QUANTA COMPUTER INC. FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 AND INDEPENDENT AUDITORS REPORT

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1 FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 AND INDEPENDENT AUDITORS REPORT Address:No.4, Wen-Ming 1 ST street, Kuei-Shan Hsiang, Taoyen Shien, Taiwan. Telephone:

2 FINANCIAL STATEMENTS TABLE OF CONTENTS Contents Page Cover Page 1 Table of Contents 2 Independent Auditors Report 3 Balance Sheets 4-5 Statements of Income 6 Statements of Changes in Stockholders' Equity 7 Statements of Cash Flows 8-9 Notes to Financial Statements

3 INDEPENDENT AUDITORS REPORT To the Board of Directors and Shareholders of Quanta Computer Inc.: We have audited the accompanying balance sheets of Quanta Computer Inc. as of June 30, 2004 and 2003, and the related statements of income, changes in stockholders equity, and cash flows for the six months then ended. 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. Except as described in the following paragraph, we conducted our audits in accordance with Rules Governing Certified Public Accountant s Examination and Certification of Financial Statements and auditing standards generally accepted in the Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 4.e, as of June 30, 2004 and 2003, long-term investments of Quanta Computer Inc. were $5,779,148 and $4,513,974, respectively. Investment income related thereto for the six months ended June 30, 2004 and 2003, were $1,147,622 and $676,995, respectively, which were recognized based upon the financial statements prepared by the investee companies and not audited in compliance with the audit procedures mentioned in the preceding paragraph. In our opinion, except for the effects of any adjustments that might have emerged had the financial statements of investee companies been audited by independent accountants, the financial statements referred to above present fairly, in all material respects, the financial position of Quanta Computer Inc. as of June 30, 2004 and 2003, and the results of its operations and its cash flows for the six months then ended in conformity with generally accepted accounting principles in the Republic of China. Taipei, Taiwan, R.O.C. August 20, 2004 The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with the accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures, and practices to audit such financial statements are those generally accepted and applied in the Republic of China

4 BALANCE SHEETS JUNE 30, 2004 AND 2003 (New Taiwan Dollars in Thousands, Except for Share Data) June 30, 2004 June 30, 2003 Amount % Amount % ASSETS Current Assets: Cash and cash equivalents (Notes (2) and (4)(a) ) $ 17,757, ,387, Short-term investments, net of allowance for market decline (Notes (2) and (4)(b) ) 40,443, ,967,202 9 Notes receivable, net 3,454-25,621 - Accounts receivable, net of allowance for doubtful accounts and sales allowances(notes (2) and (4) (c ) ) -Related parties 7,681, ,183, Other customers 31,215, ,973, Foreign exchange forward contracts receivable, less payables (Notes (2) and (4)(p) ) 5,090-1,900 - Discount on foreign exchange forward contracts (Note (2)) (1,192) - (1,265) - Other receivables 793, ,060 1 Other financial assets - current 116, ,920 - Inventories (Notes (2) and (4)(d) ) 7,215, ,985,357 8 Prepayments 856, ,302 - Deferred income tax assets - current (Notes (2) and (4)(n) ) 1,006, ,694 1 Other current assets 84, , ,178, ,723, Long-Term Investments (Notes (2) and (4)(e) ): Long-term investments accounted for under the equity method 19,185, ,082, Long-term investments accounted for under the cost method 4,682, ,451,836 3 Other long-term investments 1,589, ,271-25,457, ,895, Other financial assets - non-current (Note (4)(n) ) 7,477-10,264 - Property, Plant, and Equipment, at cost (Notes (2), (4)(f) and (6)): Land 2,755, ,755,182 2 Buildings and plant 1,493, ,484,682 1 Production equipment 1,953, ,020,678 3 Molds and tools 1,168, ,038,464 1 Furniture and office facilities 145, ,660 - Transportation equipment 15,753-12,669 - Miscellaneous equipment 724, ,598 1 Leasehold improvements 24,496-24,496-8,280, ,110,429 8 Less: Accumulated depreciation (2,699,440) (2) (3,071,308) (3) Prepayment for equipment 68, ,297 - Construction in progress 1,273, ,362-6,922, ,317,780 5 Other Assets Deferred income tax assets - non-current (Notes (2) and (4)(n) ) 34, Pledged time deposits (Note (6)) 133, ,040 - Other assets (Notes (2) and (6)) 365, , , ,581 - TOTAL ASSETS 140,099, ,530, The accompanying notes are an integral part of the financial statements. Please refer to Independent Auditors' Report dated on August 20,

5 BALANCE SHEETS JUNE 30, 2004 AND 2003 (New Taiwan Dollars in Thousands, Except for Share Data) June 30, 2004 June 30, 2003 LIABILITIES AND STOCKHOLDERS' EQUITY Amount % Amount % Current Liabilities: Short-term borrowings (Note (4)(g) ) $ 12,622, ,841 - Notes payable 4,438-3,217,665 3 Accounts payable - Related parties 22,362, ,643, Vendors 14,729, ,347, Income tax payable 602, ,390 - Accrued expenses 2,715, ,721,841 2 Other payables 5,870, ,342,686 5 Convertible corporate bonds - current (Notes (2) and (4)(h) ) 15,277, ,550,798 6 Current portion of long-term debt (Note (4)(i) ) 261, ,462 - Warranty reserve (Note (2)) 1,540, ,672 - Other current liabilities 405, ,613-76,393, ,768, Long-Term Liabilities Convertible corporate bonds - non-current (Notes (2) and (4)(h) ) ,386,000 9 Long-term debt (Note (4)(i) ) 286, , ,918-10,933,941 9 Other Liabilities Accrued pension liabilities (Note (4)(j) ) 12,122-10,881 - Deferred income tax liabilities- non-current (Notes (2) and (4)(n) ) ,309 - Deferred credits (Note 2 ) 604, , , ,143 - Total Liabilities 77,297, ,263, Stockholders' Equity 2,799,573,789 shares issued and outstanding in 2004; authorized 27,995, ,460, ,500,000,000 shares, 2,746,027,119 shares issued and outstanding in 2003.(Notes (2) and (4)(l) ) Stock dividends to be distributed (Note (4)(l) ) 3,199, ,195, ,460, Capital Surplus (Note (2)) Premium on stock issuance 6,149, ,507,671 2 Long-term equity investments 2,743, ,781 - Donations received ,893, ,597,496 2 Retained Earnings Legal reserve (Note (2)) 7,071, ,749,274 5 Special reserve (Note (2)) 10, Undistributed earnings (Note (4)(m) ) 16,363, ,426, ,446, ,175, Other adjustments to stockholders' equity Unrealized market decline of long-term equity investments (Note (2)) - - (4,797) - Cumulative translation adjustments (Note (2)) (28,375) - 37,935 - (28,375) - 33,138 - Treasury Stock (Notes (2) and (4)(m) ) (703,678) Total Stockholders' Equity 62,802, ,266, Commitments and Contingencies (Note (7)) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 140,099, ,530, The accompanying notes are an integral part of the financial statements. Please refer to Independent Auditors' Report dated on August 20,

6 STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (New Taiwan Dollars in Thousands, Expect for Share Data) For the Six Months Ended June 30, Amount % Amount % Gross sales $ 136,006, $ 121,491, Less: Sales returns 712, ,240 - Sales allowances 248, ,386 1 Net sales 135,045, ,599, Cost of sales 127,591, ,999, Gross margin 7,454, ,600,744 6 Unrealized intercompany profits, beginning of the period 298, ,153 - Unrealized intercompany profits, end of the period (394,394) - (344,130) - 7,358, ,527,767 6 Operating expenses Selling expenses 2,494, ,353,258 1 Administrative expenses 461, ,478 - Research and development expenses 1,536, ,039, ,491, ,740,116 2 Income from operations 2,867, ,787,651 4 Non-operating income Interest income 111, ,577 - Investment income accounted for under the equity method 2,877, ,247 - (Notes (2) and (4)(e) ) Dividend income 22,443-41,181 - Gain on disposal of investments 366, ,401 - Foreign exchange gain, net (Note (2)) ,315 - Other incomes 829, ,333, ,206, ,503,045 1 Non-operating expenses Interest expense 101,033-61,214 - Other investment loss (Notes (2) and (4)(e) ) 80,330-27,873 - Foreign exchange loss, net (Note (2)) 44, Loss on inventory market decline and obsolescence (Note (2)) 158, ,232 - Other expenses 145, , , ,117 - Income before income tax 6,544, ,665,579 5 Income tax expense (Notes (2) and (4)(k) ) 579, ,450 - Net income $ 5,964,452 5 $ 6,064,129 5 Earnings per share (Notes (2) and (4)(o) ) Before Tax After Tax Before Tax After Tax Basic earnings per share Basic earnings per share - retroactively adjusted Diluted earnings per share Diluted earnings per share - retroactively adjusted The accompanying notes are an integral part of the financial statements. Please refer to Independent Auditors' Report dated on August 20,

7 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (New Taiwan Dollars in Thousands, Expect for Share Data) Retained Earnings Other adjustments Unrealized losses Cumulative Total Common Stock dividends Capital Legal Special Undistributed on long-term Translation Treasury Stockholders' Stock to be distributed Surplus Reserve Reserve Earnings investments Adjustments Stock Equity Balance on January 1, 2003 $ 24,618,428-2,615,369 4,664,617-16,285,723 (1,522) 46,861-48,229, earnings distribution: Legal reserve ,084,657 - (1,084,657) Remuneration to directors and supervisors (30,000) (30,000) Cash dividends (4,923,686) (4,923,686) Employee bonuses 380, (390,291) (10,291) Stock dividends 2,461, (2,461,843) Net income for the six months ended June 30, ,064, ,064,129 Effects of change in percentage of ownership in long-term equity investments - - (17,873) - - (32,710) (50,583) Cumulative translation adjustments (8,926) - (8,926) Unrealized market decline of long-term equity investments held by investee companies recognized per ownership (3,275) Balance on June 30, 2003 $ 27,460,271-2,597,496 5,749,274-13,426,665 (4,797) 37,935-49,270,119 Balance on January 1, 2004 $ 27,991,740-7,908,329 5,749,274-20,614,242 - (10,945) - 62,252, earnings distribution: Legal reserve ,321,899 - (1,321,899) Special reserve ,944 (10,944) Remuneration to directors and supervisors (40,000) (40,000) Cash dividends (5,598,583) (5,598,583) Employee bonuses - 400, (444,000) (44,000) Stock dividends - 2,799, (2,799,292) Net income for the six months ended June 30, ,964, ,964,452 Effects of change in percentage of ownership in long-term equity investments , ,423 Cumulative translation adjustments (17,430) - (17,430) Investee companies' unrealized loss on long-term investments per ownership Convertible corporate bonds converted to common stock 3,998-23, ,484 Purchase of treasury stock (703,678) (703,678) Balance on June 30, 2004 $ 27,995,738 3,199,292 8,893,238 7,071,173 10,944 16,363,976 - (28,375) (703,678) 62,802,308 The accompanying notes are an integral part of the financial statements. Please refer to Independent Auditors' Report dated on August 20,

8 STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (New Taiwan Dollars in Thousands, Expect for Share Data) For the Six Months Ended June 30, Cash flows from operating activities: Net income $ 5,964,452 6,064,129 Adjustment to reconcile net income to net cash provided by (used in) operating activities: Depreciation 322, ,024 Amortization 52,157 46,155 Amortization of corporate bonds issue cost 34,402 13,747 Provision for inventory market decline and obsolescence 40, ,687 Provision for impairment of idled assets 24,421 - Provision for doubtful accounts and sales allowances 89,978 70,358 Deferred credits transferred to revenue (26,729) (20,337) Provision (reversal) for warranty reserve 934,722 (105,612) Loss on disposal and scrapping of property and equipment, net 10,478 33,930 Gain on disposal of long-term investments (51,528) Gain on investments recognized under the equity method over cash dividends received (2,845,077) (573,023) Bonuses received from long-term investment in partnerships over gain on investments (49,951) 22,421 Permanent impairment on long-term investments recognized under the cost method 66,250 6,375 Loss on other investments 64,389 - Foreign exchange rate effects (49,609) 2,049 Changes in assets and liabilities: Notes receivable 7,925 (23,826) Accounts receivable 8,111,355 (5,967,637) Inventories (22,376) 1,197,426 Foreign exchange forward contracts payable, net (1,560) (1,900) Discount on foreign exchange forward contracts 2,191 1,265 Other receivables 137, ,203 Other financial assets - current (48,226) 364,494 Prepayments (543,342) 97,863 Other current assets 12,737 (60,131) Deferred income tax assets, net (41,522) 200,602 Notes payable (40,743) (813,039) Accounts payable (7,049,703) 1,355,187 Accured expenses (1,144,587) (223,852) Income tax payable 33,417 (161,852) Other payables (146,734) 222,298 Other current liabilities 35,811 (158,676) Accrued pension liabilities 1,241 3,808 Other liabilities 111, ,235 Net cash provided by operating activities 3,995,669 2,619,371 Cash flows from investing activities: Proceeds from sale of property and equipment 274,988 11,678 Purchase of property and equipment (964,741) (649,983) Decrease in pledged time deposits 44, ,600 (Increase) decrease in short-term investments (21,411,594) 5,958,194 Increase in long-term investments (2,393,274) (2,281,512) Proceeds from long-term investments returned 14,638 17,385 Proceeds from sale of long-term investments 160,347 - Increase in other long-term investments (284,163) (69,230) Decrease in other receivables - dividend income 1,496,660 1,600,000 Decrease (increase) in other financial assets - non-current 1,699 (2,117) Increase in other assets (36,533) (248,316) Net cash (used in) provided by investing activities (23,097,473) 4,441,

9 STATEMENTS OF CASH FLOWS (CONT'D) FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (New Taiwan Dollars in Thousands, Expect for Share Data) For the Six Months Ended June 30, Cash flows from financing activities: Increase (decrease) in short-term borrowings 7,860,412 (3,185,317) Repayment of current portion of long-term debt (133,232) (133,232) Increase (decrease) in convertible corporate bonds (125,948) 10,364,355 Employee bonuses and remuneration to directors and supervisors (10,291) (5,000) Purchase of treasury stock (703,678) - Net cash provided by financing activities 6,887,263 7,040,806 Foreign exchange rate effects 49,609 (2,049) Net Increase (decrease) in cash and cash equivalents (12,164,932) 14,099,827 Cash and cash equivalents, beginning of the period 29,922,878 6,287,556 Cash and cash equivalents, end of the period $ 17,757,946 20,387,383 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 70,492 77,234 Income tax $ 587, ,700 Non-cash investing and financing activities: Current portion of long-term debt $ 261, ,462 Convertible corporate bonds transferred to capital and capital surplus $ 27,484 - Cash dividends payable $ 5,598,583 4,923,686 Employee bonuses and remuneration to directors and supervisors payable $ 84,000 35,291 Long-term investments transferred to short-term investments $ 37,612 - Other receivables transferred to dividend income $ 277,983 - Purchase of property and equipment with cash and other payables: Property and equipment $ 837, ,355 Add: Other payables, beginning of the period 233, ,753 Less: Other payables, end of the period (106,245) (138,125) Cash paid $ 964, ,983 The accompanying notes are an integral part of the financial statements. Please refer to Independent Auditors' Report dated on August 20,

10 NOTES TO FINANCIAL STATEMENTS (1) Organization and Business Quanta Computer Inc. (the Company ) was incorporated on May 9, 1988 in the Republic of China (ROC) and engages primarily in the manufacturing, processing, and sales of laptop computers and telecommunication products. Lin-Ko and Hua-Ya factory campuses concentrate on the manufacturing of laptop computers and telecommunication products, while research and development activities are primarily performed in Lin-Ko and Hua-Ya campuses. Shares of the Company became officially listed and traded on the Taiwan Stock Exchange on January 8, As of June 30, 2004, the number of employees was 4,670. (2) Summary of Significant Accounting Policies The Company s financial statements were prepared in accordance with the generally accepted accounting principles of the Republic of China. Summary of significant accounting policies and their measurement basis are as follows: (a) Foreign Currency Translation The Company s functional currency is the New Taiwan dollar, the national currency of the ROC. Foreign currency financial statements have been translated in accordance with ROC Statement of Financial Accounting Standards ( SFAS ) No. 14, Accounting for Foreign Currency Transactions and Translation of Foreign Financial Statements. Under SFAS No. 14, the balance sheet accounts of any non-roc subsidiaries, which are denominated in currencies other than the New Taiwan dollar, are translated at exchange rates prevailing at the end of the period. Stockholders equity is translated by the historical rates except for the beginning balance of retained earnings. Revenue and expense accounts are translated using weighted-average exchange rates during the year. Gains and losses resulting from such translations are recorded as a cumulative translation adjustment, a separate component of stockholders equity. Foreign currency transactions are recorded at the exchange rates prevailing at the transaction dates. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated using the exchange rates prevailing on that date. The resulting exchange gains or losses from settlement of such transactions or translations of monetary assets and liabilities are reflected in the accompanying statements of income. Foreign-denominated long-term investments under the cost method are translated at the spot rates of the balance sheet date. When the amount is lower than the original cost, a translation difference is included in stockholders equity as cumulative translation adjustments

11 (b) Cash Equivalents Cash equivalents are defined as highly liquid short-term investments readily convertible into known amounts of cash and with maturities within three months. Interest rate fluctuations have little effect on the values of these investments. Cash equivalents include short-term bills with repurchase agreements, commercial paper and banker s acceptances and are stated at cost. (c) Short-Term Investments Short-term investments are carried at cost. Listed stock, close-end and open-end mutual funds are valued by the lower of cost or market method on the balance sheet date. Market prices of listed stocks, and close-end mutual funds are determined by the average closing prices in the last month of an accounting period, while the market price of open-end mutual funds are determined by their net worth at the balance sheet date. Costs of securities and foreign mutual fund shares sold are determined by the weighted-average method, and the specific identification method is applied to others. (d) Accounts Receivables The Company engages in the factoring of its accounts receivable without recourse. For factoring of accounts receivable without recourse, the bank assumes the risk of credit losses. When factored, the receivable is credited and the commission fee is included in current earnings, reflected under loss on sale of receivable. Accounts receivable are carried at their net realizable value. An allowance based on the company s evaluation of the collectibility of notes and accounts receivables at period- end is provided and recognized as allowance for doubtful accounts and sales allowances. (e) Inventories Inventories are valued on a perpetual inventory basis and stated at the lower of cost or fair value. Cost is determined using the weighted-average method. Fair value is determined on the basis of net realizable value or replacement value. A provision for inventory devaluation and obsolescence is recorded when management determines that the market values of inventories are less than their cost basis or based on the number of months that inventory items remain unsold. Such provisions can be reversed in whole or in part if management further determines that the market values of inventories are greater than their cost basis. (f) Long-Term Equity Investments Long-term equity investments in which the Company owns less than 20% of the investee s voting shares or is not able to exercise significant influence over the investee s operations and financial policies are accounted for by the cost method. If there is evidence indicating that a decline in the value of an investment is other than temporary, the carrying amount of the investment is reduced to reflect its net realizable value and the related loss is recognized in the accompanying statements of income

12 When the Company has significant influence over the operating, financial and dividend policies of investees or has the intention to hold the investment for a long-term period, and owns less than 50% of the investee s voting shares, those investments are accounted for under the equity method. Some twenty-to-fifty-percent-owned ones are not carried under the equity method while preparing the first and the third quarter interim financial statements. According to SFAS and rules set forth by the former Securities and Futures Commission ( SFC ) under the Ministry of Finance ( MOF ), consolidated financial statements are required for majority-owned subsidiaries. (Consolidated financial statements are not prepared while compiling interim financial statements.) Upon sale of long-term investments, the weighted-average method is used to compute cost and disposal gain or loss. Any remaining balance of capital surplus and cumulative translation adjustments due to long-term equity investments will be recognized currently by the percentage of sale. Unrealized intercompany profits or losses resulting from transactions between the Company and an investee accounted for under the equity method are deferred. The profits or losses resulting from depreciated or amortized assets are recognized over the estimated economic lives of such assets. The profits or losses from other assets are recognized when realized. For long-term investments in partnerships, gains or losses are recognized by earnings distribution ratio of partnerships at the balance sheet date with book value thereof adjusted accordingly. For any drawing of earnings or return of capital, long-term investments will be adjusted downward accordingly. Other long-term investments refer to credit-linked deposits in connection with overseas convertible bonds, which will be redeemed at maturity. Interest revenue is recognized ratably over their term per interest rate at par. (g) Property, Plant, and Equipment and Their Depreciation Property, plant, and equipment are stated at cost. Major additions, improvements, and replacements are capitalized. Interest incurred due to asset acquisition is capitalized as part of the acquisition cost. Depreciation is applied on the straight-line method with economic lives less any salvage value. Assets still in use after full depreciation may continue to be depreciated by estimated economic lives and salvage values. Economic lives of major property and equipment are as follows: Buildings and plant Production equipment Molds and tools Furniture and office facilities Transportation equipment Miscellaneous equipment Leasehold improvements years 3-10 years 2 years 3-8 years 5 years 3-10 years 3-4 years

13 (h) Deferred Expenses Telephone line use charges, design fees for system boards and for battery molds, as well as software costs are amortized equally over 3 years. (i) Convertible Corporate Bonds Issue expense of convertible bonds with bondholders put options is amortized within the issue date and the expiration date of the put option. The unamortized amount is reported as deferred expense. As bondholders exercise the conversion right, the number of shares is calculated by the conversion price and the bond s par value on the conversion date. According to the terms of conversion, the Company transfers the number of shares at par value to common stock. The excess of conversion price over par value of common stock plus related issue cost are reflected as capital surplus premium on stock issuance. (j) Global Depository Receipts For global depository receipts issued at a premium, premium net of issue costs is transferred to capital surplus. Any excess of issue costs over premium is reflected as deferred charges and amortized annually. If issue costs are immaterial, then the issue costs are recognized as current expense. (k) Pension Plan The Company has a pension plan covering all regular employees, and contributes a certain ratio of monthly salaries paid to the pension fund, and deposits it with the Central Trust of China. Pension payments are drawn from the fund; with any deficiency reflected as a current expense. The Company adopted SFAS No. 18 Accounting for Pensions to account for pension expenses, which includes service and interest costs, projected return on pension fund assets, and net transitional benefit obligations. Unrecognized net transitional benefit obligations are amortized equally over 23 years. (l) Financial Derivatives Hedging designated forward contracts are recorded at spot rates at the contract date and adjusted by the balance sheet date exchange rate, with exchange gains and losses included in current earnings. Gain or loss, premium or discount difference between the contract and the spot rates, is recognized ratably over the term of forward contracts. Forward contract receivables netting related payables is reflected as an asset or a liability

14 Hedging designated foreign currency options are not reflected on the balance sheet on the contract date. Upon settlement, exchange gains and losses are included in current earnings. Premiums paid or collected on the purchase or sale of foreign currency options is reflected as receivables or payables, and ratably recognized over the contract term as current gain or loss. (m) Revenue Recognition Revenue is recognized when title to the product and risk and benefits of ownership is transferred to the customer. Otherwise recognition is deferred until conditions are met. Additionally, the Company ships product to designated inventory hubs at the request of certain customers. The Company recognizes revenue on these arrangements only at the time the customer collects inventory from the inventory hub, which is the point that title to the product and risk of ownership are transferred to those customers. (n) Warranty Reserve An allowance based on estimated warranty cost and past experience is provided for products with warranty and recognized as current expense. (o) Classification of Capital and Operating Expenditures Expenditures that benefit the Company in future years are capitalized, while immaterial expenditures or those with no future benefits are treated as current expense or loss. (p) Income Taxes Deferred income taxes are determined based on differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect during the years in which the differences are expected to reverse. The income tax effects resulting from taxable temporary differences are recognized as deferred income tax liabilities. The income tax effects resulting from deductible temporary differences, loss carryforwards and investment tax credits are recognized as deferred income tax assets. The realization of the deferred income tax assets is evaluated, and if it is considered more likely than not that the deferred tax assets will not be realized, a valuation allowance is recognized accordingly. Classification of the deferred income tax assets or liabilities as current or non-current is based on the classification of the related asset or liability. If a deferred income tax asset or liability is not directly related to a specific asset or liability, then the classification is based on the expected realization date of such deferred income tax asset or liability. According to the ROC Income Tax Law, undistributed income, if any, is subject to an additional 10% retained earnings tax. The surtax is charged to income tax expense after the appropriation of earnings is approved by the stockholders in the following year

15 (q) Legal Reserve and Capital Surplus Legal reserve is used exclusively to offset cumulative losses or to increase capital. Capitalization of legal reserve is permitted only until it reaches 50% of issued capital, and only 50% of it can be capitalized. It may not be used for any other purpose. According to ROC Company Law, capital surplus is used exclusively to offset cumulative losses and increase capital. Capital surplus resulting from long-term investments cannot be used to increase capital. If the Company revalues properties and uses capital surplus to offset cumulative losses, it must first be restored by future earnings before dividends or other distributions can be made. Capitalization of capital surplus must follow the ratio set forth by the former SFC. (r) Special reserve Should an item under stockholders equity be negative, an equal amount of special reserve should be provided from current and prior years retained earnings. Special reserve may be appropriated to retained earnings should the item recover. (s) Treasury stock The Company adopted SFAS No. 30 Accounting for Treasury Stock to account for the cost of the purchase of its outstanding stock as treasury stock and includes the treasury stock as a component of stockholder s equity in the accompanying balance sheet. Upon disposal of the treasury stock, the excess of the sale proceeds over cost is accounted for as capital surplus-treasury stock. If the sale proceeds are less than cost, the deficiency is accounted for as a reduction of the remaining balance of capital surplus-treasury stock. If the remaining balance of capital surplus-treasury stock is insufficient to cover the deficiency, the remainder is recorded as a reduction of retained earnings. The cost of treasury stock is computed using the weighted-average method. If treasury stock is retired, the weighted-average cost of the retired treasury stock is written off to offset the par value and the capital surplus premium, if any, of the stock retired. If the weighted-average cost written off exceeds the sum of both the par value and the capital surplus premium, the difference is accounted for as a reduction of capital surplus-treasury stock, or a reduction of retained earnings for any deficiency where capital surplus-treasury stock is insufficient to cover the difference. If the weighted-average cost written off is less than the sum of both the par value and premium, if any, of the stock retired, the difference is accounted for as an increase in capital surplus-treasury stock

16 (t) Earnings per Share ( EPS ) Basic EPS is computed based on the weighted-average number of common shares issued and outstanding, and is calculated by dividing net income by the weighted-average number of shares outstanding during the period. In the event of capitalization of retained earnings, capital surplus, or employee bonus, the share number is retroactively adjusted for additional shares issued. Diluted EPS is calculated by dividing net income by the weighted-average number of common shares used in the basic EPS calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding. Convertible corporate bonds issued by the Company are potentially dilutive common shares. If a dilutive effect does not exist, only basic EPS is disclosed; otherwise, diluted EPS shall be disclosed in addition to basic EPS. (3) REASONS FOR AND EFFECT OF ACCOUNTING CHANGES: None. (4) SUMMARY OF MAJOR ACCOUNTS: (a) Cash and Cash Equivalents June 30, 2004 June 30, 2003 Cash on hand and revolving fund $ 1,604 1,458 Checking accounts Saving accounts 16,698 3,599 Foreign currency deposits 280,817 5,057,831 Time deposits 17,458,539 15,324,249 Total $ 17,757,946 20,387,383 As of June 30, 2004, the Company entered into an agreement for a time deposit transaction of US$6,000 with BNP Paribas Paris. Such transaction grants BNP Paribas Paris to exercise foreign currency options (USD Call) two days before the maturity of the deposit at its discretion as set forth in the agreement. For relevant information in regarding of financial derivatives information, please refer to Note (4)(p). (b) Short-Term Investments June 30, 2004 June 30, 2003 Cost Market Value Cost Market Value Beneficiary Certificates $ 40,118,838 40,182,411 8,909,920 8,918,642 Common Stock 172, , , ,822 Other 152, , , ,536 Total $ 40,443,922 40,570,509 9,967,202 9,996,

17 (c) Accounts Receivable Accounts receivable June 30, 2004 June 30, Related parties $ 7,681,721 6,183,557 - Other customers 32,092,192 41,418,523 39,773,913 47,602,080 Less: Allowance for doubtful accounts and sales allowances (876,669) (445,204) Net $ 38,897,244 47,156,876 As of June 30, 2004, the Company sold accounts receivable to a financial institution. The receivables were sold without recourse. The total amount sold was US$200,000 ($6,748,000). The transaction was treated as a sale on the date the transfer of rights and obligations occurred. (d) Inventories June 30, 2004 June 30, 2003 Raw materials $ 3,729,847 4,916,337 Work in process 54, ,826 Finished goods 426, ,589 Merchandise 3,619,809 3,582,130 Inventories-in-transit 166, ,434 Total 7,996,936 9,835,316 Less: Allowance for inventory market decline and obsolescence (781,868) (849,959) Net $ 7,215,068 8,985,357 As of June 30, 2004 and 2003, the fire insurance coverage for the above inventories located in the Company s warehouse was $2,500,000, US$100,000 and $5,072,000, US$70,000, respectively

18 For the Six Months Ended June 30, 2004 and 2003 (e) Long-Term Investments Shares Book Shareholding Shares Book Shareholding Name of Investee Company (In Thousands) Value Ratio (In Thousands) Value Ratio Carried under the equity method Linko Computer GmbH - $ % (Initial investment: EUR90) Quanta International Ltd. 8,192 3,579, % 6,018 2,648, % (Initial investment: 2004: US$81,924; 2003: US$60,182) WK Technology Fund VI 37, , % 37, , % (Initial investment:$375,000) Quanta Storage Inc. 55,597 1,542, % 27, , % (Initial investment: $243,142) Quanta Display Inc. 766,987 12,294, % 766,897 7,960, % (Initial investment: $8,549,352) Quanta Venture Capital Co., Ltd. 99,990 1,239, % 99,990 1,047, % (Initial investment: $999,900) Quanta Network Systems Inc. 10,477 40, % 10,477 49, % (Initial investment: $111,065) CAM-CID Asia Pacific Investment Corp , % 3 104, % (Initial investment: US$2,750) June 30, 2004 June 30, 2003 Subtotal 19,185,241 13,082,061 Carried under the cost method Common Stock Ultralife Taiwan Inc. 6, % 6,625 66, % Alpha VC Fund, Inc ,000 30, % Evest Corp. 6,238 62, % 6,238 62, % Global Vision Venture Capital Co., Ltd. 32, , % 32, , % FuYu Venture Capital Investment Corp. 9,000 90, % 9,000 90, % Allied Material Technology Corp. 65, , % 60, , % Trumpion Microelectronics Inc. 2,865 65, % 2,340 60, % Cyberon Corp , % , % Giya Mobile Telecom Co., Ltd , % EDI Technology, Inc. 6, , % 6, , % CDIB Bio Science Ventures I Inc. 40, , % 40, , % Bio 21th Venture Copital Corp. 13, , % 13, , % Maxima Venture I Inc. 24, , % 14, , % China Power Venture Capital Corp. 19, , % 19, , % Taiflex Scientific Co.,Ltd , % Xin Tec Inc. 8, , % Allied Integrated Tatterning Corp. 29, , % Vision Venture Capital Fund 4,000 40, % Tech View Inc. 13, , % DigiMax 2,000 60, % Jemitek Electronics Crop. 2,250 29, % Alpha Network Inc. 42,500 1,062, % WE3 Technology Co., Ltd.(Initial investment: HK$10,124) 3,479 43, % FuYu (Cayman) Venture Capital Fund 2 35, % 2 45, % (Initial investment: 2004:US$1,200,2003:US$1,500) UC Fund II (Initial investment: US$2,000) 2,000 64, % 2,000 64, % Global Strategic Investment Fund 3,000 97, % 3,000 97, % (Initial investment: US$3,000) Ralink Technology Corp 2,530 77, % 2,000 69, % (Initial investment: 2004:NT$77,550;2003:NT$69,600) Fabric Networks, Inc ,319 22, % (Initial investment: US$659) Subtotal 4,463,068 2,614,

19 For the Six Months Ended June 30, 2003 and 2002 June 30, 2004 June 30, 2003 Shares Book Shareholding Shares Book Shareholding Name of Investee Company (In Thousands) Value Ratio (In Thousands) Value Ratio Preferred Stock Alventive, Inc. (Initial investment: US$3,000) ,975 - OSA Technologies, Inc. (Initial investment: US$1,500) ,000 46,620 - Triscend Corp. (Initial investment: US$3,000) ,695 - Protocom Corp.(Initial investment: US$2,000) 2, ,000 66,020 - Rasvia Systems, Inc. (Initial investment: US$3,800) 7, , ,450 - Questia Media, Inc. (Initial investment: US$5,000) 1, , , % Mellanox Technologies Ltd. (Initial investment: US$5,000) , % , % Fabric Networks, Inc. (Initial investment:us$1,341) ,685 46, % Nanosys, Inc. (Initial investment: US$500) , ,885 - Alpha & Omega Semiconductor, Ltd.(Initial investment: US$840) , % Subtotal 219, ,930 Total stock carried under the cost method 4,682,136 3,451,836 Other Long Term Investments Partnerships Strategic Value I L.P ,467 - (Initial investment:2004:us$1,955;2003$1,956) Morgan Stanley Dean Witter Venture Partners IV, L.P. - 8, ,527 - (Initial investment:2004:us$867;2003:us$812) GS PEP Technology 2000 Fund Offshore, L.P. - 21, ,670 - (Initial investment:2004:us$1,716;2003:us$1,775) GS Capital Partners Fund 2000 Offshore, L.P , ,207 - (Initial investment:2004:us$6,339;2003:us$5,492) Strategic Value II L.P , ,132 - (Initial investment:2004:us$4,389;2003:us$3,435) IPF III L.P. - 26, (Initial investment:us$800) Subtotal 431, ,003 Capital Stock Prepaid FuYu (Cayman) Venrture Capital Fund(Initial investment:us$1) Asia Pacific Genesis Venture Capital L.P.(Initial investment: US$3, , QCJ (Initial investment: 10, 000) - 3, Subtotal 129, Other Long-Term Investments- other 1,028,949 69,230 Subtotal 1,589, ,271 Total $ 25,457,271 16,895,

20 (i) As of June 30, 2004 and 2003, investments in credit-linked deposits in connection with overseas convertible bonds were the following: Issuer June 30, 2004 Deutsche Bank AG, Singapore Branch Overseas Convertible Corporate Bonds Convertible corporate bond of CMC Magnetics Corporation Interest Rate at Par (Note) Period 0.00% 2004/02/05~ 2006/10/06 Amount of Transaction Ending Balance USD 5,500 $ 185,449 Convertible corporate bond of United Microelectronics Corporation 0.00% 2003/07/11~ 2006/01/11 USD 5, ,700 Convertible corporate bond of Taiwan Semiconductor Manufacturing Limited 0.00% 2003/07/11~ 2006/01/11 USD 5, ,700 Convertible corporate bond of Formosa Plastic Corporation and Formosa Petrochemical Corporation 0.00% 2003/07/11~ 2007/01/11 USD 10, ,400 Convertible corporate bond of Hsin Chu International Bank and any Successors 0.00% 2004/05/17~ 2009/05/13 USD 5, ,700 1,028,949 June 30, 2003 Deutsche Bank AG, Convertible corporate bond 3.00% 2003/03/07~ USD 2,000 69,230 Singapore Branch of Ambit Microsystems Co. 2004/08/25 Note: Actual interest rate is the sum of interest rate at par and the floating rate. (ii) Investment income and losses accounted for under the equity method based on financial statements prepared by investee companies or audited financial statements are shown below: Six Months Ended June 30, Investee Company Quanta International Ltd. $ 912, ,402 WK Technology Fund VI 2,383 (137) Quanta Storage Inc. 79, ,998 Quanta Display Inc. 1,700,011 (365,244) Quanta Venture Capital Co., Ltd. 166, Quanta Network Systems Inc. (813) (17,346) CAM-CID Asia Pacific Investment Corp. 16,474 9,023 Total $ 2,877, ,

21 Unrealized gains and losses on intercompany transactions for the six months ended June 30, 2004 and 2003 were eliminated according to ownership. (iii) Investment income and losses in partnership based on financial statements prepared by investee companies are shown below: Six Months Ended June 30, Investee Company Strategic Value I L.P. $ - (1,569) Morgan Stanley Dean Witter Venture Partners IV, L.P. - (4,423) GS PEP Technology 2000 Fund Offshore, L.P. (1,178) (4,586) GS Capital Partners Fund 2000 Offshore, L.P. 30,247 (3,260) Strategic Value II L.P. 21,240 (7,660) Total $ 50,309 (21,498) (iv) Information regarding dividends and bonuses collected are as follows: Six Months Ended June 30, Investee Company Carried under the equity method Quanta International Ltd. $ - 380,820 WK Technology Fund VI 5,250 3,750 Quanta Storage Inc. 277,983 55,596 CAM-CID Asia Pacific Investment Corp. 26,920 35,474 Carried under the cost method Global Vision Venture Capital Co., Ltd. 22,443 41,181 Partnerships Strategic Value I,L.P (2004:US$1; 2003:US$2) Strategic Value II,L.P. 14, (2004:US$436;2003:US$25) Total $ 347, ,744 In 2004, the shareholders meeting of Quanta Storage Inc. resolved to distribute cash dividends of $277,983 and stock dividends of $166,790. The record date was July 20, As of June 30, 2004, no dividends (reflected under other receivables) have been recieved

22 For the six months ended June 30, 2004, Strategic Value II, L.P., a partnership investment of the Company, distributed the bonus in cash of US$10(equivalent to $340) and common stocks with value of US$426(equivalent to $14,198).The common stocks received were then reflected under short-term investments and sold before the end of June, For the six months ended June 30, 2004, GS Capital Partners Fund 2000 Offshore, L.P., a partnership investment of the Company, distributed earnings of US$308(equivalent to $10,258). Earnings distributed are dividends from the capitalization of earnings. Linko Computer GmbH, an investee accounted for under the equity method, filed for liquidation on December 31, Upon completion of liquidation, there were no residual assets to distribute. Therefore, the investment cost and cumulative translation adjustments in prior years were recognized as investment loss in Giya Mobile Telecom Co., Ltd., an investee accounted for under the cost method, filed for liquidation on December 31, Upon completion of liquidation, there were no residual assets to distribute. Therefore, investment cost of $2,645 was recognized as investment loss for the six months ended June 30, Ultralife Taiwan Inc., is an investee company accounted for under the cost method. There was evidence indicating that a decline in its values was other than temporary, its carrying amounts were reduced to reflect the net realizable value and investment loss of $66,250 was recognized for the six months ended June 30, FuYu (Cayman) Venture Capital Fund, an investee accounted for under the cost method, filed for fund reduction in the first half year of The capital returned in amount of US$300(equivalent to $10,035) had been reflected as the reduction in the long-term investments. Alventive, Inc., and Fabric Networks Inc. are investee companies accounted for under the cost method currently undergoing liquidation. With evidence indicating that a decline in their values were other than temporary and no residual assets to distribute, their carrying amounts were reduced to reflect their net realizable value and investment loss was recognized in Fabric Networks Inc. filed for liquidation in 2003 and distributed the residual assets totaling $4,603 to the Company for the six months ended June 30, Preferred shares of Protocom Corporation, Rasvia Systems, Inc. and Questia Media, Inc. are accounted for under the cost method. There was evidence indicating that a decline in their values was other than temporary, and their carrying amounts were reduced to reflect their net realizable value and investment loss was recognized in

23 (v) Information regarding preferred stock held by the Company as of June 30, 2004: Shares held Price per share Convertible into Voting Investee Company (thousands) (US dollars) common stock rights Alventive, Inc Yes No Protocom Corp. 2, Yes No Rasvia Systems, Inc. 7, Yes No Questia Media, Inc. 1, Yes Yes Mellanox Technologies Ltd Yes Yes Nanosys, Inc Yes No Alpha &Omega Yes No Semiconductor, Ltd. Due to Avocent Corporation s acquisition of OSA Technologies, Inc on April 7, 2004, 3000 shares of OSA Technologies, Inc. held by the Company were exchanged into 53 thousand common shares of Avocent Corporation and US$2,193 in cash. After sharing the burden of the original investment cost of US$709, the Company recognized the gain on disposal of the investment with amount of US$1,402(equivalent to $46,303). In addition, the common stock obtained had been transferred to the short-term investment after sharing the burden of the original investment cost of US$709 (equivalent to $23,414). Due to Xilinx, Inc s acquisition of Triscend Corporation on March 5, 2004, the Company obtained US$1,159 after the acquisition. The residual investment cost with the amount of US$ 1,841 (equivalent to $61,706) was recognized as investment loss. (vi) For the six months ended June 30, 2004, investee companies shares accounted for under the cost method sold by the Company are as follows: Shares sold (In Thousands) Price Cost Gain (loss) on sale Name of Investee Company Six months ended June 30, 2004 Alpha VC Fund, Inc. 3,000 $ 30,000 30,000 - Allied Material Technology Corp. 1,679 24,849 19,624 5,225 Total $ 54,849 49,624 5,

24 (f) Property, Plant, and Equipment Accumulated June 30, 2004 Cost Depreciation Carrying Value Land $ 2,755,182-2,755,182 Buildings and plant 1,493, ,822 1,077,724 Production equipment 1,953,520 1,174, ,419 Molds and tools 1,168, , ,489 Furniture and office facilities 145,619 96,439 49,180 Transportation equipment 15,753 3,613 12,140 Miscellaneous equipment 724, , ,920 Leasehold improvements 24,496 21,590 2,906 Construction in progress 1,273,426-1,273,426 Prepayment for equipment 68,243-68,243 Total $ 9,622,069 2,699,440 6,922,629 June 30, 2003 Land $ 2,755,182-2,755,182 Buildings and plant 1,484, ,758 1,112,924 Production equipment 3,020,678 1,812,642 1,208,036 Molds and tools 1,038, , ,283 Furniture and office facilities 152,660 98,265 54,395 Transportation equipment 12,669 2,803 9,866 Miscellaneous equipment 621, , ,668 Leasehold improvements 24,496 17,729 6,767 Construction in progress 91,362-91,362 Prepayment for equipment 187, ,297 Total $ 9,389,088 3,071,308 6,317,780 As of June 30, 2004, the Company entered into an agreement with non-related parties to construct a research center. Total amount of the contract was $3,212,074. As of June 30, 2004, the amount of 1,239,909 had been paid and reflected under construction in progress. For the total interest expenditure of $110,251 occurred in the six months ended June 30, 2004, the interest capitalised (reflected in Construction in progress ) amounted to $9,218 with a capitalization interest rate of 2.41%. For information regarding properties pledged as collateral for bank loans for the six months ended June 30, 2004 and 2003, please refer to Note 6. As of June 30, 2004 and 2003, the insurance coverage of the properties was $3,372,417 and $5,052,034, respectively