opto tech corporation and report of independent ... · management, as well as evaluating the...

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OPTO TECH CORPORATION FINANCIAL STATEMENTS

AND REPORT OF INDEPENDENT ACCOUNTANTS JUNE 30, 2008 AND 2007

For the convenience of readers and for information purpose only, the auditors’ report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. In the event of any discrepancy between the English version and the original Chinese version or any differences in the interpretation of the two versions, the Chinese-language auditors’ report and financial statements shall prevail.

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Report of Independent Accountants Translated from Chinese

(08)PWCR08000713 To the Board of Directors and Stockholders of Opto Tech Corporation

We have audited the accompanying balance sheets of Opto Tech Corporation (the “Company”) as of June 30, 2008 and 2007, and the related statements of income, changes in stockholders’ equity and cash flows for the six-month periods 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 explained in the following paragraph, we conducted our audits in accordance with the “Rules Governing the Examination of Financial Statements by Certified Public Accountants” and generally accepted auditing standards in the Republic of China. Those rules and 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 audit provides a reasonable basis for our opinion.

The Company’s long-term investments accounted for under the equity method and the amounts and

information disclosed in Note 11 as of June 30, 2008 and 2007 were based on their respective financial statements which were not audited by independent accountants. As of June 30, 2008 and 2007, these long-term investments amounted to $1,008,625 thousand and $627,571 thousand, respectively, and the related investment (loss) income was ($95,704) thousand and $4,450 thousand for the six-month periods then ended, respectively.

In our opinion, except for the effect on the financial statements of such adjustments, if any, as might have been determined to be necessary had the financial statements of these investee companies been audited by independent accountants as explained in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Opto Tech Corporation as of June 30, 2008 and 2007, and the results of its operations and its cash flows for the six-month periods then ended in conformity with the “Rules Governing the Preparation of Financial Statements by Securities Issuers”, “Business Entity Accounting Law”, “Regulation on Business Entity Accounting Handling” and generally accepted accounting principles in the Republic of China.

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As discussed in Notes 3 and 4(22) to the financial statements, the Board of Directors resolved that the Company would discontinue the operations of Organic Light-Emitting Diodes division (OLED division) on November 4, 2006. The Company adopted the R.O.C. SFAS No. 38, “Accounting for Non-current Assets – Held - for - Sale and Discontinued Division”, effective January 1, 2007.

As discussed in Note 3 to the financial statements, effective January 1, 2008, the Company adopted the

newly-issued EITF 96-052, “Accounting for Employees’ Bonus and Directors’ and Supervisors’ Remuneration”, as prescribed by the R.O.C. Accounting Research and Development Foundation. The expected costs of employees’ bonus and directors’ and supervisors’ remuneration are recognized as expenses and liabilities, provided that such recognition is required under legal or constructive obligation and the amounts can be estimated reasonably.

We have also reviewed the consolidated financial statements of Opto Tech Corporation and its subsidiaries (not presented herein) as of and for the six-month periods ended June 30, 2008 and 2007. In our report dated August 11, 2008, we expressed a qualified conclusion on the consolidated financial statements. /s/ PricewaterhouseCoopers August 11, 2008 The accompanying financial statements are not intended to present the financial position and results of operations and cash flows of the Company in accordance with accounting principles 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 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.

As the financial statements are the responsibility of the management, PricewaterhouseCoopers cannot accept any liability for the use of, or reliance on, the English translation or for any errors or misunderstandings that may derive from the translation.

2008 2007 2008 2007ASSETS LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Assets Current Liabilities Cash and cash equivalents (Note 4(1)) 1,002,120$ 1,499,767$ Short-term loans (Note 4(11)) 914,938$ 757,169$

Financial assets at fair value through profit or loss - current (Note 4(2)) 113,921 15,031 Accounts payable 752,143 831,558

Notes receivable 102,518 130,199 Accounts payable - related parties (Note 5) 424,407 434,439

Notes receivable - related parties (Note 5) 1,670 8,522 Income tax payable (Note 4(19)) 436 3,535

Accounts receivable - net (Note 4(3)) 1,836,931 1,678,270 Accrued expenses 304,193 211,836

Accounts receivable - related parties - net (Note 5) 103,608 190,200 Other payables 699,403 22,947

Other receivables 12,964 23,643 Unearned revenue collected in advance 1,976 9,696

Other receivables - related parties (Note 5) 6,749 7,000 Long-term liabilities - current portion (Note 4(12)) 370,000 2,020,093

Other financial assets - current (Note 6) 61,820 18,046 Other current liabilities 36,920 35,227

Inventories (Note 4(4)) 1,542,257 1,380,925 Total current liabilities 3,504,416 4,326,500

Prepaid expenses 19,318 34,781

Prepayments 3,613 5,996 Long-term Liabilities Non-current assets - held-for-sale (Notes 4(5) and 6) 286,077 322,413 Long-term loans (Note 4(12)) 1,035,850 230,000

Deferred income tax assets - current (Note 4(19)) 166,263 203,966 Capital lease payables - non-current - 25

Other current assets 712 972 Total long-term liabilities 1,035,850 230,025

Total current assets 5,260,541 5,519,731

Other LiabilitiesFunds and Investments Accrued pension liabilities (Note 4(13)) 48,230 63,063

Available-for-sale financial assets - non-current (Note 4(6)) 68,680 122,445 Guarantee deposits 81 78

Financial assets carried at cost - non-current (Note 4(7)) 224,233 331,704 Other liabilities - other (Note 4(8)) 4,019 60,990

Long-term investments - accounted for under the equity method (Note 4(8)) 1,009,836 627,571 Total other liabilities 52,330 124,131

Total funds and investments 1,302,749 1,081,720 TOTAL LIABILITIES 4,592,596 4,680,656

Property, Plant and Equipment (Notes 4(9), 5 and 6) Stockholders' Equity Cost Capital Land 12,493 12,493 Common stock (Notes 4(14)(18)) 5,230,418 7,823,713

Buildings 1,720,528 1,717,020 Capital Reserves (Note 4(15)) Machinery 2,875,232 2,522,534 Paid-in capital in excess of par 89,417 91,175

Utility facilities 928,802 923,264 Additional paid-in capital - treasury stock transactions (Note 4(17)) 60,625 29,900

Pollution prevention equipment 600,228 560,727 Capital reserve from long-term investments - 818

Transportation equipment 6,756 6,404 Capital reserve from employee's stock options (Note 4(18)) 17,665 -

Office equipment 79,839 78,374 Retained Earnings Leased assets 608 608 Legal reserve 92,095 -

Leasehold improvements 2,670 2,670 Special reserve 7,012 -

Other equipment 1,350,009 1,307,839 Unappropriated earnings (Accumulated deficit) (Note 4(16)) 465,736 2,004,748)(

Cost and revaluation increments 7,577,165 7,131,933 Other Adjustments to Stockholders' Equity Less: Accumulated depreciation 4,514,238)( 4,054,796)( Unrealized gain or loss on available-for-sale financial assets (Note 4(6)) 66,270)( 12,504)(

Accumulated impairment 6,047)( 4,724)( Cumulative translation adjustments 12,563 7,232

Construction in progress and prepayments for equipment 326,176 257,005 Unrecognized pension cost (Note 4(13)) 3,546)( 21,533)(

Total property, plant and equipment 3,383,056 3,329,418 Treasury stock (Note 4(17)) 26,699)( 174,014)(

TOTAL STOCKHOLDERS' EQUITY 5,879,016 5,740,039

Intangible asset Commitments and Contingent Liabilities (Note 7) Deferred pension costs (Note 4(13)) 2,836 1,492 Significant subsequent events (Note 9)

Other assets Idle assets (Note 4(10)) 2,631 6,356

Deposits out 1,138 1,236

Deferred expenses 27,358 34,272

Deferred income tax assets - non-current (Note 4(19)) 491,303 446,470

Total other assets 522,430 488,334

TOTAL ASSETS 10,471,612$ 10,420,695$ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 10,471,612$ 10,420,695$

OPTO TECH CORPORATIONBALANCE SHEETS

The accompanying notes are an integral part of these financial statements.See report of independent accountants dated August 11, 2008.

(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)JUNE 30,

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OPTO TECH CORPORATION STATEMENTS OF INCOME

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT FOR THE EARNINGS PER SHARE AMOUNTS)

2008 2007

The accompanying notes are an integral part of these financial statements. See report of independent accountants dated August 11, 2008.

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Operating revenues Sales revenue $ 3,576,362 $ 3,450,836 Sales returns ( 41,734) ( 16,162) Sales allowances ( 53,888) ( 29,055)

Net sales revenue (Note 5) 3,480,740 3,405,619 Other operating revenues 82,549 48,620

Total operating revenues 3,563,289 3,454,239Operating costs Cost of goods sold (Notes 4(21) and 5) ( 2,534,513) ( 2,389,603) Other operating costs ( 49,892) ( 22,815)

Total operating costs ( 2,584,405) ( 2,412,418)Gross profit 978,884 1,041,821

Unrealized gains from intercompany transactions ( 2,808) ( 60,990)Realized gains from intercompany transactions 6,645 2,228

Gross profit, net 982,721 983,059Operating expenses (Note 4(21)) Selling expenses ( 90,419) ( 143,202) General and administrative expenses ( 309,533) ( 235,795) Research and development expenses ( 87,230) ( 86,902)

Total operating expenses ( 487,182) ( 465,899)Operating income 495,539 517,160Non-operating income and gains Interest income (Note 5) 3,256 13,336 Gain on valuation of financial assets 3,921 - Investment income accounted for under the equity method (Note 4(8)) - 4,450 Gain on disposal of property, plant and equipment 537 1,854 Gain on sale of investments 8,998 42,287 Foreign exchange gain - 3,764 Rental income 1,034 970 Income from sale of scrap inventories 5,921 2,814 Gains on price recovery of inventories 3,471 13,920 Miscellaneous income 1,809 1,144

Total non-operating income and gains 28,947 84,539Non-operating expenses and losses Interest expense ( 34,231) ( 40,967) Investment loss accounted for under the equity method (Note 4(8)) ( 95,704) - Loss on disposal of property, plant and equipment ( 1,211) ( 2,996) Foreign exchange losses ( 56,972) - Financial charges ( 2,900) ( 3,610) Miscellaneous losses ( 53) ( 214)

Total non-operating expenses and losses ( 191,071) ( 47,787)Income from continuing operations before income tax 333,415 553,912Income tax (expense) benefit ( 63,497) 11,819Income from continuing operations 269,918 565,731Income from discontinued operations (Note 4(22)) Gain (loss) on disposal of discontinued operations, net of applicable income

tax of $45,344 and $24,706, respectively 28,113 ( 10,821)

Net income $ 298,031 $ 554,910

Before Tax After Tax Before Tax After Tax Basic earnings per share (Note 4(20)) Net income from continuing operations $ 0.64 $ 0.52 $ 1.09 $ 1.11 Net (loss) income from discontinued operations ( 0.03) 0.05 ( 0.07) ( 0.02)

Net income $ 0.61 $ 0.57 $ 1.02 $ 1.09

Diluted earnings per share (Note 4(20)) Net income from continuing operations $ 0.63 $ 0.52 $ 1.07 $ 1.09 Net (loss) income from discontinued operations ( 0.03) 0.05 ( 0.07) ( 0.02)

Net income $ 0.60 $ 0.57 $ 1.00 $ 1.07

Pro forma information based on the assumption that the Company’s shares held by its subsidiary are not treated as treasury stocks:

Net income $ 309,098 $ 290,944 $ 538,954 $ 575,479

Basic earnings per share Net income $ 0.60 $ 0.56 $ 1.05 $ 1.12

Diluted earnings per share Net income $ 0.59 $ 0.55 $ 1.04 $ 1.11

OPTO TECH CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)

Capital Reserves Retained Earnings Other Adjustments to Stockholders’ Equity

Common stock

Paid-in capital in

excess of par

Additional paid-in capital - treasury stock transactions

Capital reserve from

long-term investments

Capital reserve from

employee stock

warrants Legal

reserve Special reserve

Unappropriated earnings

(Accumulated deficit)

Unrealized gain or loss on

available-for-sale financial

assets

Cumulative translation

adjustments Unrecognized pension cost

Treasury stock

Total


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Balance at January 1, 2007 $ 7,822,060 $ 91,175 $ 29,900 $ 1,254 $ - $ - $ - ( $ 2,559,658) ( $ 20,138) $ 2,214 ( $ 21,533) ( $ 174,014) $ 5,171,260

Changes in equity of investees accounted for under the equity method:

Changes in capital reserve - - - ( 436) - - - - - - - - ( 436)

Changes in cumulative translation adjustments - - - - - - - - - 5,018 - - 5,018

Unrealized gain or loss on available-for-sale financial assets - - - - - - - - ( 1) - - - ( 1)

Exercise of employees’ stock options 1,653 - - - - - - - - - - - 1,653

Change in unrealized gain or loss on available-for-sale financial assets - - - - - - - - 7,635 - - - 7,635

Net income for the six-monthperiod ended June 30, 2007 - - - - - - - 554,910 - - - - 554,910

Balance at June 30, 2007 $ 7,823,713 $ 91,175 $ 29,900 $ 818 $ - $ - $ - ( $ 2,004,748) ( $ 12,504) $ 7,232 ( $ 21,533) ( $ 174,014) $ 5,740,039

Balance at January 1, 2008 $ 5,168,569 $ 89,417 $ 60,625 $ 333 $ 15,438 $ - $ - $ 920,948 ( $ 34,385) $ 20,946 ( $ 14,298) ( $ 26,699) $ 6,200,894 Distribution of 2007 earnings:

Legal reserve - - - - - 92,095 - ( 92,095) - - - - - Special reserve - - - - - - 7,012 ( 7,012) - - - - - Cash dividends - - - - - - - ( 520,312) - - - - ( 520,312) Directors’ and supervisors’

remuneration - - - - - - - ( 32,520) - - - - ( 32,520) Employees’ bonuses - - - - - - - ( 97,558) - - - - ( 97,558)

Changes in equity of investees accounted for under the equity method:

Changes in capital reserve - - - ( 333) - - - ( 3,746) - - - - ( 4,079)

Changes in cumulative translation adjustments - - - - - - - - - ( 8,383) - - ( 8,383)

Exercise of employees’ stock options 61,849 - - - 2,227 - - - - - - - 64,076

Change in net loss on unrecognized pension cost - - - - - - - - - - 10,752 - 10,752

Change in unrealized gain or loss on available-for-sale financial assets - - - - - - - - ( 31,885) - - - ( 31,885)

Net income for the six-monthperiod ended June 30, 2008 - - - - - - - 298,031 - - - - 298,031

Balance at June 30, 2008 $ 5,230,418 $ 89,417 $ 60,625 $ - $ 17,665 $ 92,095 $ 7,012 $ 465,736 ( $ 66,270) $ 12,563 ( $ 3,546) ( $ 26,699) $ 5,879,016

OPTO TECH CORPORATION STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)

2008 2007

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CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ 298,031 $ 554,910

Adjustments to reconcile net income to net cash provided by operating activities

Bad debts 11,990 25,230

Depreciation 246,412 258,034

Amortization 17,435 17,022

Investment loss (income) accounted for under equity method 95,704 ( 4,450)

Net gain on financial assets and liabilities ( 3,921) ( 887)

Gain on price recovery of inventories ( 4,395) ( 28,661)

Reclassification to financial charges from deferred expenses 1,657 1,711

Gain on reversal of impairment losses ( 1,898) ( 451)

Gain on sale of investments ( 8,998) ( 42,287)

Loss on disposal of property, plant and equipment 3,027 687

Changes in assets and liabilities

(Increase) decrease in:

Notes receivable 83,904 44,865

Notes receivable – related parties ( 830) ( 8,501)

Accounts receivable ( 241,422) ( 121,755)

Accounts receivable – related parties ( 28,544) ( 130,281)

Other receivables ( 1,241) ( 2,614)

Other receivables – related parties ( 7,165) ( 7,139)

Inventories ( 34,868) 44,826

Prepaid expenses 131 ( 14,253)

Prepayments 1,107 ( 5,051)

Other current assets 632 ( 5,508)

Deferred income tax assets 17,453 ( 40,554)

Increase (decrease) in:

Notes payable - ( 18,245)

Accounts payable ( 73,636) ( 63,894)

Accounts payable – related parties 89,680 18,137

Income tax payable ( 2,245) 3,535

Accrued expenses 82,567 24,023

Other payables 49,009 13,603

Unearned revenue collected in advance ( 71,248) 1,664

Other current liabilities ( 764) 4,442

Accrued pension liabilities ( 1,602) 3,426

Deferred credit - gain from intercompany transactions ( 3,837) 58,762

Net cash provided by operating activities 512,125 580,346

(Continued)

OPTO TECH CORPORATION STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)

2008 2007


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CASH FLOWS FROM INVESTING ACTIVITIES

Increase in restricted cash and cash equivalents ($ 43,983) ($ 18,046)

Increase in financial assets at fair value through profit or loss ( 110,000) ( 15,000) Increase in long-term investments accounted for under equity

method ( 37,300) ( 202,203)

Increase in financial assets carried at cost - ( 100,000) Proceeds from disposal of long-term investments accounted for

under equity method 15,909 -

Proceeds from disposal of available-for-sale financial assets - 103,510

Decrease in financial liabilities at fair value through profit or loss - ( 3,215)

Decrease in other financial assets - non-current - 3,000

Acquisition of property, plant and equipment ( 336,122) ( 241,549) Proceeds from disposal of property, plant and equipment

(including idle assets) 27,300 16,129

Decrease (increase) in deposits out 123 ( 49)

Increase in deferred expenses ( 14,966) ( 6,691)

Net cash used in investing activities ( 499,039) ( 464,114)

CASH FLOWS FROM FINANCING ACTIVITIES

(Decrease) increase in short-term loans ( 167,646) 36,254

Increase (decrease) in long-term loans (including long-term loans maturing within one year and lease payable) 357,742 ( 453,672)

Decrease in guarantee deposits ( 3) ( 2,841)

Exercise of employees’ stock options 64,076 1,653

Net cash provided by (used in) financing activities 254,169 ( 418,606)

Net increase (decrease) in cash and cash equivalents 267,255 ( 302,374)

Cash and cash equivalents at beginning of period 734,865 1,802,141

Cash and cash equivalents at end of period $ 1,002,120 $ 1,499,767

Supplemental disclosures of cash flow information

Interest paid $ 36,082 $ 67,363

Less: Interest capitalized ( 4,306) ( 1,886)

Interest paid (net of interest capitalized) $ 31,776 $ 65,477

Income tax paid $ 2,945 $ 494

Investing and financing activities not affecting cash flows

Long-term liabilities maturing within one year $ 370,000 $ 2,020,093

Reclassification to deferred expenses from property, plant and equipment $ 2,947 $ 65

Distribution of cash dividends $ 520,312 $ -

Distribution of employees’ bonuses $ 97,558 $ -

Distribution of directors’ and supervisors’ remuneration $ 32,520 $ -

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OPTO TECH CORPORATION NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2008 AND 2007 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS,

EXCEPT AS OTHERWISE INDICATED)

1. HISTORY AND ORGANIZATION

Opto Tech Corporation (the “Company”) was incorporated as a company limited by shares under the provisions of the Company Law of the Republic of China (R.O.C.) on December 21, 1983. The shares of the Company have been traded on the Taiwan Stock Exchange since May 2, 1995. The Company is primarily engaged in manufacturing and sales of semiconductor components as well as research and development, design, manufacturing and sales of systems products and organics light emitting diode (OLED) flat panel display. To improve the Company’s business operating performance, the Board of Directors resolved to discontinue the Company’s Organic Light-Emitting Diodes division (OLED division) operations on November 4, 2006. Through several capital increases and capital reductions, the Company’s authorized capital and paid-in capital amounted to $10,000,000 and $5,230,418, respectively, as of June 30, 2008. As of June 30, 2008, the Company had approximately 1,200 employees.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements of the Company are prepared in accordance with the “Rules Governing the Preparation of Financial Statements by Securities Issuers”, “Business Entity Accounting Law”, “Regulation on Business Entity Accounting Handling” and generally accepted accounting principles in the Republic of China. The Company’s significant accounting policies are summarized below:

1) Translation of financial statements of foreign subsidiaries

Assets and liabilities of foreign subsidiaries are translated into New Taiwan dollars using the exchange rates prevailing at the balance sheet date. Equity accounts are translated at historical rates except for beginning retained earnings, which is carried forward from prior year’s balance. Dividends are translated at the rates prevailing at the date of declaration. Profit and loss accounts are translated at weighted-average rates during the year. The resulting translation differences are included in “cumulative translation adjustments” under stockholders’ equity.

2) Foreign currency transactions

A. The Company maintains its accounts in New Taiwan dollars. Transactions denominated in foreign currencies are translated into New Taiwan dollars at the spot exchange rates prevailing at the transaction dates. Exchange gains or losses due to the difference between the exchange rate on the transaction date and the exchange rate on the date of actual receipt and payment are recognized in current year’s profit or loss.

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B. Receivables, other monetary assets and liabilities denominated in foreign currencies are translated at the spot exchange rates prevailing at the balance sheet date. Exchange gains or losses are recognized in profit or loss.

C. At the end of the period, foreign currency non-monetary assets and liabilities at fair value through profit or loss are evaluated at the spot exchange rates prevailing at the balance sheet date. Any exchange gain or loss resulting from the evaluation shall be recognized in current period’s profit or loss. Conversely, foreign currency non-monetary assets and liabilities at fair value through shareholders’ equity are evaluated at the spot exchange rates prevailing at the balance sheet date. Any exchange gain or loss resulting from the evaluation shall be recognized in stockholders’ equity. However, non-monetary items that are measured not based on the fair value are evaluated using the historical exchange rates at the date of the transaction.

3) Criteria for classifying current or non-current assets and liabilities

A. Assets that meet one of the following criteria are classified as current assets; otherwise they are classified as non-current assets:

a) Assets arising from operating activities that are expected to be realized or consumed, or are intended to be sold within the normal operating cycle;

b) Assets held mainly for trading purposes;

c) Assets that are expected to be realized within twelve months from the balance sheet date;

d) Cash and cash equivalents, excluding restricted cash and cash equivalents and those that are to be exchanged or used to pay off liabilities more than twelve months after the balance sheet date.

B. Liabilities that meet one of the following criteria are classified as current liabilities; otherwise they are classified as non-current liabilities:

a) Liabilities arising from operating activities that are expected to be paid off within the normal operating cycle;

b) Liabilities arising mainly from trading activities;

c) Liabilities that are to be paid off within twelve months from the balance sheet date;

d) Liabilities for which the repayment date cannot be extended unconditionally to more than twelve months after the balance sheet date.

4) Cash and cash equivalents

Cash equivalents represent highly liquid investments that meet the following requirements:

A. Readily convertible to cash; and

B. With maturities less than three months and which are subject to insignificant risk of changes in value resulting from fluctuations in interest rates.

The Company’s statement of cash flows is prepared on the basis of cash and cash equivalents.

5) Financial assets and financial liabilities at fair value through profit or loss

A. Financial assets and financial liabilities at fair value through profit or loss are recognized and derecognized using trade date accounting and are recognized initially at fair value.

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B. These financial assets and liabilities are subsequently remeasured and stated at fair value and the gain or loss is recognized in profit or loss. The fair value of open-end mutual funds is based on the net asset value at the balance sheet date.

6) Available-for-sale financial assets

A. Available-for-sale financial assets are recognized and derecognized using trade date accounting and are initially stated at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

B. The financial assets are remeasured and stated at fair value, and the gain or loss is recognized in equity, until the financial asset is derecognized, at which time the cumulative gain or loss previously recognized in equity shall be recognized in profit or loss. The fair values of listed stocks and OTC stocks are based on the closing prices quoted in the Taiwan Stock Exchange and the GreTai Securities Market at the balance sheet date.

C. If there is any objective evidence that the financial asset is impaired, the cumulative loss that had been recognized directly in equity shall be transferred from equity to profit or loss. When the fair value of an equity instrument subsequently increases, impairment losses recognized previously in profit or loss shall be reversed and recognized as adjustments in equity.

7) Financial assets carried at cost

A. Investment in unquoted equity instruments is recognized or derecognized using trade date accounting and is stated initially at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

B. If there is any objective evidence that the financial asset is impaired, the impairment loss is recognized in profit or loss. Such impairment loss shall not be reversed when the fair value of the asset subsequently increases.

8) Accounts receivable

A. Accounts receivable are claims resulting from the sale of goods or services. The fair value of accounts receivable is calculated based on the imputed interest rate. Accounts receivable which are collectible within one year, and where the difference between the fair value and the value at maturity is insignificant are measured at carrying value.

B. The factoring bank is not allowed to recover its loss from the Company in the event of default as non-recourse factoring is carried out. The bank assumes all the risk of uncollectible accounts, whereas the Company shall reimburse corresponding sales returns and allowance. The accounts receivable are derecognized upon factoring and the related fees paid to the factoring bank are recognized as financial expense in the current period.

9) Allowance for doubtful accounts

Allowance for doubtful accounts is provided according to the evaluation of the collectibility of notes, accounts and other receivables, taking into account the bad debts incurred in prior years and the aging analysis of the receivables.

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10) Inventories

The perpetual inventory system is adopted for inventory recognition and is recorded at standard cost. The inventories are adjusted to actual costs using the weighted-average method at the end of each month. At the end of period, inventories are evaluated at the lower of aggregate cost or market value. The market values of raw materials, supplies and semi-finished goods are determined on the basis of replacement cost while the work in process and finished goods are determined by net realizable value. Allowance for loss on decline in market value and obsolescence is provided, when necessary. The Company decided to close the operations of OLED division effective on November 4, 2006. As such, all inventories of OLED division are evaluated by the net realizable value.

11) Non-current assets held-for-sale

For non-current assets to be sold (disposal group), they are measured at the lower of carrying value or fair value.

12) Long-term equity investments accounted for under the equity method

A. Long-term equity investments in which the Company holds more than 20% of the investee company’s voting shares or has the ability to exercise significant influence on the investee’s operational decisions are accounted for under the equity method. The excess of the initial investment cost over the acquired net asset value of the investee attributable to goodwill is no longer amortized, effective January 1, 2006. Retrospective adjustment of the amount of goodwill amortized in previous year(s) is not required.

B. Long-term equity investments in which the Company holds more than 50% of the voting shares of the investees or has significant control ability on the investees’ operations are accounted for under the equity method and included in the semi-annual and annual consolidated financial statements.

C. Effective January 1, 2005, for long-term equity investments accounted for under the equity method, if the Company has the control ability over the investees, the Company recognizes all the losses incurred by such entities that will not be covered by other stockholders. When the operations of such investees become profitable, the Company recognizes the profits until the amount of losses previously recognized by the Company is fully recovered.

D. The unrealized gains (losses) on the downstream transactions between the Company and the investees accounted for under the equity method are eliminated at period-end according to the Company’s percentage of shareholding in these investees. Where the Company has controlling power over the investees, the unrealized gains (losses) are eliminated in full amount and are recognized only when they are realized. Additionally, the unrealized gains (losses) on the upstream transactions and sidestream transactions between the Company and the investees accounted for under the equity method are eliminated based on the Company’s equivalent percentage of shareholding in these investees.

～ 13 ～

E. Exchange differences arising from translation of the financial statements of overseas investee companies accounted for under the equity method are recorded as “cumulative translation adjustments” under stockholders’ equity.

F. The accounting policy on impairment of long-term investments accounted for under the equity method is described in Note 2(15).

13) Property, plant and equipment

A. Property, plant and equipment are stated at cost. Interests incurred on the loans used to bring the assets to the condition and location necessary for their intended uses are capitalized.

B. Depreciation is provided under the straight-line method based on the assets’ estimated economic service lives. Salvage value of the fully depreciated assets that are still in use is depreciated based on the re-estimated economic service lives. The estimated useful lives are 31~50 years for buildings and 2~13 years for the other property, plant and equipment.

C. Major improvements and renewals are capitalized and depreciated accordingly. Maintenance and repairs are expensed as incurred.

D. Property, plant and equipment that are idle or have no value in use are reclassified to “other assets” at the lower of the fair value less costs to sell or book value. The resulting difference is included in current operations. Depreciation provided on these assets is charged to non-operating expense.

E. The accounting policy on impairment of property, plant and equipment is described in Note 2(15).

14) Deferred assets

Deferred assets, which mainly consist of telephone line installation, computer software expenses and the expenses related to commercial papers, are amortized on a straight-line basis over their estimated useful lives of 2~21 years.

15) Impairment of non-financial assets

The Company recognizes impairment loss when there is indication that the recoverable amount of an asset is less than its carrying amount. The recoverable amount is the higher of the fair value less costs to sell or value in use. The fair value less costs to sell is the amount obtainable from the sale of the asset in an arm’s length transaction after deducting any direct incremental disposal costs. The value in use is the present value of estimated future cash flows to be derived from continuing use of the asset and from its disposal at the end of its useful life. When the impairment no longer exists, the impairment loss recognized in prior years shall be recovered. However, impairment loss of goodwill is not recoverable.

16) Warranty

Warranty is estimated based on historical experience. Service warranty expense is included in the current year’s operating expense.

～ 14 ～

17) Pension plan

A. Under the defined benefit pension plan, net periodic pension costs are recognized in accordance with the actuarial calculations. Net periodic pension costs include service cost, interest cost, expected return on plan assets, and amortization of unrecognized net transition obligation and gains or losses on plan assets. Under the defined contribution pension plan, net periodic pension costs are recognized as incurred.

B. Minimum pension liabilities in the interim financial statements are adjusted in accordance with the net periodic pension cost and funds contributed.

18) Income tax

A. Inter-period and intra-period income taxes are allocated in accordance with the R.O.C. SFAS No. 22, “Accounting for Income Taxes”. Over or under provision of prior years’ income tax liabilities is included in current period’s income tax.

B. Investment tax credits arising from expenditures incurred on acquisitions of equipment or technology, research and development, employees training, and equity investments are recognized in the year the related expenditures are incurred.

C. An additional 10% tax is levied on the unappropriated retained earnings and is recorded as income tax expense in the year the stockholders resolve to retain the earnings.

19) Treasury stock

A. When the Company acquires its issued stocks, the cost is debited as “treasury stock” and recognized as a reduction to stockholders’ equity. Treasury stocks acquired are stated at cost using the weighted-average method.

B. Upon disposal of the treasury stock, if the disposal price exceeds the cost of the treasury stock, the difference is credited to “capital reserve – treasury stock”. If the disposal price is less than the cost, the difference is debited to the capital reserve arising from the treasury stock of the same class. Where the capital reserve is insufficient to cover the difference, the remaining amount is charged against retained earnings.

C. Upon registration of cancellation, except for the book value sum of “common stock” and “capital reserve-additional paid-in”, which is in proportion to shareholding, the related gain is credited to “capital reserve-treasury stock transaction” and any loss is offset against this capital reserve account. However, when the balance of this capital reserve account is insufficient to offset the loss, then the remaining amount is charged against retained earnings.

D. The Company’s shares held by its subsidiaries are accounted for as treasury stock.

20) Share-based payment - employee compensation plan

The employee stock options granted from January 1, 2004 through December 31, 2007 are accounted for in accordance with EITF 92-070, EITF 92-071 and EITF 92-072 of the Accounting Research and Development Foundation, R.O.C., dated March 17, 2003, “Accounting for Employee Stock Options”, prescribed by the R.O.C. Accounting Research and Development Foundation. Under the share-based employee compensation plan, compensation cost is recognized using the intrinsic value method and pro forma disclosures of net income and

～ 15 ～

earnings per share is prepared under the fair value method.

21) Employees’ bonuses and directors’ and supervisors’ remuneration

Effective January 1, 2008, pursuant to EITF 96-052 of the Accounting Research and Development Foundation, R.O.C., dated March 16, 2007, “Accounting for Employees’ Bonuses and Directors’ and Supervisors’ Remuneration”, the costs of employees’ bonuses and directors’ and supervisors’ remuneration are accounted for as expenses and liabilities, provided that such recognition is required under legal or constructive obligation and the amounts can be estimated reasonably. However, if the accrued amounts for employees’ bonuses and directors’ and supervisors’ remuneration are significantly different from the actual distributed amounts resolved by the stockholders at their annual stockholders’ meeting subsequently, the differences shall be recognized as gain or loss in the following year. In addition, according to EITF 97-127 of the Accounting Research and Development Foundation, R.O.C., dated March 31, 2008, “Criteria for Listed Companies in Calculating the Number of Shares of Employees’ Stock Bonus”, the Company calculates the number of shares of employees’ stock bonus based on the closing price of the Company's common stock at the previous day of the stockholders’ meeting held in the year following the financial reporting year, and after taking into account the effects of ex-rights and ex-dividends.

22) Revenues and expenses

Revenues are recognized when the earning process is substantially completed and are realized or realizable. Costs and expenses are recognized as incurred.

23) 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 of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting period. Actual results could differ from those assumptions and estimates.

24) Settlement date accounting

If an entity recognizes financial assets using settlement date accounting, any change in the fair value of the asset to be received during the period between the trade date and the settlement date is recognized in profit or loss for financial assets or liabilities classified as at fair value through profit or loss.

3. CHANGES IN ACCOUNTING PRINCIPLES

1) Effective January 1, 2008, the Company adopted EITF 96-052 of the Accounting Research and Development Foundation, R.O.C., dated March 16, 2007. As a result of the adoption of EITF 96-052, net income decreased by $64,797 and earnings per share decreased by $0.12 for the six-month period ended June 30, 2008.

～ 16 ～

2) As mentioned in Note 4(22), the Board of Directors resolved to discontinue the operations of OLED division on November 4, 2006. The Company adopted the R.O.C. SFAS No. 38, “Accounting for Non-current Assets Held-for-Sale and Discontinued Division” effective January 1, 2007. This change in accounting principle had no effect on net income after tax and basic earnings per share after tax for the six-month period ended June 30, 2007 and total assets as of June 30, 2007.

4. DETAILS OF SIGNIFICANT ACCOUNTS

1) Cash and cash equivalents

June 30, 2008 2007 Cash on hand $ 100 $ 100

Checking and demand deposits 655,520 769,014

Time deposits 146,500 189,653

Cash equivalents 200,000 541,000

$ 1,002,120 $ 1,499,767

2) Financial assets at fair value through profit or loss

June 30, 2008 2007 Current items:

Financial assets held for trading

Funds $ 110,000 $ 15,000

Adjustment of financial assets held for trading

Forward exchange contracts 3,717 -

Funds 204 31

$ 113,921 $ 15,031

3) Accounts receivable

June 30, 2008 2007 Accounts receivable $ 1,953,254 $ 1,761,925

Less: Allowance for doubtful accounts ( 116,323) ( 83,655)

$ 1,836,931 $ 1,678,270

The Company entered into a factoring agreement with Taishin International Bank to sell its accounts receivable without recourse. Under the agreement, the Company is not required to bear uncollectible risk of the underlying accounts receivable, but is liable for the losses incurred on any business dispute. As the Company did not provide any collateral, these accounts receivable meet the derecognition criteria for financial assets. The Company has derecognized the accounts receivable sold to Taishin International Bank, net of the losses estimated for possible business disputes.

～ 17 ～

As of June 30, 2008 and 2007, the outstanding accounts receivable sold to Taishin International Bank were as follows:

June 30, 2008 Purchaser of accounts

receivable Amount

derecognized Limit Amount

advanced Interest rate range of

advanced amount Taishin International Bank $ - $ - $ - -

June 30, 2007

Purchaser of accounts receivable

Amount derecognized Limit

Amount advanced

Interest rate range ofadvanced amount

Taishin International Bank $ 113,976 $ 230,000 $ 102,602 2.80%

4) Inventories June 30, 2008

Continued

Operations DivisionOLED

Division Total Raw materials $ 704,967 $ 63,374 $ 768,341Supplies 97,333 2,651 99,984

Work in process 185,152 33,836 218,988

Semi-finished goods 236,515 464 236,979

Finished goods 554,892 31,329 586,221

1,778,859 131,654 1,910,513Less: Allowance for

obsolescence and market value decline

( 236,602) ( 128,490) ( 365,092) $ 1,542,257 $ 3,164 $ 1,545,421

June 30, 2007

Continued

Operations DivisionOLED

Division Total Raw materials $ 678,214 $ 63,465 $ 741,679Supplies 84,126 2,675 86,801

Work in process 161,975 33,761 195,736

Semi-finished goods 206,812 464 207,276

Finished goods 543,721 62,562 606,283

1,674,848 162,927 1,837,775Less: Allowance for

obsolescence and market value decline

( 293,923) ( 157,906) ( 451,829) $ 1,380,925 $ 5,021 $ 1,385,946

Since the Company discontinued the operations of OLED division on November 4, 2006, the inventories of OLED division were reclassified to “Non-current assets held-for-sale”.

～ 18 ～

5) Non-current assets held-for-sale

June 30,

2008 2007 Net amount of inventories to be disposed of $ 3,164 $ 5,021

Fixed assets

Buildings - 762

Machinery 2,266,517 2,557,231

Transportation equipment 7,676 7,676

Office equipment 74 143

Other equipment 2,218 2,298

Prepayments for equipment - 14,311

Less: Accumulated depreciation ( 549,321) ( 627,787)

Accumulated impairment ( 1,455,588) ( 1,648,986)

Net amount 271,576 305,648

Deferred expenses

Royalties 106,045 106,045

Mold and software 6,244 6,985

Less: Accumulated impairment ( 100,952) ( 101,286)

Net amount 11,337 11,744

Total $ 286,077 $ 322,413

6) Available-for-sale financial assets

June 30,

2008 2007 Non-current items:

Listed (TSE and OTC) stocks

American Xtal Technology, Inc. $ 2,881 $ 2,881

United Radiant Technology Corp. 132,069 132,069

134,950 134,950

Adjustment of available-for-sale financial assets ( 66,270) ( 12,505)

$ 68,680 $ 122,445

～ 19 ～

7) Financial assets carried at cost

June 30, 2008 2007 Non-current items:

Unlisted stocks

Action Media Technologies, Inc. $ - $ 1,962

Metrodyne Microsystem Corp. - 449

Formosa Industrial Computing, Inc. 7,632 7,632

Shin-Etsu Opto Electronic Co., Ltd. 20,000 20,000

Lanyo Technology Co., Ltd. 3,342 5,957

Giga Expitaxy Technology Corp. 33,000 33,000

Pictologic Inc. 4,000 4,000

Lu Zhu Development Co., Ltd. 138,072 158,704

Omniad Media Incorporation 6,993 100,000

Oriental System Technology Inc. 11,194 -

$ 224,233 $ 331,704

A. The above investments were measured at cost since these have no quoted prices and their fair value cannot be measured reliably.

B. On June 26, 2007, the Board of Directors resolved to participate in the capital increase by cash of Omniad Media Incorporation with the price per share of $10, amounting to $100 million in total investment with a shareholding percentage of 11.81%. The investment was accounted for under “financial assets carried at cost – non-current”.

C. As the Company sold a portion of its shares in Oriental System Technology Inc., a long-term equity investment accounted for under the equity method, the shareholding percentage was reduced to below 20%. Therefore, the investment was reclassified to “financial assets carried at cost – non-current”.

D. For the year ended December 31, 2007, the Company recognized impairment losses of $1,962, $449, $2,615, $20,632, $93,007 and $2,870 on its investments in Action Media Technologies, Inc., Metrodyne Microsystem Corp., Lanyo Technology Co., Ltd., Lu Zhu Development Co., Ltd., Omniad Media Incorporation and Oriental System Technology Inc., respectively, because the Company had assessed that the above investments had no value.

～ 20 ～

8) Long-term investments accounted for under the equity method

A. Information of long-term investments as of June 30, 2008 and 2007 are summarized below: June 30, 2008 June 30, 2007

Investee company Carrying amount

% of ownership

Carrying amount

% of ownership

OPTO Technology International Group Co., Ltd. $ 715,043 100 $ 364,834 100

Ho Chung Investment Co., Ltd. 95,256 100 36,249 100

Opto Tech (H.K.) Co., Ltd. 9,039 100 9,713 100

Opto Tech (Macao) Co., Ltd. - - 2,731 99.9

China Semiconductor Corporation 12,802 28.37 34,997 67.23

Viking Tech Corporation 96,839 11.61 160,667 22.87

Oriental System Technology Inc. (Note) - - 18,380 21.44

Jyu Shin Investment Co., Ltd. 80,857 100 - -

Neostones Microfabrication Corporation - 48.61 - 48.61

$ 1,009,836 $ 627,571

Shown as “other liability-other”:

Opto Tech (Macao) Co., Ltd. ($ 1,211) 99.90 $ - -

Note: Please refer to Note 4(7) for details.

B. Investment income (loss) accounted for under the equity method for the six-month periods ended June 30, 2008 and 2007 is set forth below:

For the six-month periods ended June 30,Investee company 2008 2007

OPTO Technology International Group Co., Ltd. ($ 98,275) ($ 7,522)

Ho Chung Investment Co., Ltd. ( 3,832) 2,360

Opto Tech (H.K.) Co., Ltd. ( 8) 45

Opto Tech (Macao) Co., Ltd. ( 1,389) ( 1,341)

China Semiconductor Corporation ( 4,651) ( 2,356)

Viking Tech Corporation 10,271 13,938

Jyu Shin Investment Co., Ltd. 2,180 -

Oriental System Technology Inc. (Note) - ( 674)

($ 95,704) $ 4,450

C. The investment income (loss) of the above investees, accounted for under the equity method for the six-month periods ended June 30, 2008 and 2007, was based on their financial statements for the corresponding periods, which were not audited by independent auditors.

～ 21 ～

D. The Board of Directors of the investee, Neostones Microfabrication Corporation, resolved to export all of the factories and to liquidate its company for the year ended December 31, 2005. The Company evaluated that the investment had been impaired and the possibility of recovery was low. Therefore, the Company recognized a permanent loss of $177,277 on its investment. On August 15, 2006, the Board of Directors of Neostones Microfabrication Corporation resolved to reduce its capital on August 20, 2006, and the percentage of capital reduction was 99.30%. As of June 30, 2008 and 2007, the number of shares of Neostones Microfabrication Corporation held by the Company was 243 thousand shares.

E. Since the Company had the control ability over Opto Tech (Macao) Co., Ltd., the Company recognized the entire losses incurred by such entity that would not be covered by other stockholders. As of June 30, 2008, the related balance of the long-term investment was ($1,211), which was shown as “other liability - other”.

F. In April 2008, the Company invested in Jyu Shin Investment Co., Ltd., a 100% owned subsidiary, by contributing 6,200 thousand shares of Viking Tech Corporation. As a result, the Company’s direct ownership percentage in Viking Tech Corporation was reduced to below 20%. However, as Jyu Shin Investment Co., Ltd. owns the 6,200 thousand shares of Viking Tech Corporation, the total ownership percentage in Viking Tech Corporation exceeded 20%. Accordingly, the Company’s investment in Viking Tech Corporation is accounted for under the equity method.

9) Property, plant and equipment

June 30, 2008

Asset Initial cost Accumulateddepreciation

Accumulated impairment Carrying value

Land $ 12,493 $ - $ - $ 12,493

Buildings 1,720,528 ( 439,827) ( 59) 1,280,642

Machinery 2,875,232 ( 2,035,421) ( 5,493) 834,318

Utility facilities 928,802 ( 593,082) - 335,720

Pollution prevention facilities 600,228 ( 495,454) - 104,774

Transportation equipment 6,756 ( 5,315) ( 64) 1,377

Office equipment 79,839 ( 61,129) ( 310) 18,400

Leased assets 608 ( 490) - 118

Leasehold improvements 2,670 ( 2,670) - -

Other equipment 1,350,009 ( 880,850) ( 121) 469,038

Prepayments for equipment 326,176 - - 326,176

$ 7,903,341 ($4,514,238) ($ 6,047) $ 3,383,056

～ 22 ～

June 30, 2007

Asset Initial cost Accumulateddepreciation


Land $ 12,493 $ - $ - $ 12,493

Buildings 1,717,020 ( 385,790) - 1,331,230

Machinery 2,522,534 ( 1,842,703) ( 4,252) 675,579

Utility facilities 923,264 ( 511,923) - 411,341

Pollution prevention facilities 560,727 ( 468,514) - 92,213

Transportation equipment 6,404 ( 4,897) ( 64) 1,443

Office equipment 78,374 ( 59,414) ( 301) 18,659

Leased assets 608 ( 338) - 220

Leasehold improvements 2,670 ( 2,670) - -

Other equipment 1,307,839 ( 778,497) ( 107) 529,235

Prepayments for equipment 257,005 - - 257,005

$ 7,388,938 ($4,054,796) ($ 4,724) $ 3,329,418

A. Since the Company discontinued the operations of OLED division on November 4, 2006, property, plant and equipment of OLED division which were to be disposed of were reclassified to “Non-current assets held-for-sale”. Please refer to Note 4(5) for details.

B. Interest capitalized to the property, plant and equipment amounted to $4,306 and $1,886 for the six-month periods ended June 30, 2008 and 2007, respectively.

10) Idle assets

June 30, 2008

Cost Accumulateddepreciation


Machinery $ 11,131 ($ 8,363) ($ 137) $ 2,631

June 30, 2007

Cost Accumulateddepreciation


Machinery $ 32,014 ($ 24,390) ($ 1,268) $ 6,356

11) Short-term loans

June 30, 2008 2007

Unsecured loans $ 914,938 $ 757,169

Interest rate 2.60%-4.45% 2.32%-6.70%

～ 23 ～

12) Long-term loans

Amount of loans

Financial Bank Credit line Period June 30, 2008 June 30, 2007

China Development Industrial Bank $ 100,000

2008.04.19~

2008.10.06 $ 100,000 $ 100,000

Yuanta Commercial Bank 200,000

2006.05.11~

2009.05.11 80,000 -

Taishin International Bank 200,000

2006.11.09~

2008.08.11 200,000 200,000

Syndicated loans with 8 financial institutions including Taishin International Bank 2,000,000

2008.03.06~

2013.03.06 995,850 -

Ta Chong Bank 300,000

2005.07.29~

2008.07.29 30,000 150,000

Taiwan Cooperative Bank 1,200,000

2001.05.18~

2008.05.18 - 360,000

Bank of Taiwan 183,000

2001.07.06~

2007.07.06 - 4,130

Mega International Commercial Bank 400,000

2002.12.25~

2007.12.25 - 61,530

Syndicated loans with 14 financial institutions including Taiwan Cooperative Bank 2,500,000

2003.12.31~

2007.12.31 - 915,310

Fuhwa Bank 200,000

2006.05.11~

2009.05.11 - 160,000

Commercial paper payable 300,000

2001.05.18~

2008.05.18 - 300,000

Less: Unamortized discount - ( 877)

1,405,850 2,250,093

Less: Current portion ( 370,000) ( 2,020,093)

$ 1,035,850 $ 230,000

A. On November 4, 2006, the Company discontinued the operations of OLED division. On November 28, 2006, the Company and 14 banks, including Taiwan Cooperative Bank, agreed to modify the credit terms specified for the Company and signed the first supplementary agreement on February 9, 2007. Contents of the agreement are as follows:

1) The deadline for principal repayment on loans taken by the Company is December 31, 2007.

2) In case the Company disposes a part or all of the collaterals provided by the OLED division prior to the final payment date, the Company should also repay the principal of the loans including interest proportionate to the ratio of the reduction in collaterals to total amount of collaterals (the mortgage amount assigned for the collateral to be disposed of divided by the mortgage amount balance assigned for all the collaterals provided for the syndicated loan and times the outstanding syndicated loan balance).

3) Once the Company has fully repaid the loan, the Company can cancel the assigned collateral.

～ 24 ～

B. On February 15, 2008, the Company signed a mortgage contract with a credit limit of $2 billion with 8 banks, including Taishin International Bank, and paid the loans used for plants and commercial papers to Taiwan Cooperative Bank. At the same time, the Company transferred the mortgaged assets, which was originally pledged to Taiwan Cooperative Bank, to the 8 banks including Taishin International Bank.

C. Please refer to Note 6 for details of the collateral.

13) Pension plans

A. The Company has a non-contributory and funded defined benefit pension plan in accordance with the Labor Standards Law, covering all regular employees. Under the defined benefit pension plan, two units are accrued for each year of service for the first 15 years and one unit for each additional year thereafter, subject to a maximum of 45 units. Pension benefits are based on the number of units accrued and the average monthly salaries and wages of the last 6 months prior to retirement. The Company contributes monthly an amount equal to 4.5% of the employees’ monthly salaries and wages to the retirement fund deposited with Bank of Taiwan (Central Trust of China had been merged with Bank of Taiwan on July 1, 2007). The pension costs under the defined benefit pension plan for the six-month periods ended June 30, 2008 and 2007 were $11,415 and $13,228, respectively. The fund balance with Bank of Taiwan was $217,671 and $200,634 as of June 30, 2008 and 2007, respectively.

B. Effective July 1, 2005, the Company established a funded defined contribution pension plan (the “New Plan”) under the Labor Pension Act. Employees have the option to be covered under the New Plan. Under the New Plan, the Company contributes monthly an amount based on 6% of the employees’ monthly salaries and wages to the employees’ individual pension accounts at the Bureau of Labor Insurance. The benefits accrued are portable when employment is terminated. The pension costs under the defined contribution pension plan for the six-month periods ended June 30, 2008 and 2007 were $12,140 and $10,857, respectively.

14) Common stock

In accordance with the resolution adopted by the Board of Directors on April 26, 2007, the Company decided to reduce its capital by $2,559,658 at a ratio of 33.31251% to cover its accumulated deficit, which was set to take effect on August 11, 2007. The capital reduction was approved at the stockholders’ meeting on June 13, 2007 and approved by the Financial Supervisory Commission, Executive Yuan, R.O.C. on August 1, 2007. As of June 30, 2008, the Company′s authorized capital and paid-in capital was $10,000,000 and $5,230,418, respectively, consisting of 523,042 thousand shares of common stock with a par value of $10 (in dollars) per share.

15) Capital reserve

The R.O.C. Securities and Exchange Law requires that capital reserve shall be exclusively used to cover any accumulated deficit or to increase capital and shall not be used for any other purpose. However, capital reserve arising from paid-in capital in excess of par value on issuance of common stock and donations can be capitalized once a year, provided that the Company has no

～ 25 ～

accumulated deficit and the amount to be capitalized does not exceed 10% of the paid-in capital.

16) Retained earnings

A. Under the Company's Articles of Incorporation, the current year's earnings, if any, shall first be distributed as follows:

1) Offset prior years’ operating losses.

2) 10% of the remaining amount shall be set aside as legal reserve, unless the accumulated legal reserve amounts to the total capital of the Company.

3) Appropriation of the remainder shall be proposed by the Board of Directors and resolved by the stockholders.

4) Bonus distributed to the employees and shareholders, and remuneration paid to the directors and supervisors should account for 15%, 80% and 5%, respectively, of the total distributed amount.

B. The Company operates in the high-tech industry and its business life cycle is in the growth stage. In view of its capital expenditure demand and comprehensive financial plan for continuous development, the Company issues both stock and cash dividends. The proportion of dividends to be distributed in stocks and cash is determined based on the Company’s rate of growth and capital expenditures. However, the amount of cash dividends shall not be lower than 20% of the dividends distributed.

C. Pursuant to the regulation of the Financial Supervisory Commission, Executive Yuan, R.O.C., if there are any negative stockholders’ equity items recorded by the Company, such as unrealized losses on the decline in market value of long-term equity investments and cumulative translation adjustments (except for treasury stock), the Company is required to set aside a special reserve from the current after-tax net income and the unappropriated retained earnings accumulated for previous years with an amount equal to the total amount of the negative items. For the negative stockholders’ equity items which occurred in previous years, the special reserve is set aside from the previous years’ unappropriated retained earnings. Additionally, if the market value of the Company’s shares held by its subsidiaries is less than their book value, an amount equal to the Company’s proportionate share of the difference should also be set aside as special reserve. If there is a subsequent recovery in the market value, a reversal based on the Company’s equity interest should be made to the special reserve.

D. Legal reserve can only be used to cover accumulated losses or to increase capital. Legal reserve can be used to increase capital only if the accumulated amount of legal reserve is more than 50% of paid-in capital, and the amount is limited to 50% of its balance.

～ 26 ～

E. The appropriation of 2007 earnings had been resolved at the stockholders’ meeting on June 13, 2008. Details are summarized below:

For the year ended December 31, 2007

Amount Dividends per share

(in dollars) Legal reserve $ 92,095

Special reserve 7,012

Cash dividends 520,312 $ 0.99

Directors’ and supervisors’ remuneration 32,520

Employees’ cash bonus 97,558

Total $ 749,497

The appropriation of 2007 earnings did not differ from the resolution of the Board of Directors on April 25, 2008. There were no retained earnings to be distributed because the Company had accumulated losses for the year ended December 31, 2006.

F. The estimated amounts of employees’ bonus and directors’ and supervisors’ remuneration for the six-month period ended June 30, 2008 are $51,558 and $17,186, respectively based on 15% and 5% (prescribed by the Company’s Articles of Incorporation) of net income for the six-month period ended June 30, 2008 after taking into account the legal reserve and other factors. The calculation of shares of stock bonus distributed is based on the closing price of the Company’s common stock at the previous day of the 2009 stockholders’ meeting after taking into account the effects of ex-rights and ex-dividends. The estimated amounts of employees’ bonus and directors’ and supervisors’ remuneration are recognized as operating expenses for the six-month period ended June 30, 2008. While, if the estimated amounts are different from the amounts approved by the stockholders subsequently, the difference is recognized as gain or loss in 2009.

17) Treasury stock

A. Changes in the treasury stock for the six-month periods ended June 30, 2008 and 2007 are set forth below (units: thousand shares):

For the six-month period ended June 30, 2008

Reason for reacquisition Beginning

shares Additions Disposal Ending sharesTo be reissued to employees - - - -


Reason for reacquisition Beginning

shares Additions Disposal Ending sharesTo be reissued to employees 15,000 - - 15,000

B. Pursuant to the R.O.C. Securities and Exchange Law, the number of shares bought back as treasury stock should not exceed 10% of the number of the Company’s issued and outstanding

～ 27 ～

shares and the amount bought back should not exceed the sum of retained earnings, paid-in capital in excess of par value and realized capital reserve. As of June 30, 2008, the shares bought back as treasury stock amounted to $0.

C. Pursuant to the R.O.C. Securities and Exchange Law, treasury stocks should be reissued to the employees within 3 years and shares not reissued within the three-year period are to be retired. Treasury shares to enhance the Company’s credit rating and stockholders’ equity should be retired within 6 months of acquisition.

D. As of June 30, 2008 and 2007, the total number of the Company’s shares held by its subsidiary, Ho Chung Investment Co., Ltd., was 1,107 thousand and 2,555 thousand shares with an average book value of $24.11 and $16.08 (in dollars) per share, respectively, and fair value of $25.30 and $27.90 (in dollars) per share, respectively.

18) Employee stock options

The Company did not recognize compensation costs under the stock-based employee compensation plan for the six-month periods ended June 30, 2008 and 2007. The exercise price under the stock-based employee compensation plan is based on the closing price of the Company’s common stock at the grant date and is subject to adjustments due to changes in the number of common shares and issuance of cash dividends. The vesting period of the Company’s employee stock option plan is 6 years. The employees may exercise the stock options in installments within a period of 2 years after the stock options are granted.

A. Details of the employee stock options are set forth below:

For the six-month periods ended June 30, 2008 2007

Stock options No. of shares (in thousands)

Weighted- average

exercise price (in dollars)

No. of shares (in thousands)

Weighted- average


Options outstanding at beginning of period 23,520 $ 10.00 19,201 $ 10.00

Options granted - -

Options exercised ( 6,185) 10.36 ( 165) 10.00

Options revoked ( 74) ( 16)

Options outstanding at end of period 17,261 19,020

Options exercisable at end of period 2,499 14,020

～ 28 ～

B. Details of the employee stock options outstanding as of June 30, 2008 and 2007 are set forth below:

Stock options outstanding as at

June 30, 2008 Stock options exercisable at

June 30, 2008

Range of exercise price

(in dollars) No. of shares (in thousands)

Weighted- average expected remaining

vesting period(in years)

Weighted- average



Weighted- average


$ 10.00 489 0.50 $ 10.00 489 $ 10.00

17.50 6,772 2.50 17.50 2,010 17.50

29.00 10,000 4.50 29.00 - 29.00

Stock options outstanding as at

June 30, 2007 Stock options exercisable at

June 30, 2007

Range of exercise price

(in dollars) No. of shares (in thousands)

Weighted- average expected remaining

vesting period(in years)

Weighted- average



Weighted- average


$ 10.00 9,020 1.50 $ 10.00 9,020 $ 10.00

11.70 10,000 3.50 11.70 5,000 11.70

On September 13, 2007, the Board of Directors of the Company approved the issuance of employees’ stock options authorized in 2004. The exercise price was adjusted from $11.70 to $17.5 on October 24, 2007.

C. The following sets forth the pro forma net income and earnings per share based on the assumption that the compensation cost is accounted for using the fair value method for the stock options granted (amended) on or after January 1, 2004:

For the six-month periods ended

June 30,

(Adjusted

retroactively) 2008 2007

Net income Net income stated in the statement of income $ 298,031 $ 554,910

Pro forma net income $ 268,407 $ 530,613

Basic earnings per share (EPS) (in dollars)

EPS stated in the statement of income

$ 0.57 $ 1.09

Pro forma EPS $ 0.52 $ 1.04

Diluted EPS (in dollars)

EPS stated in the statement of income $ 0.57 $ 1.07

Pro forma EPS $ 0.51 $ 1.03

～ 29 ～

For the stock options granted (amended) on or after January 1, 2004 with the compensation cost accounted for using the fair value method, their fair value on the grant date is estimated using the Black-Scholes option-pricing model. The weighted-average parameters used in the estimation of the fair value are as follows:


Risk-free interest rate 2.77% 2.52%Expected vesting period 1.50~6.50 years 2.50 yearsExpected price volatility 33.60%~44.40% 12.30%Dividend yield rate 0% 0%

19) Income tax

A. The adjustments for income tax payable and income tax expense are as follows:


Income tax expense (benefit) from continuing operations $ 63,497 ($ 11,819)

Income tax benefit from discontinued operations ( 45,344) ( 24,706)

Add: Net change in deferred income tax assets ( 17,453) 40,554

Less: Prepaid and withholding taxes ( 264) ( 494)

Income tax payable $ 436 $ 3,535

B. Deferred income tax assets and liabilities

June 30, 2008 2007

Deferred income tax assets – current $ 270,145 $ 301,264

Deferred income tax assets – non-current 1,015,702 1,472,853

Valuation allowance ( 628,281) ( 1,123,681)

$ 657,566 $ 650,436

～ 30 ～

C. Details of temporary differences, loss carryforwards and investment tax credits resulting in deferred income tax assets and liabilities are as follows:

June 30,

2008 2007

Amount Tax effect Amount Tax effect Current items:

Unrealized losses on sales to affiliated companies $ 2,808 $ 702 $ 60,990 $ 15,247

Unrealized losses on foreign exchange transactions 13,428 3,357 145 36

Unrealized gains on valuation of financial assets and liabilities ( 3,921) ( 980) ( 31) ( 7)

Loss on inventory value decline 341,120 85,280 458,336 114,584

Over provision of allowance for bad debts 692,545 173,136 648,650 162,163

Employee benefits 2,158 539 4,470 1,118

Service warranty expense 32,442 8,111 32,494 8,123

Less: Valuation allowance ( 103,882) ( 97,298)

$ 166,263 $ 203,966

Non-current items:

Employee benefits $ - $ - $ 2,081 $ 520

Investment loss 148,740 37,185 29,622 7,406

Impairment loss 946,187 236,547 1,430,753 357,688

Net pension costs 37,062 9,265 35,253 8,813

Loss carryforwards 1,434,976 358,744 1,238,822 309,706

Investment tax credits 373,961 788,720

Less: Valuation allowance ( 524,399) ( 1,026,383)

$ 491,303 $ 446,470

～ 31 ～

D. The Company is eligible for investment tax credits under the Statute for Upgrading Industry. Details as of June 30, 2008 are as follows:

Year of approval Qualifying item

Total tax credits

Unused tax credits

Final year tax credits

are due 2004 Research and development $ 143,763 $ 143,763 2008

Machinery and equipment 78,549 61,403 〞 Employees’ training 422 422 〞

$ 222,734 $ 205,588

2005 Research and development $ 23,968 $ 23,968 2009 Machinery and equipment 796 796 〞 Employees’ training 418 418 〞 Investments in emerging

important strategic industries 29,631 29,631

〞

$ 54,813 $ 54,813

2006 Research and development $ 24,005 $ 24,005 2010 Machinery and equipment 7,617 7,617 〞 Employees’ training 688 688 〞

$ 32,310 $ 32,310

2007 Research and development $ 43,707 $ 43,707 2011 Machinery and equipment 16,541 16,541 〞 Employees’ training 598 598 〞

$ 60,846 $ 60,846

2008 Research and development $ 20,134 $ 20,134 2012 Employees’ training 270 270 〞

$ 20,404 $ 20,404 $ 391,107 $ 373,961

E. As of June 30, 2008, losses available to be carried forward were as follows: Year in which

loss was incurred

Amount filed / approved

Losses available to be

carried forwardUnused loss

carryforwards

Final year lossescan be

carried forward2003 $ 467,252 $ 116,813 $ 86,062 2008 2004 861,121 215,280 215,280 2009 2005 162,697 40,674 40,674 2010 2006 66,910 16,728 16,728 2011

$ 1,557,980 $ 389,495 $ 358,744

～ 32 ～

F. As of June 30, 2008, the Company’s income tax returns through 2005 have been assessed and approved by the Tax Authority.

G. Details of unappropriated retained earnings (accumulated deficit) as of June 30, 2008 and 2007 are summarized below: June 30, 2008 2007 On or after January 1, 1998

Earnings subjected to 10% income tax (accumulated deficit) $ 167,705 ($ 2,559,658)

Earnings not subjected to 10% income tax 298,031 554,910

$ 465,736 ($ 2,004,748)

H. The Company, in accordance with Regulation No. 273 issued by the Accounting Research and Development Foundation in Taiwan on December 31, 1998, discloses the following information: June 30, 2008 2007 Balance of shareholders account of

deductible tax $ 11,712 $ 7,437

2007 Expected creditable tax ratio 1.27%

2006 Actual creditable tax ratio -

I. The Company’s equipment expansion is entitled to a four-year exemption on income tax under the Article 15 of Act for Establishment and Administration of Science Parks prior to amendment. Details as of June 30, 2008 are as follows:

Approval date and no.

Date of tax-exempt related equipment ready for production

Tax-exempt periods

Cost of tax-exempt related equipment

Gung-Jung-Tz No. 0910011829 on May. 15, 2002 November 20, 2001

January 1, 2005 ~ December 31, 2008

$ 438,290

Gung-Jung-Tz No. 0930012176 on May. 5, 2004 May 4, 2004


655,988

Gung-Jung-Tz No. 0950008215 on Mar. 31, 2006 March 29, 2006


388,162

$ 1,482,440

～ 33 ～

20) Earnings per share For the six-month period ended June 30, 2008 Weighted-average outstanding Net income common shares Earnings per share (in dollars) Before tax After tax (in thousands) Before tax After tax Basic earnings per share

Net income attributable to common stockholders $ 316,185 $ 298,031 518,686 $ 0.61 $ 0.57

Dilutive effect of common stock equivalents:

Stock options - - 4,740

Employees’ bonus - - 2,950

Diluted earnings per share

Net income attributable to common stockholders plus dilutive effect of common stock equivalents $ 316,185 $ 298,031 526,376 $ 0.60 $ 0.57

Effective January 1, 2008, as employees’ bonus could be distributed in the form of stock, the diluted EPS computation shall include those estimated shares that would increase from employees’ stock bonus issuance in the calculation of the weighted-average number of common shares outstanding during the reporting year, taking into account the dilutive effects of stock bonus on potential common shares; whereas, basic EPS shall be calculated based on the weighted-average number of common shares outstanding during the reporting year that include the shares of employees’ stock bonus for the appropriation of prior year earnings, which have already been resolved at the stockholders’ meeting held in the reporting year. Since capitalization of employees’ bonus no longer belongs to distribution of stock dividends (or retained earnings and capital reserve capitalized), the calculation of basic EPS and diluted EPS for all periods presented shall not be adjusted retroactively. However, the accounting treatment for the appropriation of employees’ bonus for 2007 earnings resolved at the stockholders’ meeting held in 2008 shall be accounted for in accordance with the regulations on capitalization of employees’ bonus under paragraphs 19 and 39 of R.O.C. SFAS No. 24, “Earnings per Share”.

～ 34 ～

For the six-month period ended June 30, 2007 Weighted-average outstanding Amount common shares Earnings per share (in dollars) Before tax After tax (in thousands) Before tax After tax Basic earnings per share

Net income attributable to common stockholders before retroactive adjustment $ 518,385 $ 554,910 764,724 $ 0.68 $ 0.73


Stock options - - 9,668 Net income attributable to

common stockholders plus dilutive effect of common stock equivalents before retroactive adjustment $ 518,385 $ 554,910 774,392 $ 0.67 $ 0.72

Basic earnings per share Net income attributable to

common stockholders after retroactive adjustment $ 518,385 $ 554,910 505,095 $ 1.02 $ 1.09


Stock options - - 6,448 Net income attributable to

common stockholders plus dilutive effect of common stock equivalents after retroactive adjustment $ 518,385 $ 554,910 516,423 $ 1.00 $ 1.07

The above weighted-average outstanding common shares have been adjusted retroactively in proportion to the capital reduction during the year ended December 31, 2007.

21) Personnel, depreciation and amortization expenses

Personnel, depreciation and amortization expenses are summarized as follows: For the six-month period ended June 30, 2008 Operating cost Operating expense Total Personnel expenses

Salaries $ 226,266 $ 194,927 $ 421,193

Labor and health insurance 17,419 8,847 26,266

Pension 14,495 9,060 23,555

Others 4,759 2,168 6,927

$ 262,939 $ 215,002 $ 477,941

Depreciation $ 152,995 $ 93,417 $ 246,412

Amortization $ 3,653 $ 13,782 $ 17,435

～ 35 ～


Operating cost Operating expense Total Personnel expenses

Salaries $ 207,364 $ 122,969 $ 330,333

Labor and health insurance 16,801 8,255 25,056

Pension 14,644 9,441 24,085

Others 3,901 1,721 5,622

$ 242,710 $ 142,386 $ 385,096

Depreciation $ 155,822 $ 102,212 $ 258,034

Amortization $ 3,752 $ 13,270 $ 17,022

22) Loss from discontinued operations and disclosure of cash flows

A. In accordance with the resolution adopted at the stockholders’ meeting on June 13, 2007, the Company discontinued the operations of OLED division. The Company had been actively looking for buyers in order to dispose its idle assets and to minimize the Company’s loss and liabilities.

B. Details of the disposal loss on the discontinued division for the six-month periods ended June 30, 2008 and 2007 were as follows:

For the six-month periods ended June 30,

2008 2007 Net operating revenues $ 162 ($ 4,473)

Cost of goods sold ( 13,995) ( 25,402)

Gross loss ( 13,833) ( 29,875)

Operating expenses ( 3,377) ( 5,788)

Net operating loss ( 17,210) ( 35,663)

Non-operating income/expense, net ( 21) 136

Loss before income tax from discontinued operations ( 17,231) ( 35,527)

Income tax benefit 45,344 24,706

Net income (loss) after income tax from discontinued operations $ 28,113 ($ 10,821)

C. The cash flows from the discontinued division for the six-month periods ended June 30, 2008 and 2007 are as follows:

For the six-month periods ended June 30,

2008 2007 Net cash outflow from operating activities ($ 17,247) ($ 56,158)

Net cash outflow from financing activities $ - ($ 148,230)

D. Please refer to Note 4(5) for the information on Non-current assets held-for-sale of the discontinued OLED division as of June 30, 2008 and 2007.

～ 36 ～

5. RELATED PARTY TRANSACTIONS 1) Names of the related parties and their relationship with the Company

Related party Relationship with the Company Ho Chung Investment Co., Ltd. (Ho Chung Investment) Subsidiary of the Company Opto Tech (H.K.) Co., Ltd. (Opto H.K.) Subsidiary of the Company Opto Tech (Macao) Co., Ltd. (Opto Macao) Subsidiary of the Company China Semiconductor Corporation (CSC) Subsidiary of the Company Jyu Shin Investment Co., Ltd. Subsidiary of the Company Opto Technology International Group Co., Ltd. (Opto) Subsidiary of the Company Epotec International Corp. (Epotec) Indirect subsidiary of the Company; subsidiary

of Opto (liquidated in April 2008) Graceful Business Co., Ltd. (Graceful) Indirect subsidiary of the Company; subsidiary

of Opto Opto Tech (Cayman) Co., Ltd. (Cayman) Indirect subsidiary of the Company; subsidiary

of Opto Opto Grand (Cayman) Co., Ltd. (Opto Grand) Indirect subsidiary of the Company; subsidiary

of Opto Bright Investment International Ltd. (Bright) Indirect subsidiary of the Company; subsidiary

of CSC Everyung Investment Ltd. (Everyung) Indirect subsidiary of the Company; subsidiary

of Bright Investment Opto Tech (Suzhou) Co., Ltd. (Opto Tech Suzhou) Indirect subsidiary of the Company; subsidiary

of Opto Tech Cayman Opto Tech Semiconductor (Ningbo) Co., Ltd.

(Opto Tech Ningbo) Indirect subsidiary of the Company; subsidiary

of Opto Grand Cayman Opto Plus Technology Co., Ltd. (Opto Plus) Indirect subsidiary of the Company; subsidiary

of Everyung Investment Neostones Microfabrication Corporation (Neostones

Microfabrication) Investee of the Company accounted for under

the equity method Viking Tech Corporation (Viking Tech) Investee of the Company accounted for under

the equity method United Radiant Technology Corp. (United Radiant) The Company is a director of United Radiant.Oriental System Technology Inc. (OST) The Company is a supervisor of OST. Shin-Etsu Opto Electronic Co., Ltd. (Shin-Etsu Opto) The Company is a director of Shin-Etsu Opto.Lanyo Technology Co., Ltd. (Lanyo Tech) The Company is a director of Lanyo Tech. Shunag Xin Investment Consulting Co., Ltd. (Shunag

Xin) Shunag Xin is a director of the Company.

Nichia Corp. Nichia Corp. is a director of the Company. Hitachi, Ltd. Hitachi, Ltd. is a director of the Company.

～ 37 ～

2) Significant related party transactions and balances

A. Sales


Amount % of net sales Amount % of net salesShin-Etsu Opto $ 106,207 3 $ 21,951 1

Nichia Corp. 78,576 2 47,011 1

Opto Plus 23,699 1 - -

Opto Tech Suzhou 21,427 1 30,092 1

Opto Macao - - 136,544 4

Others 481 - 1,060 -

$ 230,390 7 $ 236,658 7

The selling prices charged to the above related parties are not materially different from those charged to non-related parties. The credit term is 46~376 days for the related parties and 90~150 days for non-related parties. The credit term for some of the related parties is longer than non-related parties, and the primary reason is as follows:

China Semiconductor Corporation:

CSC was granted a longer credit term because the operations of the subsidiary was not fully established yet and its profit and working capital were limited.

The unrealized gains (losses) on the transactions between the Company and its affiliated companies have been eliminated.

B. Purchases


Amount % of net

purchases Amount % of net

purchases Nichia Corp. $ 489,097 25 $ 292,342 15

Shin-Etsu Opto 188,678 9 239,325 13

Opto Tech Suzhou 447 - 28,595 2

Others 2,263 - 221 -

$ 680,485 34 $ 560,483 30

The purchase prices charged by the above related parties were not materially different from those charged by non-related parties. The credit term for the six-month periods ended June 30, 2008 and 2007 were 75~150 days for the related parties and 90~120 days for non-related parties.

～ 38 ～

C. Notes receivable and accounts receivable

June 30,

2008 2007

Amount

% of notes receivable and

accounts receivable Amount

% of notes receivable and

accounts receivable

CSC $ 115,104 6 $ 115,925 7

Shin-Etsu Opto 52,443 3 12,266 1

Nichia Corp. 34,919 2 28,163 1

Opto Macao 11,894 1 135,044 7

Opto Tech Suzhou 8,022 - 15,793 1

Opto Plus 7,021 - - -

OST 2,523 - 7,927 -

231,926 12 315,118 17Less: Allowance for doubtful

accounts ( 11,578) ( 1) ( 2,294) -Reclassified to other accounts receivable ( 115,070) ( 6) ( 114,102) ( 7)

$ 105,278 5 $ 198,722 10

As of June 30, 2008 and 2007, the accounts receivable from CSC was reclassified to other receivables because it exceeded the normal credit term.

D. Other receivables

June 30,

2008 2007

Amount % of other receivables Amount

% of other receivables

CSC $ 115,070 584 $ 114,102 372

Opto Tech Suzhou 6,749 34 - -

Viking Tech - - 7,000 23Less: Allowance for doubtful

accounts ( 115,070) ( 584) ( 114,102) ( 372)

$ 6,749 34 $ 7,000 23

～ 39 ～

E. Accounts payable

June 30,

2008 2007

Amount % of accounts

payable Amount % of accounts

payable Nichia Corp. $ 288,389 25 $ 179,529 14

Shin-Etsu Opto 133,657 11 239,325 19

Opto Tech Suzhou 313 - 15,419 1

Others 2,048 - 166 -

$ 424,407 36 $ 434,439 34

F. Operating leases For the six-month period ended June 30, 2008

Asset Period Method of

rent payment Guarantee deposits

Rental income

Lanyo Tech Plant and

equipmentSep. 1, 2006 ~ Aug. 31, 2008 Quarterly $ 12 $ 87


Asset Period Method of

rent payment Guarantee deposits

Rental income

Lanyo Tech Plant and

equipmentSep. 1, 2006 ~ Aug. 31, 2008 Quarterly $ 12

$ 87

G. Property transactions

(1) For the six-month period ended June 30, 2008: None.

(2) For the six-month period ended June 30, 2007, the Company sold machinery to the subsidiary as follows: Disposal price Gain on disposal OST $ 14,129 $ 600

H. Loans granted to related parties

Loans granted to related parties as of June 30, 2008 and 2007 are as follows: June 30, 2008 2007 CSC $ 123,390 $ 145,910

Opto Macao 207,060 49,808

Opto Tech Suzhou 212,730 32,910

OPTO 182,340 -

$ 725,520 $ 228,628

～ 40 ～

6. PLEDGED ASSETS The Company’s assets pledged as collateral as of June 30, 2008 and 2007 are as follows:

Carrying value Purpose

June 30, 2008 June 30, 2007 Creditor Bank Type Equity investments

accounted for under equity method

$ - $ 160,667 Ta Chong Bank Long-term loans

Buildings 1,073,041 - Taishin International Bank and 7 other banks

Long-term loans

Buildings - 1,264,528 Bank of Taiwan and Taiwan Cooperative Bank

Long-term loans

Non-current assets held for sale-fixed assets

- 252,718 Taiwan Cooperative Bank and 13 other banks

Long-term loans

Machinery - 384,881 Mega International Commercial Bank

Long-term loans

Restricted assets – Special account for payment

39,660 - Taishin International Bank and 7 other banks

Long-term loans

Restricted assets – Time deposits 22,160 18,046

Mega International Commercial Bank

Loans granted for subsidiaries

$ 1,134,861 $ 2,080,840

7. COMMITMENTS AND CONTINGENT LIABILITIES

A. Please refer to Note 5 for details of the endorsements and guarantees provided to subsidiaries.

B. As of June 30, 2008, the guarantees provided by the Company through banks were as follows:

Guarantor Nature of Guarantee Amount Chang Hwa Commercial Bank Customs duty $ 23,000

C. As of June 30, 2008, the unutilized amounts of letters of credit issued for import of raw materials and machinery were as follows:

Currency Amount NTD $ 92,334

USD 5,719

JPY 153,025

D. As of June 30, 2008, the Company had signed major contracts for purchasing case facilities. Details are as follows:

Case Currency Total amount Paid amount Unpaid amountTetrad epitaxy facility USD $ 8,800 $ 4,400 $ 4,400

～ 41 ～

E. The Company has been involved in a dispute with A-Honet Information, Ltd. as to whether the contract they entered into on June 30, 2004 is a broker agreement. A-Honet Information, Ltd. considered the contract they signed as a broker agreement, so it has claimed remuneration of $5,000 from the Company. In case the claim is recognized, the maximum claim that could be made from the Company amounted to $30,000. On December 18, 2007, the Taiwan Taipei District Court rejected. However, A-Honet Information, Ltd. filed the second appeal with the high court, which upheld the decision by the Taiwan Taipei District Court on June 17, 2008.

F. The Company had entered into an agreement to lease land from Hsinchu Science Park for a period from 1990 to 2017. Total rent payable and the present value of rent payable (discounted based on the standard rate of Bank of Taiwan, which is 4.176%) as of June 30, 2008 are as follows: June 30, 2008

Total rent payable Present value of

rent payable 1~5 years $ 77,488 $ 70,611

Over 5 years 52,232 39,344

$ 129,720 $ 109,955

G. Pursuant to the syndicated loan facility agreement entered into by the Company with Taishin International Bank and 7 other banks, the Company is required to maintain its current ratio at 100% or above, debt ratio at 150% or below, interest coverage ratio at 300% or above and net value of tangible assets at $0.5 billion or above. If the Company breaches the above debt covenants, it is required to propose specific plans for improvement and the related details. However, the Company may request for immunity and it can be exempted from the breach after a resolution by the majority of the banks.

H. As of June 30, 2008 and 2007, the promissory notes issued by the Company for loans and performance guarantee of purchases amounted to $8,204,147 and $7,099,650, respectively.

8. SIGNIFICANT DISASTER LOSS

None.

9. SIGNIFICANT SUBSEQUENT EVENTS

In July 2008, the Company signed commercial draft agreements with specific companies to sell machines in the OLED department, which was resolved to be discontinued by the Board of Directors on November 4, 2006. The prices of the machines were based on the appraisal report, which was evaluated by specialists, and were agreed by two parties. The Company will transport the machines in batches according to the agreements, and the buyers will pay upon receipt of the machines. The machines have not been delivered as of August 11, 2008.

～ 42 ～

10. OTHERS

1) Financial statement presentation

Certain accounts in the June 30, 2007 financial statements were reclassified to conform with the June 30, 2008 financial statement presentation.

～ 43 ～

2) The fair values of the financial instruments June 30, 2008 June 30, 2007 Fair value Fair value

Book value

Quotations in an active market

Estimated using a

valuation Book value

Quotations in an active market

Estimated using a

valuation Non-derivative financial instruments

Assets Financial assets with fair values equal to book

values $ 3,129,092 $ - $ 3,129,092 $ 3,556,619 $ - $ 3,556,619

Financial assets at fair value through profit or loss 110,204 110,204 - 15,031 15,031 -

Available-for-sale financial instruments 68,680 68,680 - 122,445 122,445 -

Financial assets carried at cost 224,233 - - 331,704 - -

Deposits out 1,138 - 1,138 1,236 - 1,236

Liabilities Financial liabilities with fair values equal to

book values 3,502,440 - 3,502,440 4,316,804 - 4,316,804

Long-term loans 1,035,850 - 1,035,850 230,000 - 230,000

Guarantee deposits 81 - 81 78 - 78

Derivative financial instruments Assets

Financial assets at fair value through profit or loss Forward exchange contracts 3,717 3,717 - - - -

～ 44 ～

The methods and assumptions used to estimate the fair values of the above financial instruments are summarized below:

A. The fair values of short-term financial instruments are approximated using their carrying value because their present values have insignificant influence on the fair values. This method applies to cash and cash equivalents, notes and accounts receivable (including related parties), other receivables (including related parties), other financial assets – current, other current assets, short-term loan, accounts payable (including related parties), income tax payable, accrued expenses, other payables, long-term liabilities with maturity within one year and other current liabilities.

B. Since quoted market prices are available for available-for-sale financial assets, the fair values are determined by the quoted market price.

C. The fair value of deposits out and guarantee deposits is the book value since the amount is insignificant.

D. The fair value of long-term loans is based on the present value of expected future cash flows. Since long-term loans are associated with floating interest rates, the carrying value is equivalent to the fair value.

E. Since quoted market prices are available for derivative financial assets and liabilities, the fair values are determined by the quoted market price.

3) As of June 30, 2008 and 2007, the financial assets with fair value risk due to the change of interest amounted to $368,660 and $748,699, respectively and the financial liabilities with fair value risk due to the change of interest were both $0. As of June 30, 2008 and 2007, the financial assets with cash flow risk due to the change of interest were $350,757 and $590,673, respectively and the financial liabilities with cash flow risk due to the change of interest were $2,320,788 and $3,007,262, respectively.

4) For available-for-sale financial assets, during the six-month periods ended June 30, 2008 and 2007, the amount of gain or loss recognized directly in equity were $31,885 and ($7,635), respectively.

5) Procedure of financial risk control and hedge

A. The primary financial products the Company holds in addition to derivative instruments include bank loans, capital leases and cash and cash equivalents. The Company meets operating capital needs through these financial instruments. The Company also holds other financial assets and liabilities, such as accounts receivable and payable resulting from operating activities.

B. The key risk of the financial instruments of the Company is exchange rate risk, credit risk and liquidity risk. To meet its risk management objectives, the Company adopts the following strategies to control financial risk:

(A) Exchange rate risk

The Company is exposed to exchange rate risk because parts of the purchases or sales are denominated in non-functional currencies. The percentage of non-functional currencies

～ 45 ～

denominated purchases and sales over total purchases and sales incurred by the Company are estimated to be 54% and 75%, respectively.

(B) Price risk

The price risk of the Company is low.

(C) Credit risk

Before making trades with third parties, the Company has to follow credit assessment procedures based on its credit policy, and evaluates the recovery of accounts receivable and notes receivable continually.

The credit risk of other financial assets (including cash and cash equivalents, financial assets at fair value through profit or loss and available-for-sale financial assets) mainly results from the risk of failing to meet the contract requirements by the counterparty. The maximum credit risk is equal to the book value.

(D) Liquidity risk

The Company maintains sufficient capital and reaches the objective of flexible use and stabilization of capital through the instruments of bank loans and cash and cash equivalents. As of June 30, 2008 and 2007, current loans are 55% and 92% of the total loans, respectively.

6) Information of material financial risk

A. Financial investments in equity: Financial assets at fair value through profit or loss – current, financial assets carried at cost – non-current and available-for-sale financial assets – non-current.

(A) Market risk The financial investment in equity the Company engaged in is affected by the change in market prices. However, the Company has set the stop loss limit and it is expected that there will be no significant market risk. Because financial assets carried at cost which the Company invests in are not affected by the change in market prices, it is expected that there will be no significant market risk.

(B) Credit risk The Company invests in financial assets at fair value through profit or loss and available-for-sale financial assets in listed market and GreTai Securities Market or makes trade through underwriters. In addition, when investing in financial assets at fair value through profit or loss, available-for-sale financial assets and financial assets carried at cost, the Company has evaluated the credit standing of the counterparties and does not expect any non-fulfillment of the terms of the contract. Therefore, the credit risk is low.

(C) Liquidity risk

All of the financial assets at fair value through profit or loss and available-for-sale financial assets of the Company have quoted prices in active markets and therefore it is expected that the Company can quickly sell the financial assets in the markets at prices close to their fair values.

～ 46 ～

There is no active market for financial assets carried at cost of the Company, so the Company expects to have liquidity risk.

(D) Cash flow risk due to the change of interest

As the Company has no significant interest-bearing assets, cash flows are substantially independent of changes in market interest rates.

B. Receivables: Notes receivable (including related parties), accounts receivable (including related parties) and other receivables (including related parties).

(A) Market risk The receivables of the Company are all maturing within one year and therefore there is no significant market risk.

(B) Credit risk

The debtors of the Company have good credit standing. Thus, there is no significant credit risk.

(C) Liquidity risk

The receivables of the Company are all maturing within one year and therefore there is no significant liquidity risk.


The receivables of the Company are all maturing within one year. There is no cash flow risk due to the change of interest.

C. Loans: Long-term loans (including loans maturing within one year or one operating cycle).

(A) Market risk

The loans of the Company are operating advances with floating interest. Thus, there is no significant market risk.

(B) Credit risk

None.

(C) Liquidity risk

The working capital of the Company is sufficient to cover the loans, so it expects no significant liquidity risk.


The loans of the Company are financial instruments with floating interest and therefore the change in market interest will result in the change in the effective interest of financial instruments in debts and make the future cash flows fluctuate.

～ 47 ～

7) Information on derivative financial instruments

The transaction of derivative financial instruments during the six-month period ended June 30, 2008 is as follows (in thousand dollars): Terms of transaction Future cash flows

Derivative financial instruments

Par value, amount of the contract or nominal

principal Date of contract Date of performance

Price of performance/

agreed interest

Gain (loss) recognized for the six-month period ended

June 30, 2008 Cash outflow Cash inflow

Advanced forward exchange contracts

USD 1,000 2008.05.08

2008.05.08~ 2008.07.03 $30.568 $ 215 USD 1,000 $ 30,568


USD 1,000 2008.05.08

2008.05.08~ 2008.07.10 30.606 254 USD 1,000 30,606


USD 1,000 2008.05.08

2008.05.08~ 2008.07.17 30.678 335 USD 1,000 30,678


USD 1,000 2008.05.08

2008.05.08~ 2008.07.24 30.672 324 USD 1,000 30,672


USD 1,000 2008.05.08

2008.05.08~ 2008.08.05 30.742 434 USD 1,000 30,742


USD 1,000 2008.05.12

2008.05.12~ 2008.08.12 30.677 368 USD 1,000 30,677


USD 1,000 2008.05.14

2008.05.14~ 2008.08.19 30.864 532 USD 1,000 30,864


USD 1,000 2008.05.14

2008.05.14~ 2008.08.26 30.922 628 USD 1,000 30,922


USD 1,000 2008.05.14

2008.05.14~ 2008.09.04 30.915 627 USD 1,000 30,915

$ 3,717

～ 48 ～

11. SUPPLEMENTARY DISCLOSURES 1) Significant transactions

A. Loans granted during the six-month period ended June 30, 2008:

Business relationship Collateral

Number (Note 1)

Creditor Borrower General

ledger account

Maximum outstanding

balance during

the six-month

period endedJune 30, 2008

Balance atJune 30, 2008

Interest rate

Nature of loan

(Note 2)Nature of

loan

Amount oftransactions

with the borrower

Reason for short-term financing

Allowancefor doubtful

accounts Item Value

Limit on loans

granted to a single

party (Note 3)

Ceiling on total loans

granted (Note 4)

0

Opto Tech Corp.

China Semiconductor Corp.

Other receivables – related parties $ 115,155 $ 115,070 6.236% 1

Overdue accounts receivable

$ 115,070Operating needs $ 115,070 None $ - $ 293,951

$ 587,902

1

China Semiconductor Corp. Opto Plus

Other receivables – related parties 78,191 74,171 5.000% 1 〞

74,171 〞 61,450 〞 - 9,025

9,025

Note 1: The numbers filled in for the loans provided by the Company or subsidiaries are as follows:

(1) The Company is “0”.

(2) The subsidiaries are numbered in order starting from “1”.

Note 2: Relationship with the borrower is classified into the following categories:

(1) The borrower having business relationship is numbered as “1”.

(2) The borrower having the needs of short-term financing is numbered as “2”.

Note 3: Limit on loans granted to a single party, which has business relationship with the Company should not exceed 5% of the Company’s latest net asset value. Besides, limit on loans granted to a single party,

which has business relationship with the subsidiaries should not exceed total amount that the two sides have made trade in the recent year.

Note 4: Total amount of loans of the Company should not exceed 10% of the net value of the Company’s latest net asset value, and total amount of loans of the subsidiaries should not exceed 20% of the net values of

the subsidiaries’ latest net asset values.

～ 49 ～

B. Endorsements and guarantees provided during the six-month period ended June 30, 2008:

Number (Note 1)

Endorser/ guarantor

Party being endorsed/ guaranteed

Relationship with the endorser/ guarantor (Note 2)

Limit on endorsements/

guarantees provided for a single party

(Note 3)

Maximum outstanding endorsement/

guarantee amount during the six-month

period ended June 30, 2008

Outstanding endorsement/

guarantee amount atJune 30, 2008

Amount of endorsements/

guarantees secured with collateral

Ratio of accumulatedendorsement/

guarantee amount to net asset value of

the Company

Ceiling on total amount of endorsements/

guarantees provided

0 Opto Tech Corp.

China Semiconductor Corp. 3 $ 1,175,803 $ 145,320 $ 123,390 $ - 2.09 $ 2,939,508

0 〞 Opto Tech Suzhou 3 1,175,803 213,605 212,730 - 3.62 2,939,508

0 〞 Opto Macao 2 1,175,803 253,782 207,060 20,546 3.52 2,939,508

0 〞

Opto Technology International Group Co., Ltd. 2 1,175,803 182,700 182,340 - 3.10 2,939,508

$ 725,520 12.33

1

Opto Technology International Group Co., Ltd.

Opto Tech Suzhou 2 $ 214,513 $ 164,430 $ 164,106 - 22.95 $ 357,522

Note 1: The numbers filled in for the endorsements and guarantees provided by the Company or subsidiaries are as follows:

(1) The Company is “0”.

(2) The subsidiaries are numbered in order starting from “1”.

Note 2: Relationship with the endorser/guarantor is classified into the following categories:

(1) Having business relationship.

(2) The Company owns more than 50% voting shares of the endorsed/guaranteed company.

(3) The Company and its subsidiaries jointly own more than 50% voting shares of the endorsed/guaranteed company.

(4) The endorsed/guaranteed company directly or indirectly owns more than 50% voting shares of the endorser/guarantor.

(5) Mutual guarantees in the same trade due to construction undertaking pursuant to the contracts.

(6) Due to joint venture, each shareholder provides guarantees for the company in proportion to its ownership.

Note 3: Under the Company’s “Procedures for Provision of Endorsements and Guarantees”, the Company’s total guarantees and endorsements to others should not exceed 50% of the Company’s net asset value, and

total guarantees and endorsements provided for a single party should not exceed 20% of the Company’s net asset value. Besides, according to “Procedures for Provision of Endorsements and Guarantees” of

the subsidiaries, total guarantees and endorsements to others should not exceed 50% of the subsidiary’s net asset value, and total guarantees and endorsements provided for a single party should not exceed

30% of the subsidiary’s net asset value. The calculation is shown below:

(1) 5,879,016 thousand dollars × 20% ＝ 1,175,803 thousand dollars

(2) 5,879,016 thousand dollars × 50% ＝ 2,939,508 thousand dollars

(3) 715,043 thousand dollars × 30% ＝ 214,513 thousand dollars

(4) 715,043 thousand dollars × 50% ＝ 357,522 thousand dollars

～ 50 ～

C. Marketable securities held as at June 30, 2008:

As of June 30, 2008

Securities held by

Type of marketable securities Name of marketable securities

Relationship of the securities issuer with the Company

General ledger account

Number of shares(in thousands) Book value

Ownership (%)

Market value or equity per share

(in dollars)

Remark

Opto Tech Corp. fund Prudential funds – Vibo None

Financial assets at fair value through profit or loss-current 2,733 $ 35,073 - $ 12.83

None 〞〞 Yuanta funds – Wan Tai 〞〞 2,801 40,088 - 14.31 〞

〞〞 Prudential bond funds 〞〞 2,342 35,043 - 14.96 〞

$ 110,204

〞 stock American Xtal Technologies,

Inc. None

Available-for-sale financial assets-non-current 134 $ 1,269 0.05 $ 1,269

〞

〞〞 United Radiant Technology

Corp.

The Company is the director of this company. 〞 13,141 67,411 5.50 67,411

〞

$ 68,680

〞〞 Action Media Technologies, Inc. None

Financial assets carried at cost-non-current 75 $ - 1.96 $ -

〞

〞〞 Metrodyne Microsystem

Corp.

The Company is the director of this company. 〞 1 - 0.01 -

〞

〞〞 Oriental System Technology

Inc.

The Company is the supervisor of this company. 〞 1,737 11,194 19.73 10,354

〞

〞〞 Formosa Industrial

Computing, Inc. None 〞 699 7,632 4.54 8,047

〞

〞〞 Shin-Etsu Opto Electronic

Co., Ltd.


〞

〞〞 Lanyo Technology Co., Ltd.


〞

〞〞 Giga Expitaxy Technology

Corp.


〞

〞〞 Pictologic Inc. None 〞 400 4,000 1.71 2,882 〞

〞〞 Lu Zhu Development Co.,

Ltd.


〞

〞〞 Mentor Data System, Inc.

The Company is the director of this company. 〞 4,509 - 19.19 -

〞

〞〞 Omniad Media Incorporation


〞

$ 224,233

～ 51 ～

As of June 30, 2008

Securities held by





Ownership (%)


(in dollars)

Remark

Opto Tech Corp. stock Opto Tech International

Group Co., Ltd. Subsidiary of the

Company

Long-term investment accounted for under equity method 26,110 $ 715,043 100.00 $ 715,043

None

〞〞 Ho Chung Investment Corp. Subsidiary of the

Company 〞 23,830 95,256 100.00 95,256

〞

〞〞 Opto Tech Co, Ltd. (H.K.) Subsidiary of the

Company 〞 2,000 9,039 100.00 9,039

〞

〞〞 Opto Tech Co, Ltd. (Macao) Subsidiary of the

Company 〞 989 ( 1,211) 99.90 ( 1,211)

〞

〞〞 China Semiconductor Corp. Subsidiary of the

Company 〞 1,963 12,802 28.37 12,802

〞

〞〞 Jyu Shin Investment Co., Ltd. Subsidiary of the

Company 〞 7,868 80,857 100.00 80,857

〞

〞〞 Neostones Microfabrication

Corporation

Investee of the Company accounted for under the equity method 〞 243 - 48.61 -

〞

〞〞 Viking Tech Corporation

Investee of the Company accounted for under the equity method 〞 7,209 96,839 11.61 96,839

〞

$ 1,008,625

Jyu Shin Investment Co., Ltd. stock Viking Tech Corporation

Investee of the Company accounted for under the equity method

Long-term investment accounted for under equity method 6,200 $ 80,857 9.99 80,857

〞

Ho Chung Investment Corp. stock Opto Tech Corp.

Parent company of the Company

Financial assets at fair value through profit or loss-current 1,107 28,014 0.21 28,014

〞

〞〞 China Semiconductor Corp.

Investee of the Company accounted for under the equity method

Long-term investment accounted for under equity method 2,528 16,490 36.54 16,490

〞

〞〞 Viking Tech Corporation

Investee of the Company accounted for under the equity method 〞 2,726 37,301 4.39 37,301

〞

〞〞 VML Technologies B.V.

Investee of the Company accounted for under the equity method 〞 6 35,488 25.00 35,488

〞

〞〞 Brilliance Semiconductor,

Inc. None Financial assets carried

at cost-non-current 56 293 0.17 -

〞

$ 117,586

～ 52 ～

As of June 30, 2008

Securities held by





Ownership (%)


(in dollars)

Remark

China Semiconductor Corp. stock

Gigantic Pacific Investment Ltd.

Subsidiary of the Company

Long-term investment accounted for under equity method USD 9,002 $ 11,392 100.00 $ 11,392

None

〞〞 Bright Investment

International Ltd. Subsidiary of the

Company

Long-term investment accounted for under equity method USD 4,851 1,765 100.00 1,765

〞

〞〞 China Semiconductor Corp.

(M) Sdn Bhd. Subsidiary of the

Company

Long-term investment accounted for under equity method MYR 1,000 1,705 100.00 1,705

〞

$ 14,862

Gigantic Pacific Investment Ltd. stock

Shaoxing Yilida Electronics Co., Ltd.


Long-term investment accounted for under equity method USD 5,069 (USD$ 345) 100.00 (USD$ 345)

〞

Bright Investment International Ltd. stock Everyung Investment Ltd.


Long-term investment accounted for under equity method USD 4,980 USD 58 100.00 USD 58

〞

Everyung Investment Ltd. stock

Opto Plus Technology Co., Ltd.


Long-term investment accounted for under equity method USD 4,980 USD 58 100.00 USD 58

〞 Opto Technology

International Group Co., Ltd. stock

Opto Tech (Cayman) Co., Ltd.


Long-term investment accounted for under equity method USD 6,010 USD 3,241 100.00 USD 3,241

〞

〞〞 Graceful Business Co., Ltd. Subsidiary of the

Company

Long-term investment accounted for under equity method USD 50 USD 56 100.00 USD 56

〞

〞〞 Opto Grand (Cayman) Co., Ltd.Subsidiary of the

Company


〞

Opto Tech (Cayman) Co., Ltd. stock Opto Tech (Suzhou) Co., Ltd.



〞

Opto Grand (Cayman) Co., Ltd. stock

Opto Tech Semiconductor (Ningbo) Co., Ltd.



〞 Note: Epotec International Corp., a subsidiary of the Company, was liquidated in April 2008.

～ 53 ～

D. Acquisition or sale of the same security with the accumulated cost exceeding $100 million or 20% of the Company’s paid-in capital during the six-month period ended June 30, 2008: None.

E. Acquisition of real estate properties exceeding $100 million or 20% of the Company’s paid-in capital during the six-month period ended June 30, 2008: None.

F. Disposal of real estate properties exceeding $100 million or 20% of the Company’s paid-in capital during the six-month period ended June 30, 2008: None.

G. Purchases from or sales to related parties exceeding $100 million or 20% of the Company’s paid-in capital during the six-month period ended June 30, 2008:

Transaction Differences in transaction terms

compared to third party transactionsNotes/accounts

receivable (payable)

Purchaser/seller Counterparty Relationship with the Company Purchases

(sales)

Amount

Percentage oftotal purchases

(sales) Credit term Unit price Credit term

Balance

Percentage of total

notes/accounts receivable (payable)

Opto Tech Corp. Nichia Corp. This company is the director of the Company Purchases $489,097 25 75 daysequivalent to normal transaction - ($288,389) ( 25)

Opto Tech Corp. Shin-Etsu Opto Electronic Co., Ltd. The Company is the director of this company Purchases 188,678 9 150 days 〞 - ( 133,657) ( 11)

Opto Tech Corp. Shin-Etsu Opto Electronic Co., Ltd. The Company is the director of this company Sales ( 106,207) ( 3) 90 days 〞 - 52,443 3

China Semiconductor Corp.

Opto Plus Technology Co., Ltd. Indirect subsidiary of the Company Purchases 165,971 82 90 days 〞 - ( 115,259) ( 48)

H. Receivables from related parties exceeding $100 million or 20% of the Company’s paid-in capital as at June 30, 2008:

Overdue receivables

Creditor Counterparty Relationship with the

Company Balance as at June 30, 2008 Turnover rate Amount Action taken

Amount collected subsequent to the

balance sheet date Allowance for

doubtful accounts

Opto Tech Corp. China Semiconductor Corp. Subsidiary of the Company $ 115,104 - $ 115,070To be collected once CSC’s operating results improves. $ - $ 115,070

I. Derivative financial instruments undertaken during the six-month period ended June 30, 2008: Please refer to Note 10(7).

～ 54 ～

2) Information on investee companies for the six-month period ended June 30, 2008 Initial investment amount Shares held as at June 30, 2008

Investee Location Main activities Balance

as at 06/30/08Balance

as at 1/1/08 No. of shares(in thousands)

Ownership (%) Book value

Net income (loss) of the

investee

Investment income (loss) recognized by the Company Remark

Opto Tech Corp. holds—

Ho Chung Investment Co., Ltd. Taiwan Investment business $ 288,300 $ 251,000 23,830 100.00 $ 95,256 ($ 10,918) ($ 3,832)


Jyu Shin Investment Co., Ltd. Taiwan Investment business 78,678 - 7,868 100.00 80,857 2,180 2,180 〞

Opto Tech (H.K.) Co., Ltd. Hong Kong International trading 8,878 8,878 2,000 100.00 9,039 ( 8) ( 8) 〞 Opto Tech (Macao) Co., Ltd. Macao International trading 4,088 4,088 989 99.90 ( 1,211) ( 1,390) ( 1,389) 〞

China Semiconductor Corporation Taiwan

Manufacture and Sales of Displays, SMD Lamps and other LED related products 19,629 19,629 1,963 28.37 12,802 ( 16,397) ( 4,651) 〞

Opto Technology International Group Co., Ltd. Cayman Islands Holding Company 862,989 862,989 26,110 100.00 715,043 ( 98,275) ( 98,275) 〞

Viking Tech Corporation Taiwan

R&D, Manufacture and Sales of SMD Chip Resistor, DIP Power Resistor, High Frequency Ceramic Chip Inductor, SMD Ferrite Inductor, Power Inductor, Capacitor Integrated Passive Devices 72,091 140,001 7,209 11.61 96,839 54,468 10,271

Long-term investment accounted for under equity method

Neostones Microfabrication Corporation Taiwan

R&D, Manufacture and Sales of Linear Micro-accelerometer, Mini-DIL Tx/Rx, BiDi Tx/Rx , Micro- Angular Rate Sensor, Micro-Pressure, Chemical Sensor 2,917 2,917 243 48.61 - - - 〞

Ho Chung Investment Co., Ltd. holds—


R&D, Manufacture and Sales of SMD Chip Resistor, DIP Power Resistor, High Frequency Ceramic Chip Inductor, SMD Ferrite Inductor, Power Inductor, Capacitor Integrated Passive Devices 49,068 50,400 2,726 4.39 37,301 54,468 2,858


China Semiconductor Corporation Taiwan

Manufacture and Sales of Displays, SMD Lamps and other LED related products 25,285 25,285 2,528 36.54 16,490 ( 16,397) ( 5,992) 〞

VML Technologies B.V. Holland Manufacture and Design of system products 37,436 - 6 25.00 35,488 ( 3,675) ( 1,611) 〞

Jyu Shin Investment Co., Ltd. holds—


R&D, Manufacture and Sales of SMD Chip Resistor, DIP Power Resistor, High Frequency Ceramic Chip Inductor, SMD Ferrite Inductor, Power Inductor, Capacitor Integrated Passive Devices 78,678 - 6,200 9.99 80,857 54,468 2,180


China Semiconductor Corporation holds— Gigantic Pacific Investments Ltd. B.V.I. Investment business 281,707 281,707 USD 9,002 100.00 11,392 2,485 2,485

Indirect subsidiary

China Semiconductor Corp. (M) Sdn Bhd. Malaysia

Manufacture and Sales of Displays, SMD Lamps and other LED related 9,248 9,248 MYR 1,000 100.00 1,704 ( 4) ( 4) 〞

Bright Investment B.V.I. Investment business 168,421 168,421 USD 4,851 100.00 1,765 ( 8,775) ( 8,775) 〞

～ 55 ～

Initial investment amount Shares held as at June 30, 2008

Investee Location Main activities Balance

as at 6/30/08 Balance

as at 1/1/08 No. of shares(in thousands)

Ownership (%) Book value

Net income (loss) of the

investee

Investment income (loss)

recognized by the

Company Remark

Gigantic Pacific Investments Ltd. holds—

Shaoxing Yilida Electronics Co., Ltd. China

Manufacture and Sales of LED and Electronic Products USD$ 5,069 USD$ 5,069 USD$ 5,069 100.00 (USD$ 345) (USD$ 80) (USD$ 80)

Indirect subsidiary

Bright Investment International Ltd. holds –

Everyung Investment Ltd. B.V.I. Investment business USD 4,980 USD 4,980 USD 4,980 100.00 USD 58 (USD 283) (USD 283)Indirect subsidiary

Everyung Investment Ltd. holds – Opto Plus Technology Co., Ltd. China

Manufacture and Sales of LED and Electronic Products USD 4,980 USD 4,980 USD 4,980 100.00 USD 58 (USD 283) (USD 283)

Indirect subsidiary

Opto Technology International Group Co., Ltd. holds – Opto Tech (Cayman) Co., Ltd. Cayman Islands Holding Company USD 6,010 USD 6,010 USD 6,010 100.00 USD 3,241 (USD 2,060) (USD2,060)

Indirect subsidiary

Graceful Business Co., Ltd. B.V.I International trading USD 50 USD 50 USD 50 100.00 USD 56 - -

Indirect subsidiary

Opto Grand (Cayman) Co., Ltd. Cayman Islands Holding Company USD 20,000 USD 20,000 USD 20,000 100.00 USD 20,212 (USD 1,113) (USD1,113)

Indirect subsidiary

Opto Tech (Cayman) Co., Ltd. holds –

Opto Tech (Suzhou) Co., Ltd. China

Research, Design and Manufacture of LED Display, Wireless Communication Equipment and related parts USD 6,000 USD 6,000 USD 6,000 100.00 USD 3,230 (USD 2,060) (USD2,060)

Indirect subsidiary

Opto Grand (Cayman) Co., Ltd. holds –

Opto Tech Semiconductor (Ningbo) Co., Ltd. China

Manufacture and Sales of LED and Electronic products USD 20,000 USD 20,000 USD 20,000 100.00 USD 20,198 (USD 1,113) (USD1,113)

Indirect subsidiary

Note: Epotec International Corp., a subsidiary of the Company, was liquidated in April 2008.

～ 56 ～

3) Information on Mainland China investments

A. Information on Mainland China investments for the six-month period ended June 30, 2008

Investee in Mainland China Main activities Paid-in capital

Investment method

Accumulated amount of

remittance to Mainland China as of June 30, 2008

Amount remittedto Mainland Chinaduring the period

Amount remitted back to Taiwan during

the period

Accumulated amount of remittance to

Mainland China as of June 30, 2008

Ownership held by the Company (direct and indirect)

Investment income (loss) recognized by the Company for the period

(Note 2)

Book value of investments in

Mainland China as of June 30,

2008

Accumulated amount of

investment income remitted back to

Taiwan as of June 30, 2008

Opto Tech (Suzhou) Co., Ltd.

Research, Design and Manufacture of LED Display, Wireless Communication Equipment and related parts

$ 207,640

USD 6,000 Note 1(2)$ 207,640

USD 6,000$ - $ -

$ 207,640

USD 6,000 100.00%

($ 63,798)(USD 2,060)

$ 97,998

USD 3,230

$ -

Opto Tech Semiconductor (Ningbo) Co., Ltd.

Manufacture and Sales of LED and Electronic products

651,721

USD 20,000 Note 1(2)651,721

USD 20,000 - -

651,721

USD 20,000 100.00%

( 34,470)(USD 1,113)

612,807

USD 20,198 -

Shaoxing Yilida Electronics Co., Ltd. 〞

176,753

USD 5,069 Note 1(2)176,753

USD 5,069 - -

176,753

USD 5,069 64.91%

( 2,478)

(USD 80)

( 10,467)(USD 345) -

Opto Plus Technology Co., Ltd. 〞

168,617

USD 4,980 Note 1(2)168,617

USD 4,980 - -

168,617

USD 4,980 64.91%

( 8,765)(USD 283)

1,760

USD 58 -

Accumulated amount of remittance from Taiwan to Mainland China as of June 30, 2008

Investment amount approved by the Investment Commission of the

Ministry of Economic Affairs (MOEA)

Ceiling on investments in Mainland China imposed by

the Investment Commission of MOEA $ 1,204,731 USD 34,000 $ 2,281,756

Note 1: The investment methods are classified into four categories as follows:

(1) Remitting investment funds to the investee company in Mainland China through the third area.

(2) Setting up a company in the third area, which then invested in the investee company in Mainland China.

(3) Through investing in an existing company in the third area, which then invested in the investee company in Mainland China.

(4) Directly investing in the investee company in Mainland China.

(5) Other.

Note 2: The investment income or loss was recognized by indirect weighted ownership based on the financial statements of these investees which were not audited by independent accountants for the corresponding

periods.

～ 57 ～

B. The significant events occurring due to investment through the third area and the investees on Mainland China are as follows:

(1) The Company sold semi-finished goods and finished goods of LED to Opto Tech (Suzhou) Co., Ltd. during the six-month period ended

June 30, 2008. The amount was $21,427, accounting for 1% of net sales of the Company. As of June 30, 2008, accounts receivable

from Opto Tech (Suzhou) Co., Ltd. was $8,022, accounting for 0.4% of the accounts receivable of the Company.

(2) The Company imported finished goods of LED from Opto Tech (Suzhou) Co., Ltd. during the six-month period ended June 30, 2008.

The amount was $447, accounting for 0.02% of purchases of the Company. As of June 30, 2008, accounts payable to Opto Tech

(Suzhou) Co., Ltd. was $313, accounting for 0.03% of the accounts payable of the Company.

12. SEGMENT INFORMATION

According to R.O.C. SFAS No. 23, “Presentation and Disclosure of Interim Financial Statements”, the segment information is not required.

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