mti 2003 english annual report · the year 2003 was a period of major organizational reform and...

Contents

Report To Shareholders 2

MTI Product Overview 4

Financial Review 7

Selected Financial Data 7

Consolidated Results of Operations 8

Consolidated Financial Statements 11

Notes to Consolidated Financial Statements 15

Independent Accountant’s Report 54

Corporate Directory 55

2

REPORT TO SHAREHOLDERS

Dear Shareholders, The year 2003 was a period of major organizational reform and financial progress for MTI. MTI made good progress in the last year, and on behalf of the entire management team, we are pleased to report our successful expansion into greater China market, and a turnaround in bottom lines. In this letter, we will summarize some of those major achievements and financial results. Financial results: We are pleased to report a 199% increase in operating income for the year of 2003. The improvement in operating income is very encouraging, and is the result of all the reforms mentioned below. Total revenues for the year reached NT$3,573 million. Gross margin was NT$778 million, and the operating income was NT$205 million. The non-operating loss stood at NT$182 million while net profit after-tax was NT$46 million. Earnings per share for the year 2003 is NT$0.11. Vision: MTI’s vision is to become world’s leading manufacturer in wireless communication equipments. We strive to bring greatest value for our customers at the most competitive price. The pick-ups in customer demand and world economy as a whole give us great confidence for our future and our way forward. In 2004, our business will experience rapid growth with more revenue streams coming from new products launch, continual market expansion, and greater inroad into China market. Organizational reform: In order to carry out the execution for reaching our strategic objectives, MTI has continuously invested significant resources on employee development programs to enhance overall competitiveness, enabling to strengthen customer relationships for market in China and other new business expansion. MTI’s strong relationship with Stratex, Lucent, Echostar, UTStarcom and Thomson has been more closely connected. Meanwhile, the introduction of new product Wi-Fi leaves us very well positioned for the future. Supply Chain Management (SCM): Supply chain management was one of the most important initiatives taken in 2003. With the aims of reducing customer response time and better utilization of production resource, SCM integrated MTI’s entire value chain by redesigning all interface systems from order initiation to final shipment. The project proved to be a great success, with immediate result seen in lower cost and better quality. Cost reduction and new product launch: Customers today are becoming more and more demanding. With competition intensifying on daily basis, MTI has taken multiple steps to reduce cost, and enhance its market competitiveness. Cost-effective concepts are being introduced into new product designs as well as existing products. Apart from our relentless efforts to drive down dost, new products are being launched to create more revenue source, including Micro controller LNB, VSAT Broadband Direct way, next generation of wideband digital radio “Eclipse”, power amplifier for CDMA and wireless LAN “Wi-Fi” products. China market expansion: MTI’s Wuxi plant in China has become one of the major suppliers of PHS power amplifier for UTStarcom. Armed with highly efficient production facility, and top quality products, MTI quickly became UTStarcom’s key strategic partner in 2004. Backed by MTI’s solid RF competence and over 20 years of manufacturing experience, Wuxi is set to capture the emerging opportunities coming from greater China market.

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Conclusion: In summary, we have had a challenging year, and a fantastic final quarter. We have an ambitious vision, a clear strategy, and detailed plans. We expect to build on our strong RF competence and deliver increasing benefits to our customers, staff, community and shareholders. To achieve our goals requires strong dedication and commitments from our entire staff and management team. They have all made great efforts in the past year, in the face of considerable change and upheaval. They have demonstrated the MTI ‘can-do’ culture and to that end, we thank them sincerely for their efforts. Finally, we would like to thank the colleagues on the board for their commitments and most importantly, we thank you, the shareholders, for your ongoing support. Patick H.Y.Wang Chi-Chia Hsieh Andrew Chu Chairman of the Board Vice Chairman of the Board President

4

MTI Product Overview

Digital Microwave Point to Point Radios

The microwave, Millimeter-wave transceivers and ODUs are used in commercial point-to-point systems and point-to-multipoint systems to enable mobile networks transmission or fixed-access wireless communications. All of these products are tailor-made to fit customers' specifications and incorporate our RF design and integration expertise to ensure high performance. With over 19 years of accumulated design and manufacturing expertise in terms of telecommunication and satellite RF modules and sub-systems, MTI can adapt to different types of manufacturing ("High Mix / High Volume / Production") with multi-technology, multi-level manufacturing expertise. Since 1991, MTI has developed in-house environmental and reliability laboratories for specification verification tests, such as Thermal Shock, Temperature Cycling, Humidity, Leakage (Immersion), Salt Spray, ESD, Transit Drop, and Electrical Safety

Microwave radio offers several advantages over leased lines or other cable-based transmission alternatives for mid- and short- distance link such as between telecommunications networks, among commercial buildings or in rural and urban areas. MTI has been manufacturing PMP Radio RF units for some of the leading global PMP system providers. The company's mass production experience is in the 10/26/28/39 GHz frequency bands. We also have well-established sub-10GHz RF Front End design expertise, including 2.4/3.5/5.8 MMDS, MDS and UNII-band products.

Entire frequency bands from 6/7/8/13/15/18/23/26/28/38 GHz

Fully integrated modules and ODU assembly

MTI has full range of product line featuring microwave transceivers and outdoor units (ODUs) that range in frequency from 6GHz to 40GHz. Through a close partnership with the leading fixed wireless equipment providers in the industry, MTI engineers high-performance, point-to-point integrated access solutions transporting voice, data and Internet traffic for network operators and end-users throughout the world.

Direct Broadcast Satellite (DBS) Receiving Equipment

In general, most of the household uses small size dish antenna (18inch-3foot) to receive the TV program directly from the satellite broadcast. The transmission of audio and video signals via satellite is direct to the end user.

Early Satellite systems used what was called a LNA or Low Noise Amplifier and no conversion was done in the LNA. LNB stands for Low Noise Block down converter and is located at the focal point (in the nose cone) of the satellite dish antenna and amplifies the very weak received satellite signal approximately 1000 times, then converts the received microwave satellite signal to a lower frequency so that not as much signal will be lost in the coaxial cable between the dish and the receiver. There are two main types of LNB's, one is LNB and the other is LNBF. The LNBF combines the LNB

and feed-horn into a single unit and the polarity is switched when the receiver changes the voltage (either 13 or 18 volts) going to the LNBF at the dish. Depending on what voltage is sent to the LNBF by the receiver, either the horizontal or vertical antenna probe inside the throat of the LNBF will be selected.

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MTI, the world’s leading LNB manufacturer, produces complete LNB products to meet various requirements of different countries. As of today, MTI’s LNB products serve more than 78 countries in the world. MTI's high quality products are not only widely accepted by end users but also qualified by worldwide Pay TV operators in 2003. By working closely with its satellite systems customers, MTI becomes fully aware of their needs for enhancing the functions and performance of LNB systems. To further and continuously improve its competitiveness, MTI has expanded its LNB manufacturing site from Taiwan to Wuxi, China in the middle of 2001 to realize cost advantages and capture, in the long run, the emerging China opportunities.

Mobile Base Station Transceivers and Modules

Mobile base stations are an integral element of a mobile telephone network linking mobile telephone users with the public telephone network. A base station must operate at the lowest possible power to avoid interfering with other base stations and mobile telephone users in the network. The transceiver is one of the key components in the mobile base station, which determines to a large extent the performance and reliability of the mobile base station and require high degree of high power RF design know-how and manufacturing experience.

Equipped with advanced wireless communications technology for 2G/2.5G/3G mobile base station subsystems, MTI offers customers highly-integrated RF design and manufacturing solutions.

MTI’s products in this area include the Rx Front-End Unit, Transceiver, Tower Mounted Amplifier, and Power Amplifier. Mobile communication is becoming the primary mode of communication in both developed and developing countries. Typically based on 2.5G technologies (enhanced second-generation mobile technologies), most of these countries now have data services available that will lead to significant changes in the way people exchange information for business and personal use. Driven by the increasing number of worldwide mobile subscribers and higher demands for data capacity, the mobile communication industry is expected to continue its growing needs for more mobile stations.

With intensive knowledge in the RF technology, MTI not only has a variety of related product lines covering various standards on the 800MHz, 900MHz, and 1800MHz bands, but develops base station related components, including power amplifier, low noise amplifier, and tower-mounted integrated receivers. Very Small Aperture Terminal (VSAT)

VSAT is a satellite – based private communications network that can perform services such as electronic banking, instant credit checks and reservation booking. For banks, hotels, mega chain stores, or other large organizations, often with thousand of dispersed branch sites, routine management operations can be a tremendous burden. VSAT systems are an ideal management tool for simplifying corporate tasks through more streamlined inter-company communications. VSAT is also a popular "Leap-frog" method for rapidly expanding the communications infrastructure in developing countries. And, for countries of islands, laying ground lines is

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prohibitively expensive. VSAT systems provide cost-effective solutions for bringing basic communications to remote locations.

MTI specializes in designing and manufacturing VSAT satellite RF transceivers. We offer a complete satellite transceiver product line covering almost the entire C-, Ku- and Ka-Band spectrum in use by commercial and consumer satellites nowadays. Take C-Band and Ku-Band for instances, the compact ODU and single IFL cable connection make installation easier and allow flexible system design while user friendly operation eliminates the need for extensive training.

Hughes Network Systems, a leading VSAT network systems house with a significant global market, is one of MTI’s valued customers with whom we combine our technology to help people with their communication needs. MTI has also built up the strategic partnership with US Monolithics Inc., a microwave MMIC key supplier and transceiver design house, to further enhance the leadership in satellite communications market.

Wireless LAN

MTI has unique ability to serve this market and bring a new line of business. Combined over 20 years of RF, software, and low-cost manufacturing experience within MTI Group, customers will enjoy carrier-grade coverage and reliability. Established in Q3 2002, the large-scale, carrier-grade WLAN products positioned as WLAN Extender for - Large-Scale WLAN Deployment in Power, Reliability and coverage.

The Internet has transcended the limitations of distance and its growing popularity has enabled online connections in conference rooms, courtyards, coffee shops, and even in the park. Mobile workers include those must move around during work, such as storage personnel who need to monitor inventory levels in a large warehouse or medical staff who need to make regular visits to different patients in the hospital. The most important question is how to overcome the barriers of location to access accurate information and instant updates wherever these workers are. MTI's EXTENDER series offers the best solution to improve the way and

efficiency in which these people work.

The EXTENDER series developed by MTI complies with the base-station manufacturing design standards of the telecom industry and have passed rigorous environmental tests, functioning within the temperature range of -33°C to +55°C. The built-in double lightning protector not only protects the outdoor unit itself, but also prevents the electrical surge currents scurrying from damaging any other equipment linked to the unit. AP5811 possesses access point and bridge functionalities, servicing users within an 800-meter radius and communicating with a BR5811 bridge 5 kilometers away. At

a maximum backbone bandwidth of 54 Mbps, AP5811 is the best solution in establishing a Hotzone.

.

7

Financial Review The following sections review the consolidated financial results of Microelectronic Technology, Inc. and its subsidiary for the year 2003, 2002 and 2001.

Selected Financial Data (consolidated)

2003 2002 2001

(Expressed in thousands of New Taiwan dollars, except per share data)

Income Statement Data:

Net operating revenue 3,562,303 3,685,159 4,673,141

Operating cost (2,797,036) (3,034,102) (3,821,135)

Gross profit 765,267 651,057 852,006

Operating expenses (626,003) (669,623) (712,158)

Operating income (loss) 139,264 18,596 139,848

Non-operating income (expenses) (116,998) (746,343) 645,917

Consolidated income (loss) before tax 22,266 (727,747) 785,765

Income Tax benefits (expenses) 23,844 134,884 (112,038)

Net income (loss) 46,110 (611,459) 673,727

Earnings Per Share Data:

Net earnings per share (NT$) (1) 0.11 (1.43) 1.58

Balance Sheet Data

Total assets 8,097,961 7,938,929 7,244,243

Current liabilities 1,830,705 1,616,596 1,386,530

Long-term liabilities 1,568,302 1,752,172 773,486

Other liabilities 288,511 329,836 431,778

Stockholders' equity 4,410,443 4,240,325 4,652,449

Other data:

Capital expenditure 74,273 162,187 269,754

Cash flows provided by operating activities 235,198 368,295 901,511

(1) Based on the outstanding number of common shares at the end of each year after retroactively adjusting for

share dividends issued.

8

CONSOLIDATED RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements, together with the notes thereto, included elsewhere in this report.

NET OPERATING REVENUE MTI's consolidated annual revenue totaled NT$3,562 million, slightly lower than 2002 level of NT$3,685 million mainly as result of the industry slowdown. The revenue can be categorized into two major sectors. The satellite communication sector contributed 39% of the total sales, whereas the telecommunication sector represented 61% of the total sales. Even the industry environment was still in the gloom, MTI kept on developing new product lines and markets. For instance, PHS power amplifier, Wireless LAN and 3G power amplifier were new products for Telecommunication sector. As for Satellite communication sector, it could be seen that new markets and clients explored in 2003 including BSkyB in the UK, US Monolithics Inc. and Echostar Communications in the U.S. Geographically, MTI exported the majority of its 2003 annual output overseas, with North America, Europe and Mainland China taking 53%, 19% and 18%, respectively, of annual revenue.

GROSS PROFIT The consolidated gross profit in 2003 represented 21% of the total consolidated operating revenue and an increase of 18% from that reported in 2002.

Throughout 2003, MTI strove for low cost manufacturing leveraged on our fruitful supply chain management and disciplined cost control associated with the smooth ramp up of our operations in the PRC. The result was the improvement of our profit margins; the gross margin improved from 18% in 2002 to 21.3% in 2003.

61%

Sales by Sector

Telecommunications

Satellite Communications

39%

852

651765

0

200

400

600

800

1000

2001 2002 2003

Gross Profit

9

OPERATING INCOME AND LOSS Reviewing the overall expenses in 2003, the operating expense decreased 7% from NT$670 million to NT$626 million while the R&D expense increased 0.3% from NT$258 million to NT$259 million.

Following the improved profit margin with the savings of marketing and administrative expenses, the operating income consequently soared from minus NT$19 million in 2002 to NT$139 million in 2003.

NON-OPERATING INCOME AND LOSS With regard to non-operating income, there was a significant improvement from the loss of NT$ 728 million in previous year to that of NT$117 million in 2003 mostly due to the affection of other income and other investment loss. MTI recognized a permanent impairment in value of InterWAVE Communications International Ltd. as other investment loss amounting of $127 million compared with that of 2002 in the amount of $758 million. Meanwhile, other income of NT$ 246 million mainly came from cash back of bad debt for Asia Global Crossing.

In addition, the net non-operating loss mostly consisted of NT$87.5 million long-term investment loss on equity-method investees such as Global PCS, NT$42 million net interest expense and NT$ 35 million provision for obsolescent inventory.

TAXATION

MTI carried a deferred tax asset of NT$76 million as of December 31, 2003. When we reported our financial results for year 2002, the company showed a deferred tax asset balance amounted to NT$52 million. In accordance with article 22 of the R.O.C. Financial Accounting Standards Board regulation (FASB), no actual cash payment for income tax would be expected due to the deferred tax benefit resulting from funds used in equipment purchase, R&D, professional personnel training and creation of internationally acceptable brand of products.

645

626

712

67013%

15%

18% 18%

580

600

620

640

660

680

700

720

2000 2001 2002 2003

Mill

ion

in N

TD

0%2%4%6%8%10%12%14%16%18%20%

Operating expenseas a % of net sales

514692 646

-728

-117

-800-600-400-200

0200400600800

1999 2000 2001 2002 2003

Non-Operating Income (Loss)

10

NET INCOME AFTER TAX

With well-controlled operating expenses and decrease of investment loss, MTI's net income increased 108% in 2003. In sum, the net profit before tax was NT$22 million and the after tax profit was NT$ 46 million, which represented a clear turnaround of our operations compared with the net loss of NT$611 million in 2002.

LIQUIDITY AND CAPITAL RESOURCES As of December 31 2003, MTI's total assets were NT$8,098M including NT$ 3,086 million cash on hand, while total liabilities were NT$3,688M. The debt to total asset ratio remained at a healthy level of 46%. MTI’s current and acid ratios were 282% and 236%, respectively. Shareholders’ equity equaled to 54% and 53% of total assets in 2003 and 2002, respectively. These liquidity ratios plus the strong cash flow position strengthened MTI’s solid debt-servicing capability. In addition, both accounts receivable and inventory turnover days shortened from 83 and 134 days to 76 and 110 days respectively, as a result of our efficient working capital management.

Aggregate cash used for investing activities during each of those periods showed an outflow of NT$1,068 million and NT$1,190 million respectively in 2003 and 2002. Among NT$1,068 investing activities for 2003, NT$938 million was short-term investments for bond fund.

0%5%

10%15%20%25%30%35%40%45%50%

2000 2001 2002 20030%

50%

100%

150%

200%

250%

300%

350%

Debt to Asset RatioCurrent Ratio

11

MICROELECTRONICS TECHNOLOGY, INC. AND CONSOLIDATED SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001, 2002 AND 2003

(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)

2001 2002 2003 2001 2002 2003

ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY

Current Assets Current Liabilities Cash and cash equivalents (Note 4(1)) $ 1,599,197 $ 1,926,123 $ 1,279,371 Short-term loans (Note 4(7)) $ 318,402 $ 292,574 $ 726,651 Short-term investments (Note 4(2)) 508 841,183 1,806,468 Accounts payable (Note 4(8) and 5) 556,320 693,211 526,268 Notes and accounts receivable - net Accrued expenses (Note 5) 280,627 228,170 241,992 (Notes 4(3) and 5) 681,566 723,576 769,208 Other payable 79,379 96,207 54,137 Other receivables (Notes 4(16) and 5) 140,655 250,719 305,452 Advance receipts 22,476 7,007 9,900 Other financial assets-current 192,655 - 4,028 Current portion of long-term liabilities (Notes 4(6) and 4(9)) 73,222 233,012 217,300 Inventories - net (Note 4(4)) 1,236,220 1,008,098 766,478 Provision for product warranty 47,768 51,807 39,557

Prepaid expenses and prepayments(Note 5) 11,484 31,040 59,011 Other current liabilities 8,336 14,608 14,900 Deferred income tax assets (Note 4(16)) 136,214 134,035 163,507 1,386,530 1,616,596 1,830,705

3,998,499 4,914,774 5,153,523 Long-term Liabilities Long-term Investments (Note 4(5)) Bonds payable (Notes 4(10)) - 1,215,675 1,249,106

Long-term investment accounted Long-term loans (Notes 4(6) and 4(9)) 773,486 536,497 319,196 for under the equity method 281,686 304,695 237,728 773,486 1,752,172 1,568,302

Long-term investment accounted Other Liabilities for under the cost method 2,150,652 1,422,206 1,173,430 Accrued pension expense (Note 4(15)) 170,511 207,513 160,758

Allowance for long-term investments ( 701,313 ) ( 172,955 ) ( - ) Deferred income tax liabilities (Note 4(16)) 218,714 81,651 87,277 1,731,025 1,553,946 1,411,158 Other financial assets – noncurrent (Note 5) - - 190,617 Other liabilities (Note 5) 42,553 40,672 40,476 Fixed Assets - Net (Notes 4(6) and 5) 431,778 329,836 288,511

Buildings 725,780 795,959 809,194 Total liabilities 2,591,794 3,698,604 3,687,518 Machinery 1,408,129 1,493,222 1,466,656 Shareholders' Equity Transportation equipment 2,573 1,292 1,292 Common stock (Notes 4(11) and 8) 3,830,934 4,261,626 4,261,626 Furniture and fixtures 77,379 52,705 43,326 Capital reserve (Note 4(13)) 13,328 12,024 10,664 Leasehold improvements 2,825 2,825 12,667 Retained earnings (Note 4(14)) Less: Accumulated depreciation ( 864,421 ) ( 972,876 ) ( 1,077,424 ) Legal reserve 155,545 222,876 - Prepayment for equipment 24,713 10,407 1,570 Special reserve - 129,988 -

1,376,978 1,383,534 1,257,281 Undistributed earnings / (deficit) 782,631 ( 461,182 ) ( 60,848 ) Other Assets Unrealized loss on long-term investments (Note 4(5)) ( 393,640 ) ( 172,955 ) -

Leased assets (Note 5) 99,013 38,142 36,308 Cumulative translation adjustments 263,651 247,948 199,001 Refundable deposits 3,189 3,179 2,147 Total shareholders' equity 4,652,449 4,240,325 4,410,443 Deferred charges 35,539 45,354 46,927 Commitments and Contingent Liabilities (Notes 5 and 6)

137,741 86,675 85,382 TOTAL ASSETS $ 7,244,243 $ 7,938,929 $ 8,097,961 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,244,243 $ 7,938,929 $ 8,097,961

The accompanying notes are an integral part of these financial statements. See report of independent accountants dated February 10, 2004.

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MICROELECTRONICS TECHNOLOGY, INC. AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT EARNINGS PER SHARE

WHICH IS EXPRESSED IN NEW TAIWAN DOLLARS)

2001 2002 2003 Operating revenue (Note 5) $ 4,709,392 $ 3,714,966 $ 3,604,418 Sales returns and allowances ( 36,251 ) ( 29,807 ) ( 42,115 ) Net operating revenue 4,673,141 3,685,159 3,562,303 Operating costs (Note 4(18) and 5) ( 3,821,135 ) ( 3,034,102 ) ( 2,797,036 ) Gross profit 852,006 651,057 765,267 Operating expenses(Note 4(18) and 5) Marketing expenses ( 294,929 ) ( 215,535 ) ( 213,656 ) Administrative expenses ( 189,675 ) ( 195,706 ) ( 153,225 ) Research and development expenses ( 227,554 ) ( 258,412 ) ( 259,122 ) ( 712,158 ) ( 669,653 ) ( 626,003 ) Operating income / (loss) 139,848 ( 18,596 ) 139,264 Non-operating income Interest income 56,799 31,327 31,560 Gains on disposal of property and equipment (Note 5) 3,567 480 3,166 Gains on disposal of investments, net (Note 4(5)) 298,992 306,665 - Other income (Note 5) 542,754 118,212 245,590 902,112 456,684 280,316 Non-operating expenses Interest expense ( 105,833 ) ( 69,167 ) ( 73,200 ) Investment loss on equity-method investees (Note 4(5)) ( 98,888 ) ( 69,944 ) ( 87,528 ) Other investment loss (Note 4(5)) - ( 758,151 ) ( 127,186 ) Loss on disposal of investment, net (Note 4(5)) - - ( 49,396 ) Loss on market value decline and obsolescence of

inventories ( 25,931 ) ( 113,355 ) ( 35,227 ) Other expenses (Note 4(18) and 5) ( 25,543 ) ( 173,814 ) ( 24,777 ) ( 256,195 ) ( 1,184,431 ) ( 397,314 ) Income / (loss) before income tax 785,765 ( 746,343 ) 22,266 Income tax (expense) / benefit (Note 16) ( 112,038 ) 134,884 23,844 Net income / (loss) $ 673,727 ( $ 611,459 ) $ 46,110 Basis earnings per common share (Note 4 (17)) Income / (loss) before income tax $ 1.84 ( $ 1.75 ) $ 0.05 Net income / (loss) $ 1.58 ( $ 1.43 ) $ 0.11 Fully diluted earnings per common share (Note 4 (17)) Income / (loss) before income tax $ 1.84 ( $ 1.75 ) $ 0.05 Net income / (loss) $ 1.58 ( $ 1.43 ) $ 0.11 The accompanying notes are an integral part of these financial statements. See report of independent accountants dated February 10, 2004.

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MICROELECTRONICS TECHNOLOGY, INC. AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT NUMBER OF COMMON SHARES WHICH IS EXPRESSED IN THOUSANDS OF SHARES)

Capital Reserve Retained Earnings Common Shares Undistributed Unrealized loss Cumulative Gain on disposal Donated Long-term Special Earnings / on long-term translation Number Amount of fixed assets assets investment Legal reserve reserve (Deficit) investments adjustments Total 2001 Balance at January 1, 2001 312,863 $ 3,128,631 $ - $ - $ 3,043 $ 70,460 $ - $ 904,367 $ - $ 132,722 $ 4,239,223 Appropriation for legal reserve - - - - - 85,085 - ( 85,085 ) - - - Unappropriated earnings used for capital increase 62,572 625,726 - - - - - ( 625,726 ) - - - Employees’ bonus capitalized 7,658 76,577 - - - - - ( 76,577 ) - - - Directors’ and supervisors’ remuneration - - - - - - - ( 7,658 ) - - ( 7,658 ) Net income for 2001 - - - - - - 673,727 - - 673,727 Transfer of gain on disposal of fixed assets to capital

reserve - - 417 - - -

( 417 ) - - -

Change in capital reserve due to change in ownership of long-term investments - - -

- 9,868 -

- - - 9,868

Unrealized loss on long-term investments of investee companies - - -

- - -

- - ( 393,640 ) - ( 393,640 )

Translation adjustments - - - - - - - - - 130,929 130,929 Balance at December 31, 2001 383,093 3,830,934 417 - 12,911 155,545 - 782,631 ( 393,640 ) 263,651 4,652,449 2002 Appropriation for legal reserve - - - - - 67,331 - ( 67,331 ) - - - Appropriation for special reserve - - - - - - 129,988 ( 129,988 ) - - - Unappropriated earnings used for capital increase 38,310 383,093 - - - - - ( 383,093 ) - - - Employees’ bonus capitalized 4,760 47,599 - - - - - ( 47,599 ) - - - Donated assets received - - - 1,360 - - 1,360 Directors’ and supervisors’ remuneration - - - - - - - ( 4,760 ) - - ( 4,760 ) Net loss for 2002 - - - - - - - ( 611,459 ) - - ( 611,459 ) Transfer of gain on disposal of fixed assets to capital

reserve, in 2001, transferred to undistributed earnings - - ( 417 ) - - -

- 417 - - -

Change in capital reserve due to change in ownership of long-term investments - - -

- ( 2,247 ) -

- - - - ( 2,247 )

Unrealized loss on long-term investments of investee companies - - -

- - -

- - 220,685 - 220,685

Translation adjustments - - - - - - - - - ( 15,703 ) ( 15,703 ) Balance at December 31, 2002 426,163 4,261,626 - 1,360 10,664 222,876 129,988 ( 461,182 ) ( 172,955 ) 247,948 4,240,325 2003 Additional paid-in capital used for covering deficit - - - ( 1,360 ) - - - 1,360 - - - Legal reserve used for covering deficit - - - - - ( 222,876 ) - 222,876 - - - Special reserve transferred to undistributed earnings - - - - - - ( 129,988 ) 129,988 - - - Net income for 2003 - - - - - - - 46,110 - - 46,110 Unrealized loss on long-term investments of investee

companies - - - - - -

- - 172,955 - 172,955

Translation adjustments - - - - - - - - - ( 48,947 ) ( 48,947 ) Balance at December 31, 2003 426,163 $ 4,261,626 $ - $ - $ 10,664 $ - $ - ( $ 60,848 ) $ - $ 199,001 $ 4,410,443


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MICROELECTRONICS TECHNOLOGY, INC. AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)

2001 2002 2003 Cash flows from operating activities: Net income / (loss) $ 673,727 ( $ 611,459 ) $ 46,110 Adjustments to reconcile net income to net cash provided by / (used in) operating activities: Provision for bad debts / (transferred to other income) 47,625 152,360 ( 1,858 ) Depreciation, Amortization and other expense 196,341 216,154 219,133 Gain on disposal of fixed assets ( 3,567 ) ( 480 ) ( 3,166 ) Gain / (Loss) on disposal of investments, net ( 298,992 ) ( 306,665 ) 49,396 Investment loss on equity-method investees 98,888 69,944 87,528 Loss on impairment of long-term investments - 758,151 127,186 Provision for inventory loss 25,931 113,355 35,227 Changes in assets and liabilities: (Increase) / decrease in: Notes and accounts receivable 511,881 ( 40,213 ) ( 45,939 ) Other receivables ( 55,089 ) ( 68,873 ) ( 253,178 ) Inventories 401,241 117,747 202,241 Prepayments and other financial assets ( 55,985 ) ( 22,666 ) ( 32,559 ) Deferred income tax 111,543 ( 134,884 ) ( 23,844 ) Increase / (decrease) in: Accounts payable ( 525,572 ) 132,607 ( 160,402 ) Accrued expenses ( 94,013 ) ( 53,947 ) 14,162 Other payables, advance receipts and other current liabilities ( 178,618 ) ( 9,564 ) 2,002 Provision for product warranty 3,452 4,039 ( 12,250 ) Compensation interest payable - 15,675 33,431 Accrued pension expense 35,477 37,002 ( 46,755 ) Other liabilities 7,241 12 ( 1,267 )Net cash provided by operating activities 901,511 368,295 235,198 Cash flows from investing activities: Increase in short-term investments, net ( 508 ) ( 831,815 ) ( 938,470 ) Increase in long-term investments ( 158,210 ) ( 237,551 ) ( 24,746 ) Refund from paid long-term investment - 28,145 - Proceeds on disposal long-term investment 334,632 5,020 23,759 Acquisition of fixed assets ( 229,625 ) ( 148,396 ) ( 122,601 ) Proceeds on disposal of fixed assets 25,812 8,350 12,804 Increase in other assets, net ( 40,129 ) ( 13,791 ) ( 18,691 )Net cash used in investing activities ( 68,028 ) ( 1,190,038 ) ( 1,067,945 )Cash flows from financing activities: (Decrease) / Increase in short-term loans, net ( 766,044 ) ( 26,752 ) 435,250 Increase in long-term loans 700,000 - - Repayment of long-term loans ( 53,292 ) ( 77,199 ) ( 233,012 ) Increase in convertible bonds - 1,200,000 - Payment of directors’ and supervisors’ remuneration ( 6,939 ) ( 4,120 ) - Net cash (used in) / provided by financing activities ( 126,275 ) 1,091,929 202,238 Effect of change in exchange rates ( 32,962 ) 56,740 ( 16,243 )Net increase / (decrease) in cash and cash equivalents 674,246 326,926 ( 646,752 )Cash and cash equivalents: At the beginning of year 924,951 1,599,197 1,926,123 At the end of year $ 1,599,197 $ 1,926,123 $ 1,279,371 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 108,853 $ 70,471 $ 43,109


15

MICROELECTRONICS TECHNOLOGY, INC. AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001, 2002 AND 2003 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS,

EXCEPT AS OTHERWISE INDICATED)

1. HISTORY AND ORGANIZATION

(1) The Company was approved under the "Statute for the Establishment and Administration of Science-Based Industrial Park" in September 1982 and was incorporated on March 31, 1983 under the Company Law of the Republic of China (R.O.C.). The Company commenced its operations on April 29, 1983.

The main activities of the Company are the design and manufacture of wireless communication products and standard products, including microwave products, digital microwave radio transceivers and systems, VSAT, TVRO/DBS products and microwave components. The Company also manufactures customer designed products suited to the specific requirements of its customers' various microwave systems.

The principal foreign shareholder of the Company is Agilent Technologies Inc., which was incorporated in the U.S.A.

As of December 31, 2003, there were total 1,432 employees in the Company and its subsidiaries.

(2) Consolidated subsidiaries

Relationship with Percentage of direct and

Company name the Company Main operating items indirect holding interest

2003

Sasson International Holding Inc.

A directly held wholly owned subsidiary

Investment planning and consulting

100%

Jupiter Network Crop. An indirectly held wholly owned subsidiary


100%

Zeus Communications, Inc.

" Investment planning and consulting

100%

Jupiter Technology (Wuxi) Inc.

" Satellite communication and microwave communication and consulting service.

100%

(3) Global PCS Inc., Millennium Telecom Inc., EURO-MTI S.A.R.L, Welltop Technology Co., Ltd., and Wuxi Zeus Technology Inc. are the subsidiaries with total assets and operating revenue of less than 10 percent of the Company’s non-consolidated total assets and operating revenue, respectively, and, therefore, did not meet the criteria for consolidation.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements are prepared in accordance with the “Rules Governing the Preparation of Financial Statements of Securities Issuers” and generally accepted accounting standards in the Republic of China.

1) Principles of consolidation

In accordance with the R.O.C. generally accepted accounting principles and R.O.C. Securities and Exchange Commission’s regulations, the Company prepares annual financial statements on a non-consolidated and consolidated basis. All transactions among the Company and the consolidated subsidiary are eliminated in the consolidated financial statements. The consolidated financial statements include all majority owned subsidiaries, except for subsidiaries with total assets and operating revenue of less than 10 percent of the Company’s non-consolidated total assets and operating revenues. Irrespective of the above test, if the combined total assets or operating revenues of all such non-consolidated subsidiaries exceed 30 percent of the Company’s non-consolidated total assets or operating revenue, then each individual subsidiary with total assets or operating revenues greater than 3 percent of the Company’s respective non-consolidated total assets or operating revenue shall be consolidated.

2) Translation of foreign currency transactions

The accounts of the Company are maintained in New Taiwan dollars. Transactions arising in foreign currencies are translated into New Taiwan dollars at the exchange rates prevailing at the dates of the transactions. Receivables and other monetary assets and liabilities denominated in foreign currencies are translated into New Taiwan dollars at the exchange rate prevailing at the balance sheet date. Gains or losses from foreign currency translations are included in the current year's net income.

Forward exchange contracts entered into for hedging purposes are recorded using the spot rate on the contract date. Discounts or premiums on forward contracts are amortized over the period of the contract. Gains or losses on the forward contracts are determined by the difference between the spot rate at the balance sheet date and the spot rate at the date of inception of the contract. Exchange gains or losses are included in the current year’s net income.

Premiums on foreign currency options contract are translated into New Taiwan dollars using the spot rate at the date of inception of the contract and are amortized over the life of the contract. Unrealized gains and losses for known foreign currency transactions are recognized in the current year’s net income but unrealized gains and losses for foreign currency commitments are deferred until the underlying transaction is recorded, unless deferral would result in a loss at a later period.

17

3) Translation of financial statements of foreign subsidiaries into New Taiwan dollars

Assets and liabilities of foreign subsidiaries are translated into New Taiwan dollars at the exchange rates prevailing at the balance sheet date; equity accounts are translated at historical rates, except for beginning retained earnings which are transferred from prior year's ending retained earnings, and income and expense accounts are translated into New Taiwan dollars at the average rates of exchange prevailing during the period. Translation adjustments are taken directly to a separate component of shareholders' equity, “cumulative translation adjustment.”

4) Income tax

a. Income tax expense is provided based on accounting income after adjusting for permanent differences. The provision for income tax includes deferred income tax resulting from items reported in different periods for tax and financial reporting purposes. Deferred tax consequences of loss carry forwards and investment tax credits are recorded as deferred tax assets. A valuation allowance is provided on deferred income tax assets to the extent that it is more likely than not that the tax benefits will not be realized. Over or under provision of prior years’ income tax liabilities is included in current year’s income tax expense.

b. According to R.O.C. FAS NO.12, “Accounting for income tax credits”, the Company’s income tax credits generated from the acquisition of automation equipment or technology, expenses for research and development and loss carry forwards are recognized in the period when the tax credits arise.

c. An additional 10% corporate income tax on earnings derived on or after January 1, 1998, which are not distributed in the following year, is included as income tax expense in the year when the stockholders approved the resolution to retain the earnings.

5) Cash equivalents

Cash equivalents are highly liquid and short-term investments, with a maturity of three months or less at the time of purchase, that are readily convertible to known amounts of cash and with maturity dates that do not present significant risk of changes in value due to changes in interest rates.

6) Marketable securities

Marketable securities are recorded at cost when acquired. The carrying amount of the marketable securities portfolio is stated at the lower of its aggregate cost or market value at the balance sheet date.

7) Allowance for bad debts

Allowance for bad debts is provided according to the evaluation of the collectibility of ending balances of notes receivable, accounts receivable and other receivables.

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8) Inventories

Inventories are stated at cost less provision for obsolete and slow-moving items. Cost is calculated using the weighted-average method. At the balance sheet date, inventories are valued at the lower of cost or market value. Market value is determined based on the current replacement cost for raw materials and supplies, and the net realizable value is used for work in process and finished goods.

9) Long-term investments

Long-term investments in which the Company owns less than 20% of the investee company's voting rights and has no significant influence on the investee company's operational decisions are accounted for at cost, unless the investee company is a public listed company in which case the lower of market value or cost method is adopted. Under the lower of cost or market value method, the allowance for unrealized loss is shown under the shareholders' equity. When it becomes evidently clear that there has been a permanent impairment in value, and the chance of recovery is minimal, loss is recognized in the current year's net income.

Long-term investments in which the Company owns at least 20% of the investee company's shares are accounted for under the equity method, unless the Company cannot exercise significant influence over the investee company, in which case, the investment is accounted for at cost. The excess of acquisition cost over the investee company's net asset value is capitalized and amortized over five to ten years using the straight-line method. The capital reserve and long-term investment amounts are adjusted by the variance between the investment cost and net assets of the investee companies due to the disproportionate acquisition of shares in connection with the capital increase by the investee company.

10) Fixed assets

Fixed assets are stated at cost. Depreciation is provided on a straight-line method using the estimated useful lives of the assets.

The estimated useful lives are 5 to 40 years for buildings and improvements and 3 to 10 years for the other fixed assets.

Renewals and improvements are treated as capital expenditure and depreciated accordingly. Maintenance and repairs are charged to expense as incurred.

11) Deferred charges

Deferred charges, consisting of costs of electrical installation and acquisition of software, are amortized on a straight-line method.

12) Convertible Bonds

When bonds are redeemed before maturity, the excess of the stated redemption price over the par value is recognized as interest expense and compensation interest payable using the effective interest method during the period from the issue date to

19

the last day of redemption period.

The cost method is adopted when bondholders exercise their conversion rights, the book value of bonds is credited to common stock at an amount equal to the par value of the common stock and the excess is credited to capital reserve; no gain or loss is recognized on bond conversion.

For convertible bonds with redemption options, the right of redemption becomes invalid if the bondholders fail to exercise their redemption right during the redemption period. The balance of compensation interest payable is amortized over the period from the date following the redemption period to the maturity date using the effective interest method.

13) Reserve for product warranty

Under the warranty provisions of its sale contracts, the Company is obligated to correct any deficiencies in its products that occur under normal operation within a certain period after the date of sale. The Company provides a reserve for product warranty based on a certain percentage of the sales value of each product line, using historical experience.

14) Retirement plan

The Company has a defined benefit retirement plan covering all its regular employees. This plan is separately funded.

Net periodic pension cost which includes components such as service cost, interest cost, expected return on plan assets and amortization of net obligation at transition, is computed based on an actuarial valuation.

15) Revenue and expenses

Revenue is recognized when goods are shipped or installed. The related costs and expenses are recognized as incurred.

16) Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those assumptions and estimates.

3. EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES AND ESTIMATES

None.

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4. CONTENTS OF SIGNIFICANT ACCOUNTS

(1) CASH AND CASH EQUIVALENTS

December 31, 2001 2002 2003 Cash on hand $ 7,021 $ 4,725 $ 2,697 Cash in bank 711,320 254,256 88,913 Time deposits 399,200 962,047 592,990 Cash equivalents- STMM

481,656 705,095

594,771

$ 1,599,197 $ 1,926,123 $ 1,279,371

(2) SHORT-TERM INVESTMENTS

December 31,

2001 2002 2003

Beneficiary Certificates $ 508 $ 841,183 $ 1,806,468

(3) NOTES AND ACCOUNTS RECEIVABLE - NET

December 31, 2001 2002 2003 Notes receivable $ 15,142 $ 10,600 $ 1,128 Accounts receivable 768,918 837,935 745,717 Accounts receivable – related parties 33,252 10,327 22,363

817,312 858,862 769,208 Allowance for bad debts ( 135,746 ) ( 135,286 ) - $ 681,566 $ 723,576 $ 769,208

(4) INVENTORIES December 31, 2001 2002 2003 Raw materials $ 951,289 $ 797,620 $ 402,375 Work in process 258,473 302,143 245,544 Finished goods 212,172 175,322 112,938 Inventories in transit 15,878 18,971 5,621 1,437,812 1,294,056 766,478 Provision for inventory loss ( 204,261 ) ( 285,958) - 1,233,551 1,008,098 766,478 Long-term projects 529,732 - - Advance billings on long-term projects ( 527,063 ) - - 2,669 - - $ 1,236,220 $ 1,008,098 $ 766,478

(5) LONG-TERM INVESTMENTS

21

December 31,

Company name 2003 ownershippercentage (%) 2001 2002 2003

Equity method: Global PCS Inc.(Note 1) 80.19 $ 71,289 $ 64,560 ( $ 4,739 )Millennium Telecom Inc. 99.99 174,493 165,865 162,713 AsiaCast Network Systems, Inc. 37.04 34,244 16,256 3,878 EURO-MTI S.A.R.L. 100.00 1,660 1,650 1,614 Welltop Technology Co., Ltd.(Note 1) 100.00 ( 30,280 ) ( 30,212 ) ( 29,485 )Wuxi Zeus Technology Inc. 100.00 - 56,364 69,523

251,406 274,483 203,504 Cost method:

Taiwan Aerospace Corp. 0.48 25,000 25,000 25,000 Easy Data Communication Co., Ltd. 8.85 23,000 2,867 2,867 KG Telecommunications Co., Ltd. 1.12 247,073 247,073 247,073 Enovation Group Inc. - 46,785 6,362 - Kopin Taiwan Corporation 3.00 42,300 42,300 42,300 Global Crossing Ltd. - 11,572 - - Telecommunication Development Corp. - 3,495 3,475 - InterWAVE Communications International Ltd. 5.15 155,000 154,112 24,906 SR Telecom Crop. (Note 2) 2.00 63,733 63,369 6,454 Mobile Telesystems, Inc. 9.00 20,096 19,981 19,537 Scientific Technology Inc. 11.00 122,325 121,625 118,923 Taicom Capital Ltd. 13.56 349,500 347,500 339,780 Kestrel Solution, Inc. - 34,950 - - @Network Inc. 1.94 34,950 34,750 33,978 NAVII - LP 5.16 78,638 112,938 110,429 NAVII - GP 5.00 786 1,164 1,138 Digital United Holding Limited 0.34 70,145 69,743 68,194 Intelligent Epitaxy Technology, Inc. 2.20 34,950 34,750 33,978 Blue Wireless, Inc. - 34,950 34,750 - Bayspec, Inc. 1.00 17,475 17,375 16,989 Asia Global Crossing Ltd. - 698,979 - - Vaultus ,Inc. 1.00 34,950 34,750 33,978 Greast Communication Technology Co., Ltd. 19.82 - 48,322 47,906

2,150,652 1,422,206 1,173,430 Allowance for long-term investments ( 701,313 ) ( 172,955 ) - $ 1,700,745 $ 1,523,734 $ 1,376,934

For the years ended December 31, 2001, 2002 and 2003, the investment loss amounted to $24,507, $26,616 and $3,152, respectively, and the related long-term investment balances of $208,737, $182,121 and $162,713 as of December 31, 2001, 2002 and 2003, respectively, were recognized based on the investee companies’ financial statements audited by other auditors. The investment loss of AsiaCast Network Systems Inc. was $12,378 calculated as the difference between the book value and the expected salvage value under liquidation.

In the year 2003, the Company disposed the long-term investments in Enovation Group Inc., Telecommunication Development Corp., Blue Wireless, Inc., InterWAVE Communications International Ltd. and Netro Corporation, the related loss on disposal of investments were $76,742.The Company recognized a permanent impairment in value of InterWAVE Communications International Ltd. amounting to $127,186 using the lower of cost or market value method.

22

In the year 2002, the Company recognized the losses on impairment of long-term investment amounting to $12,278 and $20,133, respectively, in line with the capital reduction of Enovation Group Inc. and Easy Data Communication Co., Ltd. The Company recognized permanent impairments in value of Kestrel Solutions and Asia Global Crossing Ltd. amounting to $758,151 due to their declaration of bankruptcy.

All shares of @Network Inc., Intelligent Epitaxy Technology Inc., Blue Wireless Inc., Bayspec Inc., and part of the shares of Taicom Capital Ltd. are preferred stocks.

Note 1：The Company intends to continue its support for Global PCS Inc. and Welltop Technology Co., Ltd. and continue to recognize those long-term investment accounted for under the equity method. The credit balances are shown as “other liabilities”.

Note 2：The former name was Netro Corporation.

(6) FIXED ASSETS December 31 2001 2002 2003 Buildings $ 725,780 $ 795,959 $ 809,194 Machinery 1,408,129 1,493,222 1,466,656 Transportation equipment 2,573 1,292 1,292 Furniture and fixtures 77,379 52,705 43,326 Leasehold improvements 2,825 2,825 12,667 2,216,686 2,346,003 2,333,135 Accumulated depreciation ( 864,421 ) ( 972,876 ) ( 1,077,424 ) 1,352,265 1,373,127 1,255,711 Prepayments for equipment and

construction in process 24,713

10,407

1,570

Book value $ 1,376,978 $ 1,383,534 $ 1,257,281

As of December 31, 2001, 2002 and 2003, fixed assets with book values of $761,009, $669,604, and $587,628, respectively, were pledged as security for long-term loans.

(7) SHORT-TERM LOANS December 31 Type of loan 2001 2002 2003 Material L/C loans $ 251,505 $ 292,574 $ 470,457 Pre-export loans 14,949 - 256,194 Bank acceptance and commercial paper (net of $52 discount for 2001 )

51,948

-

-

$ 318,402 $ 292,574 $ 726,651 Interest rates per annum 2.52%～4.54% 1.825%～2.46% 1.72%~3.01%

23

(8) ACCOUNTS PAYABLE December 31 2001 2002 2003 Accounts payable $ 555,989 $ 687,828 $ 519,990 Accounts payable-related parties 331 5,383 6,278 $ 556,320 $ 693,211 $ 526,268

(9) LONG-TERM LOANS Bank name and Interest rate and December 31, type of loan repayment term 2001 2002 2003 Chiao Tung Bank The 8 th import equipment loan

Floating rate-Quarterly installments ending July 2004

$ 63,080

$ 37,770

$ 14,850

The 8 th domestic equipment loan

Floating rate-Quarterly installments ending July 2004

10,268

6,383

2,651

Loan of plant Floating rate –Quarterly installments ending July 2004

73,360

46,720

20,080

Project loan Floating rate–Yearly installments ending May 2006

300,000

300,000

300,000

The 9 th import equipment loan

Floating rate-Quarterly installments ending May 2006

280,000

261,400

187,000

The 9 th domestic equipment loan

Floating rate -Quarterly installments ending May 2006

20,000

17,236

11,915

First Commercial Bank

Fiduciary loan Floating rateSettlement in December 2003

100,000

100,000

-

846,708 769,509 536,496 Current portion ( 73,222 ) ( 233,012 ) ( 217,300 ) $ 773,486 $ 536,497 $ 319,196 Interest rates per annum 4.20%~6.475% 3.30%~6.37% 3.225%~6.37%

(10) BONDS PAYABLE December 31 2001 2002 2003 Convertible bonds payable $ - $ 1,200,000 $ 1,200,000 Compensation interest payable - 15,675 49,106 $ - $ 1,215,675 $ 1,249,106

On July 10, 2002, the Company issued unsecured convertible bonds. The main terms of the issue are as follows:

(a) Total amount: $1,200,000

(b) Interest rate: zero

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(c) Maturity date: July 9, 2007

(d) Redemption at the option of the bondholders: Bondholders may request the Company to redeem the bonds in cash equal to par value of the bonds plus interest of 7.69% and 11.46% of the par value on July 9, 2005 and July 9, 2006, respectively.

(11) COMMON STOCK

1) Pursuant to the resolution adopted at the special stockholders' meeting held on December 11, 1993, and after obtaining approval from the SFC, the Company issued 2,600,000 units of global depository receipts (GDRs) in Europe, Asia and USA, which are represented by 13,000,000 shares of common stock (Deposited Shares). Total amount received by the Company relating to these GDRs on May 24, 1994 was $837,333. The main terms and conditions of the GDRs are as follows:

A. Voting

Holders of GDRs have no right to directly exercise voting rights or attend the Company's stockholders' meeting. A holder or holders together holding at least 51% of the GDRs outstanding at the relevant record date of the stockholders' meeting can instruct the Depositary to vote in the same direction in respect of one or more resolutions to be proposed at the meeting.

B. Sale and withdrawal of GDRs

Under the current R.O.C. law, the shares represented by the GDRs may not be withdrawn by holders of GDRs commencing three months after the initial issue of GDRs. A holder of GDR may, provided that the Company has delivered to the custodian physical share certificates in respect of the Deposited Shares, request the Depositary to sell or cause to be sold on behalf of such holder the shares represented by such GDRs.

C. Dividends

GDR holders are entitled to receive dividends to the same extent as the holders of common stock subject to the terms of the Deposit Agreement and applicable laws of the R.O.C.

2) As of December 31, 2003, the Company's authorized share capital comprised of 700,000 thousand common shares at NT$10 (in dollars) par value per share, of which 50,000 thousand shares are reserved for the issuance of convertible bonds, stock option certificates and convertible preferred stock, and 426,163 thousand shares were issued and outstanding.

(12) EMPLOYEE STOCK OPTION PLAN

a. On May 23, 2002 and January 7, 2003, the Company’s employee stock option plan (the “Option Plan”) were approved by SFC to issue 33,000 units of stock options, representing 33,000,000 shares of common stock. The major terms of the Option Plan are as follows:

25

(a) The grant date of the options were May 23, 2002 and January 7, 2003 and the exercise price were $23 and $14.7 (in NT dollars) per share, respectively.

(b) The Company will issue new shares of common stock upon exercise of the options.

(c) Adjustments to the exercise price: The exercise price will be adjusted due to the capitalization of capital reserve and retained earnings. This adjustment will be made in accordance with the Option Plan and related regulations.

(d) The life of the options is six years from the grant date. The options can only be transferred through inheritance.

b. A summary of the number of options and the weighted average exercisable price under the Company’s stock option plan for the years ended December 31, 2002 and 2003 are as set forth below: For the years ended December 31, 2002 For the years ended December 31, 2003

In thousands of shares

Weighted average exercisable price (in NT dollars)


Weighted average exercisable price (in NT dollars)

Outstanding at the beginning of the year

-

$ -

14,011

$ 23

Option granted 14,011 23 18,000 14.7 Stock dividends or

adjustment of number of options

-

-

-

-

Option exercised - - - - Option confiscated - - - - Outstanding at the

end of the year 14,011

$ 23

32,011

$ 18.33

Exercisable options at the end of the year

-

-

Approved and not yet issued options at the end of the year

989

-

c. As of December 31, 2003, the summary of the outstanding stock option plan was as follows:

Number of options outstanding at the end of the year Exercisable options at the end of the year

Range of exercisable price (in NT dollars)


Expected weighted average residual years

Weighted average exercise pric (in NT dollars)


Weighted average exercise price (in NT dollars)

$ 14.7~23 32,011 4.78 $ 18.33 - $ -

(13) CAPITAL RESERVE

According to the R.O.C. Company Law, capital reserve shall be exclusively used to offset against accumulated deficit, except for capital reserve arising from paid-in capital in excess of par and donation surplus which can be used to increase capital after covering accumulated deficit.

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(14) RETAINED EARNINGS

1) The R.O.C. Company Law requires that at least 10% of the net income each year, less losses of prior years, shall be set aside as legal reserve until the accumulated reserve equals the total registered capital of the Company and can be used to offset against accumulated deficit.

According to the Company's Articles of Incorporation, 1% and no less than 7% of net income, after deducting legal reserve, shall be distributed as directors' and supervisors' remuneration and employees' bonus, respectively, at the time dividends are declared.

2) The Taiwan imputation tax system requires that any undistributed current earnings, on tax basis, of a company derived on or after January 1, 1998 be subject to an additional 10% corporate income tax if the earnings are not distributed before a specific time. This 10% additional tax on undistributed earnings paid by the company may be used as tax credit by shareholders, including foreign shareholders, against the withholding tax on dividends. In addition, the domestic shareholders can claim a proportionate share in the company’s corporate income tax as tax credit against its individual income tax liability effective 1998.

3) As of December 31, 2003, the balance of stockholders tax credit account was $6. Part of the earnings generated in 2002 was distributed and the creditable tax ratio was zero.

4) The information of 2001’s earnings distribution for employees’ bonus and directors’ and supervisors’ remuneration are as follows:

Approved in the Stockholders’ Meeting

(1) Distribution

a. Employee stock dividend

(a) Shares(in thousands of shares)

(b) Amount

(c) Percentage of outstanding shares in 2001

b. Directors’ and supervisors’ remuneration

4,760

$ 47,599

1.24%

$ 4,760

(2) Information about earnings per share (in dollars)

a. Original EPS (Note 1)

b. Imputed EPS (note 2)

$ 1.76

$ 1.62

Note 1: The original EPS was not retroactively adjusted in accordance with the issuance of capitalization of earnings and employees’ bonuses.

Note2: Imputed EPS＝ (Net income－ employees’ bonus － directors’ and supervisors’ remuneration) / weighted average outstanding common shares for 2001.

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In 2002, there was no earnings distribution for employees’ bonus and directors’ and supervisors remuneration.

The Company has not yet held the meeting of board of directors to discuss the proposal of earnings distribution for the fiscal year 2003. The approval of resolutions adopted by the board of directors and shareholders could be obtained from the “Market Observation Post System” website of Taiwan Stock Exchange Corporation.

(15) PENSION EXPENSE

1) As of December 31, 2001, 2002 and 2003, the retirement fund balances amounted to approximately $124 million, $139 million and $150 million, respectively.

2) The funded status of the pension plan is as follows:

December 31, 2001 2002 2003 Vested benefit obligation ($ 18,875 ) ($ 21,023 ) ($ 20,460 )Non-vested benefit obligation ( 133,288 ) ( 181,752 ) ( 171,897 )Accumulated benefit obligation ( 152,163 ) ( 202,775 ) ( 192,357 )Additional benefits based on future

salaries ( 189,060 )

( 212,364 )

( 154,760 )

Projected benefit obligation ( 341,223 ) ( 415,139 ) ( 347,117 )Plan assets at fair value 123,708 138,670 150,226 Funded status ( 217,515 ) ( 276,469 ) ( 196,891 )Unrecognized transition obligation 52,353 46,536 40,719 Unrecognized pension gain ( 5,349 ) 22,420 ( 4,586 )Accrued pension ($ 170,511 ) ($ 207,513 ) ($ 160,758 )Vested benefit $ 19,666 $ 21,904 $ 20,815

3) The details of net pension cost recognized based on the actuarial report are as follows: 2001 2002 2003

Service cost $ 30,821 $ 31,836 $ 32,829

Interest cost 16,246 14,502 16,606

Plan assets on future reward ( 6,031 ) ( 4,949 ) ( 4,507 )

Amortization of unrecognized transition obligation 5,817 5,817 5,817

Net periodic pension cost $ 46,853 $ 47,206 $ 50,745

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(16) INCOME TAX

1) The balances of deferred income tax assets / (liabilities) are summarized below:

December 31, 2001 2002 2003 Deferred income tax assets - current $ 136,214 $ 181,706 $ 205,610 Less: Valuation allowance - ( 47,671) ( 42,103) 136,214 134,035 163,507 Deferred income tax liabilities– non

current ( 218,714) ( 81,651) ( 87,277)Total deferred income tax (liabilities) /

assets ($ 82,500) $ 52,384 $ 76,230

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2) The temporary differences and the related deferred income tax assets / (liabilities) comprise the following: December 31, 2001 December 31, 2002 December 31, 2003

Amount Income tax effect Amount

Income tax effect Amount

Income tax effect

Deferred income tax assets - current Temporary differences: Warranty provision $ 47,768 $ 11,942 $ 51,807 $ 12,952 $ 39,567 $ 9,892 Provision for inventory loss 204,261 51,065 285,957 71,488 313,438 78,359 Allowance for bad debts 126,544 31,636 169,461 42,365 134,889 33,722 Compensation interest payable - - - - 33,431 8,358 Others 1,668 417 9,456 2,363 12,703 3,176 Loss carry forward 18,666 - - Investment tax credits 22,488 52,538 72,103 136,214 181,706 205,610 Less: Valuation allowance for deferred income tax

assets -

( 47,671 )

( 42,103 )

136,214 134,035 163,507 Deferred income tax assets / (liabilities) – non current Temporary differences: Loss on idle assets $ 61,619 15,404 $ 71,498 17,875 $ 71,495 17,874 Net pension cost 170,511 42,628 207,513 51,878 160,758 40,190 Foreign investment income accounted for by the equity

method ( 1,648,022 ) ( 412,006 ) ( 1,099,403 ) ( 274,851 ) ( 968,604 ) ( 242,151 ) Others 6,511 1,628 12,316 3,079 11,093 2,773 Investment tax credits 133,632 120,368 94,037 ( 218,714 ) ( 81,651 ) ( 87,277 ) ( $ 82,500 ) $ 52,384 $ 76,230

30

3) Income tax expense / (benefit) and income tax refundable were reconciled as follows: December 31, 2001 2002 2003 Tax on pretax income at statutory tax rate $ 196,431 $ - $ 5,566 Tax effect on permanent differences ( 33,551 ) ( 141,481 ) 16,590 Adjustment of prior years tax expense 495 - - Investment tax credits ( 51,337 ) ( 41,074 ) ( 52,267 ) Valuation allowance of income tax assets - 47,671 ( 5,568 ) 10% additional income tax on

unappropriated earnings -

-

11,835

Income tax expense / (benefit) 112,038 ( 134,884 ) ( 23,844 ) Net effect of deferred income tax ( 111,543 ) 134,884 23,844 Adjustment of prior years' tax expense ( 495 ) - - Prepaid income tax ( 523 ) ( 1,616 ) ( 1,371 ) Income tax refundable (shown in other

receivables) ($ 523 ) ($ 1,616 ) ($ 1,371 )

4) The Company is eligible for income tax exemption for a period of four consecutive years due to an expansion of production equipment through increase of capital. The effective date of this exemption is to be decided by the Company within two years from the start of operation of the new machinery and equipment of each expansion. The maximum period of such deferral of the four-year tax holiday shall not exceed four years. The details are as follows:

Capital increase method Tax - exempt period

Unappropriated earnings, capital reserve and employees' bonus capitalized in 1995

January 1, 2003~December 31, 2005


January 1, 2004~December 31, 2007.


January 1, 2004~December 31, 2007.


Tax-exempt period has not been decided by the Company


Tax-exempt period has not been decided by the Company

5) As of December 31, 2003, the Company's income tax returns for the years through 1999 have been assessed and approved by the Tax Authority, except for the year 1998 which is still under review by the Tax Authority. The Company has filed tax appeals in respect of investment tax credits of research and development expenditure for the year 1996.

31

6) At December 31, 2003, the balance of unused investment tax credits was $166,140, which will expire as follows:

Expiry Investment tax credits 2004 $ 72,103 2005 6,828 2006 34,942 2007 52,267

$ 166,140

(17) EARNINGS PER SHARE For the period ended December 31, 2001 Amount Outstanding Earnings per share Income before Common Income before income tax Net income Shares (Note) income tax Net income Basic earnings

per share:

Net income $ 785,765 $ 673,727 383,093 $ 2.05 $ 1.76 Net income

retroactively adjusted

426,163

$ 1.84

$ 1.58

For the period ended December 31, 2002 Amount Outstanding Earnings per share Loss before Common Loss before income tax Net loss Shares (Note) income tax Net loss Basic earnings

per share:

Net loss ( $ 746,343 ) ( $ 611,459 ) 426,163 ( $ 1.75 ) ( $ 1.43 ) Note: The convertible bonds and stock options are not dilutable.

For the period ended December 31, 2003 Amount Outstanding Earnings per share Income before Common Income before income tax Net income Shares (Note) income tax Net income Basic earnings

per share:

Net income $ 22,266 $ 46,110 426,163 $ 0.05 $ 0.11 Effects of potential

diluted earnings per share:

Employee stock option

-

-

4,413

Diluted earnings per share:

Net income of common stockholders plus effect of diluted share equivalent

$ 22,266

$ 46,110

430,576

$ 0.05

$ 0.11

Note: The convertible bonds is not dilutable.

32

(18) PERSONNEL EXPENSES, DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES

The personnel expenses, depreciation, depletion and amortization expenses for 2001, 2002 and 2003 were as follows:

For the years ended December 31,

2001 2002 2003

Shown in cost of sales

Shown in operating expenses Total





Personnel expenses

Salary $417,049 $270,358 $687,407 $349,859 $280,358 $630,217 $305,442 269,169 $574,611

Insurance 30,838 19,452 50,290 25,074 18,156 43,230 21,780 17,805 39,585

Pension 29,260 17,593 46,853 27,987 19,219 47,206 28,338 22,407 50,745

Others 11,886 11,216 23,102 12,057 14,049 26,106 10,058 9,434 19,492

Depreciation 136,212 38,917 175,129 140,288 43,950 184,238 173,753 27,569 201,322

Amortization 3,017 4,680 7,697 5,851 13,434 19,285 6,805 9,172 15,977

For the years ended December 31, 2001, 2002 and 2003, the depreciation of idle assets and leased assets amounted to $13,515, $12,631 and $1,834, respectively.

5. RELATED PARTY TRANSACTIONS

1) Names and relationship of related parties

Names Relationship with the Company Agilent Technologies Inc. Major foreign shareholder Hewlett-Packard Company The parent company of Agilent Technologies Inc. Global PCS Inc. 80.19% owned subsidiary Millennium Telecom Inc. 99.99% owned subsidiary Asia Cast Network Systems, Inc. 37.04% owned subsidiary Welltop Technology Co., Ltd. Investment accounted for by equity method of the

Company’s subsidiary EURO-MTI S.A.R.L Investment accounted for by equity method of the

Company’s subsidiary Optical Microwave Network Inc. Investment accounted for by equity method of the

Company’s subsidiary Wuxi Zeus Technology Inc. Investment accounted for by equity method of the

Company’s subsidiary Taicom capital Ltd. Common board chairman TCM Limited Common board chairman Trusin Limited. Common general manager with Wuxi Zeus Technology Inc.

33

2) Transactions with related parties

a) Purchases of materials 2001 2002 2003

﹒Optical Microwave Networks Inc. $ 56,312 $ 20,746 $ 21,018 ．Agilent Technologies Inc. 61,621 1,246 406 ﹒Others 310 - -

$ 118,243 $ 21,992 $ 21,424

The purchases are at market prices and payment terms are similar to those purchases from third parties.

In 2002 and 2003, the Company partially received orders, which in fact were then designed and manufactured by Global PCS Inc. These orders were not recognized as purchases and sales in the Company’s financial records. The Company received payments from third parties and later made payments to Global PCS Inc. The amount of such trading activities for the years of 2002 and 2003 were $88,432 and $44,605, respectively.

b) Sales 2001 2002 2003 ﹒Optical Microwave Networks Inc. $ 24,814 $ 762 $ 25,184 ﹒Global PCS Inc. 35,552 13,222 463 ﹒Agilent Technologies Inc. 11,270 1,599 1,435 ﹒Wuxi Zeus Technology Inc. - 3,716 5,625

$ 71,636 $ 19,299 $ 32,707

c) Purchases of fixed assets 2001 2002 2003

﹒Agilent Technologies Inc. $ 65,552 $ 7,710 $ 42,206 ﹒Global PCS Inc. - - 202

$ 65,552 $ 7,710 $ 42,408

The purchases are at market prices and payment terms are similar to those purchases from third parties.

d) Disposal of fixed assets 2001 2002 2003 Item Amount Gain Amount Gain Amount Gain

Global PCS Inc. Machinery & Furniture

$ 14,064 $ - $ - $ - $ 15 $ -

Wuxi Zeus Technology Inc.

Machinery -

-

784

625

7,499

1,421

$ 14,064 $ - $ 784 $ 625 $ 7,514 $ 1,421

34

e) Accounts receivable December 31,

2001 2002 2003 ﹒Agilent Technologies Inc. $ - $ 344 $ 73 ﹒Global PCS Inc. 33,251 9,629 1,228 ﹒Wuxi Zeus Technology Inc. - 354 13,245 ﹒Optical Microwave Networks Inc. 1 - 7,817

$ 33,252 $ 10,327 $ 22,363

f) Other receivables December 31,

2001 2002 2003

﹒Millennium Telecom Inc. $ - $ 194,948 $ 173,288 ﹒Global PCS Inc. 16,260 3,754 17,938 ﹒Wuxi Zeus Technology Inc. - 231 1,466 ﹒Optical Microwave Networks Inc. - - 12

$ 16,260 $ 198,933 $ 192,704

g) Prepaid expenses and prepayments December 31,

2001 2002 2003 Optical Microwave Networks Inc. $ - $ 7,928 $ 4,414 Global PCS Inc. - - 2,175 Agilent Technologies Inc. - 386 1,166 $ - $ 8,314 $ 7,755

h) Long-term receivables (Shown in other financial assets-non current) December 31,

2001 2002 2003 Millennium Telecom Inc. $ - $ - $ 190,617

i) Accounts payable December 31,

2001 2002 2003 ﹒Global PCS Inc. $ - $ 4,280 $ - ﹒Agilent Technologies Inc. 105 92 2 ﹒Optical Microwave Networks Inc. 139 1,011 6,234 ﹒Hewlett-Packard Company. 24 - - ﹒Wuxi Zeus Technology Inc. 63 - 42

$ 331 $ 5,383 $ 6,278

35

j) Other income 2001 2002 2003 Rental income-Global PCS Inc. $ 6,711 $ 6,711 $ 5,776 Supporting income- Global PCS Inc. - 5,626 7,557 Administrating and consulting income-

TCM 38,359

42,685

31,740

$ 45,070 $ 55,022 $ 45,073

December 31, 2001 2002 2003 k) Accrued expenses $ 2,547 $ 348 $ 379 l) Guarantee deposits received $ 1,678 $ 1,678 $ 1,678 m) Service and inspection expenses

$ 81,881 $ 51,050

$ 41,176

n) Rental expenditures $ 9,129 $ 2,774 $ 4,066 o) Other expenses $ 29,916 $ - $ 4,862

p) As of December 31, 2001, 2002 and 2003, the Company acted as guarantor for the following subsidiaries:

Subsidiary name

Line of credit

Outstanding balance of credit line

December 31, 2001 Optical Microwave Networks Inc. $ 57,668 $ 48,930 December 31, 2002 Optical Microwave Networks Inc. $ 57,338 $ 33,192 December 31, 2003 Optical Microwave Networks Inc. $ 37,376 $ 29,057 Global PCS Inc. 50,000 50,000 $ 87,376 $ 79,057

q) As of December 31, 2001 and 2003, Sasson stood as guarantor for the following subsidiaries:

Subsidiary name

Line of credit

Outstanding balance of credit line

December 31, 2001 Millennium Telecom Inc. $ 190,372 $ 190,372 December 31, 2003 Wuxi Zeus Technology Inc.. $ 101,934 $ 12,912

There was no such transaction in 2002.

36

6. COMMITMENTS AND CONTINGENT LIABILITIES

The Company leases land under a non-cancelable operating lease agreement. As of December 31, 2003, the future minimum lease payments under this lease are as follows:

Period Rental payable 2004 to 2007 $ 46,473

7. SIGNIFICANT SUBSEQUENT EVENT

None.

8. OTHERS

1) Remittability of capital and earnings

The foreign investors in the Company can repatriate their invested capital and dividends declared from net income provided that income tax on such dividends is paid to the Tax Authorities.

2) Information on derivative transactions

The Company entered into derivative contracts with certain banks. The major information are as follows:

a) As of December 31, 2001, 2002 and 2003, terms and characteristics of these contracts were as follows:

December 31, 2001 Conditions of transaction

Item Contract amount

Contract inception dates

Average rates at settlement

dates

Settlement dates

Recognized and deferred

exchange loss during the

period Forward USD7,000,000 November

8~December 5, 2001

US$1= NT$34.4620~

34.5270

January 17~February

27, 2002

($3,356)

Forward EUR600,000 December 28, 2001

EUR$1= US$0.8822

January 24, 2002

(134)

Option USD (put) 2,000,000

March 8, 2001 US$1= NT$36

March 5, 2002

115

Option USD (call) 10,000,000

July 26~September

7, 2001

US$1= NT$33.8~

34.26

January 15~February

26, 2002

(1,967)

Sasson International Holdings Inc. Hedged Assets Item Inception date Maturity date Notional shares Initial Price Gap Level ~ Floor Level

Stocks of Global Crossing Ltd.

Individual stock option

January 16, 2001

December 16, 2002 441,506 22.2609 125% ~ 95%

Note

Note : If the stock price is above the cap level, the Company will have cash in flow of USD27.83 per share. If the stock price is below the floor level the Company will have cash in flow of USD21.15 per share.

37

December 31, 2002 Conditions of transaction




dates

Settlement dates



period Forward USD 6,000,000 November 5 ~

November 20, 2002

US$1= NT$34.404~

34.867

January 16~February

27, 2003

($170)

Forward EUR 1,000,000 November 12~December

17, 2002

EUR$1= US$1.0131~

1.0303

January 16~January

30, 2003

(1,121)

Option EUR (put) 500,000

November 28, 2002

EUR$1=US$1 January 28, 2003

107

Option USD (call) 500,000

November 28, 2002

US$1=EUR$1 January 28, 2003

(940)


October 21~November

14, 2002

US$1=NT$ 34.9~35.1

April 24~May 13,

2003

2,258


October 21~November

14, 2002

US$1=NT$ 34.2~34.85

January 24~April 21,

2003

(2,854)

December 31, 2003

Conditions of transaction




dates

Settlement dates



period Forward USD9,000,000 September

3~December 4, 2003

US$1=NT$ 33.911~34.081

January 8~ February 12,

2004

($6,454)


September 4~December

18, 2003

US$1= NT$33.8~34.4

January 6~April 6,

2004

(525)


July 4~ December 18,

2003

US$1= NT$33.8~34.8

January 6~July 6,

2004

1,820

b) Purpose:

To hedge the fluctuation of exchange rate of foreign currency denominated assets.

c) Credit risk and market risk:

There is no significant credit risk with respect to the above contracts because the banks are of good standing. The market risk is low as the purpose of the contracts are solely for hedging.

38

3) Financial instruments 2001 2002 2003

Book value Fair value Book value Fair value Book value Fair value Non-derivative transactions- Financial assets: Financial assets whose

fair values equal book values

$ 2,617,262

$ 2,617,262

$ 2,903,597

$ 2,903,597

$ 2,550,823

$ 2,550,823

Short-term investments 508 508 841,183 841,744 1,806,468 1,806,468 Long-term investments 1,731,025 1,717,922 1,553,946 1,549,941 1,411,158 1,418,479Financial liabilities: Financial liabilities

whose fair values equal book values

( 2,135,952)

( 2,135,743)

( 3,332,437)

( 3,332,437)

( 3,382,728)

( 3,382,728)

Accrued pension expense ( 170,511) ( 217,515) ( 207,513) ( 276,469) ( 160,758) ( 196,891) Refundable deposits ( 4,640) ( 4,431) - - - -Derivative transactions- Foreign exchange forward

contracts ( 3,199)

( 3,199)

( 1,291)

( 1,291)

( 49)

( 49)

Options ( 1,090) ( 1,090) ( 1,429) ( 1,429) 1,037 1,037

The methods and assumptions used to measure the fair values of financial instruments are as follows:

a) Financial assets and liabilities whose fair values equal to book values.

The carrying amounts of short-term financial assets and liabilities approximate fair values due to their short maturity.

b) The fair values of long-term investments are based on the market values of the securities, or the underlying equities in the net assets of the investee companies, if market value is not available.

c) The book value of long-term loans are used as fair values as the loans bear floating interest rates.

d) The fair value of accrued pension expense equals the “Projected Benefit Obligation” minus “Plan Assets At Fair Value” based on the actuarial report.

e) The fair value of “deposits in” is estimated by the present value of expected cash flows.

4) Reclassification

Certain accounts of the 2001 and 2002 consolidated financial statements have been reclassified to conform with the presentation adopted in the 2003 financial statements.

39

9. SEGMENT INFORMATION

1) Sales to major customers

2001 2002 2003

Customer Sales % Sales % Sales % Product

A $ 659,192 12 $ 846,979 20 $ 1,346,625 35 Telecommunication

B - - 526,290 12 457,378 12 Satellite communication

C 652,945 12 976,723 23 624,774 16 Telecommunication

D 931,978 17 - - 510,459 13 Satellite communication

$ 2,244,115 41 $ 2,349,992 55 $ 2,939,236 76

2) Export sales by geographical destination

2001 2002 2003 America $ 2,718,827 $ 1,647,276 $ 1,917,425 Europe 1,365,015 868,405 684,449 Asia 298,456 1,096,873 879,931 Other areas 12,109 10,515 20,964 Total $ 4,394,407 $ 3,623,069 $ 3,502,769

40

3) Sales by geographical origin

2001 Asia Taiwan Others Adj&Elim. Consolidated Sales to unaffiliated customers $ - $ 4,673,141 $ - $ - $ 4,673,141 Inter-segment sales 7,656 1,523 - ( 9,179 ) - Total revenue $ 7,656 $ 4,674,664 $ - ( $ 9,179 ) $ 4,673,141 Operating (loss) / profit ( $ 73,762 ) $ 213,610 $ - $ - $ 139,848 Investment income 200,104 General corporate expenses (including

non-operating items)

551,646 Interest Expense ( 105,833 ) Income before income tax expense $ 785,765 At December 31, 2001 Identifiable assets $ 50,180 $ 3,251,962 $ 1,613 ( $ 10,069 ) $ 3,293,686 Long-term Investments 1,731,025 General corporate assets 2,219,532 Total assets $ 7,244,243 2002 Asia Taiwan Others Adj&Elim. Consolidated Sales to unaffiliated customers $ 30,233 $ 3,654,926 $ - $ - $ 3,685,159 Inter-segment sales 450,206 11,060 - ( 461,266 ) - Total revenue $ 480,439 $ 3,665,986 $ - ( $ 461,266 ) $ 3,685,159 Operating (loss) / profit ( $ 86,997 ) $ 68,401 $ - $ - ( $ 18,596 ) Investment loss ( 521,430) General corporate expenses (including


( 137,150 ) Interest Expense ( 69,167 ) Loss before income tax expense ( $ 746,343 ) At December 31, 2002 Identifiable assets $ 196,498 $ 3,055,769 $ 889 ( $ 137,948 ) $ 3,115,208 Long-term Investments 1,553,946 General corporate assets 3,269,775

41

Total assets $ 7,938,929 2003 Asia Taiwan Others Adj&Elim. Consolidated Sales to unaffiliated customers $ 3,553 $ 3,558,750 $ - $ - $ 3,562,303 Inter-segment sales 595,435 13,911 - ( 609,346 ) - Total revenue $ 598,988 $ 3,572,661 $ - ( $ 609,346 ) $ 3,562,303 Operating (loss) / profit ( $ 65,449 ) $ 204,713 $ - $ - $ 139,264 Investment loss ( 264,110 ) General corporate expenses (including


220,312 Interest Expense ( 73,200 ) Income before income tax expense $ 22,266 At December 31, 2003 Identifiable assets $ 227,913 $ 2,205,465 $ 1,498 ( $ 119,722 ) $ 2,315,154 Long-term Investments 1,411,158 General corporate assets 4,371,649 Total assets $ 8,097,961

42

4) Sales by class of business 2001

Sat.-com.

Telecom.

Write-off and Adjustment

Total

Total revenue $ 2,038,562 $ 2,643,758 ( $ 9,179 ) $ 4,673,141 Operating (loss) / profit ( $ 20,339 ) $ 160,187 $ - $ 139,848 Investment income 200,104 General corporate income 551,646 Interest Expense ( 105,833 ) Income before income tax expense $ 785,765 Depreciation $ 55,676 $ 117,962 Capital expenditure $ 73,287 $ 119,826 at December 31, 2001: Identifiable assets $ 1,132,510 $ 2,169,632 ( $ 10,069 ) $ 3,292,073 Long-term Investments 1,731,025

General corporate assets 2,221,145 Total assets $ 7,244,243 2002

Sat.-com.

Telecom.


Total

Total revenue $ 1,893,132 $ 2,253,293 ( $ 461,266 ) $ 3,685,159 Operating (loss) / profit ( $ 184,569 ) $ 165,973 $ - ( $ 18,596 ) Investment loss ( 521,430 ) General corporate income ( 137,150 ) Interest Expense ( 69,167 ) Income before income tax expense ( $ 746,343 ) Depreciation $ 57,399 $ 126,398 Capital expenditure $ 31,084 $ 157,640 at December 31, 2002: Identifiable assets $ 1,134,284 $ 2,117,983 ( $ 137,948 ) $ 3,114,319 Long-term Investments 1,553,946

General corporate assets 3,270,664 Total assets $ 7,938,929 2003

Sat.-com.

Telecom.


Total

Total revenue $ 1,984,518 $ 2,187,131 ( $ 609,346 ) $ 3,562,303 Operating (loss) / profit ( $ 99,117 ) $ 238,381 $ - $ 139,264 Investment loss ( 264,110 ) General corporate income 220,312 Interest Expense ( 73,200 ) Income before income tax expense $ 22,266 Depreciation $ 47,154 $ 153,948 Capital expenditure $ 59,297 $ 107,797 at December 31, 2003: Identifiable assets $ 900,163 $ 1,533,215 ( $ 119,722 ) $ 2,313,656 Long-term Investments 1,411,158

General corporate assets 4,373,147 Total assets $ 8,097,961

43

10. SPECIAL DISCLOSURE ITEMS

Pursuant to the SFC requirements, the related information of the Company and its investee companies are as follows:

1) Information of Significant Transactions:

a) Loans to others attributed to financial activities as of December 31, 2003:

None.

b) The endorsements and guarantees provided by the Company to others as of December 31, 2003: The ratio of Company being guaranteed The limit of The highest outstanding The amount of The amount of accumulated guarantee The ceiling of the Guarantor company Relationship with guarantee guarantee amount guarantee amount guarantee with amount to net asset outstanding guarantee

Number Name Name the Company for such party during 2003 at Dec. 31, 2003 collateral placed value of the Company for the respective party 0 Microelectronics

Technology, Inc.

Optical Microwave Networks Inc.

100% owned subsidiary of Welltop Technology Co., Ltd.

$4,410,443 $33,147 $29,057 None 0.66% $4,410,443

0 Microelectronics Technology, Inc.

Jupiter Technology(Wuxi) Inc.

100% owned subsidiary of Sasson International Holdings Inc.

4,410,443 33,671 15,970 None 0.36% 4,410,443


Sasson International Holdings Inc.

Wholly-owned subsidiary

4,410,443 34,612 12,912 None 0.29% 4,410,443


Global PCS Inc. Majority-owned subsidiary

4,410,443 50,000 50,000 None 1.13% 4,410,443

c) The details of marketable securities as of December 31, 2003: Kinds of

marketable Name of marketable The relationship of the General ledger December 31, 2003

Investor securities securities issuers with the Company accounts Number of shares Book value Percentage Market value (Note1)

Microelectronics Technology, Inc.

Stock Sasson International Holdings Inc.

Wholly-owned subsidiary Long-term investments 2,350 $2,053,194 100.00% $2,053,194

〃 Stock Global PCS Inc. Majority-owned subsidiary 〃 16,192,499 (4,739) 80.19% (4,739)

〃 Stock Millennium Telecom, Inc.

Majority-owned subsidiary 〃 18,999,994 162,713 99.99% 162,713

〃 Stock AsiaCast Network Systems, Inc.

Investee accounted for under equity method

〃 7,962,738 3,878 37.04% 3,878(Note2)

〃 Stock KG Telecommunications Co., Ltd.

None 〃 19,563,208 247,073 1.12% 247,073

〃 Stock Easy Data Communication Co., Ltd.

〃〃 442,308 2,867 8.85% 2,867

〃 Stock Taiwan Aerospace Corp.

〃〃 2,500,000 $25,000 0.48% $25,000

44

Kinds of

marketable Name of marketable The relationship of the General ledger December 31, 2003

Investor securities securities issuers with the Company accounts Number of shares Book value Percentage Market value (Note1)

Microelectronics Technology, Inc.

Stock Kopin Taiwan Corporation

None Long-term investments 3,000,000 $42,300 3.00% $42,300

〃 Beneficiary certificate

Pruderitital well Pool Fund

〃 Short-term investments 17,797,042 214,356 - 214,356

〃〃 Prudential Bond Fund

〃〃 14,085,900 210,336 - 210,336

〃〃 Grand Cathay Bond Fund

〃〃 23,378,261 290,865 - 290,865

〃〃 Ta Chong Callop Bond Fund

〃〃 3,990,742 41,672 - 41,672

〃〃 Capital Cash Reserves Bond Fund

〃〃 5,693,700 63,767 - 63,767

〃〃 Safe Income Bond Fund

〃〃 3,178,287 44,978 - 44,978

〃〃 Fu-Hwa Albatross Bond Fund

〃〃 9,138,690 98,184 - 98,184

〃〃 Prudential Financial Bond Fund

〃〃 21,293,741 227,309 - 227,309

〃〃 High Yield Securities Investment Trust Fund

〃〃 18,585,494 257,532 - 257,532

〃〃 Increment Securities Investment Trust Fund

〃〃 16,442,935 240,008 - 240,008

〃〃 President James Bond Fund

〃〃 5,213,460 77,249 - 77,249

(Notes 1): The market value of investment accounted for under equity method was based on the net asset value of the investee company, while the market value of investment accounted for under cost method was based on acquisition cost if not listed or the average closing price during the last month of the year if listed.

(Notes 2): The market value of AsiaCast Network Systems, Inc. was based on the expected salvage value under liquidation.

45

d) The cumulative buying, selling of one specific security over $100,000 or 20 percent of the capital stock for the year ended December 31, 2003:

Beginning balance Additions Disposals Ending balance

Investor Name of the securities General ledger

account Number of

shares Amount Number of shares Amount Number of

shares Amount Book value Gain/Loss from disposal Number of shares Amount

Microelectronic Technology Inc.

Prudential Bond Fund

Short-term investment

13,415,991 $196,280 55,003,783 $815,453 54,333,874 $805,453 $801,397 $ 4,056 14,085,900 $210,336

〃 Prudential Well Pool Fund

〃 3,518,009 41,560 62,815,973 752,327 48,536,940 582,068 579,530 2,538 17,797,042 214,356

〃 ABN AMRO Select Bond Fund

〃 - - 28,929,640 312,336 28,929,640 312,635 312,336 299 - -

〃 Solomon Bond Fund 〃 18,405,554 201,553 18,405,554 202,791 36,811,108 405,951 404,324 1,627 - - 〃 TLAM B.B. Bond

Fund 〃 20,617,931 219,381 33,398,243 359,053 54,016,174 580,029 578,434 1,595 - -

〃 Safe Income Bond Fund

〃 2,889,714 40,014 13,001,722 182,491 12,713,149 178,491 177,527 964 3,178,287 44,978

〃 Capital Cash Reserves Bond Fund

〃 3,767,217 41,300 25,320,964 281,053 23,394,481 259,903 258,586 1,317 5,693,700 63,767

〃 Grand Cathay Bond Fund

〃 - - 114,025,563 1,408,681 90,647,302 1,120,967 1,117,816 3,151 23,378,261 290,865

〃 Ta Chong Bond Fund 〃 - - 13,373,117 165,700 13,373,117 165,870 165,700 170 - - 〃 Ta Chong Callop

Bond Fund 〃 9,580,323 98,000 76,277,993 789,831 81,867,574 849,881 846,159 3,722 3,990,742 41,672

〃 Fu Hwa Albatross Bond Fund

〃 - - 45,693,452 486,133 36,554,762 389,633 387,949 1,684 9,138,690 98,184

〃 Shin Kong ChiShun Fund

〃 - - 36,900,108 516,577 36,900,108 517,517 516,577 940 - -

〃 Shin Kong NTD High Yield Fund

〃 - - 14,094,460 224,351 14,094,460 224,635 224,351 284 - -

〃 High Yield Securities Investment Trust Fund

〃 - - 55,756,482 769,302 37,170,988 512,932 511,770 1,162 18,585,494 257,532

〃 Increment Securities Investment Trust Fund

〃 - - 34,218,615 499,174 17,775,680 259,373 259,166 207 16,442,935 240,008

〃 Prudential Financial Bond Fund

〃 - - 72,274,170 768,265 50,980,429 542,965 540,956 2,009 21,293,741 227,309

〃 President James Bond Fund

〃 - - 15,640,380 230,974 10,426,920 154,173 153,725 448 5,213,460 77,249

e) Real estate acquired amounting to over $100,000 or 20 percent of the Company’s capital stock for the year ended December 31, 2003:

None.

f) Real estate disposed amounting to over $100,000 or 20 percent of the Company’s capital stock for the year ended December 31, 2003:

None.

46

g) Purchases and sales transactions with related parties over $100,000 or 20 percent of the Company’s capital stock for the year ended December 31, 2003:

Transactions Difference with general transactions Accounts receivable (payable)

Company Counter party

Relationship with the

Company Purchases

(Sales) Amount

Percentages of purchases

(sales) Term Unit price Term Amount

Percentage of accounts

receivable (payable) Note

Microelectronic Technology Inc.

Jupiter Technology (Wuxi) Inc.


Purchase $341,458 19% 30 days N/A N/A ($594) -

h) Receivables from related parties over $100,000 or 20 percent of the Company’s capital stock as of December 31, 2003:

None.

i) Information on derivative transactions:

Please see Note 8.

47

2) Information of Subsidiaries:

a) Related information on subsidiaries as of December 31, 2003: The net income Original amount Shares held by the Company / (loss) of the The income / The main business December December Number Investee (loss) recorded

Investor Investee company Location scope 31, 2003 31, 2002 of shares Percentage Book value Company by the company Note Microelectronics Technology, Inc.

Sasson International Holdings Inc.

BVI Investment planning and consulting

$659,428 $659,428 2,350 100.00% $2,053,194 ($60,377) ($60,377) Wholly-owned subsidiary

〃 Global PCS Inc. Hsinchu, Taiwan

Communication $134,847 $134,847 16,192,499 80.19% ($4,739) ($86,419) ($63,233) Majority-owned subsidiary

〃 Millennium Telecom Inc.

Taipei, Taiwan


$190,000 $190,000 18,999,994 99.99% $162,713 ($3,152) ($3,152) 〃

〃 AsiaCast Network Systems, Inc.

Taipei, Taiwan

Communication $82,327 $82,327 7,962,738 37.04% $3,878 Note ($12,378) Investee accounted for under the equity method

Sasson International Holding Inc.

EURO-MIT S.A.R.L

Luxembourg Communication US$15,000 US$15,000 500 100.00% $1,614 - - Subsidiary of Sasson International Holdings Inc.

〃 Welltop Technology Co.,Ltd

BVI Investment planning and consulting

US$828,000 US$828,000 828,000 100.00% ($29,485) $57 $57 〃

〃 Jupiter Network Corp.

BVI 〃 US$6,606,500 US$4,286,000 6,606,500 100.00% $153,524 ($41,769) ($41,769) 〃

〃 Zeus Communications, Inc.

Delaware, USA

〃 US$660,300 US$430,800 660,300 100.00% $15,209 ($4,168) ($4,168) 〃

Welltop TechnologyCo.,Ltd

Optical Microwave Networks Inc.

California USA

Communication US$737,600 US$737,600 43,000,000 100.00% ($29,557) $156 $156 Subsidiary of Welltop Technology Co.,Ltd

Jupiter Network Corp.

Jupiter Technology (Wuxi) Inc

Wuxi China Communication US$4,322,500 US$2,639,000 - 91.00% $90,328 ($37,051) ($33,716) Subsidiary of Jupiter Network Corp.

〃 Wuxi Zeus Technology Inc.

Wuxi China 〃 US$2,275,000 US$1,638,000 - 91.00% $63,182 ($8,765) ($7,976) 〃

Zeus Communications,Inc.


Wuxi China Communication US$427,500 US$261,000 - 9.00% $8,934 ($37,051) ($3,335) Subsidiary of Zeus Communications, Inc.

〃 Wuxi Zeus Technology Inc.

Wuxi China 〃 US$225,000 US$162,000 - 9.00% $6,249 ($8,765) ($789) 〃

Millennium Telecom Inc.

Neobits Technology Inc.

Taipei, Taiwan

Communication $30,575 $30,575 1,363,000 40.00% $7,116 ($17,791) ($7,116) Investee accounted for under the equity method by Millennium Telecom Inc.

〃 Asia Global Crossing Taiwan

Taipei, Taiwan

〃 $320,000 $320,000 32,000,000 40.00% $320,000 - - 〃

Note:.The long-term investment loss of AsiaCast Network Systems, Inc. was estimated to be $12,378 calculated based on the expected salvage value under liquidation.

48

b) Loans to others attributed to financial activities as of December 31, 2003:

Collateral

Number Loan of company Lower General ledger account

The biggest amount in 2003

December 31, 2003 Rate Type of

loan

Amount of selling each

other

Required reason of short-term financing

Appropriation allowance for

bad debts Name Value

The credit limit for each borrower

The limited of total amount

of loan 1 Sasson

International Holding Inc.

Millennium Telecom, Inc.

Other receivable

$363,904 $363,904 - Note $ - Operations $ - - $ - $860,775 $860,775

Note: Short-term financing.

c) The endorsements and guarantees provided by the subsidiaries to others as of December 31, 2003: Guarantor company Guarantee company

Number Name Name Relationship with

the Company

The limit of guarantee for such

party

The highest outstanding

guarantee amount during 2003

The outstanding guarantee amount at Dec. 31, 2003

The amount of guarantee with

collateral placed

The ratio of accumulated

guarantee amount to net asset value of the Company

The ceiling of the outstanding

guarantee for the respective party

1 Sasson International Holding Inc.



$2,053,194 $34,612 $12,912 - 0.6% $2,053,194

d) The details of marketable securities as of December 31, 2003:

Investor Kinds of

marketable securities

Name of marketable securities The relationship of the issuers with the Company General ledger accounts Number of shares Book value Percentage Market value (Note)

Sasson International Holdings Inc. Stock Euro-MTI S.A.R.L Subsidiary of Sasson International Holdings Inc.

Long-term investment 500 $1,614 100.00% $1,614

〃〃 Welltop Technology Co., Ltd 〃〃 828,000 (29,485) 100.00% (29,485) 〃〃 Jupiter Network Corp. 〃〃 6,606,500 153,524 100.00% 153,524 〃〃 Zeus Communications ,Inc. 〃〃 660,300 15,209 100.00% 15,209 〃〃 Taicom Capital Ltd. None 〃 20,000 339,780 13.56% 339,780 〃〃 Inter WAVE Communication

Intl. 〃〃 222,120 24,906 5.15% 33,426

〃〃 Scientific Technology Inc. 〃〃 29,273 118,923 11.00% 118,923 〃 Fund NAVF II-LP 〃〃 - 110,429 5.16% 110,429 〃 Stock Digital United Holdings

Limited 〃〃 223,000 68,194 0.34% 68,194

〃〃 SR Telecom 〃〃 24,457 6,454 2.00% 5,255 〃〃 Greast Communication

Technology Co., Ltd. 〃〃 - 47,906 19.82% 47,906

49

Investor Kinds of

marketable securities

Name of marketable securities The relationship of the issuers with the Company General ledger accounts Number of shares Book value Percentage Market value (Note)

Sasson International Holdings Inc Stock Other None Long-term investment 9,433,333 139,598 - 139,598

Welltop Technology Co.,Ltd Stock Optical Microwave Networks Inc.

Wholly-owned subsidiary Long-term investment 43,000,000 (29,557) 100.00% (29,557)

Jupiter Network Corp. Stock Jupiter Technology (Wuxi) Inc Majority-owned subsidiary Long-term investment - 90,328 91.00% 90,328 〃〃 Wuxi Zeus Technology Inc. 〃〃〃 - 63,182 91.00% 63,182

Zeus Communications ,Inc. Stock Jupiter Technology (Wuxi) Inc Majority-owned subsidiary Long-term investment - 8,934 9.00% 8,934 〃〃 Wuxi Zeus Technology Inc. 〃〃 - 6,249 9.00% 6,249

Millennium Telecom. Inc. Stock Neobits Technology Inc. Investee accounted for under equity method

Long-term investment 1,363,000 7,116 40.00% 7,116

〃〃 Asia Global Crossing Taiwan. 〃〃 32,000,000 320,000 40.00% 320,000 〃〃 Transcom Inc. None 〃 600,000 7,200 1.30% 7,200

(Note): The market value of investments accounted for under cost method is based on average closing price during the last month of the year if listed, or on acquisition cost if not listed. The market value of investment accounted for under equity method is based on the net asset value of the investee company. The market value of Asia Global Crossing Taiwan is based on the option exercise price.

e) The cumulative buying, selling of one specific security over $100,000 or 20 percent of the Company’s capital stock for the year ended December 31, 2003: None.

f) Real estate acquired amounting to over $100,000 or 20 percent of the Company’s capital stock for the year ended December 31, 2003: None.

g) Real estate disposed amounting to over $100,000 or 20 percent of the Company’s capital stock for the year ended December 31, 2003: None.

h) Purchases and sales transactions with related parties over $100,000 or 20 percent of the Company’s capital stock for the year ended December 31, 2003: None.

i) Receivables from related parties over $100,000 or 20 percent of the Company’s capital stock as of December 31, 2003: None.

j) Information on derivative transactions: None.

50

3) Disclosure of related information of investment in Mainland China:

a) Basic information, change in investment balance and profits/losses recognized from the indirect investment:

Amount of remittance out in 2002

Name of investee in Mainland

China Main activities of

investee Capital Method of investment

Beginning balance of

remittance in 2003 Remittance out

Remittance in

Ending balance of remittance from

Taiwan on December 31, 2003

Shares held by the Company

(Direct indirect)

(Note ) Profit/losses recognized in

2003

Ending balance of book value on

December 31, 2003

Ending balance of profit

remittance into Taiwan


Satellite communication and microwave communication and consulting service

USD4,750,000 Invest to Mainland China through activating company on third area

USD2,900,000 USD1,850,000 $ - USD4,750,000 100% ($37,051) $99,262 -


Satellite communication and microwave communication and consulting service


USD1,800,000 USD700,000 $ - USD2,500,000 100% (8,765) 69,431 -

Greast Communication Technology Co., Ltd.

GreastCom designs,manufactures, and sells the following items for W-CDMA and cdma2001： Base band RF Sub-system；

Repeater；Low Noise Power Amplifier；Linear Power Amplifier；Up/Down Converter；RF Chipset


USD1,390,000 USD20,000 $ - USD1,410,000 19.82% - 47,906 -

Note: Profit/losses recognized based on the financial statements audited by the Company’s auditors.

The ceiling amount of the Company for investment in Mainland China

Ending balance of investment from Taiwan as of December 31, 2003

Approved investment amount by Ministry of Economic Afairs R.O.C. Net worth × 40%

USD$8,660,000 USD$12,410,169 $1,764,177

51

b. Significant transactions with the direct and indirect investments in Mainland China (the amount is the figures prior to eliminating the purchase and sales transactions between the Company and the investee companies in China through its subsidiaries (the middlemen) in other countries.)

(a) Purchase:

(i) The Company’s net purchase from Jupiter Technology (Wuxi) Inc. For the years ended December 31, 2001 2002 2003 Amount Percentage Amount Percentage Amount Percentage Jupiter Technology (Wuxi) Inc. $ 7,656 - $ 450,206 21% $ 595,435 26%

(ii) Net purchase from Trusin Limited in Hong Kong.

For the years ended December 31, 2001 2002 2003 Amount Percentage Amount Percentage Amount Percentage Trusin Limited $ 7,656 100% $ 216,227 100% $ 720 100%

(b) Accounts payable:

(i) The Company’s accounts payable to Jupiter Technology (Wuxi) Inc. For the years ended December 31, 2001 2002 2003 Amount Percentage Amount Percentage Amount Percentage Jupiter Technology (Wuxi) Inc. $ 5,536 - $ 50,590 8% $ 87,656 22%

(ii) Accounts payable to Trusin Limited

For the years ended December 31, 2001 2002 2003 Amount Percentage Amount Percentage Amount Percentage Trusin Limited $ 5,536 100% $ 589 100% $ - -

52

(c) Sales:

(i) The Company’s net sales to Jupiter Technology (Wuxi) Inc. and Wuxi Zeus Technology Inc. For the years ended December 31, 2001 2002 2003 Amount Percentage Amount Percentage Amount Percentage Jupiter Technology (Wuxi) Inc. $ 6,133 - $ 445,997 12% $ 267,887 7% Wuxi Zeus Technology Inc. - - 1,340 - 27,723 1% $ 6,133 - $ 447,337 12% $ 295,610 8%

(ii) Net sales to Trusin Limited. For the years ended December 31, 2001 2002 2003 Amount Percentage Amount Percentage Amount Percentage Trusin Limited $ 6,133 12% $ 263,396 39% $ - -

(d) Accounts receivable:

(i) The Company’s accounts receivables from Jupiter Technology (Wuxi) Inc. and Wuxi Zeus Technology Inc. For the years ended December 31, 2001 2002 2003 Amount Percentage Amount Percentage Amount Percentage Jupiter Technology (Wuxi) Inc. $ 8,108 1% $ 139,942 19% $ 119,128 15% Wuxi Zeus Technology Inc. - - 293 - 13,245 2% $ 8,108 1% $ 140,235 19% $ 132,373 17%

(ii) Accounts receivable from Trusin Limited. For the years ended December 31, 2001 2002 2003 Amount Percentage Amount Percentage Amount Percentage Trusin Limited $ 8,108 38% $ 15,024 100% $ - -

53

(e) Property transaction

Microelectronics Technology, Inc. sold certain machinery and equipment to Jupiter Technology (Wuxi) Inc. and Wuxi Zeus Technology Inc.

2001 Name of investee in Mainland China Selling price Gain on disposal Other receivable Jupiter Technology (Wuxi) Inc. $ 6,007 $ 1,036 $ 3,204 2002 Name of investee in Mainland China Selling price Gain on disposal Other receivable Jupiter Technology (Wuxi) Inc. $ 7,025 $ 184 $ 52 Wuxi Zeus Technology Inc. 784 625 20 $ 7,809 $ 809 $ 72 2003 Name of investee in Mainland China Selling price Gain on disposal Other receivable Jupiter Technology (Wuxi) Inc. $ 4,679 $ 1,929 $ 3,619 Wuxi Zeus Technology Inc. 7,499 1,421 1,749 $ 12,178 $ 3,350 $ 5,368

～1～

REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Microelectronics Technology, Inc.

We have audited the accompanying consolidated balance sheets of Microelectronics Technology, Inc. (the Company) and its subsidiary, Sasson International Holdings Inc. (Sasson) as of December 31, 2001, 2002 and 2003, and the related consolidated statements of income, of changes in shareholders' equity and of cash flows for the years then ended, which are expressed in thousands of New Taiwan dollars. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. As described in Note 4 (5) to the consolidated financial statements, certain long-term investments were accounted for under the equity method based on the investee company’s financial statements which were audited by other auditors. Our opinion in so far as it relates to the investment loss amounting to NT$25 million, NT$27 million and NT$3 million for the years ended December 31, 2001, 2002 and 2003, respectively, and the related long-term investment balances of NT$209 million, NT$182 million and NT$163 million as of December 31, 2001, 2002 and 2003, respectively, which were included in the financial statements, is based solely on the reports of the other auditors.

We conducted our audits in accordance with generally accepted auditing standards and related rules in the Republic of China. Those rules and standards require that we plan and perform the audits 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Microelectronics Technology, Inc. and its subsidiary, Sasson International Holdings Inc. as of December 31, 2001, 2002 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles and the “Rules Governing the Preparation of Financial Statements of Securities Issuers” in the Republic of China.

February 10, 2004 -------------------------------------------------------------------------------------------------------------------------------The accompanying consolidated financial statements are not intended to present the financial position and results of operations and cash flows of the Company and its subsidiary in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of China. The standards, procedures and practices in the Republic of China governing the audit of such consolidated financial statements may differ from those generally accepted in countries and jurisdictions other than the Republic of China. Accordingly, the accompanying financial statements and report of the independent accountants are not intended for use by those who are not informed about the accounting principles or auditing standards generally accepted in the Republic of China, and their applications in practice.

～2～

Corporate Directory Directors and Executive Officers

Patrick Wang Chairman Chi-Chia Hsieh Vice-Chairman Lory Pike Director, Representative of Agilent Technologies Inc. Wesley Huang Director Amy Ding Director Bill Wurst Supervisor Wayne Chan Supervisor, Representative of Agilent Technologies Inc. Andrew Chu President Allen Yen Senior Vice President, GM of Satcom and Mobile

Division Victor Your Senior Vice President Allen Chen Vice President, GM of Radio Division Shu-huei Fuong Vice President and Chief Financial Officer Jason Chang Vice President, R&D Ken Su Vice President, Manufacturing Location Headquater Microelectronics Technology Inc. No.1, Innovation Road II Hsinchu Science Industrial Park, Taiwan Tel:886-3-577-3335 Fax: 886-3-577-0194 Manufacturing Sites Jupiter Technology (Wuxi) Co., Ltd. B15, Block 52, Wuxi State High & New Technology Industry Development Zone, Wuxi, Jiangsu Province, China Tel: 510-588-9890 Fax:510-522-9892 Optical Microwave Networks Inc. (OMNI) 130, Rose Orchard Way, San Jose, CA95134, USA Tel: 408-954-0466 Fax: 408-954-0908

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