Annual Report 2001 - VIS · Annual Report 2001. VIS Spokesman Name: Robert Hsieh ... TSMC Chairman,...

Annual Report 2001Annual Report 2001

TSE: 5347

Printed on February 28, 2002

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1

VIS SpokesmanName: Robert Hsieh

Title: Vice President, Finance/Administration

Tel: 886-3-5770355

e-mail: [email protected]

Acting SpokesmanName: Jay Tsai

Title: Manager, Public and Investor Relations Section

Tel: 886-3-5770355

e-mail: [email protected]

Stock Title TransferCompany: China Trust Commercial Bank Transfer Agency Department

Address: 5 Fl., No. 83, Sec. 1, Chung-Ching S. Rd., Taipei, Taiwan, R.O.C.

Tel: 886-2-23613033

Web site: www.chinatrust.com.tw

AuditorsAuditors: S.C. Huang, Edward Way

Company: T N SOONG & CO

Address: 12Fl., No. 156, Sec. 3, Ming-Shan E. RD., Taipei, Taiwan, R.O.C.

Tel: 886-2-25459988

Web site: www.andersen.com.tw

Vanguard International Semiconductor CorporationAddress: 123, Park Ave-3rd, Science-Based Industrial Park, Hsin-Chu, Taiwan, R.O.C.

Tel: 886-3-5770355 Fax: 886-3-5630666

Web site: www.vis.com.tw

Contents

Letter to the Shareholders . . . . . . .3

A Brief Introduction to VIS . . . . . . .4

1. Company Profile . . . . . . . . . . . . . . . . . . . . .4

2. Organization . . . . . . . . . . . . . . . . . . . . . . .5

3. Capital and Share . . . . . . . . . . . . . . . . . . . .8

4. Status of Corporate Bond Issuance . . . . . .10

5. Status of Preferred Stock Issuance . . . . . .10

6. Status of Depositary Shares Issuance . . . .10

7. Status of Employee Stock Option Plan . . .11

8. Merge and Acquisition . . . . . . . . . . . . . . .11

2. Financial Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

3. Supervisors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . .33

4. Financial Statements & Independent Auditors’ Report .33

5. Consolidated Financial Statements . . . . . . . . . . . . . . .53

6. Analysis of Operating Results . . . . . . . . . . . . . . . . . . .53

7. Financial Forecast and Result from 2000 to 2001 . . . .53

Specific Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

1. Affiliates Information . . . . . . . . . . . . . . . . . . . . . . . . .56

2. Internal Control System Execution Status . . . . . . . . . . .60

3. Dissenting Comment . . . . . . . . . . . . . . . . . . . . . . . . . .61

4. Private Placement Securities . . . . . . . . . . . . . . . . . . . .61

5. Balance of VIS Common Shares Acquired, Disposed of

and Held by Subsidiaries . . . . . . . . . . . . . . . . . . . . . . .61

6. Other Necessary Supplement . . . . . . . . . . . . . . . . . . . .61

Operational Highlights . . . . . . . . . . .12

1. Nature of Business . . . . . . . . . . . . . . . . . . . .12

2. Marketing and Sales . . . . . . . . . . . . . . . . . .12

3. Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . .13

4. Environmental Protection Measures . . . . . . .19

5. Employee Relations . . . . . . . . . . . . . . . . . . .20

6. Important Contracts . . . . . . . . . . . . . . . . . .20

7. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . .23

8. Acquisition or Disposition of Real Estate . . .24

Business and Financial Plans . . . . . . .26

1. Corporate Bond Financing Plan . . . . . . . . . .26

2. Status of Implementation and Benefits . . . . .27

Financial Statements . . . . . . . . . . . . .28

1. Brief Balance Sheet & Brief Statements

of Income . . . . . . . . . . . . . . . . . . . . . . . . . .29

VIS Philosophy1. Upholding Ethical Business Practices

2. Focusing On Core Business

3. Internationalized Operation with View on Global Market

4. Focusing on Long-term Business Strategies, Striving to be a Perpetual Enterprise

5. Treating Customers as Partner

6. Building Quality into all Aspects of Our Business

7. Constant Innovation and Entrepreneurial Vitality

8. Creating a Dynamic and Enjoyable Working Environment

9. Establishing a Open Management Style

10. Being a Good Corporate Citizen by Contributing and Caring for

both Shareholders and Employees

3

Letter to ShareholdersDear Shareholders:

The year 2001 saw a declining global economy, slowing semiconductor industry, and

continued record lows in DRAM prices. Vanguard International Semiconductor Corporation

(VIS) weathered a difficult year under such adverse conditions. Total 8-inch wafer output

for the year was 346,000 pieces, down 67,000 pieces or 16% from the same period in the

previous year. Total revenues for 2001 amounted to NT$ 9.1 billion, with an after-tax loss

of NT$ 8.69 billion and a loss of NT$ 3.9 per share.

ACCELERATING CONVERSION AND SEIZING OPPORTUNITIES

Vanguard has responded to the difficult economic climate by minimizing its losses throughcost-cutting and lowering capital expenditures. Nonetheless, VIS has continued toaccelerate its conversion to a specialized foundry company, not only actively exploring newfoundry processes technology for multiple generations of logic and memory boards, butalso carrying out organizational reengineering, the development of specialty wafertechnologies, and other strategies. These actions further strengthen VIS’s competitiveposition in the Specialty IC Foundry field, allowing us to seize opportunities to create newbusiness fronts.

TECHNOLOGICAL ADVANCEMENT

To augment its competitive advantages, VIS has achieved a number of importanttechnological advances in the past year. Apart from successfully enabling logic foundryproduction at the 0.25 um level, VIS has developed 0.5 um/0.35 um CMOS Image Sensortechnology as well as the LCD Driver IC High Voltage technology. In addition, VIS hassuccessfully put into mass production 0.18 um 256Mb DDR DRAM, as well as worked withits clients to develop high end process technology for 0.18 um flash memory and lowpower 1T-SRAM.

Looking ahead, VIS will continue to develop advanced, distinctive and specialized ICfoundry technologies, offering its clients the optimal level of customized service throughever more complete chip production technologies.

FUTURE PROSPECTS

VIS will continue its conversion to a specialized foundry company, helping its clients raise

their global competitiveness through an increasingly wide array of technologies and

services. VIS will continue to enhance its profitability, creating win-win partnerships with

its clients, and providing VIS shareholders and its dedicated employees with substantial

levels of return.

In closing, on behalf of VIS, we would like to express our deepest gratitude to all of our

clients, shareholders, and employees for your continuing support.

Chairman

President

Letter to Shareholders

Year 2002 Business Volume Forecast

27%

73%

Wafer

Package

4

1. Company Profile

1-1 Date of founding: 12/05/1994

1-2 History

Vanguard International Semiconductor Corporation (VIS) was founded in December 1994. The company was formed upon the

privatization of the Sub-Micron Project, a four-year research effort sponsored by Taiwan’s Industrial Technology Research Institute

(ITRI). Initial capitalization for VIS was NT$18 billion (approximately US$600 million), and the current registered capital is NT$33

billion. In March 1998, VIS became a listed company on the Taiwan Over-the-counter (OTC) Stock Exchange. Major investors in VIS

include the Developmental Fund of Taiwan’s Executive Yuan, Taiwan Semiconductor Manufacturing Company (TSMC), USI Far East

Corp. and Walsin Lihwa Corp.

The main VIS facilities are located in the Hsinchu Science-Based Industrial Park, Taiwan, where the company specializes in DRAM

manufacturing and logic IC foundry services. Current capacity is estimated at 37,000 wafers per month.

Vanguard believes strongly that business

should be conducted in a responsible and

ethical manner. These principles are at the

core of our corporate philosophy and form

the guidelines by which we make strategic

as well as day-to-day operational

decisions.

A Brief Introduction to VISA Brief Introduction to VIS

5

Shareholders’ Meeting

Board of DirectorsChairman of the Board

President

Supervisors

Legal & Knowledge Mgt. Center

Internal Auditing

Industrial Engineering

Industrial Safety & Env. Protection

Finance & Adm. Operations Marketing & SalesQuality Reliability

Assurance

Quality Assurance

Reliability Assur.

Quality System Mgt.

Mkt. & CorporateDevelopment

Technical Marketing

Sales

Customer Engineering& Design Service

Wafer Production

Product Technology

ManufacturingSystem

Product Assur. & Assembly Testing Service

Human Resources

Material Mgt.

Accounting

Information System

Finance

Public & InvestorRelations

Technology Development

As of December 31, 2001

Since our founding in 1994, VIS has laid a firm foundation in DRAM technology and production. In 1997, VIS received the Bronze

Medal at the Sixth National Invention Awards for its continuing innovation and patents received. VIS went on to win the Silver Medals

at the Eighth and Ninth National Invention Awards in 1999 and 2000, respectively. In 1999, VIS formed a strategic alliance with

Mitsubishi Electronic and acquired Mitsubishi’s advanced 0.18um production technology. In the same year, VIS acquired TSMC’s logic

foundry technology and was producing 22,000 wafers per month by the end of the year 2000. Moreover, VIS has entered the area of

memory foundry with a focus on advanced memory products and foundry services such as DRAM, Flash, SRAM, as well as other ASIC

products. At present, VIS is continuing to focus on developing and acquiring state-of-the-art memory and logic foundry technology,

such as high voltage technology of 40V and the above, 0.18um Flash and 0.25um/0.18um logic process technology. Our aim is to

rival world-class companies in the areas of memory and logic foundry in order to provide customers with reliable technology and

readily available production capacity.

Looking torwards the future, VIS is dedicated to the manufacture of HV and CIS (CMOS image sensor) products, producing logic

components, Flash, 1T-SRAM, low power SRAM and other products to meet market demand. In addition, VIS is committed to

building stronger alliances with our customers and consolidating our position as a specialized wafer foundry company through our

dedication to developing leading-edge memory process technology with customers.

HUMAN RESOURCES

As of December 2001, VIS had 1795 employees with an average age of 29.5 years. More than half of VIS employees hold college

degrees or higher. The chairman of VIS, Dr. Morris Chang, is also the chairman of Taiwan Semiconductor Manufacturing Company.

2. Organization

2-1 Organizational Chart

2-3 Directors and Supervisors


Title Name Date Term Shareholding Current Shareholding Spouse & Minor Education & Experience Current Position with Other CompanyElected (Year) When Elected (Notes 1) Shareholding

Amount % Amount % Amount %

Chairman Morris Chang 2000.05 3 3,240,448 0.15 3,240,448 0.15 0 0 Ph.D. Electrical Engineering, - - -Stanford University, USA Chairman, TSMC Chairman, WYSE Technology Inc.

Development 2000.05 3 639,713,750 29.08 639,713,750 29.08Fund,Executive Yuan

Director Representative 3 Nil Nil MBA, - - -of Legal Entity: The University of Texas at El Paso, Liou, Bor-Hong Director, Business Department,

Development Fund, Executive Yuan

Director Representative 3 Nil Nil Ph. D. Industry Management, - - -of Legal Entity: National Taiwan Institute of TechnologLiou, Ming-Jong Director, First Dept. Commission of

Corporations, Ministry of Economic Affairs

Director Representative 3 Nil Nil Ph. D. Electrical Engineering, - - -of Legal Entity: Princeton University, USAShih, Chin-Tay President, Industrial Technology

Research Institute

Supervisor Representative 3 Nil Nil MA, Economic, - - -of Legal Entity: National Chengchi University, Yeh, Huey-Ching Executive Secretary,

Ministry of Economic Affairs, Deputy Director, Fair Trade Committee

USI Corporation 2000.05 3 155,978,533 7.09 150,178,533 6.83

Director Representative 3 Nil Nil BA - - -of Legal Entity: . Chairman, USI Corp.Wu, Quintin Y.G

6

2-2 Executive Officers


Title Name Dated Shareholding Spouse & Education & Experience Current Position Managers are spouse or within 2

Effective Minor with Other Company degrees of consanguinity to each other

Amount %Shareholding

Title Name Relation

President S. J. Paul Chien 89/04/18 2,478,229 0.11% Nil - - -

Vice President, Jerry Chang 89/11/07 0 0 Nil - - -

Operation

Vice President, Robert Hsieh 84/02/01 1,711,353 0.08% Nil - - -

Finance &

Administration

Chairman of TSMC Corp.Director of TSMC Europe, TSMC Japan,TSMC Int’l Investment Ltd., TSMCDevelopment Inc., TSMC Technology Inc,WaferTech, LLC, Goldman Sachs Group,Inc., VIS Associates Inc. and VIS Investment Holding Inc.

Director of WYSE Technology Inc., Hui JuInvestment Corp., and Browave Corp.Supervisor of AeroVision Avionics, Corp.and Wei Hwa Avionics Industry Corp.

Nil

Director of TSMC Corp.

Nil

Chairman of USI Corporation, AsiaPolymer Corporation, China GeneralPlastics Corporation, Taita ChemicalCorporation, Swanson PlasticsCorporation, Chong Loong Trading Co.,Ltd, USI Investment Co., Ltd, AcmeElectronics Corporation, Taiwan UnitedVenture Capital Corporation, TaiwanUnited Venture Management Corp.,Genesis Venture Capital Corporation, YuTao Investment Ltd., Taiwan UnionInternational Investment Corp., UnionPolymer International Investment Corp.,National Datacomm Corporation, andFine Appliance Corporation.

Title Name Relation

M.S. Chemical Engineering,

Massachusetts Institute of Technology, USA

Senior Director, TSMC-USA

Ph.D. Chemical Engineering,

Massachusetts Institute of Technology, USA

Vice President, Operation, PSC

MBA, National Taiwan University

Vice President, Country Banking Head,

Bank of America NTSA

Director of Powerchip Semiconductor Corp., VIS

Associates Inc., VIS Investment Holding, Inc., VIS

Micro, Inc., Taiwan Semiconductor Manufacturing

Company, Ltd.

Director of MEGIC Corp.

Director of Walsin Advanced Electronics, Ltd., VIS

Associates Inc., VIS Investment Holding, Inc., VIS

Micro, Inc.

Supervisor of MEGIC Corp., Powerchip Semiconductor

Corp.

Managers are spouse orwithin 2 degrees of

consanguinity to each other

7

2-4 Information Regarding the Juristic Person Shareholders as Directors and Supervisors of VISAs of December 31, 2001

Name of Juristic Person Shareholders Shareholders who owned more than ten percent outstanding shares or top ten shareholders of the Juristic Person Shareholders

USI Corporation Shing Lee Enterprise Limited

Taiwan Semiconductor Koninkijke Philips Electronics N.V. Chi Cherng Investment Co., Ltd. Development Fund, Executive Yuan

Manufacturing Company, Ltd.

Walsin Lihwa Co. Ltd. Yu-Hwei Chiao Postal Remittances and Savings Banks Taiwan Finance Stability Fund

Cathay Life Insurance Co. Ltd. Bureau of Labor Insurance Ta Cherng Investment Co. Ltd.

Chin Cherng Investment Co. Ltd. Winbond Electronic Corporation Yu-Chi Chiao

Yu-Heng Chiao

Maw Chong Investment Corp., Ltd. Kao Sheng Investment Corp. Ltd. Der Chong Investment Corp. Ltd. Fu Yu Investment Corp. Ltd.

Emerald Investment Corp. Ltd Chia Der Investment Corp. Ltd.

TSMC 2000.05 3 556,133,496 25.28 556,133,496 25.28

Director Representative 3 Nil Nil Ph. D. Electrical Engineering, - - -of Legal Entity: National Cheng-Kung University Tseng, F.C. President, VIS

President, TSMCExecutive Vice President, TSMC

Director Rick Tsai 3 Nil Nil Ph. D. Material Science, - - -Cornell University, USAExecutive Vice President, TSMC

Director S. J. Paul Chien 3 Nil Nil M.S. Chemical Engineering, MIT, USA - - -Senior Director, TSMC-USAPresident, VIS

Director Robert Hiseh 3 Nil Nil MBA, National Taiwan University - - -Vice President, Country Banking Head,Bank of America NTSA, TaipeiVice President, VIS

Supervisor Harvey Cheng 3 Nil Nil MBA, Wharton School, - - -University of Pennsylvania, USAChairman , China Securities Investment Trust Corp.Senior Vice President & Chief Financial Officer, TSMC

Walsin Llihwa 2000.05 3 58,827,741 2.67 53,827,741 2.45Corp.

Director Representative 3 Nil Nil MBA, Golden Gate University, USA - - -of Legal Entity: Chairman, Walsin Technology Corp.Yu-Heng Chiao Chairman, Walsin Advanced Electronics,Ltd.

Vice Chairman, Walsin Lihwa Corp.

Maw Chong 2000.05 3 43,092,356 1.96 38,392,356 1.75Investment Company Ltd.

Supervisor Representative 3 Nil Nil Ph. D. Vanderbilt University, USA - - -of Legal Entity: President, USI Corp.Sidney H. Chow

Note1: Per the actual reported number of share on 12/31/2002

Director of TSMC Corp., TSMC North ofAmerica, TSMC Japan K. K., TSMC Partners,Ltd., Kung Cherng Ivnestment Co., Ltd, andChi Cherng Investment Co., Ltd.

Director of TSMC North of America, TSMCEurope B.V., TSMC Japan K. K., TSMC Partners,Ltd., Cheng Hui Investment Ltd., Sin RuiInvestment Ltd., and WaferTech, LLC.

Supervisor of TSMCDirector of Powerchip Semiconductor Corp.,VIS Associates Inc., VIS Investment Holding,Inc., and VIS Micro, Inc.

Director of Walsin Advanced Electronics Ltd.,VIS Associates Investment Inc., VIS InvestmentHolding, Inc., and VIS Micro, Inc.Supervisor of Powerchip Semiconductor Corp.and Magic Corp.

Director of TSMC Partners, Ltd., Chi HsinInvestment Co., Ltd., Systems on Silicon,Manufacturing Company Pte.Ltd. and FubonFinancial Holding Co., Ltd.Supervisor of TSMC Japan K.K.

Director of Walsin Lihwa Corp., WinbondCorp., Integral Chemical Corp., WalsinTechnology Corp., Hannstar Display Corp.,Walsin Advanced Electronics Ltd., ConcordVenture Capital Co. Ltd., Walsin Energy Corp.,Eastern Industrial Materials Limited, OperettaLimited, Walsin Lihwa Holdings Limited,Renowned International Limited, Great GloryEnterprises Inc., Harvest Win InvestmentLimited, Concord Industries Limited, WalsinIndustrial (Holdings) Limited, Kanforminternational Limited, Concord TelecomLimited, Concord Telecom Limited, WalsinLihwa Singapore Pte Limited, KonhomDevelopment Limited, Walsin InternationalManagement Limited, Konson InternationalLimited, Walsin Lihwa (HK) Limited, WalsinInternational Investments Limited, KonyeeInvestments Limited, Konwah InvestmentsLimited, and Success Holdings Limited.

Director of USI Investment Corp., UnionPolymer International Investment Corp.,Taiwan Union International Investment Corp.,Taiwan United Venture Capital Corp., ChongLoong Trading Co., Ltd., Swanlake Traders Ltd.,Swanson Plastics Corp., ACME ElectronicsCorp., Genesis Venture Capital Corp., FineAppliance Corporation, USI (H. K.) Ltd., ChinaGeneral Plastics Corp., Asia Ploymer Corp.,Taita Chemical Corp., and USI Corporation.

8

3.Capital and Share

3-1 History of CapitalizationUnit: Share, NT$

Authorized Capital Issued Capital Note

Shares Amount Shares Amount Sources of Capital Non-Money Capital OthersExpansion

12/1994 10 1,800,000,000 18,000,000,000 1,400,200,750 14,002,007,500 Original Investment * None

11/1995 10 1,800,000,000 18,000,000,000 1,800,000,000 18,000,000,000 Cash offering None None

12/1996 10 2,200,000,000 22,000,000,000 1,920,605,914 19,206,059,140 Capitalization of Profit None None



* Non-Money Capital Expansion total are NT$5,755,000,000, including property capitalized as equity investment NT$3,930,491,000 and technical know-how capitalized as equity investment

NT$1,824,509,000.

Type of Stock Authorized Capital Note

Issued Shares Un-Issued Shares Tatol

Common Stock 2,200,000,000 800,000,000* 3,000,000,000 Listed stock on OTC

*500,000,000 are reserved shares for Bond Conversion, 300,000,000 are reserved shares for stock option.

priceMonth/

Year

2-5 Information of Directors & Supervisors

With morethan five yearsexperience inbusiness,finance, lawor other areasrequired forthe operationof thisCompany

Not anemployee ofthe Companynor a director,supervisor oremployee ofany affiliatedcompany

Not an individualshareholderdirectly orindirectly owningmore than 1% ofthe Company’soutstandingshares nor one ofthe Company’stop 10 individualshareholders

Not a spouse to,nor having arelationshipwithin twodegrees of linealconsanguinitywith any personspecified incolumns 2 and 3

Not a director,supervisor, employeeor shareholder of acompany directly orindirectly owningmore than 5% of theCompany’soutstanding sharesor of one of theCompany’s top 5institutionalshareholders

Not a director,supervisor,manager orshareholder holdingmore than 5% ofthe outstandingshares of certaincompanies orinstitutions whichhave financial orbusinessrelationships withthe Company

Not the spouse of, norhim/herself the owner,partner, director, supervisoror manager of any soleproprietorship, partnership,company or institution, orthe specialist or spouse ofthe specialist which providedfinancial, commercial, orlegal consultation and/orservices to the Company orits affiliated companieswithin the last year

Note

Chairman V V V VMorris Chang

DirectorS.J. Paul Chien V V V V

DirectorRobert Hiseh V V V V V

DirectorF.C. Tseng V V V V

DirectorRick Tsai V V V V

SupervisorHarvey Chang V V V V

DirectorChin-Tay Shih V V V V

DirectorYu-Heng Chiao V V V V V V V

DirectorQuintin Y.G. Wu V V V V V V

DirectorMing-Jong Liou V V V V V V V

DirectorBor-Hong Liou V V V V V V

SupervisorHuey-Ching Yeh V V V V V V V

SupervisorSidney H. Chow V V V V V V

"V"indicates meeting conditions specified above

9

3-2 Market Price, Net Worth, Earnings and Dividends Per Share

Item 2001 2000

Highest market price 25.7 62

Market price per share Lowest market price 5.2 12.95

Average market price 13.49 38.97

Net worth per shareBefore distribution 6.087 10.023

After distribution 10.023

Earnings per shareWeighted average shares 2,200,000,000 2,200,000,000

Earnings per share (3.95) 1.17

Cash dividends

Dividends per ShareStock dividends Dividends from retained earnings

Dividends from capital surplus

Dividends in arrears

Price/Earning ratio (Note 1)

Return on investment Price/Dividend ratio (Note 2)

Cash dividend yield rate (Note 3)

Note 1. Price/Earning ratio=Average market price/Earnings per share

Note 2. Price/Dividend ratio=Average market price/Cash dividends per share

Note 3. Cash dividend yield rate = Cash dividends per share/Average market price

3-3 Dividend Policy

When allocating the net profits for each fiscal year, the Corporation shall first offset its losses in previous years and set aside a legal

capital reserve at 10% of the profits left over, until the accumulated legal capital reserve has equaled the total capital of the

Corporation; then set aside special capital reserve in accordance with relevant laws or regulations or as requested by the competent

authorities; and then set aside 1% of the balance as bonus to directors and supervisors and not less than 1% as bonus to employees

of the Corporation. Any balance left over shall allocated according to the following principles per resolution of the shareholders’

meeting:

(1) Except distribution of reserve in accordance with item (2) below, the Corporation shall not pay dividends or bonuses when the

legal capital reserve reaches over 50% of the capital or the sum set aside as capital reserve in profitable years have exceeded 20%

of such profits, the Corporation may, for the purpose of stabilization of market prices of the Corporation’s shares, distribute the

amount in excess as dividends and bonuses. Profits may be distributed in total after taking into consideration financial, business

and operational factors. Profits of the Corporation may be distributed by way of cash dividend and/or stock dividend.

Distribution of profits shall be made preferably by way of stock dividend. Distribution of profits may also be made by way of

cash dividend; provided however, the ratio for cash dividend shall not exceed 50% of total distribution.

(2) In case there is no profit for distribution in a certain year, or the profit of a certain year is far less than the profit actually

distributed by the Corporation in the previous year, or considering the financial, business or operational factors of the

Corporation, the Corporation may allocate a portion or all of its reserves for distribution in accordance with relevant laws or

regulations or the orders of the competent authorities.

3-4 Impact to Business Performance and EPS Resulted from 2002 Stock Dividend Distribution: Nil

10

Bond Domestic First secured bond Domestic Second secured bond

Issue Date Nov. 6 ,1996 Nov. 15 ,2001

Par Value NT$10,000,000 NT$1,000,000

Issue Price NT$10,000,000 NT$1,000,000

Total Amount NT$3,000,000,000 NT$1,100,000,000

Interest Rate 6.59% per annum Weighted average 3.538% per annum

Maturity Seven years(due on Nov.6, 2003) Five years(due on Nov.15, 2006)

Guarantors Guaranteed by China Trust Commercial Bank and Guaranteed by Grand Commercial Bank Hsinchu

15 others banks Branch , Bank SinoPac Hsinchu Branch,

Chiao Tung Bank Science Industrial Park Branch,

Taipei Bank Hsinchu Branch

Trustee Trustee Dept. of The International Commercial Bank of China Trustee Dept. of The International Commercial

Bank of China

Underwriter Nil Nil

Attorney David Yu Simon Hsiao

CPAs S.C.Huang S.C.Huang

Method of Repayment On the 4th, 5th, 6th, and 7th anniversary of the issue date, On the 4th, 5th anniversary of the issue date,

the bondholdersredeem 1/4 of the total value issued, i.e., the bondholders redeem 1/2 of the

NT$2.5million on the 4th anniversary, total value issued

NT$2.5 million on the 5th anniversary,

NT$2.5 million on the sixth anniversary,

and NT$2.5 million on the seventh anniversary.

Outstanding Balance NT$1,500,000,000 NT$1,100,000,000

Redemption Clause Nil Nil

Restrictive Covenants Current Ratio and Debt Ratio Current Ratio and Debt Ratio

Subordinate Nil Nil

Conversion Rights

5. Status of Preferred Stock Issuance: Nil

6. Status of Depositary Shares Issuance : Nil

4. Status of Corporate Bond Issuance :

11

7. Status of Employee Stock Option Plan (ESOP)

7-1 Status of Employee Stock Option Plan (ESOP)As of February 28, 2002

ESOP granted 1st ESOP 2nd ESOP 3rd ESOP

Approval date 2/20/2001 2/20/2001 2/20/2001

Issue(Grant) date 5/25/2001 8/24/2001 2/6/2002

Total no. of shares issued 70,790,000(shares) 82,905,000(shares) 6,305,000(shares)

Percentage of shares issued to total common stock shares 3.2% 3.8% 0.3%

Option termination 10 years 10 years 10 years

Source of option shares Issue new stock Issue new stock Issue new stock

Vesting Schedule and rate (%) 2nd year: 50% 2nd year: 50% 2nd year: 50%

3rd year : 75% 3rd year : 75% 3rd year : 75%

4th year: 100% 4th year: 100% 4th year: 100%

No. of shares acquired by employees through the exercise of options - - -

Total value of shares acquired by employees through the exercise of options (NT$) - - -

No. of unexercised shares 70,790,000(shares) 82,905,000(shares) 6,305,000(shares)

Price per share of unexercised options 15.1 10.0 14.55

Percentage of unexercised options to total common stock shares 3.2% 3.8% 0.3%

Effect to shareholders The number of shares issued to total common stock shares is fairly low.

Therefore, the ESOP has little effect on shareholders.

7-2 No. of shares granted to and holding status of Executive Managers and Top 10 EmployeesAs of February 28, 2002

Title Name Number of Exercised Unexercised

shares Price per No. of Price per share Total value No. of unexercised

granted share of unexercised of unexercised of unexercised shares to

exercised option options shares common

options (weighted stock shares

averages)*

President S.J. Paul Chien 2,610,000 - - - - - 2,610,000 11.47 29,936,700 0.12%

Vice President Jerry Chang 2,610,000 - - - - - 2,610,000 11.47 29,936,700 0.12%

Vice President Robert Hsieh 1,000,000 - - - - - 1,000,000 12.55 12,550,000 0.05%

Top 10 employees holding shares 10,270,000 - - - - - 10,270,000 12.04 123,650,800 0.47%

* Price per share of unexercised options is calculated by the weighted averages method according to the different date issued.

8. Merge and Acquisition in 2001: Nil

No. of shares

acquired by

employees through

the exercise of

options to

common stock

shares

No. of shares

acquired by

employees through

the exercise of

options to common

stock shares

No. of shares

acquired by

employees

through the

exercise of

options

Total value of

shares acquired

by employees

through the

exercise of

options (NT$)

12

1. Nature of business

1-1 Core Business

Vanguard International Corporation’s central operation includes wafer foundry services, wafer manufacturing, testing and sales of

Integrated Circuits, Large and Very Large Integrated Circuits, as well as related components and system products. We also handle

import and export activities related to VIS business. VIS is focusing on memory and specialty logic IC foundry, designing and

implementing tailor-made processes for our customers.

1-2 Research & Development

When VIS was established in 1994, we transferred 0.55um 4Mb DRAM technology from Sub-Micron program. VIS continued

improving this technology and successfully entered mass production soon after. At the same time, VIS developed its 16Mb DRAM

product, and within half a year had enhance the technology to 0.5um. This achievement led to a profitable year for VIS in 1995.

Process technology advanced further to 0.4um in May 1997. During this time, the first synchronic graphic 8Mb SGRAM (256kX32)

and 16Mb EDO DRAM were developed and mass-produced. From 1997 to the present, we have developed successive generations of

manufacturing techniques, from 0.37um to 0.21um. In a similar manner we have successfully developed and mass-produced 16Mb

EDO DRAM, 16Mb SDRAM, and 64Mb SDRAM. In 1999, VIS signed a technology transfer contract with Mitsubishi, transferring

advanced 0.18um DRAM technology and successfully entered mass production in the same year. In 2000, VIS announced its

conversion to a foundry company and transferred 0.5um/0.35um/0.25um logic foundry technology from TSMC. Moreover, VIS has

Recognizing the need to address the global market,

Vanguard is constantly seeking to expand our international

operations. Key to our success in this endeavor has been

our policy of treating customers as partners.

By implementing precision sales strategies that focus on

maintaining the highest level of customer satisfaction, we

have been able to build lasting and mutually profitable

strategic partnerships with our customers.

Operational HighlightsOperational Highlights

entered the area of memory foundry with a focus on advanced memory products and foundry services such as DRAM, Flash, SRAM,

as well as other ASIC products. Currently, VIS is committed to developing advanced 0.18 um and beyond advanced technology with

the aim of providing customers with reliable technology and readily available production capacity.

To match rapid growth in the foundry industry and to take advantage of excellent cost structures for semiconductor manufacturing in

Taiwan, VIS will concentrate their efforts on the development and transfer of 0.18um 128Mb/256Mb DDR, 0.25um/0.18um Flash and

0.25um/0.18um and beyond logic foundry processes, and 0.5um/0.35um/0.25um High Voltage process. VIS’s goal is to rival world

class companies in the field of memory and foundry mass production technology and increase the value added to our products and

wafer foundry services in order to enhance our profit making capability.

Product Plan and Schedule

Item Expected completion quarter

0.18um 256Mb DDR Q1,2001

0.18um 128Mb Graphic DDR Q2,2001

0.5/0.35um High Voltage process Q2,2002

0.25um Flash Q3,2002

0.18um Flash Q4,2002

0.25um High Voltage process Q4,2002

0.18um Logic Process Q4,2002

0.16um DRAM Q4,2002

VIS R&D Expense

Year R&D expenditure (NT$K) % of sales revenue

2000 640,407 3.3%

2001 631,329 6.9%

2. Market Outlook

2-1 Market Analysis

(1) Sales by Region Unit: NT$K

Region 1999 2000 2001

Sales Amount % Sales Amount % Sales Amount %

Europe 2,074,031 16% 2,363,828 12% 286,644 3%

America 4,874,973 37% 3,151,771 16% 1,237,812 13%

Taiwan 4,537,526 34% 1,969,857 10% 7,795,760 83%

Asia 1,851,289 14% 12,213,113 62% 55,707 1%

Others - - - - - -

Notes: Sales per region were calculated by shipment area.

As part of our global sales and marketing strategies, Vanguard maintains footholds in markets around the world and Vanguard’s

products are marketed worldwide. As the base of operations for our North and South American business, California is host to

Vanguard offices and warehouses. In Europe, Vanguard’s sales representatives in the UK are responsible for our Northern European

operations. Vanguard has also established a foothold in Germany to handle Central European operations. Product sales in Japan are

handled by authorized agencies. Vanguard’s growing presence worldwide is a testament to the success of our global marketing and

sales strategies.

13

(2) Market Share

Year 2001 Vanguard Foundry market share Unit: US$M

2001 Foundry Revenues Market Share (%)

Global Foundry Revenue 9,100 100.0 %

Vanguard Foundry Revenue 98 1.1 %

Source: IC Insights 2002,VIS

(3) Projected Market Demand, Supply and Growth

JP Morgan estimated that capital expenditures dropped 33% from 2000 to 2001, resulting in a conservative expectation of output

growth. This limited growth in capacity, however, will allow the industry to more quickly eliminate low utilization rates once demand

rebounds. On the demand side, inventory is being gradually consumed and new applications are stimulating semiconductor demand.

For example, the continuing growth of the wire communication segment due to increased demand for internet broadband

applications, as well as the demand for new and changing cellular phones for GPRS high transmission services will both serve to

stimulate demand. The launch of Microsoft’s Windows XP, the price drop of Intel’s P4 and the launch of 845 chipsets, among other

factors, should also serve to increase PC market demand, contributing to the positive influence on the sluggish semiconductors

market.

Analysts have had somewhat different estimates of worldwide semiconductor market growth over the next few years. However, their

general views on the upturn of the worldwide market are consistent. Since the fourth quarter of 2001, there have been signs of

upward movement. 2002’s global semiconductor production rate is forecasted to increase by 3% to 6%, and will keep growing at this

pace till 2005. Such a trend is driven by the global economy’s gradual recovery and the decrease of inventory levels. According to

WSTS’s (World Semiconductor Trade Statistics) October 2001 forecast, the semiconductor industry is recovering from the recession

and there will be double-digit growth rates from 2003 to 2004.

Worldwide Semiconductor Revenue and Growth

In the face of a massive global economic slowdown in 2001, global wafer foundry output decreased by one-third. However, foundry

business in the second half of 2001 picked up in anticipation of new product launches and inventory replenishment throughout the

supply chain. Consequently, the sales revenue of Taiwan’s two foundry giants, TSMC and UMC, rebounded in Q301 and Q401, giving

signs of a recovery in the wafer foundry industry.

The most important factor in the recovery of the foundry industry is strong demand for end-user applications. Given the gradual

stabilization of macro-economic factors in the latter half of 2002, the demand for PC peripheral and telecom applications is likely to

grow in the first quarter of next year. According to IC Insights’ latest report, global wafer foundry output is expected to rise

continuously (except for a small downturn in 2005) until 2006. Indeed, analysts are uniformly optimistic about the future of the wafer

foundry industry.

14

$250

$200

$150

$100

$50

$0

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

1993 1994 1995 1996 1997 1998 1999 2000 2001f 2002f 2003f 2004f

$77 $102 $144 $132 $137 $126 $149 $204 $139 $142 $169 $194

32% 42% -9% 4% -8% 19% 37% -32% 3% 19% 15%

Source: WSTS, October 2001

WSTS, 10/01

Y-Y G/R, 10/01

Unit

:

US$B

Year 2001 Vanguard DRAM market share Unit: US$M

2001 DRAM Revenues Market Share (%)

Global DRAM Revenue 11,199 100.0 %

Vanguard DRAM Revenue 176 1.6 %

Source: WSTS 01/31/2002, VIS

1998~2006 IC Foundry Sales Forecast

(4) Year 2002 Business Volume Forecast

VIS plans to manufacture 323,000 pieces of 8-inch wafer in 2002. 238,000 pieces of wafer are to be sold in the form of wafers and

the rest are to be packed and sold through our sales channels around the world.

(5) Opportunities and Threats

Under the influence of a global economic depression and a continuing slump in DRAM prices, our performance in 2001 was not as

outstanding as in 1994 or 1995. In 2000, Vanguard began its transformation into an IC foundry company, acquiring 0.50um,

0.35um and 0.25um logic foundry technologies from TSMC and entering the area of memory foundry with a focus on advanced

memory products such as DRAM, Flash, SRAM as well as other ASIC products and foundry services. At present, Vanguard has

developed 12V/18V/40V high-voltage technologies, as well as 0.5um/0.35um/0.25um CMOS image sensor technologies. With respect

to memory foundry services, Vanguard launched the production of 0.18um 1TSRAM and 0.18um Flash.

Strengths

(a) Vanguard focuses on the display, communication and consumer markets, all of which analysts have identified as markets with

strong growth expectations. The expansion of these markets will drive the rapid growth of the foundry industry.

(b) Vanguard is proud of the high quality of our products and our advanced manufacturing technology. Under a systematic

certification program, Vanguard has received ISO-9001 and ISO-14001 certification from Lloyd’s in 1996 and 1997, respectively.

Vanguard also received QS-9000 quality system certification in March 2002. This conformity to international standards improves

our international image and thereby helps us to increase our worldwide market share.

(c) Vanguard maintains a close relationship with TSMC, and we have successfully transferred 0.5um/0.35um/0.25um logic foundry

services from TSMC. In conjunction with TSMC, we provide unsurpassed foundry services to our customers.

Threats

(a) The global DRAM market is still suffering from a light depression. Although DRAM prices have lifted slightly, the fundamental

demand for end-user products is still weak.

Our strategy:

Vanguard is reacting to the weak DRAM market by progressively decreasing our investment in DRAM business and by lowering

the percentage of sales made up of packaged devices.

(b) The semiconductor industry is capital- and technology-intensive. Therefore, the cost of improving equipment and technology to

stay ahead of competitors is extremely high.

Our strategy:

Vanguard is committed to the strategy of constant technology and production capability improvements while minimizing

costs to secure maximum profits.

Vanguard has accelerated our development in the areas of logic foundry and Flash memory foundry in order to create new

business opportunities in Specialty IC foundry.

Vanguard has an excellent R&D team that is devoted to developing the most advanced technology, enhancing the yield rate

and lowering production costs.

Pure-Play Foundry Sales IDM Foundry Sales35.0

30.0

25.0

20.0

15.0

10.0

2.0

0.0

1998 1999 2000 2001 2002(e) 2003(e) 2004(e) 2005(e) 2006(e) year

30.5

27.128.2

16.6

10.99.1

13.8

8.2

5.4

Source: IC Insights, 2002

15

Unit

:

US$B

16

2-2 Major Applications and Manufacture Flow of Products

(1) Major Applications

VIS provides its customers with top quality memory integrated circuits that can be applied in related fields, including: personal

computers, servers, workstations, personal communications, consumer electronics (e.g. Home Video Games, Set-Top Box, High

Resolution TV) and other computer related peripheral products (e.g. CD-ROM, VGA Card, Laser Printers, etc.).

(2) Introduction to DRAM Manufacture Flow

17

1. Start material (silicon wafers)

Silicon wafers are sliced from purified silicon crystal ingot. Wafer numbering is done in the same time.

2. Well formation and field oxidation

2-a. Wafers are sent to photo area for well patterns exposure on wafers at steppers.

2-b. Ion implanters implants phosphorus ions into wafers forming N-type wells.

2-c. Wafers are placed into furnaces for well diffusion and forming pad oxide to release possible stress.

2-d. Wafers are placed into LPCVD furnaces to form silicon nitride.

2-e. Wafers are sent to photo area to for field patterns exposure on wafers. The patterns are then etched by etching. The photo

resist is later removed.

2-f. Wafers are placed into furnaces to form field oxide and silicon nitride is later removed.

3. Gate formation

3-a. Wafers are placed into furnace to form "sacrificial oxide" which combines wafers surface particles and are later removed.

3-b. Wafers are placed into furnace to form "gate oxide" which is the most important step in IC manufacture.

3-c. Poly silicon is form by CVD and phosphorus is doped to reduce the gate resistance.

3-d. Wafers are sent to photo area to form gate patterns.

3-e. Gate patterns are etched by dry etching and are the most important etching steps.

4. Source and drain formation

4-a. Wafers are sent to photo area for P+ source and drain exposure.

4-b. Wafers are sent to implanters for boron ion implantation.

4-c. Wafers are sent to photo area again for N+ source and drain exposure.

4-d. Wafers are sent to implanters for arson ion implantation.

5. Capacitor formation

5-a. Wafers are placed into furnace and poly silicon is formed by LPCVD.

5-b. Wafers are further oxidized, silicon nitride deposited, and oxidized to form capacitor dielectric.

5-c. Wafers are deposited with poly silicon and sent to photo area for capacitor patterns exposure. The wafers are turned to

etching area for capacitor etching.

6. Contact formation

6-a. Wafers are sent to CVD area for BPSG deposition. The BPSG is later densified in high temperature furnace to form a dielectric.

6-b. Wafers are later sent to photo area for contact pattern exposure and sent to etching area for contact etching.

7. Double metal formation

7-a. Wafers are sent to metal sputter area. First Ti-TiN, then Al-Si-Cu to form the first metal.

7-b. Wafers are sent to photo area for metal pattern exposure, and then etched at etching area for metal pattern.

7-c. Three silicon dioxide with different density are formed by CVD as a dielectric to isolate the two (top and bottom) metals.

7-d. Wafers are sent to photo area to form vias (for both metals) pattern and etched by etching.

7-e. Wafers are sent to metal sputter area. First TiN, then Al-Si-Cu to form the second metal.

7-f. Wafers are sent to photo area for metal pattern exposure. Metal patterns are later etched by etching.

8. Passivation formation

8-a. Wafers are sent to CVD for silicon nitride passivation deposition to protect wafers from being scratched and contaminated.

8-b. Wafers are sent to photo area for testing metal plate exposure. The metal connection plates are formed by etching.

8-c. Wafers are placed into furnace for annealing. The wafers are later sampling tested and finally back lapped completing wafer

manufacture process.

9. Wafers are sent for wafer acceptance test and to testing area for function testing of every die and separating fail dice.

18

2-3 Major Materials Supply Status

Major Product Major Material Major Suppliers Supply Status

Wafer TAISIL ELECTRONIC MATERIALS CORP. SHIN-ETSU HANDOTAI TAIWAN CO., LTD. Normal

MITSUBISHI MATERIALS SILICON CORP. SUMITOMO METAL INDUSTRIES, LTD.

DRAM / Chemical MERCK-KANTO ADVANCED CHEMICALS LTD. TAI-YOUNG HIGH TECH CORP. LIMITED Normal

Logic FoundryPhoto Resist SUMITOMO MITSUBISHI SILICON CORP. CLARIANT (TAIWAN) CO., LTD. Normal

Specialty Gas BOC LIENHWA INDUSTRIAL GASES CO., LTD. LIQUID AIR FAR EAST LTD. Normal

2-4 Major Customers on Purchase (Sales) over the Last Two Years

(1) Major Customers on Sales

2000 2001

TSMC TSMC

PNY TWINMOS

DAIWA-TWN ETRON

ETRON

(2) Major Customers on Purchase

2000 2001

TAISIL ELECTRONIC MATERIALS CORP. TAISIL ELECTRONIC MATERIALS CORP.

SHIN-ETSU HANDOTAI TAIWAN CO., LTD. SUMITOMO CORP.

SUMITOMO CORP. SHIN-ETSU HANDOTAI TAIWAN CO., LTD.

WAH LEE INDUSTRIAL CORP. WAH LEE INDUSTRIAL CORP.

LIQUID AIR FAR EAST LTD.

2-5 Production Over the Last two Years Unit: NT$K

Product 2000 2001

Capacity Quantity Value Capacity Quantity Value

Package (K Dies) 42,190 6,539,368 35,457 3,330,157

Wafer (piece) 235,501 4,889,786 199,136 5,817,490

Total 414,303 11,429,154 345,749 9,147,647

Note: Package=64Mb SDRAM Equivalent

2-6 Sales Over the Last Two Years Unit: NT$K

Product 2000 2001

Domestic Sales International Sales Domestic Sales International Sales

Quantity Amount Quantity Amount Quantity Amount Quantity Amount

Package (K Dies) 27,262 5,330,557 16,443 6,060,348 22,182 1,304,517 12,258 1,534,612

Wafer (piece) 234,490 7,954,857 0 0 293,900 6,270,758 521 605

Total 13,285,414 6,060,348 7,575,275 1,535,217

Note: Package=64Mb SDRAM Equivalent

19

3. PersonnelAs of February 28, 2002

Year 2000 2001 2002/2/28

Direct 906 837 810

Personnel Indirect 889 958 927

Total 1,795 1,795 1,737

Average Age 28.9 29.5 29.7

Average Year of Service 2.9 3.4 3.6

PH.D 9 9 9

Master 244 255 247

Education College 850 811 779

High School 683 709 692

Less than High School 9 11 11

4. Environmental Protection Measures

VIS has been completely free of environmental incidents for the year 2001.

VIS passed routine surveillance assessments of company operations by a Lloyds-approved third party and maintains the certification of

our ISO-14001 approved Environmental Management System (EMS).

In 2001, VIS personnel have participated in the execution of our EMS, contributing to the task of environmental protection. The

following are samples of our major achievements:

(1) Energy and Resources Savings

By changing the working temperature of the stripper ACT-690, we have been able to reduce the usage of this chemical by 30%.

(2) Waste Materials Recycling and Reuse

The recycling rate of clean plastic bags has been increased to 100%.

By using recycled boxes for wafer packaging, the use of cardboard for packaging has been decreased 50%.

(3) Pollutant Treatment Efficiency Increases

The utilization rate of VOC for wasted gas treatment has been improved to higher than 99%.

The concentration of HF in wastewater has completely passed the effluent standard of the Science-Based Park Administration.

More than 50% of the suspended halon fire extinguisher system has been changed to an automatic CO2 fire extinguisher system.

(4) Environment Information Management

VIS has established a homepage for environmental protection related activity announcements.

In the year 2001, over NT$30 million has been invested in the installation of pollution prevention systems such as:

Increased coverage of gas monitoring.

Centralized waste gas and water treatment systems.

Local scrubbers for process equipment.

VIS will continue to upgrade our ISO-approved Environmental Management System and develop programs for environmental

monitoring. The results of these monitoring programs will be used to more effectively respond to any environmental issues that may

arise, with the aim of maintaining a clean and healthy environment on our site and in our community. VIS is devoted to

environmental protection, and views it as an essential expression of our social responsibility.

20

5. Employee Relations

VIS is devoted to promoting labor/management relations built on trust and an open management style, while establishing a working

environment that is full of challenges and fun.

The company has set up several channels in order to create an environment of open communication. These include regular monthly

departmental meetings, an employee suggestion box and the internal publication "Vanguard World". The company also set up the

"Employee Relations Section", which focuses on employee relation matters, provides the employees with counseling services and holds

conferences and lectures to reinforce communication and understanding within the company. For the physical and mental wellbeing

of its staff, VIS is dedicated to improving the work environment by encouraging leisure activities, establishing recreational facilities

and providing health and insurance benefits.

There have not been any issues related to employee relations in the last 2 years.

6. Important Contract

(1) Agreement to Guarantee Corporate Bonds

Contracting Parties:

Sixteen banks participated in the issuance, including China Trust Commercial Bank, Far East International Bank, Asia Trust and

Investment Corporation and others.

Content of Agreement:

For the purpose of obtaining medium and long term operating capital and adjusting our financial structure, this company issued

7-year Corporate Bonds guaranteed by the banks for a total amount of NT$3,000,000,000.

Period of Agreement:

Effective from 09/20/96

Restrictions:

This Company shall have all machinery and equipment located in Fab 1A mortgaged to the leading bank.

(2) Syndicated Loan Agreement


Twenty-two banks are participating in the syndicated loans program, including the International Commercial Bank of China, the

Farms Bank of China, Hua Nan Commercial Bank and others.


For the construction of Wafer Fab 1B and the purchase of imported machinery and equipment, the banks will jointly provide our

company with loans up to the total amount of NT$7,800,000,000



Restrictions:

This Company shall have the FAB 1B building and the imported machinery/equipment under this loan project mortgaged to the

leading bank.

(3) Syndicated Loan Agreement


Twenty-one banks are participating in the syndicated loans program, including the International Commercial Bank of China and

others.

21


For the re-construction of Wafer Fab 1B and the purchase of imported machinery and equipment, the banks will jointly provide

our company with loans up to the total amount of NT$4,000,000,000



Restrictions:

This Company shall have the imported machinery/equipment under this loan project mortgaged to the leading bank

(4) Agreement to Guarantee Commercial Promissory Note


Seven banks participated in the issuance, including Tai Jung Commercial Bank and others.


Participating Banks will provide guarantee for our commercial promissory note of NT$1,750,000,000.



Restrictions:

This Company shall have certain machinery/equipment mortgaged to the leading bank

(5) Agreement to Guarantee Corporate Bond


Wan Tung Commercial Bank, Hsin Chu Branch.


Wan Tung Commerical Bank will provide a guarantee for our corporate bonds of NT$ 1,100,000,000 of up to NT$300,000,000.



Restrictions:

This Company shall have certain machinery/equipment mortgaged to the bank



Chiao Tung Bank, Hsin Chu Science Park Branch.


Chiao Tung Bank will provide a guarantee for our corporate bonds of NT$ 1,100,000,000 of up to NT$300,000,000.



Restrictions:




Hwa Hsin Commercial Bank, Hsin Chu Branch.


Hwa Hsin Commercial Bank will provide a guarantee for our corporate bonds of NT$ 1,100,000,000 of up to NT$300,000,000.



Restrictions:




Taipei City Bank, Hsin Chu Branch.


Taipei City Bank will provide a guarantee for our corporate bonds of NT$ 1,100,000,000 of up to NT$200,000,000.



Restrictions:


(9) Credit Grant Agreement


Tai Jung Commercial Bank.


Tai Jung Commercial Bank will provide a guarantee for our commercial promissory note of NT$300,000,000.


Effective from 07/13/2001 to 05/31/2004

Restrictions:


(10) Sub-micron Technology License Agreement

Contracting Party:

Industrial Technology Research Institute (ITRI)

Content of the Agreement:

VIS may manufacture and sell certain products by using ITRI’s sub-micron technologies.


Effective from 11/11/94 to 12/31/04

Restrictions:

This company may not grant to any third party the right to use ITRI’s sub-micron technology.

(11) Patent Cross-License Agreement

Contracting Party:

Texas Instruments Incorporated (TI)


Both parties granted each other the right to use the other party’s patented technologies to manufacture and sell semiconductor.



Restrictions:

Both parties release each other from all claims arising from infringement or alleged infringement of any party’s patent by the

other party prior to the effective date of this Agreement.


Contracting Party:

Harris Corporation (Harris)

22


Both parties granted each other the right to use the other party’s patented technologies to manufacture and sell integrated

circuit.



Restrictions:




Contracting Party:

EMI Group North America, Inc. (EMI)


Both parties granted each other the right to use the other party’s patented technologies to manufacture and sell integrated

circuit.



Restrictions:




Contracting Party:

NEC Corporation (NEC)


Both parties granted each other the right to use the other party’s patented technologies to manufacture and sell

semiconductors.



Restrictions:



(15) Technology Transfer Agreement

Contracting Party:

Mitsubishi Electric Corporation


Mitsubishi transfers its 0.2um and 0.18um DRAM technologies and granted VIS the right to manufacture its 64M SDRAM and

128M SDRAM products.



Restrictions:



7. Litigation: Nil

23

24

8. Acquisition or Disposition of Real Estate

8-1 Acquisition of Real Estate

Unit: NT$K As of February 28, 2002

Name of Real Estate Acquisition Price Vendor Relationship Status

Date with Co.

Stepper

Invesco GP R.O.C. Bond Fund

N.T.T.C. Bond Fund

Fubon Ju-I Fund

President Home Run Bond Fund



Fubon Ju-I Fund

Fubon Ju-I Fund



The First Global Investment

Trust Duo-Li-2 Bond Fund





President James Bond Fund


04/2001

04/2001

04/2001

04/2001

05/2001

07/2001

07/2001

07/2001

07/2001

07/2001

07/2001

07/2001

10/2001

10/2001

10/2001

11/2001

371,578

200,000

300,000

200,000

300,000

300,000

50,000

200,000

50,000

300,000

50,000

200,000

100,000

350,000

100,000

400,000

ASML

Invesco Taiwan Ltd.

N.T.T.C. Ltd.

Fubon Securities Investment Trust Co. Ltd.

President Investment Trust Corp.

Invesco Taiwan Ltd.

Invesco Taiwan Ltd.





The First Global Investment Trust Co. Ltd.





Supplier

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Normal

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

25

8-2 Disposition of Real Estate

Unit: NT$K As of February 28, 2002

Name of Real Estate Acquisition Disposition Book Price Income Buyer Relationship

Date Date Value (Loss) of with Co.

Disposition


N.T.T.C. Bond Fund

Fubon Ju-I Fund


Fubon Ju-I Fund

Fubon Ju-I Fund



The First Global Investment Trust

Duo-Li-2 Bond Fund




The First Global Investment Trust

Duo-Li-2 Bond Fund


04/2000

04/2001

04/2001

05/2001

07/2001

07/2001

07/2001

07/2001

07/2001

07/2001

07/2001

10/2001

10/2001

11/2001

06/2001

06/2001

06/2001

06/2001

08/2001

08/2001

10/2001

10/2001

10/2001

01/2002

01/2002

10/2001

10/2001

01/2002

0

0

0

0

0

0

0

0

0

0

0

0

0

0

201,482

302,386

201,796

301,722

200,878

50,115

303,909

50,528

202,427

305,630

50,828

100,263

100,271

402,869

1,482

2,386

1,796

1,722

878

115

3,909

528

2,427

5,630

828

263

271

2,869

Invesco Taiwan Ltd.

N.T.T.C. Ltd.

Fubon Securities Investment Trust Co. Ltd







Invesco Taiwan Ltd.

Invesco Taiwan Ltd.




Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

26

1. Corporate Bond Financing Plan

Bond Amount Period

Domestic Second Secured Bond NT$ 1.1 billion 2001/11/15~2006/11/15

Interest Rate Purpose Uploaded to the OTC Bond System

3.5~3.6% Operational needs 2001/11/16

Vanguard believes in long-term

business strategies which focus

on stable and sustained growth

while maintaining our

entrepreneurial vitality. To this

end we are constantly

innovating to meet the demands

of the dynamic and rapidly

changing hi-tech industry.

Business and Financing PlansBusiness and Financing Plans

27

2. Status of Implementation and Benefits

This project was completed in December of 2001 and uploaded to the OTC Internet forum on the 8th of January 2002. The forecasted

benefits are analyzed as follows:

Unit: NT$K

Year 2001 2002 2001 DiscrepancyItem (Forecast) (Forecast) (Actual) between real and

forecast in 2001

Total Debt 14,777,535 12,249,000 15,072,105 294,570

Financial Net Sales 9,969,748 12,474,000 9,110,492 (859,256)Information

EPS (2.51) 0.08 (3.95) (1.44)

Net Worth to Total Assets (%) 52.85 57.7 47.05 (5.8)

Capital Structure Net Worth to F/A 1.11 1.42 0.93 (0.18)Analysis

Long Term Fund to F/A 1.62 1.93 1.45 (0.17)

Liquidity Analysis Current Ratio (%) 132 154.6 102.16 (29.84)

Quick Ratio (%) 87 117.2 76.39 (10.61)

Notes: These forecasts are based on the data as of November 30th 2001.

The semiconductor industry was heavily impacted by the worldwide economic downturn, inventory adjustments and the September

11th events of 2001. These factors combined to produce the largest production shrinkage in the industry’s history, and also resulted in

VIS’s actual perfomance falling short of our forecasts. However, given the gradual economic recovery currently underway and the

surge in prices, our financial performance in 2002 is expected to improve.

28

Financial StatementsFinancial Statements

Vanguard is committed to creating a dynamic and enjoyable work environment that

will attract talented people. We believe in the importance of being a good

corporate citizen by contributing to our community while acting in the best

interests of our shareholders and employees.

29

1. Brief Balance SheetUnit:NT$K

Item Financial analysis from 1997 to 2001

2001 2000 1999 1998 1997

Current assets 6,771,922 13,000,146 9,829,869 6,600,000 7,341,573

Long-term investment 4,524,538 4,110,516 4,461,382 1,225,228 733,851

Fixed assets 14,323,956 19,030,401 19,072,057 22,860,743 22,658,108

Other assets 2,844,448 3,555,598 3,675,246 3,244,851 2,528,911

Current liabilities Before distribution 6,628,965 7,164,583 5,423,773 3,406,659 4,229,009

After distribution 6,628,965 7,164,583 5,423,773 3,406,659 4,229,009

Long-term liabilities 7,392,000 9,278,000 11,946,000 12,624,000 8,684,000

Other liabilities 1,051,140 1,203,297 215,519 163,572 103,505

Capital stock 22,000,000 22,000,000 22,000,000 20,206,059 19,206,059

Capital Surplus 21,765 21,765 3,309,311 1,501,287 -

Retained earnings Before distribution (8,683,930) 8,493 (5,852,798) (3,989,529) 983,855

After distribution (8,683,930) 8,493 (5,852,798) (3,989,529) 983,855

Total Assets 28,464,864 39,696,661 37,038,554 33,930,822 33,262,443

Total Liabilities Before distribution 15,072,105 17,645,880 17,585,292 16,194,231 13,016,514


Total Equity Before distribution 13,392,759 22,050,781 19,453,262 17,736,591 20,245,929


*Subject to change after shareholders’ meeting resolution

2. Brief Statements of IncomeUnit:NT$K


2001 2000 1999 1998 1997

Net sales 9,110,492 19,345,762 13,026,814 9,861,124 9,692,155

Gross profit (3,459,603) 4,518,477 523,542 (2,390,544) 1,216,141

Income (loss) from operation (4,714,841) 3,046,215 (2,177,391) (4,803,099) (657,657)

Interest revenue 203,655 192,292 207,726 133,449 170,883

Interest expense 729,881 936,400 1,006,757 733,928 233,573

Profit (loss) before tax (9,292,764) 2,370,720 (2,549,186) (5,572,097) (670,971)

Net profit (loss) (8,692,423) 2,573,745 (1,849,186) (4,972,097) (70,633)

Earnings (loss) per share (3.95) 1.17 (0.90) (2.53) (0.04)

30

3. Financial Analysis


2001 2000 1999 1998 1997

Capital Structure Analysis

Debt Ratio (%) 52.95 44.45 47.48 47.73 39.13

Long Term Fund to F/A (%) 145.10 164.62 164.63 132.81 127.68

Liquidity Analysis

Current Ratio (%) 102.16 181.45 181.24 193.74 173.60

Quick Ratio (%) 76.39 129.42 124.36 113.17 112.06

Interest Guarantee (Times) - 3.27 - - -

Operating Performance Analysis

Avg. Collection Turn over (Times) 4.15 7.67 7.34 5.72 9.82

Avg. Collection Days 8 8 48 50 64 37

Avg. Inv. Turn over (Times) 6.47 6.16 6.20 5.83 5.04

Avg. stock Turn over Days 5 6 59 59 63 72

Fixed Assets Turn over (Times) 0.64 1.02 0.68 0.43 0.43

Total Assets Turn over (Times) 0.32 0.49 0.35 0.29 0.29

Return on Investment Analysis

Return on Total Assets (%) (23.36) 8.71 (2.37) (12.61) 0.54

Return on Total Equity (%) (49.05) 12.40 (9.94) (26.18) (0.35)

Operating Income to Capital Stock (%) (21.43) 13.85 (9.90) (23.77) (3.42)

Profit(loss) before tax to Capital Stock (%) (42.24) 10.78 (11.59) (27.58) (3.49)

Profit(loss) after tax to Net Sales (%) - 13.30 - - -

Earnings per share (NTD)* (3.95) 1.17 (0.90) (2.53) (0.04)

Cash Flow

Cash Flow Ratio (%) 22.65 111.42 68.56 - 37.92

Cash Flow Adequacy Ratio (%) 56.43 45.94 29.20 20.19 25.70

Cash Flow Reinvestment Ratio (%) 3.04 14.53 7.62 - 4.53

Leverage Analysis

Operating leverage - 3.69 - - -

Financial leverage - 1.44 - - -

*Based on retroactive weighted average shares.

1. Capital Structure Analysis

(1) Debts ratio=Total Liabilities/Total Asset

(2) Long-term fund to fixed assets=(Shareholders’ Equity+Long-term Liabilities)/Net Properties

2. Liquidity Analysis

(1) Current ratio=Current Assets/Current Liabilities

(2) Quick ratio=(Current Assets-Inventories-Prepaid Expense)/Current Liabilities

(3) Times interest earned=Earnings before Interest and Taxes/Interest Expense

3. Operating Performance Analysis

(1) Average collection turnover=Net Sales/Average Trade Receivables

(2) Average collection days=365/Receivables Turnover rate

(3) Average inventory turnover=Cost of Sales/Average Inventory

(4) Average payment turnover=Cost of Sales/Average Trade Payables

(5) Average inventory turnover days=365/Inventory Turnover rate

(6) Fixed assets turnover=Net Sales/Net Properties

(7) Total assets turnover=Net Sales/Total Assets

4. Profitability Analysis

(1) Return on total assets=[Net Income+Interest Expensex(1-Effective tax rate)]/Average Total Assets

(2) Return ratio on stockholders’ equity=Net Income/Average Stockholders’ Equity

(3) Profit after tax to net sales=Net Income/Net Sales

(4) Earnings per share =(Net Income-Preferred Stock Dividend)/Weighted Average Number of Shares Outstanding

5. Cash Flow

(1) Cash flow ratio=Net Cash Provided by Operating Activities/Current Liabilities

(2) Cash flow adequacy ratio=Five-year Sum of Cash from Operations/Five-year Sum of Capital, Expenditures, Inventory Additions, and Cash Dividends

(3) Cash flow reinvestment ratio=(Net Cash Provided by Operating Activities-Cash Dividends)/(Gross Plant+Long-term Investment+Other Assets+Working Capital)

6. Leverage

(1) Operating leverage=(Net Sales-Variable Cost)/Income from Operations

(2) Financial leverage=Income from Operations/(Income from Operations-Interest Expenses)

Auditors’ Opinion from 1997 to 2001

31

Year CPA Audit Opinion

1997 S.C. Huang, Edward Way An Unqualified Opinion





12F, No. 156, Sec. 3, Min-Sheng E. Rd., Taipei, Taiwan, R.O.C.

Tel: 886-2-2545-9988

4. Supervisors’ Report

2001 ANNUAL REPORT OF THE COMPANY, PREPARED BY THE BOARD OF THE DIRECTORES, HAS BEEN ASSIGNED BY THE

UNDERSIGNED, ACCORDING TO THE ARTICLE 219 OF COMPANY LAW, TO T.N. SOONG & CO. FOR AUDITING . THE AUDITORS’

REPORT HAS BEEN FINISHED AND SUBMITTED BY THE SAID AUDITOR AND CHECKED BY THE UNDERSIGNED.

Vanguard International Semiconductor Corporation

YEH, HUEY-CHING

CHOW, SIDNEY H.

CHANG, HARVEY

February 1st, 2002

32

5. Financial Statements & Independent Auditors’ Report

English Translation of a Report Originally Issued in Chinese

Independent Auditors’ Report

The Board of Directors and Shareholders


We have audited the accompanying balance sheets of Vanguard International Semiconductor Corporation as of December 31, 2001

and 2000, and the related statements of income, changes in shareholders’ equity and cash flows for the years then ended. These

financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these

financial statements based on our audits.

We conducted our audits in accordance with Regulations for Auditing of Financial Statements by Certified Public Accountants, and

auditing standards generally accepted in the Republic of China. Those standards require that we plan and perform the audit to

obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes

assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial

statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vanguard

International Semiconductor Corporation as of December 31, 2001 and 2000, and the results of its operations and its cash flows for

the years then ended in conformity with the Guidelines for Securities Issuers’ Financial Reporting and accounting principles generally

accepted in the Republic of China.

January 12, 2002

Notice to Readers

The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in

accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other

jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in

the Republic of China.

33

34

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATIONBALANCE SHEETSDecember 31, 2001 and 2000

2001 2000

ASSETS Amount Amount

CURRENT ASSETS

Cash and cash equivalents (Notes 2 and 3) $ 2,966,364 10 $ 5,877,789 15

Pledged time deposit (Note 16) 10,000 - 10,000 -

Short-term investments (Notes 2 and 4) 1,100,000 4 - -

Receivable from related parties (Note 15) 574,456 2 1,863,991 5

Notes and accounts receivable 528,453 2 1,784,806 4

Allowance for doubtful receivables (Note 2) (27,503) - (83,552) -

Allowance for sales returns, discounts and others (Note 2) (78,041) - (170,578) -

Inventories - net (Notes 2 and 5) 1,127,512 4 2,755,472 7

Prepaid expenses and other current assets (Note 15) 220,406 1 462,771 1

Deferred income tax assets (Notes 2 and 14) 350,275 1 499,447 1

Total Current Assets 6,771,922 24 13,000,146 33

LONG-TERM STOCK INVESTMENTS (Notes 2 and 6) 4,524,538 16 4,110,516 10

PROPERTIES (Notes 2, 7, 15 and 16)

Cost

Buildings 7,879,494 28 7,698,061 19

Machinery and equipment 33,461,207 117 32,181,095 81

Other equipment 273,480 1 715,570 2

Total cost 41,614,181 146 40,594,726 102

Accumulated depreciation (27,633,005) (97) (22,392,575) (56)

Prepayments and construction in progress 342,780 1 828,250 2

Net Properties 14,323,956 50 19,030,401 48

OTHER ASSETS

Deferred charges - net (Notes 2 and 8) 94,125 - 1,542,923 4

Deferred income tax assets (Notes 2 and 14) 2,747,065 10 1,997,552 5

Refundable deposits 3,258 - 2,759 -

Non-operating properties (Note 2) - - 12,364 -

Total Other Assets 2,844,448 10 3,555,598 9

TOTAL ASSETS $ 28,464,864 100 $ 39,696,661 100

35

(In Thousand New Taiwan Dollars, Except Par Value)

2001 2000

LIABILITIES AND SHAREHOLDERS’ EQUITY Amount Amount

CURRENT LIABILITIES

Short-term bank loans (Note 9) $ 580,183 2 $ 797,137 2

Commercial papers issued (Note 10) 1,270,000 4 - -

Payable to related parties (Note 15) 375,626 1 453,669 1

Accounts payable 346,675 1 1,020,916 3

Payable to contractors and equipment suppliers 132,272 1 557,592 1

Current portion of long-term debts (Notes 11 and 16) 3,286,000 12 3,318,000 8

Accrued expenses and other current liabilities (Note 19) 638,209 2 1,017,269 3

Total Current Liabilities 6,628,965 23 7,164,583 18

LONG-TERM DEBTS (Notes 11 and 16)

Bonds 1,850,000 7 1,500,000 4

Bank loans 5,242,000 18 7,778,000 19

Commercial papers issued 300,000 1 - -

Total Long-term Debts 7,392,000 26 9,278,000 23

ACCRUED PENSION COST (Notes 2 and 13) 299,750 1 262,831 1

GUARANTEE DEPOSITS (Note 18) 751,390 3 940,466 2

Total Liabilities 15,072,105 53 17,645,880 44

SHAREHOLDERS’ EQUITY (Notes 2 and 12)

Capital stock, $10 par value;

Authorized - 3,000,000 th ousand shares in 2001 and 2,700,000

thousand shares in 2000,

Issued - 2,200,000 thousand shares 22,000,000 77 22,000,000 56

Capital surplus 21,765 - 21,765 -

Retained earnings:

Legal reserve 849 - - -

Unappropriated (deficit) earnings (8,684,779) (30) 8,493 -

Cumulative translation adjustments 54,924 - 20,523 -

Total Shareholders’ Equity 13,392,759 47 22,050,781 56

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 28,464,864 100 $ 39,696,661 100

The accompanying notes are an integral part of the financial statements.

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATIONSTATEMENTS OF INCOMEFor the Years Ended December 31, 2001 and 2000

(In Thousand New Taiwan Dollars, Except Earnings (Loss) Per Share)

2001 2000

Amount Amount

GROSS SALES (Notes 2 and 15) $ 9,475,384 $ 19,698,570

SALES RETURNS AND ALLOWANCES (Note 2) (364,892) (352,808)

NET SALES 9,110,492 100 19,345,762 100

COST OF SALES (Note 15) 12,570,095 138 14,827,285 77

GROSS (LOSS) PROFIT (3,459,603) (38) 4,518,477 23

OPERATING EXPENSES (Note 15)

General and administrative 535,291 6 607,974 3

Marketing 88,618 1 223,881 1

Research and development (Note 2) 631,329 7 640,407 3

Total Operating Expenses 1,255,238 14 1,472,262 7

INCOME (LOSS) FROM OPERATIONS (4,714,841) (52) 3,046,215 16

NON-OPERATING INCOME

Interest 203,655 3 192,292 1

Dividends 84,244 1 - -

Gain on sales of short-term investments 16,916 - 47,089 -

Gain on sales of long-term stock investments 5,184 - 106,825 1

Gain on disposal of properties (Note 2) - - 26,505 -

Insurance proceeds - - 357,722 2

Foreign exchange gain - net (Note 2) - - 16,256 -

Other (Note 15) 16,920 - 48,929 -

Total Non-operating Income 326,919 4 795,618 4

NON-OPERATING EXPENSES

Loss on inventory valuation loss and obsolescence (Note 2) 2,871,739 32 107,137 1

Loss on disposal of properties, deferred charges and

non-operating properties (Note 2) 956,706 10 16,573 -

Interest (Note 7) 729,881 8 936,400 5

Investment loss recognized by equity method (Notes 2 and 6) 193,262 2 325,227 2

Impairment loss on deferred charges 144,125 2 - -

Foreign exchange loss - net (Note 2) 9,129 - - -

Other - - 85,776 -

Total Non-Operating Expenses 4,904,842 54 1,471,113 8

INCOME (LOSS) BEFORE INCOME TAX (9,292,764) (102) 2,370,720 12

INCOME TAX BENEFIT (Notes 2 and 14) 600,341 7 203,025 1

NET (LOSS) INCOME ($ 8,692,423) (95) $ 2,573,745 13

EARNINGS (LOSS) PER SHARE

Based on weighted-average number of shares

outstanding - 2,200,000 thousand shares ($ 3.95) $ 1.17

The accompanying notes are an integral part of the financial statements.36

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATIONSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYFor the Years Ended December 31, 2001 and 2000

(In Thousand New Taiwan Dollars)

CAPITAL STOCK ISSUED CAPITAL SURPLUS (NOTE 2) RETAINED EARNINGS (Note 12) TOTAL

Shares Gain on Disposal Unappropriated SHAREHOLDERS’

(Thousand)Amount Paid-in Capital

of PropertiesTotal Legal Reserve

Earnings (Deficit)Total EQUITY

BALANCE, JANUARY 1, 2000 2,200,000 $ 22,000,000 $ 3,293,941 $ 15,370 $ 3,309,311 $ 239,967 ($ 6,092,765) ($ 5,852,798) ($ 3,251) $ 19,453,262

Offsetting deficit

Capital surplus - - (3,293,941) (15,370) (3,309,311) - 3,309,311 3,309,311 - -

Legal reserve - - - - - (239,967) 239,967 - - -

Net income in 2000 - - - - - - 2,573,745 2,573,745 - 2,573,745

Gain on disposal of properties - - - 21,765 21,765 - (21,765) (21,765) - -

Translation adjustments - - - - - - - - 23,774 23,774

BALANCE, DECEMBER 31, 2000 2,200,000 22,000,000 - 21,765 21,765 - 8,493 8,493 20,523 22,050,781

Legal reserve - - - - - 849 (849) - - -

Net loss in 2001 - - - - - - (8,692,423) (8,692,423) - (8,692,423)

Translation adjustments - - - - - - - - 34,401 34,401

BALANCE, DECEMBER 31, 2001 2,200,000 $ 22,000,000 $ - $ 21,765 $ 21,765 $ 849 ($ 8,684,779) ($ 8,683,930) $ 54,924 $ 13,392,759


37

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATIONSTATEMENTS OF CASH FLOWSFor the Years Ended December 31, 2001 and 2000

(In Thousand New Taiwan Dollars)

2001 2000

CASH FLOWS FROM OPERATING ACTIVITIES

Net (loss) income ($ 8,692,423) $ 2,573,745

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization 6,476,525 6,323,624

Investment loss recognized by equity method 193,262 325,227

Gain on sales of long-term stock investments (5,184) (106,825)

Deferred income tax assets (600,341) (203,025)

Loss (gain) on disposal of properties - net 50,776 (9,518)

Loss (gain) on disposal of deferred charges 904,722 (218)

Loss on disposal of non-operating properties 1,208 -

Accrued pension cost 36,919 47,362

Provisions for:

Doubtful receivables (56,049) 45,643

Sales returns, discounts and others (92,537) (26,553)

(Forward)

CUMULATIVETRANSLATIONADJUSTMENTS

(Note 2)

Changes in operating assets and liabilities:

Receivable from related parties $ 1,289,535 ($ 1,673,058)

Notes and accounts receivable 1,256,353 (94,101)

Inventories 1,627,960 (693,953)

Prepaid expenses and other current assets 242,365 542,684

Forward exchange contract receivable - 7,735

Payable to related parties (78,043) 326,048

Accounts payable (674,241) 380,233

Accrued expenses and other current liabilities (369,900) 205,310

Forward exchange contract payable (9,160) 12,421

Net Cash Provided by Operating Activities 1,501,747 7,982,781

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisitions of:

Short-term investments (1,100,000) -

Long-term stock investments (607,249) (50,402)

Properties (1,676,235) (5,918,217)

Proceeds from disposal of:

Long-term stock investments 39,550 206,640

Properties 679 58,065

Non-operating properties 11,000 -

Deferred charges - 394

Increase in deferred charges (26,388) (656,985)

(Increase) decrease in refundable deposits (499) 7,661

Net Cash Used in Investing Activities (3,359,142) (6,352,844)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from (payments on):

Short-term bank loans (216,954) 516,874

Commercial papers issued 1,270,000 -

Long-term debts (1,918,000) (2,308,000)

(Decrease) increase in guarantee deposits (189,076) 940,416

Net Cash Used in Financing Activities (1,054,030) (850,710)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,911,425) 779,227

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,877,789 5,098,562

CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,966,364 $ 5,877,789

SUPPLEMENTAL INFORMATION

Interest paid (excluding capitalized amounts of $30,619 and $73,739

in 2001 and 2000, respectively) $ 762,082 $ 972,432

Noncash investing and financing activities

Current portion of long-term debts $ 3,286,000 $ 3,318,000

Cash paid for acquisitions of properties

Total acquisitions $ 1,250,915 $5,858,141

Payable to contractors and equipment suppliers 425,320 60,076

$ 1,676,235 $ 5,918,217


38

39

NOTES TO FINANCIAL STATEMENTS(In Thousand New Taiwan Dollars, Unless Specified Otherwise)

1. GENERALThe Corporation was established on December 5, 1994, as a venture among the Ministry of Economic Affairs (MOEA) (29%), Taiwan

Semiconductor Manufacturing Company Ltd. (25%), USI Corporation (7%) and several other private investors. The MOEA’s capital contribution

consisted of the assets of and technology developed from the Submicron Experiment Project.

The Corporation’s shares are traded on the Republic of China (ROC) Over-the-Counter Securities Exchange since March 25, 1998.

The Corporation is engaged mainly in the research, design, development, manufacture, packaging, testing and sale of memory integrated circuits,

large scale integrated ICs (LSI), very large scale integrated ICs (VLSI) and related parts.

2. SIGNIFICANT ACCOUNTING POLICIESBasis of presentation

The financial statements have been prepared in conformity with accounting principles generally accepted in the Republic of China. The

significant accounting principles adopted by the Corporation are as follows:

Cash and cash equivalents

Government bonds acquired under agreements that provide for their repurchase within less than three months from date of purchase are

classified as cash equivalents.

Short-term investments

These are open-ended funds and are stated at the lower of aggregate costs or market value. Costs of such investments sold are determined

by the weighted average method.

Allowance for doubtful receivables

Allowance for doubtful receivables are provided based on a review of the collectibility of individual receivables.

Sales and allowance for sales returns, discounts and others

Sales are recognized when titles of products and risks of ownership are transferred to customers upon shipment. Allowances and related

provisions for sales returns, discounts and others are provided based on the Corporation’s historical experience; such provisions are deducted

from sales and related costs are deducted from cost of sales.

Inventories

Inventories are stated at the lower of standard cost (adjusted to approximate weighted average cost) or market value. Market value

represents net realizable value for finished goods and work in process, and replacement value for raw materials, supplies and spare parts.

Long-term stock investments

Investment in shares of stock of VIS Associates, Inc. is accounted for under the equity method since the Corporation exercises significant

influence on its operating and financial decisions. Under the equity method, the investment is initially carried at cost and adjusted

subsequently for the Corporation’s proportionate share in the net earnings or losses of VIS Associates, Inc. Such proportionate share in the

earnings or losses is recognized as investment income or loss while any cash dividend received is reflected as reduction in the carrying value

of the investments. Stock dividends received are recognized only as an increase in the number of stocks held on the ex-dividend date.

Other long-term stock investments are accounted for at cost. An allowance for decline in value is recognized as follows:

a. Listed stocks or stocks traded over the counter. If the decline in value is considered temporary, a credit is made to an allowance for

decline in value with a corresponding debit to shareholders’ equity account. The allowance is then debited for the recovery of the market

value to the extent of the existing balance. However, if the decline in value is considered irrecoverable, the allowance for decline in value

is reversed and the debit to shareholders’ equity account is credited to income.

b. Other than listed stocks or stocks traded over the counter. The decline in value is charged to current income if the decline is irrecoverable.

Costs of such investments sold are determined by the weighted-average method.

Properties and non-operating properties

Major additions, renewals, betterments and interest expenses incurred during the construction period are capitalized while maintenance and

repairs are expensed currently.

Depreciation is provided on the straight-line method over 5 to 20 years for buildings and over 2 to 5 years for machinery and equipment,

and other equipment.

Upon sale or disposal of properties, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is

credited or charged to income. Any such gain, less applicable income tax, is reclassified to capital surplus at the end of the year (before the

relevant regulation was amended).

Deferred charges

Deferred charges are amortized on the straight-line method over the following periods: Technology - 10 years; patent - 2 to 10 years;

software design costs - 3 to 5 years; and bonds issue costs - 7 years. When the value of deferred charges is considered impaired, a reduction

of such impairment loss is charged to current net income.

Pension costs

Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition asset is amortized over 26 years.

Research and development

Research and development costs consist of expenditures incurred during the course of planned search and investigation aimed at the

discovery of new knowledge which will be useful in developing new products or processes, or significantly enhancing existing products or

production processes, and the implementation of such through design, testing of product alternatives or construction of prototypes. The

Corporation expenses all research and development costs as they are incurred.

Income tax

Provision for income tax represents income tax paid and payable for the current year plus the changes in the deferred income tax assets and

liabilities during the years. Deferred income taxes are recognized for the tax effects of temporary differences, unused tax credits and

operating loss carryforwards. Valuation allowance is provided for deferred tax assets that are not certain to be realized. A deferred tax asset

or liability is, according to the classification of its related asset or liability, classified as current or noncurrent. However, if a deferred tax asset

or liability cannot be related to an asset or liability in the financial statements, then it is classified as current or noncurrent based on the

expected reversal date of temporary difference.

Adjustments to prior years’ tax are added to or deducted from the income tax expense in the year those adjustments are determined.

Income taxes (10%) on undistributed earnings generated in 1998 and onward are recorded as expense in the year when the shareholders

have resolved that the earnings shall be retained.

Derivative financial instruments

Foreign currency forward exchange contracts (forward contracts), entered into for purposes other than trading, are recorded in New Taiwan

dollars as assets or liabilities using the spot rates at the inception dates of the contracts. The difference in the New Taiwan dollar amounts

translated using the spot rates and the amounts translated using the contracted forward rates are recognized as premiums or discounts at

the inception dates of the forward contracts. Such premiums or discounts are amortized over the terms of the forward contracts using the

straight-line method and the amortizations are recognized in income. At balance sheet dates, the receivables or payables arising from

forward contracts are restated using the prevailing spot rates and the resulting differences are recognized in income. Also, the receivables and

payables related to the forward contracts are netted out and the resulting net amount is presented as either an asset or a liability.

The foreign currency amount of forward contracts, entered into for the purposes of hedging foreign currency firm commitments, are

recorded as receivable or payable at spot rate on the contract date. The difference between the foreign currency amount computed using the

spot rate and the foreign currency amount computed using the forward rate at the inception dates of the contracts are amortized over the

term of the forward contract using the straight-line method. At the balance sheet dates, the foreign currency amount of the forward

contract are remeasured using prevailing rate. The difference arising from the re-measurement is deferred and included as adjustment to the

transaction price when the commitments are realized. The receivables and/or payables related to the forward contract are netted out and the

resulting net amount is presented as either an asset or liability. The foreign exchange difference arising from the settlement of the forward

contract is presented as the adjustment to the transaction price when the commitment are realized.

The Corporation also enters into currency swap contracts to manage exposures to changes in foreign exchange rate on existing assets and

liabilities. These transactions are accounted for on an accrual basis, in which cash settlement receivable or payable is recorded as an

adjustment to interest income or expenses.

Foreign-currency transactions

Foreign-currency transactions, except derivative financial instruments, are recorded in New Taiwan dollars at the rates of exchange in effect

when the transactions occur. Gains or losses caused by the application of different foreign exchange rates when cash in foreign currency is

converted into New Taiwan dollars, or when foreign-currency receivables and payables are settled, are credited or charged to income in the

year of conversion or settlement. At year-end, the balances of foreign-currency assets and liabilities are restated at prevailing exchange rates

and the resulting differences are recorded as follows:

40

a. Long-term stock investments accounted for by equity method - as cumulative translation adjustment under shareholder’s equity.

b. Other assets and liabilities - credited or charged to current income.

Reclassifications

Certain accounts in 2000 have been reclassified to conform to 2001 classifications.

3. CASH AND CASH EQUIVALENTS2001 2000

Bank deposits $ 2,846,364 $ 4,964,529

Government bonds acquired under repurchase agreements 120,000 913,260

$ 2,966,364 $ 5,877,789

4. SHORT-TERM INVESTMENTS2001 2000

Open-ended funds $ 1,100,000 $ -

Market value $ 1,110,188 $ -

The market value is stated at net asset value as of December 31, 2001.

5. INVENTORIES2001 2000

Finished goods $ 878,275 $ 411,728

Work in process 2,870,678 2,012,677

Raw materials 65,839 161,692

Supplies and spare parts 298,726 317,164

4,113,518 2,903,261

Allowance for losses (2,986,006) (147,789)

$ 1,127,512 $ 2,755,472

6. LONG-TERM STOCK INVESTMENTS2001 2000

Carrying Value % of OwnerShip Carrying Value % of OwnerShip

Equity method - VIS Associates Inc. $ 902,999 100 $ 464,077 100

Cost method:

Stocks traded over the counter (with market value

of $3,545,133 in 2001 and $3,593,955 in 2000):

Powerchip Semiconductor Corporation 2,651,216 9 2,651,216 9

Etron Technology Inc. 275,766 3 310,132 3

Unlisted stocks

Walsin Advanced Electronics Ltd. 414,481 10 414,481 10

Megic Corporation 177,000 9 177,000 9

Form Factor Inc. 64,360 1 64,360 1

United Industrial Gases Co., Ltd. 38,716 2 29,250 2

$ 4,524,538 $ 4,110,516

Net investment loss recognized by equity method for the year ended December 31, 2001 and 2000 were $193,262 and $325,227, respectively.

The carrying value of the investment in VIS Associates Inc. as of December 31, 2001 and 2000 and the related investment losses for the years then

ended were based on its audited financial statements for those same periods. The total assets or revenues of this investee are less than 10% of

those of the Corporation and, therefore, the Corporation is not required to, and did not prepare consolidated financial statements.

41

7. PROPERTIESAccumulated depreciation consists of the following:

2001 2000

Buildings $ 3,519,556 $ 2,850,022

Machinery and equipment 23,874,865 18,933,327

Other equipment 238,584 609,226

$ 27,633,005 $ 22,392,575

Interest expense, excluding capitalized amounts of $30,619 in 2001 and $73,739 in 2000, for the years ended December 31, 2001 and 2000 were

$760,500 and $1,010,139, respectively. The interest rates used for purposes of calculating the capitalized amount were 4.26%-6.755% in 2001

and 6.59%-6.9% in 2000.

8. DEFERRED CHARGES - NET2001 2000

Software design costs $ 88,617 $ 129,904

Bonds issue costs 5,508 7,914

Technology - 729,803

Patent - 675,302

$ 94,125 $ 1,542,923

9. SHORT-TERM BANK LOANS

2001 2000

Loans for imports of materials: 2001 - US$16,006 thousand, repayable by

June 2002, interest at 2.38%-2.9%; 2000 - US$24,098 thousand,

repayable by June 2001, interest at 7.13%-7.48% $ 560,183 $ 797,137

Working capital loans: Due in January 2002, interest at 2.85% 20,000 -

$ 580,183 $ 797,137

Unused credit lines for short-term bank loans as of December 31, 2001 are about $7,158,000.

10.COMMERCIAL PAPERS ISSUED

These commercial papers, guaranteed by financial institutions, bear interest rate of 3.35% to 4.55% and have maturity date by June 2002.

11.LONG-TERM DEBTS2001 2000

Bonds

Repayable in annual installments from November 6, 2000 to November 6, 2003, interest at 6.59%, guaranteed by financial institution $ 1,500,000 $ 2,250,000

Repayable in annual installments from November 15, 2005 to November 15, 2006, interest at 3.5%-3.6%, guaranteed by financial institution 1,100,000 -

2,600,000 2,250,000

Current portion (750,000) (750,000)

$ 1,850,000 $ 1,500,000

Bank loans

Repayable in semi-annual installments through June 2004, interest at 4%-6.35% in 2001 and 6.35% in 2000 $ 3,900,000 $ 5,460,000

Repayable in semi-annual installments through October 2005, interest at 3.95%-6.42% in 2001 and 6.42% in 2000 2,920,000 3,640,000

(Forward)

42

Repayable in quarterly installments through July 2007, interest at 6.475%-6.765% in 2001 and 6.755%-6.765% in 2000 $ 330,000 $ 330,000

Repayable in semi-annual installments through February 2005, interest at 6.225%-6.765% in 2001 and 6.505%-6.765% in 2000 256,000 328,000

Repayable in semi-annual installments through July 2004, interest

at 6.35%-6.64% in 2001 and 6.63%-6.765% in 2000 220,000 292,000

Repayable in semi-annual installments through February 2003,

interest at 6.475%-6.765% in 2001 and 6.755%-6.765% in 2000 112,000 184,000

Repayable in semi-annual installments through May 2002,

interest at 6.475%-6.765% in 2001 and 6.755%-6.765% in 2000 40,000 112,000

Commercial papers issued

Due in May 2004, guaranteed by financial institutions, interest at 2.41% 300,000 -

8,078,000 10,346,000

Current portion (2,536,000) (2,568,000)

$ 5,542,000 $ 7,778,000

The bonds and loan agreements require, among other things, the maintenance of specific financial ratios. Among those specific ratios, the

Corporation has failed to meet liability ratio (liability/net worth) and net worth requirement as of December 31, 2001. Therefore, the Corporation

needs to improve its financial position by issuing capital stock for cash or other agreed financing plan by syndicates of banks within six months.

The Board of Directors’ meeting on February 1, 2002 will resolve a cash issuance of capital stock to improve the Corporation’s financial position.

Unused credit lines for long-term debts as of December 31, 2001 are about $70,000.

12.SHAREHOLDERS’ EQUITYCapital surplus except for that arising from the application of the equity method of accounting, pursuant to ROC Company Law, can only be used

to offset a deficit or transferred to capital (as a stock dividend). Such transfer from capital surplus to capital can only be made once a year at a

specific percentage.

The Corporation’s Articles of Incorporation provide that the following shall be appropriated from the annual net income after deducting any

deficit and 10% legal reserve:

a. Special reserve;

b. 1% as bonus to directors and supervisors;

c. At least 1% of the remainder as bonus to employees.

d. The appropriation of the remaining balance after the above shall be decided at the shareholders’ meeting;

These appropriations and the disposition of the remaining net income shall be resolved by the shareholders in the following year and given effect

to in the financial statements of that year.

Pursuant to existing regulations promulgated by the Securities and Futures Commission, a special reserve equivalent to the debit balance of any

account shown in the shareholder equity section of the balance sheets, other than the deficit, shall be made from unappropriated retained

earnings. The special reserve shall be adjusted accordingly based on the debit balance of such accounts as at year-end.

Under the Company Law, the aforementioned appropriation for legal reserve shall be made until the reserve equals the aggregate par value of the

Corporation’s outstanding capital stock. Such reserve may be used to offset a deficit; also, when the reserve has reached 50% of the aggregate

par value of the Corporation’s outstanding capital stock, up to 50% thereof can be distributed as stock dividend.

Under the Integrated Income Tax System which became effective on January 1, 1998, resident shareholders (including corporate shareholders) are

allowed a tax credit for the income tax paid by the Corporation on earnings generated in 1998 and onwards. An Imputation Credit Account (ICA)

is maintained by the Corporation for such income tax and the tax credit allocated to each shareholder. The maximum credit available for

allocation to each shareholder cannot exceed the balance shown in the ICA on the date of distribution of dividends.

43

In 2001, the Corporation and the Securities and Futures Commission ("SFC") has adopted and approved, respectively, a 2001 Employee Stock

Option Plan ("the Plan"). The Plan reserved 16,000 thousand units of option, each representing 10 shares of common stock, with total of 160,000

thousand shares for issuance. These options under the Plan generally vest at certain percentage from two years after the date of grant, and can be

exercised within eight years from two years after the date of grant. As of December 31, 2001, 15,370 thousand units of option have been

granted under the Plan.

13.PENSION PLANThe Corporation has a pension plan for all regular employees, which provides benefits based on length of service and average monthly salary for

the final six months of employment.

The Corporation makes monthly contributions, equal to 2% of salaries and wages, to a pension fund which is administered by a pension fund

monitoring committee and deposited in the committee’s name in the Central Trust of China which acts as trustee. The Corporation also accrues

pension cost at a percentage (currently 6%) of salaries and wages.

Certain pension information are summarized as follows:

2001 2000

a. Components of pension cost

Service cost $ 51,575 $ 57,901

Interest cost 13,224 13,477

Projected return on plan assets (6,470) (5,722)

Amortization of unrecognized net transition assets and net gain (4,839) (2,706)

$ 53,490 $ 62,950

b. Reconciliation of the funded status of the plan and accrued pension cost

Benefit obligation

Vested benefit obligation $ - $ -

Nonvested benefit obligation 98,243 66,809

Accumulated benefit obligation 98,243 66,809

Additional benefits based on future salaries 161,414 153,587

Projected benefit obligation 259,657 220,396

Fair value of plan assets (120,486) (99,528)

Funded status 139,171 120,868

Unrecognized prior service cost - -

Unrecognized net transition assets 7,170 7,511

Unrecognized net gain 153,409 134,452

Additional liability - -

Accrued pension cost $ 299,750 $ 262,831

Vested benefit $ - $ -

c. Actuarial assumptions

Discount rates used in determining present values 5% 6%

Future salary increase rate 5% 6%

Expected rate of return plan on assets 5% 6%

d. Contributions to the pension fund $ 16,571 $ 15,588

44

14.INCOME TAX BENEFIT

a. A reconciliation of income tax currently payable before tax credits is shown below:

2001 2000

Income tax expense on income before income tax at statutory rate $ - $ 474,144

The tax effects of adjustments:

Tax-exempt income - (132,733)

Temporary differences - 126,530

Permanent differences - (43,995)

Income tax currently payable $ - $ 423,946

b. Income tax benefit as of December 31, 2001 and 2000 consist of:

2001 2000

Income tax currently payable $ - $ 423,946

Additional 10% on the unappropriated earnings 39,959 -

Tax credits (39,959) (423,946)

Net change in deferred income tax assets (liabilities) for the period

- Investment tax credits (586,271) (799,079)

- Operating loss carryforwards 1,525,241 43,800

- Temporary differences 1,235,742 153,967

Valuation allowance (1,574,371) 804,337

$ 600,341 $ 203,025

c. Deferred income tax assets and liabilities as of December 31, 2001 and 2000 consist of:

2001 2000

Current

Investment tax credits $ 632,032 $ 717,156

Operating loss carryforwards 257,591 67,478

889,623 784,634

Valuation allowance (539,348) (285,187)

$ 350,275 $499,447

Noncurrent

Investment tax credits $ 993,738 $ 1,494,885

Operating loss carryforwards 3,156,253 1,821,125

Loss on inventories valuation loss and obsolescence 746,502 -

Depreciation and amortization 212,125 (56,033)

Investment loss recognized by equity method 122,517 -

Other 98,565 -

5,329,700 3,259,977

Valuation allowance (2,582,635) (1,262,425)

$ 2,747,065 $ 1,997,552

d. The balance of ICA (see Note 12) as of December 31, 2001 and 2000 were $6,158 and $610, respectively.

There was no tax creditable ratio for 2001 because of deficit. The tax creditable ratio for 2000 was 15.32%. The tax credits allocable to

shareholders were based on the balance of Imputation Credit Account (ICA) on the dividend distribution date.

e. The unappropriated retaining as of December 31, 2001 and 2000 did not contain the unappropriated earnings generated on and before 1997.

f. The effective tax rates for deferred income tax as of December 31, 2001 and 2000 were 25% and 20%, respectively.

45

15.RELATED PARTY TRANSACTIONSThe Corporation has engaged in business transactions with the following related parties:

a. VIS America: An investee of VIS Associates Inc.

b. VIS Micro: An investee of VIS Associates Inc.

c. Taiwan Semiconductor Manufacturing Company Ltd. (TSMC): A major shareholder.

d. Industrial Technology Research Institute (ITRI): Its director is the Corporation’s chairman.

e. Walsin Lihwa Corporation (WLC): A shareholder and director.

f. Powerchip Semiconductor Corp. (PSC): An investee.

g. Walsin Advanced Electronics Ltd. (WAE): An investee.

The transactions with the aforementioned parties, except those disclosed in other notes, are summarized as follows:

2001 2000

Amount % Amount %

For the year

Sales

TSMC $ 3,610,896 38 $ 6,613,450 34

WAE 67,664 1 - -

PSC - - 162 -

$ 3,678,560 39 $ 6,613,612 34

Purchase

TSMC $ 1,171,747 29 $ 203,820 15

PSC 69,770 2 379,805 29

$ 1,241,517 31 $ 583,625 44

Manufacturing expenses

WAE $ 123,949 1 $ 403,245 3

ITRI 13,016 - 23,920 -

TSMC 1,401 - 13,807 -

PSC 550 - 1,323 -

WLC - - 1,893 -

$ 138,916 1 $ 444,188 3

(Forward)

46

g. Unused operating loss carryforwards and investment tax credits arising from investments in machinery and equipment, and research and

development expenditures as of December 31, 2001 will expire as follows:

Year of Expiry Operating Loss Carryforwards Investment Tax Credits

2002 $ 1,030,365 $ 632,032

2003 5,694,914 531,647

2004 2,380,345 376,193

2005 - 85,898

2006 4,549,750 -

$ 13,655,374 $ 1,625,770

h. The income attributable to the following projects is exempt from income tax:

Tax-Exemption Period

First expansion of manufacturing plant January 1, 2000 to December 31, 2003

i. Income tax returns through 1998 have been examined and cleared by the tax authorities.

General and administrative expenses

ITRI $ 147 - $ 299 -

TSMC - - 61 -

$ 147 - $ 360 -

Marketing expenses

VIS Micro $ 20,427 23 $ 26,604 12

ITRI 124 - 95 -

$ 20,551 23 $ 26,699 12

Research and development expenses

PSC $ - - $ 9,082 1

VIS America - - 5,706 1

TSMC - - 780 -

ITRI - - 28 -

$ - - $ 15,596 2

Non-operating income

TSMC $ 29,225 9 $ 18,063 2

PSC 1,090 - 255 -

WAE 100 - - -

$ 30,415 9 $ 18,318 2

Purchase of machinery and equipment

TSMC $ 265,672 17 $ 85,279 1

VIS America - - 3,340 -

$ 265,672 17 $ 88,619 1

Purchase of other equipment

WLC 2,292 11 $ 1,303 3

At end of year

Receivable

TSMC $ 574,402 100 $ 1,863,991 100

PSC 54 - - -

$574,456 100 $ 1,863,991 100

Prepayment - VIS America $ - - $ 1,232 -

Payable

TSMC $ 322,122 86 $ 292,679 65

ITRI 33,034 9 21,452 5

WAE 17,889 5 118,754 26

VIS Micro 2,532 - 2,365 -

PSC 49 - 18,419 4

$ 375,626 100 $ 453,669 100

VIS America conducts research and development and VIS Micro provides marketing services for the Corporation. The Corporation pays actual expenses

incurred related to such undertakings plus a 5% mark-up. The Corporation had terminated its research agreement with VIS America in January 2000.

Except for the purchase of facilities from TSMC which the Corporation follows the terms set forth in the related contracts, all transactions with other

related parties are based on normal prices and collection or payment terms.

47

16.PLEDGED OR MORTGAGED ASSETSThe following assets have been pledged or mortgaged as collateral mainly for customs duties payable and long-term debts:

2001 2000

Pledged time deposit $ 10,000 $ 10,000

Properties - net 7,520,540 9,218,542

$ 7,530,540 $ 9,228,542

17.LONG-TERM OPERATING LEASESThe Corporation leases the sites of its manufacturing plant and parking lot from the Hsinchu Science-Based Industrial Park Administration under

agreements which will expire on April 2010 and June 2015, but renewable upon expiration. Annual rentals aggregate to $23,812.

The Corporation also leases machinery and equipment from Comdisco Trade Inc. under operating lease agreements through November and

December 2002 and December 2003, respectively. Annual rentals aggregate to $271,655 (US$7,762 thousand).

Future minimum annual rentals under aforementioned leases are as follows:

Year Amount

2002 $ 295,467

2003 36,612

2004 23,812

2005 23,812

2006 23,812

2007-2015 147,924

$ 551,439

18.COMMITMENTS AS OF DECEMBER 31, 2001a. The Corporation shall pay royalties under various patent/license agreements as follows:

1) ITRI - at a specific percentage of sales of certain products for five years from November 11, 1994.

2) LUCENT Technologies, Inc. - a) at a specific amount in three installments within three years and a percentage of net sales of certain

products for three years from January 1998; b) at a specific amount and a specific percentage of net sales of certain products within two

years from January 1998.

3) Texas Instruments Incorporated- at a specific percentage of net sales of certain products for ten years from January 1997.

4) HITACHI Corporation - at a specific amount in semi-annual installments within five years from May 1997.

5) NEC Corporation - at a specific amount in six installments from February 1999 to 2003.

6) MITSUBISHI Corporation - at a specific amount and a specific percentage of net sales of certain products within five years from August

1999.

b. The Corporation agrees under a Manufacturing Agreement with TSMC that is valid for a period of five years, to allocate a portion of its

manufacturing capacity to manufacture for TSMC certain devices on logic or other technologies required by it’s customers. TSMC has paid

$1,200,000 to the Corporation as guarantee deposits on July 7, 2000.

c. Unused letters of credit aggregate about US$177 thousand and JPY54,619 thousand.

48

19.ADDITIONAL DISCLOSURES

The following are the additional disclosure requirement for VIS and its affiliates pursuant to SFC requirements:

a. Financing provided: Please see Table 1 attached.

b. Marketable securities held: Please see Table 2 attached.

c. Marketable securities acquired and disposed of at costs or prices of at least NT$100 million or 20% of the paid-in capital: Please see Table 3

attached.

d. Total purchase from or sale to related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 4

attached.

e. Receivable from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 5 attached.

f. Names, locations, and related information of investees on which the Corporation exercises significant influence: Please see Table 6 attached.

g. Financial instrument transactions

The information related to derivative transactions entered into by the Corporation is disclosed below:

1) Outstanding derivative contracts as of December 31, 2001

Items Contract Amount (Thousand) Credit Risk Fair Value

Forward contracts (sell) US$ 1,000 $ - ($ 549)

Currency swap US$ 5,000 $ - ($ 2,712)

The total fair values of the outstanding contracts were negative $3,261 (shown as other current liabilities). The net exchange gains for

2001 were $14,276.

The outstanding forward contracts described above hedged accounts receivable amounting to US$6,441 thousands.

2) Transaction risk

a) Credit risk: The banks with which the Corporation has entered into the above contracts are reputable and, therefore, management

believes that the Corporation is not exposed to significant credit risks arising from probable default by such counter parties.

b) Market risk and hedge strategy: The Corporation is exposed to market risks arising from changes in exchange rates of its foreign

currency denominated transactions. It enters into forward foreign exchange contracts principally to hedge fluctuations in those

transactions, thereby limiting its risks that would otherwise result from changes in exchange rates.

c) Liquidity and cash requirement: The cash flow requirement necessary to settle the outstanding forward contract is the only net

difference between the spot rate and contracted forward rate. Management believes that the foregoing requirement is not material.

3) Fair value of financial instruments

December 31, 2001 December 31, 2000

Carrying Value Fair Value Carrying Value Fair Value

Non-derivative financial instruments

Assets

Cash and cash equivalents $ 2,966,364 $ 2,966,364 $ 5,877,789 $ 5,877,789

Pledged time deposit 10,000 10,000 10,000 10,000

Short-term investments 1,100,000 1,110,188 - -

Receivable from related parties 574,456 574,456 1,863,991 1,863,991

Notes and accounts receivable 528,453 528,453 1,784,806 1,784,806

Long-term stock investments 4,524,538 5,114,939 4,110,516 4,929,512

Refundable deposits 3,258 3,258 2,759 2,759

Liabilities

Short-term bank loans 580,183 580,183 797,137 797,137

Commercial papers issued 1,270,000 1,270,000 - -

(Forward)

49

Payable to related parties $ 375,626 $ 375,626 $ 453,669 $ 453,669

Accounts payable 346,675 346,675 1,020,916 1,020,916

Payable to contractors and equipment suppliers 132,272 132,272 557,592 557,592

Long-term debts (including current portion) 10,678,000 10,568,161 12,596,000 12,366,419

Guarantee deposits 751,390 751,390 940,466 940,466

Derivative financial instruments

Forward exchange contracts (sell) 548 (549) 12,421 (5,274)

Currency swap 2,713 (2,712) - -

Fair values of financial instruments were determined as follows:

a) Short-term financial instruments - carrying values.

b) Long-term stock investments - fair value for listed stocks and net equity value or book value for unlisted stocks.

c) Refundable deposits and Guarantee deposits - carrying values.

d) Long-term debts are based on forecasted cash flows discounted at present value, using discount rates which are interest rates of

similar long-term debts. Long-term bonds payable are discounted at present values. Fair values of other long-term debts are their

carrying values as they use floating interest rates.

e) Derivative financial instruments - based on outright forward rates in each contract.

The fair values shown above did not include the fair values of non-financial instruments and only for certain financial instruments.

Accordingly, the sum of the foregoing fair values do not represents the fair value of the Corporation.

20.SEGMENT FINANCIAL INFORMATIONa. Export sales

2001 2000

Area

U.S.A. $ 1,237,811 $2,950,767

Europe 287,408 2,014,301

Asia 54,975 1,236,063

$ 1,580,194 $6,201,131

b. Sales to customers representing at least 10% of total sales:

2001 2000

Amount % of Total Amount % of Total

Customer

TSMC $ 3,610,896 38 $ 6,613,450 34

TwinMos Technology 1,069,672 11 - -

50

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION TABLE 1

FINANCING PROVIDED

For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars)

No. Financing Counter-Party Financial Financing Maximum Ending Interest Financing Reasons Allowance Collateral Transaction Financing

Name Statement Limit for Each Balance Balance Rate for Bad Debt Amount Company’s

Account Borrowing for the Item Value Financing

Company Period Amount

Limits

0 VIS VIS Holding Prepaid Note 1 $ 1,232 $ - - Prepaid research and $ - - $ - $ - Note 2

expenses development expenses

Note 1: Not exceeding 10% of the issued capital of VIS for each transaction entity, and also limiting to 30% of the issued capital of each transaction entity.

Note 2: Not exceeding 20% of the issued capital of VIS.


MARKETABLE SECURITIES HELDDecember 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Held Company Marketable Securities Name and Type Relationship with Financial Statement Account December 31, 2001 Note

Name the CompanyShares Carrying Value % of Market Value

(Thousand) (US$ in Ownership or Net Asset

Thousand) Value (US$ in

Thousand)

VIS Bond fund

President James - Short-term investments 28,409 $ 400,000 - $ 401,960

The GP - Short-term investments 25,923 350,000 - 355,763

The First Global Investment Trust Duo Li-2 - Short-term investments 26,278 350,000 - 352,465

Stock

VIS Associates Inc. Subsidiary Long-term stock investments 41,070 902,999 100 902,999

Powerchip Semiconductor Corp. Investee Long-term stock investments 202,185 2,651,216 9 3,263,269

Etron Technology Inc. Investee Long-term stock investments 5,617 275,766 3 281,864

Walsin Advanced Electronics Ltd. Investee Long-term stock investments 34,551 414,481 10 358,994

MEGIC Corporation Investee Long-term stock investments 16,500 177,000 9 188,581

Form Factor, Inc. Investee Long-term stock investments 267 64,360 1 64,360

United Industrial Gases Co., Ltd. Investee Long-term stock investments 3,357 38,716 2 54,872

VIS Associates Inc. Stock

VIS Investment Holding, Inc. Subsidiary of VIS Long-term stock investments 68 US$ 891 100 US$ 891

Associates Inc.

Equity

Silicon Valley Equity Fund - Long-term stock investments - US$ 7,894 35 US$ 7,894

Silicon Valley Equity Fund II - Long-term stock investments - US$ 5,705 14 US$ 5,705

ABN AMRO Bank Equity Certificates - Short-term investments 23,168 US$ 10,047 - US$ 11,339

Fund

Grand Palace Trust - Long-term stock investments - US$ 2,800 100 US$ 2,800

VIS Investment StockHolding, Inc.

VIS Micro, Inc. Investee Long-term stock investments 200 US$ 258 100 US$ 258

51


MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITALFor the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Company Marketable Securities Financial Statement Counter- Nature of Beginning Balance Acquisition Disposal Ending BalanceName Type and Name Account Party Relationship

Shares Amount Shares Amount Shares Amount Carrying Gain (Loss) Shares Amount

(Thousand) (Thousand) (US$ in (Thousand) Value on Disposal (Thousand) (US$ in

Thousand) Thousand)

VIS Bond fund

President James Short-term investments - - - - 35,548 $ 500,000 7,139 $ 100,263 $ 100,000 $ 263 28,409 $400,000

The GP Short-term investments - - - - 40,874 550,000 14,951 201,482 200,000 1,482 25,923 350,000

The First Global Short-term investments - - - - 49,017 650,000 22,739 302,698 300,000 2,698 26,278 350,000

Investment Trust Duo Li-2

National Investment Short-term investments - - - - 2,048 300,000 2,048 302,386 300,000 2,386 - -

FUBON JU-I Short-term investments - - - - 31,397 450,000 31,397 452,789 450,000 2,789 - -

Capital Save Income Short-term investments - - - - 15,295 200,000 15,295 201,139 200,000 1,139 - -

President Home Run Short-term investments - - - - 51,811 650,000 51,811 656,159 650,000 6,159 - -

Stock

VIS Associates Inc. Long-term stock investments Subsidiary - 23,570 464,077 17,500 597,783 - - - - 41,070 902,999

VIS ABN AMRO Bank Equity Short-term investments - - - - 23,168 US$10,047 - - - - 23,168 US$10,047

Associates Certificates

Inc.


TOTAL PURCHASE FROM OR SALE TO RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITALFor the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars)

Company Related Nature of Relationship Transaction Details Abnormal Transaction Notes/Accounts Payable or Receivable NoteName Party

Purchase/Sale Amount % to Payment Unit Payment Ending % of

Total Terms Price Terms Balance Total

VIS TSMC Major shareholder Sales $3,610,896 38 Net 45 days None None $ 574,402 52 -

TSMC Major shareholder Purchase 1,171,747 29 Net 45 days None None 322,122 45 -


RECEIVABLE FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITALDecember 31, 2001 (Amounts in Thousand New Taiwan Dollars)

Company Related Party Nature of Relationship Ending Balance Turnover Rate Overdue Amounts Received in Subsequent Period Allowance for Bad DebtsName

Amount Action Taken

VIS TSMC Major shareholder $574,402 3.98 $- - $- $11,488


NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES ON WHICH THE CORPORATION EXERCISES SIGNIFICANT INFLUENCEDecember 31, 2001 (Amounts in Thousand New Taiwan Dollars)

Investor Investee Company Location Main Businesses Original Investment Amount Balance as of December 31, 2001 Net Income Investment Note

Company and ProductsDec. 31, 2001 Dec. 31, 2000 Shares % of Carrying

(Loss) of the Gain (Loss)

(Thousand) Ownership ValueInvestee

VIS VIS Associates Inc. British Virgin Islands Investment $ 1,338,143 $ 740,360 41,070 100 $902,999 ($193,262) ($193,262) Subsidiar

52

6. Consolidated Financial Statements: Nil

7. Review and Analysis of Financial Status and Operating Results

(1) Analysis of Operating ResultsUnit : NT$K

Item 2001 2000 In/Decrease %

Gross Sales $ 9,475,384 $ 19,698,570 (10,223,186) (52)

Less : Sales Returns & Allow. 364,892 352,808 12,084 3

Net Sales 9,110,492 19,345,762 (10,235,270) (53)

Cost of Sales 12,570,095 14,827,285 (2,257,190) (15)

Gross Profit (3,459,603) 4,518,477 (7,978,080) (177)

Operating Expenses 1,255,238 1,472,262 (217,024) (15)

Income(loss) from Operations (4,714,841) 3,046,215 (7,761,056) 255

Non-operating Income 326,919 795,618 (468,699) (59)

Non-operating Expenses 4,904,842 1,471,113 3,433,729 233

Income(loss) before Tax (9,292,764) 2,370,720 (11,663,484) 492

Tax 600,341 203,025 397,316 196

Income(loss) after Tax ($ 8,692,423) $ 2,573,745 (11,266,168) 438

(2) Liquidity Analysis

Item 2001 2000 Change%

Current Ratio(%) 102.16 181.45 -43.70

Quick Ratio(%) 76.39 129.43 -40.98

8. Financial Forecast from 2000 to 2001Unit: NT$K

2000 Financial Forecast Financial Statement 2001 Financial Forecast Financial Statement

(Audited by CPA) (Audited by CPA)

Original First Revised Second Revised Amount Complete% Original First Revised Second Revised Amount Complete%

Net Sales 20,283,940 20,705,667 19,905,757 19,345,762 97.19 14,018,427 9,969,748 8,947,843 9,110,492 101.82

Cost of Sales 15,103,660 14,954,543 15,356,989 14,827,285 96.55 14,788,921 13,579,434 12,379,662 12,570,095 101.54

Gross Profit 5,180,280 5,751,124 4,548,768 4,518,477 99.33 -770,494 -3,609,686 -3,431,819 -3,459,603 100.81

Operating 1,715,685 1,573,898 1,509,196 1,472,262 97.55 1,390,283 1,237,723 1,263,158 1,255,238 99.37

Expenses

Loss from 3,464,595 4,177,226 3,039,572 3,046,215 100.22 -2,160,777 -4,847,409 -4,694,977 -4,714,841 100.42

Operations

Non-Operating 377,572 664,894 777,636 795,618 102.31 383,104 351,218 372,086 326,919 87.86

Incomes

Non-Operating 1,190,573 1,162,522 1,392,245 1,471,113 105.66 901,546 1,629,338 5,092,688 4,904,842 96.31

Expenses

Income before 2,651,594 3,679,598 2,424,963 2,370,720 97.76 -2,679,219 -6,125,529 -9,415,579 -9,292,764 98.70

Income Tax

Net Income 2,651,594 3,839,931 2,585,296 2,573,745 99.55 -2,679,219 -5,525,529 -8,815,580 -8,692,423 98.60

53


Representation Letter

The Affiliates’ Relationship Report for the year ended December 31, 2001 was in conformity with the requirements of Securities and

Futures Committee (SFC) in the Republic of China (ROC), the Regulations Governing the Preparation of Affiliates’ Combined

Operating Report, Combined Financial Statement and Relationship Report. The aforementioned disclosures are free of any major

discrepancy from the financial statements as of December 31, 2001.

Very truly yours,


By

MORRIS CHANG

Chairman

54


Independent Auditors’ Report

The Board of Directors and the Shareholders


We have reviewed the affiliates’ relationship report of Vanguard International Semiconductor Corporation as of and for the year

ended December 31, 2001. Our reviews were made in accordance with the Guidelines for the Review of Affiliates’ Relationship

Report issued by the Securities and Future Commission of the Republic of China. A review carried out in accordance with the

foregoing guideline is substantially less in scope than an audit performed in accordance with generally accepted auditing standards,

the objective of which is the expression of an opinion regarding the affiliates’ relationship report taken as a whole. Accordingly, we

do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the company’s affiliates’ relationship

report referred to above in order for them to be in conformity with "Regulations Governing the Preparation of Affiliates’ Combined

Operating Report, Combined Financial Statement and Relationship Report" issued by the Securities and Futures Commission of the

Republic of China.

TN Soong & Co.

55

1. Affiliates Information

1. Affiliated Companies Chart

Vanguard International Semiconductor Co.

100%

VIS Associates Inc..

100%

VIS Investment Holding, Inc.

100%

VIS Micro, Inc.

2. Business Scope of the Affiliated Companies

Company Business activity

VIS Associates Inc. IC business investment

VIS Investment Holding, Inc. IC business investment

VIS Micro, Inc. Conduct service and marketing activities

56

Specific NotesSpecific Notes

Table 1

Affiliates Information

Unit: US$K

Company Date of Incorporation Place of Registration Paid-In Capital Business Activities

VIS Associates Inc. Sep. 24, 1996 Trident Chambers, PO Box 146, Road Town US$41,070 IC business investment

Tortola, British Virgin Islands

VIS Investment Nov. 15, 1996 2585 Junction Avenue US$6,750 IC business investment

Holding, Inc. San Jose, CA95134

VIS Micro, Inc. Nov. 21, 1996 2585 Junction Avenue US$200 Conduct service and marketing

San Jose, CA95134activities

NOTE: Foreign exchange rate on the reporting date is shown below:

US$1 = NTD$34.999

Table 2

VIS Shareholders Representing Both Holding Companies and Subordinates

Unit: NT$K, Except Shareholding

Reasoning Name Shareholding Date of Place of Paid-In Business

Shares Holding %Incorporation Registration Capital Activities

-None-

The presumed interested parties representing both holding companies and subordinates include the company’s Director, the shareholders conducting

business on behavior of the company, and the shareholder.

Table 3

Rosters of Directors, Supervisors, and Presidents of VIS’s Affiliated Companies

Unit: Thousand Shares

Company Title Name Shareholding

Shares Holding

VIS Associates Inc. Director Morris Chang, Paul Chien, Robert Hsieh 41,070 100%

VIS Investment Holding, Inc. Director Morris Chang, Paul Chien, Robert Hsieh 68 100%

VIS Micro, Inc. Director Paul Chien, Robert Hsieh, Stephen Pletcher 200 100%

Table 4

Operational Highlights for VIS’s Affiliated Companies

Unit: NT$K, except EPS($)

Company Paid-In Assets Liabilites Net Net Income from Net Income EPS Capital Worth Sales Operation (net of tax) (net of tax)

VIS Associates Inc. $ 1,437,409 $ 976,524 $ 73,526 $ 902,999 $ 21,227 ($ 203,511) ($ 200,497) ($ 4.88)

VIS Investment Holding, Inc. 236,243 34,497 3,325 31,172 21,227 269 657 9.73

VIS Micro, Inc. 7,000 12,652 3,625 9,028 21,227 1,011 730 3.65

57

Related Party Chart

Taiwan Semiconductor Manufacturing Company, Ltd.

25%

Vanguard International Semiconductor Co.

Table 5

Relationship Between the Subsidiary and the Controlling Company

Unit: Thousand Shares; %

Name of controlling company Nature of control Holding and pledge of shares by the Representatives of the controlling companycontrolling company as directors, supervisor or manager

Shares Holding Shares pledged Position Name

Taiwan Semiconductor The same chairman 556,133 25% 0 Director F.C. TsengManufacturing Company, Ltd.

Director Rick Tsai

Director Paul Chien

Director Robert Hsieh

Supervisor Harvey Chang

Table 6

Transaction of Purchase or Sales with Related Party

Unit: NT$K ; %

Transactions with controlling company Transaction terms with Common Reason for Accounts and notes Delinquent accounts receivable Remarkcontrolling company transaction terms difference receivable (payable)

Purchase Amount % of total Gross profit Unit Collection Unit Collection Ending % of total accounts Amount Management Bad debt (Sales) purchase margin for Price terms Price terms Balance and notes receivable allowance

(sales) goods sold (payable)

(Sales) $ 3,610,896 -38% - - 45days - 30-60days - $ 574,402 52% - - $ 11,488 -

Purchase 1,171,747 29% - - 45days - 30-60days - (322,122) -45% - - - -

58

Table 7

Prpoerty TransactionsUnit:NT$K

Transaction Name of Property Transaction Transaction Payment Payment Gain/Loss Nature of Former transaction detail Decision Price Purpose of Other

Type date Amount Term Satatus relationshipOwner Relationship Transfer Date Amount

Maker Reference acquisition or terms

(acquisition disposal and

or disposal) use status

Acquisition 3013208017-0188-001 06/22/2001 $95,040 T/T Normal $- The same APPLIED Supplier 12/11/2000 $99,138 General Contract For operation None

DCVD CENTURA SYSTEM chairman Manager

Acquisition 3013208088-0050-007 02/01/2001 467 T/T Normal - The same TOKYO Supplier 03/01/1995 28,776 Manager Contract For operation None

TOK SOG COATER chairman

Acquisition 3013208090-0084 04/12/2001 75,125 T/T Normal - The same HISSAN Supplier 12/07/1995 86,478 General Contract For operation None

CHEMICAL WET STATION chairman Manager

Acquisition RT1-N100904-0001-000 06/28/2001 95,040 T/T Normal - The same APPLIED Supplier 12/13/2000 99,138 General Contract For operation None

DCVD CENTURA SYSTEM chairman Manager

Acquisition 3030502016-0002- 07/02/2001 2,292 T/T Normal - Corporation’s < Self_Manufacture > Manager Contract For operation None

019,020 director and

POWER SYSTEM supervisor

MATERIAL:POWER CABLE

Table 8

Financing AccommodationUnit: NT$K; %

Transaction type Max. Year-end Interest Accrued Financing Reason for Collateral acquired How trading Baddebt (lending or balance balance range interest term financing (provided) decision allowanceborrowing) for the year was made

Name Amount

None

Table 9

Assets LeasingUnit:NT$K

Transaction Object Leasing Nature of Rent Collection Compared Total rent Collection Other termstype Period Leasing Reference (payment) with marketl for the period (payment)

(let or lease) Name Location terms leve status

Let VIS OFFICE VIS 1B Jan,2001~ Business Normal T/T Reasonable 13,583 Normal None4F/7F/8F Dec,2001 leasing

Let VIS OFFICE Industry Jan,2001~ Business Normal T/T Reasonable 308 Normal NoneE.RD.IV Mar,2001 leasing

Table 10

Endorsement / GuaranteeUnit: NT$K ; %

Max. Year-end balance Reason for Collateral Conditions or date Amount recognized in Violation of balance

Amount % of net valueofprovision

Name Q’ty Valuefor relief of guarantee financial statement or relevant operational

provided in financialendorsement/ responsibility or recovery amount of loss incurred rules

statementsguarantee of collateral

None

Relationship ReportOther major effective transactions in financing or business.

The Corporation made a manufacturing agreement with TSMC on February 14, 2000.

59

2. Statement of Internal ControlAs of 02/01/2002

VIS has conducted a self-assessment of internal controls for the period of January 1, 2001 to December 31, 2001, based on VIS’s

internal control system. The results are as follows:

1. VIS acknowledges that the Board of Directors and the management are responsible to establishing, to performing, and to

maintaining a sound internal control system and that it has already been established. The purposes of the internal control system

are to provide a reasonable assurance of achieving company’s goals of the efficiency and effectiveness of operations (including

the profit, performance, and safeguarding of assets..etc.), the reliability of financial reports, and the compliance with applicable

laws and regulations.

2. The Internal control system has an inherent constraint. No matter how impeccable the system is, it can only provide a reasonable

assurance of achieving the three goals above-mentioned. Due to the changes in the environment and changing circumstances.

The effectiveness of the internal control system may very accordingly. However, VIS’s internal control system has self-monitoring

functions with which once a shortcoming is found, action will be taken to cure.

3. VIS evaluates the effectiveness in the design and performance of its internal control system in accordance with the items for

evaluating the effectiveness of internal control system as indicated in the points Governing the Establishment of Internal Control

System by Public Companies¡]the "Points"¡^announced by the Securities and Futures Commission of the Ministry of Finance.

Based on management control process. The items of the assessing the internal control system specified in the points divide

internal control into five components: (1) Control Environment; (2) Risk Assessments; (3) Control Activities; (4) Information and

Communication; (5) Monitoring. Each component comprises certain factors. For the said factors please refer to the point.

4. VIS has evaluated the effectiveness in the design and performance of its internal control system in accordance with the aforesaid

factors.

5. Based upon the results of evaluation above-mentioned, VIS is of the opinion that the design and performance of its internal

control. Including the efficiency and effectiveness of operations reliability of financial reports, and compliance with applicable

laws and regulations during the period of January 1, 2001 to December 31, 2001 is effective and provide a reasonable assurance

of achieving the above-mentioned goals.

6. This Statement of Internal Control will be a prominent feature of VIS’s annual report and prospectus and will be released to the

public. Should any statement herein involve forgery, concealment or any other illegality, Article 20, 32, 171 and 174 of the

Security Transaction law shall apply.

7. This Statement of Internal Control has been approved by VIS’s Board of Directors at the meeting of Feb. 01, 2002. All agree with

this statement of internal control.


Morris Chang

Chairman of the Board

S.J. Paul Chien

President

60

3. Major contents of record or written statements made by any director orsupervisor which specified his/her dissent to important resolutions passedby the Board of Directors during 2001 or the period from January 1, 2002to February 28, 2002: Nil

4. Private Placement Securities: Nil

5. Balance of VIS Common Shares acquired, disposed ofand held by subsidiaries: Nil

6. Other Necessary Supplement: Nil

61

Morris Chang, Chairman

123 Park Ave-3rd., Science-Based Industrial Park

Hsinchu, Taiwan, R.O.C.

TEL: 886-3-5770355 FAX: 886-3-5630666


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