AU OPTRONICS CORP (Form: 20-F, Received: 06/29/2007 11:58:42)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 001-31335

(Exact name of Registrant as specified in its charter)

AU OPTRONICS CORP.

(Translation of Registrant’s name into English)

TAIWAN, REPUBLIC OF CHINA

(Jurisdiction of incorporation or organization)

1 LI-HSIN ROAD 2

HSINCHU SCIENCE PARK

HSINCHU, TAIWAN

REPUBLIC OF CHINA

(Address of principal executive offices)

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

Title of each class		Name of each exchange on which registered
Common Shares of par value NT$10.00 each		The New York Stock Exchange, Inc.*

*	Not for trading, but only in connection with the listing on the New York Stock Exchange, Inc. of American Depositary Shares representing such Common Shares

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 7,573,402,805 Common Shares**

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. o Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

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

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark which financial statement item the registrant has elected to follow. o Item 17 x Item 18

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

o Yes x No

** As a result of the exercise of employee stock options subsequent to December 31, 2006, as of March 31, 2007, we had 7,573,782,895 common shares outstanding.

TABLE OF CONTENTS

Page

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	1
CERTAIN CONVENTIONS	1
PART I	2
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE	2
ITEM 3. KEY INFORMATION	2
3.A.Selected Financial Data	2
3.B.Capitalization and Indebtedness	5
3.C.Reason for the Offer and Use of Proceeds	5
3.D.Risk Factors	5
ITEM 4. INFORMATION ON THE COMPANY	25
4.A.History and Development of the Company	25
4.B.Business Overview	26
4.C.Organizational Structure	35
4.D.Property, Plants and Equipment	38
ITEM 4A. UNRESOLVED STAFF COMMENTS	40
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS	40
5.A.Operating Results	40
5.B.Liquidity and Capital Resources	54
5.C.Research and Development	59
5.D.Trend Information	59
5.E.Off-Balance Sheet Arrangements	60
5.F.Tabular Disclosure of Contractual Obligations	60
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	65
6.A.Directors and Senior Management	65
6.B.Compensation	68
6.C.Board Practices	69
6.D.Employees	69
6.E.Share Ownership	70
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	71
7.A.Major Shareholders	71
7.B.Related Party Transactions	72
7.C.Interests of Experts and Counsel	76
ITEM 8. FINANCIAL INFORMATION	76
8.A.Consolidated Statements and Other Financial Information	76
8.A.7. Litigation	76
8.A.8. Dividends and Dividend Policy	77
8.B.Significant Changes	78
ITEM 9. THE OFFER AND LISTING	78
9.A.Offering and Listing Details	78
9.B.Plan of Distribution	79
9.C.Markets	79
9.D.Selling Shareholders	79
9.E.Dilution	79
9.F.Expenses of the Issue	79
ITEM 10. ADDITIONAL INFORMATION	79
10.A.Share Capital	79
10.B.Articles of Incorporation	79
10.C.Material Contracts	85
10.D.Exchange Controls	85
10.E.Taxation	86

10.F.Dividends and Paying Agents	90
10.G.Statement by Experts	90
10.H.Documents on Display	90
10.I.Subsidiary Information	90
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	90
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	92
PART II	92
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	92
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	92
ITEM 15. CONTROLS AND PROCEDURES	92
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT	94
ITEM 16B. CODE OF ETHICS	94
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	95
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	96
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	96
PART III	96
ITEM 17. FINANCIAL STATEMENTS	96
ITEM 18. FINANCIAL STATEMENTS	96
ITEM 19. EXHIBITS	96

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although these forward-looking statements, which may include statements regarding our future results of operations, financial condition, or business prospects, are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report. The words “anticipate,” “believe,” “expect,” “intend,” “seek,” “plan,” “estimate” and similar expressions, as they relate to us, are intended to identify a number of these forward-looking statements. Our actual results of operations, financial condition or business prospects may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons, including, among other things and not limited to, the cyclical nature of our industry, further declines in average selling prices, excess capacity in the TFT-LCD industry, our dependence on introducing new products on a timely basis, our dependence on growth in the demand for our products, our ability to compete effectively, changes in technology and competing products, our ability to successfully expand our capacity, our ability to acquire sufficient raw materials and key components, our dependence on key personnel, general political and economic conditions, including those related to the TFT-LCD industry, litigation and regulatory investigations against us , possible disruptions in commercial activities caused by natural and human-induced disasters, including terrorist activity and armed conflict, fluctuations in foreign currency exchange rates, and other factors. For a discussion of these risks and other factors, please see “Item 3. Key Information—Risk Factors.”

CERTAIN CONVENTIONS

We publish our financial statements in New Taiwan dollars, or NT dollars, the lawful currency of the Republic of China, or the ROC. This annual report contains translations of NT dollar amounts and Renminbi amounts, or RMB, into United States dollars, or U.S. dollars, at specific rates solely for the convenience of the reader. For convenience only and unless otherwise noted, all translations between NT dollars and U.S. dollars and between RMB and U.S. dollars in this annual report were made at a rate of NT$32.59 to US$1.00 and RMB7.804 to US$1.00, respectively, the noon buying rate in The City of New York for cable transfers in NT dollars per U.S. dollar and RMB per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York on December 29, 2006. No representation is made that the NT dollar, RMB or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars, RMB or NT dollars, as the case may be, at any particular rate or at all. On June 26, 2007, the noon buying rates were NT$32.77 to US$1.00 and RMB7.62 to US$1.00. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

All references in this annual report to “Taiwan” or the “ROC” are to the island of Taiwan and other areas under the effective control of the Republic of China, and all references to the “ROC government” are references to the government of the Republic of China. All references to the “our company,” “we,” “us” and “our” in the annual report are references to AU Optronics Corp. and its consolidated subsidiaries, unless the context suggests otherwise. All references in this annual report to the “PRC” or “China” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau.

All references in this annual report to “large-size panels” refer to panels ten inches and above in diagonal length. All references to “small- to medium-size panels” refer to panels which are under ten inches in diagonal length.

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

3.A. Selected Financial Data

The selected statement of income data for the years ended December 31, 2004, 2005 and 2006 and selected balance sheet data as of December 31, 2005 and 2006 set forth below have been derived from our audited consolidated financial statements included herein. The selected balance sheet data as of December 31, 2002, 2003 and 2004 and statement of income data for the years ended December 31, 2002 and 2003 have been derived from our audited financial statements that have not been included herein. Our consolidated balance sheets as of December 31, 2005 and 2006 and related consolidated statements of income, stockholders’ equity, and cash flows for each of the years ended December 31, 2004, 2005 and 2006 have been audited by KPMG Certified Public Accountants, an independent registered public accounting firm, whose report thereon is included herein. The selected financial and operating data set forth below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and the consolidated financial statements and the notes to those statements included herein.

Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the ROC, or ROC GAAP.

On October 1, 2006, we merged with Quanta Display Inc. (“QDI”), a company incorporated in Taiwan that manufactures and assembles TFT-LCD panels. Under the terms of the merger agreement, we offered one share of our common stock for every 3.5 shares of outstanding QDI common stock and we assumed substantially all of the assets, liabilities and personnel of QDI. Under both ROC GAAP and generally accepted accounting principles in the United States, or U.S. GAAP, the merger with QDI has been accounted for under the purchase method of accounting, whereby our cost of acquiring QDI was measured by the market value of the shares we issued to QDI shareholders in connection with the merger plus related acquisition costs. Such acquisition cost has been allocated to the assets of QDI we acquired and the liabilities of QDI we assumed, based on their fair value as of October 1, 2006. Our financial data, under both ROC GAAP and U.S. GAAP, referenced herein for periods or as of dates prior to October 1, 2006, do not include the financial data of QDI.

For information relating to the nature and effect of significant differences between ROC GAAP and U.S. GAAP as they relate to us, see note 25 to our consolidated financial statements.

The table below sets forth certain financial data under ROC GAAP for the periods and as of the dates indicated.

	Year Ended and As of December 31,
	2002			2003		2004			2005			2006
	NT$			NT$		NT$			NT$			NT$			US$
	(in millions, except percentages and per common share and per ADS data)
Statement of Income Data:
ROC GAAP
Net sales		75,689.2			104,860.6		168,111.6			217,388.4			293,106.8			8,993.8
Gross profit		12,083.0			23,461.8		39,643.3			29,848.0			29,850.3			915.9
Operating expenses		4,369.1			7,217.0		11,036.0			12,859.3			15,634.0			479.7
Operating income		7,713.9			16,244.8		28,607.3			16,988.7			14,216.3			436.2
Income before income tax		6,022.8			15,573.2		28,024.2			16,094.6			10,200.3			313.0
Income tax benefit (expense)		(0.1	)		86.7		(61.3	)		(473.4	)		(1,068.3	)		(32.8	)
Cumulative effect of changes in accounting principles ⁽¹⁾		—			—		—			—			(38.6	)		(1.2	)

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	Year Ended and As of December 31,
	2002			2003			2004			2005			2006
	NT$			NT$			NT$			NT$			NT$			US$
	(in millions, except percentages and per common share and per ADS data)
Statement of Income Data:
Net income		6,022.7			15,659.9			27,962.9			15,621.2			9,093.4			279.0
Weighted average shares outstanding—Basic		4,790.8			5,322.3			5,569.3			5,893.6			6,466.9			6,466.9
Weighted average shares outstanding—Diluted		5,126.4			5,385.5			5,569.3			5,893.6			6,566.0			6,566.0
Earnings per share—Basic		1.28			2.95			5.02			2.65			1.41			0.04
Earnings per share—Diluted		1.20			2.91			5.02			2.65			1.31			0.04
Earnings per ADS equivalent—Basic		12.84			29.47			50.21			26.52			14.08			0.43
Earnings per ADS equivalent—Diluted		12.00			29.13			50.21			26.52			13.06			0.40

Balance Sheet Data:
ROC GAAP
Current assets		49,830.0			50,682.3			59,747.3			95,841.0			152,742.6			4,686.8
Equity method investments		37.7			701.5			5,577.4			5,244.3			11,682.0			358.5
Property, plant and equipment		71,045.3			100,552.5			159,743.1			221,126.8			381,550.7			11,707.6
Goodwill and intangible assets		2,984.5			2,237.9			1,062.7			2,483.3			20,142.8			618.1
Total assets		129,171.4			158,070.8			230,694.4			329,796.3			578,126.0			17,739.4
Current liabilities		25,204.3			39,789.6			53,600.8			89,858.1			167,316.9			5,134.0
Long-term liabilities		26,027.6			25,306.4			46,334.0			83,940.3			179,712.8			5,514.4
Total liabilities		51,343.4			65,416.3			100,128.8			173,976.8			347,049.7			10,649.0
Capital stock		40,243.0			43,522.4			49,580.4			58,305.5			75,734.0			2,323.8
Total stockholders’ equity		77,828.0			92,654.5			130,565.6			155,819.5			231,076.3			7,090.4

Other Financial Data:
ROC GAAP
Gross margin ⁽³⁾		16.0	%		22.4	%		23.6	%		13.7	%		10.2	%		10.2	%
Operating margin ⁽⁴⁾		10.2	%		15.5	%		17.0	%		7.8	%		4.9	%		4.9	%
Net margin ⁽⁵⁾		8.0	%		14.9	%		16.6	%		7.2	%		3.1	%		3.1	%
Capital expenditures		18,035.3			39,300.6			81,868.7			80,652.3			87,246.7			2,677.1
Depreciation and amortization		12,989.9			16,294.6			25,309.3			34,493.2			52,760.2			1,618.9
Cash dividend paid		—			2,006.9			5,208.3			5,935.2			1,749.2			53.7
Cash flows from operating activities		20,821.7			37,041.5			49,393.6			48,006.0			68,526.7			2,102.7
Cash flows from investing activities		(18,125.0	)		(40,339.4	)		(87,010.2	)		(82,456.2	)		(83,300.6	)		(2,556.0	)
Cash flows from financing activities		16,754.3			(4,672.6	)		37,615.2			43,097.3			32,550.8			998.8

The table below sets forth certain financial data under U.S. GAAP for the periods and as of the dates indicated.

	Year Ended and As of December 31,
	2002			2003		2004			2005			2006
	NT$			NT$		NT$			NT$			NT$			US$
	(in millions, except percentages and per common share and per ADS data)
Statement of Income Data:
U.S. GAAP
Net sales		75,689.2			104,860.6		168,111.6			217,388.4			2 9 3 , 106.8			8 , 993.8
Gross profit		9,492.1			19,919.7		32,855.6			22,126.5			23,372.0			717.2
Operating expenses		3,678.7			6,581.8		12,686.8			12,642.7			15,819.3			485.4
Operating income		5,813.4			13,337.9		20,168.8			9,483.8			7,552. 6			231.7
Income before income tax, extraordinary item and minority interest		5,150.9			12,485.3		18,575.9			8,837.1			2, 222.4			6 8.2
Income tax expenses		(212.0	)		3,230.1		(463.4	)		(473.4	)		(1,059.2	)		(32.5	)
Minority interest in loss		–			–		–			(5.8	)		(10.0	)		(0.3	)
Extraordinary item ⁽²⁾		–			–		–			308.7			–			–
Net income		4,938.9			15,715.4		18,112.5			8,678.2			1,173.2			36.0
Weighted average shares outstanding—Basic		4,505.3			5,031.0		5,350.2			5,762.9			6 , 426.9			6 , 426.9
Weighted average shares outstanding—Diluted		4,820.9			5,091.0		5,350.2			5,762.9			6 , 426.9			6 , 426.9

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	Year Ended and As of December 31,
	2002			2003			2004			2005			2006
	NT$			NT$			NT$			NT$			NT$			US$
	(in millions, except percentages and per common share and per ADS data)
Statement of Income Data:
U.S. GAAP
Earnings per share—Basic:
Income before extraordinary item		1.10			3.12			3.39			1.46			0.18			0.01
Extraordinary item											0.05			–			–
Net income		1.10			3.12			3.39			1.51			0.18			0.01
Earnings per share—Diluted:
Income before extraordinary item		1.05			3.09			3.39			1.46			0.18			0.01
Extraordinary item											0.05			–			–
Net income		1.05			3.09			3.39			1.51			0.18			0.01
Earnings per ADS equivalent—Basic:
Income before extraordinary item		10.96			31.24			33.85			14.52			1.83			0.06
Extraordinary item											0.54			–			–
Net income		10.96			31.24			33.85			15.06			1.83			0.06
Earnings per ADS equivalent—Diluted:
Income before extraordinary item		10.54			30.92			33.85			14.52			1.83			0.06
Extraordinary item											0.54			–			–
Net income		10.54			30.92			33.85			15.06			1.83			0.06

Balance Sheet Data:
U.S. GAAP
Current assets		48,967.9			51,111.2			58,254.5			93,469.8			150,826.8			4,628.0
Property, plant and equipment		72,195.3			100,283.5			159,185.3			220,974.0			380,859.8			11,686.4
Goodwill and intangible assets		20,881.1			18,432.1			16,207.4			16,578.5			33,188.5			1,018.4
Total assets		143,531.4			173,905.7			245,114.0			342,809.3			588,399.6			18,054.6
Current liabilities		25,789.5			41,275.4			55,444.9			91,288.0			169,515.0			5,201.4
Long-term liabilities		27,149.7			25,651.4			46,983.5			84,485.1			179,924.4			5,520.9
Total liabilities		52,939.2			66,926.8			102,428.4			175,773.1			349,439.4			10,722.3
Total stockholders’ equity		90,592.2			106,978.9			142,685.6			166,918.9			238,618.1			7,321.8

Other Financial Data:
U.S. GAAP
Gross margin ⁽³⁾		12.5	%		19.0	%		19.5	%		10.2	%		8.0	%		8.0	%
Operating margin ⁽⁴⁾		7.7	%		12.7	%		12.0	%		4.4	%		2.6	%		2.6	%
Net margin ⁽⁵⁾		6.5	%		15.0	%		10.8	%		4.0	%		0.4	%		0.4	%
Capital expenditures		18,035.3			39,300.6			82,011.1			80,801.0			87,408.9			2,682.1
Depreciation and amortization		14,614.0			17,369.8			26,358.0			36,067.1			54,940.0			1,685.8
Cash flows from operating activities		21,227.5			36,987.3			48,943.8			46,951.9			67,955.3			2,085.2
Cash flows from investing activities		(18,549.9	)		(40,339.4	)		(88,001.0	)		(81,428.1	)		(83,130.7	)		(2,550.8	)
Cash flows from financing activities		16,773.4			(4,618.4	)		38,066.2			43,783.9			32,951.7			1,011.1

(1)	Represents the cumulative effect of our adoption of Republic of China Statement of Financial Accounting Standards (“ROC SFAS”) No. 34 “Financial Instruments: Recognition and Measurement” on January 1, 2006.

(2)	Represents the proportionate share of extraordinary gain reported by equity method investee in 2005. Please see note 25(c) to our consolidated financial statements for further information.

(3)	Gross margin is calculated by dividing gross profit by net sales.

(4)	Operating margin is calculated by dividing operating income by net sales.

(5)	Net margin is calculated by dividing net income by net sales.

Exchange Rate

Fluctuations in the exchange rate between NT dollars and U.S. dollars will affect the U.S. dollar equivalent of the NT dollar price of our shares on the Taiwan Stock Exchange and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the U.S. dollar conversion by the depositary of cash dividends paid

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in NT dollars on, and the NT dollar proceeds received by the depositary from any sale of, our shares represented by ADSs.

The following table sets forth, for the periods indicated, information concerning the number of NT dollars for which one U.S. dollar could be exchanged based on the noon buying rate for cable transfers in NT dollars as certified for customs purposes by the Federal Reserve Bank of New York.

	NT dollars per U.S. dollar Noon Buying Rate
	Average		High		Low		Period-End
	(of month end rates for years)
2002	NT$34.54		NT$35.16		NT$32.85		NT$34.70
2003		34.40		34.98		33.72		33.99
2004		33.27		34.16		31.74		31.74
2005		32.13		33.77		30.65		32.80
2006		32.51		33.31		31.28		32.59
December		32.51		32.74		32.27		32.59
2007: (through June 26)		33.00		33.41		32.38		32.77
January		32.77		32.99		32.38		32.95
February		32.97		33.08		32.86		32.98
March		33.01		33.13		32.84		33.01
April		33.15		33.33		33.05		33.33
May		33.28		33.41		32.97		33.09
June (through June 26 )		33.00		33.18		32.74		32.77

3.B. Capitalization and Indebtedness

Not applicable.

3.C. Reason for the Offer and Use of Proceeds

Not applicable.

3.D. Risk Factors

Risks Relating to Our Financial Condition, Business and Industry

The industry in which we operate is cyclical, with recurring periods of capacity increases. As a result, price fluctuations in response to supply and demand imbalances could harm our results of operations.

The thin film transistor liquid crystal display, or TFT-LCD, industry in general is characterized by cyclical market conditions. The industry has been subject to significant and rapid downturns as a result of an imbalance between excess supply and a slowdown in demand, resulting in sharp declines in average selling prices.

For example, average selling prices of our large-size panels increased by 12.1% between the fourth quarter of 2003 and the second quarter of 2004 but was followed by a sharp decrease of 22.2% between the second quarter and the third quarter of 2004 and a further decrease of 17.1% between the third quarter and the fourth quarter of 2004. Average selling prices of our large-size panels continued to decline by 6.5% between the fourth quarter of 2004 and the first quarter of 2005 but recovered in the remainder of the year, increasing 12.8% between the first and third quarters of 2005 and increasing another 6.0% between the third and fourth quarters of 2005. Average selling prices of our large-size panels decreased in the first three quarters of 2006 by 25.8% from the fourth quarter of 2005, but increased by 3.9% in fourth quarter of 2006. On a year-on-year basis, average selling prices declined 13.7% in 2006 compared to 2005 and declined 21.1% in 2005 compared to 2004.

Capacity expansion currently being undertaken or anticipated in the TFT-LCD industry has led to excess capacity and could continue to lead to a future period or periods of general excess capacity in the industry. For example, it is expected that as additional capacity provided by sixth- and future generation fabs becomes available, the TFT-LCD industry may face excess capacity. We cannot assure you that any continuing or further decrease in average selling prices or future downturns resulting from excess capacity or other factors affecting the industry will

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not be severe or that any such continuation, decrease or downturn would not seriously harm our business, financial condition and results of operations.

Our ability to maintain or increase our revenues will depend highly upon our ability to maintain market share, increase unit sales of existing products, and introduce and sell new products that offset the anticipated fluctuation and long-term declines in the average selling prices of our existing products. We cannot assure you that we will be able to maintain or expand market share, increase unit sales, and introduce and sell new products, to the extent necessary to compensate for market oversupply.

We may experience declines in the average selling prices of our display panels irrespective of cyclical fluctuations in the industry.

The average selling prices of our display panels have declined in general and are expected to continually decline with time irrespective of industry-wide fluctuations as a result of, among other factors, technology advances and cost reductions. Although we may be able to take advantage of the higher selling prices typically associated with new products and technologies, we cannot provide assurance that we can maintain these prices in the face of market competition. If we are unable to effectively anticipate and counter the price erosion that accompanies our products, or if we are unable to reduce our manufacturing costs, our profit margins will be adversely affected.

Although we were profitable in 2004, 2005 and 2006, if we are not profitable in 2007 or beyond, the value of the ADSs and our shares may be adversely affected.

We expect that average selling prices for many of our existing products will continue to decline over the long term. If we are not able to reduce our costs of manufacturing these panels to offset expected declines in average selling prices and maintain a high capacity utilization rate, our gross margin will continue to decline, which could seriously harm our business and reduce the value of our equity securities. Although we were profitable in 2004, 2005 and 2006 we cannot assure you that we will be profitable in 2007 or beyond.

Our future net sales, gross profit and operating income may vary significantly due to a combination of factors, including, but not limited to:

·	Our ability to develop and introduce new products to meet customers’ needs in a timely manner. The inability to develop or introduce new products in a timely manner may hurt our competitive position because customers may choose to source more advanced products from competitors.

·	Our ability to develop or acquire and implement new manufacturing processes and product technologies. If we are unable to successfully implement new manufacturing processes and product technologies in a timely manner, our competitors may seize new opportunities in new markets.

·	Our ability to control our fixed and variable costs and operating expenses. Increased fixed and variable costs and operating expenses may reduce our profitability and adversely affect our results of operations.

·	Changes in our product mix or those of our customers . When our customers or we discontinue a product or experience production problems with new products, our results of operations may fluctuate.

Our ability to obtain raw materials and components at acceptable prices and in a timely manner . A shortage in raw materials and components could result in increased raw materials and components costs and put downward pressure on gross margins as well as cause delays to our production and delivery schedules, which may result in the loss of customers and revenues.

·	Lower than expected growth in demand for TFT-LCD panels resulting in oversupply in the market . When oversupply conditions occur, we may reduce the price of our panels to maintain high capacity utilization rates or reduce the volume of our production.

·	Our ability to obtain adequate external financing on satisfactory terms . Our business is capital-intensive and if we are unable to maintain our sources of external funding, it will have a material adverse effect on our business, results of operations and future prospects.

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Fines and penalties payable. We are currently the subject of an investigation into possible anticompetitive behavior by the United States Department of Justice, the Commission of the European Communities Directorate-General for Competition, the Canadian Competition Bureau and the Japan Fair Trade Commission. In addition, the Korea Fair Trade Commission made a visit to our Korean affiliate as part of its investigation in the TFT-LCD industry. There are also over 100 civil lawsuits filed against us in the U.S. and Canada alleging, among other things, antitrust violations. Any penalties, fines or settlements made in connection with this investigation and/or these lawsuits may have a material adverse effect on our business, results of operations and future prospects.

Our results of operations fluctuate from quarter to quarter, which makes it difficult to predict our future performance.

Our results of operations have varied significantly in the past and may fluctuate significantly from quarter to quarter in the future due to a number of factors, many of which are beyond our control. Our business and operations may be adversely affected by:

·	the cyclical nature of both the TFT-LCD industry, including fluctuations in average selling prices, and the markets served by our customers;

·	the speed at which we and our competitors expand production capacity;

·	access to raw materials and components, equipment, electricity, water and other required utilities on a timely and economical basis;

·	technological changes;

·	the loss of a key customer or the postponement of orders from a key customer;

·	the outcome of on-going and future litigation and government investigations;

·	changes in end users’ spending patterns;

·	changes to our management team;

·	the rescheduling and cancellation of large orders;

·	access to funding on satisfactory terms;

·	our customers’ adjustments in their inventory; and

·	natural disasters, such as typhoons and earthquakes, and industrial accidents, such as fires and power failures, as well as geo-political instability as a result of terrorism or political or military conflicts.

Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, you should not rely on quarter-to-quarter comparisons to predict our future performance. Unfavorable changes in any of the above factors may seriously harm our business, financial condition and results of operations. In addition, our results of operations may be below the expectations of public market analysts and investors in some future periods, which may result in a decline in the price of the ADSs or shares.

Our results of operations may be adversely affected if we cannot introduce new products on a timely basis or if our new products do not gain market acceptance.

Early product development by itself does not guarantee the success of a new product. Success also depends on other factors such as product acceptance by the market. For example, although TFT-LCD technology was initially introduced commercially in the early 1990s, this technology began to gain wide market acceptance only in the last few years, especially in the consumer electronics sector. New products are developed in anticipation of future

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demand. Our delay in the development of commercially successful products with anticipated technological advancement may adversely affect our business. We cannot assure you that the launch of any new products will be successful, or that we will be able to produce sufficient quantities of these products to meet market demand.

We plan to continue to expand our operations to meet the needs of high-growth applications in computer products, consumer electronics, LCD television and other markets as demand increases. Because these products, such as mobile phones, portable game consoles, digital cameras and LCD television, are expected to be marketed to a diversified group of end-users with demands for different specifications, functions and prices, we have developed different marketing strategies to promote our panels for these products. We cannot assure you that our strategy to expand our market share for these panels will be successful. If we fail to successfully market panels for these products, our results of operations will be adversely affected.

Our net sales and results of operations may suffer if there is a downturn in the demand for, or a further decrease in the average selling prices of, panels for computer products.

A significant percentage of our net sales is derived from customers who use our TFT-LCD panels in computer products such as notebook computers and desktop monitors. Net sales of panels for computer products represented 78.1%, 65.3% and 53.0% of our net sales in 2004, 2005 and 2006, respectively. Demand for our panels for computer products is affected by numerous factors, including the general demand of the end-use markets and price attractiveness. For example, demand for desktop monitors is affected by the rate of substitution of TFT-LCD monitors for cathode ray tube, or CRT, monitors and the popularity of wide screen monitors. We believe that a significant percentage of our net sales is, and will continue to be, derived from end users purchasing TFT-LCD monitors to replace their existing CRT monitors or upgrading to larger sized TFT-LCD monitors. The rate of substitution of TFT-LCD monitors for CRT monitors may be affected by a general slowdown in the global economy or a change in the average selling prices of such products which may also adversely affect the demand. In addition, since most brand companies sell their computer products bundled with TFT-LCD monitors, a change in the bundling policy of brand companies could also reduce the demand for our products. Demand for notebook computer displays may be affected by various factors, including a slowdown in information technology spending by corporations as well as a decrease in consumer spending as a result of a general slowdown in the global economy. Demand for notebook computers is also affected by price changes. A slowdown in the demand for notebook computers could adversely affect the number of panels sold and the average selling prices for our notebook computer panels.

If the demand for LCD television or consumer electronics products, or our market share in such end-use markets, does not continue to grow as expected, our business prospects and results of operations may suffer.

Panels for use in LCD television and consumer electronics products accounted for 21.2%, 34.4% and 46.5% of our net sales in 2004, 2005 and 2006, respectively, and we believe that such end-use markets will continue to present opportunities for growth. As end users may find LCD television attractive because of their thin size as compared to traditional CRT televisions, we believe that a substantial portion of our sales growth will be derived from end users purchasing LCD televisions as additional televisions or to replace traditional CRT televisions. We have installed, and we expect to continue to install, production capacity in anticipation of increased demand for LCD television generated as a result of the growing market acceptance of LCD television. As a result, if end users purchase LCD televisions at a slower rate than we expect, we may not be able to maintain high utilization rates of the capacity installed or allocated to manufacture panels for LCD television. In addition, we may face greater than expected downward pricing pressures for our panels used for LCD television and other applications as a result of excess supply of such panels due to excess capacity or as a result of price competition by competitors seeking to stimulate demand in order to maintain or increase market share. We also manufacture panels for use in consumer electronics products. Demand for consumer electronics products that use TFT-LCD panels may be adversely affected by numerous factors, including a slowdown in general economic conditions and a change in price. If there is a slowdown in the demand for LCD television or consumer electronics products that use TFT-LCD panels, our business prospects and results of operations may suffer.

If we are unable to maintain high capacity utilization rates, our profitability will be adversely affected.

High capacity utilization rates allow us to allocate fixed costs over a greater number of panels produced. Increases or decreases in capacity utilization rates can significantly impact our gross margins. Accordingly, our

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ability to maintain or improve our gross margins will continue to depend, in part, on maintaining high capacity utilization rates. In turn, our ability to maintain high capacity utilization will depend on the ramp-up progress of our advanced production facilities and our ability to efficiently and effectively allocate production capacity among our product lines, as well as the demand for our products and our ability to offer products that meet our customers’ requirements at competitive prices. Although we maintained high capacity utilization rates in 2004 and 2005 and we have been successful in 2006 in the ramp-up of our fifth-generation, sixth-generation and 7.5-generation fabs, our results of operations in the past have been adversely affected by low capacity utilization. For example, at various times in 2006, we have had to lower our utilization rates to as low as 90% in order to offset the impact of excess inventory that was accumulating in the market. We cannot assure you that we will be able to maintain high capacity utilization rates through 2007 or beyond. If demand for our products does not meet our expectations, our capacity utilization will decrease and our gross margins will suffer.

We may experience losses on inventories.

Frequent new product introductions in the computer and consumer electronics industries can result in a decline in the average selling prices of our TFT-LCD panels and the obsolescence of our existing TFT-LCD panel inventory. This can result in a decrease in the stated value of our TFT-LCD panel inventory, which we value at the lower of cost or market value.

We manage our inventory based on our customers’ and our own forecasts. Although adjustments are regularly made based on market conditions, we typically deliver our goods to the customers one month after a firm order is placed. While we maintain open channels of communication with our major customers to avoid unexpected decreases in firm orders or subsequent changes to placed orders, and try to minimize our inventory levels, such actions by our customers may have an adverse effect on our inventory management.

We depend on a small number of customers for a substantial portion of our net sales, and a loss of any one of these customers, or a significant decrease in orders from any of these customers, would result in the loss of a significant portion of our net sales.

We depend on a small number of customers for a substantial portion of our business. In 2004, 2005 and 2006, our five largest customers accounted for 35.1% , 37.2% and 34.5%, respectively, of our net sales. In addition, certain customers individually accounted for more than 10% of our net sales in the last three years. BenQ Corporation, or BenQ, and its subsidiaries accounted for 19.9%, 13.6% and 7.4% of our net sales in 2004, 2005 and 2006, respectively. Samsung Electronics Co., Ltd., or Samsung, accounted for 3.6%, 9.2% and 11.2% of our net sales in 2004, 2005 and 2006, respectively. As some of our major customers are brand companies which also provide original equipment manufacturing services for other brand companies, such as BenQ, our panels shipped to these customers include both panels ordered for their own account as well as panels ordered by or on behalf of their brand company customers.

On March 22, 2007, the insolvency administrator of BenQ Mobile GmbH & Co. OHG (“OHG”) asserted that it will file a claim against BenQ for 504,000,000 euros. For more information, please see “Item 8.A.7. Litigation.” If this potential claim is filed or resolved in a way materially adverse to BenQ, BenQ’s results of operations and financial condition will be significantly impacted. Should we lose BenQ as a major customer, or if the amount of our sales to BenQ decreases, as a result of this potential claim or as a result of BenQ’s acquisition of OHG, our results of operations and financial condition may in turn be materially and adversely affected.

In recent years, our largest customers have varied due to changes in our product mix. We expect that we will continue to depend on a relatively small number of customers for a significant portion of our net sales and may continue to experience fluctuations in the distribution of our sales among our largest customers as we periodically adjust our product mix. Our ability to maintain close and satisfactory relationships with our customers is important to the ongoing success and profitability of our business. If any of our significant customers reduces, delays or cancels its orders, or the financial condition of our key customers deteriorate, our business could be seriously harmed. Similarly, a failure to manufacture sufficient quantities of panels to meet the demands of these customers may cause us to lose customers, which may adversely affect the profitability of our business as a result.

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If we are found to have violated antitrust and competition laws, we may be subject to severe fines or penalties that would have a material adverse effect to our business and operations.

We, along with various competitors in the TFT-LCD industry, are under investigation for alleged violation of antitrust and competition laws. In December 2006, we became the subject of an antitrust investigation by the United States Department of Justice, the Commission of the European Communities Directorate-General for Competition, the Canadian Competition Bureau and the Japan Fair Trade Commission. In addition, the Korea Fair Trade Commission visited our Korean affiliate as part of its investigation into the TFT-LCD industry. If we are found to have violated antitrust laws, we will likely have to pay a fine or penalty as part of the settlement. It is also possible that certain executive officers or senior management may be held criminally liable and subject to imprisonment. Moreover, there are also over 100 civil lawsuits filed against us in the United States and Canada alleging, among other things, antitrust violations. At this stage, it is not possible to predict the outcome or likely outcome of these investigations or these lawsuits, or the final costs of resolving these matters. We have not created and do not currently have a litigation reserve, and therefore, any penalties, fines or settlements made in connection with this investigation and/or these lawsuits may have a material adverse effect on our business, results of operations and future prospects.

Changes at our largest customers could cause sales of our products to decline.

Mergers, acquisitions, divestments or consolidations involving our largest customers can present risks to our business, as management at the new entity may change the way they do business, including their transactions with us, or may decide not to use us as one of their suppliers of TFT-LCD products. In addition, we cannot provide assurance that a combined entity resulting from a merger, acquisition or consolidation will continue to purchase TFT-LCD panels from us at the same level as each entity purchased in the aggregate when they were separate companies or that a divested company will purchase panels from us at all.

Our customers generally do not place purchase orders far in advance, which makes it difficult for us to predict our future revenues and allocate capacity efficiently and in a timely manner.

Our customers generally provide rolling forecasts four to six months in advance of, and do not place firm purchase orders until one month before, the expected shipment date. In addition, due to the cyclical nature of the TFT-LCD industry, our customers’ purchase orders have varied significantly from period to period. As a result, we do not typically operate with any significant backlog. The lack of significant backlog makes it difficult for us to forecast our revenues in future periods. Moreover, we incur expenses and adjust inventory levels of raw materials and components based in part on customers’ forecast, and we may be unable to allocate production capacity in a timely manner to compensate for shortfalls in sales. We expect that, in the future, our sales in any quarter will continue to be substantially dependent upon purchase orders received in that quarter. The inability to adjust production costs, to obtain necessary raw materials and components or to allocate production capacity quickly to respond to the demand for our products may affect our ability to maximize results of operations, which may result in a negative impact on the value of your investment in the ADSs or our shares.

Our future competitiveness and growth prospects could be adversely affected if we are unable to successfully ramp-up our first 7.5-generation fab or encounter disruptions in the construction of our second 7.5-generation fab.

We currently have a 7.5-generation fab that is designed to process substrates of 1,950 mm x 2,250 mm, which is the optimal size for the production of panels larger than 40-inches. As of March 31, 2007, our 7.5-generation fab had an estimated input capacity of approximately 20,000 substrates per month, which we expect to ramp-up to 60,000 substrates per month by the end of 2007. We also commenced construction of our second 7.5-generation fab in the third quarter of 2006. The manufacturing processes for TFT-LCD panels are highly complex and potentially vulnerable to disruptions. Moreover, the successful completion of our second 7.5-generation fab depends upon a number of factors, including: timely delivery of equipment and machinery and the hiring and training of new skilled personnel. We cannot assure you that we will be able to obtain from third parties, if necessary, the technology, intellectual property or know-how that may be required for a second 7.5-generation fab on acceptable terms. Delays in the delivery of equipment and machinery as a result of increased demand for such equipment and machinery or the delivery of equipment and machinery that do not meet our specifications could delay the establishment of our

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second 7.5-generation fab. If we face unforeseen disruptions in the manufacturing processes with respect to our first 7.5-generation fab or in the construction of our second 7.5-generation fab, we may not be able to realize the potential gains from the manufacturing of panels larger than 40-inches and may face disruptions in capturing the growth opportunities associated with the expected expansion of the market for LCD TV panels.

If capital resources required for our expansion plans are not available, we may be unable to implement successfully our business strategy.

Historically, we have been able to finance our capital expenditures through cash flow from our operating activities and financing activities, including the issuance of equity securities, long-term borrowings and the issuance of convertible and other debt securities. Our ability to expand our production facilities and establish next generation fabs will continue to largely depend on our ability to obtain sufficient cash flow from operations as well as external funding. We expect to make substantial capital expenditures in connection with the expansion of our production capacity, including investments in 2007 in connection with the ramp-up of our sixth-generation fab acquired through the QDI merger and our 7.5-generation fab, and the construction of our second 7.5-generation fab. These capital expenditures will be made well in advance of any additional sales to be generated from these expenditures. Our profitability may be adversely affected if we do not have the capital resources to complete our expansion plans or if our actual expenditures exceed planned expenditures for any number of reasons, including changes in:

·	our growth plan;

·	manufacturing process and product technologies;

·	market conditions;

·	prices of equipment; and

·	interest rates and foreign exchange rates.

We cannot assure you that required additional financing will be available to us on satisfactory terms, if at all. If adequate funds are not available on satisfactory terms at appropriate times, we may have to curtail our expansion plans, which could result in a loss of customers, adversely affect our ability to implement successfully our business strategy and limit the growth of our business.

We may encounter difficulties in realizing synergies, cost savings, or achieving within the anticipated time frame, expected strategic objectives and other benefits of the merger with QDI .

On October 1, 2006, we merged with QDI, a company incorporated in Taiwan that manufactures and assembles TFT-LCD panels. The success of the merger depends, in part, on our ability to capture anticipated synergies, growth opportunities and cost savings, which may be impeded, delayed or reduced as a result of numerous factors, some of which are outside our control. These factors include:

·	complexity of managing a larger business, including supply chain management, manufacturing capacity management, research and development, human resources and financial and audit management;

·	regulatory and commercial limitations on funding as a result of increased debt from the assumption of QDI debt;

·	difficulties in integrating the operations and financial condition, products, personnel and cultures;

·	unforeseen contingent risks or latent liabilities relating to the merger that may become apparent in the future;

·	diversion of management’s time and attention from our core business;

·	dilution of the stock ownership of existing shareholders or earnings per share;

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·	increased costs and efforts in connection with our compliance of Section 404 of the Sarbanes-Oxley Act of 2002; and

·	effects on our capacity utilization as a result of post-merger excess capacity and market conditions.

We may encounter these and other unforeseen difficulties in the integration of QDI which may cause us to fail to realize synergies, cost savings, or achieve within the anticipated time frame, expected strategic objectives and other benefits of the merger with QDI .

We operate in a highly competitive environment, and we may not be able to sustain our current market position if we fail to compete successfully.

The markets for our products are highly competitive. We experience pressure on our prices and profit margins, due largely to additional and growing industry capacity from competitors in Taiwan, Korea, Japan and the PRC. The ability to manufacture on a large scale with greater cost efficiencies is a competitive advantage in our industry. Some of our competitors have greater access to capital and substantially greater production, research and development, intellectual property, marketing and other resources than we do. Some of our competitors have announced their plans to develop, and have already invested substantial resources in, seventh or higher generation capacity. Our competitors may be able to introduce products manufactured using such capacity in advance of our schedule. In addition, some of our larger competitors have more extensive intellectual property portfolios than ours, which they may use to their advantage when negotiating cross-licensing agreements for technologies. As a result, these companies may be able to compete more aggressively over a longer period of time than we can.

The principal elements of competition in the TFT-LCD industry include:

price;

·	product performance features and quality;

·	customer service, including product design support;

·	ability to reduce production cost;

·	ability to provide sufficient quantity of products to fulfill customers’ needs;

·	research and development;

·	time-to-market; and

·	access to capital.

Our ability to compete successfully in the TFT-LCD industry also depends on factors beyond our control, including industry and general economic conditions.

If brand companies do not continue to outsource the manufacturing of their products to original equipment manufacturing service providers with production operations in Taiwan or the PRC, our sales and results of operations could be adversely affected.

In recent years, brand companies have increasingly outsourced the manufacturing of their products to original equipment manufacturing service providers in Taiwan, or such providers with part or all of their production operations in the PRC. We believe that we have benefited from this outsourcing trend in large part due to our production locations in both Taiwan and the PRC, which has allowed us to coordinate better our production and services with our customers’ requirements, especially in the areas of delivery time and product design support. We cannot assure you that this outsourcing trend will continue. If brand companies do not continue to outsource the manufacturing of their products to original equipment manufacturing service providers with their production operations in Taiwan or the PRC, our sales and results of operations could be adversely affected.

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If we are unable to manage our growth effectively, our business could be adversely affected.

We have experienced, and expect to continue to experience, growth in the scope and complexity of our operations and in the number of our employees. For example, we are currently devoting significant resources to the ramp-up of our second sixth-generation fab acquired through the QDI merger and our first 7.5-generation fab and the construction of our second 7.5-generation fab. This growth may strain our existing managerial, financial and other resources. In order to manage our growth, we must continue to implement additional operating and financial controls and hire and train additional personnel for these functions. We cannot assure you that we will be able to do so in the future, and our failure to do so could jeopardize our expansion plans and seriously harm our operations.

We may undertake acquisitions or investments to expand our business that may pose risks to our business and dilute the ownership of our existing shareholders, and we may not realize the anticipated benefits of these acquisitions or investments.

As part of our growth and product diversification strategy, we may continue to evaluate opportunities to acquire or invest in other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth of markets we can address or enhance our technical capabilities. Mergers, acquisitions or investments that we may enter into in the future entail a number of risks that could materially and adversely affect our business, operating and financial results, including:

• problems integrating the acquired operations, technologies or products into our existing business and products;

• diversion of management’s time and attention from our core business;

• adverse effects on existing business relationships with customers;

• need for financial resources above our planned investment levels;

• failures in recognizing anticipated synergies;

• difficulties in retaining business relationships with suppliers and customers of the acquired company;

• risks associated with entering markets in which we lack experience;

• potential loss of key employees of the acquired company;

• potential write-offs of acquired assets; and

• potential expenses related to the amortization of intangible assets.

Our failure to address these risks successfully may have a material adverse effect on our financial condition and results of operations. Any such acquisition or investment will likely require a significant amount of capital investment, which would decrease the amount of cash available for working capital or capital expenditures. In addition, if we use our equity securities to pay for acquisitions, the value of your ADSs and the underlying ordinary shares may be diluted. If we borrow funds to finance acquisitions, such debt instruments may contain restrictive covenants that can, among other things, restrict us from distributing dividends.

The loss of any key management personnel or the undue distraction of any such personnel may disrupt our business.

Our success depends on the continued services of key senior management, including our Chairman, President and Chief Executive Officer. We do not carry key person life insurance on any of our senior management personnel. If we lose the services of key senior management personnel, we may not be able to find suitable replacements or integrate replacement personnel in a timely manner or at all, which would seriously harm our business. In addition, our continuing growth will, to a large extent, depend on the attention of key management personnel to our daily affairs. For the foreseeable future, we expect that Mr. Kuen-Yao (K.Y.) Lee’s time will be divided between serving

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as Chairman of our company and Chairman and Chief Executive Officer of BenQ. If Mr. Lee is not able to devote enough time to our company, our operations may be adversely affected.

In May 2007, Mr. Lee was indicted by the Taoyuan District Prosecutors’ Office for alleged insider trading of BenQ stock and other related charges. While we are not a party to these proceedings, adverse publicity surrounding this case could have an adverse impact to our company. Moreover, if Mr. Lee is forced to resign from his position with us, or is otherwise no longer able to serve in his capacity as Chairman and Chief Executive Officer, our operations may be adversely affected.

If we are not able to attract and retain skilled technical personnel, including research and development and other personnel, our operations and expansion plans would be adversely affected.

Our success depends on our ability to attract and retain skilled employees, particularly engineering and technical personnel in the research and development and manufacturing processing areas. In 2004, we established a new flat panel display research and development center, the AUO Technology Center, in Hsinchu Science Park. The 5,100 square meter research center houses 15 research labs, advanced training facilities and accommodates over 1,200 research engineers. We have also established a professional on-the-job training program for employees. Without a sufficient number of skilled employees, our operations and production quality would suffer. Competition for qualified technical personnel and operators in Taiwan is intense and the replacement of skilled employees is difficult. We may encounter this problem in the future, as we require increased numbers of skilled employees for our expansion. If we are unable to attract and retain our technical personnel and other employees, this may adversely affect our business, and our operating efficiency may deteriorate.

Potential conflicts of interest with BenQ may cause us to lose opportunities to expand and improve our operations.

We face potential conflicts of interest with BenQ. BenQ is our largest shareholder, owning directly and indirectly 8.47% of our outstanding shares as of April 15, 2007, and is also one of our largest customers. BenQ and its subsidiaries accounted for 19.9%, 13.6% and 7.4% of our net sales in 2004, 2005 and 2006, respectively. BenQ’s substantial interest in our company may lead to conflicts of interest affecting our sales decisions or allocations. In addition, as of April 30, 2007, three of our nine directors and one of our three supervisors are representatives of BenQ, and Mr. Kuen-Yao (K.Y.) Lee, our Chairman and Chief Executive Officer, is also Chairman and Chief Executive Officer of BenQ. As a result, conflicts of interest between their duties to BenQ and us may arise.

We cannot assure you that when conflicts of interest arise with respect to representatives of BenQ, the conflicts of interest will be resolved in our favor. These conflicts may result in lost corporate opportunities, including opportunities that are never brought to our attention, or actions that may prevent us from taking advantage of opportunities to expand and improve our operations.

We need to comply with certain financial and other covenants under the terms of our debt instruments, the failure to comply with which would put us in default under those instruments.

Our long-term loans and facilities contain financial and other covenants and the failure to comply with the covenants could trigger a requirement for early payment. The financial covenants include current ratios, indebtedness ratios and interest coverage ratios. A default under one debt instrument may also trigger cross-defaults under our other debt instruments. In addition, such covenants restrict our ability to raise future debt financing.

If we breach our financial or other covenants, our financial condition will be adversely affected to the extent we are not able to cure such breaches or repay the relevant debt.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud

The United States Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition, an independent

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registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may still be unable to attest to our management’s assessment or may issue a report that concludes that our internal controls over financial reporting are not effective. Furthermore, during the course of the evaluation, documentation and attestation, we may identify deficiencies that we may not be able to remedy immediately. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls, on an ongoing basis, over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs. Furthermore, we have incurred considerable costs and used significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

Risks Relating to Manufacturing

Our manufacturing processes are highly complex, costly and potentially vulnerable to disruptions that can significantly increase our production costs and delay product shipments to our customers.

Our manufacturing processes are highly complex, require advanced and costly equipment and are periodically modified to improve manufacturing yields and production efficiency. We face the risk of production difficulties from time to time that could cause delivery delays and reduced production yields. These production difficulties include capacity constraints, construction delays, difficulties in upgrading or expanding existing facilities, difficulties in changing our manufacturing technology and delays in the delivery or relocation of specialized equipment. We may encounter many of these difficulties in connection with the ramp-up of production capacity of our second sixth-generation fab, acquired through the QDI merger, and our first 7.5-generation fab, and the construction of our second 7.5-generation fab. We may also encounter these difficulties in connection with the adoption of new manufacturing process technologies. We cannot assure you that we will be able to ramp-up our second sixth-generation and our first 7.5-generation fabs, and construct our second 7.5 generation fab without material delays or difficulties, or that we will not encounter manufacturing difficulties in the future.

If we are unable to obtain raw materials and components in suitable quantity and quality from our suppliers, our production schedules would be delayed and we may lose substantial customers.

Raw materials and component costs represent a substantial portion of our cost of goods sold. We must obtain sufficient quantities of high quality raw materials and components at acceptable prices and in a timely manner. We source most of our raw materials and components, including critical materials like color filters, driver integrated circuits, cold cathode fluorescent lamps, or CCFL, and polarizer and glass substrates, from a limited group of suppliers, both foreign and domestic. In 2001, we experienced a shortage of glass substrates due to the closure of the production facility of one of our two major suppliers of glass substrates. In addition, there was a shortage in the supply of color filters and glass substrates beginning in the second half of 2003 which continued into 2004. In addition, based on announced plans for new TFT-LCD production capacity, there could also be a shortage in the supply of driver integrated circuits, polarizer and CCFL. Our operations would be adversely affected if we could not obtain raw materials and components in sufficient quantity and quality at acceptable prices. We may also experience difficulties in sourcing adequate supplies for our operations if there is a ramp-up of production capacity by TFT-LCD manufacturers, including our company, without a corresponding increase in the supply of raw materials and components. The impact of any material shortage in raw materials and components will be magnified as we establish new fabs and continue to increase our production capacity.

Although approximately 59.6% of our raw materials and components was sourced locally in Taiwan in 2006, we depend on supplies of certain principal raw materials and components from suppliers in Japan. We cannot assure you that we will be able to obtain sufficient quantities of raw materials and components and other supplies of an acceptable quality in the future. Our inability to obtain high-quality raw materials and components in a timely and cost-effective manner may cause us to delay our production and delivery schedules, which may result in the loss of our customers and revenues.

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If we are unable to obtain equipment from our suppliers, we may be forced to delay our expansion plans.

We have purchased, and expect to purchase, a substantial portion of our equipment from foreign suppliers, especially for the ramp-up of our second sixth-generation and our first 7.5-generation fabs, and the construction of our second 7.5-generation fab. From time to time, increased demand for new equipment may cause lead times to extend beyond those normally required by equipment vendors. For example, in the past, increased demand for equipment caused some equipment suppliers to satisfy only partially our equipment orders in the normal time frame. The unavailability of equipment, delays in the delivery of equipment or the delivery of equipment that does not meet our specifications could delay implementation of our expansion plans and impair our ability to meet customer orders. If we are unable to implement our expansion plans on schedule or in line with customer expectations, our business may suffer.

If we are unable to manufacture successfully our products within the acceptable range of quality, our results of operations will be adversely affected.

TFT-LCD manufacturing processes are complex and involve a number of precise steps. Defective production can result from a number of factors, including:

·	the level of contaminants in the manufacturing environment;

·	human error;

·	equipment malfunction;

·	use of substandard raw materials and components; and

·	inadequate sample testing.

From time to time, we have experienced, and may in the future experience, lower than anticipated production yields as a result of the above factors, particularly in connection with the expansion of our capacity or change in our manufacturing processes. In addition, our production yield on new products will be lower than average as we develop the necessary expertise and experience to produce those products. If we fail to maintain high production yields and high quality production standards, our reputation may suffer and our customers may cancel their orders or return our panels for rework, which will adversely affect our results of operations.

If we violate environmental regulations, we may be subject to fines or restrictions that could cause our operations to be delayed or interrupted and our business to suffer.

Our operations can expose us to the risk of environmental claims which could result in damages awarded or fines imposed against us. We must comply with regulations relating to storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes resulting from our manufacturing processes. We incurred small fines in December 2002 and October 2003 for non-compliance with a waste storage-labeling requirement. In June 2004, we also incurred small fines for failure to update our air pollution emission permit.

Future changes to existing environmental regulations or unknown contamination of our sites, including contamination by prior owners and operators of our sites, may give rise to additional compliance costs or potential exposure to liability for environmental claims that may seriously affect our business, financial condition and results of operations.

Risks Relating to Our Technologies and Intellectual Property

If we cannot successfully introduce, develop or acquire advanced technologies, our profitability may suffer.

Technology and industry standards in the TFT-LCD industry evolve quickly, resulting in steep price declines in the advanced stages of a product’s life cycle. To remain competitive, we must continually develop or acquire advanced manufacturing process technologies and build next generation fabs to lower production costs and enable

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timely release of new products. In addition, we expect to utilize other display technologies, such as low temperature poly-silicon, or LTPS, technologies to develop new products. Our ability to manufacture products by utilizing more advanced manufacturing process technologies to increase production efficiency will be critical to our sustained competitiveness. We plan to invest a substantial amount of capital to ramp-up our second sixth-generation fab, acquired through the QDI merger, ramp-up our first 7.5-generation fab and construct our second 7.5-generation fab. However, we cannot assure you that we will be successful in completing our expansion plans or in the development of other future technologies for our fabs, or that we will be able to complete them without material delays or at the expected costs. If we fail to do so, our results of operations and financial condition may be materially and adversely affected. We also cannot assure you that there will be no material delays in connection with our efforts to develop new technology and manufacture more technologically advanced products. If we fail to develop or make advancements in product technologies or manufacturing process technologies on a timely basis, we may become less competitive.

Other flat panel display technologies or alternative display technologies could render our products uncompetitive.

We currently manufacture products primarily using TFT-LCD technology, which is currently one of the most commonly used flat panel display technologies. We may face competition from flat panel display manufacturers utilizing alternative flat panel technologies, including plasma discharge panel, or PDP, and organic light emitting device, or OLED, technologies. Currently, PDP technology is primarily used to produce panels larger than 30-inches for use in television, as compared to the TFT-LCD technology primarily used to produce panels less than 40-inches for use in monitors, notebooks and LCD television. However, as the demand for LCD televisions with panel sizes as large as that of televisions using PDP technology continues to grow, competition between these two technologies is likely in the large-size television market. Another commercially available flat panel technology is OLED. OLED technology is currently primarily used, and is beginning to compete with TFT-LCD technology, in small- to medium-size applications, such as mobile phones and digital still cameras. Future development of OLED technology may also allow it to compete with TFT-LCD technology in larger applications such as monitors, notebooks and LCD television and render our products uncompetitive. In addition, there are other alternative flat panel technologies currently in the research and development stage, such as field emission display, or FED, inorganic electroluminescent, or IEL, and surface-conduction electron-emitter, or SED, display technologies. If the various alternative flat panel technologies currently commercially available or in the research and development stage are developed to have better performance-to-price ratios, such technologies may compete with TFT-LCD technology and render our products uncompetitive.

We also face competition from alternative display technologies, particularly those utilizing projection technology, such as front digital mirror device projector, digital light processing projector, LCD projector and liquid crystal on silicon projector technologies. These alternative forms of display technology may be competitive in terms of performance-to-price ratio. If alternative display technologies gain a larger market share in the market for large-size television, our business prospects may be adversely affected.

However, advancement and changes in alternative flat panel technologies are dependent on manufacturing economics and consumer demand. For example, in 2006, we disbanded our research and development team dedicated to OLED technology because of high material cost and a relatively low utilization rate. Even though we seek to remain competitive through research and development of flat panel technologies, we may invest in research and development in certain technologies that do not come to fruition.

If we lose the support of our technology partners or the legal rights to use our licensed manufacturing process or product technologies, our business may suffer.

Enhancing our manufacturing process and product technologies is critical to our ability to provide high quality products to our customers at competitive prices. We intend to continue to advance our manufacturing process and product technologies through internal research and development and licensing from other companies. We currently have licensing arrangements with Fujitsu Limited, Semiconductor Energy Laboratory Co., Ltd., or SEL, Toppan Printing Co., Ltd., or Toppan, Guardian Industries Corp., Sharp Corporation, Samsung, Hitachi Displays Ltd., Honeywell International Inc., Honeywell Intellectual Properties Inc. and other companies for product and manufacturing process technologies used to produce a substantial number of our TFT-LCD panels. These

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agreements are typically for terms of five to seven years. If we are unable to renew our technology licensing arrangements with some or all of these companies on mutually beneficial economic terms, we may lose the legal right to use certain of the processes and designs which we may have employed to manufacture our products. Similarly, if we cannot license or otherwise acquire or develop new manufacturing process and product technologies that are critical to the development of our business or products, we may lose important customers because we are unable to continue providing our customers with products based on advanced manufacturing process and product technologies.

We have entered into patent and intellectual property license agreements that require periodic royalty payments. In the future, we may need to obtain additional patent licenses or renew existing license agreements. We cannot assure you that these license agreements can be obtained or renewed on acceptable terms. If these license agreements are not obtained or renewed on acceptable terms, our business and future results of operations may be materially and adversely affected.

Disputes over intellectual property rights could be costly and deprive us of the technology to stay competitive.

As technology is an integral part of our manufacturing process and product, we have, in the past, received communications alleging that our products or processes infringe product or manufacturing process technology rights held by others, and expect to continue to receive such communications. We are currently involved in intellectual property disputes with several companies. See “Item 8.A.7. Litigation.” There is no means of knowing all of the patent applications that have been filed in the United States or elsewhere and whether, if the applications are granted, such patents would have a material adverse effect on our business. If any third party were to make valid intellectual property infringement claims against our customers or us, we may be required to:

·	discontinue using disputed manufacturing process technologies;

·	pay substantial monetary damages;

·	seek to develop non-infringing technologies, which may not be feasible; or

·	seek to acquire licenses to the infringed technology, which may not be available on commercially reasonable terms, if at all.

If our products or manufacturing processes are found to infringe third-party rights, we may be subject to significant liabilities and be required to change our manufacturing processes or products. This could restrict us from making, using, selling or exporting some of our products, which could in turn materially and adversely affect our business and financial condition. In addition, any litigation, whether to enforce our patents or other intellectual property rights or to defend ourselves against claims that we have infringed the intellectual property rights of others, could materially and adversely affect our results of operations because of the management attention required and legal costs incurred.

Our ability to compete will be harmed if we are unable to adequately protect our intellectual property.

We believe that the protection of our intellectual property rights is, and will continue to be, important to the success of our business. We rely primarily on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain, copy or use information that we regard as proprietary, such as product design and manufacturing process expertise. As of April 30, 2007, we had 1,170 U.S. patent applications pending, 1,391 Taiwan patent applications pending and 2,438 patents pending in other jurisdictions. Our pending patent applications and any future applications may not result in issued patents or may not be sufficiently broad to protect our proprietary technologies. Moreover, policing any unauthorized use of our products is difficult and costly, and we cannot be certain that the measures we have implemented will prevent misappropriation or unauthorized use of our technologies, particularly in foreign jurisdictions where the laws may not protect our proprietary rights as fully as the laws of the United States. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to effectively protect our intellectual property could harm our business.

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Our rapid introduction of new technologies and products may increase the likelihood that third parties will assert claims that our products infringe upon their proprietary rights.

Although we take and will continue to take steps to ensure that our new products do not infringe upon third party rights, the rapid technological changes that characterize our industry require that we quickly implement new processes and components with respect to our products. Often with respect to recently developed processes and components, a degree of uncertainty exists as to who may rightfully claim ownership rights in such processes and components. Uncertainty of this type increases the risk that claims alleging that such components or processes infringe upon third party rights may be brought against us. If our products or manufacturing processes are found to infringe upon third party rights, we may be subject to significant liabilities and be required to change our manufacturing processes or be prohibited from manufacturing certain products, which could have a material adverse effect on our operations and financial condition.

We rely upon trade secrets and other unpatented proprietary know-how to maintain our competitive position in the TFT-LCD industry and any loss of our rights to, or unauthorized disclosure of, our trade secrets or other unpatented proprietary know-how could adversely affect our business.

We also rely upon trade secrets, unpatented proprietary know-how and information, as well as continuing technological innovation in our business. The information we rely upon includes price forecasts, core technology and key customer information. Our current standard employment agreement with our employees contains a confidentiality provision which generally provides that all inventions, ideas, discoveries, improvements and copyrightable material made or conceived by the individual arising out of the employment relationship and all confidential information developed or made known to the individual during the term of the relationship is our exclusive property. We cannot assure the enforceability of these types of agreements, or that they will not be breached. We also cannot be certain that we will have adequate remedies for any breach. The disclosure of our trade secrets or other know-how as a result of such a breach could adversely affect our business. Also, our competitors may come to know about or determine our trade secrets and other proprietary information through a variety of methods. Disputes may arise concerning the ownership of intellectual property or the applicability or enforceability of the relevant agreements, and there can be no assurance that any such disputes would be resolved in our favor. Further, others may acquire or independently develop similar technology, or if patents are not issued with respect to products arising from research, we may not be able to maintain information pertinent to such research as proprietary technology or trade secrets and that could have an adverse effect on our competitive position within the TFT-LCD industry.

Political, Geographical and Economic Risks

Due to the location of our operations in Taiwan and the PRC, we and many of our customers and suppliers are vulnerable to natural disasters and other events outside of our control, which may seriously disrupt our operations.

Most of our existing manufacturing operations, and the operations of many of our customers and suppliers, are located in Taiwan, which is vulnerable to natural disasters. In 2006, approximately 30.7% of our net sales was derived from Taiwan-based customers. In addition, we have expanded our module assembly operations to the PRC since July 2002. Our module-assembly operations in the PRC, and the operations of many of our customers and suppliers in that area, may also be vulnerable to natural disasters. As a result of this geographic concentration, disruption of operations at our fabs or the facilities of our customers and suppliers for any reason, including work stoppages, power outages, water supply shortages, fire, typhoons, earthquakes or other natural disasters, could cause delays in production and shipments of our products. Any delays or disruptions could result in our customers seeking to source TFT-LCD panels from other manufacturers. For instance, our operations stopped completely for five days in September 1999, largely because of a power outage caused by a severe earthquake. After the stoppage, it took us several days to ramp-up to full operations. Shortages or suspension of power supplies have occasionally occurred, and have disrupted our operations. The occurrence of a power outage in the future could seriously hurt our business.

Our manufacturing processes require a substantial amount of water. Although currently more than 80% of the water used in our production process is recycled, our production operations may be seriously disrupted by water shortages. For instance, the Hsinchu area, where one of our principal manufacturing sites is located, experienced a

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drought in 2002. In response to the drought in 2002, the ROC authorities implemented water-rationing measures and began sourcing water from alternative sources, and therefore we did not encounter any water shortage. However, we may encounter droughts in the Hsinchu, Taoyuan or Taichung areas in the future, where most of our current or future manufacturing sites are located. If another drought were to occur and we or the authorities were unable to source water from alternative sources in sufficient quantity, we may be required to shut down temporarily or substantially reduce the operations of these fabs, which would seriously affect our operations. In addition, even if we were able to source water from alternative sources, our reliance on supplemental water supplies would increase our operating costs. Furthermore, the disruption of operations at our customers’ facilities could lead to reduced demand for our products. The occurrence of any of these events in the future could adversely affect our business.

We have made investments in, and are exploring the possibility of expanding our businesses and operations to, or making additional investments in, the PRC, which may expose us to additional political, regulatory, economic and foreign investment risks.

We have expanded our module assembly operations to the PRC and increased the registered capital of various PRC operating subsidiaries through cash injection. Depending on our business needs, we may further expand or adjust our business operations in the PRC in the future. Our businesses and operations and our future expansion or investment plans in the PRC are significantly affected by political and economic condition, regulatory control and general legal developments in the PRC and other foreign investment risks. The PRC economy differs from the economies of most developed countries in many respects, including the structure, level of government involvement, level of development, foreign exchange control and allocation of resources. The PRC economy has been transitioning from a planned economy to a more market-oriented economy. For the past two decades, the PRC government has implemented economic reform measures emphasizing utilization of market forces in the development of the PRC economy. Although we believe these reforms will have a positive effect on our overall operations in the PRC, we cannot predict whether changes in the PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on our current or future operations in the PRC. For example, the PRC government has stated publicly that it may change its monetary policy to tighten the extension of credit and discourage investments, particularly in certain industries such as real estate and construction. This change in policy may adversely affect our operations in the PRC. In addition, the interpretation of PRC laws and regulations involves uncertainties. We cannot assure you that changes in such laws and regulations, or in their interpretation and enforcement, will not have a material adverse effect on our businesses and operations in the PRC.

Although we have been advised that we have all the relevant government approvals required in connection with our PRC operations, additional approvals from the PRC central government may be required.

We operate module assembly facilities in the Suzhou Industrial Park located in Suzhou, PRC, through our subsidiary, AU Optronics (Suzhou) Corp., Ltd. The Suzhou Industrial Park is a special economic zone established by the PRC central government with others and is under the regulation of the Suzhou Industrial Park Administrative Committee, or SIPAC. Under PRC laws and regulations, foreign investment projects require the approval of the relevant governmental authorities in the province or special economic zone in which the project is located and, in some circumstances, the approval of the relevant authorities of the PRC central government. In connection with the initial establishment and subsequent capital increases of our PRC subsidiary, we received approvals from SIPAC, which were filed by SIPAC with the State Planning Commission, the National Development and Reform Commission and the Ministry of Commerce of the central government of the PRC. We have been advised by SIPAC that such approvals and filings complete the approval process, which is consistent with the approval processes generally applicable to companies under the regulation of SIPAC, and that all necessary PRC governmental approvals in connection with the initial establishment and subsequent capital increases of our PRC subsidiary have been obtained.

The interpretation of PRC laws and regulations involves uncertainties, however, and there can be no assurance that all relevant authorities of the PRC central government will agree with SIPAC’s position, and it has come to our attention that additional approval from the PRC central government may be required for the initial establishment and subsequent capital increases of our PRC subsidiary. If required, we intend to obtain any such additional approval in consultation with SIPAC. In that event, we cannot assure you as to when the PRC central government will grant such approval, if at all. Because the PRC central government has significant discretion in dealing with our situation,

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we cannot assure you that the PRC central government will not take action that is material and adverse to our PRC operations.

In October 2006, we acquired a module-assembly facility in Songjiang, PRC as a result of our merger with QDI. We are also establishing a second module-assembly facility in the PRC, in Xiamen, Fujian Province which we expect to commence operations in the second quarter of 2007. We have received all the relevant government approvals for these facilities, but we cannot assure you that additional approvals will not be required and that such approvals, if required, will be obtained on time or at all.

The current restrictions imposed by the ROC government on investments in certain related businesses may limit our ability to compete with other TFT-LCD manufacturers that are permitted to establish TFT-LCD production operations in the PRC.

Many of our customers and competitors have expanded their businesses and operations to the PRC. In order to take advantage of the lower production costs in China and to establish a presence in the China market, we established module-assembly facility in Suzhou, Jiangsu Province of the PRC. We commenced operations at such facilities in July 2002. We are also establishing a second module-assembly facility in the PRC, in Xiamen, Fujian Province which we expect to commence operations in the second quarter of 2007 and through our merger with QDI, acquired a module-assembly facility in Songjiang, PRC. Module-assembly involves connecting components to the cell panel. We may further explore the possibility of investing in other businesses or operations in the PRC as and when we are legally permitted to do so. Currently, ROC laws and regulations permit investment in module-assembly operations in the PRC but, subject to certain exceptions, do not permit investments in array and cell operations. We do not know when or if such ROC laws and regulations governing investment in the PRC will be amended, and we cannot assure you that any such amendments to those regulations will permit us to invest in operations involving array and cell processes in the PRC.

Disruptions in Taiwan’s political environment could seriously harm our business and the market price of our shares and ADSs.

Most of our assets and operations are located in Taiwan and approximately 30.7% of our net sales is derived from customers in Taiwan in 2006. Accordingly, our business and financial condition may be affected by changes in local governmental policies and political and social instability.

Taiwan has a unique international political status. The government of the PRC asserts sovereignty over mainland China and Taiwan, and does not recognize the legitimacy of the government of the ROC. The government of the PRC has indicated that it may use military force to gain control over Taiwan if Taiwan declares independence or Taiwan refuses to accept the PRC’s stated “One China” policy. In particular, the increasing influence of the Democratic Progressive Party, which has in the past formally advocated Taiwan’s independence from the PRC, including the reelection of Mr. Chen Shui-bian, a member of that party, as President of the ROC in March 2004, may increase political tensions and instability between the PRC and the ROC. In addition, on March 14, 2005, the National Peoples’ Congress of the PRC passed what is widely referred to as the “anti-secession” law, a law authorizing the PRC military to respond to efforts by Taiwan to seek formal independence. An increase in tensions between the ROC and the PRC and the possibility of instability and uncertainty could adversely affect the prices of our ADSs and our shares. It is unclear what effects any of the events described above may have on relations with the PRC. Relations between Taiwan and the PRC and other factors affecting Taiwan’s political environment could affect our business.

If economic conditions in Taiwan deteriorate, our current business and future growth would be materially and adversely affected.

In recent years, the currencies of many East Asian countries, including Taiwan, have experienced considerable volatility and depreciation. The Central Bank of China, which is the central bank of the ROC, has from time to time intervened in the foreign exchange market to minimize the fluctuation of the U.S. dollar/NT dollar exchange rate and to prevent significant decline in the value of the NT dollar. NT dollars have depreciated against U.S. dollars from US$1.00 = NT$27.520 on January 2, 1997 to US$1.00 = NT$32.77 on June 26, 2007, based on the noon buying rates published by the Federal Reserve Bank of New York.

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Our business, financial condition and results of operations may be affected by changes in ROC government policies, taxation, inflation and interest rates in Taiwan, as well as general economic conditions in Taiwan. In addition, the banking and financial sectors in Taiwan have been seriously harmed by the general economic downturn in Asia and Taiwan in recent years, which has caused a depressed property market, and an increase in the number of companies filing for corporate reorganization and bankruptcy protection. As a result, financial institutions are more cautious in providing credit to businesses in Taiwan. We cannot assure you that we will continue to have access to credit at commercially reasonable rates of interest or at all.

The market value of our ADSs may fluctuate due to the volatility of the ROC securities market.

The trading price of our ADSs may be affected by the trading price of our shares on the Taiwan Stock Exchange. The Taiwan Stock Exchange is smaller and more volatile than the securities markets in the United States. The Taiwan Stock Exchange has experienced substantial fluctuations in the prices and volumes of trading of securities. In the past decade, the Taiwan Stock Exchange Index peaked at 12,495.34 in February 1990 and subsequently fell to a low of 2,560.47 in October 1990. On March 13, 2000, the Taiwan Stock Exchange Index experienced a 617-point drop, which represented the single largest decrease in the Taiwan Stock Exchange Index in its history. The Taiwan Stock Exchange Index experienced a 32.3% increase in 2003, a 4.2% increase in 2004 and a 6.7% increase in 2005. During the period from January 1, 2006 to December 31, 2006, the Taiwan Stock Exchange Index peaked at 7,823.72 on December 29, 2006, and reached a low of 6,257.80 on July 17, 2006. Over the same period, daily closing values of our shares ranged from NT$40.00 per share to NT$55.20 per share. On June 27, 2007, the Taiwan Stock Exchange Index closed at 8,844.22, and the closing value of our shares was NT$56.70 per share.

The Taiwan Stock Exchange is particularly volatile during times of political instability, including when relations between Taiwan and the PRC are strained. Several investment funds affiliated with the ROC government have also from time to time purchased securities from the Taiwan Stock Exchange to support the trading level of the Taiwan Stock Exchange. Moreover, the Taiwan Stock Exchange has experienced problems, including market manipulation, insider trading and settlement defaults. The recurrence of these or similar problems could have an adverse effect on the market price and liquidity of our shares and ADSs.

If the NT dollar or other currencies in which our sales, raw materials and components and capital expenditures are denominated fluctuate significantly against the U.S. dollar or the Japanese yen, our profitability may be seriously affected.

We have significant foreign currency exposure, and are affected by fluctuations in exchange rates among the U.S. dollar, the Japanese yen, the NT dollar and other currencies. Our sales, raw materials and components and capital expenditures are denominated in U.S. dollars, Japanese yen and NT dollars in varying amounts. For example, in 2006, approximately 98.6% of our net sales was denominated in U.S. dollars. During the same period, approximately 21.9%, 28.8% and 49.1% of our cost of goods sold (principally raw materials and component costs) was denominated in NT dollars, Japanese yen and U.S. dollars, respectively. In addition, in 2006, approximately 26.7%, 55.2% and 13.8% of our total capital expenditures (principally for the purchase of equipment) was denominated in NT dollars, Japanese yen and U.S. dollars, respectively. From time to time, we enter into forward foreign currency contracts to hedge our foreign currency exposure, but we cannot assure you that we will fully minimize the risk against exchange rate fluctuations and the impact on our results of operations.

Disruptions in the international trading environment may seriously decrease our international sales.

A substantial portion of our net sales is derived from sales to customers located outside of Taiwan. In 2004, 2005 and 2006, sales to our overseas customers accounted for 59.4%, 62.1% and 69.4%, respectively, of our net sales. In addition, a significant portion of our sales to customers in Taiwan is made to original equipment manufacturing service provider customers that use our display panels in the products that they manufacture on a contract basis for brand companies worldwide. We expect sales to customers outside of Taiwan to continue to represent a significant portion of our net sales. As a result, our business will continue to be vulnerable to disruptions in the international trading environment, including those caused by adverse changes in foreign government regulations, political unrest, international economic downturns, terrorist attacks and continued military involvement in Iraq and Afghanistan. These disruptions in the international trading environment may affect the demand for our

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products and change the terms upon which we sell our products overseas, which could seriously decrease our international sales.

We face risks related to health epidemics and outbreaks of contagious diseases, including avian influenza and Severe Acute Respiratory Syndrome, or SARS.

There have been recent reports of outbreaks of a highly pathogenic avian influenza, or avian flu, caused by the H5N1 virus in certain regions of Asia and Europe. An outbreak of avian flu in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, particularly in Asia. Additionally, a recurrence of SARS, a highly contagious form of atypical pneumonia, similar to the occurrence in 2003 which affected PRC, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries, would also have similar adverse effects. Since all of our operations and substantially all of our customers and suppliers are based in Asia (mainly Taiwan), an outbreak of avian flu, SARS or other contagious diseases in Asia or elsewhere, or the perception that such outbreak could occur, and the measures taken by the governments of countries affected, including the ROC and the PRC, would adversely affect our business, financial condition or results of operations.

Risks Related to our ADSs and our Trading Market

The market value of our ADSs may fluctuate due to the volatility of the securities markets.

The securities markets in the United States and other countries have experienced significant price and volume fluctuations. Volatility in the price of our ADSs may be caused by factors beyond our control and may be unrelated to, or disproportionate to changes in, our results of operations. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against that company. Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources.

Restrictions on the ability to deposit shares into our ADS facility may adversely affect the liquidity and price of our ADSs.

The ability to deposit shares into our ADS facility is restricted by ROC law. A significant number of withdrawals of shares underlying our ADSs would reduce the liquidity of our ADSs by reducing the number of ADSs outstanding. As a result, the prevailing market price of our ADSs may differ from the prevailing market price of our shares on the Taiwan Stock Exchange. Under current ROC law, no person or entity, including you and us, may deposit its shares in our ADS facility without specific approval of the ROC Financial Supervisory Commission, unless:

(1) we pay stock dividends on our shares;

(2) we make a free distribution of shares;

(3) ADS holders exercise preemptive rights in the event of capital increases for cash; or

(4) investors purchase our shares, directly or through the depositary, on the Taiwan Stock Exchange, and deliver our shares to the custodian for deposit into our ADS facility, or our existing shareholders deliver our shares to the custodian for deposit into our ADS facility.

With respect to (4) above, the depositary may issue ADSs against the deposit of those shares only if the total number of ADSs outstanding following the deposit will not exceed the number of ADSs previously approved by the ROC Financial Supervisory Commission, plus any ADSs issued pursuant to the events described in the subparagraph (1), (2) and (3) above. Issuance of additional ADSs under item (4) above will be permitted to the extent that previously ADSs have been cancelled.

In addition, in the case of a deposit of our shares requested under item (4) above, the depositary will refuse to accept deposit of our shares if such deposit is not permitted under any legal, regulatory or other restrictions notified

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by us to the depositary from time to time, which restrictions may specify blackout periods during which deposits may not be made, minimum and maximum amounts and frequencies of deposits.

ADS holders will not have the same rights as our shareholders, which may affect the value of the ADSs.

ADS holders’ rights as to the shares represented by such holders’ ADSs are governed by the deposit agreement. ADS holders will not be able to exercise voting rights on an individual basis. If holders representing at least 51% of our ADSs outstanding at the relevant record date instruct the depositary to vote in the same manner regarding a resolution, including the election of directors and supervisors, the depositary will cause all shares represented by the ADSs to be voted in that manner. If, at the relevant record date, the depositary does not receive instructions representing at least 51% of ADSs outstanding to vote in the same manner for any resolution, including the election of directors and supervisors, ADS holders will be deemed to have instructed the depositary or its nominee to authorize all the shares represented by the ADS holders’ ADSs to be voted at the discretion of our Chairman or his designee, which may not be in the ADS holders’ interest. Moreover, while shareholders who own 1% or more of our outstanding shares are entitled to submit one proposal to be considered at our annual general meetings, only holders representing at least 51% or more of our ADSs outstanding at the relevant record date are entitled to submit one proposal to be considered at our annual general meetings. Hence, only one proposal may be submitted on behalf of all ADS holders.

ADS holders’ rights to participate in our rights offerings are limited, which could cause dilution to the holdings of ADS holders.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement, the depositary will not offer ADS holders those rights unless both the distribution of the rights and the underlying securities to all our ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. Although we may be eligible to take advantage of certain exemptions under the Securities Act available to certain foreign issuers for rights offerings, we can give no assurances that we will be able to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement for any of these rights. Accordingly, ADS holders may be unable to participate in our rights offerings and may experience dilution with respect to their holdings.

Our issuance of stock bonuses and stock options to employees may have a dilutive effect on our ADSs.

Similar to other technology companies in Taiwan, from time to time we may issue bonuses to our employees in the form of shares, valued at par, under the ROC Company Law and our articles of incorporation. Since these shares are issued at par value, the issuance of these shares may have a dilutive effect on ADSs. In 2004, 2005 and 2006, we issued 88.8 million shares, 97.4 million shares and 88.6 million shares to our employees, respectively, for their services performed in 2003, 2004 and 2005, respectively. These bonus shares, valued at par, amounted to NT$887.9 million, NT$973.6 million and NT$886.1 million in 2004, 2005 and 2006. We currently maintain two employee stock option plans, both of which we assumed as a result of the QDI merger, and pursuant to which our full-time employees of our consolidated domestic and foreign subsidiaries are eligible to receive stock option grants. As of December 31, 2006, 7,225,000 options, each exercisable for one of our shares, were outstanding. See “Item 6.B. Compensation.”

Non-ROC holders of ADSs who withdraw our shares will be required to obtain a foreign investor investment identification and appoint a local custodian and agent and a tax guarantor in the ROC.

Under current ROC law, if you are a non-ROC person and wish to withdraw and hold our shares from a depositary receipt facility, you will be required to obtain a foreign investor investment identification, or the Foreign Investor Investment I.D., issued in accordance with the ROC Regulations Governing Securities Investment by Overseas Chinese and Foreign Nationals, or the Investment Regulations. You will also be required to appoint an eligible agent in the ROC to open a securities trading account and a Taiwan Depository & Clearing Corporation book-entry account and a bank account, to pay ROC taxes, remit funds, exercise shareholders’ rights and perform such other functions as you may designate upon such withdrawal. In addition, you will be required to appoint a custodian bank to hold the securities in safekeeping, make confirmation and settle trades and report all relevant information. Without obtaining such Foreign Investor Investment I.D. under the Investment Regulations and

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opening such accounts, the non-ROC withdrawing holder would be unable to hold or subsequently sell our shares withdrawn from the depositary receipt facility on the Taiwan Stock Exchange or otherwise. There can be no assurance that such withdrawing holder will be able to obtain the Foreign Investor Investment I.D. and open such accounts in a timely manner.

Non-ROC holders of ADSs withdrawing our shares represented by ADSs are also required under current ROC law and regulations to appoint an agent in the ROC for filing tax returns and making tax payments. Such agent must meet certain qualifications set by the ROC Ministry of Finance and, upon appointment, becomes a guarantor of such withdrawing holder’s ROC tax obligations. Generally, evidence of the appointment of such agent and the approval of such appointment by the ROC tax authorities may be required as conditions to such withdrawing holder’s repatriation of the profits. There can be no assurance that such withdrawing holder will be able to appoint and obtain approval for such agent in a timely manner.

The protection of the interests of our public shareholders available under our articles of incorporation and the laws governing ROC corporations is different from that which applies to a U.S. corporation.

Our corporate affairs are governed by our articles of incorporation and by the laws governing ROC corporations. The rights and responsibilities of our shareholders and members of our board of directors under ROC law are different from those that apply to a U.S. corporation. Directors of ROC corporations are required to conduct business faithfully and act with the care of good administrators. However, the duty of care required of an ROC corporation’s directors may not be the same as the fiduciary duty of a director of a U.S. corporation. In addition, controlling shareholders of U.S. corporations owe fiduciary duties to minority shareholders, while controlling shareholders in ROC corporations do not. The ROC Company Law also requires that a shareholder continuously hold at least 3% of our issued and outstanding shares for at least a year in order to request that a supervisor institute an action against a director on the company’s behalf. Therefore, our public shareholders may have more difficulty protecting their interests against actions of our management, members of our board of directors or controlling shareholders than they would as shareholders of a U.S. corporation.

Future sales or perceived sales of securities by us, our executive officers, directors, supervisors or major shareholders may hurt the price of our ADSs.

The market price of our ADSs could decline as a result of sales of ADSs or shares or the perception that these sales could occur. As of March 31, 2007, we had an aggregate of 7,573,782,895 shares issued and outstanding which were freely tradable. If we, our executive officers, directors, supervisors or our shareholders, sell ADSs or shares, the market price for our shares or ADSs could decline. Future sales, or the perception of future sales, of ADSs or shares by us, our executive officers, directors, supervisors or existing shareholders could cause the market price of our ADSs to decline.

You may not be able to enforce a judgment of a foreign court in the ROC.

We are a company limited by shares and incorporated under the ROC Company Law. All of our directors, supervisors and executive officers, and some of the experts named herein, are residents of Taiwan. As a result, it may be difficult for holders of our shares or ADSs to enforce against us or them judgments obtained outside the ROC, including those predicated upon the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in the ROC, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the United States federal securities laws.

ITEM 4. INFORMATION ON THE COMPANY

4.A. History and Development of the Company

We were incorporated as Acer Display Technology, Inc., or Acer Display, under the laws of the ROC as a company limited by shares in 1996. The shares of Acer Display were listed on the Taiwan Stock Exchange on September 8, 2000. On September 1, 2001, we completed a merger with Unipac pursuant to a merger agreement dated April 9, 2001, as amended by a supplemental agreement dated May 15, 2001. We changed our name to AU Optronics Corp. on May 22, 2001. Prior to the merger, Acer Display was primarily involved in the design,

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development, production and marketing of large-size TFT-LCD panels and Unipac was primarily involved in the design, production and marketing of both small-size and large-size TFT-LCD panels.

On October 1, 2006, we completed a merger with QDI pursuant to a merger agreement dated April 7, 2006. QDI manufactured and assembled TFT-LCD panels. As of the effective date, we became the surviving entity and assumed substantially all of the assets, liabilities and personnel of QDI.

Our principal executive offices are located at No. 1, Li-Hsin Road 2, Hsinchu Science Park, Hsinchu, Taiwan, ROC and our telephone number is 886-3-500-8899. Our agent for service of process in the United States is Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19711, and our agent’s telephone number is 302-738-6680.

Our ADSs have been listed on the New York Stock Exchange since May 29, 2002.

4.B. Business Overview

Introduction

We design, develop, manufacture, assemble and market flat panel displays and substantially all of our products are TFT-LCD panels. TFT-LCD is currently the most widely used flat panel display technology. Our panels are used in computer products (such as notebook computers and desktop monitors), consumer electronics products (such as mobile devices, digital cameras, digital camcorder, car television, car navigation systems and portable DVD players), and LCD televisions.

We sell our panels primarily to companies that design and assemble products based on their customers’ specifications, commonly known as original equipment manufacturing service providers. These original equipment manufacturing service providers, most of whose production operations are located in Taiwan or the PRC, use our panels in the products that they manufacture on a contract basis for brand companies worldwide. Our operations in Taiwan and the PRC allow us to better coordinate our production and services with our customers’ requirements, especially in respect of delivery time and design support. Some of our major original equipment manufacturing service provider customers include BenQ, TPV Electronics (Fujian) Company Limited and Proview Optronics (Shenzhen) Co. Ltd. BenQ is a shareholder of our company, and held directly and indirectly 8.47% of our outstanding shares as of April 15, 2007. We also sell our products to some brand companies on a direct shipment basis.

We currently manufacture TFT-LCD at fabrication facilities commonly known as “fabs.” We were one of the first TFT-LCD manufacturers in Taiwan to commence commercial production at a fifth-generation fab, and we now operate four fifth-generation fabs. We believe we were the first TFT-LCD manufacturer in Taiwan to commence production at a sixth-generation fab. New generations of TFT-LCD fabs are equipped to process increasingly larger sheets of glass, or substrates. For example, our sixth-generation fabs are designed to process substrates with dimensions of up to 1,500 x 1,850 millimeters, our fifth-generation fabs are designed to process substrates with dimensions of up to 1,100 x 1,300 millimeters, and our fourth-generation fab is designed to process substrates with dimensions of up to 680 x 880 millimeters. Our 7.5-generation fab, which we commenced commercial production in the fourth quarter of 2006, is designed to process substrates with dimensions of up to 1,950 x 2,250 millimeters.

We commenced commercial production of small- to medium-size panels in 1994 and large-size panels in 1999. We have significantly expanded our capacity since 1999. With production facilities utilizing 3.5-, fourth-, fifth-, sixth- and 7.5-generation technologies, we have the flexibility to produce a large number of panels of various sizes. We operate three fifth-generation fabs that commenced commercial production in March 2003, February 2004 and August 2005, respectively. We also acquired one fifth-generation fabs through our merger with QDI. We operate one sixth-generation fab that commenced commercial production in March 2005, and we acquired a second sixth-generation fab through our merger with QDI. Our existing operations are located at five principal manufacturing sites in Taiwan and three module-assembly sites in the PRC.

Since December 1, 2005, we grouped our business into two marketing channels: Information Technology Displays and Consumer Products Displays. In January 2007, we reorganized and regrouped our business into three

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marketing channels: Information Technology Displays, Television Displays and Consumer Products Displays. The Information Technology Display Business Group covers applications such as desktop, notebook and general displays. The Television Displays Business Group covers applications such as LCD television. The Consumer Products Display Business Group covers applications such as audio-video displays and mobile device displays. We believe this change should allow us to better serve the needs of customers in these three markets.

On October 1, 2006, we completed our merger with QDI, a company incorporated in Taiwan that manufactures and assembles TFT-LCD panels. Under the terms of the merger agreement dated April 7, 2006, we offered one share of our common stock for every 3.5 shares of outstanding QDI common stock issuing a total of 1,479,110,029 shares. As of the effective date of the merger, we became the surviving entity and assumed substantially all of the assets, liabilities and personnel of QDI. The merger received shareholder approval of our company and QDI on June 15, 2006, as well as approval from the Financial Supervisory Commission of the Executive Yuan, on August 15, 2006.

The purpose of the merger was to increase our competitiveness and expand our market share. With the combined production capacity of QDI, we are positioned among the largest TFT-LCD manufacturers in the world.

Through the merger, we seek to realize synergies in supply chain management and research and development, which we believe will increase our overall competitiveness. We believe we can leverage our combined buying power to achieve favorable treatment in the sourcing of key components and enhance our relationships with suppliers. In addition, the combination of our research and development capabilities should expand our panel design expertise and our intellectual property portfolio.

We believe that another expected benefit of the merger is that the product lines of the two companies are complementary with each other. We have been strong in the LCD television product and computer product market and QDI has been more competitive in the notebook panel product market. Through the merger, we plan to offer a broader range of products and expand our market share.

Principal Products

We manufacture a wide range of TFT-LCD panels for the following principal product categories:

Computer products, which typically utilize display panels ranging from 8.4 inches to larger than 20 inches, primarily for use in notebook computers and desktop monitors.

Consumer electronics products, which typically utilize display panels ranging from 1.5 inches to 10.2 inches or above for use in products such as digital cameras, digital camcorders, mobile phones, car television monitors, car navigation systems, portable television, multiple function machines, printer displays, portable game consoles and portable DVD players.

LCD television, which typically utilizes display panels with panel size of 14 inches to 46 inches. We commenced the production of display panels for LCD television in the fourth quarter of 2002.

We design, develop and manufacture our panels to address specific needs of the end-products in which they are used, such as thinness, light weight, resolution, color quality, brightness, low power consumption, touch panel features, fast response time and wide viewing angles. For example, it is important for notebook computer displays to be lightweight and thin, and to have low power consumption, while desktop monitors require high brightness and wider viewing angles.

The following table sets forth the shipment of our products by category for the periods indicated:

Year Ended December 31,

2004

2005

2006

(panels in thousands)

Panels for Computer Products

Panels for notebook computers

4,923.0

7,365.5

14,902.3

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	Year Ended December 31,
	2004		2005		2006
	(panels in thousands)
Panels for desktop monitors		12,150.8		18,652.2		24,169.6
Total panels for computer products		17,073.8		26,017.7		39,071.9
Panels for Consumer Electronics Products		33,697.7		54,598.1		79,483.0
Panels for LCD Television		1,369.4		4,033.6		9,380.7
Total		52,140.9		84,649.4		127,935.6

The following table sets forth our net sales by product category for the periods indicated:

	Year Ended December 31,
	2004		2005		2006
	NT$		NT$		NT$		US$
	(in millions)
Panels for Computer Products
Panels for notebook computers		32,268.5		33,265.0		50,306.3		1,543.6
Panels for desktop monitors		98,999.8		108,623.6		104,832.9		3,216.7
Total panels for computer products		131,268.3		141,888.6		155,139.2		4,760.3
Panels for Consumer Electronics Products		21,043.8		28,636.7		31,331.1		961.4
Panels for LCD Television		14,585.7		46,147.9		104,948.9		3,220.3
Other ⁽¹⁾		1,213.8		715.2		1,687.6		51.8
Total		168,111.6		217,388.4		293,106.8		8,993.8

______________

(1)	Includes revenues generated from sales of raw materials and components and other TFT-LCD panel products, and from service charges.

Computer Products

Panels for Notebook Computers . In 2004, 2005 and 2006, sales of panels for notebook computers accounted for 19.2%, 15.3% and 17.2%, respectively, of our net sales. The increase in notebook computer panels sales as a percentage of our total net sales in 2006 resulted primarily from the decrease in sales of desktop monitor panels as a percentage of total net sales.

The most commonly produced sizes for panels for notebook computers have changed in recent years, partly as a result of migration in TFT-LCD production technology. The most commonly produced panel sizes for notebook computers were from 12.1 inches to 14.1 inches in 2001 and 14.1 and 15.4 inches in 2002, 2003, 2004, 2005 and 2006. As fifth-generation production capacity increases, we expect that 15.4-inch panels will continue to be one of the most commonly produced sizes for notebook computers, with demand for 17-inch panels increasing as well. We typically seek to increase our production of notebook panels of a certain size, one to two quarters ahead of expected product migration towards that panel size.

In 2006, unit sales of our panels for notebook computers were approximately 14.9 million, of which a substantial majority was accounted for by 14.1 inch to 15.4 inch panels . In 2006, our net sales accounted for by panels for notebook computers was approximately NT$50.3 billion.

Panels for Desktop Monitors . We commenced commercial production of desktop monitor panels in the first quarter of 2000. In 2004, 2005 and 2006, sales of panels for desktop monitors accounted for 58.9%, 50.0% and 35.8%, respectively, of our net sales. Sales of panels for desktop monitors as a percentage of our net sales has decreased because of a change in our product mix, particularly the increase in sales of LCD television. We expect that our sales of desktop monitor panels will continue to grow in 2007, primarily as a result of our capacity expansion and demand growth due to the continued trend toward the bundling of TFT-LCD monitors with new computers, the substitution effect of purchasers replacing CRT monitors with TFT-LCD monitors and upgrading to larger-sized TFT-LCD monitors.

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The most commonly produced size of desktop monitors changes as the generation of TFT-LCD manufacturing technology evolves, with manufacturers moving production to panel sizes that make the most efficient use of glass substrates processed by their fabs. In 2006, 17-inch and 19-inch panels were most commonly produced for desktop monitors. In 2006, unit sales of our panels for desktop monitors was approximately 24.2 million, and our net sales accounted for by panels for desktop monitors was approximately NT$104.8 billion, of which a significant portion was accounted for by 17- and 19-inch panels. We expect 17-inch panels will continue to be one of the most commonly produced desktop monitor sizes, with increasing demand for 19-inch panels in 2007.

Consumer Electronics Products

Our panels for consumer electronics products are used in products such as digital cameras, camcorders, mobile phones, car television, car navigation systems, portable DVD players, multiple function machines, printer displays, portable game consoles, portable televisions, portable MP3 players, digital photo frames and ultra-mobile personal computers. Our sales of panels for consumer electronics products as a percentage of our total net sales has varied from 12.5% in 2004 to 13.2% in 2005 to 10.7% in 2006. The markets for our panels for consumer electronics products are typically more stable and less cyclical than the markets for our computer products because of the high level of our involvement in the design process of our customers and the customized nature of consumer electronics panels. Unit sales of our panels for consumer electronics products increased 45.6% to 79,483.0 thousand panels in 2006 from 54,598.1 thousand panels in 2005 primarily as a result of the growing market acceptance of the use of TFT-LCD panels in consumer electronics products and increase demand for products such as portable DVD players and other handheld devices.

LCD Television

Our panels for LCD television consist of panels with a panel size of 14 inches or above. We commenced commercial production of panels for LCD television in the fourth quarter of 2002. Our current portfolio of LCD television panels consists of 14- to 46-inch panels. Our sales of LCD television panels, as a percentage of our net sales, increased from 21.2% in 2005 to 35.8% in 2006. In 2006, approximately half of LCD television panels we produced were 30-inches and above. We believe that our sales of LCD television panels will continue to grow in 2007, primarily as a result of the full ramp-up of our second sixth-generation and our first 7.5-generation fab and expected demand growth for LCD television, while we expect average selling prices of panels for LCD television to continue to decline. Unit sales of our LCD television panels increased to 9,380.7 thousand panels in 2006 from 4,033.6 thousand panels in 2005, primarily as a result of growing market demand and the replacement of CRT televisions with LCD televisions by consumers.

Customers, Sales and Marketing

We sell our panels to original equipment manufacturing service providers such as BenQ, TPV Electronics (Fujian) Company Limited and Proview Optronics (Shenzhen) Co. Ltd. and brand companies such as Hewlett-Packard, Acer, Dell and Samsung. BenQ is a shareholder of our company, and held directly and indirectly 8.47% of our outstanding shares as of April 15, 2007. We also owned a 5.07% equity interest in BenQ as of December 31, 2006. These original equipment manufacturing service providers, most of whose production operations are located in Taiwan and the PRC, use our panels in the products they manufacture on a contract basis for brand companies.

The following table sets forth the geographic breakdown of our net sales by the location of our customers placing orders for the periods indicated:

	Year Ended December 31,
	2004					2005					2006
Region	Net Sales		%			Net Sales		%			Net Sales		%
	(in NT$ millions, except percentages)
Taiwan		68,275		40.6	%		82,473		37.9	%		89,841		30.7	%
Japan		7,365		4.4	%		4,345		2.0	%		18,170		6.2	%
Asia ⁽¹⁾		84,214		50.1	%		116,305		53.5	%		136,293		46.5	%
Europe		4,710		2.8	%		9,361		4.3	%		30,106		10.3	%
United States		1,702		1.0	%		2,761		1.3	%		13,853		4.7	%

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	Year Ended December 31,
	2004					2005					2006
Region	Net Sales		%			Net Sales		%			Net Sales		%
	(in NT$ millions, except percentages)
Others		1,846		1.1	%		2,143		1.0	%		4,844		1.6	%
Total		168,112		100.0	%		217,388		100.0	%		293,107		100.0	%

___________________

(1)	Excludes Japan and Taiwan.

Our sales in Taiwan, as set forth in the table above, represent a significant portion of our net sales for the past three years. A significant portion of these sales were made to original equipment manufacturing service providers who use our panels in the products they manufacture on a contract basis for brand companies worldwide. As orders for LCD television products from Europe and the United States increase, orders placed in Taiwan have accounted for a decreasing portion of our net sales in recent years.

We sell our panels for notebook computers to brand companies and original equipment manufacturing service providers with production operations in Taiwan and the PRC that design and manufacture notebook computers based on the specifications of their brand company customers. Our customers include Hewlett Packard, Acer and Promate. We market our panels to, and negotiate prices with, both our original equipment manufacturing service provider customers and brand customers, as display panels often constitute a significant part of the end product.

We sell our panels for desktop monitors through sales channels similar to those for notebook computers. We supply desktop monitor panels to brand companies and original equipment manufacturing service providers such as BenQ, Dell, Samsung and TPV Electronics (Fujian) Company Limited.

We sell most of our panels for digital still cameras and camcorders to brand companies based in Japan, Korea and the United States. We sell our panels for car televisions primarily to component manufacturers for automotive audio and video products based in the United States. We sell our panels for portable DVD players primarily to original equipment manufacturing service providers and component manufacturers, most of which are located in Taiwan, the PRC and other Asian countries.

We sell a significant portion of our panels for mobile device products to mobile phone brand companies such as Nokia and Motorola, and original equipment manufacturing service providers in the United States, Europe, Japan, Korea and the PRC.

As the end-use market continues to grow for LCD television products, we sell an increasing amount of LCD television products primarily to brand companies based in Japan, Korea and Europe. Orders placed by such brand customers have accounted for an increasing portion of our net sales in recent years. In addition, average price per panel for LCD television products is higher than notebook and desktop monitors.

A significant portion of our net sales is attributable to a small number of our customers. In 2004, 2005 and 2006, our five largest customers accounted for 35.1%, 37.2% and 34.5%, respectively, of our net sales. In addition, some customers individually accounted for more than 10% of our net sales for each of the last three years. BenQ and its subsidiaries accounted for 19.9%, 13.6% and 7.4% of our net sales in 2004, 2005 and 2006, respectively. Since BenQ also provides original equipment manufacturing services for its brand company customers, panels shipped to BenQ include both panels ordered for its own account as well as panels ordered by or on behalf of its brand company customers.

We focus our sales activities on a number of large customers with whom we seek to build close relationships. We appoint a sales manager to serve as the main contact person with each of our major customers. Each product category has its own sales and marketing division, and is further subdivided into smaller teams dedicated to each of our major customers. Each dedicated customer team is headed by an account manager who is primarily responsible for our relationship with that specific customer.

Our customers typically provide monthly non-binding rolling forecasts of their requirements for the coming four months, and typically place purchase orders one month before the expected shipment date. We generally

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provide a limited warranty to our customers, including the provision of replacement parts and after-sale service for our products. In connection with these warranty policies, based on our historical experience, we typically set aside an amount as a reserve to cover these warranty obligations. As of December 31, 2006, our reserve for warranties totaled NT$653.8 million (US$20.1 million). In addition, we are required under several of our sales contracts to provide replacement parts for our products, at agreed prices, for a specified period of time.

We price our products in accordance with prevailing market conditions, giving consideration to the complexity of the product, the order size, the strength and history of our relationship with the customer and our capacity utilization. Purchase prices and payment terms for sales to related parties are not significantly different from those for other suppliers. Our credit policy for sales to related parties and other customers typically requires payment within 30 to 60 days. The average number of collection days extended for sales to our customers for the years ended December 31, 2004, 2005 and 2006, was 29 days, 38 days and 62 days, respectively. We have experienced a significant increase in the number of collection days extended for sales to our customers primarily due to reasons including a shift in our product mix towards consumer LCD television products and our customer mix towards large customers. In general, we extend longer credit terms to our LCD television customers and our large customers compared to customers of our other products and our smaller customers. We believe the terms for those customers and products are comparable to the terms offered by our industry peer competitors. We have not experienced any material problems relating to customer payments.

The TFT-LCD Manufacturing Process

The basic structure of a TFT-LCD panel may be thought of as two glass substrates sandwiching a layer of liquid crystal. The front glass substrate is fitted with a color filter, while the back glass substrate has transistors fabricated on it. A light source called a backlight unit is located at the back of the panel.

The manufacturing process consists of hundreds of steps, but may be divided into three primary steps. The first step is the array process, which involves fabricating transistors on the back substrate using film deposition, lithography and etching. The array process is similar to the semiconductor manufacturing process, except that transistors are fabricated on a glass substrate instead of a silicon wafer. The second step is the cell process, which joins the back array substrate and the front color filter substrate. The space between the two substrates is filled with liquid crystal. The third step is the module-assembly process, which involves connecting additional components, such as driver integrated circuits and backlight units, to the TFT-LCD panel. We established a color filter production facility at one of our fifth-generation fabs with technical assistance from Toppan, one of our color filter suppliers, in order to meet a portion of our color filter requirements. We commenced commercial production of color filters at this facility in October 2003. We also established a color filter production facility at one of our sixth-generation fab in January 2005. In addition, we acquired a color filter production facility along with a sixth-generation fab and one module-assembly facility in October 2006 as a result of our merger with QDI.

The array and cell processes are capital-intensive and require highly automated production equipment. TFT-LCD manufacturers typically design their own fabs and purchase production equipment from various suppliers, most of which are based in Japan. Each TFT-LCD manufacturer combines various equipment according to its manufacturing process technologies to form a TFT-LCD fab. In addition to developing our own manufacturing process technologies, we also license such technologies from other companies, such as FDTC. We have automated our array and cell processes, with the exception of some steps in the cell process, such as panel inspection, panel baking and injection of liquid crystal. In contrast to the array and cell processes, the module-assembly process is highly labor-intensive, as it involves manual labor to assemble the pieces. We started to move a substantial portion of our module-assembly process to Suzhou, PRC in July 2002, as part of our efforts to reduce labor costs and the majority of the module-assembly work is conducted in Suzhou. In October 2006, we acquired a module-assembly facility in Songjiang, PRC as a result of our merger with QDI. We also expect to commence commercial production at our new module-assembly facility in Xiamen, PRC in the second quarter of 2007.

Raw Materials and Components and Suppliers

Our manufacturing operations require adequate supplies of high-quality raw materials and components on a timely basis. We purchase our raw materials and components based on forecasts from our customers, as well as our own assessments of our customers’ needs. We generally prepare forecasts one to four months in advance, depending

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on the raw materials and components, and update this forecast monthly. We source most of our raw materials and components, including critical materials such as glass substrates, color filters, CCFL, polarizer and driver integrated circuits, from a limited group of suppliers. In order to reduce our raw materials and component costs and our dependence on any one supplier, we generally purchase our raw materials and components from multiple sources. We typically do not enter into contracts with our suppliers. However, during periods of supply shortages, we typically enter into supply contracts with suppliers to ensure a stable supply of necessary raw materials and components.

In 2001, we experienced a shortage of glass substrates due to the closure of the production facility of one of our two major suppliers of glass substrates. There was a shortage in the supply of color filters and glass substrates beginning in the second half of 2003 which continued into 2004. In addition, based on announced plans for new TFT-LCD production capacity, there could also be a shortage in the supply of driver integrated circuits. Our operations would be adversely affected if we could not obtain raw materials and components in sufficient quantity and quality. We may also experience difficulties in sourcing adequate supplies for our operations if there is a ramp-up of production capacity by TFT-LCD manufacturers, including our company, without a corresponding increase in the supply of raw materials and components.

Raw materials and components constitute a substantial portion of our cost of goods sold. An increase in the cost of our raw materials may adversely effect our gross margins.

Set forth below are our major suppliers of key raw materials and components in alphabetical order by category:

Glass Substrates	Liquid Crystals	Color Filters	Polarizer	Backlight Units	Driver Integrated Circuits
Asahi Glass	Merck	Cando Corporation ⁽¹⁾	Nitto Denko	Coretronic	Nippon Electric Company

Corning Taiwan	Sojitz Taiwan	Dai Nippon Printing	Optimax	Forhouse	Novatek

Nippon Electric Glass		Toppan CFI ⁽²⁾	Daxon Technology ⁽³⁾	Radiant Opto-Electronics	Raydium Semiconductor ⁽⁴⁾

_______________________

(1)	Cando Corporation has been our equity method investee since November 2003. See “Item 7.B. Related Party Transactions.”

(2)	Toppan CFI has been our equity method investee since August 2006. See “Item 7.B. Related Party Transactions.”

(3)	Daxon Technology is a subsidiary of one of our major shareholders, BenQ. See “Item 7.B. Related Party Transactions.”

(4)	We reduced our indirect ownership in Raydium Semiconductor Corporation to less than 50% in January 2006. As a result, Raydium Semiconductor is no longer a consolidated subsidiary.

We use a large amount of water and electricity in our manufacturing process. We obtain water from government-owned entities and recycle more than 80% of the water that we use in production. We use electricity supplied by Taiwan Power Corporation. We maintain back-up generators that provide electricity in case of power interruptions, which we have experienced from time to time. In September 1999, a power outage caused by a large earthquake resulted in a suspension of production at our fabs for five days. Except for this power outage, power interruptions in general have not materially affected our production processes.

Equipment and Suppliers

We depend on a number of equipment manufacturers that make and sell the equipment that we use in our manufacturing processes. Our manufacturing processes depend on the quality and technological capacity of our equipment. We purchase equipment that is tailored to our specific requirements for our manufacturing processes. The principal types of equipment we use to manufacture TFT-LCD panels include chemical vapor deposition equipment, steppers, developers and coaters.

We made significant purchases of equipment in 2006, and we expect to make significant purchases in 2007, to implement our capacity expansion and technology advancement plans. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.” We purchase equipment from a small number of qualified

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vendors to assure consistent quality and performance. We typically order equipment four to six months or longer in advance of our planned installation.

Competition

The TFT-LCD industry is highly competitive. Most of our competitors operate fabs in Korea, Taiwan, Japan and the PRC. We believe there are no TFT-LCD fabs in the United States or Europe. Our principal competitors are:

LG. Philips LCD and Samsung, in Korea;

Chi Mei Optoelectronics, Chunghwa Picture Tubes, Hannstar Display, Innolux Display and Toppoly Optoelectronics, in Taiwan;

Sharp, Toshiba Matsushita Display Technology, Hitachi and Tottori Sanyo, in Japan; and

SVA-NEC, BOE-OT and Long-Teng Corporation, in the PRC.

The principal elements of competition for customers in the TFT-LCD market include:

price, based in large part on the ability to ramp-up lower cost, “next generation” production facilities before competitors;

product features and quality;

customer service, including product design support;

ability to keep production costs low by maintaining high yield and operating at full capacity;

ability to provide sufficient quantity of products to meet customer demand;

quality of the research and development team;

time-to-market;

superior logistics; and

access to capital.

Quality Control

We have implemented quality inspection and testing procedures at all of our fabs and module-assembly facilities. Our quality control procedures include statistical process controls, which involves sampling measurements to monitor and control the production processes. We perform outgoing quality control based on sampling plans, ongoing reliability tests covering a wide range of application conditions, in-process quality control to prevent potential quality deviations, and other programs designed for process measurement and improvement, reduction of manufacturing costs, maintenance of on-time delivery, increasing in-process production yields and improving field reliability of our products. If a problem is detected, we take steps to contain the problem, conduct defect analyses to identify the cause of the problem and take appropriate corrective and preventive actions.

We visually inspect and test all completed panels to ensure that production standards are met. To ensure the effective and consistent application of our quality control procedures, we provide quality control training to all of our production line employees according to a certification system depending on the particular levels of skills and knowledge required.

We also perform quality control procedures for raw materials and components used in our products. These procedures include testing samples for large batches, obtaining vendor testing reports and testing to ensure compatibility with other raw materials and components, as well as vendor qualification and vendor ratings.

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Our quality control programs have received accredited International Organization of Standards ISO 9001 certifications, as well as qualifications from our customers. In addition, most of our facilities have been certified as meeting the International Organization of Standards ISO 14001 environmental protection standards, with certification for our recently completed fifth-generation fab pending. The International Organization of Standards certification process involves subjecting our manufacturing processes and quality management systems to periodic reviews and observations. International Organization of Standards certification is required by certain European countries in connection with sales of industrial products in those countries. We believe that certification also provides independent verification to our customers regarding the quality control employed in our manufacturing and assembly processes.

Intellectual Property

As of April 30, 2007, we held a total of 3,164 patents, including 1,508 in Taiwan and 811 in the United States. These include patents for TFT-LCD manufacturing processes and products. These patents will expire at various dates from 2009 through 2026. We also have a total of 1,391 pending patent applications in Taiwan, 1,170 in the United States and 2,438 in other jurisdictions, including the PRC, Japan and Korea as of April 30, 2007. In addition, we have registered “AU Optronics” and our corporate logo, “AUO,” as trademarks and service marks in countries and jurisdictions where we operate, including the ROC, PRC, United States, European Union and Korea.

We require all of our employees to sign an employment agreement which prohibits the disclosure of any of our trade secrets, confidential information and proprietary technologies, and we also require our technical personnel to assign to us any inventions related to our business that they develop.

We have licenses to use certain technology and processes from certain companies. In 2004, 2005 and 2006, our running royalties and fixed license and patent fees to companies from which we license intellectual property were NT$1,017.8 million, NT$4,485.2 million and NT$4,946.8 million, respectively, which accounted for 0.6%, 2.1% and 1.7%, respectively of our net sales. The increase in royalty expense in 2006 was primarily due to an increase in royalty payments which are calculated based on net sales or unit sales as our overall sales volume increase and the consolidation of royalty expense of QDI. We expect that our royalty expenses relating to intellectual property licenses will increase in the future due to increases in unit sales.

We intend to continue to file patent applications, where appropriate, to protect our proprietary technologies. We may find it necessary to enforce our patents or other intellectual property rights or defend ourselves against claimed infringement of the rights of others through litigation, which could result in substantial cost and diversion of our resources. We may suffer legal liabilities and financial and reputational damages if we are found to infringe product or process technology rights held by others. We are currently involved in litigation regarding alleged patent infringement. See “Item 8.A.7. Litigation.”

Insurance

We maintain insurance policies on our production facilities, buildings, machinery and inventories covering property damage and damage due to fire, earthquakes, floods, and other natural and accidental perils. Our property insurance covers replacement costs for our assets. As of December 31, 2006, our insurance also included protection from covered losses, including property damage up to maximum coverage of NT$64.1 billion for all of our inventories and NT$530.9 billion for our equipment and facilities. In addition, as of December 31, 2006, we had insurance coverage for business interruptions in the aggregate amount of NT$40.3 billion. See “Item 3. Key Information—Risk Factors—Political Geographical and Economic Risks—Due to the location of our operations in Taiwan and the PRC, we and many of our customers and suppliers are vulnerable to natural disasters and other events outside of our control, which may seriously disrupt our operations.”

We also maintain insurance policies, including director and officer liability insurance, employee group health insurance, travel and life insurance, employer liability insurance, general liability insurance, and policies that provide coverage for risks during the shipment of goods and equipment, as well as during equipment installation at our fabs.

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Environmental Matters

Our manufacturing processes involve the use of hazardous materials and generate a significant amount of waste products, including wastewater, liquid waste products and hazardous gases, which are strictly monitored by local environmental protection bureaus. To meet ROC environmental standards, we employ various types of pollution control equipment for the treatment of hazardous gases, liquid waste, solid waste and the treatment of wastewater and chemicals in our fabs. We control exhaust gas and wastewater on-site. The treatment of solid and liquid wastes is subcontracted to third parties off-site in accordance with pollution control requirements.

We incurred small fines in December 2002 and October 2003 for non-compliance with a waste storage-labeling requirement. In June 2004, we also incurred small fines for failure to update our air pollution emission permit. Following each of the infractions described above, we have taken the necessary steps to obtain the appropriate permit and believe that we are in compliance with the existing environmental laws and regulations in Taiwan.

4.C. Organizational Structure

The following chart sets forth our corporate structure and ownership interest in each of our principal operating subsidiaries and affiliates as of December 31, 2006.

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The following table sets forth summary information for our subsidiaries as of December 31, 2006.

Subsidiary	Main Activities	Jurisdiction of Incorporation	Total Paid-in Capital	Percentage of Our Ownership Interest
			NT$ (in millions)
AU Optronics (L) Corp.	Holding company	Malaysia	8,769.5	100%

AU Optronics Corporation America	Sales services in the United States	United States	32.6	100% ⁽¹⁾

AU Optronics Corporation Japan	Sales services in Japan	Japan	26.1	100% ⁽¹⁾

AU Optronics Europe B.V.	Sales services in Europe	Netherlands	1.9	100% ⁽¹⁾

AU Optronics Korea Ltd.	Sales services in South Korea	South Korea	5.1	100% ⁽¹⁾

AU Optronics Singapore Pte. Ltd.	Sales services in South Asia	Singapore	2.1	100% ⁽¹⁾

AU Optronics (Shanghai ) Corp.	Sales services in the PRC	PRC	32.6	100% ⁽¹⁾

AU Optronics (Xiamen) Corp.	Assembly of TFT-LCD modules in the PRC	PRC	1,629.8	100% ⁽¹⁾

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Subsidiary	Main Activities	Jurisdiction of Incorporation	Total Paid-in Capital	Percentage of Our Ownership Interest
			NT$ (in millions)
AU Optronics (Suzhou) Corp.	Assembly of TFT-LCD modules in the PRC	PRC	6,519.2	100% ⁽¹⁾

Konly Venture Corp.	Venture capital investment	ROC	2,200.0	100%

Darwin Precisions (L) Corp.	Holding company	Malaysia	684.6	50% ⁽¹⁾

Darwin Precisions (Suzhou) Corp.	Manufacturing and assembly of backlight modules and related components in the PRC	PRC	977.9	50% ⁽²⁾

Darwin Precisions (Xiamen) Corp.	Manufacturing and assembly of backlight modules and related components in the PRC	PRC	391.2	50% ⁽²⁾

QDI Development Limited	Holding company	British Virgin Islands	28.2	100%

Quanta Display Japan Inc.	Display design	Japan	27.4	100% ⁽³⁾⁽⁴⁾

QDI International Limited	Holding Company	British Virgin Islands	236.2	100%

Tech-Well (Shanghai) Display Corp.	Assembly of TFT-LCD modules in the PRC	PRC	2,607.7	100% ⁽⁵⁾

Quanta Display Technology Investment Ltd.	Venture capital investment	ROC	594.8	100%

______________

(1)	Indirectly, through our 100% ownership of AU Optronics (L) Corp.

(2)	Indirectly, through our 50% ownership of Darwin Precisions (L) Corp.

(3)	Indirectly, through our 100% ownership of QDI Development Limited.

(4)	In August 2006, operations at Quanta Display Japan Inc. were discontinued and we are currently liquidating its assets.

(5)	Indirectly, through our 100% ownership of QDI International Limited.

In April 2006, we established a new subsidiary, AU Optronics (Xiamen) Corp., to manage and operate our second module-assembly facility in the PRC which we expect to commence operations in the second quarter of 2007. In June 2006, Darwin Precisions (Xiamen) Corp. was established to operate assembly of backlight modules in the PRC. In October 2006, we acquired QDI Development Limited, Quanta Display Japan Inc., QDI International Limited, Tech-Well (Shanghai) Display Corp. and Quanta Display Technology Investment Ltd. through our merger with QDI. In November 2006, AU Optronics Singapore Pte. Ltd. was established to offer sales services in South Asia.

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4.D. Property, Plants and Equipment

We have five principal manufacturing sites in Taiwan and three module-assembly sites in the PRC. With current production facilities utilizing 3.5-generation, fourth-generation, fifth-generation, sixth-generation and 7.5-generation technologies, we have the flexibility to produce a large number of panels of various sizes.

Principal Facilities

The following table sets forth certain information relating to principal facilities as of March 31, 2007. The land in the Hsinchu Science Park, Lungke Science Park and Central Taiwan Science Park on which our facilities are located is leased from the ROC government. The land in the Songjiang Export Processing Zone and Torch Hi-tech Industrial Development Zone on which our facilities are located is leased from the PRC government.

Location	Building Size	Input Substrate Size / Installed Capacity	Commencement of Commercial Production	Primary Use	Owned or Leased
	(in square meters)	(in millimeters)/ (substrates processed per month)

No. 5, Li-Hsin Rd. 6, Hsinchu Science Park, Hsinchu, Taiwan, ROC	69,647	610x720/45,000 ⁽¹⁾	December 1999	Manufacturing of TFT-LCD panels	· Building is owned · Land is leased (expires in December 2020)

No. 1, Li-Hsin Rd. 2, Hsinchu Science Park, Hsinchu, Taiwan, ROC	163,564	610x720/LTPS 20,000 ⁽¹⁾	November 2000	Manufacturing of TFT-LCD panels; business operations; research and development; sales and marketing	· Building is owned · Land is leased (expires in December 2020)

No. 23, Li-Hsin Rd. Hsinchu Science Park, Hsinchu, Taiwan, ROC	105,127	600x720/60,000 ⁽¹⁾	July 1999	Manufacturing of TFT-LCD panels	· Building is owned · Land is leased (expires in January 2017)

189, Hwaya Rd. 2, Kueishan Hwaya Science Park, Taoyuan, ROC*	865,426	620x750/a-Si 35,000 ⁽¹⁾ 1,100x1,300/70,000 ⁽²⁾	December 2001 October 2003	Manufacturing of TFT-LCD panels	· Building is owned · Land is owned

No. 1, Xinhe Rd. Aspire Park 325 Lungtan, Taoyuan Taiwan, ROC	248,231	680x880/60,000 ⁽³⁾ 1,100x1,250/50,000 ⁽²⁾ 1,100x1,300/70,000 ⁽²⁾	February 2001 March 2003 February 2004	Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters	· Building is owned · Land is owned

228, Lungke St., Lungke Science Park, Lungtan, Taoyuan, Taiwan, ROC*	161,425	1,500x1,850/60,000 ⁽⁴⁾	August 2005	Manufacturing of TFT-LCD panels; manufacturing of color filers	· Building is owned · Land is leased (expires in February 2008)

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Location	Building Size	Input Substrate Size / Installed Capacity	Commencement of Commercial Production	Primary Use	Owned or Leased
	(in square meters)	(in millimeters)/ (substrates processed per month)

No. 1 JhongKe Rd. Central Taiwan Science Park Taichung 407, Taiwan, ROC	536,488	1,500x1,850/120,000 ⁽⁴⁾ 1,100x1,300/60,000 ⁽²⁾ 1,950x2,250/20,000 ⁽⁵⁾	March 2005 August 2005 September 2006	Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters	· Building is owned · Land is leased (expires in December 2022)

No. 398, Suhong Zhong Road Suzhou Industrial Park, Suzhou, PRC	226,549	N/A	July 2002	Module and component assembly	· Building is owned · Land is leased (expires in 2051)

No. 3, Lane 58, San-Zhuang Rd., Songjiang Export Processing Zone, Shanghai, China*	210,530	N/A	October 2004	Module and component assembly	· Building is owned · Land is leased (expires in 2052)

No. 1689, North of XiangAn Rd., XiangAn Branch, Torch Hi-tech Industrial Development Zone, Xiamen, China	256,409	N/A	Second Quarter of 2007	Module and component assembly	· Building is owned · Land is leased (expires in 2056)

_________________________

*	Facilities acquired through our merger with QDI.

(1)	3.5-generation fab.

(2)	Fifth-generation fab.

(3)	Fourth-generation fab.

(4)	Sixth-generation fab.

(5)	7.5 generation fab.

Expansion Projects

Set forth below is a description of our principal expansion projects which we expect to finance with cash on hand, long-term debt and cash flow from operations.

Sixth-Generation Fab . Our sixth-generation fab is capable of processing substrates with dimensions of 1,500 x 1,850 millimeters. Our sixth-generation substrate size is designed to produce large-size panels with high efficiency and with capabilities of cutting, for example, eight 32-inch panels, six 37-inch panels or three 42-inch panels in wide format. We acquired our second sixth-generation fab in Lungke Science Park through our merger with QDI which commenced commercial production in August 2005. As of December 31, 2006, this fab had an estimated input capacity of approximately 60,000 substrates per month, which we expect to ramp-up to 90,000 substrates per month by the end of 2007.

7.5-Generation Fab . We established a 7.5-generation fab in order to target the HDTV market and produce LCD TVs that are larger than 40-inches. Our 7.5-generation fab is capable of processing substrates with dimensions of

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1,950 x 2,250 millimeters. Our 7.5-generation substrate size is designed to produce large-size panels with high efficiency and with capabilities of cutting, for example, eight 42-inch panels, six 47-inch panels or three 56-inch panels in wide format. We commenced commercial production at our 7.5-generation fab in September 2006. As of March 31, 2007, our 7.5-generation fab had an estimated input capacity of approximately 20,000 substrates per month, which we expect to ramp-up to 60,000 substrates per month by the end of 2007. We also commenced construction of a second 7.5-generation fab in the third quarter of 2006. As of December 31, 2006, we had purchased approximately NT$30.7 billion of machinery or equipment for our 7.5-generation fabs.

We estimate our capital expenditures to be approximately NT$90.0 billion to NT$95.0 billion for 2007, primarily for the ramp-up of our sixth-generation fab and our 7.5-generation fab and for the construction of our second 7.5-generation fab.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

5.A. Operating Results

Overview

The TFT-LCD industry in general has been characterized by cyclical market conditions. The industry has been subject to significant and rapid downturns as a result of imbalances between excess supply and slowdowns in demand, resulting in sharp declines in average selling prices. For example, average selling prices of our large-size panels fluctuated throughout 2004, increasing by 12.1% between the fourth quarter of 2003 and the second quarter of 2004 and decreasing by 22.2% between the second quarter and the third quarter of 2004 and further decreasing 17.1% between the third quarter and the fourth quarter of 2004. Average selling prices of our large-size panels continued to decline by 6.5% between the fourth quarter of 2004 and the first quarter of 2005 but recovered in the remainder of the year, increasing 12.8% between the first and third quarters of 2005 and increasing another 6.0% between the third and fourth quarters of 2005. Average selling prices of our large-size panels decreased in the first three quarters of 2006 by 25.8% from the fourth quarter of 2005, but increased by 3.9% in the fourth quarter of 2006. On a year-on-year basis, average selling prices of our large-size panels declined 13.7% in 2006 compared to 2005. We expect average selling prices of large-size panels will continue to decrease in 2007.

Our revenues depend substantially on the average selling prices of our panels and are affected by fluctuations in those prices. The average selling prices of our large-size panels, increased by 0.9% in 2004, decreased by 21.1% in 2005 and decreased by 13.7% in 2006. The change in the average selling prices of our panels and decreases in variable costs, depreciation and amortization expenses and other fixed costs associated with the expansion of our production capacity on a per panel basis contributed to the increase in our gross margins from 22.4% in 2003 to 23.6% in 2004. The 21.1% decline in average selling prices in 2005 compared to 2004 contributed to a decline in our gross margins to 13.7% in 2005. Our gross margin further decreased to 10.2% as a result of a 13.7% decline in average selling prices in 2006 compared to 2005. The strong demand for TFT-LCD panels in the first half of 2004 kept average selling prices high; however this was offset by an oversupply of and reduced demand for TFT-LCD panels in the second half of 2004, which resulted in a sharp drop in average selling prices in the second half of 2004. Average selling prices declined in the first quarter of 2005 due to increased capacity; however average selling prices recovered from the second to fourth quarter of 2005 as a result of strong demand fueled by a decrease in panel prices. Average selling prices decreased in the first three quarters of 2006 as a result of oversupply and excess inventory due to lower than expected demand for LCD television purchases from viewers of the 2006 World Cup with a slight recovery in the fourth quarter of 2006 due to a seasonal increase in demand. To meet demand, many TFT-LCD manufacturers, including our company, may expand their capacity. If such expansion in capacity is not matched by a comparable increase in demand, it could lead to overcapacity and declines in the average selling prices of our panels in the future. In addition, we expect that, as is typical in the TFT-LCD industry, the average selling prices for our existing product lines will gradually decline as the cost of manufacturing TFT-LCD panels declines and as the product becomes more commodity-like.

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Production Capacity

We measure the capacity of a fab in terms of the number of substrates and the glass area of substrates that can be produced. As of December 31, 2006, we had an annual capacity to produce approximately 9.1 million square meters of glass area of TFT-LCD panels.

Fab Construction and Ramp-Up Process

Once the design of a new fab is completed, it typically takes six to eight quarters before the fab commences commercial production, during which time we construct the building, install the machinery and equipment and conduct trial production at the fab. An additional two to four quarters are required for the fab to be in a position to produce at the installed capacity and with high production yield, where production yield is the number of good panels produced expressed as a percentage of the total number of panels produced. This process is commonly referred to as “ramp-up.” At the beginning of the ramp-up process, fixed costs, such as depreciation and amortization, other overhead expenses, labor, general and administrative and other expenses, are relatively high on a per panel basis, primarily as a result of the low output. Variable costs, particularly raw materials and component costs, are also relatively high on a per panel basis since production yield is typically low in the early stages of the ramp-up of a fab, resulting in greater waste of raw materials and components. In general, upon the completion of the ramp-up process, a fab is capable of producing at its installed capacity, leading to lower fixed costs per panel as a result of higher output, and lower raw materials and component costs per panel as a result of higher production yield.

We typically construct our new fabs in phases in order to allocate our aggregate capital expenditure across a greater period of time. As a result, the installed capacity in the early phases of production at a new fab is typically lower than the maximum capacity that can be installed at a fab.

Product Mix

Our product mix affects our sales and profitability, as the prices and costs of different size panels may vary significantly. The larger panel sizes command higher prices, but also have higher manufacturing costs. In 2006, an increase in demand for consumer electronic products using larger TFT-LCD panels such as portable DVD players caused a shift in product mix to more medium-sized panels being produced. The continued trend toward notebook computers with larger screens and the continuing demand for TFT-LCD panels for desktop monitors as a result of the replacement of CRT monitors for TFT-LCD monitors led us to shift our product mix to include primarily 14.1-inch and 15.4-inch panels for notebook computers and 15-, 17- and 19-inch panels for desktop monitors. Moreover, a strong demand for LCD television contributed to increased production of LCD television panels with sizes mainly ranging from 20- to 46-inch. Our fifth-generation fabs have enabled us to produce 15-, 17- and 19-inch or larger panels more efficiently. Our sixth and 7.5-generation fabs also enable us to produce 26, 32-, 37-, 40-, 42- and 46-inch LCD television panels. We periodically review and adjust our product mix based on the demand for, and profitability of, the different panel sizes that we manufacture.

Merger with Quanta Display, Inc.

Facing increasing competition in the TFT-LCD industry, such as from Korean companies, Samsung and LG.Philips, we sought to achieve a better competitive position in the industry through resource integration. On October 1, 2006, we completed our merger with QDI, a company incorporated in Taiwan that manufactures and assembles TFT-LCD panels, to strengthen our competitiveness through synergies such as the expansion of production capacity and lowering of raw material costs. Under the terms of the merger agreement dated April 7, 2006, we offered one share of our common stock for every 3.5 shares of outstanding QDI common stock and as a result issued 1,479,110,029 shares of AUO to QDI shareholders.

The common stock issued in connection with the merger had a fair value of NT$67.8 billion and was valued using the average closing price of our common stock of NT$46.89 over a range of trading days (from March 30, 2006 to April 14, 2006, inclusive of both dates) set around the public announcement of the merger on April 7, 2006.

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In connection with the transaction, we recorded NT$14.3 billion of goodwill, NT$3.7 billion of intangible assets and NT$49.8 billion of net tangible assets. We also incurred merger-related expenses of NT$15.9 million, which consisted of NT$9.5 million for legal and other professional fees. The merger was qualified as a tax-free reorganization and we accounted for it using the purchase method of accounting. The results of QDI’s operations have been included in our results of operations beginning on October 1, 2006.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations contained elsewhere in this annual report are based on our audited consolidated financial statements which have been prepared in accordance with ROC GAAP. Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an on-going basis, our management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in detail in Note 2 to our consolidated financial statements included elsewhere herein. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

Revenue is recognized when title to the products and risk of ownership are transferred to the customers, which occurs principally at the time of shipment. We continuously evaluate whether our products meet our inspection standards and can reliably estimate sales returns expected to result from customer inspections. Allowance and related provisions for sales returns are estimated based on historical experience, our management’s judgment, and any known factors that would significantly affect such allowance. Such provisions are deducted from sales in the same period the related revenue is recorded. There have been no changes in this policy for the last three years.

The movements of the allowance for sales returns and discounts are as follows:

	2004			2005			2006
	NT$			NT$			NT$			US$
	(in thousands)
Balance at beginning of year		45,756			698,506			414,086			12,705.9
Provision charged to revenue		696,328			337,828			2,322,856			71,275.1
Allowance assumed from the merger with QDI		—			—			98,190			3,012.9
Write-off		(43,578	)		(622,248	)		(2,001,608	)		(61,417.9	)
Balance at end of year		698,506			414,086			833,524			25,576.0

As of December 31, 2004, 2005 and 2006, the allowance for sales discounts and returns was NT$699 million, NT$414 million and NT$834 million (US$25.6 million), respectively. In 2004, we provided a significant provision for sales returns and discounts as a result of a continuous drop in average selling prices from the second quarter of 2004 to the first quarter of 2005. The provision made in 2005 decreased as compared with that provided in 2004 due to the stabilization of average selling prices in the last quarter of 2005. The provision made in 2006 increased significantly as compared with 2005 due to the drop in average selling prices as a result of oversupply and excess inventory in the first three quarters of 2006.

Long-Lived Assets and Intangible Assets

Under ROC and U.S. GAAP, we review our long-lived assets and identifiable intangible assets, including purchased intangible assets for impairment whenever events or changes in circumstances indicate that the assets may be impaired and the carrying amounts of these assets may not be recoverable. Furthermore, we review our assets

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held for sale for impairment whenever we feel that the expected selling price less cost of these assets may be lower than the carrying amount. Judgments about the fair value of assets held for sale are generally based upon market assumptions about value of similar assets.

Under ROC GAAP, we measure recoverability of our long-lived assets by comparing the carrying amount of an asset to the future net discounted cash flows to be generated by the asset. Under U.S. GAAP, we assess recoverability of our long-lived assets to be held and used by comparing the carrying amount of an asset to its future net undiscounted cash flows. If we consider our assets to be impaired, the impairment we would recognize is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. In 2004, 2005 and 2006, under ROC GAAP we recorded provisions for impairment loss on idle assets of NT$136 million, NT$9 million and NT$6.2 million (US$0.2 million), respectively, classified under non-operating expenses and losses. Under U.S. GAAP, we recorded impairment losses on assets held for sale of NT$223 million and NT$65 million in 2004 and 2005, respectively, classified under operating expenses and losses. We recorded no impairment losses on assets held for sale under operating expenses and losses in 2006.

Intangible assets are recorded at cost or at fair value on the acquisition date and are amortized over the estimated useful lives using the straight-line method. The costs of patents and licenses for the product and process technology for TFT-LCDs and other flat-panel displays are capitalized and amortized on a straight-line basis over their estimated useful lives generally for periods ranging from 3 to 15 years.

We assess the impairment of acquired intangible assets whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable. An impairment loss would be recognized when the sum of the estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Such impairment loss would be measured as the difference between the carrying amount of the asset and its fair value. Our cash flow assumptions are based on historical and forecasted revenue, operating costs, and other relevant factors. If our management's estimates of future operating results change, or if there are changes to other assumptions, the estimate of the fair value of intangible assets could change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on our consolidated financial statements.

Business Combinations

When we acquire businesses, we allocate the purchase price to tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on historical experience and information obtained from the management of the acquired companies. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates.

Under ROC GAAP, effective January 1, 2006 and in accordance with the amended ROC SFAS No. 25 “Business Combinations,” goodwill is no longer amortized but is tested for impairment at least annually or more frequently if events or circumstances indicate it might be impaired. In our assessment, we identified only one cash generating unit. The fair value of the cash generating unit calculated using a cash flow projection of five years was compared to the carrying value of stockholders’ equity.

Under US GAAP, we determined that we have one reporting unit for purposes of testing goodwill for impairment. We compare the carrying amount of total stockholders’ equity to market value on the date of impairment to determine if goodwill is potentially impaired.

Based on the assessments mentioned above, we concluded goodwill as of December 31, 2006 was not impaired under both ROC GAAP and US GAAP.

Allowance for Doubtful Accounts Receivable

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We evaluate our outstanding accounts receivables on a monthly basis for collectibility purposes. Our evaluation includes an analysis of the number of days outstanding for each outstanding accounts receivable account. When appropriate, we provide a provision that is based on the number of days for which the account has been outstanding. The provision provided on each aged account is based on our average historical collection experience and current trends in the credit quality of our customers. There have been no changes in this policy for the last three years.

The movements of the allowance for uncollectible accounts are as follows:

	2004		2005		2006
	NT$		NT$		NT$			US$
	(in thousands)
Balance at beginning of year		81,085		90,306		91,422			2,805.2
Provision charged to expense		9,221		1,116		278,216			8,536.9
Allowance assumed from the merger with QDI		—		—		149,866			4,598.5
Write-off		—		—		(45,479	)		(1,395.5	)
Balance at end of year		90,306		91,422		474,025			14,545.1

As of December 31, 2004, 2005 and 2006, the allowance we established for doubtful accounts was NT$90 million, NT$91 million and NT$474 million (US$14.5 million), respectively. The allowance made in 2006 increased significantly from 2005 due to our assumption of QDI’s allowance for doubtful accounts and an increase in sales.

Realization of Inventory

Provisions for inventory obsolescence and devaluation are recorded when we determine that the amounts that will ultimately be realized are less than their cost basis or when we determine that inventories cannot be liquidated without price concessions, which may be affected by the number of months inventory items remain unsold and their prevailing market prices. Additionally, our analysis of the amount we expect to ultimately realize are partially based upon forecasts of demand for our products and any change to these forecasts. There have been no changes in this policy for the last three years.

As of December 31, 2004, 2005 and 2006, the provision for inventory obsolescence and devaluation was NT$1,031 million, NT$1,344 million and NT$4,263 million (US$130.8 million), respectively, which were classified in cost of goods sold in the statements of income. For the years ended December 31, 2004, 2005 and 2006, we have not made any significant changes to estimates used to determine the provisions for excess and obsolete inventory.

Long-Term Investments

When we have the ability to exercise significant influence over the operating and financial policies of investees (generally those in which we own between 20% and 50% of the investee’s voting shares and/or do not have significant board and management representation) those investments are accounted for using the equity method. The difference between the acquisition cost and the carrying amount of net equity of the investee as of the acquisition date is allocated based upon the pro rata excess of fair value over the carrying value of assets on the investee’s books. Any unallocated difference is treated as investor level goodwill. Prior to January 1, 2006, under ROC GAAP, the amount of unallocated difference is amortized over five years. Commencing January 1, 2006, as required by the amended ROC SFAS No. 5 “Long-term Investments under Equity Method,” it is no longer amortized and the carrying value of the total investment is assessed for impairment. Under U.S. GAAP, such difference is not amortized, but the carrying value of the total investment is assessed for impairment. The allocation of excess basis in equity method investments requires the use of judgments regarding, among other matters, the fair value and estimated useful lives of long lived assets. Changes in those judgments would affect the amount and timing of amounts charged to our statement of income.

Certain investments in which we hold less than a 20% voting interest, but are nonetheless able to exercise significant influence over the operating and financial policies of investees through board representation or other means are also accounted for using the equity method. Significant judgment is required to assess whether we have significant influence. Factors that we consider in making such judgment include, among other matters, participation

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in policymaking processes, material intercompany transactions, interchange of managerial personnel, or technological dependency.

In 2004, we purchased 126,600,000 shares of BenQ, and, as of December 31, 2006, held a 5.07% equity interest in BenQ. As our chairman and chief executive officer is also the chairman and chief executive officer of BenQ and one of our executive officers and directors is also an executive officer and director of BenQ, and we have other commercial relationships with BenQ, we are deemed to have the ability to exercise significant influence over BenQ. As such, we account for our investment in BenQ under the equity method of accounting. The difference between the acquisition cost and the net equity of the investee as of the acquisition date is amortized based on the nature of their source. If the source cannot be identified, such difference was amortized over five years using the straight-line method prior to January 1, 2006. Effective January 1, 2006, the difference is no longer amortized. For the year ended December 31, 2006 and in accordance with ROC SFAS No. 35, we evaluated our investment in BenQ and determined that the investee was in a loss position due to the continuous decline of its stock price for a six month period. We determined that the impairment was other than temporary and therefore recognized an impairment loss of NT$271.1 million, which was calculated based on the difference between the acquisition cost and the fair value of the investment.

Income Taxes

We are subject to the continuous examination of our income tax returns by the ROC tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

As of December 31, 2006, our valuation allowances on deferred tax assets was NT$21,053 million under ROC GAAP. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and net operating losses and investment tax credits utilized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences, net operating losses and investment tax credits, net of the existing valuation allowance as of December 31, 2006.

It is management’s belief that estimates about future taxable income beyond the next two years cannot be objectively and reliably determined given the cyclical nature of the TFT-LCD industry and therefore in determining the necessary amount of required deferred tax asset valuation allowance, estimated future taxable income beyond the two-year period is not considered in our realization analysis.

The estimate of future taxable income required to realize net deferred tax assets as of December 31, 2006 is approximately NT$31,020.0 million. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

Under US GAAP, if a valuation allowance for deferred tax asset is recognized for an acquired entity’s deductible temporary differences or operating loss or tax credit carryforwards at the acquisition date, the tax benefits for those items that are first recognized (that is, by elimination of that valuation allowance) in the financial statements after the acquisition shall be applied (a) first, to reduce to zero any goodwill related to the acquisition, (b) second, to reduce to zero other non-current intangible assets related to the acquisition, and (c) third to reduce income tax expense.

Legal Contingencies

From time to time, we are involved in disputes that arise in the ordinary course of business, and we do not expect this to change in the future. We are currently involved in legal proceedings discussed in “Item 8.A.7. Litigation” and note 21 to our consolidated financial statements.

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When the likelihood of the incurrence of costs related to our legal proceedings is probable and our management has the ability to estimate such costs, we provide for estimates of external legal fees and any probably losses through charges to our consolidated statement of income. These estimates have been based on our assessment of the facts and circumstances at each balance sheet date and are subject to change based upon new information and intervening events.

For those pending legal matters we were involved as of December 31, 2006, no accruals were made for those legal contingencies except for insignificant amounts related to external legal fees.

Results of Operations

The following table sets forth certain of our results of operations data as a percentage of our net sales for the periods indicated:

	Year Ended December 31,
	2004			2005			2006
	%			%			%
Net sales		100.0			100.0			100.0
Cost of goods sold		76.4			86.3			89.8
Gross profit		23.6			13.7			10.2
Operating expenses		6.6			5.9			5.3
Selling		1.5			1.9			2.3
General and administrative		2.1			1.8			1.4
Research and development		3.0			2.2			1.6
Operating income		17.0			7.8			4.9
Net non-operating loss		(0.4	)		(0.4	)		(1.4	)
Income before income tax		16.6			7.4			3.5
Income tax expenses		0.0			0.2			0.4
Net income		16.6			7.2			3.1

Our gross, operating and net margins have decreased from 2004 to 2006. In 2005, our LCD television business represented an increasing proportion of our net sales. LCD television products required a large capital expenditure which affected our profitability. In 2006, oversupply in the TFT-LCD industry and a shift in our product mix to LCD television products contributed to a decrease in our profitability.

For the Years Ended December 31, 2006 and 2005

Net Sales

Net sales increased 34.8% to NT$293,106.8 million (US$8,993.8 million) in 2006 from NT$217,388.4 million in 2005 due to a 37.2% increase in net sales of large-size panels and a 15.2% increase in net sales of small- and medium-size panels. Net sales of large-size panels increased 37.2% to NT$260,753.1 million (US$8,001.0 million) in 2006 from NT$190,040.7 million in 2005. This increase was primarily due to an increases in unit sales and production capacity (as a result of our capacity expansion and the addition of production capacity in the fourth quarter from QDI production facilities), partially offset by a decrease in average selling prices. Large-size panels sold increased 59.1% to 48,764.0 thousand panels in 2006 from 30,654.6 thousand panels in 2005. The average selling price per panel of our large-size panels decreased 13.7% to NT$5,347 (US$164.1) in 2006 from NT$6,199 in 2005, primarily as a result of a decrease in average selling prices in the first three quarters of 2006 resulting from an oversupply of panels in the TFT-LCD industry. The increase in unit sales of large-size panels was due to our expanded production capacity and stimulated demand as a result of decreasing average selling prices. The increased demand was primarily due to increased demand for LCD televisions and notebook computers, and consumers continuing to replace their CRT monitors with TFT-LCD monitors.

Net sales of small- to medium-size panels increased 15.2% to NT$30,666.1 million (US$941.0 million) in 2006 from NT$26,632.5 million in 2005. The increase in net sales of small- to medium-size panels was primarily due to

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an increase in unit sales. Unit sales of our small- to medium-size panels increased 46.6% to 79,171.7 thousand panels in 2006 from 53,994.8 thousand panels in 2005. The average selling price per panel of our small- to medium-size panels decreased 21.5% to NT$387 (US$11.9) in 2006 from NT$493 in 2005, primarily as a result of an oversupply of panels in the TFT-LCD industry. The increase in unit sales of small- to medium-size panels was primarily due to new products which use small- to medium-size panels being introduced in the market, resulting in new customers, and the growing acceptance and use of TFT-LCD panels for consumer electronics products.

Cost of Goods Sold

Cost of goods sold increased 40.4% to NT$263,256.5 million (US$8,077.8 million) in 2006 from NT$187,540.4 million in 2005. This increase was primarily as a result of an increase in our requirements for raw materials and components and an increase in depreciation and amortization expenses. Raw materials and component costs increased 41.5% in 2006 as compared to 2005 primarily as a result of an increase in unit sales of our panels, partially offset by a decrease in average market prices of raw materials. Overhead expenses, including depreciation and amortization expenses, increased 38.4% in 2006 compared to 2005, primarily due to increased production costs and capacity at our fabs and increased depreciation expenses associated with our first sixth-generation and 7.5-generation fabs. Direct labor costs increased 34.2% in 2006 compared to 2005, primarily as a result of an increased number of employees due to our increased production capacity in the ramp-up of our first sixth-generation and 7.5-generation fabs.

As a percentage of net sales, cost of goods sold increased to 89.8% in 2006 from 86.3% in 2005. This increase was primarily as a result of the increase in cost of goods sold per panel and a decrease in average selling prices for our large-size panels.

Gross Profit

Gross profit was NT$29,850.3 million (US$915.9 million) in 2006 compared to NT$29,848.0 million in 2005. Gross margin, which is gross profit divided by net sales, was 10.2% in 2006 as compared to 13.7% in 2005. The reduction in our gross margin was primarily as a result of an increase in our cost of goods sold of 40.4%, offset by an increase in sales of 34.8%.

Under U.S. GAAP, gross profit increased 5.6% to NT$23,372.0 million (US$717.2 million) in 2006 from NT$22,126.5 million in 2005. Gross margin under U.S. GAAP was 8.0% in 2006 as compared to 10.2% in 2005. The reduction in our gross margin under U.S. GAAP was primarily as a result of an increase in our cost of goods sold and, to a lesser extent, lower employee bonus expenses in 2006.

Operating Expenses

Operating expenses increased 21.6% to NT$15,634.0 million (US$479.7 million) in 2006 from NT$12,859.3 million in 2005. As a percentage of net sales, operating expenses decreased to 5.3% in 2006 from 5.9% in 2005. The increase in operating expenses was primarily as a result of an increase in unit sales of our panels in 2006 and the consolidation of operating expenses of QDI. Selling expenses increased 68.7% to NT$6,776.3 million (US$207.9 million) in 2006 from NT$4,016.7 million in 2005, primarily due to increases in royalties paid and transportation costs as a result of increased sales. Selling expenses as a percentage of net sales increased to 2.3% in 2006 from 1.9% in 2005. General and administrative expenses increased 3.4% to NT$4,094.9 million (US$125.6 million) in 2006 from NT$3,960.4 million in 2005, primarily due to the growth of our business as a result of an increase in sales and production capacity. General and administrative expenses as a percentage of net sales decreased to 1.4% in 2006 from 1.8% in 2005. Research and development expenses decreased 2.4% to NT$4,762.8 million (US$146.1 million) in 2006 from NT$4,882.3 million in 2005, primarily due to a reduction in technology transfer fees as we ceased to amortize technology transfer fees for certain contracts that have expired. Research and development expenses as a percentage of net sales decreased to 1.6% in 2006 from 2.2% in 2005.

Under U.S. GAAP, operating expenses increased 25.1% to NT$15,819.3 million (US$485.4 million) in 2006 from NT$12,642.7 million in 2005. As a percentage of net sales, operating expenses decreased to 5.4% in 2006 from 5.9% in 2005. The increase in operating expenses was primarily due to an increase in selling expenses under U.S. GAAP, which increased 86.5% to NT$5,407.6 million (US$166.0 million) in 2006 from NT$2,899.9 million in

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2005, primarily due to an increase in transportation costs as a result of increased sales. Selling expenses as a percentage of net sales increased to 1.8% in 2006 from 1.3% in 2005. Research and development expenses increased 9.3% to NT$4,877.6 million (US$149.7 million) in 2006 from NT$4,462.9 million in 2005, primarily due to an increase in depreciation expenses for research and development equipment. Research and development expenses as a percentage of net sales decreased to 1.7% in 2006 from 2.1% in 2005. General and administrative expenses increased 4.8% to NT$5,534.1 million (US$169.8 million) in 2006 from NT$5,279.9 million in 2005. General and administrative expenses as a percentage of net sales decreased to 1.9% in 2006 from 2.4% in 2005.

Operating Income and Operating Margin

As a result of the foregoing, operating income decreased 16.3% to NT$14,216.3 million (US$436.2 million) in 2006 from NT$16,988.7 million in 2005, and operating margin decreased to 4.9% in 2006 from 7.8% in 2005.

Under U.S. GAAP, as a result of the foregoing, operating income decreased 20.4% to NT$7,552.6 million (US$231.7 million) in 2006 from NT$9,483.8 million in 2005, and operating margin decreased to 2.6% in 2006 from 4.4% in 2005.

Net Non-Operating Expenses and Losses

We had net non-operating expenses and losses of NT$4,016.0 million (US$123.2 million) in 2006 compared to net non-operating expenses and losses of NT$894.1 million in 2005. We had higher net non-operating expenses and losses in 2006 as compared to 2005 primarily as a result of increases in net interest expense and investment loss in equity method investments which was partially offset by an increase in interest income and other income. We had a net interest expense of NT$2,265.5 million (US$69.5 million) in 2006 compared to a net interest expense of NT$1,086.6 million in 2005, principally as a result of our assumption of QDI debt and an increase in the amount of average outstanding debt. We had a net foreign currency exchange gain of NT$598.3 million (US$18.4 million) in 2006 and a net gain on other income of NT$218.9 million (US$6.7 million). In addition, due to BenQ’s continuous loss position, we recorded NT$1,491.8 million (US$45.8 million) of equity loss in 2006, which represented 87.7% of our total loss reported for equity method investments in 2006. In 2006, we also recorded NT$271.1 million (US$8.3 million) of impairment loss in connection with our BenQ investment based on our assessment.

Under U.S. GAAP, we had net non-operating expenses and losses of NT$5,330.3 million (US$163.6 million) in 2006 compared to net non-operating expenses and losses of NT$646.7 million in 2005. We had higher net non-operating expenses and losses in 2006 as compared to 2005 primarily as a result of our assumption of QDI debt, including its convertible bonds, which resulted in an increase in net interest expenses. Under U.S. GAAP Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities,” the two overseas convertible bonds outstanding as of December 31, 2006 were deemed to contain embedded derivative features, which require bifurcation and accounted for at fair value, resulting in higher interest expense recorded in 2006.

Income Tax Expense

We recorded an income tax expense of NT$1,068.3 million (US$32.8 million) in 2006 compared to an income tax expense of NT$473.4 million in 2005. While we used a portion of available tax credits to offset our income tax payable, the amount of tax credits available to be applied in any year, except for the final year in which such tax credit expires, is limited to 50% of the income tax payable for that year. There is no limitation on the amount of tax credits available to be applied in the final year. Our income tax expense increased in 2006 primarily due to less investment tax credit available to be applied in 2006 as compared to 2005.

Under U.S. GAAP, we recorded an income tax expense of NT$1,059.2 million (US$32.5 million) in 2006 compared to an income tax expense of NT$473.4 million in 2005. Our income tax expense increased in 2006 primarily due to less investment tax credit available to be applied in 2006 as compared to 2005.

Net Income

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As a result of the foregoing, net income decreased 41.8% to NT$9,093.4 million (US$279.0 million) in 2006 from NT$15,621.2 million in 2005.

Under U.S. GAAP, as a result of the foregoing, net income decreased 86.5% to NT$1,173.2 million (US$36.0 million) in 2006 from NT$8,678.2 million in 2005.

For the Years Ended December 31, 2005 and 2004

Net Sales

Net sales increased 29.3% to NT$217,388.4 million (US$6,670.4 million) in 2005 from NT$168,111.6 million in 2004 due to a 28.3% increase in net sales of large-size panels and a 38.7% increase in net sales of small- and medium-size panels. Net sales of large-size panels increased 28.3% to NT$190,040.7 million (US$5,831.3 million) in 2005 from NT$148,130.6 million in 2004. This increase was primarily due to an increase in unit sales, partially offset by a decrease in average selling prices. Large-size panels sold increased 62.6% to 30,654.6 thousand panels in 2005 from 18,851.4 thousand panels in 2004. The average selling price per panel of our large-size panels decreased 21.1% to NT$6,199 (US$190.2) in 2005 from NT$7,858 in 2004, primarily as a result of a decrease in average selling prices in the first half of 2005 resulting from an oversupply of panels in the TFT-LCD industry. The increase in unit sales of large-size panels was due to our expanded production capacity and stimulated demand as a result of decreasing average selling prices. The increased demand was primarily due to increased demand for LCD televisions and notebook computers, and consumers continuing to replace their CRT monitors with TFT-LCD monitors.

Net sales of small- to medium-size panels increased 38.7% to NT$26,632.5 million (US$817.2 million) in 2005 from NT$19,208.0 million in 2004. The increase in net sales of small- to medium-size panels was primarily due to an increase in unit sales. Unit sales of our small- to medium-size panels increased 62.2% to 53,994.8 thousand panels in 2005 from 33,289.5 thousand panels in 2004. The average selling price per panel of our small- to medium-size panels decreased 14.6% to NT$493 (US$15.1) in 2005 from NT$577 in 2004, primarily as a result of an oversupply of panels in the TFT-LCD industry. The increase in unit sales of small- to medium-size panels was primarily due to new products which use small- to medium-size panels being introduced in the market, resulting in new customers, and the growing acceptance and use of TFT-LCD panels for consumer electronics products.

Cost of Goods Sold

Cost of goods sold increased 46.0% to NT$187,540.4 million (US$5,754.5 million) in 2005 from NT$128,468.3 million in 2004. This increase was primarily as a result of an increase in our requirements for raw materials and components and an increase in depreciation and amortization expenses. Raw materials and component costs increased 50.1% in 2005 as compared to 2004, primarily as a result of an increase in unit sales of our panels. While we expected the average market prices of raw materials and components to decline in 2005 compared to 2004, despite the fluctuation of market prices for glass substrates, color filters and driver integrated circuits throughout 2005, the average market prices of raw materials and components remained relatively stable in 2005 compared to 2004. Overhead expenses, including depreciation and amortization expenses, increased 39.7% in 2005 compared to 2004, primarily due to increased production costs and capacity at our fabs and increased depreciation expenses associated with our sixth-generation fab and our third fifth-generation fab, both of which commenced commercial production in 2005. Direct labor costs increased 23.3% in 2005 compared to 2004, primarily as a result of an increased number of employees due to our increased production capacity, the ramp-up of our third fifth-generation fab and sixth-generation fab.

As a percentage of net sales, cost of goods sold increased to 86.3% in 2005 from 76.4% in 2004. This increase was primarily as a result of a significant decrease in average selling prices for our large-size panels which offset the decrease in cost of goods sold per panel. The decrease in our cost of goods sold per panel for large-size panels was primarily as a result of lower raw material and component costs per panel for large-size panels.

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Gross Profit

Gross profit decreased 24.7% to NT$29,848.0 million (US$915.9 million) in 2005 from NT$39,643.3 million in 2004. Gross margin was 13.7% in 2005 as compared to 23.6% in 2004. The reduction in our gross margin was primarily as a result of an increase in our cost of goods sold and the decline in average selling prices of our products due to the commoditization of TFT-LCD products.

Under U.S. GAAP, gross profit decreased 32.7% to NT$22,126.5 million (US$678.9 million) in 2005 from NT$32,855.6 million in 2004. Gross margin, which is gross profit divided by net sales, was 10.2% in 2005 as compared to 19.5% in 2004. The greater decrease in gross margin under U.S. GAAP was primarily as a result of royalty expenses which, under U.S. GAAP, is recognized as cost of goods sold instead of operating expense. Under U.S. GAAP, royalty expenses increased 20.1% to NT$3,685.3 million (US$113.1 million) in 2005 from NT$3,067.8 million in 2004, primarily due to several new technology license agreements we entered into in 2005, some of which contained one-time technology fee payments.

Operating Expenses

Operating expenses increased 16.5% to NT$12,859.3 million (US$394.6 million) in 2005 from NT$11,036.0 million in 2004. As a percentage of net sales, operating expenses decreased to 5.9% in 2005 from 6.6% in 2004. The increase in operating expenses was primarily as a result of an increase in unit sales of our panels in 2005. Selling expenses increased 64.1% to NT$4,016.7 million (US$123.2 million) in 2005 from NT$2,447.1 million in 2004, primarily due to increases in royalties paid and transportation costs as a result of increased sales. Selling expenses as a percentage of net sales increased to 1.9% in 2005 from 1.5% in 2004. General and administrative expenses increased 10.7% to NT$3,960.4 million (US$121.5 million) in 2005 from NT$3,577.3 million in 2004, primarily as a result of the ramp-up costs at our third fifth-generation fab and our sixth-generation fab prior to commercial production at such facilities and the establishment of our 7.5-generation fab. General and administrative expenses as a percentage of net sales decreased slightly to 1.8% in 2005 from 2.1% in 2004. Research and development expenses decreased 2.6% to NT$4,882.3 million (US$149.8 million) in 2005 from NT$5,011.5 million in 2004, primarily due a reduction in technology transfer fees as we ceased to amortize technology transfer fees for certain contracts that have expired. Research and development expenses as a percentage of net sales decreased to 2.2% in 2005 from 3.0% in 2004.

Under U.S. GAAP, operating expenses slightly decreased to NT$12,642.7 million (US$387.9 million) in 2005 from NT$12,686.8 million in 2004. As a percentage of net sales, operating expenses decreased to 5.9% in 2005 from 7.5% in 2004. The decrease in operating expenses was primarily due to a decrease in general and administrative expenses recognized under U.S. GAAP. General and administrative expenses decreased 15.3% to NT$5,279.9 million (US$162.0 million) in 2005 from NT$6,232.8 million in 2004, primarily as a result of a decrease in employee bonuses granted. General and administrative expenses as a percentage of net sales decreased to 2.4% in 2005 from 3.7% in 2004. Selling expenses increased 38.5% to NT$2,899.9 million (US$89.0 million) in 2005 from NT$2,093.2 million in 2004, primarily due to increases in transportation costs as a result of increased sales. Selling expenses as a percentage of net sales remain relatively unchanged in 2005 and in 2004. Research and development expenses increased 2.3% to NT$4,462.9 million (US$136.9 million) in 2005 from NT$4,360.8 million in 2004, primarily due to an increase in depreciation expenses for research and development equipment. Research and development expenses as a percentage of net sales decreased to 2.1% in 2005 from 2.6% in 2004.

Operating Income and Operating Margin

As a result of the foregoing, operating income decreased 40.6% to NT$16,988.7 million (US$521.3 million) in 2005 from NT$28,607.3 million in 2004, and operating margin decreased to 7.8% in 2005 from 17.0% in 2004.

Under U.S. GAAP, as a result of the foregoing, operating income decreased 53.0% to NT$9,483.8 million (US$291.0 million) in 2005 from NT$20,168.8 million in 2004, and operating margin decreased to 4.4% in 2005 from 12.0% in 2004.

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Net Non-Operating Expenses and Losses

We had net non-operating expenses and losses of NT$894.1 million (US$27.4 million) in 2005 compared to net non-operating expenses and losses of NT$583.1 million in 2004. We had higher net non-operating expenses and losses in 2005 as compared to 2004 primarily as a result of an increase in net interest expense and an investment loss in equity method investments which was partially offset by an increase in foreign exchange gain. We had a net interest expense of NT$1,086.6 million (US$33.3 million) in 2005 compared to a net interest expense of NT$621.4 million in 2004, principally as a result of an increase in the amount of average outstanding debt and higher interest rates. We had a loss on equity method investments of NT$588.6 million (US$18.1 million) in 2005 compared to a gain of NT$34.3 million in 2004.

Under U.S. GAAP, we had net non-operating expenses and losses of NT$646.7 million (US$19.8 million) in 2005 compared to net non-operating expenses and losses of NT$1,592.9 million in 2004. We had lower net non-operating expenses and losses in 2005 as compared to 2004 primarily as a result of an increase in foreign currency exchange gain and no impairment loss on securities available-for-sale which was partially offset by an increase in net interest expense and investment loss. We recognized other-than-temporary impairment losses on securities available-for-sale of NT$922.9 million in 2004 compared to none in 2005. We had a foreign currency exchange gain of NT$645.6 million (US$19.8 million) in 2005 compared to NT$85.1 million in 2004.

Income Tax Expense

We recorded an income tax expense of NT$473.4 million (US$14.5 million) in 2005 compared to an income tax expense of NT$61.3 million in 2004. While we used a portion of available tax credits to offset our income tax payable, the amount of tax credits available to be applied in any year, except for the final year in which such tax credit expires, is limited to 50% of the income tax payable for that year. There is no limitation on the amount of tax credits available to be applied in the final year. Our income tax expense increased in 2005 primarily due to less final year investment tax credit available to be applied in 2005 as compared to 2004.

Under U.S. GAAP, we recorded an income tax expense of NT$473.4 million (US$14.5 million) in 2005 compared to an income tax expense of NT$463.4 million in 2004. Our income tax expense increased in 2005 primarily due to less final year investment tax credit available to be applied in 2005 as compared to 2004.

Extraordinary Item

Under U.S. GAAP, we recorded an extraordinary item of NT$308.7 million (US$9.5 million) in 2005, representing our proportionate share of extraordinary gain reported by our equity method investee, BenQ, resulting from its acquisition of Siemens’ mobile phone business in October 2005.

Net Income

As a result of the foregoing, net income decreased 44.1% to NT$15,621.2 million (US$479.3 million) in 2005 from NT$27,962.9 million in 2004.

Under U.S. GAAP, as a result of the foregoing, net income decreased 52.1% to NT$8,678.2 million (US$266.3 million) in 2005 from NT$18,112.5 million in 2004.

Inflation

We do not believe that inflation in Taiwan has had a material impact on our results of operations.

Taxation

The corporate income tax rate in Taiwan applicable to us is 25%. Pursuant to the Statute of Income Basic Tax Amount (the “IBTA Statute”) announced in late 2005, an alternative minimum tax system became effective on January 1, 2006 in Taiwan. When a taxpayer’s income tax amount is less than the basic tax amount (“BTA”), a taxpayer is required to pay the regular income tax and the difference between the BTA and the regular income tax amount. For enterprises, BTA is determined using regular taxable income plus specific add-back items applied with

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a tax rate ranging from 10% to 12%. The add-back items include exempt capital gain from non-publicly traded security transactions and exempt income under tax holidays. Currently, the tax rate set by the tax authority is 10%. There are grandfathered treatments from the tax holidays approved by the tax authorities before IBTA Statute took effect. The IBTA Statute does not have a significant impact to our financial statements.

Recognition of Deferred Tax Assets

Our valuation allowance provided on deferred tax assets is calculated differently under ROC GAAP than under U.S. GAAP. This difference has a significant impact on us because we have a significant amount of deferred tax assets as a result of the various tax credits available to us under ROC governmental tax incentive programs and net operating loss carryforwards. Please see note 25 to our consolidated financial statements included elsewhere in this annual report for further discussion and quantification of these differences. The net deferred income tax assets we are able to recognize under ROC GAAP as of December 31, 2006 amounted to NT$5,103.0 million (US$156.6 million). This recognition of net deferred tax assets under ROC GAAP resulted primarily from the ability to consider our projection of income before tax for future years. If we do not achieve the projection of income before tax for future years, the amount of the deferred tax assets recognized may be significantly reduced. See also “—Operating Results—Critical Accounting Policies—Income Taxes.”

Tax Exemptions

Based on our status as a company engaged in the TFT-LCD business in Taiwan, all income attributable to the use of equipment that we purchase, in part or in whole, with proceeds we raise through share offerings, may be exempted from corporate income tax in Taiwan if our shareholders determine to allow us, instead of the shareholders themselves, to use these tax exemptions. In addition, income attributable to the use of equipment that we purchase, in whole or in part, with retained earnings that we capitalize, may be exempted from corporate income tax in Taiwan. These exemptions typically apply for four or five consecutive years, commencing in a year to be designated by us within two years following the commencement of commercial production using such equipment. We set forth below certain information with respect to our tax exemptions:

Share offerings in 1999 by Unipac for the purchase of equipment used at two of our 3.5-generation fabs, and share offering in 1999 by Acer Display for the purchase of equipment used at our fourth-generation fab.

The tax exemption period relating to the equipment purchased for our second 3.5-generation fab is four years and will expire in 2008.

The tax exemption period relating to our fourth-generation fab commenced in 2005 and will expire in 2009.

Share offering in 1996 by Acer Display for the purchase of equipment used at our 3.5-generation fab.

The tax exemption period commenced in 2003 and will expire in 2007.

Share offerings in 2001 for the purchase of equipment used at our fourth-generation fab.

The tax exemption period commenced in 2005 and will expire in 2009.

Capitalization of retained earnings in 2001 for the purchase of equipment used at our 3.5-generation fab and fifth-generation fab.

The tax exemption period is five years for our 3.5-generation fab and fifth-generation fab.

We have not yet designated the year from which we will use this tax exemption.

Capitalization of retained earnings in 2003 for the purchase of equipment used at our fifth-generation fab.

The tax exemption period is five years.

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We have not yet received all required government approvals and have not designated the year from which we will use this tax exemption.

Issuance of ADS in 2002 for the purchase of equipment used at our fifth-generation fab.

The tax exemption period is five years.

We have not received all required government approvals and have not yet designated the year from which we will use this tax exemption.

Capitalization of retained earnings in 2004 for the purchase of equipment used at our sixth-generation fab.

The tax exemption period is five years.

We have not received all required government approvals and have not yet designated the year from which we will use this tax exemption.

Issuance of ADS in 2004 for the purchase of equipment used at our fifth-generation fab.

The tax exemption period is five years.

We have not received all required government approvals and have not yet designated the year from which we will use this tax exemption.

Capitalization of retained earnings in 2005 for the purchase of equipment used at our 7.5-generation fab.

The tax exemption period is five years.

We have not received all required government approvals and have not yet designated the year from which we will use this tax exemption.

Issuance of ADS in 2005 for the purchase of equipment used at our sixth-generation and 7.5-generation fabs.

The tax exemption period is five years.

We have not received all required government approvals and have not yet designated the year from which we will use this tax exemption.

If we make a qualified rights offering, our shareholders will be entitled, pursuant to a majority vote at a shareholders’ meeting held within two years after the rights offering, to elect to receive a tax credit for individual shareholders of up to 10% (which percentage is decreased by 1% every two years from 2000) or for corporate shareholders of up to 20% of their subscription amount against taxes payable within five years after expiration of the first three years of investment, during which period such shareholders are required to hold onto their investment in order to utilize the tax credit. For individual holders, except for the last year of that period, the tax credit deductible shall not exceed 50% of the total income tax payable by such shareholder in a particular year. Even if the shareholders elect to receive the shareholders’ tax credit, it is unlikely that ADS holders would be able to benefit from such tax credits. The ROC statute governing this tax credit does not expressly prohibit holders of ADSs from benefiting from such tax credit. However, in practice, even if an ADS holder may have other ROC sources of income against which to use the tax credit, ADS holders would not be able to prove that they meet the holding requirement necessary to claim the tax credit.

Loss Carryforwards

As of December 31, 2006, there are no loss carryforwards available.

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Tax Credits

We also benefit from certain tax credits under ROC law that may be applied toward reducing our tax liabilities. Prior to April 2002, we received tax credits at a rate of 10% of the purchase price in connection with our purchase of imported equipment and at a rate of 20% of the purchase price in connection with our purchase of locally manufactured equipment. As a result of the ROC becoming a member of the World Trade Organization, the ROC Ministry of Economic Affairs amended the tax credit rules in April 2002 to adopt a tax credit at a rate of 13% to be applied to the purchase of equipment, regardless of the location of production of the equipment. This rate was subsequently reduced to 11% in July 2004 and further reduced to 7% in March 2006. We also receive tax credits at a rate of 10% for the purchase of production technology and at a rate of 13% for the purchase of pollution control equipment which have been further reduced to 5% and 7%, respectively, in March 2006. As of December 31, 2006, we had accumulated NT$22,764.2 million (US$698.5 million) of these tax credits. These tax credits expire four years after the end of the year in which we receive the equipment. As of December 31, 2006, NT$4,148.0 million (US$127.3 million), NT$3,052.8 million (US$93.7 million), NT$9,572.9 million (US$293.7 million) and NT$5,990.6 million (US$183.8 million) of these tax credits are expected to expire in 2007, 2008, 2009 and 2010, respectively.

We also benefit from other tax credits of up to 30% of certain research and development and employee training expenses. If the amount of these expenses that we incur in any year exceeds the average of such expenses for the preceding two years, an additional 50% of the excess amount may be included in the applicable tax credit for such year. As of December 31, 2006, we had accumulated NT$2,406.3 million (US$73.8 million) of these tax credits. These tax credits expire four years after the year expenses are incurred. As of December 31, 2006, NT$320.1 million (US$9.8 million), NT$665.3 million (US$20.4 million), NT$787.1 million (US$24.2 million) and NT$633.7 million (US$19.4 million) of these tax credits are expected to expire in 2007, 2008, 2009 and 2010, respectively.

Tax on Retained Earnings

In 1997, the ROC Income Tax Law was amended to integrate the corporate income tax and shareholder dividend tax. Under such amendment, after-tax earnings generated from January 1, 1998 and not distributed to shareholders as dividends in the following year will be subject to a 10% retained earnings tax. According to the amendment to the ROC Income Tax Law, which came into effect on June 1, 2006, commencing from 2005, the undistributed retained earnings should be calculated in accordance with our audited financial statements rather than our tax returns submitted to the ROC taxation authority. See “Item 10.E. —Taxation—ROC Tax Considerations—Retained Earnings Tax.” As a result, if we do not distribute as dividends in any year all of our annual retained earnings generated in the preceding year, our applicable corporate income tax rate may exceed 25% for such year.

5.B. Liquidity and Capital Resources

We need cash primarily for capacity expansion and working capital. Although we have historically been able to meet our working capital requirements through cash flow from operations, our ability to expand our capacity has largely depended upon, and to a certain extent will continue to depend upon, our financing capability through the issuance of equity securities, long-term borrowings and the issuance of convertible and other debt securities. If adequate funds are not available, whether on satisfactory terms or at all, we may be forced to curtail our expansion plans, including plans for newer generation fabs. Our ability to meet our working capital needs from cash flow from operations will be affected by our business conditions which in turn may be affected by several factors. Many of these factors are outside of our control, such as economic downturns and declines in the average selling prices of our products caused by oversupply in the market. The average selling prices of our existing product lines are reasonably likely to be subject to further downward pressure in the future. To the extent that we do not generate sufficient cash flow from our operations to meet our cash requirements, we may need to rely on external borrowings and securities offerings. Other than as described below in “—Off-Balance Sheet Arrangements,” we have not historically relied, and we do not plan to rely in the foreseeable future, on off-balance sheet financing arrangements to finance our operations or expansion.

As of December 31, 2006, we had current assets of NT$152,742.6 million (US$4,686.8 million) and current liabilities of NT$167,316.9 million (US$5,134.0 million). We expect to meet our working capital requirements as they become due and comply with current ratio covenants in our long-term loans and facilities through cash flow

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from operations, supplemented as necessary by financing activities. In addition, we can drawdown on our existing credit facilities which would increase our current assets without affecting our current liabilities.

As of December 31, 2006, our primary source of liquidity was NT$43,925.5 million (US$1,347.8 million) of cash and cash equivalents and NT$1,848.8 million (US$56.7 million) of financial assets available-for-sale. As of December 31, 2006, we had total short-term credit lines of NT$29,418.4 million (US$902.7 million), of which we had borrowed NT$3,729.5 million (US$114.4 million). All of our short-term facilities are revolving with a term of one year, which may be extended for terms of one year each with lender consent. We are subject to restrictions on the sale, lease, transfer or other disposal of our assets under some of our short-term loan facilities. Our repayment obligations under our short-term loans are unsecured. We believe that our existing credit lines under our short-term loans, together with cash generated from our operations, are sufficient to finance our current working capital needs.

As of December 31, 2006, we had outstanding long-term borrowings of NT$182,900.3 million (US$5,612.2 million). The interest rates in respect of these long-term borrowings are variable, and as of December 31, 2006 ranged between 2.54% and 6.49% per year.

In November 2003, we entered into a NT$35.0 billion seven-year syndicated credit facility, for which Mega International Commercial Bank acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment at our fabs. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2006, NT$35.0 billion (US$1.1 billion) had been drawn down under this credit facility. We issued NT$6.0 billion secured corporate bonds under this credit facility in April 2004.

In June 2004, we entered into a NT$55.0 billion and US$150.0 million seven-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment at our fabs. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2006, NT$55.0 billion (US$1.7 billion) and US$150.0 million has been drawn down under this credit facility. We issued NT$6.0 billion secured corporate bonds under this credit facility in June 2005.

In June 2004, we issued an aggregate of 30,000,000 ADSs representing 300,000,000 shares of our common stock. The net proceeds from the offering were approximately NT$15,967.2 million. We used the net proceeds for the construction of and purchase of equipment and machinery for our production facilities, including the ramping up of our fifth-generation fabs and the construction of our sixth-generation fab.

In July 2005, we issued an aggregate of 33,000,000 ADSs representing 330,000,000 shares of our common stock. The net proceeds form the offering were approximately NT$15,594.2 million. We used the net proceeds to repay indebtedness and for the construction of and purchase of equipment and machinery production facilities.

In July 2005, we entered into a NT$42.0 billion seven-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment at our first 7.5-generation fab. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2006, NT$18.0 (US$0.6 billion) had been drawn down under this credit facility. We issued NT$5.0 billion (US$0.2 billion) secured corporate bonds under this credit facility in March 2006.

In September 2006, we entered into a NT$55.0 billion seven-year syndicated credit facility, for which Bank of Taiwan acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment at our second 7.5-generation fab. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of the filing date of this annual report, we have not drawn down any amount under this credit facility.

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In August 2006, we entered into a RMB2.8 billion and US$75.0 million seven-year syndicated credit facility, for which ABN AMRO Bank acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment at our Suzhou and Xiamen module-assembly facilities. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are guaranteed by AU Optronics (L) Corp., our wholly-owned subsidiary. As of December 31, 2006, RMB140 million (US$17.9 million) has been drawn down under this credit facility.

We assumed the following outstanding bonds, credit facilities and arrangements as a result of our merger with QDI:

In February 2004, QDI issued an aggregate principal amount of US$270 million of zero-coupon convertible bonds due February 2009. The initial conversion price was NT$22.23 per share, subject to adjustment. The conversion price was adjusted to NT$72.94 per share in 2006 as a result of our merger. As of December 31, 2006, the total carrying value was NT$64.5 million (US$2.0 million). We redeemed all outstanding bonds on April 26, 2007.

In April 2004, QDI issued an aggregate principal amount of NT$10.5 billion of zero-coupon convertible bonds due April 2009. The initial conversion price was NT$29.26 per share, subject to adjustment. The conversion price was adjusted to NT$70.49 per share in 2006 as a result of our merger. In addition, as a result of our merger, ROC regulators directed that bondholders be given the option to redeem their investments in the QDI bonds. Holders of an aggregate principal amount of NT$5.3 billion of the bonds opted for the early redemption. As of December 31, 2006, the total carrying value was NT$4,999.2 million (US$153.4 million).

In November 2004, QDI issued an aggregate principal amount of US$294.5 million of zero-coupon convertible bonds due November 2009. The initial conversion price was NT$20.02 per share, subject to adjustment. The conversion price was adjusted to NT$52.54 per share in 2006 as a result of our merger. As of December 31, 2006, the total carrying value was NT$9,753.7 million (US$299.3 million). By January 2007, US$169.6 million worth of bonds were repurchased, representing approximately 58% of the aggregate principal amount.

In July 2005, QDI issued an aggregate principal amount of NT$6.0 billion of zero-coupon convertible bonds due July 2010. The initial conversion price was NT$17.12 per share, subject to adjustment. The conversion price was adjusted to NT$44.10 per share in 2006 as a result of our merger. As of December 31, 2006, the total carrying value was NT$6,560.7 million (US$201.3 million).

In October 2000, QDI entered into a NT$15.0 billion seven-year syndicated credit facility, for which Mega International Commercial Bank acted as the agent bank for the purpose of funding the construction and purchase of machinery and equipment at our fabs. The credit line has been decreased by NT$600 million as a result of non-use of the credit facility per a credit availability period set out in the credit facility letter. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2006, NT$14.4 billion (US$441.9 million) has been drawn down under this credit facility.

In September 2002, QDI entered into a NT$13.0 billion and US$58.4 million seven-year syndicated credit facility, for which Mega International Commercial Bank acted as the agent bank for the purpose of funding the construction and purchase of machinery and equipment at our fabs. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2006, the entire amount has been drawn down.

In January 2005, QDI entered into a NT$23.3 billion and US$200.0 million seven-year syndicated credit facility, for which Mega International Commercial Bank acted as the agent bank for the purpose of funding the construction and purchase of machinery and equipment at our fabs. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2006, the entire amount has been drawn down.

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In March 2005, Tech Well (Shanghai) Display Corp. entered into a RMB249 million and US$80 million five-year syndicated credit facility, for which Citi Bank acted as agent bank for the purpose of funding the construction and purchase of machinery and equipment at our Shanghai moduel-assembly facility. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Obligations under this credit facility are guaranteed by us.

In August 2005, QDI entered into a NT$500.0 million four-year credit facility with the Industrial Bank of Taiwan for working capital purposes. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2006, NT$500.0 million (US$15.3 million) has been drawn down under this credit facility. In August 2005, QDI entered into an agreement with the Industrial Bank of Taiwan and the Land Bank of Taiwan, securitizing QDI’s loans through a special purpose vehicle administered by the Land Bank of Taiwan as trustee.

In June 2006, QDI entered into a NT$27.0 billion seven-year syndicated credit facility, for which Mega International Commercial Bank acted as the agent bank for the purpose of funding the expansion of one of our sixth generation fabs. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2006, NT$14.0 billion (US$429.6 million) has been drawn down under this credit facility.

In July 2006, QDI entered into a NT$1.0 billion four-year credit facility with the Industrial Bank of Taiwan for working capital purposes. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2006, NT$1.0 billion (US$30.7 million) has been drawn down under this credit facility. In July 2006, QDI entered into an agreement with the Industrial Bank of Taiwan and the Land Bank of Taiwan, securitizing QDI’s loans through a special purpose vehicle administered by the Land Bank of Taiwan as trustee.

With respect to all the syndicated credit facilities assumed by us as a result of our merger with QDI, we amended the terms of the credit facilities such that covenants made therein are the same as those made in our syndicated credit facilities, including covenants that we maintain certain financial ratios. We completed the amendments in early 2007.

Our long-term loans and facilities contain various financial and other covenants that could trigger a requirement for early payment. Among other things, these covenants require the maintenance of certain financial ratios, such as current ratio, indebtedness ratio, interest coverage ratio and other technical requirements. In general, covenants in the agreements governing our existing debt, and debt we may incur in the future, may materially restrict our operations, including our ability to incur debt, pay dividends, make certain investments and payments and encumber or dispose of assets. A default under one debt instrument may also trigger cross-defaults under our other debt instruments. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on our liquidity, as well as our financial condition and operations. As of December 31, 2006, we were in compliance with all financial and other covenants under our long-term loans and credit facilities.

The carrying amount of our assets pledged as collateral to secure our obligations under our long-term borrowings and bonds, including building, machinery and equipment, amounted to NT$253,295.2 million (US$7,772.2 million) as of December 31, 2006.

Net cash provided by operating activities amounted to NT$49,393.6 million in 2004, NT$48,006.0 million in 2005 and NT$68,526.7 million (US$2,102.7 million) in 2006. Our depreciation and amortization was NT$25,309.3 million in 2004, NT$34,493.2 million in 2005 and NT$52,760.2 million (US$1,618.9 million) in 2006. Our notes and accounts payable increased NT$5,026.6 million in 2004, NT$23,286.0 million in 2005 and NT$14,569.0 million (US$447.0 million) in 2006. Increases in depreciation and amortization were primarily due to increased capital investment for the expansion of our production capacity. Our notes and accounts payable were partially offset by increases in notes and accounts receivable of NT$4,541.4 million in 2004 and NT$22,100.1 million in 2005, and increases in inventories of NT$6,517.3 million in 2004, NT$3,895.6 million in 2005 and NT$13,975.0 million (US$428.8 million) in 2006.

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Net cash used for investing activities was NT$87,010.2 million in 2004, NT$82,456.2 million in 2005 and NT$83,300.6 million (US$2,556.0 million) in 2006. Net cash used for investing activities primarily reflected capital expenditures for property, plant and equipment of NT$81,868.7 million in 2004, NT$80,652.3 million in 2005 and NT$87,246.7 million (US$2,677.1 million) in 2006. These capital expenditures were primarily funded with net cash provided by operating activities and financing activities, primarily from long-term bank borrowings and the issuance of shares.

Net cash provided by financing activities was NT$37,615.2 million, in 2004, reflecting primarily our issuance of shares in connection with our ADS follow-on offering totaling NT$15,967.2 million and long-term loans and bonds of NT$28,315.8 million partially offset by our repayment of long-term loans and bonds of NT$6,892.1 million and a cash dividend distribution of NT$5,208.3 million. Net cash provided by financing activities was NT$43,097.3 million in 2005, reflecting primarily proceeds from the issuance of common stock of NT$15,594.2 million and an increase of long-term borrowings and bonds payable of NT$47,468.0 million which was offset by repayment of long-term borrowings and bonds payable of NT$7,472.8 million and the payment of a cash dividend in the amount of NT$5,935.2 million. Net cash provided by financing activities was NT$32,550.8 million (US$998.8 million) in 2006, reflecting primarily an increase of long-term borrowings and bonds payable of NT$55,791.1 million which was offset by repayment of long-term borrowings and bonds payable of NT$19,753.5 million and the payment of a cash dividend in the amount of NT$1,749.2 million.

We have made, and expect to continue to make, substantial capital expenditures in connection with the expansion of our production capacity. Substantially all of capital expenditures are invested in facilities located in Taiwan and the PRC. The table below sets forth our principal capital expenditures, paid or committed, for the periods indicated.

	2004		2005		2006
	NT$		NT$		NT$		US$
	(in millions)
Equipment purchases		80,814.5		72,536.5		64,411.7		1,976.4
Land and building purchases		2,233.3		21,317.5		24,834.6		762.0

We are sometimes required to prepay our purchases of land and equipment. Prepayments for purchases of land are the result of a standard processing procedure by the ROC government related to the transfer of legal title. Prepayments for purchases of equipment result from contractual agreements involving down payments to suppliers when the equipment is ordered by us. As of December 31, 2004, 2005 and 2006, prepayments for purchases of equipment amounted to NT$38,009.7 million, NT$15,529.0 million and NT$19,770.3 million (US$606.6 million), respectively.

For the year ended December 31, 2006, our capital expenditures amounted to NT$87,246.7 million (US$2,677.1 million), primarily for purchase of equipment to build our first 7.5-generation fab and the expansion of our existing fabs and our module-assembly operations.

We estimate our capital expenditures to be approximately NT$90.0 billion to NT$95.0 billion for 2007, primarily for the ramp-up of our second sixth-generation fab, acquired through the QDI merger, and our first 7.5-generation fab and the construction of our second 7.5-generation fab. As of April 30, 2007, we have commitments in an amount of approximately NT$44.0 billion to purchase equipment and machinery. We may increase or decrease our capital expenditures depending on cash flow from operations, the progress of our expansion plans, and market conditions.

We believe that our existing cash, cash equivalents, short-term investments, expected cash flow from operations and borrowings under our existing and future credit facilities should be sufficient to meet our capital expenditure, working capital, cash obligations under our existing debt and lease arrangements and other requirements for at least the next 12 months. We frequently need to invest in new capacity to improve our economies of scale and reduce our production costs, which may require us to raise additional capital. We cannot assure you that we will be able to raise additional capital should it become necessary on terms acceptable to us or at all. The sale of additional equity or equity-linked securities may result in additional dilution to our shareholders.

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5.C. Research and Development

We incurred research and development costs of NT$5,011.5 million, NT$4,882.3 million and NT$4,762.8 million (US$146.1 million) in 2004, 2005 and 2006, respectively, which represented 3.0%, 2.2% and 1.6%, respectively, of our net sales.

Our research and development activities are principally directed toward advancing our technologies in key components, manufacturing processes and product development, with the objective of improving the features of our products to bring added value to our customers in addition to design products that meet their specific requirements. We have a product development team dedicated to each of our primary product categories. Each of these teams focuses on the development of our existing and potential new products. To support our fabs, we maintain a centralized research and development team that works to improve our manufacturing processes, as well as a team of technical support personnel that focuses on computer integrated manufacturing. We also have a research and development team that is dedicated to the development of LTPS. In addition, we have several research and development teams to explore new design platforms for next-generation displays. Finally, we have one research and development team that focuses on manufacturing yield and key component vendors. Monetary incentives are provided to our employees if research projects result in successful patents. As of December 31, 2006, we employed approximately 1,253 research and development engineers.

We increased our spending on research and development with the goal of improving our TFT-LCD manufacturing process and developed new TFT-LCD products such as high-resolution 17-inch or larger panels for desktop monitors and 26-inch or larger panels for television. We developed alternative technologies such as LTPS in 2006.

We established a dedicated flat panel research and development center, the AUO Technology Center, in the third quarter of 2004. The research activities at the AUO Technology Center have initially been divided into several general areas, including advanced technology development in new liquid crystal materials, new system electronics, new backlight unit technologies, image and color processing, and LTPS. In addition to new product development and module processing, the AUO Technology Center also focuses on improving our current TFT-LCD panel product and manufacturing process technologies.

LCD television products experience significant growth in 2005. We successfully developed several technologies upgrading the performance of LCD television panels. Major achievements include Advanced Multi-domain Vertical Alignment (AMVA), high color gamut and fast moving picture response time (MPRT) technologies.

Multi-domain Vertical Alignment technology (MVA) is a well-recognized wide viewing angle liquid crystal technology, but there are whitish issues when panels with the MVA technology are viewed at an off-angle. AMVA provides low color wash-out at an off-angle view, eliminating whitish issues. We have successfully developed and deployed the AMVA technology since 2005.

Prior to 2005, LCD television panels are limited to the default color specification determined by the National Television Standards Committee (NTSC). In 2005, we developed optical components which match the panel spectrum, offering full color coverage on the LCD television panel and improved the NTSC ratio color gamut to 92%.

MPRT is an index to make fast-moving objects in images appear in high fidelity. We overcame intrinsic slow response time for liquid crystal material and developed several technical solutions to achieve fast MPRT, including backlight blinking, higher frame rate and gray/black field insertion. We embedded fast MPRT technologies into our 32-inch wide extended graphics array (WXGA) television panels since 2006.

5.D. Trend Information

For trend information, see “Item 5. Operating and Financial Review and Prospects—Operating Results.”

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5.E. Off-Balance Sheet Arrangements

We have, from time to time, entered into non-derivative financial instruments, including letters of credit to finance or secure our purchase payment obligations. As of December 31, 2006, we had off-balance sheet outstanding letters of credit of US$17.4 million, JP¥25,752.6 million, €14.1 million and RMB39.0 million. In addition, we have entered into interest rate swap transactions to hedge our interest rate exposure arising out of our long-term borrowing facilities. As of December 31, 2006, we had interest rate swap contracts with a total notional amount of NT$56.5 billion and with the maturity dates ranging from January 2008 to December 2011. We also entered into foreign currency forward contracts to hedge our existing assets and liabilities denominated in foreign currencies and foreign currency purchase commitments. As of December 31, 2006, we had a total notional amount of foreign currency forward contracts of US$968.5 million and JP¥83.5 billion with settlement dates ranging from January to April 2007.

5.F. Tabular Disclosure of Contractual Obligations

The following tables set forth our contractual obligations and commitments with definitive payment terms which will require significant cash outlays in the future as of December 31, 2006.

	Payments due by Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	NT$		NT$		NT$		NT$		NT$
					(in millions)
Contractual Obligations
Long-term debt obligations ⁽¹⁾		221,278.4		41,889.8		98,129.7		69,183.2		12,075.7
Operating lease obligations ⁽²⁾		2,996.3		209.8		387.9		387.9		2,010.7
Purchase obligations ⁽³⁾		37,586.9		37,586.9		-		-		-
Total		261,861.6		79,686.5		98,517.6		69,571.1		14,086.4

____________

(1)

Includes principal payment obligations only.

(2)

Represents our obligations to make lease payments to use the land on which our fabs and module-assembly facilities are located.

(3)

Includes purchase orders for the machinery and equipment at our fabs. We have placed orders related to the installation of machinery and equipment at our second sixth-generation and our first 7.5-generation fabs. As of December 31, 2006, we had made commitments of approximately NT$15.3 billion (US$0.5 billion), primarily relating to the sixth-generation fab and approximately NT$16.9 billion (US$0.5 billion), relating to the 7.5-generation fab, which commitments may be cancelled subject to the payment of certain penalties.

In addition to the contractual obligations set forth above, we also have continuing obligations to make cash royalty payments under our technology license agreements, the amounts of which are determined based on our use of such technology and patents. Pursuant to relevant regulatory requirements, we estimate that we will contribute approximately NT$90.0 million to our pension fund maintained with the Central Trust of China in 2007.

We have not entered into any financial guarantees or similar commitments to guarantee the payment obligations of non-affiliated third parties. In addition, we do not have any written options on non-financial assets. Our long-term loan and lease agreements include provisions that require early payment under certain conditions. The terms of our credit facilities for long-term borrowings also contain financial covenants, including current and debt-equity ratios and other technical requirements. Our debt under these facilities may be accelerated if there is a default, including defaults triggered by failure to comply with these financial covenants and other technical requirements. As of December 31, 2006, we were in compliance with all financial covenants and other technical requirements under our credit facilities.

U.S. GAAP Reconciliation

The following table sets forth a comparison of our net income and shareholders’ equity in accordance with ROC GAAP and U.S. GAAP for the periods indicated.

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	For the Year Ended December 31,
	2004			2005			2006
	NT$			NT$			NT$			US$
	(in millions)
Net income in accordance with
ROC GAAP		27,962.9			15,621.2			9,093.4			279.0
U.S. GAAP		18,112.5			8,678.2			1,173.2			36.0
Shareholders’ equity in accordance with
ROC GAAP		130,565.6			155,819.5			231,076.3			7,090.4
U.S. GAAP		142,685.6			166,918.9			238,618.1			7,321.8
Cash flows from operating activities in accordance with
ROC GAAP		49,393.6			48,006.0			68,526.7			2,102.7
U.S. GAAP		48,943.8			46,951.9			67,955.3			2,085.2
Cash flows from investing activities in accordance with
ROC GAAP		(87,010.2	)		(82,456.2	)		(83,300.6	)		(2,556.0	)
U.S. GAAP		(88,001.0	)		(81,428.1	)		(83,130.7	)		(2,550.8	)
Cash flows from financing activities in accordance with
ROC GAAP		37,615.2			43,097.3			32,550.8			998.8
U.S. GAAP		38,066.2			43,783.9			32,951.7			1,011.1

Below is a discussion of certain significant differences between ROC GAAP and U.S. GAAP. See note 25 to our consolidated financial statements for a complete discussion of significant differences between ROC GAAP and U.S. GAAP.

Convertible Bonds

We assumed convertible bonds from QDI in connection with the merger on October 1, 2006. In accordance with the transition rule under ROC SFAS No. 36, for convertible bonds assumed in a business combination that do not involve a major modification, as defined, the debt instruments would not be subject to the requirements of ROC SFAS No. 36, provided that the convertible bonds were initially issued before January 1, 2006. Accordingly, the equity component of the convertible bonds assumed from the QDI merger has not been bifurcated from the debt host and the entire amount of each of the assumed convertible bonds is recorded as a liability at fair value as of the acquisition date. The difference between fair value and redemption value on the date of acquisition is treated as a discount or premium, which will be amortized and reflected in the statement of income using the effective interest rate method over the redemption period. If and when the bond is converted, an amount is credited to common stock based on the par value of the common stock issued, with the difference between the carrying value of the bond and the par value of stock recorded as an adjustment to capital reserve.

Under US GAAP, we considered whether the convertible bonds contain embedded derivative instruments that should be separated from the host contract and accounted for as a derivative instrument pursuant to the guidance provided in United States Statement of Financial Accounting Standards (“US SFAS”) No. 133 “Accounting for Derivative Instruments and Hedging Activities” and related interpretations.

Based on our assessment, we concluded that the conversion features of the two overseas convertible bonds assumed from QDI at October 1, 2006 qualify as embedded derivative instruments under US SFAS No. 133 since these bonds are denominated in a currency that is different from our functional currency and therefore require bifurcation from the debt host. Accordingly, we recorded derivative instrument liabilities of NT$2.2 million and NT$1.8 million as of October 1, 2006 and December 31, 2006, respectively, based on the fair value of the conversion options embedded in the two overseas convertible bonds. We further concluded that the put and call options embedded in the convertible bonds do not meet the definition of an embedded derivative instrument under US SFAS No. 133 since they are considered to be clearly and closely related to the debt host. As a result, under US GAAP, the two overseas convertible bonds assumed from QDI have been recorded at their fair value as of the acquisition date without regard to the embedded conversion options. The recorded carrying amounts will then be accreted to their respective maturity and/or redemption amounts over the remaining terms of the bonds using the effective interest method.

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Compensation Costs

According to our articles of incorporation, a remuneration amount of up to 1% of annual distributable earnings may be paid to our directors and supervisors. Under ROC GAAP, these payments are charged directly to retained earnings in the period during which our shareholders approve these payments and are treated as financing activities in the statements of cash flows. Under U.S. GAAP, these cash payments are recorded as compensation expense in the period when the related services are rendered and are treated as operating activities in the statement of cash flows.

Certain of our employees are entitled to bonuses in accordance with our articles of incorporation, which specify a bonus amount ranging from 5% to 10% of our annual distributable earnings. Employee bonuses may be paid in cash, shares, or a combination of both. Under ROC GAAP, these bonuses are appropriated from retained earnings in the period our shareholders’ approval is obtained. If these employee bonuses are settled through the issuance of our shares, the amount charged against retained earnings is based on the par value of our shares issued.

Under U.S. GAAP, the employee bonus expense is charged to income in the year during which services are provided. Shares we issue as part of these bonuses are recorded at fair value determined at the date on which the number of shares to be issued is known and upon adoption of ROC SFAS No. 123 (revised in 2004) “Share-Based Payment” on January 1, 2006, the date on which there is a mutual understanding of the key terms and conditions of the award between us and our employees. The total amount of these bonuses is initially accrued based on the minimum cash value to be paid, with an adjustment in the subsequent year after shareholders’ approval. Any difference between the amount initially accrued and fair value of bonuses settled by the issuance of shares is recognized at the grant date.

Derivative Financial Instruments

For interest rate swaps contracts, we generally make specified payments based on fixed interest rate and notional principal amounts and receives amounts based on variable rate of interest and notional principal. Under ROC GAAP and prior to January 1, 2006, net amounts received or paid under the contracts were reported as adjustments to interest expense on long-term debt. Our forward contract receivables and payables were recorded at the spot rate at the date of inception. Discount or premium was amortized on a straight-line basis over the life of the contract. Realized and unrealized gains or losses on forward contracts resulting from actual settlement or balance sheet date translation were charged or credited to current operations. Effective from January 1, 2006, we adopted ROC SFAS No. 34 and applied hedge accounting for derivatives effective as a hedge. The requirements on hedge accounting under ROC SFAS No. 34 are not materially different from that required by US SFAS No. 133.

Under US GAAP and in accordance with US SFAS No. 133, prior to January 1, 2006, none of our derivatives met the US GAAP hedge accounting criteria. Accordingly, all derivative contracts were recognized as either assets or liabilities and subject to re-measurement at fair value at each balance sheet date. Changes in fair values of derivative instruments are recognized in earnings for US GAAP purposes. Effective January 1, 2006, in connection with the adoption of hedge accounting under ROC GAAP, we designate certain derivative contracts (mainly interest rate swap contracts) as a hedge of the variability of cash flows to be paid related to a recognized liability (cash flow hedge). For derivatives designated as hedges, changes in fair value are recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. Upon the adoption of ROC SFAS No. 34, there is no material difference on the accounting of derivative financial instruments under ROC and US GAAP.

Income Taxes

Under ROC GAAP, a valuation allowance is provided on deferred tax assets when they are not certain to be realized based on the available projection of future taxable income. However, the criteria by which the need for a valuation allowance is determined is less stringent than under U.S. GAAP. Under U.S. GAAP, cumulative losses in recent years are significant piece of negative evidence, which is difficult to overcome using projections of future taxable income for the purpose of determining the valuation allowance. We suffered losses in 2001 and also had a net loss in the fourth quarter of 2002. As a result, we did not use the projection of future taxable income in determining our net deferred tax asset valuation allowance for the periods through December 31, 2002. However, we started to generate profits in 2003, and expect to continue to generate profit going forward. Therefore, more positive

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evidence is available that the use of available future taxable income projections in determining the size of the valuation allowance is appropriate. As a result, we reversed a valuation allowance of NT$1,869.1 million in 2003.

In 1997, the ROC Income Tax Law was amended to integrate the corporate income tax and shareholder dividend tax. Under such amendment, after-tax earnings generated from January 1, 1998 and not distributed to shareholders as dividends in the following year will be subject to a 10% retained earnings tax. As a result, our undistributed and distributed income is currently subject to a corporate tax rate of 31.8% and 25.0%, respectively. According to the amendment to the ROC Income Tax Law, which came into effect on June 1, 2006, commencing from 2005, the undistributed retained earnings should be calculated in accordance with our audited financial statements rather than our tax returns submitted to the ROC taxation authority. Under ROC GAAP, the 10% tax on undistributed earnings is recognized as an expense on the date that shareholders approve the amount of the earnings distribution. Under U.S. GAAP, we measure our tax expense, including the tax effects of temporary differences, using the undistributed rate.

Depreciation of Property, Plant and Equipment

Under ROC GAAP, we depreciate buildings over estimated lives of 20 or 50 years based on guidance from the ROC Internal Revenue Code. Under U.S. GAAP, buildings are depreciated over an estimated useful life of 20 years.

Marketable Securities

Under US GAAP, marketable securities are accounted for in accordance with US SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” Prior to January 1, 2006, under ROC GAAP, marketable securities were carried at the lower of aggregate cost or market value. The fair value was determined by the average price for one month before the balance sheet date. Effective January 1, 2006, we adopted ROC SFAS No. 34 “Financial Instruments: Recognition and Measurement.” Upon the adoption of ROC SFAS No. 34, our accounting for marketable securities under ROC GAAP and US GAAP is not materially different.

Under both US SFAS No. 115 and ROC SFAS No. 34, marketable securities that have readily determinable fair values are classified as either trading, available-for-sale or held-to-maturity securities. The fair value is determined as of the balance sheet date. Marketable securities that are bought and traded for short-term profit are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Marketable securities not classified as trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income. However, when the investment is deemed to be other than temporarily impaired, it is written down to fair value at the end of the period of assessment through a charge to earnings.

Equity Method Investments

When we have the ability to exercise significant influence over the operating and financial policies of investees (generally those in which we own between 20% and 50% of the investee’s voting shares), those investments are accounted for using the equity method. The difference between the acquisition cost and the carrying amount of net equity of the investee as of the acquisition date is allocated based upon the pro rata excess of fair value over the carrying value of assets on investee’s books. Any unallocated difference is treated as investor level goodwill. Under US GAAP, such amount is not amortized. Prior to January 1, 2006, under ROC GAAP, the amount of unallocated difference is amortized over five years. Commencing January 1, 2006, as required by the amended ROC SFAS No. 5, investor level goodwill is also no longer amortized and the entire carrying value of the equity method investment is subject to assessment for impairment.

If an investee company issues new shares and the shareholders do not acquire new shares in proportion to their original ownership percentage, the investor’s equity in the investee’s net assets will be changed. Under ROC GAAP, the change in the equity interest shall be used to adjust the capital surplus and the long-term investments accounts. If a company’s capital surplus is not sufficient to offset the adjustment to long-term investment, the difference is charged to retained earnings. Under US GAAP, subsequent investments are treated as a step acquisition and additional consideration is allocated to the incremental pro rata share of the fair value of assets and liabilities acquired. When the company does not acquire new shares in proportion to its original ownership percentage, any

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gain or loss resulting from the change in investee’s equity is recognized directly to equity as a capital transaction in accordance with SEC Staff Accounting Bulletin (“SAB”) 51 “Accounting for Sales of Stock by a Subsidiary.” This policy has been consistently applied.

Unrealized inter-company profits or losses resulting from transactions between us and an investee accounted for under the equity method are deferred to the extent of our ownership. Profits or losses resulting from depreciable or amortizable assets are recognized over the estimated economic lives of such assets. Profits or losses from other assets are recognized when realized.

Under US GAAP, we recognize the income (loss) of investees on a current year basis in accordance with the Accounting Principles Board, (“APB”) 18. Prior to January 1, 2005, as permitted under ROC GAAP, we recognized our equity income (loss) of investees in the following year on a one-year lag basis if we were unable to obtain audited financial statements of the investee in time. Commencing January 1, 2005, as required by the amended ROC SFAS No. 5, we also recognize the income (loss) of all investees on a current year basis.

Recent ROC GAAP Accounting Pronouncements

In July 2006, the FASC issued ROC SFAS No. 37 “Accounting for Intangible Assets,” which we are required to adopt on January 1, 2007. The standard provides guidance on initial recognition and measurement, amortization, presentation and disclosure of intangible assets. An intangible asset should be measured initially at cost. For an intangible asset of a finite useful life, the carrying amount shall be amortized over its useful life. On the other hand, for an intangible asset with an indefinite useful life, the carrying amount shall not be amortized. Intangible assets shall be evaluated for impairment at least annually as required by ROC SFAS No. 35 “Accounting for Impairment of Assets.” Upon adoption of the standard on January 1, 2007, we expect no significant impact on our current accounting treatment.

In November 2006, the FASC issued ROC SFAS No. 38 “Accounting for Non-current Assets Held-for-sale and discontinued operations,” which we are required to adopt on January 1, 2007. Under ROC SFAS No. 38, assets classified as held-for-sale shall be measured at the lower of carrying values or fair values and ceased to be depreciated and amortized. Any impairment loss shall be recognized in current earnings. Assets classified as held-for-sale shall be presented separately on the balance sheet. ROC SFAS No. 38 also requires us to disclose information of discontinued operations separately on the statements of income and cash flow or in a footnote. Upon adoption of the standard on January 1, 2007, we expect no significant impact on its current accounting treatment.

In March 2007, the FASC issued an interpretation which requires ROC companies to recognize compensation expenses for bonuses paid to employees, directors and supervisors beginning January 1, 2008. Such bonuses are currently recorded as appropriation of earnings under ROC GAAP. On March 30, 2007, the ROC Financial Supervisory Commission also issued an interpretation which requires that bonuses granted to employees, directors and supervisors in the form of shares be valued at fair market value for purposes of compensation expenses. While definitive implementing accounting pronouncements have not yet been issued, we currently expect a significant increase in total compensation expenses upon adoption of the aforementioned interpretations on January 1, 2008.

Recent U.S. GAAP Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board, or FASB, issued US SFAS No. 154 “Accounting Changes and Error Corrections,” which replaces APB No. 20 “Accounting Changes” and US SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements—An Amendment of APB Opinion No. 28.” US SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, on the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. US SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of US SFAS No. 154 did not have a material impact on our consolidated financial position and results of operations as of and for the year ended December 31, 2006.

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial

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statements in accordance with US SFAS No. 109 “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective in fiscal years beginning after December 15, 2006. We are currently evaluating the impact of FIN 48 on our financial positions and results of operations.

In September 2006, the FASB issued US SFAS No. 157 “Fair Value Measurements,” which establishes a framework for measuring fair value and expands disclosures about fair value measurements. US SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact of US SFAS No. 157 on our financial position and results of operations.

In September 2006, the FASB issued US SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” US SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. US SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. This requirement becomes effective for fiscal years ending after December 15, 2006. Upon the adoption of US SFAS No. 158, we recognized an increase in accrued pension liabilities of NT$234.5 million as of December 31, 2006 and the corresponding decrease of NT$234.5 million in accumulated other comprehensive income.

In September 2006, the SEC issued SAB No. 108 “Considering the Effects of Prior year Misstatements when Quantifying Current Year Misstatements.” SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for our fiscal year 2006 financial statements. We adopted SAB 108 effective January 1, 2006 and recorded a cumulative effect adjustment as of January 1, 2006 for expense relating to our employee stock bonus. See Note 25 to our consolidated financial statements.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6.A. Directors and Senior Management

Members of our board of directors are elected by our shareholders. Our board of directors is composed of nine directors. The chairman of the board of directors is elected by the directors. The chairman of the board of directors presides at all meetings of the board of directors and also has the authority to act as our representative. The term of office for directors is three years.

We also have three supervisors. In accordance with the ROC Company Law, supervisors are elected by our shareholders and cannot concurrently serve as our directors, executive officers or other staff members. The term of office for supervisors is three years. The supervisors’ duties and powers include, but are not limited to, investigation of our financial condition, inspection of corporate records, verification of statements by the board of directors, giving reports at shareholders’ meetings, representation of us in negotiations with our directors and giving notification, when appropriate, to the board of directors to cease acting in contravention of applicable law or regulations or our articles of incorporation or beyond our scope of business.

Pursuant to the ROC Company Law, a person may serve as our director or supervisor in his or her personal capacity or as the representative of another legal entity. A director or supervisor who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of that legal entity, and the replacement director or supervisor may serve the remainder of the term of office of the replaced director or supervisor. Of our nine current directors, three are representatives of BenQ and one is a representative of Darly 2 Venture Ltd. Of our three supervisors, one is a representative of BenQ and one is a representative of China Development Industrial Bank, or CDIB.

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In addition, pursuant to the amended ROC Securities Exchange Act, a public company is required to either establish an audit committee (“ROC Audit Committee”) or retain supervisors, provided that the ROC Financial Supervisory Commission may, after considering the scale, business nature of a public company and other essential conditions, require the company to establish an ROC Audit Committee in place of its supervisors. Currently, the ROC Financial Supervisory Commission has not promulgated such compulsory rules, and all public companies may, at their discretion, retain either an ROC Audit Committee or supervisors. We have received a proposal for our 2007 annual general shareholders meeting to adopt an ROC Audit Committee in place of our supervisors.

On October 1, 2006, we completed our merger with QDI, a company incorporated in Taiwan that manufactures and assembles TFT-LCD panels. As of the effective date of the merger, we became the surviving entity and assumed substantially all of the assets, liabilities and personnel of QDI. Pursuant to the merger agreement dated April 7, 2006, two former executives of QDI and its affiliates were given board membership. Mr. Chee-Chun Leung was appointed as Vice Chairman of our company and Mr. Michael Wang was appointed as a director in October 2006. Mr. Kuen-Yao Lee and Mr. Hsuan Bin Chen remain as Chairman and Chief Executive Officer, and President and Chief Operating Officer, respectively, of AUO.

The following table sets forth information regarding all of our directors and supervisors as of April 30, 2007. The business address of all of our directors and supervisors is the company’s principal executive office.

Name	Age	Position	Term Expires	Years with Us	Principal Business Activities Performed Outside Our Company
Kuen-Yao (K.Y.) Lee	55	Chairman	2007	11	Chairman and Chief Executive Officer of BenQ; Director of Darfon Electronics Corp.; Director of Daxon Technology Inc.

Chee-Chun Leung ⁽¹⁾	57	Vice-Chairman	2007	1	Vice-Chairman of Quanta Computer Inc.; Chairman of Xin Min Investment Co.; Chairman of Min Da Investment Co.; Supevisor of Yi Jia Ying Investment Co.; Supervisor of Min Hwa Investment Co.

Hsuan Bin (H.B.) Chen ⁽¹⁾	56	Director	2007	10	Chairman of Wellypower Optronics Corporation; Director of BenQ

Hsi-Hua Sheaffer Lee ⁽¹⁾	52	Director	2007	11	President and Chief Operating Officer of BenQ; Chairman of Darfon Electronics Corp.

Hui Hsiung ⁽¹⁾	54	Director	2007	11

Michael Wang ⁽²⁾	53	Director	2007	1	President of Quanta Computer Inc.

Cheng-Chu Fan	55	Director	2007	3	Senior Advisor, WK Technology Fund; Director of Advantech Co., Ltd.; Director of Transcend Information, Inc.

Vivien Huey-Juan Hsieh	54	Director	2007	3	Professor at National Taipei University of Technology

T.J. Huang	61	Director	2007	3	Chairman, Systex Corporation; Chairman, Sysware Corporation; President, Asia Vest Partners TCW/YFT (Taiwan) Ltd.

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Name	Age	Position	Term Expires	Years with Us	Principal Business Activities Performed Outside Our Company
Chieh-Chien Chao	63	Supervisor	2007	3	Professor at National Chiao Tung University

Ko-Yung (Eric) Yu ⁽¹⁾	51	Supervisor	2007	11	Chief Financial Officer of BenQ; Chairman of Daxon Technology Inc.

Shin Chen ⁽³⁾	59	Supervisor	2007	2	Senior Executive Vice President, CDIB

(1)	Representing BenQ.

(2)	Representing Darly 2 Venture Ltd.

(3)	Representing CDIB.

Kuen-Yao (K.Y.) Lee has been the Chairman of our company since 1996 and a director of our company since 1996. Mr. Lee received his Bachelor’s degree in Electrical Engineering from the National Taiwan University in Taiwan in 1974 and his Master’s of Business Administration from the International Institute for Management Development in Switzerland in 1990.

Chee-Chun Leung joined our company as Vice-Chairman since our merger with QDI on October 1, 2006. Prior to his current position, Mr. Leung was President from 1993 to 2006 and is currently Vice-Chairman of Quanta Computer Inc. In 2005, he was named Vice-Chairman of QDI. Mr. Leung received his Bachelor’s degree in Physics from the National Taiwan University in 1972.

Hsuan Bin (H.B.) Chen has been a director of our company since 1998. In addition, Mr. Chen has been our President and Chief Operating Officer since 1997. Mr. Chen received his Bachelor’s degree in Communications Engineering from the National Chiao Tung University in Taiwan in 1975. Mr. Chen worked for Acer Technologies Sdn. Bhd. in Malaysia from 1992 to 1997 before he joined Acer Display in 1997.

Hsi-Hua Sheaffer Lee has been a director of our company since 1996. Mr. Lee has also been the President of BenQ since September 2003. He received a Bachelor’s degree in Electrical Engineering from the National Cheng Kung University in Taiwan in 1978.

Hui Hsiung has been a director of our company since early 2002. Mr. Hsiung joined our company in 1996 as Director of the Research and Development Department, and from 1997 to 1999 served in positions in the company’s Marketing & Sales Division. Mr. Hsiung was a director of Acer Display from April 1999 to August 2001. Since June 2002, Mr. Hsiung has also served as our Executive Vice President in charge of all our business units of our company since 1996. He received a Bachelor’s degree in Physics from the National Taiwan University in Taiwan in 1975 and a Ph.D. degree in Physics from the University of California, Berkeley in 1985.

Michael Wang has been our director since October 2006. He is also President of Quanta Computer Inc. since June 2006. Mr. Wang received a Bachelor’s degree in Electronic Engineering from the National Chiao-Tung University in Taiwan in 1988.

Cheng-Chu Fan has been a director of our company since April 2004. He is also the senior advisor to WK Technology Fund and Chairman of Gatax Technology Co., Ltd. Mr. Fan was a president of Microsoft, Taiwan from 1992 to 2001 and the president of WK Technology Fund from 2001 to 2003. Mr. Fan received a Bachelor’s degree in electrical engineering from National Taiwan University in 1974.

Vivien Huey-Juan Hsieh has been a director of our company since April 2004. Ms. Hsieh received a Ph.D. in Finance from the Graduate School of Business Administration, University of Houston, University Park, in Texas.

T.J. Huang has been a director of our company since April 2004. He is also the Chairman of Systex Corporation since 1977, the Chairman of Sysware Corporation since 1997 and the president of AsiaVest Partners, TCW/YFY (Taiwan) Ltd. since 1995. He was formerly Chief Financial Officer and Managing Director of YFY Paper Mfg. Co., Ltd. Mr. Huang received a Ph.D. in Computer Science from the University of Wisconsin at Madison in 1973.

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Chieh-Chien Chao has been a supervisor of our company since April 2004. Mr. Chao was the Chairman of Chiao Tung Bank from 1994 to 2000, the Chairman of The Farmers Bank of China from 2000 to 2003 and the Chairman of Small and Medium Business Credit Guarantee Fund from 2003 to 2004. Mr. Chao received a Ph.D. in economics from National Taiwan University in 1974.

Ko-Yung (Eric)Yu has been a supervisor of our company since 1996. Mr. Yu was the Controller of Acer Peripherals, Inc. from 1996 to 1999. Thereafter, Mr. Yu was the Chief Financial Officer of Acer Communications and Multimedia Inc. from November 1999 to December 2001, and has served as a Vice President and the Chief Financial Officer of BenQ since January 2002. He received a Bachelor’s degree in Accounting from Fu Jen Catholic University in Taiwan in 1980 and a Master’s of Business Administration degree from the Strathclyde Graduate Business School in United Kingdom in 1995.

Shin Chen has been a supervisor of our company since October 2004. He is also a Senior Executive Vice President at China Development Industrial Bank. Mr. Chen was Chief Executive Officer of Chinatrust Venture Capital Corp. from 2001 to 2004 and Chief Executive Officer of Central Investment Holdings Company from 1996 to 2000. Mr. Chen received a Ph.D. in Business Administration from Nova University in Fort Lauderdale, Florida in 1986 and a Master’s of Business Administration from California State University at Long Beach in 1976.

Executive Officers

The following table sets forth information regarding all of our executive officers as of April 30, 2007.

Name	Age	Position	Years with Us
Kuen-Yao (K.Y.) Lee	55	Chairman and Chief Executive Officer	11
Hsuan Bin (H.B.) Chen	56	President and Chief Operating Officer	10
Hui Hsiung	54	Executive Vice President	11
Max Cheng	45	Chief Financial Officer; Chief Accounting Officer; and Controller	9

Kuen-Yao (K.Y.) Lee . See “—Directors and Supervisors.”

Hsuan Bin (H.B.) Chen . See “—Directors and Supervisors.”

Hui Hsiung . See “—Directors and Supervisors.”

Max Cheng has been our Chief Financial Officer, Chief Accounting Officer and Controller since 1998. He graduated from Fu Jen Catholic University in Taiwan with a Bachelor’s degree in Business Administration in 1985 and from Northern Illinois University with a Master’s degree in Accounting in 1990. Before he joined our company in 1998, Mr. Cheng served as the Controller of Acer Technologies Sdn. Bhd. from 1995 to 1998.

On June 29, 2007, our board of directors appointed Vice-Chairman, H.B. Chen, as Chief Executive Officer and Dr. L.J. (Lai-Juh) Chen as President and Chief Operating Officer, effective September 1, 2007.

6.B. Compensation

According to our articles of incorporation, we may distribute up to 1% of our annual distributed earnings in cash to our directors and supervisors as compensation after the payment of all income taxes, the deduction of any past losses, and the allocation of 10% of our annual earnings as legal reserves. In the event that a director or supervisor serves as a representative of a legal entity, such compensation is paid to the legal entity. See “Item 10. Additional Information—Articles of Incorporation—Dividends and Distributions.” The aggregate compensation paid in 2006 to our directors and supervisors for their services was approximately NT$21.1 million (US$0.6 million). We pay our executive officers monthly salaries, in addition to employee bonuses. The aggregate compensation paid in 2006 to our executive officers for their services was approximately NT$68.8 million (US$2.1 million).

We have a defined benefit pension plan covering our regular employees in the ROC. Retirement benefits are based on length of service and average salaries or wages in the last six months before retirement. We make monthly contributions, at 2.0% of salaries and wages, to a pension fund that is deposited in the name of, and administered by, the employees’ pension plan committee. Beginning July 1, 2005, pursuant to the newly effective ROC Labor

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Pension Act, we are required to make a monthly contribution for full-time employees in the ROC that elected to participate in a defined contribution plan at a rate of no less than 6% of the employee’s monthly salaries or wages to the employee’s individual pension fund accounts at the ROC Bureau of Labor Insurance. Our accrued pension cost as of December 31, 2006 was NT$459.3 million (US$14.1 million). See note 14 to our consolidated financial statements.

We assumed two employee stock option plans, adopted in August 2002 and December 2003, respectively, as a result of the merger with QDI. Full-time QDI employees that have joined us as a result of the merger with QDI are eligible to receive stock option grants. At this stage, we have not determined whether to grant more stock options or to expand the employee stock option plans to enroll other employees.

We granted 33,428,000 stock options pursuant to the 2002 employee stock option plan, each exercisable for one QDI common share at an exercise price of NT$11.0. 100,000,000 stock options were authorized to be granted under the plan. Under the terms of the merger agreement with QDI, we assumed the 2002 employee stock option plan and reduced the number of stock options to 9,550,857 (on the basis of one of our shares of common stock for every 3.5 shares of QDI common stock ), each exercisable for one of our common shares at an adjusted exercise price of NT$38.5. Each option vests upon the second anniversary of its issuance and is exercisable for six years from the beginning of the option term. As of December 31, 2006, 1,610,953 stock options were outstanding and, of this number, all had vested. The options are generally not transferable.

We granted 40,541,170 stock options pursuant to the 2002 employee stock option plan, each exercisable for one QDI common share at an exercise price of NT$14.6. 100,000,000 stock options were authorized to be granted under the plan. Under the terms of the merger agreement with QDI, we assumed the 2003 employee stock option plan and reduced the number of stock options to 11,583,191 (on the basis of one of our shares of common stock for every 3.5 shares of QDI common stock ), each exercisable for one of our common shares at an adjusted exercise price of NT$51.1. Each option vests upon the second anniversary of its issuance and is exercisable for six years from the beginning of the option term. As of December 31, 2006, 5,614,124 stock options were outstanding and, of this number, 3,742,921 stock options had vested. The options are generally not transferable.

6.C. Board Practices

General

For a discussion of the term of office of the board of directors, see “—Directors and Senior Management.” No benefits are payable to members of the board or the executive officers upon termination of their relationship with us.

Audit Committee

Our board of directors established an audit committee in August 2002. The audit committee has responsibility for, among other things, oversight of the services provided to us by any accounting firm. The audit committee is appointed by the board of directors and currently consists of Cheng-Chu Fan, Vivien Huey-Juan Hsieh and T.J. Huang. Each audit committee member is an independent director who is financially literate with accounting or related financial management expertise. The audit committee meets as often as it deems necessary to carry out its responsibilities.

We received a proposal for our 2007 annual general shareholders meeting to adopt an ROC Audit Committee in place of our supervisors. All duties of supervisors will be performed by the ROC Audit Committee if the ROC Audit Committee is adopted. The amended ROC Securities and Exchange Act requires a member of the ROC Audit Committee to be an independent director and nominated and elected at an annual general shareholders meeting. Our current independent directors were not nominated and elected as independent directors.

6.D. Employees

Employees

The following table provides a breakdown of our employees by function as of December 31, 2004, 2005 and 2006.

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	As of December 31,
Function	2004		2005		2006
Production		14,142		18,094		31,192
Technical ⁽¹⁾		3,278		4,404		7,685
Sales and marketing		375		378		566
Management and administration		2,112		1,451		1,567
Total		19,907		24,327		41,010	⁽²⁾

(1)	Includes research and development personnel.

(2)	We added 5,855 employees as a result of the merger with QDI.

The following table provides a breakdown of our employees by geographic location as of December 31, 2004, 2005 and 2006.

	As of December 31,
Location	2004		2005		2006
Taiwan ⁽¹⁾		10,544		13,514		20,965
PRC ⁽²⁾		9,329		10,741		19,973
Others		34		72		72
Total		19,907		24,327		41,010	⁽³⁾

(1)	Employed by AU Optronics Corp.

(2)	Employed by AU Optronics (Suzhou) Corp., AU Optronics (Xiamen) Corp. and Tech-Well (Shanghai) Display Corp.

(3)	We added 5,855 employees as a result of the merger with QDI.

Employee salaries are reviewed and adjusted annually, while performance evaluations are conducted semi-annually. Salaries are adjusted based on inflation and individual performance. As an incentive, discretionary cash bonuses may be paid based on the performance of individuals. In addition, ROC law generally requires that our employees in Taiwan be given preemptive rights to subscribe for between 10% and 15% of any of our share offerings.

Our employees in Taiwan participate in our profit distributions under our articles of incorporation. Employees in Taiwan are entitled to receive bonus shares, cash or a combination of bonus shares and cash, based on a percentage of our annual distributed earnings. The amount allocated in shares is, subject to the resolution of our shareholders’ meeting, determined by valuing the shares at their par value, or NT$10.00 per share, and paid to our employees in Taiwan based on individual performance and job seniority. Based on par value, we paid NT$887.9 million in bonus shares and NT$380.5 million in cash bonuses to our employees in 2004 with respect to 2003. Based on par value, we paid NT$973.6 million in bonus shares and NT$649.1 million in cash bonuses to our employees in 2005 with respect to 2004. Based on par value, we paid NT$886.1 million in bonus shares and NT$379.7 million in cash bonuses to our employees in 2006 with respect to 2005.

The Hsinchu Science Park Administration offers a variety of employee-related services, including medical examinations, health insurance, career planning advice and other services for our employees in Taiwan. In addition to the services provided by the Hsinchu Science Park Administration, we have established a welfare committee, a pension fund committee, and other employee committees and a variety of employee benefit programs.

We have two employee stock option plans, which we assumed as a result of the merger with QDI. Eligible employees may participate in our employee stock option plans. See “Item 6.B. Compensation.”

We do not have any collective bargaining arrangement with our employees. We consider our relations with our employees to be good.

6.E. Share Ownership

The table below sets forth the share ownership, as of April 30, 2007, of the legal entities represented by our directors and supervisors and executive officers.

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Name	Number of Shares Owned			Percentage of Shares Owned
Kuen-Yao (K.Y.) Lee, Chairman and Chief Executive Officer		9,677,454			*
Chee-Chun Leung, Vice Chairman		638,029,792	⁽¹⁾		8.42	%
Hsuan Bin (H.B.) Chen, Director, President and Chief Operating Officer		5,421,956			*
Hsi-Hua Sheaffer Lee, Director		638,029,792	⁽¹⁾		8.42	%
Hui Hsiung, Director and Executive Vice President		638,029,792	⁽¹⁾		8.42	%
Michael Wang, Director		1,560,697	⁽²⁾		*
Cheng-Chu Fan, Director		—			—
Vivien Huey-Juan Hsieh, Director		—			—
T.J. Huang, Director		—			—
Chieh-Chien Chao, Supervisor		—			—
Ko-Yung (Eric) Yu, Supervisor		638,029,792	⁽¹⁾		8.42	%
Shin Chen, Supervisor		40,732,629	⁽³⁾		*
Max Cheng, Chief Financial Officer, Chief Accounting Officer and Controller		1,059,780			*

*	The number of common shares held is less than 1% of our total outstanding common shares.

(1)	Represents shares held by BenQ.

(2)	Represents shares held by Darly 2 Venture Ltd.

(3)	Represents shares held by CDIB.

As of April 30, 2007, none of our directors, supervisors or executive officers held any of our employee stock options. None of our directors, supervisors or executive officers has voting rights different from those of other shareholders.

For a description of the two employee stock option plans assumed by us as a result of the merger with QDI, see “—Compensation.”

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.A. Major Shareholders

BenQ is one of our major shareholders. In March 2007, BenQ announced that its board of directors has approved the sale of up to 100,000,000 of our shares, representing 1.32% of our outstanding shares as of December 31, 2006. As of April 15, 2007, BenQ beneficially owned 8.47% of our outstanding shares. Three of our directors and one of our supervisors are representatives of BenQ.

Quanta Computer Inc. is one of our major shareholders. As of December 31, 2006, Quanta Computer beneficially owned 5.31% of our outstanding shares. The vice-chairman of Quanta Computer is also vice-chairman of our board of directors. See “Item 6.A. Directors and Senior Management.”

UMC was one of our major shareholders, holding 9.74% and 1.33% of our outstanding shares as of December 31, 2004 and 2005, respectively. Prior to our shareholders’ meeting on April 29, 2004, three of our directors and one of our supervisors were representatives of UMC. UMC is no longer represented on our current board of directors and supervisors.

There have been no changes in our major shareholders since April 30, 2007.

The following table sets forth information known to us with respect to the beneficial ownership of our shares as of April 15, 2007, the most recent practicable date, unless otherwise noted, by (1) each shareholder known by us to beneficially own more than 5% of our shares and (2) all directors and supervisors as a group.

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Name of Beneficial Owner	Number of Shares Beneficially Owned	Percentage of Shares Beneficially Owned	Percentage of Shares Beneficially Owned (Fully Diluted)

BenQ 157, Shan-Ying Road, Gueishan, Taoyuan 333, Taiwan, ROC	641,466,625	8.47%	8.47%
Quanta Computer Inc. ⁽¹⁾ 211, Wen Hwa 2 ^nd Road, Gueishan Hsiang, Taoyuan, Taiwan, ROC	402,464,697	5.31%	5.31%
All directors and supervisors as a group ⁽²⁾	695,422,528	9.18%	9.18%

(1)	As of December 31, 2006.

(2)

Calculated as the sum of: (a) with respect to directors and supervisors who are serving in their personal capacity, the number of shares held by such director or supervisor and (b) with respect to directors and supervisors who are serving in the capacity as legal representatives, the number of shares owned by such institutional or corporate shareholder for which such director or supervisor is a legal representative.

None of our major shareholders has voting rights different from those of our other shareholders. To the best of our knowledge, we are not directly or indirectly controlled by another corporation, any foreign government, or any other natural or legal person, severally or jointly.

We are not aware of any arrangement that may at a subsequent date result in a change of control of our company.

As of December 31, 2006 , approximately 7,573.4 million of our shares were outstanding. We beli eve that, of such shares, approximately 1, 114 . 5 million shares in the form of ADSs were held by approximately 2 4 , 903 holders in the United States as of April 1 3 , 2007 .

7.B. Related Party Transactions

We have not extended any loans or credit to any of our directors, supervisors or executive officers, and we have not provided guarantees for borrowings by any of these persons. We have not entered into any fee-paying contract with any of these persons for such person to provide services not within such person’s capacity as a director, supervisor or executive officer of the company.

We have, from time to time, purchased raw materials and components and sold our panels to our affiliated companies. We believe that these transactions with related parties have been conducted on arms’-length terms. Given the nature of our business, it is not practical for us to review many of these related party transactions on a day-to-day basis. However, at the meeting of our board of directors on April 11, 2002, we adopted an amended related party transactions policy which requires, among other things:

pre-approval by a majority vote of disinterested directors of each sale to, or purchase of raw materials and components from, a related party that is in the ordinary course of our business, which transaction involves a transaction amount in excess of 5% of our net sales or raw materials and component purchases, as the case may be, for the previous three months on an unconsolidated basis, provided that any series of similar transactions with the same related party that collectively exceeds 40% of our net sales or raw materials and component purchases, as the case may be, for the previous three months on an unconsolidated basis shall also require pre-approval;

periodic review by our board of directors of other related party transactions in the ordinary course of business;

pre-approval by a majority vote of disinterested directors of related party transactions not in the ordinary course of business and not otherwise specified in our related party transaction policy; and

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recusal of any interested director from consideration of matters involving the company he or she represents or with respect to which the director might have a conflict of interest.

BenQ and Related Companies

BenQ

BenQ is one of our major shareholders, owning directly and indirectly a 8.47% equity interest in our company as of April 15, 2007. In addition, three of our nine directors and one of our three supervisors are legal representatives of BenQ. In 2004, we purchased shares in BenQ, which as of December 31, 2006 represents 5.07% of their outstanding shares, in order to establish a long-term strategic relationship with BenQ. In 2005, we received cash dividends of NT189.9 million from our investment in BenQ shares.

We sell panels for desktop monitors and LCD television to BenQ. We generated net sales to BenQ in the amount of NT$2,310.9 million in 2004, NT$2,083.6 million in 2005 and NT$1,997.4 million (US$61.3 million) in 2006, and our receivables from these sales were NT$475.8 million as of December 31, 2004, NT$409.5 million as of December 31, 2005 and NT$381.7 million (US$11.7 million) as of December 31, 2006.

We purchased TFT-LCD monitors, projectors, mobile phones and notebook computers from BenQ for use in our business. We did not make any purchases from BenQ in 2004, 2005 and 2006.

BenQ (IT) Co., Ltd. Suzhou (“BQS”)

BQS, an affiliate of our company, was 100% indirectly owned by BenQ as of March 31, 2007. We sell desktop monitor display panels and consumer electronics display panels to BQS. We generated net sales to BQS in the amount of NT$30,030.2 million in 2004, NT$26,532.9 million in 2005 and NT21,647.0 million (US$664.2 million) in 2006, and our receivables from these sales was NT$4,007.5 million as of December 31, 2004, NT$4,821.8 million as of December 31, 2005 and NT$8,342.6 million (US$256.0 million) as of December 31, 2006. For a discussion of an increase in receivables, please see “Item 4.B. Business Overview—Customers, Sales and Marketing.”

BenQ Optronics (Suzhou) Co. Ltd. (“BQOS”)

BQOS, an affiliate of our company, was 100% indirectly owned by BenQ as of March 31, 2007. We sell desktop monitor display panels and consumer electronics display panels to BQOS. We generated net sales to BQOS in the amount of NT$132.8 million in 2004, NT$354.7 million in 2005 and NT$1,227.9 million (US$37.7 million) in 2006, and our receivables from these sales was NT$63.5 million as of December 31, 2005 and NT$432.1 million (US$13.3 million) as of December 31, 2006. We had no receivables as of December 31, 2004.

BenQ Technologies Czech S.V.O. (“BQZ”)

BQZ, an affiliate of our company, was 100% directly owned by BenQ as of March 31, 2007. We sell desktop monitor display panels and television display panels to BQZ. We generated net sales to BQZ in the amount of NT$210.8 million in 2005 and NT$209.8 million (US$6.4 million) in 2006, and our receivables from these sales was NT$132.8 million as of December 31, 2005 and NT$69.6 million (US$2.1 million) as of December 31, 2006.

BenQ Mexicana S.A. De C.V. (“BQX”)

BQX, an affiliate of our company, was 100.0% owned by BenQ as of March 31, 2007. We sell panels for desktop monitors to BQX. We generated net sales to BQX in the amount of NT$850.7 million in 2004, NT$370.2 million in 2005 and NT$164.5 million (US$5.0 million) in 2006, and our receivables from these sales was NT$85.1 million as of December 31, 2004, NT$216.0 million as of December 31, 2005 and NT$18.9 million (US$0.6 million) as of December 31, 2006.

Daxon Technology Inc. (“Daxon”)

Daxon, an affiliate of our company, was 53.37% directly and indirectly owned by BenQ as of March 31, 2007. We purchased polarizers from Daxon in the amount of NT$676.7 million in 2005 and NT$3,730.5 million

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(US$114.5 million) in 2006, and our payables from these purchases was NT$608.0 million as of December 31, 2005 and NT$1,433.9 million (US$44.0 million) as of December 31, 2006.

Darfon Electronics Corp. (“Darfon”)

Darfon, an affiliate of our company, was 58.27% directly and indirectly owned by BenQ as of March 31, 2007. We purchased inverters from Darfon in the amount of NT$113.3 million in 2004 and NT$203.7 million in 2005 and NT$254.0 million (US$7.8 million) in 2006, and our payables from these purchases was NT$50.7 million as of December 31, 2004, NT$99.9 million as of December 31, 2005 and NT$23.4 million (US$0.7 million) as of December 31, 2006.

Acer Inc.

Acer Inc. is our affiliate, owning a 4.71% equity interest in BenQ as of March 31, 2007. We sell notebook computer display panels and desktop monitor display panels to Acer Inc. We generated net sales to Acer Inc. in the amount of NT$6,733.6 million in 2004, NT$8,999.4 million in 2005 and NT$3,909.5 million (US$120.0 million) in 2006. Our receivables from these sales were NT$521.8 million as of December 31, 2004, NT$1,967.4 million as of December 31, 2005 and NT$8.9 million (US$0.3 million) as of December 31, 2006. As of June 30, 2006, Acer Inc. ceased using the equity method to valuate its investment in BenQ and has not considered BenQ an affiliate since then. Therefore, related party transactions with Acer Inc. are accounted for up until June 30, 2006.

Wistron Corp. and affiliates

Wistron Corp., an affiliate of our company, was 8.75% owned by Acer Inc. as of March 31, 2007. We sell notebook computer display panels to Wistron. We generated net sales to Wistron in the amount of NT$931.7 million in 2004, NT$393.2 million in 2005 and NT$13.9 million (US$0.4 million) in 2006. Our receivables from these sales were, NT$116.2 million as of December 31, 2004 and NT$51.3 million as of December 31, 2005. We had no receivables as of December 31, 2006.

Wistron InfoComm (Philippines) Corp., an affiliate of our company, was 100.0% owned by Wistron Corp. as of March 31, 2007. We sell notebook computer display panels to Wistron InfoComm (Philippines) Corp. We generated net sales to Wistron InfoComm (Philippines) Corp. in the amount of NT$906.9 million in 2004, NT$167.7 million in 2005 and NT$22.6 million (US$0.7 million) in 2006, and our receivables from these sales were NT$53.8 million as of December 31, 2004 and NT$27.7 million. We had no receivables as of December 31, 2006.

Wistron InfoComm (Kuanshan) Corp., an affiliate of our company, was 100.0% indirectly owned by Wistron Corp. as of March 31, 2007. We sell notebook computer display panels to Wistron InfoComm (Kuanshan) Corp. We generated net sales to Wistron InfoComm (Kuanshan) Corp. in the amount of NT$819.6 million in 2004, NT$961.8 million in 2005 and NT$0.3 million (US$0.0 million) in 2006, and our receivables from these sales were NT$213.0 million as of December 31, 2004 and NT$0.3 million as of December 31, 2005. We had no receivables as of December 31, 2006.

Wistron InfoComm Manufacturing (Kuanshan) Co. Ltd., an affiliate of our company, was 100.0% indirectly owned by Wistron Corp. as of March 31, 2007. We sell notebook computer display panels to Wistron InfoComm Manufacturing (Kuanshan) Co. Ltd. We generated net sales to Wistron InfoComm Manufacturing (Kuanshan) Co. Ltd. in the amount of NT$826.9 million in 2005, and our receivables from these sales were NT$103.8 million as of December 31, 2005.

As of June 30, 2006, Wistron Corp. and affiliates ceased using the equity method to valuate its investment in BenQ and has not considered BenQ an affiliate since then. Therefore, related party transactions with Wistron Corp. and affiliates are accounted for up until June 30, 2006.

Acer Building Maintenance Management Corp.

Acer Building Maintenance Management Corp., an affiliate of our company, was 100.0% indirectly owned by Acer Inc. as of March 31, 2007. In 2000, we entered into lease agreements with Min Tour Inc., the predecessor of Acer Building Maintenance Management Corp., for land, buildings, dormitories and equipment. We paid Min Tour

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related rent and administration fees in the amount of NT$89.3 million in 2003. In September 2003, Min Tour was acquired by Acer Building Maintenance Management Corp., and the obligations of Min Tour Inc. under these agreements were assumed by Acer Building Maintenance Management Corp. after the acquisition. We paid Acer Building Maintenance Management Corp. related rent and administration fees in the amount of NT$89.5 million in 2004. As security for our obligations under the lease agreement, we made refundable deposits, the outstanding balance of which amounted to NT$867.0 million as of December 31, 2004. No payments to Acer Building Maintenance Management Corp. were made in 2005 and the balance of refundable deposits was zero as of December 31, 2005. In January 2005, we purchased 193,058 square meters of land in Taoyuan, Taiwan from Acer Building Maintenance Management Corp. for a purchase price of approximately NT$2,774 million. As of June 30, 2006, Acer Building Maintenance Management Corp. ceased using the equity method to valuate its investment in BenQ and has not considered BenQ an affiliate since then. Therefore, related party transactions with Acer Building Maintenance Management Corp. are accounted for up until June 30, 2006.

Cando Corporation

We owned 21.47% of Cando Corporation as of March 31, 2007. We purchased color filters from Cando Corporation in the amount of NT$2,551.1 million in 2004, NT$2,986.8 million in 2005 and NT$3,365.9 million (US$103.3 million) in 2006, and our payables from these purchases were NT$633.9 million, NT$1,111.4 million and NT$881.0 million (US$27.0 million) as of December 31, 2004, 2005 and 2006, respectively.

Quanta Computer Inc. (“QCI”) and affiliates

Quanta Computer was the parent company of QDI prior to our merger with QDI. Pursuant to the merger agreement dated April 7, 2006, two former executives of QDI and its affiliates were given board membership, one of which is currently serving as the vice-chairman of our board of directors.

We sell television and desktop monitor display panels to QCI. We generated net sales to QCI in the amount of NT$562.4 million (US$17.3 million) in 2006, and our receivables from these sales was NT$312.4 million (US$9.6 million) as of December 31, 2006.

Tech-Front (Shanghai) Computer Co., Ltd. (“TFC”), an affiliate of our company, was 100% indirectly owned by QCI as of March 31, 2007. We sell notebook computer display panels to TFC. We generated net sales to TFC in the amount of NT$263.5 million (US$8.1 million) in 2006. Our receivables from these sales were NT$225.1 million (US$6.9 million) as of December 31, 2006.

Tech-Yeh (Shanghai) Computer Co., Ltd. (“TYC”), an affiliate of our company, was 100% indirectly owned by QCI as of March 31, 2007. We sell television display panels to TYC. We generated net sales to TYC in the amount of NT$382.4 million (US$11.7 million) in 2006. Our receivables from these sales were NT$230.1 million (US$7.1 million) as of December 31, 2006.

Tech-Pro (Shanghai) Computer Co., Ltd. (“TPC”), an affiliate of our company, was 100% indirectly owned by QCI as of March 31, 2007. We sell television display panels to TPC. We generated net sales to TPC in the amount of NT$226.3 million (US$6.9 million) in 2006. Our receivables from these sales were NT$184.3 million (US$5.7 million) as of December 31, 2006.

Other Related Company

Fujitsu Display Technologies Corporation (“FDTC”)

We purchased a 20% ownership interest in FDTC in March 2003 and sold a 10% ownership interest in August 2004. We sold our remaining 10% ownership in FDTC in May 2005. We purchased liquid crystals, backlight units, driver integrated circuits and polarizers from FDTC in the amount of NT$316.1 million in 2004. We sold display panels for notebook and desktop computers to FDTC in the amount of NT$2,538.8 million in 2004, NT$31.2 million in 2005.

We entered into a Joint Research and Development and Cost Sharing Agreement with FDTC in March 2003 for joint research and development of TFT-LCD technologies. This agreement was terminated in July 2004. We paid

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NT$182.3 million as cost shared for research and development project under this agreement in 2004. In 2005, FDTC was merged into Fujitsu Limited.

Toppan CFI (Taiwan) Co. Ltd. (“Toppan CFI”)

We purchased a 49.0% ownership interest in Toppan CFI in 2006. We purchased color filters from Toppan CFI in the amount of NT$2,241.3 million (US$68.8 million) in 2006, and our payables from these purchases amounted to NT$2,214.1 million (US$67.9 million) as of December 31, 2006.

7.C. Interests of Experts and Counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION

8.A. Consolidated Statements and Other Financial Information

8.A.1. See Item 18 for our audited consolidated financial statements.

8.A.2. See Item 18 for our audited consolidated financial statements, which cover the last three financial years.

8.A.3. See page F-2 for the audit report of our accountants, entitled “Report of Independent Registered Public Accounting Firm.”

8.A.4. Not applicable.

8.A.5. Not applicable.

8.A.6. See note 23 to our consolidated financial statements included in Item 18 of this annual report for the amount of our export sales.

8.A.7. Litigation

On April 13, 2004, Commissariat A L’Energie Atomique, a French government agency, filed a lawsuit against us, our U.S. subsidiary and sixteen other defendants in the United States Federal District Court for the District of Delaware. The suit alleges infringement of certain patents. The suit was dismissed in December 2006 after we entered into a patent license agreement with Commissariat A L’Energie Atomique.

On December 1, 2006, LG. Philips LCD filed a suit in the United States District Court for the District of Delaware against us and other TFT-LCD manufacturing companies, claiming infringement of certain of LG. Philips ’ patents in the United States r elating to the manufacturing of TFT-LCD panels. LG. Philips is seeking, among other things, monetary damages for past infringement and an injunction against future infringement. We are reviewing the merits of this suit on an on-going basis.

On March 8, 2 007, we filed a suit in the United States District Court for the Western District of Wisconsin against LG.Philips LCD and LG.Philips America , claiming infringement of certain of our patents in the United States relating to the manufacturing of TFT-LCD pane ls. We are seeking, among other things, monetary damages for past infringement and an injunction against future infringement. On May 30, 2007, the suit was transferred to the United States District Court for the District of Delaware.

On February 2, 2007, Anvik Corporation filed a suit in the United States District Court for the Southern District of New York against us and other TFT-LCD manufacturing companies, claiming infringement of certain of Anvik Corporation ’ s patents in the United States relating to the use of photo-masking equipment manufactured by Nikon Corporation in the manufacturing of TFT-LCD panels. Anvik Corporation is seeking, among other things, monetary damages for past infringement and an injunction against future infringement. We are rev i ewing the merits of this suit on an on-going basis.

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On March 19, 2007, Honeywell International Inc. and Honeywell Intellectual Properties Inc. filed a suit in the United States District Court for the Eastern District Court of Texas against us and other TF T-LCD manufacturing companies, including BenQ, claiming infringement of certain of Honeywell ’ s patents in the United States relating to the manufacturing of TFT-LCD panels. Honeywell International and Honeywell Intellectual Properties are seeking, among ot her things, monetary damages for past infringement and an injunction against future infringement. At this stage, it is not possible to predict the outcome or likely outcome of this investigation or these lawsuits, or the final costs of resolving these matt ers. We are reviewing the merits of this suit on an on-going basis.

In December 2006, certain of our subsidiaries received notice of an investigation into possible anticompetitive behavior in the TFT-LCD industry conducted by local authorities in the United States, Europe, Canada and Japan. In December, the local authority in Korea visited our affiliate in Korea. We and our affiliates intend to cooperate with these investigations. We have also been named as a defendant among certain other TFT-LCD manufacturers in over one hundred civil class action lawsuits in the United States and several civil class action lawsuits in Canada alleging antitrust violations. We retained counsels to handle the related matters. The ultimate outcome of the investigations or these lawsuits or the final costs of resolving these matters is uncertain. We are reviewing the merits of the investigations and civil lawsuits on an on-going basis.

The following is a description of a BenQ-related event and proceeding:

On March 22, 2007, the insolvency administrator of OHG asserted that it will file a claim against BenQ for €504,000,000. At this stage, it is not possible to assess the impact as to this event on our results of operations or financial position due to insufficient information to explain the legal ground for any such claim. We are reviewing this event on an on-going basis.

On March 30, 2007, BenQ filed a counter-claim against Siemens AG in an international arbitration tribunal in Switzerland. At this stage, it is not possible to predict the outcome or likely outcome of this event. We are reviewing this event on an on-going basis.

8.A.8. Dividends and Dividend Policy

We distributed cash dividends of NT$0.5 per share on August 11, 2003 and stock dividends of NT$0.5 per share for the year 2002 on July 31, 2003. We distributed a cash dividend of NT$1.2 per share on July 23, 2004 and a stock dividend of NT$0.5 per share on July 12, 2004 for the year 2003. We distributed a cash dividend of NT$1.2 per share on September 15, 2005 and a stock dividend of NT$0.9 per share on August 26, 2005 for the year 2004. We distributed a cash dividend of NT$0.3 per share on August 7, 2006 and a stock dividend of NT$0.3 per share on August 7, 2006 for the year 2005.

Our articles of incorporation provide that the cash portion of any dividend shall generally not be less than 10% of the annual dividend. However, the ratio for cash dividends may be adjusted in accordance with actual earnings and operation conditions. The form, frequency and amount of future dividends will depend upon our earnings, cash flow, financial condition, reinvestment opportunities and other factors.

We are generally not permitted under the ROC Company Law to distribute dividends or to make any other distributions to shareholders for any fiscal year in which we have no earnings. Our articles of incorporation provide that we shall allocate 10% of our annual earnings as a legal reserve in each fiscal year after:

payment of all income taxes; and

deduction of any past losses.

Earnings distributions are made in the following manner:

5% to 10% of the earnings to be distributed is distributable as a bonus for employees;

no more than 1% of the earnings to be distributed is distributable as remuneration to directors and supervisors; and

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all or a portion of the balance is distributable as dividend and bonus to our shareholders.

In addition to permitting dividends to be paid out of accumulated earnings after deducting losses, we are permitted under the ROC Company Law to make distributions to our shareholders of additional shares by capitalizing reserves, including the legal reserve. However, the capitalized portion payable out of our legal reserve is limited to 50% of the total accumulated legal reserve, and only if and to the extent the accumulated legal reserve exceeds 50% of our paid-in capital. See “Item 10. Additional Information—Articles of Incorporation—Dividends and Distributions.” For information as to ROC taxes on dividends and distributions, see “Item 10. Taxation—ROC Tax Considerations—Dividends.”

The holders of ADSs will be entitled to receive dividends to the same extent as the holders of our shares, subject to the terms of the deposit agreement.

Any cash dividends will be paid to the depositary in NT dollars and, after deduction of any applicable ROC taxes and fees and expenses of the depositary and custodian, except as otherwise provided in the deposit agreement, will be converted by the depositary into U.S. dollars and paid to the holders of ADSs. Whenever the depositary receives any free distribution of shares, including stock dividends, on any ADSs that the holders of ADSs hold, the depositary may, and will if we so instruct, deliver to the holders of ADSs additional ADSs which represent the number of shares received in the free distribution, after deduction of applicable taxes and the fees and expenses of the depositary and the custodian. If additional ADSs are not so delivered, each ADS that the holders of ADSs hold shall represent its proportionate interest in the additional shares distributed.

8.B. Significant Changes

We have not experienced any significant changes since the date of the annual financial statements.

ITEM 9. THE OFFER AND LISTING

9.A. Offering and Listing Details

Our shares have been listed on the Taiwan Stock Exchange since September 8, 2000 under the number “2409.” The ADSs have been listed on the New York Stock Exchange under the symbol “AUO” since May 23, 2002. The table below sets forth, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the Taiwan Stock Exchange for the shares and the high and low closing prices and the average daily volume of trading activity on the New York Stock Exchange for the shares represented by ADSs.

	Taiwan Stock Exchange						New York Stock Exchange(1)
	Closing Price Per Share						Closing Price per ADS
	High		Low		Average Daily Trading Volume		High		Low		Average Daily Trading Volume
	(NT$)		(NT$)		(in thousands of shares)		(US$)		(US$)		(in thousand of ADSs)
2002:		58.57		15.24		93,256.21		12.33		4.30		733.59
2003:		49.90		16.86		95,656.02		14.80		4.81		438.40
2004:		78.50		41.40		97,560.92		27.93		12.47		3,274.97
2005:		55.70		41.50		58,771.47		18.14		12.73		1,848.57
First Quarter		49.90		41.50		58,172.41		16.48		12.73		2,056.82
Second Quarter		55.70		45.45		59,284.95		18.14		14.57		1,650.07
Third Quarter		54.50		40.50		51,883.38		17.42		12.25		2,010.34
Fourth Quarter		49.00		36.05		55,640.56		15.01		10.93		2,459.76
2006:		55.20		40.00		47,043.79		17.56		12.16		2,162.58
First Quarter		55.20		45.55		61,146.76		17.30		14.15		2,531.71
Second Quarter		55.10		40.00		56,726.53		17.56		12.16		2,049.58
Third Quarter		50.60		44.15		37,891.75		15.83		13.46		2,054.66
Fourth Quarter		47.60		42.10		33,973.65		14.46		12.76		2,021.21
November		45.00		42.80		33,222.27		13.59		12.97		1,870.30
December		45.30		42.10		33,842.67		13.83		12.76		1,708.51
2007 (through June 26):		59.10		43.30		36,164.12		17.99		13.06		1,463.09

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	Taiwan Stock Exchange						New York Stock Exchange(1)
	Closing Price per Share						Closing Price per ADS
	High		Low		Average Daily Trading Volume		High		Low		Average Daily Trading Volume
	(NT$)		(NT$)		(in thousands of shares)		(US$)		(US$)		(in thousand of ADSs)
First Quarter		48.60		43.30		34,827.81		15.06		13.06		1,484.99
January		45.70		43.30		24,662.82		14.10		13.06		1,373.75
February		48.60		44.90		50,420.67		15.06		13.77		1,688.52
March		48.40		44.90		36,415.43		14.79		13.74		1,410.34
Second Quarter (through June 26)		59.10		47.85		37,455.14		17.99		14.69		1,440.83
April		54.00		47.85		48,311.05		16.71		14.69		1,756.30
May		54.90		50.80		27,181.41		16.51		15.30		1,221.58
June (through June 26)		59.10		52.80		37,978.88		17.99		16.15		1,358.294

(1)	Each ADS represents the right to receive 10 common shares.

9.B. Plan of Distribution

Not applicable.

9.C. Markets

The principal trading markets for our shares are the Taiwan Stock Exchange and the New York Stock Exchange, on which our shares trade in the form of ADSs.

9.D. Selling Shareholders

Not applicable.

9.E. Dilution

Not applicable.

9.F. Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

10.A. Share Capital

Not applicable.

10.B. Articles of Incorporation

The following statements summarize the material elements of our capital structure and the more important rights and privileges of our shareholders conferred by ROC law and our Articles of Incorporation.

Objects and Purpose

The scope of our business as set forth in Article 2 of our articles of incorporation includes the research, development, production, manufacture and sale of the following products: plasma display and related systems, liquid crystal display and related systems, LTPS and related systems, amorphous silicon photo sensor device parts and components, thin film photo diode sensor device parts and components, thin film transistor photo sensor device parts and components, touch imaging sensors, full color active-matrix flat panel displays, field emission displays, single crystal liquid crystal displays, original equipment manufacturing for amorphous silicon thin film transistor process and flat panel display modules, original design manufacturing and original equipment manufacturing business for flat panel display modules and the simultaneous operation of a trade business relating to our business.

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Directors

Our board of directors is elected by our shareholders and is responsible for the management of our business. Our articles of incorporation provide that our board of directors is to have between seven to nine members. Currently, our board of directors is composed of nine directors. The chairman of our board is elected by the directors. The chairman presides at all meetings of our board of directors, and also has the authority to represent our company. The term of office for our directors is three years.

As required under our articles of incorporation, we currently have three supervisors. In accordance with the ROC Company Law, supervisors are elected by our shareholders and cannot concurrently serve as our directors, executive officers or other staff members. The term of office for supervisors is three years. The supervisors’ duties and powers include, but are not limited to, investigation of our financial condition, inspection of corporate records, verification of statements by the board of directors, giving reports at shareholders’ meetings, representation of us in negotiations with our directors and giving notification, when appropriate, to the board of directors to cease acting in contravention of applicable law or regulations or our articles of incorporation or beyond our scope of business.

In addition, pursuant to the amended ROC Securities Exchange Act, a public company is required to either establish an ROC Audit Committee or retain supervisors, provided that the ROC Financial Supervisory Commission may, after considering the scale, business nature of a public company and other essential conditions, require the company to establish an ROC Audit Committee in place of its supervisors. Currently, the ROC Financial Supervisory Commission has not promulgated such compulsory rules, and all public companies may, at their discretion, retain either an ROC Audit Committee or supervisors.

The election of our directors and supervisors by our shareholders may be conducted by means of cumulative voting or other voting mechanics, if any, adopted in our articles of incorporation. Pursuant to the ROC Company Law, the election of our directors and supervisors is currently conducted by means of cumulative voting, as our articles of incorporation do not provide for another voting mechanism. The most recent election for all of the directors and supervisors was held on April 29, 2004.

Pursuant to the ROC Company Law, a person may serve as a director or supervisor in his or her personal capacity or as the representative of another legal entity. A legal entity that owns our shares may be elected as a director or supervisor, in which case a natural person must be designated to act as the legal entity’s representative. A legal entity that is our shareholder may designate its representative to be elected as our director or supervisor on its behalf. In the event several representatives are designated by the same legal entity, any or all of them may be elected. A natural person who serves as the representative of a legal entity as a director or supervisor may be removed or replaced at any time at the discretion of such legal entity, and the replacement director or supervisor may serve the remainder of the term of office of the replaced director or supervisor. Currently, four of our directors and two of our supervisors are representatives of other legal entities, as shown in “Item 6.—Directors, Senior Management and Employees—Directors and Senior Management—Executive Officers.”

The present members of the board of directors and supervisors took office on April 30, 2004. At the 2007 annual general shareholders meeting to be held on June 13, 2007, our shareholders will elect new directors and supervisors. Also, we received a proposal for our 2007 annual general shareholders meeting to adopt an ROC Audit Committee in place of our supervisors. All duties of supervisors will be performed by the ROC Audit Committee after the ROC Audit Committee is adopted.

Shares

As of March 31, 2007, our authorized share capital was NT$90 billion, divided into nine billion common shares, of which 100 million shares are reserved for the issuance of shares for employee stock options, and 7,573,782,895 shares were issued.

On June 15, 2006, our shareholders approved the issuance of 263,521,455 common shares for purposes of distributing stock dividends and employee stock bonuses. The stock issuance was authorized by the government authorities. The record date for this stock issuance is August 7, 2006.

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All shares presently issued, including those underlying our ADSs, are fully paid and in registered form, and existing shareholders are not obligated to contribute additional capital.

New Shares and Preemptive Rights

The issuance of new shares requires the prior approval of our board of directors. If our issuance of any new shares will result in any change in our authorized share capital, we are required under ROC law to amend our articles of incorporation, which requires approval of our shareholders in a shareholders’ meeting. We must also obtain the approval of, or submit a registration to, the ROC Financial Supervisory Commission and the Hsinchu Science Park Administration Bureau, as applicable. Generally, when a company issues capital stock for cash, 10% to 15% of the issue must be offered to its employees. In addition, if a public company intends to offer new shares for cash, at least 10% of the issue must also be offered to the public. This percentage can be increased by a resolution passed at a shareholders’ meeting, which will reduce the number of new shares in which existing shareholders may have preemptive rights. Unless the percentage of the shares offered to the public is increased by a resolution, existing shareholders of the company have a preemptive right to acquire the remaining 75% to 80% of the issue in proportion to their existing shareholdings.

Register of Shareholders and Record Date

Our share registrar, SinoPac Securities Corporation, maintains the register of our shareholders at its office in Taipei, Taiwan, and enters transfers of our shares in the register upon presentation of, among other documents, the certificates in respect of our shares transferred. The ROC Company Law permits us, by giving advance public notice, to set a record date and close the register of shareholders for a specified period in order to determine the shareholders or pledgees that are entitled to certain rights pertaining to our shares. Under the ROC Company Law, our register of shareholders should be closed for a period of sixty days before each ordinary meeting of shareholders, thirty days before each extraordinary meeting of shareholders and five days before each record date.

Transfer of Shares

Under the ROC Company Law, shares are transferred by endorsement and delivery of the related share certificates. In addition, transferees must have their names and addresses registered on our register in order to assert shareholders’ rights against us. Notwithstanding the foregoing, shareholders are required to file their specimen seals with our share registrar. The settlement of trading of our shares on the Taiwan Stock Exchange will be carried out on the book-entry system maintained by Taiwan Depository & Clearing Corporation.

Shareholders’ Meetings

We are required to hold an annual ordinary shareholders’ meeting once every calendar year, generally within six months after the end of each fiscal year. Any shareholder who holds 1% or more of our issued and outstanding common shares may submit one written proposal for discussion at our annual ordinary shareholders meeting. Our directors may convene an extraordinary shareholders’ meeting whenever they think fit, and they must do so if requested in writing by shareholders holding not less than 3% of our paid-in share capital who have held their shares for more than a year. In addition, any of our supervisors may convene a shareholders’ meeting under certain circumstances. For a public company in Taiwan, such as our company, at least 15 days’ advance written notice must be given of every extraordinary shareholders’ meeting and at least 30 days’ advance written notice must be given of every annual ordinary shareholders’ meeting. Unless otherwise required by law or by our articles of incorporation, voting for an ordinary resolution requires an affirmative vote of a simple majority of those present and voting. A distribution of cash dividends would be an example of an act requiring an ordinary resolution. A special resolution may be adopted in a meeting of shareholders convened with a quorum of holders of at least two-thirds of our total outstanding shares at which the holders of at least a majority of our shares represented at the meeting vote in favor thereof. A special resolution is necessary for various matters under ROC law, including:

any amendment to our articles of incorporation;

our dissolution or amalgamation;

a merger or spin-off;

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transfers of the whole or a substantial part of our business or properties;

the acquisition of the entire business of another company which would have a significant impact on our operations;

the distribution of any stock dividend; or

the removal of directors or supervisors.

However, in the case of a public company such as our company, a special resolution may be adopted by holders of at least two-thirds of the shares represented at a meeting of shareholders at which holders of at least a majority of the total outstanding shares are present.

Voting Rights

According to the ROC Company Law, a holder of our shares has one vote for each share held at shareholders’ meetings. However, (i) treasury shares or (ii) our common shares held by an entity in which our company owns more than 50% of the voting shares or paid-in capital, or “Controlled Entity,” or by a third entity in which our company and a Controlled Entity jointly own, directly or indirectly, more than 50% of the voting shares or paid-in capital cannot be voted. There is cumulative voting for the election of directors and supervisors. In all other matters, shareholders must cast all their votes the same way on any resolution. Voting rights attached to our common shares may be exercised by personal attendance or proxy, or at our discretion, by written or electronic ballot.

If any shareholder is represented at an ordinary or extraordinary shareholders’ meeting by proxy, a valid proxy form must be delivered to us five days before the commencement of the ordinary or extraordinary shareholders’ meeting. Voting rights attached to our shares that are exercised by our shareholders’ proxy are subject to ROC proxy regulations. Any shareholder who has a personal interest in a matter to be discussed at our shareholders’ meeting, the outcome of which may impair our interests, is not permitted to vote or exercise voting rights nor vote or exercise voting rights on behalf of another shareholder on such matter.

Except for trust enterprises or share transfer agents approved by the ROC Financial Supervisory Commission, where one person is appointed as proxy by two or more shareholders who together hold more than 3% of our shares, the votes of those shareholders in excess of 3% of our total issued shares will not be counted.

You will not be able to exercise voting rights on the shares underlying your ADSs on an individual basis.

Dividends and Distributions

We may distribute dividends in any year in which we have accumulated earnings. Before distributing a dividend to shareholders following the end of a fiscal year, we must recover any past losses, pay all outstanding taxes, and set aside in a legal reserve 10% of our annual earnings for that fiscal year until our legal reserve equals our paid-in capital.

At the shareholders’ annual ordinary meeting, our board of directors submits to the shareholders for approval proposals for the distribution of a dividend or the making of any other distribution to shareholders from our accumulated earnings or reserves for the preceding fiscal year. Dividends may be distributed either in cash, in the form of shares or a combination of cash and shares. Our articles of incorporation provide that the cash portion of any dividend shall generally not be less than 10% of the annual dividend. However, the ratio for cash dividends may be adjusted in accordance with actual earnings and operating conditions. Dividends are paid proportionately to shareholders as listed on the register of shareholders on the relevant record date.

Our articles of incorporation provide that we shall allocate 10% of our annual earnings as a legal reserve in each fiscal year after:

payment of all income taxes; and

deduction of any past losses.

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Earnings distributions are made in the following manner:

5% to 10% of the earnings to be distributed is distributable as a bonus for employees;

no more than 1% of the earnings to be distributed is distributable as remuneration to directors and supervisors; and

all or a portion of the balance is distributable as a dividend and bonus to our shareholders.

For information on the dividends paid by us in recent years, see “Item 8. Financial Information—Dividends and Dividend Policy.” For information as to ROC taxes on dividends and distributions, see “Item 10.—Additional Information—Taxation—ROC Tax Considerations—Dividends.”

Acquisition of Shares by Our Company

With limited exceptions under the ROC Company Law, we are not permitted to acquire our shares.

In addition, pursuant to the Securities and Exchange Law, we may, by a board resolution adopted by majority consent at a meeting with two-thirds of our directors present, purchase our shares on the Taiwan Stock Exchange or by a tender offer, in accordance with the procedures prescribed by the ROC Financial Supervisory Commission, for the following purposes:

to transfer shares to our employees;

to facilitate conversion arising from bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants issued by our company into shares; and

if necessary, to maintain our credit and our shareholders’ equity; provided that the shares so purchased shall be cancelled thereafter.

We are not allowed to purchase more than 10% of our aggregate issued and outstanding shares. In addition, we may not spend more than the aggregate amount of our retained earnings, the premium from issuing stock and the realized portion of the capital reserve to purchase our shares.

We may not pledge or hypothecate any purchased shares. In addition, we may not exercise any shareholders’ rights attaching to such shares. In the event that we purchase our shares on the Taiwan Stock Exchange or through a tender offer, our affiliates, directors, supervisors, officers and their respective spouses and minor children and/or nominees are prohibited from selling any of our shares during the period in which we purchase our shares.

According to the ROC Company Law, as last amended and effective from February 5, 2006, an entity in which our company directly or indirectly owns more than 50% of the voting shares or paid-in capital, which is referred to as a controlled entity, may not purchase our shares. Also, if our company and a controlled entity jointly own, directly or indirectly, more than 50% of the voting shares or paid-in capital of another entity, which is referred to as a third entity, the third entity may not purchase shares in either our company or a controlled entity.

On October 14, 2002, our board of directors approved a buyback program for market repurchases of up to 10 million shares during the period between October 15, 2002 and December 14, 2002 at the target purchase price of between NT$15 and NT$20 per share, with a view to transferring these shares to our employees. We did not make any repurchases under this buyback program. On December 16, 2002, our board of directors approved another buyback program for market repurchases of up to 20 million shares during the period between December 17, 2002 and February 16, 2003 at the target price of between NT$17.5 and NT$23.5 per share for the same purpose. We

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repurchased an aggregate of 12 million shares at an average purchase price of NT$20.9 per share, or an aggregate purchase price of NT$250.8 million, under this buyback program.

Liquidation Rights

In the event of our liquidation, the assets remaining after payment of all debts, liquidation expenses, taxes and distributions to holders of preferred shares, if any, will be distributed pro rata to our shareholders in accordance with the ROC Company Law.

Rights to Bring Shareholder Suits

Under the ROC Company Law, a shareholder may bring suit against us in the following events:

Within 30 days from the date on which a shareholders’ resolution is adopted, a shareholder may file a lawsuit to annul a shareholders’ resolution if the procedure for convening a shareholders’ meeting or the method of resolution violates any law or regulation or our articles of incorporation.

If the substance of a resolution adopted at a shareholders’ meeting contradicts any applicable law or regulation or our articles of incorporation, a shareholder may bring a suit to determine the validity of such resolution.

Shareholders may bring suit against our directors and supervisors under the following circumstances:

Shareholders who have continuously held 3% or more of the total number of issued and outstanding shares for a period of one year or longer may request in writing that a supervisor institute an action against a director on our behalf. In case the supervisor fails to institute an action within 30 days after receiving such request, the shareholders may institute an action on our behalf. In the event that shareholders institute an action, a court may, upon motion of the defendant, order such shareholders to furnish appropriate security.

In the event that any director, supervisor, officer or shareholder who holds more than 10% of our issued and outstanding shares and their respective spouse and minor children and/or nominees sells shares within six months after the acquisition of such shares, or repurchases the shares within six months after the sale, we may make a claim for recovery of any profits realized from the sale and purchase. If our board of directors or our supervisors fail to make a claim for recovery, any shareholder may request that our board of directors or our supervisors exercise the right of claim within 30 days. In the event our directors or our supervisors fail to exercise such right during such 30-day period, such requesting shareholder will have the right to make a claim for such recovery on our behalf. Our directors and supervisors will be jointly and severally liable for damages suffered by us as a result of their failure to exercise the right of claim.

Financial Statements

For a period of at least ten days before our annual shareholders’ meeting, we must make available our annual financial statements at our principal offices in Hsinchu, Taiwan and our share registrar in Taipei, for inspection by our shareholders.

Transfer Restrictions

Our directors, supervisors, officers and shareholders holding more than 10% of our issued and outstanding shares and their respective spouse and minor children and/or nominees, which we refer to as insiders, are required to report any changes in their shareholding to us on a monthly basis. No insider is permitted to sell shares on the Taiwan Stock Exchange for six months from the date on which the relevant person becomes an insider. In addition, the number of shares that insiders can sell or transfer on the Taiwan Stock Exchange on a daily basis is limited by ROC law. Furthermore, insiders may sell or transfer our shares on the Taiwan Stock Exchange only after reporting to the ROC Financial Supervisory Commission at least three days before the transfer, provided that such reporting is not required if the number of shares transferred does not exceed 10,000.

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Other Rights of Shareholders

Under the ROC Company Law, dissenting shareholders are entitled to appraisal rights in the event of a spin-off, a merger or various other major corporate actions. Dissenting shareholders may request us to redeem their shares at a fair price to be determined by mutual agreement. If no agreement can be reached, the valuation will be determined by court order. Dissenting shareholders may exercise their appraisal rights by notifying us before the related shareholders’ meeting or by raising and registering their dissent at the shareholders’ meeting.

Transfer Agent and Registrar

The transfer agent and registrar for our shares is SinoPac Securities Corporation, 3rd Floor, 53, Po Ai Road, Taipei, Taiwan; telephone number: 886-2-2381-6288. The transfer agent and registrar for our ADS is Citibank, N.A., 388 Greenwich Street, 14th Floor, New York, New York, 10013, USA; telephone number: 1-877-248-4237.

10.C. Material Contracts

License from FDTC (Fujitsu Limited) . We have a license agreement with FDTC (which was merged into Fujitsu Limited), effective as of March 31, 2003, which provides for the non-transferable and non-exclusive license and technical support to manufacture all of our TFT-LCD panels at each of our facilities. The agreement provides for an initial license fee and fixed royalty payments to be paid following the effective date of the agreement.

Licenses from SEL . We entered into a license agreement with SEL effective as of September 1, 2003 in connection with our settlement and mutual release relating to a suit brought by SEL. The license agreement provides for the non-transferable and non-exclusive license to manufacture all of our amorphous silicon TFT-LCD panels and modules at each of our facilities using intellectual property owned by SEL. The agreement provides for a fixed license fee and ongoing royalty payments.

QDI Merger Agreement . We entered into merger agreement with QDI dated April 7, 2006. Under the terms of the merger agreement, we offered one share of our common stock for every 3.5 shares of outstanding QDI common stock and we assumed substantially all of the assets, liabilities and personnel of QDI.

10.D. Exchange Controls

We have extracted from publicly available documents the information presented in this section. Please note that citizens of the PRC and entities organized in the PRC are subject to special ROC laws, rules and regulations, which are not discussed in this section.

The ROC’s Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated to handle foreign exchange transactions by the Central Bank of China. Current regulations favor trade-related foreign exchange transactions. Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters. All foreign currency needed for the importation of merchandise and services may be purchased freely from the designated foreign exchange banks.

Aside from trade-related foreign exchange transactions, Taiwan companies and residents may remit to and from Taiwan foreign currencies of up to US$50 million and US$5 million, respectively, each calendar year. A requirement is also imposed on all private enterprises to report all medium- and long-term foreign debt with the Central Bank of China.

In addition, a foreign person without an alien resident card or an unrecognized foreign entity may remit to and from Taiwan foreign currencies of up to US$100,000 per remittance if required documentation is provided to ROC authorities. This limit applies only to remittances involving a conversion between NT dollars and U.S. dollars or other foreign currencies.

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10.E. Taxation

ROC Tax Considerations

The following summarizes the principal ROC tax consequences of owning and disposing of ADSs and shares if you are not a resident of the ROC. You will be considered a non-resident of the ROC for the purposes of this section if:

you are an individual and you are not physically present in Taiwan for 183 days or more during any calendar year; or

you are an entity and you are organized under the laws of a jurisdiction other than Taiwan and have no fixed place of business or other permanent establishment or business agent in Taiwan.

You should consult your own tax advisors concerning the tax consequences of owning ADSs or shares in Taiwan and any other relevant taxing jurisdiction to which you are subject.

Dividends

Dividends, whether in cash or shares, declared by us out of retained earnings and paid out to a holder that is not a Taiwan resident in respect of shares represented by ADSs or shares are subject to ROC withholding tax. The current rate of withholding for non-residents is 20% of the amount of the distribution, in the case of cash dividends, or of the par value of the shares distributed, in the case of stock dividends. As discussed below in “Retained Earnings Tax,” our after-tax earnings will be subject to an undistributed retained earnings tax. To the extent dividends are paid out of retained earnings that have been subject to the retained earnings tax, the amount of such tax will be used by us to offset the withholding tax liability on such dividend. Consequently, the effective rate of withholding on dividends paid out of retained earnings previously subject to the retained earnings tax will be less than 20%. There is no withholding tax with respect to stock dividends declared out of our capital reserves.

Capital Gains

Gains realized on ROC securities transactions inside or outside of Taiwan are currently exempt from ROC income tax. In addition, sales of ADSs by non-resident holders are not regarded as sales of ROC securities and, as a result, any gains on such transactions are currently not subject to ROC income tax.

Securities Transaction Tax

The ROC government imposes a securities transaction tax that will apply to sales of shares, but not to sales of ADSs. The transaction tax is payable by the seller for the sale of shares and is equal to 0.3% of the sales proceeds.

Estate and Gift Tax

ROC estate tax is payable on any property within the ROC of a deceased individual, and ROC gift tax is payable on any property within the ROC donated by any individual. Estate tax is currently payable at rates ranging from 2% of the first NT$670,000 to 50% of amounts over NT$111,320,000. Gift tax is payable at rates ranging from 4% of the first NT$670,000 to 50% of amounts over NT$50,090,000. Under ROC estate and gift tax laws, shares issued by ROC companies, such as our shares, are deemed located in the ROC regardless of the location of the holder. It is unclear whether or not ADSs will be deemed assets located in the ROC for the purpose of ROC gift and estate taxes.

Preemptive Rights

Distributions of statutory preemptive rights for shares in compliance with the ROC Company Law are not subject to ROC tax. Proceeds derived from sales of statutory preemptive rights evidenced by securities by a non-resident are exempt from income tax, but may be subject to ROC securities transaction tax, discussed above. Proceeds derived from sales of statutory preemptive rights that are not evidenced by securities are subject to income tax at the rate of:

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25% of the gains realized by non-Taiwan entities; and

35% of the gains realized by non-Taiwan individuals.

We have the sole discretion to determine whether statutory preemptive rights are evidenced by securities or not.

Retained Earnings Tax

Under the ROC Income Tax Laws, we are subject to a 10% retained earnings tax on our after-tax earnings generated after January 1, 1998 that are not distributed in the following year. Any retained earnings tax so paid will further reduce the retained earnings available for future distribution. According to the amendment to the ROC Income Tax Law, effective from June 1, 2006, commencing from 2005, the undistributed retained earnings should be calculated in accordance with our audited financial statements rather than our tax returns submitted to the ROC taxation authority. When we declare dividends out of those retained earnings, a maximum amount of up to 10% of the declared dividends will be credited against the 20% withholding tax imposed on the non-resident holders of our ADS or shares.

Tax Treaty

Taiwan does not have an income tax treaty with the United States. Taiwan has tax treaties for the avoidance of double taxation with Indonesia, Singapore, South Africa, Australia, the Netherlands, Vietnam, New Zealand, Malaysia, Macedonia, Swaziland, Gambia, the United Kingdom, Senegal, Sweden, Belgium and Denmark which may limit the rate of ROC withholding tax on dividends paid with respect to shares. It is unclear whether, if you hold ADSs, you will be considered to hold shares for the purposes of these treaties. Accordingly, if you may otherwise be entitled to the benefits of an income tax treaty, you should consult your tax advisors concerning your eligibility for the benefits with respect to ADSs.

United States Federal Income Tax Considerations for United States Holders

The following is a discussion of the material U.S. federal income tax consequences of the purchase, ownership and disposition of our ADSs or shares to the U.S. Holders described in this annual report, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire such securities. The discussion set forth below applies only to beneficial owners of our ADSs or shares that are U.S. Holders, hold the ADSs or shares as capital assets and are non-residents of Taiwan as defined under “ROC Tax Considerations.” You are a “U.S. Holder” if, for United States federal income tax purposes, you are:

a citizen or resident of the United States;

a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or

an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

This summary is based on the Internal Revenue Code of 1986, as amended, (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis. In addition, this summary is based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. This summary does not contain a detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances and does not address the effects of any state, local or non-U.S. tax laws (or other U.S. federal tax consequences, such as U.S. federal estate or gift tax consequences). In addition, it does not describe the U.S. federal income tax consequences applicable to U.S. Holders subject to special treatment under the U.S. federal income tax laws, such as:

dealers and traders in securities or foreign currencies;

certain financial institutions;

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insurance companies;

tax-exempt organizations;

partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

persons liable for alternative minimum tax;

persons holding ADSs or shares as part of a hedge, straddle, conversion transaction, or integrated transaction;

persons owning, or treated as owning, 10% or more of our voting stock;

persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar; or

persons who acquired ADSs or shares pursuant to the exercise of any employee stock option or otherwise as compensation.

If a partnership holds our ADSs or shares, the tax treatment of a partner will depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding ADSs or shares, you are urged to consult your own tax advisor.

You are urged to consult your tax advisor concerning the particular United States federal income tax consequences to you of the purchase, ownership and disposition of ADSs or shares, as well as the consequences to you arising under the laws of any other taxing jurisdiction.

The U.S. Treasury has expressed concerns that parties involved in transactions in which ADSs are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by the holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S. Holders. Accordingly, the analysis of the creditability of ROC taxes and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, each described below, could be affected by actions that may be taken by parties to whom the ADSs are pre-released.

For U.S. federal income tax purposes, the beneficial owner of an ADS will generally be treated as the owner of the shares underlying the ADS. Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.

This discussion assumes that we were not a passive foreign investment company for our 2006 taxable year, as discussed below.

Taxation of Dividends

Distributions you receive on your ADSs or shares, other than certain pro rata distributions of shares, including amounts withheld in respect of ROC withholding taxes, will generally be treated as dividend income to you to the extent the distributions are made from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, we expect that distributions will generally be reported to U.S. holders as dividends. The amount of a dividend will include any amounts withheld by us or our paying agent in respect of ROC taxes (reduced by any credit against such withholding tax as a result of the 10% retained earnings tax previously paid by us). The amount will be treated as foreign source dividend income to you and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code.

Dividends paid in New Taiwan dollars will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your (or, in the case of ADSs, the depositary’s) receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in

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respect of the dividend income. You may have foreign currency gain or loss, which will be U.S. source, if you do not convert the amount of such dividend into U.S. dollars on the date of receipt.

Subject to limitations that may vary depending upon your circumstances and the concerns expressed by the U.S. Treasury described above, you may be entitled to a credit against your U.S. federal income taxes for the amount of ROC income taxes that are withheld from dividend distributions made to you. In determining the amounts withheld in respect of ROC taxes, any reduction of the amount withheld on account of an ROC credit in respect of the 10% retained earnings tax imposed on us is not considered a withholding tax and will not be treated as distributed to you or creditable by you against your U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules governing the foreign tax credit are complex. We therefore urge you to consult your own tax advisor regarding the availability of the foreign tax credit under your particular circumstances. Instead of claiming a credit, you may, at your election, deduct otherwise creditable ROC taxes in computing your taxable income, subject to generally applicable limitations.

Subject to applicable limitations that may vary depending upon a U.S. Holder’s individual circumstances, under current law, dividends paid to certain non-corporate U.S. Holders in taxable years beginning before January 1, 2011 will be taxable at a maximum tax rate of 15% if the dividends constitute qualified dividend income. Qualified dividend income means dividends received from qualified foreign corporations, and a foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the New York Stock Exchange where, our ADSs are traded. U.S. Holders should consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of their particular circumstances.

It is possible that pro rata distributions of shares to all shareholders may be made in a manner that is not subject to U.S. federal income tax, but is subject to ROC withholding tax as discussed above under “ROC Tax Considerations—Dividends.” Such distribution will not give rise to U.S. federal income tax against which the ROC withholding tax imposed on these distributions may be credited. Accordingly, you may not be able to credit such ROC tax against your U.S. federal income tax liability unless you have other foreign source income in the appropriate foreign tax credit class of income. The basis of any new ADSs or shares you receive as a result of a pro rata distribution of shares by us will be determined by allocating your basis in the old ADSs or shares between the old ADSs or shares and the new ADSs or shares received, based on their relative fair market values on the date of distribution.

Taxation of Capital Gains

For U.S. federal income tax purposes, when you sell or otherwise dispose of your ADSs or shares, you will recognize U.S. source capital gain or loss in an amount equal to the difference between the U.S. dollar value of the amount realized for the ADSs or shares and your adjusted tax basis in the ADSs or shares, determined in U.S. dollars. Any such gain or loss will be long-term capital gain or loss if you held the ADSs or shares for more than one year. Your ability to deduct capital losses is subject to limitations.

Passive Foreign Investment Company Rules

We believe that we were not a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our 2006 taxable year and do not expect to be considered a PFIC in the foreseeable future. However, since PFIC status depends upon the composition of our income and assets and the market value of our assets (including, among others, goodwill) from time to time, there can be no assurance that we will not be considered a PFIC for any taxable year. If we were treated as a PFIC for any taxable year during which you held ADSs or shares, certain adverse tax consequences could apply to you.

If we are treated as a PFIC for any taxable year during which you held ADSs or shares, gain recognized by you on a sale or other disposition of ADSs or shares would be allocated ratably over your holding period for the ADSs or shares. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge would be imposed on the amount allocated to such taxable year. Further, any distribution in respect of ADSs or shares in excess of 125%

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of the average of the annual distributions on ADSs or shares received by you during the preceding three years or your holding period, whichever is shorter, would be subject to taxation as described above. Certain elections may be available (including a mark-to-market election) that may mitigate the adverse tax consequences described above.

In addition, if we were to be treated as a PFIC in a taxable year in which we pay a dividend or the prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to certain non-corporate holders would not apply.

Information Reporting and Backup Withholding

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and to backup withholding unless (i) you are a corporation or other exempt recipient or (ii) in the case of backup withholding, you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.

The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the Internal Revenue Service.

10.F. Dividends and Paying Agents

Not applicable.

10.G. Statement by Experts

Not applicable.

10.H. Documents on Display

It is possible to read and copy documents referred to in this annual report that have been filed with the SEC at the SEC’s public reference rooms in Washington, D.C., New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the reference rooms.

10.I. Subsidiary Information

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

Market risk is the risk of loss related to adverse changes in market prices, including interest rates and foreign exchange rates, of financial instruments. We are exposed to various types of market risks, including changes in interest rates and foreign currency exchange rates, in the ordinary course of business.

We use financial instruments, including variable rate debt and swap and foreign currency forward contracts, to finance our operations and to manage risks associated with our interest rate and foreign currency exposures, through a controlled program of risk management in accordance with established policies. We have used, and intend to continue to use, derivative financial instruments only for hedging purposes. These policies are reviewed and approved by our board of directors. Our treasury operations are subject to the review of our internal audit department, which review is submitted for our supervisors’ review on a quarterly basis.

As of December 31, 2006, we had U.S. dollar- and Japanese yen-denominated savings and checking accounts of US$176.4 million and ¥8,954.2 million, respectively. We also had certificates of deposit denominated in U.S. dollars and Japanese yen in the amount of US$247.9 million and ¥27,624.7 million, respectively. Since export sales are primarily conducted in U.S. dollars, we had U.S. dollar-denominated accounts receivable of US$1,777.9 million as of December 31, 2006, which represents 98.0% of the total accounts receivable balance at that date. We also had Japanese yen-denominated accounts receivable of ¥495.6 million attributable to our Japanese operations as of

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December 31, 2006, which represents 0.2% of the total accounts receivable balance at that date. In addition, we had U.S. dollar- and Japanese yen-denominated accounts payable of US$1,605.1 million and ¥75,206.0 million, respectively, relating to our overseas vendors.

Our primary market risk exposures relate to interest rate movements on borrowings and exchange rate movements on foreign currency-denominated accounts receivable and capital expenditures relating to equipment used in our manufacturing processes and purchased primarily from Japan. The fair value of forward exchange contracts and interest rate swaps has been determined by obtaining from our bankers the estimated amount that would be received/(paid) to terminate the contracts.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations. We incur debt obligations primarily to support general corporate purposes, including capital expenditures and working capital needs. We use interest rate swaps to modify our exposure to interest rate movements and reduce borrowing costs. Interest rate swaps limit the risks of fluctuating interest rates by allowing us to convert a portion of the interest on our borrowings from a variable rate to a fixed rate.

As of December 31, 2006, we had 123 outstanding interest rate swap agreements with thirteen major international financial institutions, having a total notional principal amount of NT$56,500 million.

The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps, debt obligations and certain assets. For debt obligations, the table sets forth principal cash flows and related weighted average interest rates by expected maturity date. For interest rate swaps, the table presents notional amounts and weighted average interest rates by contractual maturity date. Notional amounts are used to calculate the contractual payments to be exchanged under a contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. The information is presented in the currencies in which the instruments are denominated. We do not have any capital lease obligations.

	Expected Maturity Date
	2007			2008			2009			2010			2011			Thereafter			Total			Fair Value at December 31, 2006
	(in thousands)
Assets
Certificates of Deposit:
Fixed rate (US$)		247,921			—			—			—			—			—			247,921			247,921
Average interest rate		5.170	%		—			—			—			—			—			5.170	%		5.170	%
Fixed rate (NT$)		5,503,644			—			—			—			—			—			5,503,644			5,503,644
Average interest rate		1.355	%		—			—			—			—			—			1.355	%		1.355	%
Fixed rate (JP¥)		27,624,699			—			—			—			—			—			27,624,699			27,624,699
Average interest rate		0.246	%		—			—			—			—			—			0.246	%		0.246	%
Fixed rate (CNY)		101,000			—			—			—			—			—			101,000			101,000
Average interest rate		1.620	%		—			—			—			—			—			1.620	%		1.620	%
Liabilities Bonds:
Secured (NT$) ⁽¹⁾		1,000,000			2,500,000			5,500,000			5,500,000			2,500,000			0			17,000,000			16,887,600
Fixed rate		1.430	%		1.430	%		1.741	%		1.976	%		1.948	%		––			1.784	%
Secured Long-term Loans:
Fixed rate (NT$)		150,000			325,000			550,000			475,000			0			0			1,500,000			1,532,197
Average interest rate		2.862	%		2.710	%		2.715	%		2.734	%		––			––			2.717	%
Variable rate (NT$)		30,921,556			36,622,512			41,072,279			33,029,544			27,678,665			12,075,720			181,400,276			181,400,276
Average interest rate		2.203	%		2.302	%		2.368	%		2.334	%		2.435	%		2.397	%		2.372	%
Interest Rate Swaps ⁽²⁾ :
Variable to fixed (NT$)		—			14,500,000			10,000,000			1,000,000			31,000,000			—			56,500,000			(324,153	)
Pay rate		—			2.231	%		1.928	%		2.040	%		2.059	%		—			2.080	%

(1)	NT$5,500 million are variable rate and NT$11,500 million are fixed rate.

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(2)	90-day Taipei Money Market Secondary middle rate settled quarterly (1.748% as of December 31, 2006).

Foreign Currency Risk

The primary foreign currencies to which we are exposed are the Japanese yen and the U.S. dollar. We enter into short-term forward exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities, and firm commitments for the purchase of raw materials and components and capital expenditures denominated in U.S. dollars. The purpose of entering into these hedges is to minimize the impact of foreign currency fluctuations on the results of operations. Gains and losses on foreign currency contracts and foreign currency denominated liabilities are recorded in the period of the exchange rate changes, while gain and loss on foreign currency contracts that hedge foreign currency commitments are deferred until the commitments are realized. The contracts have maturity dates that do not exceed three months.

The table below sets forth our outstanding foreign currency forward contracts as of December 31, 2006:

	(in thousands)
Contracts to sell US$/Buy NT$:
Aggregate contract amount	US$674,000
Average contractual exchange rate	NT$32.4559 per US$
Contracts to sell NT$/Buy Japanese yen:
Aggregate contract amount	NT$23,396,738
Average contractual exchange rate	JPY3.5689 per NT$
Contracts to sell NT$/Buy US$:
Aggregate contract amount	US$294,500
Average contractual exchange rate	NT$32.5805 per US$
Fair value of all forward contracts	NT$(506,632)

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this report, have concluded that based on the evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, that our disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the

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reliability of financial reporting and the preparation of financial statements for external purposes in accordance with ROC GAAP and US GAAP.

Our internal control over financial reporting includes those policies and procedures that:

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with ROC GAAP and US GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of internal control effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006 based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, our management believes that our internal control over financial reporting was effective as of December 31, 2006.

We merged with QDI on October 1, 2006. Our management excluded from its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 QDI’s internal control over financial reporting associated with total assets of NT$190,725.6 million as of the merger date and total manufacturing costs of NT$15,908.9 million for the year ended December 31, 2006.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by KPMG, an independent registered public accounting firm, as stated in their report which is included below.

Attestation Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

AU Optronics Corp.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting that AU Optronics Corp. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) . The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

AU Optronics Corp. acquired Quanta Display Inc. (“QDI”) on October 1, 2006 and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 the QDI’s internal control over financial reporting associated with total assets of NT$190,725.6 million as of the date of acquisition and total manufacturing costs of NT$15,908.9 million for the year ended December 31, 2006. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of QDI.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AU Optronics Corp. as of December 31, 2005 and 2006, and the related statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated June 26, 2007 expressed an unqualified opinion on those consolidated financial statements.

/s/KPMG Certified Public Accountants

Hsinchu, Taiwan (Republic of China)

June 26, 2007

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Vivien Huey-Juan Hsieh is an audit committee financial expert, as that term is defined in Item 16A(b) of Form 20-F.

ITEM 16B. CODE OF ETHICS

Our employee handbook, which applies to all officers and employees, contains provisions covering conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of company assets and encouraging the reporting of any illegal or unethical behavior. Although, we have not adopted a written code of

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ethics specifically for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, the provisions in our employee handbook cover these individuals and there have not been any waivers of the provisions of the employee handbook for any officers or employees. Ethical oversight and actual or apparent conflicts of interest have historically been handled informally by senior management, the board of directors and supervisors. We will continue to address violations of the code of business conduct and ethics contained in our employee handbook and will continue to consider a separate code of ethics with the board of directors should the need arise. We will provide a copy of our employee handbook without charge upon written request to:

AU Optronics Corp.

Finance Department

1 Li-Hsin Road 2

Hsinchu Science Park

Hsinchu, Taiwan

Republic of China

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Duration of the Mandate and Terms of Office of the Independent Registered Public Accounting Firm

KPMG, our independent registered public accounting firm, began serving as our auditor upon the formation of our company. The head auditors currently responsible for our audit are Mei-Yu Tseng and Chung-Hwa Wei. Ms. Tseng has been serving in her role since the second quarter of 2004, when she took over for Shing Hai Wei who had until then served as our head auditor since our incorporation. Mr. Wei has been serving in his role since the third quarter of 2005, when he took over for Kuen-Huei Chen who retired in October 2005 and had until then served as our head auditor.

Policy on Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm

Our audit committee is responsible for the oversight of KPMG’s work. The policy of our audit committee is to pre-approve all audit and non-audit services provided by KPMG, including audit services, audit-related services, tax services and other services, as described below. The audit committee sets forth its pre-approval in detail, listing the particular services or categories of services which are pre-approved, and setting forth a specific budget for such services. In urgent circumstances, the audit committee’s chairman may issue such a pre-approval. Additional services may be pre-approved on an individual basis. KPMG and our management then report to the audit committee on a quarterly basis regarding the extent of services actually provided in accordance with the applicable pre-approval, and regarding the fees for the services performed.

Auditor Fees

The following are fees for professional services to KPMG for the years ended December 31, 2005 and 2006.

	Year ended December 31,
Services	2005		2006
	NT$		NT$
	(in thousands)
Audit Fees ⁽¹⁾		26,611		37,930
Tax Fees ⁽²⁾		400		—
Total		27,011		37,930

(1)

Audit Fees . This category includes the audit of our financial statements, review of quarterly financial statements and services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years, and service related to testing the effectiveness of our internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of quarterly financial statements and statutory audits required by non-U.S. jurisdictions, including statutory audits required by the Tax Bureau of the ROC, Customs Bureau of the ROC and Financial Supervisory Commission of the ROC. This category also includes comfort letters, consents and assistance with and review of documents filed with the SEC.

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(2)	Tax Fees . This category consists of professional services rendered by KPMG for tax compliance.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.

Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.

PART III

ITEM 17. FINANCIAL STATEMENTS

We have elected to provide financial statements for fiscal year 2006 and the related information pursuant to Item 18.

ITEM 18. FINANCIAL STATEMENTS

Our consolidated financial statements and the report thereon by our independent auditors listed below are attached hereto as follows:

(a) Report of Independent Registered Public Accounting Firm dated June 26, 2007.

(b) Consolidated Balance Sheets of the Company and subsidiaries as of December 31, 2005 and 2006.

(c) Consolidated Statements of Income of the Company and subsidiaries for the years ended December 31, 2004, 2005 and 2006.

(d) Consolidated Statements of Stockholders’ Equity of the Company and subsidiaries for the years ended December 31, 2004, 2005 and 2006.

(e) Consolidated Statements of Cash Flows of the Company and subsidiaries for the years ended December 31, 2004, 2005 and 2006.

(f) Notes to Consolidated Financial Statements of the Company and subsidiaries.

ITEM 19. EXHIBITS

1.1	Articles of Incorporation (English translation).

2.1	Deposit Agreement, dated May 29, 2002, among AU Optronics Corp., Citibank, N.A. as depositary, and Holders and Beneficial Owners of American depositary shares evidenced by American depositary receipts issued thereunder, including the form of American depositary receipt (incorporated herein by reference to Exhibit 2(A) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

2.2	Amendment No. 1 to the Deposit Agreement, dated February 15, 2006, among AU Optronics Corp., Citibank, N.A. as depositary, and Holders and Beneficial Owners of American depositary shares evidenced by American depositary receipts issued thereunder, including the amended form of American depositary receipt.

4.1	Patent and Technology License Agreement by and between FDTC and AU Optronics Corp., for TFT-LCD technologies, dated March 31, 2003 (incorporated herein by reference to Exhibit 4(g) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

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4.2	Stock Purchase Agreement by and among FDTC, Fujitsu and AU Optronics Corp., for purchase certain amount of stocks of FDTC, dated March 25, 2003 (incorporated herein by reference to Exhibit 4(i) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.3	Patent License Agreement by and between SEL and AU Optronics Corp., for amorphous silicon TFT technologies, effective on September 1, 2003. (Confidential treatment requested for certain portions of the agreement).

4.4	Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, No. 76-6 Small Section, Hsinchu, Taiwan, Republic of China, with respect to part of the site of our previous L1 fab (incorporated herein by reference to Exhibit 4(j) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.5	Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, No. 77 Small Section, Hsinchu, Taiwan, Republic of China, with respect to part of the site of L1 fab (incorporated herein by reference to Exhibit 4(k) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.6	Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, Nos. 255-46 Gin-Shan Section, Hsinchu, Taiwan, Republic of China, the site of one of our 3.5-generation fabs (incorporated herein by reference to Exhibit 4(l) to ours annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.7	Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, Nos. 114-4 Gin-Shan Section, Hsin-Chu, Taiwan, Republic of China, the site of one of our 3.5-generation fabs (incorporated herein by reference to Exhibit 4(m) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.8	Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, Nos. 472 etc, Gin-Shan Section, Hsinchu, Taiwan, Republic of China, the site of one of our 3.5-generation fabs (incorporated herein by reference to Exhibit 4(n) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.9	Lease Agreement by and between Acer Display Technology, Inc. and Min-Tour Inc. for No. 1 Xinhe Road Aspire Park, 325 Lungtan, Taoyuan, Taiwan, Republic of China, the site of our fourth-generation fab and module-assembly plant (in Chinese, with English summary translation) (incorporated herein by reference to Exhibit 10.12 to our Registration Statement on Form F-1 (Registration No. 333-87418) as filed with Commission on May 1, 2002).

4.10	Lease Agreement by and between AU Optronics Corp. and UMC for No. 1, Gin-Shan Section 7 of Hsinchu Science Park, Hsinchu, Taiwan, Republic of China, the site of one of our fourth-generation fab module-assembly plant (in Chinese, with English summary translation) (incorporated herein by reference to Exhibit 10.13 to our Registration Statement on Form F-1 (Registration No. 333-87418) as filed with the Commission on May 1, 2002).

4.11	Lease Agreement by and between AU Optronics (Suzhou) Corp. and Chinese-Singapore Suzhou Industrial Park Development Co., Ltd. for No. 398, Suhong Zhong Road, Suzhou Industrial Park, Suzhou, The People’s Republic of China, the site of two of our module-assembly plants (incorporated herein by reference to Exhibit 4(q) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.12	Merger Agreement, dated April 7, 2006, between AU Optronics Corp. and Quanta Display Inc. (incorporated herein by reference to Item 1 of our Form 6-K as filed with the Commission on May 12, 2006).

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4.13	Quanta Display Inc. 2002 Employee Stock Option Plan (English translation).

4.14	Quanta Display Inc. 2003 Employee Stock Option Plan (English translation).

8.1	List of Subsidiaries.

12.1	Certification of Kuen-Yao (K.Y.) Lee, Chairman and Chief Executive Officer of AU Optronics Corp., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (included on the signature page hereto).

12.2	Certification of Max Cheng, Chief Financial Officer of AU Optronics Corp., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (included on the signature page hereto).

13.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

AU OPTRONICS CORP.


By:	/s/ KUEN-YAO (K.Y.) LEE
	Name:	Kuen-Yao (K.Y.) Lee
	Title:	Chief Executive Officer

Date: June 29, 2007

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Consolidated Financial Statements of Advanced Semiconductor Engineering, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets	F-2
Consolidated Statements of Income	F-4
Consolidated Statements of Stockholders’ Equity	F-6
Consolidated Statements of Cash Flows	F-7
Notes to Consolidated Financial Statements	F-8

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AU OPTRONICS CORP.

AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2004, 2005 and 2006

(With Report of Independent Registered Public Accounting Firm)

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

AU Optronics Corp.:

We have audited the consolidated balance sheets of AU Optronics Corp. and subsidiaries (the “Company”) as of December 31, 2005 and 2006, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AU Optronics Corp. and subsidiaries as of December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the Republic of China.

As further described in note 2(z) to the consolidated financial statements, the Company adopted, effective January 1, 2006, the Republic of China Statement of Financial Accounting Standards (ROC SFAS) No. 34, “Financial Instruments: Recognition and Measurement”, ROC SFAS No. 36, “Financial Instruments: Disclosure and Presentation”, the amended ROC SFAS No. 1, “Conceptual Framework for Financial Accounting and Preparation of Financial Statements” and the amended ROC SFAS No. 5, “Long-term Investments under Equity Method.”

The consolidated financial statements as of and for the year ended December 31, 2006, have been translated into United States dollars solely for the convenience of the readers. We have audited the translation and, in our opinion, the consolidated financial statements expressed in New Taiwan dollars have been translated into United States dollars on the basis set forth in note 2(w) to the consolidated financial statements.

Accounting principles generally accepted in the Republic of China vary in certain significant respects from accounting principles generally accepted in the United States of America (US GAAP). Information relating to the nature and effect of such differences is presented in note 25 to the consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 26, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG Certified Public Accountants

Hsinchu, Taiwan (Republic of China)

June 26, 2007

F-1

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AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2005 and 2006

(Expressed in thousands of New Taiwan dollars and US dollars )

	2005			2006
	NT$			NT$			US$
Assets
Current assets:
Cash and cash equivalents (note 3)		26,263,265			43,925,540			1,347,823
Notes and accounts receivable, net (note 6)		34,848,588			47,309,900			1,451,669
Receivables from related parties (note 19)		7,766,800			10,521,081			322,832
Other current financial assets (notes 5 and 6)		1,114,300			1,112,729			34,143
Inventories, net (note 7)		19,167,488			42,315,892			1,298,432
Prepayments and other current assets (note 21)		1,384,076			3,038,927			93,247
Deferred tax assets (note 16)		3,709,886			2,669,816			81,921
Available-for-sale financial assets — current (notes 2(z) and 4)		1,586,504			1,848,758			56,728
Total current assets		95,840,907			152,742,643			4,686,795
Long-term investments:
Equity method investments (note 8)		5,244,334			11,682,012			358,454
Available-for-sale financial assets — noncurrent (notes 2(z) and 4)		10,000			177,175			5,437
Financial assets carried at cost		63,538			536,961			16,476
Total long-term investments		5,317,872			12,396,148			380,367
Property, plant and equipment (notes 9, 19 and 20) :
Land		3,590,536			6,273,615			192,501
Buildings		38,056,666			59,044,906			1,811,749
Machinery and equipment		244,584,417			415,490,722			12,749,025
Other equipment		10,563,592			16,390,328			502,925
		296,795,211			497,199,571			15,256,200
Less: accumulated depreciation		(92,929,473	)		(141,700,949	)		(4,347,988	)
Construction in progress		1,704,372			6,254,058			191,901
Prepayments for purchases of land and equipment		15,556,729			19,797,975			607,486
Net property, plant and equipment		221,126,839			381,550,655			11,707,599
Intangible assets:
Technology related fees (note 21)		2,483,329			2,485,374			76,262
Goodwill (note 24)		-			14,288,008			438,417
Core technologies (note 24)		-			3,369,392			103,387
Total intangible assets		2,483,329			20,142,774			618,066
Other assets:
Idle assets, net (note 9)		1,165,781			1,776,756			54,519
Refundable deposits (note 19)		246,373			274,248			8,415
Deferred charges and others		1,441,982			3,632,452			111,459
Deferred tax assets (note 16)		222,157			2,433,212			74,661
Restricted cash in bank (note 20)		32,200			43,200			1,326
Long-term prepayments for materials (note 21)		1,918,888			3,063,271			93,994
Prepaid pension cost (note 14)		-			70,602			2,166
Total other assets		5,027,381			11,293,741			346,540
Total Assets		329,796,328			578,125,961			17,739,367

See accompanying notes to consolidated financial statements.

F-2

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AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Balance Sheets (continued)

December 31, 2005 and 2006

(Expressed in thousands of New Taiwan dollars and US dollars, except for par value)

	2005		2006
	NT$		NT$		US$
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings (note 10)		-		3,729,465		114,436
Accounts payable		48,642,321		69,495,532		2,132,419
Payables to related parties (note 19)		2,197,285		6,738,803		206,775
Accrued expenses and other current liabilities (note 16)		9,491,564		14,237,442		436,865
Financial liabilities measured at fair value—current (notes 2(z) and 5)		-		506,632		15,546
Equipment and construction in progress payable		19,694,213		30,719,178		942,595
Current installments of long-term borrowings (notes 13 and 20)		9,832,723		31,071,555		953,408
Current installments of bonds payable (notes 11, 12 and 20)		-		10,818,265		331,950
Total current liabilities		89,858,106		167,316,872		5,133,994
Long-term liabilities:
Financial liabilities measured at fair value — noncurrent ( notes 2(z) and 5 )		-		1,534		47
Bonds payable, excluding current installments (notes 11 and 20)		12,000,000		16,000,000		490,948
Convertible bonds payable (note 12)		-		11,559,907		354,707
Long-term borrowings, excluding current installments (notes 13 and 20)		71,940,306		151,828,721		4,658,752
Hedging derivative financial liabilities—noncurrent (notes 2(z) and 5)		-		322,619		9,900
Total long-term liabilities		83,940,306		179,712,781		5,514,354
Other liabilities (note 14)		178,424		19,990		613
Total liabilities		173,976,836		347,049,643		10,648,961
Stockholders’ equity (notes 2(z), 5 and 15):
Capital stock:
Common stock, NT$10 par value		58,305,471		75,734,028		2,323,842
Capital surplus		57,664,144		110,675,618		3,396,000
Retained earnings:
Legal reserve		4,964,545		6,527,244		200,284
Special reserve		201,809		201,809		6,193
Unappropriated retained earnings		34,507,005		37,262,566		1,143,374
		39,673,359		43,991,619		1,349,851
Cumulative foreign currency translation adjustment		59,213		305,857		9,385
Unrealized gain or loss on financial instruments		-		27,182		834
		155,702,187		230,734,304		7,079,912
Minority interest		117,305		342,014		10,494
Total stockholders’ equity		155,819,492		231,076,318		7,090,406
Commitments and contingent liabilities (notes 11, 13, 19 and 21)
Total Liabilities and Stockholders’ Equity		329,796,328		578,125,961		17,739,367

See accompanying notes to consolidated financial statements.

F-3

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AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2004, 2005 and 2006

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

	2004		2005			2006
	NT$		NT$			NT$			US$

Net sales (note 19)		168,111,569		217,388,388			293,106,770			8,993,764
Cost of goods sold (note 19)		128,468,264		187,540,389			263,256,485			8,077,830
Gross profit		39,643,305		29,847,999			29,850,285			915,934
Operating expenses (note 19):
Selling		2,447,102		4,016,672			6,776,339			207,927
General and administrative		3,577,327		3,960,354			4,094,917			125,649
Research and development		5,011,547		4,882,285			4,762,767			146,142
		11,035,976		12,859,311			15,634,023			479,718
Operating income		28,607,329		16,988,688			14,216,262			436,216
Non-operating income and gains:
Interest income		174,898		225,062			1,136,209			34,864
Investment gain recognized by equity method, net (note 8)		34,268		-			-			-
Gain on sale of investments, net (notes 4 and 8)		39,778		121,679			29,562			907
Foreign currency exchange gain, net		85,132		645,572			598,282			18,358
Other income		166,899		228,886			458,694			14,075
		500,975		1,221,199			2,222,747			68,204
Non-operating expenses and losses:
Interest expense (note 9)		796,279		1,311,683			3,401,740			104,380
Investment loss recognized by equity method, net (note 8)		-		588,597			1,701,545			52,211
Assets impairment loss (notes 4, 8 and 9)		-		22,321			287,052			8,808
Loss on valuation of financial instruments (notes 2(z) and 5)		-		-			608,572			18,674
Other losses		287,827		192,718			239,796			7,358
		1,084,106		2,115,319			6,238,705			191,431
Income before income tax and cumulative effect of changes in accounting principles		28,024,198		16,094,568			10,200,304			312,989
Income tax expense (note 16)		61,346		473,429			1,068,324			32,781
Income before cumulative effect of changes in accounting principles		27,962,852		15,621,139			9,131,980			280,208
Cumulative effect of changes in accounting principles (note 2(z))		-		-			(38,585	)		(1,184	)
Net income		27,962,852		15,621,139			9,093,395			279,024
Attributable to:
Equity holders of the parent company		27,962,852		15,626,991			9,103,472			279,333
Minority interest		-		(5,852	)		(10,077	)		(309	)
Net income		27,962,852		15,621,139			9,093,395			279,024

See accompanying notes to consolidated financial statements.

F-4

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AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Statements of Income (continued)

Years ended December 31, 2004, 2005 and 2006

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

2004

2005

2006

NT$

US$

Earnings per share—Basic (note 17):

Income before cumulative effect of changes in accounting principles

5.82

2.77

1.42

0.04

Cumulative effect of changes in accounting principles

(0.01

)

Basic EPS—net income

5.82

2.77

1.41

0.04

Basic EPS—retroactively adjusted

5.02

2.65

Earnings per share—Diluted (note 17):

Income before cumulative effect of changes in accounting principles

5.82

2.77

1.32

0.04

Cumulative effect of changes in accounting principles

(0.01

)

Diluted EPS—net income

5.82

2.77

1.31

0.04

Diluted EPS—retroactively adjusted

5.02

2.65

See accompanying notes to consolidated financial statements.

F-5

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AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Years ended December 31, 2004, 2005 and 2006

(Expressed in thousands of New Taiwan dollars, US dollars and shares)

	Capital Stock							Retained Earnings
	Common shares		Common stock		Capital surplus			Legal reserve		Special reserve		Unappropriated retained earnings			Cumulative foreign currency translation adjustment			Unrealized gain or loss on financial instruments			Treasury stock			Minority interest			Total

Balance at December 31, 2003		4,352,237		43,522,372		32,197,790			602,267		-		16,578,660			4,419			-			(250,981	)		-			92,654,527
Appropriation for legal reserve		-		-		-			1,565,993		-		(1,565,993	)		-			-			-			-			-
Cash dividends		-		-		-			-		-		(5,208,285	)		-			-			-			-			(5,208,285	)
Issuance of shareholders stock dividends		217,012		2,170,119		-			-		-		(2,170,119	)		-			-			-			-			-
Issuance of employee stock bonus		88,792		887,918		-			-		-		(887,918	)		-			-			-			-			-
Cash employees’ profit sharing		-		-		-			-		-		(380,535	)		-			-			-			-			(380,535	)
Remuneration to directors and supervisors		-		-		-			-		-		(70,470	)		-			-			-			-			(70,470	)
Issuance of common stock for cash		300,000		3,000,000		12,967,194			-		-		-			-			-			-			-			15,967,194
Effect of disproportionate participation in investee’s capital increase		-		-		109			-		-		(153,569	)		-			-			-			-			(153,460	)
Net income		-		-		-			-		-		27,962,852			-			-			-			-			27,962,852
Foreign currency translation adjustment		-		-		-			-		-		-			(206,228	)		-			-			-			(206,228	)
Balance at December 31, 2004		4,958,041		49,580,409		45,165,093			2,168,260		-		34,104,623			(201,809	)		-			(250,981	)		-			130,565,595
Appropriation for legal reserve		-		-		-			2,796,285		-		(2,796,285	)		-			-			-			-			-
Appropriation for special reserve		-		-		-			-		201,809		(201,809	)		-			-			-			-			-
Cash dividends		-		-		-			-		-		(5,935,249	)		-			-			-			-			(5,935,249	)
Issuance of shareholders stock dividends		445,144		4,451,437		-			-		-		(4,451,437	)		-			-			-			-			-
Issuance of employee stock bonus		97,363		973,625		-			-		-		(973,625	)		-			-			-			-			-
Cash employees’ profit sharing		-		-		-			-		-		(649,084	)		-			-			-			-			(649,084	)
Remuneration to directors and supervisors		-		-		-			-		-		(37,447	)		-			-			-			-			(37,447	)
Issuance of common stock for cash		330,000		3,300,000		12,294,150			-		-		-			-			-			-			-			15,594,150
Issuance of treasury stock to employees		-		-		-			-		-		(73,076	)		-			-			250,981			-			177,905
Effect of disproportionate participation in investee’s capital increase		-		-		204,901			-		-		(106,597	)		-			-			-			-			98,304
Net income		-		-		-			-		-		15,626,991			-			-			-			-			15,626,991
Minority interest in net income of subsidiaries		-		-		-			-		-		-			-			-			-			(5,852	)		(5,852	)
Foreign currency translation adjustment		-		-		-			-		-		-			261,022			-			-			-			261,022
Adjustments for changes in minority interests		-		-		-			-		-		-			-			-			-			123,157			123,157
Balance at December 31, 2005		5,830,548		58,305,471		57,664,144			4,964,545		201,809		34,507,005			59,213			-			-			117,305			155,819,492
Appropriation for legal reserve		-		-		-			1,562,699		-		(1,562,699	)		-			-			-			-			-
Cash dividends		-		-		-			-		-		(1,749,164	)		-			-			-			-			(1,749,164	)
Issuance of shareholders stock dividends		174,916		1,749,164		-			-		-		(1,749,164	)		-			-			-			-			-
Issuance of employee stock bonus		88,605		886,051		-			-		-		(886,051	)		-			-			-			-			-
Cash employees’ profit sharing		-		-		-			-		-		(379,736	)		-			-			-			-			(379,736	)
Remuneration to directors and supervisors		-		-		-			-		-		(21,097	)		-			-			-			-			(21,097	)
Issuance of new shares for merger		1,479,110		14,791,100		52,957,471			-		-		-			-			-			-			-			67,748,571
Employee stock options assumed from merger with QDI		-		-		76,062			-		-		-			-			-			-			-			76,062
Issuance of stock for employee stock options exercised		224		2,242		6,390			-		-		-			-			-			-			-			8,632
Effect of disproportionate participation in investee’s capital increase and unrealized gain or loss on financial instruments		-		-		(28,449	)		-		-		-			-			11,912			-			-			(16,537	)
Net income		-		-		-			-		-		9,103,472			-			-			-			-			9,103,472
Minority interest in net income of subsidiaries		-		-		-			-		-		-			-			-			-			(10,077	)		(10,077	)
Unrealized gain on available-for-sale financial assets		-		-		-			-		-		-			-			255,159			-			-			255,159
Unrealized loss on cash flow hedges		-		-		-			-		-		-			-			(239,889	)		-			-			(239,889	)
Foreign currency translation adjustment		-		-		-			-		-		-			246,644			-			-			-			246,644
Adjustments for changes in minority interests		-		-		-			-		-		-			-			-			-			234,786			234,786
Balance at December 31, 2006		7,573,403		75,734,028		110,675,618			6,527,244		201,809		37,262,566			305,857			27,182			-			342,014			231,076,318
Balance at December 31, 2006 (in US$)				2,323,842		3,396,000			200,284		6,193		1,143,374			9,385			834			-			10,494			7,090,406

See accompanying notes to consolidated financial statements.

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Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2004, 2005 and 2006

(Expressed in thousands of New Taiwan dollars and US dollars)

	2004			2005			2006
	NT$			NT$			NT$			US$
Cash flows from operating activities:
Net income		27,962,852			15,621,139			9,093,395			279,024
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		23,653,128			33,271,070			50,632,568			1,553,623
Amortization of intangible assets and deferred charges		1,656,148			1,222,130			2,127,650			65,285
Provision for inventory devaluation		588,428			613,105			3,309,176			101,540
Investment loss (gain) recognized by equity method, net		(75,230	)		467,731			1,676,373			51,438
Proceeds from cash dividends		-			206,920			26,903			825
Unrealized foreign currency exchange loss (gain), net		4,046			(391,789	)		(393,310	)		(12,068	)
Provision for idle assets revaluation and others		136,574			22,321			287,052			8,808
Loss (gain) from disposal and write-off of property, plant and equipment, and others		22,539			35,469			(2,224	)		(68	)
Amortization of premium for convertible bonds and commercial paper		-			-			(549,683	)		(16,866	)
Loss on valuation of financial instruments and cumulative effect of change in accounting principles		-			-			713,966			21,908
Changes in operating assets and liabilities, net of effects from merger with QDI:
Decrease (increase) in notes and accounts receivable (including related parties)		(4,541,413	)		(22,100,074	)		598,788			18,373
Increase in inventories, net		(6,517,288	)		(3,895,603	)		(13,975,020	)		(428,813	)
Increase in deferred tax assets, net		(294,415	)		(1,048,303	)		(159,586	)		(4,897	)
Decrease (increase) in prepayments (including long-term prepayments for materials) and other current assets		(299,920	)		(3,489,294	)		1,191,679			36,566
Increase in notes and accounts payable (including related parties)		5,026,628			23,285,954			14,569,014			447,039
Increase (decrease) in accrued expenses and other current liabilities		2,012,180			4,204,553			(532,219	)		(16,331	)
Increase (decrease) in accrued pension liabilities		59,323			(19,299	)		(87,790	)		(2,694	)
Net cash provided by operating activities		49,393,580			48,006,030			68,526,732			2,102,692
Cash flows from investing activities:
Purchase of available-for-sale financial assets		-			-			(13,189	)		(404	)
Proceeds from disposal of available-for-sale financial assets		708,756			-			12,771			392
Acquisition of property, plant and equipment		(81,868,673	)		(80,652,331	)		(87,246,727	)		(2,677,101	)
Proceeds from disposal of property, plant and equipment		-			20,530			279,615			8,580
Purchase of long-term investments		(5,385,466	)		(266,072	)		(8,383,329	)		(257,236	)
Proceeds from disposal of long-term investments		230,736			319,612			60,373			1,852
Proceeds from long-term investments returned		-			21,284			-			-
Increase in intangible assets and deferred charges		(721,488	)		(2,778,815	)		(2,488,687	)		(76,364	)
Decrease in refundable deposits		25,961			882,591			49,054			1,505
Increase in restricted cash in bank		-			(3,000	)		(11,000	)		(338	)
Cash decrease resulting from change in consolidated entity		-			-			(32,528	)		(998	)
Cash assumed from merger with QDI		-			-			14,473,057			444,095
Net cash used in investing activities		(87,010,174	)		(82,456,201	)		(83,300,590	)		(2,556,017	)
Cash flows from financing activities:
Increase (decrease) in short-term borrowings		5,882,209			(6,183,004	)		(1,618,585	)		(49,665	)
Increase in guarantee deposits		1,455			3,729			3,275			100
Repayment of long-term borrowings and bonds payable		(6,892,110	)		(7,472,752	)		(19,753,513	)		(606,122	)
Proceeds from long-term borrowings and bonds payable		28,315,772			47,468,013			55,791,101			1,711,909
Issuance of common stock for cash		15,967,194			15,594,150			-			-
Cash dividends		(5,208,285	)		(5,935,249	)		(1,749,164	)		(53,672	)
Proceeds from issuance of stock for employee stock options exercised		-			-			8,632			265
Directors’ and supervisors’ remuneration and employees’ profit sharing		(451,005	)		(686,531	)		(400,833	)		(12,299	)
Proceeds from issuance of treasury stock		-			177,905			-			-
Proceeds from issuance of subsidiary shares to minority interests		-			131,087			269,907			8,282
Net cash provided by financing activities		37,615,230			43,097,348			32,550,820			998,798
Effect of exchange rate change on cash		(163,055	)		(181,575	)		(114,687	)		(3,519	)
Net increase (decrease) in cash and cash equivalents		(164,419	)		8,465,602			17,662,275			541,954
Cash and cash equivalents at beginning of year		17,962,082			17,797,663			26,263,265			805,869
Cash and cash equivalents at end of year		17,797,663			26,263,265			43,925,540			1,347,823
Supplemental disclosures of cash flow information:
Cash paid for interest expense (excluding interest capitalized)		771,423			1,190,438			2,883,499			88,478
Cash paid for income taxes		14,189			607,511			1,232,844			37,829
Additions to property, plant and equipment:
Increase in property, plant and equipment		83,047,775			93,854,019			89,246,312			2,738,457
Increase in construction in-progress and prepayments		(1,179,102	)		(13,201,688	)		(1,999,585	)		(61,356	)
Cash paid		81,868,673			80,652,331			87,246,727			2,677,101
Supplementary disclosure of non-cash investing and financing activities
Current installments of long-term liabilities		7,084,416			9,832,723			41,889,820			1,285,358
Cash assumed from merger with QDI:
Common stock issued for consideration of merger								67,764,472			2,079,303
Employee stock options assumed								73,383			2,252
Liabilities assumed								122,887,762			3,770,720
Less: Non-cash assets acquired								(161,964,552	)		(4,969,763	)
Less: Goodwill								(14,288,008	)		(438,417	)
Cash assumed from merger with QDI								14,473,057			444,095
Impact of change in consolidated entity:
Cash								32,528			998
Non-cash assets								68,195			2,093
Liabilities								(37,811	)		(1,160	)
Minority interests								(35,121	)		(1,078	)
								27,791			853

See accompanying notes to consolidated financial statements.

F-7

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of and for the years ended

December 31, 2004, 2005 and 2006

1.	Organization

AU Optronics Corp. (“AUO”) was founded in the Hsinchu Science Park of the Republic of China on August 12, 1996. AUO’s main activities are the research, development, production and sale of thin film transistor liquid crystal displays (“TFT-LCDs”), and other flat panel displays used in a wide variety of applications, including notebooks, desktop monitors, televisions, personal digital assistants, car televisions, digital cameras and camcorders, car navigation systems and mobile phones. AUO’s common shares were publicly listed on the Taiwan Stock Exchange in September 2000 and its American Depositary Shares (“ADSs”) were listed on the New York Stock Exchange in May 2002.

On September 1, 2001, Unipac Optoelectronics Corp. (“Unipac”) was merged with and into the Company in a transaction accounted for in accordance with the pooling-of-interests method of accounting. Unipac was principally engaged in the research, development, design, manufacture and sale of TFT-LCD and LCD modules.

On October 1, 2006, Quanta Display Inc. (“QDI”) was merged with and into the Company in a transaction accounted for in accordance with the purchase method of accounting. QDI was principally engaged in the manufacture of TFT-LCD and LCD modules.

AU Optronics (L) Corp. (“AUL”) is a wholly owned subsidiary of AUO and was incorporated in September 2000. AUL is a holding company investing in the wholly owned foreign subsidiaries including AU Optronics Corporation America (“AUA”), AU Optronics (Suzhou) Corp. (“AUS”), AU Optronics Europe B.V. (“AUE”), AU Optronics Korea Ltd. (“AUK”), AU Optronics Corporation Japan (“AUJ”), AU Optronics (Shanghai) Corp. (“AUSH”), AU Optronics (Xiamen) Corp. (“AUXM”), AU Optronics Singapore Pte. Ltd. (“AUSA”), and a 50%-owned subsidiary, namely Darwin Precisions (L) Corp. (“DPL”). AUS and AUXM are engaged in the assembly of TFT-LCD module products in Mainland China. AUA, AUJ, AUE, AUK and AUSA are mainly engaged in the sale of TFT-LCDs. AUSH is engaged in the sale of TFT-LCD module products in Mainland China. DPL is a holding company investing in the wholly owned foreign subsidiary, Darwin Precisions (Suzhou) Corp. (“DPS”) and Darwin Precisions (Xiamen) Corp. (“DPXM”). DPS and DPXM are engaged in the manufacture and assembly of backlight modules in Mainland China.

Konly Venture Corp. (“Konly”), a wholly owned subsidiary of AUO, was incorporated in August 2002. Konly is an investment holding company for investments in other technology companies including Raydium Semiconductor Corporation (“Raydium”). Raydium was incorporated in October 2003 and is engaged in the development, design and sale of integrated circuits.

(Continued)

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Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

QDI Development Limited (“QDL”) is a wholly owned subsidiary of AUO. QDL is a holding company investing in the wholly owned foreign subsidiary Quanta Display Japan Inc. (“QDJ”), which is engaged in the sale of TFT-LCD module products in Japan.

QDI International Limited (QIL) is a wholly owned subsidiary of AUO. QIL is a holding company investing in the wholly owned foreign subsidiary Tech-Well (Shanghai) Display Corp. (“AUSJ”). which is engaged in the assembly of TFT-LCD module products in Mainland China. Quanta Display Technology Investment Ltd. (“QDIT”) is a wholly owned subsidiary of AUO. QDIT is an investment holding company.

In January 2006, Konl y reduced its investment in Raydium to an ownership interest of less than 50% and no longer held a controlling interest over Raydium . As a result, Raydium is excluded from the Company ’ s consolidated financial statements from the date of the sale and the remaining 18% ownership interest in Raydium has been accounted for under the equity method .

In April and November 2006, AUL invest ed in wholly owned foreign subsidiar ies AUXM and AUSA , respectively . In June 2006, DPL invest ed in DPXM, a wholly owned forei gn subsidiary .

AUO acquired a controlling interest over QDL, QIL, QDIT , QDJ, and AUSJ in connection with the merger with QDI on October 1, 2006.

As of December 31, 2005 and 2006, AUO and its consolidated subsidiaries have 24,327 and 41,010 employees, respectively.

2.	Summary of Significant Accounting Policies

(a)

Accounting principles and consolidation policy

The consolidated financial statements include the accounts of AUO and the aforementioned subsidiaries, hereinafter, referred to individually or collectively as “the Company”. The Company includes in its consolidated financial statements the results of operations of all entities in which it has control over the financial and operating policies, irrespective of whether or not it has a majority shareholding in such entities.

The consolidated financial statements are prepared in accordance with the Guideline Governing the Preparation of Financial Report by Securities Issuers and accounting principles generally accepted in the Republic of China (“ROC GAAP”). These consolidated financial statements are not intended to present the financial position and the related results of operations and cash flows of the Company based on accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of China.

All significant intercompany balances and transactions are eliminated in the consolidated financial statements.

(Continued)

F-9

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(b)

Revenue recognition

Revenue is recognized when title to the products and risk of ownership are transferred to customers, which occurs principally at the time of shipment.

Allowance and related provisions for sales returns and discounts are estimated based on historical experience. Such provisions are deducted from sales in the year the products are sold.

(c)

Use of estimates

The preparation of the accompanying consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. Economic conditions and events could cause actual results to differ significantly from such estimates.

(d)

Foreign currency transactions and translation

AUO’s reporting currency is the New Taiwan dollar. The Company and its subsidiaries record transactions in their respective local currencies. The translation from the applicable foreign currency assets and liabilities to the New Taiwan dollar is performed using exchange rates in effect at the balance sheet date. Revenue and expense accounts are translated using average exchange rates during the year. Gains and losses resulting from such translations are recorded as a cumulative translation adjustment, a separate component of stockholders’ equity. Foreign currency transactions are recorded at the exchange rates prevailing at the transaction dates. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated using the exchange rates prevailing on that date.

Effective January 1, 2006 and in accordance with the amended Republic of China Statement of Financial Accounting Standards (ROC SFAS) No. 14, “The Effects of Changes in Foreign Exchange Rates”, non-monetary assets and liabilities denominated in foreign currency that are carried at fair value are reported at the rate that was in effect when the fair values were determined. Subsequent adjustments to carrying values of such non-monetary assets and liabilities, including the effects of changes in exchange rates, are reported in profit or loss for the period, except that if movements in fair values of a non-monetary item is recognized directly in equity, any foreign exchange component of that adjustment is also recognized directly in equity. The adoption of the amended ROC SFAS No. 14 had no impact on the Company’s consolidated financial statements.

(e)

Cash equivalents and restricted cash in bank

The Company consider s all highly liquid investments, such as investments in government bonds with repurchase agreements with original maturity of three months or less to be cash equivalents. Time deposits, which are provided as collateral, are classified as current assets or non-current assets depending on the term of the obligation secured by such collateral.

(Continued)

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Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(f)

Financial instruments and hedging activities

Effective January 1, 2006, the Company adopted ROC SFAS No. 34 , “ Financial Instruments: Recognition and Measurement . ” The Company adopted transaction (or settlement) date accounting for financial instrument transactions. Upon initial recognition, financial instruments are evaluated at fair value. Except for trading-purpose financial instruments, acquisition cost or issuance cost is added to the original ly recognized amount.

F inancial instruments are classified into the following categories in accordance with the purpose of holding or issuing of such financial instruments :

(1)

F inancial assets and liabilities measur ed at fair value through profit or loss : Financial instruments are classified into this category if the purpose of acquisition is principally for selling or repurchasing in the near term. Except for effective hedging derivative financial instruments, all other financial derivatives are included in this category.

(2)

Available - for - sale financial assets: These are evaluated at fair value, and any changes are recorded as a separate component of stockholders ’ equity. If there is objective evidence of impai rment, an impairment loss is recognized in profit or loss. If, in a subsequent period, events or changes in circumstances indicate that the amount of impairment loss decreases, reversal of a previously recognized impairment loss for equity securities is n ot allowed; while for debt securities, the reversal is allowed through profit or loss provided that the decrease is clearly attributable to an event which occurred after the impairment loss is recognized.

(3)

Financial liabilities measured at amortized c ost : Financial liabilities not measured at fair value through profit or loss and not designated as hedges are reported at amortized cost.

(4)

Financial assets carried at cost: Equity investments which cannot be evaluated at fair value are recorded base d on original cost. If there is objective evidence that an impairment loss has been incurred on unquoted equity instruments that is carried at cost, the amount of the impairment loss is measured as the difference between the carrying amount of the financ i al asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

(5)

Hedging purpose derivative financial instrument: Such derivative instruments are entered into for hedging pu rpose. The purpose of cross currency swaps for hedging purpose is to hedge exchange rate resulting from assets, liabilities or commitments denominated in foreign currency. Changes in the fair value of the hedging instrument designated as a cash flow hedge are recognized directly in equity. If a hedge of a forecasted transaction subsequently results in the recognition of a n asset or a liability, then the a mount recogni z ed in equity is reclassified into profit or loss in the same period or periods during wh ich the asset acquired or liability assumed affects profit or loss . F or hedges o ther than those covered by the preceding statements, the associated cumulative gain or loss is removed from equity and recogni z ed in profit or loss in the same period or perio ds during which the hedged forecast transaction affects profit or loss.

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. When a derivative financial instrument is no longer effective as a hedge, the Company discontinues hedge accounting prospectively and accounts for the derivative financial instruments as a financial asset or liability measured at fair value through profit or loss.

Effective January 1, 2006, the Company also adopted ROC SFAS No. 36 “ Financial Instruments : Disclosure and Presentation . ” ROC SFAS No. 36 require s the presentation of financial instruments and identifies the information to be disclosed. The presen tation requirements apply to the classification of financial instruments, from the perspective of issuer, into financial assets, financial liabilities and equity instrument , the classification of related interest, dividends, losses and gains , and the circu mstances in which financial assets and financial liabilities should be offset. This statement requires the disclosure of information about factors that affect the amount, timing and certainty of an entity ’ s future cash flows relating to financial instrume nts and accounting policies applied to those instruments. The guidance also requires disclosure of information about the nature and extent of an entity ’ s use of financial instruments, the business purpose s , the risks associated, and the management ’ s polic ies on controlling those risks. The principles in ROC SFAS No. 36 complement the principles in ROC SFAS No. 34 , “ Financial Instruments: Recognition and Measurement ” on the recognition and measurement of financial assets and financial liabilities.

Prior to the adoption of ROC SFAS No. 34, the Company ’ s accounted for its investment and other financial instruments, other than those accounted for under the equity method, as follows:

(1)

Equity investments of the Company were classified as short-term investm ents and long-term investments based on the intention and term of holding. Short-term i nvestments were recorded at cost when acquired and were stated at the lower of aggregate cost or fair value at the balance sheet date . The market value for open-end mu tual funds was determined based on the ir net asset value at the balance sheet date. The fair value of publicly traded equity securities was determined based on quoted market price on the balance sheet date . Impairment loss on short-term investment was ch arged to current operations. Long-term investments in non-listed securities were accounted for a t cost. If there is objective evidence that a decline in value of a long-term investment carried at cost was other than temporary, an impairment loss was reco gnized and charged to current operations .

(2)

F orward currency exchange contract receivables and payables were recorded at the spot rate at the date of inception. T he discount or premium wa s amortized on a straight-line basis over the life of the contrac t. Realized and unrealized gains or losses on these contracts resulting from actual settlement or balance sheet date translation were charged or credited to current operations.

(3)

I nterest rate swap contracts were used to hedge changes in cash flows a ssociated with variable rate of long-term debt. T he net amounts received or paid under the contracts were reported as adjustments to interest expense on long-term debt.

(Continued)

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Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(g)

Derivative financial instruments and hedging activities

Effective January 1, 2006, the Company adopted ROC SFAS No. 34, “Financial Instruments: Recognition and Measurement.” The Company uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. In accordance with the Company’s treasury policy, the Company holds or issues derivative financial instruments for hedging purposes. When a derivative financial instrument is no longer effective as a hedge, the Company discontinues hedge accounting prospectively and accounted it as financial instruments held for trading purposes.

Hedge accounting recognizes the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and the hedged item. If hedging relationship of a cash flow hedge meets the criteria for hedge accounting, it is accounted for as follows:

Changes in the fair value of the hedging instrument designated as a cash flow hedge are recognized directly in equity. If a hedge of a forecasted transaction subsequently results in the recognition of an asset or a liability, then the amount recognized in equity is reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. For hedges other than those covered by the preceding statements, the associated cumulative gain or loss is removed from equity and recognized in profit or loss in the same period or periods during which the hedged forecast transaction affects profit or loss.

The Company enters into forward foreign currency exchange contracts in 2005 to hedge currency fluctuations affecting foreign currency transactions. These forward exchange contract receivables and payables are recorded at the spot rate at the date of inception. The discount or premium is amortized on a straight-line basis over the life of the contract. Realized and unrealized gains or losses on these contracts resulting from actual settlement or balance sheet date translation are charged or credited to current operations. In addition, the Company enters into interest rate swap contracts to hedge changes in cash flows associated with existing variable rate of long-term debt. The net amounts received or paid under the contracts are reported as adjustments to interest expense on long-term debt.

(h)

Allowance for doubtful accounts

The allowance for doubtful accounts is based on the age, credit quality and results of the Company ’ s evaluation of collectibility of the outstanding balance of notes and accounts receivable.

(i)

Inventories

Inventories are stated at the lower of cost or fair value. Cost is determined using the weighted-average method. The fair value of raw material is determined on the basis of replacement cost.

Fair values of finished goods and work-in-process are determined on the basis of net realizable value. A provision for inventory obsolescence and devaluation is recorded when management determines that the fair values of inventories are less than the cost basis or when management determines that inventories cannot be liquidated without price concessions . The provision is calculated based, in part, on the number of months inventory items remain unsold .

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(j)

Equity method investments

Effective J anuary 1, 2006, u nder the amended ROC SFAS No. 5, “ Long-term Investment s in Equity Securities” and ROC SFAS No . 25, “ Business Combination s ” , the difference between the acquisition cost and carrying amount of net equity of the investee as of the acquisition date is allocated based upon the pro rata excess of fair value over the carrying value of noncurrent assets on the investee ’ s books. Allocated amounts are amortized based on the method used for the related assets. Any unallocated difference is treated a s investor level goodwill. If the allocation reduces noncurrent assets to zero value, the remaining excess over acquisition cost is recognized as an extraordinary gain.

Prior to January 1, 2006, investor level goodwill is amortized over five years on a straight-line basis . Commencing January 1, 2006, as r equired by the amended ROC SFAS No. 5 , investor level goodwill is no longer amortized but tested for impairment .

If an investee company issues new shares and the Company does not acquire new shares in proportion to its original ownership percentage, the Company’s equity in the investee’s net assets will be changed. The change in the equity interest shall be used to adjust capital surplus and long-term investment accounts. If the Company ’ s capital sur plus is in sufficient to offset the adjustment to long-term investment, the difference is charged as a reduction to retained earnings.

Unrealized inter-company profits or losses resulting from transactions between the Company and an investee accounted fo r under the equity method are deferred to the extent of the Company ’ s ownership . P rofits or losses resulting from deprecia ble or amortiz able assets are recognized over the estimated economic lives of such assets. P rofits or losses from other assets are r ecognized when realized.

Prior to January 1, 2005, if equity-method investees were unable to forward their audited financial statements in a timely manner, the Company recognize d its equity in the income (loss) of the investees in the following year. Co mmencing January 1, 2005, the Company recognizes its equity in the income (loss) of the investees on a current year basis. As a result of this change, the Company recognized investment loss pertaining to fiscal year 2004 of NT$10,405 thousand for the year ended December 31, 2005 . See note 2(z).

The differences resulting from translation of the financial statements of the foreign investees accounted for under the equity method into New Taiwan dollars, net of the related tax effect, are recorded as cumula tive translation adjustments in stockholders ’ equity.

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(k)

Property, plant and equipment

Property, plant and equipment are stated at acquisition cost. Significant renewals and improvements are treated as capital expenditures and are depreciated ac cordingly. Interest costs related to the construction of property, plant and equipment are capitalized and included in the cost of the related asset. Maintenance and repairs are charged to expense as incurred.

Excluding land, depreciation of propert y, plant and equipment is provided over the estimated useful lives of the respective assets using the straight-line method less any salvage value. The range of the estimated useful lives is as follows: buildings — 20 to 50 years, machinery and equipment — 3 to 10 years, leasehold improvement — shorter of 5 years or the lease term, and other equipment — 3 to 5 years.

Property, plant and equipment not in use are classified as idle assets and are stated at the lower of carrying amount or net realizable value .

(l)

Impairment of long-lived assets and long-lived assets to be disposed of

Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net discounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the i mpairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(m)

Goodwill and other intangible assets

I ntangible asset s are recorded at cost or at fair value on the acquisition date and are amortized over the estimated useful lives using the straight-line method. The costs of patent s and license s for the product and process technology for TFT-LCDs and other flat-panel displays are capitalized and amortized on a straight-line basis over their estimated useful lives generally for periods ranging from 3 to 15 years.

Goodwill is recognized when the purchase price exceeds the fair value of i dentifiable net assets acquired in a business combination . Effective January 1, 2006 and in accordance with the amended ROC SFAS No. 25 , “ Business Combination s ” , goodwill is no longer amortized but is tested for impairment in accordance with ROC SFAS No. 3 5 , “ Impairment of A ssets ” , at least annually or more frequently if events or circumstances indicate it might be impaired . Reversal of impairment loss of goodwill is not allowed .

Core technologies are amortized using the straight-line method over the est imated useful lives of three years. Such core technologies include certain primary technologies in the design, manufacture and assembl y of TFT-LCD products acquired in connection with the merger with QDI on October 1, 2006 .

(Continued)

F-15

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(n)

Deferred charges

Deferred charges consist of the cost of software systems, electrical facility installation charges, syndicated loan, bond issuances and land use rights. The costs of the software systems, electrical facil ity installation charges and expenses associated with synd icated loan s are amortized over the estimated useful lives of three to seven years on a straight-line basis . The c ost s associated with the issu ance of bonds payable are amortized by using the straight-line method over the period from the issuance date to th e maturity date (five years). The difference in amortization amount for expenses associated with loans and bonds issuance costs under the straight-line method is not materiality different from the amounts determined using the effective interest method. The cost of land use rights are amortized using the straight-line method over the lease term of 50 years.

(o)

Convertible bonds assumed in a business combination

The Company assumed the convertible bonds from QDI in connection with the merger on Octobe r 1, 2006. Pursuant to transition provisions under ROC SFAS No. 36, convertible bonds assumed in a business combination that were initially issued prior to December 31, 2005 are not subject to the provisions of ROC SFAS No. 34 and ROC SFAS No. 36 , provided that the assumed convertible bonds do not involve a major modification, as determined by the management. As such, t he Company accounted for the assumed convertible bonds in accordance with ROC SFAS No. 25, “ Business Combinations” , and recorded the entire convertible bond amount at fair value as of the acquisition date. The differen ces between the recorded amounts and the par value of the convertible bond are amortized and charged to the statement of income as interest expense using the interest method ov er the respective remaining redemption period s .

(p)

Employee retirement plan

Pursuant to government regulations, the Company has established an employee noncontributory , defined bene fit retirement plan (the Plan) for subsidiaries located in the Republic of China covering full-time employees in the Republic of China. In accordance with the Plan, employees are eligible for retirement or are required to retire after meeting certain age or service requirements. Payments of retirement benefits are based on ye ars of service and the average salary for the six-month period before the employees ’ retirement. Each employee earns two months of salary for the first fifteen years of service, and one month of salary for each year of service thereafter. The maximum reti r ement benefit is 45 months of salary. The plan is funded by contributions made by the Company , plus earnings thereon. On a monthly basis, the Company contributes two percent of wages and salaries to a pension fund maintained with the Central Trust of Chi na. Retirement benefits are paid to eligible participants on a lump-sum basis upon retirement. For defined benefit plan under the ROC Labor Standard s Law (the “ old system” ), the Company adopted ROC SFAS No. 18, “ Accounting for Pensions” , which requires t he Company to perform an actuarial calculation on its pension obligation as of each fiscal year-end. Based on the actuarial calculation, the Company recognizes a minimum pension liability and net periodic pension costs covering the service lives of the Pl an participants.

(Continued)

F-16

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Commencing July 1, 2005, pursuant to the effective ROC Labor Pension Act (hereinafter referred to as the “ new system” ), employees who elected to participate in the new system or joined the Company after July 1, 2005, are subjected to a defined contribution plan under the new system. For the defined contribution plan, the Company is required to make a monthly contribution at a rate no less than six percent of an employee ’ s monthly salaries or wages to the employee ’ s individual pension fu nd accounts at the ROC Bureau of Labor Insurance. Cash contributions are charged to current operations as pension cost .

AUL, DPL, QDL and QIL have not set up their retirement plans. AUA, AUJ, AUE, AUK, AUSA, AUS, AUSH, AUXM, AUSJ, DPS, DPXM and QDJ have set up their retirement plans respectively based on local government regulations.

(q)

Treasury stock

T reasury stock repurchased by the Company is accounted for under the cost method. The cost of treasury stock is shown as a deduction to stockholders ’ e quity, while any gain or loss from selling treasury stock is treated as an adjustment to capital surplus or retaine d earnings.

(r)

Employee stock options assumed in a business combination

The Company assumed the employee stock options of QDI in connectio n with the merger with QDI on October 1, 2006. Pursuant to the provisions of ROC SFAS No. 25, “ Business Combination s” , f air value of the vested employee stock options is measured on the consummation date and included i n the purchase price . F air value of unvested options is allocated to compensation cost and is amortized over the post-combination requisite service period.

(s)

Government grants

Income from government grants for research and development is recognized as non-operating income when qualifying expenditures are made and income is realizable.

(t)

Income tax

Income taxes are accounted for under the asset and liability method. Deferred income taxes are determined based on differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect during the years in which the differences are expected to reverse. The income tax effects resulting from taxable temporary differences are recognized as deferred income tax liabilities. The income tax effects resulting from deductible temporary differences, net operating loss carryforwards and income tax credits are recognized as deferred income tax assets. The realization of the deferred income tax assets is evaluated, and if it is considered more likely than not that the deferred tax assets will not be realized, a valuation allowance is recognized accordingly.

(Continued)

F-17

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Classification of the deferred income tax assets or liabilities as current or non-current is based on the classification of the related asset or liability. If the deferred income tax asset or liability is not directly related to a specific asset or liability, then the classification is based on the expected realization date of such deferred income tax asset or liability.

According to the ROC Income Tax Law, undistributed income, if any, earned after December 31, 1997, is subject to an additional 10 percent retained earning tax. The surtax is charged to income tax expense after the appropriation of earnings is approved by the stockholders in the following year.

The income tax of the Company is to be filed according to the law of the registered nation of the consolidated entity and it is filed by each business entity independently instead of jointly. The income tax expense of the Company is the total income tax expenses of the consolidated entity in the consolidated financial statements.

(u)

Investment tax credits

Income tax expense is reduced by available investment tax credits that are generated in the current year or carried over from the prior years. Any unused investment tax credits will be carried forward to future years subject to the assessment of the need for a valuation allowance.

(v)

Earnings per common share

Earnings per share of common stock (“EPS”) is computed in accordance with ROC SFAS No. 24, “Earnings Per Share.” Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by taking basic earnings per share into consideration, plus additional common shares that would have been outstanding if the potential dilutive share equivalents had been issued. The net income (loss) is also adjusted for the interest and other income or expenses derived from any underlying dilutive share equivalents. The weighted average outstanding shares are adjusted retroactively for stock dividends, including transfers from retained earnings and capital surprise to common stock, and employee stock bonus issued.

(w)

Convenience translation into U.S. dollars

The consolidated financial statements are stated in New Taiwan dollars. Translation of the 2006 New Taiwan dollar amounts into U.S. dollar amounts is included solely for the convenience of the readers using the noon buying rate of the Federal Reserve Bank in New York on December 29, 2006 of NT$32.59 to US$1. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be converted into U.S. dollars at this rate or any other rate of exchange.

(Continued)

F-18

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(x)

Business combinations

Business combinations are accounted under the purchase method of accounting as set forth in the amended ROC SFAS No. 25 “ Business Combination s . ” G oodwill associated with a business combination is no longer amortized but is tested for impairment at least annually or more frequently if events or circumstances indicate it might be impaired. The Company completed the merger with QDI on October 1, 2006. See note 24.

(y)

Reclassification

T he Company reclassified certain of its accounts in the consolidated financial statements as of December 31, 2005 and for the year ended December 31, 2004 and 2005 in accordance with ROC S FAS N o . 34, which was effective from January 1, 2006 , to conform with the current year presentation . Th e reclassification ha d no material impact on the consolidated financial statement s .

(z)

Accounting changes

Effective January 1, 2005, the Co mpany adopted the amended ROC SFAS No. 5, “ Long-term Investment s under Equity Method” and recognized its equity in the income (loss) of equity method investee on a current year basis. Delaying the recognition to the following year is no longer allowed. As a result, the Company recognized investment loss of NT$11,294 thousand for the year ended December 31, 2005, NT$10,405 thousand of which related to investment loss for year ended December 31, 2004 . In addition , the Company adopted ROC SFAS No. 35, “ Impairment of Assets” and recognized an impairment loss of NT$4,165 thousand for the year ended December 31, 2005 on an equity method investment. As a result of the aforementioned changes, net income and basic EPS of the Company decreased by NT$14,570 thousand and NT$0.003, respectively, for the year ended December 31, 2 005.

Effective January 1, 2006, the Company adopted ROC SFAS No. 34, “ Financial Instruments: Recognition and Measurement” , ROC SFAS No. 36, “ Financial Instruments: Disclosure and Presentation” , the amended ROC SFAS No. 1 , “ Conceptual Framework for Financi al Accounting and Preparation of Financial Statements” and the amended ROC SFAS No. 5, “ Long-term Investments under Equity Method . ” The impact on net income and basic EPS of the Company for the year ended December 31, 2006 are as follows:

Nature of a ccou nting changes	Increase (decrease) in net income			Increase (decrease) in basic EPS
	NT$			NT$
	(in thousands , except for per share data )

Accounting for financial instruments		(183,363	)		(0.024	)
Accounting for investor-level goodwill		112,969			0.015
		(70,394	)		(0.009	)

(Continued)

F-19

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1)

Financial instruments are accounted for in accordance with ROC SFAS No. 34 and ROC SFAS No. 36. Refer to notes 4, 5, and 18 for further details.

(2)

Effective January 1, 2006 and in accordance with ROC SFAS No. 5, the unallocated difference between the acquisition cost and carrying amount of net equity of equity-method method investees (i.e. investor-level goodwill) is no longer amortized.

On January 1, 2006, as a result of the adoption of ROC SFAS No. 34, the Company recognized NT$(38,585) thousand as cumulative effect of changes in accounting principles for adjustments made to the carrying amounts of financial instruments classified as financial assets or liabilities measured at fair value through profit or loss and NT$(225,564) thousand as a separate components of stockholders’ equity for adjustments made to the carrying amounts of financial instruments classified as available-for-sale and financial instruments effective as hedges.

3.	Cash and Cash Equivalents

December 31,

2005

2006

NT$

US$

(in thousands)

Cash and bank deposits

17,340,808

31,123,600

955,005

Government bonds

8,922,457

12,801,940

392,818

26,263,265

43,925,540

1,347,823

T he Company purchases gove rnment bonds under agreements to sell substantially the same securities within 30 days of the repurchase agreements. Interest rates ranged from 1.20% to 1.30% and 1.47% to 1.51% in 2005 and 2006, respectively.

4.	Financial Assets

December 31,

2005

2006

NT$

US$

(in thousands)

Available-for-sale financial assets—current:

Publicly listed stocks

1,586,504

1,848,758

56,728

Fair value

1,697,414

(Continued)

F-20

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	December 31,
	2005		2006
	NT$		NT$		US$
	(in thousands)

Available-for-sale financial assets—noncurrent:
Promate Electronic Co., Ltd. (Promate)		10,000		16,847		517
Nano Electro-Optical Technology Co., Ltd. (Nano-Op)		-		160,328		4,920
		10,000		177,175		5,437
Financial assets carried at cost—noncurrent:
Darly3 Venture Inc. (Darly3)		38,633		38,633		1,185
StarBex International Inc. (StarBex)		7,905		7,905		243
Daxon Technology Inc. (Daxon)		17,000		7,207		221
Entire Technology Co., Ltd. (Entire)		-		210,800		6,468
Skypola Optronics Co., Ltd. (Skypola)		-		234,800		7,205
Exploit Technology Co., Ltd. (Exploit)		-		37,616		1,154
		63,538		536,961		16,476

Effective January 1, 2006, upon the adoption of ROC SFAS No. 34, the Company reclassified the consolidated balance sheets as of December 31, 2005 to conform with the current year presentation. Short-term and long-term equity investments of NT$1,586,504 thousand and NT$10,000 thousand, respectively, accounted for using the lower of cost or market value method as of December 31, 2005 were reclassified as available-for-sale financial assets—current and noncurrent, respectively. Long-term investments in non-listed equity securities of NT$63,538 thousand accounted of using the cost method were reclassified as financial assets carried at cost.

In 2006, the Company and its subsidiaries recognized unrealized gains of NT$255,159 thousand and NT$7,906 thousand, respectively, as a separate component in equity, for the effect of change in quoted market value for its investments in listed equity securities.

For the year ended December 31, 2005, the Company evaluated its investment in StarBex and determined that the investee was in a continuous loss position for more than twelve months. The Company determined that the impairment was permanent and therefore wrote-off an impairment loss of NT$8,970 thousand to current operations.

In 2006, the Company assessed its investment in Daxon in accordance with ROC SFAS No. 35 and determined that the likelihood of recovering its investment in this investee was remote given that the investee was in a continuous loss position for more than twelve months. As a result, the Company recognized impairment loss of NT$9,793 thousand for the year ended December 31, 2006.

(Continued)

F-21

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In August 2004, the Company disposed 10% of its ownership interest in Fujitsu Display Technologies Corporation (FDTC) and forfeited its right to appoint a member to the board of directors. Consequently, the Company was unable to exercise significant influence over FDTC. Commencing September 2004, the Company accounted for its investment in FDTC using the cost method of accounting. In May 2005, the Company disposed the remaining 10% ownership interest in FDTC, carrying amount of which was NT$198,530 thousand. Gain on disposal of this investment was NT$106,080 thousand for the year ended December 31, 2005.

5.	Derivative Financial Instruments and Hedging Policy

(a)

Derivative financial instruments

	December 31,
	2005					2006
	Notional amount		Carrying amount			Notional amount	Carrying amount
			NT$				NT$		US$
	(in thousands)
Derivative financial liabilities (assets):
Sale of foreign currency forward contracts	USD838,000			(450,980	)	USD674,000		35,798		1,098
Purchase of foreign currency forward contracts	YEN61,900,000			248,919		YEN83,500,000		468,552		14,377
Purchase of foreign currency forward contracts		-		-		USD294,500		2,282		70
Purchase of foreign currency forward contracts	USD8,000			972		-		-		-
Interest rate swaps	NTD25,500,000			-		NTD56,500,000		324,153		9,946

T he afo rementioned derivative financial instruments were classified in the consolidated balance sheets under the current and noncurrent portion of financial liabilities measured at fair value through profit or loss, except for derivative financial instruments des ignated as hedges which were classified under hedging derivative financial liabilities — noncurrent .

The C ompany enter ed into foreign exchange forward contracts with several banks to hedge foreign currency exchange risk resulting from business operation s a nd investment activit ies . As of December 31, 2006, unrealized loss resulting from the change s in fair value of these derivative contracts amounted to NT $669,147 thousand.

(Continued)

F-22

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The C ompany entered into interest rate swap contracts with several banks to hed ge interest risk exposure arising from the Company ’ s financi ng activit ies . As of December 31, 200 5 and 200 6 , total notional amount of outstanding interest rate swap contract s amounted to NT$25,500,000 thousand and NT $56,500,000 thousand, respectively. Of the total notional amount as of December 31, 2006, NT $51,000,000 thousand was related to effective hedges ( see hedg e accounting detailed below ). As of December 31, 2006, changes in fair value of these derivative contracts of NT$4,860 thousand and NT$319, 852 thousand were recognized in earnings and unrealized loss in stockholders ’ equity , respectively .

(b)

Hedge accounting

The Company entered into interest rate swap transactions to hedge its exposure to changes in cash flows associated with fluctuating interest rates on its floating rate long-term debts. As of December 31, 2006, details of hedged item designated as cash flows hedges and their respective hedging derivative financial instruments were as follows:

Hedged item	Hedging instrument	Notional amount	Fair value of hedging instrument	Expected period of cash flows	Expected period of recognition in earnings
			NT$
(in thousands)

Bonds payable with variable interest rate	Interest rate swaps contracts	5,500,000	(21,508)	Apr. 2007– Apr. 2009	Jan. 2007– Apr. 2009

Long-term borrowings with variable interest rate	Interest rate swaps contracts	45,500,000	(301,111)	Jan. 2007– Dec. 2011	Jan. 2007– Dec. 2011

Unrealized losses on derivative instruments effective as cash flow hedges as of December 31, 2006, which were recognized as a separate component of stockholders’ equity, were as follows:

	December 31, 2006
	NT$		US$
	(in thousands)

A mount recognized in equity upon initial adoption		314,521		9,650
A mount recognized in e quity for current period change		5,331		164
		319,852		9,814

(Continued)

F-23

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(c)

Information of derivative financial instruments in year 2005

(1)

Interest rate swaps

As of December 31, 2005, interest rate swap contracts outstanding were as follows:

December 31, 2005
Inception	Maturity	Notional amount	Fixed interest rate paid	Variable interest rate received	Fair value
		NT$			NT$
(in thousands)

2003	Jan. 8, 2008 – Dec. 11, 2008	14,500,000	1.65% – 2.54%	1.426% – 1.458%	(168,533)

2004	Jan. 16, 2009 – Jul. 13, 2009	4,500,000	2.18% – 2.78%	1.42% – 1.503%	(98,890)

2004	Apr. 23, 2009	5,500,000	1.43%	0% – 3.0001%	(46,282)

2005	Sep. 14, 2010 – Sep. 21, 2010	1,000,000	2.03% – 2.05%	1.454% – 1.473%	(586)
					(314,291)

Interest expense result ing from these interest rate swap contracts for the year ended December 31, 2005 was NT$184,136 thousand.

(Continued)

F-24

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)

Foreign currency forward contracts

As of December 31, 2005, the details of foreign currency forward contracts outstanding were as follows:

December 31, 2005
Buy	Sell	Contract amount	Fair value		Settlement date	Maturity amount
			NT$
			(in thousands)

NTD	USD	USD838,000	449,283		Jan. 10, 2006– Feb. 27, 2006	NTD27,903,200

YEN	NTD	NTD17,595,929	(286,768	)	Jan. 10, 2006– Mar. 10, 2006	YEN61,900,000

YEN	USD	USD8,000	1,274		Jan. 6, 2006– Feb. 10, 2006	YEN945,021
			163,789

The details of the aforementioned foreign c urrency forward contracts included in other current financial assets as of December 31, 2005 were as follows:

	NT$
	(in thousands)

Foreign currency forward contracts receivable		45,492,249
Foreign currency forward contracts payable		(45,374,351	)
Unamortized premium		85,135
Foreign currency forward contracts receivable, net		203,033
Fair value		163,789

E xchange loss es result ing from these forward contracts for the year ended December 31, 2005 were NT$1,094,308 thousand.

(Continued)

F-25

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

6.	Notes and Accounts Receivable

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)

Notes receivable		22,460			72,656			2,229
Accounts receivable		35,232,155			48,466,302			1,487,153
Less: allowance for doubtful accounts		(87,300	)		(422,123	)		(12,953	)
allowance for sales returns and discounts		(318,727	)		(806,935	)		(24,760	)
		34,848,588			47,309,900			1,451,669

During 2006, the Company entered into financing facilities with banks to sell certain of its accounts receivable , detai ls of which are as follows:

Underwriting bank	Purchase d amount	Amount sold	Amount e xcluded	Principle terms	Promissory note as collateral
		(in thousands)

Ta Chong Bank	USD20,000	USD63,287	USD63,287	See Note s	None

China trust Commercial Bank	USD15,000	USD49,953	USD49,953	See Note s	None

Mizuho Corporate Bank	USD75,000	-	-	See Note s	None

Note 1:

Under this facility, the Company, irrevocably and without recourse, transferred accounts receivables to the underwriting bank.

Note 2:

Within the amount sold to the underwriting bank, the risk of non-collection or default by customers in the event of financial difficulties is borne by the bank. The Company is not responsible for the collection of the receivables subject to the facility, and any legal proceedings and costs thereof in recovering the receivables.

Note 3:

The Company had informed its customers subject to the facility to make repayment directly to the underwriting bank.

Note 4:

As of December 31, 2006, total outstanding balances of accounts receivables sold to the underwriting banks, net of fees charged by the banks, of NT$460,873 thousand were classified under other current financial assets.

(Continued)

F-26

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

7.	Inventories

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)

Finished goods		6,849,281			21,764,004			667,812
Work in process		10,290,872			21,247,361			651,960
Raw materials and spare parts		3,371,630			3,567,828			109,476
		20,511,783			46,579,193			1,429,248
Less:provision for inventory obsolescence and devaluation		(1,344,295	)		(4,263,301	)		(130,816	)
		19,167,488			42,315,892			1,298,432

8.	Equity Method Investments

	December 31,
	2005					2006
	%			Amount		%			Amount
				NT$					NT$		US$
	(in thousands)

BenQ Corporation (BenQ)		5	%		3,436,212		5	%		1,646,765		50,530

Cando Corporation (Cando)		21	%		1,381,336		21	%		1,168,510		35,855

Wellypower Optronics Corporation Ltd. (Wellypower)		9	%		359,221		9	%		461,439		14,159

Apower Optronics Corporation (Apower)		7	%		40,978		6	%		59,595		1,828

Sita Technology Corp. (Sita)		45	%		26,587		45	%		25,277		775

Patentop Ltd. (Patentop)		41	%		-		41	%		-		-

Toppan CFI (Taiwan) Co., Ltd. (Toppan CFI)		-			-		49	%		7,375,926		226,325

Orise Technology Co., Ltd. (Orise)		-			-		20	%		290,786		8,923

Asia Pacific Genesis Venture Capital Fund L.P. (Asia Pacific VC)		-			-		11	%		286,457		8,790

Daxin Material Corp. (Daxin)		-			-		43	%		153,976		4,725

Light House Technology Co., Ltd. (LHTC)		-			-		21	%		124,101		3,808

Raydium Semiconductor Corp. (Raydium)		-			-		18	%		89,180		2,736
					5,244,334					11,682,012		358,454

(Continued)

F-27

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In November 2004, AUO purchased 126,600 thousand shares of BenQ via open market, representing 5.47% of BenQ’s total outstanding shares. As the Company and BenQ share a common chairman and chief executive officer, a second officer board member, and have other commercial relationships, the Company is deemed to have significant influence over BenQ. As such, the Company accounts for its investment in BenQ under the equity method of accounting. The total acquisition cost amounted to NT$4,108,923 thousand. The difference between the acquisition cost and the net equity of the investee as of the acquisition date is amortized based on the nature of their source. If the source cannot be identified, such difference was amortized over five years using the straight-line method prior to January 1, 2006. Effective January 1, 2006, the difference is no longer amortized. For the year ended December 31, 2006 and in accordance with ROC SFAS No. 35, the Company evaluated its investment in BenQ and determined that the investee was in a continuous loss position for more than twelve months. The Company determined that the impairment was permanent and therefore recognized an impairment loss of NT$271,108 thousand.

In January 2005, the Company made additional investments in Wellypower and increased its ownership interest from 1.41% to 9.32%. In addition, pursuant to the special shareholders meeting held on March 30, 2005, the Company obtained two board of director seats in Wellypower which provided the Company significant influence over the Wellypower’s operating and financial policies. As such, the Company accounts for its investment in Wellypower under the equity method of accounting effective from January 1, 2005. In addition, the Company was also able to exercise significant influence over Wellypower’s subsidiary, Apower, through a combination of its influence on the operations of Wellypower and its direct investment. As such, the Company accounts for its investment in Apower under the equity method of accounting effective from January 1, 2005.

The market value of the Company’s investments in BenQ and Wellypower, determined based on quoted market price, were NT$4,209,893 thousand and NT$1,981,070 thousand, respectively, as of December 31, 2005, and NT$2,319,628 thousand and NT$1,584,856 thousand respectively, as of December 31, 2006.

Prior to January 1, 2005, as Patentop was unable to forward its standalone audited financial statements in a timely manner, the Company recognized the income (loss) of this investee in the following year. Commencing January 1, 2005, ROC SFAS No. 5, “Long-term Investments under Equity Method”, as amended, requires the Company to recognize the income (loss) of investees on a current year basis. As a result, for the year ended December 31, 2005, the Company recognized investment loss of NT$11,294 thousand, of which NT$10,405 thousand was attributed to the Company’s equity in net loss of Patentop for the year ended December 31, 2004. Pursuant to ROC SFAS No. 35, “Impairment of Assets”, the Company evaluated its investment in Patentop and recognized an impairment loss of NT$4,165 thousand for the year ended December 31, 2005, as the remaining carrying amount of the investment was deemed not recoverable.

(Continued)

F-28

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In August 2006, the C ompany acquired a 3 9 . 7 % ownership interest in Toppan CFI which provide d the Company the ability to exercise significant influence over Toppan CFI ’ s operating and financial policies . As such, the Company account ed for its investment in Toppan CFI using the equity method of accounting . The total acquisition cost amounted to NT$6,102,816 thousand. In October 200 6, the Com pany made additional investment in Toppan CFI at an acquisition cost of NT$1,430,048 and increased its ownership interest to 49%. The difference between the acquisition cost and the net equity of the investee as of the acquisition date is allocated based upon the pro rata excess of fair value over the carrying value of noncurrent assets of Toppan CFI.

In connection with the merger with QDI on October 1, 2006, t he Compan y acquired ownership interest of 11% in Asia Pacific VC , a limited partnership . As ROC GAAP did not provide any explicit guidance on the accounting for investment in a limited partnership, the Company accounted for its non controlling limited partner interest using the equity method of accounting based on guidance provided by the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 78-9, “Accounting for Investments in Real Estate Ventures.”

In January 2006, the Company sold its 47% ownership interest in Raydium and no longer held a controlling interest over Raydium. As a result, Raydium was excluded from the Company’s consolidated financial statements from the date of the sale and the remaining 18.48% ownership interest in Raydium has been accounted for under the equity method. The gain on disposal of this investment amounted to NT$25,172 thousand.

As of December 31, 2006, the details of the difference between the acquisition cost and the fair value of net assets acquired are as follows:

	2006
	Beginning balance			Current period net i ncrease			Amortization		Ending balance
	NT$			NT$			NT$		NT$
	(in thousands)

Amortizable assets		(56,171	)		(523,377	)		19,655		(559,893	)
Goodwill		849,552			6,481			-		856,033
Non-amortizable assets		316,244			(28,207	)		-		288,037
		1,109,625			(545,103	)		19,655		584,177

Upon the adoption of ROC SFAS No. 34 on January 1, 2006, the Company recognized unrealized gains of NT$4,006 thousand as a separate component of stockholders’ equity for the effect of change in quoted market value for its investments in listed equity securities.

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

9.	Property, Plant and Equipment, and Idle Assets

Interest capitalized and included in property, plant and equipment amounted to NT$516,436 thousand, NT$976,404 thousand and NT$643,660 thousand for the years ended December 31, 2004, 2005 and 2006, respectively. The capitalization interest rates ranged from 1.725% to 5.265%, 2.030% to 5.200%, and 2.490% to 6.370% in 2004, 2005 and 2006, respectively.

Certain property, plant and equipment were pledged as collateral against long-term borrowings (see note 20).

Idle assets as of December 31, 2005 and 2006 consisted of the following:

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)
Cost:
Land		478,214			478,214			14,673
Buildings		544,421			664,536			20,391
Machinery and other equipment		1,158,881			3,427,361			105,166
		2,181,516			4,570,111			140,230
Less: accumulated depreciation		(795,138	)		(2,566,607	)		(78,754	)
		1,386,378			2,003,504			61,476
Less: allowance for devaluation on idle assets		(220,597	)		(226,748	)		(6,957	)
		1,165,781			1,776,756			54,519

10.

Short-term Borrowings

The Company entered into unsecured short-term bank loans to support its working capital requirements. Short-term borrowings as of December 31, 2005 and 2006 consisted of the following:

December 31,

2005

2006

NT$

US$

(in thousands)

Short-term borrowings

3,729,465

114,436

Unused available balance

25,141,089

25,688,935

Interest rates on short-term borrowings outstanding as of December 31, 2006 ranged from 5.97% to 6.09%. The unused credit lines as of December 31, 2006 were for use by a foreign subsidiary. These credit facilities do not require the payment of commitment fee and will expire by December 28, 2007.

(Continued)

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Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

11.

Bonds Payable

Bonds payable as of December 31, 2005 and 2006 consisted of the following:

December 31,

2005

2006

NT$

US$

(in thousands)

Secured bonds payable

12,000,000

17,000,000

521,632

Less: current portion

(1,000,000

)

(30,684

)

12,000,000

16,000,000

490,948

Interest payable

84,603

160,655

4,930

Unused available balance

5,000,000

7,000,000

214,790

The significant terms of secured bonds payable are as follows:

	Secured Bond 1	Secured Bond 2	Secured Bond 3

Par value	NT$6,000,000 thousand	NT$6,000,000 thousand	NT$5,000,000 thousand

Issue date	Apr. 23, 2004 – Apr. 24, 2004	Jun. 6, 2005 – Jun. 13, 2005	Mar. 21, 2006

Issue price	At par value	At par value	At par value

Coupon rate	As stated below	Bond I: 2.0000% Bond II: 1.9901%	Fixed rate 1.948%

Duration	As stated below	Jun. 6, 2005 – Jun. 13, 2010	Mar. 21, 2006 – Mar. 21, 2011

Bank that provided guarantee	International Commercial Bank of China and eleven other banks	Bank of Taiwan and eight other banks	Mizuho Corporate Bank and six other banks

Redemption	As stated below	As state d below	As stated below

(Continued)

F-31

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Secured Bond 1 issued in 2004 can be divided into five types, namely, I, II, III, IV and V, based upon their respective issuance structures. Bond I has a fixed coupon rate of 1.43%, and the remaining are floating-rate based. However, the Company has entered into separate interest rate swap contracts that have the effect of converting the floating rates into fixed rates. Whereas Bond I is of a three-year term, the rest has a term of five years. The Company is obligated to repay the principal amount of each tranche under Bond I in full at maturity; the principal amount of tranche A-F under Bond II, tranche A, B, E, F under Bond III, and tranche A and B under Bond IV will be repaid in 3 installments in a proportion of 10/60, 25/60 and 25/60 at the end of year 3, 4 and 5, respectively, from its respective issuance date; tranche G and H under Bond II, tranche C and D under Bond III, tranche C and D under Bond IV, as well as tranche A-D under bond V will be repaid in 2 equal installments at the end of year 4 and 5 from its respective issuance date. As of December 31, 2006, the current portion of secured bonds payable amounted to NT$1,000,000 thousand, which represents the Bond I principle amount of NT$500,000 thousand due on April 23, 2007 and the first installment of Bond II, Bond III and Bond IV of NT$250,000 thousand, NT$166,667 thousand and NT$83,333 thousand, respectively, due on April 23, 2007.

Secured Bond 2 issued in 2005 can be divided into two types, namely I and II based upon their respective coupon rates and interest calculation structure. While the Company is obligated to make annual interest payment for both types of bonds, Bond I is calculated based on simple interest and Bond II is calculated semi-annually based on compound interest. Based upon their respective issuance date, the bonds can be further divided into six tranches, namely A, B, C, D, E and F, payable in two equal installments at the end of year 4 and 5 from their respective issuance date.

Secured Bond 3 issued in 2006 is calculated based on simple interest. The Company is obligated to make annual interest payment for the bond. The bond is payable in two equal installments at the end of year 4 and 5 from its issuance date.

All of the aforementioned bonds are secured by bank guarantees through an arrangement of a syndicated bank guarantee facility. Based on financial covenants under the syndicate agreement for the bond guarantee, the Company is obligated to maintain its current ratio, debt ratio, interest coverage ratio, and tangible net worth, as defined, at a certain level. The Company has complied with the aforementioned debt covenants in 2005 and 2006.

Certain of the Company’s assets are pledged to secure the bonds payable, see note 20.

(Continued)

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Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12.

Convertible Bonds Payable

The Company assumed the convertible bonds of QDI in connection with the merger with QDI on October 1, 2006. On the date of acquisition, these outstanding QDI ’ s convertible bonds were recorded at fair value and t he convers ion price was adjusted in accordance with the exchange ratio of 3.5 QDI ’ s shares to one AUO ’ s share effected by the QDI merger . All rights and obligations remain the same as the original terms and conditions .

The Company assumed two unsecured domestic c onvertible corporate bonds ( hereinafter referred to as TCB 1 and TCB 2 ) , and two unsecured overse as convertible corporate bonds ( hereinafter referred to as ECB 2 and ECB 3 ) from the merger with QDI . Details of these convertible bonds are discussed in deta il in the following paragraphs.

As of December 31, 2006, outstanding convertible bonds payable consisted of the following :

	December 31, 2006
	TCB 1			TCB 2		ECB 2			ECB 3			Total
	NT$			NT$		NT$			NT$			NT$			US$
	(in thousands)
Convertible bonds payable		5,197,500			5,987,100		63,595			9,599,522			20,847,717			639,697
Unamortized premium (discount)		(198,256	)		573,563		929			154,219			530,455			16,276
		4,999,244			6,560,663		64,524			9,753,741			21,378,172			655,973
Less: current portion		-			-		(64,524	)		(9,753,741	)		(9,818,265	)		(301,266	)
		4,999,244			6,560,663		-			-			11,559,907			354,707

As b ondholders have the right to request the Company to repurchase ECB 2 on August 5, 2007 a nd ECB 3 on January 26, 2007, the Comp any has classified the aforementioned overseas convertible bonds under current liabilities.

(Continued)

F-33

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

S ignificant terms of the aforementioned convertible bonds payable are as follows:

(a)

Domestic convertible bond 1 (“TCB 1”)

Par value		NT$10,500,000 thousand

Original issue date		April 22, 2004

Original issue price		102.5% of par value

Coupon rate		0%

Maturity date		April 21, 2009

Collateral		None

Conversion method		Bondholders may convert bonds into common shares at any time between May 22, 2004 and April 11, 2009.

Conversion price		NT$70.49 (as adjusted effective October 1, 2006 as a result of merger with QDI)

Put right		No

Redemption terms		(1) Unless previously redeemed, purchased and cancelled, or converted, bonds will be redeemed on maturity at par. (2) Effective from the first anniversary of issuance to the 40 days before maturity, the Company may redeem the outstanding bonds at par if the closing price of its common share on the Taiwan Stock Exchange is at least 150% of the conversion price for 30 consecutive trading days. (3) Effective from the first anniversary of issuance to the 40 days before maturity, the Company may redeem the outstanding bonds at par if the total amount of outstanding bonds is less than NT$1,050,000 thousand.

In October 2006, the Company repurchased, at par, from bondholders who expressed dissent to the merger between AUO and QDI in accordance with the ROC Company Law, and the Business Mergers and Acquisition Act. The principal amount of early redemption amounted to NT$5,302,500 thousand.

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(b)

Domestic convertible bond 2 (“TCB 2”)

Par value		NT$6,000,000 thousand

Original issue date		July 18, 2005

Original issue price		At par value

Coupon rate		0%

Maturity date		July 17, 2010

Collateral		None

Conversion method		Bondholders may convert bonds into common shares at any time between August 18, 2005 and July 7, 2010.

Conversion price		NT$44.10 (as adjusted effective October 1, 2006 as a result of merger with QDI)

Put right		Bondholders have the right to request the Company to repurchase bonds on July 18, 2008 at 100% of the unpaid principle balance.

Redemption terms		(1) Unless previously redeemed, purchased and cancelled, or converted, bonds will be redeemed on maturity at par. (2) Effective from the first anniversary of issuance to the 40 days before maturity, the Company may redeem the outstanding bonds at par if the closing price of its common share on the Taiwan Stock Exchange is at least 150% of the conversion price for 30 consecutive trading days. (3) Effective from the first anniversary of issuance to the 40 days before maturity, the Company may redeem the outstanding bonds at par if the total amount of outstanding bonds is less than NT$600,000 thousand.

In August 2006, certain bondholders exercised their rights to convert bonds into common shares with a principal amount of NT$12,900 thousand.

(Continued)

F-35

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(c)

Overseas convertible bond 2 (“ECB 2”)

Par value		US$270,000 thousand

Original issue date		February 5, 2004

Original issue price		At par value

Coupon rate		0%

Maturity date		February 5, 2009

Collateral		None

Conversion method		Bondholders may, between March 16, 2004 and January 26, 2009, convert bonds into common shares or certificates exchangeable for common stock.

Conversion price		NT$72.94 (as adjusted effective October 1, 2006 as a result of merger with QDI). For purposes of determining the number converted shares, a fixed exchange rate of US$1=NT$33.33 is used.

Put right		Bondholders have the right to request the Company to repurchase bonds on August 5, 2006 at 99.875% (see Note below) and August 5, 2007 at 99.825%, of the unpaid principle balance.

Redemption terms		(1) Unless previously redeemed, put option exercised, purchased and cancelled, or converted, bonds will be redeemed on maturity at 99.75% of par. (2) The Company may redeem the bonds at par, in whole or in part, if the closing price of its common shares on the Taiwan Stock Exchange translated into U.S. dollars at rate of NT$33.33 = US$1 is at least 125% of the conversion price for a period of 30 consecutive trading days.

In April 2004, certain bondholders exercised their rights to convert bonds into common shares with a principal amount of NT$2,243,613 thousand (US$67,810 thousand).

In August 2006, certain bondholders exercised put option and requested the Company to redeem their outstanding bonds at 99.825% of par. Total principal amount redeemed amounted to NT$6,563,834 thousand (US$200,239 thousand).

(Continued)

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Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(d)

Overseas convertible bond 3 (“ECB 3”)

Par value		US$294,500 thousand

Original issue date		November 26, 2004

Original issue price		At par value

Coupon rate		0%

Maturity date		November 26, 2009

Collateral		None

Conversion method		Bondholders may, at any time between the 41 days after issuance to the 10 days before maturity, convert bonds into common shares or certificates exchangeable for common stock.

Conversion price		NT$52.54 (as adjusted effective October 1, 2006 as a result of merger with QDI). For purposes of determining the number converted shares, a fixed exchange rate of US$1=NT$32.57 is used.

Put right		Bondholders have the right to request the Company to repurchase bonds on January 26, 2007 at 100% of the unpaid principle balance. See further at note 22.

Redemption terms		(1) Unless previously redeemed, purchased and cancelled, or converted, bonds will be redeemed on maturity at par. (2) Effective from the 26th month of issuance, the Company may, at any time after January 26, 2007, redeem the bonds at par, in whole or in part, if the closing price of its common share on the Taiwan Stock Exchange translated into U.S. dollars at the rate of NT$32.57 = US$1 is at least 125% of the conversion price for 30 consecutive trading days. (3) The Company may redeem total amount of outstanding bonds in whole at par in the event that 95% of the bonds have been previously redeemed, converted, or purchased and cancelled.

(Continued)

F-37

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

13.

Long-term Borrowings

Bank/			December 31,
Agent Bank	Purpose	Term	2005		2006
			NT$		NT$		US$
			(in thousands)

Mega International Commercial Bank	See Note 2	From Dec. 21, 2000 through Dec. 21, 2007. Repayable in 10 semi-annual installments starting from June 2003.		4,400,000		2,200,000		67,505

Chinatrust Commercial Bank	See Note 2	From Sep. 21, 2000 through Sep. 21, 2007. Repayable in 10 semi-annual installments starting from Mar. 2003.		5,400,000		2,700,000		82,847

Chinatrust Commercial Bank	See Note 2	From April 25, 2003 through April 25, 2010. Repayable in 9 semi-annual installments starting from April 2006. Denominated in NT$115,000 million and US$100 million.		14,783,500		11,479,431		352,238

Mega International Commercial Bank	See Note 2	From May 11, 2004 through May 11, 2011. Repayable in 9 semi-annual installments starting from May 2007.		29,000,000		29,000,000		889,844

Bank of Taiwan	See Note 2	From Dec. 18, 2004 through Dec. 18, 2011. Repayable in 9 semi-annual installments starting from Dec. 2007. Denominated in NT$49,000 million and US$150 million.		18,925,250		53,889,400		1,653,556

Bank of Taiwan	See Note 2	From Dec. 29, 2005 through Dec. 29, 2012. Repayable in 9 semi-annual installments starting from Dec. 2008.		3,000,000		13,000,000		398,895

Mega International Commercial Bank (Note 1)	See Note 2	From Oct. 06, 2000 through Oct. 06, 2007. Repayable in 10 semi-annual installments starting from April 2003.		-		2,880,000		88,371

Mega International Commercial Bank (Note 1)	See Note 2	From Sep. 30, 2002 through Sep. 30, 2009. Repayable in 9 semi-annual installments starting from Sep. 2005. Denominated in NT$13,000 million and US$58.4 million.		-		9,926,897		304,599

Mega International Commercial Bank (Note 1)	See Note 2	From Jan. 12, 2005 through Jan. 12, 2012. Repayable in 9 semi-annual installments starting from Jan. 2008. Denominated in NT$23,300 million and US$200 million.		-		29,819,200		914,980

Industrial Bank of Taiwan (Notes 1 and 2)	See Note 2	From Nov. 17, 2005 through Nov. 17, 2009. Repayable in 6 semi-annual installments starting from May 2007.		-		500,000		15,342

(Continued)

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Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Bank/			December 31,
Agent Bank	Purpose	Term	2005		2006
			NT$		NT$		US$
			(in thousands)

Mega International Commercial Bank (Note 1)	See Note 2	From July 14, 2006 through July 14, 2013. Repayable in 10 semi-annual installments starting from Jan. 2009.		-		14,000,000		429,580

Industrial Bank of Taiwan (Notes 1 and 3)	See Note 3	From Aug. 29, 2006 through Aug. 29, 2010. Repayable in 5 semi-annual installments starting from Aug. 2008.		-		1,000,000		30,684

Citi Bank (Syndicated loan I)	See Note 2	From Apr. 10, 2003 through Nov. 14, 2007. Repayable in 6 semi-annual installments starting from May 2005. Denominated in RMB800 million.		2,170,277		1,113,809		34,176

Citi Bank (Syndicated loan I)	See Note 2	From Oct. 12, 2004 through Nov. 14, 2007. Repayable in 6 semi-annual installments starting from May 2005. Denominated in US$20 million.		437,929		217,448		6,672

Citi Bank (Syndicated loan II)	See Note 2	From Aug. 10, 2005 through Dec. 2, 2009. Repayable in 6 semi-annual installments starting from June 2007. Denominated in US$54 million		919,466		1,760,977		54,034

Citi Bank (Syndicated loan II)	See Note 2	From April 28, 2006 through Nov. 30, 2009. Repayable in 4 semi-annual installments starting from May 2008. Denominated in RMB830 million.		-		2,311,466		70,926

Industrial and Commercial Bank of China	See Note 2	From June 11, 2002 through June 10, 2007. Repayable in 2 semi-annual installments starting from Dec. 2006. Denominated in RMB57 million.		231,916		162,872		4,998

Industrial and Commercial Bank of China	See Note 2	From April 11, 2002 through April 10, 2007. Repayable on April 10, 2007. Denominated in RMB60 million		244,122		250,572		7,689

Industrial and Commercial Bank of China	See Note 2	From Aug. 31, 2004 through Mar. 1, 2009. Repayable on Mar. 1, 2009. Denominated in RMB40 million.		162,748		167,048		5,126

Bank of China	See Note 2	From June 10, 2002 through Mar. 19, 2007. Repayable in 5 semi-annual installments starting from Mar. 2005. Denominated in RMB166 million.		405,242		-		-

Standard Chartered Bank	See Note 2	From Dec. 31, 2004 through Nov. 11, 2009. Repayable in 6 semi-annual installments starting from May 2007. Denominated in RMB320 million.		878,839		1,336,384		41,006

(Continued)

F-39

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Bank/			December 31,
Agent Bank	Purpose	Term	2005			2006
			NT$			NT$			US$
			(in thousands)

Bank of America	See Note 2	From Jan. 24, 2005 through Dec. 30, 2009. Repayable in 6 semi-annual installments starting from June 2007. Denominated in RMB200 million.		813,740			835,240			25,629

ABN-AMRO Bank	See Note 2	From Dec. 7, 2006 through Aug. 1, 2013. Repayable in 9 semi-annual installments starting from Aug. 2009. Denominated in RMB800 million.		-			334,096			10,251

ABN-AMRO Bank	See Note 2	From Aug. 2, 2006 through Aug. 2, 2013. Repayable in 9 semi-annual installments starting from Sep. 2009. Denominated in RMB2,000 million. Repayment for the first 8 installments is RMB 6 million per installment , with remaining balanc e payable at t he last installment .		-			250,572			7,689

China Construction Bank	See Note 2	From Aug. 10, 2006 through Aug. 10, 2011, 25% of which payable in Aug. 2009, 25% in Aug. 2010 and the remaining 50% in Aug. 2011. Denominated in US$1 million and RMB20 million.		-			116,135			3,564

Citi Bank	See Note 2	From Feb. 27, 2006 through Mar. 30, 2010. Repayable in 7 semi-annual installments starting from Mar. 2007. Denominated in RMB249 million.		-			1,039,874			31,908

Citi Bank	See Note 2	From Nov. 27, 2006 through Feb. 27, 2007. Repayable on Feb. 27, 2007. Denominated in US$80 million.		-			2,608,855			80,051
				81,773,029			182,900,276			5,612,160
Less: current portion				(9,832,723	)		(31,071,555	)		(953,408	)
				71,940,306			151,828,721			4,658,752
Unused available balance				73,653,956			107,029,987			3,284,136

Note 1:

Long-term borrowings assumed from QDI in connection with the merger on October 1, 2006 were recorded at fair value as of the acquisition date.

Note 2:

The purpose of the loan is for the purchase of machinery, equipment and building.

Note 3:

The purpose of the loan is for operational use.

(Continued)

F-40

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company entered into the aforementioned long-term loan arrangements with banks and financial institutions to support capital expenditures on construction projects and the purchase of machiner ies and equipment. Commitment fee is charged per annum and payable quarterly based on the committed-to-withdraw but unused balance, if any. No commitment fees were paid for the years ended December 31, 2005 and 2006. These credit facilities contain covenants that require the Company to maintain certain financial ratios such as current ratio, debt-equity ratio, interest coverage ratio, tangible assets ratio and others as specified in the loan agreements. The Company has complied with the aforementioned debt covenants in 2005 and 2006.

Interest rat es on long-term borrowings outstanding as of December 31, 2005 and 2006 ranged from 2.36% to 5.27% and 2.54% to 6.49%, respectively. The long-term borrowings are at floating interest rates that reprice within one to six months.

Certain property, plant and equipment were pledged as collateral against long-term borrowings, see note 20.

As of December 31, 2006, future principal repayment for the Company’s long-term borrowings and bonds are listed as follows:

	NT$		US$
	(in thousands)

2007		41,889,820		1,285,358
2008		46,008,174		1,411,727
2009		52,121,525		1,599,310
2010		39,004,544		1,196,825
2011		30,178,665		926,010
Thereafter		12,075,720		370,535
Total		221,278,448		6,789,765

(Continued)

F-41

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

14.

Retirement Plan

The following table sets forth the defined benefit obligation and the amounts recognized related to the Company’s retirement plan.

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)
Benefit obligation:
Vested benefit obligation		(3,990	)		(4,515	)		(139	)
Non-vested benefit obligation		(261,636	)		(433,354	)		(13,297	)
Accumulated benefit obligation		(265,626	)		(437,869	)		(13,436	)
Additions based on future salary increase		(299,866	)		(523,777	)		(16,072	)
Projected benefit obligation		(565,492	)		(961,646	)		(29,508	)
Fair value of plan assets		398,478			791,306			24,281
Funded status		(167,014	)		(170,340	)		(5,227	)
Unrecognized pension loss		(16,762	)		229,265			7,035
Unrecognized net transition obligation		12,761			11,677			358
Prepaid pension assets (accrued pension liabilities)		(171,015	)		70,602			2,166

On October 1, 2006, the Company recorded prepaid pension assets of NT$153,827 thousand in connection with the merger with QDI, which represented the excess of the fair value of plan assets over the projection benefit obligation as of the date of acquisition. The QDI’s retirement plan was merged into the Company’s retirement plan as of October 1, 2006.

The components of net periodic pension cost for 2004, 2005 and 2006 are summarized as follows:

	For the year ended December 31,
	2004			2005			2006
	NT$			NT$			NT$			US$
	(in thousands)
Defined benefit pension plan:
Service cost		127,467			69,596			8,100			249
Interest cost		15,213			17,835			20,508			629
Expected return on plan assets		(7,571	)		(11,322	)		(15,208	)		(467	)
Amortization		4,303			1,084			3,092			95
Net periodic pension cost		139,412			77,193			16,492			506
Defined contribution pension cost		-			170,573			442,814			13,587

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Unrecognized net transition obligation is amortized on a straight-line basis over 16 years.

Net periodic pension cost for subsidiaries amounted to NT$95,927 thousand, NT$140,874 thousand and NT$240,693 (US$7,385) thousand for the years ended December 31, 2004, 2005 and 2006, respectively.

Significant weighted-average actuarial assumptions used in the above calculations are summarized as follows:

	December 31,
	2004	2005	2006
Discount rate	3.50%	3.50%	2.75%–3.50%
Rate of increase in future compensation levels	3.50%	3.50%	3.50%
Expected long-term rate of return on plan assets	3.50%	3.50%	2.75%–3.50%

15.

Stockholders’ Equity

(a)

C ommon stock

Based on stockholder resolution on June 14, 2005, the Company increased its common stock by NT$5,425,062 thousand, par value NT$10 per share, through the transfer of retained earnings and employee bonuses of NT$4,451,437 thousand and NT$973,625 thousand, respectively. The stock issuances were authorized by and registered with government authorities. Pursuant to stockholder resolution, the Company issued 330 million shares of its common stock in the form of 33 million ADS on July 22, 2005. Each ADS represents the right to receive 10 shares of common stock. The public offering price per ADS was US$15.35.

Based on stockholder resolution on June 15, 2006, the Company increased its common stock by NT$2,635,215 thousand, par value NT$10 per share, through the transfer of retained earnings and employee bonuses of NT$1,749,164 thousand and NT$886,051 thousand, respectively. The stock issuances were authorized by and registered with government authorities. Pursuant to stockholder resolution, the Company issued 263,522 thousand shares of its common stock.

On June 15, 2006, the Company’s stockholders approved the merger with QDI. Upon consummation of the merger, the Company issued new common stock of 1,479,110 thousand shares, par value NT$10 per share, to shareholders of QDI at conversion ratio of 3.5 shares of common stock of QDI to one share of common stock of AUO. The merger was completed on October 1, 2006 and registered with government authorities. Upon completion of the merger, QDI was dissolved. The same conversion ratio was applied to the conversion of private placement shares of 171,429 thousand shares previously issued by QDI.

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In connection with the merger with QDI, the Company assumed QDI’s employee stock options. As of December 31, 2006, total number of shares issued upon exercise of vested options by employees totaled 224 thousand shares. Proceeds from stock issuance for options exercised amounted to NT$8,632 thousand. The stock issuances were completed and registered with government authorities.

As of December 31, 2005 and 2006, the Company’s authorized common stock, par value NT$10 per share, amounted to NT$70,000,000 thousand and NT$90,000,000 thousand, respectively, and issued common stock, par value NT$10 per share, amounted to NT$58,305,471 thousand and NT$75,734,028 thousand, respectively.

(b)

Capital surplus

Pursuant to the Republic of China Company Law, the capital surplus has to be used to offset a deficit, and then the capital surplus resulting from the issuance of new shares at a premium and from donations received by the Company can be used to increase common stock. Furthermore, pursuant to securities regulations, the total sum of capital surplus capitalized per year may not exceed 10 percent of the paid-in capital. Additionally, the capital surplus realized from a capital increase shall be capitalized only from the following fiscal year after the capital increase being registered by the Company with the competent authority.

(c)

Legal reserve

According to the Republic of China Company Law, the Company must retain 10 percent of its annual income as a legal reserve until such retention equals the amount of issued common stock. The retention is accounted for by transfers to a legal reserve upon approval at the annual stockholders’ meeting. The legal reserve can be used to offset an accumulated deficit and transferred to common stock however cannot be distributed as cash dividends.

(d)

Distribution of earnings and dividend policy

According to the Company’s revised articles of incorporation on June 15, 2006, 10% of the Company’s annual income, after offsetting any accumulated deficit, shall be set aside as a legal reserve. After establishing the legal reserve, earnings may be distributed in the following order in accordance with the Company’s articles of incorporation:

(1)

5 to 10 percent as employee bonuses

(2)

At most 1 percent as remuneration to directors and supervisors

(3)

The remainder, after retaining a certain portion for business consideration, as common stockholders’ dividends.

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The appropriation of the Company’s net income may be distributed by way of cash dividend and/or stock dividend. Since the Company is in a capital-intensive industry, distribution of profits shall be made preferably by way of stock dividend. Distribution of profits may also be made by way of cash dividend, and the amount of that should in principle exceed or equal 10% of total dividends. This cash dividend percentage may be adjusted depending on actual profit of the year and operational conditions.

According to Financial Supervisory Commission (“FSC”) regulations, when there is a deduction item in stockholders’ equity during the year, an amount equal to the deduction item before earnings distribution must be appropriated as a special reserve within retained earnings. The special reserve will be available for dividend distribution only after the related stockholders’ equity deduction item has been reversed.

Employee bonuses and directors’ remuneration appropriated from the distributable retained earnings of 2005 were as follows:

	Shares		NT$
	(in thousands)

Employee bonuses – stock (at par value)		88,605		886,051
Employee bonuses – cash				379,736
Directors’ and supervisors’ remuneration				21,097
				1,286,884

If the above distributions were recorded as expenses in 2005, the pro forma information on basic earnings per share in 2005 after retroactive adjustment would be NT$2.43.

Earnings distribution of fiscal year 2006 earnings has not been proposed by the board of directors and is still subject to approval at the stockholders’ meeting.

(e)

Treasury stock

Based on a board of directors resolution on December 16, 2002, the Company purchased its own shares on the Taiwan Stock Exchange for use as employee bonus shares. The Company did not purchase treasury shares during the years ended December 31, 2004, 2005, or 2006.

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(f)

Employee s tock o ption s p lans

The Company assumed Employee Stock Options Plans (“ESO Plans”) from the merger with QDI. The ESO Plans entitle option holders to subscribe one common stock per unit thereof. Options are granted to eligible employees, including those of domestic and overseas subsidiaries. Options granted will expire six years after the date of grant and holders may exercise options vested, effective from two years after date of grant, in accordance with the vesting schedule. Options were granted at the exercise price equal to the closing price of the common stock of QDI listed on the Taiwan Stock Exchange on the grant date.

As of October 1, 2006, details of ESO Plans assumed were as follows:

ESO Plans	Issuing date	Units issued	Term of grant	Option exercising term	Exercise price*

2002 ESO Plan	Aug. 8, 2002	1,861	Aug. 8, 2002 – Aug. 7, 2008	Aug. 8, 2004 – Aug. 7, 2008	NT$38.50

2003 ESO Plan	Dec. 31, 2003	5,614	Dec. 31, 2003 – Dec. 30, 2009	Dec. 31, 2005 – Dec. 30, 2009	NT$51.10

* As adjusted effective October 1, 2006 as a result of the merger with QDI

Additional disclosure for the ESO Plans:

	Unit			Weighted average price
	(in thousands)			NT$

Outstanding units at date of acquisition		7,475			48.0
Units exercised		(224	)		38.5
Units cancelled		(26	)		38.5
Outstanding units at end of year		7,225			48.3

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of December 31, 2006, details of outstanding and vested options of ESO Plans were as follows:

		Outstanding stock options						Vested options
Exercise price		Unit		Remaining vesting period (year)		Exercise price		Unit		Exercise price
NT$		(in thousands)				NT$		(in thousands)		NT$

	38.50		1,611		1.58		38.50		1,611		38.50
	51.10		5,614		3.00		51.10		3,743		51.10
			7,225						5,354

The Company determined the fair value of vested ESO options at the date of acquisition using the Black-Scholes option pricing model. The fair value of NT$73,382 thousand was included in the purchase price for the merger with a corresponding offset to capital surplus. Deferred compensation cost relating to unvested options amounted to NT$2,680 thousand.

On the date of acquisition, the exercise price and units issued were adjusted in accordance with the conversion ratio of 3.5 QDI’s shares to one AUO’s share.

Assumptions used to estimate the fair value of the aforementioned employee stock options are summarized as follows:

	2002 stock option plan			2003 stock option plan

Dividend yield		2.4	%		2.4	%
Expected volatility		40.6	%		43.7	%
Risk-free interest rate		1.7	%		1.7	%
Expected continuing period	0.9		year	1.9		years

16.

Income Taxes

(a)

The Company is authorized to be a “Science-based industry” as defined under the ROC Statute for the Establishment and Administration of Science-based Industrial Park and an “Important technology-based industry company” as defined under the Statute for Upgrading Industries.

Pursuant to these statutes, the Company, the extinguished Unipac and QDI have elected appropriate tax incentives, such as tax exemption for qualified TFT-LCD products/processes and investment tax credits for shareholders, based on initial investment and subsequent capital increases.

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The followings are the details of the Company’s effective tax incentive provided by the Ministry of Finance as of December 31, 2006:

Year of investment	Tax incentive chosen	Tax exemption period

1996	Tax exemption of the Company’s L5 facility corporate income taxes for five years	2003–2007

1999	Tax exemption of the Company’s L3B facility corporate income taxes for four years	2005–2008

1999, 2000, 2001	Tax exemption of the Company’s L6 facility corporate income taxes for five years	2005–2009

2001, 2002, 2003	Tax exemption of the Company’s L6 facility corporate income taxes for five years	2006–2010

2002	Tax exemption of the Company’s L6 facility corporate income taxes for five years	2007–2011

2003	Tax exemption of the Company’s L6 facility corporate income taxes for five years	2008–2012

(b)

The components of income tax expense (benefit) are summarized as follows:

	For the year ended December 31,
	2004			2005			2006
	NT$			NT$			NT$			US$
	(in thousands)

Current income tax expense		355,761			1,521,732			1,227,910			37,678
Deferred income tax benefit		(294,415	)		(1,048,303	)		(159,586	)		(4,897	)
		61,346			473,429			1,068,324			32,781

The statutory income tax rate in the Republic of China is 25%. Commencing January 1, 2006, the Statute of Income Basic Tax Amount (the “IBTA Statute”), which is also known as the Alternative Minimum Tax Act, became effective and imposes an alternative minimum tax (“AMT”). The Company calculated AMT during the year in accordance with the IBTA Statute. Subsidiary companies calculated income tax in accordance with local tax law and regulations.

The differences between income tax expense based on the Republic of China statutory income tax rate of 25% and income tax expense as reported in the consolidated statements of income for the year ended December 31, 2004, 2005 and 2006 are summarized as follows:

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	For the year ended December 31,
	2004			2005			2006
	NT$			NT$			NT$			US$
	(in thousands)

Expected income tax expense		7,006,049			4,023,642			2,550,076			78,247
Tax exemption		(1,424,088	)		(479,973	)		(917,564	)		(28,155	)
Increase of investment tax credits, net of expired portion		(7,144,655	)		(4,813,223	)		(4,327,895	)		(132,798	)
Tax on undistributed retained earnings		419,039			1,491,149			927,908			28,472
Increase in valuation allowance		1,031,632			127,211			2,710,172			83,160
Non-deductible expenses and others		173,369			124,623			125,627			3,855
Income tax expense		61,346			473,429			1,068,324			32,781

(c)

The components of deferred income tax assets (liabilities) are summarized as follows:

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)
Current:
Investment tax credits		2,313,606			1,093,319			33,548
Unrealized loss and expenses		443,809			407,963			12,518
Unrealized sales profit		715,238			183,901			5,643
Unrealized exchange gain		(57,755	)		(122,377	)		(3,755	)
Loss on valuation of financial assets		-			168,501			5,170
Inventories		295,999			937,925			28,779
Other		-			584			18
		3,710,897			2,669,816			81,921
Valuation allowance		(1,011	)		-			-
Net deferred tax assets — current		3,709,886			2,669,816			81,921

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)
Non-current:
Investment tax credits		9,929,707			24,077,161			738,790
Net operating loss carryforwards		11,594			-			-
Deferred tax liabilities — property, plant and equipment		(776,554	)		(318,188	)		(9,763	)
Investment loss (gain) under the equity method		(89,961	)		(265,088	)		(8,134	)
Impairment loss on long-term investment under the equity method		-			65,708			2,016
Goodwill		-			(89,300	)		(2,740	)
Other		78,550			16,057			492
		9,153,336			23,486,350			720,661
Valuation allowance		(8,931,179	)		(21,053,138	)		(646,000	)
Net deferred tax assets — non-current		222,157			2,433,212			74,661

Total gross deferred tax assets		13,807,856			27,076,862			830,833
Total gross deferred tax liabilities		(943,623	)		(920,696	)		(28,251	)
Total valuation allowance		(8,932,190	)		(21,053,138	)		(646,000	)
		3,932,043			5,103,028			156,582

(d)

Investment tax credits

According to the Statute for Upgrading Industries, the purchase of machinery for the automation of production and pollution control, expenditure for research and development and training of professional personnel entitles the Company to tax credits. This credit may be applied over a period of five years. The amount of the credit that may be applied in any year except the final year is limited to 50% of the income tax payable for that year. There is no limitation on the amount of investment tax credit that may be applied in the final year. As of December 31, 2006, the Company’s remaining investment tax credits and their related expiration years were as follows:

Year of assessment	Unused tax credits				Expiration year
	NT$		US$
	(in thousands)

2003		4,468,067		137,099	2007
2004		3,718,121		114,088	2008
2005		10,359,994		317,889	2009
2006 (estimated)		6,624,298		203,262	2010
		25,170,480		772,338

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Pursuant to the Business Mergers and Acquisition Act, the Company is entitled to net operating loss (NOL) carryforwards of NT$1,014,035 thousand and investment tax credits of NT$9,410,776 thousand sustained by QDI prior to the date of acquisition. As of December 31, 2006, unused NOL carryforwards and investment tax credits available to the Company amounted to NT$0 and NT$9,410,776 thousand, respectively. The Company recognized valuation a llowance of NT $9,410,776 thousand on QDI ’ s unused investment tax credits at October 1, 2006 .

(e)

The 2001 income tax return has been assessed by the tax authorities for additional tax payable due to dispute in Unipac’s loss carryforwards of NT$3,546,535 thousand prior to combination with the Company was regarded as not eligible for use by the Company after the merger. The Company disagreed with the assessment and subsequently filed a tax appeal. The appeal is still under review. The Company has evaluated the impact on the financial statements and accrued additional income tax in 2004. As of December 31, 2006, the tax authorities had assessed the income tax returns of the Company through 2003 (except for 2002 which is still under review) and of QDI through 2004.

(f)

Information about the integrated income tax system

Beginning in 1998, an integrated income tax system was implemented in the Republic of China. Under the new tax system, the income tax paid at the corporate level can be used to offset the Republic of China resident stockholders’ individual income tax. The Company is required to establish an imputation credit account (ICA) to maintain a record of the corporate income taxes paid and imputation credit that can be allocated to each stockholder. The credit available to the Republic of China resident stockholders is calculated by multiplying the dividend by the creditable ratio. The creditable ratio is calculated as the balance of the ICA divided by earnings retained by the Company since January 1, 1998.

Information related to the ICA is summarized below:

December 31,

2005

2006

NT$

US$

(in thousands)

Unappropriated earnings:

Earned after January 1, 1998

34,507,005

37,262,566

1,143,374

ICA balance

376,987

1,279,762

39,269

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	For the year ended December 31,
	2005			2006
				(estimated)
Creditable ratio for earnings distribution to the Republic of China resident stockholders		4.54	%		3.43	%

17.

Earnings Per Share

Earning per common share in 2004, 2005 and 2006 are computed as follows:

	For the year ended December 31,
	2004				2005				2006
	Pre-tax		After tax		Pre-tax		After tax		Pre-tax			After tax
	NT$		NT$		NT$		NT$		NT$			NT$
	(in thousands, except for per share data)
Basic earnings per share:
Net income before cumulative effect of changes in accounting principles		28,024,198		27,962,852		16,100,420		15,626,991		10,119,034			9,142,458
Cumulative effect of changes in accounting principles		-		-		-		-		(38,986	)		(38,986	)
Net income		28,024,198		27,962,852		16,100,420		15,626,991		10,080,048			9,103,472
Weighted average number of shares outstanding:
Shares of common stock at beginning of the year		4,340,237		4,340,237		4,946,041		4,946,041		5,830,547			5,830,547
Issuance of common stock for cash		156,667		156,667		146,465		146,465		-			-
Common stock issued in connection with the acquisition of QDI		-		-		-		-		372,817			372,817
Stock options		-		-		-		-		41			41
Issuance of shareholders stock dividends and employee stock bonus		305,804		305,804		542,506		542,506		263,522			263,522
Treasury stock transferred to employees		-		-		3,748		3,748		-			-
Weighted average number of shares outstanding during the year		4,802,708		4,802,708		5,638,760		5,638,760		6,466,927			6,466,927

Retroactive adjustment of capitalization of retained earnings		766,612		766,612		254,853		254,853
Retroactively adjusted weighted average outstanding shares		5,569,320		5,569,320		5,893,613		5,893,613
Basic earnings per share (NT$):
Basic earnings per share—net income before cumulative effect of changes in accounting principles		5.84		5.82		2.86		2.77		1.57			1.42
Basic earnings per share—cumulative effect of changes in accounting principles		-		-		-		-		(0.01	)		(0.01	)
Basic earnings per share—net income		5.84		5.82		2.86		2.77		1.56			1.41
Basic earnings per share – retroactively adjusted		5.03		5.02		2.73		2.65

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	For the year ended December 31,
	2004				2005				2006
	Pre-tax		After tax		Pre-tax		After tax		Pre-tax			After tax
	NT$		NT$		NT$		NT$		NT$			NT$
	(in thousands, except for per share data)
Diluted earnings per share:
Net income		28,024,198		27,962,852		16,100,420		15,626,991		10,080,048			9,103,472
Effects of potential common shares:
Adjustment for interest of convertible bonds payable		-		-		-		-		(706,883	)		(530,162	)
		28,024,198		27,962,852		16,100,420		15,626,991		9,373,165			8,573,310
Shares of common stock at beginning of the year		4,802,708		4,802,708		5,638,760		5,638,760		6,466,927			6,466,927
Potential number of common shares assumed upon conversion of convertible bonds		-		-		-		-		99,045			99,045
Stock options		-		-		-		-		56			56
Weighted average number of shares outstanding during the year		4,802,708		4,802,708		5,638,760		5,638,760		6,566,028			6,566,028
Weighted average number of shares outstanding—retroactively adjusted		5,569,320		5,569,320		5,893,613		5,893,613
Diluted earnings per share (NT$):
Diluted earnings per share—net income before cumulative effect of changes in accounting principles		5.84		5.82		2.86		2.77		1.44			1.32
Diluted earnings per share—cumulative effect of changes in accounting principles		-		-		-		-		(0.01	)		(0.01	)
Diluted earnings per share—net income		5.84		5.82		2.86		2.77		1.43			1.31
Diluted earnings per share—retroactively adjusted		5.03		5.02		2.73		2.65

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

18.

Additional Disclosure on Financial Instruments

(a)

Fair value information

As of December 31, 2005 and 2006, the fair value of the Company’s financial assets and liabilities were as follows:

	December 31, 2005				December 31, 2006
	Fair value		Carrying amount		Fair value				Carrying amount
	NT$		NT$		NT$		US$		NT$		US$
	(in thousands)
Financial assets:
Cash and cash equivalents		26,263,265		26,263,265		43,925,540		1,347,823		43,925,540		1,347,823
Notes and accounts receivable		42,615,388		42,615,388		57,830,981		1,774,501		57,830,981		1,774,501
Available-for-sale financial assets—current		1,697,414		1,586,504		1,848,758		56,728		1,848,758		56,728
Other current financial assets		1,114,300		1,114,300		1,112,729		34,143		1,112,729		34,143
Deposit-out		246,373		246,373		274,248		8,415		274,248		8,415
Financial liabilities:
Notes and accounts payable		50,839,606		50,839,606		76,234,335		2,339,194		76,234,335		2,339,194
Equipment and construction in progress payables		19,694,213		19,694,213		30,719,178		942,595		30,719,178		942,595
Short-term borrowings		-		-		3,729,465		114,436		3,729,465		114,436
Long-term borrowings (including current portion)		81,773,029		81,773,029		182,900,276		5,612,159		182,900,276		5,612,159
Convertible bonds payable (including current portion)		-		-		21,464,841		658,633		21,378,172		655,973
Bonds payable (including current portion)		11,951,724		12,000,000		17,077,390		524,007		17,000,000		521,632
Foreign currency forward contracts		163,789		203,033		506,632		15,546		506,632		15,546
Interest rate swaps contracts		-		-		324,153		9,946		324,153		9,946

(Continued)

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Notes to Consolidated Financial Statements

(b)

The following m ethods and assumptions are used to estimate the fair value of the C ompany ’ s financial assets and liabilities :

(1)

The carrying amounts of cash and cash equivalents, notes and accounts receivable, restricted cash in banks, refundable deposits, other current financial assets, accounts payable, payables to related parties, equipment and construction in progress payables and short-term borrowings approximate their fair value due to the short-term nature of these items.

(2)

The fair value of financial instruments is based on publicly quoted market prices. If market price is unavailable, fair value is determined using valuation technique, with estimates and assumptions consistent with that made by market participants.

(3)

Long-term borrowings are obtained at floating interest rates which are calculated based on prevailing market rate adjusted by the Company’s credit spread. Management believes the carrying value of the long-term borrowings approximates fair value. Refer to note 13.

(c)

The fair value of the C ompany ’ s financial assets and liabilities determined by publicly quoted market price , if available and fair value determined using valuation technique were as follows:

	December 31, 2006
	Publicly quoted market prices				Fair value based on valuation technique
	NT$		US$		NT$		US$
	(in thousands)
Financial assets:
Cash and cash equivalents		43,925,540		1,347,823		-		-
Notes and accounts receivable		-		-		57,830,981		1,774,501
Available-for-sale financial assets—current		1,848,758		56,728		-		-
Other current financial assets		-		-		1,112,729		34,143
Deposit-out		-		-		274,248		8,415
Financial liabilities:
Notes and accounts payable		-		-		76,234,335		2,339,194
Equipment and construction in progress payables		-		-		30,719,178		942,595
Short-term borrowings		-		-		3,729,465		114,436
Long-term borrowings (including current portion)		-		-		182,900,276		5,612,159
Convertible bonds payable (including current portion)		-		-		21,464,841		658,633
Bonds payable (including current portion)		-		-		17,077,390		524,007
Foreign currency forward contracts		-		-		506,632		15,546

(Continued)

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Notes to Consolidated Financial Statements

December 31, 2006

Publicly quoted

market prices

Fair value based on

valuation technique

NT$

US$

NT$

US$

(in thousands)

Interest rate swaps contracts

324,153

9,946

(d)

T he C ompany pledged certain of its financial assets to secure long-term borrowings a s of Dec ember 31, 2005 and 2006 , see n ote 20 .

(e)

L oss on valuation of financial instruments resulting from the change in fair value amounted NT $ 647,157 thousand for the year ended December 31, 2006 .

(f)

F inancial liabilities with exposure to cash flow risk resulting from change in interest rates amounted to NT $ 135,629,741 thousand as of December 31, 2006 .

(g)

Financial risks relating to financial instruments

(1)

Market risk

The Company holds equity securities which are classified as financial assets in available-for-sale. They are valued by fair value, and are exposed to the risk of price changes in securities market.

The foreign exchange forward contract of the merged company was expected with a cash inflow of YEN83,500,000 thousand, a cash inflow of US$294,500 thousand, and a cash outflow of US$674,000 thousand to be generated in January to April 2007. The exchange rate of foreign exchange forward contact is fixed and therefore, no significant cash flow risk is expected.

(2)

Credit risk

The Company’s potential credit risk is derived primarily from cash in bank, equity investments, and accounts receivable. The Company maintains its cash and short-term investments with various reputable financial institutions. The Company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any one institution. As a result, the Company believes that there is a limited concentration of credit risk in cash and investments.

The majority of the Company’s customers are in the computer, consumer electronics and LCD TV industry. The Company continuously evaluates the credit quality of its customers. If necessary, the Company will require collateral from those customers. In addition, the Company evaluates the collectibility of trade receivables and provides adequate allowance for bad debts, if necessary. It is management’s belief that there will be no significant losses due to concentration of credit.

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Notes to Consolidated Financial Statements

(3)

Liquidity risk

Liquidity risk is the risk of being unable to settle the derivative contracts on schedule. The purpose of these instruments held by the Company is to manage and hedge changes in cash flows and risks associated with floating interest rate debt and foreign currency rates. There is no significant liquidity risk for the related cash flows.

(4)

Cash flow risk resulting from change in interest rates

The Company’s short-term and long-term borrowings are principally floating interest rate borrowings. As a result, the Company is exposed to fluctuation in interest rates that affect cash flows for interest payments on these borrowings. As the general market interest rate increases by one percent, cash flows in respect of these interest payments may fluctuate by approximately NT$1,356,297 thousand per annum.

19.

Related-party Transactions

(a)

Name and relationship

Name of related party		Relationship with the Company

BenQ Corporation (“BenQ”)		Shareholder and represented on the Company’s board of directors; the Company’s affiliate
Gallant Precision Machining Co., Ltd. (“GPM”)		Investee of BenQ
BenQ Mexican, S.A. De C. V. (“BQX”)		Subsidiary of BenQ
BenQ Technologies Czech S.V.O. (“BQZ”)		Subsidiary of BenQ
Daxon Technology Inc. (“Daxon”)		Subsidiary of BenQ
Darfon Electronics Corp. (“Darfon”)		Subsidiary of BenQ
BenQ (IT) Co., Ltd. Suzhou (“BQS”)		Subsidiary of BenQ
BenQ Optronics (Suzhou) Co., Ltd. (“BQOS”)		Subsidiary of BenQ
Acer Inc. (“Acer”)		Shareholder and represented on BenQ’s board of directors prior to June 30, 2006 (Note 1)
Aspire Service & Development Inc. (“ASD”)		Subsidiary of Acer (Note 1)
Wistron Corp. (“Wistron”)		Investee of Acer (Note 1)
Cowin Worldwide Corp. (“Cowin”)		Subsidiary of Wistron (Note 1)
Wistron Infocomm (Philippines) Corp. (“WPH”)		Subsidiary of Wistron (Note 1)
Wistron Infocomm Manufacturing (Kunshan) Co., Ltd. (”WEKS”)		Subsidiary of Wistron (Note 1)
Wistron Infocomm (Kunshan) Corp. (“WKS”)		Subsidiary of Wistron (Note 1)
Toppan CFI (Taiwan) Co., Ltd. (“Toppan CFI”)		Investee of AUO (Note 2)
Cando Corporation (“Cando”)		Investee of the Company
Raydium Semiconductor Corporation (“Raydium”)		Investee of Konly

(Continued)

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Notes to Consolidated Financial Statements

Name of related party		Relationship with the Company

Orise Technology Co., Ltd. (“OTC”)		Investee of Konly
Quanta Computer Inc. (“QCI”)		Common vice president, QCI’s vice chairman and president represented on the Company’s board of directors (Note 3)
Tech-Front (Shanghai) Computer Co., Ltd. (“TFC”)		Subsidiary of QCI (Note 3)
Tech-Yeh (Shanghai) Computer Co., Ltd. (“TYC”)		Subsidiary of QCI (Note 3)
Tech-Pro (Shanghai) Computer Co., Ltd. (“TPC”)		Subsidiary of QCI (Note 3)
Tech-Com (Shanghai) Computer Co., Ltd. (“TCC”)		Subsidiary of QCI (Note 3)

Note 1 :

As Acer reduced its investment in BenQ and resigned its members hip to the board of directors during the year , BenQ ceased accounting for its investment in Acer using the equity-method of accounting. Accordingly , effective June 30, 2006, Acer is no longer a related party of the Company. As a result, related-party tra nsactions with Acer were disclosed until the end of June 2006.

Note 2 :

The C ompany invested in Toppan CFI during the year and accounted for its investment in Toppan CFI using the e quity m ethod of accounting . Effective August 31, 2006, Toppan CFI is consid ered as a related party of the Company and related party transactions were disclosed therefrom .

Note 3 :

The Company acquired QDI on October 1, 2006 . As a result, effective October 1, 2006, these companies become related part ies of the Company and related party transactions were disclosed therefrom .

(b)

Significant transactions with related parties

(1)

Sales

Net sales to related parties were as follows:

	For the year ended December 31,
	2004		2005		2006
	NT$		NT$		NT$		US$
	(in thousands)

BQS		30,030,189		26,532,871		21,647,010		664,222
Acer		6,733,616		8,999,415		3,909,532		119,961
BenQ		2,310,915		2,083,647		1,997,401		61,289
WKS		819,631		961,816		322		10
WEKS		-		826,929		-		-
Wistron		931,678		393,157		13,871		426
BQOS		132,753		354,655		1,227,909		37,677
BQZ		-		210,846		209,841		6,439
BQX		850,691		370,150		164,455		5,046
Cowin		-		-		123,565		3,792

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Notes to Consolidated Financial Statements

	For the year ended December 31,
	2004		2005			2006
	NT$		NT$			NT$			US$
	(in thousands)

WPH		906,906		167,742			22,613			694
FDTC		2,136,101		-			-			-
ACT		164,972		-			-			-
QCI		-		-			562,388			17,256
TYC		-		-			382,428			11,735
TFC		-		-			263,497			8,085
TPC		-		-			226,261			6,943
Others		64,325		129,159			50,134			1,538
Less: allowance for sales returns and discounts		-		(31,264	)		(131,735	)		(4,042	)
		45,081,777		40,999,123			30,669,492			941,071

The collection terms for sales to related parties and unrelated customers were month-end 30 to 45 days and 30 to 60 days, respectively. The average collection days for the years ended December 31, 2004, 2005 and 2006 were 44 days, 59 days and 106 days, respectively, for sales to related parties, and 41 days, 52 days and 57 days, respectively, for sales to unrelated customers. The pricing and other terms for sales to related parties were not materially different from those with unrelated customers.

As of December 31, 2005 and 2006, receivables resulting from the above transactions were as follows:

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)

BQS		4,821,840			8,342,590			255,986
BQOS		63,456			432,137			13,260
BenQ		409,520			381,674			11,711
BQZ		132,768			69,620			2,136
BQX		215,997			18,932			581
Acer		1,967,407			8,931			274
WEKS		103,771			-			-
QCI		-			312,397			9,586
TYC		-			230,103			7,061
TFC		-			225,100			6,907
TPC		-			184,349			5,657
Others		100,569			20,899			641
Less: allowance for doubtful accounts		(4,123	)		(51,903	)		(1,593	)
Less: allowance for sales returns and discounts		(95,358	)		(26,589	)		(816	)
		7,715,847			10,148,240			311,391

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Notes to Consolidated Financial Statements

(2)

Purchases

Net purchases from related parties were as follows:

	For the year ended December 31,
	2004		2005		2006
	NT$		NT$		NT$		US$
	(in thousands)

Daxon		-		676,729		3,730,519		114,468
Cando		2,551,073		2,986,751		3,365,891		103,280
Toppan CFI		-		-		2,241,338		68,773
Darfon		113,266		203,737		254,017		7,794
Raydium		-		-		157,084		4,820
OTC		-		-		134,647		4,132
Novatek		537,578		-		-		-
FDTC		316,122		-		-		-
Faraday		60,432		-		-		-
BenQ		-		-		-		-
Others		433		58,626		148,993		4,572
		3,578,904		3,925,843		10,032,489		307,839

The pricing and payment terms with related parties were not materially different from those with unrelated vendors. The payment terms were both 30 to 120 days in 2005 and 2006.

As of December 31, 2005 and 2006, payables resulting from the above purchases were as follows:

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Notes to Consolidated Financial Statements

	December 31,
	2005		2006
	NT$		NT$		US$
			(in thousands)

Toppan CFI		-		2,214,130		67,939
Daxon		608,060		1,433,875		43,997
Cando		1,111,363		881,006		27,033
OTC		-		118,073		3,623
Others		133,686		212,448		6,519
		1,853,109		4,859,532		149,111

(3)

Acquisition of property, plant and equipment, operating leases and others

In accordance with the board of directors resolution on January 12, 2005, the Company purchased the originally leased land at Lungtan from ASD for cash consideration of NT$2,774,000 thousand.

In 2005 and 2006, the Company purchased machineries of NT$974,587 thousand and NT$1,783,794 thousand, respectively, from GPM. In addition, the Company acquired property, plant, equipment of NT$29,794 thousand and NT$1,825 thousand in 2005 and 2006, respectively, from other related parties.

The Company entered into lease agreements for building and dormitory with related parties. Total rental expenses and administration fees amounted to NT$23,442 thousand and NT$6,507 thousand for the years ended December 31, 2005 and 2006, respectively. As of December 31, 2005 and 2006, refundable deposits resulting from the above transactions amounted to NT$3,245 thousand and NT$0, respectively.

During 2005 and 2006, the Company paid expenses on behalf of related parties amounted to NT$78,908 thousand and NT$29,863 thousand, respectively.

During 2006, Cando paid NT$157,598 thousand on behalf of the Company for the purchases of masks, mold equipment and others.

As of December 31, 2005 and 2006, amounts due to related parties as a result from the aforementioned transactions amounted to NT$344,176 thousand and NT$1,879,271 thousand, respectively.

(4)

Disposal of property, plant and equipment, operating leases and others

The Company leased part of its facility to related parties. Total rental income amounted to NT$21,819 thousand, NT$17,276 thousand and NT$23,728 thousand for the years ended December 31, 2004, 2005 and 2006, respectively.

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Notes to Consolidated Financial Statements

During 2006, the Company sold property, plant and equipment to related parties for a total consideration of NT$242,643 thousand. Loss on disposal amounted to NT$1,622 thousand. The pricing for sales to related parties was not materially different from those with unrelated parties.

As of December 31, 2005 and 2006, rental and other receivables from the disposal of property, plant and equipment amounted to NT$10,267 thousand and NT$57,743 thousand, respectively. The rental price and other terms for such transactions with related parties were similar to those with unrelated parties.

During 2005 and 2006, the Company paid on behalf of Cando NT$492,261 thousand and NT$47,610 thousand, respectively, for purchases of materials. As of December 31, 2005 and 2006, outstanding receivables resulting from the above transactions amounted to NT$40,686 thousand and NT$13 thousand, respectively.

During 2006, the Company paid on behalf of Toppan CFI NT$321,874 thousand for purchases of materials. As of December 31, 2006, outstanding receivables resulting from the above transactions amounted to NT$315,085 thousand.

During 2005 and 2006, Konly received cash dividends of NT$17,020 thousand and NT$26,903 thousand, respectively, from its investment in Wellypower, which had been recorded as a deduction in the long-term investment account.

During 2005, the Company received cash dividends of NT$189,900 thousand from its investment in BenQ, which had been recorded as a deduction in the long-term investment account.

On December 29, 2006, the Company’s board of directors approved the sale of the company’s L1 manufacturing facility to GPM at a sale price of no less than NT$230,000 thousand. This transaction has been submitted to the Hsinchu Science Park Administration Bureau for approval.

20.

Pledged Assets

December 31,

Pledged assets

Pledged to secure

2005

2006

NT$

US$

(in thousands)

Restricted cash in banks

Oil purchase, customs duties and guarantees for foreign workers

32,200

43,200

1,326

Building

Long-term borrowings

6,867,162

30,148,367

925,080

Machinery and equipment

Long-term borrowings and bonds payable

108,651,713

223,146,823

6,847,095

115,551,075

253,338,390

7,773,501

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Notes to Consolidated Financial Statements

21.

Commitments and Contingencies

(a)

Outstanding letters of credit

As of December 31, 2005 and 2006, the Company had the following outstanding letters of credit:

	December 31,
Currency	2005		2006
	(in thousands)

USD		4,884		17,359
JPY		11,731,873		25,752,573
EU		-		14,070
NTD		93,578		-
RMB		-		39,000

The outstanding letters of credit facilitate the Company’s purchase of machinery and equipment and materials from foreign suppliers. The letters of credit are irrevocable and expire upon the Company’s payment of the related obligations.

(b)

Technology and licensing agreements

The Company has entered into technical collaboration and patent licensing agreements with Toppan Printing Co., Ltd., Semiconductor Energy Laboratory Co., Ltd., Hitachi Displays Ltd., Guardian Industries Corp., Sharp Corporation, Honeywell International Inc., Honeywell Intellectual Properties Inc., Samsung Electronics Co., Ltd., and others. In connection with the merger with QDI, the Company assumed QDI’s technical cooperation and patent licensing agreements with Hitachi Displays Ltd., Guardian Industries Corp., and others. Pursuant to the terms of each signed agreement, the Company is required to pay fixed license and patent fees and/or royalties based upon its use of technology and patents.

(c)

Purchase commitments

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Notes to Consolidated Financial Statements

In March 2005, the Company entered into a non-cancelable long-term materials supply agreement with Corning Display Technologies Taiwan Co. Ltd. (Corning Taiwan) for the supply of LCD glass substrates. The contract runs from March 9, 2005 to June 30, 2009. In accordance with the agreement, the Company makes prepayments to Corning Taiwan in several installments during the contract period which will be deductible from subsequent purchases. The portion of prepayments which are expected to be utilized within one year is included in current assets. The non-current portion is included under other assets.

In connection with the merger with QDI, the Company assumed QDI’s five-year materials purchase and supply agreement with Corning Taiwan entered into by QDI in April 2005. In accordance with the agreement, Corning Taiwan guarantees to supply sixth-generation TFT-LCD and color filters glass substrates for quantity and pricing negotiated.

(d)

As of December 31, 2005 and 2006 , outstanding commitment s for purchase agreements for major property, plant and equipment totaled NT$ 41,967,317 thousand and NT$ 37,586,917 thousand, respectively.

(e)

Operating lease agreements

The Company entered into operating lease agreements for operating facilities and land with the Science Park Administration Bureaus for periods from March 1, 1994 to December 31, 2025. Future minimum lease payments as of December 31, 2006 under the existing non-cancelable agreements are:

Years		Minimum lease payments
		NT$
		(in thousands)

2007		209,803
2008		193,950
2009		193,950
2010		193,950
2011		193,950
Thereafter		2,010,701

Rental expense for operating leases amounted to NT$218,716 thousand, NT$160,550 thousand and NT$290,162 in 2004, 2005 and 2006, respectively.

(f)

Litigation

In December 2006, LG.Philips LCD Co., Ltd. filed a lawsuit in the United States District Court for the District of Delaware for patent infringement against AUO, AUO ’ s cus tomers, and other TFT-LCD manufacturer. The Company has retained legal counsel to handle the related matters. LG. Philips LCD is seeking, among other things, monetary damages for past infringement and an injunction against future infringement. This lit i gation is still in an early

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Notes to Consolidated Financial Statements

stage . While we intend to defend the suit vigorously, the ultimate outcome of the matter is uncertain. T he Company is reviewing the merits of this suit on an on-going basis.

In March 2007, we filed a lawsuit in the United States District Court for the Western District of Wisconsin against LG.Philips LCD and LG.Philips LCD America, claiming infringement of certain of our patents in the United States relating to the manufacturing of TFT-LCD products. We are seeking, among other things, monetary damages for past infringement and an injunction against future infringement. On May 30, 2007, the suit was transferred to the United States District Court for the District of Delaware.

In February 2007, Anvik Corporation filed a lawsuit in the United States District Court for the Southern District Court of New York for patent infringement against AUO and other TFT-LCD manufacturers. The Company has retained legal counsel to handle the related matters. Anvik Corporation is seeking, among other things, monetary damages for past infringement and an injunction against future infringement. This litigation is still in the preliminary phase. While we intend to defend the suit vigorously, the ultimate outcome of the matter is uncertain. The Company is reviewing the merits of this suit on an on-going basis.

In March 2007, Honeywell International Inc. and Honeywell Intellectual Properties Inc. filed a lawsuit in the United States District Court for the Eastern District Court of Texas against the Company and other TFT-LCD manufacturing companies, including BenQ, claiming infringement of certain of Honeywell’s patents in the United States relating to the manufacturing of TFT-LCD products. Honeywell International and Honeywell Intellectual Properties are seeking, among other things, monetary damages for past infringement and an injunction against future infringement. This litigation is still in the preliminary phase. While we intend to defend the suit vigorously, the ultimate outcome of the matter is uncertain. The Company is reviewing the merits of this suit on an on-going basis.

In addition to the matters described above, the Company is also a party to other litigation matters and claims that arise during the normal course of operations. While the results of these litigation matters and claims cannot be predicted with certainty, at this stage the Company does not expect the final outcome of these matters will have a material adverse effect on its financial position or results of operations.

In December 2006, certain of the Company’s subsidiaries received notice of an investigation into possible anticompetitive behavior in the TFT-LCD industry conducted by local authorities in the United States, Europe, Canada and Japan. In December, the local authority in Korea visited the Company’s affiliate in Korea. The Company and its affiliates intend to cooperate with these investigations. The Company has also been named as defendant among certain TFT-LCD manufacturers in over one hundred civil class action lawsuits in the United States and several civil class action lawsuits in Canada alleging antitrust violations. The Company has retained

counsels to handle the related matters. The ultimate outcome of the investigations or these lawsuits or the final costs of resolving these matters is uncertain. We are reviewing the merits of the investigations and civil lawsuits on an on-going basis.

22.

Subsequent Events

(Continued)

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Notes to Consolidated Financial Statements

On January 25, 2007, certain of the Company’s bondholders for overseas convertible bond 3 (ECB 3) exercised put options and requested the Company to redeem their outstanding bonds at par. Total principal amount redeemed amounted to US$169,589 thousand, representing 58% of the total amount issued.

On March 22, 2007, the insolvency administrator of BenQ Mobile GmbH & Co. OHG (“OHG”) asserted that it will file a claim against BenQ, an equity-method investee of the Company, for 504,000,000 in Euro. At this stage, it is not possible to assess the impact as to this event on the Company’s results of operations or financial position due to insufficient information to explain the legal ground for any such claim. The Company is reviewing this event on an on-going basis. This litigation is still in the preliminary phase. At this stage, it is not possible to predict the outcome or likely outcome of this event.

23.

Segment Information

(a)

Industrial information

The Company consists of a single reportable operating segment, namely, the research, development, production and sale of TFT-LCDs and other flat panel displays.

(b)

Geog raphic information

Geographical breakdown of sales for the years ended December 31, 2004, 2005 and 2006 are summarized as follows:

	For the year ended December 31,
	2004		2005		2006
	NT$		NT$		NT$		US$
	(in thousands)

Taiwan		68,274,912		82,473,265		89,840,936		2,756,703
The People’s Republic of China		64,288,311		76,147,847		80,559,955		2,471,922
Other (individually less than 10% of total net sales)		35,548,346		58,767,276		122,705,879		3,765,139
		168,111,569		217,388,388		293,106,770		8,993,764

Sales are attributed to countries based upon the location of customers placing orders .

The Company’s TFT-LCD manufacturing process can be divided into three primary steps, namely the array process, cell process and module-assembly process. The array and cell processes are capital-intensive thus require highly automated production equipment. The

(Continued)

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Notes to Consolidated Financial Statements

module-assembly process is highly labor-intensive thus the Company has moved majority of the module-assembly operations to the PRC since 2002. Geographical breakdown of long-lived assets as of December 31, 2004, 2005 and 2006 are summarized as follows:

	December 31,
	2004		2005		2006
	NT$		NT$		NT$		US$
			(in thousands)

Taiwan		151,409,890		211,863,809		377,307,330		11,577,396
The People’s Republic of China		10,645,228		12,904,003		26,155,953		802,576
Other		10,373		8,137		6,902		212
		162,065,491		224,775,949		403,470,185		12,380,184

(c)

Major customer information

For the years ended December 31, 2004, 2005 and 2006, sales to individual customers representing greater than 10 percent of consolidated net sales were as follows:

	For the year ended December 31,
	2004				2005				2006
	Amount		%		Amount		%		Amount				%
	NT$				NT$				NT$		US$
							(in thousands)

BQS		30,030,189		18		26,532,871		12		21,647,010		664,222		7
Samsung		6,018,337		4		19,903,556		9		32,824,794		1,007,204		11
		36,048,526		22		46,436,427		21		54,471,804		1,671,426		18

24.

Business Combination

On April 7, 2006, the Company’s board of directors approved the proposal to merge with QDI. The merger was consummated on October 1, 2006 through the issuance of 1,479,110 thousand new common shares, par value NT$10 per share, in exchange for all of the 5,176,885 outstanding common shares of QDI, representing an exchange ratio of 3.5 shares of common stock of QDI to one share of common stock of AUO.

The merger was accounted for in accordance with ROC SFAS No. 25, “Business Combinations” using the purchase method of accounting. Under the purchase method, the aggregate purchase price of NT$67,837,855 thousand was determined based on the market value of shares issued, direct transaction costs incurred and the fair value of outstanding vested QDI employee stock options assumed as of the acquisition date. The market value of shares issued amounted to NT$67,748,572 thousand and was determined based on the average market price of the Company’s common shares over the five-day period (i.e. March 30, 2006 through April 14, 2006) before and after the terms of the acquisitions were agreed upon and announced on April 7, 2006. Direct transaction costs of NT$15,900 thousand included legal and accounting fees, and other external costs directly related to

(Continued)

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Notes to Consolidated Financial Statements

the merger. Under the terms of the merger agreement, QDI’s employee stock options outstanding as of October 1, 2006 were converted into options to purchase shares of AUO’s common stock. The fair value of the vested portion of such employee stock options amounted to NT$73,383 thousand and was determined using the Black-Scholes option pricing model.

In accordance with ROC SFAS No. 25, the aggregate purchase price was allocated to QDI’s net tangible and intangible assets and liabilities based upon their estimated fair values as of October 1, 2006. The excess purchase price over the value of the net identifiable tangible and intangible assets was recorded as goodwill. The fair value assigned to tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions of management.

The following represents the allocation of the purchase price to the acquired net assets of QDI:

	October 1, 2006
	NT$
	(in thousands)

Current assets		44,805,553
Long-term investments		685,065
Property, plant and equipment		122,453,035
Intangible assets—core technologies		3,675,700
Other assets		4,818,256
Current liabilities		(55,196,602	)
Long-term liabilities		(67,681,426	)
Other liabilities		(9,734	)
Goodwill		14,288,008
		67,837,855

Identifiable intangible assets acquired included core technologies in the design, manufacture and assemble of TFT-LCD products developed by QDI. The Company amortizes the fair value of the acquired core technologies using the straight-line method over the estimated useful live of three years.

Goodwill of NT$14,288,008 thousand represented the excess of the purchase price over the fair value of the acquired net tangible and intangible assets. In accordance with ROC SFAS No. 25, goodwill is no longer amortized but is tested for impairment at least annually or more frequently if events or circumstances indicate it might be impaired.

The following unaudited pro forma financial information summarized the combined results of operations of AUO and QDI as though the business combination had taken place on January 1, 2005. The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations had the merger been effected on January 1, 2005.

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Notes to Consolidated Financial Statements

	December 31,
	2005		2006
	NT$		NT$			US$
	(in thousands, except for per share data)

Net sales		279,060,413		344,804,286			10,580,064
Income (loss) before income tax		6,202,917		(3,585,706	)		(110,025	)
Net income (loss)		5,852,711		(4,654,044	)		(142,806	)
Earnings (loss) per share—basic		0.86		(0.63	)		(0.02	)

25.

Summary of Significant Differences Between Accounting Principles Followed by the Company and Accounting Principles Generally Accepted in the United States of America

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the Republic of China (ROC GAAP), which differ in certain significant respects from accounting principles generally accepted in the United States of America (US GAAP). A discussion of the significant differences between US GAAP and ROC GAAP as they apply to the Company is as follows:

(a)

Business combinations

(1)

Merger with Unipac

AUO completed the merger with Unipac on September 1, 2001, through the issuance of 1,512,281 thousand common shares in exchange for all of the outstanding shares of Unipac. Under the applicable ROC GAAP, the merger was accounted for using the pooling-of-interests method and, accordingly, the assets and liabilities of Unipac were recorded based on the carrying value at the date of the merger. Further, according to the Republic of China Company Law, the excess of Unipac’s net assets over the par value of the Company’s issued common stock for completion of the merger was appropriated from unappropriated earnings and recorded as capital surplus. Under US GAAP, the merger was accounted for as the acquisition of Unipac by the Company using the purchase method of accounting. Under purchase accounting, the aggregate purchase price of NT$39,636,901 thousand was calculated based on the market value of the shares issued, and such amount was allocated to the assets acquired and liabilities assumed based on their respective fair values. The market value of the shares was based on the average market price of the Company’s common shares over the five-day period before and after the terms of the acquisition were agreed upon and announced. The difference between the purchase price and the fair value of the assets acquired, including identifiable intangible assets, and liabilities assumed of Unipac was recorded as goodwill.

AUO’s management is responsible for the determination of the fair value of the assets acquired, including identifiable intangible assets, and liabilities assumed of Unipac. In determining such fair values, management considered a number of factors, including

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

valuation reports by third parties. The following table summarized the estimated fair value of the assets and liabilities of Unipac at the date of acquisition.

	September 1, 2001
	NT$
	(in thousands)

Current assets		10,566,296
Long-term investments		38,767
Property, plant and equipment		30,568,067
Intangible assets		8,730,382
Goodwill		11,599,692
Other assets acquired		443,961
Total assets		61,947,165
Current liabilities		2,763,917
Long-term debt		18,615,702
Other liabilities		930,645
Total liabilities assumed		22,310,264
Net assets acquired		39,636,901

Of the NT$8,730,382 thousand of acquired intangible assets, NT$53,450 thousand was assigned to in-process research and development assets that were written off at the date of acquisition in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method”. The remaining NT$8,676,932 thousand of acquired intangible assets has a weighted average useful life of approximately 88 months and no estimated residual value. Such intangible assets include large-size TFT-LCD panel’s product and process technology of NT$3,123,655 thousand and small and mid-size TFT-LCD panel’s product and process technology of NT$5,553,277 thousand. The key technology for small and mid-size TFT-LCD production includes the technologies independently developed by Unipac and 13 related patents. The key technology for large size TFT-LCD production includes the technologies jointly developed by Unipac and Matsushita, product technologies developed by Unipac and the three related patents.

The fair value of Unipac’s inventories (represented by estimated selling prices less the sum of costs of disposal and a reasonable profit allowance for the selling effort) was less than its carrying amount by approximately NT$387,901 thousand at September 1, 2001. As a

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Notes to Consolidated Financial Statements

result, the amount allocated to Unipac’s inventories in connection with the purchase price allocation performed under US GAAP was NT$387,901 thousand less than the carrying value of Unipac’s inventories under ROC GAAP. These inventories were fully sold as of December 31, 2002.

The remaining purchase price of NT$11,599,692 thousand was allocated to goodwill. Pursuant to U.S. Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, goodwill arising from purchase business combinations are not amortized but are tested for impairment.

There were deferred tax assets of NT$652,960 thousand with a related valuation allowance for deferred tax assets of NT$652,960 thousand and deferred tax liabilities of NT$680,849 thousand, respectively, which were recorded as part of the purchase accounting at September 1, 2001. As the Company continues to generate profits after 2002, the valuation allowance was released. In accordance with SFAS No. 109, the release of a valuation allowance for deferred tax assets that were created from a purchase accounting transaction results in a reduction in goodwill rather that a benefit recorded in the income statement.

(2)

Merger with QDI

AUO completed the merger with QDI on October 1, 2006. Under ROC GAAP, the merger was accounted for in accordance with ROC SFAS No. 25 using the purchase method of accounting. Under US GAAP, the merger was accounting for in accordance with SFAS No. 141, “Business Combination”, using the purchase method of accounting. Accordingly, there are no material differences identified for the accounting of the merger with QDI. See note 24 for further details.

Goodwill of NT$14,288 million represented the excess of the purchase price over the fair value of the underlying net tangible and intangible assets, which, based on management assessment, is primarily attributable to the opportunity to strengthen competitiveness through expanding production capacity and lowering material costs that can provide greater long-term growth. Management believes that the combined company will be better positioned to face increasing competition from other key TFT-LCD manufacturers.

The following unaudited pro forma financial information summarizes the combined results of operations of AUO and QDI on a US GAAP basis as though the business combination had taken place on January 1, 2005. This unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations had the merger been effected on January 1, 2005.

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands, except for per share data)

Net sales		279,060,413			344,804,286			10,580,064
Net loss		(2,788,085	)		(13,190,084	)		(404,728	)
Loss per share—basic		(0.48	)		(2.05	)		(0.06	)

For US GAAP purposes, SFAS No. 142 classifies intangible assets into three categories, namely (1) intangible assets with a finite useful life subject to amortization; (2) intangible assets with an indefinite life not subject to amortization; and (3) goodwill. For intangible assets with a finite life, test for impairment is performed if conditions exist indicating that the carrying value may not be recoverable. The Company has no intangible assets with indefinite lives.

The Company performs test of impairment of goodwill annually or more frequently if events or circumstances indicate it might be impaired. The Company has determined that it is a single reporting unit for purposes of testing goodwill for impairment. Accordingly, the Company compares the carrying amount of its total stockholders’ equity (as determined on a US GAAP basis) to its market value (based on the quoted value of its common stock) on the impairment evaluation date to determine if goodwill is potentially impaired. Based on these assessments, the Company concluded that goodwill as of December 31, 2005 and 2006 was not impaired.

The Company’s product and process technology intangible assets are amortized over their respective useful lives. The Company reviews such product and process technology assets with finite lives for impairment to ensure they are appropriately valued if conditions exist that may indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic region, or a change in the assessment of future operations.

(b)

Compensation

(1)

Remuneration to directors and supervisors

According to AUO’s articles of incorporation, a remuneration amount up to 1% of annual distributable earnings may be paid to its directors and supervisors. Under ROC GAAP, such payments are charged directly to retained earnings in the period stockholders approve such payment and presented under financing activities in the consolidated statement of cash flows. Under US GAAP, such cash payments are recorded as compensation expense in the period when the related services are rendered based on management’s best estimate of the amounts to be paid upon stockholders’ approval and presented under operating activities in the consolidated statement of cash flows.

(2)

Employee bonuses

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Certain employees of AUO are entitled to bonuses in accordance with provisions of AUO’s articles of incorporation, which specify a bonus amount ranging from 5 % to 10 % of annual distributable earnings. Employee bonuses may be paid in cash, shares, or a combination of both.

Under ROC GAAP, such bonuses are appropriated from retained earnings in the period stockholders’ approval is obtained. If such employee bonuses are settled through the issuance of stock, the amount charged against retained earnings is based on the par value of the common shares issued.

Under US GAAP, employee bonuses are charged to income in the year services are provided. The total amount of these bonuses is initially accrued based on the minimum cash value to be paid, with an adjustment in the subsequent year after shareholders’ approval. Any difference between the amount initially accrued and fair value of bonuses settled by the issuance of shares is recognized at the grant date.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. (“SAB”) 108, “Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements.” SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach (“dual approach”). The rollover approach quantifies misstatements based on the amount of the error originating in the current year statement of income whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. SAB 108 provides a transition accommodation to permit the correction of previously immaterial errors determined under the Company’s previous method of quantifying unadjusted misstatements but determined to be material under the dual approach. The Company adopted SAB 108 effective January 1, 2006.

On September 19, 2006, the SEC staff published its views on accounting issues related to Accounting Principles Board Opinions No. (“APB”) 25 resulting from past stock option grant practices in a letter to Financial Executives International and the American Institute of Certified Public Accountants. The topics addressed in the letter primarily relate to questions about whether a company’s determination of the measurement date of past stock option awards was appropriate. The Company has undertaken a review of its past stock bonus granting practices and identified certain misstatements in its employee bonus expense for US GAAP purposes for the years 2001 through 2005 relating to the portion of employee bonuses settled through issuance of the Company’s common stock. Specifically, the Company had inappropriately computed the stock-based compensation expense using the date of stockholders’ approval as the measurement date before the number of shares that each individual employee is entitled to receive was known.

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Prior to the adoption of SAB 108, the Company quantified unadjusted misstatements under the rollover approach, under which the unadjusted misstatements relating to the employee stock bonus expense were deemed immaterial. Upon initial adoption of SAB 108 for the year 2006, the Company quantified the misstatement of employee stock bonus expense under the dual approach and assessed that the unadjusted misstatements would be material. As such, the Company recorded a cumulative effect adjustment as of January 1, 2006 for the unadjusted misstatements. The impact to the Company’s beginning retained earnings for 2006 for US GAAP purposes was an increase of NT$767,694 thousand, with a corresponding decrease in capital surplus to correct the misstatements.

(3)

Transfer of treasury stock to employees

Based on board of directors resolution on December 16, 2002, the Company purchased its own shares on the Taiwan Stock Exchange for use as employee bonus shares in future periods. During 2002 and 2003, the Company purchased treasury stock amounting to 12,000 thousand shares at a total cost of NT$250,981 thousand. None of the treasury stock had been disposed of or transferred to employees as of December 31, 2004. Upon approval by the Financial Supervisory Commission of the ROC (FSC) on August 16, 2005, the Company transferred to its employees all of the treasury stock at a price below the carrying value of the treasury stocks. The plan prescribed a service condition of one year. Accordingly, 50% of the shares was deemed vested upon grant date and the remaining 50% nonvested until the fulfillment of service requisite period.

Under ROC GAAP, the Company adopted SFAS No. 30, “Accounting for Treasury Stock”, and accounts for the transaction as a disposal of treasury stocks. The difference between the selling price and carrying value of treasury stocks is offset against capital surplus.

Under US GAAP, the Company adopted SFAS No. 123, “Accounting for Stock-Based Compensation” and evaluated the arrangement as an employee stock purchase plan (ESPP) that grants rights to purchase shares at the stated price and has no option feature. Compensation cost is measured as the excess of the quoted market price over the exercise price at the date of grant taking into account of expected forfeiture rate. Pursuant to the terms in the transfer agreement, the Company recognized compensation cost of NT$215,580 thousand immediately to current operations on the grant date and accrued NT$215,580 thousand as deferred compensation cost, NT$67,922 thousand and NT$147,658 thousand of which was charged to current operations for the year ended December 31, 2005 and 2006, respectively.

Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), “Share-based Payment.” The adoption of SFAS No. 123R did not have a material impact on the accounting for above transactions.

(c)

Equity method investments

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

When the Company has the ability to exercise significant influence over the operating and financial policies of investees (generally those in which the Company owns between 20% and 50% of the investee’s voting shares), those investments are accounted for using the equity method. The difference between the acquisition cost and the carrying amount of net equity of the investee as of the acquisition date is allocated based upon the pro rata excess of fair value over the carrying value of assets on investee’s books. Any unallocated difference is treated as investor level goodwill. Under US GAAP, such amount is not amortized. Prior to January 1, 2006, under ROC GAAP the amount of unallocated difference is amortized over five years. Commencing January 1, 2006, as required by the amended ROC SFAS No. 5, investor level goodwill is also no longer amortized and the entire carrying value of the equity method investment is subject to assessment for impairment.

Under US GAAP, the Company recognizes the income (loss) of investees on a current year basis in accordance with the APB 18. Prior to January 1, 2005, as permitted under ROC GAAP, the Company recognized its equity income (loss) of investees in the following year on a one-year lag basis if the Company was unable to obtain audited financial statements of the investee in time. Commencing January 1, 2005, as required by the amended ROC SFAS No. 5, the Company also recognizes the income (loss) of all investees on a current year basis.

In March 2003, the Company purchased a 20% equity ownership in FDTC resulting in recognition of investor level goodwill of NT$240,179 thousand. In August 2004, the Company disposed of 10% ownership in FDTC and ceased having the ability to exercise significant influence over FDTC. As a result starting from September 2004, the investment in FDTC is accounted for using the cost method. In May 2005, the Company sold the remaining 10% ownership in FDTC at a gain of NT$73,009 thousand.

In November 2003, the Company purchased a 12.31% ownership in Cando and accounted for its investment under the equity method of accounting. The Company recognized investor level goodwill of NT$22,769 thousand. In February and May 2004, the Company made additional investments in Cando. Under ROC GAAP, the Company charged NT$153,569 thousand to retained earnings in 2004. Under US GAAP, the subsequent investments are treated as a step acquisition for which the Company recognized investor level goodwill of NT$230,616 thousand.

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In 2004, the Company purchased a 5.47% ownership in BenQ and accounted for its investment under the equity method of accounting. The Company recognized investor level goodwill of NT$1,120,275 thousand. In 2005, the Company’s equity interest in BenQ was diluted as a result of non-participation in investee’s capital increase and other changes in BenQ’s equity during the year. Under ROC GAAP, the Company recognized NT$164,910 thousand to increase capital surplus and charged NT$86,500 to retained earnings. Under US GAAP, the Company recorded NT$78,410 thousand as an adjustment to capital surplus.

On October 1, 2005, BenQ acquired Siemens’ mobile phone business and recognized negative goodwill of NT$5,727,307 thousand under ROC GAAP. Negative goodwill is amortized under ROC GAAP. Under US GAAP, negative goodwill is recognized as an extraordinary gain in the consolidated statement of income. As required by APB 18, for US GAAP purposes, the Company recognized its proportionate share of the extraordinary gain of NT$308,702 in 2005.

In January 2005, the Company made additional investments in Wellypower and accounted for its investment prospectively under the equity method of accounting under ROC GAAP. The Company did not retroactively apply the equity method of accounting for its investment in Wellypower under US GAAP because the effects on prior periods are immaterial. The Company recognized investor level goodwill of NT$8,442 thousand as a result of these additional investments.

(d)

Marketable securities

Under US GAAP, marketable securities are accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Prior to January 1, 2006, under ROC GAAP, marketable securities were carried at the lower of aggregate cost or market value. The fair value was determined by the average price for one month before the balance sheet date. Effective January 1, 2006, the Company adopted ROC SFAS No. 34, “Financial Instruments: Recognition and Measurement.” Upon the adoption of ROC SFAS No. 34, the Company’s accounting for marketable securities under ROC GAAP and US GAAP is the same.

Under both SFAS No. 115 and ROC SFAS No. 34, marketable securities that have readily determinable fair values are classified as either trading, available-for-sale or held-to-maturity securities. The fair value is determined as of the balance sheet date. Marketable securities that are bought and traded for short-term profit are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Marketable securities not classified as trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income. However, when the investment is deemed to be other than temporarily impaired, it is written down to fair value at the end of the period of assessment through a charge to earnings.

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company had no trading or held-to-maturity securities as of December 31, 2005 and 2006. In 2004, for US GAAP purposes, one of the Company’s available-for-sale securities was in a continuous loss position for more than twelve months. The Company determined that the impairment was other than temporary, and as a result, unrealized loss of NT$922,901 thousand was written off to current operations in the Company’s US GAAP consolidated statement of income for the year ended December 31, 2004.

(e)

Land cost

Pursuant to board of directors resolution on January 12, 2005, the Company purchased land in Lungtan which was previously leased by the Company from Aspire Service and Development Inc. (ASD). Prior to the acquisition, the lease arrangement was subject to rent escalation adjustment of 5% each year. As a result, under US GAAP, the Company recognized a cumulative escalation adjustment of rental expense of NT$86,278 thousand since prior years. At the time of acquisition, the liability was eliminated and the cost of land was reduced by this amount under US GAAP.

(f)

Convertible bonds

Under ROC GAAP and prior to January 1, 2006, when convertible bonds were issued, the entire instrument was recorded as a liability at an amount equal to the proceeds received. Any discount or premium to the par value of the convertible bond was amortized and reflected in the statement of income using the effective interest rate method. If the convertible bonds contained a redemption premium above its par value amount, the excess was amortized using the effective interest rate method over the redemption period as a charge to interest expense. Upon conversion, the carrying value of the bond was credited to common stock at its par value and the difference between the carrying value of the bond was credited to common stock at its par value and the difference between the carrying value of the bond and the par value of stock was recorded to capital reserve. No gain or loss was recognized. Effective from January 1, 2006, ROC SFAS No. 34 and ROC SFAS No. 36 require derivatives embedded in hybrid instruments, if not clearly and closely related to the host contract, to be bifurcated and accounted for at fair value.

AUO assumed the convertible bonds from QDI in connection with the merger on October 1, 2006. In accordance with the transition rule under ROC SFAS No. 36, for convertible bonds assumed in a business combination that do not involve a major modification, as defined, the debt instruments would not be subject to the requirements of ROC SFAS No. 36, provided that the convertible bonds were initially issued before January 1, 2006. Accordingly, the equity component of the convertible bonds assumed from the QDI merger has not been bifurcated from the debt host and the entire amount of each of the assumed convertible bonds is recorded as a liability at fair value as of the acquisition date. The difference between fair value and

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

redemption value on the date of acquisition is treated as a discount or premium, which will be amortized and reflected in the statement of income using the effective interest rate method over the redemption period. If and when the bond is converted, an amount is credited to common stock based on the par value of the common stock issued, with the difference between the carrying value of the bond and the par value of stock recorded as an adjustment to capital reserve.

Under US GAAP, AUO considered whether the convertible bonds contain embedded derivative instruments that should be separated from the host contract and accounted for as a derivative instrument pursuant to the guidance provided in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and related interpretations.

Based on its assessment, the Company concluded that the conversion features of the two overseas convertible bonds assumed from QDI at October 1, 2006 qualify as embedded derivative instruments under SFAS No. 133 since these bonds are denominated in a currency that is different from the Company’s functional currency and therefore require bifurcation from the debt host. Accordingly, the Company recorded derivative instrument liabilities of NT$2,248,999 and NT$1,803,701 as of October 1, 2006 and December 31, 2006, respectively, based on the fair value of the conversion options embedded in the assumed overseas convertible bonds. The Company further concluded that the put and call options embedded in the convertible bonds do not meet the definition of an embedded derivative instrument under SFAS No. 133 since they are considered to be clearly and closely related to the debt host. As a result, under US GAAP, the overseas convertible bonds assumed from QDI have been recorded at their fair value as of the acquisition date without regard to the embedded conversion options. The recorded carrying amounts will then be accreted to their respective maturity and/or redemption amounts over the remaining terms of the bonds using the effective interest method.

(g)

Shareholders stock dividends paid

Under ROC GAAP, shareholders stock dividends paid are recorded at par value, with a charge to retained earnings. Under US GAAP, generally if the ratio of distribution is less than 25 % of the same class of shares outstanding, the fair value of the shares issued should be charged to retained earnings. The effect of stock dividends issued in 2005 and 2006 decreased retained earnings and increased capital surplus by NT$18,918,606 thousand and NT$5,439,900 thousand, respectively.

(h)

Pension benefits

Prior to January 1, 1998, the pension expense recorded by the Company in connection with its defined benefit pension plan was based on contributions made by the Company to the pension plan as required by the Republic of China Labor Standards Law (the “old system”). Effective from January 1, 1998, the Company adopted ROC SFAS No. 18, “Accounting for Pensions”, which is not materially different from SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, with the exception of the accounting upon adoption. Subsequent to January 1, 1998, net pension expense was recognized on an actuarially determined basis. Under

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

US GAAP, the Company accounts for its defined benefit pension plan in accordance with SFAS No. 87. Accumulated pension obligation and pension expense are determined on an actuarial basis from the date the pension plan was started in 1996. Therefore, pension obligation and related expense are different between ROC GAAP and US GAAP because of unrecognized prior service cost.

In 2003, the Company adopted SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. SFAS No. 132, as revised, requires additional disclosures about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans.

Effective December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. SFAS No. 158 requires the funded status of a defined benefit plan to be recognized on the balance sheet and the recognition of changes in funded status in the year in which the changes occur through comprehensive income. SFAS No. 132 and SFAS No. 158 did not change the measurement or recognition of net periodic pension expense. The adoption of SFAS No. 158 had no effect on the statements of income for the periods presented.

Beginning July 1, 2005, pursuant to the effective ROC Labor Pension Act (the “new system”), employees who elected to participate in the new system or joined the Company after July 1, 2005 are subject to a defined contribution plan under the new system. There is no material difference between ROC GAAP and US GAAP on the accounting of defined contribution pension plan.

Substantially all participants in the defined benefit plan elected to participate in the defined contribution plan. The transfer of participants to the Defined Contribution Plan did not have a material effect on the Company’s financial position or results of operations. Participants’ accumulated benefits under the Defined Benefit Plan were not impacted by their election to change in plans and their seniority remains regulated by the ROC Labor Standards Law, such as the retirement criteria and the amount payable. The Company is required to make contribution to the Defined Benefit Plan until it is fully funded.

(i)

Depreciation of property, plant and equipment

Under ROC GAAP, the Company depreciates buildings over 20 to 50 years in accordance with the relevant ROC Internal Revenue Code. Under US GAAP, buildings are depreciated over their estimated useful lives, which are considered to be 20 years.

(j)

Derivative financial instruments and hedging activities

For interest rate swaps contracts, the Company generally makes specified payments based on fixed interest rate and notional principal amounts and receives amounts based on variable rate of interest and notional principal. Under ROC GAAP and prior to January 1, 2006, net amounts received or paid under the contracts were reported as adjustments to interest expense on long-term debt. The Company’s forward contract receivables and payables were recorded at the spot rate at the date of inception. Discount or premium was amortized on a straight-line basis over

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

the life of the contract. Realized and unrealized gains or losses on forward contracts resulting from actual settlement or balance sheet date translation were charged or credited to current operations. Effective from January 1, 2006, the Company adopted ROC SFAS No. 34 and applied hedge accounting for derivatives effective as a hedge. The requirements on hedge accounting under ROC SFAS No. 34 are not materially different from that required by SFAS No. 133.

Under US GAAP and prior to January 1, 2006, the Company did not adopt any hedge accounting for its derivative transactions. Accordingly, all derivative contracts were recognized as either assets or liabilities and subject to re-measurement at fair value at each balance sheet date. Changes in fair values of derivative instruments were recognized in earnings for US GAAP purposes. Effective January 1, 2006, in connection with the adoption of ROC SFAS No. 34, the Company also designates certain derivative contracts (mainly interest rate swap contracts) as cash flow hedges for US GAAP purposes with changes in fair value of the hedging instruments recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. Upon the adoption of ROC SFAS No. 34, there is no material difference between the accounting under ROC GAAP and US GAAP for derivative financial instruments executed on or after January 1, 2006.

(k)

Compensated absences

Under ROC GAAP, the Company is not required to accrue for earned but unused vacation at the end of each year. Under US GAAP, earned but unused vacation that can be carried over to subsequent periods is accrued for at each balance sheet date.

(l)

Research and development expense

For ROC GAAP, the amortization of the payment of the capitalized technology fixed license and patent fees for product and process technology is included in research and development expense. For US GAAP, this amortization expense is included in cost of goods sold.

(m)

Operating leases

The Company entered into certain non-cancelable lease agreements with rental payments subject to escalation adjustments of 5% each year. Under ROC GAAP, fixed escalation of rental payment is recognized as it becomes payable. Under US GAAP, fixed escalation of rental payments is recognized on a straight-line basis over the lease term.

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Notes to Consolidated Financial Statements

(n)

Income tax

The statutory income tax rate in the Republic of China is 25%. Under a revised tax rule effective on January 1, 1998, an additional 10% corporation income tax is assessed but only to the extent that taxable income is not distributed before the end of the subsequent year. The additional income tax, or the undistributed earnings surtax, is determined in the subsequent year when the distribution plan relating to earnings attributable to the preceding year is resolved and approved by the Company’s stockholders. The actual payment of the undistributed earnings surtax will then become due and payable in the year following the finalization of the distribution plan.

Once the 10% tax is determined, the Company will not be entitled to any additional credit or refund, even if the current year’s undistributed earnings on which such tax was based is distributed in future years, in which case the shareholders, but not the Company, can claim an income tax credit.

Under ROC GAAP, the undistributed earnings surtax is recorded as tax expense in the period during which the stockholders resolve and approve the amount of the earnings distribution. For US GAAP purposes, the Company recognizes income tax expense based on the tax rate assuming all earnings are undistributed. Any tax benefits resulting from actual earnings distribution are recognized as a reduction of income tax expense in the period when the distribution plan is resolved and approved. Accordingly, under US GAAP and prior to 2006, the tax rate used by the Company to measure its income tax expense, including the tax effects of temporary differences, was 32.5%, which reflects the 25% statutory income tax rate on distributed earnings and the additional tax on undistributed earnings at a rate of 7.5% on a tax-effected basis.

In May 2006, the ROC Income Tax Act was revised to amend the definition of “undistributed retained earnings” such that the undistributed earnings surtax will be computed as 10% of income after tax as determined in accordance with the Commercial Accounting Act, which is based on ROC GAAP. The revised definition of “undistributed retained earnings” is applied retroactively commencing from the determination of the undistributed earnings surtax for 2005. Under ROC GAAP, despite the change in the calculation of the undistributed earnings surtax, the additional tax expense will continue to be recognized in the period when the amount of earnings distribution is resolved and approved by the stockholders.

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Under US GAAP, since the new tax law requires the calculation of the undistributed earnings surtax be based solely on the Company’s ROC GAAP income, any tax expense associated with the undistributed earnings surtax recorded under ROC GAAP will effectively reduce the computed amount of the undistributed earnings surtax pertaining to the period such tax expense is recorded for ROC GAAP purposes. As a result, the tax rate used by the Company to measure income tax expense under US GAAP changed from 32.5% to 31.8% beginning in 2006. In addition, since the undistributed earnings surtax would be based on the Company’s ROC GAAP income, temporary differences arising from any differences between the tax base and ROC GAAP base of the Company’s assets and liabilities would no longer have an impact on the computation of the amount of the undistributed earnings surtax. Because the reversal of such temporary differences will not result in future taxable or deductible amounts for purposes of the calculation of the undistributed earning surtax, the deferred tax assets and liabilities relating to such temporary differences are recognized at the distributed income tax rate of 25%, rather than at the undistributed tax rate of 32.5% prior to the tax law change. For temporary differences that arise from the differences between US GAAP and ROC GAAP, the resulting deferred tax assets and liabilities will be recognized at the revised undistributed tax rate of 31.8%.

(o)

Earnings per share

Under ROC GAAP, basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by taking basic earnings per share into consideration, plus additional common shares that would have been outstanding if the potential dilutive share equivalents had been issued. The net income (loss) is also adjusted for the interest and other income or expenses derived from any underlying dilutive share equivalents. The weighted average outstanding shares are adjusted retroactively for stock dividends, including transfers from retained earnings and capital surprise to common stock, and employee stock bonus issued. Under US GAAP, the calculation of basic and diluted EPS is not materially different from that under ROC GAAP, except that EPS is not restated for employee stock bonus adjusted.

(p)

Reclassification

The Company reclassified certain of its accounts in the consolidated condensed balance sheet as of December 31, 2005 to conform to the current year presentation.

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(q)

Recent accounting pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective in fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on the Company’s financial positions and results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, which establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of SFAS No. 157 on the Company’s financial position and results of operations.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. This requirement becomes effective for fiscal years ending after December 15, 2006. Upon the adoption of SFAS No. 158, the Company recognized an increase in accrued pension liabilities of NT$234,510 thousand as of December 31, 2006 and the corresponding decrease of NT$234,510 thousand in accumulated other comprehensive income.

(Continued)

F-83

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(r)

US GAAP reconciliations

(1)

Reconciliation of consolidated net income

	For the year ended December 31,
	2004			2005			2006
	NT$			NT$			NT$			US$
	(in thousands, except for per share data)

Net income attributable to equity holders of the parent company, ROC GAAP		27,962,852			15,626,991			9,103,472			279,333
US GAAP adjustments:
(a) Purchase method of accounting for acquisition of Unipac
- Amortization of intangible assets		(1,049,496	)		(1,049,496	)		(1,049,496	)		(32,203	)
- Amortization of premium on bonds payable		12,364			-			-			-
- Depreciation		209,138			118,490			(70,961	)		(2,177	)
(b) Compensation
- Remuneration to directors and supervisors		(37,447	)		(21,096	)		(24,000	)		(736	)
- Employee bonuses
- Provision		(1,622,709	)		(1,265,786	)		(737,381	)		(22,626	)
- Adjustment to fair value		(5,593,883	)		(4,137,909	)		(3,265,096	)		(100,187	)
- Compensation cost arising from ESPP		-			(283,502	)		(147,658	)		(4,531	)
(c) Investment gain (loss) on foreign subsidiaries and long-term equity investments		209,694			139,516			(334,340	)		(10,259	)
(c) Equity portion investee extraordinary gain		-			308,702			-			-
(d) Investment loss on marketable securities		(922,901	)		-			-			-
(f) Accretion of interest expense on convertible bonds		-			-			(1,223,176	)		(37,532	)
(h) Pension expense		3,058			1,057			1,108			34
(i) Depreciation of property, plant and equipment		(359,310	)		(756,783	)		(1,147,039	)		(35,196	)
(j) Derivative financial instruments recorded at fair value		(249,585	)		(45,051	)		144,730			4,441
(k) Compensated absences expense		(49,232	)		40,952			(88,171	)		(2,706	)
(m) Escalation adjustment of rent expense		2,080			2,129			2,130			65
Tax effect of change in tax law		-			-			9,086			279
Deferred tax effect of US GAAP adjustments		416,978			556,036			1,089,033			33,416
(n) Valuation allowance for deferred tax assets		(819,053	)		(556,036	)		(1,089,033	)		(33,416	)
Net income, US GAAP		18,112,548			8,678,214			1,173,208			35,999

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the year ended December 31,

2004

2005

2006

NT$

US$

(in thousands, except for per share data)

Earnings per share — Basic:

Income before extraordinary item

3.39

1.46

0.18

0.01

Extraordinary item

0.05

Net income

3.39

1.51

0.18

0.01

Earnings per share — Diluted:

Income before extraordinary item

3.39

1.46

0.18

0.01

Extraordinary item

0.05

Net income

3.39

1.51

0.18

0.01

Basic—Weighted-average number of shares outstanding (in thousands)

5,350,187

5,762,865

6,426,872

Diluted—Weighted-average number of shares outstanding (in thousands)

5,350,187

5,762,865

6,426,928

(Continued)

F-85

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)

Reconciliation of consolidated stockholders’ equity

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)

Total stockholders’ equity, ROC GAAP		155,702,187			230,734,304			7,079,912
(a) Purchase method of accounting for acquisition of Unipac
- Goodwill		10,946,732			10,946,732			335,892
- Intangible assets, net of amortization		3,148,486			2,098,990			64,406
- Other assets		602,789			531,829			16,319
(b) Compensation
- Remuneration to directors and supervisors		(21,096	)		(24,000	)		(736	)
- Employee bonuses accrual		(1,265,786	)		(737,381	)		(22,626	)
- Deferred expense arising from ESPP		147,658			-			-
(c) Foreign subsidiaries and long-term equity investments		554,448			258,742			7,939
(c) Cumulative translation adjustment		12,719			12,719			390
(d) Marketable securities		(544,867	)		(519,920	)		(15,954	)
(e) Land cost		(86,278	)		(86,278	)		(2,647	)
(f) Convertible bonds		-			(1,223,176	)		(37,532	)
(h) Defined benefit plan
- Accrued pension cost		(28,630	)		(27,522	)		(845	)
- Adoption of SFAS No. 158		-			(234,510	)		(7,196	)
(i) Accumulated depreciation of property, plant and equipment		(1,729,190	)		(2,869,001	)		(88,033	)
(j) Derivative financial instruments recorded at fair value		(353,836	)		-			-
(k) Compensated absences accrual		(142,991	)		(231,162	)		(7,093	)
(m) Accrued rental expense		(23,451	)		(21,321	)		(654	)
(n) Tax effect of US GAAP adjustments		-			9,086			279
Total stockholders’ equity, US GAAP		166,918,894			238,618,131			7,321,821

(Continued)

F-86

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(s)

US GAAP consolidated condensed financial statements

Consolidated Condensed Balance Sheets

December 31, 2005 and 2006

(Expressed in thousands of New Taiwan dollars and US dollars)

	2005		2006
	NT$		NT$		US$
Assets
Current assets		93,469,821		150,826,764		4,628,008
Long-term investments		5,887,920		12,639,537		387,834
Property, plant and equipment, net		220,973,967		380,859,841		11,686,402
Goodwill and intangible assets		16,578,548		33,188,496		1,018,364
Other assets		5,899,022		10,884,969		333,998
Total Assets		342,809,278		588,399,607		18,054,606

Liabilities and Stockholders’ Equity
Current liabilities		91,287,977		169,515,030		5,201,443
Long-term liabilities		84,485,102		179,924,432		5,520,848
Minority interest		117,305		342,014		10,494
Stockholders’ equity		166,918,894		238,618,131		7,321,821
Total Liabilities and Stockholders’ Equity		342,809,278		588,399,607		18,054,606

(Continued)

F-87

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Consolidated Condensed Statements of Income

Years ended December 31, 2004, 2005 and 2006

(Expressed in thousands of New Taiwan dollars and US dollars)

	2004			2005			2006
	NT$			NT$			NT$			US$

Net sales		168,111,569			217,388,388			293,106,770			8,993,764
Cost of goods sold		135,255,952			195,261,896			269,734,794			8,276,612
Gross profit		32,855,617			22,126,492			23,371,976			717,152
Operating expenses		12,686,795			12,642,678			15,819,338			485,405
Income from operations		20,168,822			9,483,814			7,552,638			231,747
Non-operating income (expenses), net		(1,592,854	)		(646,725	)		(5,330,269	)		(163,555	)
Income before income tax, minority interest and extraordinary item		18,575,968			8,837,089			2,222,369			68,192
Income tax expense		(463,420	)		(473,429	)		(1,059,238	)		(32,502	)
Income before minority interest and extraordinary item		18,112,548			8,363,660			1,163,131			35,690
Minority interest in loss		-			(5,852	)		(10,077	)		(309	)
Income before extraordinary item		18,112,548			8,369,512			1,173,208			35,999
Extraordinary item—equity in extraordinary gain of equity method investee		-			308,702			-			-
Net income		18,112,548			8,678,214			1,173,208			35,999

(Continued)

F-88

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Consolidated Condensed Statements of Comprehensive Income

Years ended December 31, 2004, 2005 and 2006

(Expressed in thousands of New Taiwan dollars and US dollars)

	2004			2005			2006
	NT$			NT$			NT$			US$

Net income		18,112,548			8,678,214			1,173,208			35,999
Other comprehensive income (loss) before tax:
Unrealized holding gains (loss) on securities available-for-sale		578,620			(208,705	)		292,017			8,960
Foreign currency cumulative translation adjustment		(291,708	)		372,700			327,996			10,064
Reclassification adjustments for securities sold		(3,625	)		-			-			-
Amortization of fair value adjustment for interest rate swap		4,166			-			-			-
Derivative and hedging activities—interest rate swap		-			-			(104,907	)		(3,219	)
Other comprehensive income before income taxes		287,453			163,995			515,106			15,805
Income tax expense (benefit)		(65,917	)		86,626			-			-
Other comprehensive income		353,370			77,369			515,106			15,805
Comprehensive income		18,465,918			8,755,583			1,688,314			51,804

(Continued)

F-89

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Consolidated Condensed Statements of Stockholders' Equity

Years ended December 31, 2004, 2005 and 2006

(Expressed in thousands of New Taiwan dollars and US dollars)

	Common stock		Additional paid-in capital			Retained earnings (accumulated deficits)			Accumulated other comprehensive income (loss)			Treasury stock			Total

Balance at December 31, 2003		43,522,372		55,306,778			8,905,924			(505,214	)		(250,981	)		106,978,879
Cash dividends		-		-			(5,208,285	)		-			-			(5,208,285	)
Issuance of shareholders stock dividends		2,170,119		13,671,747			(15,841,866	)		-			-			-
Issuance of employee stock bonus		887,918		5,593,883			-			-			-			6,481,801
Issuance of common stock for cash		3,000,000		12,967,194			-			-			-			15,967,194
Net income		-		-			18,112,548			-			-			18,112,548
Other comprehensive income, net of tax		-		-			-			353,370			-			353,370
Others		-		109			-			-			-			109
Balance at December 31, 2004		49,580,409		87,539,711			5,968,321			(151,844	)		(250,981	)		142,685,616
Cash dividends		-		-			(5,935,249	)		-			-			(5,935,249	)
Issuance of shareholders stock dividends		4,451,437		18,918,606			(23,370,043	)		-			-			-
Issuance of employee stock bonus		973,625		4,137,909			-			-			-			5,111,534
Cash employees’ profit sharing		3,300,000		12,294,150			-			-			-			15,594,150
Issuance of treasury stock to employees		-		431,160			(73,076	)		-			250,981			609,065
Net income		-		-			8,678,214			-			-			8,678,214
Other comprehensive income		-		-			-			77,369			-			77,369
Others		-		98,195			-			-			-			98,195
Balance at December 31, 2005		58,305,471		123,419,731			(14,731,833	)		(74,475	)		-			166,918,894
Cumulative effect adjustment for adoption of SAB 108		-		(767,694	)		767,694			-			-			-
Balance at January 1, 2006, as adjusted		58,305,471		122,652,037			(13,964,139	)		(74,475	)		-			166,918,894
Cash dividends		-		-			(1,749,164	)		-			-			(1,749,164	)
Issuance of shareholders stock dividends		1,749,164		5,439,900			(7,189,064	)		-			-			-
Issuance of employee stock bonus		886,051		3,265,095			-			-			-			4,151,146
Issuance of new shares for merger		14,791,100		52,957,471			-			-			-			67,748,571
Employee stock options assumed from merger with QDI		-		73,383			-			-			-			73,383
Net income		-		-			1,173,208			-			-			1,173,208
Other comprehensive income		-		-			-			515,106			-			515,106
Adoption of SFAS No. 158		-		-			-			(234,510	)		-			(234,510	)
Others		2,242		19,255			-			-			-			21,497
Balance at December 31, 2006		75,734,028		184,407,141			(21,729,159	)		206,121			-			238,618,131
Balance at December 31, 2006 (in US$)		2,323,843		5,658,396			(666,743	)		6,325			-			7,321,821

(Continued)

F-90

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Consolidated Condensed Statements of Cash Flows

Years ended December 31, 2004, 2005 and 2006

(Expressed in thousands of New Taiwan dollars and US dollars)

	2004			2005			2006
	NT$			NT$			NT$			US$

Net cash provided by (used in):
Operating activities		48,943,756			46,951,914			67,955,306			2,085,158
Investing activities		(88,000,970	)		(81,428,055	)		(83,130,667	)		(2,550,802	)
Financing activities		38,066,233			43,783,879			32,951,652			1,011,096
Effect of exchange rate change on cash		(173,438	)		157,864			(114,291	)		(3,507	)
Net change in cash and cash equivalents		(1,164,419	)		9,465,602			17,662,000			541,945
Cash and cash equivalents at beginning of year		17,962,082			16,797,663			26,263,265			805,869
Cash and cash equivalents at end of year		16,797,663			26,263,265			43,925,265			1,347,814

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(t)

Additional US GAAP disclosure

(1)

Securities available-for-sale

The Company holds marketable equity securities that are classified as available-for-sale securities. Information on available-for-sale securities held at each balance sheet date is as follows:

					Total unrealized		Total unrealized
	Cost		Fair value		gains		losses
	NT$		NT$		NT$		NT$
			(in thousands)
Current assets:
As of December 31, 2005		1,618,209		1,551,696		46,532		(113,045	)
As of December 31, 2006		1,623,291		1,849,032		225,741		-
Long-term investments:
As of December 31, 2005		10,000		19,861		9,861		-
As of December 31, 2006		71,596		177,175		105,579		-

Prior to the adoption of ROC SFAS No. 34, fair value was determined by the average price for one month before the balance sheet date. Commencing January 1, 2006, fair value is determined by the price on the balance sheet date for both ROC GAAP and US GAAP. The noncurrent portion of securities available-for-sale was included in other long-term investments in the accompanying consolidated balance sheets.

Information on sales of available-for-sale equity securities for the years ended December 31, 2004, 2005 and 2006 are as follows. The costs of the securities sold were determined on a weighted average basis.

	Proceeds		Gross realized		Gross realized
	from sales		gains		losses
	NT$		NT$		NT$
	(in thousands)

For the year ended December 31, 2004		4,057,400		5,131		-
For the year ended December 31, 2005		1,000,000		-		-
For the year ended December 31, 2006		-		-		-

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)

Allowance for doubtful accounts, and sales returns and discounts

An analysis of the allowance for doubtful accounts, and sales returns and discounts is as follows:

	For the year ended December 31,
	2004			2005			2006
	NT$			NT$			NT$			US$
	(in thousands)
Allowance for doubtful accounts, and sales returns and discounts:
Balance at beginning of year		126,841			788,812			505,508			15,511
Allowance assumed from merger with QDI		-			-			248,056			7,611
Provision charged to current operations		705,549			338,944			2,601,072			79,812
Write-offs		(43,578	)		(622,248	)		(2,047,087	)		(62,813	)
Balance at end of year		788,812			505,508			1, 307 ,549			40,121

Of the provision charged to operations, NT$9,221 thousand, NT$0, and NT$0 was charged to general and administrative expenses during the years ended December 31, 2004, 2005, and 2006, respectively.

(3)

Pension Related Benefits

The Company has a defined benefit pension plan covering full-time employees of AUO in the Republic of China who joined the Company before July 1, 2005 and elected to participate in the plan.

One of the principal assumptions used to calculate net periodic pension cost is the expected long-term rate of return on plan assets. The expected long-term rate of return on plan assets may result in recognized returns that are greater or less than the actual returns on those plan assets in any given year. Over time, however, the expected long-term rate of return on plan assets is designed to approximate the actual long-term returns.

The discount rate assumptions used to account for pension plans reflect the rates available on high-quality, fixed-income debt instruments on December 31 of each year. The rate of increase in compensation is another significant assumption used for pension accounting and is determined by the Company based upon annual review.

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Net period benefit cost for the Company’s defined benefit pension plan amounted to NT$136,123 thousand, NT$76,136 thousand and NT$15,384 (US$472) thousand for the year ended December 31, 2004, 2005 and 2006, respectively.

The Company uses a measurement date of December 31 for its plan.

(i)

Obligation and funded status

The following table sets forth the change in benefit obligations for our pension plan:

	December 31,
	2005			2006
	NT$			NT$		US$
	(in thousands)

Projected benefit obligation at beginning of year		486,441			565,492		17,352
Service cost		69,596			8,100		248
Interest cost		17,835			20,508		629
Merger of QDI’s plan		-			127,189		3,903
Actuarial loss (gain)		(8,380	)		240,357		7,375
Projected benefit obligation at end of year		565,492			961,646		29,507

The accumulated benefit obligation for our pension plan was NT$307,153 thousand and NT$437,869 thousand at December 31, 2005 and 2006, respectively.

The following table sets forth the change in the fair value of plan assets for our pension plan:

	December 31,
	2005		2006
	NT$		NT$		US$
	(in thousands)

Fair value of plan assets at beginning of year		299,030		398,478		12,227
Actual return on plan assets		2,955		7,531		231
Merger of QDI’s plan		-		281,016		8,623
Actual contribution		96,493		104,281		3,200
Fair value of plan assets at end of year		398,478		791,306		24,281

(Continued)

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AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Plan assets only contain a Pension Fund (the “Fund”) denominated solely in cash, as mandated by the ROC Labor Standards Law. The Company contributes an amount equal to 2% of salaries paid every month to the Fund as required by the law. The Fund is administered by a pension fund monitoring committee (the “Committee”) and is deposited in the Committee’s name in the Central Trust of China. Additional contributions may be required in the future in order to provide for unfunded obligations.

The pension amounts recognized in the Company’s consolidated balance sheets were as follows:

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)
Funded status—plan assets less than benefit obligations		(167,014	)		(170,340	)		(5,227	)
Unrecognized transition obligation		5,946			-			-
Unrecognized loss (gain)		(38,577	)		-			-
Accrued liability		(199,645	)		(170,340	)		(5,227	)

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)

Accrued liability at beginning of year		(220,002	)		(199,645	)		(6,126	)
Net periodic pension cost		(76,136	)		(15,384	)		(472	)
Actual contribution		96,493			104,281			3,200
Merger of QDI’s plan		-			153,827			4,720
Adoption of SFAS No. 158 ⁽¹⁾		-			(213,419	)		(6,549	)
Accrued liability at end of year		(199,645	)		(170,340	)		(5,227	)

(ii)

The amount included effect of adoption of SFAS No. 158 for AUO and consolidated subsidiaries, but excluded that of equity-method investees.

(Continued)

F-95

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(iii)

Components of net periodic benefit cost

Net periodic benefit cost for our defined benefit pension plan consists of the following:

	For the year ended December 31,
	2004			2005			2006
	NT$			NT$			NT$			US$
	(in thousands)

Service cost		127,467			69,596			8,100			249
Interest cost		15,213			17,835			20,508			629
Expected return on plan assets		(7,571	)		(11,322	)		(15,208	)		(467	)
Amortization of net transition cost		472			472			472			15
Recognized net actuarial loss (gain)		542			(445	)		1,512			46
Net periodic benefit cost		136,123			76,136			15,384			472

(iv)

Assumptions

The weighted-average assumptions used in computing the benefit obligation are as follows:

	December 31,
	2004			2005			2006

Discount rate		3.50	%		3.50	%		2.75%-3.50	%
Rate of increase in compensation levels		3.50	%		3.50	%		3.50	%

The weighted-average assumptions used in computing net periodic benefit cost are as follows:

	For the year ended December 31,
	2004			2005			2006

Discount rate		3.50	%		3.50	%		2.75%-3.50	%
Rate of increase in compensation levels		3.50	%		3.50	%		3.50	%
Expected long-term rate of return on plan assets		3.50	%		3.50	%		2.75%-3.50	%

According to applicable regulations in the ROC, the minimum return on the plan assets should not be lower than the market interest rate on two-year time deposits. The return on plan assets has exceeded the minimum amount for all periods presented.

(Continued)

F-96

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(v)

Contributions

The Company contributed NT$104,281 thousand to the pension plan in 2006, and anticipates contributing up to an additional NT$90,000 thousand to this plan in 2007.

(vi)

Expected benefit payment

The benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter are as follows:

Year	Retirement benefit payment
	NT$ (in thousands)

2007		419
2008		2,543
2009		774
2010		2,869
2011		36,019
2012-2016		111,199

(4)

Income taxes

(i)

The components of provision for income tax expense (benefit) are summarized as follows:

	For the year ended December 31,
	2004		2005			2006
	NT$		NT$			NT$			US$
	(in thousands)

Current income tax expense		355,761		1,521,732			1,218,824			37,399
Deferred income tax expense (benefit)		107,659		(1,048,303	)		(159,586	)		(4,897	)
Income tax expense		463,420		473,429			1,059,238			32,502

Substantially all of the income before income tax and income tax expense is from domestic sources.

(Continued)

F-97

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The income tax expense (benefit) as reported under US GAAP for 2004, 2005 and 2006, respectively, are summarized as follows:

	For the year ended December 31,
	2004			2005			2006
	NT$			NT$			NT$			US$
	(in thousands)

Expected income tax expense		6,037,190			2,974,284			555,592			17,048
Increase of investment tax credits, net of expired portion		(7,144,655	)		(5,051,650	)		(4,359,577	)		(133,770	)
Increase in valuation allowance		840,313			1,462,798			3,681,893			112,976
Tax exemption		(1,851,314	)		(623,963	)		(838,410	)		(25,726	)
Employee stock bonus		2,345,392			1,756,201			1,000,619			30,703
Impairment loss on available-for-sale securities		299,943			-			-			-
Tax on undistributed retained earnings		-			-			910,347			27,933
Non-deductible expense and others		(63,449	)		(44,241	)		108,774			3,338
Income tax expense		463,420			473,429			1,059,238			32,502

(ii)

The components of deferred income tax assets and liabilities are summarized as follows:

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)
Deferred tax assets:
Inventories		384,799			937,925			28,780
Unrealized loss and expenses		357,874			328,493			10,080
Other current liabilities		1,195,358			465,792			14,292
Investment tax credits		11,180,324			24,139,172			740,693
Net operating loss carryforwards		15,072			-			-
Convertible bonds		-			388,971			11,935
Property, plant & equipment		-			588,461			18,056
Other		256,699			313,838			9,630
Gross deferred tax assets		13,390,126			27,162,652			833,466
Valuation allowance		(7,742,750	)		(20,813,826	)		(638,657	)
Net deferred tax assets		5,647,376			6,348,826			194,809

(Continued)

F-98

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	December 31,
	2005			2006
	NT$			NT$			US$
	(in thousands)
Deferred tax liabilities:
Property, plant & equipment		(483,027	)		-			-
Intangible assets resulting from combination with Unipac		(1,023,258	)		(667,479	)		(20,481	)
Long-term investment—equity method		(127,465	)		(265,088	)		(8,134	)
Others		(81,583	)		(313,233	)		(9,611	)
Total deferred tax liabilities		(1,715,333	)		(1,245,800	)		(38,226	)
Net deferred tax assets		3,932,043			5,103,026			156,583

In assessing the realizability of deferred tax assets in accordance with US GAAP, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and net operating losses and investment tax credits utilized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net operating losses and investment tax credits, net of the existing valuation allowance at December 31, 2006. The estimate of future taxable income required to realize net deferred tax assets at December 31, 2006, is approximately NT$31,020,000 thousand. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

Pursuant to the Business Mergers and Acquisition Act, the Company is entitled to net operating loss (NOL) carryforwards of NT$1,014,035 thousand and investment tax credits of NT$9,410,776 thousand sustained by QDI prior to the date of acquisition. As of October 1, 2006, the Company recognized a valuation allowance of NT$9,410,776 thousand on the unused investment tax credits because management believes that it is more likely than not that the Company will not realize the benefits of those deferred tax assets based on expected future earnings. Subsequently recognized tax benefits related to the valuation allowance for deferred tax assets as of December 31, 2006 that will be allocated to goodwill and other noncurrent intangible assets was NT$9,410,776 thousand.

(Continued)

F-99

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The valuation allowance at December 31, 2006 represents the amount of tax benefits related to investment tax credits and net operating loss carryforwards, which management determined are not more likely than not to be realized due, in part, to projections of future taxable income for the next two years. It is management’s belief that estimates about future taxable income beyond the next few years cannot be objectively and reliably determined given the cyclical nature of the TFT-LCD industry and therefore in determing the necessary amount of required deferred tax asset valuation allowance, estimated future taxable income beyond the two-year period is not considered in AUO’s realization analysis. As of December 31, 2004, 2005 and 2006, the valuation allowance amounted to NT$840,313 thousand, NT$1,462,798 thousand and NT$13,071,076 thousand, respectively. Of the NT$13,071,076 thousand in 2006, NT$9,410,776 thousand was attributable to unused investment tax credits assumed from QDI, the benefit of which will reduce goodwill when and if realized.

Similar to ROC GAAP, deferred tax assets and liabilities under US GAAP would be classified as current or noncurrent based on the classification of the related asset or liability, and the valuation allowance is allocated on a pro rata basis for the relevant jurisdiction. As of December 31, 2005 and 2006, deferred tax assets and liabilities under US GAAP were as follows:

	December 31,
	2005			2006
	NT$			NT$			US$
				(in thousands)

Deferred tax assets—current		3,199,569			3,220,232			98,811
Deferred tax assets—noncurrent		2,447,807			2,540,133			77,942
Deferred tax liabilities—current		(62,230	)		(122,377	)		(3,755	)
Deferred tax liabilities—noncurrent		(1,653,103	)		(534,962	)		(16,415	)
		3,932,043			5,103,026			156,583

In 2004, 2005 and 2006, the total income taxes are allocated as follows:

	For the year ended December 31,
	2004			2005			2006
	NT$			NT$			NT$			US$
	(in thousands)

Income tax benefit (expense)		(463,420	)		(473,429	)		(1,059,238	)		(32,502	)
Other comprehensive income		65,917			(86,623	)		-			-
Total income taxes		(397,503	)		(560,052	)		(1,059,238	)		(32,502	)

(Continued)

F-100

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(5)

Non-derivative financial instruments

As of December 31, 2005 and 2006, the estimated fair value and carrying amounts of non-derivative financial instruments were as follows:

	December 31, 2005
	Fair value		Carrying amount
	NT$		NT$
	(in thousands)
Assets:
Cash and cash equivalents		26,263,265		26,263,265
Notes and accounts receivable		34,848,588		34,848,588
Receivables from related parties		7,766,800		7,766,800
Other financial assets—current		1,074,754		1,074,754
Securities available-for-sale—current		1,551,696		1,551,696
Long-term investments—equity method
Fair value (available)		6,348,344		4,189,221
Fair value (not available)		-		1,615,299
Long-term investments — other
Fair value (available)		19,862		19,862
Fair value (not available)		-		63,538
Restricted cash in bank		32,200		32,200

Liabilities:
Accounts payable		48,642,321		48,642,321
Payables to related parties		2,197,285		2,197,285
Equipment and construction in process payable		19,694,213		19,694,213
Bonds payable		11,951,724		12,000,000
Long-term borrowings, including current installments		81,773,029		81,773,029

(Continued)

F-101

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	December 31, 2006
	Fair value				Carrying amount
	NT$		US$		NT$		US$
	(in thousands)
Assets:
Cash and cash equivalents		43,925,265		1,347,814		43,925,265		1,347,814
Notes and accounts receivable		47,309,900		1,451,669		47,309,900		1,451,669
Receivables from related parties		10,521,081		322,832		10,521,081		322,832
Other financial assets—current		1,110,680		34,081		1,110,680		34,081
Securities available-for-sale—current		1,849,032		56,736		1,849,032		56,736
Long-term investments—equity method
Fair value (available)		3,904,484		119,806		2,207,059		67,722
Fair value (not available)		-		-		9,718,342		298,200
Long-term investments—other
Fair value (available)		177,175		5,436		177,175		5,436
Fair value (not available)		-		-		536,961		16,476
Restricted cash in bank		43,200		1,326		43,200		1,326

Liabilities:
Accounts payable		69,495,532		2,132,419		69,495,532		2,132,419
Payables to related parties		6,738,803		206,775		6,738,803		206,775
Equipment and construction in process payable		30,719,178		942,595		30,719,178		942,595
Bonds payable, including current installments		38,542,231		1,182,640		37,797,647		1,159,793
Long-term borrowing, including current installments		182,900,276		5,612,160		182,900,276		5,612,160

(Continued)

F-102

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(6)

Property, plant and equipment

As of December 31, 2005 and 2006, the components of property, plant and equipment are summarized as follows:

	December 31, 2005
	Cost		Accumulated depreciation			Carrying amount
	NT$		NT$			NT$
	(in thousands)

Land		3,504,258		-			3,504,258
Buildings		37,962,042		(4,092,454	)		33,869,588
Machinery and equipment		239,565,644		(79,006,735	)		160,558,909
Other equipment		13,661,181		(7,881,070	)		5,780,111
Construction in progress		1,704,372		-			1,704,372
Prepayments for purchases of land and equipment		15,556,729		-			15,556,729
		311,954,226		(90,980,259	)		220,973,967

	December 31, 2006
	Cost		Accumulated depreciation			Carrying amount
	NT$		NT$			NT$
	(in thousands)

Land		6,187,337		-			6,187,337
Buildings		58,976,016		(6,347,165	)		52,628,851
Machinery and equipment		410,855,911		(123,284,102	)		287,571,809
Other equipment		22,561,855		(14,142,044	)		8,419,811
Construction in progress		6,254,058		-			6,254,058
Prepayments for purchases of land and equipment		19,797,975		-			19,797,975
		524,633,152		(143,773,311	)		380,859,841

(Continued)

F-103

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(7)

The changes in the components of accumulated other comprehensive income are as follows:

	Derivative and hedging activities—interest rate swap			Unrealized gains (losses) on securities			Foreign currency translation adjustment			Defined benefit plan			Accumulated other comprehensive income ( loss)
	NT$			NT$			NT$			NT$			NT$
	(in thousands)

Balance at December 31, 2003		(2,810	)		(512,700	)		10,296			-			(505,214	)
Other comprehensive income (loss)		-			578,620			(224,435	)		-			354,185
Reclassification adjustments for gains (losses) reclassified into income		2,810			(3,625	)		-			-			(815	)
Balance at December 31, 2004		-			62,295			(214,139	)		-			(151,844	)
Other comprehensive income (loss)		-			(208,705	)		286,074			-			77,369
Balance at December 31, 2005		-			(146,410	)		71,935			-			(74,475	)
Other comprehensive income (loss)		(104,907	)		292,017			327,996			-			515,106
Adoption of SFAS No. 158		-			-			-			(234,510	)		(234,510	)
Balance at December 31, 2006		(104,907	)		145,607			399,931			(234,510	)		206,121

The following tables set forth the related income tax effects allocated to each component of other comprehensive income:

	For the year ended December 31, 2004
	Before-tax amount			Tax (expense) benefit			Net-of-tax amount
	NT$			NT$			NT$
	(in thousands)
Derivative and hedging activities— interest rate swap:
Reclassification adjustment for gains realized in income		4,166			(1,356	)		2,810
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period		578,620			-			578,620
Reclassification adjustment for gains realized in income		(3,625	)		-			(3,625	)
Foreign currency translation adjustment		(291,708	)		67,273			(224,435	)
Other comprehensive income		287,453			65,917			353,370

(Continued)

F-104

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	For the year ended December 31, 2005
	Before-tax amount			Tax (expense) benefit			Net-of-tax amount
	NT$			NT$			NT$
	(in thousands)
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period		(208,705	)		-			(208,705	)
Foreign currency translation adjustment		372,700			(86,626	)		286,074
Other comprehensive income		163,995			(86,626	)		77,369

	For the year ended December 31, 2006
	Before-tax amount			Tax (expense) benefit		Net-of-tax amount
	NT$			NT$		NT$
	(in thousands)

Derivative and hedging activities—interest rate swap:		(104,907	)		-		(104,907	)
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period		292,017			-		292,017
Foreign currency translation adjustment		327,996			-		327,996
Other comprehensive income		515,106			-		515,106

There are no tax effects from realized or unrealized gains (losses) on securities available-for-sale since capital gains and losses on Republic of China securities are not taxable in Taiwan.

(Continued)

F-105

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(8)

Product revenue information

The Company’s chief operating decision maker is the Executive Board, which comprises five key personnel in the top management. The Executive Board reviews consolidated results of revenue by products and manufacturing operations when making decisions about allocating resources and assessing performance of the Company. Consequently, the Company has determined that it has no operating segments as that term is defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

The revenue for principal products is comprised of the following:

	For the year ended December 31,
	2004		2005		2006
	NT$		NT$		NT$		US$
	(in millions)
Panels for Computer Products:
Panels for notebook computers		32,268		33,265		50,306		1,544
Panels for desktop monitors		99,000		108,623		104,833		3,217
Total panels for computer products		131,268		141,888		155,139		4,761
Panels for Consumer Electronics Products		21,044		28,637		31,331		961
Panels for LCD Television		14,586		46,148		104,949		3,220
Other ⁽¹⁾		1,214		715		1,688		52
Total		168,112		217,388		293,107		8,994

⁽¹⁾

Includes revenues generated from sales of raw materials and components and other TFT-LCD panel products, and from service charges.

(Continued)

F-106

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(9)

Earnings per common share in 2004, 2005 and 2006 are computed as follows:

	For the year ended December 31,
	2004		2005			2006
	NT$		NT$			NT$
	(in thousands, except for per share data)
Net income for computing basic earnings per share:
Income before extraordinary item		18,112,548		8,369,512			1,173,208
Extraordinary gain		-		308,702			-
Net income		18,112,548		8,678,214			1,173,208

Weighted average number of shares outstanding (thousand shares):
Shares of common stock at the beginning of the year		4,340,237		4,958,041			5,830,547
Issuance of common stock for cash		156,667		146,465			-
Common stock issued in connection with the acquisition of QDI		-		-			372,817
Issuance of shareholders stock dividends		268,560		498,760			223,467
Stock options		-		-			41
Treasury stock		-		(8,252	)		-
Retroactive adjustment of capitalization of retained earnings		584,723		167,851			-
Weighted average number of shares outstanding during the year		5,350,187		5,762,865			6,426,872

Basic earnings per share:
Income before extraordinary item		3.39		1.46			0.18
Extraordinary item		-		0.05			-
Net income		3.39		1.51			0.18

(Continued)

F-107

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	For the year ended December 31,
	2006
	NT$
	(in thousands, except for per share data)
Net income for computing diluted earnings per share:		1,173,208

Weighted average number of shares outstanding (thousand shares):
Shares of common stock at the beginning of the year		5,830,547
Potential number of common shares assumed upon stock options		97
Common stock issued in connection with the acquisition of QDI		372,817
Issuance of shareholders stock dividends and employee stock bonus		223,467
Weighted average number of shares outstanding during the year		6,426,928

Diluted earnings per share		0.18

As of December 31, 2006, convertible bonds with principal amount s of NT$ 11,184,600 thousand and US$296,451 thousand were ex cluded from the computation of diluted earnings per share due to their anti - dilutive effect.

(Continued)

F-108

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(10)

Goodwill and other intangible assets

(i)

Goodwill

The change s in the carrying amount of goodwill for the year ended December 31, 2005 and 2006 are as follows:

December 31,

2005

2006

NT$

US$

(in thousands)

Balance at beginning of year

10,946,732

335,892

Goodwill acquired during the year

14,288,008

438,417

Balance at end of year

10,946,732

25,234,740

774,309

(ii)

Other intangible assets

The other intangible assets are TFT-LCD panels ’ product and process technology license and pat ent fees , and core technologies acquired in connection with the merger with QDI . The detail s of the other intangible assets are as follows:

	December 31, 2005
	Gross carrying amount		Accumulated amortization
	NT$		NT$
	(in thousands)
Amortizable intangible assets:
Patents		16,200,809		10,568,993

December 31, 2006

Gross carrying Amount

Accumulated amortization

NT$

US$

NT$

US$

(in thousands)

Amortizable intangible assets:

Patents

17,230,259

528,698

12,645,895

388,030

Core technologies

3,675,700

112,786

306,308

9,399

20,905,959

641,484

12,952,203

397,429

Patents are amortized using the straight-line method over estimated useful lives of three to 15 years . C ore technologies are amortized using the straight-li ne method over the estimated useful lives of three years.

(Continued)

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Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Amortization expense on other intangible assets amounted to NT$2, 579 , 8 00 thousand, NT$ 1 , 613 , 402 thousand and NT$ 2,383,210 thousand for the years ended December 31, 200 4 , 200 5 and 200 6 , respective ly.

As of December 31, 200 6 , the Company ’ s estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:

Year	December 31, 2006
	NT$		US$
	(in thousands)

2007		2,537,363		77,857
2008		2,519,455		77,308
2009		1,161,834		35,650
2010		241,881		7,422
2011		241,881		7,422
Thereafter		1,251,342		38,396
Total		7,953,756		244,055

(11)

Summarized financial information of equity method investees

The following table provides summarized financial information of the Company ’ s e quity method investees.

	For the year ended December 31,
	2004		2005			2006
	NT$		NT$			NT$			US$
	(in millions)

Current assets				119,652			75,622			2,320
Noncurrent assets				69,609			88,245			2,707
Current liabilities				108,564			80,065			2,456
Long-term liabilities				17,280			28,734			882
Minority interests				2,915			4,010			123
Stockholders’ equity				60,502			51,058			1,567
Net sales		177,815		183,727			255,970			7,855
Gross profit		21,458		16,217			20,958			643
Net income (loss)		5,080		(2,151	)		(31,908	)		(979	)

F-110

Exhibit 1.1

Chapter 1: General Provisions

Article 1

The Company is incorporated, registered and organized as a company limited by shares and permanently existing in accordance with the Company Law of the Republic of China (the "Company Law") and the Compa ny's English name is AU Optronics Corp.

Article 2

The scope of business of the Company shall be as follows:

1. CC01080		Electronic parts and components manufacturing business
2. F119010		Electronic material wholesale business (for operations outside the Science Pa rk only)
3. CC01030		Electronic appliances and AV electronics products manufacturing business (for operations within Central Taiwan Science Park only)

To research, develop, produce, manufacture and sell the following products:

(1)	Plasma display and related syst ems
(2)	Liquid crystal display and related systems
(3)	Organic light emitting diodes and related systems
(4)	Amorphous silicon photo sensor device parts and components
(5)	Thin film photo diode sensor device parts and components
(6)	Thin film transistor photo sensor device pa rts and components
(7)	Touch imaging sensors
(8)	Full color active matrix flat panel displays
(9)	Field emission displays
(10)	Single crystal liquid crystal displays
(11)	Original equipment manufacturing for amorphous silicon thin film transistor process and flat panel display modules
(12)	Original design manufacturing and original equipment manufacturing business for flat panel display modules
(13)	The simultaneous operation of a trade business relating to the Company's business

The operation of the businesses listed above shall be condu cted in accordance with the relevant laws and regulations.

Article 3

The head office of the Company shall be in the Science-Based Industrial Park, Hsinchu, Taiwan, the Republic of China ("R.O.C.") or such other appropriate place as may be decided by the bo ard of directors (the "Board"). Subject to the approval of the Board and other relevant authorities, the Company may, if necessary, set up branches, factories, branch operation offices or branch business offices both inside and outside of the R.O.C.

Artic le 4

T he total amount of the Company's investment is not subject to the restriction of Article 13 of the Company Law . The Company may provide guarantees or endorsements on behalf of third parties due to business or investment relationships with such thir d parties.

Chapter 2: Shares

Article 5

The total capital of the Company is Ninety Billion New Taiwan Dollars (NT$ 9 0,000,000,000), divided into Nine Billion ( 9 , 0 00,000,000) shares with a par value of Ten New Taiwan Dollars (NT$10) each and in registered f orm. The Board of Directors is authorized to issue the un-issued shares in installments .

A total of 100,000,000 shares among the above total capital should be reserved for issuance of employee stock options, which may be issued in installments.

Article 6

The share certificates of the Company shall be all in registered form. The share certificates, after due registration with the competent authority, shall be signed or sealed by at least three directors and shall be legally authenticated prior to issue.

Wh ere it is necessary for the Company to deliver its share certificates to the Taiwan Securities Central Depositary Co., Ltd. ( “ TSCD ” ) for custody of such share certificates, the Company may, upon request of the TSCD, combine its share certificates into larg er denominations.

The Company may, pursuant to the applicable laws and regulations, deliver shares or other securities through the book-entry system maintained by the TSCD, instead of physical certificates evidencing shares or other securities.

Article 7

The Company may charge its net cost for handling, replacing or exchanging share certificates if the original share certificates were transferred, lost or destroyed.

Chapter 3: Shareholders' Meetings

Article 8

Shareholders' meetings shall be of two types, ordinary meetings and extraordinary meetings. Ordinary meetings shall be convened annually by the Board within six months of the end of each fiscal year. Extraordinary meetings shall be convened in accordance with the relevant laws, whenever necessary.

Article 9

Unless otherwise provided in the Company Law, a resolution shall be adopted at a meeting attended by the shareholders holding and representing a majority of the total issued and outstanding shares and at which meeting a majority of the attending shareholders shall vote in favor of the resolution. In case a shareholder is unable to attend a shareholders' meeting, such shareholder may issue a proxy in the form issued by the Company, setting forth the scope of authorization by signing and affixing s uch shareholder's seal on the proxy form for the representative to be present on such shareholder's behalf. Except for trust enterprises or other stock transfer agencies approved by the securities authorities , if a person is designated as proxy by more th an two shareholders, any of his voting rights representing in excess of 3% of the total issued and outstanding shares shall not be considered. The relevant matters related to the use and rescission of the proxy shall be conducted in accordance with the Com pany Law and applicable rules.

Chapter 4: Directors and Supervisors

Article 10

The Company shall have seven to nine directors and three supervisors elected at shareholders' meetings and the person to be elected must have legal competence. The term of off ice for all directors and supervisors shall be three (3) years. The directors and supervisors are eligible for re-election.

The Board is authorized to determine the compensation for the directors and supervisors, taking into account the extent and value of the services provided for the Company ’ s operation and with reference to the standards of local and overseas industry.

Article 10-1

In pursuant to the Article 183 of the Securities and Exchange Act, the Company shall have 3 independent directors on the B oard. The independent directors shall be nominated under the Candidate Nomination System, and be elected from among the nominees listed in the roster of independent director candidates. The professional qualifications, restrictions on the shareholdings an d concurrent positions held, method of nomination, and other matters with respect to independent directors shall be in compliance with the laws and regulations prescribed by the competent authority.

Article 1 1

The Company shall have a chairman of the Board. The chairman of the Board shall be elected by and among the directors by a majority of directors present at a meeting attended by more than two thirds of directors. As necessary, a vice chairman may be elected by and among the directors. The chairman o f the Board shall preside internally at the meetings of the Board and shall externally represent the Company. In case the chairman of the Board cannot exercise his power and authority, the vice chairman shall act on his behalf. In case there is no vice c h airman or the vice chairman is also on leave or cannot exercise his power and authority for any reason, the chairman of the Board may designate one of the directors to act on his behalf. In the absence of such a designation, the directors shall elect a d e signee from among themselves.

Article 1 2

Where a director is unable to attend a meeting of the Board, he may appoint another director to represent him by proxy in accordance with Article 205 of the Company Law. Each director may act as a proxy for one oth er director only.

Chapter 5: President & Vice Presidents

Article 1 3

The Company shall have a president and several vice presidents. Appointment, dismissal, and remuneration of the president and vice presidents shall be subject to the provisions of the Co mpany Law.

Chapter 6: Accounting

Article 1 4

After the end of each fiscal year, the Board shall submit the following documents: (1) business report, (2) financial statements, (3) proposal for allocation of surplus or recovery of loss. The above documents s hall be examined by the supervisors or audited by an accountant appointed by the supervisors and then submitted to the shareholders at the ordinary meeting of shareholders for their

adoption.

Article 1 5

Where the Company has a profit at the end of each fis cal year, the Company shall first allocate the profit to recover losses for preceding years. Ten percent of any remaining net earnings shall be allocated as the Company's legal reserve and a certain amount shall be allocated as special reserve in accordan ce with applicable laws and regulations or as requested by the competent authority . The balance shall be distributed as follows:

1.	e mployee bonus: 5% to 10%;

2.	r emuneration of directors and supervisors: no more than 1%; and

3.	a ll or a portion of t he remaini ng balance shall be distributed as shareholders' dividends.

The Company's dividend policy will be to pay dividends from surplus. Upon consideration of factors such as the Company's current and future investment environment, cash requirements, competitive c onditions inside and outside of the R.O.C. and capital budget requirements, the shareholders' interest, maintenance of a balanced dividend and the Company's long term financial plan, the Board shall propose the profit allocation each year subject to relev a nt laws, then submit such proposal to the shareholders' meeting for approval. In principle, no less than 1 0% of the total dividend to be paid with respect to any fiscal year shall be paid in the form of cash.

Chapter 7: Supplementary Articles

Article 1 6

With respect to the matters not provided herein, the Company Law and other applicable laws and regulations shall govern.

Article 1 7

These Articles of Incorporation were enacted by the incorporators in the incorporators meeting held on July 18, 1996 and w ere effectively approved by the competent authority.

The first amendment was made on September 18, 1996.

The second amendment was made on September 15, 1997.

The third amendment was made on April 23, 1998.

The fourth amendment was made on April 23, 1999.

T he fifth amendment was made on March 9, 2000.

The sixth amendment was made on May 10, 2001.

The seventh amendment was made on May 10, 2001.

The eighth amendment was made on October 17, 2001.

The ninth amendment was made on May 21, 2002.

The tenth amendment was made on May 29, 2003.

The eleventh amendment was made on April 29, 2004.

The twelfth amendment was made on June 14, 2005.

The thirteenth amendment was made on June 15, 2006.

EXHIBIT 2.2

CONFORMED COPY

AU OPTRONICS CORP.

AND

CITIBANK, N.A.,

As Depositary,

AND

ALL HOLDERS AND BENEFICIAL OWNERS OF

AMERICAN DEPOSITARY SHARES EVIDENCED BY

AMERICAN DEPOSITARY RECEIPTS

ISSUED AND OUTSTANDING UNDER THE

DEPOSIT AGREEMENT, DATED AS OF MAY 29, 2002

Amendment No. 1

Deposit Agreement

____________________________

Dated as of February 15, 2006

AMENDMENT NO. 1 TO DEPOSIT AGREEMENT

AMENDMENT NO. 1 TO DEPOSIT AGREEMENT, dated as of February 15, 2006 (the “ Amendment ”), by and among AU Optronics Corp., a company organized and existing under the laws of the Republic of China (the “ Company ”), Citibank, N.A., a national banking association organized under the laws of the United States of America (the “ Depositary ”), and all Holders and Beneficial Owners from time to time of American Depositary Shares evidenced by American Depositary Receipts issued and outstanding under the Deposit Agreement, dated as of May 29, 2002.

WITNESSETH THAT:

WHEREAS, the Company and the Depositary entered into that certain Deposit Agreement, dated as of May 29, 2002 (the “ Deposit Agreement ”), for the creation of American Depositary Shares representing the Shares (as defined in the Deposit Agreement) so deposited and for the execution and delivery of American Depositary Receipts (“ Receipts ”) in respect of the American Depositary Shares (“ ADSs ”); and

WHEREAS, the Company Law of the Republic of China has been amended to permit certain shareholders of the Company to make proposals to be considered at the annual ordinary meeting of the Company’s shareholders and the Company desires to amend the Deposit Agreement to reflect such change and to permit Beneficial Owners of ADSs, subject to the conditions set forth herein, to instruct the Depositary to make a proposal for consideration at the annual ordinary meeting of the Company’s shareholders; and

WHEREAS, the Company Law of the Republic of China has been amended to permit certain shareholders of the Company to nominate candidates to be considered for election as directors at a meeting of the Company’s shareholders involving the election of directors if the

Company amends its Articles of Incorporation to adopt a Candidate Nomination System, as hereinafter defined, and the Company desires to amend the Deposit Agreement to reflect such change and to permit Beneficial Owners of ADSs, subject to the amendment of the Company's Articles of Incorporation and the conditions set forth herein, to instruct the Depositary to nominate candidates to be considered for election as directors at a meeting of the Company’s shareholders; and

WHEREAS, pursuant to Section 6.1 of the Deposit Agreement, the Company and the Depositary deem it desirable to amend the Deposit Agreement, the Receipts currently outstanding and the form of Receipt annexed to the Deposit Agreement as Exhibit A for the purposes set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Depositary hereby agree to amend the Deposit Agreement, the Receipts and the form of Receipt attached as Exhibit A to the Deposit Agreement as follows:

ARTICLE I

DEFINITIONS

SECTION 1.01. Definitions . Unless otherwise specified in this Amendment, all capitalized terms used, but not defined, herein shall have the meanings given to such terms in the Deposit Agreement.

SECTION 1.02. Effective Date . The term “ Effective Date ” shall mean the date set forth above and as of which this Amendment shall become effective.

ARTICLE II

AMENDMENTS TO DEPOSIT AGREEMENT

SECTION 2.01. Deposit Agreement . All references in the Deposit Agreement to the term “Deposit Agreement” shall, as of the Effective Date, refer to the Deposit Agreement, dated as of May 29, 2002, as amended by this Amendment.

SECTION 2.02. Principal Office . The definition of “Principal Office” in Section 1.30 of the Deposit Agreement is, as of the Effective Date, deleted in its entirety and in its stead the following is inserted:

“SECTION 1.30. “ Principal Office ”, when used with respect to the Depositary, shall mean the principal office of the Depositary at which at any particular time its depositary receipts business shall be administered, which, at the date of the Deposit Agreement, is located at 388 Greenwich Street, New York, New York 10013, U.S.A.”

SECTION 2.03. Submission of Proposals . The Deposit Agreement is hereby amended, as of the Effective Date, to add the following Section 4.16 at the end of Article IV of the Deposit Agreement:

“Section 4.16 Right to Submit Proposals at Annual Ordinary Meeting of Shareholders .

(a) Proposals by Shareholders .

“ Submission Period ”) announced by the Company (which Submission Period and the place for eligible shareholders to submit the Proposal the Company undertakes to announce publicly each year in a report on Form 6-K submitted to the Commission prior to the commencement of the 60 days closed period prior to the annual ordinary meeting of the Company’s shareholders), (iii) only one (1) matter for consideration at the annual ordinary meeting of the Company’s shareholders shall be allowed in each Proposal, and (iv) the proposing shareholder shall attend, in person or by a proxy, such annual ordinary meeting of the Company’s shareholders whereat his or her or its Proposal is to be discussed in the Chinese language and such proposing shareholder, or his or her or its proxy, shall take part in the discussion of such Proposal in the Chinese language. As the holder of the Deposited Securities, the Depositary or its nominee is entitled, provided the conditions of ROC law are satisfied, to submit only one (1) Proposal each year in respect of all of the Shares held on deposit as of the applicable Shareholder Proposal Record Date. Holders and Beneficial Owners of ADSs do not under ROC law have individual rights to submit Proposals to the Company for consideration at the annual ordinary meeting of the Company’s shareholders but may be able to submit Proposals to the Company for consideration at the annual ordinary meeting of the Company’s shareholders if the Beneficial Owners (i) timely present their ADSs to the Depositary for cancellation pursuant to the terms of the Deposit Agreement and become holders of Shares in the ROC prior to the expiration of the Submission Period and prior to the applicable Shareholder Proposal Record Date, and (ii) otherwise satisfy the conditions of ROC law applicable to the submission of Proposals to the Company for consideration at an annual ordinary meeting of the Company’s shareholders. Beneficial Owners of ADSs may not receive sufficient advance notice of an annual ordinary meeting of the Company’s shareholders to enable the timely withdrawal of Shares to make a Proposal to the Company and may not be able to re-deposit under the Deposit Agreement the Shares so withdrawn. The Company has informed the Depositary that a Proposal shall only be voted upon at the annual ordinary meeting of the Company’s shareholders if the Proposal is accepted by the board of directors of the Company as eligible in accordance with Article 172-1 of the ROC Company Law and the Company's Articles of Incorporation for consideration at an annual ordinary meeting of the Company’s shareholders.

(b) Single Proposal by Depositary or its Nominee on behalf of Beneficial Owners .

length, (ii) the Proposal is submitted to the Depositary by the Submitting Holder(s) at least two (2) Business Days prior to the expiration of the Submission Period, (iii) the Proposal is accompanied by a written certificate signed by each Submitting Holder, addressed to the Depositary and the Company and in a form satisfactory to the Depositary and the Company (the “ First Proposal Certificate ”), certifying, inter alia , (w) that each Submitting Holder has only certified the said Proposal, (x) that the Submitting Holder(s) own(s), individually or in the aggregate, at least 51% of the ADSs outstanding as of the date the Proposal is submitted by the Submitting Holder(s) to the Depositary (the “ Proposal Submission Date ”), (y) if the Proposal Submission Date is (i) on or after the applicable ADS Record Date, that the Submitting Holder(s) owned at least 51% of the ADSs outstanding as of the applicable ADS Record Date, and (ii) prior to the applicable ADS Record Date, that the Submitting Holder(s) will continue to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date and will provide the Second Proposal Certificate, as defined below, and (z) the name(s) and address(es) of the Submitting Holder(s) and the number of ADSs owned by each Submitting Holder (together with certified evidence of each Submitting Holder’s ownership of the applicable ADSs as of the Proposal Submission Date, in the case of (y)(ii) above, and the applicable ADS Record Date, in the case of (y)(i) above), (iv) if the Proposal Submission Date is prior to the applicable ADS Record Date, the Submitting Holder(s) must also provide, within five (5) Business Days after the applicable ADS Record Date, a second written certificate signed by each Submitting Holder, addressed to the Depositary and the Company and in a form satisfactory to the Depositary and the Company (the “ Second Proposal Certificate ”), certifying, inter alia , that the Submitting Holder(s) continued to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date (together with certified evidence of each Submitting Holder’s ownership of the applicable ADSs as of such applicable ADS Record Date), (v) the Proposal is accompanied by a joint and several irrevocable undertaking of all Submitting Holders (which undertaking may be contained in the First Proposal Certificate or the Second Proposal Certificate) that each such Submitting Holder shall pay all fees and expenses incurred in relation to the submission of the Proposal for voting at the annual ordinary meeting of the Company’s shareholders (including, but not limited to, the costs and expenses of the Submitting Holder(s), or his, her, its or their representative, to attend the annual ordinary meeting of the Company’s shareholders), (vi) the Shares registered in the name of the Depositary or its nominee as representative of the Holders and Beneficial Owners constitute one percent (1%) or more of the total issued and outstanding Shares of the Company as of the Shareholder Proposal Record Date, (vii) such Proposal contains only one (1) matter for consideration at the annual ordinary meeting of the Company’s shareholders, and (viii) the Submitting Holder(s), or his, her, its or their representative, attend(s) the annual ordinary meeting of the Company’s shareholders and take(s) part in the discussions of the Proposal in the Chinese language, provided further that only one (1) individual may attend, and take part in the discussion of the Proposal at such annual ordinary meeting on behalf of a Submitting Holder(s). Each

Beneficial Owner hereby agrees and acknowledges that (i) if the Submitting Holder(s), or his, her, its or their representative, does not attend the annual ordinary meeting of the Company's shareholders, the chairman of such meeting may ask the attending shareholders to discuss, or not discuss, the Proposal, and (ii) in no event shall a Submitting Holder’s, or his, her, its or their representative's, presence at an annual ordinary meeting of the Company’s shareholders entitle such Submitting Holder(s), or his, her, its or their representative, to vote the Shares represented by such Submitting Holder’s ADSs (or any other ADSs) at such annual ordinary meeting of the Company’s shareholders.

Upon the timely receipt by the Depositary of any Proposal which the Depositary reasonably believes to be in full compliance with the immediately preceding paragraph, the Depositary shall submit a copy of such Proposal and of the other materials received from the Submitting Holder(s) to the Company prior to the expiration of the Submission Period. Any Proposal so submitted as to which the Depositary has not received within five (5) Business Days after the applicable ADS Record Date any Second Proposal Certificate required under the immediately preceding paragraph shall be deemed irrevocably withdrawn at the expiration of such five (5) Business Day period. In the event the Depositary receives more than one (1) Proposal by a Submitting Holder, or a group of Submitting Holders, each of which appears to satisfy the requirements set forth in the immediately preceding paragraph, the Depositary is hereby authorized and instructed to disregard all Proposals received from such Submitting Holder(s), except for the first Proposal received by the Depositary from such Submitting Holder(s) and shall submit such Proposal to the Company for consideration at the annual ordinary meeting of the Company's shareholders in accordance with the terms hereof. The Depositary shall not have any obligation to verify the accuracy of the information contained in any document submitted to it by the Submitting Holder(s). Neither the Depositary nor its nominee shall be obligated to attend and speak at the annual ordinary meeting of the Company’s shareholders on behalf of the Submitting Holder(s).

Notwithstanding anything contained in the Deposit Agreement or any ADR and except that the Depositary shall arrange, at the request of the Company and at the Company's expense, for the mailing to Holders of copies of materials that the Company has made available to the Depositary for such purpose, the Depositary shall not be obligated to provide to the Holders or Beneficial Owners of ADSs any notices relating to the proposal rights, including, without limitation, notice of the Submission Period, or the receipt of any Proposal(s) from Submitting Holders, or of the holdings of any ADSs by any persons, except that the Depositary shall, upon a Holder's request, inform such Holder of the total number of ADSs then issued and outstanding.”

SECTION 2.04. Submission of Nominations . The Deposit Agreement is hereby amended, as of the Effective Date, to add the following Section 4.17 at the end of Article IV of the Deposit Agreement:

“Section 4.17 Right to Submit Nominations at Meeting of Shareholders .

(a) No Right Absent Amendment to Articles of Incorporation .

No rights under this Section 4.17 shall be effective absent an amendment to the Company’s Articles of Incorporation adopting a system whereby candidates may be nominated by holders of Shares to serve on the Company’s board of directors (a “ Candidate Nomination System ”) and any rights so arising shall, at all times, be subject to the provisions of the Company’s Articles of Incorporation, as amended, and ROC Company Law, as amended.

(b) Nominations by Shareholders .

The Company has informed the Depositary that under ROC Company Law, in the event that the Company amends its Articles of Incorporation to adopt a Candidate Nomination System, holders of one percent (1%) or more of the total issued and outstanding Shares of the Company as of the applicable record date for determining holders of Shares with the right to vote at a meeting of the Company’s shareholders (the “ Candidate Nomination Record Date ”), would be entitled to submit a roster of candidates (the “ Nomination ”) to be considered for nomination to the Company’s board of directors at a meeting of the Company’s shareholders involving the election of directors, provided that : (i) the number of director candidates contained in the Nomination shall not exceed the number of the directors to be elected at such meeting, (ii) the Nomination is submitted to the Company prior to the expiration of the period for submission of Nominations (the “ Nomination Submission Period ”) announced by the Company (which Nomination Submission Period, the number of the directors to be elected, the place for eligible shareholders to submit the Nomination and other applicable information the Company undertakes to announce publicly in a report on Form 6-K submitted to the Commission prior to the commencement of the 60 days (for an ordinary meeting) or 30 days (for an extraordinary meeting) closed period prior to the subject meeting of the Company’s shareholders), (iii) the Nomination shall contain the name, educational background and past work experience of each director candidate identified in the Nomination, (iv) the Nomination shall include a letter of consent issued by each director candidate identified in the Nomination consenting to act as director if she/he/it is elected as such, (v) a written statement by each director candidate assuring that she/he/it is not in violation of any of the circumstances set forth in Article 30 of the ROC Company Law, as amended, (vi) if a director candidate is a corporate shareholder of the Company (which cannot be the Depositary or its nominee), or such corporate shareholder's representative,

additional information and documents reflecting the basic registration information of such corporate shareholder and the document certifying the number of Shares in its possession have been included, and (vii) any further conditions under Article 192-1 of the ROC Company Law, as amended, and of the Company’s amended Articles of Incorporation are so satisfied. In the event that the Company were to amend its Articles of Incorporation to adopt a Candidate Nomination System, as holder of the Deposited Securities, the Depositary or its nominee would be entitled, provided the conditions of the Company’s amended Articles of Incorporation are satisfied, to submit only one (1) Nomination for each meeting involving the election of directors in respect of all of the Shares held on deposit as of the Candidate Nomination Record Date. The Company shall promptly notify the Depositary of an amendment of its Articles of Incorporation adopting a Candidate Nomination System. Holders and Beneficial Owners of ADSs do not under ROC law have individual rights to submit Nominations to the Company for consideration at a meeting of the Company’s shareholders involving the election of directors but may be able to submit a Nomination to the Company for consideration at a meeting of the Company’s shareholders involving the election of directors if the Beneficial Owners (i) timely present their ADSs to the Depositary for cancellation pursuant to the terms of the Deposit Agreement and become holders of Shares in the ROC prior to the expiration of the Nomination Submission Period and prior to the Candidate Nomination Record Date, and (ii) otherwise satisfy the conditions of ROC law applicable to the submission of Nominations to the Company for consideration at a meeting of the Company’s shareholders involving the election of directors. Beneficial Owners of ADSs may not receive sufficient advance notice of a meeting of the Company’s shareholders involving the election of directors to enable the timely withdrawal of Shares to make a Nomination to the Company and may not be able to re-deposit under the Deposit Agreement the Shares so withdrawn. The Company has informed the Depositary that a Nomination shall only be voted upon at a meeting of the Company’s shareholders involving the election of directors if the Nomination is accepted by the board of directors of the Company as eligible in accordance with Article 192-1 of the ROC Company Law and the Company's Article of Incorporation for consideration at a meeting of the Company’s shareholders involving the election of directors.

shall not exceed the number of the directors to be elected at such meeting, (ii) the Nomination shall contain the name, educational background and past work experience of each director candidate identified in the Nomination, (iii) the Nomination shall include a letter of consent issued by each director candidate identified in the Nomination consenting to act as director if she/he/it is elected as such, (iv) a written statement by each director candidate assuring that she/he/it is not in violation of any of the circumstances set forth in Article 30 of the ROC Company Law, as amended, (v) if a director candidate is corporate shareholder of the Company (which cannot be the Depositary or its nominee), or such corporate shareholder's representative, additional information and documents reflecting the basic registration information of such corporate shareholder and the document certifying the number of Shares in its possession have been included, (vi) any further conditions under Article 192-1 of the ROC Company Law, as amended, and of the Company’s amended Articles of Incorporation are so satisfied, (vii) the Nomination is submitted to the Depositary by the Nominating Holder(s) at least two (2) Business Days prior to the expiration of the Nomination Submission Period, (viii) the Nomination is accompanied by a written certificate signed by each Nominating Holder, addressed to the Depositary and the Company and in a form satisfactory to the Depositary and the Company (the “ First Nomination Certificate ”), certifying, inter alia , (w) that each Nominating Holder has only endorsed the said Nomination, (x) that the Nominating Holder(s) own(s), individually or in the aggregate, at least 51% of the ADSs outstanding as of the date the Nomination is submitted by the Nominating Holder(s) to the Depositary (the “ Nomination Submission Date ”), (y) if the Nomination Submission Date is (i) on or after the applicable ADS Record Date, that the Nominating Holder(s) owned at least 51% of the ADSs outstanding as of the applicable ADS Record Date, and (ii) prior to the applicable ADS Record Date, that the Nominating Holder(s) will continue to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date and will provide the Second Nomination Certificate, as defined below, and (z) the name(s) and address(es) of the Nominating Holder(s) and the number of ADSs owned by each Nominating Holder (together with certified evidence of each Nominating Holder’s ownership of the applicable ADSs as of the Nomination Submission Date, in the case of (y)(ii) above, and the applicable ADS Record Date, in the case of (y)(i) above), (ix) if the Nomination Submission Date is prior to the applicable ADS Record Date, the Nominating Holder(s) must also provide, within five (5) Business Days after the applicable ADS Record Date, a second written certificate signed by each Nominating Holder addressed to the Depositary and the Company and in a form satisfactory to the Depositary and the Company (the “ Second Nomination Certificate ”), certifying, inter alia , that the Nominating Holder(s) continued to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date (together with certified evidence of each Nominating Holder’s ownership of the applicable ADSs as of such applicable ADS Record Date), (x) the Nomination is accompanied by a joint and several irrevocable undertaking of all Nominating Holders (which undertaking may be contained in the First Nomination Certificate or the Second Nomination Certificate) that each such Nominating Holder shall pay all fees and

expenses incurred in relation to the submission of the Nomination at the meeting of the Company’s shareholders, and (xi) the Shares registered in the name of the Depositary or its nominee as representative of the Holders and Beneficial Owners constitute one percent (1%) or more of the total issued and outstanding Shares of the Company as of the Candidate Nomination Record Date. Each Beneficial Owner hereby agrees and acknowledges that in no event shall the Depositary or its nominee be nominated by the Nominating Holder(s) for election as a director at a meeting of the Company's shareholders.

Upon the timely receipt by the Depositary of any Nomination which the Depositary reasonably believes to be in full compliance with the immediately preceding paragraph, the Depositary shall submit a copy of such Nomination and of the other materials received from the Nominating Holder(s) to the Company prior to the expiration of the Nomination Submission Period. Any Nomination so submitted as to which the Depositary has not received within five (5) Business Days after the applicable ADS Record Date any Second Nomination Certificate required under the immediately preceding paragraph shall be deemed irrevocably withdrawn at the expiration of such five (5) Business Day period. In the event the Depositary receives more than one (1) Nomination by a Nominating Holder, or a group of Nominating Holders, each of which appears to satisfy the requirements set forth in the immediately preceding paragraph, the Depositary is hereby authorized and instructed to disregard all Nominations received from such Nominating Holder(s), except for the first Nomination received by the Depositary from such Nominating Holder(s) and shall submit such Nomination to the Company for consideration at a meeting of the Company's shareholders involving the election of directors in accordance with the terms hereof. The Depositary shall not have any obligation to verify the accuracy of the information contained in any document submitted to it by the Nominating Holder(s). Neither the Depositary nor its nominee shall be obligated to attend and speak at the meeting of the Company’s shareholders involving the election of directors on behalf of the Nominating Holder(s).

Notwithstanding anything contained in the Deposit Agreement or any ADR, and except that the Depositary shall arrange, at the request of the Company and at the Company's expense, for the mailing to Holders of copies of materials that the Company has made available to the Depositary for such purpose, the Depositary shall not be obligated to provide to the Holders or Beneficial Owners of ADSs any notices relating to the nomination rights, including, without limitation, notice of the Nomination Submission Period, or the receipt of any Nomination(s) from Nominating Holders, or of the holdings of any ADSs by any persons, except that the Depositary shall, upon a Holder's request, inform such Holder of the total number of ADSs then issued and outstanding..”

ARTICLE III

AMENDMENTS TO THE RECEIPTS

SECTION 3.01. Amendments to Receipts.

(a) The last sentence of the introductory paragraph of the form of Receipt attached as Exhibit A to the Deposit Agreement and of each of the Receipts issued and outstanding under the Deposit Agreement as of the Effective Date is hereby amended as of the Effective Date by deleting such sentence in its entirety and inserting the following in its stead: “The Depositary’s Principal Office is located at 388 Greenwich Street, New York, New York 10013, U.S.A.”

(b) The address of the Principal Office of the Depositary identified on the bottom of the front page of the Receipt attached as Exhibit A to the Deposit Agreement and of each of the Receipts issued and outstanding under the Deposit Agreement as of the Effective Date is hereby amended as of the Effective Date by identifying such address as “388 Greenwich Street, New York, New York 10013, U.S.A.”

(c) The first sentence of paragraph (1) of the form of Receipt attached as Exhibit A to the Deposit Agreement and of each of the Receipts is issued and outstanding under the terms of the Deposit Agreement as of the Effective Date is hereby amended as of the Effective Date by deleting such sentence in its entirety and inserting the following in its stead:

“This American Depositary Receipt is one of an issue of American Depositary Receipts (“Receipts”), all issued and to be issued upon the terms and conditions set forth in the Deposit Agreement, dated as of May 29, 2002, as amended by Amendment No. 1 to Deposit Agreement, dated as of February 15, 2006 (as so amended and further amended from time to time, the “Deposit Agreement”), by and among the Company, the Depositary and all Holders and Beneficial Owners from time to time of American Depositary Shares (“ADSs”) evidenced by Receipts issued thereunder, each of whom by accepting an ADS (or an interest therein) agrees to become a party thereto and becomes bound by all the terms and provisions thereof.”

SECTION 3.02. Addition to Receipts .

Each of the Receipts issued and outstanding as of the Effective Date and the form of Receipt attached as Exhibit A to the Deposit Agreement is hereby amended as of the Effective Date to add the following Paragraphs (25) and (26) at the end of the Receipt:

“(25) Right to Submit Proposals at Annual Ordinary Meeting of Shareholders .

(a) Proposals by Shareholders .

The Company has informed the Depositary that under ROC Company Law, as in effect as of the date of the Deposit Agreement, holders of one percent (1%) or more of the total issued and outstanding Shares of the Company as of the applicable record date for determining holders of Shares with the right to vote at an annual ordinary meeting of the Company’s shareholders (the “ Shareholder Proposal Record Date ”), are entitled to submit one (1) written proposal (such proposal shall not include a Beneficial Owner's right to nominate candidates for election as directors at a meeting of the Company’s shareholders in accordance with the terms and subject to the conditions of Section 4.17 of the Deposit Agreement, the “ Proposal ”) each year for consideration at the annual ordinary meeting of the Company’s shareholders, provided that : (i) the Proposal is in the Chinese language and does not exceed 300 Chinese characters (including the reason(s) for the Proposal and all punctuation marks) in length, (ii) the Proposal is submitted to the Company prior to the expiration of the period for submission of Proposals (the “ Submission Period ”) announced by the Company (which Submission Period and the place for eligible shareholders to submit the Proposal the Company undertakes to announce publicly each year in a report on Form 6-K submitted to the Commission prior to the commencement of the 60 days closed period prior to the annual ordinary meeting of the Company’s shareholders), (iii) only one (1) matter for consideration at the annual ordinary meeting of the Company’s shareholders shall be allowed in each Proposal, and (iv) the proposing shareholder shall attend, in person or by a proxy, such annual ordinary meeting of the Company’s shareholders whereat his or her or its Proposal is to be discussed in the Chinese language and such proposing shareholder, or his or her or its proxy, shall take part in the discussion of such Proposal in the Chinese language. As the holder of the Deposited Securities, the Depositary or its nominee is entitled, provided the conditions of ROC law are satisfied, to submit only one (1) Proposal each year in respect of all of the Shares held on deposit as of the applicable Shareholder Proposal Record Date. Holders and Beneficial Owners of ADSs do not under ROC law have individual rights to submit Proposals to the Company for consideration at the annual ordinary meeting of the Company’s shareholders but may be able to submit Proposals to the Company for consideration at the annual ordinary meeting of the Company’s shareholders if the Beneficial Owners (i) timely present their ADSs to the Depositary for cancellation pursuant to the terms

of the Deposit Agreement and become holders of Shares in the ROC prior to the expiration of the Submission Period and prior to the applicable Shareholder Proposal Record Date, and (ii) otherwise satisfy the conditions of ROC law applicable to the submission of Proposals to the Company for consideration at an annual ordinary meeting of the Company’s shareholders. Beneficial Owners of ADSs may not receive sufficient advance notice of an annual ordinary meeting of the Company’s shareholders to enable the timely withdrawal of Shares to make a Proposal to the Company and may not be able to re-deposit under the Deposit Agreement the Shares so withdrawn. The Company has informed the Depositary that a Proposal shall only be voted upon at the annual ordinary meeting of the Company’s shareholders if the Proposal is accepted by the board of directors of the Company as eligible in accordance with Article 172-1 of the ROC Company Law and the Company's Articles of Incorporation for consideration at an annual ordinary meeting of the Company’s shareholders.

(b) Single Proposal by Depositary or its Nominee on behalf of Beneficial Owners .

Holders and Beneficial Owners of ADSs do not have individual proposal rights. The Depositary will, if so requested by (a) Beneficial Owner(s) as of the applicable ADS Record Date that own(s), individually or as a group, at least 51% of the ADSs outstanding as of the applicable ADS Record Date (such Beneficial Owner(s), the “ Submitting Holder(s) ”), submit to the Company for consideration at the annual ordinary meeting of the Company’s shareholders one (1) Proposal each year, provided that : (i) the Proposal submitted to the Depositary by the Submitting Holder(s) is in the Chinese language and does not exceed 300 Chinese characters (including the reason(s) for the Proposal and all punctuation marks) in length, (ii) the Proposal is submitted to the Depositary by the Submitting Holder(s) at least two (2) Business Days prior to the expiration of the Submission Period, (iii) the Proposal is accompanied by a written certificate signed by each Submitting Holder, addressed to the Depositary and the Company and in a form satisfactory to the Depositary and the Company (the “ First Proposal Certificate ”), certifying, inter alia , (w) that each Submitting Holder has only certified the said Proposal, (x) that the Submitting Holder(s) own(s), individually or in the aggregate, at least 51% of the ADSs outstanding as of the date the Proposal is submitted by the Submitting Holder(s) to the Depositary (the “ Proposal Submission Date ”), (y) if the Proposal Submission Date is (i) on or after the applicable ADS Record Date, that the Submitting Holder(s) owned at least 51% of the ADSs outstanding as of the applicable ADS Record Date, and (ii) prior to the applicable ADS Record Date, that the Submitting Holder(s) will continue to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date and will provide the Second Proposal Certificate, as defined below, and (z) the name(s) and address(es) of the Submitting Holder(s) and the number of ADSs owned by each Submitting Holder (together with certified evidence of each Submitting Holder’s ownership of the applicable ADSs as of the Proposal Submission Date, in the case of (y)(ii) above, and the applicable ADS Record Date, in the case of (y)(i) above)), (iv) if the Proposal Submission Date is prior to

the applicable ADS Record Date, the Submitting Holder(s) must also provide, within five (5) Business Days after the applicable ADS Record Date, a second written certificate signed by each Submitting Holder, addressed to the Depositary and the Company and in a form satisfactory to the Depositary and the Company (the “ Second Proposal Certificate ”), certifying, inter alia , that the Submitting Holder(s) continued to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date (together with certified evidence of each Submitting Holder’s ownership of the applicable ADSs as of such applicable ADS Record Date), (v) the Proposal is accompanied by a joint and several irrevocable undertaking of all Submitting Holders (which undertaking may be contained in the First Proposal Certificate or the Second Proposal Certificate) that each such Submitting Holder shall pay all fees and expenses incurred in relation to the submission of the Proposal for voting at the annual ordinary meeting of the Company’s shareholders (including, but not limited to, the costs and expenses of the Submitting Holder(s), or his, her, its or their representative, to attend the annual ordinary meeting of the Company’s shareholders), (vi) the Shares registered in the name of the Depositary or its nominee as representative of the Holders and Beneficial Owners constitute one percent (1%) or more of the total issued and outstanding Shares of the Company as of the Shareholder Proposal Record Date, (vii) such Proposal contains only one (1) matter for consideration at the annual ordinary meeting of the Company’s shareholders, and (viii) the Submitting Holder(s), or his, her, its or their representative, attend(s) the annual ordinary meeting of the Company’s shareholders and take(s) part in the discussions of the Proposal in the Chinese language, provided further that only one (1) individual may attend, and take part in the discussion of the Proposal at such annual ordinary meeting on behalf of a Submitting Holder(s). Each Beneficial Owner hereby agrees and acknowledges that (i) if the Submitting Holder(s), or his, her, its or their representative, does not attend the annual ordinary meeting of the Company's shareholders, the chairman of such meeting may ask the attending shareholders to discuss, or not discuss, the Proposal, and (ii) in no event shall a Submitting Holder’s, or his, her, its or their representative's, presence at an annual ordinary meeting of the Company’s shareholders entitle such Submitting Holder(s), or his, her, its or their representative, to vote the Shares represented by such Submitting Holder’s ADSs (or any other ADSs) at such annual ordinary meeting of the Company’s shareholders.

receives more than one (1) Proposal by a Submitting Holder, or a group of Submitting Holders, each of which appears to satisfy the requirements set forth in the immediately preceding paragraph, the Depositary is hereby authorized and instructed to disregard all Proposals received from such Submitting Holder(s), except for the first Proposal received by the Depositary from such Submitting Holder(s) and shall submit such Proposal to the Company for consideration at the annual ordinary meeting of the Company's shareholders in accordance with the terms of the Deposit Agreement. The Depositary shall not have any obligation to verify the accuracy of the information contained in any document submitted to it by the Submitting Holder(s). Neither the Depositary nor its nominee shall be obligated to attend and speak at the annual ordinary meeting of the Company’s shareholders on behalf of the Submitting Holder(s).

(26) Right to Submit Nominations at Meeting of Shareholders.

(a) No Right Absent Amendment to Articles of Incorporation .

No rights under this paragraph shall be effective absent an amendment to the Company’s Articles of Incorporation adopting a system whereby candidates may be nominated by holders of Shares to serve on the Company’s board of directors (a “ Candidate Nomination System ”) and any rights so arising shall, at all times, be subject to the provisions of the Company’s Articles of Incorporation, as amended, and ROC Company Law, as amended.

(b) Nominations by Shareholders .

the directors to be elected at such meeting, (ii) the Nomination is submitted to the Company prior to the expiration of the period for submission of Nominations (the “ Nomination Submission Period ”) announced by the Company (which Nomination Submission Period, the number of the directors to be elected, the place for eligible shareholders to submit the Nomination and other applicable information the Company undertakes to announce publicly in a report on Form 6-K submitted to the Commission prior to the commencement of the 60 days (for an ordinary meeting) or 30 days (for an extraordinary meeting) closed period prior to the subject meeting of the Company’s shareholders), (iii) the Nomination shall contain the name, educational background and past work experience of each director candidate identified in the Nomination, (iv) the Nomination shall include a letter of consent issued by each director candidate identified in the Nomination consenting to act as director if she/he/it is elected as such, (v) a written statement by each director candidate assuring that she/he/it is not in violation of any of the circumstances set forth in Article 30 of the ROC Company Law, as amended, (vi) if a director candidate is a corporate shareholder of the Company (which cannot be the Depositary or its nominee), or such corporate shareholder's representative, additional information and documents reflecting the basic registration information of such corporate shareholder and the document certifying the number of Shares in its possession have been included, and (vii) any further conditions under Article 192-1 of the ROC Company Law, as amended, and of the Company’s amended Articles of Incorporation are so satisfied. In the event that the Company were to amend its Articles of Incorporation to adopt a Candidate Nomination System, as holder of the Deposited Securities, the Depositary or its nominee would be entitled, provided the conditions of the Company’s amended Articles of Incorporation are satisfied, to submit only one (1) Nomination for each meeting involving the election of directors in respect of all of the Shares held on deposit as of the Candidate Nomination Record Date. The Company shall promptly notify the Depositary of an amendment of its Articles of Incorporation adopting a Candidate Nomination System. Holders and Beneficial Owners of ADSs do not under ROC law have individual rights to submit Nominations to the Company for consideration at a meeting of the Company’s shareholders involving the election of directors but may be able to submit a Nomination to the Company for consideration at a meeting of the Company’s shareholders involving the election of directors if the Beneficial Owners (i) timely present their ADSs to the Depositary for cancellation pursuant to the terms of the Deposit Agreement and become holders of Shares in the ROC prior to the expiration of the Nomination Submission Period and prior to the Candidate Nomination Record Date, and (ii) otherwise satisfy the conditions of ROC law applicable to the submission of Nominations to the Company for consideration at a meeting of the Company’s shareholders involving the election of directors. Beneficial Owners of ADSs may not receive sufficient advance notice of a meeting of the

Company’s shareholders involving the election of directors to enable the timely withdrawal of Shares to make a Nomination to the Company and may not be able to re-deposit under the Deposit Agreement the Shares so withdrawn. The Company has informed the Depositary that a Nomination shall only be voted upon at a meeting of the Company’s shareholders involving the election of directors if the Nomination is accepted by the board of directors of the Company as eligible in accordance with Article 192-1 of the ROC Company Law and the Company's Article of Incorporation for consideration at a meeting of the Company’s shareholders involving the election of directors.

Holders and Beneficial Owners of ADSs do not have individual nomination rights. In the event that the Company were to amend its Articles of Incorporation to adopt a Candidate Nomination System, the Depositary would, if so requested by (a) Beneficial Owner(s) as of the applicable ADS Record Date that own(s), individually or as a group, at least 51% of the ADSs outstanding as of the applicable ADS Record Date (such Beneficial Owner(s), the “ Nominating Holder(s) ”), submit to the Company for consideration at a meeting of the Company’s shareholders involving the election of directors one (1) Nomination, provided that : (i) the number of director candidates contained in the Nomination shall not exceed the number of the directors to be elected at such meeting, (ii) the Nomination shall contain the name, educational background and past work experience of each director candidate identified in the Nomination, (iii) the Nomination shall include a letter of consent issued by each director candidate identified in the Nomination consenting to act as director if she/he/it is elected as such, (iv) a written statement by each director candidate assuring that she/he/it is not in violation of any of the circumstances set forth in Article 30 of the ROC Company Law, as amended, (v) if a director candidate is corporate shareholder of the Company (which cannot be the Depositary or its nominee), or such corporate shareholder's representative, additional information and documents reflecting the basic registration information of such corporate shareholder and the document certifying the number of Shares in its possession have been included, (vi) any further conditions under Article 192-1 of the ROC Company Law, as amended, and of the Company’s amended Articles of Incorporation are so satisfied, (vii) the Nomination is submitted to the Depositary by the Nominating Holder(s) at least two (2) Business Days prior to the expiration of the Nomination Submission Period, (viii) the Nomination is accompanied by a written certificate signed by each Nominating Holder, addressed to the Depositary and the Company and in a form satisfactory to the Depositary and the Company (the “ First Nomination Certificate ”), certifying, inter alia , (w) that each Nominating Holder has only endorsed the said Nomination, (x) that the Nominating Holder(s) own(s), individually or in the aggregate, at least 51% of the ADSs outstanding as of the date the Nomination is submitted by the Nominating Holder(s) to the Depositary (the “ Nomination Submission Date ”), (y) if the Nomination Submission Date is (i) on or after the applicable ADS Record Date, that the Nominating Holder(s) owned at least 51% of the ADSs outstanding as of the applicable ADS Record Date, and (ii) prior to the applicable ADS Record Date, that the Nominating Holder(s) will continue to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date and will provide the Second Nomination Certificate,

as defined below, and (z) the name(s) and address(es) of the Nominating Holder(s) and the number of ADSs owned by each Nominating Holder (together with certified evidence of each Nominating Holder’s ownership of the applicable ADSs as of the Nomination Submission Date, in the case of (y)(ii) above, and the applicable ADS Record Date, in the case of (y)(i) above), (ix) if the Nomination Submission Date is prior to the applicable ADS Record Date, the Nominating Holder(s) must also provide, within five (5) Business Days after the applicable ADS Record Date, a second written certificate signed by each Nominating Holder addressed to the Depositary and the Company and in a form satisfactory to the Depositary and the Company (the “ Second Nomination Certificate ”), certifying, inter alia , that the Nominating Holder(s) continued to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date (together with certified evidence of each Nominating Holder’s ownership of the applicable ADSs as of such applicable ADS Record Date), (x) the Nomination is accompanied by a joint and several irrevocable undertaking of all Nominating Holders (which undertaking may be contained in the First Nomination Certificate or the Second Nomination Certificate) that each such Nominating Holder shall pay all fees and expenses incurred in relation to the submission of the Nomination at the meeting of the Company’s shareholders, and (xi) the Shares registered in the name of the Depositary or its nominee as representative of the Holders and Beneficial Owners constitute one percent (1%) or more of the total issued and outstanding Shares of the Company as of the Candidate Nomination Record Date. Each Beneficial Owner hereby agrees and acknowledges that in no event shall the Depositary or its nominee be nominated by the Nominating Holder(s) for election as a director at a meeting of the Company's shareholders.

Upon the timely receipt by the Depositary of any Nomination which the Depositary reasonably believes to be in full compliance with the immediately preceding paragraph, the Depositary shall submit a copy of such Nomination and of the other materials received from the Nominating Holder(s) to the Company prior to the expiration of the Nomination Submission Period. Any Nomination so submitted as to which the Depositary has not received within five (5) Business Days after the applicable ADS Record Date any Second Nomination Certificate required under the immediately preceding paragraph shall be deemed irrevocably withdrawn at the expiration of such five (5) Business Day period. In the event the Depositary receives more than one (1) Nomination by a Nominating Holder, or a group of Nominating Holders, each of which appears to satisfy the requirements set forth in the immediately preceding paragraph, the Depositary is hereby authorized and instructed to disregard all Nominations received from such Nominating Holder(s), except for the first Nomination received by the Depositary from such Nominating Holder(s) and shall submit such Nomination to the Company for consideration at a meeting of the Company's shareholders involving the election of directors in accordance with the terms of the Deposit Agreement. The Depositary shall not have any obligation to verify the accuracy of the information contained in any document submitted to it by the Nominating Holder(s). Neither the Depositary nor its nominee shall be obligated to attend and

speak at the meeting of the Company’s shareholders involving the election of directors on behalf of the Nominating Holder(s).

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

SECTION 4.01. Representations and Warranties . The Company represents and warrants to, and agrees with, the Depositary and the Holders and Beneficial Owners, that:

(a) This Amendment, when executed and delivered by the Company, and the Deposit Agreement and all other documentation executed and delivered by the Company in connection therewith, will be and have been, respectively, duly and validly authorized, executed and delivered by the Company, and constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles; and

(b) In order to ensure the legality, validity, enforceability or admissibility into evidence of this Amendment or the Deposit Agreement as amended hereby, and other document furnished hereunder or thereunder in the Republic of China, neither of such agreements need to be filed or recorded with any court or other authority in the Republic of China, except for filing this Amendment with the Financial Supervisory Commission, nor does any stamp or similar tax need be paid in the Republic of China on or in respect of such agreements; and

(c) None of the terms of this Amendment violate or conflict with, nor does the execution and delivery of this Amendment, the filing of the related Post-Effective Amendment No. 1 to the Registation Statement on Form F-6 or the consummation of the transactions contemplated therein violate or conflict with any agreement to which the Company is a party or by which the Company is bound; and

(d) All of the information provided to the Depositary by the Company in connection with this Amendment is true, accurate and correct.

ARTICLE V

MISCELLANEOUS

SECTION 5.01. New Receipts . From and after the Effective Date, the Depositary shall arrange to have new Receipts printed or amended that reflect the changes to the form of Receipt effected by this Amendment. All Receipts issued hereunder after the Effective Date, once such new Receipts are available, whether upon the deposit of Shares or other Deposited Securities or upon the transfer, combination or split-up of existing Receipts, shall be substantially in the form of the specimen Receipt attached as Exhibit A hereto. However, Receipts issued prior or subsequent to the date hereof, which do not reflect the changes to the form of Receipt effected hereby, do not need to be called in for exchange and may remain outstanding until such time as the Holders thereof choose to surrender them for any reason under the Deposit Agreement. The Depositary is authorized and directed to take any and all actions deemed necessary to effect the foregoing.

SECTION 5.02. Notice of Amendment to Holders . The Depositary is hereby directed to send notices informing the Holders (i) of the terms of this Amendment, (ii) of the Effective Date of this Amendment, and (iii) that the Holders shall be given the opportunity, but that it is

unnecessary, to substitute their Receipts with new Receipts reflecting the changes effected by this Amendment, as provided in Section 5.01 hereof.

SECTION 5.03. Indemnification . The Company hereby agrees that, to the extent the Depositary (or any of its directors, employees and officers) incur any liability as a result of the terms of this Amendment and the transactions contemplated herein, the Depositary (and all of its directors, employees and officers) shall be indemnified and held harmless by the Company in the manner provided for in Section 5.8 of the Deposit Agreement.

IN WITNESS WHEREOF, the Company and the Depositary have caused this Amendment to be executed by representatives thereunto duly authorized as of the date set forth above.

AU OPTRONICS CORP.

/s/ Kuen-Yao (K.Y.) Lee

By:_____________________________

Chief Executive Officer

CITIBANK, N.A., as Depositary

/s/ Paul Martin

By:_____________________________

Vice President

EXHIBIT A

[FORM OF RECEIPT]

CUSIP NUMBER: 002255 10 7

Number

AUO ____________________

[American Depositary Shares (each American Depositary Share representing ten (10) Fully Paid shares of common stock, par NT$10.00 per share)]

[COP American Depositary Shares (each COP American Depositary Share representing an undivided interest in a global Certificates of Payment, each interest representing the irrevocable right to receive ten (10) Fully Paid shares of common stock par value NT$10.00 per share)]

[EC American Depositary Shares (each EC American Depositary Share representing an undivided interest in an Entitlement Certificate, each interest representing the irrevocable right to receive ten (10) shares of common stock par NT$10.00 per share)]

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AMERICAN DEPOSITARY RECEIPT

FOR

AMERICAN DEPOSITARY SHARES

representing

[DEPOSITED SHARES OF COMMON STOCK]

[INTERESTS IN THE DEPOSITED CERTIFICATE(S) OF PAYMENT]

[DEPOSITED ENTITLEMENT CERTIFICATE(S)]

AU Optronics Corp.

(Incorporated under the laws of the Republic of China)

CITIBANK, N.A., a national banking association organized and existing under the laws of the United States of America, as depositary (the “ Depositary ”), hereby certifies that _____________is the owner of ______________ American Depositary Shares (hereinafter “ ADS ”), representing deposited [shares of common stock] [interests in the global Certificate(s) of Payment representing the irrevocable right to receive shares of common stock] [Entitlement Certificate(s) representing the irrevocable right to receive shares of common stock] , par value NT$10.00 per share, or evidence of rights to receive such [shares of common stock (the “ Shares ”)] [interests in the global Certificate(s) of Payment (the “ Certificate(s) of Payment ”][Entitlement Certificate(s) (the “ Entitlement Certificate(s) ”)] (such [Shares][Certificate(s) of Payment][Entitlement Certificate(s)] are hereafter called “ Eligible Securities ”) of AU Optronics Corp., a company incorporated under the laws of the Republic of China (the “ Company ”). As of the date of the Deposit Agreement (as hereinafter defined), each ADS represents [ten (10) Shares][an undivided interest in an Entitlement Certificate, each interest representing the irrevocable right to receive [ten (10)] Shares][an undivided interest in a global Certificate(s) of Payment, each interest representing the irrevocable right to receive ten (10) Shares] deposited under the Deposit Agreement with the Custodian, which at the date of execution of the Deposit Agreement is Citibank, N.A., (Taipei) (the “ Custodian ”). The ratio of American Depositary Shares to Eligible Securities is subject to amendment as provided in Article IV of the Deposit Agreement. The Depositary's Principal Office is located at 388 Greenwich Street, New York, New York 10013, U.S.A.

1. The Deposit Agreement . This American Depositary Receipt is one of an issue of American Depositary Receipts (“Receipts”), all issued and to be issued upon the terms and conditions set forth in the Deposit Agreement, dated as of May 29, 2002, as amended by Amendment No. 1 to Deposit Agreement, dated as of February 15, 2006 (as so amended and further amended from time to time, the “Deposit Agreement”), by and among the Company, the Depositary and all Holders and Beneficial Owners from time to time of American Depositary

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Shares (“ADSs”) evidenced by Receipts issued thereunder, each of whom by accepting an ADS (or an interest therein) agrees to become a party thereto and becomes bound by all the terms and provisions thereof. The Deposit Agreement sets forth the rights and obligations of Holders and Beneficial Owners of Receipts and the rights and duties of the Depositary in respect of the Eligible Securities deposited thereunder and any and all other securities, property and cash from time to time received in respect of such Eligible Securities and held thereunder (such Eligible Securities, securities, property and cash are herein called “Deposited Securities”). Copies of the Deposit Agreement are on file at the Principal Office of the Depositary and with the Custodian.

The statements made on the face and reverse of this Receipt are summaries of certain provisions of the Deposit Agreement and the Articles of Incorporation of the Company (as in effect on the date of the signing of the Deposit Agreement) and are qualified by and subject to the detailed provisions of the Deposit Agreement and the Articles of Incorporation, to which reference is hereby made. All capitalized terms used herein which are not otherwise defined herein shall have the meanings ascribed thereto in the Deposit Agreement. The Depositary makes no representation or warranty as to the validity or worth of the Deposited Securities. The Depositary has made arrangements for the acceptance of the ADSs into DTC. Each Beneficial Owner of ADSs held through DTC must rely on the procedures of DTC and the DTC Participants to exercise and be entitled to any rights attributable to such ADSs.

2. Surrender of ADSs and Withdrawal and Sale of Deposited Securities . The Depositary and the Company have been advised that under ROC law, until three (3) months after the closing of the Offering, a Holder is not entitled to withdraw or sell Shares from the ADS Facility, consequently, the Company and the Depositary agree to prohibit the surrender of ADSs and the sale or Delivery of any Shares deposited in connection with the Offering until the expiration of such three-month period. A Holder wishing to withdraw Shares from the ADS Facility shall be required under ROC law to appoint an eligible agent in the Republic of China to open a securities trading account with a local brokerage firm after receiving an approval from the TSE and a bank account (the securities trading account and the bank account, collectively, the “Accounts”), to pay ROC taxes, remit funds, exercise stockholders' rights and perform such other functions as may be designated by such withdrawing Holder. In addition, such withdrawing Holder is also required to appoint a custodian bank to hold the securities in safekeeping, make confirmations and settle trades and report all relevant information. Without making such appointment and until approval from the TSE is obtained, the withdrawing Holder would be unable to receive, hold, or subsequently sell the Deposited Securities withdrawn from the ADS Facilities on the TSE or otherwise.

(a) Sale of Deposited Securities . Upon surrender of Receipts at the Principal Office and upon payment of any fees, reasonable expenses, taxes or other governmental charges as provided hereunder, subject to the terms of this Deposit Agreement, and the transfer restrictions applicable to the Deposited Securities, if any, Holders may request that the Deposited Securities represented by such Holders' Receipts be sold on such Holders' behalf. Any Holder requesting a sale of Deposited Securities may be required by the Depositary to deliver, or cause to be delivered, to the Depositary a written order requesting the Depositary to sell, or cause to be sold, such Deposited Securities. Any such sale of Deposited Securities will be conducted in accordance with applicable ROC law through a securities company in the ROC on the TSE or in such other manner as is or may be permitted under applicable ROC law. Any

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such sale of Deposited Securities will be at the expense and risk of the Holder requesting such sale.

Upon receipt of any proceeds from any such sale, the Depositary shall, subject to any restrictions imposed by ROC law and regulations, and as provided hereunder and under the Deposit Agreement, convert or cause to be converted any such proceeds into U.S. dollars and distribute any such proceeds to the Holders entitled thereto after deduction or payment of any fees, reasonable expenses, taxes or governmental charges incurred in connection with such sale, as provided under the Deposit Agreement. Any such sale may be subject to ROC taxation on capital gains, if any, and will be subject to a securities transaction tax in the ROC.

(b) Withdrawal of Deposited Securities . The Holder of ADSs shall be entitled to Delivery (at the Custodian's designated office) of the Deposited Securities at the time represented by the ADS(s) upon satisfaction of each of the following conditions: (i) the Holder (or a duly authorized attorney of the Holder) has duly Delivered ADSs to the Depositary at its Principal Office (and if applicable, the Receipts evidencing such ADSs) for the purpose of withdrawal of the Deposited Securities represented thereby, (ii) if so required by the Depositary, the Receipts Delivered to the Depositary for such purpose have been properly endorsed in blank or are accompanied by proper instruments of transfer in blank (including signature guarantees in accordance with standard securities industry practice), (iii) if so required by the Depositary, the Holder of the ADSs has executed and delivered to the Depositary a written order directing the Depositary to cause the Deposited Securities being withdrawn to be Delivered to or upon the written order of the person(s) designated in such order, (iv) the Holder has delivered to the Depositary the certification contemplated in Exhibit C to the Deposit Agreement, duly completed by or on behalf of the Beneficial Owner(s) of the ADSs surrendered for withdrawal (unless the Depositary is otherwise instructed by the Company), and (v) all applicable fees and charges of, and reasonable expenses incurred by, the Depositary and all applicable taxes and governmental charges (as are set forth in Section 5.9 of, and Exhibit B to, the Deposit Agreement) have been paid, subject, however, in each case, to the terms and conditions of the Receipts evidencing the surrendered ADSs, of the Deposit Agreement, of the Company's Articles of Incorporation and of any applicable laws and the regulations and rules of the Republic of China and the rules of the TSE and the Taiwan Securities Central Depository, and to any provisions of or governing the Deposited Securities, in each case as in effect at the time thereof.

Upon satisfaction of each of the conditions specified above, the Depositary (i) shall cancel the ADSs Delivered to it (and, if applicable, the Receipts evidencing the ADSs so Delivered), (ii) shall direct the Registrar to record the cancellation of the ADSs so Delivered on the books maintained for such purpose, and (iii) shall direct the Custodian to Deliver (without unreasonable delay) at the Custodian's designated office the Deposited Securities represented by the ADSs so canceled together with any certificate or other document of title for the Deposited Securities, or evidence of the electronic transfer thereof (if available), as the case may be, to or upon the written order of the person(s) designated in the order delivered to the Depositary for such purpose, subject however, in each case , to the terms and conditions of the Deposit Agreement, of the Receipts evidencing the ADSs so canceled, of the Articles of Incorporation of the Company, of applicable laws and the rules and regulations of the Republic of China and the rules of the TSE and the Taiwan Securities Central Depository, and to the terms and conditions of or governing the Deposited Securities, in each case as in effect at the time thereof.

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The Depositary shall not accept for surrender ADSs representing less than one Eligible Security. In the case of the Delivery to it of ADSs representing a number other than a whole number of Eligible Securities, the Depositary shall cause ownership of the appropriate whole number of Eligible Securities to be Delivered in accordance with the terms hereof, and shall, at the discretion of the Depositary, either (i) return to the person surrendering such ADSs the number of ADSs representing any remaining fractional Eligible Security, or (ii) sell or cause to be sold the fractional Eligible Security represented by the ADS(s) so surrendered and remit the proceeds of such sale (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes withheld) to the person surrendering the ADSs. In addition, trading restrictions on the TSE may result in the price per Eligible Security or on any lot of any type of Eligible Security other than an integral multiple of 1,000 Eligible Securities being lower than the price of Eligible Securities in lots of integral multiples of 1,000 Eligible Securities.

Notwithstanding anything else contained in any Receipt or the Deposit Agreement, the Depositary may make delivery at the Principal Office of the Depositary of (i) any cash dividends or cash distributions, or (ii) any proceeds from the sale of any distributions of securities or rights, which are at the time held by the Depositary in respect of the Deposited Securities represented by the ADSs surrendered for cancellation and withdrawal. At the request, risk and expense of any Holder so surrendering ADSs, and for the account of such Holder, the Depositary shall direct the Custodian to forward (to the extent permitted by law) any cash or other property (other than securities) held by the Custodian in respect of the Deposited Securities represented by such ADSs to the Depositary for delivery at the Principal Office of the Depositary. Such direction shall be given by letter or, at the request, risk and expense of such Holder, by cable, telex or facsimile transmission.

3. Transfer, Combination and Split-Up of Receipts . The Registrar shall register the transfer of this Receipt (and of the ADSs represented thereby) on the books maintained for such purpose and the Depositary shall cancel this Receipt and execute new Receipts evidencing the same aggregate number and type of ADSs as those evidenced by this Receipt when canceled, shall cause the Registrar to countersign such new Receipts and shall Deliver such new Receipts to or upon the order of the person entitled thereto, if each of the following conditions has been satisfied: (i) this Receipt has been duly Delivered by the Holder (or by a duly authorized attorney of the Holder) to the Depositary at its Principal Office for the purpose of effecting a transfer thereof, (ii) this Receipt has been properly endorsed or is accompanied by proper instruments of transfer (including signature guarantees in accordance with standard securities industry practice), (iii) this Receipt has been duly stamped (if required by the laws of the State of New York or of the United States), and (iv) all applicable fees and charges of, and expenses incurred by, the Depositary and all applicable taxes and governmental charges (as are set forth in Section 5.9 of, and Exhibit B to, the Deposit Agreement) have been paid, subject, however, in each case, to the terms and conditions of this Receipt, of the Deposit Agreement and of applicable law, in each case as in effect at the time thereof.

The Registrar shall register the split-up or combination of this Receipt (and of the ADSs represented hereby) on the books maintained for such purpose and the Depositary shall cancel this Receipt and execute new Receipts for the number of ADSs requested, but in the aggregate not exceeding the number of the same type of ADSs evidenced by this Receipt (when canceled), shall cause the Registrar to countersign such new Receipts and shall Deliver such new

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Receipts to or upon the order of the Holder thereof, if each of the following conditions has been satisfied: (i) this Receipt has been duly Delivered by the Holder (or by a duly authorized attorney of the Holder) to the Depositary at its Principal Office for the purpose of effecting a split-up or combination hereof, and (ii) all applicable fees and charges of, and expenses incurred by, the Depositary and all applicable taxes and government charges (as are set forth in Section 5.9 of, and Exhibit B to, the Deposit Agreement) have been paid, subject, however, in each case , to the terms and conditions of this Receipt, of the Deposit Agreement and of applicable law, in each case as in effect at the time thereof.

4. Pre-Conditions to Registration, Transfer, Etc . As a condition precedent to the execution and delivery, registration of transfer, split-up, combination or surrender of any Receipt, the delivery of any distribution thereon, or the withdrawal of any Deposited Securities, the Depositary or the Custodian may require (i) payment from the depositor of Eligible Securities or presenter of ADSs or of a Receipt of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax or charge and fee with respect to Eligible Securities being deposited or withdrawn) and payment of any applicable fees and charges of the Depositary as provided in the Deposit Agreement and in this Receipt, (ii) the production of proof satisfactory to it as to the identity and genuineness of any signature or any other matters contemplated in the Deposit Agreement, and (iii) compliance with (A) any laws or governmental regulations relating to the execution and delivery of Receipts or ADSs or to the deposit of Eligible Securities or to the withdrawal of Deposited Securities and (B) such reasonable regulations as the Depositary and the Company may establish consistent with the provisions of this Receipt, the Deposit Agreement and applicable law.

The issuance of ADSs against deposits of Eligible Securities generally or against deposits of particular Eligible Securities may be suspended, or the deposit of particular Eligible Securities may be refused, or the registration of transfer of Receipts in particular instances may be refused, or the registration of transfer of Receipts generally may be suspended, during any period when the transfer books of the Company, the Depositary, a Registrar or the Eligible Securities Registrar are closed or if any such action is deemed necessary or advisable by the Depositary or the Company, in good faith, at any time or from time to time because of any requirement of law, any government or governmental body or commission or any securities exchange upon which the ADSs or Eligible Securities are listed, or under any provision of the Deposit Agreement or this Receipt, or under any provision of, or governing, the Deposited Securities, or because of a meeting of shareholders of the Company or for any other reason, subject in all cases to Paragraph (23) hereof. In addition, the Depositary and the Custodian shall refuse to accept Shares for deposit (i) whenever notified, as provided in the Deposit Agreement that the Company has restricted transfer of such Shares to comply with delivery or transfer requirements and/or ownership restrictions referred to in the Deposit Agreement or under applicable law, or (ii) in the case of a deposit of Shares requested under the terms of Section 2.3(iv) of the Deposit Agreement, if such deposit is not permitted under any restriction notified by the Company to the Depositary from time to time, which restrictions may specify black-out periods during which deposits may not be made, minimum or maximum numbers of Shares and frequencies of deposit.

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Notwithstanding any provision of the Deposit Agreement or this Receipt to the contrary, Holders are entitled to surrender outstanding ADSs to withdraw the Deposited Securities at any time subject only to (i) temporary delays caused by closing the transfer books of the Depositary or the Company, or the deposit of Eligible Securities in connection with voting at a shareholders' meeting or the payment of dividends, (ii) the payment of fees, taxes and similar charges, (iii) compliance with any U.S. or foreign laws or governmental regulations relating to the Receipts or to the withdrawal of the Deposited Securities, and (iv) other circumstances specifically contemplated by Section I.A.(l) of the General Instructions to Form F-6 (as such General Instructions may be amended from time to time).

5. Compliance With Information Requests . Notwithstanding any other provision of the Deposit Agreement or this Receipt, each Holder and Beneficial Owner of the ADSs represented hereby agrees to comply with requests from the Company pursuant to applicable law, the rules and requirements of the TSE, and any other stock exchange on which the Eligible Securities or ADSs are, or will be, registered, traded or listed, or the Articles of Incorporation of the Company, which are made to provide information, inter alia , as to the capacity in which such Holder or Beneficial Owner owns ADSs (and Eligible Securities and Deposited Securities, as the case may be) and regarding the identity of any other person(s) interested in such ADSs and the nature of such interest and various other matters, whether or not they are Holders and/or Beneficial Owners at the time of such request.

6. Ownership Restrictions . Notwithstanding any provision of this Receipt or of the Deposit Agreement, the Company may restrict transfers of the Shares, Eligible Securities or securities convertible into Shares where the Company informs the Depositary that such transfer might result in ownership of Shares exceeding limits imposed by applicable law, the SFC, the TSE or Articles of Incorporation of the Company. The Company may also restrict, in such manner as it deems appropriate, transfers of ADSs where such transfer may result in the total number of Shares, Deposited Securities or securities convertible into Shares represented by the ADSs owned by a single Holder or Beneficial Owner to exceed any such limits. The Company may, in its sole discretion, but subject to applicable law, instruct the Depositary to take action with respect to the ownership interest of any Holder or Beneficial Owner in excess of the limits set forth in the preceding sentence, including but not limited to, the imposition of restrictions on the transfer of ADSs, the removal or limitation of voting rights or the mandatory sale or disposition on behalf of a Holder or Beneficial Owner of the Deposited Securities represented by the ADSs held by such Holder or Beneficial Owner in excess of such limitations, if and to the extent such disposition is permitted by applicable law and the Articles of Incorporation of the Company.

7. Liability of Holder for Taxes and Other Charges . If any tax or other governmental charge shall become payable with respect to any Receipt or any Deposited Securities or ADSs, such tax or other governmental charge shall be payable by the Holders and Beneficial Owners to the Depositary. The Company, the Custodian and/or Depositary may withhold or deduct from any distributions made in respect of Deposited Securities and may sell for the account of a Holder and/or Beneficial Owner any or all of the Deposited Securities and apply such distributions and sale proceeds in payment of such taxes or governmental charges, (including applicable interest and penalties), the Holder and the Beneficial Owner hereof remaining liable for any deficiency. The Custodian may refuse the deposit of Eligible Securities

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and the Depositary may refuse to issue ADSs, to deliver ADRs, register the transfer, split-up or combination of ADRs and (subject to Paragraph (23) hereof) the withdrawal of Deposited Securities until payment in full of such tax, charge, penalty or interest is received. Every Holder and Beneficial Owner may be asked to indemnify the Depositary, the Company, the Custodian, and any of their respective agents, officers, employees and Affiliates for, and hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from any inaccuracy in the information provided by such Holder and/or Beneficial Owner in connection with obtaining any tax benefit for such Holder and/or Beneficial Owner.

8. Representations and Warranties of Depositors . Each person depositing Shares under the Deposit Agreement shall be deemed thereby to represent and warrant that (i) such Shares and the certificates therefor are duly authorized, validly issued, fully paid, non-assessable and legally obtained by such person, (ii) all preemptive (and similar) rights, if any, with respect to such Shares have been validly waived or exercised, (iii) the person making such deposit is duly authorized to make such deposit, (iv) the Shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim and are not, and the ADSs issuable upon such deposit will not be, Restricted Securities except (as contemplated in Section 2.14 of the Deposit Agreement), and (v) the Shares presented for deposit have not been stripped of any rights or entitlements. Such representations and warranties shall survive the deposit and withdrawal of Shares, the issuance and cancellation of ADSs in respect thereof and the transfer of such ADSs. Each person depositing Certificates of Payment under the Deposit Agreement shall be deemed thereby to represent and warrant that (i) such Certificates of Payment are duly authorized, validly issued, fully paid, non-assessable and legally obtained by such person, (ii) all preemptive (and similar) rights, if any, with respect to such Certificates of Payment have been validly waived or exercised, (iii) the person making such deposit is duly authorized to make such deposit, (iv) the Certificates of Payment presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, and are not, and the Temporary COP ADSs issuable upon such deposit will not be, Restricted Securities (except as contemplated in Section 2.14 of the Deposit Agreement) and (v) the Certificates of Payment presented for deposit have not been stripped of any rights or entitlements. Such representations and warranties shall survive the deposit of Certificates of Payment, the issuance and cancellation of Temporary COP ADSs in respect thereof and the transfer of such Temporary COP ADSs. Each person depositing Entitlement Certificates under the Deposit Agreement shall be deemed thereby to represent and warrant that (i) such Entitlement Certificates are duly authorized, validly issued, fully paid and legally obtained by such person, (ii) all preemptive (and similar) rights, if any, with respect to such Entitlement Certificates have been validly waived or exercised, (iii) the person making such deposit is duly authorized to do so, (iv) the Entitlement Certificates presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, and are not, and the Temporary EC ADSs issuable upon such deposit will not be, Restricted Securities and (v) the Entitlement Certificates presented for deposit have not been stripped of any rights or entitlements. Such representations and warranties shall survive the deposit of Entitlement Certificates, the issuance and cancellation of Temporary EC ADSs in respect thereof and the transfer of such Temporary EC ADSs.

If any such representations or warranties are false in any way, the Company and Depositary shall be authorized, at the cost and expense of the person depositing, Shares,

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Certificates of Payment or Entitlement Certificates, to take any and all actions necessary to correct the consequences thereof.

9. Filing Proofs, Certificates and Other Information . Any person presenting Eligible Securities for deposit, any Holder and any Beneficial Owner may be required, and every Holder and Beneficial Owner agrees, from time to time to provide to the Depositary and the Custodian such proof of citizenship or residence, taxpayer status, payment of all applicable taxes or other governmental charges, exchange control approvals and any other applicable regulatory approval, legal or beneficial ownership of ADSs and Deposited Securities, compliance with applicable laws and the terms of the Deposit Agreement or this receipt evidencing the ADS(s) and the provisions of, or governing, the Deposited Securities, to execute such certifications and to make such representations and warranties, and to provide such other information and documentation (or, in the case of Eligible Securities in registered form presented for deposit, such information relating to the registration on the books of the Company or of the Eligible Securities Registrar) as the Depositary or the Custodian may deem reasonably necessary or proper or as the Company may reasonably require by written request to the Depositary consistent with its obligations under the Deposit Agreement, this Receipt and applicable laws and regulations. The Depositary and the Registrar, as applicable, may withhold the execution or delivery or registration of transfer of any Receipt or the distribution or sale of any dividend or distribution of rights or of the proceeds thereof or, to the extent not limited by Paragraph (23) hereof, the delivery of any Deposited Securities until such proof or other information is filed or such certificates are executed, or such representations are made, or such information and documentation are provided, in each case to the Depositary's, the Registrar's and the Company's satisfaction.

10. Charges of Depositary . The Depositary shall charge the following fees for the services performed under the terms of the Deposit Agreement:

(i) to any person to whom ADSs are issued upon the deposit of Eligible Securities, a fee not in excess of U.S. $ 5.00 per 100 ADSs (or fraction thereof) so issued under the terms of the Deposit Agreement (excluding issuances pursuant to paragraphs (iii)(b) and (v) below);

(ii) to any person surrendering ADSs for cancellation and withdrawal of Deposited Securities, a fee not in excess of U.S. $ 5.00 per 100 ADSs (or fraction thereof) so surrendered;

(iii) No fee shall be payable upon distribution of (a) cash dividends or (b) ADSs pursuant to stock dividends (or other free distributions of stock) so long as the charging of such fee is prohibited by the exchange upon which the ADSs are listed. If charging of such fees is not prohibited, the fees specified in (i) above shall be payable in respect of ADS distributions pursuant to stock dividends (or other free distributions of stock) and the fees specified in (iv) below shall be payable in respect of distributions of cash;

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(iv) to any Holder of ADSs, a fee not in excess of U.S. $ 2.00 per 100 ADSs (or fraction thereof) held for the distribution of cash proceeds ( i.e. , upon the sale of rights and other entitlements); and

(v) to any Holder of ADSs, a fee not in the excess of U.S. $ 5.00 per 100 ADSs (or fraction thereof) issued upon the exercise of rights to purchase additional ADSs.

In addition, Holders, Beneficial Owners, persons depositing Eligible Securities for deposit and persons surrendering ADSs for cancellation and withdrawal of Deposited Securities will be required to pay the following charges:

(b) taxes (including applicable interest and penalties) and other governmental charges;

(c) such registration fees as may from time to time be in effect for the registration of Deposited Securities on the share register and applicable to transfers of Deposited Securities to or from the name of the Custodian, the Depositary or any nominees upon the making of deposits and withdrawals, respectively;

(d) such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing or withdrawing Deposited Securities or Holders and Beneficial Owners of ADSs;

(e) the expenses and charges incurred by the Depositary in the conversion of foreign currency;

(f) such fees and expenses as are incurred by the Depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to Eligible Securities, Deposited Securities, ADSs and ADRs; and

(g) the fees and expenses incurred by the Depositary in connection with the delivery of Deposited Securities.

Any other charges and expenses of the Depositary under the Deposit Agreement will be paid by the Company upon agreement between the Depositary and the Company. All fees and charges may, at any time and from time to time, be changed by agreement between the Depositary and Company but, in the case of fees and charges payable by Holders or Beneficial Owners, only in the manner contemplated by Paragraph (21) of this Receipt. The Depositary will provide, without charge, a copy of its latest fee schedule to anyone upon request. The charges and expenses of the Custodian are for the sole account of the Depositary.

11. Title to Receipts . It is a condition of this Receipt, and every successive Holder of this Receipt by accepting or holding the same consents and agrees, that title to this Receipt (and to each ADS evidenced hereby) shall be transferable upon the same terms as a certificated security under the laws of the State of New York, provided that the Receipt has been properly endorsed or is accompanied by proper instruments of transfer. Notwithstanding any notice to the contrary, the Depositary and the Company may deem and treat the Holder of this

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Receipt (that is, the person in whose name this Receipt is registered on the books of the Depositary) as the absolute owner thereof for all purposes. Neither the Depositary nor the Company shall have any obligation nor be subject to any liability under the Deposit Agreement or this Receipt to any holder of this Receipt or any Beneficial Owner unless such holder is the Holder of this Receipt registered on the books of the Depositary or, in the case of a Beneficial Owner, such Beneficial Owner or the Beneficial Owner's representative is the Holder registered on the books of the Depositary.

12. Validity of Receipt . This Receipt (and the ADSs represented hereby) shall not be entitled to any benefits under the Deposit Agreement or be valid or enforceable for any purpose against the Depositary or the Company unless this Receipt has been (i) dated, (ii) signed by the manual or facsimile signature of a duly authorized signatory of the Depositary, (iii) countersigned by the manual or facsimile signature of a duly authorized signatory of the Registrar, and (iv) registered in the books maintained by the Registrar for the registration of issuances and transfers of Receipts. Receipts bearing the facsimile signature of a duly authorized signatory of the Depositary or the Registrar, who at the time of signature was a duly authorized signatory of the Depositary or the Registrar, as the case may be, shall bind the Depositary, notwithstanding the fact that such signatory has ceased to be so authorized prior to the delivery of such Receipt by the Depositary.

13. Available Information; Reports; Inspection of Transfer Books . The Company is subject to the periodic reporting requirements of the Exchange Act and accordingly files certain information with the Commission. These reports and documents can be inspected and copied at the public reference facilities maintained by the Commission located at Judiciary Plaza, 100 F Street, N.E., Washington D.C. 20549. The Depositary shall make available for inspection by Holders at its Principal Office any reports and communications, including any proxy soliciting materials, received from the Company which are both (a) received by the Depositary, the Custodian, or the nominee of either of them, as the holder of the Deposited Securities and (b) made generally available to the holders of such Deposited Securities by the Company.

The Registrar shall keep books for the registration of issuances and transfers of Receipts which at all reasonable times shall be open for inspection by the Company and by the Holders of such Receipts, provided that such inspection shall not be, to the Registrar's knowledge, for the purpose of communicating with Holders of such Receipts in the interest of a business or object other than the business of the Company or other than a matter related to the Deposit Agreement or the Receipts.

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The Registrar may close the transfer books with respect to the Receipts, at any time or from time to time, when deemed necessary or advisable by it in good faith in connection with the performance of its duties hereunder, or at the reasonable written request of the Company subject, in all cases, to Paragraph (23) hereof.

Dated:

CITIBANK, N.A.,

as Depositary

By:_________________________

Authorized Signatory

CITIBANK, N.A.
Transfer Agent and Registrar

By: ______________________________
Authorized Signatory

The address of the Principal Office of the Depositary is 388 Greenwich Street, New York, New York 10013, U.S.A.

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[FORM OF REVERSE OF RECEIPT]

SUMMARY OF CERTAIN ADDITIONAL PROVISIONS

OF THE DEPOSIT AGREEMENT

14. Dividends and Distributions in Cash, Eligible Securities, etc . Subject always to the laws and regulations of the Republic of China, whenever the Depositary receives directly confirmation from the Custodian of receipt of any cash dividend or other cash distribution on any Deposited Securities, or receives proceeds from the sale of any Deposited Securities or any entitlements held in respect of Deposited Securities under the terms of the Deposit Agreement, the Depositary will (i) promptly convert or cause to be converted such cash dividend, distribution or proceeds into Dollars (upon the terms of the Deposit Agreement), (ii) if applicable, establish the ADS Record Date upon the terms described in Paragraph (15) hereof and in Section 4.9 of the Deposit Agreement, and (iii) distribute promptly the amount thus received (net of (a) applicable fees and charges of, and reasonable expenses incurred by, the Depositary and (b) taxes withheld) to the Holders entitled thereto as of the ADS Record Date in proportion to the number of ADS held as of the ADS Record Date. The Depositary shall distribute only such amount, however, as can be distributed without attributing to any Holder a fraction of one cent, and any balance not so distributed shall be held by the Depositary (without liability for interest thereon) and shall be added to and become part of the next sum received by the Depositary for distribution to Holders of ADSs then outstanding at the time of the next distribution. If the Company, the Custodian or the Depositary is required to withhold and does withhold from any cash dividend or other cash distribution in respect of any Deposited Securities an amount on account of taxes, duties or other governmental charges, the amount distributed to Holders on the ADSs representing such Deposited Securities shall be reduced accordingly. Such withheld amounts shall be forwarded by the Company, the Custodian or the Depositary to the relevant governmental authority.

If any distribution upon any Deposited Securities consists of a dividend in, or free distribution of, Eligible Securities, the Company shall cause such Eligible Securities to be deposited with the Custodian and registered, as the case may be, in the name of the Depositary, the Custodian or their respective nominees. Upon receipt of confirmation of such deposit from the Custodian, the Depositary shall, subject to and in accordance with the Deposit Agreement and the laws and regulations of the Republic of China, establish the ADS Record Date and either (i) the Depositary shall distribute to the Holders as of the ADS Record Date in proportion to the number of ADSs held as of the ADS Record Date, additional ADSs (of the applicable series), which represent in aggregate the number of Eligible Securities received as such dividend, or free distribution, subject, however, in each case, to the terms of the Deposit Agreement (including, without limitation, the limitations set forth on the face of this Receipt and in Article II of the Deposit Agreement and net of (a) the applicable fees and charges of, and reasonable expenses incurred by, the Depositary and (b) taxes), or (ii) if additional ADSs are not so distributed, each ADS issued and outstanding after the ADS Record Date shall, to the extent permissible by law, thenceforth also represent rights and interest in the additional integral number of Shares distributed upon the Deposited Securities represented thereby ( subject, however, in each case, to the laws and regulations of the Republic of China and net of (a) the applicable fees and charges of, and the reasonable expenses incurred by, the Depositary and (b) taxes). In lieu of delivering

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fractional ADSs, the Depositary shall sell the number of Eligible Securities or ADSs, as the case may be, represented by the aggregate of such fractions and distribute the net proceeds upon the terms set forth in the Deposit Agreement.

In the event that the Depositary determines that any distribution in property (including Eligible Securities) is subject to any tax or other governmental charges which the Depositary is obligated to withhold, or, if the Company in the fulfillment of its obligations under the Deposit Agreement, has furnished an opinion of U.S. counsel determining that Eligible Securities must be registered under the Securities Act or other laws in order to be distributed to Holders (and no such registration statement has been declared effective), the Depositary may dispose of all or a portion of such property (including Eligible Securities and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable and the Depositary shall distribute the net proceeds of any such sale (after deduction of (a) taxes and (b) fees and charges of, and reasonable expenses incurred by, the Depositary) to Holders entitled thereto upon the terms of the Deposit Agreement. The Depositary shall hold and/or distribute any unsold balance of such property in accordance with the provisions of the Deposit Agreement.

Upon timely receipt of a notice indicating that the Company wishes an elective distribution to be made available to Holders upon the terms described in the Deposit Agreement, the Company and the Depositary shall determine whether such distribution is lawful and reasonably practicable. If so, the Depositary shall, subject to the terms and conditions of the Deposit Agreement, establish an ADS record date according to Paragraph (15) and establish procedures to enable the Holder hereof to elect to receive the proposed distribution in cash or in additional ADSs. If a Holder elects to receive the distribution in cash, the dividend shall be distributed as in the case of a distribution in cash. If the Holder hereof elects to receive the distribution in additional ADSs, the distribution shall be distributed as in the case of a distribution in Eligible Securities. If such elective distribution is not lawful or not reasonably practicable, the Depositary shall, to the extent permitted by law, distribute to Holders, on the basis of the same determination as is made in the Republic of China in respect of the Deposited Securities for which no election is made, either (x) cash or (y) additional ADSs representing such additional Eligible Securities, in each case, upon the terms described in the Deposit Agreement. Nothing herein or in the Deposit Agreement shall obligate the Depositary to make available to the Holder hereof a method to receive the elective distribution in Eligible Securities (rather than ADSs). There can be no assurance that the Holder hereof will be given the opportunity to receive elective distributions on the same terms and conditions as the holders of Deposited Securities.

Upon timely receipt by the Depositary of a notice indicating that the Company wishes rights to subscribe for additional Eligible Securities to be made available to Holders of ADSs, the Depositary upon consultation with the Company, shall determine, whether it is lawful and reasonably practicable to make such rights available to the Holders. If and whenever the Company shall announce its intention to make any offer or invitation to the holders of Eligible Securities to subscribe for or to acquire Eligible Securities or other assets by way of rights, the Depositary shall as soon as practicable thereafter give notice of the same to the Holders, including if applicable, the last date for acceptance thereof and the manner by which and the time during which Holders may instruct the Depositary to exercise such rights. The Depositary shall

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make such rights available to any Holders only if (i) the Company shall have timely requested the Depositary to make such rights available to Holders, (ii) the Depositary shall have received satisfactory documentation contemplated in the Deposit Agreement, and (iii) the Depositary shall have determined that such distribution of rights is reasonably practicable. In the event any of the conditions set forth above are not satisfied or if the Company requests the Depositary that the rights not be made available to Holders of ADSs, the Depositary shall proceed with the sale of rights as contemplated below. In the event that the conditions set forth above are satisfied, the Depositary shall establish an ADS Record Date (upon the terms described in the Deposit Agreement) and establish procedures (x) to distribute rights to purchase additional ADSs (by means of warrants or otherwise), (y) to enable the Holders to exercise the rights (upon payment of the subscription price and of the applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes), and (z) to deliver ADSs upon the valid exercise of such rights. Nothing herein or in the Deposit Agreement shall obligate the Depositary to make available to the Holders a method to exercise rights to subscribe for Eligible Securities (rather than ADSs). If (i) the Company does not timely request the Depositary to make the rights available to Holders or if the Company requests that the rights not be made available to Holders, (ii) the Depositary fails to receive satisfactory documentation required by the Deposit Agreement or determines it is not lawful or not reasonably practicable to make the rights available to Holders, or (iii) any rights made available are not exercised and appear to be about to lapse, the Depositary shall determine whether it is lawful and reasonably practicable to sell such rights, in a riskless principal capacity, at such place and upon such terms (including public and private sale) as it may deem reasonably practicable. The Depositary shall, upon such sale, convert and distribute proceeds of such sale (net of applicable fees and charges of, and reasonable expenses incurred by, the Depositary and taxes) upon the terms hereof and of the Deposit Agreement. If the Depositary is unable to make any rights available to Holders or to arrange for the sale of the rights upon the terms described above, the Depositary shall allow such rights to lapse. The Depositary shall not be responsible for (i) any failure to determine that it may be lawful or practicable to make such rights available to Holders in general or any Holders in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale, or exercise, or (iii) the content of any materials forwarded to the ADR Holders on behalf of the Company in connection with the rights distribution.

Notwithstanding anything herein or in the Deposit Agreement to the contrary, if registration (under the Securities Act or any other applicable law) of the rights or the securities to which any rights relate may be required in order for the Company to offer such rights or such securities to Holders and to sell the securities represented by such rights, the Depositary will not distribute such rights to the Holders (i) unless and until a registration statement under the Securities Act (or other applicable law) covering such offering is in effect or (ii) unless the Company furnishes the Depositary opinion(s) of counsel for the Company in the United States and counsel to the Company in any other applicable country in which rights would be distributed in each case satisfactory to the Depositary, to the effect that the offering and sale of such securities to Holders and Beneficial Owners are exempt from, or do not require registration under, the provisions of the Securities Act or other applicable securities laws. In the event that the Company, the Depositary or the Custodian shall be required to withhold and does withhold from any distribution of property (including rights) an amount on account of taxes or other governmental charges, the amount distributed to the Holders of ADSs representing such Deposited Securities shall be reduced accordingly. In the event that the Depositary determines

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that any distribution in property (including Eligible Securities and rights to subscribe therefor) is subject to any tax or other governmental charges which the Depositary is obligated to withhold, the Depositary may dispose of all or a portion of such property (including Eligible Securities and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable to pay any such taxes or charges.

There can be no assurance that Holders generally, or any Holder in particular, will be given the opportunity to exercise rights on the same terms and conditions as the holders of Deposited Securities or be able to exercise such rights. Nothing herein or in the Deposit Agreement shall obligate the Company to file any registration statement in respect of any rights or Eligible Securities or other securities to be acquired upon the exercise of such rights.

Upon receipt of a notice indicating that the Company wishes property other than cash, Eligible Securities or rights to purchase additional Eligible Securities, to be made to Holders of ADSs, the Depositary shall determine whether such distribution to Holders is lawful and reasonably practicable. The Depositary shall not make such distribution unless (i) the Company shall have requested the Depositary to make such distribution to Holders, (ii) the Depositary shall have received the documentation contemplated in the Deposit Agreement, and (iii) the Depositary shall have determined that such distribution is reasonably practicable. Upon satisfaction of such conditions, the Depositary shall distribute the property so received to the Holders of record, as of the ADS Record Date, in proportion to the respective number of ADSs held by them and in such manner as the Depositary may deem practicable for accomplishing such distribution (i) upon receipt of payment or net of the applicable fees and charges of, and expenses incurred by, the Depositary, and (ii) net of any taxes withheld. The Depositary may dispose of all or a portion of the property so distributed and deposited, in such amounts and in such manner (including public or private sale) as the Depositary may deem practicable or necessary to satisfy any taxes (including applicable interest and penalties) or other governmental charges applicable to the distribution.

If the conditions above are not satisfied, the Depositary shall sell or cause such property to be sold in a public or private sale, at such place or places and upon such terms as it may deem practicable and shall (i) cause the proceeds of such sale, if any, to be converted into Dollars and (ii) distribute the proceeds of such conversion received by the Depositary (net of applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) to the Holders as of the ADS Record Date upon the terms hereof and of the Deposit Agreement. If the Depositary is unable to sell such property, the Depositary may dispose of such property in any way it deems reasonably practicable under the circumstances.

15. Fixing of ADS Record Date . Whenever the Depositary shall receive notice of the fixing of a record date by the Company for the determination of holders of Deposited Securities entitled to receive any distribution (whether in cash, Eligible Securities, rights or other distribution), or whenever for any reason the Depositary causes a change in the number of Deposited Securities that are represented by each ADS, or whenever the Depositary shall receive notice of any meeting of, or solicitation of consents or proxies of, holders of Deposited Securities, or whenever the Depositary shall find it necessary or convenient in connection with the giving of any notice, solicitation of any consent or any other matter, the Depositary shall fix a record date (the “ADS Record Date”) for the determination of the Holders

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of Receipts who shall be entitled to receive such distribution, to give instructions for the exercise of voting rights at any such meeting, to give or withhold such consent, to receive such notice or solicitation or to otherwise take action, or to exercise the rights of Holders with respect to such changed number of Deposited Securities represented by each ADS. The Depositary shall make reasonable efforts to establish the ADS Record Date as closely as possible to the applicable record date for the Deposited Securities (if any) set by the Company in the Republic of China. Subject to applicable law and the terms and conditions of this Receipt and the Deposit Agreement, only the Holders of Receipts at the close of business in New York on such ADS Record Date shall be entitled to receive such distributions, to give such instructions, to receive such notice or solicitation, or otherwise take action.

16. Voting of Deposited Securities . (a) Voting by Shareholders . The following is a summary of certain rights of holders of Shares, interests in Certificate(s) of Payment and Entitlement Certificate(s), if any, to vote at shareholders' meetings under ROC Company Law and the Articles of Incorporation of the Company, in each case, as in effect on the date hereof: (i) a holder of Shares (including holders of interests in any Certificate of Payment evidencing the irrevocable right to receive Shares) is entitled to one vote for each Share held, (ii) the election of directors and supervisors takes place by means of cumulative voting, and (iii) a shareholder must, as to all matters subject to a vote of shareholders (other than the election of directors and supervisors), exercise the voting rights for all Shares held by such shareholder in the same manner ( e.g. , a holder of 1,000 Shares cannot split his/her votes but must vote all 1,000 Shares in the same manner except in the event of cumulative voting for an election of directors and supervisors). Pursuant to ROC law, the voting rights attaching to the Deposited Securities must be exercised by, or on behalf of, the Depositary's nominee, as representative of the Holders and Beneficial Owners, collectively in the same manner, except in the case of an election of directors and supervisors, which currently should be on a cumulative basis. Deposited Securities which have been withdrawn from the applicable ADS Facility and timely transferred on the Company's register of shareholders to a person other than the Depositary may be voted by the Registered Holder(s) thereof directly, subject, in each case, to the limitations of ROC law and the Articles of Incorporation of the Company. Holders may not receive sufficient advance notice of shareholders' meetings to enable them to timely withdraw the Deposited Securities and vote at such meetings and may not be able to re-deposit the withdrawn securities under the terms of the Deposit Agreement.

(b) Voting by ADS Holders . Holders of ADSs have no individual voting rights with respect to the Deposited Securities represented by their ADSs. Each Holder shall, by acceptance of ADSs or acquisition of any beneficial interest therein, have authorized and directed the Depositary's nominee, without liability, to appoint the Chairman of the Board of Directors of the Company (or the Chairman's designate) (the “Voting Representative”), as representative of the Depositary's nominee, who is registered in the ROC as representative of the Holders and Beneficial Owners in respect of the Deposited Securities (the “Registered Holder”), to vote the Shares or Deposited Securities in accordance with the terms hereof.

The Company agrees to use its best efforts to timely notify the Depositary of any proposed shareholders' meeting and to timely provide to the Depositary in New York, at least twenty-four (24) calendar days before any ordinary shareholders' meeting or at least fourteen (14) calendar days before any extraordinary shareholders' meeting, a sufficient number of copies

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reasonably requested by the Depositary of an English language translation of the Company's notice of shareholders' meeting and the agenda of the materials to be voted on (in the form the Company generally makes available to holders of Shares in the ROC, including, without limitation, a list of candidates proposed by the Company for an election of directors or supervisors) (such materials collectively, the “Shareholder Notice”). As soon as practicable after receipt by the Depositary of the requisite number of Shareholder Notices, the Depositary shall establish the ADS Record Date (upon the terms of Paragraph (15) hereof and Section 4.9 of the Deposit Agreement) and shall, at the Company's expense and provided that no U.S. legal prohibitions exist, deliver to Holders as of the applicable ADS Record Date, (i) the Shareholder Notice, (ii) a depositary notice setting forth the manner in which Holders of ADSs may instruct the Depositary to cause the Deposited Securities represented by their ADSs to be voted under the terms of the Deposit Agreement, including a description of the Management Instruction (as defined below), together with a form of voting instructions and/or other means to provide voting instructions (the depositary notice and the related materials prepared by the Depositary collectively, the “Depositary Notice”). The Depositary is under no obligation to mail the Shareholder Notice and the Depositary Notice to Holders if the Company has failed to provide to the Depositary in New York the requisite number of Shareholder Notices at least twenty-four (24) calendar days prior to the date of any ordinary shareholders' meeting or at least fourteen (14) calendar days before the date of any extraordinary shareholders' meeting. If the Depositary has not delivered the Shareholder Notice or Depositary Notice to Holders, it will endeavor to cause all Deposited Securities represented by ADRs to be present at the relevant shareholders' meeting insofar as practicable and permitted under applicable law but will not cause the Shares or other Deposited Securities to be voted; provided , however , that the Depositary may determine, in its sole discretion, to send such Shareholder Notice and Depositary Notice to Holders and/or cause the Shares or other Deposited Securities to be voted as it deems appropriate. There can be no assurance that Holders generally or any Holder in particular will receive Shareholder Notices and Depositary Notices with sufficient time to enable the return of voting instructions to the Depositary in a timely manner.

Notwithstanding anything else contained in the Deposit Agreement, the Depositary shall not have any obligation to take any action with respect to any meeting, or solicitation of consents or proxies or instructions, of holders of Shares or other Deposited Securities if the taking of such action would violate U.S. laws.

(c) Voting of Deposited Securities Upon ADS Holders' Instructions . If Holders of ADSs together holding at least 51% of all the ADSs (including Temporary ADSs) outstanding as of the relevant ADS Record Date shall instruct the Depositary, prior to the date established for such purpose by the Depositary, to vote in the same manner in respect of one or more resolutions to be proposed at a shareholders' meeting (including resolutions for the election of directors and/or supervisors), the Depositary shall notify the Voting Representative as the representative of the Registered Holder to attend such shareholders' meeting and vote all Deposited Securities evidenced by ADSs then outstanding as of the ADS Record Date (including Temporary ADSs) in the manner so instructed by such Holders. If voting instructions are received by the Depositary on or before the date established by the Depositary for the receipt of such instructions from any Holder as of the ADS Record Date, which are signed but without further indication as to voting instructions, the Depositary shall deem such Holder to have instructed a vote in favor of the items set forth in such instructions. The Depositary and

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Custodian shall not have any obligation to monitor, and shall not incur any liability for, the actions, or the failure to act, of the Voting Representative (or his/her designate) as representative of the Registered Holder.

(d) Depositary Authorization . If, for any reason (other than a failure by the Company to supply the requisite number of Shareholder Notices to the Depositary within the requisite time period provided in the Deposit Agreement), the Depositary has not, prior to the date established for such purpose by the Depositary, received instructions from Holders together holding at least 51% of all ADSs (including Temporary ADSs) outstanding at the relevant ADS Record Date, to vote in the same manner in respect of any resolution (including resolutions for the election of directors and/or supervisors), then, subject to the following paragraph, the Holders shall be deemed to have authorized and directed the Depositary's nominee to authorize (the “Depositary Authorization”) the Voting Representative as the representative of the Registered Holder to attend and vote at such meeting all the Deposited Securities represented by ADSs then outstanding (including Temporary ADSs) in his or her discretion. In such circumstances, the Voting Representative shall be free to exercise the votes attaching to the Deposited Securities in any manner she/he wishes, which may not be in the interests of the Holders.

The Depositary's Authorization, provided in the manner and under the circumstances described in the preceding paragraph, shall be subject to the receipt by the Depositary prior to each shareholders' meeting of an opinion of ROC counsel of the Company addressed to, and in form and substance satisfactory to, the Depositary to the effect that under ROC law (i) the arrangements relating to the Depositary Authorization are permissible, and (ii) the Depositary will not be deemed to be authorized to exercise any discretion when causing the voting in accordance with Section 4.10 of the Deposit Agreement and will not (in the absence of negligence, bad faith or breach of contract, and subject to general principles of agency) be subject to any liability under ROC law for losses arising from the exercise of the voting arrangements set out in Section 4.10 of the Deposit Agreement on the grounds that voting in accordance with Section 4.10 of the Deposit Agreement is in violation of ROC law. In the event the Depositary does not receive such opinion, the Depositary will not grant the Depositary Authorization, but will cause the Deposited Securities to be present at the shareholders' meeting to the extent practicable and permitted by applicable law and will not cause the Deposited Securities to be voted.

The Depositary shall not, and the Depositary shall ensure that the Custodian and its nominees do not, vote or attempt to exercise the right to vote that attaches to the Shares or other Deposited Securities, other than in accordance with instructions given in accordance with Section 4.10 of the Deposit Agreement. The terms of Section 4.10 of the Deposit Agreement may be amended from time to time in accordance with the terms of the Deposit Agreement. By continuing to hold ADSs after the effective time of such amendment, all Holders and Beneficial Owners shall be deemed to have agreed to the terms of the Deposit Agreement as so amended.

17. Changes Affecting Deposited Securities . Upon any change in nominal or par value, split-up, cancellation, consolidation or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting the Company or to which it is a party, any securities which shall be received by the Depositary or the Custodian in exchange for, or in conversion of or replacement of or otherwise

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in respect of, such Deposited Securities shall, to the extent permitted by law, be substituted for and treated as Deposited Securities under the Deposit Agreement, and the Receipts shall, subject to the provisions of the Deposit Agreement and applicable law, evidence ADSs representing the right to receive such additional or replacement securities, as applicable. The Depositary may, with the Company's approval, and shall, if the Company shall so request, subject to the terms of the Deposit Agreement and receipt by the Depositary of (a) a written opinion of U.S. counsel (reasonably satisfactory to the Depositary) stating whether or not: (1) such exchange, conversion or replacement requires registration of such securities under the Securities Act and/or Exchange Act or (2) such exchange, conversion or replacement of such securities as then contemplated is exempt from the registration requirements of the Securities Act and/or Exchange Act and (b) a written opinion of ROC counsel (reasonably satisfactory to the Depositary) stating that (1) such exchange, conversion or replacement does not violate the laws or regulations of the Republic of China and (2) all requisite regulatory consents and approvals relating to such exchange, conversion or replacement have been obtained in the Republic of China, execute and deliver additional Receipts as in the case of a dividend of Eligible Securities, or call for the surrender of outstanding Receipts to be exchanged for new Receipts, in either case, as well as in the event of newly deposited Shares, with necessary modifications to the form of Receipt contained herein, specifically describing such new Deposited Securities or corporate change. Notwithstanding the foregoing, in the event that any security so received may not be lawfully distributed to some or all Holders, the Depositary may, with the Company's approval, and shall, if the Company requests, subject to receipt of an opinion of the Company 's counsel, satisfactory to the Depositary, that such action is not in violation of any applicable laws or regulations, sell such securities at public or private sale, at such place or places and upon such terms as it may deem proper and may allocate the net proceeds of such sales (net of (a) fees and charges of, and reasonable expenses incurred by, the Depositary and (b) taxes) for the account of the Holders otherwise entitled to such securities upon an averaged or other practicable basis without regard to any distinctions among such Holders and distribute the net proceeds so allocated to the extent practicable as in the case of a distribution received in cash pursuant to the Deposit Agreement. The Depositary shall not be responsible for (i) any failure to determine that it may be lawful or feasible to make such securities available to Holders in general or any Holder in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale, or (iii) any liability to the purchaser of such securities.

18. Exoneration . Neither the Depositary nor the Company shall be obligated to do or perform any act which is inconsistent with the provisions of the Deposit Agreement or incur any liability (i) if the Depositary or the Company shall be prevented or forbidden from, or delayed in, doing or performing any act or thing required by the terms of the Deposit Agreement and this Receipt, by reason of any provision of any present or future law or regulation of the United States, the Republic of China or any other country, or of any other governmental authority or regulatory authority or stock exchange, or on account of the possible criminal or civil penalties or restraint, or by reason of any provision, present or future of the Articles of Incorporation of the Company or any provision of or governing any Deposited Securities, or by reason of any act of God, terrorism or war or other circumstances beyond its control (including, without limitation, nationalization, expropriation, currency restrictions, work stoppage, strikes, civil unrest, revolutions, rebellions, explosions and computer failure), (ii) by reason of any exercise of, or failure to exercise, any discretion provided for in the Deposit Agreement or in the

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Articles of Incorporation of the Company or provisions of or governing Deposited Securities, (iii) for any action or inaction in reliance upon the advice or information from legal counsel, accountants, any person presenting Shares for deposit, any Holder, any Beneficial Owner or authorized representative thereof, or any other person believed by it in good faith to be competent to give such advice or information, (iv) for the inability by a Holder or Beneficial Owner to benefit from any distribution, offering, right or other benefit which is made available to holders of Deposited Securities but is not, under the terms of this Deposit Agreement, made available to Holders of ADS or (v) for any consequential or punitive damages for any breach of the terms of the Deposit Agreement. The Depositary, its controlling persons, its agents, any Custodian and the Company, its controlling persons and its agents may rely and shall be protected in acting upon any written notice, request or other document believed by it to be genuine and to have been signed or presented by the proper party or parties. No disclaimer of liability under the Securities Act is intended by any provision of the Deposit Agreement or this Receipt.

19. Standard of Care . The Company and its agents assume no obligation and shall not be subject to any liability under the Deposit Agreement or the Receipts to Holders or Beneficial Owners or other persons, except that the Company and its agents agree to perform their obligations specifically set forth in the Deposit Agreement without negligence or bad faith. The Depositary and its agents assume no obligation and shall not be subject to any liability under the Deposit Agreement or the Receipts to Holders or Beneficial Owners or other persons, except that the Depositary and its agents agree to perform their obligations specifically set forth in the Deposit Agreement without negligence or bad faith. Without limitation of the foregoing, neither the Depositary, nor the Company, nor any of their respective controlling persons, or agents, shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Securities or in respect of the Receipts, which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense (including reasonable fees and disbursements of counsel) and liability be furnished as often as may be required (and no Custodian shall be under any obligation whatsoever with respect to such proceedings, the responsibility of the Custodian being solely to the Depositary). The Depositary and its agents shall not be liable for any failure to carry out any instructions to vote any of the Deposited Securities, or for the manner in which any vote is cast or the effect of any vote, provided that any such action or omission is in good faith and without negligence and in accordance with the terms of the Deposit Agreement. Provided that the Depositary acts or omits to act in good faith and without negligence, the Depositary shall not incur any liability for any failure to determine that any distribution or action may be lawful or reasonably practicable, for the content of any information submitted to it by the Company for distribution to the Holders or for any inaccuracy of any translation thereof, for any investment risk associated with acquiring an interest in the Deposited Securities, for the validity or worth of the Deposited Securities or for any tax consequences that may result from the ownership of ADSs, Shares or Deposited Securities, for the credit-worthiness of any third party, for allowing any rights to lapse upon the terms of the Deposit Agreement, for the failure or timeliness of any notice from the Company. Nothing in this Receipt or in the Deposit Agreement shall cause the Depositary or any of its agents to incur any liability as a result of any action or failure to act by any trustee under a Trust Deed governing the Bonds.

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20. Resignation and Removal of the Depositary; Appointment of Successor Depositary . The Depositary may at any time resign as Depositary under the Deposit Agreement by written notice of resignation delivered to the Company, such resignation to be effective on the earlier of (i) the 60th day after delivery thereof to the Company, or (ii) upon the appointment of a successor depositary and its acceptance of such appointment as provided in the Deposit Agreement. The Depositary may at any time be removed by the Company by written notice of such removal which notice shall be effective on the earlier of (i) the 60th day after delivery thereof to the Depositary, or (ii) upon the appointment of a successor depositary and its acceptance of such appointment as provided in the Deposit Agreement. In case at any time the Depositary acting hereunder shall resign or be removed, the Company shall use its best efforts to appoint a successor depositary, which shall be a bank or trust company having an office in the Borough of Manhattan, the City of New York. Every successor depositary shall be required by the Company to execute and deliver to its predecessor and to the Company an instrument in writing accepting its appointment hereunder, and thereupon such successor depositary, without any further act or deed (except as required by applicable law), shall become fully vested with all the rights, powers, duties and obligations of its immediate predecessor other than as contemplated in the Deposit Agreement. The immediate predecessor depositary, upon payment of all sums due to it and on the written request of the Company, shall (i) execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder (other than as contemplated in the Deposit Agreement), (ii) duly assign, transfer and deliver all rights, titles and interests to the Deposited Securities to such successor, and (iii) deliver to such successor a list of the Holders of all outstanding Receipts and such other information relating to Receipts and Holders thereof as the successor may reasonably request. Any such successor depositary shall promptly provide notice of its appointment to such Holders. Any corporation into or with which the Depositary may be merged or consolidated shall be the successor of the Depositary without the execution or filing of any document or any further act.

21. Amendment/Supplement . This Receipt and any provisions of the Deposit Agreement may at any time and from time to time be amended or supplemented by written agreement between the Company and the Depositary in any respect which they may deem necessary or desirable without the prior written consent of the Holders or Beneficial Owners. Any amendment or supplement which shall impose or increase any fees or charges (other than the charges in connection with foreign exchange control regulations, and taxes and other governmental charges, delivery and other such expenses), or which shall otherwise materially prejudice any substantial existing right of Holders or Beneficial Owners, shall not, however, become effective as to outstanding Receipts until the expiration of thirty (30) days after notice of such amendment or supplement shall have been given to the Holders of outstanding Receipts. The parties hereto agree that any amendments or supplements which (i) are reasonably necessary (as agreed by the Company and the Depositary) in order for (a) the ADSs to be registered on Form F-6 under the Securities Act or (b) the ADSs to be traded solely in electronic book-entry form and (ii) do not in either such case impose or increase any fees or charges to be borne by Holders, shall be deemed not to materially prejudice any substantial rights of Holders or Beneficial Owners. Every Holder and Beneficial Owner at the time any amendment or supplement becomes effective shall be deemed, by continuing to hold such ADS(s), to consent and agree to such amendment or supplement and to be bound by the Deposit Agreement as amended or supplemented thereby. In no event shall any amendment or supplement impair the

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right of the Holder to surrender such Receipt and receive therefor the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law. Notwithstanding the foregoing, if any governmental body should adopt new laws, rules or regulations which would require amendment or supplement of the Deposit Agreement to ensure compliance therewith, the Company and the Depositary may amend or supplement the Deposit Agreement and this Receipt at any time in accordance with such changed laws, rules or regulations. Such amendment or supplement to the Deposit Agreement in such circumstances may become effective before a notice of such amendment or supplement is given to Holders or within any other period of time as required for compliance with such laws, rules or regulations.

22. Termination . The Depositary shall, at any time at the written direction of the Company, terminate the Deposit Agreement by providing notice of such termination to the Holders of all Receipts then outstanding at least thirty (30) days prior to the date fixed in such notice for such termination. If sixty (60) days shall have expired after (i) the Depositary shall have delivered to the Company a written notice of its election to resign, or (ii) the Company shall have delivered to the Depositary a written notice of the removal of the Depositary, and in either case a successor depositary shall not have been appointed and accepted its appointment as provided herein and in the Deposit Agreement, the Depositary may terminate the Deposit Agreement by providing notice of such termination to the Holders of all Receipts then outstanding at least thirty (30) days prior to the date fixed for such termination. On and after the date of termination of the Deposit Agreement, the Holder of a Receipt will, upon surrender of such Receipt at the Principal Office of the Depositary, upon the payment of the charges of the Depositary for the surrender of Receipts referred to in Paragraph (2) hereof and in the Deposit Agreement and subject to the conditions and restrictions therein set forth and subject always to the restrictions on withdrawal as may be in effect under the laws and regulations of the Republic of China, and upon payment of any applicable taxes or governmental charges, be entitled to Delivery, to him or upon his order, of the amount of Deposited Securities represented by such Receipt. If any Receipts shall remain outstanding after the date of termination of the Deposit Agreement, the Registrar thereafter shall discontinue the registration of transfers of Receipts, and the Depositary shall suspend the distribution of dividends to the Holders thereof, and shall not give any further notices or perform any further acts under the Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to Deposited Securities, shall sell rights as provided in the Deposit Agreement, and shall continue to deliver Deposited Securities, subject to the conditions and restrictions set forth in the Deposit Agreement, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for Receipts surrendered to the Depositary (after deducting, or charging, as the case may be, in each case the charges of the Depositary for the surrender of a Receipt, any expenses for the account of the Holder in accordance with the terms and conditions of the Deposit Agreement and any applicable taxes or governmental charges or assessments). At any time after the expiration of six (6) months from the date of termination of the Deposit Agreement, the Depositary may sell the Deposited Securities then held hereunder and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it hereunder, in an unsegregated account, without liability for interest for the pro rata benefit of the Holders whose Receipts have not theretofore been surrendered, such Holders thereupon becoming general creditors of the Depositary with respect to such net proceeds. After making such sale, the Depositary shall be discharged from all

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obligations under the Deposit Agreement with respect to the Receipts, the Deposited Securities and the ADSs, except to account for such net proceeds and other cash (after deducting, or charging, as the case may be, in each case, the charges of the Depositary for the surrender of a Receipt, any expenses for the account of the Holder in accordance with the terms and conditions of the Deposit Agreement and any applicable taxes or governmental charges or assessments). Upon the termination of the Deposit Agreement, the Company shall be discharged from all obligations under the Deposit Agreement except as set forth in the Deposit Agreement.

23. Compliance with U.S. Securities Laws . Notwithstanding any provisions in this Receipt or the Deposit Agreement to the contrary, the withdrawal or delivery of Deposited Securities will not be suspended by the Company or the Depositary except as would be permitted by Instruction I.A.(1) of the General Instructions to Form F-6 Registration Statement, as amended from time to time, under the Securities Act of 1933.

24. Certain Rights of the Depositary; Limitations . Subject always to the laws and regulations of the Republic of China and to the further terms and provisions of this Paragraph (24) and Section 5.10 of the Deposit Agreement, the Depositary, its Affiliates and their agents, on their own behalf, may own and deal in any class of securities of the Company and its Affiliates and in ADSs. In its capacity as Depositary, the Depositary shall not lend Deposited Securities or ADSs; provided, however, that the Depositary may, to the extent permitted by applicable law, (i) issue ADSs prior to the receipt of Eligible Securities pursuant to Section 2.3 of the Deposit Agreement and (ii) deliver Deposited Securities only upon the prior receipt of ADSs for cancellation upon withdrawal of Deposited Securities pursuant to Section 2.7 of the Deposit Agreement, including ADSs which were issued under (i) above but for which Eligible Securities may not have been received (each such transaction in (i) above a “Pre-Release Transaction”). The Depositary may receive ADSs in lieu of Eligible Securities under (i) above. Each such Pre-Release Transaction will be (a) subject to a written agreement whereby the person or entity (the “Applicant”) to whom ADSs or Deposited Securities are to be delivered (w) represents that at the time of the Pre-Release Transaction the Applicant or its customer owns the Eligible Securities that are to be delivered by the Applicant under such Pre-Release Transaction, (x) agrees to indicate the Depositary as owner of such Eligible Securities in its records and to hold such Eligible Securities in trust for the Depositary until such Eligible Securities are delivered to the Depositary or the Custodian, (y) unconditionally guarantees to deliver to the Depositary or the Custodian, as applicable, such Eligible Securities, and (z) agrees to any additional restrictions or requirements that the Depositary deems appropriate, (b) at all times fully collateralized with cash, United States government securities or such other collateral as the Depositary deems appropriate, (c) terminable by the Depositary on not more than five (5) business days' notice and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The Depositary will normally limit the number of ADSs and Eligible Securities involved in such Pre-Release Transactions at any one time to thirty percent (30%) of the ADSs outstanding (without giving effect to ADSs outstanding under (i) above), provided, however, that the Depositary reserves the right to disregard such limit from time to time as it deems appropriate and may, with the prior written consent of the Company, change such limit for purposes of general application.

The Depositary may also set limits with respect to the number of ADSs and Eligible Securities involved in Pre-Release Transactions with any one person on a case by case

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basis as it deems appropriate. The Depositary may retain for its own account any compensation received by it in conjunction with the foregoing. Collateral provided pursuant to (b) above, but not the earnings thereon, shall be held for the benefit of the Holders (other than the Applicant). Temporary COP ADSs, Temporary EC ADSs, Certificate of Payment and Entitlement Certificates shall not be eligible for Pre-Release Transactions hereunder.

In addition, to the extent permitted under applicable law, in its capacity as Depositary, the Depositary may, when a Holder of ADSs so requests, cause the Deposited Shares to be sold and deliver the proceeds of the sale prior to the receipt and cancellation of ADSs (each such transaction a “Pre-Cancellation Sale”) prior to the receipt of ADSs for cancellation. Each such Pre-Cancellation Sale will be (a) accompanied by or subject to a written agreement whereby the person or entity (the “Applicant”) to whom the proceeds of the sale of Deposited Securities are to be delivered which, (i) represents that at the time of the Pre-Cancellation Sale, the Applicant or its customer owns the ADSs that are to be delivered by the Applicant under such Pre-Cancellation Sale, (ii) agrees to indicate the Depositary as owner of such ADSs in its records and to hold such ADSs in trust for the Depositary until such ADSs are delivered to the Depositary, (iii) unconditionally guarantees to deliver to the Depositary such ADSs, and (iv) agrees to any additional restrictions or requirements that the Depositary deems appropriate; (b) at all times fully collateralized with cash, United States government securities or such other collateral as the Depositary deems appropriate; (c) terminable by the Depositary on not more than five (5) business days notice; and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate and may, with the prior written consent of the Company, change such limit for purposes of general application.

The Depositary will normally limit the number of Deposited Securities involved in such Pre-Cancellation Sales at any one time to thirty percent (30%) of the Deposited Securities outstanding, provided , however , that the Depositary reserves the right to disregard such limit from time to time as it deems appropriate.

(25) Right to Submit Proposals at Annual Ordinary Meeting of Shareholders .

(a) Proposals by Shareholders .

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year in a report on Form 6-K submitted to the Commission prior to the commencement of the 60 days closed period prior to the annual ordinary meeting of the Company’s shareholders), (iii) only one (1) matter for consideration at the annual ordinary meeting of the Company’s shareholders shall be allowed in each Proposal, and (iv) the proposing shareholder shall attend, in person or by a proxy, such annual ordinary meeting of the Company’s shareholders whereat his or her or its Proposal is to be discussed in the Chinese language and such proposing shareholder, or his or her or its proxy, shall take part in the discussion of such Proposal in the Chinese language. As the holder of the Deposited Securities, the Depositary or its nominee is entitled, provided the conditions of ROC law are satisfied, to submit only one (1) Proposal each year in respect of all of the Shares held on deposit as of the applicable Shareholder Proposal Record Date. Holders and Beneficial Owners of ADSs do not under ROC law have individual rights to submit Proposals to the Company for consideration at the annual ordinary meeting of the Company’s shareholders but may be able to submit Proposals to the Company for consideration at the annual ordinary meeting of the Company’s shareholders if the Beneficial Owners (i) timely present their ADSs to the Depositary for cancellation pursuant to the terms of the Deposit Agreement and become holders of Shares in the ROC prior to the expiration of the Submission Period and prior to the applicable Shareholder Proposal Record Date, and (ii) otherwise satisfy the conditions of ROC law applicable to the submission of Proposals to the Company for consideration at an annual ordinary meeting of the Company’s shareholders. Beneficial Owners of ADSs may not receive sufficient advance notice of an annual ordinary meeting of the Company’s shareholders to enable the timely withdrawal of Shares to make a Proposal to the Company and may not be able to re-deposit under the Deposit Agreement the Shares so withdrawn. The Company has informed the Depositary that a Proposal shall only be voted upon at the annual ordinary meeting of the Company’s shareholders if the Proposal is accepted by the board of directors of the Company as eligible in accordance with Article 172-1 of the ROC Company Law and the Company's Articles of Incorporation for consideration at an annual ordinary meeting of the Company’s shareholders.

(b) Single Proposal by Depositary or its Nominee on behalf of Beneficial Owners .

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after the applicable ADS Record Date, that the Submitting Holder(s) owned at least 51% of the ADSs outstanding as of the applicable ADS Record Date, and (ii) prior to the applicable ADS Record Date, that the Submitting Holder(s) will continue to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date and will provide the Second Proposal Certificate, as defined below, and (z) the name(s) and address(es) of the Submitting Holder(s) and the number of ADSs owned by each Submitting Holder (together with certified evidence of each Submitting Holder’s ownership of the applicable ADSs as of the Proposal Submission Date, in the case of (y)(ii) above, and the applicable ADS Record Date, in the case of (y)(i) above), (iv) if the Proposal Submission Date is prior to the applicable ADS Record Date, the Submitting Holder(s) must also provide, within five (5) Business Days after the applicable ADS Record Date, a second written certificate signed by each Submitting Holder, addressed to the Depositary and the Company and in a form satisfactory to the Depositary and the Company (the “ Second Proposal Certificate ”), certifying, inter alia , that the Submitting Holder(s) continued to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date (together with certified evidence of each Submitting Holder’s ownership of the applicable ADSs as of such applicable ADS Record Date), (v) the Proposal is accompanied by a joint and several irrevocable undertaking of all Submitting Holders (which undertaking may be contained in the First Proposal Certificate or the Second Proposal Certificate) that each such Submitting Holder shall pay all fees and expenses incurred in relation to the submission of the Proposal for voting at the annual ordinary meeting of the Company’s shareholders (including, but not limited to, the costs and expenses of the Submitting Holder(s), or his, her, its or their representative, to attend the annual ordinary meeting of the Company’s shareholders), (vi) the Shares registered in the name of the Depositary or its nominee as representative of the Holders and Beneficial Owners constitute one percent (1%) or more of the total issued and outstanding Shares of the Company as of the Shareholder Proposal Record Date, (vii) such Proposal contains only one (1) matter for consideration at the annual ordinary meeting of the Company’s shareholders, and (viii) the Submitting Holder(s), or his, her, its or their representative, attend(s) the annual ordinary meeting of the Company’s shareholders and take(s) part in the discussions of the Proposal in the Chinese language, provided further that only one (1) individual may attend, and take part in the discussion of the Proposal at such annual ordinary meeting on behalf of a Submitting Holder(s). Each Beneficial Owner hereby agrees and acknowledges that (i) if the Submitting Holder(s), or his, her, its or their representative, does not attend the annual ordinary meeting of the Company's shareholders, the chairman of such meeting may ask the attending shareholders to discuss, or not discuss, the Proposal, and (ii) in no event shall a Submitting Holder’s, or his, her, its or their representative's, presence at an annual ordinary meeting of the Company’s shareholders entitle such Submitting Holder(s), or his, her, its or their representative, to vote the Shares represented by such Submitting Holder’s ADSs (or any other ADSs) at such annual ordinary meeting of the Company’s shareholders.

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such five (5) Business Day period. In the event the Depositary receives more than one (1) Proposal by a Submitting Holder, or a group of Submitting Holders, each of which appears to satisfy the requirements set forth in the immediately preceding paragraph, the Depositary is hereby authorized and instructed to disregard all Proposals received from such Submitting Holder(s), except for the first Proposal received by the Depositary from such Submitting Holder(s) and shall submit such Proposal to the Company for consideration at the annual ordinary meeting of the Company's shareholders in accordance with the terms of the Deposit Agreement. The Depositary shall not have any obligation to verify the accuracy of the information contained in any document submitted to it by the Submitting Holder(s). Neither the Depositary nor its nominee shall be obligated to attend and speak at the annual ordinary meeting of the Company’s shareholders on behalf of the Submitting Holder(s).

(26) Right to Submit Nominations at Meeting of Shareholders.

(a) No Right Absent Amendment to Articles of Incorporation .

(b) Nominations by Shareholders .

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undertakes to announce publicly in a report on Form 6-K submitted to the Commission prior to the commencement of the 60 days (for an ordinary meeting) or 30 days (for an extraordinary meeting) closed period prior to the subject meeting of the Company’s shareholders), (iii) the Nomination shall contain the name, educational background and past work experience of each director candidate identified in the Nomination, (iv) the Nomination shall include a letter of consent issued by each director candidate identified in the Nomination consenting to act as director if she/he/it is elected as such, (v) a written statement by each director candidate assuring that she/he/it is not in violation of any of the circumstances set forth in Article 30 of the ROC Company Law, as amended, (vi) if a director candidate is a corporate shareholder of the Company (which cannot be the Depositary or its nominee), or such corporate shareholder's representative, additional information and documents reflecting the basic registration information of such corporate shareholder and the document certifying the number of Shares in its possession have been included, and (vii) any further conditions under Article 192-1 of the ROC Company Law, as amended, and of the Company’s amended Articles of Incorporation are so satisfied. In the event that the Company were to amend its Articles of Incorporation to adopt a Candidate Nomination System, as holder of the Deposited Securities, the Depositary or its nominee would be entitled, provided the conditions of the Company’s amended Articles of Incorporation are satisfied, to submit only one (1) Nomination for each meeting involving the election of directors in respect of all of the Shares held on deposit as of the Candidate Nomination Record Date. The Company shall promptly notify the Depositary of an amendment of its Articles of Incorporation adopting a Candidate Nomination System. Holders and Beneficial Owners of ADSs do not under ROC law have individual rights to submit Nominations to the Company for consideration at a meeting of the Company’s shareholders involving the election of directors but may be able to submit a Nomination to the Company for consideration at a meeting of the Company’s shareholders involving the election of directors if the Beneficial Owners (i) timely present their ADSs to the Depositary for cancellation pursuant to the terms of the Deposit Agreement and become holders of Shares in the ROC prior to the expiration of the Nomination Submission Period and prior to the Candidate Nomination Record Date, and (ii) otherwise satisfy the conditions of ROC law applicable to the submission of Nominations to the Company for consideration at a meeting of the Company’s shareholders involving the election of directors. Beneficial Owners of ADSs may not receive sufficient advance notice of a meeting of the Company’s shareholders involving the election of directors to enable the timely withdrawal of Shares to make a Nomination to the Company and may not be able to re-deposit under the Deposit Agreement the Shares so withdrawn. The Company has informed the Depositary that a Nomination shall only be voted upon at a meeting of the Company’s shareholders involving the election of directors if the Nomination is accepted by the board of directors of the Company as eligible in accordance with Article 192-1 of the ROC Company Law and the Company's Article of Incorporation for consideration at a meeting of the Company’s shareholders involving the election of directors.

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ADSs outstanding as of the applicable ADS Record Date (such Beneficial Owner(s), the “ Nominating Holder(s) ”), submit to the Company for consideration at a meeting of the Company’s shareholders involving the election of directors one (1) Nomination, provided that : (i) the number of director candidates contained in the Nomination shall not exceed the number of the directors to be elected at such meeting, (ii) the Nomination shall contain the name, educational background and past work experience of each director candidate identified in the Nomination, (iii) the Nomination shall include a letter of consent issued by each director candidate identified in the Nomination consenting to act as director if she/he/it is elected as such, (iv) a written statement by each director candidate assuring that she/he/it is not in violation of any of the circumstances set forth in Article 30 of the ROC Company Law, as amended, (v) if a director candidate is corporate shareholder of the Company (which cannot be the Depositary or its nominee), or such corporate shareholder's representative, additional information and documents reflecting the basic registration information of such corporate shareholder and the document certifying the number of Shares in its possession have been included, (vi) any further conditions under Article 192-1 of the ROC Company Law, as amended, and of the Company’s amended Articles of Incorporation are so satisfied, (vii) the Nomination is submitted to the Depositary by the Nominating Holder(s) at least two (2) Business Days prior to the expiration of the Nomination Submission Period, (viii) the Nomination is accompanied by a written certificate signed by each Nominating Holder, addressed to the Depositary and the Company and in a form satisfactory to the Depositary and the Company (the “ First Nomination Certificate ”), certifying, inter alia , (w) that each Nominating Holder has only endorsed the said Nomination, (x) that the Nominating Holder(s) own(s), individually or in the aggregate, at least 51% of the ADSs outstanding as of the date the Nomination is submitted by the Nominating Holder(s) to the Depositary (the “ Nomination Submission Date ”), (y) if the Nomination Submission Date is (i) on or after the applicable ADS Record Date, that the Nominating Holder(s) owned at least 51% of the ADSs outstanding as of the applicable ADS Record Date, and (ii) prior to the applicable ADS Record Date, that the Nominating Holder(s) will continue to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date and will provide the Second Nomination Certificate, as defined below, and (z) the name(s) and address(es) of the Nominating Holder(s) and the number of ADSs owned by each Nominating Holder (together with certified evidence of each Nominating Holder’s ownership of the applicable ADSs as of the Nomination Submission Date, in the case of (y)(ii) above, and the applicable ADS Record Date, in the case of (y)(i) above), (ix) if the Nomination Submission Date is prior to the applicable ADS Record Date, the Nominating Holder(s) must also provide, within five (5) Business Days after the applicable ADS Record Date, a second written certificate signed by each Nominating Holder addressed to the Depositary and the Company and in a form satisfactory to the Depositary and the Company (the “ Second Nomination Certificate ”), certifying, inter alia , that the Nominating Holder(s) continued to own at least 51% of the ADSs outstanding as of the applicable ADS Record Date (together with certified evidence of each Nominating Holder’s ownership of the applicable ADSs as of such applicable ADS Record Date), (x) the Nomination is accompanied by a joint and several irrevocable undertaking of all Nominating Holders (which undertaking may be contained in the First Nomination Certificate or the Second Nomination Certificate) that each such Nominating Holder shall pay all fees and expenses incurred in relation to the submission of the Nomination at the meeting of the Company’s shareholders, and (xi) the Shares registered in the name of the Depositary or its nominee as representative of the Holders and Beneficial Owners constitute one percent (1%) or more of the total issued and outstanding Shares of the Company

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as of the Candidate Nomination Record Date. Each Beneficial Owner hereby agrees and acknowledges that in no event shall the Depositary or its nominee be nominated by the Nominating Holder(s) for election as a director at a meeting of the Company's shareholders.

Upon the timely receipt by the Depositary of any Nomination which the Depositary reasonably believes to be in full compliance with the immediately preceding paragraph, the Depositary shall submit a copy of such Nomination and of the other materials received from the Nominating Holder(s) to the Company prior to the expiration of the Nomination Submission Period. Any Nomination so submitted as to which the Depositary has not received within five (5) Business Days after the applicable ADS Record Date any Second Nomination Certificate required under the immediately preceding paragraph shall be deemed irrevocably withdrawn at the expiration of such five (5) Business Day period. In the event the Depositary receives more than one (1) Nomination by a Nominating Holder, or a group of Nominating Holders, each of which appears to satisfy the requirements set forth in the immediately preceding paragraph, the Depositary is hereby authorized and instructed to disregard all Nominations received from such Nominating Holder(s), except for the first Nomination received by the Depositary from such Nominating Holder(s) and shall submit such Nomination to the Company for consideration at a meeting of the Company's shareholders involving the election of directors in accordance with the terms of the Deposit Agreement. The Depositary shall not have any obligation to verify the accuracy of the information contained in any document submitted to it by the Nominating Holder(s). Neither the Depositary nor its nominee shall be obligated to attend and speak at the meeting of the Company’s shareholders involving the election of directors on behalf of the Nominating Holder(s).

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(ASSIGNMENT AND TRANSFER SIGNATURE LINES)

FOR VALUE RECEIVED, the undersigned Holder hereby sell(s), assign(s) and transfer(s) unto ______________________________ whose taxpayer identification number is _______________________ and whose address including postal zip code is ________________, the within Receipt and all rights thereunder, hereby irrevocably constituting and appointing ________________________ attorney-in-fact to transfer said Receipt on the books of the Depositary with full power of substitution in the premises.

Dated:

Name:________________________________

By:

Title:

NOTICE: The signature of the Holder to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatsoever.

If the endorsement be executed by an attorney, executor, administrator, trustee or guardian, the person executing the endorsement must give his/her full title in such capacity and proper evidence of authority to act in such capacity, if not on file with the Depositary, must be forwarded with this Receipt.

All endorsements or assignments of Receipts must be guaranteed by a member of a Medallion Signature Program approved by the Securities Transfer Association, Inc.

SIGNATURE GUARANTEED

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Legends

[The Receipts issued in respect of Partial Entitlement American Depositary Shares shall bear the following legend on the face of the Receipt: “This Receipt evidences American Depositary Shares representing partial entitlement' [common shares][interests in the global Certificates of Payment][Entitlement Certificates] of AU Optronics Corp., and as such do not entitle the holders thereof to the same per-security entitlement as other [common shares][interests in the global Certificates of Payment][Entitlement Certificates] (which are 'full entitlement' [common shares][interests in the global Certificates of Payment][Entitlement Certificates]) issued and outstanding at such time. The American Depositary Shares represented by this Receipt shall entitle holders to distributions and entitlements identical to other American Depositary Shares when the [common shares][interests in the global Certificates of Payment][Entitlement Certificates] represented by such American Depositary Shares become 'full entitlement' [common shares][interests in the global Certificates of Payment][Entitlement Certificates] ”.]

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TABLE OF CONTENTS

Page

ARTICLE I DEFINITIONS		3
SECTION 1.01.	Definitions	3
SECTION 1.02.	Effective Date	3
		4
ARTICLE II AMENDMENTS TO DEPOSIT AGREEMENT
SECTION 2.01.	Deposit Agreement	4
SECTION 2.02.	Principal Office	4
SECTION 2.03.	Submission of Proposals	4
SECTION 2.04.	Submission of Nominations	8

ARTICLE III AMENDMENTS TO THE RECEIPTS		12
SECTION 3.01.	Amendments to Receipts.	12
SECTION 3.02.	Addition to Receipts.	13

ARTICLE IV REPRESENTATIONS AND WARRANTIES		20
SECTION 4.01.	Representations and Warranties	20

ARTICLE V MISCELLANEOUS
SECTION 5.01.	New Receipts	21
SECTION 5.02.	Notice of Amendment to Holders	21
SECTION 5.03.	Indemnification	22

(i)

Exhibit 4.13

QUANTA DISPLAY INC.

2002 Employee Stock Option Plan

(Translation)

1.	Purpose

In order to attract and retain the professionals required by the Company and provide incentives for employees to stay on their jobs and boost employees’ loyalty to the Company that benefits both the Company and the shareholders, the Company hereby makes this employee stock option plan (“Plan”) in accordance with Article 28-3 of the Securities and Exchange Law and the Regulations Governing Offering and Issuance of the Securities by Issuers promulgated by the Securities and Futures Commission.

2.	Period of Grant

The Company may grant the options in one or more tranches within one (1) year from the date of receipt of notice from the relevant authority (“Authority”) indicating that the Company’s filing of the Plan with the Authority has become effective. The actual dates of grant will be determined by the Chairman of the Board of Directors of the Company (“Chairman”).

3.	Eligibility of Optionee

Each optionee shall be a full-time employee of either the Company or any of its domestic or overseas subsidiaries, in which the Company’s direct (indirect) shareholding is more than 50% with certain job grade or having special contribution to the Company. The record date to determine the eligibility will be determined by the Chairman and whether an employee is entitled to receive options, and the number of options to be received, shall be proposed by the human resource department in accordance with the relevant regulations at the time of grant and taking into consideration factors as relates to title, job grade, compensation, seniority, performance, contribution, or special achievement and the Company’s operation needs and the business development strategy and policy, further approved by the Chairman and submitted to the Board of Directors for approval.

The number of options granted to any optionee in any tranche shall not exceed ten percent (10%) of the total number of options granted in that trances, and the total number of options to be exercised by any optionee within each fiscal year shall not

exceed one percent (1%) of the outstanding common shares of the Company at the year end.

4.	Total Number of Options to be Granted

The total number of options authorized to be granted with respect to the Plan is 100,000,000 units, with one (1) unit entitled to subscribe one (1) common share of the Company. The total number of common shares of the Company reserved for issuance upon exercise of the options is 100,000,000 shares.

5.	Terms and Conditions

(1) The exercise price of the options shall be the net worth of the Company per share as shown in the most recent financial statements audited by the account .

(2)	Vesting Schedule

(i)	The grant period for options is six (6) years, during which employees may not transfer their options except to heirs. Upon the expiration of the grant period, unexercised options are deemed forfeited by the employee.

(ii)	Employees may exercise up to one-third of their options two years after the grant; employees may exercise up to two-thirds of their options three years after the grant; employees may exercise up to 100% of their options four years after the grant.

(iii)

After the Company grants options to an optionee, the Company shall have the right to revoke and cancel unvested options in the event that the optionees violates employment or work rules with gross negligence or the optionees’ job performance decreases significantly.

(iv)	The vesting period and percentage of options exercisable may be adjusted by the Board of Directors at the time of each issuance.

(3)	Type of Shares Underlying the Options

The common shares of the Company shall be the underlying shares.

(4)	If an optionee’s employment with the Company is terminated, the optionee shall settle options during the aforesaid grant period in accordance with the following provisions:

(i) In case of general termination (including voluntary termination, retirement, severance and layoff) — Vested options shall be exercised within thirty (30) days from the employment termination date. Unvested options shall become invalid on the employment termination date.

(ii) Transfer to Affiliates — In case the optionee is approved by the Company’s General Manager to transfer to an affiliate or other company due to the necessity of

the operations of the Company, the rights and obligations of the granted options shall not be affected by such transfer.

(iii) Temporarily on Leave Without Pay — In case the optionee is approved to be temporarily on leave without pay, vested options shall be exercised within thirty (30) days from the effective date of the temporary leave; otherwise, the right to exercise options shall be deferred until the optionee’s reinstatement. For unvested options, the accumulation of years of employment with respect to the vesting schedule set forth in Paragraph 5(2) above shall suspend during the period of the optionee’s temporary leave and shall resume after the optionee’s reinstatement, subject to the aforesaid grant period.

(iv) Work Injury — Options granted to the employees who are unable to remain on the job due to work injury will not be affected by such employees’ departure, provided that such options shall be exercised in accordance with the Plan.

(v) Death — The heir(s) of the deceased employee inherit(s) the options granted to the deceased employee and such options will not be affected by the death of the employee, provided that the heir(s) of the deceased employees shall exercise such options in accordance with the Plan. Inheriting shall be done in accordance with the Civil Code as well as the Regulations Governing Stock Affairs of Public Companies.

(vi) If optionees or their heir(s) do not exercise the options within the above prescribed period, unexercised options are deemed forfeited by the optionees or their heir(s).

(5) Manner to Handle the Forfeited Options — The Company will cancel all forfeited options without reissue.

6.	Underlying Shares

The Company will issue new common shares of the Company as the underlying shares.

7. Adjustments of the Exercise Price

(1) The exercise price shall be subject to adjustment in accordance with the following formula (to be rounded to the nearest NT$0.01), upon the occurrence of changes in paid-in capital of the Company (as a result of issuance of new shares for cash, capitalization of retained earnings or capital reserves, stock split and issuance of new shares for cash as underlying shares of global depositary receipts).

NEP = OEP x [N + [(p x n)/OEP]/(N+ n)

Where:

NEP = the exercise price after such adjustment

OEP = the exercise price before such adjustment

N = the number of outstanding common shares

P= the consideration to purchase the new shares per share.

n = the number of new common shares to be issued for cash or arising from the capitalization of retained earnings or capital reserves or stock split

Note 1: The number of treasury shares which have not been transferred or cancelled shall be deducted from the number of outstanding common shares .

Note 2: In the case of capitalization of retained earnings or capital reserves, or stock split, the consideration is zero.

Note 3: If the exercise price after adjustment exceeds the exercise price before adjustment, no adjustment shall be made.

Note 4: The exercise price will not be adjusted in case of issuance of new common shares in connection with mergers.

(2) After issuance of the options, if the Company distributes cash dividends, the exercise price shall be adjusted in accordance with the same ratio.

8. Issuance of Additional Options

Upon the occurrence of the Company’s capitalization of retained earnings and capital reserves, in addition to adjusting the exercise price in accordance with provisions set forth in Paragraph 7(1) above, the Company will issue additional options in proportion to the increase of paid-in capital (only integral options will be issued and any fractional options resulting therefrom will be disregarded) at the adjusted price to holders of existing unvested or unexercised options, provided that there are sufficient common shares reserved for granting the options as specified in the Articles of Incorporation of the Company.

9. Procedures for Exercising Options

(1) Except during a period in which the shareholders’ book is closed in accordance with relevant laws; or, the period from three (3) business days prior to the date of public announcement to close shareholders’ book for stock dividends, cash dividends, or rights offering filed by the Company with the Taiwan Stock Exchange Corporation to the record date, optionee may exercise options in accordance with the vesting schedule set forth in Paragraph 5(2) above by submitting a written notice (the “Exercise Notice”) to the Company to purchase the newly issued common shares of the Company.

(2) The Company shall inform the optionee of the payment for exercising the options to a designated bank upon the receipt of the Exercise Notice. The Exercise Notice shall not be withdrawn once the payment has been made.

(3) The Company shall register the optionee and his/her shares in the shareholders record upon receipt of the payment and shall issue and deliver the common shares of the Company to the optionee via the book entry system maintained by Taiwan Depository & Clearing Corporation within five (5) business days.

(4) The common shares so issued are listed and tradable on the Taiwan Stock Exchange upon delivery to the optionee.

(5) The Company shall file the amendment registration application with the relevant authority after the end of each quarter for change in the Company’s paid-in capital.

10. Rights and Obligations after Exercising Options

The holders of common shares of the Company issued upon exercise of the options shall have the same rights, obligations and privileges as holders of common shares of the Company.

11. Confidentiality and Restrictions on Disposal

(1) All employees who receive stock options of the Company must keep the matter confidential without inquiring other employees for information or disclosing related information to others, including but not limited to the number of options received and the interest related thereof. Violation by an employee of this provision shall be handled in accordance with Paragraph 5(2)(iii).

(2) Employees shall not transfer, hypothecate, or pledge their options and vested interest, or give them to others as gift or dispose them in any other manner.

12. Enforcement Rules

With respect to matters concerning the number of options to be granted, exercise of the options, payment and issuance of share certificate, other related procedures, and operation details and timing, the Company shall notify each option holders separately.

13. Other Important Provisions

(1) The Plan shall become effective upon obtaining approval from the Board of Directors of the Company and the Authority. Amendments to the Plan may be made due to change of the regulations, requests from the Authority or change of the objective environment and such amendment shall be submitted to the Board of Directors for approval and submitted to the Authority for record.

(2) Any other matters not set forth in the Plan shall be dealt with in accordance with the applicable laws and regulations.

Exhibit 4.14

QUANTA DISPLAY INC.

2003 Employee Stock Option Plan

(Translation)

1.	Purpose

2.	Period of Grant

3.	Eligibility of Optionee

Each optionee shall be a full-time employee of either the Company or any of its domestic or overseas subsidiaries, in which the Company’s direct (indirect) shareholding is more than 50% with certain job grade or having special contribution to the Company. The record date to determine the eligibility will be determined by the Chairman and whether an employee is entitled to receive options, and the number of options to be received, shall be approved by the approved by the Chairman in accordance with the relevant regulations at the time of grant and taking into consideration factors as relates to title, job grade, compensation, seniority, performance, contribution, or special achievement and the Company’s operation needs and the business development strategy and policy, and submitted to the Board of Directors for approval.

exceed one percent (1%) of the outstanding common shares of the Company at the year end.

4.	Total Number of Options to be Granted

5.	Terms and Conditions

(1) The exercise price of the options shall be the closing price of the Company’s common shares on the date that the options are granted. If the closing price of the Company’s common shares on the date that the options are granted is less than the par value, the exercise price of the options shall be the par value of the common shares.

(2)	Vesting Schedule

(i)	The grant period for options is six (6) years, during which employees may not transfer their options except to heirs. Upon the expiration of the grant period, unexercised options are deemed forfeited by the employee.

(ii)	Employees may exercise up to one-third of their options two years after the grant; employees may exercise up to two-thirds of their options three years after the grant; employees may exercise up to 100% of their options four years after the grant.

(iii)

(3)	Type of Shares Underlying the Options

The common shares of the Company shall be the underlying shares.

(4)	If an optionee’s employment with the Company is terminated, the optionee shall settle options during the aforesaid grant period in accordance with the following provisions:

(ii) Transfer to Affiliates — In case the optionee is approved by the Company’s General Manager to transfer to an affiliate or other company due to the necessity of

the operations of the Company, the rights and obligations of the granted options shall not be affected by such transfer.

(vi) If optionees or their heir(s) do not exercise the options within the above prescribed period, unexercised options are deemed forfeited by the optionees or their heir(s).

(5) Manner to Handle the Forfeited Options — The Company will cancel all forfeited options without reissue.

6.	Underlying Shares

The Company will issue new common shares of the Company as the underlying shares.

7. Adjustments of the Exercise Price

NEP = OEP x [N + [(p x n)/OEP]/(N+ n)

Where:

NEP = the exercise price after such adjustment

OEP = the exercise price before such adjustment

N = the number of outstanding common shares

P= the consideration to purchase the new shares per share.

n = the number of new common shares to be issued for cash or arising from the capitalization of retained earnings or capital reserves or stock split

Note 1: The number of treasury shares which have not been transferred or cancelled shall be deducted from the number of outstanding common shares .

Note 2: In the case of capitalization of retained earnings or capital reserves, or stock split, the consideration is zero.

Note 3: If the exercise price after adjustment exceeds the exercise price before adjustment, no adjustment shall be made.

Note 4: The exercise price will not be adjusted in case of issuance of new common shares in connection with mergers.

Note: 5: If the exercise price after adjustment is less than the par value, the exercise price shall be the par value of the common shares per share.

(2) After issuance of the options, if the Company distributes cash dividends, the exercise price shall be adjusted in accordance with the same ratio.

8. Issuance of Additional Options

9. Procedures for Exercising Options

(4) The common shares so issued are listed and tradable on the Taiwan Stock Exchange upon delivery to the optionee.

(5) The Company shall file the amendment registration application with the relevant authority after the end of each quarter for change in the Company’s paid-in capital.

10. Rights and Obligations after Exercising Options

The holders of common shares of the Company issued upon exercise of the options shall have the same rights, obligations and privileges as holders of common shares of the Company.

11. Confidentiality and Restrictions on Disposal

the interest related thereof. Violation by an employee of this provision shall be handled in accordance with Paragraph 5(2)(iii).

(2) Employees shall not transfer, hypothecate, or pledge their options and vested interest, or give them to others as gift or dispose them in any other manner.

12. Enforcement Rules

13. Other Important Provisions

(1) The Plan shall become effective upon obtaining approval from the Board of Directors of the Company and the Authority.

(2) Any amendment to the Plan and other matters not set forth in the Plan shall be dealt with in accordance with the applicable laws and regulations.

EXHIBIT 8.1

List of Subsidiaries

AU Optronics Corp., a corporation organized under the laws of the Republic of China, has eighteen subsidiaries:

(i)		AU Optronics (L) Corp., a corporation organized under the laws of Malaysia;

(ii)		AU Optronics Corporation America, a corporation organized under the laws of California, United States of America;

(iii)		AU Optronics Corporation Japan, a corporation organized under the laws of Japan;

(iv)		AU Optronics Europe B.V., a limited liability company incorporated under the laws of the Netherlands;

(v)		AU Optronics Korea Ltd., a corporation organized under the laws of South Korea;

(vi)		AU Optronics Singapore Pte. Ltd., a corporation organized under the laws of Singapore;

(vii)		AU Optronics (Shanghai) Corp., a corporation organized under the laws of the People's Republic of China;

(viii)		AU Optronics (Xiamen) Corp., a corporation organized under the laws of the People's Republic of China;

(ix)		AU Optronics (Suzhou) Corp., a corporation organized under the laws of the People's Republic of China;

(x)		Konly Venture Corp., a corporation organized under the laws of the Republic of China;

(xi)		Darwin Precisions (L) Corp., a corporation organized under the laws of Malaysia;

(xii)		Darwin Precisions (Suzhou) Corp., a corporation organized under the laws of the People's Republic of China;

(xiii)		Darwin Precisions (Xiamen) Corp., a corporation organized under the laws of the People's Republic of China;

(xiv)		QDI Development Limited, a corporation organized under the laws of the British Virgin Islands;

(xv)		Quanta Display Japan Inc., a corporation organized under the laws of Japan;

(xvi)		QDI International Limited, a corporation organized under the laws of the British Virgin Islands;

(xvii)		Tech-Well (Shanghai) Display Corp., a corporation organized under the laws of the People's Republic of China; and

(xviii)		Quanta Display Technology Investment Ltd., a corporation organized under the laws of the Republic of China.

EXHIBIT 12.1

Certification

I, Kuen-Yao (K.Y.) Lee, the Chief Executive Officer of AU Optronics Corp., or the registrant, certify that:

1.	I have reviewed this annual report on Form 20-F of AU Optronics Corp.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the company and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)	Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)	Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5.	The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: June 29, 2007


By:	/s/ KUEN-YAO (K.Y.) LEE
	Name:	Kuen-Yao (K.Y.) Lee
	Title:	Chief Executive Officer

EXHIBIT 12.2

Certification

I, Max Cheng, the Chief Financial Officer of AU Optronics Corp., or the registrant, certify that:

1.	I have reviewed this annual report on Form 20-F of AU Optronics Corp.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

(a)

(b)

(c)	Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)	Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5.	The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: June 29, 2007


By:	/s/ MAX CHENG
	Name:	Max Cheng
	Title:	Chief Financial Officer

EXHIBIT 13.1

906 Certification

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

Ladies and Gentlemen:

The certification set forth below is being submitted in connection with the Annual Report on Form 20-F for the year ended December 31, 2006 (the “Report”) for the purpose of complying with the Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Kuen-Yao (K.Y.) Lee, the Chief Executive Officer and Max Cheng, the Chief Financial Officer of AU Optronics Corp., each certifies that, to the best of his knowledge:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of AU Optronics Corp.

Date: June 29, 2007


By:	/s/ KUEN-YAO (K.Y.) LEE
	Name:	Kuen-Yao (K.Y.) Lee
	Title:	Chief Executive Officer


By:	/s/ MAX CHENG
	Name:	Max Cheng
	Title:	Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to AU Optronics Corp. and will be retained by AU Optronics Corp. and furnished to the Securities and Exchange Commission or its staff upon request.