products accounted for 26.7% of our net operating revenues, down from 31.5% in 2003.

     Small outline package sales increased by 20.3% from NT$3,160 million in 2003 to NT$3,800 million in 2004. The increase in our small outline package sales was attributable to increase in unit sales of small outline package products, which increased by 0.3% from 631.7 million units in 2003 to 633.4 million units in 2004. In 2004, small outline package products accounted for 10.8% of our net operating revenues, down from 11.5% in 2003.

     Gross profit and gross margin. Our gross profit increased by 55.1% from NT$4,114 million in 2003 to NT$6,381 million in 2004. Our gross margin (gross profit as a percentage of net operating revenues) increased from 15.0% in 2003 to 18.1% in 2004. Our cost of goods sold increased by 23.9% from NT$23,298 million in 2003 to NT$28,871 million in 2004, primarily due to a greater emphasis on higher quality package and testing services as well as a continuing environment of rising variable costs such as for raw materials (in particular, the cost of substrate), labor and overhead. The increases in gross profit and gross margin were primarily due to higher equipment utilization, depreciation savings and cost control measures.

     Operating expenses. Operating expenses increased by 28.5% from NT$1,593 million in 2003 to NT$2,048 million in 2004. Operating expenses as a percentage of net operating revenues remained relatively the same at 5.8% in 2003 and 2004.

	•		Selling expenses. Selling expenses increased by 32% from NT$415 million in 2003 to NT$549 million in 2004 mainly due to commission fees paid to Siliconware USA Inc. for sales of our products in North America.
	•		General and administrative expenses. General and administrative expenses increased by 20.7% from NT$618 million in 2003 to NT$747 million in 2004 due primary to increased salaries paid to administrative personnel.
	•		Research and development expenses. Research and development expenses increased by 34.6% from NT$559 million in 2003 to NT$753 million in 2004 due to increased salaries paid to R&D personnel and cost for developing new products.

     Operating income and operating margin. We recorded an operating income of NT$2,521 million and an operating margin of 9.2% (operating income as a percentage of net operating revenues) in 2003 and generated operating income of NT$4,333 million and operating margin of 12.3% in 2004. The increase in operating margin was primarily due to an increase of gross profit as a percentage of operating revenues.

     Net non-operating loss. Our net non-operating loss increased by 59.4% from NT$318 million in 2003 to NT$508 million in 2004. The increase in net non-operating loss was primarily due to higher other non-operating loss, offset by a decrease in investment loss. The increase in other non-operating loss in 2004 was due to a provision of NT$468 million for the estimated liabilities arising in connection with our VAT-related tax assessment and increase in the recognition of impairment loss on idle property, plants and equipment from NT$132 million in 2003 to NT$461 million in 2004. The decrease in investment loss was due to our investment in ChipMOS. For the three months ended March 31, 2004, we recognized an investment income of NT$247 million from ChipMOS’s financial results in 2003, whereas for the three months ended March 31, 2003, we recognized an investment loss of NT$366 million from ChipMOS’s financial results in 2002. If the investment loss and gain were recorded in their respective years, our net operative loss would have been different. Under US GAAP, there is no provision that allows us to delay recognition of ChipMOS’s income or loss.

     Income tax benefit. We recognized an income tax benefit of NT$636 million and NT$457 million in 2003 and 2004, respectively, primarily due to investment tax credits, the unrealized loss on long-term investments, and loss carryforward in both years. The decrease in income tax benefit was mainly due to the change in allowance taken in respect of deferred taxable assets. A valuation allowance has been provided against the deferred taxable assets to the extent that the tax benefit will more likely than not be realized.

     Net income (loss). As a result of the factors discussed above, we recorded net income of NT$2,839 million in 2003, compared with net income of NT$4,282 million in 2004.

     B. Liquidity and Capital Resources

     We need cash primarily for capacity expansion, equipment purchases and working capital. We believe that our working capital is sufficient for our present requirements. 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 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. Our ability to meet our working capital needs from cash flow from operations will be affected by the demand for our services and products, which in turn may be affected by several factors, many of which 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. 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. 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.

Liquidity

     As of December 31, 2005, our primary source of liquidity was NT$12,341 million (US$376.3 million) of cash and cash equivalents. As of December 31, 2005, we had total availability under existing short-term lines of credit, short-term commercial paper and trade facilities of NT$5,508 million (US$167.9 million) available from seven domestic and foreign financial institutions, of which NT$1,478 million (US$45.1 million) were used as borrowings, letters of credit or guarantees. The weighted average interest rate for borrowings denominated in NT dollars under these facilities was 1.662% as of December 31, 2005 and ranged from 1.535% to 1.980% from January 1, 2005 to December 31, 2005. All of our short-term facilities are revolving facilities with a term of one year, which may be extended for terms of one year each with lender’s consent. None of our current short-term commercial paper facilities have received a credit rating. As of December 31, 2005, we had no short-term borrowing outstanding under these short-term commercial paper facilities.

     The following table sets forth our cash flows with respect to operating activities, investing activities, financing activities and the effect of exchange rate changes on cash for the periods indicated.

		Year Ended December 31,
		2003				2004				2005
		NT$				NT$				NT$				US$
		(in millions)
Net cash provided by operating activities			8,053				8,767				13,215				402.9
Net cash used in investing activities			(4,228	)			(11,620	)			(6,397	)			(195.0	)
Net cash provided by (used in) financing activities			2,408				1,659				(5,435	)			(165.7	)
Effect of exchange rate changes on cash			—				(86	)			36				1.1
Net increase (decrease) in cash and cash equivalents			6,233				(1,280	)			1,419				43.3

Net Cash Provided by Operating Activities

     In 2005, net cash provided by operations was NT$13,215 million (US$402.9 million) compared to NT$8,767 million in 2004. The increase in net cash provided by operating activities was primarily the result of a significant increase in net income. Our changes in accounts receivable increased from NT$405 million in 2004 to NT$3,767 million in 2005 and our changes in accounts payable also increased from a negative NT$35 million in 2004 to a positive NT$3,020 million in 2005, partly offset by a decrease in changes in other payables from NT$471 million in 2004 to NT$62 million in 2005. Our depreciation and amortization expenses increased from NT$6,153 million in 2004 to NT$6,572 million (US$200.4 million) in 2005. The increase in our depreciation and amortization expenses in 2005 compared to 2004 was due to additional equipment installed in connection with our capacity expansion program.

     In 2003, net cash provided by operations was NT$8,053 million compared to NT$8,767 million in 2004. The increase in net cash provided by operating activities was primarily the result of an increase in net income (post adjustment for non-cash related expenses) despite an offset due to an increase in foreign currency exchange gains on bonds payable. Our changes in accounts receivable decreased from NT$1,221 million in 2003 to NT$405 million in 2004 and our changes in accounts payable also decreased from NT$781 million in 2003 to a negative NT$35 million in 2004, partly offset by an increase in changes in other payables from NT$60 million in 2003 to NT$471 million in 2004. Our depreciation and amortization expenses increased from NT$5,185 million in 2003 to NT$6,153 million in 2004. The increase in our depreciation and amortization expenses in 2004 compared to 2003 was due to additional equipment installed in connection with our capacity expansion program.

Net Cash Used in Investing Activities

     In 2005, cash used in investing activities was NT$6,397 million (US$195 million) compared to NT$11,620 million in 2004. Net cash used in investing activities primarily reflected capital expenditures for property, plants and equipment. These capital expenditures were primarily funded with net cash provided by operating and financing activities. We are sometimes required to prepay our purchases of land and equipment. As of December 31, 2004 and 2005, we did not have any outstanding balance of any prepayments for purchases of land. Prepayments for purchases of equipment result from contractual agreements involving down payments to suppliers when we place an order for the equipment. As of December 31, 2004 and 2005, outstanding balances of prepayments for purchases of equipment amounted to NT$1,024 million and NT$2,277 million (US$69.4 million), respectively. We have entered into agreements with third parties in connection with our expansion plans. We do not have any written options on non-financial assets. We made short-term investments of NT$4,774 million (US$145.5 million) in 2005, compared to NT$4,760 million in 2004.

     In 2003, cash used in investing activities was NT$4,228 million compared to NT$11,620 million in 2004. Net cash used in investing activities primarily reflected capital expenditures for property, plants and equipment. These capital expenditures were primarily funded with net cash provided by financing activities. We are sometimes required to prepay our purchases of land and equipment. As of December 31, 2003 and 2004, we did not have any outstanding balance of any prepayments for purchases of land. Prepayments for purchases of equipment result from contractual agreements involving down payments to suppliers when we place an order for the equipment. As of December 31, 2003 and 2004, outstanding balances of prepayments for purchases of equipment amounted to NT$2,327 million and NT$1,024 million, respectively. We have entered into agreements with third parties in connection with our expansion plans. As of December 31, 2004, we had outstanding obligations of approximately NT$181 million under these agreements. We do not have any written options on non-financial assets. We made short-term investments of NT$4,760 million in 2004, compared to nil in 2003.

Net Cash Provided by (Used in) Financing Activities

     In 2005, net cash used in financing activities was NT$5,435 million (US$165.7 million) as compared to cash provided by financing activities of NT$1,659 million in 2004. In 2004, net cash provided by financing activities reflected primarily our long-term borrowings of NT$6,300 million, repayment of long-term borrowings of NT$9,149 million and proceeds from our issuance of NT$6,646 million zero-coupon convertible bonds due 2009. In 2005, net cash used in financing activities reflected primarily our repayment of long-term borrowings of NT$3,217 million (US$98.1 million).

     In 2003, net cash provided by financing activities was NT$2,408 million as compared to cash provided by financing activities of NT$1,659 million in 2004. In 2003, net cash provided by financing activities reflected primarily our long-term borrowings of NT$5,129 million and the repayment of long-term borrowings of NT$2,330 million.

Capital Resources

     We have made, and expect to continue to make, substantial capital expenditures in connection with the expansion of our production capacity in Taichung, Hsinchu and Suzhou. See “Item 4. Information on the Company — B. Business Overview — Capital Expenditures and Divestitures.” Our initial budget for capital expenditures for 2006 is approximately US$373 million. We expect to increase our long-term borrowings in order to meet our capital expenditures. We believe that our cash on hand, existing credit facilities, new borrowings and anticipated cash flows from operations will be sufficient to meet our currently anticipated capital requirements as well as our capital lease and debt service repayment obligations for 2006.

     If our anticipated market outlook changes, we may need to adjust the amount of our capital expenditures upward or downward. As a result, we may need to invest in new capacity to improve our economies of scale and reduce our production cost, which would 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.

     As of December 31, 2005, we had outstanding long-term borrowings (including current portion but excluding convertible bonds of NT$11,310 million) of NT$5,124 million (US$156.2 million) owed to foreign and domestic financial institutions. The interest rates of these long-term borrowings dollars are at fixed and variable rates, which were and as of December 31, 2005 ranged from 2.1% to 5.2% per year. We have pledged a substantial portion of our assets, with a carrying value of NT$92 million (US$2.8 million) as of December 31, 2005, to secure our obligations under two facilities. Our material long-term borrowings (excluding convertible bonds) as of December 31, 2005 consist of the following:

	•		A multiple-purpose credit facility entered into on December 26, 2001 in the aggregate principal amount of NT$3,470 million for the purposes of (i) refinancing certain of our long-term indebtedness at a lower interest rate and (ii) buying back the convertible bonds due 2004 in any amount at any time after the closing of the offering of our convertible bonds due 2007, or meeting our cash requirement in the event that holders of the convertible bonds due 2004 exercise their put options on July 21, 2002. This facility consists of: (i) secured corporate bonds due 2005 in the aggregate amount of NT$800 million issued between January 16, 2002 and January 18, 2002, which are guaranteed by several banks, including ABN-AMRO Rothschild, Taiwan branch, each with the maturity date of January 18, 2005, (ii) a medium-term loan facility in the amount of NT$1.17 billion, and (iii) a NIF commercial paper facility in the amount of NT$1.5 billion renewable until January 18, 2005, each for a period not to exceed 180 days. The extent to which we will draw on this facility will depend on interest rates, exchange rates and other relevant factors, including whether we should exhaust the proceeds of our convertible bonds due 2007 before we apply the proceeds of the credit facility in the event that certain of the holders of the convertible bonds due 2004 exercise their put options on July 21, 2002.
	•		A multiple-purpose credit facility led by China Trust Commercial Bank entered into on July 14, 2004 in the aggregate principal amount of NT$5.0 billion for the purposes of refinancing certain of our long-term indebtedness at a lower interest rate. This facility is a mid-term credit facility. As of December 31, 2005, we had drawn NT$4.8 billion (US$146.3 million) from the credit facility to refinance our exiting indebtedness.

     In addition, we entered into a multiple-purpose credit facility led by Citibank on June 5, 2003 in the aggregate principal amount of NT$5.2 billion for the purposes of (i) refinancing certain of our long-term indebtedness at a lower interest rate and (ii) funding our operating capital. This facility is a mid-term credit facility. We had repaid all of the borrowings under the facility on August 30, 2004.

     Our credit facilities for long-term borrowings include certain provisions that would trigger a requirement for early payment. Under the terms of our credit facilities for long-term borrowings, we are also 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. As of December 31, 2005, we complied with all financial covenants of existing facilities.

     Our long-term bonds payable consists of US$200 million zero coupon convertible bonds due 2007 that we issued in 2002 and US$200 million zero coupon convertible bonds due 2009 that we issued in 2004:

	•		On January 28, 2002, we issued convertible bonds in the amount of US$200 million due 2007, the proceeds of which were used to purchase raw materials and to finance the exercise of the put options by bondholders on July 21, 2002 with respect to, and for our repurchase of, certain convertible bonds due 2004, which we issued in 1997 and are no longer outstanding. The zero coupon convertible bonds due 2007 are convertible into our shares or ADSs. As of December 31, 2005, US$30.2 million of these convertible bonds had been converted. We had repurchased US$33.7 million of these convertible bonds and had redeemed US$7.2 million of these convertible bonds at the option of the bondholders.
	•		On February 5, 2004, we issued another series of convertible bonds in the amount of US$200 million due 2009, the proceeds of which were used to purchase equipment and raw materials. The zero coupon convertible bonds due 2009 are convertible into our shares or ADSs. None of these convertible bonds had been converted as of December 31, 2005. These bonds are scheduled to mature in February 2009 and will be redeemable by us on February 5, 2008 at the option of the bondholder.

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 to provide services not within the capacity of director, supervisor or executive officer of our company.

     We have, from time to time, purchased raw materials and sold our services and products to our affiliated companies. We believe that these transactions with related parties have been conducted either on arm’s-length terms or on terms more favorable to us than arm’s-length terms. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”

Inflation/Deflation

     The inflation rate in Taiwan was (0.3)% in 2003, 1.6% in 2004 and 2.3% in 2005. 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 which applies to us is 25%. Based on our status as a company engaged in the semiconductor packaging business in Taiwan, we have been granted exemptions from income taxes in Taiwan because we used the proceeds raised through the offering of global depository receipts in 1995 to purchase packaging equipment. As permitted by Taiwan tax regulation, we can use these exemptions for five years from the date when we begin to generate income from the use of this packaging equipment. As a result, we began to use these exemptions in 1998. These tax exemptions resulted in tax savings of approximately NT$160 million in 2000. Because we incurred net loss for income tax return purposes in 2001 and 2002, we cannot take advantage of these tax exemptions for years 2001 and 2002. These tax

exemptions expired at the end of 2002. The ROC government enacted new tax regulations applicable to several industries, including the semiconductor industry. The new regulations exclude certain products in the semiconductor industry, including some of our products, from these tax exemptions. We continue to use this tax exemption since 2004.

     For example, our quad flat packaging products, certain fine pitch products and small outline packaging products would no longer be tax-exempt. However, our other products and services, including our substrate packaging products and testing services, are expected to continue to enjoy tax exemptions under the new regulations. We are also entitled to apply for exemptions from income taxes in 2003 from the proceeds of ADSs we issued in early 2000.

     We also benefit from other tax incentives generally available to technology companies, including tax credits of no more than 35% for research and development and employee training expenses and tax credits ranging from 10% to 20% for investment in automation equipment and technology and certain qualifying investments. According to the amended Statute for Upgrading Industries and relevant regulations effective in 2002, the tax credit for research and development and employee training expenses is 30%. Historically, these tax incentives have resulted in decreases of income tax payable by approximately NT$399 million, NT$436 million and NT$1,450 million (US$44.2 million) in 2003, 2004 and 2005, respectively. In 2003, 2004 and 2005, our effective income tax rates were (28.89)%, (11.95)% and 0.2%, respectively, as tax benefits more than offset income taxes payable. According to the ROC tax credit rules, we currently enjoy a tax credit of 11% for the purchase of equipment.

     In 1997, the ROC Income Tax Law was amended to integrate the corporate income tax and shareholder dividend tax to eliminate the double taxation effect for resident shareholders of ROC companies. Under the amendment, all retained earnings generated beginning January 1, 1998 and not distributed to shareholders as dividends in the following year are assessed a 10% retained earnings tax. As a result, if we do not distribute all of our annual retained earnings as dividends in the following year, our effective tax rate would exceed 25%.

US GAAP Reconciliation

     Our financial statements have been prepared in accordance with ROC GAAP, which differs in certain significant respects from US GAAP. The US GAAP information in note 30 to the consolidated financial statements summarize the principal differences between the amounts determined in accordance with our accounting policy, which is based on ROC GAAP, and determined in accordance with US GAAP together with reconciliation of net income and shareholders’ equity from a ROC GAAP basis to a US GAAP basis. The following table shows a comparison of our net income and stockholders’ equity according to ROC GAAP and US GAAP for the periods indicated.

     Reconciliation of Consolidated Net Income

		For the Years Ended December 31,
		2003				2004				2005
		NT$				NT$				NT$				US$
		[Restated]				[Restated]
		(in millions)
Net income as reported under ROC GAAP			2,839				4,282				8,244				251.3
US GAAP adjustments:
Compensated absences			(2	)			1				(10	)			(0.3	)
Compensation			(341	)			(699	)			(1,235	)			(37.6	)
Impairment on long-term investments			—				—				13				0.4
Embedded derivative			86				(80	)			(2,422	)			(73.9	)
Adjustment to the gain on disposal of available for sale marketable securities			—				(2	)			—				—
Trading marketable securities			6				—				—				—
Treasury stock transferred to employee			(154	)			(193	)			—				—
Equity investments:
Timing difference			631				399				(658	)			(20.0	)
Net income/(loss) variance between US GAAP and ROC GAAP			(30	)			(8	)			37				1.1