TSMC Annual Report 2002 | Quarterlytics

FY2002 Annual Report · TSMC

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121, Park Ave. 3, Science-Based Industrial Park,
Hsin-Chu, Taiwan 300-77, R.O.C.
Tel: 886-3-578-0221 Fax: 886-3-578-1546
http://www.tsmc.com

Taiwan Semiconductor Manufacturing Company, Ltd.

Morris Chang, Chairman

TSE: 2330
NYSE: TSM

Taiwan Semiconductor
Manufacturing Company, Ltd.

Annual Report 2002

(cid:127) Taiwan Stock Exchange Market Observation Post System: http://mops.tse.com.tw (cid:127) TSMC annual report is available at http://www.tsmc.com/english/tsmcinfo/c0203.htm

Printed on March 12, 2003

TSMC SPOKESPERSON
Name: Harvey Chang
Title: Senior Vice President & CFO
Tel: 886-3-563-6688 Fax: 886-3-563-7000
Email: spokesperson@tsmc.com.tw

Acting Spokesperson
Name: J.H. Tzeng
Title: Public Relations Department Manager
Tel: 886-3-563-6688 Fax: 886-3-567-0121
Email: jhtzeng@tsmc.com.tw

AUDITORS
Company: T N SOONG & CO
Auditors: S. C. Huang, Edward Way
Address: 12F, 156, Sec. 3, Min-Sheng E. Rd.
Taipei, Taiwan 105, R.O.C.
Tel: 886-2-2545-9988 Fax: 886-2-2545-9966
Website: http://www.tns.com.tw

STOCK TITLE TRANSFER
Company: China Trust Commercial Bank
Transfer Agency Department

Address: 5F, 83, Sec. 1, Chung-Ching S. Rd.
Taipei, Taiwan 100, R.O.C.
Tel: 886-2-2361-3033 Fax: 886-2-2311-6723
Website: http://www.chinatrust.com.tw

DEPOSITARY BANK (ADR)
Company: Citibank, N.A.

Depositary Receipts Services

Address: 111 Wall Street

New York, NY10005, U.S.A.
Website: http://www.citibank.com/adr

ADR Shareholder Information
Toll Free: 1-877-248-4237

Outside USA: 1-816-843-4281

Email: citibank@em.fcnbd.com

TSMC's depositary receipts of the common shares are
listed on New York Exchange (NYSE) under the symbol
TSM. The information relating to TSM is available at
http://www.nyse.com and http://mops.tse.com.tw

TSMC WEBSITE: http://www.tsmc.com

MAJOR FACILITIES
Corporate Headquarters & FAB 2, FAB 5
121, Park Ave. 3
Science-Based Industrial Park
Hsin-Chu, Taiwan 300-77, R.O.C.
Tel: 886-3-578-0221 Fax: 886-3-578-1546

FAB 3
9, Creation Rd. 1
Science-Based Industrial Park
Hsin-Chu, Taiwan 300-77, R.O.C.
Tel: 886-3-578-1688 Fax: 886-3-578-1548

FAB 6
1, Nan-Ke North Rd.
Science-Based Industrial Park
Shan-Hwa, Tainan, Taiwan 741-44, R.O.C.
Tel: 886-6-505-2000 Fax: 886-6-505-2057

FAB 7
6, Creation Rd. 2
Science-Based Industrial Park
Hsin-Chu, Taiwan 300-77, R.O.C.
Tel: 886-3-578-5112 Fax: 886-3-577-3628

FAB 8
25, Li-Hsin Rd.
Science-Based Industrial Park
Hsin-Chu, Taiwan 300-77, R.O.C.
Tel: 886-3-567-8888 Fax: 886-3-566-2051

FAB 12
6, Li-Hsin Rd. 6
Science-Based Industrial Park
Hsin-Chu, Taiwan 300-77, R.O.C.
Tel: 886-3-563-6688 Fax: 886-3-563-7000

TSMC North America
2585 Junction Avenue
San Jose, CA 95134, U.S.A.
Tel: 1-408-382-8000 Fax: 1-408-382-8008

TSMC Europe B.V.
World Trade Center, Strawinskylaan 1145
1077 XX Amsterdam, The Netherlands
Tel: 31-20-305-9900 Fax: 31-20-305-9911

TSMC Japan K.K.
21F, Queen's Tower C, 2-3-5, Minato Mirai
Nishi-ku, Yokohama, Kanagawa, 220-6221, Japan
Tel: 81-45-682-0670 Fax: 81-45-682-0673

TSMC Shanghai Representative Office
Suite 4605, Plaza 66, 1266 Nanjing W. Rd.
Shanghai, China Postcode: 200040
Tel: 86-21-6288-3558 Fax: 86-21-6288-2528

TABLE OF CONTENTS

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LETTER TO THE SHAREHOLDERS

A BRIEF INTRODUCTION TO TSMC
Company Profile
Market Overview
Organization
Capital & Shares
Issuance of Corporate Bonds
Preferred Shares
Issuance of American Depositary Shares
Status of Employee Stock Option Plan (ESOP)
Status of Mergers and Acquisitions
Corporate Governance
Social Responsibility Information

OPERATIONAL HIGHLIGHTS
Business Activities
Customers
Raw Material Supply
Employees
Innovation
Efficiency
Quality
Environmental Protection & Expenditures
Important Contracts
Litigation Proceedings
Acquisition or Disposal of Property, Plant and Equipment

FINANCING PLANS AND IMPLEMENTATION
Preferred A Shares
Corporate Bond

FINANCIAL STATUS, OPERATING RESULTS, AND RISK MANAGEMENT
Financial Position
Operating Results
Cash Flow
Major Capital Expenditure
Long-Term Investment
Risk Management

FINANCIAL INFORMATION
Condensed Balance Sheet
Condensed Statement of Income
Financial Analysis
Condensed Interim Balance Sheet by Quarter
Condensed Interim Statement of Income by Quarter
Auditors' Opinions
Supervisors' Report
Financial Difficulties
Financial Statements & Independent Auditors' Report
Consolidated Financial Statements & Independent Auditors' Report
US GAAP Financial Information
Financial Forecast and Operation Results from 2001 to 2002

SPECIAL NOTES
Affiliates Information
Combined Financial Statements & Independent Accountants' Report
Internal Control System Execution Status
Major Issues on Record or Written Statements made by Any Director or Supervisor which
Specified his/her Dissent to Important Resolutions Passed by the Board of Directors
Private Placement Securities
Balance of TSMC Common Shares/ADR Acquired, Disposed of and Held by Subsidiaries
Major Decisions of Shareholder Meetings and Board Meetings
Legal Penalties
Other Necessary Supplement

LETTER TO THE SHAREHOLDERS

Dear Shareholders,

TSMC ("the Company") achieved financial results in 2002 better than those obtained by most

semiconductor companies. TSMC also gained market share and continued technology leadership. We

are pleased to report on these achievements below in detail:

Financial Results

TSMC closed its 2002 books with revenue of NT$160,961 million and net income after tax of

NT$21,610 million. Earnings per share (EPS) for the year 2002 was NT$1.14 on a fully diluted basis.

Compared with one year ago, these results represent a 27.9% growth rate in net sales, 49.2%

growth rate in net income after tax, and 52% growth rate in EPS.

Marketing & Sales

TSMC has gained market share in the dedicated foundry segment of the semiconductor

manufacturing sector continuously since 2000. By the estimates of IC Insights, TSMC's market share

of the foundry segment reached 56% in 2002, after 53% in 2001, and 49% in 2000. TSMC had

active business dealings with more than 200 customers in the past year.

Technology Advancement

TSMC kept its technology development at the forefront of the semiconductor industry in 2002.

TSMC's 0.13um process technology is in volume production with high yields. The Company also

implemented 90 nanometer process technology in a 300 mm facility (Fab 12) with the successful

production of 8M SRAM with good yield. Other R&D accomplishments worthy of note include: silicon

germanium (SiGe) RF BiCMOS process, 0.18 um CMOS Image Sensor Process, and 0.13um Embedded

Memory technology. Exploratory research currently undertaken by TSMC includes: FinFET transistors;

strained silicon and silicon-on-insulator (SOI) application; and Magnetic RAM (MRAM).

TSMC

Annual Report 2002

TSMC

Annual Report 2002

2003 Production Plan*

Quantity: thousand pcs 8-inch wafer

795

676

675

482

430

Capacity and Capital Expenditures

.Acknowledgement

TSMC production capacity, expressed in the unit of 8-inch equivalent wafers, was 3.9 million wafers

in 2002. Thirty-six percent of the production capacity was capable of advanced technologies (e.g.

0.18um, 0.15um and 0.13um). This is an improvement over 2001 when the advanced technology

capacity represented only 22% of the annual production capacity of 4.4 million wafers.

Capital expenditure in 2002 amounted to approximately NT$54.4 billion (equivalent to US$1.6

billion), 20% lower than a year ago. The majority of the expenditure was for the ramp up of Fab 12

We would like to extend our deepest appreciation to our customers, shareholders, and employees for their continued support and

dedication. We close this letter with sincere wishes for your good health and prosperity in 2003.

221

242

production capacity and infrastructure development for new 300mm fabs. With Fab 12 (Phase I) in

commercial production, and Fab 14 (Phase I) ready for equipment installation, TSMC should be able

to ramp up production capacity promptly along with market demand.

Fab 2

Fab 3

Fab 5

Fab 6

Fab 7

Fab 8 Fab 12

* TSMC only: 3,521 thousand pcs 8-inch

wafers
Total TSMC managed capacity: 4,363
thousand pcs 8-inch wafers including
WaferTech, VIS, and SSMC

2003 Sales Plan by Technology

Quantity: thousand pcs 8-inch wafer

>=0.50 um 18%

0.35 um 12%

0.25 um 21%

0.18 um 22%

0.15 um 13%

<=0.13 um 14%

TSMC

Annual Report 2002

Recognition & Awards

TSMC's superior performance continues to attract recognition and credit from around the world.

Among the numerous media surveys conducted in 2002 (e.g. Asiamoney, Euromoney, FinanceAsia,

IR Magazine, CommonWealth Magazine, etc), TSMC continued to stand out as a corporate role

model. The awards that TSMC received in 2002 covered areas ranging from overall management,

financial management, investor relationship, quality management, to social responsibility. TSMC also

received the Corporate Innovation Award from IEEE in June 2002.

Outlook

We are confident that the world semiconductor industry continues to be one of the higher growth

industries. TSMC believes that the world semiconductor industry will register a moderate growth rate

in 2003 over 2002. We believe that the foundry segment is likely to report a higher growth rate than

that of the industry as a whole. TSMC subscribes to the view that the value of foundry output could

account for about 30% world IC markets by 2010; up from 16% in 2001.

Morris Chang,
Chairman and CEO

F.C. Tseng,
Deputy CEO

Rick Tsai,
President and COO

Morris Chang,
Chairman and CEO

F.C. Tseng,
Deputy CEO

TSMC

Annual Report 2002

A BRIEF INTRODUCTION TO TSMC

1. Company Profile

TSMC was founded on February 21, 1987 at Hsinchu Science-Based Industrial Park, Taiwan. The
common shares of TSMC are listed on Taiwan Stock Exchange (TSE); the depositary receipts of the
common shares are listed on New York Stock Exchange (NYSE) under the symbol TSM.

The establishment of a dedicated integrated circuit (IC) foundry by TSMC was the first of its kind in
the world. TSMC remains the world's largest dedicated IC foundry to this day. TSMC's charter prevents
it from designing, manufacturing, or marketing IC products under its own brand name. This makes
TSMC a desirable partner, free from potential conflict of business with its customers.

TSMC operates one 6-inch wafer fab (Fab 2), five 8-inch wafer fabs (Fab 3, 5, 6, 7, and 8), and two
12-inch fabs (Fab 12 and 14). The Company also has capacity commitments in its subsidiary
WaferTech in the United States, its affiliate Vanguard International Semiconductor Corporation (VIS)
in Taiwan, and a joint venture (with Philips Semiconductor) under the name of Systems on Silicon
Manufacturing Company (SSMC) in Singapore. The total installed annual capacity of TSMC and
affiliates amounted to 3.9 million 8-inch equivalent wafers by the end of 2002.

TSMC views its role as a responsible corporate citizen seriously. The Company is committed to
community service and maintaining strong stakeholder relationships.

TSMC's Board of Directors (the "Board") is comprised of experienced businessmen and distinguished
scholars. The Board upholds the financial integrity and management soundness of TSMC. Sir Peter
Bonfield (formerly CEO and Chairman of Executive Committee, British Telecommunications) and
Professor Lester Thurow of M.I.T., joined TSMC as independent directors in 2002. In addition,
Professor Michael Porter became a Supervisor. An Audit Committee was established to oversee the
integrity of TSMC's financial and audit systems.

1.1 Core Values

Integrity- Integrity is a fundamental value of the Company. This commitment to integrity can best be
illustrated by our strong corporate governance efforts as well as the demand of honesty and
uprightness for all TSMC employees.

Customer Orientation- TSMC believes that superior customer service has been what distinguished
the Company from its peers in the dedicated IC foundry segment of the semiconductor industry. All in
all, TSMC believes that premium service results in premium return to shareholders.

Innovation- TSMC believes in the potential and capability in everyone to innovate. Future emphasis
will be to apply the spirit of innovation to every aspect of the Company's business, from the way we
think to the way we act.

Commitment- TSMC believes that commitment is the driving force that makes things happen. TSMC
asks its entire staff their personal commitments to their jobs and to the Company. TSMC believes that
the welfare of the employees is best served when the welfare of the Company is duly taken care of.

1.2 Statement of Company Vision

Our vision is to be the most advanced, innovative and largest provider of foundry services, and in
partnership with our customers, to forge a most powerful force in the semiconductor industry. To
realize our vision, we must be:

(1) a technology leader, competitive with industry leaders,
(2) the manufacturing leader,
(3) the most reputable and service-oriented; and the greatest total-benefits provider.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

1.3 Corporate Recognition

The awards that honored TSMC in 2002 include:
• Most Popular Company in Taiwan (Global Views Monthly, June 2002);
• Most Admired Company in Taiwan (CommonWealth Magazine, October 2002- for the sixth consecutive year);
• Best Taiwan Company (Euromoney, December 2002);
• Best Managed Company & Best Investor Relations (Asiamoney, December 2002); and
• Corporate Innovation Award (IEEE, June 2002).

2. Market Overview

2.1 TSMC Achievements

TSMC not only maintained its leading position but also gained market share in the dedicated foundry segment of the semiconductor industry in
2002. The Company further solidified its leadership in manufacturing processes for geometries of 0.18um-and-below. In addition, TSMC
embarked on a number of programs to introduce new technologies in anticipation of the upcoming System-on-a-Chip (SoC) era.

2.2 Market Analysis

IC foundry is a manufacturing sub-segment of the IC industry. The total revenue of the dedicated IC foundry segment amounted to
US$8.4 billion in 2002, up 20% from a year ago. According to IC Insights, an IC market research company, the largest geographic
segment of the dedicated foundry market is the North America market; 63% of the dedicated foundry revenue came from companies
based in North America in 2002. The second largest market segment is the Asia Pacific market. The companies based in this region
accounted for 23% of the dedicated foundry revenue in 2002. This percentage is followed by 9% revenue contribution from companies
based in Europe, and 5% revenue contribution from companies based in Japan.

IC Insights estimated that in 2002, TSMC had a 56% market share of the dedicated foundry segment of the semiconductor industry.

2.3 Industry Growth Forecast

TSMC believes that the semiconductor industry will grow at a rate of about 8-10% in the coming decade. We expect that the dedicated
foundry segment will grow at a higher rate. The business associated with the faster growth fabless segment, when combined with the IDM
outsourcing trend, are expected to generate a stronger business demand for dedicated foundries than that of the industry average.

2.4 Foundry Market Outlook: Opportunities and Threats

TSMC believes that foundry services will play an increasingly important role in the IC industry as the industry continues to consolidate
worldwide. Industry analysts forecast that by 2005, about 25% of global IC production will come from foundries. However, falling wafer
average selling prices caused by excess capacity is a threat facing the IC industry. To capitalize on opportunities, to minimize competitive
threats, and to reduce risk, TSMC will continue focusing on the high growth segments.

Moreover, TSMC is committed to stay ahead of other foundry businesses in terms of advanced process development and services. TSMC's
emphasis on the development and introduction of technologies and support services in 2003 includes the following:

• Advanced Technologies (0.13um, 90nm on 300mm) for SoC;
• MS/RF Technologies;
• Embedded Memory Processes;

• Special Logic Processes (CMOS Image Sensor, Color Filter, High

Voltage, Liquid Crystal on Silicon);
• Premier Foundry Design Services; and
• Backend Services (In-House Bumping, Testing)

2.5 China Project

In September 2002, TSMC submitted to the Taiwan Government an application to invest in a semiconductor fabrication plant in
China. TSMC plans to equip the plant initially with used tools and machinery to be relocated from TSMC fabs. At the end of February
2003, the Government granted a "Phase I" approval for TSMC to begin the investment process. We expect to begin installing the tools and
machinery after the Government's Phase II approval is obtained.

TSMC earlier had entered into a Memorandum of Understanding (MOU) with the Songjiang Municipal Government. The MOU calls for
TSMC to build a semiconductor complex at the outskirts of Shanghai under the two major preconditions: (1) TSMC must first receive all
relevant Taiwan government approvals; and (2) there must be sufficient market demand for the plant's output.

The purpose for the investment is to enable TSMC to become a key participant in the Mainland China domestic semiconductor market.

3. Organization

3.1 Organization Chart

3.2 Function Description

China Project
• China development strategy

Research & Development
• Advanced technology research & development, mask operation,

and design services

Chief Information Officer
• Company-wide information infrastructure, e-Business strategy,

information systems development and operation

Chief Technology Officer
• Exploratory technology development and patent affairs management

Human Resources
• Human resources management and organizational development

Quality & Reliability
• Quality and reliability management

Internal Audit
• Internal audit and process compliance

Worldwide Marketing & Sales
• Marketing - strategy, technology and services marketing
• Business Operation - business plan and supply chain management

• Customer Service - customer loyalty and solution effectiveness
• Regional Operations - business development & account services

for North America, Europe, Japan, and Asian regions

Material Management & Risk Management
• Purchasing, warehousing, industrial safety, import & export,

logistic support, and environmental protection

Operations I
• Manufacturing operations (Fab 2, 3, 5, 6, 7, and 8), product

engineering, and back-end operations

Operations II
• Manufacturing operations (Fab 12 and 14), new fab planning,
manufacturing technology integration, production control,
industrial engineering, and operational efficiency

General Counsel
• Corporate legal affairs, contracts, patent and other intellectual property

matters

Chief Financial Officer & Spokesperson
• Finance and accounting services, including investor relations,
treasury, tax, assets management, financial and management
accounting

• Corporate spokesperson

TSMC

Annual Report 2002

TSMC

Annual Report 2002

3.3 Directors & Supervisors

Title
Name

Chairman
Morris Chang

Director
Lester Carl Thurow

Director
F.C. Tseng

Date
Elected

Term
Due

Shareholding when
Elected

Current Shareholding (Note 1)

Spouse & Minor
Shareholding (Note 1)

04/14/2000

June 2003

45,109,604

0.59%

91,669,112

0.46%

90,675

0.00%

Director
Peter Leahy Bonfield

05/07/2002

June 2003

0.00%

05/07/2002

June 2003

04/14/2000

June 2003

12,032,090

0.16%

30,356,889

0.15%

98,219

0.00%

Koninklijke Philips Electronics N.V.
Representatives: (Note 2)

04/14/2000

June 2003

1,295,885,897

16.89%

2,554,450,279

12.82%

Director
A.P.M. van der Poel

Director
J. C. Lobbezoo

Director
Jaap van Oost

Development Fund, Executive Yuan
Representatives: (Note 2)

Director
Chintay Shih

Chi Cherng Investment Co., Ltd.
Representative: (Note 2)

Director
Stan Shih

Koninklijke Philips Electronics N.V.
Representatives: (Note 2)

Supervisor
Robbert Brakel

Development Fund, Executive Yuan
Representatives: (Note 2)

Supervisor
George C. Shiu

Hsin Ruey Investment Co., Ltd.
Representative: (Note 2)

Supervisor
Michael E. Porter

04/14/2000

June 2003

1,158,545,600

15.10%

1,793,522,406

9.00%

04/14/2000

June 2003

984,000

0.01%

12,738,029

0.06%

04/14/2000

June 2003

1,295,885,897

16.89%

2,554,450,279

12.82%

04/14/2000

June 2003

1,158,545,600

15.10%

1,793,522,406

9.00%

04/14/2000

June 2003

641,500

0.01%

12,761,869

0.06%

TSMC
Shareholding
by Nominee
Arrangement
(Share)

Education & Selected Past Positions

Selected Current Positions

Ph.D., Electrical Engineering, Stanford University
Chairman, Industrial Technology Research Institute
President & COO, General Instrument Corporation

Chairman of Vanguard International Semiconductor Corp.
Chairman and/or Director of TSMC subsidiary companies

Engineering, Loughborough University of Technology
CEO and Chairman of the Executive Committee,
British Telecommunications Plc

Ph.D., Economics, Harvard University
Dean of Sloan School of Management, M.I.T.

Senior Non-Executive Director of AstraZeneca Group Plc, London
Director of L.M. Ericsson, Sweden
Director of Mentor Graphics Corporation Inc., Oregon, USA
Vice President of the British Quality Foundation
Member of the Citigroup International Advisory Board

Jerome and Dorothy Lemelson Professor of Management and Economics,
Sloan School of Management, M.I.T.
Director of Analog Devices Inc.

Ph.D., Electrical Engineering, National Cheng-Kung University
President, TSMC
President, Vanguard International Semiconductor Corp.

President and/or Director of TSMC subsidiary companies
Chairman of Global Unichip Corp.
Director of Vanguard International Semiconductor Corp.

B.S., Electronic Engineering, Eindhoven Technical University

Director of Koninklijke Philips Electronics N. V.
Executive Vice President Koninklijke Philips Electronics N. V.

B.A., Business Economics, Erasmus University

Chief Financial Officer, Philips Semiconductors B.V.

B.S., Economics, Erasmus University, Rotterdam

President & CEO, Philips Taiwan

Ph.D., Electrical Engineering, Princeton University

Director of Vanguard International Semiconductor Corp.
President, Industrial Technology Research Institute

M.S., Electrical Engineering, National Chiao Tung University
Chairman, CEO, Co-Founder, The Acer Group

Chairman of Acer Group
Director of Applied Materials, Inc.

Post Doctorate Controllers Programme (RC), Free University of Amsterdam

Vice President & Financial Controller Asia Pacific of Philips Semiconductors

Ph.D., Candidate in Economics, John Hopkins University

Deputy Executive Secretary, Development Fund, Executive Yuan
Director of Powerchip Semiconductor Corp.

Ph.D., Business Economics, Harvard University

Bishop William Lawrence University Professor, Harvard Business School

Managers Are Spouse or Within
Second-degree Relative of
Consanguinity to Each Other

Title

Name

Relation

Cash
Compensation
in 2002 (NT$)

13,504,802

67,742

13,504,798

54,019,192

26,769,596

120,000

13,384,798

120,000

54,019,192

26,769,596

120,000

13,384,798

67,742

Note 1: As reported on 02/28/2003
Note 2: Information on Directors & Supervisors that are Representatives of Juridical Person Shareholders

Directors / Supervisors that are
Representative of Juridical Person
Shareholders

Director : A.P.M. van der Poel
Director : J. C. Lobbezoo
Director : Jaap van Oost
Supervisor : Robbert Brakel

Director : Chintay Shih
Supervisor : George C. Shiu

Juridical Person Shareholders

Koninklijke Philips Electronics N.V.

Top Ten Shareholders of Juridical Person Shareholders, or Shareholders Owning More than 10%
of Juridical Person Shareholders

Top Ten Shareholders : Not Available
Shareholders Owned More than 10% Shares: None

Development Fund, Executive Yuan

Not Applicable

Director : Stan Shih

Chi Cherng Investment Co., Ltd.

Supervisor : Michael E. Porter

Hsin Ruey Investment Co., Ltd.

Chi Cherng is beneficially owned 100% by TSMC. TSMC has a 35.71% ownership interest in Chi Cherng,
the balance of the 64.29% ownership interest is held by the TSMC subsidiary Hsin Ruey Investment Co., Ltd.

Hsin Ruey is beneficially owned 100% by TSMC. TSMC has a 35.71% ownership interest in Hsin Ruey,
the balance of the 64.29% ownership interest is held by the TSMC subsidiary Chi Cherng Investment Co., Ltd.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

Independence Analysis of Board Members

Of the nine directors, seven are non-management members. Two (Messrs Peter Bonfield, Lester Thurow ) out of these seven members

are not shareholders and are also independent from any major shareholders of TSMC. Messrs Peter Bonfield, Lester Thurow, and Stan

Shih meet the requirement of independency of directors under NYSE proposed rulings.

Independence Analysis of Board Members Under Taiwan SFC Criteria

Taiwan SFC provides a set of criteria to determine the independence of Board Members. The specific criteria, and their applicability on

TSMC Board Members are shown below in details.

Independence Criteria of Directors & Supervisors

Name

Over five years
of experience in
business, finance,
legal or areas
required by the
Company

Not an
employee of the
Company, nor a
director,
supervisor or
employee of
affiliated
companies

Not a spouse nor
first- or second-
degree relative to
any person
specified in
columns 3 and 4

Not a natural
person
shareholder
directly or
indirectly
owning more
than 1% of the
Company's
outstanding
shares, nor one
of the
Company's top
ten natural
person
shareholders

Not a juridical
person or its
representative
as defined in
Article 27 of
Company Law

Criteria

Not a director,
supervisor or
employee of a
shareholder of
juridical person
of the Company
directly or
indirectly
owning more
than 5% of the
Company's
outstanding
shares nor one
of the
Company's top
five shareholders
of juridical
person

Not a director,
supervisor,
manager or
shareholder
holding more
than 5% of the
outstanding
shares of certain
companies or
institutions that
have financial or
business
relationship with
the Company

Not an owner,
partner, director,
supervisor, manager
of any sole
proprietor,
partnership,
company or
institution and
his/her spouse, or
the specialist and
his/her spouse, that
provides finance,
commerce, legal
consultation and
services to the
Company or
affiliated companies
within one year

Chairman
Morris Chang

Director
Peter Leahy Bonfield

Director
Lester Carl Thurow

Director
A.P.M. van der Poel

Director
Jan Lobbezoo

Director
Jaap van Oost

Director
Chintay Shih

Director
Stan Shih

Director
F. C. Tseng

Supervisor
Robbert Brakel

Supervisor
George C. Shiu

Supervisor
Michael E. Porter

Note 1

Note 2

"V" indicates meeting conditions specified above.
Note 1: Stan Shih represents the juridical person shareholder- Chi Cherng Investment Co., Ltd. that is a TSMC affiliated company.
Note 2: Michael Porter represents the juridical person shareholder- Hsin Ruey Investment Co., Ltd. that is a TSMC affiliated company.

Board of Directors
Composition
TSMC's Board of Directors consists of nine distinguished members. Their outstanding careers and breadth of experience cover the
high-technology industry, finance, business, as well as management sectors. Two independent directors, Sir Peter Bonefield, former CEO
of British Telecommunications, and Professor Lester Thurow of M.I.T., joined the TSMC Board in 2002. A complete list of TSMC's
directors, their qualifications and experiences can be found on page 10-11.

The Board convened four regular meetings and two special meetings in 2002. During each Board meeting, TSMC's senior managers
presented progress reports and important business issues as required by Taiwan law. The following table summarizes the attendance of
each Board member.

Name of Director

Morris Chang

F.C. Tseng

Peter L. Bonfield (Appointed on May 7, 2002)

Lester C. Thurow (Appointed on May 7, 2002)

A.P.M. van der Poel

Jan Lobbezoo

Paul Zeven

Jaap van Oost (Appointed on November 1, 2002 to replace Paul Zeven.)

Stan Shih

Chintay Shih

Number of Meetings of Board
Directors Attended in 2002

Responsibilities
The Company's management is legally responsible, inter alia, for day-to-day operations, preparation of financial statements, fund raising,
and investments. The activities of the Board do not supersede or alter those responsibilities. The Board's primary duty is to fulfill its
oversight responsibilities for the overall business and affairs of TSMC. Also, in conjunction with the Company's staff, the Board monitors
regulatory activities, such as amendments to Taiwan's laws, amendments to the U.S. SEC Rules and Regulations, and changes to the New
York Stock Exchange's listing requirements.

CEO's Appointment and Responsibility

TSMC's Board appoints the Chief Executive Officer (CEO) who is responsible for the Company's operation and policy implementation. The

CEO performs his duties in accordance with TSMC's Articles of Incorporation, applicable laws, and regulations.

Training Provided to Directors
From time to time, the company provides to TSMC directors and supervisors information from the Company concerning regulatory
limitations on conflicts of interest, stock trading as well as various other requirements under applicable laws and regulations. TSMC
management also arranges, periodically, orientation and training sessions for directors and supervisors. For example, in 2002, in addition
to the orientation provided to new directors and supervisor, at the request of the ROC Securities and Futures Commission, TSMC also
provided its directors with materials on the legal obligations and liabilities of directors of ROC listed companies.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

3.4 Management Team

Title
Name

Date
Effective

Shareholding

(Note 1)

Spouse & Minor

Shareholding
(Note 1)

Education & Selected Past Positions

Selected Current Positions

Managers are Spouse or Within Second-degree
Relative of Consanguinity to Each Other

Title

Name

Relation

TSMC Shareholding by
Nominee Arrangement
(Share)

Number of Employee
Stock Option Granted

Chairman & Chief Executive Officer
Morris Chang

03/03/1998

see page 10

Deputy Chief Executive Officer
F.C. Tseng

08/07/2001

see page 10

see page 11

President & Chief Operating Officer
Rick Tsai

08/07/2001

19,591,738

0.10%

0.00%

Ph.D., Material Science, Cornell University, USA
Executive Vice President, Worldwide Marketing and Sales, TSMC
President, Vanguard International Semiconductor Corp.

05/13/1997

19,995,152

0.10%

2,006,603

0.01%

Ph.D., Business Administration, University of Kentucky, USA
Vice President, Corporate Sales and Marketing , TSMC

02/03/1998

6,394,499

0.03%

0.00%

MBA, Wharton School, University of Pennsylvania, USA
Chairman, China Securities Investment Trust Corp.
President, China Development Corp.

11/07/2000

8,674,015

0.04%

0.00%

Ph.D., Electrical Engineering, Stanford University, USA
Vice President, Research and Development, TSMC
Department Manager, Device Research and Applications, Hewlett-Packard Company

08/07/2001

1,458,172

0.01%

0.00%

Ph.D., Nuclear Engineering and Applied Physics, Columbia University, USA
Vice President, Worldwide Sales & Services, IBM

09/05/2000

5,466,520

0.03%

41,608

0.00%

Master, Physics, National Tsing Hua University
Vice President, Tainan Site Operation, TSMC
President, TSMC-Acer Semiconductor Manufacturing Corp.

08/07/2001

5,069,556

0.03%

0.00%

03/03/1998

3,574,322

0.02%

968

0.00%

Ph.D., Electrical Engineering, University of Illinois, Champaign-Urbana, USA
Vice President, U.S. Subsidiary, TSMC North America
Director, Device and Flow Design, Semiconductor Process and Device Center,
Texas Instruments Incorporated

Ph.D., Electrical Engineering, Yale University, USA
Vice President, South Site Operation, TSMC
Senior Vice President, Chartered Semiconductor Manufacturing Ltd.

08/11/1998

4,294,842

0.02%

0.00%

Master, Management, Stanford University, USA
Regional Vice President, Lucent Technologies, Asia Pacific Ltd.

05/11/1999

7,959,370

0.04%

0.00%

08/11/2000

839,508

0.00%

Ph.D., Electrical Engineering and Computer Science, University of California, Berkeley, USA
Vice President, South Site Operation, TSMC
President, Worldwide Semiconductor Manufacturing Corp.

Ph.D., Electrical Engineering, Princeton University, USA
General Director, Electronic Research and Service Organization, Industrial Technology
Research Institute
President, Taiwan Semiconductor Industry Association

03/06/2001

760,782

0.00%

Ph.D., Physics, Columbia University, USA
Senior Vice President, Winbond Electronics Corp.
Vice President, Vanguard International Semiconductor Corp.

Senior Vice President &
Chief Information Officer
Quincy Lin

Senior Vice President
Chief Financial Officer & Spokesperson
Harvey Chang

Senior Vice President
Research & Development
Shang-Yi Chiang

Senior Vice President
Worldwide Marketing & Sales
Kenneth Kin

Vice President
Material Management &
Risk Management
J. B. Chen

Vice President
Research & Development
Ping Yang

Vice President
Operations I
C.C. Wei

Vice President
Human Resources
Swee-Huat Lee

Vice President
Operations II
Mark Liu

Vice President
Corporate Marketing
Genda Hu

Vice President
Business Operation
Chung-Shih Hsu

Chief Technology Officer
Chenming Hu

Vice President
Operations I
M.C. Tzeng

see page 11

Director of TSMC subsidiary companies
Director of Vanguard International Semiconductor Corp.

Director of TSMC subsidiary companies
Director of Shin-Etsu Handotai Taiwan
Director of W. K. Technology Fund IV
Director of Powertech Technology Inc.

Director and/or Supervisor of TSMC subsidiary companies
Director of System on Silicon Manufacturing Company Pte Ltd.
Director of Fubon Financial Holding Co., Ltd.
Supervisor of Vanguard International Semiconductor Corp.

Director of United Industrial Gases Co., Ltd.

Director of Global Unichip Corp.

Director of System on Silicon Manufacturing Company Pte Ltd.

Director of Hontung Venture Capital Co., Ltd.

CTO

Chenming Hu

Brother

08/07/2001

958,635

0.00%

Ph.D., Electrical Engineering and Computer Science, University of California, Berkeley, USA

Co-Chairman, Celestry Design Technologies, Inc.

Vice President

Genda Hu

Brother

08/07/2001

3,504.556

0.02%

502,750

0.00%

Master, Applied Chemistry, Chung Yuan University
Senior Director, Fab 2 Operation, TSMC

Manager

M.J. Tzeng

Brother

Vice President & General Counsel
Richard Thurston (Note 2)

02/08/2002

250,000

0.00%

J.D., Rutgers School of Law, State University of New Jersey, USA
Ph.D., History, University of Virginia, USA
Partner, Haynes Boone, LLP.
Vice President Corporate Staff, Assistant General Counsel, Texas Instruments Incorporated

Director of TSMC Partners, Ltd.

05/07/2002

309,646

0.00%

M.S., Materials Science and Engineering, Oregon State University, USA
Group Vice President, Applied Materials, Inc.
Vice Chairman, Applied Materials Taiwan, Ltd.

Vice President
Worldwide Customer Service
Chiam Wu (Note 2)

Note 1: As of 02/28/2003
Note 2: Appointed in 2002

TSMC

Annual Report 2002

TSMC

Annual Report 2002

Information on Net Change in Shareholding and Net Change in Shares Pledged by Directors, Supervisors, Management
and Shareholders of 10% Shareholdings or More:

Unit: Share

Stock Trade with Related Party: None

Stock Pledge with Related Party: None

2002

01/01/2003 ~ 02/28/2003

Net Change in
Shareholding

Net Change in
Shares Pledged (Note)

Net Change in
Shareholding

Net Change in
Shares Pledged (Note)

3.5 TSMC Long-Term Investments Ownership

Title
Name

Chairman & CEO
Morris Chang

Director
Peter Leahy Bonfield

Director
Lester Carl Thurow

Director & Supervisor
Koninklijke Philips Electronics N.V.
Representatives:

A.P.M. van der Poel
J. C. Lobbezoo
Jaap van Oost
Robbert Brakel

Director & Supervisor
Development Fund, Executive Yuan
Representative:
Chintay Shih
George C. Shiu

Director
Chi Cherng Investment Co., Ltd.
Representative: Stan Shih

Supervisor
Hsin Ruey Investment Co., Ltd.
Representative: Michael E. Porter

Director & Deputy CEO
F.C. Tseng

President & COO
Rick Tsai

Senior Vice President & CIO
Quincy Lin

Senior Vice President & CFO
Harvey Chang

Senior Vice President
S.Y. Chiang

Senior Vice President
Kenneth Kin

Vice President
J. B. Chen

Vice President
Ping Yang

Vice President
C.C. Wei

Vice President
Swee-Huat Lee

Vice President
Mark Liu

Vice President
Genda Hu

Vice President
Chung-Shih Hsu

CTO
Chenming Hu

Vice President
M.C. Tzeng

Vice President & General Counsel
Richard Thurston

Vice President
Chiam Wu

1,956,648

232,222,752

12,011,491

107,520,000

9,714,701

11,354,701

2,544,012

1,040,271

(130,000)

2,495,526

490,000

188,000

167,877

1,413,845

1,040,000

368,172

30,671

305,243

(576,609)

(512,000)

105,896

777,577

364,397

259,842

288,635

88,285

250,000

255,422

(60,000)

(81,000)

(75,000)

(27,000)

Long-Term Investment

Equity Method:

Ownership by TSMC (1)

Direct/Indirect Ownership by
Directors, Supervisors, and
Management (2)

As of 12/31/2002

Total Ownership
(1) + (2)

TSMC International Investment Ltd.

987,968,244

TSMC Partners, Ltd.

Systems on Silicon Manufacturing Co. Pte Ltd.

300,000

382,264

Vanguard International Semiconductor Corp.

556,133,496 (Note 2)

Emerging Alliance Fund

Not Applicable (Note 4)

Ya-Xin Technology Co., Ltd.

TSMC - North America

TSMC - Japan

34,125,000

11,000,000

6,000

100.0%

32.0%

25.3%

99.5%

100.0%

987,968,244

300,000

955,660

573,396

48.0% (Note 1)

649,827,621

29.5% (Note 3)

1,205,961,117

Not Applicable (Note 4)

34,125,000

11,000,000

6,000

Chi Cherng Investment Co., Ltd.

Not Applicable (Note 4)

35.7%

Not Applicable (Note 4)

64.3% (Note 5)

Not Applicable (Note 4)

Hsin Ruey Investment Co., Ltd.

Not Applicable (Note 4)

35.7%

Not Applicable (Note 4)

64.3% (Note 6)

Not Applicable (Note 4)

TSMC - Europe

Cost Method:

Traded

Amkor Technology

Monolithic System Tech.

Taiwan Mask Corp.

Non - Traded

United Industrial Gases Co. Ltd.

Shin-Etsu Handotai Taiwan Company Ltd.

Hontung Venture Capital

W.K. Technology Fund IV

Funds:

Horizon Ventures

Crimson Asia Capital

200

100.0%

200

505,050

470,346

0.3%

Not Available (Note 7)

1.6%

Not Available (Note 7)

505,050

470,346

8,793,780

2.1%

Not Available (Note 7)

8,793,780

16,782,937

10,500,000

8,391,608

5,000,000

10.8%

Not Available (Note 7)

7.0%

Not Available (Note 7)

10.5%

Not Available (Note 7)

1.9%

Not Available (Note 7)

16,782,937

10,500,000

8,391,608

5,000,000

Not Applicable (Note 4)

12.1%

Not Applicable (Note 4)

Not Available (Note 7)

Not Applicable (Note 4)

1.0%

Not Applicable (Note 4)

Not Available (Note 7)

Not Applicable (Note 4)

100.0%

80.0%

54.8%

99.5%

100.0%

0.3%

1.6%

2.1%

10.8%

7.0%

10.5%

1.9%

12.1%

1.0%

Note 1: Share interest held by Koninklijke Philips Electronics N.V.
Note 2: Did not include prepaid investment of NT$849,360,442 and an additional investment of NT$766,815,168 made in January, 2003. As a result, TSMC's ownership in Vanguard increased

from 25.3% to 28.1%.

Note 3: 29.1% owned by Development Fund, Executive Yuan
Note 4: Not applicable: These firms do not issue shares. TSMC's investment is measured as a percentage of ownership interest
Note 5: Ownership interest held by Hsin Ruey Investment Co., Ltd.
Note 6: Ownership interest held by Chi Cherng Investment Co., Ltd.
Note 7: Not available: Not all information is available to TSMC as of the report date

Note: This refers to the creation of security interest over TSMC shares in favor of creditors, usually in connection with a shareholder's own financing activities.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

4. Capital & Shares

4.1 History of Capitalization

Month
Year

Price

Par
Value

Amount

Sources of Capital

Authorized

Paid-in

Remark

Capital Increase
by Assets
other than Cash

02/1987

1,000

5,510,000

5,510,000,000

1,377,500

1,377,500,000

Founding

12/1988

1,000

5,510,000

5,510,000,000

2,204,000

2,204,000,000

Cash Offering

11/1989

1,000

5,510,000

5,510,000,000

3,306,000

3,306,000,000

Cash Offering

07/1990

1,000

5,510,000

5,510,000,000

3,360,797

3,360,797,000

Capitalization of Profits

12/1990

1,000

5,510,000

5,510,000,000

3,911,797

3,911,797,000

Cash Offering

07/1991

12/1991

12/1992

08/1993

07/1994

06/1995

05/1996

07/1997

07/1998

07/1999

11/1999

06/2000

220

08/2000

12/2000

07/2001

07/2002

551,000,000

5,510,000,000

391,179,700

3,911,797,000

Par Value Change from
NT$1000 to NT$10

551,000,000

5,510,000,000

473,829,700

4,738,297,000

Cash Offering

551,000,000

5,510,000,000

551,000,000

5,510,000,000

Cash Offering: NT$ 582,171,120
Capitalization of Profits:
NT$189,531,880

780,000,000

7,800,000,000

608,304,000

6,083,040,000

Capitalization of Profits

780,000,000

7,800,000,000

780,000,000

7,800,000,000

Capitalization of Profits

3,000,000,000

30,000,000,000

1,439,000,000

14,390,000,000

Capitalization of Profits

3,000,000,000

30,000,000,000

2,654,200,000

26,542,000,000

Capitalization of Profits

8,500,000,000

85,000,000,000

4,081,300,000

40,813,000,000

Capitalization of Profits

8,500,000,000

85,000,000,000

6,047,175,967

60,471,759,670

Capitalization of Profits

9,100,000,000

91,000,000,000

7,548,483,035

75,484,830,350

Capitalization of Profits

9,100,000,000

91,000,000,000

7,670,881,717

76,708,817,170

Conversion of ECB

17,800,000,000

178,000,000,000

9,990,849,423

99,908,494,230

Capitalization of Profits:
NT$21,320,311,040 and
Capital Surplus:
NT$1,879,366,020

17,800,000,000

178,000,000,000

10,105,849,423

101,058,494,230

Cash Offering (ADR)

17,800,000,000

178,000,000,000

11,689,364,587

116,893,645,870

Merger with WSMC &
TSMC-ACER

17,800,000,000

178,000,000,000

12,989,364,587

129,893,645,870

Cash Offering (Preferred Stock)

24,600,000,000

246,000,000,000

18,132,553,051

181,325,530,510

Capitalization of Profits

24,600,000,000

246,000,000,000

19,922,886,745

199,228,867,450

Capitalization of Profits

As of 02/28/2003
Unit: Share/NT$

Date of Approval &
Approval Document No.

02/21/1987
(76) Ko Chu She Tzu No. 065

12/19/1988
(77) Yuan Ching Tzu No. 15501

11/24/1989
(78) Yuan Ching Tzu No. 12823

07/23/1990
(79) Yuan Ching Tzu No. 08171

12/21/1990
(79) Yuan Ching Tzu No. 14632

07/18/1991
(80) Yuan Ching Tzu No. 08651

12/06/1991
(80) Yuan Ching Tzu No. 14252

12/30/1992
(81) Yuan Ching Tzu No. 17304

08/27/1993
(82)Yuan Ching Tzu No. 11830

07/21/1994
(83)Yuan Ching Tzu No. 09791

06/30/1995
(84) Yuan Shang Tzu No. 09473

05/29/1996
(85) Yuan Shang Tzu No. 08703

07/11/1997
(86) Yuan Shang Tzu No. 13347

07/13/1998
(87) Yuan Shang Tzu No. 016805

07/09/1999
(88) Yuan Shang Tzu No. 014308

11/24/1999
(88) Yuan Shang Tzu No. 025112

06/05/2000
(89) Yuan Shang Tzu No. 011645

06/30/2000
(89) Yuan Shang Tzu No. 013893

08/11/2000
(89) Yuan Shang Tzu No. 018254

12/18/2000
(89) Yuan Shang Tzu No. 027775

07/19/2001
(90) Yuan Shang Tzu No. 018039

07/15/2002
Yuan Shang Tzu No. 0910016373

4.2 Capital & Shares

Type of Stock

Issued Shares

Listed

Non-Listed

Total

Un-issued
Shares

Reserved Shares
for Convertible
Bond

Authorized Capital

Unit: Share

Total

Common Stock

Preferred Stock

18,622,886,745

1,300,000,000

3,299,511,937

1,377,601,318

24,600,000,000

TSMC

Annual Report 2002

4.3 Status of Shareholders

Stock: Preferred A Share

As of 05/22/2002 (last record date)

Government
Agencies

Financial
Institutions

Other Juridical
Person

Foreign Institutions
& Natural Persons

Domestic Natural
Persons

Number of Shareholders

Shareholding

Holding Percentage (%)

Stock: Common Share

0.00

1,299,925,653

99.99

0.00

Total

74,347

1,300,000,000

0.01

100.00

As of 06/25/2002 (last record date)

Government
Agencies

Financial
Institutions

Other Juridical
Person

Foreign Institutions
& Natural Persons

Domestic Natural
Persons

Number of Shareholders

122

939

1,645

422,284

Total

424,998

Shareholding

1,932,597,885

911,277,493

2,431,203,807

9,253,781,911

4,094,025,649

18,622,886,745

Holding Percentage (%)

10.38

4.89

13.06

49.69

21.98

100.00

4.4 Distribution Profile of Shareholder Ownership

Stock: Preferred A Share

As of 05/22/2002 (last record date)

Shareholder Ownership (Unit: Share)

Number of Shareholders

Total Shares Owned

Ownership %

1 ~ 999

1,000 ~ 5,000

5,001 ~ 10,000

15,001 ~ 20,000

Over 1,000,001

Total

Stock: Common Share

12,556

23,650

6,473

31,668

1,299,925,653

1,300,000,000

0.01%

99.99%

100.00%

As of 06/25/2002 (last record date)

Shareholder Ownership (Unit: Share)

Number of Shareholders

Total Shares Owned

Ownership %

1 ~ 999

1,000 ~ 5,000

5,001 ~ 10,000

10,001 ~ 15,000

15,001 ~ 20,000

20,001 ~ 30,000

30,001 ~ 40,000

40,001 ~ 50,000

50,001 ~ 100,000

100,001 ~ 200,000

200,001 ~ 400,000

400,001 ~ 600,000

600,001 ~ 800,000

800,001 ~ 1,000,000

Over 1,000,001

Total

78,780

230,933

53,869

21,686

10,221

9,884

5,146

2,737

5,496

2,889

1,524

484

304

172

873

424,998

30,354,269

520,123,773

372,134,973

257,132,644

175,093,734

237,005,623

177,173,376

122,672,028

379,510,296

398,759,920

420,357,320

236,762,227

210,068,996

153,878,778

0.16%

2.79%

2.00%

1.38%

0.94%

1.27%

0.95%

0.66%

2.04%

2.14%

2.26%

1.27%

1.13%

0.83%

14,931,858,788

18,622,886,745

80.18%

100.00%

TSMC

Annual Report 2002

As of 05/22/2002 (last record date)

TSMC's dividend policy is set forth in its Articles of Incorporation. Except as otherwise specified in the Articles of Incorporation, TSMC

4.7 Dividend Policy

4.5 Major Shareholders

Stock: Preferred A Share

No.

Shareholders

Stock: Common Share

No.

Shareholders

Total Shares Owned

Ownership %

As of 06/25/2002 (last record date)

Total Shares Owned

Ownership %

2,554,450,279

13.72%

Philips Electronic Building Elements Industries (Taiwan), Ltd.

1,299,925,653

99.99%

Koninklijke Philips Electronics N.V.

Development Fund, Executive Yuan

ADR-Taiwan Semiconductor Manufacturing Company, Ltd.

Philips Electronics Industries (Taiwan), Ltd.

JPMorgan Chase Bank, Taipei Branch Emerging Markets Growth Fund, Inc.

The Growth Fund of America, Inc.

JPMorgan Chase Bank, Taipei Branch in Custody for Europacific Growth Fund

Merrill Lynch International, Ltd.

1,793,522,406

1,753,357,072

1,490,108,183

440,684,965

309,023,000

267,644,209

248,499,234

JPMorgan Chase Bank, Taipei Branch in Custody for The New Perspective Fund, Inc.

221,462,384

Directorate General of Postal Remittances and Savings Banks

163,681,017

4.6 Other Share Information

Net Worth, Earnings, Dividends and Market Price Per Share

9.63%

9.42%

8.00%

2.37%

1.66%

1.44%

1.33%

1.19%

0.88%

Item

Market Price Per Share

Highest Market Price

Lowest Market Price

Average Market Price

Net Worth Per Share

Before Distribution

After Distribution

Earnings Per Share

2001

105.5

43.6

77.7

15.70

15.67

Weighted Average Shares (thousand shares)

16,832,554

0.83

0.75

4.00

93.61

Earnings Per Share

Earnings Per Share (Note 3)

Dividends Per Share

Cash Dividends

Stock Dividends

Dividends from Retained Earnings

Dividends from Capital Surplus

Accumulated Undistributed Dividend

Return on Investment

Price / Earning Ratio (Note 4)

Price / Dividend Ratio (Note 5)

Cash Dividend Yield Rate (Note 6)

Note 1: Pending shareholders' meeting resolution
Note 2: Financials of the period not yet finalized
Note 3: Retroactive adjustment for stock dividends and bonus to employees
Note 4: Price / Earning Ratio = Average Market Price / Earnings Per Share
Note 5: Price / Dividend Ratio = Average Market Price / Cash Dividends Per Share
Note 6: Cash Dividend Yield Rate = Cash Dividends Per Share / Average Market Price

TSMC

Annual Report 2002

2002

01/01/2003 - 02/28/2003

97.5

34.9

67.4

15.19

(Note 1)

18,580,700

1.14

(Note 1)

1.00
-

59.12

(Note 1)

50.5

40.2

45.1

(Note 2)

18,580,886

(Note 2)

shall not pay dividends when there is no profit for a particular fiscal year. TSMC profits may be distributed by way of cash dividend, stock

dividend, or a combination of cash and stock. Since TSMC is in a capital-intensive industry, profit distribution generally has been made by

way of stock dividend. The ratio for cash dividend shall not exceed 50% of the total distribution.

4.8 Distribution of Profit

The Board adopted the proposal for 2002 profit distribution at its Meeting on March 4, 2003. The proposed profit distribution will be

effected upon the shareholders approval at the Regular Shareholder Meeting in June 2003.

Directors & Supervisors Compensation

Cash Dividends to Preferred A Shareholders

Stock Dividends to Common Shareholders (Note 1)

Employee Profit Sharing (Note 2)
Employee Profit Sharing as % of the sum of Stock Dividends to Common Shareholders and Employee
Profit Sharing

Note 1: Equivalent to underlying number of shares: 1,489,830,940
Note 2: Equivalent to underlying number of shares: 153,901,299

Proposal to Distribute 2002 Profits

NT$58,484,489

NT$455,000,000

NT$14,898,309,400

NT$1,539,012,990

9.36%

2001 profit distribution set aside as Directors & Supervisors Compensation, and Employee Profit Sharing.

Board Resolution
(March 26, 2002)

Amount (NT$)

Actual Result

Underlying Number
of Shares

Dilution Rate % (on Common
Shares Outstanding as of
December 31, 2002)

Directors & Supervisors
Compensation (Cash)

Employee Profit Sharing
(Common Share)

133,847,984

1,070,783,880

107,078,388

Total

1,204,631,864

0.57

The EPS of 2001, 2002 may vary if "Directors & Supervisors Compensation" and "Employee Profit Sharing" were subject to different

accounting treatments:

Accounting Treatments

Treatment as Profit Distribution

Treatment as Expenses (Employee Profit Sharing expensed at par value)

2001 EPS

NT$ 0.83

NT$ 0.76

2002 EPS

NT$ 1.14

NT$ 1.05

4.9 Impact to 2003 Business Performance, EPS, and ROE Resulting from Stock Dividend Distribution: Not Applicable

TSMC is not required by Taiwan law to provide a 2003 financial forecast (see "Guidelines for Disclosure of Financial Forecast by Public

Companies").

4.10 Buyback of Treasury Stock during the period January 1, 2002 to February 28, 2003: None

TSMC

Annual Report 2002

5. Issuance of Corporate Bonds

5.1 Corporate Bonds

5.2 Convertible Bonds: None

As of 02/28/2003

5.3 Exchangeable Bonds: None

Issuance

Issuing Date

Denomination

Offering Price

Total Amount

Coupon Rate

Tenure

Guarantor

Trustee

Underwriter

Domestic Unsecured
Bond (I)

Domestic Unsecured
Bond (III)

Domestic Unsecured
Bond (IV)

Domestic Unsecured
Bond (V)

03/04/1998

10/21/1999

12/04/2000 - 12/15/2000

01/10/2002 - 01/24/2002

NT$1,000,000

NT$ 1,000,000
NT$10,000,000

NT$1,000,000
NT$5,000,000

Par

NT$4,000,000,000

NT$10,000,000,000

NT$15,000,000,000

7.71% p.a.

TrancheA: 5.67% p.a.
TrancheB: 5.95% p.a.

TrancheA: 5.25% p.a.
TrancheB: 5.36% p.a.

5 years
Maturity: 03/04/2003

TrancheA: 3 years
Maturity: 10/21/2002

TrancheB: 5 years
Maturity: 10/21/2004

TrancheA: 5 years
Maturity: 12/04/2005-
12/15/2005

TrancheB: 7 years
Maturity: 12/04/2007-
12/14/2007

TrancheA: 2.60% p.a.
TrancheB: 2.75% p.a.
TrancheC: 3.00% p.a.

TrancheA: 5 years
Maturity: 01/10/2007-
01/22/2007

TrancheB: 7 years
Maturity: 01/10/2009-
01/24/2009

TrancheC: 10 years
Maturity: 01/10/2012-

01/24/2012

The International
Commercial Bank of
China

Citibank Securities
(Taiwan)

TC Bank

The International
Commercial Bank of
China

TC Bank

Grand Cathay Securities

Private Placement

Legal Counsel

Lee & Li

Eluvzy International Law
Office

Yan-an International Law
Office

TN Soong & Co

5.4 Bonds with Warrants: None

6. Preferred Shares

6.1 Preferred A Share

Issue Date: 11/29/2000

Par Value

Issue Price

Number of Shares Issued

Total Issue Amount

As of 02/28/2003

NT$10

1,300,000,000

NT$13,000,000,000

Rights and Obligations

Dividend

Cash Dividend of 3.5% p.a. ; Cumulative

Distribution upon Liquidation

Up to Total Issue Amount (NT$13,000,000,000)

Voting Right

Others

Same as Common Share

Not Entitled for Stock Dividend

Auditor

Repayment

Outstanding

Redemption or Early
Repayment Clause

Covenants

Credit Rating

Bullet

Outstanding Shares

Redeemed/Converted

NT$4,000,000,000

NT$5,000,000,000

NT$15,000,000,000

Balance

NT$13,000,000,000

Condition for Redemption/Conversion

Redemption at Maturity (May 29, 2003) at Par

Customary Covenants

Not Rated

TSMC's Domestic
Unsecured Bond III has
received a rating of
"twAA" from Taiwan
Ratings Corporation on
09/20/1999

TSMC's Domestic
Unsecured Bond IV has
received a rating of
"twAA" from Taiwan
Ratings Corporation on
11/08/2000

TSMC's Domestic
Unsecured Bond V has
received a rating of
"twAA" from Taiwan
Ratings Corporation on
12/03/2001

Market Price

High

Low

Average

Not traded

Conversion/
Subscription Rights

Conversion/Subscription as of the Date of the
Annual Report Printed

None

Issue/Conversion/Subscription

No Conversion into Common Shares

Other
Rights of
Bondholders

Conversion Right

Impact/Dilution on Existing Shareholders and Preferred A Share Shareholders

Dividend Right of Preferred Share is Preferred to that
of Common Share

Amount of
Converted or
Exchanged Common
Shares, ADRs or
Other Securities as of
02/28/2003

Not Applicable

6.2 Preferred Share with Warrant: None

Dilution Effect
and Other Adverse Effects
on Existing Shareholders

Custodian

TSMC

Annual Report 2002

TSMC

Annual Report 2002

7. Issuance of American Depositary Shares

Issuing Date

10/08/1997

11/20/1998

01/12/1999 ~
01/14/1999

07/15/1999

08/23/1999 ~
09/09/1999

02/22/2000 ~
03/08/2000

04/17/2000

06/07/2000 ~
06/15/2000

05/14/2001 ~
06/11/2001

06/12/2001

11/27/2001

02/07/2002 ~
02/08/2002

11/21/2002 ~
12/19/2002

Issuance & Listing

NYSE

Total Amount (US$)

594,720,000

184,554,440

35,500,000

296,499,641

158,897,089

379,134,599

224,640,000

1,167,873,850

240,999,660

297,649,640

320,600,000

1,001,650,000

160,097,914

Offering Price per
ADS (US$)

24.78

15.26

17.75

24.516

28.964

57.79

56.16

35.75

20.63

16.03

16.75

8.73

Units Issued

24,000,000

12,094,000

2,000,000

12,094,000

5,486,000

6,560,000

4,000,000

32,667,800

11,682,000

14,428,000

20,000,000

59,800,000

18,348,000

Underlying
Securities

TSMC Common Shares
from Selling
Shareholders

TSMC Common Shares
from Selling
Shareholders
(Pursuant to ADR
Conversion Sale
Program)

TSMC Common Shares
from Selling
Shareholders

Cash Offering and
TSMC Common Shares
from Selling
Shareholders

TSMC Common Shares
from Selling
Shareholders
(Pursuant to ADR
Conversion Sale
Program)

TSMC Common Shares
from Selling
Shareholders

TSMC Common Shares
from Selling
Shareholders
(Pursuant to ADR
Conversion Sale
Program)

Common Shares
Represented

Rights and
Obligations of
ADS Holders

120,000,000

60,470,000

10,000,000

60,470,000

27,430,000

32,800,000

20,000,000

163,339,000

58,410,000

72,140,000

100,000,000

299,000,000

91,740,000

Same as those of
Common Share
Holders

Trustee

Not Applicable

Depositary Bank

Custodian Bank

ADSs Outstanding
(Note)

Apportionment of
expenses for the
issuance and
maintenance

Citibank, N.A.-
New York

Citibank, N.A.-
Taipei Branch

Citibank, N.A-
New York

Citibank, N.A.-
Taipei Branch

Citibank, N.A.-
New York

Citibank, N.A.-
Taipei Branch

Citibank, N.A.-
New York

Citibank, N.A.-
Taipei Branch

Citibank, N.A.-
New York

Citibank, N.A.-
Taipei Branch

Citibank, N.A.-
New York

Citibank, N.A.-
Taipei Branch

Citibank,N.A.-
New York

Citibank, N.A.-
Taipei Branch

Citibank, N.A.-
New York

Citibank, N.A.-
Taipei Branch

Citibank, N.A.-
New York

Citibank, N.A.-
Taipei Branch

Citibank, N.A.-
New York

Citibank, N.A.-
Taipei Branch

Citibank, N.A.-
New York

Citibank, N.A.-
Taipei Branch

Citibank, N.A.-
New York

Citibank, N.A.-
Taipei Branch

Citibank, N.A.-
New York

Citibank, N.A.-
Taipei Branch

24,000,000

46,222,650

48,222,650

71,407,859

76,893,859

83,453,859

87,453,859

144,608,739

156,290,739

170,718,739

259,006,235

318,806,235

369,019,413

All fees and expenses
such as underwriting
fees, legal fees, listing
fees and other
expenses related to
issuance of ADSs were
borne by the selling
shareholders, while
maintenance expenses
such as annual listing
fees and accountant
fees were borne by
TSMC

All fees and expenses
such as underwriting
fees, legal fees, listing
fees and other
expenses related to
issuance of ADSs were
borne by the selling
shareholders , while
maintenance expenses
such as annual listing
fees and accountant
fees were borne by
TSMC

Terms and Conditions in
the Deposit Agreement
and Custody Agreement

See Deposit
Agreement and
Custody Agreement
for Details

Closing Price per
ADS (US$)

2002

01/01/2003 -
02/28/2003

High

Low

Average

High

Low

Average

18.86

5.35

12.25

8.30

6.45

7.28

Note: TSMC has in aggregate issued 223,159,800 ADSs since 1997, which, if taking into consideration of stock dividend distributed over the period, would amount to 369,496,454 ADSs.

As of February 28, 2003, total number of outstanding ADSs was 369,019,413 after 477,041 ADSs were redeemed.
Stock dividend distributed in 1998, 1999, 2000, 2001 and 2002 was 45%, 23%, 28%,40% and 10% respectively.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

8. Status of Employee Stock Option Plan (ESOP)

10.2 Audit Committee

8.1 Issuance of Employee Stock Option

ESOP Granted

2002 - First Grant

2002 - Second Grant

As of 02/28/2003

The Board established an Audit Committee on August 6, 2002 to assist the Board in fulfilling its oversight responsibilities. The Audit
Committee reviews various matters, including: the Company's financial reports; the Company's auditing and accounting policies and
procedures; and the Company's systems of internal control.

Approval Date by the Securities and Futures Commission

Issue (Grant) Date

Number of Shares Issued

06/25/2002

08/22/2002

18,909,700

Percentage of Issued Shares to Outstanding Common Shares

0.10154%

Option Duration

Source of Option Shares

Vesting Schedule

Shares Exercised

Value of Shares Exercised (NT$)

Shares Unexercised

Grant Price Per Unexercised Share

10 years

New Common Share

2nd Year: up to 50%
3rd Year: up to 75%
4th Year: up to 100%

18,909,700

NT$53

Percentage of Shares Unexercised to Outstanding Common Shares

0.10154%

06/25/2002

11/08/2002

1,085,000

0.00583%

10 years

New Common Share

2nd Year: up to 50%
3rd Year: up to 75%
4th Year: up to 100%

1,085,000

NT$51

0.00583%

Impact to Shareholders' Equity

Dilution to Shareholders' Equity is Limited

TSMC's Audit Committee is empowered to conduct any study or investigation which it deems appropriate to discharge its
responsibilities. It has direct access to TSMC's internal auditors, the Company's outside independent auditors, as well as any employee of
the Company. The Committee is authorized to retain and oversee special legal, accounting, or other consultants it deems appropriate
fulfilling for its charter purposes.

The Audit Committee, by its charter, shall consist of 3~5 members. As of March 2003, four members comprised the Audit Committee:
two of whom are directors, and the other two are supervisors of TSMC. The Committee meets at least four times a year. The Chairman
of the Committee, when necessary, can call additional meetings. Audit Committee membership, rules and regulations may be changed
from time to time in order to comply with changing rules and regulations of applicable government agencies.

The Audit Committee held its first meeting on November 5, 2002. Meeting attendance was as follows:

Name of Member

Peter L. Bonfield (Designated on August 6, 2002)

Lester C. Thurow (Designated on August 6, 2002)

Michael E. Porter (Designated on August 6, 2002)

Robbert Brakel (Designated on August 6, 2002)

Number of Meetings of Audit
Committee Attended In 2002

8.2 ESOP Granted to Management Team and to Top Ten Employees with an Individual Grant Value

Number of Meetings Held in 2002

over NT$30,000,000: None

9. Status of Mergers and Acquisitions

TSMC acquired 52% of the shares of Global Unichip Corporation (GUC), a SoC design service company, through a merger of a wholly
owned subsidiary of TSMC, Ya-Xin Technology Co., Ltd., and GUC in January 2003. TSMC's ownership in GUC was subsequently
diluted to 47.3% in February 2003 after a capital call.

10. Corporate Governance

Maintaining the highest possible standards of corporate governance has been an integral part of TSMC's core values since its founding.
TSMC upholds and advocates operational transparency and respect for shareholder rights. TSMC believes that a sound and efficient Board of
Directors is the hub of successful corporate governance. In order to strengthen the structure and responsibilities of the Board in general, and
to reinforce TSMC's commitment to good corporate governance practices in particular, during 2002, TSMC invited outside professionals to
either join the Board (e.g. Sir Peter Bonfield, and Professor Lester Thurow) or to act as a Supervisor (e.g. Professor Michael Porter). TSMC also
established an Audit Committee comprising of independent directors and supervisors. During 2002, TSMC was recognized by Finance Asia
as having the best Corporate Governance of any Taiwan Corporation.

10.1 Summary of Articles of Incorporation

To fulfill the requirements of the ROC Company Law and regulatory requirements, the following sections of TSMC's Articles of
Incorporation have been drafted and revised as needed:

I - General Provisions

- Capital Stock
- Directors and Supervisors

Section
Section II
Section III
Section IV - Management of the Corporation
Section V - Financial Reports
Section VI - Supplementary Provisions

The last revision of these Articles of Incorporation was made at TSMC's Shareholder Meeting on May 7, 2002. Detailed information
regarding these Articles of Incorporation is available at the Company's website www.tsmc.com.

10.3 Shareholder Meetings

Meetings of TSMC's shareholders include both regular meetings and special meetings. The Board, in accordance with the ROC Company
Law, shall convene a regular shareholder meeting within six months of the end of each fiscal year. Generally, the shareholder meetings
are held in Hsinchu, Taiwan, where TSMC's head office is located. Shareholders or supervisors may convene special shareholder meetings
in accordance with relevant laws. The Board may also convene special shareholder meetings as needed. Notices of shareholder meetings
must be in writing, setting forth the location, time and purpose of the meeting and shall be sent to each shareholder at least thirty days
(in the case of regular meetings), or fifteen days (in the case of special meetings), prior to the date of each meeting.

Voting Rights
TSMC shareholders have one vote for each share held of record. Except as otherwise provided by relevant laws, shareholders may adopt a
resolution by a simple majority of the total issued and outstanding shares that are represented at a shareholder meeting where a majority of
the total issued and outstanding shares are present in person or by proxy. The election of directors and supervisors at a shareholder meeting is
by cumulative voting. Ballots for the election of directors are cast separately from those for the election of supervisors.

Holders of Preferred A Shares have the same voting rights as holders of common shares.

Other Rights of Shareholders & Procedures for Exercising Shareholders' Rights
Under the ROC Company Law, dissenting shareholders are entitled to appraisal rights in the event of merger, spin-off, or certain other
major corporate actions. A shareholder may exercise appraisal rights by serving written notice on TSMC prior to the related shareholder
meeting and/or by raising an objection at the shareholder meeting. In addition to appraisal rights, shareholders may also bring other
actions such as for the annulment of resolutions, or derivative actions in accordance with relevant laws and regulations.

Procedures of Putting Proposals at Shareholder Meetings
The Board proposes the agenda for shareholder meetings in accordance with the ROC Company Law and TSMC's "Rules and Procedures
of Shareholder Meeting" (the "Rules"). Shareholders may also propose special motions during shareholder meetings in accordance with
the Rules.

Ways that Shareholders Nominate Directors to Board and Supervisors
TSMC's directors and supervisors are elected in accordance with the ROC Company Law and TSMC's "Rules for Election of Directors and Supervisors".
Except as provided in the Company Law, TSMC does not adopt special provisions for nominating directors or supervisors by any shareholder.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

10.4 Taiwan Corporate Governance Implementation as Required by SFC

Item

1. Corporate Governance Structure & Principles

(1) Does the Company have Corporate Governance Model and cover all governance principles?

(2) Does the Company have good Internal Control System and implement it effectively?

2. Share Structure & Shareholders' Rights

(1) Does the Company have Shareholder Meeting Rules?

(2) Does the Company appoint responsible people to handle shareholder suggestions or disputes?

(3) Does the Company have Principal Shareholder List?

(4) Does the Company disclose major shareholders' share transaction activities?

(5) Does the Company and its affiliates have Risk Management Mechanism and Fire Wall?

3. Board Structure & Independency

(1) Does the Company have two or more independent directors?

(2) Does the Company's board have Audit Committee?

(3) Are Chairman and President different persons, and not connected by marriage or relationship of first-degree relative?

4. Responsibilities of Board & Management

(1) Does the Company have board meeting rules?

(2) Does the Company have any functional committees?

(3) Does the board regularly evaluate the independency of external auditors?

(4) Does the Company have responsibility insurance for directors?

(5) Does the Company provide training to directors?

(6) Does the Company have risk management policy and risk measures and implement it?

5. Supervisor's Composition, Responsibilities, and Independency

(1) Does the Company have one or more independent supervisor?

(2) Does the supervisor have communication channel with employees, shareholders, and stakeholders?

(3) Does the Company have supervisor meeting or meeting rules?

(4) Does the Company have responsibility insurance for supervisors?

(5) Does the Company provide training to supervisors?

6. Stakeholders Relationship

(1) Does the Company have communication channel with stakeholders?

(2) Does the Company deem its social responsibility important?

Implemented or Not

Implementation Status

Reason for Non-Implementation

Improvement Plans

Yes

Please refer to "Corporate Governance" section on page 26 of this Annual Report.

TSMC has established a thorough internal control system. TSMC implements its internal control
through the "Internal Control System" and "Internal Audit Program".

TSMC has established "Rules and Procedures of Shareholder Meeting" based on the relevant rules
and regulations of Taiwan.

TSMC has designated relevant departments to handle shareholder's suggestions or disputes.

TSMC keeps track of shareholdings of directors, supervisors, officers, and shareholders holding more
than 10% of the outstanding shares of TSMC.

TSMC regularly discloses major shareholders' transaction activities according to the relevant laws and
regulations of Taiwan.

TSMC has established relevant guidelines in its "Internal Control System".

Sir Peter Leahy Bonfield, Prof. Lester Carl Thurow, and Mr. Stan Shih meet the requirement of
independency of directors under NYSE proposed rulings. They meet all of the board independency
criteria under Taiwan SFC except that the directorship of Stan Shih arises from being the
Representative of juridical person shareholder Chi Cherng Investment Co., Ltd. Also refer to
page 12 "Independency Analysis of Board Members Under Taiwan SFC Criteria" for details.

TSMC's Board of Directors established an Audit Committee on August 6, 2002.

There is no family relationship between TSMC's Chairman and president.

TSMC's Board of Directors has established an Audit Committee.

The Audit Committee regularly evaluates the independency of external auditors.

TSMC has Directors & Officers Liability Insurance (D&O Insurance) for its directors.

Please refer to "Corporate Governance" section on page 26 of this Annual Report.

TSMC has risk management policy and risk measures under various internal policies and internal audit system.

One of TSMC's Supervisors, Prof. Michael Porter, meets the requirement of independency under
NYSE proposed rulings. Prof. Michael Porter meets all of the independency criteria set by Taiwan SFC
except that his appointment arises from being the Representative of a juridical person shareholder
Hsin Ruey Investment Co., Ltd. Also refer to page 12 "Independency Analysis of Board Members
Under Taiwan SFC Criteria" for details.

TSMC has bought D&O Insurance for its supervisors.

Please refer to "Corporate Governance" section on page 26 of this Annual Report.

TSMC has designated relevant departments to communicate with stakeholders.

TSMC established the "TSMC Education and Culture Foundation" in 1998 to perform its social
responsibilities.

This is a new Taiwan regulatory
requirement.

Rules will be adopted in accordance with
relevant regulations.

This is a new Taiwan regulatory
requirement.

A formal channel will be established
after consultation with SFC.

This is a new Taiwan regulatory
requirement.

A formal channel will be established
after consultation with SFC.

(3) Are directors actually disqualified from voting during the meetings of board of directors on the matters in which his interest conflicts

Yes

TSMC's Board has adopted this principle as a practice.

with TSMC's?

(4) Does the Company have consumer or client protection policy and its implementation status?

Not Applicable

TSMC does not sell consumer goods.

7. Information Disclosure

(1) Does the Company appoint responsible people to handle information collection and disclosure?

(2) Does the Company have spokesperson?

(3) Does the Company have corporate website to disclose financial and corporate governance information?

Yes

TSMC has designated relevant departments to handle the collection and disclosure of information as
required by relevant laws and regulations of Taiwan and other jurisdictions.

TSMC has designated a spokesperson as required by relevant regulation.

TSMC discloses its information through its website www.tsmc.com.tw.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

11. Social Responsibility Information

11.1 TSMC Education and Culture Foundation

11.2 Other Social Issues

Health and Safety Performance

Being both ISO 14001 and OHSAS 18001 certified since 1996, TSMC has gained the highest recognition in health-and-safety

TSMC believes that corporations can and should assume a more active role towards the society beyond their financial contributions. In

management and practice. TSMC offers comprehensive health care and employee assistance programs throughout all of its operating

this connection, the TSMC Education and Culture Foundation (the "TSMC Foundation") was established in 1998 as a formal vehicle to

sites. Health care programs include on-site physician consultation, and 24-hour on site service nursing. In addition, on-site fitness

facilitate education and culture development in Taiwan.

facilities as well as annual physical check-ups are available for all employees.

Dr. F.C. Tseng, Deputy CEO of TSMC, was appointed Chairman of the Foundation in 2002. The Foundation's activities in the past year

Policies and Procedures Relating to Adherence to Health and Safety

TSMC believes that its health and safety actions should not only meet relevant ESH legal requirements, but also be benchmarked against

recognized international practices. The Company's goals are to prevent incidents, improve employee safety and health, protect property,

prevent pollution, and above all use all resources effectively.

Equal Opportunity

Employees are recruited in line with the Company's operating needs and strategic directions. TSMC believes in equal opportunity and

values the diversity that its staff contributes. Recruitment is carried out via open selection based on merits of the candidates and

matching needs of each position to ensure selection of the best talents irrespective of race, gender, age, lifestyle, religion, nationality and

political affiliation.

Supplier Selection Process and Criteria Regarding Social and Environmental Parts

TSMC established an ESH Performance Evaluation System and linked it to the procurement system. This set-up helps the Company's

procurement policy to achieve a balance between quality, price and ESH. In 2002, TSMC also established a "Green Procurement

Procedure" to evaluate suppliers' environmental performances for supplier selection. The procedure requires suppliers to establish

Environmental Management System (EMS) and disclose hazardous substances content in their products.

Social and Environmental Impacts of TSMC's Outsourced Operations or Contractors

TSMC communicates regularly with its suppliers on ESH issues and encourages their improvements on ESH constantly. TSMC also

conducts periodical random audits to its suppliers and waste treatment contractors to assure that the required environmental

compliances are strictly adhered to.

Social and Environmental Impacts of TSMC's Suppliers

A life cycle assessment (LCA) study for TSMC was conducted in 2002. The functional unit is defined as per 8-inch wafer produced; and the

system boundary is investigated from internal data of TSMC to major suppliers and contractors. The study collected and calculated data from

energies, raw materials, and pollutants from silica, wafer production, wafer processing, and major chemicals needed, i.e., from cradle to gate.

included:

Commitment to Education

The highlight of the year is TSMC Esthetics Education Program. Dr. F. C. Tseng led the Foundation to launch a project to promote

esthetics education for elementary school students in rural Taiwan. By offering exposure to the fine arts at a young age, the Foundation

hopes to enable children to develop talents, creativity, and enhance art appreciation skills. TSMC Foundation continued in 2002 three

educational grant programs to National Tsing Hua University to help incubate emerging talents in high technology, corporate

management, and intellectual property rights. The collaboration with the IMBA program of National Chengchi University also extended

into 2002 to foster the cultivation of international business leaders.

Contribution to the Communities in which TSMC has fab operation

TSMC Foundation renders extensive services in communities where TSMC's facilities are located. The Foundation provides funding to

build a better community for both TSMC employees and neighbors. The Foundation focuses on art and cultural activities, environmental

protection issues, athletic events, as well as other programs to help enhance the quality of life.

Sponsorship of National Arts and Cultural Activities

Major national art and cultural events sponsored by TSMC Foundation in 2002 include: (1) The Taipei House Project- the restoration of

the former American Ambassador's Residence into a film exchange gateway for Taiwan's movie industry, (2) The World of Heavenly

Khan- Treasure of T'ang Dynasty Exhibition- In addition to exhibition sponsorships, the Foundation also hosted trips to visit the

exhibitions by students of elementary and junior high schools in the vicinity of TSMC fab sites.

Social Wellness and Other Programs

TSMC Foundation extended its sponsorship for the second year to support the training of 480 home caretakers by Red Cross of the

Republic of China (Taiwan), in the interest of servicing self-care living by senior citizens. TSMC Foundation was also a major sponsor to an

important student volunteer program with the purpose to promote student volunteer works in the community services of 319 towns in

Taiwan.

Recognitions & Awards

TSMC Foundation received the Annual Gold Medal of the Wen-Hsin Award by the Council for Cultural Affairs for the fifth consecutive

year. CommonWealth Magazine ranked TSMC No. 1 in Corporate Citizens for the third consecutive year. The Foundation also received

Taipei Cultural Award from the Culture Bureau, Taipei City Government, as a tribute to the Foundation's educational and cultural services

for the city.

Foundation Chairman Dr. FC Tseng welcoming the first group
of the students to join TSMC Esthetic Education Trip.

Chairman Morris Chang congratulating on the opening of
Taipei House, the former American Ambassador's Residence.

Dr. Tseng accepting the Taipei Culture Award from Taipei City
Mayor Ma on behalf of TSMC Foundation.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

OPERATIONAL HIGHLIGHTS

1. Business Activities

1.1 TSMC Business Scope

TSMC's business focus is on IC foundry and associated services. The Company excels in every aspect of

its business, namely, process technologies, wafer manufacturing, capacity utilization, customer services,

as well as a wide range of support services including design services, mask manufacturing, wafer

probing, in-house bumping and testing. Over the past 16 years, customers worldwide have relied on

TSMC to manufacture chips that are used across the entire spectrum of electronic applications.

1.2 Customer Applications

TSMC's customers sell the advanced IC chips to a diverse range of electronic end products, including

PCs, servers, computer peripherals, information appliances, wired and wireless communications

systems, automotive and industrial equipment, and also consumer electronics such as DVD players,

game consoles and digital still cameras (DSC). The innovative evolution of end product applications

drives the customers to utilize TSMC's technologies and service, and simultaneously steers TSMC to

further its technology development as well.

1.3 Net Sales over the Last Two Years

Unit: Quantity (8-inch wafer) / Amount (NT$K)

Sales Quantity
& Amount

Year

2002

Major
Product

Wafer

Package

Other

Total

Local

Export

Quantity

Amount

Quantity

Amount

486,036

17,552,160

2,137,078

125,580,978

13,407

13,268

1,603,118

51,903

36,415

3,521,966

12,689,700

499,389

19,168,685

2,225,396

141,792,644

Sales Quantity
& Amount

Year

2001

Major
Product

Wafer

Package

Other

Total

Local

Export

Quantity

Amount

Quantity

Amount

539,347

28,267,693

1,544,899

80,969,736

19,209

12,523

1,241,470

3,067,248

55,022

35,871

3,556,057

8,785,799

571,079

32,576,411

1,635,792

93,311,592

1.4 Production over the Last Two Years

Unit: Capacity / Quantity (8-inch wafer) / Amount (NT$K)

Year

2001

2002

Wafers

Capacity

Quantity (Note 1)

Amount (Note 2)

4,378,925

3,890,893

2,234,163

2,833,818

83,741,166

90,745,812

Note 1: Wafer out
Note 2: Total Manufacturing Cost = Wafer out x Actual Unit Cost

TSMC

Annual Report 2002

TSMC

Annual Report 2002

2. Customers

4. Employees

TSMC conducts regular reviews and surveys to ensure that customers needs are adequately addressed. Improvement plans and feedback
to customers are integral parts of this business process.

TSMC Personnel Structure by Gender, Age and Service Year

TSMC's customers are globally based, have diverse product specialties, and enjoy prominent standing in the various business segments of
the semiconductor industry. Fabless segment customers include those such as Altera Corporation, Broadcom Corporation, NVIDIA
Corporation, Qualcom Incorporated and VIA Technology Inc. Examples of IDM customers include Analog Devices Inc., Motorola Inc., and
Philips Electronics N.V.. TSMC's business with NVIDIA Corporation amounted to over 10% of TSMC's revenue in 2002. No other customer
has business with TSMC that amounted to 10% or more of Company revenue in 2002.

2.1 Customer Service

TSMC has declared itself a service-oriented company in the belief that customer service is the critical factor in enhancing customer
loyalty. TSMC believes that customer loyalty leads to higher levels of customer retention and expansion of relationships. It is TSMC's goal
to become the most advanced and largest technology and foundry service provider. TSMC also believes that achieving this goal will
attract, serve, and retain customers, meanwhile to enhance customer loyalty and partnership.

To facilitate customer interaction and information access on a real time basis, TSMC has established a range of internet based services covering
applications in design collaboration, engineering collaboration, and logistic collaboration. They are collectively branded as e-foundry sm.

2.2 Customer Satisfaction

2.3 Market Expansion/Penetration

TSMC continued to diversify its customer base while supporting growth of existing customers. Among all active customers in 2002, over
30 of them were new. TSMC's customers also gained market share in a number of end applications, include computer, wired
communications, wireless communications, and consumer electronics.

3. Raw Material Supply

Major Materials

Major Suppliers

Market Status

Wafer

MEMC

SUMCO

S.E.H.

Wacker

These four suppliers provide over 80% of the world's wafer capacity from multiple
manufacturing sites, including USA, Asia and Europe.

Chemicals

Merck-Kanto

These two companies are major global bulk chemical suppliers.

Tai-Young High Tech

The chemical raw materials of these two suppliers are either imported from Japan or,
sourced from local Taiwan producers.

Photoresist

T.O.K.

S.E.H.

Sumitomo

AZ/Clariant

These four companies are worldwide major photoresist suppliers. They all store stock in
Taiwan and provide just in time service.

Specialty Gases

TAIYO TOYO SANSO

These four companies are worldwide major specialty gas suppliers.

AIR PRODUCT

AIR LIQUID

BOC

TSMC

Annual Report 2002

Attracting and retaining the right talent is one of the key objectives of TSMC's human resource strategy. TSMC's total workforce, by the

end of 2002, reached 14,938 in number. New staff in 2002 consisted of 110 managers, 500 professionals and 700 technicians.

Gender-wise, female employees made up 57.8% of TSMC's total staff and 13% of its managerial personnel. Nationality-wise, 4.5% of

TSMC's employees at the professional and managerial levels are non-Taiwan nationals. TSMC's staff are highly educated: 3% of employees

hold Ph.D.'s, 25% Masters, 15% university bachelors, 26% college degrees, and 31% high school graduates. The following table shows the

TSMC personnel structure from 2000 until February 28, 2003.

TSMC Personnel Structure by Job Title

Manager

Professional

Assistant Engineer/Clerical

Technician

Total

2000

1,249

4,950

1,063

7,360

2001

1,286

4,600

982

6,801

14,622

13,669

Male

Female

Gender

Average Age

Average Service Year

4.1 Human Capital

2000

41.7%

58.3%

28.9

3.2

2001

42.1%

57.9%

29.8

4.1

2002

As of 02/28/2003

1,465

5,077

914

7,482

14,938

1,477

4,978

904

7,343

14,702

2002

As of 02/28/2003

42.2%

57.8%

30.0

4.2

42.4%

57.6%

30.2

4.5

TSMC strives to create an environment that provides favorable work set-ups, offers personal challenges, and supports career

development. As a result, TSMC maintained a relatively high retention rate among its highly educated workforce. TSMC also endorses

professional know-how, positive attitude, affirmative values, honest behavior and genuine commitment to succeed as part of its human

capital base. There have been no major labor disputes or financial losses as a result of labor disputes from January 1, 2002 until February

28, 2003.

4.2 People Development

Continuous learning is the cornerstone of TSMC's employee development strategy. TSMC implemented the individual employee

development plan initiative (IDP) in 2002. Each IDP is customized to meet the employees' personal development aspirations as well as

duty-oriented needs.

4.3 Employee Satisfaction

TSMC conducts annual Employee Satisfaction Survey to determine improvement or degradation in employee involvement and

engagement. As another indicia of employee satisfaction, TSMC has been recognized as "Best Employer in Asia" in the regional Hewitt

Associates, Asia Wall Street Journal, and Far Eastern Economic Review.

4.4 Compensation

The Company's compensation program consists of cash compensation and profit sharing. Cash compensation includes base salary and

quarterly cash incentive bonus; and profit sharing is awarded in the form of stock grants.

TSMC

Annual Report 2002

Profit Sharing

• 0.18um CMOS Image Sensor Process

This is a variable incentive compensation for TSMC employees, which is designed to link employees' interest directly with that of the

TSMC released 0.18um high performance CMOS Image Sensor Process. It was compatible with TSMC's 0.18um CMOS logic process

shareholders. The total budget for each year's profit sharing plan is based on the distributable net income for the year. Individual

and embedded memory process, thus providing a SoC platform for consumer and industrial imaging applications.

rewards are based on each employee's job responsibility, contribution, and performance. The value of profit sharing constitutes a

significant portion of the employees' total compensation. The more senior in responsibility, the greater proportion of their total

compensation is dependent on the variable profit sharing plan, especially for managers and executives.

Eight percent of the Company's 2001 distributable net income (net of legal reserve), in the form of 107,078,388 common shares, was

approved by the shareholders for employee profit sharing awarded in July 2002.

• Embedded Memory Technology

TSMC successfully manufactured 0.13um 1TRAM products.

• Flash/Embedded Flash Technology

TSMC released an embedded Flash technology for very stringent automotive applications. Additionally, TSMC served the smart card

market segment by extending 0.25um embedded Flash technology. For 0.18um embedded Flash technology, TSMC also demonstrated

To align with respective market practices, our overseas employees do not participate in the profit sharing plan, instead they participate

8 M IP block in both 2.5V and 1.8V operations.

in our ESOP. The options are granted for a period of 10 years with a vesting schedule of 50% in second year, 75% in third year and

100% in fourth year.

5. Innovation

5.1 R&D Organization and Investment

TSMC believes that its R&D team is among the highest-quality and largest-applied semiconductor

research teams in the world. TSMC increased its process R&D staff by over 12% in 2002. The personnel

engaged in exploratory technologies increased three-fold in order to strengthen long-term R&D focus.

R&D expenditure increased in 2002 by 10% to NT$ 11.7 billion.

TSMC started in Fab12 a 300mm RD pilot line in 2002 to extend the R&D of 90nm and future technology

generations. Also established in 2002 were: a new characterization lab for advanced materials; an

advanced lithography center; and a process/material simulation lab that extends its fundamental and

exploratory work in semiconductor technology. TSMC also has developed strong relationships with key

process tool and materials vendors.

5.2 R&D Accomplishments in 2002

Reflecting its commitment to innovation, TSMC was awarded 462 US patents and 552 ROC patents in 2002. TSMC's R&D also

• State-of-the-art Mask Technology

TSMC mask work facilities featured state-of-the-art E-beam mask writers and inspection tools for both R&D and production use.

• Design Services

TSMC enriched its advanced libraries/IP portfolio for 0.13um and 90nm process technologies. TSMC also further strengthened design

services by launching the on-line technical information service - DocuFastsm. The Docufast service allows customers to download a set

of TSMC technical documents that are well managed to ensure consistency and comprehensiveness.

5.4 R&D Plans for 2003

Moving forward in 2003, TSMC's R&D focus will be on Nexsys 90nm logic/mixed signal technology platforms and related embedded

memory for SoC applications in 300mm wafers; 65nm logic technology; 0.13um embedded memory; 0.18um color image sensors;

0.25um high-voltage process modules, as well as low power, low cost, customized SiGe RF BiCMOS technologies and support process.

TSMC plans to continue to work closely with international consortia and photolithography equipment suppliers to ensure timely

development of 193 high NA scanner, EUV scanner, E-Beam Projection technology and "liquid immersion lithography" to support process

development of sub-90nm technology. TSMC's R&D team will also explore processes beyond the 65nm generation, including geometries

as small as 40nm and 30nm. Exploratory work is already under way on new transistors and process technologies such as SOI, 3D

structures, MRAM, and strained-layer CMOS. The new focus will be on developing advanced high-k gate insulators and extreme low-k

interconnect insulator materials.

demonstrated an industry-leading 90nm CMOS logic process. We believe that this new process can become a leading SoC platform

As companies worldwide have reduced their investments in advancing semiconductor technologies, TSMC plans to maintain its long-

in the industry. Several breakthroughs were also made in demonstrating spin-on and chemical vapor deposition-based low-k

term lead over competitors in the foundry segment of the semiconductor industry through a strong exploratory technology research

processes with dielectric constants below 2.5 for future technology nodes.

program. With its highly competent and dedicated R&D team, and its commitment to innovate, TSMC is confident of its ability to deliver

TSMC conducts exploratory technology research in several important areas, including new device structures, strained Si, SOI, and novel

nonvolatile memory. For example, TSMC published several novel designs of transistors known as FinFETs that achieve higher performance

and lower leakage than traditional transistors, meeting the stringent leakage and speed projections of the International Technology

Roadmap. We believe that these devices should be able to meet the needs of most applications in 2010.

5.3 Spectrum of New Technologies

New process technology options were introduced in 2002:

• 0.13um Mixed-Signal/RF Technology

TSMC delivered more than 30 customer products within this technology field.

• Silicon Germanium RF BiCMOS Technology

TSMC succeeded in developing 0.18um SiGe RF BiCMOS technology. This process is compatible with TSMC's baseline 0.18um CMOS

logic processes and, when combined with other features, can develop in a single chip for high speed, low power, low noise, wired and

wireless applications.

the best and most cost-effective SoC processes for its customers.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

6. Efficiency

6.1 Supply Chain Integration/Collaboration

One goal of TSMC is to be the most efficient partner of a customer's global supply chain integration and collaboration. Accordingly, since

2001, TSMC has initiated an enterprise supply chain management program to improve operational efficiency and increase customer

satisfaction. TSMC expects that this program will reduce significantly a customer's response time demand and to improve delivery

schedule accuracy.

6.2 Inventory Management

7. Quality

TSMC is committed to provide to its customers the best quality wafers for their products. TSMC Q&R ensures best quality wafer

manufacturing from technology development to production through reliability evaluation, failure analysis, and qualification. Wafer

manufacturing quality starts from material supply management, real time in-process monitoring, to customer feedback. TSMC Q&R also

helps to steer the company towards the ultimate goal of zero defect through continuous improvement programs in terms of cost

conscious, and efficient systems and effective methodologies.

Customers' feedback suggests that products shipped have either met or exceeded their field quality requirements in the marketplace.

Also, in 2002, TSMC was the industry's first company to receive certification of the latest ISO automotive specification requirements -

ISO/TS16949:2002.

TSMC implemented a series of collaborative projects in 2002 to integrate information among Materials Management Division, IT

Divisions, Accounting, and Fab users. We believe that the results have successfully enhanced the efficiency and effectiveness of the entire

supply chain.

8. Environmental Protection & Expenditures

Two major noteworthy projects are Supply On-Line and Materials Planning Management System (MPMS). The former focuses on

8.1 Air Quality and PFC Emission

integrating suppliers' related information and to make the information accessible to suppliers. This has resulted in a significant reduction

TSMC's air pollution prevention facilities meet rigorous environmental standards. For example, TSMC has achieved a lower than legal standard

in inventory levels. The latter stresses improving demand forecasts, resulting in significant improvement in raw material service levels,

emission rate in terms of volatile organic compounds, acid gases, and alkali gases. Since 1993, TSMC has also phased out ozone-depleting

thus reducing the risk of material shortage.

6.3 Value from Key Process in the Form of Time Saving and Cost Savings

Major TSMC business process re-engineering projects include:

Demand Fulfillment Process

Re-engineer key order fulfillment processes to improve TSMC overall responsiveness to customers' demands and management of the

supply chain.

Customer Service and Satisfaction Process

Reconstruct the process flow for customer service by providing integrated service and offering active and effective solutions to meet

customer demands.

Technology Deployment Process

Establish a process flow from new technology development to volume production that results in more effective cost performance and

faster product-to-market time.

Recruiting and Development Process

substances in all manufacturing processes. TSMC has endorsed a memorandum by the Taiwan Semiconductor Industrial Association to

reduce, until 2010, perfluorinated compounds (PFCs) emission a value of 10% compared with the averages of 1997 through 1999.

8.2 Water Consumption

TSMC successfully weathered through the 2002 drought through a series of water conservation measures. TSMC has also set priority to

improve water recovery ratio and to reduce water usage by process tools.

8.3 Energy Consumption and Conservation

TSMC's Fab 8 won the "Energy Conservation Award" by the Ministry of Economic Affairs (MOEA), Taiwan in 2002.

8.4 Waste Disposal and Land Contamination

TSMC's industrial waste that cannot be reused or recycled is treated with incineration methods. In 2002, a small portion of general

industrial waste was sent to landfills environmentally certified (2,000 tons). All lands on which are located TSMC's fabs are free from

contamination, according to the standards set out by Soil and Groundwater Pollution Remediation Act of Taiwan's Environmental

Protection Agency (EPA).

This process is being re-engineered to ensure that we enhance our effectiveness in recruiting and developing the right talents, so that we

have the right organizational capabilities and high performance culture to optimize TSMC's growth potential.

8.5 Environmental Performance

TSMC enforces a rigorous ESH Policy that complies with Taiwan's EPA regulations, and we believe, complies with most international

environmental standards. There was only one non-compliance reportable incident in 2002. In that case, TSMC accidentally discharged a

small amount of diesel oil into a storm sewer. TSMC took remedial actions and was fined by Hsinchu City Environmental Protection

Bureau (EPB) for about NT$ 60,000.

TSMC has contributed significant resources to ESH improvement programs. These efforts earned TSMC four national awards in 2002:

(1) "Annual Environmental Protection Award for Enterprises" from the EPA, (2) "National Award for Outstanding Achievements in

Operation and Maintenance for Pollution Control Facilities" from the Industry Development Bureau, (3) "Energy Conservation Award"

from the MOEA, and (4) "Water Conservation Outstanding Performance Awards" from the Water Resources Agency.

In addition, TSMC was also one of the Dow Jones Sustainability Indexes (DJSI) components in 2001 and 2002. Components of the DJSI

are selected among companies worldwide on exceptional corporate sustainability achievements. DJSI provides a linkage between

companies implementing sustainability principles and investors wishing to profit from these companies' superior performance and

favorable risk/return profiles.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

9. Important Contracts

• Technology Cooperation Agreement

Term of Agreement: 07/09/1997 - 07/08/2007

• Patent License Agreement

Term of Agreement: 1/1/2001 - 12/31/2011

Contracting Party: A multinational company

Summary: Under this agreement, the parties have entered into cross license arrangements for certain semiconductor patents. TSMC

Contracting Party: Philips Electronics N.V. (now renamed Koninklijke Philips Electronics N.V.) (Philips)

shall pay license fees to the said company.

Summary: Under this agreement, TSMC is obliged to pay to Philips royalties at a fixed percentage of net sales for certain products.

• Manufacturing Agreement

• Amended and Restated Joint Technology Cooperation Agreement

Term of Agreement: 7/16/2001-12/31/2005

Term of Agreement: 02/16/1996 - 12/31/2005, automatically renewed for one year unless terminated with a six-month prior written

Contracting Party: STMicroelectronics NV, Philips Semiconductors International B.V., Motorola, Inc.

notice by TSMC.

Contracting Party: WaferTech, LLC

Summary: Under this agreement, TSMC has the right to purchase the entire calculated installed capacity of WaferTech, LLC during the

Summary: Under this agreement, the parties have entered into a joint technology cooperation arrangement for certain high-

performance and advanced semiconductor technologies development.

production period.

• Shareholders' Agreement

Term of Agreement: Effective as of 03/30/1999 and may be terminated as provided in the agreement.

Contracting Party: Philips Electronics N.V. (now renamed Koninklijke Philips Electronics N.V.) (Philips) and EDB Investments Pte Ltd. (EDBI)

Summary: Under this agreement, TSMC, Philips and EDBI agreed to form a joint venture "Systems on Silicon Manufacturing Company

Pte Ltd." (SSMC) to build an IC foundry in Singapore. TSMC holds 32% of the shares. Philips and TSMC are committed to purchasing a

certain percentage of SSMC's capacity.

• Technology Cooperation Agreement

Term of Agreement: 03/30/1999 - 03/29/2009

10. Litigation Proceedings

To protect its intellectual capital, trade secrets, and other assets, TSMC may initiate as appropriate, litigation against former

employees and third parties. Also, as is the case for many companies in the high-technology industry, TSMC receives from time

to time communications from third parties asserting that TSMC's technologies, designs, and manufacturing processes may

infringe certain patents or other intellectual property rights. TSMC takes these matters seriously. TSMC investigates all such

claims and takes action as is appropriate under the circumstances.

TSMC was not involved in any material litigation in 2002 and is not currently involved in any material litigation.

Contracting Party: Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)

Summary: Under this agreement, TSMC shall transfer its certain process technologies to SSMC, and SSMC shall pay TSMC

11. Acquisition or Disposal of Property, Plant and Equipment

remuneration at a certain percentage of the net selling prices of its products.

11.1 Acquisition of property, plant and equipment; in the amount no less than NT$300 million, or 20%

• Patent License Agreement

Term of Agreement: 10/26/2001 - 12/31/2006

Contracting Party: A multinational company

Summary: Under this agreement, the parties have entered into cross license arrangements for certain semiconductor patents.

• Foundry Related Agreements

Term of Agreement: 1995 - 2004

Contracting Parties: Several multinational companies

Summary: Under these agreements, TSMC guarantees a pre-determined capacity for a set number of years to customers. In return,

customers deposit certain money with TSMC.

• Manufacturing Agreement

Term of Agreement: 2/14/2000 - 2/13/2005

Contracting Party: Vanguard International Semiconductor Corporation (VIS)

Summary: Under this agreement, VIS shall reserve its certain capacity to manufacture for TSMC certain devices required by TSMC's

customers, at prices as agreed by the parties.

• Patent License Agreement

Term of Agreement: 11/1/2002 - 10/31/2012

Contracting Party: A multinational company

of paid-in capital

Property, Plant and Equipment

Fab12 Plant & Office

Fab12 Process Hook-Up, SP2

Acquisition
Date

03/31/02

Total Price

Vendor

2,331,870

Fu Tsu Construction

410,642

Marketech

Fab12 Electrical Power Equip., GIS & Engineering

03/31/02

1,113,300

United Integrated Services

Fab12 Cleanroom System

03/31/02

1,104,326

M+W Zander

Fab12 Ultra Pure Water & Reclaim System, DI Water

03/31/02

392,193

Organo

Fab12 Gas System & Piping

Fab7 Cleanroom System

Interbay System

Scanners

03/31/02

01/01/2002

03/31/2002

03/31/2002 ~
12/31/2002

01/31/2003 ~
02/28/2003

482,438

Confederate Technology

307,457

M+W Zander

680,403

SHINKO

3,434,792

ASML

1,155,807

ASML

Electronic Beam Operation

2002/06/30

364,334

KLA - TENCOR

Unit: NT$K

Relationship
with the
Company

Purpose

None

in-house use

Summary: Under this agreement, the parties have entered into cross license arrangements for certain semiconductor patents. TSMC

11.2 Disposal of property, plant and equipment up to NT$300 million or 20% of paid-in capital: None

shall pay license fees to the said company.

• Patent License Agreement

Term of Agreement: 7/1/2002 - 6/30/2009

Contracting Party: A multinational company

Summary: Under this agreement, the parties have entered into cross license arrangements for certain semiconductor patents. TSMC

shall pay license fees to the said company.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

FINANCING PLANS AND IMPLEMENTATION

1. Preferred A Shares

1.1 Financing Plans

Source of Fund

Issuance

Issuing Date

Tenor

Rate

Outstanding

Preferred A Shares

11/29/2000

2.5 Years

3.50%

1,300,000,000 Shares

Use of Fund

Project

Project Amount (NT$K)

Expansion Plan

Fund Used in 2001 (NT$K)

Fund Used in 2002 (NT$K)

Fab 12 Equipment
Procurement

32,700,000

8,250,000

24,450,000

Approved by the Securities and Futures Commission and disclosed on the Taiwan Stock Exchange Market

Observation Post System on 09/22/2000.

1.2 Status of Implementation & Benefits

Expansion plan completed as of 12/31/2002.

2. Corporate Bond

2.1 Financing Plans

Source of Fund

Issuance

Issue Date

Tenor

Coupon Rate

Outstanding

Corporate Bond

01/10/2002 -
01/24/2002

Class A: 5 years
Class B: 7 years
Class C: 10 years

Class A: 2.60% p.a.
Class B: 2.75% p.a.
Class C: 3.00% p.a.

Class A: NT$ 2.5 billion
Class B: NT$ 8.0 billion
Class C: NT$ 4.5 billion

Use of Fund

Project

Expending Plan

Fund Used in 2002 (NT$K)

Future Fund Use (NT$K)

The proceeds of the bond finance a part of Fab 14 investment
that is expected to amount to NT$77.63 billion in total.

3,278,000

74,352,000

Approved by the Securities and Futures Commission and disclosed on the Taiwan Stock Exchange Market

Observation Post System on 12/17/2001.

2.2 Status of Implementation & Benefits

Project commenced in 2002 and expected to last until 2004.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

FINANCIAL STATUS, OPERATING
RESULTS, AND RISK MANAGEMENT

1. Financial Position

2002

2001

Variance

Variance %

Unit: NT$K

Item

Current Assets

Fixed Assets

Other Assets

Total Assets

Current Liabilities

Long-term Liabilities

Total Liabilities

Capital Stock

Capital Surplus

94,747,405

63,652,726

31,094,679

217,192,263

215,499,242

1,693,021

23,097,348

23,713,325

(615,977)

370,015,511

335,734,684

34,280,827

31,160,103

25,210,619

5,949,484

43,002,201

33,333,990

9,668,211

74,162,304

58,544,609

15,617,695

199,228,867

181,325,531

17,903,336

57,004,789

57,128,433

(123,644)

Retained Earnings

40,792,197

37,507,410

3,284,787

Total Shareholders' Equity

295,853,207

277,190,075

18,663,132

1.1 Variance Analysis for Deviation over 20%

• The increase in current assets was largely due to an increase in cash and cash equivalents, which in

turn, resulted from operating activities and the issuance of corporate bonds.

• The increase in current liabilities was primarily due to an increase in payables to vendors, contractors and

equipment suppliers.

• Long-term liabilities increased as a result of the issuance of corporate bonds.

1.2 Major Impact on Financial Position: There was no significant impact on financial position.

1.3 Future Plan on Financial Position: Not Applicable

2. Operating Results

Item

Gross Sales

2002

2001

Variance

Variance %

Unit: NT$K

164,805,296

128,563,819

36,241,477

Less: Sales Returns and Allowances

(3,843,967)

(2,675,816)

(1,168,151)

Net Sales

Cost of Sales

Gross Profit

Operating Expense

Operating Income

160,961,329

125,888,003

35,073,326

108,994,184

89,506,952

19,487,232

51,967,145

36,381,051

15,586,094

17,790,839

19,038,765

(1,247,926)

34,176,306

17,342,286

16,834,020

Non-operating Income

1,762,893

2,891,557

(1,128,664)

Non-operating Expense

8,826,744

9,575,128

(748,384)

Income Before Tax

Tax Benefit (Expense)

Income After Tax

27,112,455

10,658,715

16,453,740

(5,502,164)

3,824,459

(9,326,623)

21,610,291

14,483,174

7,127,117

49%

-3%

10%

24%

29%

27%

10%

28%

44%

28%

22%

43%

-7%

97%

-39%

-8%

154%

-244%

49%

TSMC

Annual Report 2002

TSMC

Annual Report 2002

2.1 Variance Analysis for Deviation over 20%

3. Cash Flow

• Increase in net sales and gross profit: The increase was largely due to the increase in customer demand. The improved gross profit was

primarily due to higher capacity utilization and improved product mix.

• Increase in sales returns and allowances: The sales returns and allowances increased as a result of a more conservative provision on the

potential sales returns & allowance.

• Increase in cost of sales: The cost of sales increased as a result of higher sales activity.

Cash Balance as of
December, 2001

Net Cash Provided
by Operating
Activities

Net Cash Outflows
from Investing and
Financing Activities

Cash Balance as of
December, 2002

Remedy for Cash Shortfall

Investment Plan

Financing Plan

33,403,706

94,288,101

(66,035,012)

61,656,795

Unit: NT$K

• Reduction in non-operating income: The reduction was primarily due to inclusion in 2001 of a non-recurring insurance claim. In

addition, interest income also decreased as the result of lowered interest rates.

3.1 Analysis of Cash Flow

• Increase in income tax expense: The increase was caused by lower tax credits and higher taxable profit.

2.2 Reasons for changing the Company's major business; explain the variance resulting from the
adjustment of selling prices or costs, the increase or decrease of quantity and the combination of
production and selling, or the replacement of old products. If the Company's operation strategy,
market situation, economic environment or other internal or external factors has changed or
expects to have any significant change, explain the fact, influencing factors and the possible
impact to the Company's future finance and responding proposal: Not Applicable

2.3 Planned selling quantities and its base for next year. Explain the major factors that keep the

Company's forecast sales quantity to rise or decline: Please refer to "Letter To The Shareholders".

2.4 Gross Profit Variance Analysis

Unit: NT$Million

Gross Profit
in 2001

Gross Profit
in 2002

Variance

Variance Owing to Price
Difference

Variance Owing to Cost
Difference

Variance Owing to Product Mix
and Quantity Difference

36,381

51,967

15,586

(13,677)
1. Competition & excess capacity
globally caused unfavorable
price variance.

2. Technology advancement

caused price level to erode.

11,583

17,680

Increased utilization from 51%
in 2001 to 73% in 2002 resulted
in cost savings due to efficient
asset turnover.

1. Revenue from advanced

technology increased from 32%
in 2001 to 52% in 2002, this
mix improvement results in
higher Gross Profit.

2. Wafer shipment growth 24% in
2002, this quantity difference
results in higher Gross Profit.

• NT$94.2 billion net cash provided by operating activities: This represents the sum of (1) profit from operating activities, and (2) non

cash charges such as depreciation and amortization expenses.

• NT$66.0 billion net cash outflows from investing and financing activities: This represents the sum of (1) NT$69.6 billion for

investment activities mainly for capital expenditures; offset by (2) NT$3.6 billion net cash inflow from financing activities

(being the surplus of bond issue proceeds, less bond repayment and return/release of funds to customers).

3.2 Remedy for Cash Shortfall and Liquidity Analysis: Because TSMC enjoys a cashflow surplus, remedial actions are not required.

3.3 Cash Flow Projection for Next Year: TSMC does not provide financial projections, including cash flow projections.

4. Major Capital Expenditure

4.1 Major Capital Expenditure and Its Source of Capital

Project

Production
Equipment

R&D
Equipment

Actual or
Planned
Source of
Capital

Owner's
Equity/Bond

Actual or
Planned
Completion
Date in 2002

Total
Amount

The Execution of Major Capital Expenditure

2001

2002

2003
(Note)

2004
(Note)

2005
(Note)

Unit: NT$K

Completed

99,657,084

51,059,596

48,597,488

Completed

11,146,037

8,929,830

2,216,207

Note: Can not be reasonably estimated at the time of preparation.

4.2 Estimated Possible Benefit

It is estimated that TSMC production capacity may be increased annualy by 500,000 8-inch equivalent wafers in 2003 and onwards,

owing to the above capital expenditure investment.

Other Benefits (e.g. Product Quality, Anti-Pollution, Cost Reduction and etc.): Please refer to "Operational Highlights".

5. Long-term Investment

None of the current year investments exceeded 5% of the Company's capital.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

6. Risk Management

6.4 Political and Regulatory Environment

6.1 Environmental, Safety and Health (ESH) Risks and Emergencies and Natural Disasters

TSMC is committed to maintaining a comprehensive risk management system dedicated to the safety, security, and protection of our

people, our assets, as well as those of our vendors and customers. Dedicated processes and procedures exist for: (1) ESH Management;

(2) Risk Analysis; and (3) Accident Prevention and Loss Minimization.

TSMC's management team monitors closely political and regulatory developments which could have an impact on TSMC business and

operations. Political and regulatory developments did not have an adverse effect on TSMC during 2002.

Since TSMC is also a NYSE listed company, TSMC is required to comply with the provisions of Sarbanes-Oxley Act (and relevant

regulations) that are applicable to non-US companies. Not only has TSMC taken measures to ensure compliance with applicable

regulatory requirements, TSMC will continue to monitor regulatory developments and to implement changes as necessary for

TSMC has adopted the International Standard on Environmental Management Systems (ISO 14001) as its standard for environmental

compliance.

management. TSMC Fabs 2, 3, 5, 6, 7, 8 and 12 all have been ISO 14001 certified. TSMC is also Taiwan's first semiconductor company

6.5 Contingent Plans for Events That May Have a Significant Adverse Impact on the Company's Business

TSMC is dedicated to maintaining the highest degree of integrity, ethics, and fairness in managing and running its operations.

TSMC management does not tolerate unethical behavior or compromise of its core values and principles.

TSMC pays special attention to emergency preparedness for natural and man-made disasters such as typhoons, earthquakes,

and environmental contamination. We have established extensive contingency planning including the establishment of

processes and procedures for creating emergency task forces as and when necessary. In such a situation, contingency planning

would include the preparation of a thorough analysis of the emergency, its impact, alternatives, and solutions for each possible

scenario, and appropriate precautionary and/or recovery measures. Each task force's responsibility would be to ensure TSMC's

ability to conduct business with as little personal harm, business disruption, and financial impact as possible under the

circumstances. As of the date of this Annual Report, there are no reportable material contingencies.

to receive OHSAS 18001 certification for Fabs 2, 3, 5, 6, 7, 8 and 12.

In order to deal with emergencies and natural disasters at each of our facilities, TSMC has developed comprehensive plans and

procedures focusing on loss prevention, emergency response, crisis management, and business recovery. We maintain specialized

prevention and response teams trained both to handle emergencies and to work closely with government agencies should an emergency

situation ever arise.

6.2 Management of Financial Operations

Internal policies and procedures exist with respect to high-risk/high-leveraged investment, lending/endorsement and

guarantee for other parties, financial derivatives transactions

Because TSMC focuses on running its foundry manufacturing operations both effectively and efficiently, it does not engage in high-risk/

high-leveraged investments. To control and monitor various types of financial transactions, the Company has established internal policies

and procedures based on sound financial and business practices, all in compliance with the relevant rules and regulations issued by the

Taiwan Securities and Futures Commission. TSMC policies and procedures include "Policies and Procedures for Financial Derivatives

Transactions", "Procedures for Lending Funds to Other Parties", "Procedures for Acquisition or Disposal of Assets," and "Procedures for

Endorsement and Guarantee". The financial transactions of a derivative nature that TSMC enters into are strictly for hedging purposes

and not for any trading or speculative purpose.

Covenants

Two of TSMC's subsidiaries, TSMC Development, Inc. and WaferTech, LLC, have entered into long-term syndicated loan facility

agreements. In connection with those agreements, TSMC provides guarantees up to US$680 million in the aggregate. Customary

Borrower and/or Guarantor covenants exist in those agreements.

6.3 Internal Management of Economic Risk

Interest Rate Fluctuation

TSMC's exposure to interest rate risks derives primarily from long-term debt obligations that are incurred in the normal course of

business. The Company's policy is to limit its exposure to risks associated with rising interest rates and, therefore, TSMC finances

its needs through long-term, fixed-rate debt.

Foreign Exchange Volatility

The Company is exposed to foreign exchange risks for both revenues and procurement. Most of TSMC's revenues derive from the

export of its products (88% in 2002). A substantial portion of the Company's procurement of equipment, tools and material is

imported. Therefore, in order to protect against reduction in value resulting from foreign exchange rate volatility, TSMC utilizes

mainly forward currency contracts to hedge its foreign exchange exposure.

Inflation

Inflation in Taiwan was approximately -0.2% in 2002. It did not have a significant impact on TSMC operations and profits.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

FINANCIAL INFORMATION

TSMC

Annual Report 2002

TSMC

Annual Report 2002

1. Condensed Balance Sheet

Financial Analysis from 1998-2002

Item

Current assets
Long-term investments
Fixed assets
Other assets
Current liabilities

Before distribution
After distribution
Long-term liabilities
Other liabilities
Capital stock
Capital surplus
Retained earnings

Before distribution
After distribution

Unrealized loss on long-term investment
Cumulative transaction adjustments
Total Assets
Total Liabilities

Before distribution
After distribution

Total Equity

Before distribution
After distribution

*Subject to change after shareholders' meeting resolution

1998

1999

2000

2001

26,378,422
17,537,765
73,636,209
6,554,817

8,138,796
8,276,867
25,025,206
6,872,545
60,471,760
164,219

24,162,113
9,010,971
-
(727,426)
124,107,213

38,770,670
28,208,643
89,566,029
4,877,392

14,469,329
14,684,480
20,000,000
6,183,565
76,708,817
11,831,411

33,320,615
11,785,153
-
(101,981)
161,422,734

85,950,586
33,422,010
207,005,370
14,594,492

41,188,662
41,814,102
29,000,000
9,030,097
129,893,646
55,285,821

76,924,173
24,866,848
(71,564)
(278,377)
340,972,458

63,652,726
32,869,391
215,499,242
23,713,325

25,210,619
25,799,467
24,000,000
9,333,990
181,325,531
57,128,433

37,507,410
19,015,226
-
1,228,701
335,734,684

Unit: NT$K

2002

94,747,405
34,978,495
217,192,263
23,097,348

31,160,103
*
39,281,665
3,720,536
199,228,867
57,004,789

40,792,197
*
(194,283)
945,129
370,015,511

40,036,547
40,174,618

40,652,894
40,868,045

79,218,759
79,844,199

58,544,609
59,133,457

74,162,304
*

84,070,666
83,932,595

120,769,840
120,554,689

261,753,699
261,128,259

277,190,075
276,601,227

295,853,207
*

2. Condensed Statement of Income

Financial Analysis from 1998-2002

Item

1998

1999

2000

2001

2002

Unit: NT$K(Except EPS: NT$)

Net sales
Gross profit*
Income from operations
Non-operating Income
Non-operating Expense
Interest revenue
Interest expense
Income from operations of continued

segments-before tax

Income from operations of continued

segments-after tax

Net income
Earnings per share

Capitalized interest

50,233,008
20,336,042
16,202,245
1,024,981
287,295
566,020
981,388

73,131,206
33,240,484
25,916,619
1,249,706
3,056,460
808,616
1,415,527

166,228,420
75,996,839
60,541,105
5,409,307
2,112,818
1,575,460
1,858,197

125,888,003
36,381,051
17,342,286
2,891,557
9,575,128
1,365,919
1,951,830

160,961,329
51,967,145
34,176,306
1,762,893
8,826,744
1,008,147
2,119,935

13,648,622

24,109,865

63,837,594

10,658,715

27,112,455

15,344,203
15,344,203
2.54
0.98
661,414

***

24,559,884
24,559,884
3.24
1.56
305,312

***

65,106,194
65,106,194
5.71
3.58
72,903

***

14,483,174
14,483,174
0.83
0.75
207,297

***

21,610,291
21,610,291
1.14

165,857

* Certain accounts of 1998 through 2000 have been reclassified to conform to 2001 & 2002 classifications
** Based on weighted average shares outstanding in each year
***Retroactive adjustment for capitalization of unappropriated earnings and bonus to employees

TSMC

Annual Report 2002

3. Financial Analysis

Financial Analysis from 1998-2002

Capital Structure

Debts ratio(%)

Analysis

Long-term fund to fixed assets (%)

Liquidity Analysis

Current ratio (%)

Operating

Performance

Analysis

Profitability

Analysis

Quick ratio (%)

Times interest earned (times)

Average collection turnover (times)

Days sales outstanding

Average inventory turnover (times)

Average inventory turnover days

Average payment turnover (times)

Fixed assets turnover (times)

Total assets turnover (times)

Return on total assets (%)

Return on equity (%)

Operating income to capital stock (%)

Profit before tax to capital stock (%)

Cost to Revenue Ratio (%)

Profit after tax to net sales (%)

Net worth per share (NTD)

Earnings per share (NTD) (Note)

Dividends per share (NTD)

Cash dividends (NTD)

Stock dividends (NTD)

Cash flow

Cash flow ratio (%)

Leverage

Others

Cash flow adequacy ratio (%)

Cash flow reinvestment ratio (%)

Operating leverage

Financial leverage

Royalty Expense (NT$K)

Royalty Revenue (NT$K)

Gross Margin (NT$K)

1998

32.26

148.16

324.11

273.86

8.91

5.90

61.85

6.82

53.49

10.12

0.68

0.40

14.04

19.99

26.79

22.57

59.52

30.55

13.90

0.98

4.50

417.00

102.04

21.65

2.69

1.06

1999

25.18

157.17

267.95

233.95

14.83

7.18

50.82

9.96

36.66

12.08

0.82

0.45

18.19

23.98

33.79

31.43

54.55

33.58

15.74

1.56

2.30

273.50

106.00

19.31

2.47

1.06

2000

23.23

140.46

208.68

178.13

34.02

7.70

47.42

10.77

33.90

10.76

0.80

0.49

24.12

31.43

46.61

49.15

54.28

39.17

21.28

3.58

2.80

213.17

106.03

22.47

2.34

1.03

2001

17.44

139.76

252.48

211.92

5.84

5.32

68.61

9.19

39.70

11.52

0.58

0.37

4.76

5.37

9.56

5.88

71.10

11.50

15.70

0.75

4.00

284.27

105.73

16.00

6.14

1.13

2002

20.04

154.30

304.07

264.11

12.79

9.08

40.20

11.57

31.55

20.72

0.74

0.44

6.63

7.54

17.15

13.61

67.71

13.43

15.19

1.14

1.00

302.59

122.72

17.88

3.88

1.07

637,136

1,032,167

2,477,021

3,715,200

6,232,338

23,557

55,077

204,350

20,336,042

33,240,484

75,996,839

36,381,051

51,967,145

900,897

16.55

Sales and Marketing Costs (NT$K)

809,302

1,810,701

2,953,008

2,341,081

Effective Tax Rate (%)

Working Capital (NT$K)

Capital Expenditure (NT$K)

9.50

18,239,626

28,066,471

Note: Retroactive adjustment for capitalization of unappropriated earnings and bonus to employees.
*The calculation formula of financial analysis were listed as follows :
1. Capital Structure Analysis

(1) Debts ratio
(2) Long-term fund to fixed assets = (Shareholders' Equity + Long-term Liabilities) / Net Properties

= Total Liabilities / Total Assets

2. Liquidity Analysis
(1) Current ratio
(2) Quick ratio
(3) Times interest earned

= Current Assets / Current Liabilities
= (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities
= Earnings before Interest and Taxes / Interest Expenses

3. Operating Performance Analysis
(1) Average collection turnover
(2) Days sales outstanding
(3) Average inventory turnover
(4) Average inventory turnover days = 365 / Inventory Turnover rate
(5) Average payment turnover
(6) Fixed assets turnover
(7) Total assets turnover

= Net Sales / Average Trade Receivables
= 365 / Receivables Turnover rate
= Cost of Sales / Average Inventory

= Cost of Sales / Average Trade Payables
= Net Sales / Net Properties
= Net Sales / Total Assets

5.90

7.54

17.56

24,301,341

44,761,924

38,442,107

63,587,302

29,842,159

79,720,461

68,002,448

54,443,595

(2) Return on equity =Net Income / Average Shareholders' Equity
(3) Cost to Revenue Ratio =Cost of Goods Sold / Net Sales
(4) Profit after tax to net sales =Net Income / Net Sales
(5) Earnings per share =( Net Income - Preferred Stock Dividend ) / Weighted

Average Number of Shares Outstanding

(6) Net worth per share

=( Shareholders' Equity - Preferred Stock ) / Number of shares outstanding

5. Cash flow

(1) Cash flow ratio =Net Cash Provided by Operating Activities / Current Liabilities
(2) Cash flow adequacy ratio =Five-year sum of cash from operations / Five-year sum of

capital expenditures, inventory additions, and cash dividends

(3) Cash flow reinvestment ratio =( Cash Provided by Operating Activities - Cash Dividends ) /

( Gross Plant + Investment + Other Assets + Working Capital )

6. Leverage

(1) Operating leverage = ( Net Sales - Variable Cost ) / Income from Operations
(2) Financial leverage = Income from Operations / ( Income from Operations - Interest Expenses )

4. Profitability Analysis

(1) Return on total assets

= (Net Income + Interest Expenses * (1 - Effective tax rate ) ) / Average Total

Assets

TSMC

Annual Report 2002

4. Condensed Interim Balance Sheet by Quarter

5. Condensed Interim Satement of Income by Quarter

Unit: NT$K

Unit: NT$K (Except EPS: NT$)

ASSETS

Current assets

Long-term investments

Fixed assets

Other assets

TOTAL ASSETS

March 31, 2002

Amount

92,433,940

31,419,316

209,025,911

24,307,203

June 30, 2002
Amount

106,364,142

36,713,728

211,233,052

20,669,458

September 30, 2002
%

Amount

December 31, 2002
%

Amount

100,404,633

36,348,928

217,505,497

23,183,673

94,747,405

34,978,495

217,192,263

23,097,348

357,186,370

100

374,980,380

100

377,442,731

100

370,015,511

100

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Current liabilities

Long-term liabilities

Other liabilities

Total liabilities

SHAREHOLDERS' EQUITY

Capital stock

Capital surplus

Retained earnings

Unrealized loss on long-term investment

Cummulative translation adjustments

Treasury stock (at cost)

Total Shareholders' Equity

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY

29,868,651

36,470,000

9,139,044

75,477,695

181,325,531

57,158,972

44,095,242

1,232,851

(2,103,921)

40,484,868

36,470,000

8,861,098

85,815,966

199,228,867

57,004,789

35,079,257

(233,799)

(1,914,700)

41,347,199

38,648,931

3,839,272

83,835,402

199,228,867

57,004,789

38,239,423

(68,960)

1,117,910

(1,914,700)

31,160,103

39,281,665

3,720,536

74,162,304

199,228,867

57,004,789

40,792,197

(194,283)

945,129

(1,923,492)

281,708,675

289,164,414

293,607,329

295,853,207

357,186,370

100

374,980,380

100

377,442,731

100

370,015,511

100

Total

Amount

GROSS SALES

37,324,313

44,770,649

40,622,990

42,087,344

164,805,296

(1,534,598)

(588,195)

(787,973)

(933,201)

(3,843,967)

35,789,715

100

44,182,454

100

39,835,017

100

41,154,143

100

160,961,329

100

23,763,009

12,026,706

3,844,702

27,759,398

16,423,056

4,447,576

11,975,480

26,999,812

12,835,205

4,467,771

8,367,434

30,471,965

10,682,178

5,030,790

5,651,388

108,994,184

51,967,145

17,790,839

34,176,306

SALES RETURNS AND
ALLOWANCES

NET SALES

COST OF SALES

GROSS PROFIT

OPERATING EXPENSES

INCOME FROM OPERATIONS

8,182,004

NON-OPERATING INCOME

Interest

Gain on sales of property,
plant and equipment

Technical service income

Others

Total Non-operating Income

NON-OPERATING EXPENSES

Recognized loss on investment

by equity method-net

Interest

Casualty loss

Loss on sales of and provision
for loss on property, plant
and equipment

Foreign exchange loss-net

Amortization of premium of
option contracts-net

Others

214,746

254,581

13,806

148,897

632,030

946,289

541,343

104,828

91,224

60,847

51,656

Total Non-operating Expenses

1,796,187

INCOME BEFORE INCOME TAX

7,017,847

INCOME TAX EXPENSE

NET INCOME

(430,015)

6,587,832

(1)

264,275

(3,766)

70,631

58,564

389,704

786,763

569,807

12,642

931

(414)

9,018

1,378,747

10,986,437

(1,676,918)

9,309,519

-
1

291,187

4,665

58,292

19,353

373,497

1,821,121

522,667

26,954

40,821

291,721

7,189

2,710,473

-
1

(4)

6,030,458

(2,870,292)

3,160,166

(7)

237,939

18,518

61,621

49,584

367,662

2,162,337

486,118

2,015

102,846

19,314

127,792

40,915

2,941,337

3,077,713

(524,939)

2,552,774

0.13

-
1

1,008,147

273,998

204,350

276,398

1,762,893

5,716,510

2,119,935

119,485

221,955

120,568

419,513

108,778

8,826,744

27,112,455

(5,502,164)

21,610,291

1.14

-
1

(4)

EARNINGS PER SHARE AFTER TAX

0.39

0.45

0.17

TSMC

Annual Report 2002

TSMC

Annual Report 2002

6. Auditors' Opinion from 1998 to 2002

9. Financial Statements & Independent Auditors' Report

Year

1998

1999

2000

2001

2002

CPA

S.C. Huang, Edward Way

Audit Opinion

An Unqualified Opinion

English Translation of a Report Originally Issued in Chinese

Independent Auditors' Report

January 16, 2003

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Ltd.

T N Soong & Co
12F, No. 156, Sec. 3, Min-Sheng E. Rd., Taipei, Taiwan, R.O.C.
Tel: 886-2-2545-9988

7. Supervisors' Report

The Board of Directors have prepared and submitted to us the Company's 2002 Business Report, Financial Statements, and proposal for

allocating profits. The CPAs of T N Soong & Co were retained to audit the Financial Statements and have submitted a report relating

thereto. The above Business Report, Financial Statements and proposal have been further examined as being correct and accurate by the

undersigned, the supervisors of Taiwan Semiconductor Manufacturing Company Limited. According to Article 219 of the Company Law,

we hereby submit this report.

Taiwan Semiconductor Manufacturing Company Limited

Supervisor

Robbert Brakel

Supervisor

George C. Shiu

Supervisor

Michael E. Porter

March 11, 2003

8. Financial Difficulties

The Company should disclose the financial impact to the Company if the Company and its affiliated companies incur any financial or

cash flow difficulties from 2002 until February 28, 2003: None

We have audited the accompanying balance sheets of Taiwan Semiconductor Manufacturing Company Ltd. as of December 31, 2002

and 2001, and the related statements of income, changes in shareholders' equity and cash flows for the years then ended. These

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

statements based on our audits.

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

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

reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test

basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting

principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We

believe that our audits provide a reasonable basis for our opinion.

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

Semiconductor Manufacturing Company Ltd. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for

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

accepted in the Republic of China.

As disclosed in Note 3 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 30,

''Accounting for Treasury Stock'' (SFAS 30) on January 1, 2002. SFAS 30 requires a parent company to record stock held by its subsidiary

as treasury stock. The adoption of SFAS 30 resulted in the decrease of long-term investments and simultaneous increase of the book

value of treasury stock by NT$1,923,492 thousand as of December 31, 2002. Furthermore, net income increased by NT$25,909

thousand for the year ended December 31, 2002.

We have also audited the consolidated financial statements of Taiwan Semiconductor Manufacturing Company Ltd. as of and for the

years ended December 31, 2002 and 2001, and have expressed a modified unqualified opinion and an unqualified opinion on such

financial statements, respectively.

T N Soong & Co

An Associate Member Firm of Deloitte Touche Tohmatsu

Effective April 22, 2002

(Formerly a Member Firm of Andersen Worldwide, SC)

Taipei, Taiwan

The Republic of China

Notice to Readers

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

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

The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of

China.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

BALANCE SHEETS

December 31, 2002 and 2001

(In Thousand New Taiwan Dollars, Except Par Value)

ASSETS

CURRENT ASSETS

Cash and cash equivalents (Notes 2 and 4)

Receivables from related parties (Note 16)

Notes receivable

Accounts receivable

Allowance for doubtful receivables (Note 2)

Allowance for sales returns and others (Note 2)

Inventories - net (Notes 2 and 5)

Deferred income tax assets (Notes 2 and 12)

Prepaid expenses and other current assets (Notes 2, 16 and 19)

Total Current Assets

LONG-TERM INVESTMENTS (Notes 2, 3, 6 and 18)

PROPERTY, PLANT AND EQUIPMENT (Notes 2, 7 and 16)

Cost

Buildings

Machinery and equipment

Office equipment

Accumulated depreciation

Advance payments and construction in progress

Net Property, Plant and Equipment

GOODWILL (Note 2)

OTHER ASSETS

Deferred charges - net (Notes 2, 8 and 18)

Deferred income tax assets (Notes 2 and 12)

Refundable deposits (Notes 16 and 18)

Idle assets (Note 2)

Assets leased to others (Note 2)

Miscellaneous

Total Other Assets

2002

2001

2002

2001

Amount

LIABILITIES AND SHAREHOLDERS' EQUITY

Amount

$61,656,795

10,183,488

60,240

9,495,447

(929,864)

(2,363,067)

10,340,336

3,320,000

2,984,030

94,747,405

34,978,495

68,488,180

303,334,232

5,697,828

377,520,240

(188,447,604)

28,119,627

217,192,263

2,612,926

9,792,490

9,712,567

543,469

339,400

87,246

9,250

20,484,422

(1)

102

(51)

$33,403,706

523,861

176,582

19,957,636

(1,100,492)

(2,581,551)

8,504,418

2,347,000

2,421,566

63,652,726

32,869,391

52,527,184

242,347,119

4,754,183

299,628,486

(140,224,640)

56,095,396

215,499,242

2,961,317

3,239,723

16,175,070

772,912

555,053

9,250

20,752,008

(1)

(42)

CURRENT LIABILITIES

Payable to related parties (Note 16)

Accounts payable

Payable to contractors and equipment suppliers

Accrued expenses and other current liabilities (Notes 2, 6, 10 and 19)

Current portion of bonds (Note 9)

Total Current Liabilities

LONG-TERM LIABILITIES

Bonds - net of current portion (Note 9)

Other long-term payables (Notes 10 and 18)

Accrued pension cost (Notes 2 and 11)

Guarantee deposits (Note 18)

Deferred gain on sales and leaseback (Note 2)

Total Long-term Liabilities

Total Liabilities

SHAREHOLDERS' EQUITY (Notes 2 and 13)

Capital stock - $10 par value

Authorized: 24,600,000 thousand shares

Issued:

Preferred - 1,300,000 thousand shares

Common - 18,622,887 thousand shares in 2002 and

16,832,554 thousand shares in 2001

Capital surplus:

Merger and others (Note 2)

Treasury stock (Note 3)

Retained earnings:

Appropriated as legal reserve

Appropriated as special reserve

Unappropriated earnings

Unrealized loss on long-term investments (Note 2)

Cumulative translation adjustments (Note 2)

Treasury stock (at cost) - 42,001 thousand shares (Notes 2, 3 and 14)

Total Shareholders' Equity

$2,466,998

4,849,234

14,004,383

5,839,488

4,000,000

31,160,103

35,000,000

4,281,665

2,210,542

1,395,066

114,928

43,002,201

74,162,304

13,000,000

186,228,867

56,961,753

43,036

18,641,108

22,151,089

(194,283)

945,129

(1,923,492)

295,853,207

$2,082,606

1,123,894

12,367,319

4,636,800

5,000,000

25,210,619

24,000,000

1,854,853

7,210,972

268,165

33,333,990

58,544,609

13,000,000

168,325,531

57,128,433

17,180,067

349,941

19,977,402

1,228,701

277,190,075

TOTAL ASSETS

$370,015,511

100

$335,734,684

100

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$370,015,511

100

$335,734,684

100

The accompanying notes are an integral part of the financial statements.
(With T N Soong & Co. report dated January 16, 2003)

TSMC

Annual Report 2002

TSMC

Annual Report 2002

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

STATEMENTS OF INCOME

For the Years Ended December 31, 2002 and 2001

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

2002

2001

Amount

GROSS SALES (Notes 2 and 16)

$164,805,296

$128,563,819

SALES RETURNS AND ALLOWANCES (Note 2)

(3,843,967)

(2,675,816)

NET SALES

160,961,329

100

125,888,003

100

COST OF SALES (Note 16)

GROSS PROFIT

OPERATING EXPENSES (Note 16)

Research and development

General and administrative

Marketing

Total Operating Expenses

INCOME FROM OPERATIONS

NON-OPERATING INCOME

Interest (Note 2)

Gain on sales of property, plant and equipment (Note 2)

Technical service income (Notes 16 and 18)

Insurance compensation - net

Amortization of premium income from option contracts - net

(Notes 2 and 19)

Other (Note 16)

Total Non-operating Income

NON-OPERATING EXPENSES

Investment loss recognized by equity method - net (Notes 2 and 6)

Interest (Notes 2, 7 and 19)

Amortization of premium expense from option contracts - net

(Notes 2 and 19)

Loss on sales of and provision for loss on property, plant and

equipment (Note 2)

(Forward)

108,994,184

51,967,145

11,725,035

5,164,907

900,897

17,790,839

34,176,306

1,008,147

273,998

204,350

276,398

1,762,893

5,716,510

2,119,935

419,513

221,955

89,506,952

36,381,051

10,649,019

6,048,665

2,341,081

19,038,765

17,342,286

1,365,919

52,376

55,077

860,835

234,732

322,618

2,891,557

6,429,631

1,951,830

234,862

Foreign exchange loss - net (Notes 2 and 19)

Casualty loss - net (Note 2)

Amortization of bond issuance cost (Note 2)

Loss on sales of long-term investments (Note 2)

Other

Total Non-operating Expenses

INCOME BEFORE INCOME TAX

2002

Amount

$120,568

119,485

18,523

2,403

87,852

8,826,744

2001

Amount

$695,620

12,504

102,978

147,703

9,575,128

3,824,459

Gain on
Sales of
Properties

Donation

Treasury
Stock

27,112,455
Total

Legal
Reserve

Special
Reserve

Unappropriated
10,658,715
Earnings

Total

INCOME TAX BENEFIT (EXPENSE) (Notes 2 and 12)

NET INCOME

(5,502,164)

$21,610,291

(4)

$14,483,174

EARNINGS PER SHARE (Note 15)

Basic earnings per share

Diluted earnings per share

Before
Income
Tax

$1.43

After
Income
Tax

$1.14

Before
Income
Tax

$0.55

After
Income
Tax

$0.75

The pro forma net income and earnings per share, on the assumption that the stock of parent company held by its subsidiary is treated

as an investment instead of the treasury stock, are shown as follows (Note 14):

NET INCOME

EARNINGS PER SHARE

Basic earnings per share

Diluted earnings per share

The accompanying notes are an integral part of the financial statements.
(With T N Soong & Co. report dated January 16, 2003)

Before
Income
Tax
$ 27,086,546

After
Income
Tax
$ 21,584,382

$1.43

$1.13

TSMC

Annual Report 2002

TSMC

Annual Report 2002

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Years Ended December 31, 2002 and 2001

(In Thousand New Taiwan Dollars)

CAPITAL STOCK ISSUED

CAPITAL SURPLUS (Notes 2 and 13)

RETAINED EARNINGS (Note 13)

Preferred Stock

Shares
(Thousand)

Amount

Common Stock
Shares
(Thousand)

Amount

From
Merger

Additional
Paid-in Capital

From Long-term
Investments

Excess on
Foreign Bond
Investment

Gain on
Sales of
Properties

Donation

Treasury
Stock

Total

Legal
Reserve

Special
Reserve

Unappropriated
Earnings

Total

UNREALIZED
GAIN (LOSS) ON
LONG-TERM
INVESTMENTS
(Note 2)

CUMULATIVE
TRANSLATION
ADJUSTMENTS
(Note 2)

TREASURY
STOCK
(Notes 2, 3
and 14)

TOTAL
SHAREHOLDERS'
EQUITY

BALANCE, JANUARY 1, 2001

1,300,000

$13,000,000

11,689,365

$116,893,646

$22,329,129

$23,172,550

$246,219

$9,410,632

$127,236

$55

$ -

$55,285,821

$10,689,323

$1,091,003

$65,143,847

$76,924,173

($71,564)

($278,377)

$261,753,699

Appropriations of prior year's earnings

Legal reserve

Special reserve

Bonus to employees - stock

Cash dividends paid for preferred stocks

Stock dividends - 40%

Remuneration to directors and supervisors

Net income in 2001

Reclassification of the accumulated deficits from the merged

company

Gain on sales of property, plant and equipment

Gain on sales of property, plant and equipment from investees

Reversal of the unrealized loss on long-term investments

Translation adjustments

467,443

4,674,426

4,675,746

46,757,459

1,803,168

162

39,282

BALANCE, DECEMBER 31, 2001

1,300,000

13,000,000

16,832,554

168,325,531

24,132,297

23,172,550

246,381

9,410,632

166,518

Appropriations of prior year's earnings

Legal reserve

Special reserve

Bonus to employees - stock

Cash dividends paid for preferred stocks

Stock dividends - 10%

Remuneration to directors and supervisors

Net income in 2002

Transfer of the capital surplus from gain on sales of property,

plant and equipment to retained earnings

Transfer of the capital surplus from gain on sales of property,
plant and equipment of investees to retained earnings

Unrealized loss on long-term investments from subsidiaries

Translation adjustments

Reclassification of stocks of a parent company held by

subsidiaries from long-term investments to treasury stock

Capital surplus resulted from sales of treasury stock

107,078

1,070,783

1,683,255

16,832,553

(162)

(166,518)

1,803,168

39,282

162

(162)

43,036

57,128,433

17,180,067

349,941

19,977,402

37,507,410

1,448,317

(1,448,317)

(349,941)

349,941

6,490,744

(6,490,744)

(741,062)

741,062

(4,674,426)

(41,137)

(46,757,459)

(584,303)

14,483,174

(1,803,168)

(39,282)

(162)

(1,070,783)

(455,000)

(16,832,553)

(133,848)

21,610,291

153,794

166,518

162

71,564

(194,283)

1,507,078

1,228,701

(283,572)

(41,137)

(584,303)

14,483,174

71,564

1,507,078

277,190,075

(455,000)

(133,848)

21,610,291

(194,283)

(283,572)

(1,923,492)

43,036

(166,518)

12,724

BALANCE, DECEMBER 31, 2002

1,300,000

$13,000,000

18,622,887

$186,228,867

$24,132,297

$23,172,550

$246,219

$9,410,632

$ -

$55

$43,036

$57,004,789

$18,641,108

$22,151,089

$40,792,197

($194,283)

$945,129

($1,923,492)

$295,853,207

The accompanying notes are an integral part of the financial statements.
(With T N Soong & Co. report dated January 16, 2003)

TSMC

Annual Report 2002

TSMC

Annual Report 2002

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2002 and 2001

(In Thousand New Taiwan Dollars)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation and amortization

Deferred income taxes

Investment loss recognized by equity method - net

Loss on sales of long-term investments - net

Loss (gain) on sales of and provision for loss on property,

plant and equipment - net

Accrued pension cost

Allowance for doubtful receivables

Allowance for sales returns and others

Changes in operation assets and liabilities:

Decrease (increase) in:

Receivable from related parties

Notes receivable

Accounts receivable - net

Inventories - net

Prepaid expenses and other current assets

Forward exchange contracts receivable

Increase (decrease) in:

Payable to related parties

Accounts payable

Forward exchange contracts payable

Accrued expenses and other current

liabilities

Net Cash Provided by Operating Activities

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisitions of:

Property, plant and equipment

Long-term investments

Proceeds from sales of:

Property, plant and equipment

Long-term investments

Increase in deferred charges

Decrease in refundable deposits

Net Cash Used in Investing Activities

(Forward)

2002

2001

$21,610,291

$14,483,174

57,621,462

5,489,503

5,716,510

2,403

(52,043)

355,689

(170,628)

(218,484)

(9,659,627)

116,342

10,462,189

(1,835,918)

(148,120)

(199,609)

384,392

3,725,340

(379,579)

1,467,988

94,288,101

(54,443,595)

(10,187,730)

494,805

1,402

(5,724,583)

229,443

(69,630,258)

48,875,754

(3,840,777)

6,429,631

102,978

182,486

345,318

153,758

377,384

470,954

(51,407)

10,377,678

2,463,517

359,342

49,480

(2,263,972)

(6,866,059)

218,165

(201,096)

71,666,308

(68,002,448)

(4,563,682)

298,231

162,334

(1,465,703)

195,073

(73,376,195)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of bonds

Payments on lease obligation

Increase (decrease) in guarantee deposits

Remuneration paid to directors and supervisors

Cash dividends paid for preferred stocks

Net Cash Provided by (Used in) Financing Activities

2002

2001

$10,000,000

(5,815,906)

(133,848)

(455,000)

3,595,246

(50,000)

124,593

(584,303)

(41,137)

(550,847)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

28,253,089

(2,260,734)

CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR

33,403,706

35,664,440

CASH AND CASH EQUIVALENTS, END OF THE YEAR

$61,656,795

$33,403,706

SUPPLEMENTAL INFORMATION

Interest paid (excluding capitalized interest of NT$165,857
thousand and NT$207,297 thousand in 2002 and 2001,
respectively)

Income tax paid

Noncash investing and financing activities:

Reclassification of stocks of a parent company held by subsidiaries

from long-term investments to treasury stocks

Effect of exchange rate changes on cash and cash equivalents

Current portion of bonds

Cash paid for acquisitions of property, plant and equipment:

$1,771,682
$12,661

$1,923,492
($142,438)

$4,000,000

$1,980,399
$16,318

$-
$1,258,395

$5,000,000

Total acquisitions

$56,080,659

$55,977,367

Decrease (increase) in payable to contractors and equipment

suppliers

Cash paid for acquisitions of deferred charges:

Total acquisition

Other long-term payable (including current portion)

The accompanying notes are an integral part of the financial statements.
With T N Soong & Co. report dated January 16, 2003)

(1,637,064)

$54,443,595

$10,401,176

(4,676,593)

$5,724,583

12,025,081

$68,002,448

$1,465,703

TSMC

Annual Report 2002

TSMC

Annual Report 2002

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

NOTES TO FINANCIAL STATEMENTS

(Amounts in Thousand New Taiwan Dollars, Unless Specified Otherwise)

1. GENERAL

Taiwan Semiconductor Manufacturing Company Ltd. (the ''Company'' or ''TSMC''), a Republic of China corporation, was incorporated as a

venture among the Government of the Republic of China, acting through the Development Fund of the Executive Yuan; Philips

Electronics N.V. and certain of its affiliates (Philips); and certain other private investors. In September 1994, its shares were listed on the

Taiwan Stock Exchange. In October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange in the form of

American Depositary Shares.

TSMC is engaged mainly in the manufacturing, selling, packaging, and testing and designing of integrated circuits and other

semiconductor devices, and the manufacturing of masks.

2. SIGNIFICANT ACCOUNTING POLICIES

Cash and cash equivalents

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

are classified as cash equivalents.

Allowance for doubtful receivables

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

Sales and sales returns and allowances

Sales are recognized when titles of products and risks of ownerships are transferred to customers, primarily upon shipment. Allowance

and related provisions for sales returns and others are estimated based on historical experience. Such provisions are deducted from sales

in the year the products are sold and the estimated related costs are deducted from cost of sales.

Inventories

Inventories are stated at the lower of cost (standard cost and adjusted to approximate weighted-average cost at the end of each period)

or market value. Market value represents net realizable value for finished goods and work in process, and replacement value for raw

materials, supplies and spare parts.

Long-term investments

Investments in shares of stock of companies wherein the Company exercises significant influence on the operating and financial policy

decisions are accounted for using the equity method. The Company's proportionate share in the net income or net loss of investee

companies are recognized as components of the ''Investment income/loss recognized by equity method - net'' account. The Company

adopted Statements of Financial Accounting Standards No. 30, ''Accounting for Treasury Stock'' (SFAS 30) on January 1, 2002. SFAS 30

requires a parent company to record stock held by its subsidiary as treasury stock. The recorded value of treasury stock is based upon

the carrying values of the short/long-term investments on the subsidiaries' books as of January 1, 2002.

When the Company subscribes to additional investee shares at a percentage different from its existing equity interest, the resulting

carrying amount of the investment in equity investee differs from the amount of Company's proportionate share in the investee's net

equity. The Company records such difference as an adjustment to ''capital surplus'' as well as the ''long-term investments'' accounts. In

the event an investee has an accumulated deficit, it will record an offset to its capital surplus, excluding the reserve for asset revaluation,

through retained earnings. The Company will also record a corresponding entry equivalent to its proportionate share of the investee

capital surplus, excluding the reserve for asset revaluation, that was generated subsequent to any acquisition of equity interest in the

investee. If an investee's functional currency is a foreign currency, ''cumulative translation adjustments'' would result from the process of

translating the investees' financial statements into the functional currency of the Company.

Other stock investments are accounted for using the cost method. Cash dividends are recognized as income in the year received but are

accounted for as reduction in the carrying values of the long-term investments if the dividends are received in the same year that the

related investments are acquired. Stock dividends are recognized neither as investment income nor increase of long-term investment

but recorded only as an increase in the number of shares held. An allowance is recognized for any decline in the market value of

investments using quoted market prices with the corresponding amount debited to shareholders' equity. A reversal of the allowance will

result from a subsequent recovery of the market value. The carrying values of investments with no quoted market price are reduced to

reflect another than temporary decline in their values with the related impairment loss charged to income.

Investments in foreign mutual funds are stated at the lower of aggregate cost or net asset value (NAV). An allowance is recognized

when the cost of the funds are lower than their net asset values, with the corresponding amount debited to shareholders' equity. A

reversal of the allowance will result from a subsequent recovery of the net asset value.

The costs of investments sold are determined using the weighted-average method.

If an investee company has an unrealized loss on a long-term investment evaluated using the lower-of-cost-or-market method, the

Company recognizes a corresponding unrealized loss in proportion to its equity interest and records the amount as a component of its

own shareholders' equity.

Gain or loss on transactions with investee companies wherein the Company owned at least 20% of the outstanding common stock but

less than a controlling interest are deferred in proportion to the ownership percentage until realized through a transaction with a third

party. The entire amount of the gains or losses on sales to majority-owned subsidiaries are deferred until such gains or losses are

realized through the subsequent sale of the related products to third parties. Gains or losses from sales by investee companies to the

Company are deferred in proportion to the ownership percentage until realized through transactions with third parties.

Property, plant and equipment, assets leased to others and idle assets

Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Idle assets are stated at the

lower of book value or net realized value. Significant additions, renewals, betterments and interest expense incurred during the

construction period are capitalized. Maintenance and repairs are expensed in the period incurred. Property, plant and equipment

covered by agreements qualifying as capital leases are carried at the lower of the present value of future minimum rent payments, or the

market value of the property at the inception date of the lease. The lessee's periodic rent payment includes the purchase price of the

leased property and the interest expense.

Depreciation is computed using the straight-line method over these estimated service lives: Buildings - 10 to 20 years; machinery and

equipment - 5 years; and office equipment - 3 to 5 years.

Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts,

and any gain or loss is credited or charged to income in the period of disposal.

Goodwill

Goodwill represents the excess of fair market value of identifiable net assets acquired and consideration paid in connection with a

business combination. The amount is amortized using the straight-line method over the estimated useful life of 10 years.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

Deferred charges

Deferred charges consist of software and system design costs, technology know-how, bond issuance costs, and technology license fees.

The amounts are amortized as follows: Software and system design costs - 3 years, technology know-how - 5 years; bond issuance

costs - the term of the bonds; technology license fee - the shorter of the estimated life of the technology or the term of the technology

interest income or expense.

The notional amount of foreign currency option contracts entered into for hedging purposes are not recognized as an asset or liability

on the contract dates. The premiums paid or received for the call or put options are amortized to income on a straight-line basis over

transfer contract.

Pension costs

Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition obligation and unrecognized

net gain/loss are amortized over 25 years.

Deferred gain on sales and leaseback

The gain on the sale of property by the Company that it simultaneously leased back is deferred. This deferred gain on sales and

leaseback transactions is amortized as follows: (a) operating leases - adjustment of rental expenses over the term of the leases and (b)

capital leases - adjustment of depreciation expenses over the estimated useful life or term of the lease; whichever is shorter.

Casualty loss

Casualty loss consists of the accrued loss caused by the earthquake on March 31, 2002 less the estimated insurance compensation.

Income tax

The Company uses an inter-period tax allocation method for income tax. Deferred income tax assets and liabilities are recognized for the

tax effects of temporary differences, unused tax credits, and operating loss carry forwards. Valuation allowances are provided to the

extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is,

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

liability does not relate to an asset or liability in the financial statements, then it is classified as current or non-current based on the

the term of the related contract.

Foreign-currency transactions

Foreign-currency transactions are recorded in New Taiwan dollars at the current rate of exchange in effect when the transaction occurs.

Gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in a foreign currency are

recognized in current operations. At year-end, foreign-currency assets and liabilities are revalued at the prevailing exchange rate with

the resulting gain or loss recognized in current operations.

3. NEW ACCOUNTING PRONOUNCEMENTS

In accordance with the Statement of Financial Accounting Standards No. 30, ''Accounting for Treasury Stock'' (SFAS 30) and other

relevant regulations from Securities and Futures Commission (SFC), the Company is required to reclassify its common stock held by

subsidiaries from short/long-term investments to treasury stock. The reclassification is based on the carrying value of NT$2,115,695

thousand as recorded by the Company's subsidiaries as of January 1, 2002. The adoption of SFAS 30 resulted in the decrease of long-

term investments and the increase of treasury stock by NT$1,923,492 thousand as of December 31, 2002, and an increase in net

income for the year ended December 31, 2002 by NT$25,909 thousand.

expected length of time before it is realized.

4. CASH AND CASH EQUIVALENTS

Any tax credit arising from the purchase of machinery, equipment and technology, research and development expenditures, personnel

Cash and bank deposits

training, investments in important technology-based enterprise are recognized using the current method.

Government bonds acquired under repurchase agreements

Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax provision.

As of January 1, 1998, income taxes on unappropriated earnings of 10% are expensed in the year of shareholder approval which is

usually the year subsequent to the year incurred.

Derivative financial instruments

The Company enters into foreign currency forward contracts to manage currency exposures in cash flow and in foreign currency-

denominated assets and liabilities. The differences in the New Taiwan dollar amounts translated using the current rate and the amounts

translated using the contracted forward rates are amortized over the terms of the forward contracts using the straight-line method. At

the balance sheet dates, the receivables or payables arising from forward contracts are restated using the prevailing current rate and the

resulting differences are recognized in income. Also, the receivables and payables related to the forward contract are netted with the

resulting amount presented as either an asset or liability.

The Company enters into interest rate swap transactions to manage exposures from changes in interest rates on existing liabilities. These

transactions are accounted for on an accrual basis, in which the cash settlement receivable or payable is recorded as an adjustment to

5. INVENTORIES - NET

Finished goods

Work in process

Raw materials

Supplies and spare parts

Less - allowance for losses

2002

$58,917,928

2,738,867

2001

$31,678,047

1,725,659

$61,656,795

$33,403,706

2002

$3,610,547

7,227,129

389,164

693,526

11,920,366

(1,580,030)

$10,340,336

2001

$1,618,635

6,685,094

521,680

870,780

9,696,189

(1,191,771)

$8,504,418

TSMC

Annual Report 2002

TSMC

Annual Report 2002

6. LONG-TERM INVESTMENTS

Shares of stock

Equity method

TSMC International Investment

TSMC Partners

Systems on Silicon Manufacturing Company

Pte Ltd. (SSMC)

Vanguard International Semiconductor (VIS)

Emerging Alliance Fund

Ya-Shin Technology

TSMC - North America

TSMC - Japan

Chi Cherng Investment

Hsin Ruey Investment

TSMC - Europe

Kung Cherng Investment

Cherng Huei Investment

Po Cherng Investment

Chi Hsin Investment

Prepayment for subscribed stocks

VIS

Cost method

Traded

Amkor Technology

Monolithic System Tech.

Taiwan Mask Corp.

Non-traded

United Technology

Shin-Etsu Handotai Taiwan Company Ltd.

Hon Tung Venture Capital

W.K. Technology Fund IV

Funds

Horizon Ventures

Crimson Asia Capital

2002

2001

Carrying
Value

% of
Owner Ship
-

Carrying
Value

% of
Owner Ship

$22,265,157

3,753,733

3,136,115

2,415,297

767,239

341,250

173,601

94,258

41,894

39,815

13,670

100

$19,987,814

3,032,376

2,907,967

3,377,526

741,617

786,062

80,156

156,694

157,352

10,147

177,812

166,639

164,724

158,252

33,042,029

31,905,138

849,360

280,748

104,289

32,129

193,584

105,000

83,916

50,000

849,666

195,452

41,988

237,440

280,748

32,129

193,584

105,000

150,000

50,000

811,461

125,701

27,091

152,792

$34,978,495

$32,869,391

100

On January 8, 2003, the Company's investee company, VIS issued 600,000 thousand shares of common stock at a discounted price of

NT$7 per share. The Company prepaid NT$849,360 thousand at the end of 2002 for the share subscription and paid an

additional NT$ 766,815 thousand in January 2003. In this round of equity offering, the Company purchased a total of 230,882

thousand shares of VIS stocks. As a result, its ownership in VIS increased from 25% to 28%.

The Company s investees, Hsin Ruey Investment, Chi Hsin Investment and Kung Cherng Investment were merged at the end of October

2002, with Hsin Ruey Investment as the surviving company. In addition, the Company s investees, Chi Cherng Investment, Cherng Huei

Investment and Po Cherng Investment were also merged at the end of October 2002. Chi Cherng Investment is the surviving company

of the merger. The Company s ownership is approximately 36% in Hsin Ruey Investment and approximately 36% in Chi Cherng

Investment subsequent to the merger.

The Company established Ya Shin Technology (''Ya Shin'') in November 2002 and subsequently signed a merger agreement with Global

UniChip Corp. (''Global UniChip'') in December 2002. The merger was effective on January 4, 2003 and Global UniChip is the surviving

company. The Company holds 52% of Global UniChips' shares after the completion of the merger.

The carrying value of the investments accounted for using the equity method and the related investment gains or losses were determined

based on the audited financial statements of the investees in the respective year. The investment gains or losses of the investee

companies consisted of the following:

TSMC International Investment

SSMC

VIS

TSMC Partners

Others

The market values and net asset values of the long-term investments is as follows:

Market value of traded stocks

Equity in the net assets of non-traded stocks

Net asset value of funds

7. PROPERTY, PLANT AND EQUIPMENT

Accumulated depreciation consisted of the following:

Buildings

Machinery and equipment

Office equipment

2002

($4,714,203)

(1,155,076)

(821,771)

993,292

(18,752)

2001

($4,855,844)

(1,722,080)

(2,236,940)

2,357,405

27,828

($5,716,510)

($6,429,631)

2002

$4,792,108

33,880,022

237,440

2002

$22,289,909

163,208,908

2,948,787

2001

$7,055,888

29,124,386

152,792

2001

$15,181,445

122,659,129

2,384,066

$188,447,604

$140,224,640

TSMC

Annual Report 2002

TSMC

Annual Report 2002

The status of construction of the Company's manufacturing facilities at December 31, 2002 is as follows:

10. OTHER LONG-TERM PAYABLES

Manufacturing Plant

Fab 6

Fab 12 Phase 1

Fab 14 Phase 1

Estimated
Costs

Accumulated
Expenditures

Expected or Actual
Date of Starting Operations

$93,932,000

80,318,400

30,411,000

$87,054,700

47,095,400

22,169,900

March 2000

March 2002

June 2003

Interest expense (before deducting capitalized amounts of NT$165,857 thousand in 2002 and NT$207,297 thousand in 2001) for the

years ended December 31, 2002 and 2001 were NT$2,285,792 thousand and NT$2,159,127 thousand, respectively. The interest rate

used for purposes of calculating the capitalized amounts was 5.283% in 2002 and 2001.

2002

2001

The changes in the fund and accrued pension cost are summarized as follows:

The Company entered into several license arrangements for certain semiconductor patents. The future payments to be paid under the

agreements as of December 31, 2002 are as follows:

Year

2003

2004

2005

2006

2007

2008 and thereafter

Less - current portion

11. PENSION PLAN

Amount

$1,157,299

1,226,805

987,009

469,189

486,566

1,112,096

5,438,964

(1,157,299)

$4,281,665

The Company has a pension plan for all regular employees that provide benefits based on length of service and average monthly salary

for the six month period prior to retirement.

The Company contributes an amount equal to 2% of salaries every month to a Pension Fund (the ''Fund''). The Fund is administered by a

pension fund monitoring committee (the ''Committee'') and deposited in the Committee's name in the Central Trust of China.

a. Components of pension cost

Service cost

Interest cost

Projected return on plan assets

Amortization

Net pension cost

2002

$442,294

121,552

(45,102)

1,681

$520,425

2001

$417,967

95,920

(43,968)

8,300

$478,219

TSMC

Annual Report 2002

8. DEFERRED CHARGES - NET

Technology license fees

Software and system design costs

Technology know-how

Bond issuance costs

Other

9. BONDS

Domestic unsecured bonds:

2002

$6,519,286

3,167,366

49,500

45,908

10,430

$9,792,490

2001

$996,578

2,073,752

103,500

33,091

32,802

$3,239,723

Issued on March 4, 1998 and payable on March 4, 2003 in one lump sum payment,

7.71% annual interest payable semi-annually

Issued on October 21, 1999 and payable on October 21, 2002 and 2004 in two equal

payments, 5.67% and 5.95% annual interest payable annually, respectively

Issued December 4 to 15, 2000 and payable in December 2005 and 2007 in two

equal payments, 5.25% and 5.36% annual interest payable annually, respectively

$4,000,000

5,000,000

10,000,000

15,000,000

Issued January 10 to 24, 2002 and payable in January 2007, 2009 and 2012 in three
equal payments, 2.6%, 2.75% and 3% annual interest payable annually, respectively

15,000,000

$39,000,000

$29,000,000

Future principal payments under the Company's bonds arrangements as of December 31, 2002 are as follows:

Year of Repayment

2003

2004

2005

2006

2007

2008 and thereafter

TSMC

Annual Report 2002

Amount

$4,000,000

5,000,000

10,500,000

7,000,000

12,500,000

$39,000,000

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

b. Income tax benefit (expense) consists of:

2002

2001

Benefit obligation

Vested benefit obligation

Nonvested benefit obligation

Accumulated benefit obligation

Additional benefits based on future salaries

Projected benefit obligation

Fair value of plan assets

Funded status

Unrecognized net transitional obligation

Unrecognized net gain

Accrued pension liabilities

Accrued pension cost

c. Actuarial assumptions

Discount rated used in determining present values

Future salary increase rate

Expected rate of return on plan assets

d. Contributions to pension fund

e. Payments from pension fund

$21,294

1,604,027

1,625,321

1,300,712

2,926,033

(1,014,086)

1,911,947

(149,391)

445,759

2,227

$2,210,542

3.75%

3.00%

3.75%

$164,720

$5,360

$739

1,024,525

1,025,264

1,407,014

2,432,278

(835,583)

1,596,695

(157,691)

415,849

$1,854,853

5.0%

$131,894

$ -

Current income tax expense before tax credits

Additional 10% on unappropriated earnings

Income tax credits

Other income tax

Income tax paid in current year

Net change in deferred income tax assets (liabilities)

Investment tax credits

Temporary differences

Valuation allowance

Income tax benefit (expense)

c. Deferred income tax assets (liabilities) consist of the following:

Current

Investment tax credits

Noncurrent

Investment tax credits

Temporary differences

Valuation allowance

2002

($4,704,298)

(162,938)

4,867,236

(12,661)

2,510,192

(1,072,086)

(6,927,609)

($5,502,164)

2001

($2,569,358)

(319,000)

2,888,358

(16,318)

144,925

(1,874,945)

5,570,797

$3,824,459

2002

2001

$3,320,000

$2,347,000

$23,247,653

(3,565,841)

(9,969,245)

$21,710,461

(2,493,755)

(3,041,636)

$9,712,567

$16,175,070

12. INCOME TAX BENEFIT (EXPENSE)

a. A reconciliation of income tax expense on income before income tax at the statutory rate and current income tax expense before tax

credits is shown below:

d. Integrated income tax information:

The balances of the imputation credit account (ICA) as of December 31, 2002 and 2001 were NT$6,650 thousand and NT$9,365

thousand, respectively.

Income tax expense based on ''income before income tax'' at

statutory rate of 25%

Tax-exempt income

Temporary and permanent differences

($6,778,114)

2,526,500

(452,684)

($2,664,679)

1,089,000

(993,679)

The imputation credit allocated to each shareholder shall be based on the balance in the ICA on the date of distribution of dividends;

thus the expected creditable ratio for 2002 may be adjusted according to the difference between the expected and actual imputation

credit allowed under the regulation.

e. The unappropriated retained earnings as of December 31, 2002 and 2001 included earnings generated through December 31, 1997

Current income tax expense - before tax credits

($4,704,298)

($2,569,358)

was NT$0 and NT$4,827 thousand, respectively.

2002

2001

The expected and actual credible ratio for 2002 and 2001 was 0.03% and 0.04%, respectively.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

f. As of December 31, 2002, investment tax credits consisted of the following:

13. SHAREHOLDERS EQUITY

Regulation

Items

Total
Creditable Amounts

Remaining
Creditable Amounts

Expiry Year

Statute for Upgrading

Purchase of machinery and

Industries

equipment

Statute for Upgrading

Research and development

Industries

expenditures

Statute for Upgrading

Personnel training

Industries

Statute for Upgrading

Reputation setting

Industries

Statute for Upgrading

Investments in important

Industries

technology based
enterprises

$4,237,050
4,767,347
8,180,857
3,110,906
5,335,558

$-
4,767,347
8,180,857
3,110,906
2,775,029

$25,631,718

$18,834,139

$562,158
671,546
1,974,320
3,111,472
1,540,000

$-
671,546
1,974,320
3,111,472
1,540,000

$7,859,496

$7,297,338

$8,822
16,104
43,264
28,886

$97,076

$10,133
319

$10,452

$2,878
5,420
201,372
138,864
1,947

$-
16,104
43,264
28,886

$88,254

$-
319

$319

$-
5,420
201,372
138,864
1,947

$350,481

$347,603

2002
2003
2004
2005
2006

2002
2003
2004
2005

2002
2003

2002
2003
2004
2005
2006

The Company has issued 369,019 thousand American Depositary Shares (ADS) on the New York Stock Exchange as of December 31,

2002. The number of common shares represented by the ADSs is 1,845,097 thousand shares (one ADS represents five common shares).

Capital surplus can only be used to offset a deficit under the ROC Company Law. However, the components of capital surplus generated

from donations (donated capital) and the excess of the issue price over the par value of capital stock (including the stock issued for new

capital, mergers, and the purchase of treasury stock) can be transferred to capital as stock dividends.

The Company's Articles of Incorporation provide that the following shall be appropriated from annual net income (less any deficit):

a. 10% legal reserve;

b. Special reserve in accordance with relevant laws or regulations;

c. Remuneration to directors and supervisors and bonus to employees equal to 0.3% and at least 1% of the remainder, respectively.

Individuals who receive bonus to employees may include employees of affiliated companies and are approved by the board of

directors or a representative of the board of directors;

d. Dividends to holders of preferred shares equal to a 3.5% annual rate, based on the period which the preferred shares have been

outstanding;

e. The appropriation of the remaining balance after the above shall be decided at the shareholders meeting.

Dividends are distributed in cash, shares of common stock or a combination of cash and common stock. Distribution of profits are

preferably made in the form of stock dividend. The total of cash dividends paid in any given year should not exceed 50% of total

dividends distributed.

These appropriations of net income shall be approved by the shareholders in the following year and given effect in the financial

statements of that year.

The bonus to employees and the remuneration to directors and supervisors appropriated from the earnings of 2001 were approved in

the shareholders meeting on May 7, 2002:

Bonus to employees - in stock

Remuneration to directors and supervisors - in cash

Amounts

$1,070,783

133,848

$1,204,631

Shares (Thousand)

107,078

The shares distributed as a bonus to employees represent 0.64% of the Company s total outstanding common shares as of December

31, 2001.

The above appropriation of the earnings is consistent with the resolution of the meeting of board of directors dated on March 26, 2002.

If the above distributable earnings were both paid in cash, and charged against income of 2001, the basic EPS after income tax for the

g. Income from the following expansion and construction of the Company s manufacturing plants is exempt from income tax:

year ended December 31, 2001 would be decreased from NT$0.83 to NT$0.76.

Expansion of Fab 1 and Fab 2 - modules A and B, Fab 3 and Fab 4, and construction of Fab 5

Construction of Fab 6

1999 to 2002

2001 to 2004

The above information associated with the appropriation of bonus to employees and remuneration to directors and supervisors is

available at Market Observation System website.

h. The tax authorities have examined income tax returns of the Company through 1999. However, the Company is contesting the

assessment of the tax authority for 1992, 1993, 1996 and 1997.

The aforementioned appropriation for legal reserve shall be made until the reserve equals the aggregate par value of the Company s

outstanding capital stock. The reserve can only be used to offset a deficit; or distribute as stock dividend when the balance is 50% of the

aggregate par value of the outstanding capital stock of the Company up to the half amount of the reserve balance.

Tax-Exemption Period

As of January 16, 2003, the appropriation of the earnings of 2002 has not been yet resolved by the board of directors.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

A special reserve equivalent to the debit balance of any account shown in the shareholder s equity section of the balance sheet (except

15. EARNINGS PER SHARE rnings per share (EPS) is computed as follows:

for the recorded cost of treasury stock held by subsidiaries), other than the deficit, shall be made from unappropriated retained earnings

pursuant to existing regulations promulgated by the Securities and Futures Commission. The special reserve is allowed to be

appropriated when the debit balance of such accounts are reversed.

The gain on sales or disposal of property, plant and equipment generated prior to 2000, less the applicable income tax, was reclassified

to capital surplus as of each year-end. A gain in the amount of NT$39,282 thousand, less applicable income tax, was recognized and

transferred to the capital surplus at the end of 2001 prior to the amended regulations. To comply with the amended regulations, the

aforementioned capital surplus was transferred to retained earnings upon the approval of the shareholders meeting on May 7, 2002.

The shareholders also approved the accumulated capital surplus of NT$127,236 thousand generated from gains prior to 2000 to be

transferred to retained earnings, after appropriating the required 10% legal reserve.

Under the Integrated Income Tax System that became effective on January 1, 1998, ROC resident shareholders are allowed a tax credit

for the income tax paid by the Company on earnings generated as of January 1, 1998. An Imputation Credit Account (ICA) is maintained

by the Company for such income tax and the tax credit allocated to each shareholder.

On June 25, 2002, the SFC approved the Company's Employee Stock Option Plan (''the Plan''). The Plan provides qualified employees with

100,000 thousand units of option rights with each unit representing 1 common share of stock. The option rights are valid for 10 years

and exercisable at certain percentages subsequent to the second anniversary of issuance. Under the terms of the plan, stock options are

granted at an exercise price equal to the closing price of TSMC's common shares listed on Taiwan Stock Exchange at the date of grant.

As of December 31, 2002, there were 19,726 thousand shares granted at a weighted average price of approximately NT$ 53.

The Company issued 1,300,000 thousand shares of unlisted Series A - preferred stock to certain investors on November 29, 2000. The

following are the rights of the preferred shareholders and other terms and conditions:

Preferred shareholders

a. are entitled to receive cumulative cash dividends at an annual rate of 3.5%.

b. are not entitled to receive any common stock dividends (whether declared out of unappropriated earnings or capital surplus).

c. have priority over the holders of common shares to the assets of the Company available for distribution to shareholders upon

liquidation or dissolution, however, the preemptive rights to the assets shall not exceed the issue value of the shares.

d. have voting rights similar to that of the holders of common shares.

Earnings per share (EPS) is computed as follows:

December 31, 2002

Income

Less - preferred stock dividends

Basic earnings per share

Income available to common

shareholders

Diluted earnings per share

Income available to common

shareholders

December 31, 2001

Income

Less - preferred stock dividends

Basic earnings per share

Income available to common

shareholders

Diluted earnings per share

Income available to common

shareholders

Amounts (Numerator)
Before
Income Tax

After
Income Tax

Share
(Denominator)
(Thousand)

EPS (Dollars)

Before
Income Tax

After
Income Tax

$27,112,455

$21,610,291

(455,000)

$26,657,455

$21,155,291

18,580,700

$1.43

$1.14

$26,657,455

$21,155,291

18,580,700

$1.43

$1.14

$10,658,715

$14,483,174

(455,000)

$10,203,715

$14,028,174

18,622,887

$0.55

$0.75

$10,203,715

$14,028,174

18,622,887

$0.55

$0.75

The potential common shares from the employee stock option plan (see Note 13) are not included in the denominator of the diluted

earning-per-share computation as such shares are not dilutive using the treasury stock method under the Statement of Financial

e. have no right to convert their shares into common shares. The preferred shares are to be redeemed within thirty months from their

Accounting Standards No. 24, ''Earning Per Share''.

issuance. The preferred shareholders have the aforementioned rights and the Company s related obligations remain the same until

the preferred shares are redeemed by the Company.

The average number of shares outstanding for EPS calculation has been adjusted retroactively for issuance of stock dividends and stock

bonuses. The retroactive adjustment caused the basic EPS before income tax and after income tax for the year ended December 31,

2001 to decrease from NT$0.61 and NT$0.83 to NT$0.55 and NT$0.75, respectively.

14. TREASURY STOCK (COMMON STOCK)

Purpose of Purchase

Year ended December 31, 2002

(Shares in Thousand)

16. RELATED PARTY TRANSACTIONS

Beginning
Shares

Increase

Decrease

Ending
Shares

The Company engages in business transactions with the following related parties:

a. Industrial Technology Research Institute (ITRI); the Chairman of the Company is a director of ITRI

b. Philips Electronics N.V. (Philips); a major shareholder

Reclassification of stocks held by subsidiaries from
short/long-term investment to treasury stocks

39,270

3,818

1,087

42,001

On January 1, 2002, the Company reclassified its capital stock held by its subsidiaries with book value of NT$2,115,695 thousand from

long-term investments to treasury stock. Proceeds from the sale of treasury stock for the year ended December 31, 2002 were

NT$96,501 thousand. As of December 31, 2002, the book value and market value of the treasury stock was NT$1,923,492 thousand

and NT$2,048,164 thousand, respectively. Capital stock held by a subsidiary as an investment is recorded as treasury stock with the

holder having the same rights as other common shareholders.

TSMC

Annual Report 2002

c. Subsidiaries

TSMC - North America

TSMC - Europe

TSMC - Japan

TSMC

Annual Report 2002

d. Investees

VIS

SSMC

e. Indirect subsidiaries

TSMC Technology

WAFERTECH, LLC.

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

2002

2001

Amount

$94,433,401

2,909,008

94,409

92,119

7,018

1,152

$97,537,107

$9,955,154

3,469,198

2,751,297

$16,175,649

$40,401

$ -

2,389,257

114,546

1,177,094

48,972

3,111

$3,732,980

$6,797,817

3,801,975

42,984

$10,642,776

$161,604

Non-operating income

SSMC (technical service income mainly)

WAFERTECH, LLC

VIS

At December 31

Receivables

TSMC - North America

Philips and its affiliates

VIS

ITRI

SSMC

Others

2002

2001

Amount

$126,061

1,635

$127,696

$9,739,236

352,706

58,301

22,974

5,678

4,593

$95,284

4,612

467

$100,363

116,499

320,179

37,383

20,671

29,129

Prepaid expense and other current asset

Prepaid rent - ITRI

$ -

$42,664

$10,183,488

100

$523,861

100

Payables

Philips and its affiliates

VIS

WAFERTECH, LLC

SSMC

TSMC - Europe

TSMC - Japan

TSMC - North America

TSMC Technology

$730,847

653,876

617,751

391,426

29,520

19,643

14,511

9,424

$499,331

548,472

817,616

470

54,601

15,355

136,443

10,318

$2,849,517

100

$2,418,276

100

$2,466,998

100

$2,082,606

100

$208,226

132,086

$340,312

$ -

$194,696

124,384

1,028,725

118,648

$1,466,453

$268,871

24,645

$293,516

Refundable deposits - VIS

$514,846

$750,788

Sales to related parties are based on normal selling prices and collection terms. The payables to WAFERTECH represent the purchase of

finished goods. The purchase prices of finished goods were calculated in accordance with the related contractual agreements.

The Company has authorized its exclusive distributor, TSMC - North America, to promote semiconductor products in North America and

South America starting January 2002. The selling prices to TSMC - North America are approximately 99% of those to third parties and

are invoiced with thirty day payment terms, which is not significantly different from third parties.

TSMC

Annual Report 2002

For the years

Sales

TSMC - North America

Philips and its affiliates

ITRI

VIS

SSMC

WAFERTECH, LLC

Purchase

WAFERTECH, LLC

VIS

SSMC

Rental expense - ITRI

Manufacturing expenses

Technical assistance fee - Philips

Marketing expenses

Commission

TSMC - Japan

TSMC - Europe

TSMC - North America

Service Charge

TSMC - North America

Sales of property, plant and equipment

VIS

WAFERTECH, LLC

(Forward)

TSMC

Annual Report 2002

17. SIGNIFICANT LONG-TERM OPERATING LEASES

g. The Company provided guarantee on loans amounting to US$200,000 thousand, US$40,000 thousand and US$440,000 thousand

The Company leases land from the Science-Based Industrial Park Administration where its Fab 2 through Fab 14 manufacturing facilities

for TSMC Development, Inc., TSMC- North America and WAFERTECH, LLC, respectively.

reside. These agreements expire on various dates from March 2008 to December 2020 and have annual rent payments aggregating

NT$225,576 thousand. The agreements can be renewed upon their expiration.

Future remaining lease payments are as follows:

Year

2003

2004

2005

2006

2007

2008 and thereafter

18. SIGNIFICANT COMMITMENTS AND CONTINGENCY AS OF DECEMBER 31, 2002

The Company's commitments and contingency as of December 31, 2002 are as follows:

Amount

$225,576

225,576

1,742,413

$2,870,293

h. Under a Technical Transfer Agreement with National Semiconductor Corporation (''National'') entered into on June 27, 2000, the

Company shall receive payments for license of certain technology to National. The agreement will remain in force for ten years. After

the initial expiration date, this agreement will be automatically renewed for successive periods of two years unless pre-terminated by

either party under certain conditions. In January 2003, the agreement was amended such that National will discontinue making

payments under the original terms and the Company will discontinue transferring any additional technology. The Company granted

National the option to request additional technology transfers under the same terms and conditions of the original agreement

through January 2008.

i. The Company entered into a Manufacturing Agreement with Vanguard International Semiconductor Corp. (''VIS''). VIS agrees to

reserve certain production capacity for the Company to manufacture certain logic devices or other technologies required by the

Company's customers at selling prices as agreed by the parties. The Company paid NT$1,200,000 thousand to VIS as security bond.

VIS shall return portions of the bond without any interest to the Company upon the purchase of wafers by the Company. The

contract will remain in force for five years.

j. Starting from 2001, the Company entered into several license arrangements for certain semiconductor patents. The terms of the

contracts range from five to ten years with payments to be paid in the form of royalties over the term of the related contracts. The

Company has recorded the related amounts as a liability and a deferred charge to be amortized to cost of sales on a straight-line

basis over the shorter of the estimated life of the technology or the term of the contract.

k. Unused letter of credits as of December 31, 2002 were NT$6,480 thousand, 51,000 thousand, Euro 520 thousand and SG$85

a. Under a Technical Cooperation Agreement with Philips, as amended on May 12, 1997, the Company shall pay technical assistance

thousand.

fees as a percentage of net sales, as defined in the agreement, of certain products. The agreement shall remain in force up to July 8,

l. As of December 31, 2002, unused credit lines for short-term loans were NT$7,930,000 thousand and US$337,500 thousand.

2007 and thereafter be automatically renewed for successive periods of three years. Under the amended agreement, the fee is

subject to deduction by the amounts the Company pays to any third party for settling any licensing/infringement issue after the first

five-year period of the amended agreement, provided that the fee after reduction will not be below a certain percentage of the net

19. ADDITIONAL DISCLOSURES

selling price.

Following are the additional disclosures required by the SFC for TSMC and investees:

b. Subject to certain equity ownership and notification requirements, Philips and its affiliates can avail themselves each year of up to

a. Financing provided: Please see Table 1 attached;

30% of the Company's production capacity.

c. Under a technical cooperation agreement with ITRI, the Company shall reserve and allocate up to 35% of certain of its production

capacity for use by the Ministry of Economic Affairs (MOEA) or any other party designated by the MOEA.

d. Under several foundry agreements, the Company shall allocate a portion of its production output for sale to certain major customers

from whom guarantee deposits of US$39,810 thousand had been received as of December 31, 2002.

e. Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March 30, 1999, the parties formed a

joint venture company to be named Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) for the purpose of constructing an

integrated circuit foundry in Singapore, and allow the Company to invest in 32% of SSMC's capital. The Company and Philips

committed to buy a specific percentage of the production capacity of SSMC. If any party defaults on the agreement and the capacity

utilization of SSMC falls below a specific percentage of its total capacity, the defaulting party should compensate SSMC for all related

unavoidable costs.

f. The Company provides of technical services to SSMC under a Technical Cooperation Agreement (the ''Agreement'') entered into on

May 12, 1999. The Company receives compensation for such services computed at a specific percentage of net selling prices of

specific products sold by SSMC. The Agreement remains in force for ten years and is automatically renewed for successive periods of

five years unless pre-terminated by either party under certain conditions.

b. Endorsement/guarantee provided: Please see Table 2 attached;

c. Marketable securities held: Please see Table 3 attached;

d. Marketable securities acquired and disposed of at costs or prices of at least NT$100 million or 20% of the paid-in capital: Please see

Table 4 attached;

e. Acquisition of individual real estate at costs of at least NT$100 million or 20% of the paid-in capital: Please see Table 5 attached;

f. Disposal of individual real estate at prices of at least NT$100 million or 20% of the paid-in capital: None;

g. Total purchase from or sale to related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 6

attached;

h. Receivable from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 7 attached;

i. Names, locations, and related information of investees of which the Company exercises significant influence: Please see Table 8

attached;

j. Financial instrument transactions:

1) Derivative financial instruments

The relevant information for the derivative financial instruments entered into by the Company is as follows:

TSMC

Annual Report 2002

TSMC

Annual Report 2002

a) Forward exchange contracts as of December 31, 2002

c) Option contracts

Currency

Sell

Buy

USD

EUR

JP Y

Contract
Amount
(Thousand)

$715,000

89,000

4,274,850

Fair Value
(Thousand)

Settlement Date

Maturity
(Thousand)

NT$24,874,483

Jan. 2, 2003 - Feb. 24, 2003

NT$24,886,765

NT$3,231,707

Jan. 15, 2003 - Mar. 14, 2003

NT$1,249,159

Jan. 6, 2003 - Jan. 15, 2003

NT$3,234,260

NT$1,250,394

As of December 31, 2002, receivables from forward exchange contracts (shown in the balance sheets as part of ''other current assets''

account) aggregate to NT$199,609 thousand, and payables from forward exchange contracts (shown in the balance sheets as part

of ''other current liabilities'' account) aggregate to NT$17,538 thousand. The net exchange gain for the year ended December 31,

2002 was NT$1,522,383 thousand.

The net assets or liabilities hedged by the above forward exchange contracts are as follows:

Accounts receivable

Accounts payable

b) Interest rate swaps

Amount
(Thousand)

US$487,905

JP 4,287,733

EUR 49,026

The Company entered into foreign currency option contracts to hedge risks of exchange rate fluctuations arising from its anticipated

U.S. dollar cash receipts on export sales and its European and Yen currency obligations for purchases of machinery and equipment.

Outstanding option contracts as of December 31, 2002 were as follows:

Type

Contract

Currency

Contract
Amount
(Thousand)

Carrying
Value

Fair Value
(Thousand)

Strike Price

Maturity

European

Call option written

European

Call option written

European

Put option written

USD

EUR

$230,000

$10,000

10,000

($404,884)

32.78~33.22 (US$/NT$)

Jan. 9, 2003 - Feb. 25, 2003

($3,652)

($1,596)

119.2 (US$/JPY)

Jan. 30, 2003 - Feb. 27, 2003

1.017 (US$/EUR)

Jan. 30, 2003 - Feb. 27, 2003

For the year ended December 31, 2002, the Company recognized premium income of NT$228,030 thousand and premium expense

of NT$647,543 thousand.

d) Transaction risk

i) Credit risk. The banks, which are the counter-parties to the foregoing derivative financial instruments, are reputable financial

institutions. Management believes its exposures related to the potential default by those counter-parties are low.

ii) Market price risk. All derivative financial instruments are intended as hedges for fluctuations in currency exchange rates on the

Company 's foreign currency denominated receivables or payables and interest rate fluctuations on its floating rate long-term

loans. Gains or losses from forward exchange contracts are likely to be offset by gains or losses from the hedged receivables and

payables. Interest rate risks are also controlled as the expected cost of capital is fixed. Thus, market price risks are believed to be

The Company entered into interest rate swap contracts to hedge exposures from rising interest rates on its floating rate long-term

minimal.

loans. Interest expense on these transactions for the year ended December 31, 2002 were NT$261,107 thousand. Outstanding

contracts as of December 31, 2002 were as follows:

Contract Date

April 28, 1998

April 29, 1998

June 26, 1998

July 1, 1999

Period

May 21, 1998 - May 21, 2003

June 26, 1998 - June 26, 2003

July 6, 1998 - July 6, 2003

July 1, 1999 - June 28, 2004

Amount
(Thousand)

NT$2,000,000

NT$1,000,000

US$11,429

iii) Liquidity and cash flow requirements. The cash flow requirements on forward contracts are limited to the net differences

between the current exchange rates and the contracted forward rates at the date of settlement. The cash flow requirements for

interest rate swap contracts is limited to the amounts payable arising from the differences in the rates. In addition, options may

not be exercised in the event the strike price is higher than the related market price at the exercise date. Management believes

that the foregoing cash flow requirements are not material.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

2) Fair value of financial instruments

Non-derivative financial instruments

Assets

Cash and cash equivalents

Receivables from related parties

Notes and accounts receivable

Long-term investments

Refundable deposits

Liabilities

Payables to related parties

Accounts payable

Payable to contractors and
equipment suppliers

Bonds (includes current portion)

Other long-term payables

Guarantee deposits

Derivative financial instruments

Forward exchange contracts (buy)

Forward exchange contracts (sell)

Interest rate swaps

Option

2002

2001

Carrying
Amount

Fair Value

Carrying
Amount

Fair Value

$61,656,795

$33,403,706

20. SEGMENT FINANCIAL INFORMATION

a. Gross export sales

Area

America

Asia and others

Europe

2002

$86,045,821

49,916,588

9,216,429

$145,178,838

2001

$63,896,732

23,874,375

7,523,873

$95,294,980

The export sales information is based on amounts billed to customers with the region.

b. Gross sales to major customer

Customers with sales exceeding 10% of the total sales are as follows:

Customers

A Customers

2002

Amount

$32,769,054

2001

Amount

$21,789,769

7,210,972

The sales to A customer in 2002 were completed through TSMC - North America, due to the Company authorized its exclusive

distributor through TSMC - North America, to promote semiconductor products in North America and South America starting January

2002.

10,183,488

9,555,687

34,978,495

543,469

2,466,998

4,849,234

14,004,383

39,000,000

4,281,665

1,395,066

10,183,488

9,555,687

38,909,570

543,469

2,466,998

4,849,234

14,004,383

39,762,245

4,281,665

1,395,066

523,861

20,134,218

32,869,391

772,912

2,082,606

1,123,894

12,367,319

29,000,000

523,861

20,134,218

36,333,066

772,912

2,082,606

1,123,894

12,367,319

29,703,063

38,369

143,702

(23,994)

(50,273)

26,089

139,913

(164,342)

(410,132)

(397,117)

26,969

(39,500)

(427,225)

(343,088)

(252,833)

Fair values of financial instruments were determined as follows:

a) Short-term financial instruments - carrying values.

b) Long-term investments - market value for traded companies and net equity value for non-trade companies.

c) Refundable deposits and guarantee deposits - carrying values.

d) Long-term liabilities - based on forecasted cash flows discounted at interest rates of similar long-term liabilities. Bonds payable is

discounted to present value. Fair values of other long-term liabilities are also their carrying values as they use floating interest rate.

e) Derivative financial instruments - based on quotations from banks.

The fair values of non-financial instruments were not included in the fair values disclosed above. Accordingly, the sum of the fair

values of the financial instruments listed above does not represent the fair value of the Company as a whole.

3) Investment in Mainland China:

The Company filed an investment project with the Investment Commission of MOEA to establish a foundry in mainland China. As of

January 16, 2003, the foregoing project has not been approved by the authority.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

TABLE 1

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

FINANCING PROVIDED

For the Year Ended December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

No.

Financing
Name

Counter-party

Financial
Statement
Account

Maximum Balance for
the Period
(US$ in Thousand)

Ending Balance
(US$ in Thousand)

Interest
Rate

Financing
Reasons(Note1)

Transaction
Amounts

Reasons for
Short-term
Financing

Allowance
for Bad Debt

Collateral

Item

Value

Financing Limit for
Each Borrowing
Company

Financing Amount
Limits
(US$ in Thousand)

TSMC-BVI

TSMC

Other receivables

Technology Inc.

$536,372
(US$15,434)

4.25%

Operating capital

N/A

$ 34,334,852
(US$987,968)(Note 2)

Note 1: The No.2 represents short-term financing.
Note 2: Not exceeding the issued capital of the Company.

TABLE 2

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

ENDORSEMENT/GUARANTEE PROVIDED

For the Year Ended December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

No.

Endorsement/
Guarantee
Provider

Name

Counter-party

Nature of
Relationship(Note 2)

Limits on Each Counter-
party's Endorsement/
Guarantee Amounts

Maximum Balance
for the Period
(US$ in Thousand)

Ending Balance
(US$ in Thousand)

Value of Collateral
Property, Plant and
Equipment(Note 3)

Ratio of Accumulated Amount
of Collateral to Net Equity of
the Latest Financial Statement

Maximum
Collateral/Guarantee
Amounts Allowable(Note 1)

TSMC

TSMC Development Inc.

TSMC - North America

WAFERTECH, LLC

(Note 4)

$9,313,804
(US$268,000)

1,390,120
(US$40,000)

15,291,320
(US$440,000)

$6,950,600
(US$200,000)

1,390,120
(US$40,000)

15,291,320
(US$440,000)

$59,768,660

2.37%

0.47%

5.21%

Note 1: 30% of the issued capital of the Company.
Note 2: The No. 2 represents a subsidiary in which TSMC holds directly over 50% of the equity interest.

The No. 3 represents an investee in which TSMC holds directly and indirectly over 50% of the equity interest.

Note 3: Promissory notes for collateral.
Note 4: Not exceeding 10% of the issued capital of the Company, and also limited to the issued capital of the transaction entity, unless otherwise approved by Board of directors.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

TABLE 3

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

MARKETABLE SECURITIES HELD

December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Held Company Name

Type and Name of
Marketable Security

Relationship with
the Company

Financial Statement
Account

December 31, 2002

Shares
(Thousand)

Carrying Value
(US$ in
Thousand)

Percentage
of Ownership

Market Value or Net
Asset Value
(US$ in Thousand)

Note

TSMC

Stock

TSMC - North America

Subsidiary

Long-term investment

11,000

$173,601

TSMC - Europe

TSMC - Japan

VIS

TSMC-BVI

Chi Cherng Investment

Subsidiary

Investee

Subsidiary

Investee

Long-term investment

Hsin Ruey Investment

Investee

Long-term investment

13,670

94,258

556,133

2,415,297

987,968

22,265,157

41,894

39,815

TSMC Partners

Subsidiary

Long-term investment

300

3,753,733

SSMC

Emerging Alliance Fund

Taiwan Mask Corp.

United Technology Co., Ltd.

Shin-Etsu Handotai Taiwan Co., Ltd.

W.K. Technology Fund IV

Ya Shin Technology

Hon Tung Ventures Capital

Amkor Technology

Monolithic System Tech.

Crimson Asia Capital

Horizon Ventures

Investee

Subsidiary

Long-term investment

382

8,794

16,783

10,500

5,000

34,125

8,392

505

470

N/A

3,136,115

767,239

32,129

193,584

105,000

50,000

341,250

83,916

280,748

104,289

41,988

195,452

TSMC - North America

Chi Cherng Investment

Stock

TSMC

Stock

TSMC

Certificate

Parent company

Long-term investment

12,692

748,282

Parent company

Short-term investment

12,738

459,285

Hsin Ruey Investment

Major shareholder

Long-term investment

900,109

(Forward)

TSMC

Annual Report 2002

The treasury stocks in amounts of
NT$748,282 thousand are deducted
from the carrying value.

The carrying value does not include
prepayment for subscribed stock of
NT$849,360 thousand.

The treasury stocks in amounts of
NT$459,285 thousand are deducted
from the carrying value.

The treasury stocks in amounts of
NT$460,233 thousand are deducted
from the carrying value.

The treasury stocks in amounts of
NT$255,692 thousand are deducted
from the carrying value.

100

N/A

$921,883

13,670

94,258

4,326,719

22,265,157

501,179

500,048

3,940,495

3,136,115

767,239

160,574

280,931

137,355

59,866

341,250

71,216

89,866

214,949

41,988

195,452

610,434

612,636

900,109

TSMC

Annual Report 2002

Held Company Name

Type and Name of
Marketable Security

Relationship with
the Company

Financial Statement
Account

December 31, 2002

Shares
(Thousand)

Carrying Value
(US$ in
Thousand)

Percentage of
Ownership

Market Value or
Net Asset Value
(US$ in Thousand)

Note

Hsin Ruey Investment

Stock

TSMC

Certificate

Parent company

Short-term investment

12,762

$460,233

TSMC-BVI

Stock

Chi Cherng Investment

Major shareholder

Long-term investment

902,137

VIS

InveStar Semiconductor

Development Fund Inc.

InveStar Semiconductor

Development Fund (II) Inc.

TSMC Development Inc.

TSMC Technology Inc.

3DFX Interactive Inc.

Stock

VIS Associates, Inc.

PowerChip Semiconductor, Inc.

Etron Technology, Inc.

Walsin Technology, Inc.

MEGIC Corporation

Form Factor, Inc.

Subsidiary

Investee

Long-term investment

45,000

US$44,634

51,300

US$43,179

US$307,094

US$2,321

41,070

191,671

4,859

34,551

16,500

267

1,193,891

2,100,716

101,839

302,559

177,000

64,360

United Technology Co., Ltd.

Investee

Long-term investment

3,357

38,716

VIS Associates Inc.

Stock

VIS Investment Holding, Inc.

Subsidiary

Long-term investment

Equity

Silicon Valley Equity Fund

Silicon Valley Equity Fund II

Equity certificate

ABN AMRO Bank

Fund

Grand Palace Trust

Long-term investment

3,648

US$817

US$397

US$7,317

US$5,355

200

US$2,719

US$279

VIS Investment Holding, Inc.

Stock

VIS Micro, Inc.

Subsidiary

Long-term investment

TSMC Development, Inc.

Stock

WAFERTECH, LLC

Subsidiary

Long-term investment

US$326,609

TSMC Partners

InveStar Semiconductor

ADR

TSMC

Stock

Development Fund Inc.

Marvell Technology Group Ltd.

Silicon Laboratories

WGRD

Programmable Microelectronics,

(Taiwan) Inc.

Parent company

Short-term investment

762

US$7,357

Short-term investment

Long-term investment

3,413

104

1,580

US$3,350

US$287

US$625

US$1,566

(Forward)

TSMC

Annual Report 2002

100

$613,782

902,137

US$44,634

US$43,179

US$307,094

US$2,321

1,193,891

2,100,716

101,839

302,559

156,819

64,360

56,206

US$397

US$7,386

US$5,355

US$817

US$2,719

US$279

US$326,609

US$6,080

US$69,181

US$202

US$635

US$1,566

The amount is shown in the carrying
value.

TSMC

Annual Report 2002

Held Company Name

Type and Name of
Marketable Security

Relationship with
the Company

Financial Statement
Account

December 31, 2002

Shares
(Thousand)

Carrying Value
(US$ in
Thousand)

Percentage
of Ownership

Market Value or
Net Asset Value
(US$ in Thousand)

Note

Long-term investment

Short-term investment

Long-term investment

Divio

Global Test Corp.

Chipstrate Technologies, Inc.

Richtek Technology Corporation

Advanced Power Electronics, Corp.

Preferred stock

Integrated Memory Logic, Inc.

Divio

SiRF Technology, Inc.

Capella Microsystems, Inc.

Sensory, Inc.

Equator Technologies, Inc.

LightSpeed Semiconductor

Corporation

Tropian, Inc.

Sonics, Inc.

Atheros, Inc.

NanoAmp Solutions, Inc.

Formfactor, Inc.

Monolithic Power Systems, Inc.

Memsic, Inc.

Reflectivity, Inc.

Signia Technologies, Inc.

Match Lab, Inc.

HINT Corporation

Ordius, Inc. (Creosys, Inc.)

Incentia Design Systems, Inc.

InveStar Semiconductor

Development Fund (II) Inc.

IP Unity

Stock

WGRD

Procoat Technology

Richtek Technology Corporation

Programmable Microelectronics

(Taiwan), Inc.

Auden Technology MFG. Co., Ltd.

Geo Vision, Inc.

EoNex Technologies, Inc.

Conwise Technology Co., Ltd.

Yi Yang Technology

Goyatek Technology Inc.

Trendchip Technologies Corp.

(Forward)

TSMC

Annual Report 2002

13,268

6,660

1,023

2,750

1,831

667

306

300

1,404

300

2,252

1,758

2,686

1,607

541

267

2,521

2,727

1,064

3,000

1,875

1,000

1,500

286

1,008

105

3,500

845

487

953

180

2,800

1,740

2,000

US$3

US$5,176

US$300

US$346

US$1,345

US$1,809

US$500

US$1,333

US$481

US$625

US$258

US$1,339

US$2,334

US$3,530

US$3,593

US$853

US$2,000

US$1,500

US$1,192

US$300

US$1,500

US$1,000

US$450

US$500

US$1,636

US$630

US$1,942

US$1,006

US$140

US$1,117

US$129

US$2,024

US$1,930

US$967

US$1,787

US$864

US$3

US$5,176

US$300

US$346

US$1,345

US$1,809

US$500

US$1,333

US$481

US$625

US$258

US$1,339

US$2,334

US$3,530

US$3,593

US$853

US$2,000

US$1,500

US$1,192

US$300

US$1,500

US$1,000

US$450

US$500

US$1,636

US$640

US$1,942

US$1,006

US$140

US$1,117

US$129

US$2,024

US$1,930

US$967

US$1,787

US$864

TSMC

Annual Report 2002

Held Company Name

Type and Name of
Marketable Security

Relationship with
the Company

Financial Statement
Account

December 31, 2002

Shares
(Thousand)

Carrying Value
(US$ in
Thousand)

Percentage
of Ownership

Market Value or
Net Asset Value
(US$ in Thousand)

Note

Preferred stock

Memsic, Inc.

Oepic, Inc.

Equator Technologies, Inc.

NanoAmp Solutions, Inc.

Signia Technologies, Inc.

Advanced Analogic Technology, Inc.

Monolithic Power Systems, Inc.

Ralink Technology, Inc.

Sonics, Inc.

Newport Opticom, Inc.

Silicon Data, Inc.

Reflectivity, Inc.

Capella Microsystems, Inc.

Angstron Systems, Inc.

Tropian, Inc.

SiRF Technology, Inc.

LeadTONE, Inc.

Match Lab, Inc.

eBest!, Inc.

Kilopass Technology, Inc.

Bond

eBest!, Inc.

Long-term investment

2,289

2,696

770

250

1,500

948

804

1,833

3,082

1,157

2,000

1,596

800

1,567

1,464

680

313

185

US$1,560

US$1,240

US$452

US$1,000

US$150

US$1,261

US$1,946

US$1,500

US$3,082

US$810

US$1,000

US$1,500

US$200

US$750

US$2,000

US$131

US$238

US$250

US$97

3,887

US$2,000

US$24

Emerging Alliance Fund

Stock

Global Investment Holding, Inc.

Investee

Long-term investment

10,000

$100,000

Preferred stock

Quake Technologies, Inc.

Pixim, Inc.

Newport Opticom, Inc.

NetLogic Microsystems, Inc.

Ikanos Communication, Inc.

Quicksilver Technology, Inc.

Litchfield Communications

Mosaic Systems

Accelerant Networks

Zenesis Technologies

Reflectivity, Inc.

Iridigm Display

Spreadtrum

XHP Microsystem

Long-term investment

467

833

962

602

1,741

1,475

3,799

2,481

441

861

1,596

305

2,279

US$1,000

US$2,500

US$1,000

US$1,850

US$1,500

US$2,338

US$1,000

US$500

US$1,000

US$500

US$1,500

US$502

US$1,000

US$750

US$1,560

US$1,240

US$452

US$1,000

US$150

US$1,261

US$1,946

US$1,500

US$3,082

US$810

US$1,000

US$1,500

US$200

US$750

US$2,000

US$131

US$238

US$250

US$97

US$2,000

US$24

$100,000

US$1,000

US$2,500

US$1,000

US$2,932

US$1,500

US$2,338

US$1,000

US$500

US$1,000

US$500

US$1,500

US$502

US$1,000

US$750

Prepayment for subscribed stock

TSMC

Annual Report 2002

TSMC

Annual Report 2002

TABLE 4

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST

NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

For the Year Ended December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Acquiring on

Type and Name of Marketable

Financial Statement

Selling Company Name

Security

Account

Counter-party

Nature of

Relationship

Beginning Balance

Acquisition

Disposal

Ending Balance

Amount (US$

Carrying

Gain (Loss) on

Amount (US$

(Thousand)

in Thousand)

(Thousand)

in Thousand)

(Thousand)

in Thousand)

Value(US$ in

Disposal(US$ in

(Thousand)

in Thousand)

Thousand)

(Note 1)

TSMC

TSMC - BVI

TSMC Development Inc.

VIS

VIS Associates Inc.

Stock

SSMC

TSMC-BVI

Monolithic System Tech.

Emerging Alliance Fund

VIS

Ya-Shin Technology

Stock

Long-term investment

SSMC

TSMC-BVI

Monolithic System Tech.

Emerging Alliance Fund

VIS

Ya-Shin Technology

TSMC Development Inc.

Long-term investment

TSMC Development Inc.

InveStar Semiconductor Development

Long-term investment

InveStar Semiconductor

Development Fund (II) Inc.

Fund (II) Inc.

WaferTech, LLC

Bond fund

Yuan Da Duo Li #2

Da-Hua

THE TP ROC

NITC

JIHSUN

Tung Yi Chian Pang

Equity certificate

ABN AMRO Bank

Long-term investment

WaferTech, LLC

Short-term investment

Long-term investment(Note 3)

Investee

Subsidiary

Investee

Subsidiary

Investee

Subsidiary

301

779,968

$2,907,967

19,987,814

741,617

208,000

470

$1,421,846

7,280,000

104,289

168,615

556,133

3,377,526

121,338(Note 2)

849,360(Note 2)

34,125

341,250

US$201,231

US$208,000

45,000

US$45,766

6,300

US$6,300

US$226,541

US$120,000

$ -

7,970

3,974

6,458

2,977

4,407

2,869

382

987,968

470

677,471

34,125

51,300

$3,136,115

22,265,157

104,289

767,239

3,264,657

341,250

US$307,094

US$43,179

US$326,609

26,278

25,923

350,000

28,409

400,000

33,108

70,860

3,814

43,630

450,000

850,000

580,000

550,000

59,386

70,860

25,923

3,814

43,630

28,409

807,970

853,974

356,458

582,977

554,407

402,869

800,000

850,000

350,000

580,000

550,000

400,000

23,168

US$10,047

1,194

US$536

20,714

US$14,806

US$9,766(Note4)

US$5,706

3,648

US$817

Note 1: The ending balance included the recognition of the investment income (loss) by the equity method and the accumulated translation adjustment.
Note 2: Prepayment for the subscribe stock
Note 3: This equity certificate had been reclassified from short-term investment to long-term investment starting from July 2002.
Note 4: The total book value for sale is US$9,100 thousand and with the unrealized loss on long-term investment is US$666 thousand.

TSMC

Annual Report 2002

TSMC

Annual Report 2002

TABLE 5

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

ACQUISITION OF INDIVIDUAL REAL ESTATE AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

For the Year Ended December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Company
Name

Types of
Property

Transaction Date

Transaction
Amount

Payment Term

Counter-party

TSMC

Fab 12

June 19, 2002

$263,000

By the construction progress

Mandartech Interiors, Inc.

July 11, 2002

August 6, 2002

137,402

By the construction progress

UISC

124,775

By the construction progress

Meissner & Wurst

November 15, 2002

244,654

By the construction progress

Fu Tsu Construction Co., Ltd.

Fab 14

April 9, 2002

135,000

By the construction progress

Fu Tsu Construction Co., Ltd.

April 12, 2002

June 24, 2002

109,880

By the construction progress

Great Construction System, Inc.

984,995

By the construction progress

Fu Tsu Construction Co., Ltd.

TABLE 6

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

TOTAL PURCHASE FROM OR SALE TO RELATED PARTIES AMOUNTING TO AT LEAST

NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

For the Year Ended December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Nature of
Relationship

Prior Transaction of Related Counter-party

Owner

Relationship

Transfer Date

Amount

Price Reference

Purpose of Acquisition

N/A

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Other
Terms

None

Company
Name

Related Party

Nature of Relationship

Transaction Details

Abnormal Transaction

Notes/Accounts
Payable or Receivable

Note

Purchase/Sale

Amount

% to Total

Payment Terms

Unit Price

Payment Terms

Ending Balance

% to Total

TSMC

TSMC - North America

Subsidiary

Philips and its affiliates

Major shareholder

WAFERTECH, LLC

VIS

SSMC

Subsidiary

Investee

Sales

Purchase

($94,433,401)

(2,909,008)

9,955,154

3,469,198

2,751,297

(57)

(2)

TABLE 7

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

30 days from invoice date

(See Note 16)

$9,739,236

None

30 days from monthly closing date

(See Note 16)

45 days from monthly closing date

30 days from invoice date

None

352,706

(617,751)

(653,876)

(391,426)

(25)

(26)

(16)

Company
Name

TSMC

Related Party

Nature of Relationship

Ending Balance

Turnover Rate

Amount

Action Taken

Overdue

Amounts Received in
Subsequent Period

Allowance for
Bad Debts

TSMC - North America

Philips and its affiliates

Subsidiary

Major shareholder

$9,739,236

352,706

18 days

29 days

$3,709,733

55,050

Accelerate demand on accounts receivable

$2,155,511

69,090

100

TSMC

Annual Report 2002

TSMC

Annual Report 2002

101

TABLE 8

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES

SIGNIFICANT INFLUENCE

December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Main Businesses
and Products

Original Investment Amount

Balance as of December 31, 2002

Dec. 31,
2002

Dec. 31,
2001

Shares
(Thousand)

Percentage
of Ownership

Carrying
Value (Note1)

Net Income

Investment

(Loss) of
the Investee

Gain (Loss)
(Note 2)

Note

Investee Company

Location

Investor Company: TSMC

TSMC - North America

TSMC - Europe

TSMC - Japan

San Jose,
California, U.S.A.

Amsterdam,
The Netherlands

Yokohama, Japan

VIS

Hsin-Chu, Taiwan

TSMC - BVI

Tortola,
British Virgin Islands

Marketing and
engineering support

IC Design and
manufacturing

Investment

$333,178

11,000

2,960

83,760

6,503,640
(Note3)

6,503,640

556,133

31,445,780

24,165,780

987,968

Chi Cherng Investment

Taipei, Taiwan

Hsin Ruey Investment

Taipei, Taiwan

TSMC Partners

Tortola,
British Virgin Islands

Investment

SSMC

Singapore

Manufacturing wafers

Emerging Alliance Fund

Cayman Islands

Investment

Ya-Shin Technology

Taipei, Taiwan

Electronic
manufacturing

300,000

10,350

6,408,190

1,005,660

341,250

100,000

10,350

4,986,344

837,045

300

382

34,125

100

$173,601

$140,654

$139,021

Subsidiary

13,670

94,258

2,415,297
(Note 3)

22,265,157

41,894

39,815

3,753,733

3,136,115

767,239

341,250

(1,615)

1,615

Subsidiary

3,145

6,045

Subsidiary

(3,250,831)

(821,771)

Investee

(4,714,203)

Subsidiary

13,821

12,533

924,362

13,122

6,632

Investee

993,292

Subsidiary

(3,609,569)

(1,155,076)

Investee

(142,865)

(142,151)

Subsidiary

Note 1: The treasury stocks are not deducted from the carrying values.
Note 2: The gain from sales of treasury stock, which was transferred to capital surplus, is not deducted from the investment gain (loss) was in amount of NT$43,036 thousand.
Note 3: The amount has not included the prepayment for the subscribed shares of 121,338 shares with total amount of NT$849,360 thousand.

10. Consolidated Financial Statements & Independent Auditors' Report

English Translation of a Report Originally Issued in Chinese

Independent Auditors' Report

January 16, 2003

The Board of Directors and the Shareholders

Taiwan Semiconductor Manufacturing Company Ltd.

We have audited the accompanying consolidated balance sheets of Taiwan Semiconductor Manufacturing Company Ltd. and subsidiaries

(the "Company") as of December 31, 2002, and 2001, and the related consolidated statements of income, changes in shareholders'

equity and cash flows for the years then ended. 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 Regulations for Auditing of Financial Statements by Certified Public Accountants, and

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

reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test

basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting

principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We

believe that our audits provide a reasonable basis for our opinion.

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

position of Taiwan Semiconductor Manufacturing Company Ltd. and subsidiaries as of December 31, 2002 and 2001, and the results of

their operations and their cash flows for the years then ended, in conformity with the Guidelines for Securities Issuers' Financial

Reporting and generally accepted accounting principles in the Republic of China.

As disclosed in Note 3 to the financial statements, the Company adopted Statement of Financial Accounting Standards (''SFAS'') No. 30,

''Accounting for Treasury Stock'' on January 1, 2002. SFAS No. 30 requires a parent company to record stock held by its subsidiary as

treasury stock. The adoption of SFAS No. 30 resulted in the decrease of long-term investments and simultaneous increase of the book

value of treasury stock by NT$1,923,492 thousand as of December 31, 2002. Furthermore, net income increased by NT$25,909

thousand for the year ended December 31, 2002.

T N Soong & Co

An Associate Member Firm of Deloitte Touche Tohmatsu

Effective April 22, 2002

(Formerly a Member Firm of Andersen Worldwide, SC)

Taipei, Taiwan

The Republic of China

Notice to Readers

The accompanying consolidated financial statements are intended only to present the consolidated financial position, results of

operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not

those of any other jurisdiction. The standards, procedures and practices to audit such consolidated financial statements are those

generally accepted and applied in the Republic of China.

102

TSMC

Annual Report 2002

TSMC

Annual Report 2002

103

2002

2001

Amount

LIABILITIES AND SHAREHOLDERS' EQUITY

$67,790,204

$37,556,295

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001

(In Thousand New Taiwan Dollars, Except Par Value)

A SS E T S

CURRENT ASS E T S

Cash and cash equivalents (Notes 2 and 5)

Short-term investments (Notes 2 and 6)

Receivable from related parties (Note 20)

Notes receivable

Accounts receivable (Note 23)

Allowance for doubtful receivables (Note 2)

Allowance for sales returns and others (Note 2)

Inventories - net (Notes 2 and 7)

Deferred income tax assets (Notes 2 and 16)

Prepaid expenses and other current assets (Notes 2, 20 and 23)

Total Current Assets

170,012

439,659

60,240

19,530,702

(932,993)

(2,372,515)

11,201,446

3,401,729

3,248,674

102,537,158

LO N G -TERM INVESTMENTS (Notes 2, 3, 8 and 18)

10,635,496

P R O P E R T Y, PLANT AND EQUIPMENT (Notes 2, 9 , 12 and 20)

C o s t

Land and land improvements

B u i l d i n g s

Machinery and equipment

Office equipment

Total cost

Accumulated depreciation

Advance payments and construction in progress

Net Property, Plant and Equipment

GOODWILL (Note 2)

OTHER ASS E T S

Deferred charges - net (Notes 2 and 10)

Deferred income tax assets (Notes 2 and 16)

Refundable deposits (Notes 20 and 22)

Idle assets (Note 2)

Assets leased to others (Note 2)

M i s c e l l a n e o u s

Total Other Assets

874,907

76,428,851

343,951,592

6,996,027

428,251,377

(210,101,159)

28,348,093

246,498,311

10,158,845

9,873,825

9,773,226

557,266

386,317

87,246

34,709

20,712,589

(1)

110

(54)

1,398,071

494,732

176,582

19,957,636

(1,100,492)

(2,581,551)

9,828,328

2,350,147

2,721,421

70,801,169

11,599,150

877,371

60,523,505

280,023,690

6,062,496

347,487,062

(155,948,960)

59,749,530

251,287,632

11,437,572

3,769,750

16,245,828

784,089

555,053

37,452

21,392,172

(1)

(42)

CURRENT LIABILITIES

Short-term bank loans (Note 11)

Payable to related parties (Note 20)

Accounts payable (Note 23)

Payable to contractors and equipment suppliers

Accrued expenses and other current liabilities (Note 23)

Current portion of long-term liabilities (Notes 12, 13 and 14)

Total Current Liabilities

LO N G -TERM LIABILITIES

Long-term bank loans (Note 12)

Long-term bonds payables (Note 13)

Other long-term payables (Note 14)

Total Long-term Liabilities

OTHER LIABILITIES

Accrued pension cost (Notes 2 and 15)

Guarantee deposits (Note 22)

Deferred gain on sales and leaseback (Note 2)

O t h e r s

Total Other Liabilities

MINORITY INTEREST IN SUBSIDIARIES (Note 2)

2002

Amount

$729,813

1,776,149

5,138,592

14,132,100

6,477,212

12,107,899

40,361,765

11,051,454

35,000,000

4,281,665

50,333,119

2,211,560

1,395,066

114,928

177,256

3,898,810

95,498

2001

Amount
.

$6,269,181

1,048,273

1,397,879

12,867,236

6,746,483

5,000,000

33,329,052

22,399,360

24,000,000

46,399,360

1,856,617

7,212,688

268,165

141,498

9,478,968

120,240

Total Liabilities

94,689,192

89,327,620

SHAREHOLDERS' EQUITY (Notes 2 and 17)

Capital stock - $10 par value

Authorized: 24,600,000 thousand shares

Issued: Preferred - 1,300,000 thousand shares

Common - 18,622,887 thousand shares in 2002 and

16,832,554 thousand shares in 2001

Capital surplus:

Merger and others (Note 2)

Treasury stock (Notes 3 and 18)

Retained earnings:

Appropriated as legal reserve

Appropriated as special reserve

Unappropriated earnings

Unrealized loss on long-term investments (Note 2)

Cumulative translation adjustments (Note 2)

Treasury stock (at cost) - 42,001 thousand shares (Notes 2, 3 and 18)

Total Shareholders' Equity

13,000,000

186,228,867

56,961,753

43,036

18,641,108

22,151,089

(194,283)

945,129

(1,923,492)

295,853,207

100

13,000,000

168,325,531

57,128,433

17,180,067

349,941

19,977,402

1,228,701

277,190,075

$366,517,695

100

TSMC

Annual Report 2002

105

T O TAL ASS E T S

$390,542,399

100

$366,517,695

100

T O TAL LIABILITIES AND SHAREHOLDERS' EQUITY

$390,542,399

The accompanying notes are an integral part of the consolidated financial statements.
(With T N Soong & Co. report dated January 16, 2003)

104

TSMC

Annual Report 2002

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2002 and 2001

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

G R O SS SALES (Notes 2, 20 and 24)

$166,187,670

$128,560,708

Premium expense from option contracts - net (Notes 2

2002

2001

Amount

SALES RETURNS AND ALLOWANCES (Note 2)

(3,886,462)

(2,675,816)

NET SALES

COST OF SALES (Note 20)

GROSS PROFIT

OPERATING EXPENSES (Notes 20 and 24)

Research and development

General and administrative

Marketing

Total Operating Expenses

INCOME FROM OPERATIONS

NON-OPERATING INCOME (Note 24)

Interest

Royalty income (Note 22)

Gain on sales of property, plant and equipment (Note 2)

Technical service income (Notes 20 and 22)

Gain on sales of short-term investments - net (Note 2)

Insurance compensation - net

Premium income from option contracts - net (Notes 2 and 23)

Gain on sales of long-term investments - net (Note 2)

Other (Note 20)

Total Non-operating Income

NON-OPERATING EXPENSES (Note 24)

Interest (Notes 2, 9 and 23)

Investment loss recognized by equity method - net (Notes 2 and 8)

Permanent loss on long-term investments (Note 2)

Loss on sales of and provision for loss on property, plant and

equipment (Note 2)

(Forward)

162,301,208

100

125,884,892

100

109,988,058

52,313,150

11,725,035

7,007,283

1,991,793

20,724,111

31,589,039

1,094,724

527,126

273,998

162,149

69,610

291,860

2,419,467

2,616,740

1,976,847

795,674

466,385

92,228,098

33,656,794

10,649,019

7,939,839

2,290,139

20,878,997

12,777,797

1,486,656

1,301,606

52,376

55,077

1,619,062

860,835

234,732

105,439

759,793

6,475,576

3,144,042

3,959,020

235,629

and 23)

Loss on sales of long-term investments - net (Note 2)

Foreign exchange loss - net (Notes 2 and 23)

Casualty loss - net (Note 2)

Amortization of bond issuance costs (Note 2)

Other

Total Non-operating Expenses

INCOME BEFORE INCOME TAX (Note 24)

INCOME TAX BENEFIT(EXPENSE) (Notes 2 and 16)

INCOME BEFORE MINORITY INTEREST

MINORITY INTEREST IN LOSS (INCOME) OF SUBSIDIARIES

(Notes 2 and 24)

CONSOLIDATED NET INCOME

2002

Amount

$419,513

170,831

120,568

119,485

18,523

81,792

6,786,358

27,222,148

(5,636,648)

21,585,500

24,791

$21,610,291

(3)

2001

Amount

695,620

12,504

420,053

8,466,868

10,786,505

3,740,678

14,527,183

(44,009)

$14,483,174

CONSOLIDATED EARNINGS PER SHARE (Note 19)

Basic earnings per share

Diluted earnings per share

The accompanying notes are an integral part of the consolidated financial statements.
(With T N Soong & Co. report dated January 16, 2003)

Income

Consolidated

Income

Consolidated

Before

Net

Before

Income Tax

Income

Income Tax

$1.44

$1.14

$0.55

Net

Income

$0.75

106

TSMC

Annual Report 2002

TSMC

Annual Report 2002

107

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Years Ended December 31, 2002 and 2001

(In Thousand New Taiwan Dollars)

CAPITAL STOCK ISSUED

CAPITAL SURPLUS (Notes 2 and 17)

RETAINED EARNINGS (Note 17)

Preferred Stock

Shares
(Thousand)

Amount

Common Stock
Shares
(Thousand)

Amount

From
Merger

Additional
Paid-in Capital

From Long-term
Investments

Excess on
Foreign Bond
Investment

Gain on
Sales of
Properties

Donation

Treasury
Stock

Total

Legal
Reserve

Special
Reserve

U n a p p r o p r i a t e d
E a r n i n g s

UNREALIZED
GAIN(LOSS) ON ON
LONG-TERM
INVESTMENTS
(Note 2)

Total

CUMULATIVE
TRANSLATION
ADJUSTMENTS
(Note 2)

TREASURY
STOCK
(Notes 2, 3
and 18)

TOTAL
SHAREHOLDERS'
EQUITY

BALANCE, JANUARY 1, 2001

1,300,000

$13,000,000

11,689,365

$116,893,646

$22,329,129

$23,172,550

$246,219

$9,410,632

$127,236

$55

$ -

$55,285,821

$10,689,323

$1,091,003

$65,143,847

$76,924,173

($71,564)

($278,377)

$261,753,699

Appropriations of prior year's earnings

Legal reserve

Special reserve

Bonus to employees - stock

Cash dividends paid for preferred stocks

Stock dividends - 40%

Remuneration to directors and supervisors

Net income in 2001

Reclassification of the accumulated deficits from the merged

company

Gain on sales of property, plant and equipment

Gain on sales of property, plant and equipment from investees

Reversal of the unrealized loss on long-term investments

Translation adjustments

467,443

4,674,426

4,675,746

46,757,459

1,803,168

162

39,282

BALANCE, DECEMBER 31, 2001

1,300,000

13,000,000

16,832,554

168,325,531

24,132,297

23,172,550

246,381

9,410,632

166,518

Appropriations of prior year's earnings

Legal reserve

Special reserve

Bonus to employees - stock

Cash dividends paid for preferred stocks

Stock dividends - 10%

Remuneration to directors and supervisors

Net income in 2002

Transfer of the capital surplus from gain on sales of property,

plant and equipment to retained earnings

Transfer of the capital surplus from gain on sales of property,
plant and equipment of investees to retained earnings

Unrealized loss on long-term investments

Translation adjustments

Reclassification of stocks of a parent company held by

subsidiaries from long-term investments to treasury stock

Capital surplus resulted from sales of treasury stock

107,078

1,070,783

1,683,255

16,832,553

(162)

(166,518)

1,803,168

39,282

162

(162)

43,036

57,128,433

17,180,067

349,941

19,977,402

37,507,410

1,448,317

(1,448,317)

(349,941)

349,941

6,490,744

(6,490,744)

(741,062)

741,062

(4,674,426)

(41,137)

(46,757,459)

(584,303)

14,483,174

(1,803,168)

(39,282)

(162)

(1,070,783)

(455,000)

(16,832,553)

(133,848)

21,610,291

153,794

166,518

162

71,564

(194,283)

1,507,078

1,228,701

(283,572)

(41,137)

(584,303)

14,483,174

71,564

1,507,078

277,190,075

(455,000)

(133,848)

21,610,291

(194,283)

(283,572)

(1,923,492)

43,036

(166,518)

12,724

BALANCE, DECEMBER 31, 2002

1,300,000

$13,000,000

18,622,887

$186,228,867

$24,132,297

$23,172,550

$246,219

$9,410,632

$ -

$55

$43,036

$57,004,789

$18,641,108

$22,151,089

$40,792,197

($194,283)

$945,129

($1,923,492)

$295,853,207

The accompanying notes are an integral part of the consolidated financial statements.
(With T N Soong & Co. report dated January 16, 2003)

108

TSMC

Annual Report 2002

TSMC

Annual Report 2002

109

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2002 and 2001

(In Thousand New Taiwan Dollars)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

Adjustments to reconcile net income to net cash provided by

operating activities:

Depreciation and amortization

Deferred income taxes

Investment loss recognized by equity method - net

Permanent loss on long-term investments

Loss (gain) on sales of long-term investments - net

Loss on sales of and provision for loss on property, plant and

equipment - net

Reversal of provision for losses on short-term investments - net

Pension cost accrued

Allowance for doubtful receivables

Allowance for sales returns and others

Minority interest in income (loss) of subsidiaries

Changes in operating assets and liabilities:

Decrease (increase) in:

Receivable from related parties

Notes receivable

Accounts receivable

Inventories-net

Forward exchange contracts receivable

Prepaid expenses and other current assets

Increase (decrease) in:

Payable to related parties

Accounts payable

Forward exchange contract payables

Accrued expenses and other current liabilities

Net Cash Provided by Operating Activities

CASH FLOWS FROM INVESTING ACTIVITIES

Decrease in short-term investments

Acquisitions of:

Long-term investments

Property, plant and equipment

Proceeds from sales of:

Long-term investments

Property, plant, and equipment

(Forward)

110

TSMC

Annual Report 2002

2002

2001

$21,610,291

$14,483,174

65,000,873

5,421,020

1,976,847

795,674

170,831

192,387

355,705

(167,499)

(209,036)

(24,791)

55,073

116,342

426,934

(1,373,118)

(199,609)

(330,819)

727,876

3,740,713

(379,579)

601,110

98,507,225

55,323,040

(3,788,154)

3,959,020

(105,439)

183,253

(13,146)

345,340

153,758

123,228

44,009

453,994

(51,407)

10,377,678

2,957,395

49,480

202,303

(1,558,066)

(7,109,948)

218,165

(429,965)

75,817,712

1,184,419

117,173

(3,192,427)

(55,235,458)

53,048

495,878

(5,120,580)

(70,201,205)

559,137

301,416

Increase in deferred charges

Decrease in refundable deposits

Decrease (increase) in other assets

Increase (decrease) in minority interest in subsidiaries

Increase in goodwill

Net Cash Used in Investing Activities

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of:

Short-term bank loans

Long-term bonds

Payments on:

Short-term bank loans

Long-term bank loans

Increase (decrease) in guarantee deposits

Decrease in lease obligation

Cash dividends paid for preferred stocks

Remuneration paid to directors and supervisors

Increase in issuance costs of financing

Net Cash (Used in) Provided by Financing Activities

NET INCREASE (DECREASE) IN CASH AND CASH

EQUIVALENTS

2002

($5,724,583)

226,823

2,711
49

(62,189,540)

10,000,000

(5,539,368)

(4,397,306)

(5,817,622)

(455,000)

(133,848)

(3,002)

6,346,146

2001

($1,805,250)

194,978

(9,162)

(249,166)

(1,019,227)

(77,231,886)

2,435,340

(940,007)

126,309

(51,286)

(455,000)

(170,440)

(47,689)

897,227

29,971,539

(516,947)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH

EQUIVALENTS

262,370

(766,975)

CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR

37,556,295

38,840,217

CASH AND CASH EQUIVALENTS, END OF THE YEAR

$67,790,204

$37,556,295

SUPPLEMENTAL INFORMATION

Interest paid (excluding the amounts capitalized of

NT$213,686 thousand and NT$507,094 thousand in 2002
and 2001, respectively)

Income tax paid

Noncash investing and financing activities:

Reclassification of a parent company stock held by

subsidiaries from long-term investments to treasury stock

Effect of exchange rate changes on cash and cash

equivalents

Current portion of long-term liabilities

(Forward)

$2,301,765

$165,121

$1,923,492

($142,438)

$12,107,899

$3,468,112

$20,767

$1,258,395

$5,001,116

TSMC

Annual Report 2002

111

Cash paid for acquisition of property, plant and equipment:

Total acquisition

Decrease (increase) in payables to contractors and equipment suppliers

$56,500,322

(1,264,864)

$57,518,168

12,683,037

T S M C

2002

2001

The following diagram presents information regarding the relationship and ownership percentages among TSMC and its subsidiaries as

of December 31, 2002:

Cash paid for acquisition of deferred charges:

Total acquisition

Increase in other long-term payable (including current portion)

The accompanying notes are an integral part of the consolidated financial statements.
(With T N Soong & Co. report dated January 16, 2003)

$55,235,458

$70,201,205

$10,401,176

(4,676,593)

$1,805,250

$5,724,583

$1,805,250

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousand New Taiwan Dollars, Unless Specified Otherwise)

1. GENERAL

Taiwan Semiconductor Manufacturing Company Ltd. (TSMC), a Republic of China corporation, was incorporated as a venture among the

government of the ROC, acting through the Development Fund of the Executive Yuan; Philips Electronics N.V. and certain of its affiliates

(Philips); and certain other private investors. In September 1994, its shares were listed on the Taiwan Stock Exchange. On October 8,

1997, TSMC listed its shares of stock on the New York Stock Exchange in the form of American Depositary Shares.

TSMC is engaged mainly in the manufacturing, selling, packaging, testing and designing of integrated circuits and other semiconductor

devices, and the manufacturing of masks.

TSMC has six direct wholly-owned subsidiaries, namely, TSMC North America (TSMC-North America), Taiwan Semiconductor

Manufacturing Company Europe B.V (TSMC-Europe), TSMC Japan K. K. (TSMC-Japan), TSMC International Investment Ltd. (TSMC

International), TSMC Partners Ltd. (TSMC Partners), Ya Xin Technology, Inc. (Ya Xin), a 99.5% owned subsidiary, Emerging Alliance Fund, LP

(Emerging Alliance) and two 36% owned affiliates - Chi Cherng Investment Co., Ltd. (Chi Cherng, which is 36% owned by TSMC and 64%

owned by Hsin Ruey Investment Co., Ltd.) and Hsin Ruey Investment Co., Ltd. (Hsin Ruey, which is 36% owned by TSMC and 64% owned

by Chi Cherng) TSMC International has two wholly-owned subsidiaries-TSMC Development, Inc. (TSMC Development), TSMC

Technology, Inc. (TSMC Technology), and two 97%-owned subsidiaries - InveStar Semiconductor Development Fund, Inc. (InveStar) and

InveStar Semiconductor Development Fund, Inc. (II) LDC (InveStar II). TSMC Development has a 99.7% owned subsidiary, WaferTech, LLC

(WaferTech).

TSMC established Ya Xin in November 2002 and subsequently signed a merger agreement with Global UniChip Corp. (Global UniChip) in

December 2002. The merger was effective on January 4, 2003 and Global UniChip is the surviving company. TSMC holds 52% of Global

UniChips' shares after the completion of the merger.

1 0 0 %

3 6 %

9 9 . 5 %

1 0 0 %

T S M C-
North America

T S M C- Japan

T S M C
I n t e r n a t i o n a l

T S M C- E u r o p e

TSMC Pa r t n e r s

Chi Cherng

Hsin Ruey

E m e r g i n g
Alliance

Ya Xin

1 0 0 %

9 7 %

T S M C
Te c h n o l o g y

T S M C
D e v e l o p m e n t

I n v e S t a r

InveStar II

9 9 . 7 %

Wa f e r Te c h

T S M C-North America is engaged in the sales and marketing of integrated circuits and semiconductor devices. TSMC-Europe, TSMC-

Japan, TSMC Development and TSMC Technology are engaged mainly in marketing and engineering support activities. TSMC Partners,

Chi Cherng and Hsin Ruey are engaged in investments. Ya Xin is engaged in the design of integrated circuits. TSMC International is

engaged in providing investment in companies involved in design, manufacture, and other related business in semiconductor industries.

Emerging Alliance, InveStar and InveStar II are engaged in investing new start-up companies in the fields of high-technology. WaferTech

is engaged in the manufacturing, selling, testing and in designing of integrated circuits and other semiconductor devices.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation

TSMC consolidates the accounts of all majority (directly and indirectly) owned subsidiaries. The consolidated financial statements

include, as of and for the years ended December 31, 2002 and 2001, the accounts of TSMC, TSMC-North America, TSMC- E u r o p e ,

T S M C-Japan, TSMC Partners, Emerging Alliance, Chi Cherng, Hsin Ruey, Ya Xin (a newly established entity in 2002) and TSMC

International and its subsidiaries, InveStar, InveStar II, TSMC Development (including WaferTech) and TSMC Technology. TSMC and the

foregoing subsidiaries are hereinafter referred to collectively as the "Company". All significant intercompany balances and transactions

have been eliminated in these consolidated financial statements.

TSMC's investees, Hsin Ruey, Chi Hsin Investment Co., Ltd. (Chi Hsin) and Kung Cherng Investment Co., Ltd. (Kung Cherng) were merged

on October 30, 2002, with Hsin Ruey as the surviving company. In addition, TSMC's investees, Chi Cherng, Cherng Huei Investment Co., Ltd.

(Cherng Huei) and Po Cherng Investment Co., Ltd. (Po Cherng) were merged on October 30, 2002 with Chi Cherng as the surviving

company. Chi Hsin, Kung Cherng, Cherng Huei and Po Cherng were consolidated entities as of and for the year ended December 31,

2001.

112

TSMC

Annual Report 2002

TSMC

Annual Report 2002

113

Minority interests in Emerging Alliance (0.5%), InveStar (3%), InveStar II (3%) and Wa f e r Tech (0.3% in 2002 and 1% in 2001) are

The costs of investments sold are determined using the weighted-average method.

presented separately in the consolidated financial statements.

Cash and cash equivalents

If an investee company has an unrealized loss on a long-term investment evaluated using the lower- o f- c o s t - o r-market method, the

Company recognizes a corresponding unrealized loss in proportion to its equity interest and records the amount as a component of its

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

own shareholders' equity.

are classified as cash equivalents.

Short-term investments

Gain or loss on transactions with investee companies wherein the Company owned at least 20% of the outstanding common stock but

less than a controlling interest are deferred in proportion to the ownership percentage until realized through a transaction with a third

p a r t y. The entire amount of the gains or losses on sales to majority-owned subsidiaries are deferred until such gains or losses are

Short-term investments are carried at the lower of cost or market value. The costs of investments sold are determined by the specific

realized through the subsequent sale of the related products to third parties. Gains or losses from sales by investee companies to the

identification method.

Allowance for doubtful receivables

Company are deferred in proportion to the ownership percentage until realized through transactions with third parties.

Property, plant and equipment, assets leased to others and idle assets

Allowances for doubtful receivables are provided based on a review of the collectibility of accounts receivables.

Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Idle assets are stated at the

Sales and sales returns and allowances

Sales are recognized when titles of products and risks of ownerships are transferred to customers, primarily upon shipment. Allowance

and related provisions for sales returns and others are estimated based on historical experience. Such provisions are deducted from sales

lower of book value or net realized value. Significant additions, renewals, betterments and interest expense incurred during the

construction period are capitalized. Maintenance and repairs are expensed in the period incurred. Property, plant and equipment

covered by agreements qualifying as capital leases are carried at the lower of the present value of future minimum rent payments, or the

market value of the property at the inception date of the lease. The lessee's periodic rental payment includes the purchase price of the

in the year the products are sold and the estimated related costs are deducted from cost of sales.

leased property and the interest expense.

Inventories

Inventories are stated at the lower of cost or market value. Inventories are recorded at standard cost and adjusted to approximate

weighted-average cost at the end of each period. Market value represents net realizable value for finished goods and work in process,

and replacement value for raw materials, supplies and spare parts.

Long-term investments

Depreciation is computed using the straight-line method over these estimated service lives, which range as follows: Land improvements

- 20 years; buildings - 10 to 20 years; machinery and equipment - 5 years; and office equipment - 3 to 7 years.

Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts,

and any gain or loss is credited or charged to income in the period of disposal.

Goodwill

Investments in shares of stock of companies wherein the Company exercises significant influence on the operating and financial policy

decisions are accounted for using the equity method. The Company's proportionate share in the net income or net loss of investee

Goodwill represents the excess of the consideration paid for acquisitions over the fair market value of identifiable net assets acquired

and the difference between the investment cost and the Company's proportionate share in the net assets of acquired investee

companies are recognized as components of the "Investment income/loss recognized by equity method - net" account. The Company

companies. Goodwill is amortized using the straight-line method over the estimated life of 10 years.

adopted Statements of Financial Accounting Standards ("SFAS") No. 30, "Accounting for Treasury Stock" on January 1, 2002. SFAS No.30

requires a parent company to record stock held by its subsidiary as treasury stock. The recorded value of treasury stock is based on the

Deferred charges

carrying values of the short/long-term investments on the subsidiaries' books as of January 1, 2002.

When the Company subscribes to additional investee shares at a percentage different from its existing equity interest, the resulting

carrying amount of the investment in equity investee differs from the amount of Company's proportionate share in the investee's net

equity. The Company records such difference as an adjustment to "capital surplus" as well as the "long-term investments" accounts. In

Deferred charges consist of software and system design costs, technology know-how, bond issuance and financing costs, and

technology license fees. The amounts are amortized as follows: Software and system design costs - 3 years, technology know-how - 5

years; bond issuance and financing costs - the term of the bonds or the related line of credit; technology license fee - the shorter of the

estimated life of the technology or the term of the technology transfer contract.

the event an investee has an accumulated deficit, it will record an offset to its capital surplus, excluding the reserve for asset revaluation,

Pension costs

through retained earnings. The Company will also record a corresponding entry equivalent to its proportionate share of the investee

capital surplus, excluding the reserve for asset revaluation, that was generated subsequent to any acquisition of equity interest in the

investee.

Other stock investments are accounted for using the cost method. Cash dividends are recognized as income in the year received but are

Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition obligation and unrecognized

net gain/loss are amortized over 25 years.

Deferred gain on sales and leaseback

accounted for as reduction in the carrying values of the long-term investments if the dividends are received in the same year that the

The gain on the sale of property that is simultaneously leased back is deferred by the Company. This deferred gain on sales and

related investments are acquired. Stock dividends are recognized neither as investment income nor increase of long-term investment but

leaseback transactions is amortized as follows: (a) operating leases - adjustment of rental expenses over the term of the leases and (b)

recorded only as an increase in the number of shares held. An allowance is recognized for any decline in the market value of

capital leases - adjustment of depreciation expenses over the estimated useful life of the property or the term of the lease; whichever is

investments using quoted market prices with the corresponding amount debited to shareholders' equity. A reversal of the allowance will

result from a subsequent recovery of the market value. The carrying values of investments with no quoted market price are reduced to

reflect an other than temporary decline in their values with the related impairment loss charged to income.

shorter.

Casualty loss

Investments in foreign mutual funds are stated at the lower of cost or net asset value (NAV). An allowance is recognized when the cost

of the funds are lower than their net asset values, with the corresponding amount debited to shareholders' equity. A reversal of the

allowance will result from a subsequent recovery of the net asset value.

Investment in convertible notes and stock purchase warrants are carried at cost.

Casualty loss consists of the accrued loss caused by the earthquake on March 31, 2002 less the estimated insurance compensation.

Income tax

The Company uses an inter-period tax allocation method for income tax. Deferred income tax assets and liabilities are recognized for

the tax effects of temporary differences, unused tax credits, and operating loss carry forwards. Valuation allowances are provided to the

114

TSMC

Annual Report 2002

TSMC

Annual Report 2002

115

extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is,

4. SIGNIFICANT ELIMINATION ENTRIES

Significant transactions and balances with subsidiaries that have been eliminated upon consolidation are as follows:

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

liability does not relate to an asset or liability in the financial statements, then it is classified as current or non-current based on the

expected length of time before it is realized.

Any tax credit arising from the purchase of machinery, equipment and technology, research and development expenditures, personnel

training, investments in important technology-based enterprise are recognized using the current method.

Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax provision.

As of January 1, 1998, income taxes on unappropriated earnings (excluding the foreign consolidated entities) of 10% are expensed in

the year of shareholder approval which is usually the year subsequent to the year incurred.

Derivative financial instruments

The Company enters into foreign currency forward contracts to manage currency exposures in cash flow and in foreign currency-

denominated assets and liabilities. The differences in the New Taiwan dollar amounts translated using the spot rate and the amounts

translated using the contracted forward rates are amortized over the terms of the forward contracts using the straight-line method. At

the balance sheet dates, the receivables or payables arising from forward contracts are restated using the prevailing spot rate at the

balance sheet date and the resulting differences are recognized in charged to income. Also, the receivables and payables related to the

forward contract are netted with the resulting amount presented as either an asset or a liability.

The Company enters into interest rate swap transactions to manage exposures from changes in interest rates on existing liabilities. These

transactions are accounted for on an accrual basis, in which the cash settlement receivable or payable is recorded as an adjustment to

interest income or expense.

The notional amount of foreign currency option contracts entered into for hedging purposes are not recognized as an asset or liability

on the contract dates. The premiums paid or received for the call or put options are amortized to income on a straight-line basis over

the term of the related contract.

Foreign-currency transactions

Foreign-currency transactions are recorded in New Taiwan dollars at the current rate of exchange in effect when the transaction occurs.

Gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in a foreign currency are

recognized in current operations. At year-end, foreign-currency assets and liabilities are revalued at the prevailing exchange rate with the

resulting gain or loss recognized in current operations.

Translation of foreign-currency financial statements

Company

TSMC

Account

Payable to related parties

Receivable from related parties

Sales

Purchases

Marketing expenses - commissions

Other revenue

Notes receivable

Interest receivable

Royalty income

Interest revenue

Notes receivable

Deferred revenue

Royalty income

Interest income

Accounts receivable

Deferred revenue

Management service income

Technical service income

Deferred charges

Administrative expense

TSMC

International

TSMC Partners

TSMC

Technology

WaferTech

ROC Financial Accounting Standards (FAS) No. 14, "Accounting for Foreign-Currency Transactions," applies to foreign subsidiaries that

use the local foreign currency as its functional currency. The financial statements of foreign subsidiaries are translated into New Taiwan

5. CASH AND CASH EQUIVALENTS

dollars at the following exchange rates: assets and liabilities - current rate on balance sheet date; shareholders' equity - historical rate;

income and expenses - weighted average rate during the year. The resulting translation adjustment is recorded as a separate component

of shareholders' equity.

Cash and bank deposits

Government bonds acquired under

repurchase agreements

3. NEW ACCOUNTING PRONOUNCEMENTS

In accordance with the Statement of Financial Accounting Standards No.30, "Accounting for Treasury Stock" and other relevant

regulations from Securities and Futures Commission (SFC), the Company is required to reclassify its common stock held by subsidiaries

from short/long-term investments to treasury stock. The reclassification is based on the carrying value of NT$2,115,695 thousand as

6. SHORT-TERM INVESTMENTS

recorded by the subsidiaries as of January 1, 2002. The adoption of SFAS No.30 resulted in the decrease of long-term investments and

the increase of treasury stock by NT$1,923,492 thousand as of December 31, 2002, and an increase in net income for the year ended

December 31, 2002 by NT$25,909 thousand.

Listed stocks

Market value

Amount

$617,751

29,520

19,643

14,511

9,424

9,739,236

4,545

94,433,401

1,152

9,955,154

208,226

132,086

1,635

347,530

188,842

455,778

26,660

10,666,619

9,398,140

607,669

345,620

4,986

13,356

27,331

14,758

31,278

34,563

Transaction Entity

WaferTech

TSMC-Europe

TSMC-Japan

TSMC-North America

TSMC Technology

TSMC-North America

TSMC Technology

TSMC-North America

WaferTech

TSMC-Japan

TSMC-Europe

WaferTech

TSMC Technology

TSMC International

WaferTech

TSMC Development

WaferTech

TSMC Development

TSMC Technology

2002

$65,051,337

2,738,867

2001

$35,830,636

1,725,659

$67,790,204

$37,556,295

2002

$170,012

$2,455,582

2001

$1,398,071

$6,917,133

116

TSMC

Annual Report 2002

TSMC

Annual Report 2002

117

The market values of listed stocks as of December 31, 2002 and 2001 were based on the average closing price for the month of

December 2002 and 2001, respectively.

7. INVENTORIES-NET

Finished goods

Work in process

Raw materials

Supplies and spare parts

Less-allowance for losses

2002

2001

$3,837,245

7,611,344

518,196

970,960

12,937,745

(1,736,299)

$11,201,446

$1,790,305

7,374,752

744,719

1,110,323

11,020,099

(1,191,771)

$9,828,328

8. LONG-TERM INVESTMENTS

Carrying Value

% of
Owner Ship

Carrying Value

% of
Owner Ship

2002

2001

Shares of stock

Equity method

Publicly traded

Vanguard International Semiconductor (VIS)

$2,415,297

Non-publicly traded

Systems on Silicon Manufacturing

Company Pte Ltd. (SSMC)

Prepayment for subscribed stocks

VIS

Cost method

Common stock

Publicly traded stock

Amkor Technology

Monolithic System Tech.

Taiwan Mask

Non-publicly traded stock

United Technology

Global Testing Corp. (GTC)

Shin-Etsu Handotai Taiwan Co., Ltd.

Global Investment Holding

Hong Tung Venture Capital

EoNEX Technologies, Inc.

Procoat Technology, Inc.

Conwise Technology Corp. Ltd.

Goyatek Technology, Inc.

Programmable Microelectronics (Taiwan) Corp.

W.K. Technology, Fund IV

RichTek Technology Corp.

(Forward)

118

TSMC

Annual Report 2002

3,136,115

5,551,412

849,360

280,748

104,289

32,129

193,584

179,882

105,000

100,000

83,916

70,305

67,490

67,039

62,104

59,358

50,000

46,986

$3,377,526

2,907,967

6,285,493

280,748

32,129

193,584

179,951

105,000

107,270

150,000

59,296

50,000

45,015

APE

Auden Technology MFG. Co., Ltd.

Yi Yang Technology

TrendChip Technologies Corp.

ChipStrate Technology, Inc.

GeoVision, Inc.

Divio, Inc.

EmpowerTel Networks, Inc.

3DFX Interactive

Ubicom, Inc.

Capella Microsystems

Equator Technologies, Inc.

Preferred stock

Non-publicly traded stock

Sonics, Inc.

Tropian, Inc.

Reflectivity, Inc.

Monolithic Power Systems, Inc.

Atheros Communications, Inc.

Memsic, Inc.

Pixim, Inc.

Quicksilver Technology

FormFactor, Inc.

Kilopass Technologies, Inc.

NetLogic Microsystems

NanoAmp Solutions, Inc.

Newport Opticom, Inc.

Integrated Memory Logic, Inc.

Match Lab, Inc.

IP Unity

Ikanos Communication

Ralink Technologies, Inc.

SiRF Technology Holdings, Inc.

LightSpeed Semiconductor Corp.

Advanced Analogic Technology, Inc.

OEpic, Inc.

Accelerant Networks

Litchfield Communications

Quake Technologies, Inc.

Spreadtrum

HiNT Corp.

Silicon Data, Inc.

XHP Microsystem

(Forward)

2002

2001

Carrying Value

% of
Owner Ship

Carrying Value

% of
Owner Ship

$46,743

38,819

33,606

29,992

10,426

4,518

104

$46,748

69,658

105

12,031

10,396

6,028

4,740

3,151

1,667,038

1,355,850

229,787

150,620

146,262

137,135

124,868

106,344

87,845

82,153

69,506

65,005

64,397

63,288

62,868

60,818

56,856

52,707

52,130

50,878

46,534

43,824

43,094

35,138

34,753

26,353

231,397

151,688

69,998

123,037

125,754

107,088

87,498

122,497

69,998

64,748

64,838

77,124

63,318

61,249

52,498

51,248

107,251

44,131

87,497

34,999

8,750

TSMC

Annual Report 2002

119

2002

2001

Carrying Value

% of
Owner Ship

Carrying Value

% of
Owner Ship

Angstron Systems, Inc.

Equator Technologies, Inc.

Capella Microsystems, Inc.

Sensory, Inc.

Iridigm Display

Mosaic Systems

Zenesis Technologies

Divio, Inc.

Incentia Design Systems, Inc.

Oridus, Inc. (CreOsys, Inc.)

Signia Technologies, Inc.

LeadTONE Wireless, Inc.

eBest!, Inc.

EmpowerTel Networks, Inc.

RapidStream, Inc.

Y-Media Corp.

Rise Technology Company

Ubicom, Inc.

OmegaBand, Inc. (Seagull Semiconductor, Inc.)

PicoTurbo, Inc.

Procoat Technology, Inc.

Convertible notes

eBest!, Inc.

PicoTurbo, Inc.

Rise Technology Company

OmegaBand, Inc.(Seagull Semiconductor, Inc.)

Funds

Horizon Ventures

Crimson Asia Capital

BIAM Global Opportunity Fund

Warrant

OEpic, Inc.

$26,065

24,675

23,667

21,720

17,639

17,569

17,377

15,639

8,270

3,370

2,329,412

834

195,452

41,988

237,440

$26,249

99,358

80,441

43,749

17,500

17,499

52,498

78,748

179,480

73,754

52,499

52,498

47,636

43,749

30,000

2,868,509

10,323

10,500

6,730

27,553

125,701

27,091

908,944

1,061,736

$10,635,496

$11,599,150

The carrying value of the investments accounted for using the equity method and the related investment losses were determined based

on the audited financial statements of the investees in the same year. The investment losses of investee companies consist of the

following:

SSMC

VIS

2002

$1,155,076

821,771

$1,976,847

The market values and net asset values of the Company's long-term investments are as follows:

Market value of publicly traded stocks

Equity in the net assets of non-publicly traded stocks

Net asset value of funds

2002

$4,792,108

7,720,481

237,440

2001

$1,722,080

2,236,940

$3,959,020

2001

$7,056,942

8,286,549

1,202,453

On January 8, 2003, the Company's investee company, VIS, issued 600,000 thousand shares of common stock at a discounted price of

NT$7 per share. The Company prepaid NT$849,360 thousand at the end of 2002 for the share subscription and paid an additional

NT$766,815 thousand in January 2003. In this round of equity offering, the Company purchased a total of 230,882 thousand shares of

VIS stocks. As a result, its ownership in VIS increased from 25% to 28%.

9. PROPERTY, PLANT AND EQUIPMENT

Accumulated depreciation consisted of the following:

Land improvements

Buildings

Machinery and equipment

Office equipment

2002

$127,341

24,140,506

181,998,606

3,834,706

2001

$108,770

16,604,096

136,033,250

3,202,844

$210,101,159

$155,948,960

Information on the status of expansion or construction plans of TSMC's manufacturing facilities at December 31, 2002 is as follows:

Manufacturing Plant

Fab 6

Fab 12 Phase 1

Fab 14 Phase 1

Estimated
Cost

Accumulated
Expenditures

Expected or Actual
Date of Starting Operations

$93,932,000

$87,054,700

80,318,400

30,411,000

47,095,400

22,169,900

March 2000

March 2002

June 2003

Interest expense (before deducting capitalized amounts of NT$213,686 thousand and NT$507,094 thousand in 2002 and 2001,

respectively) for the years ended December 31, 2002 and 2001 were NT$2,830,426 thousand and NT$3,651,136 thousand, respectively.

The interest rates used for purpose of calculating the capitalized amount were 2.07% to 5.283% in 2002 and 2.54% to 5.283% in 2001.

120

TSMC

Annual Report 2002

TSMC

Annual Report 2002

121

10. DEFERRED CHARGES - NET

Technology license fees

Software and system design costs

Bond issuance costs and financing costs

Technology know-how

Others

2002

$6,519,334

3,167,366

127,195

49,500

10,430

$9,873,825

2001

$996,578

2,073,802

150,142

103,500

445,728

$3,769,750

11. SHORT-TERM BANK LOANS

Unsecured loan in US dollars:

2002

2001

US$21,000 thousand, refinanced in May 2002, repayable by May 2003,
annual interest at 1.82% and 2.33% in 2002 and 2001, respectively

$729,813

US$82,000 thousand, repayable by March 2002,

annual interest at 2.679%

US$5,500 thousand, repayable by June 2002,

annual interest at 3.188%

US$21,565 thousand, repayable by October 2002,

annual interest at 2.590%

US$46,000 thousand, repayable by October 2002,

annual interest at 2.548%

Secured loan in NT dollars:

NT$107,100 thousand, repayable by October 2002,

annual interest at 3.2% to 3.8%

$729,813

$734,979

2,869,918

192,495

754,735

1,609,954

107,100

$6,269,181

As of December 31, 2002, future minimum principal payments under the Company's long-term bank loan arrangements are as follows:

Year

2003

2004

2005

13. BONDS

Domestic unsecured bonds:

Issued on March 4, 1998 and payable on March 4, 2003

in one lump sum payment, 7.71% annual interest payable
semi-annually

Issued on October 21, 1999 and payable on October 21,

2002 and 2004 in two equal payments,
5.67% and 5.95% annual interest payable annually, respectively

Issued from December 4 to 15, 2000 and payable in
December 2005 and 2007 in two equal payments,
5.25% and 5.36% annual interest payable annually, respectively

Issued from January 10 to 24, 2002 and payable in

January 2007, 2009 and 2012 in three equal payments,
2.6%, 2.75% and 3% annual interest payable annually, respectively

Amount

$6,950,600

11,051,454

$18,002,054

2002

2001

$4,000,000

5,000,000

10,000,000

15,000,000

$39,000,000

$29,000,000

As of December 31, 2002, future principal payments for the Company's bond arrangements are as follows:

As of December 31, 2002, TSMC provided NT$1,390,120 thousand (US$40,000 thousand) guarantee for the above US$21,000 thousand loan.

Year of Repayment

Unused credit lines as of December 31, 2002 aggregated approximately NT$7,930,00 thousand and US$366,500 thousand.

12. LONG-TERM BANK LOANS

Secured loan:

US$440,000 thousand, repayable by February 2005,

US$122,000 thousand repaid in 2002, annual floating
interest at 2.078% and 2.578% in 2002 and 2001,
respectively

Unsecured loan:

US$200,000 thousand, repayable by December 2003,

annual interest at 2.0375% and 2.54% in 2002 and 2001,
respectively

2002

2001

$11,051,454

$15,399,560

6,950,600

6,999,800

$18,002,054

$22,399,360

As of December 31, 2002, all of the loans above were guaranteed by TSMC. In addition, the property and equipment of WaferTech

with carrying amount of approximately NT$29,053,508 thousand (US$836,000 thousand) is pledged for the secured loan. Under the

unsecured loan, TSMC is required to maintain certain financial covenants which, if violated, could result in the payment of this

obligation becoming due prior to the originally scheduled maturity date. These financial covenants require TSMC to, among other

things; maintain minimum levels of working capital, earnings before interest, taxes, depreciation and amortization, and net worth.

TSMC was in compliance with these financial covenants as of December 31, 2002.

Unused credit lines for long-term bank loans as of December 31, 2002 aggregated approximately US$122,000 thousand.

122

TSMC

Annual Report 2002

2003

2004

2005

2006

2007

2008 and thereafter

Amount

$4,000,000

5,000,000

10,500,000

7,000,000

12,500,000

$39,000,000

14. OTHER LONG-TERM PAYABLES

TSMC entered into several license arrangements for certain semiconductor patents. Future payments under the agreements as of

December 31, 2002 are as follows:

Year

2003

2004

2005

2006

2007

2008 and thereafter

Amount

$1,157,299

1,226,805

987,009

469,189

486,566

1,112,096

5,438,964

TSMC

Annual Report 2002

123

15. PENSION PLAN

16. INCOME TAX BENEFIT (EXPENSE)

TSMC has pension plans for all regular employees that provide benefits based on length of service and average monthly salary for the six

month period prior to retirement.

TSMC contributes an amount equal to 2% of salaries paid every month to a Pension Fund (the "Fund"). 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.

The changes in the Fund and accrued pension costs are summarized as follows:

a. Components of pension cost

Service cost

Interest cost

Projected return on plan assets

Amortization

Net pension cost

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

2002

$442,294

121,552

(45,102)

1,681

$520,425

2001

$417,967

95,920

(43,968)

8,300

$478,219

2002

2001

Benefit obligation

Vested benefit obligation

Nonvested benefit obligation

Accumulated benefit obligation

Additional benefits based on future salaries

Projected benefit obligation

Fair value of plan assets

Funded status

Unrecognized net transitional obligation

Unrecognized net gain

Accrued pension cost

c. Actuarial assumptions

Discount rated used in determining present values

Future salary increase rate

Expected rate of return on plan assets

d. Contributions to pension fund

e. Payments from pension fund

$21,294

1,607,272

1,628,566

1,300,712

2,929,278

(1,014,086)

1,915,192

(149,391)

445,759

$2,211,560

3.75%

3.00%

3.75%

$164,720

$5,360

$739

1,026,289

1,027,028

1,407,014

2,434,042

(835,583)

1,598,459

(157,691)

415,849

$1,856,617

5.0%

$131,894

a. A reconciliation of income tax expense on income before income tax at the statutory rate and current income tax expense on income

before tax credits is shown below:

2002

2001

($6,881,352)

($2,699,626)

Income tax expense based on "income before income tax"

at statutory rate

Tax effect of:

Tax-exempt income

Temporary and permanent differences

2,526,500

(519,490)

Current income tax expense before income tax credits

($4,874,342)

b. Income tax benefit (expense) consists of:

Current income tax expense before income tax credits

Additional 10% tax on the unappropriated earnings

Income tax credits

Other income tax

Income tax expense

Net change in deferred income tax assets (liabilities)

Net operating loss

Investment tax credits

Temporary differences

Valuation allowance

Income tax benefit (expense)

c. Deferred income tax assets (liabilities) consist of the following:

2002

($4,874,342)

(179,362)

4,867,236

(29,160)

(215,628)

1,733,990

2,510,192

(5,910,152)

(3,755,050)

($5,636,648)

1,089,000

(986,598)

($2,597,224)

2001

($2,597,224)

(322,292)

2,888,358

(16,318)

(47,476)

3,751,051

3,044,170

(1,918,009)

(1,089,058)

$3,740,678

Current

Investment tax credits

Temporary differences

Noncurrent

Net operating loss

Investment tax credits

Temporary differences

Valuation allowance

2002

2001

$3,320,000

81,729

$3,401,729

$7,852,338

23,247,653

(8,352,647)

(12,974,118)

$2,347,000

3,147

$2,350,147

$6,118,348

21,710,461

(2,363,913)

(9,219,068)

The effective tax rate used in determining TSMC's deferred tax asset as of December 31, 2002 and 2001 was 25%; the effective tax

rates for the subsidiaries are 34% to 41% as of December 31, 2002 and 2001.

$9,773,226

$16,245,828

124

TSMC

Annual Report 2002

TSMC

Annual Report 2002

125

d. Integrated income tax information:

17. SHAREHOLDERS' EQUITY

The balances of the imputation credit account (ICA) as of December 31, 2002 and 2001 were NT$6,650 thousand and NT$9,365
thousand, respectively.

The expected and actual creditable ratio for 2002 and 2001 was 0.03% and 0.04%, respectively.

The imputation credit allocated to each shareholder shall be based on the balance in the ICA on the date of distribution of dividends;
thus the expected creditable ratio for 2002 may be adjusted according to the difference between the expected and actual imputation
credit allowed under the regulation.

TSMC has issued 369,019 thousand American Depositary Shares (ADS) on the New York Stock Exchange as of December 31, 2002. The

number of common shares represented by the ADSs is 1,845,097 thousand shares (one ADS represents five common shares).

Capital surplus can only be used to offset a deficit under the ROC Company Law. However, the components of capital surplus generated

from donations (donated capital) and the excess of the issue price over the par value of capital stock (including the stock issued for new

capital, mergers, and the purchase of treasury stock) can be transferred to capital as stock dividends.

TSMC's Articles of Incorporation provide that the following shall be appropriated from annual net income (less any deficit):

e. As of December 31, 2002 and 2001, the unappropriated retained earnings generated up to December 31, 1997, was NT$0 and

a. 10% legal reserve;

NT$4,827 thousand.

f. As of December 31, 2002, TSMC's investment tax credits consisted of the following:

Regulation

Items

Total
Creditable Amounts

Remaining
Creditable Amounts

Expire Year

Statute for Upgrading

Purchase of machinery and

Industries

equipment

Statute for Upgrading

Research and development

Industries

expenditures

Statute for Upgrading

Personnel training

Industries

Statute for Upgrading

Reputation setting

Industries

Statute for Upgrading

Industries

Investments in important
technology based
enterprises

$4,237,050
4,767,347
8,180,857
3,110,906
5,335,558

$-
4,767,347
8,180,857
3,110,906
2,775,029

$25,631,718

$18,834,139

$562,158
671,546
1,974,320
3,111,472
1,540,000

$-
671,546
1,974,320
3,111,472
1,540,000

$7,859,496

$7,297,338

$8,822
16,104
43,264
28,886

$97,076

$10,133
319

$10,452

$2,878
5,420
201,372
138,864
1,947

$-
16,104
43,264
28,886

$88,254

$-
319

$319

$-
5,420
201,372
138,864
1,947

2002
2003
2004
2005
2006

2002
2003
2004
2005

2002
2003

2002
2003
2004
2005
2006

g. The sales from the following expansion and construction of TSMC's manufacturing plants is exempt from income tax:

Expansion of Fab 1 and Fab 2 - modules A and B, Fab 3 and Fab 4, and construction of Fab 5
Construction of Fab 6

1999 to 2002
2001 to 2004

Tax-Exemption Period

$350,481

$347,603

b. Special reserve in accordance with relevant laws or regulations;

c. Remuneration to directors and supervisors and bonus to employees equal to 0.3% and at least 1% of the remainder, respectively.

Individuals who receive bonus to employees may include employees of affiliated companies and are approved by the board of

directors or a representative of the board of directors;

d. Dividends to holders of preferred shares equal to a 3.5% annual rate, based on the period which the preferred shares have been

outstanding;

e. The appropriation of the remaining balance after the above shall be decided at the shareholders' meeting.

Dividends are distributed in cash, shares of common stock or a combination of cash and common stock. Distribution of profits is

preferably made in the form of stock dividend. The total of cash dividends paid in any given year should not exceed 50% of total

dividends distributed.

These appropriations of net income shall be approved by the shareholders in the following year and given effect in the financial

statements of that year.

The bonus to employees and the remuneration to directors and supervisors appropriated from the earnings of 2001 were approved in

the shareholders' meeting on May 7, 2002 as follows:

Bonus to employees - in stock

Remuneration to directors and supervisors - in cash

Amounts

$1,070,783

133,848

$1,204,631

Shares (Thousand)

107,078

The shares distributed as a bonus to employees represent 0.64% of TSMC's total outstanding common shares as of December 31,

2001.

The above appropriation of the earnings is consistent with the resolution of the meeting of board of directors dated on March 26,

2002. If the above distributable earnings were both paid in cash and charged against the income of 2001, the consolidated basic

EPS for the year ended December 31, 2001 would decrease from NT$0.83 to NT$0.76.

As of January 16, 2003, the appropriation of the earnings of 2002 has not yet been resolved by the board of directors.

The above information associated with the appropriation of bonus to employees and remuneration to directors and supervisors is

available at Market Observation System website.

The aforementioned appropriation for legal reserve shall be made until the reserve equals the aggregate par value of TSMC's

outstanding capital stock. The reserve can only be used to offset a deficit; or distribute as a dividend when the balance is 50% of the

aggregate par value of the outstanding capital stock of TSMC up to the half amount of the reserve balance.

A special reserve equivalent to the debit balance of any account shown in the shareholder's equity section of the balance sheets

h. The tax authorities have examined income tax returns of the Company through 1999. However, the Company is contesting the

(except for the recorded costs of treasury stocks held by subsidiaries), other than the deficit, shall be made from unappropriated

assessment by the tax authority for 1992, 1993, 1996 and 1997.

126

TSMC

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TSMC

Annual Report 2002

127

retained earnings pursuant to existing regulations promulgated by the Securities and Futures Commission. The special reserve is allowed

In 1996, WaferTech adopted an Executive Incentive Plan, which was amended in 1997. Under the 1997 amendment, the Board of

to be appropriated when the debit balance of such accounts are reversed.

The gain on sales or disposal of property, plant and equipment generated prior to 2000, less the applicable income tax, was reclassified

to capital surplus as of each year-end. A gain in the amount of NT$39,282 thousand, less applicable income tax, was recognized and

transferred to the capital surplus at the end of 2001 prior to the amended regulations. To comply with the amended regulations, the

aforementioned capital surplus was transferred to retained earnings upon the approval of the shareholders' meeting on May 7, 2002.

Directors approved the Senior Executive Incentive Plan and the Employee Incentive Plan (the "Plan II") under which officers, key

employees and non-employee directors may be granted option rights. Plan II provides 15,150 thousand option rights. While WaferTech

may grant employees option rights that are exercisable at different times or within different periods, it has generally granted option

rights which are exercisable on a cumulative basis in annual installments of 25% each on the first, second, third, and fourth

anniversaries of the date of grant.

The shareholders also approved the accumulated capital surplus of NT$127,236 thousand generated from gains prior to 2000 be

Information with respect to stock option rights activities under Plan II is as follows:

transferred to retained earnings, after appropriating the required 10% legal reserve.

Under the Integrated Income Tax System that became effective on January 1, 1998, ROC resident shareholders are allowed a tax credit

for the income tax paid by TSMC on earnings generated as of January 1, 1998. An Imputation Credit Account (ICA) is maintained by

TSMC for such income tax and the tax credit allocated to each shareholder.

TSMC issued 1,300,000 thousand shares of unlisted Series A - preferred stock to certain investors on November 29, 2000. The following

are the rights of the preferred shareholders and the related terms and conditions:

Preferred shareholders

a. are entitled to receive cumulative cash dividends at an annual rate of 3.5%.

b. are not entitled to receive any common stock dividends (whether declared out of unappropriated earnings or capital surplus).

c. have priority over the holders of common shares to the assets of the Company available for distribution to shareholders upon

liquidation or dissolution, however, the preemptive rights to the assets shall not exceed the issue value of the shares.

d. have voting rights similar to that of the holders of common shares.

Balance, January 1, 2001

Options granted

Options exercised

Options cancelled

Balance, December 31, 2001

Options granted

Options exercised

Options cancelled

Balance, December 31, 2002

Option Rights Available
For Grant

Outstanding Option Rights

Number of
Option Rights

Exercise Price
(US$)

3,782

826

4,608

216

4,824

6,837

(2,949)

(826)

3,062

(1,260)

(216)

1,586

1.23

1.02

1.27

1.43

1.22

1.93

e. have no right to convert their shares into common shares. The preferred shares are to be redeemed within thirty months from their

Options granted will expire if not exercised at specified dates between May 2006 and June 2011.

issuance. The preferred shareholders have the aforementioned rights and the Company's related obligations remain the same until the

In December 2000, WaferTech implemented a Stock Option Buyback Program ("Buyback") with its employees. The Buyback program

preferred shares are redeemed by the Company.

On June 25, 2002, the SFC approved TSMC's Employee Stock Option Plan (the "Plan I"). Plan I provides qualified employees and non-

employees with 100,000 thousand units of option rights with each unit representing one common share of stock. The option rights are

valid for 10 years and exercisable at certain percentages subsequent to the second anniversary of issuance. Under the terms of the plan,

stock options are granted at an exercise price equal to the closing price of TSMC's common shares listed on the Taiwan Stock Exchange

at the date of grant. At December 31, 2002, the maximum number of shares authorized to be granted by TSMC, TSMC-North America

and Wa f e r Tech under this plan are 70,000 thousand, 16,000 thousand and 14,000 thousand option rights, respectively. The initial

grant of options will be vested 50% two years after the grant date, 75% three years after the grant date and 100% four years after the

grant date.

Information with respect to stock option rights activities under Plan I is as follows:

provides employees with the right to sell back all vested stock options and outstanding ownership interests granted under the program

to WaferTech. The repurchase price for outstanding ownership interests is US$6. The repurchase price for vested stock options is US$6

less the exercise price of the option. As of December 31, 2002, the Company has repurchased 2,476 thousand outstanding ownership

interests at a cost of US$15,466 thousand.

18. TREASURY STOCK (COMMON STOCK)

Purpose of Purchase

Beginning Shares

Increase

Decrease

Ending Shares

(Shares in Thousand)

Option Rights Available
For Grant

Outstanding Option Rights

Year ended December 31, 2002

Number of
Option Rights

Weighted Average Exercise Price
(NT$)

Reclassification of stocks held by subsidiaries from

short/long-term investment to treasury stock

39,270

3,818

1,087

42,001

100,000

(19,726)

357

80,631

19,726

(357)

19,369

On January 1, 2002, TSMC reclassified its capital stock held by its subsidiaries with book value of NT$2,115,695 thousand from

short/long-term investments to treasury stock. Proceeds from sales of treasury stock for the year ended December 31, 2002 were

NT$96,501 thousand. The book value and market value of such treasury stock was NT$1,923,492 thousand and NT$2,048,164

thousand, respectively. Effective from January 1, 2002, capital stock held by a subsidiary as an investment is recorded as treasury stock

with the holder having the same rights as other common shareholders.

Option rights authorized

Options granted

Options exercised

Options cancelled

Balance, December 31, 2002

128

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Annual Report 2002

129

19. EARNINGS PER SHARE

Earnings per share (EPS) is computed as follows:

Amounts (Numerator)

Income Before
Income Tax

Consolidated
Net Income

Share
(Denominator)
(Thousand)

EPS (Dollars)

Income Before
Income Tax

Consolidated
Net Income

Year ended December 31, 2002

Income

Less - preferred stock dividends

Basic earnings per share

$27,222,148

$21,610,291

(455,000)

Income available to common shareholders

$26,767,148

$21,155,291

18,580,700

$1.44

$1.14

Diluted earnings per share

Income available to common shareholders

$26,767,148

$21,155,291

18,580,700

$1.44

$1.14

Year ended December 31, 2001

Income

Less - preferred stock dividends

Basic earnings per share

$10,786,505

$14,483,174

(455,000)

The potential common shares from the employee stock option plan (see Note 17) are not included in the denominator of the diluted

e a r n i n g - p e r-share computation as such shares result in a non-dilutive per-share amount using the treasury stock method under the

Statement of Financial Accounting Standards No. 24, "Earning Per Share".

The average number of shares outstanding for EPS calculation has been adjusted retroactively for issuance of stock dividends and stock

bonuses. The retroactive adjustment caused the basic EPS before income tax and after income tax for the year ended of December 31,

2001 to decrease from NT$0.61 and NT$0.83 to NT$0.55 and NT$0.75, respectively.

20. RELATED PARTY TRANSACTIONS

The Company engaged in business transactions with the following related parties:

a. Industrial Technology Research Institute (ITRI), the Chairman of TSMC is one of its directors.

b. Philips Electronics N.V., (Philips), a major shareholder of TSMC.

c. Investees of TSMC

VIS

SSMC

Income available to common shareholders

$10,331,505

$14,028,174

18,622,887

$0.55

$0.75

Sales of property, plant and equipment

Diluted earnings per share

VIS

Non-operating income

Income available to common shareholders

$10,331,505

$14,028,174

18,622,887

$0.55

$0.75

SSMC (technical service income mainly)

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

2002

2001

Amount

For the year ended

Sales

Philips and its affiliates

ITRI

VIS

SSMC

Purchase

VIS

SSMC

Operating expense -Rental

ITRI

Manufacturing expenses -Technical service fee

$2,909,008

94,409

92,119

7,018

$3,102,554

$3,469,198

2,751,297

$6,220,495

$40,401

$2,389,257

114,546

1,177,094

48,972

$3,729,869

$3,801,975

42,984

$3,844,959

$161,604

Philips

$2,849,517

100

$2,418,276

VIS

At December 31

Receivables

Philips and its affiliates

VIS

ITRI

SSMC

$126,061

$352,706

58,301

22,974

5,678

$268,871

$95,284

467

$95,751

$116,499

320,179

37,383

20,671

100

Prepaid expense and other current asset - Rent

ITRI

Payables

Philips and its affiliates

VIS

SSMC

Refundable deposits

VIS

$439,659

100

$494,732

100

$730,847

653,876

391,426

$1,776,149

$514,846

100

$42,664

$499,331

548,472

470

$1,048,273

$750,788

100

Sales to related parties are based on normal selling prices and collection terms, except for sales of property, plant and equipment and

technical service fee, which were in accordance with the related contracts.

130

TSMC

Annual Report 2002

TSMC

Annual Report 2002

131

21. SIGNIFICANT LONG-TERM OPERATING LEASES

TSMC leases land from the Science-Based Industrial Park Administration where its Fab 2 through Fab 14 manufacturing facilities reside.

These agreements expire on various dates from March 2008 to December 2020 and have annual rent payments aggregating

NT$225,576 thousand. The agreements can be renewed upon their expiration.

TSMC-North America leases its office premises and certain equipment under non-cancelable operating agreements, which will expire in

2020. TSMC-Europe and TSMC-Japan entered into lease agreements for their office premises, which will expire in 2004. Current

annual rent payments aggregate to NT$115,281 thousand.

Future remaining lease payments are as follows:

Year

2003

2004

2005

2006

2007

2008 and thereafter

Amount

$340,857

343,886

339,821

339,779

336,857

2,073,229

$3,774,429

22. SIGNIFICANT COMMITMENTS AND CONTINGENCIES

The significant commitments and contingencies of the Company and its subsidiaries as of December 31, 2002 are as follows:

a.Under a Technical Cooperation Agreement with Philips, as amended on May 12, 1997, TSMC shall pay technical assistance fees as a
percentage of net sales, as defined in the agreement, of certain products. The agreement shall remain in force up to July 8, 2007
and thereafter be automatically renewed for successive periods of three years. Under the amended agreement, the fee is subject to
deduction by the amounts TSMC pays to any third party for settling any licensing/infringement issue after the first five-year period of
the amended agreement, provided that the fee after reduction will not be below a certain percentage of the net selling price.

b.Subject to certain equity ownership and notification requirements, Philips and its affiliates can avail themselves each year of up to

30% of TSMC's production capacity.

c. Under a technical cooperation agreement with ITRI, TSMC shall reserve and allocate up to 35% of certain of its production capacity

for use by the Ministry of Economic Affairs (MOEA) or any other party designated by the MOEA.

d.Under several foundry agreements, TSMC shall allocate a portion of its production output for sale to certain major customers from

h. Under a Technology Transfer Agreement with National Semiconductor Corporation ("National") entered into on June 27, 2000, TSMC
shall receive payments for license of certain technology to National. The agreement will remain in force for ten years. After the initial
expiration date, this agreement will be automatically renewed for successive periods of two years unless pre-terminated by either party
under certain conditions. In January 2003, the agreement was amended such that National will discontinue making payments under
the original terms and TSMC will discontinue transferring any additional technology. TSMC granted National the option to request
additional technology transfers under the same terms and conditions of the original agreement through January 2008.

i. TSMC entered into a Manufacturing Agreement with VIS. VIS agrees to reserve certain production capacity for TSMC to manufacture
certain logic devices or other technologies required by TSMC's customers at selling prices as agreed by the parties. TSMC paid
NT$1,200,000 thousand to VIS as a security bond. VIS shall return portions of the bond without any interest to TSMC upon the
purchase of wafers by TSMC. The contract will remain in force for five years.

j. In December 2000, TSMC-North America and WaferTech initiated stock appreciation right programs whereby the employees receive
cash bonuses based on the appreciation of the quoted market price of the shares of stock of TSMC. At December 31, 2002, the
exercise price of the stock appreciation right was higher than the market price of TSMC stock, therefore no compensation expense is
recognized for the year ended December 31, 2002.

k. WaferTech caused some contractors to incur additional labor and material costs outside the contracts. WaferTech recorded a reserve

of US$3,000 thousand during 2002 for a litigation arising from a change by certain contractors.

l. Unused letters of credit as of December 31, 2002 were NT$6,480 thousand, US$1,509 thousand, ￥51,000 thousand, Euro 520

thousand and S$85 thousand.

23. ADDITIONAL DISCLOSURES

Following are the additional disclosures required by the SFC for the Company:

a. Financing provided: Please see Table 1 attached;

b. Endorsement/guarantee provided: Please see Table 2 attached;

c. Marketable securities held: Please see Table 3 attached;

d. Marketable securities acquired or disposed of at costs or prices of at least NT$100 million or 20% of paid-in capital: Please see Table

4 attached;

e. Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of paid-in capital: Please see Table 5

attached;

f. Disposal of individual real estate properties at prices of at least NT$100 million or 20% of paid-in capital: None;

g. Total purchases from or sales to related parties of at least NT$100 million or 20% of paid-in capital: Please see Table 6 attached;

whom guarantee deposits of US$39,810 thousand had been received as of December 31, 2002.

h. Receivable from related parties amounting to at least NT$100 million or 20% of paid-in capital: Please see Table 7 attached;

e.Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March 30, 1999, the parties formed a
joint venture company named Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) for the purpose of constructing an
integrated circuit foundry in Singapore, and allow TSMC to invest in 32% of SSMC's capital. TSMC and Philips committed to buy a
specific percentage of the production capacity of SSMC. If any party defaults on the agreement and the capacity utilization of SSMC
falls below a specific percentage of its total capacity, the defaulting party is required to compensate SSMC for all related unavoidable
costs.

f. TSMC provides technical services to SSMC under a Technical Cooperation Agreement (the "Agreement") entered into on May 12,
1999. TSMC receives compensation for such services computed at a specific percentage of net selling prices of specific products sold
by SSMC. The Agreement remains in force for ten years and is automatically renewed for successive periods of five years unless pre-
terminated by either party under certain conditions.

g.Beginning in 2001, TSMC entered into several license arrangements for certain semiconductor patents. The terms of the contracts
range from five to ten years with payments to be paid in the form of royalties over the term of the related contracts. TSMC has
recorded the related amounts as a liability and a deferred charge to be amortized to cost of sales on a straight-line basis over the

shorter of the estimated useful life of the technology or the term of the contract.

132

TSMC

Annual Report 2002

i . Names, locations, and related information of investee on which the Company exercises significant influences: Please see Table 8

attached.

j. Financial instrument transactions:

1) Derivative financial instruments

The relevant information on the derivative financial instruments entered into by the Company is as follows:

a) Forward exchange contracts as of December 31, 2002

Currency

Sell

Buy

USD

EUR

J P Y

Contract
Amount
(Thousand)

$715,000

89,000

Fair Value
(Thousand)

Settlement Date

Maturity
(Thousand)

NT$24,874,483

Jan. 2, 2003 - Feb. 24, 2003

NT$24,886,765

￥4,274,850

NT$1,249,159

Jan.6, 2003 - Jan. 15, 2003

NT$3,231,707

Jan.15, 2003 - Mar. 14, 2003

NT$3,234,260

NT$1,250,394

TSMC

Annual Report 2002

133

As of December 31, 2002, receivables from forward exchange contracts (included in "other current assets" account) aggregate to

NT$199,609 thousand, and payables from forward exchange contracts (included in "other current liabilities" account) aggregate to

rate swap contracts is limited to the amounts payable arising from the differences in the rates. In addition, options may not be

exercised in the event the strike price is higher than the related market price at the exercise date. Management believes that the

NT$17,538 thousand. The net exchange gain for the year ended December 31, 2002 was NT$1,522,383 thousand.

foregoing cash flow requirements are not material.

The net assets and liabilities hedged by the above forward exchange contracts are as follows:

2) Fair value of financial instruments

Accounts receivable

Accounts payable

b) Interest rate swaps

Amount
(Thousand)

US $487,905

JP ￥4,287,733
49,026

E UR

The Company entered into interest rate swap contracts to hedge exposures from rising interest rates on its floating rate long-term

loans. Interest expense on these transactions for the year ended December 31, 2002 were NT$261,107 thousand. Outstanding

contracts as of December 31, 2002 were as follows:

Contract Date

April 28, 1998

April 29, 1998

June 26, 1998

July 1, 1999

c) Option contracts

Period

May 21, 1998 - May 21, 2003

June 26, 1998 - June 26, 2003

July 6, 1998 - July 6, 2003

July 1, 1999 - June 28, 2004

Amount
(Thousand)

NT$2,000,000

NT$1,000,000

US$11,429

The Company entered into foreign currency option contracts to hedge risks of exchange rate fluctuations arising from its anticipated

U.S. dollar cash receipts on export sales and its European and Yen currency obligations for purchases of machinery and equipment.

Outstanding option contracts as of December 31, 2002 were as follows:

Type

Contract

Currency

Contract
Amount
(Thousand)

Carrying
Value

Fair Value
(Thousand)

Non-derivative financial instruments

Assets

Cash and cash equivalents

Short-term investments

Receivables from related parties

Notes and accounts receivable

Long-term investments

Refundable deposits

Liabilities

Short-term bank loans

Payable to related parties

Accounts payable

December 31

2002

Carrying
Amount

Fair Value

2001

Carrying
Amount

Fair Value

$67,790,204

$37,556,295

170,012

439,659

19,590,942

10,635,496

557,266

2,455,582

439,659

19,590,942

12,750,029

557,266

1,398,071

494,732

20,134,218

11,599,150

784,089

729,813

1,776,149

5,138,592

729,813

1,776,149

5,138,592

6,269,181

1,048,273

1,397,879

6,917,133

494,732

20,134,218

16,545,944

784,089

6,269,181

1,048,273

1,397,879

12,867,236

22,399,360
29,703,063

141,498
7,212,688

Payable to contractors and equipment suppliers

14,132,100

12,867,236

Long-term bank loans

(includes current portion)

Bonds (includes current portion)

Other long-term liabilities (includes

current portion and other liabilities - others)

Guarantee deposits

18,002,054

39,000,000

5,616,220

1,395,066

18,002,054

39,762,245

5,616,220

1,395,066

22,399,360

29,000,000

141,498

7,212,688

Strike Price

Maturity

Derivative financial instruments

European

Call option written

European

Call option written

European

Put option written

USD

EUR

$230,000

$10,000

10,000

$ -

($404,884)

32.78~33.22 (US$/NT$)

Jan. 9, 2003 - Feb. 25, 2003

(3,652)

(1,596)

119.2 (US$/JPY)

Jan. 30, 2003 - Feb. 27, 2003

1.017 (US$/EUR)

Jan. 30, 2003 - Feb. 27, 2003

For the year ended December 31, 2002, the Company recognized premium income of NT$228,030 thousand and premium expense

Forward exchange contracts (buy)

Forward exchange contracts (sell)

Interest rate swaps

Options

$38,369

143,702

(23,994)

(50,273)

26,089

139,913

(164,342)

(410,132)

(397,117)

26,969

(39,500)

(427,225)

(343,088)

(252,833)

of NT$647,543 thousand.

d) Transaction risk

i) Credit risk. The banks, which are the counter-parties to the foregoing derivative financial instruments, are reputable financial

institutions. Management believes its exposures related to the potential default by those counter-parties are low.

ii) Market price risk. All derivative financial instruments are intended as hedges for fluctuations in currency exchange rates on the

Fair values of financial instruments were determined as follows:

a) Short-term financial instruments - carrying values.

b) Short-term investments - market values.

c) Long-term investments - market value for traded companies and net equity value for non-traded companies.

Company's foreign currency denominated receivables or payables and interest rate fluctuations on its floating rate long-term loans.

d) Refundable deposits, guarantee deposits and other long-term liabilities - carrying values.

Gains or losses from forward exchange contracts are likely to be offset by gains or losses from the hedged receivables and

payables. Interest rate risks are also controlled as the expected cost of capital is fixed. Thus, market price risks are believed to be

minimal.

iii) Liquidity and cash flow requirements. The cash flow requirements on forward contracts are limited to the net differences between

e) Long-term bank loan - fair values of long-term bank loans are their carrying values as they use floating interest rate.

f) Long-term liabilities - based on forecasted cash flows discounted at interest rates. Bonds payable is discounted to present value. Fair

values of other long-term liabilities are also their carrying values as they use floating interest rate.

the current exchange rates and the contracted forward rates at the date of settlement. The cash flow requirements for interest

g) Derivative financial instruments - based on bank quotations.

134

TSMC

Annual Report 2002

TSMC

Annual Report 2002

135

The fair values of non-financial instruments were not included in the fair values disclosed above. Accordingly, the sum of the fair values

b. Gross export sales

of the financial instruments listed above does not represent the fair value of the Company and its subsidiaries as a whole.

3) Investment in Mainland China

TSMC filed an investment project with the Investment Commission of MOEA to establish a foundry in mainland China. As of January 16,

2003, the foregoing project has not been approved by the authority.

Area

North Americas

Asia and others

Europe

2002

$95,139,355

42,020,560

9,358,802

2001

$63,893,621

23,874,375

7,523,873

$146,518,717

$95,291,869

24. SEGMENT FINANCIAL INFORMATION

a. Geographic information:

Overseas

Taiwan

Adjustments and
Elimination

Consolidated

The customer with sales greater than 10% of the Company's total sales is as follows:

The export sales information is presented by billed regions.

c. Major customer

2002

Sales to unaffiliated customers

Transfers between geographic areas

$95,774,432

$66,526,776

$162,301,208

9,537,846

94,434,553

(103,972,399)

Total sales

$105,312,278

$160,961,329

($103,972,399)

$162,301,208

Customers

A Customer

2002

Amount

$32,769,054

2001

Amount

$21,789,769

Gross profit

Operating expenses

Non-operating income

Non-operating expenses

Income before income tax

Minority interest loss

Identifiable assets

Long-term investments

Total assets

2001

($19,865)

$51,967,145

($365,870)

$52,313,150

(20,724,111)

2,419,467

(6,786,358)

$27,222,148

$24,791

$75,840,416

$336,405,063

($32,338,576)

$379,906,903

10,635,496

$390,542,399

Sales to unaffiliated customers

Transfers between geographic areas

$125,884,892

8,152,070

3,111

(8,155,181)

Total sales

$8,152,070

$125,888,003

($8,155,181)

$125,884,892

Gross profit

Operating expenses

Non-operating income

Non-operating expenses

Income before income tax

Minority interest income

Identifiable assets

Long-term investments

Total assets

136

TSMC

Annual Report 2002

($1,224,832)

$36,381,055

($1,499,429)

$73,433,656

$303,954,097

($22,469,208)

$33,656,794

(20,878,997)

6,475,576

(8,466,868)

$10,786,505

($44,009)

$354,918,545

11,599,150

$366,517,695

TSMC

Annual Report 2002

137

TABLE 1

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

FINANCING PROVIDED

For the Year Ended December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

No.

Financing
Name

Counter-party

Financial
Statement
Account

Maximum Balance for
the Period
(US$ in Thousand)

Ending Balance
(US$ in Thousand)

TSMC

Other receivables

International

Technology, Inc.

$536,372
(US$15,434)

Interest
Rate

4.25%

Financing
Reasons (Note1)

Transaction
Amounts

Reasons for
Short-term
Financing

Allowance
for Bad Debt

Collateral

Item

Value

Financing Limit for
Each Borrowing
Company

Financing Amount
Limits
(US$ in Thousand)

Operating capital

N/A

$ 34,334,852
(US$987,968)(Note 2)

Note 1: The No.2 represents short-term financing.
Note 2: Not exceeding the issued capital of the Company.

TABLE 2

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

ENDORSEMENT/GUARANTEE PROVIDED

For the Year Ended December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

No.

Endorsement/
Guarantee
Provider

Name

Counter-party

Nature of
Relationship (Note 2)

TSMC

TSMC Development Inc.

TSMC - North America

WaferTech

Limits on Each
Counter-party's
Endorsement/
Guarantee Amounts

(Note 4)

Maximum Balance
for the Period
(US$ in Thousand)

$9,313,804
(US$268,000)

1,390,120
(US$40,000)

15,291,320
(US$440,000)

Note 1: 30% of the issued capital of the Company.
Note 2: The No. 2 represents a subsidiary in which TSMC holds directly over 50% of the equity interest.

The No. 3 represents an investee in which TSMC holds directly and indirectly over 50% of the equity interest.

Ending Balance
(US$ in Thousand)

Value of Collateral
Property, Plant and
Equipment (Note 3)

Ratio of Accumulated Amount
of Collateral to Net Equity of
the Latest Financial Statement

Maximum
Collateral/Guarantee
Amounts Allowable (Note 1)

$6,950,600
(US$200,000)

1,390,120
(US$40,000)

15,291,320
(US$440,000)

$59,768,660

2.37%

0.47%

5.21%

138

TSMC

Annual Report 2002

TSMC

Annual Report 2002

139

TABLE 3

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

MARKETABLE SECURITIES HELD

December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Held Company Name

Type and Name of
Marketable Security

Relationship with
the Company

Financial Statement
Account

December 31, 2002

Shares
(Thousand)

Carrying Value
(US$ in Thousand)

Percentage
of Ownership

Market Value or
Net Asset Value
(US$ in Thousand)

Note

TSMC

Stock

TSMC - North America

Subsidiary

Long-term investment

11,000

$173,601

TSMC - Europe

TSMC - Japan

VIS

TSMC International

Chi Cherng Investment

Subsidiary

Investee

Subsidiary

Investee

Long-term investment

Hsin Ruey Investment

Investee

Long-term investment

556,133

987,968

13,670

94,258

2,415,297

22,265,157

41,894

39,815

TSMC Partners

Subsidiary

Long-term investment

300

3,753,733

SSMC

Emerging Alliance

Taiwan Mask Corp.

United Technology Co., Ltd.

Shin-Etsu Handotai Taiwan Co., Ltd.

W.K. Technology Fund IV

Ya Xin Technology

Hon Tung Ventures Capital

Amkor Technology

Monolithic System Tech.

Crimson Asia Capital

Horizon Ventures

Investee

Subsidiary

Long-term investment

TSMC - North America

Chi Cherng Investment

Stock

TSMC

Stock

TSMC

Certificate

Parent company

Long-term investment

Parent company

Short-term investment

382

8,794

16,783

10,500

5,000

34,125

8,392

505

470

N/A

12,692

12,738

3,136,115

767,239

32,129

193,584

105,000

50,000

341,250

83,916

280,748

104,289

41,988

195,452

748,282

459,285

Hsin Ruey Investment

Major shareholder

Long-term investment

900,109

100

N/A

$921,883

13,670

94,258

4,326,719

22,265,157

501,179

500,048

3,940,495

3,136,115

767,239

160,574

280,931

137,355

59,866

341,250

71,216

89,866

214,949

41,988

195,452

610,434

612,636

900,109

The treasury stocks in amounts of
NT$748,282 thousand are deducted
from the carrying value.

The carrying value does not include
prepayment for subscribed stock of
NT$849,360 thousand.

The treasury stocks in amounts of
NT$459,285 thousand are deducted
from the carrying value.

The treasury stocks in amounts of
NT$460,233 thousand are deducted
from the carrying value.

The treasury stocks in amounts of
NT$255,692 thousand are deducted
from the carrying value.

(Forward)

140

TSMC

Annual Report 2002

TSMC

Annual Report 2002

141

Held Company Name

Type and Name of
Marketable Security

Relationship with
the Company

Financial Statement
Account

December 31, 2002

Shares
(Thousand)

Carrying Value
(US$ in Thousand)

Percentage of
Ownership

Market Value or
Net Asset Value
(US$ in Thousand)

Note

Hsin Ruey Investment

Stock

TSMC

Certificate

Parent company

Short-term investment

12,762

$460,233

TSMC International

Stock

Chi Cherng Investment

Major shareholder

Long-term investment

902,137

VIS

InveStar Semiconductor

Development Fund, Inc.

InveStar Semiconductor

Development Fund (II), Inc.

TSMC Development, Inc.

TSMC Technology, Inc.

3DFX Interactive, Inc.

Stock

VIS Associates, Inc.

PowerChip Semiconductor, Inc.

Etron Technology, Inc.

Walsin Technology, Inc.

MEGIC Corporation

Form Factor, Inc.

Subsidiary

Long-term investment

Subsidiary

Long-term investment

Subsidiary

Investee

Long-term investment

VIS Associates Inc.

Stock

VIS Investment Holding, Inc.

Subsidiary

Long-term investment

United Technology Co., Ltd.

Investee

Long-term investment

Equity

Silicon Valley Equity Fund

Silicon Valley Equity Fund II

Equity certificate

ABN AMRO Bank

Fund

Grand Palace Trust

Long-term investment

VIS Investment Holding, Inc.

Stock

TSMC Development, Inc.

TSMC Partners

InveStar Semiconductor

VIS Micro, Inc.

Stock

WaferTech

ADR

TSMC

Stock

Development Fund Inc.

Marvell Technology Group Ltd.

Silicon Laboratories

WGRD

Programmable Microelectronics,

(Taiwan) Inc.

Subsidiary

Long-term investment

Subsidiary

Long-term investment

Parent company

Short-term investment

Long-term investment

(Forward)

142

TSMC

Annual Report 2002

45,000

51,300

41,070

191,671

4,859

34,551

16,500

267

3,357

US$44,634

US$43,179

US$307,094

US$2,321

1,193,891

2,100,716

101,839

302,559

177,000

64,360

38,716

US$397

US$7,317

US$5,355

200

762

3,413

104

1,580

US$2,719

US$279

US$326,609

US$7,357

US$3,350

US$287

US$625

US$1,566

100

$613,782

902,137

US$44,634

US$43,179

US$307,094

US$2,321

1,193,891

2,100,716

101,839

302,559

156,819

64,360

56,206

US$397

US$7,386

US$5,355

US$817

US$2,719

US$279

US$326,609

US$6,080

US$69,181

US$202

US$635

US$1,566

The amount is shown in the carrying
value.

TSMC

Annual Report 2002

143

Long-term investment

3,648

US$817

Held Company Name

Type and Name of
Marketable Security

Relationship with
the Company

Financial Statement
Account

December 31, 2002

Shares
(Thousand)

Carrying Value
(US$ in Thousand)

Percentage
of Ownership

Market Value or
Net Asset Value
(US$ in Thousand)

Note

Long-term investment

Short-term investment

Long-term investment

Divio, Inc.

Global Test Corp.

Chipstrate Technologies, Inc.

Richtek Technology Holding Corp.

Advanced Power Electronics, Corp.

Preferred stock

Integrated Memory Logic, Inc.

Divio, Inc.

SiRF Technology Holdings, Inc.

Capella Microsystems, Inc.

Sensory, Inc.

Equator Technologies, Inc.

LightSpeed Semiconductor

Corporation

Tropian, Inc.

Sonics, Inc.

Atheros Communications, Inc.

NanoAmp Solutions, Inc.

Formfactor, Inc.

Monolithic Power Systems, Inc.

Memsic, Inc.

Reflectivity, Inc.

Signia Technologies, Inc.

Match Lab, Inc.

HiNT Corporation

Ordius, Inc. (Creosys, Inc.)

Incentia Design Systems, Inc.

InveStar Semiconductor

Development Fund (II) Inc.

IP Unity

Stock

WGRD

Procoat Technology

Richtek Technology Corporation

Programmable Microelectronics

(Taiwan), Inc.

Auden Technology MFG. Co., Ltd.

Geo Vision, Inc.

EoNEX Technologies, Inc.

Conwise Technology Co., Ltd.

Yi Yang Technology

Goyatek Technology Inc.

Trendchip Technologies Corp.

(Forward)

144

TSMC

Annual Report 2002

13,268

6,660

1,023

2,750

1,831

667

306

300

1,404

300

2,252

1,758

2,686

1,607

541

267

2,521

2,727

1,064

3,000

1,875

1,000

1,500

286

1,008

105

3,500

845

487

953

180

2,800

1,740

2,000

US$3

US$5,176

US$300

US$346

US$1,345

US$1,809

US$500

US$1,333

US$481

US$625

US$258

US$1,339

US$2,334

US$3,530

US$3,593

US$853

US$2,000

US$1,500

US$1,192

US$300

US$1,500

US$1,000

US$450

US$500

US$1,636

US$630

US$1,942

US$1,006

US$140

US$1,117

US$129

US$2,024

US$1,930

US$967

US$1,787

US$864

US$3

US$5,176

US$300

US$346

US$1,345

US$1,809

US$500

US$1,333

US$481

US$625

US$258

US$1,339

US$2,334

US$3,530

US$3,593

US$853

US$2,000

US$1,500

US$1,192

US$300

US$1,500

US$1,000

US$450

US$500

US$1,636

US$640

US$1,942

US$1,006

US$140

US$1,117

US$129

US$2,024

US$1,930

US$967

US$1,787

US$864

TSMC

Annual Report 2002

145

Held Company Name

Type and Name of
Marketable Security

Relationship with
the Company

Financial Statement
Account

December 31, 2002

Shares
(Thousand)

Carrying Value
(US$ in Thousand)

Percentage
of Ownership

Market Value or
Net Asset Value
(US$ in Thousand)

Note

Preferred stock

Memsic, Inc.

OEpic, Inc.

Equator Technologies, Inc.

NanoAmp Solutions, Inc.

Signia Technologies, Inc.

Advanced Analogic Technology, Inc.

Monolithic Power Systems, Inc.

Ralink Technology, Inc.

Sonics, Inc.

Newport Opticom, Inc.

Silicon Data, Inc.

Reflectivity, Inc.

Capella Microsystems, Inc.

Angstron Systems, Inc.

Tropian, Inc.

SiRF Technology Holdings, Inc.

LeadTONE Wireless, Inc.

Match Lab, Inc.

eBest!, Inc.

Kilopass Technology, Inc.

Bond

eBest!, Inc.

Stock

Long-term investment

2,289

2,696

770

250

1,500

948

804

1,833

3,082

1,157

2,000

1,596

800

1,567

1,464

680

313

185

3,887

US$1,560

US$1,240

US$452

US$1,000

US$150

US$1,261

US$1,946

US$1,500

US$3,082

US$810

US$1,000

US$1,500

US$200

US$750

US$2,000

US$131

US$238

US$250

US$97

US$2,000

US$24

Global Investment Holding, Inc.

Investee

Long-term investment

10,000

$100,000

Preferred stock

Quake Technologies, Inc.

Pixim, Inc.

Newport Opticom, Inc.

NetLogic Microsystems, Inc.

Ikanos Communication, Inc.

Quicksilver Technology, Inc.

Litchfield Communications

Mosaic Systems

Accelerant Networks

Zenesis Technologies

Reflectivity, Inc.

Iridigm Display

Spreadtrum

XHP Microsystem

Long-term investment

467

833

962

602

1,741

1,475

3,799

2,481

441

861

1,596

305

2,279

US$1,000

US$2,500

US$1,000

US$1,850

US$1,500

US$2,338

US$1,000

US$500

US$1,000

US$500

US$1,500

US$502

US$1,000

US$750

US$1,560

US$1,240

US$452

US$1,000

US$150

US$1,261

US$1,946

US$1,500

US$3,082

US$810

US$1,000

US$1,500

US$200

US$750

US$2,000

US$131

US$238

US$250

US$97

US$2,000

US$24

$100,000

US$1,000

US$2,500

US$1,000

US$2,932

US$1,500

US$2,338

US$1,000

US$500

US$1,000

US$500

US$1,500

US$502

US$1,000

US$750

Emerging Alliance

(Forward)

146

TSMC

Annual Report 2002

Prepayment for subscribed stock

TSMC

Annual Report 2002

147

TABLE 4

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE

PAID-IN CAPITAL

For the Year Ended December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Acquiring on

Selling Company Name

Type and Name of

Marketable Security

Financial Statement

Account

Counter-party

Nature of

Relationship

TSMC

Stock

SSMC

TSMC International

Monolithic System Tech.

Emerging Alliance

VIS

Ya Xin Technology

TSMC International

Stock

TSMC Development, Inc.

VIS

VIS Associates, Inc.

TSMC Development Inc.

InveStar Semiconductor

Development Fund (II) Inc.

WaferTech

Bond fund

Yuan Da Duo Li #2

Da-Hua

THE TP ROC

NITC

JIHSUN

Tung Yi Chian Pang

Equity certificate

ABN AMRO Bank

Long-term investment

SSMC

TSMC-BVI

Monolithic System Tech.

Emerging Alliance Fund, LP

VIS

Ya Xin Technology

TSMC Development, Inc.

InveStar Semiconductor

Development Fund (II), Inc.

Long-term investment

WaferTech

Short-term investment

Long-term investment(Note 3)

Investee

Subsidiary

Investee

Subsidiary

Investee

Subsidiary

Note 1: The ending balance included the recognition of the investment income (loss) by the equity method and the accumulated translation adjustment.
Note 2: Prepayment for the subscribe stock.
Note 3: This equity certificate had been reclassified from short-term investment to long-term investment starting from July 2002.
Note 4: The total book value for sale is US$9,100 thousand and with the unrealized loss on long-term investment is US$666 thousand.

Beginning Balance

Acquisition

Disposal

Ending Balance

Amount (US$

Carrying Value

Gain (Loss) on

Amount (US$

(Thousand)

in Thousand)

(Thousand)

in Thousand)

(Thousand)

in Thousand)

(US$ in

Disposal(US$ in

(Thousand)

in Thousand)

Thousand)

(Note 1)

301

779,968

$2,907,967

19,987,814

741,617

208,000

470

$1,421,846

7,280,000

104,289

168,615

556,133

3,377,526

121,338(Note 2)

849,360(Note 2)

34,125

341,250

US$201,231

US$208,000

45,000

US$45,766

6,300

US$6,300

US$226,541

US$120,000

26,278

25,923

350,000

28,409

400,000

33,108

70,860

3,814

43,630

450,000

850,000

580,000

550,000

59,386

70,860

25,923

3,814

43,630

28,409

807,970

853,974

356,458

582,977

554,407

402,869

800,000

850,000

350,000

580,000

550,000

400,000

$ -

7,970

3,974

6,458

2,977

4,407

2,869

382

987,968

470

677,471

34,125

51,300

$3,136,115

22,265,157

104,289

767,239

3,264,657

341,250

US$307,094

US$43,179

US$326,609

23,168

US$10,047

1,194

US$536

20,714

US$14,806

US$9,766(Note 4)

US$5,706

3,648

US$ 817

148

TSMC

Annual Report 2002

TSMC

Annual Report 2002

149

TABLE 5

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

ACQUISITION OF INDIVIDUAL REAL ESTATE AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

For the Year Ended December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Company
Name

Types of
Property

Transaction Date

Transaction
Amount

Payment Term

Counter-party

TSMC

Fab 12

June 19, 2002

$263,000

By the construction progress

Mandartech Interiors, Inc.

July 11, 2002

August 6, 2002

137,402

By the construction progress

UISC

124,775

By the construction progress

Meissner & Wurst

November 15, 2002

244,654

By the construction progress

Fu Tsu Construction Co., Ltd.

Fab 14

April 9, 2002

135,000

By the construction progress

Fu Tsu Construction Co., Ltd.

April 12, 2002

June 24, 2002

109,880

By the construction progress

Great Construction System, Inc.

984,995

By the construction progress

Fu Tsu Construction Co., Ltd.

TABLE 6

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

TOTAL PURCHASE FROM OR SALE TO RELATED PARTIES AMOUNTING TO AT LEAST

NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

For the Year Ended December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Nature of

Prior Transaction of Related Counter-party

Relationship

Owner

Relationship

Transfer Date

Amount

Price Reference

Purpose of Acquisition

N/A

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Public bidding

Manufacturing purpose

Other

Terms

None

Company
Name

Related Party

Nature of Relationship

Transaction Details

Purchase/Sale

Amount

% to Total

TSMC

TSMC - North America

Subsidiary

Philips and its affiliates

Major shareholder

WaferTech

VIS

SSMC

Subsidiary

Investee

Sales

Purchase

$94,433,401

2,909,008

9,955,154

3,469,198

2,751,297

Transaction Details

Payment Terms

Abnormal Transaction

Notes/Accounts
Payable or Receivable

Note

Unit Price

Payment Terms

Ending Balance

% to Total

30 days from invoice date

30 days from monthly closing date

45 days from monthly closing date

30 days from invoice date

None

$9,739,236

352,706

(617,751)

(653,876)

(391,426)

(25)

(26)

(16)

150

TSMC

Annual Report 2002

TSMC

Annual Report 2002

151

TABLE 7

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Related Party

Nature of Relationship

Ending Balance

Turnover Rate

Amount

Action Taken

Overdue

Amounts Received in
Subsequent Period

Allowance for
Bad Debts

TSMC - North America

Philips and its affiliates

Subsidiary

Major shareholder

$9,739,236

352,706

18 days

29 days

$3,709,733

55,050

Accelerate demand on accounts receivable

$2,155,511

69,090

Company
Name

TSMC

TABLE 8

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES SIGNIFICANT

INFLUENCE

December 31, 2002

(Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified)

Investor

Company

TSMC

Investee Company

Location

Main Businesses and Products

Original Investment Amount

Balance as of December 31, 2002

Net Income

Investment

Dec. 31,

Percentage

Carrying

(Loss) of the

Gain (Loss)

Note

2002

2001

(Thousand)

of Ownership

Value (Note1)

Investee

(Note 2)

TSMC - North America

San Jose, California, U.S.A.

Marketing and engineering support

$333,178

11,000

TSMC - Europe

TSMC - Japan

VIS

Amsterdam, The Netherlands

Marketing and engineering support

Yokohama, Japan

Hsin-Chu, Taiwan

Marketing and engineering support

IC Design and manufacturing

TSMC International

Tortola, British Virgin Islands

Chi Cherng Investment

Taipei, Taiwan

Hsin Ruey Investment

Taipei, Taiwan

TSMC Partners

Tortola, British Virgin Islands

Investment

SSMC

Emerging Alliance

Ya Xin Technology

Singapore

Cayman Islands

Taipei, Taiwan

Manufacturing wafers

Investment

Electronic manufacturing

Note 1: The treasury stocks are not deducted from the carrying values.
Note 2: The gain from sales of treasury stock of NT$43,036 thousand, which was transferred to capital surplus, was not deducted from the investment gain (loss).
Note 3: The amount has not included the prepayment for the subscribed shares of 121,338 shares with total amount of NT$849,360 thousand.

2,960

83,760

6,503,640
(Note3)

2,960

83,760

6,503,640

556,133

31,445,780

24,165,780

987,968

300,000

10,350

6,408,190

1,005,660

341,250

100,000

10,350

4,986,344

837,045

300

382

34,125

100

$173,601

$140,654

$139,021

Subsidiary

13,670

94,258

2,415,297
(Note 3)

(1,615)

3,145

1,615

Subsidiary

6,045

Subsidiary

(3,250,831)

(821,771)

Investee

22,265,157

(4,714,203)

Subsidiary

41,894

39,815

13,821

12,533

13,122

Investee

6,632

Investee

3,753,733

924,362

993,292

Subsidiary

3,136,115

(3,609,569)

(1,155,076)

Investee

767,239

341,250

(142,865)

(142,151)

Subsidiary

152

TSMC

Annual Report 2002

TSMC

Annual Report 2002

153

11. US GAAP Financial Information

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

Please be advised that our 2002 full annual report that includes complete US GAAP reconciled financial statements and footnotes will be

avaliable when we file Form 20-F with the SEC. Our Form 20-F, or our 2002 full annual report, can be found at the SEC and on TSMC's

website no later than June 30, 2003.

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

RECONCILIATIONS OF TOTAL ASSETS

December 31, 2002 and 2001

(In Thousand New Taiwan Dollars)

TOTAL ASSETS UNDER ROC GAAP

US GAAP Adjustments :

2002

2001

$390,542,399

$366,517,695

CONSOLIDATED BALANCE SHEET

December 31, 2002 and 2001

(In Thousand New Taiwan Dollars)

ASSETS

CURRENT ASSETS

Cash and cash equivalents

Short-term investments

Receivable from related parties

Notes receivable

Accounts receivable - net

Inventories - net

Deferred income tax assets

Prepaid expenses and other current assets

Total Current Assets

LONG-TERM INVESTMENTS

PROPERTY, PLANT AND EQUIPMENT - NET

GOODWILL

OTHER ASSETS

Deferred charges - net

Deferred income tax assets

Refundable deposits

Idle assets - net

Assets leased to others

Miscellaneous

Total Other Assets

2002

2001

- Effects of the US GAAP adjustments

(1,414,756)

(1,476,433)

- Adjustment to market value - trading securities

2,116,432

3,936,191

- Adjustment of long-term investments

- Equity investees

- Adjustment to market value - available-for-sale securities

- TSMC

- Equity investees

- Impairment loss

- Reversal of depreciation of assets impaired under US GAAP

- Goodwill

- Carrying value difference for purchase of 68% TASMC

- Accumulated amortization

- Effect of US GAAP adjustments on deferred income tax

- Capital stock payment for technology transfer

- Treasury stock

18,611

7,083

(10,916,070)

2,910,952

52,212,732

(14,895,672)

(4,061)

(49,500)

29,985,751

168,926

499,302

(10,916,070)

1,455,476

52,212,732

(16,186,405)

(2,639)

(103,500)

(2,115,695)

27,471,885

TOTAL ASSETS UNDER US GAAP

$420,528,150

$393,989,580

$67,790,204

170,012

439,659

60,240

16,225,194

11,201,446

3,401,729

3,248,674

102,537,158

10,635,496

246,498,311

10,158,845

9,873,825

9,773,226

557,266

386,317

87,246

34,709

20,712,589

$37,556,295

1,398,071

494,732

176,582

16,275,593

9,828,328

2,350,147

2,721,421

70,801,169

11,599,150

251,287,632

11,437,572

3,769,750

16,245,828

784,089

555,053

37,452

21,392,172

TOTAL ASSETS UNDER ROC GAAP

$390,542,399

$366,517,695

154

TSMC

Annual Report 2002

TSMC

Annual Report 2002

155

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

December 31, 2002 and 2001

(In Thousand New Taiwan Dollars, Except Par Value)

LIABILITIES

CURRENT LIABILITIES

Short-term bank loans

Payable to related parties

Accounts payable

Payables to contractors and equipment suppliers

Accrued expenses and other current liabilitie

Current portion of long-term liabilitie

Total Current Liabilities

LONG-TERM LIABILITIES

Long-term bank loans

Long-term bonds payable

Other long-term payable

Total Long-term Liabilities

OTHER LIABILITIES

Accrued pension cost

Guarantee deposits

Deferred gain on sales and leaseback

Others

Total Other Liabilities

2002

2001

$729,813

1,776,149

5,138,592

14,132,100

6,477,212

12,107,899

40,361,765

11,051,454

35,000,000

4,281,665

50,333,119

2,211,560

1,395,066

114,928

177,256

3,898,810

$6,269,181

1,048,273

1,397,879

12,867,236

6,746,483

5,000,000

33,329,052

22,399,360

24,000,000

46,399,360

1,856,617

7,212,688

268,165

141,498

9,478,968

TOTAL LIABILITIES UNDER ROC GAAP

94,593,694

89,207,380

RECONCILIATIONS OF TOTAL LIABILITIES

As of and for the Years Ended December 31, 2002 and 2001

(In Thousand New Taiwan Dollars)

TOTAL LIABILITIES UNDER ROC GAAP

US GAAP Adjustments:

- Derivative financial investments

- Bonus to employees, directors and supervisors

- Pension expenses

2002

$94,593,694

516,278

1,597,497

39,772

2,153,547

2001

$89,207,380

962,215

1,201,437

48,360

2,212,012

TOTAL LIABILITIES UNDER ROC GAAP

$96,747,241

$91,419,392

MINORITY INTEREST IN SUBSIDIARIES UNDER ROC GAAP

US GAAP Adjustment:

- Shareholders' equity

MINORITY INTEREST IN SUBSIDIARIES UNDER US GAAP

95,498

62,689

158,187

120,240

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

December 31, 2002 and 2001

(In Thousand New Taiwan Dollars, Except Par Value)

SHAREHOLDERS' EQUITY

Capital stock, $10 par value

Authorized - 24,600,000 thousand shares and

Issued:

Preferred stock - 1,300,000 thousand shares

Common stock - 18,622,887 thousand shares

Capital surplus

Retained earnings

Appropriated as legal reserve

Appropriated as special reserve

Unappropriated earnings

Unrealized loss on long-term investments

Cumulative translation adjustments

Treasury stock

2002

2001

$13,000,000

186,228,867

57,004,789

18,641,108

22,151,089

(194,283)

945,129

(1,923,492)

$13,000,000

168,325,531

57,128,433

17,180,067

349,941

19,977,402

1,228,701

TOTAL SHAREHOLDERS' EQUITY UNDER ROC GAAP

295,853,207

277,190,075

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

UNDER ROC GAAP

$390,542,399

$366,517,695

156

TSMC

Annual Report 2002

TSMC

Annual Report 2002

157

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

RECONCILIATIONS OF SHAREHOLDERS' EQUITY

As of and for the Years Ended December 31, 2002 and 2001

(In Thousand New Taiwan Dollars)

CONSOLIDATED STATEMENT OF INCOME

For the Years Ended December 31, 2002 and 2001

(In Thousand New Taiwan Dollars)

TOTAL SHAREHOLDERS' EQUITY UNDER ROC GAAP

$295,853,207

$277,190,075

GROSS SALES

2002

2001

US GAAP Adjustments:

- Adjustment to market value for trading securities

- US GAAP adjustments on equity-method investees

- Adjustment to market value - available-for-sale securities

- TSMC

- Equity-method investees

- Loss on impairment of assets

- Reversal of depreciation on assets impaired under US GAAP

- Effect of US GAAP adjustments on deferred income tax

- Goodwill

- Carrying value difference from 68% purchase of TASMC

- Accumulated amortization

- Capital stock payment for technology transfer

- Derivative financial instruments

- Bonus to employees, directors and supervisors

- Accrued pension expense

- Treasury stock

- Minority interest

- Mandatory redeemable preferred stock

2,116,431

(1,414,756)

18,611

7,083

(10,916,070)

2,910,952

(4,061)

52,212,732

(14,895,672)

(49,500)

(516,278)

(1,597,497)

(39,772)

(62,688)

(13,000,000)

14,769,515

3,936,191

(1,476,433)

168,926

499,302

(10,916,070)

1,455,476

(2,639)

52,212,732

(16,186,405)

(103,500)

(962,215)

(1,201,437)

(48,360)

(2,115,695)

(13,000,000)

12,259,873

TOTAL SHAREHOLDERS' EQUITY UNDER US GAAP

310,622,722

289,449,948

MANDATORY REDEEMABLE PREFERRED STOCK

13,000,000

TOTAL LIABILITY AND SHAREHOLDERS' EQUITY UNDER US GAAP

$420,528,150

$393,989,580

SALES RETURNS AND ALLOWANCES

NET SALES

COST OF SALES

GROSS PROFIT

OPERATING EXPENSES

Research and development

General and administrative

Marketing

Total Operating Expenses

INCOME FROM OPERATIONS

NON-OPERATING INCOME

Interest income

Royalty income

Gain on sales of property, plant and equipment

Technical service income

Gain on sale of short-term investment - net

Insurance compensation - net

Premium income from option contracts - net

Gain on sales of long-term investments - net

Other

Total Non-Operating Income

NON-OPERATING EXPENSES

Interest expense

Investment loss recognized by equity method - net

Permanent loss on long-term investments

Loss on sales of and provision for loss on property, plant and equipment

Premium expenses from option contracts - net

Loss on sales of long-term investments - net

Foreign exchange loss - net

Casualty loss - net

Amortization of bond issuance costs

Other

Total Non-Operating Expenses

INCOME BEFORE INCOME TAX

INCOME TAX BENEFIT (EXPENSE)

INCOME BEFORE MINORITY INTEREST

MINORITY INTEREST IN LOSS (INCOME) OF SUBSIDIARIES

CONSOLIDATED NET INCOME

2002

$166,187,670

(3,886,462)

162,301,208

(109,988,058)

52,313,150

11,725,035

7,007,283

1,991,793

20,724,111

2001

$128,560,708

(2,675,816)

125,884,892

(92,228,098)

33,656,794

10,649,019

7,939,839

2,290,139

20,878,997

31,589,039

12,777,797

1,094,724

527,126

273,998

162,149

69,610

291,860

2,419,467

2,616,740

1,976,847

795,674

466,385

419,513

170,831

120,568

119,485

18,523

81,792

6,786,358

27,222,148

(5,636,648)

21,585,500

24,791

$21,610,291

1,486,656

1,301,606

52,376

55,077

1,619,062

860,835

234,732

105,439

759,793

6,475,576

3,144,042

3,959,020

235,629

695,620

12,504

420,053

8,466,868

10,786,505

3,740,678

14,527,183

(44,009)

$14,483,174

158

TSMC

Annual Report 2002

TSMC

Annual Report 2002

159

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES

12. Financial Forecast and Operation Results from 2001 to 2002 (Note)

2002

2001

$21,610,291

$14,483,174

Item

Net Sales

Cost of Sales

Gross Profit

Financial Forecast 2001
(Reviewed by CPA)

Financial Statement 2001
(Audited by CPA)

Original

First Revised

Second Revised

Amount

Achievement %

Unit: NT$K

Reasons for Penalty
or Charged by
TSE, OTC and SFC

149,038,964

121,893,177

125,562,194

125,888,003

101,052,405

88,276,165

88,990,120

89,506,952

47,986,559

33,617,012

36,572,074

36,381,051

Operating Expenses

18,610,914

19,336,062

18,909,731

19,038,765

Income from Operations

29,375,645

14,280,950

17,662,343

17,342,286

Non-operating Income

1,560,592

2,476,136

2,691,210

Non-operating Expenses

8,744,087

10,716,002

11,000,597

2,891,557

9,575,128

Income before Income Tax

22,192,150

6,041,084

9,352,956

10,658,715

Net Income

25,737,275

10,988,558

13,203,313

14,483,174

Note: 2002 financial forecast is not required according to regulations.

(1,819,760)

61,677

1,455,476

(1,421)

1,290,733

54,000

445,938

(1,597,497)

(6,911,423)

8,587

(62,689)

(7,076,379)

14,533,912

587,401

(633,955)

1,455,476

(126)

(10,790,937)

54,000

(518,377)

(1,201,437)

(25,208,512)

719

(95,031)

(107,500)

(36,458,279)

(21,975,105)

100.26%

100.58%

99.48%

100.68%

98.19%

107.44%

87.04%

113.96%

109.69%

None

RECONCILIATIONS OF NET INCOME

For the Years Ended December 31,2002 and 2001

(In Thousand New Taiwan Dollars)

NET INCOME UNDER ROC GAAP

US GAAP Adjustments:

- Adjustment to market value for trading securities

- US GAAP adjustments on equity-method investees

- Reversal of depreciation on assets impaired under US GAAP

- Income tax effect of US GAAP adjustments

- Amortization of goodwill

- Amortization of capital stock payment for technology transfer

- Adjustment to market value for derivative financial instruments

- Bonuses to employees, directors and supervisors

- Current year accrual

- Fair market value adjustment of prior year accural

- Pension expense

- Gain on sales of treasury stock

- Amortization of compensation expense

- Minority interest effect of US GAAP adjustments

NET INCOME UNDER US GAAP

Cumulative preferred dividends

(455,000)

INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS UNDER US GAAP

$14,078,912

($22,430,105)

160

TSMC

Annual Report 2002

TSMC

Annual Report 2002

161

SPECIAL NOTES

1. Affiliates Information

(1) TSMC Affiliated Companies Chart

(2) TSMC Affiliated Companies

December 31, 2002

Taiwan Semiconductor Manufacturing Company, Ltd.

Company

Date of Incorporation

Place of Registration

Paid-in Capital

Business Activities

Unit: Share, %

Unit: NT(US, EUR, JPY) $K

TSMC North America

Jan. 18, 1998

San Jose, California, USA

US$ 11,000

Marketing & Engineering support

Taiwan Semiconductor Manufacturing

Company Europe B.V.

TSMC Japan K.K.

Mar. 4, 1994

Sep. 10, 1997

Amsterdam, The Netherlands

EUR 90.76

Marketing & Engineering support

Yokohama, Japan

JPY 300,000

Marketing & Engineering support

TSMC, North America

TSMC, Europe B.V.

TSMC, Japan K.K.

Shareholding: 100%

TSMC International
Investment Ltd.
Shareholding: 100%

TSMC Partners, Ltd.

Shareholding: 100%

Ya Xin
Technology Co.
Shareholding: 100%

Emerging
Alliance Fund
Shareholding: 99%

Chi Cherng
Investment Co., Ltd.
Shareholding: 36%
Hsin Ruey: 64%

Vanguard Int'l
Semiconductor Corp.
Shareholding: 25%

TSMC
Development, Inc.
Shareholding: 100%

TSMC
Technology, Inc.
Shareholding: 100%

InveStar
Semiconductor
Development Fund (I)
Shareholding: 97%

InveStar
Semiconductor
Development Fund (II)
Shareholding: 97%

Hsin Ruey
Investment Co., Ltd.
Shareholding: 36%
Chi Cherng: 64%

Vanguard
Association Inc.
Shareholding: 100%

WaferTech, LLC

Shareholding: 99%

VIS Investment
Holding
Shareholding: 100%

TSMC International Investment Ltd.

Apr. 9, 1996

Tortola, British Virgin Islands

US$ 987,968

Mar. 26, 1998

Feb. 16, 1996

Feb. 20, 1996

Tortola, British Virgin Islands

Delaware, USA

US$ 300

US$ 942,583

US$ 0.001

Investment

TSMC Partners, Ltd.

TSMC Development, Inc.

TSMC Technology, Inc.

InveStar Semiconductor Development

Fund, Inc.

InveStar Semiconductor Development

Fund, Inc.(II) LDC.

Emerging Alliance Fund, L.P.

Wafertech, LLC

Hsin Ruey Investment Co., Ltd.

Chi Cherng Investment Co., Ltd.

Ya Xin Technology Co., Ltd.

Vanguard International
Semiconductor Corp.

VIS Associates, Inc.

VIS Investment Holding, Inc.

Sep. 10, 1996

Cayman Islands

US$ 46,350

Investment

Aug. 25, 2000

Jan. 10, 2001

Jun. 3, 1996

Jul. 13, 1998

Jul. 15, 1998

Nov. 20, 2002

Dec. 5, 1994

Sep. 24, 1996

Nov. 16, 1996

Cayman Islands

Washington, USA

Taipei, Taiwan

US$ 52,839

US$ 30,075

Investment

US$ 889,927

Wafer Manufacturing

NT$ 840,000

Investment

NT$ 341,250

Electronic Manufacturing

Hsin-Chu, Taiwan

NT$ 22,000,000

IC Design & Manufacturing

Tortola, British Virgin Islands

US$ 41,070

IC Related Investment

Delaware, USA

US$ 6,250

IC Related Investment

Note: Foreign exchange rate on the reporting date is shown below:

$1 USD= $34.753NT
$1 EU= $36.34NT
$1 JPY= $0.2925NT

(3) Business Scope of TSMC and its Affiliated Companies

TSMC and its affiliates work together to provide dedicated foundry services to our customers around the world. In addition, few of

TSMC's affiliate companies are focused on conducting investment business. In general, TSMC and its affiliates give each other support in

technology, capacity, marketing and services with an aim to create the maximum synergy, enabling TSMC to provide our worldwide

customers with the best dedicated foundry services worldwide. The ultimate goal of this strategy is to ensure TSMC's leading position in

the global IC market.

(4) TSMC Shareholders Representing Both Holding Companies and Subordinates

December 31, 2002

Reasoning

Name
(Note1)

Shareholding (Note 2 )

Holding %

Date of
Incorporation

Place of
Registration

Paid-in
Capital

Business
Activities

Unit: NT$K, except Shareholding

The presumed interested parties representing both holding companies and subordinates include the company's Director, the shareholders
conducting business on behavior of the company, and the shareholders holding more than 50% shares of the company.
Note 1: The same legal and natural persons apply a company name and a personal name, respectively.
Note 2: It shows the shareholdings to the holding company (excluding the holdings to the subordinates).

None

162

TSMC

Annual Report 2002

TSMC

Annual Report 2002

163

(5) Rosters of Directors, Supervisors, and Presidents of TSMC's Affiliated Companies

December 31, 2002

Company

Title

Name

TSMC North America

TSMC Europe B. V.

TSMC Japan K.K.

TSMC International Investment Ltd.

TSMC Partners, Ltd.

TSMC Development, Inc.

TSMC Technology, Inc.

Director
Director
President

F.C.Tseng
Rick Tsai
Edward C. Ross

Director
Director
Director
Director
President

Morris Chang
Rick Tsai
Quincy Lin
Kees den otter
Kees den otter

Chairman
Director
Director
Director
Director
Supervisor
President

Sachiaki Nagae
Morris Chang
F.C.Tseng
Rick Tsai
Hisao Baba
Harvey Chang
Hisao Baba

Director
President

Morris Chang
F.C.Tseng

Director
Director
Director
Director
Director
Director

F.C.Tseng
Rick Tsai
Quincy Lin
Steve Tso
Richard L. Thurston
Harvey Chang

Chairman
President

Morris Chang
Morris Chang

Chairman
President

Morris Chang
Morris Chang

InveStar Semiconductor
Development Fund, Inc.

Director

Kenneth Tai

InveStar Semiconductor
Development Fund, Inc. (II) LDC.

Director

Kenneth Tai

Emerging Alliance Fund, L.P.
WaferTech, LLC

NIL
Director
Director
Director
President

NIL
Morris Chang
Rick Tsai
Steve Tso
Steve Tso

Hsin Ruey Investment Co., Ltd.

Director

Rick Tsai (Representative of Chi Cherng Huei Investment Co., Ltd.)

Chi Cherng Investment Co., Ltd.

Director

F.C.Tseng (Representative of Hsin Ruey Investment Co., Ltd.)

(Forward)

164

TSMC

Annual Report 2002

Unit : NT$, except Shareholding

Shareholding

Amount

-
-

(TSMC holds 11,000,000 shares)
-
-
-
-
-
(TSMC holds 200 shares)
-
-
-
-
-
-
-
(TSMC holds 6,000 shares)
-
-
(TSMC holds 987,968,244 shares)
-
-
-
-
-
-
(TSMC holds 300,000 shares)
-
-
(TSMC International Investment Ltd. Holds 942,583,200,000 shares)

-
-
(TSMC International Investment Ltd. Holds 1,000 shares)
375,000 shares

(TSMC International Investment Ltd. holds 45,000,000 shares)
-

(TSMC International Investment Ltd. holds 51,300,000 shares)

(TSMC's investment US$ 29,925,000 )
-
-
-
-
(TSMC Development, Inc. holds 293,639,833 Preferred Shares)
(Chi Cherng's investment NT$ 540,000,080 )
(TSMC's investment NT$299,999,880 )
(Hsin Ruey's investment NT$ 540,000,080 )
(TSMC's investment NT$299,999,880 )

-
-

(100%)
-
-
-
-
-
(100%)
-
-
-
-
-
-
-
(100%)
-
-
(100%)
-
-
-
-
-
-
(100%)
-
-
(100%)
-
-
(100%)
(0.81%)

(97.09%)
-

(97.09%)

(99.50%)
-
-
-
-
(99.7%)
(64.29%)
(35.71%)
(64.29%)
(35.71%)

Company

Title

Name

Ya Xin Technology Co., Ltd.

Chairman
Director
Director
Supervisor

F.C.Tseng
Ping Yang
Jim Lai
Lora Ho

Vanguard International Semiconductor
Corporation

VIS Associates, Inc.

VIS Investment Holding, Inc.

Chairman
Director
Director
Director
Director
Director
Director
Director
Director
Director
Supervisor
Supervisor
President
Director
Director
Director
Director
Director
Director

Morris Chang
Liu, Bor-Hong (Representative of The Development Fund, Executive Yuan, R.O.C.)
Liou, Ming-Jong (Representative of The Development Fund, Executive Yuan, R.O.C.)
Shih, Chin-Tay (Representative of The Development Fund, Executive Yuan, R.O.C.)
Rick Tsai (Representative of TSMC)
F.C.Tseng (Representative of TSMC)
Paul Chien (Representative of TSMC)
Robert Hsieh (Representative of TSMC)
Wu, Quintin Y.G. (Representative of USI Far East Corp.)
Chiao, Yu-Heng (Representative of Walsin Lihwa Corp.)
Sheng-Chung Lin (Representative of The Development Fund, Executive Yuan, R.O.C.)
Harvey Chang (Representative of TSMC)
Paul Chien
Morris Chang (Representative of VIS)
Robert Hsieh (Representative of VIS)
Paul Chien (Representative of VIS)
Morris Chang (Representative of VIS Associates Inc.)
Robert Hsieh (Representative of VIS Associates Inc.)
Paul Chien (Representative of VIS Associates Inc.)

(6) Operational Highlights for TSMC Affiliated Companies

December 31, 2002

Unit : NT$, except Shareholding

Shareholding

Amount

-
-
-
-
(TSMC's investment NT$341,250,000 )
3,240,448 shares
(The Development Fund holds 639,713,750 shares)

-
-
-
-
(100%)
0.15%
(29.08%)

(TSMC holds 556,133,496 shares)

(25.28%)

(USI Far East Corp. holds 135,460,533 shares)
(Walsin Lihwa Corp. holds 53,827,741 shares)

(6.16%)
(2.45%)

2,478,229 shares

( VIS holds 41,070,000 shares)

0.11%

(100%)

(VIS Associates Inc. holds 62,500 shares)

(100%)

Paid-in
Capital

Assets

Liabilities

Net Worth

Net Sales

Income
from
Operation

Net Income
(net of tax)

EPS
(net of tax)

Note

Unit: NT$K, except EPS($)

382,283

11,662,710

10,993,449

669,261

1,341,031

221,589

3,298

87,750

32,124

105,725

18,454

11,467

13,670

94,258

142,373

199,821

6,423

9,515

140,654

(1,615)

3,145

TSMC International Investment Ltd.

34,334,860

33,777,434

11,512,277

22,265,157

(4,310,563)

(4,917,956)

(4,714,203)

10,426

13,580,421

32,757,594

12,208,328

0.035

809,318

9,639,926

6,965,411

1,076,191

3,940,495

5,242,917

(266,872)

550,655

(79)

(21,810)

40,354

(9,078,729)

21,528

924,362

3,081.21

1,610,802

1,601,596

762

1,600,835

109,535

(563,921)

(511,495)

1,836,314

1,545,813

1,045,210

767,239

180

1,545,633

767,239

12,122

7,978

30,927,641

22,812,680

11,899,859

10,912,822

9,807,065

840,000

341,250

1,407,320

1,416,358

341,250

7,151

13,034

22,000,000

26,419,326

14,435,497

1,427,306

1,196,359

217,206

16,272

2,468

1,400,169

1,403,324

341,250

1,193,829

1,193,891

13,804

(311,070)

(27,197)

(607,096)

9,520

7,789

(315,153)

(142,865)

(837,532)

12,533

13,821

9,832

8,102

8,307,710

21,279

(4,214,677)

(3,250,831)

(337)

313

318,605

227

Company

TSMC North America

TSMC Europe B.V.

TSMC Japan K.K.

TSMC Partners, Ltd.

TSMC Development, Inc.

TSMC Technology, Inc.

InveStar Semiconductor Development

Fund, Inc.

InveStar Semiconductor Development

Fund, Inc. (II) LDC.

Emerging Alliance Fund, LP

Wafertech, LLC

Hsin Ruey Investment Co., Ltd.

Chi Cherng Investment Co., Ltd.

Ya Xin Technology Co., Ltd.

Vanguard International Semiconductor

Corp.

VIS Associates, Inc.

VIS Investment Holding, Inc.

* Based on US GAAP

12.79

N.A.

524.20

(5.04)

N/A

(11.04)

(5.96)

N/A

0.26

0.29

0.00

(1.48)

7.76

3.63

TSMC

Annual Report 2002

165

2. Combined Financial Statements & Independent Accountants' Report

English Translation of a Report Originally Issued in Chinese

Representation Letter

The combined balance sheet as of December 31, 2002 and the combined statement of income for the year ended December 31, 2002

of Taiwan Semiconductor Manufacturing Co., Ltd. and Vanguard International Semiconductor Corporation are in conformity with the

requirements on public companies and their affiliates, taken as a whole, of Securities and Futures Committee (SFC) in the Republic of

China (ROC), the ROC regulations governing the preparation of financial statements of public companies and accounting principles

generally accepted in the Republic of China.

The accounting records underlying the combined balance sheet and the combined statement of income accurately and fairly reflect, in

reasonable detail, the transactions of the Taiwan Semiconductor Manufacturing Company, Ltd., its consolidated affiliates and Vanguard

Independent Accountants' Report

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Ltd.

We have reviewed the combined balance sheet as of December 31, 2002 and the related combined statement of income for the year

then ended of Taiwan Semiconductor Manufacturing Company Ltd. and Vanguard International Semiconductor Corporation. Our

reviews were made in accordance with the Guidelines for the Review of Combined Financial Statements of Affiliates. It is substantially

less in scope than an examination in accordance with auditing standards generally accepted in the Republic of China, the objective of

which is the expression of an opinion regarding the combined balance sheet and the combined statement of income taken as a whole.

International Semiconductor Corporation. There are no plans or intentions that may materially affect the carrying values or

Accordingly, we do not express such an opinion.

classifications of assets and liabilities.

Very truly yours,

Based on our reviews, we are not aware of any material modifications that should be made to the combined balance sheet and the

combined statement of income referred to above in order for them to be in conformity with ''Regulations Governing the Preparation of

Affiliates' Combined Operating Report, Combined Financial Statements and Relationship Report'' in the Republic of China (ROC), and the

ROC regulation governing the preparation of financial statements of public company and the ROC generally accepted accounting

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

principles.

MORRIS CHANG

Chairman

As disclosed in Note 3 to the financial statements, the Company adopted Statement of Financial Accounting Standards (''SFAS'') No. 30,

''Accounting for Treasury Stock'' on January 1, 2002. SFAS No. 30 requires a parent company to record stock held by its subsidiary as

treasury stock. The adoption of SFAS No. 30 resulted in the decrease of long-term investments and simultaneous increase of the book

value of treasury stock by NT$1,923,492 thousand as of December 31, 2002. Furthermore, net income increased by NT$25,909

thousand for the year ended December 31, 2002.

T N Soong & Co

An Associate Member Firm of Deloitte Touche Tohmatsu

Effective April 22, 2002

(Formerly a Member Firm of Andersen Worldwide, SC)

Taipei, Taiwan

The Republic of China

January 16, 2003

Notice to Readers

The accompanying combined financial statements were not prepared with a view to comply with the published guidelines of the United

States Securities and Exchange Commission or the American Institute of Certified Public Accountants (''AICPA'') and have not been

examined or otherwise reported upon under AICPA guidelines. They are not presented in accordance with generally accepted accounting

principles in the United States of America for consolidated financial statements.

166

TSMC

Annual Report 2002

TSMC

Annual Report 2002

167

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL

SEMICONDUCTOR CORPORATION

COMBINED BALANCE SHEET

December 31, 2002

(In Thousand New Taiwan Dollars, Except Par Value)

ASSETS

CURRENT ASSETS
Cash and cash equivalents (Notes 2 and 5)
Short-term investments (Notes 2 and 6)
Receivables from related parties (Note 21)
Notes receivable
Accounts receivable (Note 24)
Allowance for doubtful receivables (Note 2)
Allowance for sales returns and others (Note 2)
Inventories - net (Notes 2 and 7)
Deferred income tax assets (Notes 2 and 17)
Prepaid expenses and other current assets (Notes 21 and 24)
Total Current Assets

LONG-TERM INVESTMENTS (Notes 2, 3, 8 and 19)

PROPERTY, PLANT AND EQUIPMENT (Notes 2, 9 and 13)
Cost

Land and land improvements
Buildings
Machinery and equipment
Office and other equipment
Total cost

Accumulated depreciation
Advance payments and construction in progress
Net Property, Plant and Equipment

GOODWILL (Note 2)

OTHER ASSETS
Deferred income taxes assets (Notes 2 and 17)
Deferred charges - net (Notes 2 and 10)
Refundable deposits
Idle assets - net (Note 2)
Assets leased to others (Note 2)
Miscellaneous
Total Other Assets

Amount

$73,165,758
170,012
381,812
60,664
20,131,799
(1,016,923)
(2,456,986)
12,970,416
3,412,940
3,470,885
110,290,377

11,349,920

874,907
84,376,642
377,256,106
7,744,848
470,252,503
(242,369,570)
29,157,931
257,040,864

10,158,845

13,153,131
9,921,646
45,245
386,317
87,246
34,709
23,628,294

18
-
-
-
5
-
(1)
3
1
1
27

-
21
91
2
114
(59)
7
62

3
3
-
-
-
-
6

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Short-term bank loans (Note 11)
Commercial paper (Note 12)
Payable to related parties (Note 21)
Accounts payable (Note 24)
Payable to contractors and equipment suppliers
Accrued expenses and other current liabilities (Note 24)
Current portion of long-term debt (Notes 9, 13 , 14 and 15)
Total Current Liabilities

LONG-TERM LIABILITIES
Long-term bonds payables (Note 14)
Long-term bank loans (Note 13)
Other long-term payables (Note 15)
Obligation under capital lease (Notes 2 and 9)
Total Long-term Liabilities

OTHER LIABILITIES
Accrued pension cost (Notes 2 and 16)
Guarantee deposits (Note 23)
Deferred gain on sale and leaseback (Note 2)
Other
Total Other Liabilities

MINORITY INTEREST IN AFFILIATES (Note 2)

Total Liabilities

SHAREHOLDERS' EQUITY (Notes 2 and 18)
Capital stock - $10 par value

Authorized: 24,600,000 thousand shares
Issued: Preferred - 1,300,000 thousand shares

Common - 18,622,887 thousand shares

Capital surplus

Merger and others (Note 2)
Treasury stock (Notes 3 and 19)

Retained earnings:

Appropriated as legal reserve
Unappropriated earnings

Unrealized loss on long-term investments (Note 2)
Cumulative translation adjustments (Note 2)
Treasury stock (at cost) - 42,001 thousand shares (Notes 2, 3 and 19)
Total Shareholders' Equity

Amount

$1,283,000
1,080,000
1,167,437
5,786,264
14,414,639
7,205,454
15,572,189
46,508,983

36,100,000
16,384,413
4,281,665
290,416
57,056,494

2,550,918
1,399,846
114,928
177,256
4,242,948

8,806,668

116,615,093

13,000,000
186,228,867

56,961,753
43,036

18,641,108
22,151,089
(194,283)
945,129
(1,923,492)
295,853,207

-
-
-
1
4
2
4
11

9
4
1
-
14

1
-
-
-
1

3
45

14
-

5
5
-
-
-
72

TOTAL ASSETS

$412,468,300

100

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$412,468,300

100

The accompanying notes are an integral part of the combined financial statements.
(With T N Soong & Co. review report dated January 16, 2003)

168

TSMC

Annual Report 2002

TSMC

Annual Report 2002

169

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD., AND VANGUARD INTERNATIONAL

SEMICONDUCTOR CORPORATION

COMBINED STATEMENT OF INCOME

For the Year Ended December 31, 2002

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

GROSS SALES (Notes 2, 21 and 25)

SALES RETURNS AND ALLOWANCES (Note 2)

NET SALES

COST OF SALES (Note 21)

GROSS PROFIT

OPERATING EXPENSES (Notes 21 and 25)

Research and development

General and administrative

Marketing

Total Operating Expenses

INCOME FROM OPERATIONS

NON-OPERATING INCOME (Notes 21 and 25)

Interest

Gain on reversal of inventory reserve (Note 2)

Royalty income (Note 23)

Gain on sales of property, plant and equipment (Note 2)

Technical service income (Notes 21 and 23)

Gain on sales of short-term investments - net (Note 2)

Other

Total Non-operating Income

NON-OPERATING EXPENSES (Note 25)

Interest (Notes 2, 9 and 24)

Permanent loss on long-term investments (Note 2)

Investment loss recognized by equity method - net (Notes 2 and 8)

Loss on sales of and provision for loss on property, plant and equipment (Note 2)

Premium expense from option contracts - net (Notes 2 and 24)

(Forward)

Amount

$171,038,907

(4,236,258)

166,802,649

100

118,054,595

48,748,054

11,890,880

7,237,899

2,225,936

21,354,715

27,393,339

1,146,375

793,424

527,126

278,896

162,149

99,215

295,835

3,303,020

3,095,841

907,596

836,221

531,626

419,513

Casualty loss - net (Note 2)

Foreign exchange loss - net (Notes 2 and 24)

Loss on sales of long-term investments - net (Note 2)

Amortization of issuance costs of bonds (Note 2 )

Other

Total Non-operating Expenses

INCOME BEFORE INCOME TAX (Note 25)

INCOME TAX EXPENSE (Notes 2 and 17)

INCOME BEFORE MINORITY INTEREST

MINORITY INTEREST IN LOSS OF AFFILIATES (Notes 2 and 25)

COMBINED NET INCOME

EARNINGS PER SHARE (Note 20)

Basic earnings per share

Diluted earnings per share

The accompanying notes are an integral part of the combined financial statements.
(With T N Soong & Co. review report dated January 16, 2003)

Amount

$119,485

106,045

80,405

18,523

81,792

6,197,047

24,499,312

(5,342,872)

19,156,440

2,453,851

$21,610,291

(3)

Income
Before
Income Tax

Combined
Net
Income

$1.29

$1.14

170

TSMC

Annual Report 2002

TSMC

Annual Report 2002

171

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD., AND VANGUARD INTERNATIONAL SEMICONDUCTOR

CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS

(Amounts in Thousand New Taiwan Dollars, Unless Specified Otherwise)

1. GENERAL

Taiwan Semiconductor Manufacturing Company Ltd. ("TSMC"), a Republic of China corporation, was incorporated as a venture among

the government of the Republic of China, acting through the Development Fund of the Executive Yuan; Philips Electronics N.V. and

certain of its affiliates (Philips); and certain other private investors. In September 1994, its shares were listed on the Taiwan Stock

Exchange (TSE). In October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange in the form of American

Depositary Shares. The shares of Vanguard International Semiconductor Corporation (VIS), TSMC's 25% owned affiliate, have been listed

on the Republic of China (ROC) Over-the-Counter Securities Exchange since March 25, 1998.

TSMC is engaged mainly in the manufacturing, selling, packaging, testing and designing of integrated circuits and other semiconductor

devices, and the manufacturing of masks. VIS is engaged mainly in the researching, designing, developing, manufacturing, packaging,

testing and selling of memory integrated circuits, large scale integrated ICs, extra large scale integrated ICs and related parts.

Notice to Readers

The combined financial statements include the consolidated accounts of TSMC plus the accounts of VIS, which is not a consolidated

subsidiary of TSMC. TSMC's consolidated financial statements prepared in accordance with accounting principles generally accepted in

the United States, would not include the assets, liabilities, shareholders' equity, revenues or expenses of VIS.

TSMC-North America is engaged in the sales and marketing of integrated circuits and semiconductor devices. TSMC-Europe, TSMC-

Japan, TSMC Development and TSMC Technology are engaged mainly in marketing and engineering support activities. TSMC Partners,

Chi Cherng and Hsin Ruey are engaged in investments. Ya Xin is engaged in design of integrated circuits. TSMC International is

engaged in providing investment in companies involved in design, manufacture, and other related business in semiconductor industries.

Emerging Alliance, InveStar and InveStar II are engaged in investing in new start-up companies in the fields of high-technology.

WaferTech is engaged in the manufacturing, selling, testing and designing of integrated circuits and other semiconductor devices. VIS'

subsidiaries are mainly engaged in marketing, researching, developing and investing affairs.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Combination

All significant intercompany balances and transactions have been eliminated in these combined financial statements. The combined

financial statements include, as of and for the year ended December 31, 2002, the accounts of all majority (directly and indirectly)

owned subsidiaries of TSMC and VIS (TSMC's 25% owned affiliate), whom TSMC exercises significant influence on. TSMC and the

TSMC has six direct wholly-owned subsidiaries, namely, TSMC North America (TSMC-North America), Taiwan Semiconductor

foregoing subsidiaries and affiliates are hereinafter referred to collectively as the "Company".

Manufacturing Company Europe B.V (TSMC-Europe), TSMC Japan K. K. (TSMC-Japan), TSMC International Investment Ltd. (TSMC

International), TSMC Partners Ltd. (TSMC Partners), Ya Xin Technology, Inc. (Ya Xin), a 99.5% owned subsidiary, Emerging Alliance Fund,

LP (Emerging Alliance) and two 36% owned affiliates - Chi Cherng Investment Co., Ltd. (Chi Cherng, which is 36% owned by TSMC and

The respective total assets and revenues of VIS Associates, Inc. and its subsidiaries, which are subsidiaries of VIS, are less than 10% of

those of VIS; therefore, the accounts of these entities are not included in VIS' combined financial statements.

64% owned by Hsin Ruey Investment Co., Ltd.) and Hsin Ruey Investment Co., Ltd. (Hsin Ruey, which is 36% owned by TSMC and 64%

Minority interests in the aforementioned affiliates are presented separately in the combined financial statements.

owned by Chi Cherng). TSMC International has two wholly-owned subsidiaries - TSMC Development, Inc. (TSMC Development), TSMC

Technology, Inc. (TSMC Technology), and two 97%-owned subsidiaries - InveStar Semiconductor Development Fund, Inc. (InveStar) and

InveStar Semiconductor Development Fund, Inc. (II) LDC (InveStar II). TSMC Development has a 99.7% owned subsidiary, WaferTech, LLC

(WaferTech). VIS has three direct and indirect wholly-owned subsidiaries, namely, VIS Associates, Inc., VIS Investment Holding, Inc. and

VIS Micro, Inc.

TSMC established Ya Xin in November 2002 and subsequently signed a merger agreement with Global UniChip Corp. (Global UniChip) in

December 2002. The merger was effective on January 4, 2003 and Global UniChip is the surviving company. TSMC holds 52% of Global

UniChips' shares after the completion of the merger.

The following diagram presents information regarding the relationship and ownership percentages among TSMC, VIS and their affiliates

as of December 31, 2002:

TSMC

25%

100%

36%

99.5%

100%

VIS

TSMC-
North America

TSMC- Japan

TSMC
International

TSMC-Europe

TSMC Partner

Chi Cherng

Hsin Ruey

Emerging
Alliance

Ya Xin

100%

97%

TSMC-
Technology

TSMC-
Development
99.7%

WaferTech

InveStar

InveStar II

100%

Vanguard
Associated Inc.

100%

VIS
Investment

100%

VIS
Micro Inc.

172

TSMC

Annual Report 2002

Cash and cash equivalents

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

are classified as cash equivalents.

Short-term investments

Short-term investments are carried at the lower of cost or market value. The costs of investments sold are determined using the specific

identification method.

Allowance for doubtful receivables

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

Sales and sales returns and allowances

Sales are recognized when titles of products and risks of ownerships are transferred to customers, primarily upon shipment. Allowance

and related provisions for sales returns and others are estimated based on historical experience. Such provisions are deducted from

sales in the year the products are sold and the estimated related costs are deducted from cost of sales.

Inventories

Inventories are stated at the lower of cost or market value. Inventories are recorded at standard cost and adjusted to approximate

weighted-average cost at the end of each period. Market value represents net realizable value for finished goods and work in process,

and replacement value for raw materials, supplies and spare parts.

TSMC

Annual Report 2002

173

Long-term investments

Goodwill

Investments in shares of stock of companies wherein the Company exercises significant influence on the operating and financial policy

Goodwill represents the excess of the consideration paid for acquisitions over the fair market value of identifiable net assets acquired

decisions are accounted for using the equity method. The Company's proportionate share in the net income or net loss of investee

and the difference between the investment cost and the Company's proportionate share in the net assets of acquired investee

companies are recognized as components of the "Investment income/loss recognized by equity method - net" account. The Company

companies. Goodwill is amortized using the straight-line method over the estimated life of 10 years.

adopted Statements of Financial Accounting Standards ("SFAS") No. 30, "Accounting for Treasury Stock" on January 1, 2002. SFAS No. 30

requires a parent company to record stock held by its subsidiary as treasury stock. The recorded value of treasury stock is based on the

Deferred charges

carrying values of the short/long-term investments on the subsidiaries' books as of January 1, 2002.

When the Company subscribes to additional investee shares at a percentage different from its existing equity interest, the resulting

carrying amount of the investment in equity investee differs from the amount of Company's proportionate share in the investee's net

equity. The Company records such difference as an adjustment to "capital surplus" as well as the "long-term investments" accounts. In

the event an investee has an accumulated deficit, it will record an offset to its capital surplus, excluding the reserve for asset revaluation,

through retained earnings. The Company will also record a corresponding entry equivalent to its proportionate share of the investee

capital surplus, excluding the reserve for asset revaluation that was generated subsequent to any acquisition of equity interest in the

investee.

Other stock investments are accounted for using the cost method. Cash dividends are recognized as income in the year received but are

accounted for as reduction in the carrying values of the long-term investments if the dividends are received in the same year that the

related investments are acquired. Stock dividends are recognized neither as investment income nor increase of long-term investment but

recorded only as an increase in the number of shares held. An allowance is recognized for any decline in the market value of

investments using quoted market prices with the corresponding amount debited to shareholders' equity. A reversal of the allowance will

result from a subsequent recovery of the market value. The carrying values of investments with no quoted market price are reduced to

reflect other than temporary declines in their values with the related impairment loss charged to income.

Investments in foreign mutual funds are stated at the lower of cost or net asset value (NAV). An allowance is recognized when the cost

of the funds are lower than their net asset values, with the corresponding amount debited to shareholders' equity. A reversal of the

allowance will result from a subsequent recovery of the net asset value.

Investment in convertible notes and stock purchase warrants are carried at cost.

The costs of investments sold are determined using the weighted-average method.

If an investee company has an unrealized loss on a long-term investment evaluated using the lower-of-cost-or-market method, the

Company recognizes a corresponding unrealized loss in proportion to its equity interest and records the amount as a component of its

own shareholders' equity.

Gain or loss on transactions with investee companies wherein the Company owned at least 20% of the outstanding common stock but

less than a controlling interest are deferred in proportion to the ownership percentage until realized through a transaction with a third

party. The entire amount of the gains or losses on sales to majority-owned subsidiaries is deferred until such gains or losses are realized

through the subsequent sale of the related products to third parties. Gains or losses from sales by investee companies to the Company

are deferred in proportion to the ownership percentage until realized through transactions with third parties.

Deferred charges consist of software and system design costs, technology know-how, bond issuance and financing costs, and

technology license fees. The amounts are amortized as follows: Software and system design costs - 3 years, technology

know-how - 5 years; bond issuance and financing costs - the term of the bonds and related line of credit; technology license fee - the

shorter of the estimated life of the technology or the term of the technology transfer contract.

Pension costs

Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition obligation and unrecognized

net gain are amortized over 25 years by TSMC and 26 years by VIS.

Deferred gain on sales and leaseback

The gain on the sale of property that it simultaneously leased back is deferred by the Company. This deferred gain on sales and

leaseback transactions is amortized as follows: (a) operating leases - adjustment of rental expenses over the term of the leases and (b)

capital leases - adjustment of depreciation expenses over the estimated useful life of the property or the term of the lease; whichever is

shorter.

Casualty loss

Casualty loss consists of the accrued loss caused by the earthquake on March 31, 2002 less the estimated insurance compensation.

Income tax

The Company uses an inter-period tax allocation method for income tax. Deferred income tax assets and liabilities are recognized for

the tax effects of temporary differences, unused tax credits, and operating loss carry forwards. Valuation allowances are provided to the

extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is,

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

liability does not relate to an asset or liability in the financial statements, then it is classified as current or non-current based on the

expected length of time before it is realized.

Any tax credit arising from the purchase of machinery, equipment and technology, research and development expenditures, personnel

training, investments in important technology-based enterprise are recognized using the current method.

Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax provision.

As of January 1, 1998, income taxes on unappropriated earnings (excluding the foreign combined entity) of 10% are expensed in the

year of shareholder approval which is usually the year subsequent to the year incurred.

Property, plant and equipment, assets leased to others and idle assets

Derivative financial instruments

Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Idle assets are stated at the

lower of book value or net realized value. Significant additions, renewals, betterments and interest expense incurred during the

construction period are capitalized. Maintenance and repairs are expensed in the period incurred. Property, plant and equipment

covered by agreements qualifying as capital leases are carried at the lower of the present value of future minimum rent payments, or the

market value of the property at the inception date of the lease. The lessee's periodic rent payment includes the purchase price of the

leased property and the interest expense.

Depreciation is computed using the straight-line method over these estimated service lives, which range as follows: Land improvements -

20 years, buildings - 5 to 20 years; machinery and equipment - 5 years; and office and other equipment - 2 to 7 years.

The Company enters into foreign currency forward contracts to manage currency exposures in cash flow and in foreign currency-

denominated assets and liabilities. The differences in the New Taiwan dollar amounts translated using the spot rate and the amounts

translated using the contracted forward rates are amortized over the terms of the forward contracts using the straight-line method. At

the balance sheet dates, the receivables or payables arising from forward contracts are restated using the prevailing spot rate at the

balance sheet date and the resulting differences are recognized in charged to income. Also, the receivables and payables related to the

forward contract are netted with the resulting amount presented as either an asset or a liability.

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

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

Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts,

adjustment to interest income or expenses.

and any gain or loss is credited or charged to income in the period of disposal.

174

TSMC

Annual Report 2002

TSMC

Annual Report 2002

175

The Company enters into interest rate swap transactions to manage exposures from changes in interest rates on existing liabilities. These

transactions are accounted for on an accrual basis, in which the cash settlement receivable or payable is recorded as an adjustment to

interest income or expense.

The notional amount of foreign currency option contracts entered into for hedging purposes are not recognized as an asset or liability

on the contract dates. The premiums paid or received for the call or put options are amortized to income on a straight-line basis over

the term of the related contract.

Foreign-currency transactions

Foreign-currency transactions are recorded in New Taiwan dollars at the current rate of exchange in effect when the transaction occurs.

Gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in a foreign currency are

recognized in current operations. At year-end, foreign-currency assets and liabilities are revalued at the prevailing exchange rate with the

resulting gain or loss recognized in current operations.

Translation of foreign-currency financial statements

ROC Financial Accounting Standards (FAS) No. 14, "Accounting for Foreign-Currency Transactions," applies to foreign subsidiaries that

use the local foreign currency as its functional currency. The financial statements of foreign subsidiaries are translated into New Taiwan

dollars at the following exchange rates: assets and liabilities - current rate on balance sheet date; shareholders' equity - historical rate;

income and expenses - weighted average rate during the year. The resulting translation adjustment is recorded as a separate component

of shareholders' equity.

3. NEW ACCOUNTING PRONOUNCEMENTS

In accordance with the Statement of Financial Accounting Standards No. 30, "Accounting for Treasury Stock" and other relevant

regulations from Securities and Futures Commission (SFC), the Company is required to reclassify its common stock held by subsidiaries

from short/long-term investments to treasury stock. The reclassification is based on the carrying value of NT$2,115,695 thousand as

Company

TSMC

Account

Payable to related parties

Receivable from related parties

Refundable deposits

Sales

Purchases

Marketing expenses - commissions

Other revenue

Notes receivable

Interest receivable

Royalty income

Interest revenue

TSMC International

(Forward)

TSMC

Annual Report 2002

176

Amount

$653,876

617,751

29,520

19,643

14,511

9,424

9,739,236

58,301

4,545

514,846

94,433,401

92,119

1,152

9,955,154

3,469,198

208,226

132,086

1,635

347,530

188,842

455,778

26,660

Transaction Entity

VIS

WaferTech

TSMC-Europe

TSMC-Japan

TSMC-North America

TSMC Technology

TSMC-North America

VIS

TSMC Technology

VIS

TSMC-North America

VIS

WaferTech

VIS

TSMC-Japan

TSMC-Europe

WaferTech

TSMC Technology

Company

TSMC Partners

TSMC Technology

Account

Notes receivable

Deferred revenue

Royalty income

Interest income

Accounts receivable

Deferred revenue

Management service income

Technical service income

WaferTech

Deferred charges

Administrative expense

5. CASH AND CASH EQUIVALENTS

Cash and bank deposits

Government bonds acquired

under repurchase agreements

6. SHORT TERM INVESTMENTS

Listed stocks

Market value

Amount

Transaction Entity

10,666,619

9,398,140

607,669

345,620

4,986

13,356

27,331

14,758

31,278

34,563

TSMC International

WaferTech

TSMC Development

WaferTech

TSMC Development

TSMC Technology

2002

$70,109,524

3,056,234

$73,165,758

2002

$170,012

$2,455,582

The market values of listed stocks as of December 31, 2002 were based on the average closing price for the month of December 2002.

7. INVENTORIES-NET

Finished goods

Work in process

Raw materials

Supplies and spare parts

Less-allowance for losses

2002

$4,752,138

10,299,342

557,279

1,239,407

16,848,166

(3,877,750)

$12,970,416

TSMC

Annual Report 2002

177

8. LONG-TERM INVESTMENTS

Shares of stock

Equity method:

Non-publicly traded stock

Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)

VIS Associates Inc.

Cost method:

Common stock

Publicly traded stock

Monolithic System Tech.

Amkor Technology

Taiwan Mask

PowerChip Semiconductor, Inc.

Etron Technology Inc.

Non-publicly traded stock

Walsin Advanced Electronics

United Technology

Global Testing Corp. (GTC)

Megic

Shin-Etsu Handotai Taiwan Co. Ltd.

Global Investment Holding

Hong Tung Venture Capital

EoNEX Technologies, Inc.

Procoat Technology, Inc.

Conwise Technology Corp. Ltd.

FormFactor, Inc.

Goyatek Technology, Inc.

Programmable Microelectronics (Taiwan) Corp.

W.K. Technology, Fund IV

RichTek Technology Corp.

APE

Auden Technology MFG. Co., Ltd.

Yi Yang Technology

TrendChip Technologies Corp.

ChipStrate Technology, Inc.

GeoVision, Inc.

Divio, Inc.

Preferred stock

Non-publicly traded stock

Sonics, Inc.

Tropian, Inc.

Reflectivity, Inc.

Monolithic Power Systems, Inc.

Atheros Communications, Inc.

(Forward)

178

TSMC

Annual Report 2002

2002

Carrying Value

% of Owner Ship

2002

Carrying Value

% of Owner Ship

Memsic, Inc.

Pixim, Inc.

Quicksilver Technology

FormFactor, Inc.

Kilopass Technologies, Inc.

NetLogic Microsystems

NanoAmp Solutions, Inc.

Newport Opticom, Inc.

Integrated Memory Logic, Inc.

Match Lab, Inc.

IP Unity

Ikanos Communication

Ralink Technologies, Inc.

SiRF Technology Holdings, Inc.

LightSpeed Semiconductor Corp.

Advanced Analogic Technology, Inc.

OEpic, Inc.

Accelerant Networks

Litchfield Communications

Quake Technologies, Inc.

Spreadtrum

HiNT Corp.

Silicon Data, Inc.

XHP Microsystem

Angstron Systems, Inc.

Equator Technologies, Inc.

Capella Microsystems, Inc.

Sensory, Inc.

Iridigm Display

Mosaic Systems

Zenesis Technologies

Divio, Inc.

Incentia Design Systems, Inc.

Oridus, Inc. (CreOsys, Inc.)

Signia Technologies, Inc.

LeadTONE Wireless, Inc.

eBest!, Inc.

Convertible note

eBest!, Inc.

(Forward)

$3,136,115

1,217,065

4,353,180

104,289

280,748

32,129

2,513,378

216,852

302,559

232,300

179,882

177,000
105,000

100,000

83,916

70,305

67,490

67,039

64,360

62,104

59,358

50,000

46,986

46,743

38,819

33,606

29,992

10,426

4,518

104

4,979,903

229,787

150,620

146,262

137,135

124,868

100

$106,344

87,845

82,153

69,506

65,005

64,397

63,288

62,868

60,818

56,856

52,707

52,130

50,878

46,534

43,824

43,094

35,138

34,753

26,353

26,065

24,675

23,667

21,720

17,639

17,569

17,377

15,639

8,270

3,370

2,329,412

834

TSMC

Annual Report 2002

179

Funds

Horizon Ventures
Crimson Asia Capital

Less - allowance for losses

2002

Carrying Value

% of Owner Ship

-
-

$195,452
41,988
237,440

(550,849)

$11,349,920

The carrying value of the investments accounted for using the equity method and the related investment gains or losses were
determined based on the audited financial statements of the investees in the same year. The investment gain and loss of investee
companies consist of the following:

SSMC
VIS Associates Inc.

The market values and net assets values of the Company's long-term investments are as follows:

Market value of publicly traded stocks
Equity in the net assets of non-publicly traded stocks
Net asset value of funds

2002

($1,155,076)
318,855

($836,221)

2002

$2,667,944
8,644,956
237,440

On January 8, 2003, the Company's investee company, VIS, issued 600,000 thousand shares of common stock at a discounted price of
NT$7 per share. The Company prepaid NT$849,360 thousand at the end of 2002 for the share subscription and paid an additional
NT$ 766,815 thousand in January 2003. In this round of equity offering, the Company purchased a total of 230,882 thousand shares of
VIS stocks. As a result, its ownership in VIS increased from 25% to 28%.

9. PROPERTY, PLANT AND EQUIPMENT

Accumulated depreciation consists of the following:

Land improvements
Buildings
Machinery and equipment
Office and other equipment

2002

$127,341
28,383,157
209,774,513
4,084,559

$242,369,570

Information on the status of expansion or construction plans of TSMC's manufacturing facilities at December 31, 2002 is as follows:

Manufacturing Plant

Fab 6

Fab 12-Phase 1

Fab 14-Phase 1

180

TSMC

Annual Report 2002

Estimated
Cost

Accumulated
Expenditures

Expected or Actual Date of
Starting of Operations

$93,932,000

$87,054,700

80,318,400

30,411,000

47,095,400

22,169,900

March 2000

March 2002

June 2003

Interest expense (before deducting capitalized amount of NT$ 3,332,138 thousand) for the year ended December 31, 2002 was
NT$ 236,297 thousand. The interest rates used for purposes of calculating the capitalized amount were 2.07% to 6.59%.

VIS has entered into agreements to lease certain equipment that qualify as capital leases and will expire in September 2005. Information
on capital leases is summarized as follows:

Total amount of equipment under capital lease

Present value of obligation under capital lease
Current portion

Long-term portion

10. DEFERRED CHARGES - NET

Technology license fees
Software and system design costs
Bond issuance costs and financing costs
Technology know-how
Others

11. SHORT-TERM BANK LOANS

Unsecured loan in US dollars:

US$21,000 thousand, refinanced in May 2002,

annual interest at 1.82%, repayable by May 2003

Loans for importation of materials:

US$7,285 thousand, repayable by January 2003,

annual interest 1.83% - 2.14%

Working capital loans:

Repayable by April 2003, annual interest at 2.55% - 2.60%

2002

$530,674

$445,800
(155,384)

$290,416

2002

$6,519,334
3,212,086
130,296
49,500
10,430

$9,921,646

2002

$729,813

253,187

300,000

$1,283,000

As of December 31, 2002, TSMC provided NT$1,390,120 thousand (US$40,000 thousand) guarantee for the above US$21,000
thousand loan.

Unused credit lines as of December 31, 2002 aggregated approximately NT$14,070,000 thousand and US$366,500 thousand.

12. COMMERCIAL PAPER

The instruments, which bear annual interest rates ranging from 1.95% to 2.10%, are secured by bank guaranty and are repayable from
January 2003 to May 2003.

TSMC

Annual Report 2002

181

2002

14. BONDS

13. LONG-TERM BANK LOANS

Secured loan:

US$440,000 thousand, repayable by February 2005, US$122,000 thousand repaid in 2002,

annual floating interest at 2.078%

Unsecured loan:

US$200,000 thousand, repayable by December 2003, annual interest at 2.0375%

Loans for purchases of equipment and facility:

Repayable in semi-annual installments from November 1999 to June 2004,

annual floating interest at 3.00% to 4.00%

Repayable in semi-annual installments from October 2000 to October 2005,

annual floating interest at 2.89% to 3.95%

Repayable in semi-annual installments from October 2004 to October 2007,

annual interest at 4.03% to 4.25%

Repayable in quarterly installments from January 2003 to July 2007,

annual interest at 5.07% to 6.48%

Repayable in semi-annual installments from February 2000 to February 2005,

annual interest at 5.32% to 6.48%

Repayable in semi-annual installments from July 1999 to July 2004,

annual interest at 5.32% to 6.35%

Repayable in semi-annual installments from December 2003 to December 2007,

annual interest at 3.75%

Repayable in semi-annual installments from December 2003 to December 2007,

annual interest at 2.02%

Repayable in semi-annual installments from February 1998 to February 2003,

annual interest at 5.32% to 6.48%

Commercial paper guaranteed by financial institutions:

Repayable from May 2002 to May 2005, annual interest at 2.22% to 2.57%

Repayable in May 2004, annual interest at 1.60% to 2.41%

$11,051,454

6,950,600

2,340,000

2,200,000

400,000

330,000

184,000

148,000

111,000

88,865

40,000

1,750,000

300,000

$25,893,919

As of December 31, 2002, all of the US dollar loans above were guaranteed by TSMC. In addition, the property and equipment of WaferTech
with carrying amount of approximately NT$29,053,508 thousand (US$836,000 thousand) is pledged for the secured loan. Under the
unsecured loan, TSMC is required to maintain certain financial covenants which, if violated, could result in payment of this obligation becoming
due prior to the originally scheduled maturity date. These financial covenants require TSMC to, among other things, maintain minimum levels
of working capital, earnings before interest, taxes, depreciation and amortization, and net worth. TSMC was in compliance with these financial
covenants as of December 31, 2002. Properties of VIS with carrying value of NT$8,218,845 thousand have been pledged as collateral for the
loans for purchases of equipment and facility and commercial paper.

The bonds (Note 14) and loan agreements of VIS require, among other things, the maintenance of certain financial ratios, including current
ratio, debt ratio and net worth ratio. Among those specific ratios, VIS has failed to meet the net worth requirement as of December 31, 2002.
The covenant violation can only be cured by raising additional capital or by approval by the banks. On January 8, 2003 VIS issued shares of
capital stock for proceeds of NT$4,200,000 thousand to cure the covenant violation (Note 18).

As of December 31, 2002, future minimum principal payments under the Company's long-term bank loan arrangements are as follows:

Year

2003
2004
2005
2006
2007 and thereafter

Amount

$9,509,506
1,156,000
14,393,454
-
834,959

$25,893,919

Unused credit lines for long-term bank loans as of December 31, 2002 aggregated approximately NT$200,135 thousand and US$122,000 thousand.

182

TSMC

Annual Report 2002

2002

$4,000,000

5,000,000

Domestic unsecured bonds

Issued on March 4, 1998 and payable on March 4, 2003

in one lump sum payment, 7.71% annual interest payable semi-annually

Issued on October 21, 1999 and payable on October 21,2002

and 2004 in two equal payments, 5.67% and 5.95% annual interest payable
annually, respectively

Issued from December 4 to 15, 2000 and payable in December 2005

and 2007 in two equal payments, 5.25% and 5.36% annual interest payable annually, respectively

15,000,000

Issued from January 10 to 24, 2002 and payable in January2007,

2009 and 2012 in three equal payments, 2.6%, 2.75% and 3% annual interest
payable annually , respectively

Domestic secured bonds

Payable on November 15, 2005 and 2006 in two equal payments,

3.5% to 3.6% annual interest payable annually, guaranteed by financial institution

Payable from November 6, 2000 to 2003 in four equal payments,
6.59% annual interest payable annually, guaranteed by financial institution

As of December 31, 2002, future principal payments under the above bond arrangements are as follows:

Year of Repayment

2003

2004

2005

2006

2007

2008 and thereafter

15,000,000

1,100,000

750,000

$40,850,000

Amount

$4,750,000

5,000,000

11,050,000

550,000

7,000,000

12,500,000

$40,850,000

15. OTHER LONG-TERM PAYABLES

TSMC entered into several license arrangements for certain semiconductor patents. Future payments under the agreements as of

December 31, 2002 are as follows:

Year

2003

2004

2005

2006

2007

2008 and thereafter

Amount

$1,157,299

1,226,805

987,009

469,189

486,566

1,112,096

$5,438,964

TSMC

Annual Report 2002

183

a. A reconciliation of income tax expense on income before income tax at the statutory rate and current income tax expense on income

before tax credits is shown below:

16. PENSION PLAN

17. INCOME TAX BENEFIT (EXPENSE)

TSMC and VIS have pension plans for all regular employees, which provide benefits based on length of service and average monthly

salary for the six month period prior to retirement.

TSMC and VIS contribute an amount equal to 2% of salaries paid every month to Pension Funds (the "Funds"). The Funds are

administered by pension fund monitoring committees (the "Committees") and are deposited in the Committees' names in the Central

Trust of China. The pension cost of VIS is accrued at an amount equal to 6% of salaries.

Income tax expense based on "income before income tax" at statutory rate

The changes in the Funds and accrued pension cost are summarized as follows:

2002

Temporary and permanent differences

Tax effect of:

Tax-exempt income

a. Components of pension cost

Service cost

Interest cost

Projected return on plan assets

Amortization

Net pension cost

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

Benefit obligation

Vested benefit obligation

Nonvested benefit obligation

Accumulated benefit obligation

Additional benefits based on future salaries

Projected benefit obligation

Fair value of plan assets

Funded status

Unrecognized net transitional obligation

Unrecognized net gain

Accrued pension cost

c. Actuarial assumptions

Discount rate used in determining present values

Future salary increase rate

Expected rate of return on plan assets

d. Contributions to pension fund

e. Payments from pension fund

$498,112

134,535

(51,596)

(3,758)

$577,293

$21,294

1,768,532

1,789,826

1,433,022

3,222,848

(1,154,754)

2,068,094

(142,562)

625,386

$2,550,918

3.75%

3.00%

3.75%

$181,980

$5,360

Current income tax expense before income tax credits

b. Income tax expense consists of:

Current income tax expense before income tax credits

Additional 10% tax on the unappropriated earnings

Income tax credits

Other income tax

Income tax expense

Net change in deferred income tax assets

Investment tax credits

Loss carryforward

Temporary differences

Valuation allowance

Income tax expense

c. Deferred income tax assets (liabilities) consists of the following:

Current

Investment tax credits

Loss carryforward

Temporary differences

Valuation allowance

Noncurrent

Investment tax credits

Loss carryforward

Temporary differences

Valuation allowance

2002

($6,881,352)

2,526,500

(519,490)

($4,874,342)

2002

($4,874,342)

(179,362)

4,867,236

(29,160)

(215,628)

2,041,014

2,588,736

(6,035,076)

(3,721,918)

($5,342,872)

2002

$3,807,330

1,423,729

655,371

(2,473,490)

$3,412,940

$23,916,915

10,667,199

(7,871,504)

(13,559,479)

$13,153,131

184

TSMC

Annual Report 2002

TSMC

Annual Report 2002

185

The effective tax rate used in determining the deferred tax asset of TSMC and its affiliates as of December 31, 2002 were 25% to 41%.

d. Integrated income tax information:

Balance of the imputation credit accounts

TSMC

VIS

TSMC's and VIS's expected and actual creditable ratios for 2002 were 0.03% and nil, respectively.

The imputation credit allocated to each shareholder shall be based on the balance in the ICA on the date of distribution of dividends;

thus the expected creditable ratio for 2002 may be adjusted according to the difference between the expected and actual imputation

credit allowed under the regulation.

e. As of December 31, 2002, the unappropriated retained earnings generated up to December 31, 1997, was NT$0.

f. As of December 31, 2002, TSMC's and VIS's investment tax credits consisted of the following:

Regulation

Items

Total
Creditable Amounts

Remaining
Creditable Amounts

Expire Year

Statute for Upgrading

Loss carryforward

Industries

Statute for Upgrading

Purchase of

Industries

machinery
and equipment

Statute for Upgrading

Research and

Industries

development
expenditures

Statute for Upgrading

Personnel training

Industries

Statute for Upgrading

Reputation setting

Industries

(Forward)

186

TSMC

Annual Report 2002

$257,591
1,423,729
595,086
1,142,696
1,077,079

$-
1,423,729
595,086
1,142,696
1,077,079

$4,496,181

$4,238,590

$4,691,585
5,017,733
8,532,858
3,210,161
5,410,244

$-
5,017,733
8,532,858
3,210,161
2,849,715

$26,862,581

$19,610,467

$737,991
866,375
1,996,224
3,198,606
1,540,000

$-
866,375
1,996,224
3,198,606
1,540,000

$8,339,196

$7,601,205

$10,161
18,033
45,552
30,880

$-
18,033
45,552
30,880

$104,626

$94,465

$10,457
803

$11,260

$-
803

$803

2002
2003
2004
2006
2007

2002
2003
2004
2005
2006

2002
2003
2004
2005

2002
2003

Regulation

Items

Total
Creditable Amounts

Remaining
Creditable Amounts

Expire Year

2002

$6,650

$7,396

Statute for Upgrading

Industries

Investments in
important
technology based
enterprise

$42,580
45,122
201,372
168,864
1,947

$-
45,122
201,372
168,864
1,947

2002
2003
2004
2005
2006

$459,885

$417,305

g. The sales from the following expansion and construction of TSMC's and VIS's manufacturing plants is exempt from income tax:

TSMC:

Expansion of Fab1 and Fab2-modules A and B, Fab3 and Fab4, and construction of Fab5

Construction of Fab 6

VIS:

First expansion of manufacturing plant

Tax-Exemption Period

1999 to 2002

2001 to 2004

2000 to 2003

h. The tax authorities have examined income tax returns of TSMC through 1999. However, TSMC is contesting the assessment by the tax

authority for 1992, 1993, 1996 and 1997.

The tax authorities have examined income tax returns of VIS through 1999.

18. SHAREHOLDERS' EQUITY

TSMC has issued 369,019 thousand American Depositary Shares (ADS) on the New York Stock Exchange as of December 31, 2002. The
number of common shares represented by the ADSs is 1,845,097 thousand shares (one ADS represents five common shares).

Capital surplus can only be used to offset a deficit under the ROC Company Law. However, the components of capital surplus generated
from donations (donated capital) and the excess of the issue price over the par value of capital stock (including the stock issued for new
capital, mergers, and the purchase of treasury stock) can be transferred to capital as stock dividends.

TSMC's Articles of Incorporation provide that the following shall be appropriated from annual net income (less any deficit):

a. 10% legal reserve;

b. Special reserve in accordance with relevant laws or regulations;

c. Remuneration to directors and supervisors and bonus to employees equal to 0.3% and at least 1% of the remainder, respectively.
Individuals who receive bonus to employees may include employees of affiliated companies and are approved by the board of
directors or a representative of the board of directors;

d. Dividends to holders of preferred shares equal to a 3.5% annual rate, based on the period which the preferred shares have been

outstanding;

e. The appropriation of the remaining balance after the above shall be decided at the shareholders' meeting.

Dividends are distributed in cash, shares of common stock or a combination of cash and common stock. Distribution of profits is
preferably made in the form of stock dividend. The total of cash dividends paid in any given year should not exceed 50% of total
dividends distributed.

These appropriations of net income shall be approved by the shareholders in the following year and given effect in the financial
statements of that year.

The bonus to employees and the remuneration to directors and supervisors appropriated from the earnings of 2001 were approved in
the shareholders' meeting on May 7, 2002 as follows:

TSMC

Annual Report 2002

187

Bonus to employees - in stock

Remuneration to directors and supervisors - in cash

Amounts

$1,070,783

133,848

$1,204,631

Shares (Thousand)

107,078

The shares distributed as a bonus to employees represent 0.64% of TSMC's total outstanding common shares as of December 31, 2001.

The above appropriation of the earnings is consistent with the resolution of the meeting of board of directors dated on March 26, 2002.

If the above distributable earnings were both paid in cash and charged against the income of 2001, the basic combined EPS for the year

ended December 31, 2001 would be decrease from NT$0.83 to NT$0.76.

As of January 16, 2003, the appropriation of the earnings of 2002 has not yet been resolved by the board of directors.

The above information associated with the appropriation of bonus to employees and remuneration to directors and supervisors is

available at Market Observation System website.

The aforementioned appropriation for legal reserve shall be made until the reserve equals the aggregate par value of TSMC's outstanding

On June 25, 2002, the SFC approved TSMC's Employee Stock Option Plan (the "Plan I"). Plan I provides qualified employees and non-

employees with 100,000 thousand units of option rights with each unit representing one common share of stock. The option rights are

valid for 10 years and exercisable at certain percentages subsequent to the second anniversary of issuance. Under the terms of the plan,

stock options are granted at an option price equals to the market price of TSMC on the TSE at the date of grant. At December 31,

2002, the maximum number of shares authorized to be granted by TSMC, TSMC-North America and WaferTech under this plan are

70,000 thousand, 16,000 thousand and 14,000 thousand option rights, respectively. The initial grant of options vests 50% two years

after the grant date, 75% three years after the grant date and 100% four years after the grant date.

Information with respect to stock option rights activities under Plan I is as follows:

Option Rights Available For Grant

Outstanding Option Rights

Number of Option Rights

Weighted Average
Exercise Price (NT$)

Option rights authorized

Options granted

Options exercised

Options cancelled

100,000

(19,726)

357

80,631

19,726

(357)

19,369

capital stock. The reserve can only be used to offset a deficit; or distribute as a dividend when the balance is 50% of the aggregate par

Balance, December 31, 2002

value of the outstanding capital stock of TSMC up to the half amount of the reserve balance.

A special reserve equivalent to the debit balance of any account shown in the shareholder's equity section of the balance sheets (except

for the recorded costs of treasury stocks held by subsidiaries), other than the deficit, shall be made from unappropriated retained

earnings pursuant to existing regulations promulgated by the Securities and Futures Commission. The special reserve is allowed to be