TSMC VISION & CORE VALUES TSMC's Vision Our vision is to be the most advanced and largest technology and foundry services provider to fabless companies and IDMs, and in partnership with them, to forge a powerful competitive force in the semiconductor industry. To realize our vision, we must have a trinity of strengths: (1) Be a technology leader, competitive with the leading IDMs (2) Be the manufacturing leader (3) Be the most reputable, service-oriented and maximum-total-benefits silicon foundry TSMC Core Values Integrity - Integrity is our most basic and most important core value. We tell the truth. We believe the record of our accomplishments is the best proof of our merit. Hence, we do not brag. We do not make commitments lightly. Once we make a commitment, we devote ourselves completely to meeting that commitment. We compete to our fullest within the law, but we do not slander our competitors and we respect the intellectual property rights of others. With vendors, we maintain an objective, consistent, and impartial attitude. We do not tolerate any form of corrupt behavior or politicking. When selecting new employees, we place emphasis on the candidates' qualifications and character, not connections or access. Commitment - TSMC is committed to the welfare of customers, suppliers, employees, shareholders, and society. These stakeholders all contribute to TSMC's success, and TSMC is dedicated to serving their best interests. In return, TSMC hopes all these stakeholders will make a mutual commitment to the Company. Innovation - Innovation is the wellspring of TSMC's growth, and is a part of all aspects of our business, from strategic planning, marketing and management, to technology and manufacturing. At TSMC, innovation means more than new ideas, it means putting ideas into practice. Customer Partnership - At TSMC, customers come first. Their success is our success, and we value their ability to compete as we value our own. We strive to build deep and enduring relationships with our customers, who trust and rely on us to be part of their success over the long term. 0 TSMC Board of Directors Back row, from the left: Rick Tsai, F.C. Tseng, Chintay Shih Front row, from the left: Stan Shih, Carly Fiorina, Morris Chang, Peter Bonfield, Lester Thurow 1 1. LETTER TO SHAREHOLDERS 2 VISION 3 Dear Shareholders, the same year, TSMC completed 45-nanometer technology qualifica- tion and entered production. In December, we announced, at the In 2007, TSMC delivered its 6th consecutive annual growth in revenue IEEE International Electron Devices Meeting in Washington DC, our since 2001. Although we saw weakened demand in the first quarter development of the first 32-nanometer technology and the proven as customers worked down inventories, our revenue recovered in the functionality of the test chip. Customers continue to move toward following quarters with rising utilization rates and improving prof- our more powerful and efficient 65nm and 45nm technologies. In itability quarter over quarter. 2007, we have increased our market share at the 65nm node and fur- ther solidified our leadership in advanced technologies. Meanwhile, Due to customers' inventory correction that took place in early part of the number of customers we have engaged in discussions for TSMC's 2007, growth of the pure-play foundry segment of the semiconduc- 45nm technology is higher at this stage than we experienced for tor industry for the year was essentially flat, lagging the global semi- 65nm at the same ramp point. conductor industry's estimated 4% growth. Nevertheless, in our 20th year as a public company, TSMC continued to enjoy a market share of Awards about 50% in the pure-play foundry segment it created, and announced several major operational and technological develop- In 2007, TSMC continued to receive recognition and awards from ments. More importantly, better capital discipline in 2008 along with around the world as a corporate role model. Among the numerous increasing capital productivity and operating efficiencies should put media surveys conducted in 2007, FinanceAsia, Corporate us in a stronger position for continued growth and higher profitabili- Governance Asia, The Asset Magazine, and the IR Magazine all have ty in future years. Financial Results awarded TSMC as the Best Corporate Governance, while FinanceAsia has also chosen TSMC as the Best Managed Company with the Best CFO and the Best Investor Relations in the Taiwan region. IR Magazine also awarded TSMC with the Grand Prix for Best Overall Investor Revenue for 2007 totaled NT$322.63 billion, a 1.6 percent increase Relations, Best Investment Meetings, Best IR by a CEO, and Best IR compared with NT$317.41 billion in 2006. Net income was Officer. CommonWealth Magazine voted us the Most Admired NT$109.18 billion, a decrease of 14 percent compared with net Company for the 11th consecutive time and also awarded us with income of NT$127.01 billion earned in 2006. Diluted earnings per Excellence in Corporate Social Responsibility. share decreased 15.8% to NT$4.14, compared with NT$4.92 for 2006. In US dollars, TSMC revenue for 2007 increased 0.7% to Corporate Development US$9.83 billion, while net income declined 15% to US$3.23 billion. Although TSMC registered another revenue record in 2007, a lower The Company and Royal Philips Electronics announced in March 2007 average utilization rate and a larger decline in average selling price a four-phased plan to facilitate an orderly exit by Philips from its than in 2006 contributed to the decrease in earnings. TSMC shareholding. In the third phase of the program completed on Among other highlights in 2007, TSMC achieved: ● Total average billing utilization of 93% ● Average gross profit margin of 44.1% ● Average operating profit margin of 34.6% December 31, 2007, the Company had repurchased a total of 800 million of its common shares over the open market from the Taiwan Stock Exchange, accounting for approximately 3.03% of its total out- standing shares, at an average price of NT$60.58 per share. The repurchased shares will be cancelled. During the year, TSMC shipped more than 8 million eight-inch equiva- TSMC increased to 37 percent its ownership of outstanding shares of lent wafers, representing about 7.5% of global IC wafer shipments. Vanguard International Semiconductor Corporation. We expect the Technology Innovations investment will strengthen the Company's business alliance with Vanguard and advance our eight-inch wafer strategy. TSMC continues to lead the semiconductor industry by pushing the Starting in 2008, Taiwan accounting rules require the expensing of boundaries of advanced technology. Our investment and long-term employee profit sharing in the Company's financial statements. TSMC commitment in advanced technology development helps enable our took an early leadership position by announcing in November 2006 a customers to bring their leading-edge products first to market. In change in its profit sharing mechanism in order to better balance the early 2007, TSMC delivered the foundry segment's first functional 65- interests of TSMC's employees and its shareholders. As we informed nanometer embedded DRAM for customer product. In September of the market as well as our employees at that time, employee profit 4 Capacity Plan 19% 17% 13% 7.1 million 8.3 million 9.3 million Annual Growth Rate Capacity: 8-inch equivalent wafers Sales Breakdown by Technology 49% 55% 61% 100% 2006 2007 2008 2006 2007 2008 0% ≧ 0.15µm ≦ 0.13µm 2008 wafer shipment is expected to be approximately 9 million 8-inch equivalent wafers. sharing for the year 2008 will be at 15% of 2008's net income, and the Company will start accruing such an amount in each quarter beginning the first quarter of 2008. Outlook As we begin our 21st year, management anticipates the global semi- conductor market should grow by a mid-single digit rate in 2008, and that the foundry segment in general, and TSMC in particular, should grow by more than that. While much depends on macro-economic developments globally, our 2008 results will benefit from the capacity that we have already built over the years along with improvements in capital productivity and operating efficiency. We are focused on balancing capacity installa- tion with anticipated demand to maintain high utilization rates, which will have a positive impact on return on investment. Given TSMC's 2008 capacity plan, which represents an annual capacity increase of 12.7%, we expect the capital intensity ratio, defined as capital expenditure as a percentage of sales, will be lower this year. We are also focusing on pricing so that it will reflect the true value proposition that TSMC's products and services represent to our cus- tomers. The semiconductor competitive landscape will continue to transform itself as the costs associated with designing and producing advanced technology continues to grow. Customers and suppliers are today dealing with new processes and new materials as complex and costly as they are powerful. All of us at TSMC will continue to commit our- selves to enabling our customers' success and increasing our share- holders' value throughout 2008 and beyond. Morris Chang Chairman Rick Tsai President and CEO 5 2. COMPANY PROFILE 6 VALUE 7 2.1 An Introduction to TSMC TSMC is the world's largest dedicated semiconductor foundry. Founded on February 21, 1987 and headquartered in Hsinchu, Taiwan, TSMC pioneered the business model of focusing solely on manufacturing customers' semiconductor designs. As a dedicated semiconductor foundry, the company does not design, manufacture, or market semiconductor products under its own brand name, ensuring that TSMC does not compete directly with its customers. TSMC's diverse global customer base ensures that TSMC- manufactured microchips are used in a broad variety of applications, including various segments of the computer, communications and consumer electronics markets. Total capacity of the manufacturing facilities managed by TSMC, including subsidiaries and joint ventures, was 8.29 million 8-inch equivalent wafers in 2007. In Taiwan, TSMC operates two advanced 12-inch wafer fabs, four 8-inch wafer fabs, and one 6-inch wafer fab. TSMC also manages two 8-inch fabs at wholly owned subsidiaries: WaferTech in the United States and TSMC (Shanghai) Company, Ltd. in China. In addition, TSMC obtains 8-inch wafer capacity from other companies in which TSMC has an equity interest. TSMC provides customer service through its account management and engineering services offices in North America, Europe, Japan, China, South Korea, and India. The company employed more than 20,000 people worldwide as of the end of 2007. TSMC continued to lead the industry in advanced process technologies. Already first to provide 65nm production capacity, TSMC in 2007 became the first foundry to provide 45nm production. In addition to general-purpose logic process technology, TSMC supports the wide-ranging needs of its customers with embedded non-volatile memory, embedded DRAM, mixed signal/RF, high voltage, CMOS image sensor, color filter, and silicon germanium technologies. In December 2007, TSMC announced at the IEDM conference in Washington the foundry's first 32nm technology with functional SRAM. The company is listed on the Taiwan Stock Exchange (TSE) under ticker number 2330, and its American Depositary Shares trade on the New York Stock Exchange (NYSE) under the symbol TSM. 2.2 Market/Business Summary 2.2.1 TSMC Achievements In 2007, TSMC maintained its leading position in the dedicated foundry segment of the global semiconductor industry, with an estimated market segment share of 47%, above twice the share of its closest competitor. TSMC achieved this result amid fierce competition from both established players and relatively new entrants to the business. A key contributory factor to TSMC's strong position is its lead in advanced process technologies. In 2007, 55% of TSMC's wafer revenue came from manufacturing processes with geometries of 0.13µm and below. A critical milestone was reached in December 2007, when TSMC shipped its one-millionth 90nm 12-inch wafer. Moreover, TSMC also achieved volume production of the 45nm process as well as development of the leading-edge 32nm process, both industry firsts. By the fourth quarter of 2007, more than 39% of TSMC's revenue came from 90nm processes or below. In line with its unwavering focus on customer partnership, TSMC offers innovative services as well as advanced technologies. Among the many innovative services unveiled in 2007 were: Multi-Layer Mask Service, which enables maximum customer flexibility in prototyping single or multi-chip verifications or small volume production runs; Reference FlowTM 8.0, the latest generation of TSMC's design methodology, which increases yield, lowers risks and improves design margins; and Active Accuracy Assurance, which enables design optimization critical for silicon success in leading-edge technologies such as 45nm. TSMC continued to advance the semiconductor roadmap in 2007. Examples of technologies the Company developed or rolled out include: ● 32nm technology with functional SRAM ● 45nm technology ● 55nm technology, a 90% linear shrink from 65nm ● 65nm mixed signal and radio frequency (MS/RF) technologies ● 65nm embedded DRAM technology ● 0.13µm embedded flash memory ● 0.16µm high voltage process for small panel single chip drivers ● 0.20µm process for larger panel source drivers ● 0.25µm bipolar complementary device (BCD) ● 1.00µm ultra high voltage process In addition, a major focus of TSMC's technology development in 2007 was its quarter-node strategy. TSMC unveiled CMOS Logic 0.152µm, CMOS Mixed Signal 0.152µm, CMOS Logic 0.12µm, CMOS Logic 85nm General, and CMOS Logic 85nm Low Power technologies. These quarter-node technologies enabled customers to produce their IC chips even more cost-effectively by shrinking the process nodes. 2.2.2 Market Overview The integrated circuit (IC) market in 2007 reached US$218.5 billion in revenue, an increase of 4.3% over 2006. This represented 85% of total worldwide semiconductor revenue of US$256 billion. Growth of fabless design companies slightly outpaced that of integrated device manufacturers (IDMs) in 2007, with a market share of 21% of total IC revenues. IC foundry, a manufacturing sub-segment of the IC industry that serves both fabless companies and IDMs, generated total revenues of US$24.3 billion in 2007, up 4.3% year on year, while revenues from dedicated IC foundries such as TSMC reached US$20.7 billion, up 4% from 2006. It is estimated that the production value of dedicated IC foundries accounted for 19% of worldwide IC revenues in 2007. 8 In 2007, the largest geographic market for dedicated foundry services was North America, which accounted for 59% of overall dedicated Differentiation TSMC's leading industry position is based on a trinity of key foundry revenue. The second largest geographic market was Asia differentiating strengths: technology leadership, manufacturing Pacific (excluding Japan), which accounted for 26% of total dedicated excellence, and customer partnership. As a technology leader, TSMC foundry revenue in 2007. European-based customers accounted for has consistently been the first dedicated foundry to develop the next 9%, and orders from companies based in Japan contributed 6%. generation of leading-edge technologies. As a manufacturing leader, 2.2.3 Industry Outlook, Opportunities and Threats support services to expedite time-to-market and time-to-volume. TSMC is renowned for its yield management, and offers best-in-class Industry Demand and Supply Outlook The semiconductor market in 2007 experienced modest growth of And, in customer partnership, TSMC works closely with its customers on end-to-end collaboration to optimize design and manufacturing efficiencies. Going forward, TSMC will continue building on this 3.5%. For 2008, based on current market conditions, semiconductor trinity of strengths to provide the best overall value to its customers. market growth could be around the mid single digit depending on the level of global economic growth. As the inventory level in general appears normal at the beginning of 2008, the growth of the foundry Strategy TSMC is confident its differentiating strengths will enable it to segment could outperform the semiconductor industry by a few leverage the attractive growth opportunities in the foundry sector percentage points in 2008. On the other hand, the foundry capacity going forward. TSMC works constantly to ensure that these strengths could expand at 13% in 2008 according to IC Insights, compared are maintained and improved, both in the short-term and in the with the 15% compound annual growth rate of the past 3 years. This long-term. For example, TSMC is intensively working on the leading- indicates that there may be more cautious capacity investment from edge 32nm process to maintain its technology leadership position, major foundry players in response to slowing industry demand. and is poised to be the first dedicated foundry player to roll out Opportunities and Threats in the Foundry Sector of the Semiconductor Market Despite the fact that the semiconductor market as a whole is production in that technology. Numerous efforts are also underway to ensure manufacturing excellence, such as continuing enhancement of Design-For-Manufacturing (DFM) support services to increase yield and efficiency. Finally, TSMC conducts throughout the year customer maturing, TSMC believes that foundry services, the sector TSMC reviews and surveys to better understand customer needs and wants, competes in, will play an increasingly important role as the IC and accordingly adjusts its offering in response, thereby industry becomes more reliant on outsourced manufacturing. IC strengthening its partnership with customers. Insights forecasts that by 2012, 27% of global semiconductor revenue will come from dedicated foundries, compared with 19% in To counter the ongoing challenge of falling wafer prices, TSMC's 2007. Consequently, the dedicated foundry sector is forecast to grow long-term and short-term development plans are to continue at a rate of 12% in 2008, outpacing overall industry growth. As the strengthening its core capabilities and value propositions; including leader in dedicated foundry services, TSMC is well positioned to its ability to deliver customer product to market earlier and with capture the faster growth opportunities of this sector. On the other better functionality, advanced and mainstream technologies with hand, threats remain, such as the continuing fall in wafer prices, due sufficient capacity support and flexible manufacturing, and focus on to the fact that the IC industry is prone to fast-declining end customer service. In addition, TSMC will continue optimizing its application prices, as well as potential industry overcapacity if the service portfolio in order to balance profitability and growth. global economic climate experiences a downturn. 2.2.4 TSMC Position, Differentiation and Strategy Position As the leader in the dedicated foundry segment of the IC manufacturing industry, TSMC commanded a 47% share of this segment in 2007, with total revenue of US$9.8 billion. In terms of geographic distribution categorized by company headquarters, 77% of total revenue came from North America, 11% from the Asia Pacific region excluding Japan, 9% from Europe, and 3% from Japan. In terms of end product application, 32% of total revenue came from the computing sector, 42% from communications, 17% from consumer products, and 9% from other categories, such as industrial products. 9 2.3 Organization 2.3.1 Organization Chart Audit Committee Compensation Committee Shareholders' Meeting Board of Directors Chairman Vice Chairman President & CEO Research and Development Information Technology Design and Technology Platform Human Resources Quality and Reliability Corporate Planning Worldwide Sales and Marketing Materials Management and Risk Management Advanced Technology Business Mainstream Technology Business Note: Beginning March 1, 2008, TSMC re-structured its business organization in order to improve the company's structural profitability and further strengthen customer partnerships by forming the new Advanced Technology Business Organization and Mainstream Technology Business Organization. These two new organizations will respectively take responsibility for formulation, development, and execution of advanced technology and mainstream technology business objectives. 10 2.3.2 Major Corporate Functions Research and Development ● Advanced technology research and development, and exploratory research and development Information Technology ● Technology and business system integration, Information technology infrastructure, and IT development and operation Design and Technology Platform ● Design services and technology platform development Human Resources ● Human resources management and organizational development Quality and Reliability ● Quality and reliability management Corporate Planning ● Production planning and control, industrial engineering, and operational efficiency Worldwide Sales and Marketing ● Brand Management — corporate brand management ● Market Research — market analysis, forecast and research ● Customer Service — customer loyalty and solutions management ● Regional Operations — business development and account services for the North American, European, Japanese, and Asian regions Materials Management and Risk Management ● Purchasing, warehousing, import and export, logistics support, industrial safety, and environmental protection Advanced Technology Business ● Manufacturing Operations (Fabs 12 and 14), new fab planning, manufacturing technology integration, advanced product engineering, mask manufacturing, advanced technology business development, and technology and service marketing Mainstream Technology Business ● Manufacturing Operations (Fabs 2, 3, 5, 6, and 8), mainstream product engineering, backend technology and service, mainstream technology business development, capacity management, and technology and service marketing Finance & Spokesperson ● Finance and accounting services including investor relations, public relations, treasury, tax, asset management, strategic investment, and financial and accounting management ● Corporate spokesperson Legal ● Corporate legal affairs, litigation, commercial transactions, patents and other intellectual property management China ● Business strategy and development, manufacturing operations, and account services in China Special Projects ● Ongoing new business initiatives and developing new strategic businesses Internal Audit ● Internal audit and process compliance 11 Finance & Spokesperson Legal China Special Projects Internal Audit 2.4 Board Members 2.4.1 Information Regarding Board Members Title/Name Chairman Morris Chang Vice Chairman F.C. Tseng Date Elected Term Expires Date First Elected 05/16/2006 05/15/2009 12/10/1986 Shareholding When Elected Current Shareholding Shares 112,677,772 % 0.46% Shares 116,637,208 % 0.46% 05/16/2006 05/15/2009 05/13/1997 39,010,891 0.16% 36,602,589 0.14% National Development Fund, Executive Yuan Representative: (Note 1, 2) Director Chintay Shih 05/16/2006 05/15/2009 12/10/1986 1,581,649,966 6.39% 1,637,228,303 6.39% - - - - Director Rick Tsai Independent Director Sir Peter Leahy Bonfield Independent Director Lester Carl Thurow Independent Director Stan Shih Independent Director Carleton (Carly) S. Fiorina 05/16/2006 05/15/2009 06/03/2003 25,466,795 0.10% 31,261,025 0.12% 05/16/2006 05/15/2009 05/07/2002 05/16/2006 05/15/2009 05/07/2002 - - - - - - - - 05/16/2006 05/15/2009 04/14/2000 1,415,785 0.01% 1,465,534 0.01% 05/16/2006 05/15/2009 05/16/2006 - - - - Remarks: 1. No member of the Board of Directors held TSMC shares by nominee arrangement. 2. No member of the Board of Directors had a spouse or relative within two degrees of consanguinity serving as a manager or director at TSMC. Note 1: Major Shareholder of TSMC's Director that is a Juridical Person Shareholder Director that is a Juridical Person Shareholder National Development Fund, Executive Yuan Top 10 Shareholders Not Applicable Note 2: Major shareholder of juridical person shareholder as stated in note 1: Not applicable. 12 Spouse & Minor Shareholding Shares 121,430 % 0.00% Selected Education, Past Positions & Current Positions at Non-profit Organizations Selected Current Positions at TSMC and Other Companies As of 02/29/2008 None Ph.D., Electrical Engineering, Stanford University, USA Master Degree, Mechanical Engineering, MIT Chairman, Industrial Technology Research Institute President & COO, General Instrument Corporation Group Vice-President, Texas Instruments CEO, TSMC Supervisor, Industrial Technology Research Institute Life Member Emeritus of MIT Corporation Member of National Academy of Engineering, USA Trustee of the Eisenhower Foundation Member of the Committee of 100 Fellow of Computer History Museum, USA Member of the International Advisory Committee of NYSE Euronext Board of Directors 131,532 0.00% Ph.D., Electrical Engineering, National Chengkung University, Taiwan President, Vanguard International Semiconductor Corporation President, TSMC Deputy CEO, TSMC - - 154,676 0.00% - - - - - - Ph.D., Electrical Engineering, Princeton University, USA President, Industrial Technology Research Institute Director of Vanguard International Semiconductor Corporation Professor and Dean, College of Technology Management, National Tsinghua University Managing Director and Special Advisor, Industrial Technology Research Institute Ph.D., Material Science, Cornell University, USA President, Vanguard International Semiconductor Corporation COO, TSMC Executive Vice President, Worldwide Marketing and Sales, TSMC Honours Degree in Engineering, Loughborough University Fellow of the Royal Academy of Engineering Chairman and CEO, ICL Plc CEO and Chairman of the Executive Committee, British Telecommunications Plc Vice President, the British Quality Foundation Ph.D., Economics, Harvard University, USA Dean, Sloan School of Management, MIT Jerome and Dorothy Lemelson Professor of Management and Economics, Sloan School of Management, MIT Chairman, TSMC (Shanghai) Company Ltd. Chairman, Global Unichip Corporation Director, Prosperity Venture Capital Corporation Director, digimax, Inc. Director, Allegro Manufacturing Pte, Ltd. Director, Industrial Technology Investment Corporation President & CEO, TSMC Director, TSMC subsidiary companies Chairman of Supervisory Board, NXP B.V. Director, L.M. Ericsson, Sweden Director, Mentor Graphics Corporation Inc., Oregon, USA Director, Sony Corporation, Japan Member of the Sony Corporation Advisory Board Director, Actis Capital LLP Board Director, Dubai International Capital Member of the Citigroup International Advisory Board Director, Analog Devices Inc. 15,956 0.00% Honorary Doctor of International Law, Thunderbird American Graduate School of International Management, USA Honorary Fellowship, University of Wales, Cardiff, UK Honorary Doctor of Technology, The Hong Kong Polytechnic University, Hong Kong Honorary EE Ph.D., MSEE, BSEE, National Chiao Tung University, Taiwan Co-Founder and Chairman Emeritus of the Acer Group Group Chairman, iD SoftCapital Director, Acer Incorporated Director, Qisda Corporation Director, Wistron Corporation Director, Nan Shan Life Insurance Company, Ltd. - - Master Degree in Business Administration, Robert H. Smith School of Business, University of Director, Revolution Health Group LLC Maryland at College Park, Md. Master Degree, Science, MIT's Sloan School Bachelor Degree in Medieval History and Philosophy, Stanford University, USA Senior Management, AT&T and Lucent Technologies Chairman and Chief Executive Officer, Hewlett-Packard Director, CyberTrust Director, MIT Corporation Board of Trustees 13 2.4.2 Directors' Professional Qualifications and Independence Analysis According to the relevant requirements set by Taiwan's Securities and Futures Bureau, the professional qualifications and independence status of the Company's Board members are listed in the table below. Name/Criteria Chairman Morris Chang Vice Chairman F.C. Tseng Director Chintay Shih Director Rick Tsai Independent Director Sir Peter Leahy Bonfield Independent Director Lester Carl Thurow Independent Director Stan Shih Independent Director Carleton (Carly) S. Fiorina Meet One of the Following Professional Qualification Requirements, Together with at Least Five Years Work Experience An Instructor or Higher Position in a Department of Commerce, Law, Finance, Accounting, or Other Academic Department Related to the Business Needs of the Company in a Public or Private Junior College, College or University A Judge, Public Prosecutor, Attorney, Certified Public Accountant, or Other Professional or Technical Specialists Who Has Passed a National Examination and Been Awarded a Certificate in a Profession Necessary for the Business of the Company Have Work Experience in the Area of Commerce, Law, Finance, or Accounting, or Otherwise Necessary for the Business of the Company (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) Note: Directors or Supervisors, during the two years before being elected or during the term of office, have been or be any of the following, please tick the appropriate corresponding boxes: 1. Not an employee of the company or any of its affiliates; 2. Not a director or supervisor of the company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the company, its parent company, or any subsidiary in which the company holds, directly or indirectly, more than 50% of the voting shares; 3. Not a natural-person shareholder who holds shares, together with those held by the person's spouse, minor children, or held by the person under others' names, in an aggregate amount of 1% or more of the total number of outstanding shares of the company or ranking in the top 10 in holdings; 4. Not a spouse, relative within the second degree of kinship, or lineal relative within the fifth degree of kinship, of any of the persons in the preceding three subparagraphs; 5. Not a director, supervisor, or employee of a corporate shareholder that directly holds 5% or more of the total number of outstanding shares of the company or that holds shares ranking in the top five in holdings; 6. Not a director, supervisor, officer, or shareholder holding 5% or more of the shares, of a specified company or institution that has a financial or business relationship with the company; 7. Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the company or to any affiliate of the company, or a spouse thereof; 8. Not having a marital relationship, or a relative within the second degree of kinship to any other director of the company; 9. Not been a person of any conditions defined in Article 30 of the Company Law; and 10. Not a governmental, juridical person or its representative as defined in Article 27 of the Company Law. 14 1 (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) 2 (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) 3 (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) Criteria (Note) 4 (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) 5 (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) 6 (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) 7 (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) 8 (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) 9 (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) 10 (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) (cid:57) Number of Other Public Companies Concurrently Serving as an Independent Director 0 0 0 0 0 0 0 0 15 2.4.3 Remuneration Paid to Directors (Note 1) Unit: NT$ thousands Base Compensation (A) Profit Sharing (B) (Note 3) Allowances (C) (Note 4) Remuneration Total Remuneration (A+B+C) as a % of 2007 Net Income From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities 23,856 23,856 176,890 176,890 6,011 6,011 0.19% 0.19% Title/Name Chairman Morris Chang Vice Chairman F.C. Tseng Koninklijke Philips Electronics N.V. Representative: Director J.C. Lobbezoo (Note 2) National Development Fund, Executive Yuan Representative: Director Chintay Shih Director Rick Tsai Independent Director Sir Peter Leahy Bonfield Independent Director Lester Carl Thurow Independent Director Stan Shih Independent Director Carleton (Carly) S. Fiorina Note 1: Remuneration Policies: The base compensation for the Chairman, Vice-Chairman and directors are determined in accordance with the procedures set forth in TSMC's Articles of Incorporation. The Articles of Incorporation also provides that TSMC shall allocate no more than 0.3% of earnings available for distribution as bonus to directors. The distribution of compensation to directors shall be made in accordance with TSMC's "Rules for Distribution of Compensation to Directors". Note 2: Koninklijke Philips Electronics N.V. resigned from TSMC's Board on March 9, 2007. Note 3: The Board adopted a proposal for 2007 compensation to TSMC's directors in the amount of NT$176,890 thousand at its meeting on February 19, 2008. The proposed compensation will be effected upon the approval of shareholders at the Annual Shareholder Meeting on June 13, 2008. Note 4: Includes allowances for company cars. Compensation paid to company drivers totaled NT$3,901 thousand. Note 5: Represents cumulative employee stock options exercisable as of the date of this Annual Report. Note 6: Total remuneration paid to TSMC's directors and supervisors in 2006 was NT$663,666 thousand, accounting for 0.52% of 2006 net income. Remuneration Paid to Directors (Note 1) Total Remuneration (A+B+C) Total Compensation (A+B+C+D+E) From All Consolidated Entities From TSMC From All Consolidated Entities 2007 Koninklijke Philips Electronics N.V. Koninklijke Philips Electronics N.V. Under NT$2,000,000 NT$2,000,000 ～ NT$5,000,000 NT$5,000,000 ～ NT$10,000,000 NT$10,000,000 ～ NT$15,000,000 NT$15,000,000 ～ NT$30,000,000 NT$30,000,000 ～ NT$50,000,000 NT$50,000,000 ～ NT$100,000,000 Over NT$100,000,000 Total - - - 9 From TSMC Rick Tsai (Note 2) - - Morris Chang F.C. Tseng National Development Fund, Executive Yuan Sir Peter Leahy Bonfield Lester Carl Thurow Stan Shih Carleton (Carly) S. Fiorina - - - - - - - - - - - Morris Chang F.C. Tseng National Development Fund, Executive Yuan Sir Peter Leahy Bonfield Lester Carl Thurow Stan Shih Carleton (Carly) S. Fiorina - - Rick Tsai 9 - - Note 1: The proposed compensation will be effected upon the approval of shareholders at the Annual Shareholder Meeting on June 13, 2008. Note 2: According to the Company's Articles of Incorporation, directors who also serve as executive officers of this Corporation are not entitled to receive bonus to directors. As a result, no director remuneration was paid to Dr. Rick Tsai. 16 Base Compensation, Bonuses, and Allowances (D) From TSMC From All Consolidated Entities Compensation Earned as Employee of TSMC or of TSMC's Consolidated Entities Employee Profit Sharing (E) Exercisable Employee Stock Options (Note 5) (F) Total Compensation (A+B+C+D+E) as a % of 2007 Net Income (Note 6) From TSMC From All Consolidated Entities Cash Stock (Fair Market Value) Cash Stock (Fair Market Value) From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities Compensation Paid to Directors from Non- consolidated Affiliates 9,744 9,744 26,000 149,511 26,000 149,511 1,611 1,611 0.36% 0.36% 0 17 2.5 Management Te a m 2.5.1 Information Regarding Management Te a m Title (Note 1)/Name Date Effective (Note 2) President & Chief Executive Officer Rick Tsai 07/01/2005 Shareholding Shareholding 31,261,025 % 0.12% Senior Vice President Special Projects Kenneth Kin Senior Vice President & Chief Information Officer Information Technology & Materials Management and Risk Management Stephen T. Tso 07/04/2001 6,030,912 0.02% 12/31/2004 14,262,599 0.06% 12/01/2005 12,181,439 0.05% Spouse & Minor Shareholding - - - - % - - - - Senior Vice President Advanced Technology Business Mark Liu Senior Vice President Mainstream Technology Business C.C. Wei Vice President Mainstream Technology Business M.C. Tzeng Vice President & General Counsel Richard Thurston 12/01/2005 8,044,114 0.03% 259 0.00% 01/01/2002 7,057,682 0.03% 101,699 0.00% 01/02/2002 3,360,833 0.01% - - Vice President, Chief Financial Officer & Spokesperson Lora Ho 09/08/2003 5,681,674 0.02% 109,170 0.00% Vice President Human Resources P.H. Chang Vice President Worldwide Sales and Marketing Jason C.S. Chen Vice President Design and Technology Platform Fu-Chieh Hsu Vice President Research and Development Wei-Jen Lo Vice President Research and Development Jack Sun Vice President Advanced Technology Business Y.P. Chin Vice President Quality and Reliability N.S. Tsai Senior Director Corporate Planning L.C. Tu Senior Director Internal Audit Jan Kees van Vliet 02/17/2004 3,775,456 0.01% - - 03/31/2005 1,782,270 0.01% 122 0.00% 03/31/2006 1,350,874 0.01% 06/05/2006 2,095,378 0.01% 06/23/2006 5,070,698 0.02% - - - - - - 02/19/2008 7,454,537 0.03% 2,243,420 0.01% 02/19/2008 1,969,556 0.01% 296,272 0.00% 06/25/2002 8,732,786 0.03% 1,239,999 0.00% 10/15/2003 1,623,356 0.01% - - Note 1: TSMC's business organization was re-structured beginning March 1, 2008. Note 2: The date effective means the offical date joining the Management Team. 18 TSMC Shareholding by Nominee Arrangement (Shares) - - - - - - - - - - - - - - - - - Education & Selected Past Positions Selected Current Positions at Other Companies Ph.D., Material Science, Cornell University, USA Executive Vice President, Worldwide Marketing and Sales, TSMC COO, TSMC President, Vanguard International Semiconductor Corp. Director, TSMC subsidiary companies Ph.D., Nuclear Engineering and Applied Physics, Columbia University, USA Vice President, Worldwide Sales & Services, IBM Microelectronics Division Director, TSMC subsidiary companies Ph.D., Materials Science & Engineering, University of California, Berkeley, USA President, WaferTech, LLC Senior Vice President, Operations, TSMC Director, TSMC subsidiary companies Ph.D., Electrical Engineering & Computer Science, University of California, Berkeley, USA Vice President, South Site Operation, TSMC President, Worldwide Semiconductor Manufacturing Corp. None Ph.D., Electrical Engineering, Yale University, USA Vice President, South Site Operation, TSMC Senior Vice President, Chartered Semiconductor Manufacturing Ltd. Master, Applied Chemistry, Chungyuan University, Taiwan Senior Director, Fab 2 Operation, TSMC Director, TSMC subsidiary companies Director, TSMC affiliated companies As of 02/29/2008 Managers Who are Spouses or within Second-degree Relative of Consanguinity to Each Other Title Name Relation - - - - - - - - - - - - - - - None Department Manager M.J. Tzeng Siblings 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, TSMC subsidiary companies Director, TSMC affiliated companies Master, Finance, National Taiwan University, Taiwan Senior Director, Accounting, TSMC Vice President, TI-Acer Semiconductor Manufacturing Corp. Ph.D., Materials Science & Engineering, Purdue University, USA Senior Director, Materials Management, TSMC Vice President, Worldwide Semiconductor Manufacturing Corp. Director and/or Supervisor, TSMC subsidiary companies Supervisor, TSMC affiliated companies None Master, Business Administration, University of Missouri-Columbia, USA Vice President & Co-Director of Worldwide Sales & Marketing Group, Intel Director, TSMC subsidiary companies Ph.D., Electrical Engineering and Computer Sciences, University of California, Berkeley, USA Chairman and CEO, Monolithic System Technology Inc. Chairman and President, Myson Technology Inc. Ph.D., Solid State Physics & Surface Chemistry, University of California, Berkeley, USA Director, Advanced Technology Development & CTM Plant Manager, Intel Ph.D., Electrical Engineering, University of Illinois, USA Senior Director, Logic Technology Division, TSMC Master, Electricl Engineering, National Cheng Kung University, Taiwan Senior Director, Product Engineering & Services, TSMC Ph.D., Material Science, Massachusetts Institute of Technology, USA Senior Director, Assembly Test Technology & Service, TSMC Vice President, Operations, Vanguard International Semiconductor Corp. Master, Business Administration, Tulane University, USA Senior Director, Fab 5 Operation, TSMC Master, Management, Delft/Erasmus University, the Netherlands Senior Director, Pricing & Business Process, TSMC Chief Financial Officer & member of the Board of Management, Philips Taiwan Director, TSMC subsidiary companies None None None None None None - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 19 2.5.2 Compensation Paid to President and Vice Presidents (Note 1) Unit: NT$ thousands Title Name President & Chief Executive Officer Senior Vice President Special Projects Senior Vice President & Chief Information Officer Information Technology & Materials Management and Risk Management Senior Vice President Advanced Technology Business Senior Vice President Mainstream Technology Business Vice President Mainstream Technology Business Vice President & General Counsel Vice President Chief Financial Officer & Spokesperson Vice President Human Resources Vice President Worldwide Sales and Marketing Vice President Design and Technology Platform Vice President Research and Development Vice President Research and Development Rick Tsai Kenneth Kin Stephen T. Tso Mark Liu C.C. Wei M.C. Tzeng Richard Thurston Lora Ho P.H. Chang Jason C.S. Chen Fu-Chieh Hsu Wei-Jen Lo Jack Sun Salary Bonuses and Allowances (Note 2) From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities 50,940 50,940 17,384 17,522 Note 1: Compensation Policy: The cash compensation and profit sharing paid to the president and each vice president are also reviewed by the Compensation Committee individually based on their job responsibility, contribution and performance before the compensation and profit sharing proposals are submitted to the Board of Directors for approval. Note 2: Include the use of company cars. Compensation paid to the drivers totaled NT$4,669 thousand. Note 3: The Board adopted a proposal for 2007 employee profit sharing distribution in 2008 with respect to 2007 earnings at its meeting on February 19, 2008. The above-mentioned figures are preliminary and the proposed employee profit sharing distribution will be processed after the approval of the same by shareholders at the Annual Shareholder Meeting on June 13, 2008. Note 4: Total compensation paid to TSMC's president and vice presidents in 2006 was NT$1,791,128 thousand, accounting for 1.41% of 2006 net income. Note 5: Represents cumulative employee stock options exercisable as of the date of this Annual Report. Compensation Paid to President and Vice Presidents (Note) Under NT$2,000,000 From NT$2,000,000 ～ NT$5,000,000 From NT$5,000,000 ～ NT$10,000,000 From NT$10,000,000 ～ NT$15,000,000 From NT$15,000,000 ～ NT$30,000,000 From NT$30,000,000 ～ NT$50,000,000 From NT$50,000,000 ～ NT$100,000,000 Over NT$100,000,000 Total From TSMC From All Consolidated Entities 2007 - - - - - - - - - - - - C.C. Wei, M.C. Tzeng, Richard Thurston, Lora Ho, P.H. Chang, Jason C.S. Chen, Fu-Chieh Hsu, Wei-Jen Lo, Jack Sun Rick Tsai, Kenneth Kin, Stephen T. Tso, Mark Liu 13 Note: The Board adopted a proposal for 2007 employee profit sharing distribution in 2008 with respect to 2007 earnings at its meeting on February 19, 2008. The above-mentioned figures are preliminary and the proposed employee profit sharing distribution will be processed after the approval of the same by shareholders at the Annual Shareholder Meeting on June 13, 2008. 20 Employee Profit Sharing (Note 3) Total Compensation as a % of 2007 Net Income (Note 4) Exercisable Employee Stock Options (Note 5) From TSMC Cash From All Consolidated Entities Stock (Fair Market Value) Cash Stock (Fair Market Value) From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities Compensation Received from Non-consolidated Affiliates 162,395 933,838 162,395 933,838 1.07% 1.07% 2,892 2,892 0 21 2.5.3 Employee Profit Sharing Granted to Management Team (Note) Unit: NT$ thousands Title President & Chief Executive Officer Senior Vice President, Special Projects Senior Vice President & Chief Information Officer Information Technology & Materials Management and Risk Management Senior Vice President, Advanced Technology Business Senior Vice President, Mainstream Technology Business Vice President, Mainstream Technology Business Vice President & General Counsel Vice President, Chief Financial Officer & Spokesperson Vice President, Human Resources Vice President, Worldwide Sales and Marketing Vice President, Design and Technology Platform Vice President, Research and Development Vice President, Research and Development Senior Director, Corporate Planning Senior Director, Internal Audit Name Rick Tsai Kenneth Kin Stephen T. Tso Mark Liu C.C. Wei M.C. Tzeng Richard Thurston Lora Ho P.H. Chang Jason C.S. Chen Fu-Chieh Hsu Wei-Jen Lo Jack Sun L.C. Tu Jan Kees van Vliet Note: The Board adopted a proposal for 2007 employee profit sharing distribution in 2008 with respect to 2007 earnings at its meeting on February 19, 2008. The above-mentioned figures are preliminary and the proposed employee profit sharing distribution will be processed after the approval of the same by shareholders at the Annual Shareholder Meeting on June 13, 2008. 22 Stock (Fair Market Value) Cash Total Employee Profit Sharing Total Employee Profit Sharing Paid to Management Team as a % of 2007 Net Income 992,134 172,532 1,164,666 1.07% 23 3. CORPORATE GOVERNANCE 24 TRUST 25 TSMC advocates and acts upon the principles of operational transparency and respect for shareholder rights. We believe that the basis for successful corporate governance is a sound and effective Board of Directors. In line with this principle, TSMC's Board of Directors established an Audit Committee in 2002 and a Compensation Committee in 2003. TSMC's corporate governance was recognized in 2007 with the "Best Corporate Governance Award" for the Hong Kong and Taiwan regions from IR Magazine, the "Best in Taiwan of Asset Corporate Governance Awards 2007" from The Asset Magazine, the "Corporate Governance Asia Recognition in Taiwan" from Corporate Governance Asia. It was also recognized as the company "Most Committed to Corporate Governance" for the Taiwan region by FinanceAsia Magazine. 3.1 Board of Directors TSMC's Board of Directors consists of eight distinguished members with a great breadth of experience as world-class business leaders or scholars. Four of the eight members are independent directors: former British Telecommunications Chief Executive Officer, Sir Peter Bonfield; Professor Lester Thurow from the Massachusetts Institute of Technology; former Acer Group Chairman, Mr. Stan Shih; and former Hewlett- Packard Chairman and CEO, Ms. Carleton (Carly) Fiorina. Under the leadership of Chairman Morris Chang, TSMC's Board of Directors takes a serious and forthright approach to its duties and is a serious, competent and independent Board. In the spirit of Chairman Chang's approach to corporate governance, a board of directors' primary duty is to supervise. The Board should supervise the Company's: compliance with relevant laws and regulations; financial transparency; timely disclose of material information, and maintaining of highest integrity within the company. TSMC's Board of Directors strives to perform through the Audit Committee and the Compensation Committee, the hiring of a financial expert for the Audit Committee, coordination with the Internal Audit department, and through the ombudsman reporting system. The second duty of the board of directors is to provide guidance to the management team of the Company. TSMC's management quarterly reports to the TSMC Board on a variety of subjects. The management also proposes and reviews the Company's business strategies with the Board. Furthermore, the management often reviews with and updates TSMC's Board on the progress of the strategies, obtaining Board guidance as appropriate. The third duty of the board of directors is to dismiss officers of the company when necessary and to evaluate the management's performance. TSMC's management has maintained a healthy and functional communication with TSMC Board of Directors, has been devoted in executing guidance of TSMC Board of Directors, and is dedicated in running the business operations, all to achieve the best interest for all TSMC shareholders. Board of Directors Meeting Status The Chairman convened four regular meetings and two special meetings in 2007. The directors' attendance status is as follows: Title Chairman Vice Chairman Director Director Director Independent Director Independent Director Independent Director Independent Director Name Morris Chang F.C. Tseng Koninklijke Philips Electronics N.V. Representative: J.C. Lobbezoo National Development Fund, Executive Yuan Representative: Chintay Shih Rick Tsai Sir Peter Leahy Bonfield Lester Carl Thurow Stan Shih Carleton S. Fiorina Attendance in Person By Proxy 6 5 1 4 6 4 3 5 4 0 1 0 2 0 1 2 1 2 Attendance Rate in Person (%) 100% 83% Notes None None 100% Resigned on March 9, 2007 67% None 100% 67% 50% 83% 67% None None None None None Annotations: 1. In 2007, there were no written or otherwise recorded resolutions on which an independent director had a dissenting opinion or qualified opinion. 2. There were no recusals of Directors due to conflicts of interests in 2007. 3. Measures taken to strengthen the functionality of the Board: We believe that the basis for successful corporate governance is a sound and effective Board of Directors. In line with this principle, TSMC's Board of Directors has established an Audit Committee and a Compensation Committee. As of January 1, 2007, the Audit Committee has taken on the duties of supervisors as set forth in the relevant rules and regulations governing supervisors. 26 3.1.1 Audit Committee The Audit Committee assists the Board in carrying out its financial oversight responsibilities and other duties as set forth in the Company Act, the Securities and Exchange Act, and other applicable laws and regulations. Matters required to be reviewed by the Audit Committee include the Company's financial reports; auditing and accounting policies and procedures; internal control systems; material asset or derivatives transactions; offering or issuance of any equity-type securities; hiring or dismissal of an attesting CPA, or the compensation given thereto; and appointment or discharge of financial, accounting, or internal auditing officers. TSMC's Audit Committee is empowered by its Charter to conduct any study or investigation it deems appropriate to fulfill its responsibilities. It has direct access to TSMC's internal auditors, the Company's independent auditors, and all employees of the company. The Committee is authorized to retain and oversee special legal, accounting, or other consultants as it deems appropriate to fulfill its mandate. As of February 2008, the Audit Committee was comprised of all four independent directors and had engaged a financial expert consultant. The Audit Committee Charter is available on TSMC's corporate website. Audit Committee Meeting Status Sir Peter Bonfield, Chairman of the Audit Committee, convened four regular meetings and three special meetings in 2007. The Committee members' attendance status is as follows: Title Chair Member Member Member Financial Expert Name Sir Peter Leahy Bonfield Lester Carl Thurow Stan Shih Carleton S. Fiorina J.C. Lobbezoo Attendance in Person By Proxy Attendance Rate in Person (%) 7 6 7 7 7 0 1 0 0 0 100% 86% 100% 100% 100% Notes None None None None None Annotations: 1. The following Securities and Exchange Act §14-5 resolution was not approved by the Audit Committee but was approved by two thirds or more of all directors on August 24, 2007: Resolution:To approve the purchase of no more than 10% of Vanguard International Semiconductor Corp. shares from the National Development Fund, Executive Yuan. 2. There were no recusals of independent directors due to conflicts of interests in 2007. 3.1.2 Compensation Committee The Compensation Committee assists the Board in discharging its responsibilities related to TSMC's compensation and benefits policies, plans and programs, and in the evaluation and compensation of TSMC's executives. As of February 2008, the Compensation Committee was comprised of five members. All four independent directors served as voting members of the Committee; the Chairman of the Board, Dr. Morris Chang, was a non-voting member. Mr. Stan Shih, Chairman of the Compensation Committee, convened four regular meetings in 2007. The Compensation Committee Charter is available on TSMC's corporate website. 27 3.2 Taiwan Corporate Governance Implementation as Required by the Taiwan Financial Supervisory Commission Item Implementation Status Reason for Non-implementation 1. Shareholding Structure & Shareholders' Rights (1) Method of handling shareholder suggestions or complaints (2) The Company's possession of a list of major shareholders and a list of ultimate owners of these major shareholders (3) Risk management mechanism and "firewall" between the Company and its affiliates 2. Composition and Responsibilities of the Board of Directors (1) Independent Directors TSMC has designated appropriate departments, such as Investor Relations, Public Relations, the SEC Compliance Department, Legal, etc., to handle shareholder suggestions or complaints. TSMC tracks the shareholdings of directors, officers, and shareholders holding more than 10% of the outstanding shares of TSMC. TSMC has established appropriate guidelines in its "Internal Control System" policy and procedures. Sir Peter Leahy Bonfield, Prof. Lester Carl Thurow, Mr. Stan Shih and Ms. Carleton S. Fiorina are the independent directors of TSMC. (2) Regular evaluation of external auditors' independence The Audit Committee regularly evaluates the independence of external auditors. 3. Identity and Responsibilities of Supervisors (1) Independent Supervisor(s) (2) Communication channel with employees or shareholders 4. Communication channel with stakeholders 5. Information Disclosure (1) Establishment of a corporate website to disclose information regarding the Company's financials, business and corporate governance status (2) Other information disclosure channels (e.g., maintaining an English-language website, appointing responsible people to handle information collection and disclosure, appointing spokespersons, webcasting investors conference) TSMC authorized its Audit Committee to take over the duties of supervisors as set forth in the relevant rules and regulations, effective January 1, 2007. The terms of the prior supervisors expired on December 31, 2006. The Audit Committee is comprised of all independent directors of TSMC and a financial expert consultant. The Audit Committee has a direct channel of communication with TSMC's Internal Audit unit, external auditors and all employees. TSMC has designated appropriate departments, such as Investor Relations, Public Relations, the SEC Compliance Department, Legal, etc., to communicate with stakeholders on a case by case basis, as needed. Furthermore, the contact information providing access to the Company's spokesperson and relevant departments is available on TSMC's website. TSMC discloses information through its website http://www.tsmc.com. Since TSMC is a foreign private issuer with American Depository Receipts listed on the New York Stock Exchange (NYSE), TSMC is subject to various NYSE regulations, one of which requires TSMC to disclose the significant ways in which its corporate governance practices differ from those followed by US domestic companies under NYSE listing standards. Such disclosure information may be found at the following web address: http://www.tsmc.com/download/english/e03_governance/NYSE_Section_303A.pdf TSMC has designated appropriate departments (e.g. Investor Relations, Public Relations, the SEC Compliance Department, Legal, etc.) to handle the collection and disclosure of information as required by the relevant laws and regulations of Taiwan and other jurisdictions. TSMC has designated spokespersons as required by relevant regulations. TSMC webcasts live investor conferences. None None None None None 6. Operations of the Company's Nomination Committee, Compensation Committee, or other committees of the Board of Directors TSMC's Board of Directors has established an Audit Committee and a Compensation Committee. Please refer to the "Corporate Governance" section on pages 24-31 of this Annual Report for details. None 7. If the Company has established corporate governance policies based on TSE Corporate Governance Best Practice Principles, please describe any discrepancy between the policies and their implementation. For the status of TSMC's corporate governance, please refer to the "Corporate Governance" section on pages 24-31 of this Annual Report. 8. Please describe the company's corporate social responsibility (such as human rights, employee rights, employee wellness, community participation, social contribution, community service, investor relations, supplier relations and rights of stakeholders) policy and implementation. For the status of TSMC's corporate social responsibility efforts, please refer to the "Corporate Social Responsibility" section on pages 66-71 of this Annual Report. 9. Other important information to facilitate better understanding of the Company's corporate governance practices (e.g., directors' and supervisors' training records, the implementation of risk management policies and risk evaluation measures, the implementation of consumer/customer protection policies, and purchasing insurance for directors and supervisors): (1) Status of Risk Management Policies and Risk Evaluation: Please refer to the "Risk Management" section on pages 61-65 of this Annual Report. (2) Status of Customer Relations Policies: Please refer to the "Customer Partnership" section on page 51 of this Annual Report. (3) TSMC maintains D&O Insurance for its directors and officers. 10. If the Company has a self corporate governance evaluation or has authorized any other professional organization to conduct such an evaluation, the evaluation results, major deficiencies or suggestions, and improvements are stated as follows: None TSMC was recognized for its corporate governance in 2007 with the "Best Corporate Governance Award" for the Hong Kong and Taiwan regions from IR Magazine, the "Best in Taiwan of Asset Corporate Governance Awards 2007" from The Asset Magazine, and the "Corporate Governance Asia Recognition in Taiwan" award from Corporate Governance Asia. The Company was also acknowledged as the "Most Committed to Corporate Governance" for the Taiwan region by the FinanceAsia Magazine. 28 Continuing Education/Training of Directors in 2007 Title/Name Chairman Morris Chang (Note) Vice Chairman F.C. Tseng Director Stan Shih (Note) Director Rick Tsai Date 03/07 Host by Training/Speech Title Business Weekly Magazine Leadership in 21st Century (talk with Jack Welch) 06/06 - 06/07 MIT Quantum Leaps Event - The Asia Information Initiative (in Japan) 11/24 Global Chinese Business Leaders Summit Keynote Speech of "Marching towards a world-class enterprise" 11/29 - 12/02 Asia Business Council ABC Autumn Forum 05/17 Security & Futures Institute Insider trading and interest relationships for directors & supervisors, related matters and case studies September TSMC's Legal Department Relevant laws and regulations on "Insider Trading" 01/06 03/06 12/13 Taipei International Management Council Speech of "Branding Taiwan" Bureau of Foreign Trade Sun Yun Suan Foundation Speech of "Building and Managing a Brand" Speech of "Branding Taiwan" September TSMC's Legal Department Relevant laws and regulations on "Insider Trading" Duration 1 hour 45 minutes 2 days 30 minutes 4 days 3 hours 1 hour 2 hours 2 hours 2 hours 1 hour 1. From time to time, TSMC provides directors with information concerning regulatory requirements and developments as related to directors' activities. TSMC management also regularly presents updates on the Company's business and other information to directors. 2. Regular regulatory update reports are provided by TSMC's General Counsel and by the Company's independent auditors at the Audit Committee meetings. Note: Selected speeches, including preparatory work, on corporate governance and related topics. 3.3 Major Resolutions of Shareholders' Meeting and Board Meetings 3.3.1 Major Resolutions of Shareholders' Meeting and Implementation Status Major Resolutions: TSMC's 2007 regular Shareholder Meeting was held in Hsinchu, Taiwan on May 7, 2007. At the meeting, shareholders present in person or by proxy approved the following resolutions: (1) The 2006 Business Report and Financial Statements; (2) The distribution of 2006 profits; (3) The capitalization of 2006 dividends, employee profit sharing and capital surplus; (4) Revisions to the Articles of Incorporation; and (5) Revisions to the internal rules and policies as follows: ● Procedures for Acquisition or Disposal of Assets ● Policies and Procedures for Financial Derivatives Transactions ● Procedures for Lending Funds to Other Parties ● Procedures for Endorsement and Guarantee ● Rules for Election of Directors and Supervisors Implementation Status: All the resolutions of the Shareholders' Meeting have been fully implemented in accordance with the resolutions. 3.3.2 Major Resolutions of Board Meetings During the 2007 calendar year, and through the period of January 1 to February 29, 2008, five regular meetings and two special meetings were convened. Major resolutions approved at these meetings are summarized below: (1) The 2006 business report and financial statements; (2) Distribution of 2006 profits, and the capitalization of dividends, employee profit sharing and capital surplus; (3) 2007 financial plan; (4) Convening the 2007 Annual Shareholders' Meeting; (5) 2007 R&D projects and sustaining capital appropriation; (6) TSMC's sponsorship of the sale of ADRs by Koninklijke Philips Electronics N.V.; (7) Specification of the number of directors comprising TSMC's Board of Directors; (8) The 2007 semi-annual financial statement; (9) Purchasing of Vanguard International Semiconductor Corporation shares via Block Trade; (10) Repurchasing up to US$1.5 billion (approximately NT$48.5 billion) of the Company's common shares from the open market; (11) The 2007 business report and financial statements; (12) Distribution of 2007 profits and capitalization of dividends, employee profit sharing and capital surplus; (13) 2008 financial plan; (14) The cancellation of 800,000,000 treasury shares and the paid-in capital reduction of NT$8,000,000,000; (15) Convening the 2008 Annual Shareholders' Meeting; (16) 2008 R&D projects and sustaining capital appropriation; (17) Promotion of Mr. Y.P. Chin and Dr. N.S. Tsai as Vice Presidents of TSMC. 3.3.3 Major Issues of Record or Written Statements Made by Any Director Dissenting to Important Resolutions Passed by the Board of Directors from January 1, 2007 to February 29, 2008: None. 29 3.4 Internal Control System Execution Status Statement of Internal Control System Date: February 19, 2008 Based on the findings of a self-assessment, Taiwan Semiconductor Manufacturing Company Limited (TSMC) states the following with regard to its internal control system during the period from January 1, 2007 to December 31, 2007: 1. TSMC is fully aware that establishing, operating, and maintaining an internal control system are the responsibility of its Board of Directors and management. TSMC has established such a system aimed at providing reasonable assurance regarding the achievement of objectives in the following categories: (1) effectiveness and efficiency of operations (including profitability, performance, and safeguarding of assets), (2) reliability of financial reporting, and (3) compliance with applicable laws and regulations. 2. An internal control system has inherent limitations. No matter how perfectly designed, an effective internal control system can provide only reasonable assurance of accomplishing the three objectives mentioned above. Moreover, the effectiveness of an internal control system may be subject to changes of environment or circumstances. Nevertheless, the internal control system of TSMC contains self- monitoring mechanisms, and TSMC takes corrective actions whenever a deficiency is identified. 3. TSMC evaluates the design and operating effectiveness of its internal control system based on the criteria provided in the Regulations Governing the Establishment of Internal Control Systems by Public Companies (hereinbelow, the "Regulations"). The criteria adopted by the Regulations identify five components of internal control based on the process of management control: (1) control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring. Each component further contains several items. Please refer to the Regulations for details. 4. TSMC has evaluated the design and operating effectiveness of its internal control system according to the aforesaid criteria. 5. Based on the findings of the evaluation mentioned in the preceding paragraph, TSMC believes that, during the year 2007, its internal control system (including its supervision and management of subsidiaries), as well as its internal controls to monitor the achievement of its objectives concerning operational effectiveness and efficiency, reliability of financial reporting, and compliance with applicable laws and regulations, were effective in design and operation, and reasonably assured the achievement of the above-stated objectives. 6. This Statement will be an integral part of TSMC's Annual Report for the year 2007 and Prospectus, and will be made public. Any falsehood, concealment, or other illegality in the content made public will entail legal liability under Articles 20, 32, 171, and 174 of the Securities and Exchange Law. 7. This Statement has been passed by the Board of Directors in their meeting held on February 19, 2008, with zero of the eight attending directors expressing dissenting opinions, and the remainder all affirming the content of this Statement. Taiwan Semiconductor Manufacturing Company Limited Morris Chang Chairman of the Board of Directors Rick Tsai President & CEO The disclosure of the external auditors' opinion on TSMC's internal control is not applicable. 30 3.5 Status of Personnel Responsible for Preparing Financial Reports No personnel responsible for preparing financial reports resigned or were dismissed in 2007, and as of February 29, 2008. 3.5.1 Certification Details of Employees Whose Jobs are Related to the Release of the Company's Financial Information Certification Certified Public Accountants (CPA) US Certified Public Accountants (US CPA) Certified Internal Auditor (CIA) Chartered Financial Analyst (CFA) Certified Management Accountant (CMA) Financial Risk Manager (FRM) Cerficate in Financial Management (CFM) Certification in Control Self-Assessment (CCSA) Capability Examination on Enterprise Internal Control held by the Securities and Futures Institute (ICC-ROC) Certified Information Systems Auditor (CISA) Certified Information Systems Manager (CISM) Certified Information Systems Security Professional (CISSP) BS7799/ISO 27001 Lead Auditor SAP 4.6C FI Consultant Number of Employees Internal Audit Finance 0 2 8 0 0 0 0 3 3 2 1 1 2 1 9 5 4 2 1 1 1 0 0 0 0 0 0 0 3.6 Information Regarding TSMC's Independent Auditor Audit Fees: Unit: NT$ thousands Accounting Firm Name of CPA Audit Fee Non-audit Fee System Design Company Registration Human Resource Whether the CPA's Audit Period Covers an Entire Fiscal Year Note Others Subtotal Yes No Audit Period Deloitte & Touche Hung-Wen Huang Ming-Cheng Chang 82,399 - 811 - - 811 (cid:57) TSMC did not replace its independent auditor during 2006, 2007, and as of February 29, 2008. TSMC's Chairman, Chief Executive Officer, Chief Financial Officer, and managers in charge of its finance and accounting operations did not hold any positions within TSMC's independent audit firm or its affiliates during 2007. 31 4. CAPITAL AND SHARES 32 PRECISION 33 4.1 Capital and Shares 4.1.1 Capitalization Unit: Share/NT$ Month/Year Issue Price (Per Share) Authorized Share Capital Capital Stock Shares Amount Shares Amount Sources of Capital Remark Capital Increase by Assets Other than Cash 03/2007 06/2007 07/2007 09/2007 12/2007 10 10 10 10 10 27,050,000,000 270,500,000,000 25,829,687,846 258,296,878,460 Exercise of Employee Stock Options None 28,050,000,000 280,500,000,000 25,832,959,219 258,329,592,190 Exercise of Employee Stock Options None 28,050,000,000 280,500,000,000 26,419,387,460 264,193,874,600 Capitalization of Profits: NT$5,089,391,770 and Capital Surplus: NT$774,890,640 None 28,050,000,000 280,500,000,000 26,423,516,808 264,235,168,080 Exercise of Employee Stock Options None 28,050,000,000 280,500,000,000 26,426,201,794 264,262,017,940 Exercise of Employee Stock Options None As of 02/29/2008 Date of Approval & Approval Document No. 03/07/2007 Yuan Shang Tzu No. 0960005253 06/07/2007 Yuan Shang Tzu No. 0960014355 07/06/2007 Yuan Shang Tzu No. 0960017514 09/12/2007 Yuan Shang Tzu No. 0960024269 12/26/2007 Yuan Shang Tzu No. 0960035468 Authorized Share Capital Issued Shares Listed Non-listed Total Unissued Shares As of 02/29/2008 Total 25,627,997,015 0 25,627,997,015 2,422,002,985 28,050,000,000 4.1.2 Capital and Shares Unit: Share Type of Stock Common Stock Shelf Registration: None. 4.1.3 Composition of Shareholders Common Share Type of Shareholders Government Agencies Financial Institutions Other Juridical Persons Foreign Institutions & Natural Persons Domestic Natural Persons 9 98 836 2,156 435,991 1,878,009,110 1,276,869,744 780,432,679 18,551,394,963 3,933,673,334 26,420,379,830 7.11% 4.83% 2.95% 70.22% 14.89% 100.00% As of 06/16/2007 (last record date) Total 439,090 Number of Shareholders Shareholding Holding Percentage (%) 34 Distribution Profile of Share Ownership Common Share Shareholder Ownership (Unit: Share) Number of Shareholders 155,702 172,380 48,646 21,291 8,262 11,623 5,482 3,173 5,941 2,874 1,471 521 269 168 1,287 439,090 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 Preferred Share: None. 4.1.4 Major Shareholders with 5% Shareholdings or More Common Share Shareholders ADR-Taiwan Semiconductor Manufacturing Company, Ltd. Koninklijke Philips Electronics N.V. National Development Fund, Executive Yuan Ownership 47,222,348 396,636,356 330,748,443 253,386,372 141,823,912 278,897,109 187,313,168 140,770,345 405,465,936 388,820,975 406,238,567 253,301,539 186,256,141 149,850,675 22,853,647,944 26,420,379,830 As of 06/16/2007 (last record date) Ownership (%) 0.18% 1.50% 1.25% 0.96% 0.54% 1.06% 0.71% 0.53% 1.53% 1.47% 1.54% 0.96% 0.70% 0.57% 86.50% 100.00% Total Shares Owned Ownership (%) As of 06/16/2007 (last record date) 5,671,912,039 2,111,490,224 1,637,228,303 21.47% 7.99% 6.20% 35 4.1.5 Net Change in Shareholding and Net Change in Shares Pledged by Directors, Management and Shareholders with 10% Shareholdings or More: Unit: Share Title/Name Chairman Morris Chang Vice Chairman F.C. Tseng Director, President & Chief Executive Officer Rick Tsai Director National Development Fund, Executive Yuan Representative: Chintay Shih Independent Director Sir Peter Leahy Bonfield Independent Director Lester Carl Thurow Independent Director Stan Shih Independent Director Carleton (Carly) S. Fiorina Senior Vice President Special Projects Kenneth Kin Senior Vice President & Chief Information Officer Information Technology & Materials Management and Risk Management Stephen T. Tso Senior Vice President Advanced Technology Business Mark Liu Senior Vice President Mainstream Technology Business C.C. Wei Vice President Mainstream Technology Business M.C. Tzeng Vice President & General Counsel Richard Thurston Vice President, Chief Financial Officer & Spokesperson Lora Ho Vice President Human Resources P.H. Chang Vice President Worldwide Sales and Marketing Jason C.S. Chen Vice President Design and Technology Platform Fu-Chieh Hsu Vice President Research and Development Wei-Jen Lo Vice President Research and Development Jack Sun Vice President Advanced Technology Business Y.P. Chin (Note 2) Vice President Quality and Reliability N.S. Tsai (Note 2) Senior Director Corporate Planning L.C. Tu Senior Director Internal Audit Jan Kees van Vliet 2007 01/01/2008 ~ 02/29/2008 Net Change in Shareholding Net Change in Shares Pledged (Note 1) Net Change in Shareholding Net Change in Shares Pledged (Note 1) 580,189 (1,582,058) 3,207,992 8,144,076 - - 7,290 - 1,864,200 1,571,639 1,252,486 1,531,657 927,600 962,464 1,202,243 1,163,059 881,279 1,265,874 1,014,802 657,313 - - - - - - - - - - - (400,000) - 580,000 - - 470,000 - - - Not Applicable Not Applicable Not Applicable Not Applicable 500,386 589,794 - - - (270,000) (10,000) - - - - - - (60,000) (120,000) (117,000) (63,000) (410,000) (70,000) - (70,000) (90,000) (30,000) (200,000) - - (24,000) - - - - - - - - - - - - - 600,000 60,000 - - - - - - - - - - Note 1: 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. Note 2: Mr. Y.P. Chin and Mr. N.S. Tsai were promoted on February 19, 2008. Their net change in shareholding or shares pledged was from 02/19/2008 to 02/29/2008. 36 4.1.6 Stock Trade with Related Party: None. 4.1.7 Stock Pledge with Related Party: None. 4.1.8 Information on Our 10 Largest Shareholders Who are Related Parties to Each Other: None of TSMC's 10 largest shareholders are related parties to each other. 4.1.9 Long-term Investments Ownership Ownership by TSMC (1) Direct/Indirect Ownership by Directors and Management (2) Total Ownership (1) + (2) Shares % Shares Long-term Investment Equity Method: TSMC International Investment Ltd. TSMC Partners, Ltd. TSMC Global, Ltd. TSMC North America TSMC Europe B.V. TSMC Japan Limited TSMC Korea Limited Chi Cherng Investment Co., Ltd. Hsin Ruey Investment Co., Ltd. TSMC (Shanghai) Company Ltd. Systems on Silicon Manufacturing Co. Pte Ltd. Vanguard International Semiconductor Corp. XinTec Inc. Global UniChip Corp. Emerging Alliance Fund, L.P. VentureTech Alliance Fund II, L.P. VentureTech Alliance Fund III, L.P. Cost Method: Non-publicly Traded United Industrial Gases Co. Ltd. Shin-Etsu Handotai Taiwan Company Ltd. Hontung Venture Capital Co., Ltd. W.K. Technology Fund IV Funds: Horizon Ventures Fund Crimson Asia Capital 987,968,244 300,000 1,284 11,000,000 200 6,000 80,000 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Not Applicable (Note 2) Not Applicable (Note 2) Not Applicable (Note 2) 35.7% (Note 4) 35.7% (Note 5) 100.0% 463,350 616,240,459 91,702,823 42,572,353 Not Applicable (Note 2) Not Applicable (Note 2) Not Applicable (Note 2) 16,782,937 10,500,000 2,632,867 4,000,000 Not Applicable (Note 2) Not Applicable (Note 2) 38.8% 36.2% 42.5% 37.0% 99.5% 98.0% 98.0% 9.9% 7.0% 10.5% 1.9% 12.1% 1.0% Note 1: 16.0% represents the shareholding owned by National Development Fund, Executive Yuan Note 2: Not applicable. These firms do not issue shares. TSMC's investment is measured as a percentage of ownership. Note 3: Not available. Not all information is available to TSMC as of the report date. Note 4: TSMC directly owns 35.7% and indirectly owns 64.3% in Chi Cherng Investment Co., Ltd., through Hsin Ruey Investment Co., Ltd. Note 5: TSMC directly owns 35.7% and indirectly owns 64.3% in Hsin Ruey Investment Co., Ltd., through Chi Cherng Investment Co., Ltd. As of 12/31/2007 % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Shares 987,968,244 300,000 1,284 11,000,000 200 6,000 80,000 Not Applicable (Note 2) Not Applicable (Note 2) Not Applicable (Note 2) 35.7% (Note 4) 35.7% (Note 5) 100.0% % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0 0 0 0 0 0 0 0 0 0 0 272,654,033 16.0% (Note 1) 0 0 0 0 0 0% 0% 0% 0% 0% 463,350 888,894,492 91,702,823 42,572,353 Not Applicable (Note 2) Not Applicable (Note 2) Not Applicable (Note 2) Not Available (Note 3) Not Available (Note 3) Not Available (Note 3) Not Available (Note 3) Not Available (Note 3) Not Available (Note 3) Not Available (Note 3) Not Available (Note 3) 16,782,937 10,500,000 2,632,867 4,000,000 Not Applicable (Note 2) Not Available (Note 3) Not Applicable (Note 2) Not Applicable (Note 2) Not Available (Note 3) Not Applicable (Note 2) 38.8% 52.2% 42.5% 37.0% 99.5% 98.0% 98.0% 9.9% 7.0% 10.5% 1.9% 12.1% 1.0% 37 4.1.10 Share Information TSMC's earnings per share decreased 15.9% in 2007 to NT$4.14 per share. The following table details TSMC's net worth, earnings, dividends and market price per common share in 2007, as well as other data regarding return on investment. Net Worth, Earnings, Dividends, and Market Price Per Common Share Unit: NT$, except for weighted average shares and return on investment ratios 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 Weighted Average Shares (thousand shares) Diluted Earnings Per Share Adjusted Diluted Earnings Per Share (Note 1) Dividends Per Share Cash Dividends Stock Dividends Dividends from Retained Earnings Dividends from Capital Surplus Accumulated Undistributed Dividend Return on Investment Price/Earnings Ratio (Note 3) Price/Dividend Ratio (Note 4) Cash Dividend Yield (Note 5) Note 1: Retroactively adjusted for stock dividends and stock bonuses to employees Note 2: Pending shareholders' approval Note 3: Price/Earnings Ratio = Average Market Price/Adjusted Diluted Earnings Per Share Note 4: Price/Dividend Ratio = Average Market Price/Cash Dividends Per Share Note 5: Cash Dividend Yield = Cash Dividends Per Share/Average Market Price 4.1.11 Dividend Policy 2006 2007 01/01/2008 ~ 02/29/2008 64.80 (Note 1) 52.30 (Note 1) 59.14 (Note 1) 19.67 16.49 25,813,183 4.92 4.81 3.00 0.02 0.03 - 12.30 19.71 5% 73.10 (Note 1) 57.40 (Note 1) 63.72 (Note 1) 18.47 (Note 2) 26,368,250 4.14 (Note 2) 3.00 (Note 2) 0.02 (Note 2) 0.03 (Note 2) - (Note 2) (Note 2) (Note 2) 63.60 49.60 57.99 - - - - - - - - - - - - TSMC's profits may be distributed by way of cash dividend and/or stock dividend. The preferred method of distributing profits is by way of cash dividend. Under TSMC's Articles of Incorporation, stock dividend shall not exceed 50% of the total dividend distribution in any given fiscal year. Except under certain conditions specified in the Company's Articles of Incorporation, TSMC does not pay dividends when there is no profit or retained earnings. 4.1.12 Distribution of Profit The Board adopted a proposal for 2007 profit distribution at its Meeting on February 19, 2008. The proposed profit distribution will be effected according to the relevant regulations, upon the approval of shareholders at the Annual Shareholders' Meeting on June 13, 2008. 38 Proposal to Distribute 2007 Profits 4.2 Issuance of Corporate Bonds Unit: NT$ Bonus to Directors Cash Dividends to Common Shareholders (NT$3.0 per share) Stock Dividends to Common Shareholders (NT$0.02 per share at par value, i.e., 2 shares for each 1,000 shares owned; equivalent to underlying 51,254,208 Shares) (Note 1) Employees' Profit Sharing in Cash Employees' Profit Sharing in Stock (Equivalent to underlying 393,988,308 shares) (Note 2) 176,889,955 76,881,311,145 512,542,080 3,939,883,064 3,939,883,080 Note 1: In addition, it is proposed to capitalize a portion of capital surplus in the amount of NT$768,813,120. For each 1,000 shares owned, each common share holder will be entitled to receive 3 shares from such capitalization of capital surplus, and, together with the 2 shares of stock dividend as mentioned above, 5 shares in total. Note 2: Employee profit sharing paid in stock as a % of total capitalization of stock dividends and employee profit sharing paid in stock: 88.49% Note 3: Pro forma earnings per share with profit sharing paid to directors and employees (cash and stock) expensed at fair market value (based on the closing price at the end of fiscal year): NT$3.06 According to the Company's Articles of Incorporation, TSMC shall allocate no more than 0.3% of earnings available for distribution (net income after a regulatory required deduction for prior years' losses and contributions to legal and special reserves) as a bonus to directors, and not less than 1% as bonus to employees. 2006 Profit Distribution Set Aside as Directors & Supervisors Compensation, and Employee Profit Sharing: Board Resolution (02/06/2007) Amount (NT$) Amount (NT$) 285,799,875 285,799,875 4,572,797,994 4,572,797,994 Actual Result Underlying Number of Shares - - Dilution (%) - - 4,572,798,010 4,572,798,010 457,279,801 1.73% Directors & Supervisors Compensation (Cash) Employee Profit Sharing in Cash Employee Profit Sharing in Stock Total 9,431,395,879 9,431,395,879 - - 4.1.13 Impact to 2008 Business Performance and EPS Resulting from Stock Dividend Distribution: Not applicable. 4.2.1 Corporate Bonds As of 02/29/2008 Issuance Issuing Date Denomination Offering Price Total Amount Coupon Rate Tenure Guarantor Trustee Underwriter Legal Counsel Auditor Repayment Outstanding Domestic Unsecured Bond ( ) 01/10/2002 - 01/24/2002 NT$1,000,000 NT$5,000,000 Par NT$15,000,000,000 Tranche A: 2.60% p.a. Tranche B: 2.75% p.a. Tranche C: 3.00% p.a. Tranche A: 5 years Maturity: 01/10/2007 - 01/22/2007 Tranche B: 7 years Maturity: 01/10/2009 - 01/24/2009 Tranche C: 10 years Maturity: 01/10/2012 - 01/24/2012 None TC Bank Not Applicable Yan-an International Law Office TN Soong & Co Bullet NT$12,500,000,000 Redemption or Early Repayment Clause None Covenants Credit Rating Other Rights of Bondholders Customary Covenants twAAA (Taiwan Ratings Corporation, 09/12/2007) Conversion Right None Not Applicable Amount of Converted or Exchanged Common Shares, ADRs or Other Securities as of 02/29/2008 Dilution Effect and Other Adverse Effects on Existing Shareholders Custodian None None 4.2.2 Convertible Bond: None. 4.2.3 Exchangeable Bond: None. 4.1.14 Buyback of Common Stock Buyback Plan Purpose Period As of 02/29/2008 4.2.4 Shelf Registration: None. Second Buyback Plan For the shareholders' interest 11/14/2007 ~ 12/31/2007 4.2.5 Bond with Warrants: None. 4.3 Preferred Shares Planned Buyback Price Range (NT$) 43.20 ~ 94.20 per common share Class and Number of Shares Bought Back 800,000,000 common shares 4.3.1 Preferred Share: None. Value of Shares Bought Back (NT$) 48,466,957,100 Number of Shares Cancelled or Transferred (Note) 0 Accumulated Number of Treasury Shares Held (Note) 800,000,000 common shares Accumulated Treasury Shares Held as a % of Total Outstanding Shares 3.03% Note: The shares bought back were subsequently cancelled in March 2008. 4.3.2 Preferred Share with Warrants: None. 39 4.4 Issuance of American Depositary Shares Issuing Date 10/08/1997 11/20/1998 Issuance & Listing NYSE NYSE 01/12/1999 - 01/14/1999 NYSE 07/15/1999 NYSE 08/23/1999 - 09/09/1999 NYSE 02/22/2000 - 03/08/2000 NYSE 04/17/2000 NYSE 06/07/2000 - 06/15/2000 NYSE Total Amount (US$) 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 Offering Price Per ADS (US$) 24.78 15.26 Units Issued 24,000,000 12,094,000 17.75 2,000,000 24.516 12,094,000 28.964 5,486,000 57.79 6,560,000 Underlying Securities TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) 56.16 4,000,000 TSMC Common Shares from Selling Shareholders 35.75 32,667,800 Cash Offering and TSMC Common Shares from Selling Shareholders Common Shares Represented 120,000,000 60,470,000 10,000,000 60,470,000 27,430,000 32,800,000 20,000,000 163,339,000 Rights & Obligations of ADS Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable 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 ADSs Outstanding (Note1) 24,000,000 46,222,650 48,222,650 71,407,859 76,893,859 83,453,859 87,453,859 (Note 2) Citibank, N.A. New York Citibank, N.A. Taipei Branch 144,608,739 (Note 3) Trustee Depositary Bank Custodian Bank Apportionment of Expenses for Issuance & Maintenance Terms and Conditions in the Deposit Agreement & Custody Agreement See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details Closing Price Per ADS (US$) 2007 01/01/2008 - 02/29/2008 High Low Average High Low Average 11.74 9.11 10.32 10.24 7.99 9.24 Note 1: TSMC has in aggregate issued 813,544,500 ADSs since 1997, which, if taking into consideration stock dividend distributed over the period, would amount to 1,136,896,859 ADSs. As of February 29, 2008, total number of outstanding ADSs was 1,129,367,405 after 7,529,454 ADSs were redeemed. Stock dividends distributed in 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006 and 2007 was 45%, 23%, 28%, 40%, 10%, 8%, 14.08668%, 4.99971%, 2.99903% and 0.49991% respectively. Note 2: 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. Note 3: All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to issuance of ADSs were borne by TSMC and the selling shareholders, while maintenance expenses such as annual listing fees and accountant fees were borne by TSMC. 40 05/14/2001 - 06/11/2001 NYSE 06/12/2001 11/27/2001 NYSE NYSE 02/07/2002 - 02/08/2002 NYSE 11/21/2002 - 12/19/2002 NYSE 07/14/2003 - 07/21/2003 NYSE 11/14/2003 NYSE 08/10/2005 - 09/08/2005 NYSE 05/23/2007 NYSE 240,999,660 297,649,640 320,600,000 1,001,650,000 160,097,914 908,514,880 1,077,000,000 1,402,036,500 2,563,200,000 20.63 20.63 16.03 16.75 8.73 10.40 10.77 8.6 10.68 11,682,000 14,428,000 20,000,000 59,800,000 18,348,000 87,357,200 100,000,000 163,027,500 240,000,000 TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders 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 TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders 58,410,000 72,140,000 100,000,000 299,000,000 91,740,000 436,786,000 500,000,000 815,137,500 1,200,000,000 Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable 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 156,290,739 170,718,739 259,006,235 318,806,235 369,019,413 485,898,166 585,898,166 864,210,597 1,128,739,639 (Note 2) See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details 41 4.5 Status of Employee Stock Option Plan 4.5.1 Issuance of Employee Stock Options Employee Stock Options Granted Approval Date by the Securities & Futures Bureau Issue (Grant) Date Number of Options Granted Percentage of Shares Exercisable to Outstanding Common Shares Option Duration Source of Option Shares Vesting Schedule Shares Exercised Value of Shares Exercised (NT$) Shares Unexercised Original Grant Price Per Share (NT$) Adjusted Exercise Price Per Share (NT$) Percentage of Shares Unexercised to Outstanding Common Shares Impact to Shareholders' Equity First Grant 06/25/2002 08/22/2002 18,909,700 0.10154% 10 years New Common Share 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 13,074,921 484,990,600 7,378,713 NT$53.0 NT$32.9 0.02792% Second Grant 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% 1,025,657 35,888,631 380,872 NT$51.0 NT$31.7 0.00144% Third Grant 06/25/2002 03/07/2003 6,489,514 0.03485% 10 years New Common Share 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 1,034,539 30,912,280 6,400,862 NT$41.6 NT$25.9 0.02422% Dilution to Shareholders' Equity is Limited Dilution to Shareholders' Equity is Limited Dilution to Shareholders' Equity is Limited 4.5.2 Employee Stock Options Granted to Management Team and to Top 10 Employees with an Individual Grant Value over NT$30,000,000 Title Chairman President & Chief Executive Officer Senior Vice President Senior Vice President Senior Vice President Senior Vice President Vice President Name Morris Chang (Note 1) Rick Tsai (Note 1) Mark Liu (Note 1) Stephen T. Tso (Note 1) Kenneth Kin (Note 1) C.C. Wei (Note 1) Jack Sun (Note 1) Number of Options Granted (Note 2) % of Shares Exercisable to Outstanding Common Shares 3,814,296 0.01443% Vice President & General Counsel Richard Thurston (Note 1) Note 1: TSMC granted options to certain of its officers (as listed above) as a result of their voluntary selection to exchange part of their profit sharing for stock options in 2003. This includes a voluntary exchange by Chairman Morris Chang in his capacity as Chief Executive Officer. Note 2: Number of options granted includes the additional shares due to stock dividend distributed in 2004, 2005, 2006 and 2007. 4.6 Status of New Share Issuance in Connection with Mergers and Acquisitions TSMC did not issue new shares in connection with mergers or acquisitions in 2007, and as of the date of this Annual Report. 4.7 Financing Plans and Implementation: Not applicable. 42 Fourth Grant 06/25/2002 06/06/2003 23,090,550 0.12399% 10 years New Common Share 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 10,185,496 404,387,594 14,367,090 NT$58.5 NT$36.4 0.05436% Fifth Grant 10/29/2003 12/03/2003 842,900 0.00416% 10 years Sixth Grant 10/29/2003 02/19/2004 15,720 0.00008% 10 years New Common Share 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% New Common Share 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 217,218 11,435,449 436,154 NT$66.5 NT$51.3 0.00165% 2,764 136,430 12,566 NT$63.5 NT$48.9 0.00005% Seventh Grant 10/29/2003 05/11/2004 11,167,817 0.05510% 10 years New Common Share 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 4,787,202 216,488,294 5,609,165 NT$57.5 NT$44.2 0.02123% Eighth Grant 10/29/2003 08/11/2004 135,300 0.00058% 10 years New Common Share 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 55,669 2,205,709 77,663 NT$43.8 NT$38.9 0.00029% As of 12/31/2007 Ninth Grant 01/06/2005 05/17/2005 10,742,350 0.04620% 10 years New Common Share 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2,077,447 100,132,951 7,212,205 NT$54.3 NT$48.2 0.02729% Dilution to Shareholders' Equity is Limited Dilution to Shareholders' Equity is Limited Dilution to Shareholders' Equity is Limited Dilution to Shareholders' Equity is Limited Dilution to Shareholders' Equity is Limited Dilution to Shareholders' Equity is Limited Exercised Unexercised Shares Exercised Exercise Price Per Share Value of Shares Exercised (NT$) % of Shares Exercised to Outstanding Common Shares Shares Unexercised Adjusted Grant Price Per Share Value of Shares Unexercised (NT$) As of 12/31/2007 % of Shares Unexercised to Outstanding Common Shares 116,662 29.9 3,488,194 0.00044% 3,697,634 25.9 95,768,721 0.01399% 43 5. OPERATIONAL HIGHLIGHTS 44 DEDICATION 45 5.1 Business Activities 5.2 Technology Leadership 5.1.1 Business Scope 5.2.1 R&D Organization and Investment TSMC's business scope is IC foundry and associated services. The TSMC increased its research and development investment and Company excels in all aspects of its business, including expanded its world-class R&D organization in 2007, strengthening its semiconductor process technology research and development, wafer lead in providing best-in-class semiconductor technologies and manufacturing, logistics management, capacity utilization, customer design solutions to its customers. The Company also expanded its service, and associated services such as design services, mask R&D in mainstream and derivative technologies, advanced CMOS and manufacturing, wafer probing, in-house bumping and testing. TSMC system-on-chip (SoC). R&D expenditure reached NT$17.9 billion, strives to provide the best overall value to customers; the success of while R&D staff grew by 14.5% during the same period. The TSMC's business is manifested in the success of its customers. Company will continue to invest significant amounts in research and 5.1.2 Customer Applications development in 2008. TSMC has accelerated its developments of transistor, memory, and Over the past 20 years, more than 500 customers worldwide have interconnect technologies with a new R&D organization. During relied on TSMC to manufacture chips that are used across the entire 2007, the R&D organization once again proved its value by providing spectrum of electronic applications, including computers and a first-to-market portfolio of 45nm foundry technology as well as the peripherals, information appliances, wired and wireless industry's first 32nm capability. TSMC also expanded its external R&D communications systems, automotive and industrial equipment, partnerships and alliances with world-class research institutions. For consumer electronics such as DVDs, digital TVs, game consoles, example, TSMC is a core member of IMEC, the respected European digital still cameras (DSCs), and many other applications. CMOS R&D consortium. TSMC also has a partnership agreement with The rapid evolution of end products drives our customers to utilize conduct exploratory research and modeling in advanced CMOS, TSMC's innovative technologies and services, while at the same time beyond CMOS, and special "more than Moore" technologies. In spurring TSMC's own development of technology. As always, success addition, TSMC has strengthened its collaborative research with key depends on leading rather than following industry trends. partners on design-process optimization. TSMC also continues to 5.1.3 Shipments and Gross Sales in 2007 and 2006 promote innovation and the advancement of technology. fund nanotechnology research at major universities worldwide to NXP, a semiconductor company with world-class technology, to Unit: Shipments (8-inch equivalent wafers) /Gross Sales (NT$ thousands) 2007 2006 Shipments Gross Sales Shipments Gross Sales 1,442,285 38,066,322 1,087,883 30,945,735 6,255,368 246,329,084 5,670,064 246,018,463 These research efforts enable the Company to offer its customers industry-leading, first-to-market technology and design solutions, helping to ensure their product success in this complex and challenging nanometer era. 53 3,641 104 8,548 R&D Expenditures (Amount: NT$ thousnads) 303,427 12,192,114 438,599 21,227,574 15,945 43,148 3,471,751 19,104,387 13,968 41,045 3,050,487 17,959,341 1,458,283 41,541,714 1,101,955 34,004,770 6,601,943 277,625,585 6,149,708 285,205,378 2006 2007 16,076,432 17,946,322 01/01/2008 ～02/29/2008 3,656,210 Wafer Package Other Total Domestic Export Domestic Export Domestic Export Domestic Export 5.1.4 Production in 2007 and 2006 Unit: Capacity/Output (8-inch equivalent wafers) /Amount (NT$ thousands) Year 2007 2006 Wafers Capacity 8,289,788 7,061,856 Output 7,861,951 7,154,333 Amount 164,625,063 147,668,232 5.2.2 R&D Accomplishments in 2007 R&D Highlights ● 45 Nanometer Technology 2007 was a outstanding year for TSMC's 45nm technology. In the third quarter of 2007, we extended our technology leadership in the foundry sector with qualification and delivery of the first 45nm low- power technology (N45LP) including advanced 193nm immersion lithography, competitive performance-enhancing silicon strains, and extreme low-k inter-metal dielectric material. Our N45LP is believed to have the world's best density and speed at the lowest standby leakage for wireless/RF SoC and handheld applications. 46 TSMC's leadership in immersion lithography and its success in 45nm Overlay performance was also raised to a new level consistent with technology also paved the road for its successful development of the requirements of our 45nm and 40nm volume productions, which 40nm technology. Both high-performance and low-power 40nm had the tightest design rules in the industry. technologies have demonstrated both best-in-class performance and density with good yield. The Company expects to wrap up its development of the 45nm and 40nm technology portfolios in 2008. ● Long-term Research 2007 was also a great year for TSMC in its expansion of long-term research. One of the technological breakthroughs reported by the As a part of TSMC's shift towards building stronger and tighter NXP-TSMC Research Partnership was a revolutionary embedded foundry-customer co-development relationships for advanced memory technology with superior performance, up to 1000 times technology, very intensive customer engagement and collaboration faster than traditional non-volatile memories, coupled with scalability were involved throughout the development of both the 45nm and and reduced power consumption. The estimated power consumption 40nm technologies. This win-win business model was successfully is at least one order of magnitude lower than existing solutions. This demonstrated as TSMC's new 45nm technology enabled and technology will be helpful, for example, to prevent data stream accelerated customer success. For example, one key TSMC customer interruptions and increase the security of transactions while using successfully placed phone calls using the world's first 45nm 3G near field communication (NFC) to complete mobile payment cellular phone chip in 2007. transactions or content upload. TSMC's 45nm and 40nm technologies extended the Company's Another breakthrough was a quartz-replacement resonator for industry leadership not only on technical metrics such as producing smaller and thinner clocks in silicon chips than currently performance, power and density, but also in terms of development using traditional quartz crystals. This makes it possible to embed milestones and customer shuttle verifications. The Company provided clocks into smart cards or SIM cards, which can be used to improve its customers with the first-to-market cyber shuttle for both the the cryptographic protection of smart cards. 45nm and 40nm technologies. First-wave customers have already used more than 200 shuttle blocks. There was also the excellent progress on the next-generation ● 32 Nanometer Technology In 2007, TSMC led the industry in demonstrating the first 32nm technology, which supported both analog and digital functionalities. The 0.15µm2 high-density SRAM cell was realized using 193nm immersion lithography. The full functionality of the 2Mb SRAM test transistor technology in 2007. The research team demonstrated high- performance FinFET devices featuring an optimized gatestack. Another example was the improvement of power consumption in low operational power CMOS devices. Using rapid circuit-based optimization, power consumption was effectively reduced by 80%. chip was proven with the smallest bit-cell at the 32nm node. This leading-edge technology was optimized for low power, high density Spectrum of Technologies Beyond the highlights above, TSMC continued to develop a broad and manufacturing margins with optimal process complexity. TSMC mix of new technologies. The Company accelerated its SoC roadmap, plans to provide complete digital, analog and RF functions, as well as including embedded DRAM (eDRAM) and RF with earlier availability, high-density memory capabilities at the 32nm node for integrated RF higher integration and more variants. We are on our way to bring up and SoC applications. 45nm RF and eDRAM availabilities by 3 to 6 months after the readiness of the logic platform. TSMC also demonstrated a general-purpose 32nm technology with functional SRAMs intended for high-end ASIC and graphics applications. In addition, the Company has made excellent progress ● Embedded DRAM Embedded DRAM is important for many applications, such as game in 32nm high-K/metal gate technology for high performance consoles, digital TVs, networking, base stations, and hard-disk drives. applications. Early feasibility results were published by TSMC in 2007. TSMC's eDRAM is fully compatible with the Company's logic ● Immersion Lithography Immersion lithography provides better depth of focus and enables the industry to continue scaling beyond the 65nm node, all the way to 22nm. It has been more than 5 years since Dr. Burn Lin of TSMC proposed immersion lithography. TSMC was the first to demonstrate 90nm SRAM using the immersion scanner in 2004. The Company was also the first to achieve single-digit immersion-related defects on 300mm wafers in early 2006, demonstrating 65nm customer product chip yield in July 2006. The Company yielded 32Mb SRAM with 45nm process in December 2006, and qualified 45nm at the end of 2007. TSMC led the industry in achieving manufacturing-ready immersion lithography for the 45nm generation. The Company developed technology. In 2007, TSMC qualified 65nm embedded DRAM technologies for both high-speed and low-power applications. These technologies will enter production in early 2008. Several customer products have already been successfully piloted. We also successfully demonstrated 45nm low-power (N45LP) eDRAM and made excellent progress in 40nm general-purpose eDRAM technology. ● Mixed Signal/Radio Frequency (MS/RF) Technology TSMC completed 65nm MS/RF low-power product qualification in 2007 and successfully moved into production. The technology has enabled one leading cellular phone company to tape out its cellular product with proven SoC functionality. 45nm MS/RF technology was also developed in partnership with early customers. This technology has provided approximately 15% corner tightening for Metal-Oxide- proprietary techniques and resist systems to produce nearly defect- Metal capacitors, an improvement that was also retrofitted to 90nm free immersion lithography patterning for volume production. and 80nm technologies, as well as providing a wide-range inductor 47 for various design applications. A HVMOS was also developed to 5.2.3 Intellectual Property fulfill power-management design needs. ● Silicon Germanium BiCMOS Technology Through intensive yield improvement efforts, TSMC's silicon A strong portfolio of intellectual property strengthens TSMC's technology leadership. In 2007, TSMC received 462 U.S. patents, 322 Taiwanese patents, 111 PRC patents, and other patents issued in germanium (SiGe) BiCMOS technology achieved the same yield level countries around the world. We are in the process of implementing a as its MS/RF CMOS technology. Combined with the Through-Silicon- unified model for TSMC's intellectual capital management. Strategic Via (TSV) technology developed in 2007, TSMC's SiGe BiCMOS technology can now provide a high-performance, cost-effective solution to power amplifier applications, enabling a higher level of design integration. A variety of passive devices were also developed, including a high-density (2.0Ff/ µm2) metal-insulator-metal (MiM) capacitor, 46KA ultra-thick-metal, and a linear poly/sinker capacitor, for cost-effective yet high-performance MS/RF design. considerations and close alignment with business objectives now drive the creation, management and use of our intellectual property. At TSMC, we have built a process to extract value from our intellectual property by aligning our intellectual property strategy with our R&D, marketing, and corporate development strategies. Intellectual property rights protect our freedom to operate, enhance our competitive position, and give us leverage to participate in many ● CMOS Image Sensor Technology A high-performance, low-cost 0.11µm 4T CMOS image sensor (CIS) profit-generating activities. process with aluminum-copper backend was successfully developed We have worked continuously to improve the quality of our and qualified by TSMC in 2007. This new process aimed at high-end intellectual property portfolio and to reduce the cost of maintaining imaging applications with a small pixel size of 1.75µm and high it. We expect to continue investing in our intellectual property resolutions of greater than three megapixels. It was compatible with portfolio and intellectual property management system to ensure TSMC's 0.13µm CMOS logic, which enabled SoC platforms in mobile that we receive maximum business value from our intellectual phones, digital cameras, security sensors, automotive applications property rights. and other image sensor markets. Color backside illumination image capability was also successfully demonstrated. This can extend 5.2.4 Future R&D Plans 0.11µm CIS technology to smaller pixel sizes (1.4 µm) and ultra-high resolutions (larger than eight megapixels). ● Flash/Embedded Flash Technology In 2007, TSMC also completed the qualification of its automotive- In 2008, TSMC plans to focus on the development and qualification of the 32nm logic/mixed signal technology platforms as well as the exploratory study of a 22nm logic technology platform. Both nodes should have superior transistor performance, high-k dielectric and grade application using embedded flash (embFlash) processes at the metal gate processes. Other development projects will include 45nm 0.18µm technology node. Production is well underway. In addition, embedded DRAM; 45nm/40nm mixed signal/RF for communications 0.13µm embFlash technology was also qualified for commercial applications; embedded flash IP development in 90nm/65nm embFlash prototype activities. For next-generation embFlash technology, a new cell with scaling capabilities of the 90nm and technologies; and 90nm CMOS image sensor technology. 65nm nodes was demonstrated. A test vehicle with 32Mb flash IP has Following the significant successes of TSMC's advanced technologies been proven with good yield. ● Mask Technology Mask technology is an integral part of advanced lithography. TSMC in 2007, the Company plans to continue to grow the R&D organization. TSMC will further expand the 300mm R&D pilot line to speed up 32nm qualification with its early engagement customers and the 22nm exploratory research programs with world-leading has developed proprietary resolution-enhancement techniques that research institutions. We plan to reinforce our exploratory were highly optimized with our in-house mask-making technology, development work on new transistors and technologies such as 3D including optical proximity correction (OPC), subresolution-assist structures, MRAM, strained-layer CMOS, and novel 3D-IC devices with mask features, and phase-shifting masks. In 2007, we implemented a TSV. The study of the fundamental physics of nanometer CMOS low-cost, high-precision OPC methodology based on our proprietary hardware and software approaches. Our OPC methodology significantly improved the cycle time, while maintaining the high accuracy required for both the 45nm and 32nm technology nodes. Fast Lithography Process Check (LPC) technology and Design For Manufacturing (DFM) were also being extended to the 45nm node. TSMC mask facilities featured state-of-the-art E-beam mask writers, etchers, and inspection and repair tools for both R&D and production usages at 45nm, and were moving steadily towards 32nm. TSMC's strength in mask technology provides significant benefits to our customers in terms of technical excellence, quality, fast cycle time, and one-stop service. transistors is a core aspect of our efforts to improve the understanding and guide the design of transistors at advanced nodes. The findings of these studies are being applied to ensure our continued industry leadership at the 32nm and 22nm nodes. One of TSMC's goals is to extend Moore's law through innovative in-house work, as well as by collaborating with industry leaders and academia to push the envelope in finding cost-effective technologies and manufacturing solutions. TSMC plans to continue working closely with international consortia and photolithography equipment suppliers to ensure the timely development of 193nm high-NA scanner technology, liquid immersion lithography, EUV lithography, and massively parallel E- 48 Beam direct-write technologies. These technologies are now fundamental to our process development efforts at the 32nm and 22nm nodes and beyond. Best-in-Class Cycle Time Management One of the keys to our customer's success is TSMC's ability to deliver products with short demand fulfillment cycle times. To achieve this for our customers, TSMC has developed a sophisticated TSMC plans to continue its collaboration with mask inspection manufacturing scheduling and dispatching system, implemented equipment suppliers to develop viable inspection techniques. This industry-leading automated materials handling systems, and collaborative partnership should help to ensure that we maintain our employed effective lean manufacturing approaches. TSMC strives leadership position in mask quality and cycle time, and continue to unceasingly to improve the productivity of both people and meet aggressive R&D, prototyping and production requirements. equipment, and its cycle times are among the best in the Overall, TSMC will continue to invest heavily to expand our R&D capabilities. With a highly competent and dedicated R&D team and unwavering commitment to innovation, we are confident of our Flexible Manufacturing Management Flexible Manufacturing is a crucial element that addresses the ability to deliver the best and most cost-effective SoC technologies fluctuations in demand forecast. In most cases, TSMC has the ability for our customers, and to support our business growth and to meet unanticipated customer demand surges, thanks in large part semiconductor industry. profitability. TSMC R&D future major project summary: Project Name Description Risk Production (Estimated Target Dates) 40nm logic platform technology and applications 40nm general-purpose and low-power SoC technologies with embedded memory and analog/RF 32nm logic platform technology and applications Next-generation technology for both digital and analog products 22nm logic platform technology and applications Exploratory technology for both digital and analog products 3D-IC Next-generation lithography Long-term research Low cost solution with better form factor and performance for SIP EUV and multiple E-Beam to extend Moore's Law Special SoC technology (including new NVM, MEMS, RF, analog) and 15nm transistors The above plans account for roughly 70% of total corporate R&D budget in 2008. 2008 2009 2011 2010-2011 2011-2012 2012-2014 5.3 Manufacturing Excellence 5.3.1 Efficiency Fast Yield Ramp Up Fast yield ramp for new products is a key factor behind the success of TSMC and its customers. The Company has developed a comprehensive technology transfer methodology extending from R&D to production in order to shorten new technology learning curve. TSMC's seamless technology transfer also enables consistent yields when customers transfer production to a second internal fab. In 2007, the Company delivered a significant breakthrough on 65nm ramp-up by shortening the yield learning curve by 20% in comparison with that of the previous generation, 90nm. Accurate Delivery TSMC has a proven record of providing customers with consistent on- time delivery. To become even more responsive to our customers' need for flexibility in delivery, TSMC has re-engineered its demand fulfillment system with a state-of-the-art manufacturing scheduling system. The system further enhances the accuracy of our deliveries to our customers. to our cluster fab capability as well as extensive know-how in performance matching for both tools and Fabs. Knowledge Management TSMC has built the industry's leading, state-of-the-art knowledge management, and Best Known Method (BKM) systems. TSMC maintains a vast repository system for key knowledge. This database also features a sophisticated expert system that embeds the captured knowledge into TSMC's engineering system. Inventory Management TSMC made continuous improvements in materials and inventory management in 2007. Demand and supply information from the materials management and other related departments was integrated using a system of real-time updates and reports. The system is intended to improve the Company's responsiveness to wafer demand forecasts. The speed and accuracy of TSMC's response has been improved through real-time demand information sharing. This ensures that the Company can continue to appropriately respond to ever-changing industry conditions. 5.3.2 GigaFabTM TSMC's 12-inch fabs are a key part of its manufacturing strategy. TSMC currently operates two 12-inch GigaFabsTM — Fab 12 and Fab 14. The combined capacity of the two GigaFabsTM reached 388,000 12-inch wafers or 873,000 8-inch equivalent wafers in the fourth quarter of 2007. Production within these two facilities supports 0.13µm, 90nm, 65nm and 45nm process technologies. Part of the capacity is reserved for research and development work and currently supports 32nm and beyond technology development. These GigaFabsTM are the center stones of TSMC's unceasing efforts to improve manufacturing excellence and to deliver manufacturing breakthroughs. Not only do these GigaFabsTM have the inherent scale advantages over smaller fabs, they also enable greater flexibility to adapt to demand fluctuations, improve product quality and yields, accelerate yield learning and time to volume, shorten cycle times, and minimize costly product re-qualification. 49 5.3.3 Raw Materials and Supply Chain Risk Management In 2007, TSMC brought together materials management, fab operations, risk management and quality system management in one project to improve supply chain risk management. TSMC worked together with suppliers throughout 2007 to prepare safety inventories, improve their quality, and enhance supply chain risk management. Raw Materials Supply Major Suppliers Market Status Procurement Strategy F.S.T. MEMC S.E.H. Siltronic SUMCO Air Products ATMI BASF MGC TYS AZ Shin-Etsu Chemical Nissan Sumitomo T.O.K. Air Liquide Air Products Linde Taiyo Nippon Sanso These five suppliers together provide over 85% of the world's wafer supply. TSMC's suppliers of silicon wafers are required to pass stringent quality certification procedures. Each supplier has multiple manufacturing sites in order to meet customer demand, including plants in North America, Asia, and Europe. TSMC procures wafers from multiple sources to ensure adequate supplies for volume manufacturing and to appropriately manage supply risk. TSMC maintains competitive price and service agreements with its wafer suppliers, and when necessary enters into strategic and collaborative agreements with key suppliers. TSMC regularly reviews the quality, delivery, cost and service performance of its wafer suppliers. The results of these reviews are incorporated into TSMC's subsequent purchasing decisions. A periodic audit of each wafer supplier's quality assurance systems ensures that TSMC can maintain the highest quality in its own products. These five companies are the major suppliers for bulk and specialty chemicals. Most suppliers have relocated many of their operations closer to TSMC's major manufacturing facilities, thereby significantly improving procurement logistics. The suppliers' products are regularly reviewed to ensure that TSMC's specifications are met and product quality is satisfactory. These five companies are the major suppliers for photoresist. TSMC works closely with its suppliers to ensure that they have adequate production lead time to supply the required products to TSMC. TSMC conducts periodic audits of the suppliers' quality assurance systems to ensure that they meet TSMC's standards. These four companies are the major suppliers of specialty gases. The majority of the four suppliers are located in different geographic locations, minimizing supply risk to TSMC. The products of these four suppliers are interchangeable. TSMC has long-term contracts with these suppliers to ensure supply stability and service quality. In addition, the availability of other domestic suppliers enables TSMC to secure better purchase terms for these gases. TSMC conducts periodic audits of the suppliers' quality assurance systems to ensure that they meet TSMC's standards. Major Materials Raw Wafers Chemicals Photoresist Gases 5.3.4 Quality TSMC is committed to providing customers with the best quality wafers for their products. Our Quality and Reliability (Q&R) services champion the partnership between customers and the entire TSMC organization to achieve "quality on demand". The goal of quality on demand is to fulfill customers' needs regarding time to market, reliable quality, and market competition over a broad range of products. In the design stage, Q&R technical services assist customers to design-in their product reliability requirements. Q&R also works with R&D on process development in order to assure reliability performance, not only for a variety of circuit devices, but also for different types of IC packages. Q&R has deployed systems to ensure robust quality in managing production dynamics as the Company meets customers' business requirements. To sustain production quality and minimize risks to customers when deviations occur, manufacturing quality monitoring and event management span all critical stages, from raw material supply, mask-making, and real-time in-process monitoring, to wafer sort and assembly and customer field quality performance. Advanced failure and materials analysis techniques are also developed and effectively applied to identify the root causes for process development, customer new product development, and product manufacturing issues. In 2007, nanoprobing was used to accelerate yield learning, and newly developed dopant profiling and high spatial resolution strain measurement techniques were effectively used to support development activities. TSMC Q&R is also responsible for leading the Company towards the ultimate goal of zero-defect production, using continuous improvement programs. Periodic customer feedback indicates that products shipped from TSMC have consistently met or exceeded their field quality requirements in the marketplace. In 2007, TSMC conformed to ISO/TS 16949 requirements for a sixth consecutive year, continuing to meet the automotive industry's stringent quality requirements. This year, TSMC met and received the IECQ's QC08000 standard certification for control of hazardous materials. 50 5.4 Customer Partnership 5.4.1 Customers TSMC's global customers have diverse product specialties and excellent performance records in various segments of the semiconductor industry. Fabless customers include Altera Corporation, Advanced Micro Devices, Inc., Broadcom Corporation, Marvell Semiconductor Inc., NVIDIA Corporation, Qualcomm Inc. and VIA Technologies Inc. IDM customers include Analog Devices Inc., Freescale Semiconductor Inc., NXP Semiconductors (formerly Philips Semiconductors), and Texas Instruments Inc. In 2006 and 2007, there was only one customer from which the sales was accounted for more than 10% of our gross sales. For more information, please refer to the "Financial Information" on page 81 of Annual Report (II). Customer Service TSMC is committed to providing the best services to our customers and believes that customer service is critical to enhancing customer loyalty. In turn, customer loyalty leads to higher levels of customer retention and to expansion of our business relationships. TSMC's goal is to maintain our position as the most advanced and largest provider of semiconductor manufacturing technologies and foundry services. TSMC believes that achieving this goal will help retain existing customers, attract new customers, and strengthen customer partnerships. To facilitate customer interaction and information access on a real- time basis, TSMC has established a wide range of web-based services covering applications in design, engineering, and logistics collaborations. They are collectively branded as eFoundryTM. Customer Satisfaction TSMC regularly conducts surveys and reviews to ensure that customers' needs and wants are being adequately understood and addressed. Continual improvement plans supplemented by customer feedback are an integral part of this business process. Market Expansion and Penetration TSMC continues to diversify its customer base while supporting the growth of our existing customers. TSMC acquired more than 80 new customers in 2007. 5.4.2 Technology Platform and Design Enablement Design is becoming increasingly intertwined with manufacturing as technology advances into deep sub-micron nodes. TSMC is dedicated to serving its customers by lowering the barriers to advanced technology design. TSMC and its alliance partners offer comprehensive design infrastructure to support our technology platform. In April 2007, TSMC announced the 45nm Design Ecosystem to accelerate the adoption of new technologies. TSMC's design ecosystem offers a portfolio of process-proven libraries and IP, design tools and reference flow. In June 2007, TSMC unveiled Reference FlowTM 8.0 to address 45nm design challenges. It features a powerful statistical analysis methodology, a set of new power management techniques and an array of design for manufacturing enhancements. Reference FlowTM 8.0 further strengthens the Reference FlowTM 7.0 released in 2006. The higher standards of accuracy are critical to achieve silicon success with 45nm and beyond. To achieve new levels of accuracy for TSMC's advanced process technologies, TSMC also announced the Active Accuracy Assurance Initiative. The initiative provides an on-going evolution of accuracy standards for all stages of the design and manufacturing value chain. From 2006 to 2007, TSMC established three design centers in North America. This activity allowed TSMC to recruit local design talent to further enhance TSMC capability on design enablement. 5.5 Employees 5.5.1 Human Capital Human capital is one of the most important assets of TSMC. TSMC is committed to create a corporate culture that embraces innovation and diversity. Believing that an inspiring work environment promotes innovation, TSMC strives to provide employees with a work environment that is challenging yet enjoyable and rewarding. In 2007, TSMC was named the "Most Admired Company in Taiwan" by Commonwealth Magazine for the 11th consecutive year. At the end of 2007, TSMC had 23,020 employees worldwide, among whom 2,520 were managers and 8,814 were professionals. Female managers comprised 11.4% of all managers and non-Taiwanese nationals comprised 11.5% of all TSMC managers and professionals. At the end of February 2008, TSMC's total workforce, managers and professionals were 22,973, 2,526 and 8,793 respectively. The following tables summarize TSMC's workforce structure: TSMC Workforce Structure Managers Professionals Assistant Engineers/Clericals Technicians Gender Average Age Male (%) Female (%) Average Years of Service Total 12/31/2006 12/31/2007 02/29/2008 2,313 8,222 893 10,818 46.9% 53.1% 31.6 5.4 22,246 2,520 8,814 844 10,842 47.9% 52.1% 32.1 5.8 23,020 2,526 8,793 865 10,789 52.0% 48.0% 32.2 6.0 22,973 51 TSMC Workforce Structure by Level of Education ● Direct Labor (DL) Training: DL training enables production line 12/31/2006 12/31/2007 02/29/2008 2.6% 28.0% 19.6% 20.6% 29.2% 2.9% 29.7% 19.9% 18.9% 28.6% 3.0% 29.8% 19.8% 18.9% 28.5% Ph.D. Master's Bachelor's Other Higher Education High School 5.5.2 Recruitment Attracting new employees and retaining and motivating the existing employees are key to the success of TSMC's human resources strategy. TSMC believes in equal opportunity employment. Recruitment is conducted via an open selection process and is based on the candidate's ability to fulfill the needs of each position, regardless of race, gender, age, religion, nationality, or political affiliation. In order to seek out the best talents around the world, TSMC employs a number of recruiting programs, including academic corporate collaboration program, Joint Development Program in Campus, summer internship, job fair, Technology Talents Career Symposium. During 2007, TSMC recruited 163 managers, 1,685 professionals and 894 technicians. 5.5.3 People Development Continuous learning is the cornerstone of TSMC's employee development strategy. A tailor-made individual development plan is established for each employee that suits the employee's development needs. Employees are provided with a comprehensive network of resources, including on-the-job training, coaching, mentoring, job rotation, on-site courses, e-learning, and external learning opportunities. TSMC provides employees with a wide range of on-site general, professional and management training programs. During 2007, TSMC conducted 872 internal training sessions totaling 698,564 training hours. A total of 245,988 attendees participated in those trainings. The total training expenses were NT$61,931,620. TSMC's training programs include: ● Management Training: Management training includes management development training programs tailored to the needs of managers at all levels. Management training programs include New Manager Program, Experienced Manager Program, and Senior Manager Program, as well as other elective courses. ● General Training: General training refers to training required by government regulations and company policies, such training includes industry-specific safety, workplace health and safety, quality, and fab emergency response team training. ● Professional/Functional Training: Professional/functional training provides technical and professional training required by various functions within the company, offering training courses on equipment engineering, process engineering, accounting, and information technology, among others. employees to acquire the knowledge, skills, and attitude they need to perform their job well. It also helps employees pass required tests in order to be certified for operating equipments. DL training includes DL Skill Training, Technician "Train-the-Trainer" Training, and Manufacturing Leader Training. ● New Employee Training: New Employee training includes new employee orientation and pre-job training. The training consists of new employee basic training and job orientation. In addition to the on-site training courses, TSMC has established "Procedures for Employee Training and Education" in order to encourage employees to participate in various training programs. TSMC provides education subsidies for employee development that best suits company and individual development objectives. 5.5.4 Employee Satisfaction TSMC has continuously promoted programs devoted to employee benefits, employee care, employee rewards, and employee communication. TSMC works hard to provide a work environment that is challenging yet enjoyable. Employee Benefits Programs ● TSMC Employee Welfare Committee plans and implements various welfare programs, including hobby clubs, art and cultural seminars, employee outings, TSMC Sports Day, TSMC Family Day. In addition, TSMC also provides holiday bonuses, wedding bonuses, funeral and emergency subsidies. ● To ensure that employees have all the conveniences that they need while at work, TSMC provides on-site cafeteria, dry-cleaning, travel, banking, haircut services, housing, and commute assistances. ● Health improvement programs and psychological consultation services are provided to employees to ensure the physical and psychological well being of all employees. ● In order to promote healthy living, during 2007, TSMC Sports Center was established. It is open to all employees and their family members and provides a variety of workout facilities. TSMC provides Children Centers at Hsinchu and Tainan sites to meet employees' needs for childcare. Employee Rewards ● Innovation and customer partnership are key elements of TSMC's core values. TSMC annual innovation awards and customer partnership awards were established to recognize and reward employees who contribute to TSMC's overall success. ● In addition to the TSMC annual innovation awards and customer partnership awards, there are a number of other award programs to recognize employees' achievements, including the Outstanding Engineer Award for each fab and the Total Quality Excellence Conference Award. Additionally, TSMC also recommends its employees for external awards. In 2007, TSMC employees were granted a number of national awards, including the National Model Worker Award, the Top 10 National Outstanding Managers Award, the Outstanding Engineer Award, the Outstanding Young Engineer Award, and the National QCC Silver Award. 52 Employee Communication TSMC is committed to keeping an open communication channel with and form of the distribution are determined by the Board of Directors based on the Compensation Committee's recommendation and are its employees. Regular communication meetings are held for the subject to shareholders' approval at the Annual General Meeting. The various levels of managers. Periodic employee satisfaction surveys are Company determines the amount of the profit-sharing bonus based conducted. Silicon Garden Magazine, a quarterly TSMC magazine, is on operating results and industry practice in the Republic of China. published covering things from work to fun. These all help Individual awards are based on each employee's job responsibility, maintaining the free flow of information between TSMC and its contribution and performance. employees. In order to ensure employees' opinions and complaints can be heard, with a locally competitive base salary, the Company grants short-term an employee opinion/complaint submission mechanism is and long-term bonuses as a part of total compensation. The In addition to providing employees of TSMC's overseas subsidiaries established, which includes: performance bonus is a short-term incentive and is granted in line with local regulations, market practices, and the overall operating ● A confidential complaint channel headed personally by a vice performance of each subsidiary. The long-term incentive bonus is president for employees to file complaints related to major awarded based on TSMC's financial performance and is vested over management, financial and auditing issues. the course of several years in order to encourage long-term employee ● A communication channel managed by the Employee Relations commitment and development within the Company. department for employees to express their opinions regarding their work and the working environment in general. 5.5.7 Retirement Policy ● Call Service Center and employee care teams in each fab to deal with issues related to employees' work and personal life. TSMC's retirement policy is in accordance with the provisions in the Labor Standards Law and Labor Pension Act of the Republic of China. TSMC is committed to establishing and promoting policies and measures for ensuring gender equality in accordance with 5.5.8 Ethics and Business Conduct employment laws and sexual harassment prevention policies to create a fair working environment for employees of both sexes. TSMC's corporate image and professional reputation are among the Company's most important intangible assets. Honorable, honest and Between January 1, 2007 and February 29, 2008, there were no labor legitimate business practices are one of the cornerstones of TSMC's disputes or settlements that resulted in a loss to TSMC. long-term success. TSMC has established an Ethics Code (the "Code") 5.5.5 Retention TSMC works hard to retain outstanding employees. We are committed to: to assist its employees in understanding the meaning of honorable and honest business practices, and to provide employees with guidelines to follow and implement. This Code covers the behavioral norms for all employees in their dealings with each other as well as with the Company, customers, ● Setting up retention and counseling plans for different groups. For suppliers, investors and the general public. In case of violations of the example, TSMC employs a "Buddy System" to help new employees Code, the individual faces appropriate disciplinary action. to fit in quickly through assistance provided by senior employees. ● Enabling employees to enhance professional knowledge and to pursue further career development through numerous employee development programs. ● Establishing various employee welfare and care programs to encourage employees to develop their careers and at the same time to maintain work-life balance. 5.5.6 Compensation TSMC's compensation program includes cash compensation and profit sharing. Cash compensation includes a monthly salary and a variable quarterly incentive bonus. The employee is entitled to a profit sharing of no less than one percent of TSMC's net income after deducting the losses of previous years and contributions to legal and special reserves. The purpose of this profit-sharing bonus is to reward employees' contributions appropriately, to encourage employees to work consistently to ensure the success of TSMC, and to link employees' interests with those of TSMC's shareholders. The amount 53 5.6 Material Contracts Technology Cooperation Agreement Term of Agreement: 2004 - 2008 Contracting Party: Koninklijke Philips Electronics N.V. (Philips) (In September 2006, Philips assigned its rights and obligations under this agreement to Philips Semiconductors International B.V., which has now been renamed NXP B.V.) Summary: The parties cross license certain semiconductor patents under the agreement, and TSMC is obligated to pay Philips (now NXP B.V.) a fixed amount of license fees for patent license coverage obtained for TSMC's benefit. Shareholders Agreement Term of Agreement: Effective as of 03/30/1999 and may be terminated as provided in the agreement Contracting Parties: Koninklijke Philips Electronics N.V. (Philips) and EDB Investments Pte Ltd. (EDBI) (In September 2006, Philips assigned its rights and obligations under this agreement to Philips Semiconductors International B.V. which has now been renamed NXP B.V. In November 2006, NXP B.V. and TSMC purchased all SSMC shares owned by EDBI; EDBI is no longer a contracting party to this agreement.) Summary: TSMC, Philips and EDBI had formed a Singapore joint venture "Systems on Silicon Manufacturing Company Pte Ltd." (SSMC) for Manufacturing, License, and Technology Transfer Agreement Term of Agreement: 04/01/2004 - 03/31/2006, automatically renewable for successive one-year terms until and unless both parties decide otherwise by mutual consent in writing. Contracting Party: Vanguard International Semiconductor Corporation (VIS) Summary: VIS reserves certain capacity to manufacture TSMC products on mutually agreed terms. TSMC may also transfer certain technologies to VIS, for which it will in return receive royalties from VIS. Patent License Agreement Term of Agreement: 11/01/2002 - 10/31/2012 Contracting Party: A multinational company Summary: The parties entered into a cross licensing arrangement for certain semiconductor patents. TSMC pays license fees to the contracting party. Patent License Agreement Term of Agreement: 07/01/2002 - 06/30/2009 Contracting Party: A multinational company Summary: The parties entered into a cross licensing arrangement for certain semiconductor patents. TSMC pays license fees to the contracting providing IC foundry services. Philips Semiconductor (now NXP B.V.) party. 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 Contracting Party: Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) Summary: TSMC agreed to transfer certain process technologies to SSMC, and SSMC agreed to pay TSMC a certain percentage of the net selling price of SSMC products. Patent License Agreement Term of Agreement: 12/20/2007 - 12/31/2017 Contracting Party: A multinational company Summary: The parties entered into a cross licensing arrangement for certain semiconductor patents. TSMC pays license fees to the contracting company. Patent License Agreement Term of Agreement: 01/01/2001 - 12/31/2011 Contracting Party: A multinational company Summary: The parties entered into a cross licensing arrangement for certain semiconductor patents. TSMC pays license fees to the contracting party. The Second Amendment to the Amended and Restated Joint Technology Cooperation Agreement Term of Agreement: 07/16/2001 - 12/31/2008 (terminated effective January 2008) Contracting Parties: STMicroelectronics N.V. Philips Semiconductors International B.V. (now NXP B.V.) Freescale Semiconductor, Inc. Summary: The parties entered into a joint technology cooperation arrangement for the development of certain high-performance and advanced semiconductor technologies. TSMC has terminated its participation in this cooperation. 54 Technology Development and License Agreement Term of Agreement: 12/04/2003 - 12/03/2007 Contracting Party: Freescale Semiconductor, Inc. Summary: The parties agreed jointly to develop certain advanced SOI process technologies and to cross license related intellectual property rights. Settlement Agreement Term of Agreement: 01/30/2005 - 12/31/2010 Contracting Parties: Semiconductor Manufacturing International Corp. (SMIC) and certain of its subsidiaries Summary: The parties settled their patent infringement and trade secret misappropriation disputes, whereby SMIC agrees to pay TSMC US$175 million over six years. Research and Development Collaboration Agreement Term of Agreement: 01/01/2007 - 12/31/2010 Contracting Party: NXP B.V. Summary: The parties entered into research and development collaboration to develop advanced semiconductor technologies. Asset Sale and Purchase Agreement Effective Date of Agreement: 10/8/2007 Contracting Party: Atmel North Tyneside, Atmel Corporation Summary: The parties entered into an asset sale and purchase agreement, whereby TSMC purchases Atmel North Tynesides' semiconductor production equipment and tools for US$82 million. Note: TSMC is not currently party to any other material contract, other than contracts entered into in the ordinary course of our business. The Cpmpany's "Significant Commitments and Contingencies" are disclosed in the "Financial Information" of Annual Report (II), pages 28-29. 55 6. FINANCIAL HIGHLIGHTS 56 TRANSPARENCY 57 TSMC's trinity of strengths, technology leadership, manufacturing excellence, and customer partnership, are built on a foundation of financial strength. In 2007, we generated positive free cash flow for the 6th consecutive year. We also returned a record amount of cash to our shareholders through cash dividends and share buybacks. With our strong balance sheet and our consistent profitability, we believe we are well positioned for our future growth and for delivering increasing long-term returns to our shareholders. 6.1 Financial Status and Operating Results 6.1.1 Financial Status Unconsolidated Unit: NT$ thousands Item Current Assets Fixed Assets Other Assets Total Assets Current Liabilities Long-term Liabilities Total Liabilities Capital Stock Capital Surplus Retained Earnings Total Shareholders' Equity 2007 174,299,286 234,564,558 19,017,626 551,772,623 43,800,810 20,880,411 64,681,221 264,271,037 53,732,682 218,864,571 487,091,402 2006 193,676,010 228,235,359 14,295,330 573,584,904 42,905,154 22,698,466 65,603,620 258,296,879 54,107,498 197,124,532 507,981,284 ● Analysis of Deviation over 20% The increase in other assets was mainly due to increase in deferred charges and deferred income tax assets. ● Major Impact on Financial Position The above deviations over 20% had no major impact on TSMC's financial position. ● Future Plan on Financial Position: Not applicable. Consolidated Unit: NT$ thousands Item Current Assets Fixed Assets Other Assets Total Assets Current Liabilities Long-term Liabilities Total Liabilities Capital Stock Capital Surplus Retained Earnings Equity Attributable to Shareholders of the Parent Total Shareholders' Equity ● Analysis of Deviation over 20% 2007 249,822,329 260,252,187 24,329,385 570,865,226 48,706,007 31,473,648 80,179,655 264,271,037 53,732,682 218,864,571 487,091,402 490,685,571 2006 260,317,168 254,094,190 19,178,650 587,485,159 46,860,531 31,486,512 78,347,043 258,296,879 54,107,498 197,124,532 507,981,284 509,138,116 The increase in other assets was mainly due to increase in deferred charges and deferred income tax assets. ● Major Impact on Financial Position The above deviations over 20% had no major impact on TSMC's financial position. ● Future Plan on Financial Position: Not applicable. 58 Difference (19,376,724) 6,329,199 4,722,296 (21,812,281) 895,656 (1,818,055) (922,399) 5,974,158 (374,816) 21,740,039 (20,889,882) Difference (10,494,839) 6,157,997 5,150,735 (16,619,933) 1,845,476 (12,864) 1,832,612 5,974,158 (374,816) 21,740,039 (20,889,882) (18,452,545) % -10% 3% 33% -4% 2% -8% -1% 2% -1% 11% -4% % -4% 2% 27% -3% 4% 0% 2% 2% -1% 11% -4% -4% 6.1.2 Operating Results Unconsolidated Unit: NT$ thousands Item Gross Sales Sales Returns & Allowances Net Sales Cost of Sales Gross Profit Unrealized Gross Profit from Affiliates Realized Gross Profit Operating Expenses Income from Operations Non-operating Income & Gains Non-operating Expenses & Losses Income before Income Tax Income Tax Expenses Income before Cumulative Effect of Changes in Accounting Principles Cumulative Effect of Changes in Accounting Principles Income after Income Tax ● Analysis of Deviation over 20% 2007 319,167,299 (5,519,655) 313,647,644 176,223,224 137,424,420 265,106 137,159,314 24,907,267 112,252,047 10,834,698 2,335,339 120,751,406 (11,574,313) 109,177,093 - 109,177,093 2006 319,210,148 (5,328,513) 313,881,635 164,163,235 149,718,400 - 149,718,400 23,418,541 126,299,859 11,596,727 3,090,087 134,806,499 (7,550,582) 127,255,917 (246,186) 127,009,731 Difference (42,849) (191,142) (233,991) 12,059,989 (12,293,980) 265,106 (12,559,086) 1,488,726 (14,047,812) (762,029) (754,748) (14,055,093) (4,023,731) (18,078,824) 246,186 (17,832,638) % 0% 4% 0% 7% -8% - -8% 6% -11% -7% -24% -10% 53% -14% - -14% Decrease in non-operating expenses and losses: The decrease was mainly due to less loss on settlement and disposal of financial instruments and foreign exchange loss, offset in part by an increase in provision for litigation loss. Increase in income tax expenses: The increase was primarily due to higher taxable income in 2007. ● Sales Volume Forecast and Related Information For additional details, please refer to "Letter to Shareholders" on pages 4-5 of this Annual Report. Consolidated Unit: NT$ thousands Item Gross Sales Sales Returns & Allowances Net Sales Cost of Sales Gross Profit Operating Expenses Income from Operations Non-operating Income & Gains Non-operating Expenses & Losses Income before Income Tax Income Tax Expenses Income before Cumulative Effect of Changes in Accounting Principles Cumulative Effect of Changes in Accounting Principles Net Income Net Income Attributable to Shareholders ofthe Parent 2007 328,336,172 (5,705,576) 322,630,596 180,280,385 142,350,211 30,628,304 111,721,907 11,933,803 2,013,684 121,642,026 (11,709,626) 109,932,400 - 109,932,400 109,177,093 2006 322,883,499 (5,476,328) 317,407,171 161,597,081 155,810,090 28,545,396 127,264,694 9,705,592 3,608,078 133,362,208 (7,773,711) 125,588,497 1,606,749 127,195,246 127,009,731 Difference 5,452,673 (229,248) 5,223,425 18,683,304 (13,459,879) 2,082,908 (15,542,787) 2,228,211 (1,594,394) (11,720,182) (3,935,915) (15,656,097) (1,606,749) (17,262,846) (17,832,638) % 2% 4% 2% 12% -9% 7% -12% 23% -44% -9% 51% -12% - -14% -14% 59 ● Analysis of Deviation over 20% Increase in non-operating income and gains: The increase was primarily due to an increase in interest income, gain on settlement and disposal of financial instruments, and valuation gain on financial instruments. Decrease in non-operating expenses and losses: The decrease was mainly due to less loss on settlement and disposal of financial instruments, valuation loss on financial instruments and foreign exchange loss, offset in part by an increase in provision for litigation loss. Increase in income tax expenses: The increase was primarily due to higher taxable income in 2007. ● Sales Volume Forecast and Related Information For additional details, please refer to "Letter to Shareholders" on pages 4-5 of this Annual Report. 6.1.3 Cash Flow Unconsolidated Unit: NT$ thousands Cash Balance 12/31/2006 Net Cash Provided by Operating Activities in 2007 Net Cash Outflows from Investing and Financing Activities in 2007 Cash Balance 12/31/2007 Remedy for Cash Shortfall Investment Plan Financing Plan 100,139,709 174,116,992 (201,834,599) 72,422,102 - - ● Analysis of Cash Flow NT$174.1 billion net cash provided by operating activities: Mainly from net income and depreciation/amortization. NT$65.9 billion net cash used in investing activities: Primarily for capital expenditures. NT$135.9 billion net cash used in financial activities: Mostly for the payout of cash dividends and repurchase of common shares. ● Remedial Actions for Cash Shortfall: As a result of positive cash flows and ample cash on-hand, remedial actions are not required. ● Cash Flow Projection for Next Year: Not applicable. Consolidated Unit: NT$ thousands Cash Balance 12/31/2006 Net Cash Provided by Operating Activities in 2007 Net Cash Outflows from Investing and Financing Activities in 2007 Cash Balance 12/31/2007 Remedy for Cash Shortfall Investment Plan Financing Plan 117,837,192 183,766,668 (206,617,372) 94,986,488 - - ● Analysis of Cash Flow NT$183.8 billion net cash provided by operating activities: Mainly from net income and depreciation/amortization. NT$70.7 billion net cash used in investing activities: Primarily for capital expenditures. NT$135.9 billion net cash used in financial activities (including effect of exchange rate changes): Mostly for the payout of cash dividends and repurchase of common shares. ● Remedial Actions for Cash Shortfall: As a result of positive cash flows and ample cash on-hand, remedial actions are not required. ● Cash Flow Projection for Next Year: Not applicable. 6.1.4 Major Capital Expenditure Major Capital Expenditure and Sources of Funding Unit: NT$ thousands Plan Actual or Planned Source of Capital Total Amount as of 12/31/2007 Production Facilities and Equipment Cash flow generated from operations R&D Equipment Cash flow generated from operations 302,408,147 15,016,577 Status of Actual or Projected Use of Capital 2004 75,797,890 2,000,055 2005 75,040,652 3,869,192 2006 73,643,829 3,746,173 2007 77,925,776 5,401,157 60 Expected Future Benefits With the above-mentioned capital expenditures, it is estimated that Organization Description ● RM Steering Committee: TSMC's annual production capacity will increase by approximately 1 Is composed of functional heads; million 8-inch equivalent wafers in 2008. In addition, we expect 2009 Reviews risk control progress; and and 2010 production capacity will also increase. Identifies and approves the prioritized risk lists. 6.1.5 Investments Exceeding 5% of Company's Paid-in ● RM Working Committee: Capital in 2007: Not applicable. Is composed of representatives from each function; 6.2 Risk Management Aligns functional ERM activities; and Follows up the risk control action plan. TSMC and its subsidiaries are committed to proactively and cost- ● RM Division: effectively integrating and managing strategic, operational, financial Coordinates the RM Working Committee activities; and hazardous risks together with potential consequences to Facilitates functional risk management activities; and operations and revenue. Consolidates ERM reports into the RM Steering Committee. TSMC has established an Enterprise Risk Management (ERM) program 6.2.2 Strategic Risks based on TSMC's corporate vision as well as its long-term sustainability and responsibility to both industry and society. The program is overseen by the Audit Committee. Industry Developments The semiconductor and microelectronics industries are affected by demand for end products, e.g., personal computers, handsets, and The ERM program seeks to provide for TSMC's adequate management consumer electronics. Our semiconductor foundry business is of risks on behalf of its stakeholders, shareholders and other affected by such market conditions, and most of our customers also interested parties. operate in these industries. Because our business is, and will continue to be, dependent on the requirements of semiconductor and 6.2.1 Risk Management (RM) Organization Chart microelectronics companies for our services, periods of downturn and Audit Committee President & CEO RM Steering Committee Materials Management and Risk Management Senior Vice President RM Working Committee RM Division overcapacity may lead to reduced demand for our services. To mitigate such risks, TSMC covers a broad spectrum of customer and product portfolios to avoid significant impact from events in any single semiconductor or microelectronics industry. Changes in Technology Technologies used in the semiconductor industry are constantly changing. If we do not anticipate these technological changes and rapidly develop new and innovative technologies, or if our competitors unforeseeably gain sudden access to more advanced technologies, we may not be able to win bids for advanced foundry services on competitive terms. Hence, we have concentrated on maintaining a competitive edge in research and development. Staying at the leading edge of technology development is and always will be a top priority effort for TSMC. Decrease in Demand and Average Selling Price Since our sales revenue is derived from customers in the personal computer, communication device and consumer electronics industries, demand in these industries may adversely affect demand for our services and place pressure on our average selling prices. TSMC maintains a broad range of customer and product portfolios to address such risks. Our premium services and proven trustworthiness also enable TSMC to maintain more stable pricing. 61 Competition The markets for our foundry services are highly competitive with our raw materials from sole-source suppliers. TSMC evaluates the risk of supply disruptions from single-source suppliers and assists those other dedicated foundry service providers as well as integrated device suppliers in lowering production and transportation risk by helping manufacturers. Our competition may, from time to time, decide to suppliers improve quality and safety. Also, TSMC monitors supplier undertake aggressive pricing tactics that may lead to lost customer site inventory for earlier detecting of supply risk. To lower the risk of business or decreased average selling prices for TSMC. Such risks, potential price increases, TSMC seeks to establish long-term contracts however, are mitigated as TSMC's technology leadership, with critical suppliers. TSMC also continues to look for additional manufacturing excellence, and customer partnership create a very sources for single-sourced materials. high bar for competition to undercut simply by lowering prices. Risks Associated with Changes in the Political and Regulatory Environment TSMC's management team closely monitors both domestic and ● Equipment Our operations and ongoing expansion plans depend on our ability to obtain a significant amount of equipment and related services from a limited number of suppliers in a market that is characterized, foreign political and regulatory developments that could have a from time to time, by intense demand, limited supply and long material impact on TSMC's financial operations, and sets related risk delivery cycles. During such times, supplier-specific or industry-wide management procedures. lead times for delivery can be as long as four to ten months or more. Supplier-specific or industry-wide shortages of equipment could In March 2007, the Accounting Research and Development result in longer delivery times. If we are unable to obtain equipment Foundation of the Republic of China issued an interpretation that in a timely manner, we may be unable to fulfill our customers' orders, requires companies to expense the bonus payable to directors, which could negatively impact our financial condition and results of supervisors and employees, rather than recording it as an operations. To better manage equipment lead time, we have appropriation of earnings. The Company has applied this ruling to its implemented various business models with suppliers to shorten the financial statements for the fiscal year beginning on or after January procurement lead time. We also provide our projected demand for 1, 2008. The new requirement will increase the costs of goods sold various items to many of our equipment suppliers to help them plan and operation expenses, and will affect the Company's annual net their production in advance. income. However, the Company will adopt measures such as increasing productivity and cost savings to minimize the impact of this requirement. 6.2.3 Operational Risks Risks Associated with Intellectual Property Rights Our ability to compete successfully and to achieve future growth will depend in part on the continued strength of our intellectual property portfolio. There can be no assurance that, as our business or business models expand into new areas, we will be able to independently Risks Associated with Capacity Expansion To meet customer demand, TSMC increased its annual production develop the technology, trade secrets, software or know-how necessary to conduct our business or that we can do so without capacity by approximately 1.23 million 8-inch equivalent wafers in infringing the intellectual property rights of others. We may have to 2007. The total average billing utilization rate for 2007 was 93%. As rely increasingly on licensed technology from others. To the extent of the date of this Annual Report, the benefits brought about by such that we rely on licenses from others, there can be no assurance that capacity expansion have been in line with TSMC's expectations. TSMC we will be able to obtain all of the licenses we desire in the future on has established systems to evaluate and forecast market demand and terms we consider reasonable or at all. The lack of necessary licenses refers to these forecasts and evaluations when expanding capacity. could expose us to claims for damages and/or injunctions from third Risks Associated with Sales Concentration In 2006 and 2007, our 10 largest customers accounted for 53% and parties, as well as claims for indemnification by our customers in instances where we have contractually agreed to indemnify our customers against damages resulting from infringement claims. We 51%, respectively, of our net sales. In particular, our largest customer have received, from time to time, communications from third parties in 2007 accounted for more than 10% of our net sales. Since a asserting that our technologies, manufacturing processes, the design relatively limited number of customers contribute a significant portion of our revenue, unforeseen loss or significant reduction of a major customer's business may adversely affect TSMC's performance. TSMC mitigates such risk by placing customer partnership in its core strategy, and works closely with customers from end to end to provide the best overall value, so that such unforeseen events are minimized. Risks Associated with Purchase Concentration ● Raw Materials TSMC procures raw materials from multiple sources whenever possible to ensure adequate supplies for volume production and to of the integrated circuits made by us or the use by our customers of semiconductors made by us may infringe their patents or other intellectual property rights. And, because of the nature of the industry, we may continue to receive such communications in the future. In some instances, these disputes have resulted in litigation. While we actively enforce and protect our intellectual property rights, there can be no assurance that our efforts will be adequate to prevent the misappropriation or improper use of the protected technology, trade secret, software or know-how. If we fail to obtain or maintain certain government, technology or intellectual property licenses and, if litigation relating to alleged mitigate purchase concentration risk. However, we procure some of intellectual property matters occurs, it could prevent us from 62 manufacturing or selling particular products or applying particular These SMIC-related matters are still pending in their respective technologies, which could reduce our opportunities to generate forums, and their specific outcome cannot be determined at this revenues. time. Management intends to protect vigorously its intellectual property rights to maintain shareholder value. Risks Associated with Litigations To protect its intellectual property rights, trade secrets and other In April 2004, UniRAM Technology, Inc. filed an action against MoSys intellectual assets, TSMC may initiate, as appropriate, litigation Inc., TSMC and TSMC North America in the U.S. District Court for the against former employees or third parties. As is the case for most Northern District of California, alleging patent infringement and companies in the high-technology industry, TSMC receives from time trade secret misappropriation and seeking injunctive relief and to time notices from third parties alleging that TSMC's technologies, damages. UniRAM later dropped its patent infringement claims designs, and manufacturing processes may infringe patents or other during the course of litigation, but TSMC and TSMC North America's intellectual property rights. TSMC takes these matters seriously, inequitable conduct counterclaim against UniRAM's asserted patents investigates all such claims, and takes appropriate action as the remained. In 2007, the trade secret misappropriation portion of the circumstances require. case went to trial, and in September 2007, a jury rendered a verdict awarding US$30.5 million to UniRAM Technology, Inc. The court held In December 2003, we commenced legal action in several forums a separate bench trial on the inequitable conduct counterclaims in against SMIC and certain of its subsidiaries for several causes of January 2008, but has yet to issue a decision as of the date of this action including but not limited to patent infringement and trade Annual Report. As a procedural matter, the jury verdict cannot be secret misappropriation. The dispute with SMIC was settled under a entered into the record while the inequitable conduct issues remain settlement agreement entered into in January 2005 and pursuant to undecided. Nevertheless, as a result of the verdict, we have accrued which SMIC is paying us US$175 million in installments over six years. the full amount of the jury award by reporting it as a separate line Under its terms, we agreed not to sue SMIC for itemized acts of item in the income statements. The charge is classified as part of our alleged trade secret misappropriation except in the event of breach. non-operating expenses. We intend to continue to pursue remedies In addition, we and SMIC agreed to cross license each other's certain against this verdict. patents through December 2010. The settlement agreement also provided for the dismissal without prejudice of all pending legal Other than the matters provided above, TSMC was not involved in actions between the two companies, including matters pending in any other material litigation during 2007 and as of the date of this the U.S. District Court for the Northern District of California, Superior Annual Report. Court of California for Alameda County, the U.S. International Trade Commission and Hsinchu District Court in Taiwan. The settlement does not grant a license to SMIC to use any of our trade secrets nor Risks Associated with Mergers and Acquisitions In 2007, and as of the date of this Annual Report, TSMC did not does it result in TSMC transferring any technology or providing any complete any merger and acquisition activities. technical assistance to SMIC. In August 2006, TSMC, TSMC North America, and WaferTech filed a complaint with the Superior Court of the State of California in the County of Alameda against Semiconductor Manufacturing International Corporation (SMIC), Risks Associated with Recruiting and Retaining Qualified Personnel The company's growth and development rely on the continuing SMIC (Shanghai), SMIC (Beijing) and SMIC Americas, alleging breach service and contributions of our executive officers and skilled of a settlement agreement reached in 2005 and misappropriation of management and technical personnel. Losing any of these personnel trade secrets. The suit sought injunctive relief along with monetary without adequate replacement could jeopardize our business. While damages. In September 2006, SMIC filed a cross-complaint against us expansion of TSMC's business generates ongoing demand for in the same court alleging breach of settlement agreement, implied personnel, due to the intense competition in recruiting qualified covenant of good faith and fair dealing. SMIC also filed a civil action manpower, we cannot guarantee that our needs can be fulfilled in against us in November 2006 with the Beijing People's High Court time. We have conducted in-depth personnel analyses, consolidated alleging defamation and breach of good faith. the efforts of all levels of the management, and implemented appropriate strategies and plans to minimize the potential risks/impacts of a deficit in qualified personnel. Future R&D Plans and Expected R&D Spending For additional details, please refer to "Future R&D Plans" on pages 48- 49 of this Annual Report. In September 2007, the court in the California action ruled on TSMC's motion for preliminary injunction. While the court did not grant a full preliminary injunction against SMIC, the court found that TSMC has demonstrated a significant probability of establishing that SMIC retains and is using TSMC Information in SMIC's 0.13µm and smaller technologies that should have been returned under the Settlement Agreement, and there is significant threat of serious irreparable harm to TSMC if SMIC were to disclose or transfer that information before final resolution of the case. Therefore, the court ordered that, effective immediately, SMIC must provide 10 business days advance notice and an opportunity for TSMC to object before disclosing items enumerated in the Court Order to SMIC's third party partners. 63 Changes in Corporate Image and Impact on Company's Crisis Management TSMC has established an excellent corporate image based on its firm For example, during the period from January 1, 2008 to February 29, 2008, the U.S. dollar has depreciated 4.7% against the NT dollar, which may have a material impact on our results of operations. TSMC belief in its core values, its rigorous corporate governance, and its hedged its foreign exchange exposure resulting from its assets and outstanding operations. The Company has won recognition such as: liabilities mainly through cross currency swaps and currency forward contracts. ● Commonwealth magazine's benchmark for Most Admired Company in Taiwan ● Commonwealth magazine's Best Corporate Citizenship for a large company ● Inflation Our most significant export market is North America and we do not believe that inflation in the R.O.C. or North America had a material ● GlobalViews magazine's Corporate Social Responsibility award impact on our results of operations in 2007. However, we cannot ● Number one in the Asian Wall Street Journal's survey of the top 10 ensure that there will be no significant variations in the inflation rates companies in Taiwan in the future or any such variation would not have a material impact ● First place in Cheers magazine's survey of Company Most Admired on our results of operations. by the New Generation ● The Executive Yuan's Enterprise Sustainable Development Award ● The Ministry of Economic Affairs' Outstanding Innovation Achievement Award ● The Environmental Protection Administration's National Enterprise Environmental Protection Award Risks Associated with High-risk/High-leveraged Investment; Lending, Endorsements, and Guarantees for Other Parties; and Financial Derivative Transactions TSMC did not make high-risk or high-leveraged financial investments during 2007 and up to the date of this report. Neither did TSMC ● IR Magazine's award for Best Corporate Governance in Taiwan and provide lending, endorsements or guarantees for other parties in the Hong Kong and Best Investor Relations in Taiwan. period. We believe this recognition is the strongest proof of TSMC's positive The financial transactions of a "derivative" nature that TSMC entered corporate image. into were strictly for hedging purposes and not for any trading or speculative purpose. For more information, please refer to the In addition, the Company has established departments such as Brand "Financial Information" on page 64 of Annual Report (II). Management, Customer Service, Public Relations, Employee Relations, Investor Relations, Risk Management, Internal Audit, and To control various types of financial transactions, the company has the TSMC Education and Culture Foundation to further improve established internal policies and procedures based on sound financial TSMC's corporate image and to take preparatory measures for the and business practices, all in compliance with the relevant rules and prevention and control of potential reputational risk. regulations issued by the Taiwan Securities and Futures Bureau. TSMC policies and procedures include "Policies and Procedures for Financial Risks Associated with Change in Management In 2007, and as of the date of this Annual Report, there were no such Derivative Transactions", "Procedures for Lending Funds to Other Parties", "Procedures for Acquisition or Disposal of Assets", and risks for TSMC. 6.2.4 Financial Risks Internal Management of Economic Risks ● Interest Rate Fluctuation TSMC's exposure to interest rate risks derives primarily from long- "Procedures for Endorsement and Guarantee". Risks Associated with Impairment Charges Under R.O.C. GAAP and U.S. GAAP, TSMC is required to evaluate our long-lived assets and intangible assets for impairment whenever there is an indication of impairment. If certain criteria are met, TSMC is required to record an impairment charge. TSMC is also required term debt obligations that are incurred in the normal course of under R.O.C. GAAP and U.S. GAAP to evaluate goodwill for business. In order to limit its exposure to interest rate risks, TSMC impairment at least on an annual basis or whenever a triggering finances its funding needs through issuance of long-term, fixed-rate debt. On the asset side, the primary objective of our investments in fixed income securities is to preserve principal in highly liquid markets. In order to maintain our liquidity profile, the majority of fixed income securities are at the short end of the yield curve. event or an indication of impairment occurs. We currently are not able to estimate the extent or timing of any impairment charge for future years. Any impairment charge required may have a material adverse effect on our net income. ● Foreign Exchange Volatility Over half of our capital expenditures and manufacturing costs are denominated in currencies other than NT dollars, primarily U.S. dollars, Japanese yen, and Euros. More than 90% of our sales are denominated in U.S. dollars and currencies other than NT dollars. Therefore, any significant fluctuation to our disadvantage in such The determination of an impairment charge at any given time is based significantly on our expected results of operations over a number of years subsequent to that time. As a result, an impairment charge is more likely to occur during a period when our operating results are otherwise already depressed. TSMC has established systems to closely monitor and evaluate capacity utilization and exchange rate may have an adverse effect on our financial condition. economic cycle. 64 6.2.5 Hazardous Risks TSMC is committed to maintaining a comprehensive risk management system dedicated to the conservation of natural One or more of TSMC's existing shareholders may, from time to time, dispose of significant numbers of their shares. For example, the National Development Fund, one of TSMC's largest shareholders, has sold TSMC shares in form of ADSs in several transactions since 1997. resources, safety of people, and protection of property. In order to In May 2005, Philips, another major shareholder of TSMC, reiterated effectively handle emergencies and natural disasters at each facility, its intention, first announced in October 2003, to gradually and management has developed comprehensive plans and procedures orderly reduce its equity interest in TSMC. that focus on loss prevention, emergency response, crisis management, and business recovery. TSMC has adopted international On March 9, 2007, Philips and TSMC jointly announced a multi-phase standards for ESH management. All TSMC fabs have been ISO 14001 plan to facilitate an orderly exit by Philips from its current certified (Environmental Management System), OHSAS 18001 shareholding in TSMC. Specifically, according to the announced plan, certified (Occupational Health and Safety Management System) and Philips intends to divest its current shareholding in TSMC through QC080000 certified (Hazardous Substance Process Management System). one or more block trades on the Taiwan Stock Exchange, a public offering of our common shares in the form of ADSs, and through participation in share buy-backs conducted by TSMC during a period TSMC pays special attention to emergency preparedness for disasters beginning in 2007 and ending in 2010. such as typhoons, earthquakes, environmental contamination, large- scale product returns, disruption of IT systems, strikes, and The plan's initial step occurred on March 12, 2007, when Philips sold disruptions to the supply of raw materials or water, electricity, gases, approximately US$1.75 billion worth of our common shares over the and public utilities. We have established contingency plans, which Taiwan Stock Exchange through block trades to a few institutional include the establishment of emergency task forces when necessary, investors in Taiwan. Further, the plan's second step was a sale by the preparation of a thorough analysis of the emergency, its impact, Philips in a public offering registered with the U.S. Securities and alternatives, and solution for each possible scenario, and appropriate Exchange Commission of about US$2.56 billion worth of our precautionary and/or recovery measures. Each task force is given the common shares in the form of ADSs on May 18, 2007. It is the responsibility to ensure TSMC's ability to conduct business while intention of TSMC and Philips that no further ADS offerings will be minimizing personal injuries, business disruption, and financial conducted in respect of Philips' shareholding in TSMC. impact under the circumstances. For the year 2007 and up to the date of this Annual Report, there are no reportable material events For the third step of the plan, TSMC conducted a share repurchase that have necessitated the activation of such contingency plans. In program from November 14, 2007 to December 31, 2007, in the 2007, we also conducted the continuous improvement project for amount of approximately US$1.5 billion, and subsequently canceled building anti-seismic capability evaluation and tool anchorage 800 million common shares that had been repurchased. During the fixation. same period, Philips also disposed 800 million of our common shares by selling them in the open market. After the completion of this third We use some combustible materials in manufacturing processes and step, Philips held approximately 5.1% of our total outstanding are therefore subject to explosion and fire risk. We maintain many common shares as of February 29, 2008. overlapping risk prevention and protection systems, as well as comprehensive fire and casualty insurance, including insurance for Last, the plan's fourth step calls for TSMC to conduct, subject to loss of property and loss of profit resulting from business maintaining the current annual cash dividend per share, additional interruption. Nonetheless, our risk management and insurance share repurchase and cancellation programs between 2008 and coverage may not be sufficient to cover all of our potential losses. If 2010, in which Philips has informed TSMC that it intends to tender its any of our fabs were to be damaged or cease operations as a result remaining common shares held in TSMC at such time. Philips may of an explosion, fire, or environmental excursions, it could reduce our also consider selling its remaining common shares held in TSMC to manufacturing capacity and might cause us to lose important specified long-term investors mutually agreeable to Philips and TSMC. customers, thereby having a potentially material adverse impact on our financial performance. In addition to periodic fire protection system inspection and fire fighting drills, we also carried out a corporate-wide fire risk mitigation project focused on management and hardware improvements. 6.2.6 Other Risks Potential Impact and Risks Associated with Sales of Significant Numbers of Shares by TSMC's Directors, and Major Shareholders Who Own 10% or More of TSMC's Total Outstanding Shares The value of TSMC shareholders' investment may be reduced by possible future sales of TSMC shares owned by the major shareholders. There is currently no other shareholder who owns 10% or more of TSMC's total outstanding shares. Other Material Risks During 2007 and as of the date of this Annual Report, TSMC's management is not aware of any other risk event with a potentially material impact on the financial status of the Company. 65 7. CORPORATE SOCIAL RESPONSIBILITY 66 PROMISE 67 TSMC's core value of commitment extends to all aspects of its and corporate carbon asset management. All TSMC facilities continue business, including commitment to the welfare of employees, society, to conduct a GHG inventory on an annual basis. The inventory result and the environment. 7.1 Environmental, Safety and Health Management shows that the major direct GHG emission is perfluorinated compounds (PFCs), which are used in the semiconductor manufacturing process. The primary indirect GHG emission is electricity consumption. TSMC believes its environmental, safety and health practices should TSMC is also taking measures to reduce its emission of greenhouse not only comply with legal requirements, but also measure up to gases. TSMC has endorsed a memorandum of understanding recognized international practices. The Company aims to prevent between the Taiwan Semiconductor Industry Association, the R.O.C. pollution, efficiently use all resources, prevent accidents, improve Environmental Protection Administration, and the World employee safety and health, protect property, and establish a work Semiconductor Council, whereby TSMC is committed to reducing PFC environment that promotes the well-being of our employees and of emissions to 10% below the average of 1997 and 1999 by 2010. This the communities in which we operate. emissions target remains fixed as TSMC continues to grow and expand its manufacturing facilities. The Company is taking the All TSMC manufacturing facilities have received ISO 14001 following measures to reduce emissions in line with certification for environmental management systems and OHSAS recommendations provided by the Intergovernmental Panel on 18001 certification for occupational health and safety management Climate Change (IPCC): systems. TSMC strives for continuous improvement and actively seeks ● Accurate measurement of PFC gas production and the effectiveness to enhance pollution prevention, power and resource conservation, of exhaust gas abatement equipment in order to calculate actual waste reduction, health and safety management, fire and explosion PFC emission volumes prevention and other risks such as earthquakes in order to reduce ● Evaluation of feasible alternatives to greenhouse gases and environmental, safety and health risk. In 2006, TSMC began to adopt gradually replacement of greenhouse gases at all manufacturing the IECQ QC080000 Hazardous Substance Process Management facilities (HSPM) System in order to meet customer needs for management of ● Evaluation and installation of PFC exhaust gas abatement hazardous materials and to meet the European Union's Restriction of equipment, in line with effectiveness and safety considerations Hazardous Substances (RoHS) directive. All TSMC manufacturing facilities were QC080000 certified in 2007. TSMC is committed to communicating with suppliers and contractors Coal-fired power generators are a major source of electricity in Taiwan and emit large amounts of carbon dioxide (CO2). TSMC makes continuous efforts to conserve energy, which reduces both carbon on environmental, safety and health issues and encouraging them to dioxide gas emissions and costs. TSMC has not only adopted energy- improve their ESH performance. In line with this policy, TSMC uses conservative designs for both manufacturing fabs and offices, but priority work management and self-management to govern work has also improved the energy efficiency of facilities during operation. performed by contractors. TSMC requires contractors performing high-risk operations to complete certification for technicians, and to establish their own OHSAS 18001 safety and health management Air and Water Pollution Control TSMC has installed effective air and water pollution control system before bidding on contracts. This self-management is aimed equipment in each wafer fab to meet regulatory emissions standards. at increasing contractors' sense of ownership and responsibility, with In addition, TSMC maintains backup pollution control systems, the goal of promoting safety awareness and technical improvement including emergency power supplies, to lower the risk of pollutant for contractors in the industry. emission in the event of equipment breakdown. TSMC monitors the operations of air and water pollution control equipment centrally TSMC has also conducted on-site ESH audits of local material around the clock and tracks system effectiveness to ensure emitted suppliers' and testing/assembly subcontractors since 2005. In the case air and discharged water quality. of suppliers or subcontractors which performed poorly on ESH audits, TSMC requires these organizations to take preventive and corrective action to improve their ESH performance. TSMC also assists them to improve their ESH performance. 7.1.1 Environmental Protection Greenhouse Gases (GHG) Emission Reduction TSMC is committed to environmental protection and actively participates in international environmental protection programs. In 2005, TSMC was Taiwan's first semiconductor company to make a complete inventory of its GHG and to gain ISO14064 certification for its processes and outputs. The purpose of the inventory was to serve as a reference for TSMC's strategy to reduce GHG, to meet future domestic regulatory requirements, and to prepare for carbon trading Water Conservation To make most effective use of Taiwan's limited water resources, all TSMC fabs make efforts to increase water reclamation rates by adjusting the water usage of manufacturing equipment and improving wastewater reclamation systems. New fabs are able to reclaim 85% of process water, meeting or exceeding the standards of the Science Park Administration and outperforming most semiconductor fabs around the world. TSMC also strives to reduce non-manufacturing-related water consumption, including water used in air conditioning systems, sanitary facilities, cleaning, landscaping and kitchens. 68 Waste Management and Recycling TSMC has established a designated unit responsible for waste controls on high-risk operations and also evaluates the seismic tolerance of facilities and equipment to reduce the risk of earthquake recycling and disposal. To meet the goal of sustainable resource damage. In health management, TSMC maintains regular wellness utilization, TSMC's first priority is to reduce process waste before and professional health programs and also establishes Company-level considering recycling or disposal. TSMC carefully selects waste prevention committees when infectious diseases such as Severe Acute disposal and recycling contractors and performs annual audits of Respiratory Syndrome (SARS) or Avian Influenza pose a potential risk certification documents, site operations and transportation routes to to the Company. ensure legal and proper disposal of waste. Other Environmental Protection Programs TSMC has implemented an environmental accounting system, Working Environment and Employee Safety Protection TSMC's ESH (Environmental, Safety and Health) policy commits to preventing incidents, improving employees' safety and health, allowing each fab to calculate cost savings or profits created by each protecting property and establishing a secure working environment. environmental program. TSMC safety and health management operations apply to: In addition, TSMC conducts "Product Life Cycle Assessments" (Product ● Hardware Safety of Equipment Used by Process, Facilities, IT, LCA), collecting and analyzing data from the entire semiconductor and General Services Departments manufacturing chain from raw materials suppliers to finished In addition to meeting regulatory and internal standards when products, including statistics for such items as energy, raw materials building or rebuilding facilities, TSMC also maintains procedures consumption, and pollution. The product LCA study has established governing new equipment and raw materials management, safety "Eco-Profiles" for all TSMC fabs and will help the Company to meet approvals for bringing new tools online, revising safety rules, seismic future international regulations such as the European Union's protection measures, and other safety measures. "Energy-Using Product" directive. These "Eco-Profiles" can also be provided to customers who require such documentation. ● General Safety Management, Training and Audit All TSMC facilities hold environmental, safety and health committee TSMC also maintains "green procurement" procedures, requiring raw meetings on a monthly basis. TSMC takes preventive measures such materials suppliers to declare that the materials they supply to TSMC as controls on high-risk work, contractor management, chemical do not contain any prohibited substances. This ensures that products safety management, personal protective equipment requirements, manufactured by TSMC comply with customer requirements and the and safety audit management. In addition, TSMC also maintains regulatory requirements of the European Union's RoHS directive. detailed disaster response procedures and performs regular drills to TSMC also encourages employees to use "Green Mark" products in minimize harm to employees and property, as well as the impact on offices, such as recycled paper, desktop PCs, LCD monitors, and society and the environment in the event of a disaster. batteries. TSMC has adopted the standards of Taiwan "Green Building" and U.S. ● Working Environment Measurement TSMC conducts working environment physical and chemical LEED (Leadership in Energy and Environmental Design) to apply on measurements every six months to safeguard employees' health, future new fab and office building design, which may be more including measurement of factors such as noise, air quality, chemical energy and resource efficient than usual designs. In the meantime, exposure, and illumination. The measurement results for each item TSMC is planning to upgrade existing office buildings to comply with must be compliant with regulatory requirements; otherwise LEED standard year by year starting in 2008. corrective action is undertaken. Environmental Compliance Record There were no environmental penalties or fines in 2007. 7.1.2 Safety and Health Safety and Health Management TSMC's safety and health management is built on the framework of the OHSAS 18001 system, and adheres to the management principle of "Plan, Do, Check, Act" to prevent accidents and protect employee safety and health as well as Company assets. Besides accident prevention, TSMC has established emergency response procedures to protect the lives of employees and contractors if disasters should occur, as well as to minimize the negative impact on society and the environment. TSMC communicates to suppliers to reduce potential risks in the operation ● Emergency Response Planning and execution of an effective emergency response requires big-picture thinking and continuous improvement and practice drills. TSMC's emergency response plans include procedures for rapid response to accidents and disaster recovery as well as establishing response procedures for potential disasters. All TSMC fabs conduct major annual emergency response exercises and evacuation drills. TSMC's on-site service contractors also participate in emergency response planning and exercises to ensure cooperation in handling accidents and to effectively minimize damage caused by disasters. In addition to regular emergency response drills held by engineering and facilities departments each quarter, laboratory, canteen, dormitory, and shuttle bus personnel also hold emergency response of production equipment and follows safety control procedures when drills to prepare for events such as chemical leakage, ammonia installing production equipment. The Company places stringent release, fires, and automobile accidents. 69 ● Employee Health Enhancement TSMC provides healthcare and staff assistance services in every fab. TSMC employees enjoy health services such as 24-hour nursing care, annual physical examinations, psychological consultations, stress management programs, workshops, and staff assistance projects. In addition, the Company also provides subsidized or free clinical and dental care services, women's healthcare, acupuncture and massage services and programs. Health enhancement activities include nutritional consultation, weight-loss classes, an acupuncture weight-loss program, carotid and thyroid ultrasound examinations, an endocrinology clinic, a dermatology clinic, bone mineral densitometry examinations and cancer screenings. Canteens also provide healthy meals with high fiber and low fat, as well as all-fruit meals. TSMC fabs have fitness centers with treadmills, exercise equipment, and aerobics classrooms to encourage employees to participate in athletic activity. In addition, all employees can find health information through the Company's healthcare website. Supplier and Contractor Management For the purpose of enhancing its supply chain management, TSMC is committed to communicating with and encouraging its contractors and suppliers to improve their environmental, safety and health performance. By means of communication between senior managers, site audits and experience sharing, TSMC collaborates with major raw materials suppliers and contractors to ensure continual improvement. Contractors performing high-risk activities must lay out clearly- defined safety precautions and preventative measures. In addition, contractors working on high-risk engineering projects must establish OHSAS 18001 systems and the workers must successfully complete work skill training. Environmental, Safety and Health-related Awards in 2007 ● Recognized by the Ministry of Economic Affairs Water Resources Agency for "Excellence in Water Conservation" ● Recognized by the Ministry of Economic Affairs Bureau of Energy for "Excellence in Energy Conservation" ● Recognized by the Ministry of Economic Affairs Industry Development Bureau for "Excellence in Voluntary Greenhouse Gas Reduction" ● Environmental Protection Administration's "Award for Outstanding Achievement in Industrial Waste Disposal, Resources Reduction, and Recycling" ● Recognized by the Tainan Science Park for "Outstanding Achievement in Environmental Protection" ● Recognized by the Executive Yuan Council of Labor Affairs (CLA) for "Excellence in Safety and Health 5-Star Award" ● Recognized by Hsinchu Science Park Administrations for Excellence in Labor Safety and Hygiene ● Chosen for membership in the Dow Jones Sustainability World Index for a seventh consecutive year, and the only Taiwan member since 2003 7.2 TSMC Education and Culture Foundation TSMC established the Education and Culture Foundation in 1998 to coordinate the Company's sponsorship as part of its efforts in corporate social responsibility. The Foundation's resources are directed towards promoting our engagement in four areas: commitment to education, sponsorship of art events, contribution to local communities, and the employee volunteer program. In 2007, marking TSMC's 20th anniversary, the Foundation organized a series of activities to highlight our commitment. We initiated a charity concert to help aboriginal students, collaborated with the renowned Taiwan Literature Camp, sponsored a children's arts education TV program, and expanded the TSMC employee volunteer program. Over the next 20 years, the Company will continue to further do our duty as a leading corporate citizen and make our community a better and more beautiful place to live in. 7.2.1 Commitment to Education The Foundation has been running its "TSMC Esthetic Education Tour" program since 2003. It sponsors underprivileged students from remote school districts on education tours to museums, art galleries, and local historic sites. By 2007, the Foundation had tallied over 50,000 visits on this project. As an extension, in 2007 TSMC commissioned the Public Television Service to produce and broadcast a related children's TV program — An Enchanted Journey through the National Palace Museum. Using lively animation and an in-depth introduction, the program presents the beauty and profusion of the Chinese cultural heritage and makes the artifacts more accessible to young viewers. Developing scientific talents and nurturing future leaders have always been two of our long-term goals. The Foundation maintains our support of the Wu Chien-Shiung and the Wu Ta-You Science Camps. In 2007, the Wu Chien-Shiung Science Camp, together with the 2007 Asian Science Camp, invited five Nobel laureates and 13 other world- class scientists to give lectures to talented high school and university students. We also work closely with leading universities on a wide range of programs. The Foundation provides financial aid for students from low-income families, supports chaired professor positions and lecture series, and sponsors students from National Tsinghua University and National Chiaotung University to study abroad for one year. The Foundation has also made contributions to the construction of new facilities at leading research institutes in the science, technology management, and electric engineering, including National Taiwan University, National Tsinghua University, and the University of California, Berkeley. In July of 2007, National Taiwan University began the second phase of construction of a new chemistry research center. The TSMC Building at Tsinghua University, is almost complete and will open in 2008. 70 7.2.2 Sponsorship of Arts Education Nationwide 7.2.4 The Employee Volunteer Program In 2007, the TSMC Foundation sponsored the renowned Taiwan Besides sponsoring the above educational, art, and literature Literature Camp. Students and literature devotees from all over the programs and activities, the Foundation has encouraged employees country gather in Hsinchu to hear from authors and literary experts, to participate in volunteer programs. Employees and their family giving Hsinchu, a city primarily known for science and technology, an members have either served as volunteer docents on weekends at the infusion of the humanities. The popular TSMC Youth Literature National Museum of Natural Science in Taichung or joined the TSMC Award, established in the hope of cultivating literary taste in our Book Reading Volunteer Program to read stories to elementary school society, entered its fourth year. Now well established as one of most children in remote townships in Hsinchu or Tainan on weekdays. rigorous youth literature awards, the event attracted a huge number of students to participate in the competition. The TSMC Volunteer Docent Program at the National Museum of Natural Science in Taichung has operated for four years. In 2007, the Noting the importance of preserving historic sites, the Foundation program was expanded to recruit employees of TSMC-affiliated continued to sponsor the Taipei Story House's Literature Salon. companies, including Vanguard, VisEra, and Global Unichip. About Cultural activities such as regular author readings on the site gave the 200 employees have volunteered every year, and over the past four old building a new lease of life and attracted the general public to years, volunteers have put in a total of over 25,000 hours and given this cultural heritage site. 7.2.3 Contribution to Local Communities tours to over 500,000 visitors. The TSMC Book Reading Volunteer Program, now in its third year, has already recruited 160 people, who volunteered in four schools in 2006 and in five in 2007. Over the past three years, there have been almost 7,000 reading sessions, and the The Foundation continues to sponsor and organize art and cultural total reading hours have reached almost 10,000. Through many years activities in our site communities of Hsinchu and Tainan. In 2007, the of dedicated volunteer work from TSMC employees, employees of TSMC Hsinchu Art Festival was inaugurated with a special charity TSMC-affiliated companies, and their family members, TSMC has concert. Students from the remote schools of Taoshan and Wufeng shown its commitment to the expansion of science education and the were invited to perform with a prominent symphony orchestra. The education of the underprivileged. concert gave the children an opportunity to show their musical talent and also encouraged the general public to participate in fundraising and community building. All of the proceeds were donated to the education of underprivileged children in remote school districts in Hsinchu County. The festival also included other outstanding events such as classical music concerts, opera and drama, family activities, and art and literature seminars. Over 40,000 people from the community participated or attended, making for an overwhelmingly positive response. 71 8. AFFILIATE INFORMATION AND OTHER SPECIAL NOTES 72 COOPERATION 73 TSMC's affiliates support our core foundry business with related services such as design service and back-end assembly and test, enabling TSMC to provide customers with the most complete set of solutions for their needs. 8.1 Affiliates 8.1.1 TSMC Affiliated Companies Chart TSMC North America Shareholding: 100% TSMC Europe B.V. Shareholding: 100% TSMC Japan Limited Shareholding: 100% TSMC Korea Limited Shareholding: 100% TSMC (Shanghai) Company Limited Shareholding: 100% TSMC International Investment Ltd. Shareholding: 100% TSMC Partners, Ltd. Shareholding: 100% TSMC Global, Ltd. Shareholding: 100% Global Unichip Corp. Shareholding: 37.04% XinTec Inc. Shareholding: 42.51% Hsin Ruey Investment Co., Ltd. Shareholding: TSMC: 35.71% Chi Cherng: 64.29% Chi Cherng Investment Co., Ltd. Shareholding: TSMC: 35.71% Hsin Ruey: 64.29% Emerging Alliance Fund, L.P. Shareholding: 99.5% VentureTech Alliance Fund II, L.P. Shareholding: 98% VentureTech Alliance Fund III, L.P. Shareholding: 98% As of 12/31/2007 TSMC Technology, Inc. Shareholding: 100% TSMC Development, Inc. Shareholding: 100% WaferTech, LLC Shareholding: 99.996% InveStar Semiconductor Development Fund, Inc. Shareholding: 97.09% InveStar Semiconductor Development Fund, Inc. (II) LDC. Shareholding: 97.09% TSMC Design Technology Canada Inc. Shareholding: 100% Global Unichip Japan Co., Ltd. Shareholding: 100% Global Unichip Corp.-NA Shareholding: 100% VentureTech Alliance Holdings, LLC Shareholding: 100% Mutual-Pak Technology Co., Ltd. Shareholding: 51% TSMC 74 8.1.2 Business Scope of TSMC and Its Affiliated Companies TSMC's affiliates support the company's core business of providing dedicated foundry services to customers around the world. Several of TSMC's affiliated companies are focused on investing in companies involved in design, manufacturing, and other related businesses in the semiconductor industry. TSMC and its affiliates provide mutual support in technology, capacity, marketing and services to maximize synergy within the group, enabling TSMC to provide its customers with the most complete dedicated foundry services worldwide and ensure TSMC's leading position in the global foundry market. 8.1.3 TSMC Affiliated Companies Unit: NT(US, EUR, JPY, KRW)$ thousands As of 12/31/2007 Date of Incorporation Place of Registration Capital Stock Business Activities Company TSMC North America TSMC Europe B.V. TSMC Japan Limited TSMC Korea Limited TSMC (Shanghai) Company Limited Jan. 18, 1988 Mar. 04, 1994 Sep. 10, 1997 May 02, 2006 Aug. 04, 2003 San Jose, California, USA Amsterdam, The Netherlands Yokohama, Japan Seoul, Korea Shanghai, China TSMC International Investment Ltd. Apr. 09, 1996 Tortola, British Virgin Islands TSMC Technology, Inc. InveStar Semiconductor Development Fund, Inc. Feb. 20, 1996 Sep. 10, 1996 InveStar Semiconductor Development Fund, Inc. (II) LDC. Aug. 25, 2000 TSMC Development, Inc. WaferTech, LLC TSMC Partners, Ltd. TSMC Design Technology Canada Inc. TSMC Global, Ltd. Global Unichip Corporation Global Unichip Japan Co., Ltd. Global Unichip Corporation-NA XinTec Inc. Hsin Ruey Investment Co., Ltd. Chi Cherng Investment Co., Ltd. Mutual-Pak Technology Co., Ltd. Emerging Alliance Fund, L.P. VentureTech Alliance Fund II, L.P. VentureTech Alliance Fund III, L.P. VentureTech Alliance Holdings, LLC Feb. 16, 1996 Jun. 03, 1996 Mar. 26, 1998 May 28, 2007 Jul. 13, 2006 Jan. 22, 1998 Jun. 16, 2005 Feb. 02, 2004 Sep. 11, 1998 Jul. 13, 1998 Jul. 15, 1998 Mar. 22, 2006 Jan. 10, 2001 Feb. 27, 2004 Mar. 25, 2006 Apr. 25, 2007 Delaware, USA Cayman Islands Cayman Islands Delaware, USA Washington, USA Tortola, British Virgin Islands Ontario, Canada Tortola, British Virgin Islands Hsinchu, Taiwan Yokohama, Japan San Jose, California, USA Taoyuan, Taiwan Taipei, Taiwan Taipei, Taiwan Taipei, Taiwan Cayman Islands Cayman Islands Cayman Islands Delaware, USA US$ EUR JPY KRW$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ NT$ JPY US$ NT$ NT$ NT$ NT$ US$ US$ US$ 11,000 Sales and marketing of integrated circuits and semiconductor devices 90.76 Marketing activities 300,000 Marketing activities 400,000 Marketing activities 371,000 987,968 Manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices Providing investment in companies involved in the design, manufacture, and other related business in the semiconductor industry 0.001 Engineering support activities 8,983 Investing in new start-up technology companies 44,339 Investing in new start-up technology companies 0.001 Investment activities 435,410 Manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices 300 Investment activities 2,300 Engineering support activities 1,284,000 Investment activities 1,419,360 Researching, developing, manufacturing, testing and marketing of integrated circuits 10,000 Providing products consulting 100 Providing products consulting 2,157,391 Wafer level chip size packaging service 840,000 Investment activities 840,000 Investment activities 90,000 Manufacturing and selling of electronic parts, and researching, developing and testing of RFID 29,978 Investing in new start-up technology companies 33,600 Investing in new start-up technology companies 30,100 Investing in new start-up technology companies N/A Investing in new start-up technology companies 8.1.4 Common Shareholders of TSMC and Its Subsidiaries or Its Affiliates with Actual of Deemed Control: None. 75 8.1.5 Rosters of Directors, Supervisors, and Presidents of TSMC's Affiliated Companies Unit: NT (US) $, except shareholding Company TSMC North America TSMC Europe B.V. TSMC Japan Limited TSMC Korea Limited TSMC (Shanghai) Company Limited TSMC International Investment Ltd. TSMC Technology, Inc. InveStar Semiconductor Development Fund, Inc. Title Director Director President Director Director Director President Chairman Director Director Supervisor President Director Director President Chairman Director Director Supervisor President Director Director President Chairman Director President Director President InveStar Semiconductor Development Fund, Inc. (II) LDC. Director President TSMC Development, Inc. WaferTech, LLC TSMC Partners, Ltd. TSMC Design Technology Canada Inc. TSMC Global, Ltd. Chairman Director President Chairman Director President Director Director President Director Director Director President Director Director Supervisor President 76 Name Kenneth Kin Rick Cassidy Rick Cassidy Kenneth Kin Wendell Huang Maria Marced Maria Marced Rick Tsai Kenneth Kin Makoto Onodera Lora Ho Makoto Onodera Ta Ming Wang Chih-Chun Tsai (Note 1) Representative of TSMC: F.C.Tseng Representative of TSMC: C.C.Wei Representative of TSMC: Y.C. Chao Representative of TSMC: Lora Ho Y.C. Chao Lora Ho Richard Thurston Lora Ho Lora Ho Richard Thurston Lora Ho Wendell Huang (Note 1) Wendell Huang (Note 1) Lora Ho Richard Thurston Lora Ho Rick Tsai Stephen T. Tso Kuo-Chin Hsu Lora Ho Richard Thurston Lora Ho Fu-Chieh Hsu Sreedhar Natarajan Richard Thurston Fred Wang Lora Ho Richard Thurston Wendell Huang (Note 1) As of 12/31/2007 Shareholding Shares (Investment Amount) % (Investment Holding %) - - - TSMC holds 11,000,000 shares - - - - TSMC holds 200 shares - - - - - TSMC holds 6,000 shares - - TSMC holds 80,000 shares (US$371,000,000) (US$371,000,000) (US$371,000,000) (US$371,000,000) - - - - TSMC holds 987,968,244 shares - - - TSMC International Investment Ltd. holds 1,000 shares - TSMC International Investment Ltd. holds 8,721,359 shares - TSMC International Investment Ltd. holds 43,047,573 shares - - - TSMC International Investment Ltd. holds 1,000 shares - - - TSMC Development, Inc. holds 293,636,833 preferred shares - - - TSMC holds 300,000 shares - - - - TSMC Partners, Ltd. holds 2,300,000 shares - - - TSMC holds 1,284 shares - - - 100% - - - - 100% - - - - - 100% - - 100% (100%) (100%) (100%) (100%) - - - - 100% - - - 100% - 97.09% - 97.09% - - - 100% - - - 99.996% - - - 100% - - - - 100% - - - 100% (Continued) Company Title Name Shareholding Shares (Investment Amount) % (Investment Holding %) Global Unichip Corporation Global Unichip Japan Co., Ltd. Global Unichip Corporation-NA XinTec Inc. Hsin Ruey Investment Co., Ltd. Chi Cherng Investment Co., Ltd. Mutual-Pak Technology Co., Ltd. Emerging Alliance Fund, L.P. VentureTech Alliance Fund II, L.P. VentureTech Alliance Fund III, L.P. VentureTech Alliance Holdings, LLC Note 1: No President postion listed Chairman Vice Chairman Director Director Director Director Director Director Supervisor Supervisor Supervisor President Director Director Director Supervisor President Director Director Supervisor President Chairman Director Director Director Director Supervisor Supervisor President Director President Director President Chairman Director Director Supervisor President None None None None Representative of TSMC: F.C. Tseng K.C. Shih Representative of Chin Yu Investment Ltd.: C.C. Lu Representative of TSMC: Lora Ho Representative of TSMC: Jim Lai Representative of TSMC: Jason C.S. Chen (Note 2) C.W. Jen W.C. Liu Representative of TSMC: Wendell Huang C.H. Kao Yu Lin Jim Lai Representative of GUC: Jim Lai Representative of GUC: Chung-Lin Tsai Representative of GUC: S.H. Cheng Representative of GUC: K.C. Shih Chung-Lin Tsai Representative of GUC: S.H. Cheng Representative of GUC: Jim Lai Representative of GUC: K.C. Shih Jim Lai Representative of TSMC: Shang-Yi Chiang Representative of TSMC: C.C.Wei Representative of TSMC: Lora Ho Representative of OmniVision International Holding, Ltd.: XinPing He Tzun Zing Chen Representative of Cheng Xin Technology Development Corp.: Toang Chiou Lu Representative of Quanta Computer Inc.: Chao Pin Lu Lidon Chen Representative of Chi Cherng Investment Co., Ltd.: Wendell Huang (Note 1) 42,572,353 shares 3,640,853 shares 1,268,869 shares 42,572,353 shares 42,572,353 shares 42,572,353 shares - - 42,572,353 shares - - - 200 shares 200 shares 200 shares 200 shares - 100,000 shares 100,000 shares 100,000 shares - 91,702,838 shares 91,702,838 shares 91,702,838 shares 9,473,751 shares 1,608,893 shares 996,669 shares 4,496,504 shares 232,326 shares (NT$540,000,080) Representative of Hsin Ruey Investment Co., Ltd.: (NT$540,000,080) (TSMC's investment NT$299,999,880) Jessica Chou (Note 1) Hsu-Tung Chen Lewis Hwan Reprsentative of VentureTech Alliance Fund III, L.P.: Kai Tseng Wei-Pong Lin Lewis Hwan None None None None (TSMC's investment NT$299,999,880) 70,000 shares 1,524,000 shares 4,590,000 shares 20,000 shares 1,524,000 shares (TSMC's investment US$29,828,009) (TSMC's investment US$32,928,000) (TSMC's investment US$29,498,000) None Note 2: On March 10, 2008, TSMC appointed Mr. Fu-Chieh Hsu to replace Mr. Jason C.S. Chen as a director. 37.04% 3.17% 1.10% 37.04% 37.04% 37.04% - - 37.04% - - - 100% 100% 100% 100% - 100% 100% 100% - 42.51% 42.51% 42.51% 4.39% 0.75% 0.46% 2.08% 0% (64.29%) (35.71%) (64.29%) (35.71%) 1% 13.93% 51% 0.20% 13.93% (99.50%) (98%) (98%) (100%) 77 8.1.6 Operational Highlights of TSMC Affiliated Companies (Note) TSMC (Shanghai) Company Limited 13,639,707 19,000,810 10,379,647 8,621,163 5,798,239 (1,197,463) (959,165) TSMC International Investment Ltd. 32,052,646 38,863,540 11,045,318 27,818,222 1,566,054 Unit: NT$ thousands, except EPS ($) Company TSMC North America TSMC Europe B.V. TSMC Japan Limited TSMC Korea Limited TSMC Technology, Inc. InveStar Semiconductor Development Fund, Inc. InveStar Semiconductor Development Fund, Inc. (II) LDC. TSMC Development, Inc. WaferTech, LLC TSMC Partners, Ltd. TSMC Design Technology Canada Inc. Global Unichip Corporation Global Unichip Japan Co., Ltd. Global Unichip Corporation-NA XinTec Inc. Hsin Ruey Investment Co., Ltd. Chi Cherng Investment Co., Ltd. Mutual-Pak Technology Co., Ltd. Emerging Alliance Fund, L.P. Capital Stock Assets Liabilities Net Worth Net Sales Income from Operation Net Income (Net of Tax) Basic EPS (Net of Tax)* As of 12/31/2007 Remark 356,873 30,709,415 28,283,119 2,426,296 194,928,377 4,342 87,090 13,880 127,901 122,825 18,076 39,199 17,896 1,639 88,702 104,929 16,437 313,770 212,730 20,660 267,773 41,052 9,733 1,885 210,754 31,366 3,531 1,926 562,154 16,432 552,356 317,779 1,821,721 1,448,213 302,505 11,248 562,154 17,552 552,356 315,634 1,814,836 1,814,836.00 1,479,998 302,505 11,548 N/A 1,008.35 5.02 0.032 291,435 1,438,490 946,888 1,601,116 1,928,005 733,014 196,354 3,434 213,874 1,404,762 1,924,571 0.032 16,657,254 1,760 16,655,494 14,126,007 8,419,049 864,061 13,508,139 8,773,454 9,733 74,619 131,675 38,322 31,647 7,554,988 4,734,685 93,353 44,204,188 1,149,360 3,628,005 1,325,475 2,302,530 345,132 669,012 363,471 1,824,325 9,407,547 302,552 123,850 2,379,319 6,988,940 17,256 60,141 2,903 3,244 2,157,391 840,000 840,000 90,000 972,576 4,682 9,731 5,814,517 2,199,313 2,199,769 80,633 498,195 1,472 1,675 2,474,718 3,758 3,757 2,143 27,970 19,769 - - 3,210 8,056 3,339,799 2,195,555 2,196,012 78,490 470,225 1,190,189 915,177 - 704,983 732,585 822 2,862 357 1,711 2,963,300 465,056 465,155 62,339 62,991 - 638,423 210,195 3,333 - 62,126 62,778 (5,316) 137,201 140,497 (41,533) - 58,751 59,407 (2,605) 137,201 140,497 (41,533) - 19.16 156,830.00 588.50 24.08 N/A 0.57 17,552.00 61.49 7.12 6.37 1,785.00 0.02 2.16 N/A N/A (0.29) N/A N/A N/A N/A TSMC Global, Ltd. 41,656,812 44,235,835 2,321,578 2,321,568 1,808,074.77 VentureTech Alliance Fund II, L.P. 1,090,085 1,209,958 VentureTech Alliance Fund III, L.P. 976,534 915,177 VentureTech Alliance Holdings, LLC - - *Except Global Unichip Japan Co., Ltd., the basic EPS of each group entity is calculated based on audit figures. Note: Foreign exchange rates for balance sheet amounts are as follows: $1 USD = $32.443 NT, $1 EUR = $47.84 NT, $1 JPY = $0.2903 NT, $1 RMB = $4.442 NT, $1 KRW = $0.0347 NT Foreign exchange rates for income statement amounts are as follows: $1 USD = $32.853 NT, $1 EUR = $45.03 NT, $1 JPY = $0.28 NT, $1 RMB = $4.319 NT, $1 KRW = $0.034 NT 78 8.2 Status of TSMC Common Shares and ADRs Acquired, Disposed of, and Held by Subsidiaries (In thousands of NTD except for number of shares) Name of Subsidiary Paid-in Capital Source of Funding Percentage Owned by TSMC Transaction Date Acquisition (Note 2) Disposal Number of Shares Amount Number of Shares Amount Investment Income (Loss) 35.7% 35.7% Year 2007 Year 2008 (Note 1) Year 2007 Year 2008 (Note 1) 84,722 0 84,881 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Chi Cherng Investment Co., Ltd. Hsin Ruey Investment Co., Ltd. 840,000 840,000 Retained earnings Retained earnings Note 1: As of 02/29/2008 Note 2: Stock dividend distributed in 2007 Note 3: Carrying cost of TSMC shares 8.3 Special Notes Balance Number of Shares 17,031,993 17,031,993 Amount (Note 3) 458,564 458,564 17,063,919 17,063,919 459,511 459,511 Balance of Pledged Shares Balance of Guarantee Provided by TSMC Balance of Financing Provided by TSMC 0 0 0 0 0 0 0 0 0 0 0 0 8.3.1 Private Placement Securities in 2007 and as of the Date of this Annual Report: None. 8.3.2 Regulatory Authorities' Legal Penalties to the Company or Its Employees, and the Company's Resulting Punishment on Its Employees in 2007 and as of the Date of this Annual Report: None. 8.3.3 Any Events in 2007 and as of the Date of this Annual Report that Had Significant Impacts on Shareholders' Right or Security Prices as Stated in Item 2 Paragraph 2 of Article 36 of Securities and Exchange Law of Taiwan: None. 8.3.4 Other Necessary Supplement: None. 79 1. Condensed Balance Sheet 1.1 Condensed Balance Sheet from 2003 to 2007 (Unconsolidated) 1.2 Condensed Balance Sheet from 2003 to 2007 (Consolidated) Unit: NT$ thousands Unit: NT$ thousands Item Current Assets 2003 2004 2005 2006 2007 Item 2003 2004 2005 2006 2007 158,526,272 173,667,311 197,562,416 193,676,010 174,299,286 Current Assets 166,541,670 184,449,082 212,300,790 260,317,168 249,822,329 Long-term Investments 37,965,353 73,292,863 80,659,601 137,378,205 123,891,153 Long-term Investments 10,748,014 38,101,849 42,382,494 53,895,151 36,461,325 Fixed Assets Other Assets Current Liabilities Before Distribution After Distribution 188,286,752 227,976,400 214,145,633 228,235,359 234,564,558 11,638,485 12,616,636 15,172,165 14,295,330 19,017,626 Fixed Assets Other Assets Current Liabilities 211,854,263 258,911,326 244,823,292 254,094,190 260,252,187 18,256,584 17,991,834 20,003,013 19,178,650 24,329,385 30,537,984 60,638,852 32,184,415 42,905,154 43,800,810 Before Distribution 30,420,923 63,919,308 35,122,227 46,860,531 48,706,007 43,691,881 110,460,630 97,699,015 125,252,816 * After Distribution 43,574,820 113,741,086 100,636,827 129,208,193 * Long-term Liabilities 33,300,829 23,752,940 22,111,575 14,175,271 14,001,462 Long-term Liabilities 42,827,716 32,264,210 30,410,171 22,873,542 24,284,470 3,363,740 4,196,119 7,613,476 8,523,195 6,878,949 Other Liabilities 4,848,584 4,229,537 7,738,483 8,612,970 7,189,178 202,666,189 232,519,637 247,300,246 258,296,879 264,271,037 Capital Stock 202,666,189 232,519,637 247,300,246 258,296,879 264,271,037 56,855,885 56,537,259 57,117,886 54,107,498 53,732,682 Capital Surplus 56,855,885 56,537,259 57,117,886 54,107,498 53,732,682 71,100,090 113,730,016 142,771,034 197,124,532 218,864,571 Before Distribution 71,100,090 113,730,016 142,771,034 197,124,532 218,864,571 Retained Earnings Unrealized Loss on Long-term Investment (35) - - - 26,846,412 49,195,999 70,114,801 109,687,478 * - After Distribution 26,846,412 49,195,999 70,114,801 109,687,478 Unrealized Loss on Long-term Investment (35) - - - * - Cumulative Transaction Adjustments 225,408 (2,226,427) (640,742) (1,191,165) (1,072,853) Cumulative Transaction Adjustments 225,408 (2,226,427) (640,742) (1,191,165) (1,072,853) Unrealized Gains on Financial Instruments - - - 561,615 680,997 Unrealized Gains on Financial Instruments - - - 561,615 680,997 396,416,862 487,553,210 507,539,815 573,584,904 551,772,623 Total Assets 407,400,531 499,454,091 519,509,589 587,485,159 570,865,226 67,202,553 88,587,911 61,909,466 65,603,620 64,681,221 Before Distribution 78,097,223 100,413,055 73,270,881 78,347,043 80,179,655 80,356,450 138,409,689 127,424,066 147,951,282 * After Distribution 91,251,120 150,234,833 138,785,481 160,694,705 * Total Liabilities 329,214,309 398,965,299 445,630,349 507,981,284 487,091,402 316,060,412 349,143,521 380,115,749 425,633,622 * Equity Attributable to Shareholders of the Parent Before Distribution After Distribution Minority Interest Total Equity Before Distribution After Distribution *Subject to change after shareholders' meeting resolution 329,214,309 398,965,299 445,630,349 507,981,284 487,091,402 316,060,412 349,143,521 380,115,749 425,633,622 * 88,999 75,737 608,359 1,156,832 3,594,169 329,303,308 399,041,036 446,238,708 509,138,116 490,685,571 316,149,411 349,219,258 380,724,108 426,790,454 * Other Liabilities Capital Stock Capital Surplus Retained Earnings Before Distribution After Distribution Total Assets Total Liabilities Before Distribution After Distribution Total Equity Before Distribution After Distribution *Subject to change after shareholders' meeting resolution 2 2. Condensed Statement of Income 2.1 Condensed Statement of Income from 2003 to 2007 (Unconsolidated) 2.2 Condensed Statement of Income from 2003 to 2007 (Consolidated) Unit: NT$ thousands (Except EPS: NT$) Unit: NT$ thousands (Except EPS: NT$) Item Net Sales Gross Profit 2003 2004 2005 2006 2007 201,904,341 255,992,427 264,588,364 313,881,635 313,647,644 Item Net Sales 2003 2004 2005 2006 2007 202,996,812 257,212,618 266,565,070 317,407,171 322,630,596 72,891,637 110,160,584 115,244,049 149,718,400 137,159,314 Gross Profit 74,883,478 115,819,183 118,202,874 155,810,090 142,350,211 Income from Operations 52,647,577 86,822,778 93,013,824 126,299,859 112,252,047 Income from Operations 51,300,581 88,481,674 90,968,559 127,264,694 111,721,907 Non-operating Income and Gains 2,665,799 6,785,048 7,381,360*** 11,596,727 10,834,698 Non-operating Income and Gains 5,669,312 6,015,558 9,399,360*** 9,705,592 11,933,803 Non-operating Expenses and Losses 4,285,101 1,829,242 6,575,761*** 3,090,087 2,335,339 Non-operating Expenses and Losses 5,791,248 2,531,645 6,104,672*** 3,608,078 2,013,684 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 Adjusted Earnings Per Share 819,377 1,687,681 2,506,769*** 3,382,868 2,634,636 Interest Revenue 888,107 1,783,693 2,806,226*** 4,542,149 5,651,700 1,576,343 1,278,072 1,180,484*** 661,200 584,736 Interest Expense 1,891,009 1,454,242 1,413,374*** 890,602 842,242 51,028,275 91,778,584 93,819,423 134,806,499 120,751,406 47,258,700 92,316,115 93,575,035 127,255,917 109,177,093 Income from Operations of Continued Segments - before Tax Income from Operations of Continued Segments - after Tax 51,178,645 91,965,587 94,263,247 133,362,208 121,642,026 47,255,688 92,329,013 93,632,668 125,588,497 109,932,400 47,258,700 92,316,115 93,575,035 127,009,731 109,177,093 Net Income 47,255,688 92,329,013 93,632,668 127,195,246 109,932,400 2.33* 1.78** 3.97* 3.50** 3.79* 3.55** - 4.93* 4.82** - 4.14* - - Net Income Attributable to Shareholders of the Parent Earnings Per Share Adjusted Earnings Per Share 2.33* 1.78** 3.97* 3.50** 47,258,700 92,316,115 93,575,035 127,009,731 109,177,093 Capitalized Interest 138,668 262,109 * Based on weighted average shares outstanding in each year ** Retroactive adjustment for capitalization of unappropriated earnings and bonus to employees *** Certain accounts of year 2005 have been reclassified to conform to year 2006 classifications. Capitalized Interest 139,516 278,334 * Based on weighted average shares outstanding in each year ** Retroactive adjustment for capitalization of unappropriated earnings and bonus to employees *** Certain accounts of year 2005 have been reclassified to conform to year 2006 classifications. 3.79* 3.55** - 4.93* 4.82** - 4.14* - - 3 3. Financial Analysis 3.1 Financial Analysis from 2003 to 2007 (Unconsolidated) Capital Structure Analysis Debt Ratio(%) Liquidity Analysis Long-term Fund to Fixed Assets Ratio (%) Current Ratio (%) Quick Ratio (%) Times Interest Earned (Times) Operating Performance Analysis 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) Profitability Analysis Return on Total Assets (%) Return on Equity (%) Operating Income to Paid-in Capital Ratio (%) Pre-tax Income to Paid-in Capital Ratio (%) Net Margin (%) Basic Earnings Per Share (NT$) (Note1) Earnings Per Share (NT$) (Note1) Cash Flow Cash Flow Ratio (%) Leverage Cash Flow Adequacy Ratio (%) Cash Flow Reinvestment Ratio (%) Operating Leverage Financial Leverage 2003 16.95 192.53 519.11 478.38 30.67 9.19 39.74 12.14 30.06 14.41 1.07 0.51 12.67 15.12 25.98 25.18 23.41 1.78 1.78 355.85 145.42 17.71 3.21 1.03 2004 18.17 185.42 286.40 261.92 57.67 9.35 39.04 11.63 31.39 14.39 1.12 0.53 21.16 25.36 37.34 39.47 36.06 3.50 3.50 236.94 149.94 18.12 2.46 1.02 2005 12.20 218.42 613.84 560.93 80.48 8.08 45.18 9.82 37.19 14.24 1.24 0.52 19.01 22.16 37.61 37.94 35.37 3.55 3.55 468.02 150.88 12.50 2.30 1.01 2006 11.44 228.78 451.40 404.49 204.39 9.26 39.40 9.27 39.37 15.81 1.38 0.55 23.60 26.64 48.90 52.06 40.46 4.82 4.81 457.01 153.75 14.18 2.04 1.01 2007 11.72 213.63 397.94 348.53 207.51 8.82 41.40 8.78 41.57 16.05 1.34 0.57 19.49 21.94 42.48 45.69 34.81 4.14 4.14 397.52 139.35 9.73 2.23 1.01 Ananlysis of Deviation over 20% for 2007 vs. 2006: 1. The cash flow reinvestment ratio decreased by 31%, which was primarily due to a decrease of net cash provided by operating activities and an increase of cash dividends. Note 1: Retroactively adjusted for capitalization of unappropriated earnings and bonuses to employees. (3) Average Inventory Turnover = Cost of Sales / Average Inventory (6) Earnings Per Share = (Net Income - Preferred Stock Dividend) / Weighted Average Note 2: Certain accounts of year 2005 have been reclassified to conform to year 2006 classifications. (4) Average Inventory Turnover Days = 365 / Average Inventory Turnover Number of Shares Outstanding (5) Average Payment Turnover = Cost of Sales / Average Trade Payables 5. Cash Flow *Glossary 1. Capital Structure Analysis (1) Debt Ratio = Total Liabilities / Total Assets (6) Fixed Assets Turnover (7) Total Assets Turnover 4. Profitability Analysis = Net Sales / Net Fixed Assets = Net Sales / Total Assets (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 Dividend (2) Long-term Fund to Fixed Assets = (Shareholders' Equity + Long-term Liabilities) / Net Fixed Assets (1) Return on Total Assets = (Net Income + Interest Expenses * (1 - Effective Tax Rate) ) / (3) Cash Flow Reinvestment Ratio = (Cash Provided by Operating Activities - Cash Dividends) / (Gross Ratio 2. Liquidity Analysis (1) Current Ratio (2) Quick Ratio = Current Assets / Current Liabilities (3) Operating Income to Paid-in = Operating Income / Paid-in Capital = (Current Assets - Inventories - Prepaid Expenses) / Current Capital Ratio (1) Operating Leverage (2) Financial Leverage = (Net Sales - Variable Cost) / Income from Operations = Income from Operations / (Income from Operations - Interest Liabilities (4) Pre-tax Income to Paid-in Capital = Income Before Tax / Paid-in Capital Expenses) (2) Return on Equity = Net Income / Average Shareholders' Equity 6. Leverage Average Total Assets Fixed Assets + Investments + Other Assets + Working Capital) (3) Times Interest Earned = Earnings before Interest and Taxes / Interest Expenses 3. Operating Performance Analysis (1) Average Collection Turnover = Net Sales / Average Trade Receivables (2) Days Sales Outstanding = 365 / Average Collection Turnover Ratio (5) Net Margin = Net Income / Net Sales 4 3.2 Financial Analysis from 2003 to 2007 (Consolidated) Capital Structure Analysis Debts Ratio (%) Liquidity Analysis Long-term Fund to Fixed Assets (%) Current Ratio (%) Quick Ratio (%) Times Interest Earned (Times) Operating Performance Analysis 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) Profitability Analysis Return on Total Assets (%) Return on Equity (%) Operating Income to Paid-in Capital Ratio(%) Pre-tax Income to Paid-in Capital Ratio (%) Net Margin (%) Basic Earnings Per Share (NT$) (Note1) Earnings Per Share (NT$) (Note1) Cash Flow Cash Flow Ratio (%) Leverage Industry Specific Key Performance Indicator Cash Flow Adequacy Ratio (%) Cash Flow Reinvestment Ratio (%) Operating Leverage Financial Leverage Billing Utilization Rate (%) Advanced Technologies (0.13-micron and below) Percentage of Wafer Sale (%) Sales Growth (%) Net Income Growth (%) 2003 19.17 175.65 547.46 502.20 26.14 9.03 40.41 10.98 33.24 15.43 0.96 0.50 12.30 15.12 25.31 25.25 23.28 1.78 1.78 381.44 132.59 17.97 3.23 1.04 92 17 25.1 118.7 2004 20.10 166.58 288.57 261.62 53.92 9.22 39.60 10.21 35.74 14.75 0.99 0.51 20.68 25.36 38.05 39.55 35.90 3.50 3.50 239.60 146.18 18.54 2.38 1.02 105 28 26.7 95.3 2005 14.10 194.69 604.46 549.94 67.69 7.84 46.54 8.91 40.94 14.37 1.09 0.51 18.89 22.16 36.78 38.12 35.13 3.55 3.55 447.65 154.53 12.64 2.31 1.02 94 45 3.6 1.4 2006 13.34 209.38 555.51 506.39 152.46 8.84 41.28 8.25 44.22 15.41 1.25 0.54 23.12 26.64 49.27 52.22 40.07 4.82 4.81 437.46 156.75 14.36 1.99 1.01 102 49 19.1 35.7 2007 14.05 197.87 512.92 461.11 145.43 8.55 42.69 7.96 45.85 15.76 1.24 0.57 19.10 21.94 42.28 46.03 34.07 4.14 4.14 377.30 142.46 10.07 2.21 1.01 93 (Note 2) 55 1.6 -14.0 Analysis of Deviation over 20% - 2007 vs. 2006: 1. The cash flow reinvestment ratio decreased by 30%, which was primarily due to a decrease in cash provided by operating activities and an increase in cash dividends. Note 1: Retroactive adjustment for capitalization of unappropriated earnings and bonus to employees. Note 2: Capacity includes wafers committed by Vanguard. Note 3: Certain accounts of prior years have been reclassified to conform to current year classifications. *Glossary 1. Capital Structure Analysis (1) Debt Ratio (2) Long-term Fund to Fixed Assets = Total Liabilities / Total Assets = (Shareholders' Equity + Long-term Liabilities) / Net Fixed Assets 3. Operating Performance Analysis (1) Average Collection Turnover (2) Days Sales Outstanding (3) Average Inventory Turnover (4) Average Inventory Turnover Days (5) Average Payment Turnover (6) Fixed Assets Turnover (7) Total Assets Turnover 4. Profitability Analysis = Net Sales / Average Trade Receivables = 365 / Average Collection Turnover = Cost of Sales / Average Inventory = 365 / Average Inventory Turnover = Cost of Sales / Average Trade Payables = Net Sales / Net Fixed Assets = Net Sales / Total Assets Ratio 2. Liquidity Analysis (1) Current Ratio (2) Quick Rratio = Current Assets / Current Liabilities = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities (2) Return on Equity (3) Operating Income to Paid-in = Net Income / Average Shareholders' Equity = Operating Income / Paid-in Capital Average Total Assets (3) Times Interest Earned = Earnings before Interest and Taxes / Interest Expenses Capital Ratio 6. Leverage (1) Operating Leverage (2) Financial Leverage (1) Return on Total Assets = (Net Income + Interest Expenses * (1 - Effective Tax Rate) ) / (3) Cash Flow Reinvestment Ratio (4) Pre-tax Income to Paid-in = Income before Tax / Paid-in Capital Capital Ratio (5) Net Margin (6) Earnings Per Share 5. Cash Flow = Net Income / Net Sales = (Net Income - Preferred Stock Dividend) / Weighted Average Number of Shares Outstanding (1) Cash Flow Ratio (2) Cash Flow Adequacy Ratio = Net Cash Provided by Operating Activities / Current Liabilities = Five-year Sum of Cash from Operations / Five-year Sum of Capital Expenditures, Inventory Additions, and Cash Dividend = (Cash Provided by Operating Activities - Cash Dividends) / (Gross Fixed Assets + Investments + Other Assets + Working Capital) = (Net Sales - Variable Cost) / Income from Operations = Income from Operations / (Income from Operations - Interest Expenses) 5 4. Auditors' Opinions from 2003 to 2007 6. Financial Difficulties The Company should disclose the financial impact to the Company if the Company and its affiliated companies have incurred any financial or cash flow difficulties in 2007 and as of the date of this Annual Report: None. Year 2003 2004 2005 2006 2007 CPA Audit Opinion Yu-Feng Huang, Yung-Do Way Hung-Wen Huang, Ming-Cheng Chang Hung-Wen Huang, Ming-Cheng Chang Hung-Wen Huang, Ming-Cheng Chang Hung-Wen Huang, Ming-Cheng Chang An Unqualified Opinion with explantory An Unqualified Opinion An Unqualified Opinion An Unqualified Opinion An Unqualified Opinion Deloitte Touche Tohmatsu 12F, No. 156, Sec. 3, Min-Sheng E. Rd., Taipei, Taiwan, R.O.C. Tel: 886-2-2545-9988 5. Audit Committee's Report The Board of Directors has prepared the Company's 2007 Business Report, Financial Statements, and proposal for allocation of profits. The CPA firm of Deloitte & Touche was retained to audit TSMC's Financial Statements and has issued an audit report relating to the Financial Statements. The Business Report, Financial Statements, and profit allocation proposal have been reviewed and determined to be correct and accurate by the undersigned, the Audit Committee members of Taiwan Semiconductor Manufacturing Company Limited. According to Article 14-4 of the Securities and Exchange Act and Article 219 of the Company Law, we hereby submit this report. Taiwan Semiconductor Manufacturing Company Limited Independent Director Sir Peter Leahy Bonfield Independent Director Lester Carl Thurow Independent Director Stan Shih Independent Director Carleton (Carly) S. Fiorina March 12, 2008 6 7. Financial Statements for the Years Ended December 31, 2007 and 2006 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT Notice to Readers The Board of Directors and Shareholders Taiwan Semiconductor Manufacturing Company Limited 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 We have audited the accompanying balance sheets of Taiwan Semiconductor Manufacturing practices to audit such financial statements are those generally accepted and applied in the Republic Company Limited as of December 31, 2007 and 2006, and the related statements of income, changes of China. 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 For the convenience of readers, the auditors' report and the accompanying financial statements have financial statements based on our audits. been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements difference in the interpretation of the two versions, the Chinese-language auditors' report and by Certified Public Accountants and auditing standards generally accepted in the Republic of China. financial statements shall prevail. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Limited as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting with respect to financial accounting standards, and accounting principles generally accepted in the Republic of China. We have also audited, in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China, the consolidated financial statements of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of and for the years ended December 31, 2007 and 2006, and have expressed an unqualified opinion on the consolidated financial statements. January 10, 2008 7 Taiwan Semiconductor Manufacturing Company Limited BALANCE SHEETS DECEMBER 31, 2007 AND 2006 (In Thousands of New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Financial assets at fair value through profit or loss (Notes 2, 3 and 5) Available-for-sale financial assets (Notes 2, 3 and 6) Held-to-maturity financial assets (Notes 2 and 7) Receivables from related parties (Note 24) Notes and accounts receivable Allowance for doubtful receivables (Notes 2 and 8) Allowance for sales returns and others (Notes 2 and 8) Other receivables from related parties (Note 24) Other financial assets Inventories, net (Notes 2 and 9) Deferred income tax assets (Notes 2 and 17) Prepaid expenses and other current assets Total current assets LONG-TERM INVESTMENTS (Notes 2, 3, 6, 7, 10 and 11) Investments accounted for using equity method Available-for-sale financial assets Held-to-maturity financial assets Financial assets carried at cost Total long-term investments PROPERTY, PLANT AND EQUIPMENT (Notes 2, 12 and 24) Cost Buildings Machinery and equipment Office equipment Accumulated depreciation Advance payments and construction in progress Net property, plant and equipment INTANGIBLE ASSETS Goodwill (Note 2) Deferred charges, net (Notes 2 and 13) Total intangible assets OTHER ASSETS Deferred income tax assets (Notes 2 and 17) Refundable deposits Others (Note 2) Total other assets $ 2007 Amount 72,422,102 42,083 22,267,223 11,526,946 26,701,648 17,911,328 (688,972) (3,856,685) 525,308 331,698 20,987,142 5,268,000 861,465 174,299,286 113,048,081 1,397,186 8,697,726 748,160 123,891,153 101,907,892 589,131,625 9,167,107 700,206,624 (486,725,019) 21,082,953 234,564,558 1,567,756 7,172,413 8,740,169 7,241,933 2,741,538 293,986 10,277,457 2006 Amount $ 100,139,709 44,601 25,967,061 8,510,823 16,869,509 16,278,164 (690,931) (2,751,065) 449,266 653,460 19,152,214 7,832,000 1,221,199 193,676,010 101,044,356 6,647,511 28,973,495 712,843 137,378,205 96,961,851 527,850,728 8,659,225 633,471,804 (417,467,250) 12,230,805 228,235,359 1,567,756 5,593,068 7,160,824 5,761,127 1,306,234 67,145 7,134,506 % 13 - 4 2 5 3 - - - - 4 1 - 32 21 - 2 - 23 18 107 2 127 (88) 4 43 - 1 1 1 - - 1 % 17 - 5 2 3 3 - - - - 3 1 - 34 18 1 5 - 24 17 92 2 111 (73) 2 40 - 1 1 1 - - 1 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Financial liabilities at fair value through profit or loss (Notes 2, 3 and 5) Accounts payable Payables to related parties (Note 24) Income tax payable (Notes 2 and 17) Accrued expenses and other current liabilities (Note 15) Payables to contractors and equipment suppliers Current portion of bonds payable (Note 14) Total current liabilities LONG-TERM LIABILITIES Bonds payable (Note 14) Other long-term payables (Note 15) Other payables to related parties (Notes 24 and 26) Total long-term liabilities OTHER LIABILITIES Accrued pension cost (Notes 2 and 16) Guarantee deposits (Note 26) Deferred credits (Notes 2 and 24) Total other liabilities Total liabilities CAPITAL STOCK - NT$10 PAR VALUE Authorized: 28,050,000 thousand shares in 2007 27,050,000 thousand shares in 2006 Issued: 26,427,104 thousand shares in 2007 25,829,688 thousand shares in 2006 CAPITAL SURPLUS (Notes 2 and 19) RETAINED EARNINGS (Note 19) Appropriated as legal capital reserve Appropriated as special capital reserve Unappropriated earnings OTHERS (Notes 2, 3, 21 and 23) Cumulative translation adjustments Unrealized gains on financial instruments Treasury stock: 834,096 thousand shares in 2007 33,926 thousand shares in 2006 Total shareholders' equity 2007 2006 Amount % Amount % $ 247,646 9,485,818 2,999,630 10,977,963 14,700,013 5,389,740 - 43,800,810 12,500,000 1,501,462 - 14,001,462 3,657,679 2,240,677 980,593 6,878,949 - 2 - 2 3 1 - 8 3 - - 3 1 - - 1 $ 10,751 6,143,679 3,326,916 7,850,418 7,903,867 10,669,523 7,000,000 42,905,154 12,500,000 1,271,896 403,375 14,175,271 3,530,116 3,809,961 1,183,118 8,523,195 - 1 1 1 1 2 1 7 2 - - 2 1 1 - 2 64,681,221 12 65,603,620 11 264,271,037 53,732,682 56,406,684 629,550 161,828,337 218,864,571 (1,072,853) 680,997 (49,385,032) (49,776,888) 487,091,402 48 10 10 - 29 39 - - (9) (9) 88 258,296,879 54,107,498 43,705,711 640,742 152,778,079 197,124,532 (1,191,165) 561,615 (918,075) (1,547,625) 507,981,284 45 10 8 - 26 34 - - - - 89 100 TOTAL $ 551,772,623 100 $ 573,584,904 100 TOTAL $ 551,772,623 100 $ 573,584,904 The accompanying notes are an integral part of the financial statements. 8 Taiwan Semiconductor Manufacturing Company Limited STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) 2007 2006 Amount % Amount % GROSS SALES (Notes 2 and 24) $ 319,167,299 $ 319,210,148 SALES RETURNS AND ALLOWANCES (Note 2) 5,519,655 5,328,513 NET SALES 313,647,644 100 313,881,635 100 COST OF SALES (Notes 18 and 24) GROSS PROFIT UNREALIZED GROSS PROFIT FROM AFFILIATES (Note 2) REALIZED GROSS PROFIT OPERATING EXPENSES (Notes 18 and 24) Research and development General and administrative Marketing Total operating expenses 176,223,224 137,424,420 265,106 137,159,314 15,913,834 7,660,776 1,332,657 24,907,267 56 44 - 44 5 3 - 8 164,163,235 149,718,400 - 149,718,400 14,601,385 7,190,422 1,626,734 23,418,541 52 48 - 48 5 2 1 8 INCOME FROM OPERATIONS 112,252,047 36 126,299,859 40 NON-OPERATING INCOME AND GAINS Equity in earnings of equity method investees, net (Notes 2 and 10) Interest income (Note 2) Settlement income (Note 26) Technical service income (Notes 24 and 26) Rental income (Note 24) Gain on disposal of property, plant and equipment and other assets (Notes 2 and 24) Foreign exchange gain, net (Note 2) Valuation gain on financial instruments, net (Notes 2, 5 and 23) Others (Note 24) Total non-operating income and gains NON-OPERATING EXPENSES AND LOSSES Provision for litigation loss (Note 26 j) Interest expense Loss on settlement and disposal of financial instruments, net (Notes 2, 5 and 23) Valuation loss on financial instruments, net (Notes 2, 5, and 23) Loss on disposal of property, plant and equipment and other assets (Note 2) 5,468,230 2,634,636 985,114 712,162 368,748 305,201 71,128 - 289,479 10,834,698 1,008,635 584,736 413,809 239,413 4,814 2 1 - - - - - - - 3 - - - - - 5,526,727 3,382,868 967,506 670,297 224,281 596,459 - 33,850 194,739 11,596,727 - 661,200 1,623,882 - 240,985 2 1 1 - - - - - - 4 - - 1 - - (Continued) Foreign exchange loss, net (Note 2) Others Total non-operating expenses and losses INCOME BEFORE INCOME TAX INCOME TAX EXPENSE (Notes 2 and 17) NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF TAX BENEFIT OF NT$82,062 THOUSAND (Note 3) 2007 Amount $ - 83,932 2,335,339 120,751,406 (11,574,313) 109,177,093 - 2006 Amount $ 412,726 151,294 3,090,087 134,806,499 (7,550,582) 127,255,917 (246,186) % - - - 39 (4) 35 - NET INCOME $ 109,177,093 35 $ 127,009,731 % - - 1 43 (2) 41 - 41 EARNINGS PER SHARE (NT$, Note 22) Basic earnings per share Diluted earnings per share 2007 2006 Before Income Tax After Income Tax Before Income Tax After Income Tax $ 4.58 4.58 $ $ $ 4.14 4.14 $ $ 5.10 5.09 $ $ 4.82 4.81 Certain pro forma information (after income tax) is shown as follows, based on the assumption that the Company's stock held by subsidiaries is treated as available-for-sale financial assets instead of treasury stock (Notes 2 and 21): NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES NET INCOME EARNINGS PER SHARE (NT$) Basic earnings per share Diluted earnings per share The accompanying notes are an integral part of the financial statements. 2007 2006 $ $ $ $ 109,278,855 109,278,855 4.14 4.14 $ $ $ $ 127,338,237 127,092,051 4.81 4.81 (Concluded) 9 Taiwan Semiconductor Manufacturing Company Limited STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In Thousands of New Taiwan Dollars, Except Dividends Per Share) BALANCE, JANUARY 1, 2006 Appropriations of prior year's earnings Legal capital reserve Reversal of special capital reserve Bonus to employees - in cash Bonus to employees - in stock Cash dividends to shareholders - NT$2.50 per share Stock dividends to shareholders - NT$0.15 per share Bonus to directors and supervisors Capital surplus transferred to capital stock Net income in 2006 Adjustment arising from changes in percentage of ownership in equity method investees Translation adjustments Issuance of stock from exercising stock options Cash dividends received by subsidiaries from the Company Valuation gain on available-for-sale financial assets Equity in the valuation gain on available-for-sale financial assets held by equity method investees BALANCE, DECEMBER 31, 2006 Appropriations of prior year's earnings Legal capital reserve Reversal of special capital reserve Bonus to employees - in cash Bonus to employees - in stock Cash dividends to shareholders - NT$3.00 per share Stock dividends to shareholders - NT$0.02 per share Bonus to directors and supervisors Capital surplus transferred to capital stock Net income in 2007 Adjustment arising from changes in percentage of ownership in equity method investees Translation adjustments Issuance of stock from exercising stock options Cash dividends received by subsidiaries from the Company Valuation gain on available-for-sale financial assets Equity in the valuation gain on available-for-sale financial assets held by equity method investees Treasury stock repurchased by the Company Capital Stock Shares (In Thousands) Capital Surplus Amount Legal Capital Reserve Special Capital Reserve Unappropriated Earnings Total Cumulative Translation Adjustments Unrealized Gain on Financial Instruments Treasury Stock Total Shareholders' Equity Retained Earnings Others $ 24,730,025 $ 247,300,246 $ 57,117,886 $ 34,348,208 $ 2,226,427 $ 106,196,399 $ 142,771,034 $ (640,742) $ - $ (918,075) $ 445,630,349 - - - 343,213 - 370,950 - 370,950 - - - 14,550 - - - - - - 3,432,129 - 3,709,504 - 3,709,504 - - - 145,496 - - - - - - - - - (3,709,504) - 187,095 - 429,701 82,320 - - - 9,357,503 - - - - - - - - - - - - - - - (1,585,685) - - - - - - - (9,357,503) 1,585,685 (3,432,129) (3,432,129) (61,825,061) (3,709,504) (257,410) - 127,009,731 - - (3,432,129) (3,432,129) (61,825,061) (3,709,504) (257,410) - 127,009,731 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (550,423) - - - - - - - 242,248 - 319,367 - - - - - - - - - - - - - - - - - (3,432,129) - (61,825,061) - (257,410) - 127,009,731 187,095 (550,423) 575,197 82,320 242,248 319,367 25,829,688 258,296,879 54,107,498 43,705,711 640,742 152,778,079 197,124,532 (1,191,165) 561,615 (918,075) 507,981,284 - - - 457,280 - 51,659 - 77,489 - - - 10,988 - - - - - - - 4,572,798 - 516,594 - 774,891 - - - 109,875 - - - - - - - - - - - (774,891) - (28,639) - 326,952 101,762 - - - 12,700,973 - - - - - - - - - - - - - - - - (11,192) - - - - - - - - - - - - - - (12,700,973) 11,192 (4,572,798) (4,572,798) (77,489,064) (516,594) (285,800) - 109,177,093 - - (4,572,798) (4,572,798) (77,489,064) (516,594) (285,800) - 109,177,093 - - - - - - - - - - - - - - - - - - - - - - - - 118,312 - - - - - - - - - - - - - - - - - - 24,325 95,057 - - - - - - - - - - - - - - - - - (4,572,798) - (77,489,064) - (285,800) - 109,177,093 (28,639) 118,312 436,827 101,762 24,325 - (48,466,957) 95,057 (48,466,957) BALANCE, DECEMBER 31, 2007 $ 26,427,104 $ 264,271,037 $ 53,732,682 $ 56,406,684 $ 629,550 $ 161,828,337 $ 218,864,571 $ (1,072,853) $ 680,997 $ (49,385,032) $ 487,091,402 The accompanying notes are an integral part of the financial statements. 10 Taiwan Semiconductor Manufacturing Company Limited STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In Thousands of 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 Unrealized gross profit from affiliates Amortization of premium/discount of financial assets Loss (gain) on disposal of available-for-sale financial assets, net Equity in earnings of equity method investees, net Dividends received from equity method investees Gain on disposal of investments accounted for using equity method investees, net Gain on disposal of financial assets carried at cost, net Loss on impairment of financial assets carried at cost Gain on disposal of property, plant and equipment and other assets, net Deferred income tax Loss on idle assets Changes in operating assets and liabilities: Decrease (increase) in: Financial assets and liabilities at fair value through profit or loss Receivables from related parties Notes and accounts receivable Allowance for doubtful receivables Allowance for sales returns and others Other receivables from related parties Other financial assets Inventories Prepaid expenses and other current assets Increase (decrease) in: Accounts payable Payables to related parties Income tax payable Accrued expenses and other current liabilities Accrued pension cost Deferred credits 2007 2006 $ 109,177,093 $ 127,009,731 72,820,579 265,106 (117,159) (271,094) (5,468,230) 677,147 - - - (300,387) 1,083,194 - 239,413 (9,832,139) (1,633,164) (1,959) 1,105,620 (76,042) 321,762 (1,834,928) 359,734 3,342,139 (327,286) 3,127,545 1,259,738 127,563 72,747 66,699,455 - 2,399 485 (5,526,727) 626,367 (26,031) (212) 36,608 (355,474) 179,828 44,072 1,112,776 4,181,095 4,313,654 (285,413) (1,518,904) 985,419 (99,109) (2,894,259) (49,426) (1,908,427) (612,381) 4,034,530 157,262 68,724 (95,745) Net cash provided by operating activities 174,116,992 196,080,297 Financial assets carried at cost Investments accounted for using equity method Property, plant and equipment and other assets Proceeds from return of capital by investees Increase in deferred charges Increase in refundable deposits Increase in other asset Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Repayment of bonds payable Increase (decrease) in guarantee deposits Cash dividends Cash bonus paid to employees Bonus to directors and supervisors Repurchase of treasury stock Proceeds from exercise of employee stock options Net cash used in financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid Income tax paid INVESTING AND FINANCING ACTIVITIES AFFECTING BOTH CASH AND NON- CASH ITEMS Acquisition of property, plant, and equipment Decrease (increase) in payables to contractors and equipment suppliers Cash paid Repurchase of treasury stock Increase in accrued expenses and other current liabilities Cash paid 2007 - - 54,509 433,551 (2,685,610) (1,435,304) (232,575) (65,941,107) (7,000,000) (1,569,284) (77,489,064) (4,572,798) (285,800) (45,413,373) 436,827 (135,893,492) (27,717,607) 100,139,709 72,422,102 661,200 7,330,401 76,023,264 5,279,783 81,303,047 48,466,957 (3,053,584) 45,413,373 - - 3,673,182 - $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2006 71,191 37,946 1,277,729 162,354 (1,272,355) (1,222,592) - (117,301,784) - 917,016 (61,825,061) (3,432,129) (257,410) - 575,197 (64,022,387) 14,756,126 85,383,583 100,139,709 661,200 3,189,528 79,026,104 (1,810,293) 77,215,811 - - - 7,000,000 688,591 617,892 39,687,637 (Concluded) 11 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Available-for-sale financial assets Held-to-maturity financial assets Investments accounted for using equity method Financial assets carried at cost Property, plant and equipment Proceeds from disposal or redemption of: Available-for-sale financial assets Held-to-maturity financial assets (9,547,253) - (7,358,685) (36,333) (81,303,047) 18,844,520 17,325,120 (98,679,832) (18,554,027) (5,515,466) (12,940) (77,215,811) 73,212,019 10,410,000 NON-CASH INVESTING AND FINANCING ACTIVITIES Current portion of bonds payable Current portion of other payables to related parties (under payables to related parties) Current portion of other long-term payable (under accrued expenses and other current liabilities) Transfer of available-for-sale financial assets and other net assets to investments accounted for using equity method (Note 6) (Continued) The accompanying notes are an integral part of the financial statements. Taiwan Semiconductor Manufacturing Company Limited date. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) 1. GENERAL Taiwan Semiconductor Manufacturing Company Limited (the Company or TSMC), a Republic of China (R.O.C.) corporation, was incorporated as a venture among the Government of the R.O.C., acting through the Development Fund of the Executive Yuan; Philips Electronics N.V. and certain of its affiliates (Philips); and certain other private investors. On September 5, 1994, its shares were listed on the Taiwan Stock Exchange (TSE). On October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs). The Company is engaged mainly in the manufacturing, selling, packaging, testing and computer- aided designing of integrated circuits and other semiconductor devices and the manufacturing of masks. respectively. Cash Equivalents Repurchase agreements collateralized by government bonds, asset-backed commercial papers and corporate notes acquired with maturities of less than three months from the date of purchase are classified as cash equivalents. The carrying amount approximates fair value. Financial Assets/Liabilities at Fair Value Through Profit or Loss Derivatives that do not meet the criteria for hedge accounting are initially recognized at fair value, with transaction costs expensed as incurred. The derivatives are remeasured at fair value subsequently with changes in fair value recognized in earnings. A regular way purchase or sale of financial assets is accounted for using settlement date accounting. Fair value is estimated using valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. When the fair value is positive, the derivative is recognized as a financial asset; when the fair value is negative, the derivative is recognized as a financial liability. As of December 31, 2007 and 2006, the Company had 20,555 and 20,202 employees, respectively. Available-for-Sale Financial Assets 2. SIGNIFICANT ACCOUNTING POLICIES The financial statements are presented in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the R.O.C. For the convenience of readers, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the R.O.C. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail. Significant accounting policies are summarized as follows: Use of Estimates The preparation of financial statements in conformity with the aforementioned guidelines, law and principles requires management to make reasonable assumptions and estimates of matters that are inherently uncertain. The actual results may differ from management's estimates. Classification of Current and Noncurrent Assets and Liabilities Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the balance sheet date. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the balance sheet 12 Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported as a separate component of shareholders' equity. The corresponding accumulated gains or losses are recognized in earnings when the financial asset is derecognized from the balance sheet. A regular way purchase or sale of financial assets is accounted for using settlement date accounting. The fair value of structured time deposits is estimated using valuation techniques. Fair value of open- end mutual funds is determined using the net assets value at the end of the year. For debt securities, fair value is determined using the average of bid and asked prices at the end of the year. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases, for debt securities, the amount of the decrease is recognized in earnings, provided that the decrease is clearly attributable to an event which occurred after the impairment loss was recognized. Held-to-maturity Financial Assets Financial instruments for which the Company has a positive intention and ability to hold to maturity are categorized as held-to-maturity financial assets and are carried at amortized cost under the effective interest method except for structured time deposits which are carried at acquisition cost. Those financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Gains or losses are recognized at the time of derecognition, impairment or amortization. A regular way purchase or sale of financial assets is accounted for using settlement date accounting. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, of equity method investees, net" account. Effective January 1, 2006, pursuant to the revised in a subsequent period, the amount of the impairment loss decreases and the decrease is clearly Statement of Financial Accounting Standards No. 5, "Long-term Investments Accounted for Using the attributable to an event which occurred after the impairment loss was recognized, the previously Equity Method" (SFAS No. 5), the cost of an investment shall be analyzed and the cost of investment recognized impairment loss is reversed to the extent of the decrease. The reversal may not result in a in excess of the fair value of identifiable net assets acquired, representing goodwill, shall not be carrying amount that exceeds the amortized cost that would have been determined as if no amortized and instead shall be tested for impairment annually. If the fair value of identifiable net impairment loss had been recognized. Allowance for Doubtful Receivables assets acquired exceeds the cost of investment, the excess shall be proportionately allocated as reductions to fair values of non-current assets (except for financial assets other than investments accounted for using the equity method and deferred income tax assets). The accounting treatment An allowance for doubtful receivables is provided based on a review of the collectibility of notes and for the investment premiums paid before January 1, 2006 is the same as that for goodwill which is accounts receivable. The Company determines the amount of the allowance for doubtful receivables no longer being amortized; while investment discounts continue to be amortized over the remaining by examining the aging analysis of outstanding notes and accounts receivable and current trends in periods. When an indication of impairment is identified, the carrying amount of the investment is the credit quality of its customers as well as its internal credit policies. reduced, with the related impairment loss recognized in earnings. Revenue Recognition and Allowance for Sales Returns and Others When the Company subscribes for additional investee's shares at a percentage different from its The Company recognizes revenue when evidence of an arrangement exists, the rewards of ownership existing ownership percentage, the resulting carrying amount of the investment in the investee differs and significant risk of the goods has been transferred to the buyer, price is fixed or determinable, and from the amount of the Company's share of the investee's equity. The Company records such a collectibility is reasonably assured. Provisions for estimated sales returns and others are generally difference as an adjustment to long-term investments with the corresponding amount charged or recorded in the period the related revenue is recognized, based on historical experience, credited to capital surplus. management's judgment, and any known factors that would significantly affect the allowance. Sales prices are determined using fair value taking into account related sales discounts agreed to by the Company's ownership percentages in the investees until such gains or losses are realized through the Company and its customers. Sales agreements typically provide that payment is due 30 days from transactions with third parties. The entire amount of the gains or losses on sales to investees over invoice date for a majority of the customers and 30 to 45 days after the end of the month in which which the Company has a controlling interest is deferred until such gains or losses are realized sales occur for some customers. Since the receivables from sales are collectible within one year and through subsequent sales of the related products to third parties. Gains or losses on sales from equity such transactions are frequent, fair value of the receivables is equivalent to the nominal amount of method investees to the Company are deferred in proportion to the Company's ownership Gains or losses on sales from the Company to equity method investees are deferred in proportion to the cash to be received. Inventories percentages in the investees until they are realized through transactions with third parties. Gains or losses on sales between equity method investees over each of which the Company has control are deferred in proportion to the Company's weighted-average ownership percentage in the investee Inventories are stated at the lower of cost or market value. Inventories are recorded at standard cost which records gains or losses. In transactions between equity method investees over either or both of and adjusted to the approximate weighted-average cost at the balance sheet date. Market value which the Company has no control, gains or losses on sales are deferred in proportion to the represents replacement cost for raw materials, supplies and spare parts and net realizable value for multiplication of the Company's weighted-average ownership percentages in the investees. Such work in process and finished goods. The Company assesses the impact of changing technology on its gains or losses are recorded until they are realized through transactions with third parties. inventories on hand and writes off inventories that are considered obsolete. Year-end inventories are evaluated for estimated excess quantities and obsolescence based on a demand forecast within a If an investee's functional currency is a foreign currency, differences will result from the translation of specific time horizon, which is generally 180 days or less. Estimated losses on scrap and slow-moving the investee's financial statements into the reporting currency of the Company. Such differences are items are recognized and included in the allowance for losses. charged or credited to cumulative translation adjustments, a separate component of shareholders' Investments Accounted for Using Equity Method Investments in companies wherein the Company exercises significant influence over the operating Financial Assets Carried at Cost equity. and financial policy decisions are accounted for using the equity method. The Company's share of the Investments for which the Company does not exercise significant influence and that do not have a net income or net loss of an investee is recognized in the "equity in earnings/losses of equity method quoted market price in an active market and whose fair value cannot be reliably measured, such as investees, net" account. Prior to January 1, 2006, the difference, if any, between the cost of non-publicly traded stocks and mutual funds, are carried at their original cost. The costs of non- investment and the Company's proportionate share of the investee's equity was amortized by the publicly traded stocks and mutual funds are determined using the weighted-average method. If there straight-line method over five years, with the amortization recorded in the "equity in earnings/losses is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A 13 subsequent reversal of such impairment loss is not allowed. system design costs and other charges - 3 years. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the Cash dividends are recognized as investment income upon resolution of shareholders of an investee recoverable amount increases in a subsequent period, the previously recognized impairment loss but are accounted for as a reduction to the original cost of investment if such dividends are declared would be reversed and recognized as a gain. However, the adjusted amount may not exceed the on the earnings of the investee attributable to the period prior to the purchase of the investment. carrying amount that would have been determined, net of amortization, as if no impairment loss had Stock dividends are recorded as an increase in the number of shares held and do not affect been recognized. investment income. The cost per share is recalculated based on the new total number of shares. Any difference between the initial carrying amount of a debt security and the amount due at maturity is Effective January 1, 2007, the Company adopted the newly released Statement of Financial amortized using the effective interest method, with the amortization recognized in earnings. Accounting Standards No. 37, "Accounting for Intangible Assets". The Company had reassessed the Property, Plant and Equipment, Assets Leased to Others and Idle Assets Expenditures related to research activities and those related to development activities that do not Property, plant and equipment and assets leased to others are stated at cost less accumulated meet the criteria for capitalization are charged to expenses when incurred. useful lives and the amortization method of its recognized intangible assets at the effective date. depreciation. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a Pension Costs subsequent period, the amount previously recognized as impairment would be reversed and For employees who participate in defined contribution pension plans, pension costs are recorded recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would based on the actual contributions made to employees' individual pension accounts during their have been determined, net of depreciation, as if no impairment loss had been recognized. Significant service periods. For employees who participate in defined benefit pension plans, pension costs are additions, renewals and betterments incurred during the construction period are capitalized. recorded based on actuarial calculations. Maintenance and repairs are expensed as incurred. Income Tax Depreciation is computed using the straight-line method over the following estimated service lives: The Company applies intra-period and inter-period allocations for its income tax whereby (1) a buildings - 10 to 20 years; machinery and equipment - 5 years; and office equipment - 3 to 5 years. portion of current year's income tax expense is allocated to the cumulative effect of changes in accounting principles; and (2) deferred income tax assets and liabilities are recognized for the tax Upon sale or disposal of property, plant and equipment and assets leased to others, the related cost effects of temporary differences and unused tax credits. Valuation allowances are provided to the and accumulated depreciation are deducted from the corresponding accounts, with any gain or loss extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A recorded as non-operating gains or losses in the period of sale or disposal. deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred tax asset or liability does not relate to an asset or When property, plant and equipment are determined to be idle or useless, they are transferred to idle liability in the financial statements, then it is classified as either current or noncurrent based on the assets at the lower of the net realizable value or carrying amount. Depreciation on the idle assets is expected length of time before it is realized or settled. provided continuously, and the idle assets are tested for impairment on a periodical basis. Intangible Assets Any tax credits arising from purchases of machinery, equipment and technology, research and development expenditures, personnel training expenditures, and investments in important Goodwill represents the excess of the consideration paid for acquisition over the fair value of technology-based enterprises are recognized using the flow-through method. identifiable net assets acquired. Prior to January 1, 2006, goodwill was amortized using the straight- line method over the estimated life of 10 years. Effective January 1, 2006, pursuant to the newly Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax revised Statement of Financial Accounting Standards No. 25, "Business Combinations - Accounting provision. Treatment under Purchase Method" (SFAS No. 25), goodwill is no longer amortized and instead is tested for impairment annually. If an event occurs or circumstances change which indicated that the Income tax on unappropriated earnings at a rate of 10% is expensed in the year of shareholder fair value of goodwill is more likely than not below its carrying amount, an impairment loss is approval which is the year subsequent to the year the earnings are generated. recognized. A subsequent reversal of such impairment loss is not allowed. Deferred charges consist of technology license fees, software and system design costs and other effective on January 1, 2006. The alternative minimum tax (AMT) imposed under the AMT Act is a charges. The amounts are amortized over the following periods: Technology license fees - the shorter supplemental tax levied at a rate of 10% which is payable if the income tax payable determined of the estimated life of the technology or the term of the technology transfer contract; software and pursuant to the Income Tax Law is below the minimum amount prescribed under the AMT Act. The The R.O.C. government enacted the Alternative Minimum Tax Act (the AMT Act), which became 14 taxable income for calculating the AMT includes most of the tax-exempt income under various laws requires inventories to be stated at the lower of cost or net realizable value item by item. Inventories and statutes. The Company has considered the impact of the AMT Act in the determination of its tax are recorded by the specific identification method, first-in, first-out method or weighted average liabilities. Stock-based Compensation method. The last-in, first-out method is no longer permitted. The revised SFAS No. 10 should be applied to financial statements for the fiscal years beginning on or after January 1, 2009. Early adoption is permitted. Employee stock option plans that are amended or have options granted on or after January 1, 2004 are accounted for by the interpretations issued by the Accounting Research and Development 3. ACCOUNTING CHANGES Foundation of the Republic of China. The Company adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee On January 1, 2006, the Company adopted the newly released Statements of Financial Accounting vesting period. Treasury Stock Standards No. 34, "Financial Instruments: Recognition and Measurement" (SFAS No. 34) and No. 36, "Financial Instruments: Disclosure and Presentation." Treasury stock is stated at cost and shown as a deduction in shareholders' equity. When the Company The Company had categorized its financial assets and liabilities upon initial adoption of the newly retires treasury stock, the treasury stock account is reduced and the common stock as well as the released SFASs. The adjustments made to the carrying amounts of the financial instruments capital surplus - additional paid-in capital are reversed on a pro rata basis. When the book value of categorized as financial assets or liabilities at fair value through profit or loss were included in the the treasury stock exceeds the sum of the par value and additional paid-in capital, the difference is cumulative effect of changes in accounting principles; the adjustments made to the carrying amounts charged to capital surplus - treasury stock transactions and to retained earnings for any remaining of those categorized as available-for-sale financial assets were recognized as adjustments to amount. The Company's stock held by its subsidiaries is treated as treasury stock and reclassified from shareholders' equity. investments accounted for using equity method to treasury stock. The gains resulted from disposal of the treasury stock held by subsidiaries and cash dividends received by subsidiaries from the Company The effect of adopting the newly released SFASs is summarized as follows: are recorded under capital surplus - treasury stock transactions. Foreign-currency Transactions Foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign-currency transactions or Financial assets or liabilities at fair value through profit or loss Available-for-sale financial assets monetary assets and liabilities denominated in foreign currencies are recognized in earnings. Recognized as Cumulative Effect of Changes in Accounting Principles (Net of Tax) Recognized as a Separate Component of Shareholders' Equity $ $ (246,186) - (246,186) $ $ - - - At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with the resulting gains or losses recognized in earnings. The adoption of the newly released SFASs resulted in an increase in net income before cumulative Recent Accounting Pronouncements effect of changes in accounting principles of NT$280,036 thousand, an increase in net income of NT$33,850 thousand, and an increase in basic earnings per share (after income tax) of NT$0.001, for In March 2007, the Accounting Research and Development Foundation of the R.O.C. issued an the year ended December 31, 2006. interpretation that requires companies to record the bonus paid to directors, supervisors and employees as an expense rather than an appropriation of earnings. This interpretation should be Effective January 1, 2006, the Company adopted the newly revised SFAS No. 5 and SFAS No. 25, applied to financial statements for fiscal years beginning on or after January 1, 2008. which prescribe that investment premiums, representing goodwill, be assessed for impairment at least The Accounting Research and Development Foundation of the R.O.C. issued Statement of Financial material effect on the Company's financial statements as of and for the year ended December 31, on an annual basis instead of being amortized. Such a change in accounting principle did not have a Accounting Standards No. 39, "Accounting for Share-based Payment" (SFAS No. 39) in August 2007, 2006. which requires companies to record share-based payment transactions in the financial statements at fair value. SFAS No. 39 should be applied to financial statements for fiscal years beginning on or after January 1, 2008. The Accounting Research and Development Foundation of the R.O.C. revised Statement of Financial Accounting Standards No. 10, "Accounting for Inventories" (SFAS No. 10) in November 2007, which 15 4. CASH AND CASH EQUIVALENTS Outstanding cross currency swap contracts as of December 31, 2007 and 2006: December 31 December 31, 2007 Maturity Date Contract Amount (In Thousands) Range of Interest Rates Paid Range of Interest Rates Received Cash and deposits in banks Repurchase agreements collateralized by government bonds Asset-backed commercial papers 2007 61,832,143 10,067,843 522,116 72,422,102 $ $ 5. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS Derivatives - financial assets Forward exchange contracts Cross currency swap contracts Derivatives - financial liabilities Forward exchange contracts Cross currency swap contracts December 31 2007 $ $ $ $ 6,516 35,567 42,083 183,916 63,730 247,646 2006 68,898,115 31,241,594 - 100,139,709 2006 - 44,601 44,601 - 10,751 10,751 $ $ $ $ $ $ The Company entered into derivative contracts during the years ended December 31, 2007 and 2006 to manage exposures due to fluctuations of foreign exchange rates. The derivative contracts entered into by the Company did not meet the criteria for hedge accounting prescribed by SFAS No. 34. Therefore, the Company did not apply hedge accounting treatment for its derivative contracts. Outstanding forward exchange contracts as of December 31, 2007: Maturity Date Contract Amount (In Thousands) January 2008 February 2008 to July 2008 US$ 100,000 EUR 48,000 December 31, 2007 Sell US$/buy NT$ Sell EUR/buy NT$ 16 January 2008 to February 2008 US$ 975,000 3.53% - 5.60% 0.02% - 3.01% December 31, 2006 January 2007 to February 2007 US$ 820,000 3.19% - 5.91% 0.90% - 3.25% For the years ended December 31, 2007 and 2006, net losses arising from derivative financial instruments were NT$924,316 thousand (including realized settlement losses of NT$684,903 thousand and valuation losses of NT$239,413 thousand) and NT$1,615,796 thousand (including realized settlement losses of NT$1,649,646 thousand and valuation gains of NT$33,850 thousand), respectively. 6. AVAILABLE-FOR-SALE FINANCIAL ASSETS Open-end mutual funds Government bonds Corporate bonds Structured time deposits Current portion December 31 $ 2007 14,966,675 4,146,082 4,052,242 499,410 23,664,409 (22,267,223) $ 2006 25,967,061 1,998,067 4,150,202 499,242 32,614,572 (25,967,061) $ 1,397,186 $ 6,647,511 In 2004, the Company entered into investment management agreements with three well-known financial institutions (fund managers) to manage its investment portfolios. In accordance with the investment guidelines and terms specified in these agreements, the securities invested by the fund managers cannot be below a pre-defined credit rating. In the second half year of 2006, the Company transferred investment portfolios managed by the fund managers of US$1,277,789 thousand to TSMC Global Ltd. (TSMC-Global), a subsidiary of TSMC. The transferred investment portfolios held by TSMC Global are still being managed by the same fund managers in accordance with the aforementioned investment guidelines and terms. Structured time deposits categorized as available-for-sale financial assets consisted of the following: The amount of interest earned from the callable range accrual deposits is based on a pre-defined December 31, 2007 Step-up callable deposits Domestic deposits December 31, 2006 Step-up callable deposits Domestic deposits Principal Amount Carrying Amount Interest Rate Maturity Date range as determined by the 3-month or 6-month LIBOR plus an agreed upon rate ranging between 2.10% and 3.45%. Based on the terms of the contracts, if the 3-month or 6-month LIBOR moves outside of the pre-defined range, the interest paid to the Company is at a fixed rate between zero and 1.5%. Under the terms of the contracts, the bank has the right to cancel the contracts prior to the $ 500,000 $ 499,410 1.76% March 2008 maturity date. $ 500,000 $ 499,242 1.76% March 2008 Hong Kong and Singapore amounted to US$80,000 thousand and US$20,000 thousand, respectively. As of December 31, 2007, no structured time deposit was resided in banks located in foreign countries. As of December 31, 2006, the principal of the deposits that resided in banks located in The interest rate of the step-up callable deposits was pre-determined by the Company and the banks. 8. ALLOWANCES FOR DOUBTFUL RECEIVABLES, SALES RETURNS AND OTHERS 7. HELD-TO-MATURITY FINANCIAL ASSETS Movements of the allowance for doubtful receivables were as follows: Corporate bonds Government bonds Structured time deposits Current portion December 31 2007 10,900,247 7,824,425 1,500,000 20,224,672 (11,526,946) $ 2006 13,742,541 12,070,657 11,671,120 37,484,318 (8,510,823) 8,697,726 $ 28,973,495 $ $ Balance, beginning of year Write-off Balance, end of year Years Ended December 31 2007 690,931 (1,959) 688,972 $ $ 2006 976,344 (285,413) 690,931 $ $ Movements of the allowance for sales returns and others were as follows: As of December 31, 2007 and 2006, structured time deposits categorized as held-to-maturity financial assets consisted of the following: Principal Amount Interest Receivable Range of Interest Rates Maturity Date December 31, 2007 Step-up callable deposits Domestic deposits December 31, 2006 Step-up callable deposits Domestic deposits Callable range accrual deposits Domestic deposits Foreign deposits $ 1,500,000 $ 5,585 1.77% - 1.83% April 2008 to October 2008 $ 4,500,000 $ 13,928 1.40% - 1.83% June 2007 to October 2008 3,911,520 3,259,600 4,808 4,998 (See below) (See below) September 2009 to December 2009 October 2009 to January 2010 $ 11,671,120 $ 23,734 Finished goods Work in process Raw materials Supplies and spare parts Allowance for losses Balance, beginning of year Provision Write-off Balance, end of year 9. INVENTORIES, NET $ $ $ Years Ended December 31 $ $ $ 2007 2,751,065 5,519,655 (4,414,035) 3,856,685 December 31 2007 3,811,212 15,867,005 1,428,592 612,128 21,718,937 (731,795) 2006 4,269,969 5,328,513 (6,847,417) 2,751,065 2006 4,754,342 13,251,174 1,515,996 421,648 19,943,160 (790,946) $ 20,987,142 $ 19,152,214 17 10. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD Movements of the difference between the cost of investments and the Company's share in investees' net assets allocated to depreciable assets for the years ended December 31, 2007 and 2006 were as December 31 2007 2006 Carrying Amount % of Ownership Carrying Amount % of Ownership TSMC Global (Note 6) TSMC International Investment Ltd. (TSMC International) Vanguard International Semiconductor Corporation (VIS) Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) TSMC (Shanghai) Company Limited (TSMC-Shanghai) TSMC Partners, Ltd. (TSMC Partners) TSMC North America (TSMC-North America) XinTec Inc. (XinTec) VentureTech Alliance Fund II, L.P. (VTAF II) VentureTech Alliance Fund III, L.P. (VTAF III) Global UniChip Corporation (GUC) Emerging Alliance Fund, L.P. (Emerging Alliance) Chi Cherng Investment Co., Ltd. (Chi Cherng) Hsin Ruey Investment Co., Ltd. (Hsin Ruey) TSMC Japan Limited (TSMC-Japan) Taiwan Semiconductor Manufacturing Company Europe B.V. (TSMC-Europe) TSMC Korea Limited (TSMC-Korea) $ 44,204,188 27,688,565 11,024,568 9,092,741 8,622,715 4,734,180 2,255,647 1,501,521 1,170,841 906,536 823,552 467,873 173,429 171,658 104,929 88,702 16,436 100 100 36 39 100 100 100 43 98 98 37 99 36 36 100 100 100 $ 42,496,592 26,593,749 5,741,870 7,960,869 9,027,984 4,433,819 2,014,990 - 733,130 228,005 629,755 793,585 115,507 114,297 95,757 49,741 14,706 100 100 27 39 100 100 100 - 98 98 38 99 36 36 100 100 100 Balance, beginning of year Addition Balance, end of year follows: Balance, beginning of year Addition Reduction Balance, end of year Years Ended December 31 2007 943,277 2,081,282 (347,171) 2,677,388 $ $ 2006 (17,764) 1,010,846 (49,805) 943,277 $ $ Movements of the aforementioned difference allocated to goodwill for the years ended December 31, 2007 and 2006 were as follows: Years Ended December 31 2007 213,984 773,365 987,349 December 31 2007 364,913 383,247 748,160 $ $ $ $ $ $ $ $ 2006 - 213,984 213,984 2006 364,913 347,930 712,843 $113,048,081 $101,044,356 11. FINANCIAL ASSETS CARRIED AT COST Non-publicly traded stocks Mutual funds In November 2006, the Company acquired 81 thousand shares in SSMC for SGD 115,227 thousand from EDB Investments Pte Ltd. under a Shareholders Agreement. After the acquisition, the number of SSMC shares owned by the Company increased to 463 thousand and the Company's percentage of ownership increased from 32% to 39%. In January 2007, the Company acquired 90,526 thousand shares in XinTec, representing 43% of its total common shares, for NT$1,357,890 thousand. In August 2007, the Company acquired additional 169,600 thousand shares in VIS for NT$4,927,865 thousand; after the acquisition, the Company's percentage of ownership in VIS increased from 27% to 36%. For the years ended December 31, 2007 and 2006, net equity in earnings of equity method investees of NT$5,468,230 thousand and NT$5,526,727 thousand were recognized, respectively. The related equity in earnings of equity method investees were determined based on the audited financial statements of the investees for the same periods as the Company. As of December 31, 2007 and 2006, fair values of publicly traded stocks in investments accounted for using equity method were NT$24,319,275 thousand and NT$17,044,040 thousand, respectively. 18 12. PROPERTY, PLANT AND EQUIPMENT 13. DEFERRED CHARGES, NET Year Ended December 31, 2007 Year Ended December 31, 2007 Cost Buildings Machinery and equipment Office equipment Accumulated depreciation Buildings Machinery and equipment Office equipment Advance payments and construction in progress Net Cost Buildings Machinery and equipment Office equipment Accumulated depreciation Buildings Machinery and equipment Office equipment Advance payments and construction in progress Balance, Beginning of Year $ 96,961,851 527,850,728 8,659,225 633,471,804 49,595,917 361,401,800 6,469,533 417,467,250 12,230,805 $228,235,359 Additions Disposals Reclassification Balance, End of Year $ 5,025,296 61,793,498 936,003 $ 67,754,797 $ 7,783,832 61,492,223 958,315 $ 70,234,370 $ 8,268,467 $ (31,835) (487,386) (328,555) $ (847,776) $ (30,957) (459,113) (328,363) $ (818,433) $ - $ 1,036 (156,839) (2,365) $ (158,168) $ 583,681 $ (47,420) (25,215) (99,566) $ (172,201) $101,907,892 589,131,625 9,167,107 700,206,624 Technology license fees Software and system design costs Others Balance, Beginning of Year $ 4,038,551 1,517,575 36,942 Additions Amortization Deduction Reclassification Balance, End of Year $ 3,263,950 1,181,579 283,990 $ (1,656,113) (820,183) (104,179) $ - (51) - $ (296,451) (569,648) 296,451 $ 5,349,937 1,309,272 513,204 $ 5,593,068 $ 4,729,519 $ (2,580,475) $ (51) $ (569,648) $ 7,172,413 Year Ended December 31, 2006 Balance, Beginning of Year $ 4,985,806 1,623,276 72,062 Additions Amortization Deduction Reclassification Balance, End of Year $ 373,054 899,301 - $ (1,320,309) (1,006,141) (35,120) $ - - - $ - 1,139 - $ 4,038,551 1,517,575 36,942 $ 6,681,144 $ 1,272,355 $ (2,361,570) $ - $ 1,139 $ 5,593,068 Technology license fees Software and system design costs Others 14. BONDS PAYABLE 57,349,828 422,278,071 7,097,120 486,725,019 21,082,953 $234,564,558 Balance, End of Year $ 96,961,851 527,850,728 8,659,225 633,471,804 49,595,917 361,401,800 6,469,533 417,467,250 12,230,805 $228,235,359 Year Ended December 31, 2006 Balance, Beginning of Year Additions (Deduction) Disposals Reclassification $ 90,769,622 459,850,773 7,850,035 558,470,430 $ 7,160,975 73,454,632 1,046,724 $ 81,662,331 42,902,526 310,626,317 5,662,986 359,191,829 14,867,032 $ 7,441,573 55,880,978 1,009,599 $ 64,332,150 $ (2,636,227) $ (964,370) (5,218,678) (196,984) $ (6,380,032) $ (748,011) (4,869,587) (196,629) $ (5,814,227) $ - $ (4,376) (235,999) (40,550) $ (280,925) $ (171) (235,908) (6,423) $ (242,502) $ - Domestic unsecured bonds: Issued in December 2000 and repayable in December 2007, 5.36% interest payable annually $ - $ 4,500,000 December 31 2007 2006 Issued in January 2002 and repayable in January 2007, 2009 and 2012 in three installments, 2.60%, 2.75% and 3.00% interest payable annually, respectively Current portion 12,500,000 12,500,000 - 15,000,000 19,500,000 (7,000,000) $ 12,500,000 $ 12,500,000 As of December 31, 2007, future principal repayments for the Company's bonds were as follows: Year of Repayment 2009 2012 Amount 8,000,000 4,500,000 12,500,000 $ $ 19 Net $214,145,633 No interest was capitalized during the years ended December 31, 2007 and 2006. 15. OTHER LONG-TERM PAYABLES b. Reconciliation of funded status of the plan and accrued pension cost at December 31, 2007 and Most of the payables resulted from license agreements for certain semiconductor-related patents. As of December 31, 2007, future payments for other long-term payables were as follows: Year of Payment 2008 2009 2010 2011 Current portion (classified under accrued expenses and other current liabilities) 16. PENSION PLANS $ Amount 3,673,182 582,027 497,676 421,759 5,174,644 (3,673,182) $ 1,501,462 2006 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 transition obligation Unrecognized net loss Accrued pension cost Vested benefits The Labor Pension Act (the Act) became effective on July 1, 2005. The employees who were subject to the Labor Standards Law prior to July 1, 2005 were allowed to choose to be subject to the pension mechanism under the Act with their seniority as of July 1, 2005 retained or continue to be subject to the pension mechanism under the Labor Standards Law. Employees who joined the Company after July 1, 2005 can only be subject to the pension mechanism under the Act. c. Actuarial assumptions at December 31, 2007 and 2006 Discount rate used in determining present values Future salary increase rate Expected rate of return on plan assets The pension mechanism under the Act is deemed a defined contribution plan. Pursuant to the Act, the Company has made monthly contributions equal to 6% of each employee's monthly salary to d. Contributions to the Fund for the year employees' pension accounts starting from July 1, 2005, and recognized pension costs of NT$616,548 thousand and NT$618,975 thousand for the years ended December 31, 2007 and 2006, respectively. e. Payments from the Fund for the year The Company has a defined benefit plan under the Labor Standards Law that provides benefits based on an employee's 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 paid each month to a pension fund (the Fund), which is administered by the pension fund monitoring committee (the Committee) and deposited in the Committee's name in the Bank of Taiwan (originally the Central Trust of China, which was merged into the Bank of Taiwan on July 1, 2007). Pension information on the defined benefit plan is summarized as follows: a. Components of net periodic pension cost for the year Service cost Interest cost Projected return on plan assets Amortization Net periodic pension cost 20 2007 184,232 155,297 (50,326) 35,596 324,799 $ $ 2006 178,432 163,740 (49,115) 12,339 305,396 $ $ 2007 2006 $ $ $ $ $ 120,146 3,450,818 3,570,964 2,428,786 5,999,750 (2,199,189) 3,800,561 (107,891) (34,991) 3,657,679 125,443 2007 2.75% 3.00% 3.00% 2007 200,732 2007 15,003 $ $ $ $ $ 102,920 3,873,239 3,976,159 2,964,923 6,941,082 (1,945,572) 4,995,510 (116,191) (1,349,203) 3,530,116 106,645 2006 2.25% 3.00% 2.50% 2006 230,577 2006 10,823 17. INCOME TAX d. Integrated income tax information: a. A reconciliation of income tax expense based on "income before income tax" at statutory rate and The balance of the imputation credit account as of December 31, 2007 and 2006 was income tax currently payable was as follows: NT$3,012,848 thousand and NT$828,612 thousand, respectively. Income tax expense based on "income before income tax" at statutory rate (25%) Tax effect of the following: Tax-exempt income Temporary and permanent differences Cumulative effect of changes in accounting principles Additional tax at 10% on unappropriated earnings Income tax credits used Years Ended December 31 2007 2006 $ 30,187,852 $ 33,701,625 (7,602,675) (789,073) - 2,686,561 (13,740,683) (12,274,041) (2,080,110) (82,062) 1,156,130 (12,715,377) The estimated creditable ratio for distribution of earnings of 2007 and 2006 was 1.86% and 5.23%, respectively. The imputation credit allocated to shareholders is based on its balance as of the date of dividend distribution. The estimated creditable ratio may change when the actual distribution of imputation credit is made. e. All earnings generated prior to December 31, 1997 have been appropriated. Income tax currently payable $ 10,741,982 $ 7,706,165 f. As of December 31, 2007, investment tax credits consisted of the following: b. Income tax expense consisted of the following: Law/Statute Item Total Creditable Amount Remaining Creditable Amount Expiry Year Years Ended December 31 Statute for Upgrading Industries Purchase of machinery and equip- ment Income tax currently payable Other income tax adjustments Net change in deferred income tax assets Investment tax credits Temporary differences Valuation allowance Income tax expense c. Net deferred income tax assets consisted of the following: Current deferred income tax assets Investment tax credits Noncurrent deferred income tax assets, net Investment tax credits Temporary differences Valuation allowance $ 2007 10,741,982 (250,863) 5,120,137 (302,847) (3,734,096) $ 2006 7,706,165 (335,411) 3,908,879 (1,522,734) (2,206,317) $ 11,574,313 $ 7,550,582 December 31 2007 $ $ $ 5,268,000 9,568,755 1,143,311 (3,470,133) 7,241,933 2006 7,832,000 12,124,892 840,464 (7,204,229) 5,761,127 $ $ $ Statute for Upgrading Industries Research and development expendi- tures Statute for Upgrading Industries Personnel training expenditures $ 238,012 3,177,254 6,029,704 6,508,673 3,696,375 $ - - - 6,508,673 3,696,375 $ 19,650,018 $ 10,205,048 $ 1,245,142 2,560,454 1,486,845 1,781,376 1,654,065 $ - - 1,029,080 1,781,376 1,654,065 $ 8,727,882 $ 4,464,521 $ 16,197 16,155 46,130 41,252 $ - - 46,130 41,252 $ 119,734 $ 87,382 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 Statute for Upgrading Industries Investments in important technology- $ 79,804 $ 79,804 2010 based enterprises 21 g. The profits generated from the following projects are exempt from income tax for a four- or five- 19. SHAREHOLDERS' EQUITY year period: Construction of Fab 12 - module A Construction of Fab 14 - module A Construction of Fab 14 - module B Tax-exemption Period 2004 to 2007 2006 to 2010 2007 to 2011 h. The tax authorities have examined income tax returns of the Company through 2004. As of December 31, 2007, 1,132,867 thousand ADSs of the Company were traded on the NYSE. The number of common shares represented by the ADSs is 5,664,337 thousand (one ADS represents five common shares). Capital surplus can only be used to offset a deficit under the Company Law. However, the capital surplus generated from donations and the excess of the issuance price over the par value of capital stock (including the stock issued for new capital, mergers, convertible bonds and the surplus from treasury stock transactions) may be appropriated as stock dividends, which are limited to a certain 18. LABOR COST, DEPRECIATION AND AMORTIZATION percentage of the Company's paid-in capital. Labor cost Salary Labor and health insurance Pension Meal Welfare Others Depreciation Amortization Labor cost Salary Labor and health insurance Pension Meal Welfare Others Year Ended December 31, 2007 Classified as Cost of Sales Classified as Operating Expenses Total $ 9,201,605 608,748 605,879 434,106 183,463 175,781 $ 4,392,243 337,124 335,596 167,962 110,894 12,011 $ 13,593,848 945,872 941,475 602,068 294,357 187,792 $ 11,209,582 $ 5,355,830 $ 16,565,412 $ 66,375,152 $ 1,801,193 $ 3,816,399 $ 778,185 $ 70,191,551 $ 2,579,378 Capital surplus consisted of the following: From merger Additional paid-in capital From convertible bonds From treasury stock transactions From long-term investments Donations December 31 $ 2007 24,003,546 19,526,492 9,360,424 490,950 351,215 55 $ 2006 24,003,546 19,974,431 9,360,424 389,188 379,854 55 $ 53,732,682 $ 54,107,498 The Company's Articles of Incorporation provide that, when allocating the net profits for each fiscal year, the Company shall first offset its losses in previous years and then set aside the following items Year Ended December 31, 2006 accordingly: Classified as Cost of Sales Classified as Operating Expenses Total $ 9,877,603 686,125 610,873 449,505 184,560 225,615 $ 4,172,915 352,085 313,416 159,302 99,323 19,784 $ 14,050,518 1,038,210 924,289 608,807 283,883 245,399 a. Legal capital reserve at 10% of the profits left over, until the accumulated legal capital reserve has equaled the Company's paid-in capital; b. Special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in charge; c. Bonus to directors and bonus to employees of the Company of not more than 0.3% and not less $ 12,034,281 $ 5,116,825 $ 17,151,106 than 1% of the remainder, respectively. Directors who also serve as executive officers of the Depreciation Amortization $ 61,028,727 $ 1,430,069 $ 3,296,764 $ 918,011 $ 64,325,491 $ 2,348,080 Company are not entitled to receive the bonus to directors. The Company may issue stock bonuses to employees of an affiliated company meeting the conditions set by the Board of Directors or, by the person duly authorized by the Board of Directors; d. Any balance left over shall be allocated according to the resolution of the shareholders' meeting. 22 The Company's Articles of Incorporation also provide that profits of the Company may be distributed The shareholders' meeting held on May 7, 2007 also resolved to distribute stock dividends out of by way of cash dividend and/or stock dividend. However, distribution of profits shall be made capital surplus in the amount of NT$774,891 thousand. preferably by way of cash dividend. Distribution of profits may also be made by way of stock dividend; provided that the ratio for stock dividend shall not exceed 50% of the total distribution. The amounts of the appropriations of earnings for 2006 and 2005 were consistent with the resolutions of the meetings of the Board of Directors held on February 6, 2007 and February 14, Any appropriations of the profits are recorded in the year of shareholder approval and given effect to 2006, respectively. If the above bonus to employees, directors and supervisors had been paid entirely in the financial statements of that year. in cash and charged to earnings of 2006 and 2005, the basic earnings per share (after income tax) for the years ended December 31, 2006 and 2005 shown in the respective financial statements The Company no longer has supervisors since January 1, 2007. The required duties of supervisors are would have decreased from NT$4.93 to NT$4.56 and NT$3.79 to NT$3.50, respectively. The shares being fulfilled by the Audit Committee. distributed as a bonus to employees represented 1.77 % and 1.39% of the Company's total outstanding common shares as of December 31, 2006 and 2005, respectively. The appropriation for legal capital reserve shall be made until the reserve equals the Company's paid- in capital. The reserve may be used to offset a deficit, or be distributed as dividends and bonuses for As of January 10, 2008, the Board of Directors had not resolved the appropriation for earnings of the portion in excess of 50% of the paid-in capital if the Company has no unappropriated earnings 2007. and the reserve balance has exceeded 50% of the Company's paid-in capital. The Company Law also prescribes that, when the reserve has reached 50% of the Company's paid-in capital, up to 50% of The information about the appropriations of bonus to employees, directors and supervisors is the reserve may be transferred to capital. available at the Market Observation Post System website. A special capital reserve equivalent to the net debit balance of the other components of shareholders' Under the Integrated Income Tax System that became effective on January 1, 1998, R.O.C. resident equity (for example, cumulative translation adjustments and unrealized loss on financial assets, but shareholders are allowed a tax credit for their proportionate share of the income tax paid by the excluding treasury stock) shall be made from unappropriated earnings pursuant to existing Company on earnings generated since January 1, 1998. regulations promulgated by the Securities and Futures Bureau (SFB). Any special reserve appropriated may be reversed to the extent that the net debit balance reverses. 20. STOCK-BASED COMPENSATION PLANS The appropriations of earnings for 2006 and 2005 had been approved in the shareholders' meetings The Company's Employee Stock Option Plans under the 2004 Plan, 2003 Plan and 2002 Plan were held on May 7, 2007 and May 16, 2006, respectively. The appropriations and dividends per share approved by the SFB on January 6, 2005, October 29, 2003 and June 25, 2002, respectively. The were as follows: Legal capital reserve Special capital reserve Bonus to employees - in cash Bonus to employees - in stock Cash dividends to shareholders Stock dividends to shareholders Bonus to directors and supervisors Appropriation of Earnings Dividends Per Share (NT$) For Fiscal Year 2006 For Fiscal Year 2005 For Fiscal Year 2006 For Fiscal Year 2005 $ 12,700,973 (11,192) 4,572,798 4,572,798 77,489,064 516,594 285,800 $ 9,357,503 (1,585,685) 3,432,129 3,432,129 61,825,061 3,709,504 257,410 $100,126,835 $ 80,428,051 $ 3.00 0.02 $ 2.50 0.15 maximum number of options authorized to be granted under the 2004 Plan, 2003 Plan and 2002 Plan was 11,000 thousand, 120,000 thousand and 100,000 thousand, respectively, with each option eligible to subscribe for one common share when exercisable. The options may be granted to qualified employees of the Company or any of its domestic or foreign subsidiaries, in which the Company's shareholding with voting rights, directly or indirectly, is more than fifty percent (50%). The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. Under the terms of the plans, the options are granted at an exercise price equal to the closing price of the Company's common shares listed on the TSE on the grant date. Options of the plans that had never been granted or had been granted but were subsequently cancelled had expired as of December 31, 2007. 23 Information about outstanding options for the years ended December 31, 2007 and 2006 was as No compensation cost was recognized under the intrinsic value method for the years ended Number of Options (In Thousands) Weighted-average Exercise Price (NT$) forma results of the Company would have been as follows: December 31, 2007 and 2006. Had the Company used the fair value based method to evaluate the options granted after January 1, 2004, using the Black-Scholes model, the assumptions and pro follows: Year ended December 31, 2007 Balance, beginning of year Options granted Options exercised Options cancelled Balance, end of year Year ended December 31, 2006 Balance, beginning of year Options granted Options exercised Options cancelled Balance, end of year $ $ 52,814 1,094 (10,988) (1,045) 41,875 67,758 2,758 (14,550) (3,152) 52,814 37.9 37.9 39.8 45.9 37.4 39.4 40.1 40.1 43.7 39.6 Assumptions: Expected dividend yield Expected volatility Risk free interest rate Expected life Net income: Net income as reported Pro forma net income Earnings per share (EPS) - after income tax (NT$): Basic EPS as reported Pro forma basic EPS Diluted EPS as reported Pro forma diluted EPS The numbers of outstanding options and exercise prices have been adjusted to reflect the appropriations of earnings in accordance with the plans. The options granted were the result of the 21. TREASURY STOCK aforementioned adjustment. As of December 31, 2007, information about outstanding and exercisable options was as follows: Range of Exercise Price (NT$) Number of Options (In Thousands) $25.9 - $36.4 $38.9 - $51.3 28,527 13,348 41,875 Options Outstanding Weighted-average Remaining Contractual Life (Years) 5.16 6.89 Options Exercisable Weighted-average Exercise Price (NT$) Number of Options (In Thousands) Weighted-average Exercise Price (NT$) $ 33.1 46.6 37.4 28,528 6,838 35,366 $ 33.1 46.4 35.6 24 Year ended December 31, 2007 Parent company stock held by subsidiaries Repurchase under share buyback plan Year ended December 31, 2006 Parent company stock held by subsidiaries 32,938 - 988 33,926 As of December 31, 2007 and 2006, the book value of the treasury stock was NT$49,385,032 thousand and NT$918,075 thousand; the market value was NT$51,713,947 thousand and NT$2,290,026 thousand, respectively. The Company's common shares held by subsidiaries were treated as treasury stock and the holders are entitled to the rights of shareholders, with the exception of voting rights. The Company held a meeting of the Board of Directors and approved a share buyback plan to repurchase the Company's common shares up to 800,000 shares listed on the TSE during the period from November 14, 2007 to January 13, 2008 for the buyback price in the range from NT$43.2 to NT$94.2. As of December 31, 2007, the Company had repurchased 800,000 thousand common shares for a total cost of NT$48,466,957 thousand. All the treasury stock repurchased will be retired in 2008. Years Ended December 31 2007 2006 1.00% - 3.44% 43.77% - 46.15% 3.07% - 3.85% 5 years 109,177,093 109,095,663 4.14 4.14 4.14 4.14 $ $ 1.00% - 3.44% 43.77% - 46.15% 3.07% - 3.85% 5 years 127,009,731 126,889,209 4.82 4.81 4.81 4.81 $ $ Beginning Shares Addition Stock Dividends Ending Shares (Shares in Thousands) 33,926 - 33,926 - 800,000 800,000 170 - 170 34,096 800,000 834,096 22. EARNINGS PER SHARE 23. DISCLOSURES FOR FINANCIAL INSTRUMENTS a. Fair values of financial instruments were as follows: Years Ended December 31 2007 2006 Before Income Tax After Income Tax Before Income Tax After Income Tax Basic EPS (NT$) Income before cumulative effect of changes in accounting principles Cumulative effect of changes in accounting principles $ $ 4.58 - $ 4.14 - $ 5.11 (0.01) 4.83 (0.01) Assets December 31 2007 2006 Carrying Amount Fair Value Carrying Amount Fair Value Income for the year Diluted EPS (NT$) $ 4.58 $ 4.14 $ 5.10 $ 4.82 Financial assets at fair value through profit or loss Available-for-sale financial assets Held-to-maturity financial assets $ 42,083 23,664,409 20,224,672 $ 42,083 23,664,409 20,192,188 $ 44,601 32,614,572 37,484,318 $ 44,601 32,614,572 37,375,517 Income before cumulative effect of changes in accounting principles Cumulative effect of changes in accounting principles $ $ 4.58 - $ 4.14 - $ 5.10 (0.01) 4.82 (0.01) Liabilities Income for the year $ 4.58 $ 4.14 $ 5.09 $ 4.81 Financial liabilities at fair value through profit or loss Bonds payable (including current portion) Other long-term payables (including current portion) $ 247,646 12,500,000 5,174,644 $ 247,646 12,669,987 5,174,644 $ 10,751 19,500,000 2,981,754 $ 10,751 19,817,149 2,981,754 EPS is computed as follows: Year ended December 31, 2007 Basic EPS Amounts (Numerator) Before Income Tax After Income Tax Number of Shares (Denominator) (In Thousands) EPS (NT$) Before Income Tax After Income Tax Income available to common shareholders Effect of dilutive potential common stock - stock options $120,751,406 - $109,177,093 - 26,346,582 21,668 $ 4.58 $ 4.14 Diluted EPS Income available to common shareholders (including effect of dilutive potential common stock) $120,751,406 $109,177,093 26,368,250 $ 4.58 $ 4.14 Year ended December 31, 2006 Basic EPS b. Methods and assumptions used in the estimation of fair values of financial instruments 1) The aforementioned financial instruments do not include cash and cash equivalents, receivables, other financial assets, payables, and payables to contractors and equipment suppliers. The carrying amounts of these financial instruments approximate their fair values due to their short maturities. 2) Fair values of financial assets/liabilities at fair value through profit or loss were estimated using valuation techniques incorporating estimates and assumptions that were consistent with prevailing market conditions. 3) Fair values of available-for-sale and held-to-maturity financial assets were based on their quoted market prices; except for structured time deposits of which the fair values were estimated using valuation techniques. Income available to common shareholders Effect of dilutive potential common stock-stock options $134,478,251 - $127,009,731 - 26,374,757 24,101 $ 5.10 $ 4.82 4) Fair value of bonds payable was based on their quoted market price. Diluted EPS Income available to common shareholders (including 5) Fair value of other long-term payables was based on the present value of expected cash flows, effect of dilutive potential common stock) $134,478,251 $127,009,731 26,398,858 $ 5.09 $ 4.81 which approximates their carrying amount. 25 c. The changes in fair value during the years ended December 31, 2007 and 2006 of derivatives 2) Credit risk. Credit risk represents the potential loss that would be incurred by the Company if the estimated using valuation techniques were recognized as losses of NT$239,413 thousand and counter-parties or third-parties breached contracts. Financial instruments with positive fair gains of NT$33,850 thousand, respectively. values at the balance sheet date are evaluated for credit risk. The counter-parties or third-parties to the foregoing financial instruments are reputable financial institutions, business d. As of December 31, 2007 and 2006, financial assets exposed to fair value interest rate risk were organizations, and government agencies. Management believes that the Company's exposure to NT$43,931,164 thousand and NT$70,143,491 thousand, respectively; financial liabilities exposed default by those parties is low. to fair value interest rate risk were NT$247,646 thousand and NT$10,751 thousand, respectively, and financial assets exposed to cash flow interest rate risk were nil and NT$7,171,120 thousand, 3) Liquidity risk. The Company has sufficient operating capital to meet cash needs upon settlement respectively. of derivative financial instruments and bonds payable. Therefore, the liquidity risk is low. e. Movements of the unrealized gain on financial instruments for the years ended December 31, 4) Cash flow interest rate risk. The Company mainly invests in fixed-interest-rate debt securities. 2007 and 2006 were as follows: Therefore, cash flows are not expected to fluctuate significantly due to changes in market Year Ended December 31, 2007 Valuation Gain on Available-for-sale Financial Assets Equity in Valuation Gain on Available-for- sale Financial Assets Held by Investees interest rates. 24. RELATED PARTY TRANSACTIONS Total Balance, beginning of year Recognized directly in shareholders' equity Removed from shareholders' equity and recognized in earnings $ 242,248 295,419 (271,094) $ 319,367 95,057 - $ 561,615 390,476 (271,094) Balance, end of year $ 266,573 $ 414,424 $ 680,997 Year Ended December 31, 2006 Valuation Gain on Available-for-sale Financial Assets Equity in Valuation Gain on Available-for- sale Financial Assets Held by Investees $ - 241,763 485 $ - 319,367 - Total - 561,130 485 Balance, beginning of year Recognized directly in shareholders' equity Removed from shareholders' equity and recognized in losses Balance, end of year $ $ f. Information about financial risks 242,248 $ 319,367 $ 561,615 c. Investees GUC (with a controlling interest) VIS (accounted for using equity method) SSMC (accounted for using equity method) The Company engages in business transactions with the following related parties: a. Philips, one of the major shareholders of the Company, which has become a non-related party since March 2007. b. Subsidiaries TSMC-North America TSMC-Europe TSMC-Japan TSMC-Shanghai TSMC-Korea 1) Market risk. The derivative financial instruments categorized as financial assets/liabilities at fair value through profit or loss are mainly used to hedge the exchange rate fluctuations of foreign- d. Indirect subsidiaries currency assets and liabilities; therefore, the market risk of derivatives will be offset by the foreign exchange risk of these hedged items. Available-for-sale financial assets held by the Company are mainly fixed-interest-rate debt securities; therefore, the fluctuations in market interest rates will result in changes in fair values of these debt securities. WaferTech, LLC (WaferTech) TSMC Technology, Inc. (TSMC Technology) TSMC Design Technology Canada, Inc. (TSMC Canada) e. Indirect investee 26 VisEra Technology Company, Ltd. (VisEra), an indirect investee accounted for using equity method. f. Others Related parties over which the Company has control or exercises significant influence but with which the Company had no material transactions. Transactions with the aforementioned parties, other than those disclosed in other notes, are summarized as follows: For the year Sales TSMC-North America Philips Others Purchases WaferTech TSMC-Shanghai SSMC VIS Others Manufacturing expenses VisEra Philips Marketing expenses - commission TSMC-Europe TSMC-Japan TSMC-Korea General and administrative expenses - rental GUC Research and development expenses TSMC Technology (primarily consulting fees) TSMC Canada (primarily consulting fees) GUC Others 2007 2006 Amount % Amount % $ 192,846,641 - 1,072,708 $ 193,919,349 $ 8,774,750 5,828,541 5,468,410 4,188,107 1,028 $ 24,260,836 $ 39,078 - $ 39,078 $ $ $ $ 316,748 220,858 26,818 564,424 6,139 354,423 129,665 56,887 44,168 $ 585,143 61 - - 61 18 12 11 9 - 50 - - - 24 16 2 42 - 2 1 1 - 4 $ 190,459,073 4,024,990 972,872 $ 195,456,935 $ 12,530,552 4,405,843 6,820,632 3,911,838 - $ 27,668,865 $ - 755,904 $ 755,904 $ 236,454 254,758 9,981 $ $ 501,193 14,606 $ 37,559 - 39,421 - $ 76,980 60 1 - 61 27 10 15 8 - 60 - 1 1 15 16 - 31 - - - - - - (Continued) Sales of property, plant and equipment TSMC-Shanghai WaferTech Non-operating income and gains VIS (primarily technical service income, see Note 26h) TSMC-Shanghai (primarily technical service income) VisEra (primarily rental income) SSMC (primarily technical service income, see Note 26e) Others As of December 31 Receivables TSMC-North America Philips Others Other receivables TSMC-Shanghai VIS TSMC-North America SSMC VisEra Others Payables VIS WaferTech SSMC TSMC-Shanghai Philips Others Other long-term payables Philips (Note 25a) Deferred credits TSMC-Shanghai VisEra 2007 Amount % 2006 Amount $ 3,295 546 $ 3,841 $ 346,260 338,038 321,799 290,586 1,731 6 1 7 3 3 3 3 - $ 401,561 - $ 401,561 $ 261,237 278,295 246,242 314,953 - $ 1,298,414 12 $ 1,100,727 $ 26,626,880 - 74,768 100 - - $ 16,461,956 250,919 156,634 % 44 - 44 2 2 2 3 - 9 97 2 1 $ 26,701,648 100 $ 16,869,509 100 $ 151,037 118,749 98,885 84,778 40,101 31,758 29 22 19 16 8 6 $ 123,853 121,911 59,547 69,568 58,980 15,407 28 27 13 15 13 4 $ 525,308 100 $ 449,266 100 $ 838,584 784,280 655,029 596,581 - 125,156 28 26 22 20 - 4 $ 717,562 864,733 459,305 478,714 688,591 118,011 22 26 14 14 21 3 2,999,630 100 $ $ - $ 510,564 62,175 $ 572,739 - 52 6 58 $ $ 3,326,916 100 403,375 100 $ 723,661 124,350 $ 848,011 61 11 72 (Concluded) 27 The terms of sales to related parties were not significantly different from those of sales to third annual net sales. The Company and Philips (now NXP B.V.) agreed to cross license the patents parties. For other related party transactions, prices were determined in accordance with mutual owned by each party. The Company also obtained through Philips (now NXP B.V.) a number of agreements. cross patent licenses. The Company deferred the gains (classified under the deferred credits) derived from sales of property, b. Under a technical cooperation agreement with ITRI, the R.O.C. Government or its designee plant and equipment to TSMC-Shanghai and VisEra, and then recognized such gains (classified under approved by the Company can use up to 35% of the Company's capacity if the Company's the non-operating income and gains) over the depreciable lives of the disposed assets. outstanding commitments to its customers are not prejudiced. The term of this agreement is for five years beginning from January 1, 1987 and is automatically renewed for successive periods of The Company leased part of its office space from GUC and also leased certain buildings and facilities five years unless otherwise terminated by either party with one year prior notice. The agreement to VisEra. The related rental expense and rental income were classified under non-operating expenses was automatically renewed in 1992, 1997, 2002, and on January 1, 2007. and income, respectively. The lease terms and prices were determined in accordance with mutual agreements. 25. SIGNIFICANT LONG-TERM LEASES c. Under several foundry agreements, the Company shall reserve a portion of its production capacity for certain major customers that have guarantee deposits with the Company. As of December 31, 2007, the Company had a total of US$68,391 thousand of guarantee deposits. The Company leases several parcels of land from the Science Park Administration. These operating d. Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March leases expire on various dates from March 2008 to December 2027 and can be renewed upon 30, 1999, the parties formed a joint venture company, SSMC, which is an integrated circuit expiration. foundry in Singapore. The Company's equity interest in SSMC was 32%. Nevertheless, Philips parted with its semiconductor company which was renamed as NXP B.V. in September 2006. The As of December 31, 2007, future lease payments were as follows: Company and NXP B.V. purchased all the SSMC shares owned by EDB Investments Pte Ltd. pro rata Year 2008 2009 2010 2011 2012 2013 and thereafter Amount $ 325,608 304,578 255,380 253,798 253,798 1,741,955 according to the Shareholders Agreement on November 15, 2006. After the purchase, the Company and NXP B.V. currently own approximately 39% and 61% of the SSMC shares, respectively. The Company and Philips (now NXP B.V.) committed to buy specific percentages of the production capacity of SSMC. The Company and Philips (now NXP B.V.) are required, in the aggregate, to purchase up to 70% of SSMC's capacity, but the Company alone is not required to purchase more than 28% of the capacity. If any party defaults on the commitment and the capacity utilization of SSMC falls below a specific percentage of its capacity, the defaulting party is $ 3,135,117 required to compensate SSMC for all related unavoidable costs. 26. SIGNIFICANT COMMITMENTS AND CONTINGENCIES The significant commitments and contingencies of the Company as of December 31, 2007, except those disclosed in other notes, were as follows: e. The Company provides 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 price of all products sold by SSMC. The Agreement shall remain in force for ten years and may be automatically renewed for successive periods of five years each unless pre-terminated by either party under certain conditions. a. On June 20, 2004, the Company and Philips (Philips parted with its semiconductor company which was renamed as NXP B.V. in September 2006) amended the Technical Cooperation Agreement, which was originally signed on May 12, 1997. The amended Technical Cooperation Agreement is for five years beginning from January 1, 2004. Upon expiration, this amended Technical Cooperation Agreement will be terminated and will not be automatically renewed; however, the patent cross license arrangement between the Company and Philips (now NXP B.V.) will survive the expiration of the amended Technical Cooperation Agreement. Under this amended Technical Cooperation Agreement, the Company will pay Philips (now NXP B.V.) royalties based on a fixed amount mutually agreed-on, rather than under a certain percentage of the Company's f. Under a Technology Transfer Agreement (TTA) with National Semiconductor Corporation (National) entered into on June 27, 2000, the Company shall receive payments for the licensing of certain technology to National. The agreement was to remain in force for ten years and could be automatically renewed for successive periods of two years thereafter unless either party gives written notice for early termination under certain conditions. In January 2003, the Company and National entered into a Termination Agreement whereby the TTA was terminated. Under the Termination Agreement, the Company will be relieved of any further obligation to transfer any additional technology. In addition, the Company granted National an option to request prior to January 2008 the transfer of certain technologies under the same terms and conditions as the 28 terminated TTA. National did not make such request by the deadline, therefore the option has TSMC, TSMC-North America and WaferTech to object before disclosing items enumerated in the expired in January 2008. Court Order to SMIC's third party partners. The Court, however, did not grant a preliminary injunction as requested by TSMC, TSMC-North America and WaferTech. The result of the above- g. In December 2003, the Company entered into a Technology Development and License Agreement mentioned litigation cannot be determined at this time. with Freescale Semiconductor, Inc. to jointly develop 65-nm SOI (silicon on insulator) technology. The Company will also license related 90-nm SOI technology from Freescale Semiconductor, Inc. j. In April 2004, UniRAM Technology, Inc. filed an action with the US District Court in the Northern Any intellectual properties arising out of the co-development project shall be jointly owned by the District of California against TSMC and TSMC North America, alleging patent infringement and parties. In accordance with the agreement, the Company will pay royalties to Freescale trade secret misappropriation and seeking injunctive relief and damages. A jury in the District Semiconductor, Inc. and will share a portion of the costs associated with the joint development Court made a verdict in September 2007, awarding US$30.5 million to the plaintiff. TSMC intends project. to pursue remedies against this verdict. h. The Company provides a technology transfer to VIS under a Manufacturing License and 27. ADDITIONAL DISCLOSURES Technology Transfer Agreement entered into on April 1, 2004. The Company receives compensation for such technology transfer in the form of royalty payments from VIS computed at Following are the additional disclosures required by the SFB for the Company and its investees: specific percentages of net selling price of certain products sold by VIS. VIS agreed to reserve its certain capacity to manufacture for the Company certain products at prices as agreed by the a. Financing provided: None; parties. i. TSMC, TSMC-North America and WaferTech filed a series of lawsuits in late 2003 and 2004 against Semiconductor Manufacturing International Corporation, SMIC (Shanghai) and SMIC c. Marketable securities held: Please see Table 1 attached; Americas (aggregately referring to as "SMIC"). The lawsuits alleged that SMIC infringed multiple b. Endorsement/guarantee provided: None; TSMC, TSMC-North America and WaferTech patents and misappropriated TSMC, TSMC-North d. Marketable securities acquired or disposed of at costs or prices of at least NT$100 million or 20% America and WaferTech's trade secrets. These suits were settled out of court on January 30, 2005. of the paid-in capital: Please see Table 2 attached; As part of the settlement, Semiconductor Manufacturing International Corporation shall pay US$175 million over six years to resolve TSMC, TSMC-North America and WaferTech's claims. As of e. Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of the December 31, 2007, SMIC had paid US$90 million in accordance with the terms of this settlement paid-in capital: Please see Table 3 attached; agreement. In August 2006, TSMC, TSMC-North America and WaferTech filed a lawsuit against SMIC in Alameda County Superior Court in California for breach of aforementioned settlement f. Disposal of individual real estate properties at prices of at least NT$100 million or 20% of the paid- agreement, breach of promissory notes and trade secret misappropriation, seeking injunctive relief in capital: None; and monetary damages. In September 2006, SMIC filed a cross-complaint against TSMC, TSMC- North America and WaferTech in the same court, alleging TSMC, TSMC-North America and g. Total purchases from or sales to related parties of at least NT$100 million or 20% of the paid-in WaferTech of breach of the settlement agreement and implied covenant of good faith and fair capital: Please see Table 4 attached; dealing, in response to TSMC, TSMC-North America and WaferTech's August complaint. In November 2006, SMIC filed a complaint with Beijing People's High Court against TSMC, TSMC- h. Receivable from related parties amounting to at least NT$100 million or 20% of the paid-in North America and WaferTech alleging defamation and breach of good faith. The California State capital: Please see Table 5 attached; Superior Court of Alameda County issued an Order on TSMC, TSMC-North America and WaferTech's pre-trial motion for a preliminary injunction against SMIC on September 7, 2007. In i. Names, locations, and related information of investees on which the Company exercises significant the Order, the Court found "TSMC has demonstrated a significant likelihood that it will ultimately influence: Please see Table 6 attached; prevail on the merits of its claim for breach of certain paragraphs of the (2005) Settlement Agreement" with SMIC. The Court also found "TSMC has demonstrated a significant probability of j. Information about derivatives of investees over which the Company has a controlling interest: establishing that SMIC retains and is using TSMC Information in SMIC's 0.13um and smaller technologies, and there is significant threat of serious irreparable harm to TSMC if SMIC were to TSMC-Shanghai entered into forward exchange contracts during the year ended December 31, disclose or transfer that information before final resolution of the case." Therefore, the Court 2007 to manage exposures due to foreign exchange rate fluctuations. As of December 31, 2007, ordered that, effective immediately, SMIC must provide advance notice and an opportunity for no forward exchange contract was outstanding. 29 For the year ended December 31, 2007, net gains arising from forward exchange contracts of c. Export sales TSMC-Shanghai were NT$2,181 thousand (including realized settlement gains of NT$2,064 thousand and valuation losses of NT$117 thousand). XinTec entered into forward exchange contracts during the year ended December 31, 2007 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of December 31, 2007: Sell US$/buy NT$ Maturity Date January 2008 Contract Amount (In Thousands) US$ 11,000 Area Americas Asia Europe and others Years Ended December 31 2007 2006 $ 159,721,699 77,616,258 40,287,628 $ 153,974,683 102,121,046 29,109,649 $ 277,625,585 $ 285,205,378 The export sales information is based on the amounts billed to customers within the areas. d. Major customers representing at least 10% of gross sales Years Ended December 31 2007 Amount $ 37,350,210 2006 Amount $ 33,610,918 % 12 % 11 For the year ended December 31, 2007, net losses arising from forward exchange contracts of XinTec were NT$2,834 thousand (including realized settlement losses of NT$1,283 thousand and valuation losses of NT$1,551 thousand). k. Information on investment in Mainland China Customer A Sales to Customer A above were made through TSMC-North America. 1) The name of the investee in mainland China, the main businesses and products, its issued capital, method of investment, information on inflow or outflow of capital, percentage of ownership, equity in the net gain or net loss, ending balance, amount received as dividends from the investee, and the limitation on investee: Please see Table 7 attached. 2) Significant direct or indirect transactions with the investee, its prices and terms of payment, unrealized gain or loss, and other related information which is helpful to understand the impact of investment in mainland China on financial reports: Please see Note 24. 28. SEGMENT FINANCIAL INFORMATION a. Industry financial information The Company operates in one industry. Therefore, the disclosure of industry financial information is not applicable to the Company. b. Geographic information The Company has no significant foreign operations. Therefore, the disclosure of geographic information is not applicable to the Company. 30 TABLE 1 Taiwan Semiconductor Manufacturing Company Limited and Investees MARKETABLE SECURITIES HELD DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars, Unless Otherwise Specified) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note The Company Open-end mutual funds NITC Bond Fund Fuh Hwa Bond NITC Taiwan Bond ING Taiwan Bond Fund Prudential Financial Bond Fund President James Bond JF Taiwan Bond Fund ING Taiwan Income Fund Taishin Lucky Fund AIG Taiwan Bond Fund Cathay Bond Fund Dresdner Bond DAM Fund JF First Bond Fund HSBC Taiwan Money Management Fund INVESCO Bond Fund Government bond 2003 Government Bond Series B 2004 Government Bond Series B 2006 Government Bond Series D 2004 Government Bond Series G 2006 Government Bond Series D 2003 Government Bond Series B 2003 Asian Development Bank Govt. Bond 2003 Government Bond Series F 2003 Government Bond Series H European Investment Bank Bonds 2003 European Bank for Reconstruction and Development Govt. Bond Series A Corporate bond Hua Nan Bank Cathay Bank Taiwan Power Company Formosa Petrochemical Corporation Formosa Petrochemical Corporation Taiwan Power Company Nan Ya Plastics Corporation CPC Corporation, Taiwan China Steel Corporation Formosa Plastic Corporation Shanghai commercial & Saving Bank - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets Available-for-sale financial assets Held-to-maturity financial assets Available-for-sale financial assets Held-to-maturity financial assets 12,239 132,997 103,016 85,581 83,306 77,128 59,049 54,621 68,945 54,469 60,126 54,319 35,324 27,416 27,176 $ 2,045,935 1,801,674 1,474,856 1,310,030 1,236,728 1,208,799 915,252 878,682 718,556 705,033 703,824 639,542 504,206 413,504 410,054 - - - - - - - - - - - - - - - - - - - - - - 2,349,163 1,197,121 399,733 200,065 3,651,840 1,647,947 855,088 799,049 400,709 379,829 89,963 1,573,338 1,180,440 899,200 399,264 3,581,667 2,630,064 1,804,346 1,200,318 1,000,000 391,134 292,718 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A $ 2,045,935 1,801,674 1,474,856 1,310,030 1,236,728 1,208,799 915,252 878,682 718,556 705,033 703,824 639,542 504,206 413,504 410,054 2,349,163 1,197,121 399,733 200,065 3,647,566 1,647,413 875,103 797,744 399,825 400,000 90,000 1,573,338 1,180,440 899,200 399,264 3,547,308 2,629,939 1,796,764 1,199,461 987,430 391,011 292,648 (Continued) 31 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note Stocks TSMC Global TSMC International VIS SSMC TSMC Partners TSMC-North America XinTec GUC TSMC-Japan TSMC-Europe TSMC-Korea United Industrial Gases Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Hontung Venture Capital Co., Ltd. Fund Horizon Ventures Fund Crimson Asia Capital Capital TSMC-Shanghai VTAF II VTAF III Emerging Alliance Chi Cheng Hsin Ruey Stocks TSMC VIS Stocks TSMC VIS Subsidiary Investment accounted for using 1 $ 44,204,188 100 $ 44,204,188 equity method Subsidiary Investee accounted for using equity method Investee accounted for using equity method Subsidiary Subsidiary Investee with a controlling financial interest Investee with a controlling financial interest Subsidiary Subsidiary Subsidiary - - - - - - Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Financial assets carried at cost Financial assets carried at cost Investment accounted for using equity method Parent Company Investee accounted for using equity Available-for-sale financial assets Investments accounted for using method equity method Parent Company Investee accounted for using equity Available-for-sale financial assets Investments accounted for using method equity method 987,968 616,240 27,688,565 11,024,568 463 9,092,741 300 11,000 91,703 42,572 6 - 80 16,783 10,500 4,000 2,633 - - - - - - - - 17,032 5,082 17,064 3,748 4,734,180 2,255,647 1,501,521 823,552 104,929 88,702 16,436 193,584 105,000 40,000 26,329 312,949 70,298 8,622,715 1,170,841 906,536 467,873 173,429 171,658 1,055,984 109,815 1,057,963 85,718 100 36 39 100 100 43 37 100 100 100 10 7 2 10 12 1 27,688,565 14,974,643 8,123,596 4,734,180 2,255,647 1,419,627 9,344,632 104,929 88,702 16,436 305,599 321,254 52,690 20,536 312,949 70,298 100 8,621,163 98 98 99 36 36 - - - - 1,166,386 896,703 467,873 631,993 Treasury stock of NT$458,564 thousand is deducted from the carrying value 631,169 Treasury stock of NT$459,511 thousand is deducted from the carrying value 1,055,984 123,491 1,057,963 91,067 (Continued) Chi Cherng Hsin Ruey 32 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note TSMC International TSMC Development TSMC Partners Emerging Alliance VTAF II Stocks InveStar InveStar II TSMC Development TSMC Technology Stocks WaferTech Common stock VisEra Holding Company TSMC Canada Common stock Pixim, Inc. RichWave Technology Corp. Global Investment Holding Inc. Preferred stock Audience, Inc. Axiom Microdevices, Inc. Miradia, Inc. Mobilygen Mosaic Systems, Inc. Next IO, Inc. Optichron, Inc. Optimal Corporation Pixim, Inc. Teknovus, Inc. Capital VentureTech Alliance Holdings Common stock Yobon Sentelic Leadtrend RichWave Technology Corp. Preferred stock 5V Technologies, Inc. Ageia Technologies, Inc. Aquantia Corporation Audience, Inc. Subsidiary Subsidiary Subsidiary Subsidiary Investments accounted for using 8,721 US$ 42,038 97 US$ 42,038 equity method 43,048 1 1 US$ 57,594 US$ 674,084 US$ 6,592 97 100 100 US$ 57,594 US$ 674,084 US$ 6,592 Subsidiary Investments accounted for using - US$ 227,469 100 US$ 227,469 equity method Investee accounted for using equity Investments accounted for using 43,000 US$ 67,948 49 US$ 67,948 method Subsidiary equity method 2,300 US$ 2,877 100 US$ 2,877 Financial assets carried at cost 1,036 4,247 10,800 US$ 275 US$ 1,648 $ 100,000 - 13 6 US$ 275 US$ 1,648 $ 100,000 - - - - - - - - - - - - - Financial assets carried cost 1,654 1,000 3,040 1,415 2,481 800 714 - 3,606 6,977 US$ 250 US$ 1,000 US$ 1,000 US$ 750 US$ 12 US$ 500 US$ 1,000 US$ 229 US$ 862 US$ 1,327 Subsidiary Investments accounted for using - - - - - - - - - - equity method Financial assets carried at cost Financial assets carried cost 1,875 1,200 1,265 1,043 2,357 2,030 1,786 2,989 US$ 919 US$ 2,040 US$ 660 US$ 730 US$ 1,768 US$ 2,074 US$ 2,273 US$ 814 1 1 3 1 6 4 3 - 2 2 10 13 15 5 2 11 2 5 2 US$ 250 US$ 1,000 US$ 1,000 US$ 750 US$ 12 US$ 500 US$ 1,000 US$ 229 US$ 862 US$ 1,327 - US$ 919 US$ 2,040 US$ 660 US$ 730 US$ 1,768 US$ 2,074 US$ 2,273 US$ 814 (Continued) 33 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Axiom Microdevices, Inc. Beceem Communications GemFire Corporation Impinj, Inc. Miradia, Inc. Mobilygen Next IO, Inc. Optichron, Inc. Pixim, Inc. Power Analog Microelectronics QST Holding, LLC Teknovus, Inc. Tzero Technologies, Inc. Xceive Capital VentureTech Alliance Holdings - - - - - - - - - - - - - - Financial assets carried cost 5,044 650 600 475 3,416 569 216 1,050 3,279 3,039 - 1,599 730 714 US$ 2,088 US$ 1,600 US$ 68 US$ 1,000 US$ 3,106 US$ 149 US$ 182 US$ 1,844 US$ 641 US$ 2,409 US$ 145 US$ 454 US$ 1,500 US$ 1,000 Subsidiary Investments accounted for using - - equity method 4 1 1 - 3 1 - 2 2 13 3 - 2 2 10 Note Market Value or Net Asset Value (US$ in Thousands) US$ 2,088 US$ 1,600 US$ 68 US$ 1,000 US$ 3,106 149 US$ US$ 182 US$ 1,844 US$ 641 US$ 2,409 US$ 145 US$ 454 US$ 1,500 US$ 1,000 - VTAF III Common stock Mutual-pak Technology Co., Ltd. Subsidiary Investments accounted for using 4,590 US$ 1,672 51 US$ 1,672 equity method Preferred stock Advasense Sensors, Inc. Auramicro, Inc. Exclara, Inc. (Formerly Synpitec, Inc.) M2000, Inc. Neoconix, Inc. Powervation, Ltd. Quellan, Inc Silicon Technical Services, LLC Tilera, Inc. Validity Sensors, Inc. Convertible bond GTBF, Inc. Capital VentureTech Alliance Holdings Common stock Monolithic Power Systems, Inc. Memsic, Inc. Capella Microsystems (Taiwan), Inc Preferred stock Integrated Memory Logic, Inc. - - - - - - - - - - - Financial assets carried at cost Subsidiary Investments accounted for using equity method 1,929 2,500 14,513 3,000 2,458 191 3,106 1,055 1,698 6,424 - - US$ 1,834 US$ 750 US$ 2,412 US$ 3,000 US$ 4,000 US$ 2,930 US$ 3,500 US$ 1,208 US$ 2,360 US$ 2,545 6 17 19 5 6 19 6 2 3 3 US$ 1,834 US$ 750 US$ 2,412 US$ 3,000 US$ 4,000 US$ 2,930 US$ 3,500 US$ 1,208 US$ 2,360 US$ 2,545 US$ 1,500 N/A US$ 1,500 - 80 - - - - - Financial assets at fair value through profit or loss Available-for-sale financial assets Financial assets carried at cost 1,352 US$ 29,024 1,364 530 US$ 13,812 US$ 154 Financial assets carried at cost 2,872 US$ 1,221 7 9 2 9 US$ 29,024 US$ 13,812 US$ 154 US$ 1,221 (Continued) InveStar 34 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership InveStar II Tsmc Global IP Unity, Inc. NanoAmp Solutions, Inc. Sonics, Inc. Common stock Monolithic Power Systems, Inc Rich Tek Technology Corp. Geo Vision, Inc. Memsic, Inc. Rich Tek Technology Corp. Geo Vision, Inc. eLCOS Microdisplay Technology, Ltd. EoNEX Technologies, Inc. Sonics, Inc. Epic Communication, Inc. EON Technology, Corp. Goyatek Technology, Corp. Trendchip Technologies Corp. Capella Microsystems (Taiwan), Inc Ralink Technology (Taiwan), Inc. Auden Technology MFG. Co., Ltd Preferred stock Alchip Technologies Limited eLCOS Microdisplay Technology, Ltd. FangTek, Inc. Kilopass Technology, Inc. NanoAmp Solutions, Inc. Sonics, Inc. Agency bonds Fed Hm Ln Pc Pool 1b1225 Fed Hm Ln Pc Pool 1b2566 Fed Hm Ln Pc Pool 1b2632 Fed Hm Ln Pc Pool 1b2642 Fed Hm Ln Pc Pool 1b2776 Fed Hm Ln Pc Pool 1b2792 Fed Hm Ln Pc Pool 1b2810 Fed Hm Ln Pc Pool 1b7453 Fed Hm Ln Pc Pool 1g0038 Fed Hm Ln Pc Pool 1g0053 Fed Hm Ln Pc Pool 1g0104 Fed Hm Ln Pc Pool 1g1282 Fed Hm Ln Pc Pool 1g1411 Fed Hm Ln Pc Pool 1h2520 Fed Hm Ln Pc Pool 1h2524 Fed Hm Ln Pc Pool 780870 Fed Hm Ln Pc Pool 781959 Fed Hm Ln Pc Pool 782785 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Financial assets carried at cost Financial assets at fair value through profit or loss Available-for-sale financial assets Financial assets carried at cost Financial assets carried at cost Available-for-sale financial assets 1,008 541 1,844 US$ 494 US$ 853 US$ 3,530 864 US$ 18,561 152 6 1,145 261 15 270 55 2,220 191 4,243 2,088 1,000 534 2,383 1,049 6,128 3,500 6,931 3,887 375 2,115 - - - - - - - - - - - - - - - - - - US$ 1,371 US$ 59 US$ 11,594 US$ 2,362 US$ 135 US$ 27 US$ 3,048 US$ 32 US$ 37 US$ 1,175 US$ 545 US$ 574 US$ 210 US$ 791 US$ 223 US$ 2,950 US$ 3,500 US$ 3,250 US$ 2,000 US$ 1,500 US$ 3,082 US$ 139 US$ 157 US$ 178 US$ 234 US$ 340 US$ 223 US$ 296 US$ 2,805 US$ 296 US$ 367 US$ 142 US$ 4,077 US$ 3,618 US$ 2,669 US$ 1,970 US$ 721 US$ 3,834 US$ 254 1 2 2 3 - - 7 - - 1 5 - 1 6 7 4 2 3 4 15 8 16 6 1 6 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Note Market Value or Net Asset Value (US$ in Thousands) US$ 494 US$ 853 US$ 3,530 US$ 18,561 US$ 1,371 US$ 59 US$ 11,594 US$ 2,362 US$ 135 US$ 27 US$ 3,048 US$ 32 US$ 37 US$ 1,175 US$ 545 US$ 574 US$ 210 US$ 791 US$ 223 US$ 2,950 US$ 3,500 US$ 3,250 US$ 2,000 US$ 1,500 US$ 3,082 US$ 139 US$ 157 US$ 178 US$ 234 US$ 340 US$ 223 US$ 296 US$ 2,805 US$ 296 US$ 367 US$ 142 US$ 4,077 US$ 3,618 US$ 2,669 US$ 1,970 US$ 721 US$ 3,834 US$ 254 (Continued) 35 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note Fed Hm Ln Pc Pool 782837 Fed Hm Ln Pc Pool 782968 Fed Hm Ln Pc Pool 783022 Fed Hm Ln Pc Pool 783026 Fed Hm Ln Pc Pool B19205 Fed Hm Ln Pc Pool E89857 Fed Hm Ln Pc Pool G11295 Fed Hm Ln Pc Pool M80855 Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal National Mort Assoc Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Gtd Fnma Pool 255883 Fnma Pool 555549 Fnma Pool 555715 Fnma Pool 632399 Fnma Pool 662401 Fnma Pool 667766 Fnma Pool 680932 Fnma Pool 681393 Fnma Pool 685116 Fnma Pool 691283 Fnma Pool 694287 Fnma Pool 703711 Fnma Pool 725095 Fnma Pool 730033 Fnma Pool 740934 Fnma Pool 742232 Fnma Pool 750798 Fnma Pool 773246 Fnma Pool 790828 Fnma Pool 793932 Fnma Pool 794040 Fnma Pool 795548 Fnma Pool 799664 Fnma Pool 799868 Fnma Pool 804764 Fnma Pool 804852 Fnma Pool 804962 Fnma Pool 805163 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 494 US$ 1,147 US$ 536 US$ 303 US$ 7,103 US$ 1,347 US$ 1,126 US$ 2,942 US$ 1,784 US$ 1,832 US$ 2,360 US$ 2,742 US$ 2,178 US$ 3,665 US$ 2,136 US$ 3,275 US$ 3,044 US$ 2,844 US$ 2,059 US$ 2,194 US$ 2,011 US$ 3,567 US$ 1,717 US$ 3,126 US$ 1,385 US$ 171 US$ 390 US$ 560 US$ 1,310 US$ 1,110 US$ 2,388 US$ 599 US$ 3,442 US$ 20 US$ 467 US$ 1,023 US$ 169 US$ 1,110 US$ 23 US$ 22 US$ 229 US$ 2,009 US$ 438 US$ 608 US$ 234 US$ 94 US$ 32 US$ 396 US$ 330 US$ 388 US$ 408 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A US$ 494 US$ 1,147 US$ 536 US$ 303 US$ 7,103 US$ 1,347 US$ 1,126 US$ 2,942 US$ 1,784 US$ 1,832 US$ 2,360 US$ 2,742 US$ 2,178 US$ 3,665 US$ 2,136 US$ 3,275 US$ 3,044 US$ 2,844 US$ 2,059 US$ 2,194 US$ 2,011 US$ 3,567 US$ 1,717 US$ 3,126 US$ 1,385 US$ 171 US$ 390 US$ 560 US$ 1,310 US$ 1,110 US$ 2,388 US$ 599 US$ 3,442 US$ 20 US$ 467 US$ 1,023 US$ 169 US$ 1,110 US$ 23 US$ 22 US$ 229 US$ 2,009 US$ 438 US$ 608 US$ 234 US$ 94 US$ 32 US$ 396 US$ 330 US$ 388 US$ 408 36 (Continued) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note Fnma Pool 806642 Fnma Pool 806721 Fnma Pool 814418 Fnma Pool 815626 Fnma Pool 819423 Fnma Pool 821129 Fnma Pool 888249 Fnma Pool 888499 Fnma Pool 888502 Fnma Pool 888507 Fnma Pool 888515 Fnma Pool 888519 Fnma Pool 888527 Fnma Pool 888738 Fnma Pool 888793 Fnma Pool 900296 Gnma Ii Pool 081150 Gnma Ii Pool 081153 Fed Home Ln Bank Federal Farm Cr Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Mtg Disc Nts Federal Home Loan Bank Federal Home Loan Banks Federal Natl Mtg Assn Federal Natl Mtg Assn Medium Federal Natl Mtg Assn Mtn Federal Natl Mtg Assn Mtn Federal Natl Mtg Assn Mtn Federal Natl Mtg Assn Mtn Tennessee Valley Auth Corporate bonds Abbott Labs American Gen Fin Corp. American Gen Fin Corp. Mtn American Gen Fin Corp. Mtn American Honda Fin Corp. Mtn Ameritech Capital Funding Co. Amgen Inc. Anz Cap Tr I Atlantic Richfield Co. Axa Finl Inc. Beneficial Corp. Mtn Bk Entry Burlington Res Inc. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 777 US$ 635 US$ 343 US$ 2,301 US$ 538 US$ 512 US$ 60 US$ 2,438 US$ 236 US$ 911 US$ 1,730 US$ 123 US$ 69 US$ 4,935 US$ 5,697 US$ 3,276 US$ 470 US$ 1,423 US$ 5,175 US$ 3,511 US$ 8,977 US$ 8,939 US$ 4,965 US$ 5,969 US$ 4,980 US$ 19,023 US$ 5,134 US$ 22,342 US$ 4,621 US$ 21,500 US$ 5,169 US$ 3,512 US$ 2,982 US$ 3,171 US$ 3,398 US$ 3,066 US$ 6,068 US$ 1,510 US$ 3,139 US$ 3,451 US$ 1,962 US$ 3,107 US$ 489 US$ 2,978 US$ 984 US$ 2,216 US$ 2,147 US$ 2,274 US$ 3,653 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A US$ 777 US$ 635 US$ 343 US$ 2,301 US$ 538 US$ 512 US$ 60 US$ 2,438 US$ 236 US$ 911 US$ 1,730 US$ 123 US$ 69 US$ 4,935 US$ 5,697 US$ 3,276 US$ 470 US$ 1,423 US$ 5,175 US$ 3,511 US$ 8,977 US$ 8,939 US$ 4,965 US$ 5,969 US$ 4,980 US$ 19,023 US$ 5,134 US$ 22,342 US$ 4,621 US$ 21,500 US$ 5,169 US$ 3,512 US$ 2,982 US$ 3,171 US$ 3,398 US$ 3,066 US$ 6,068 US$ 1,510 US$ 3,139 US$ 3,451 US$ 1,962 US$ 3,107 US$ 489 US$ 2,978 US$ 984 US$ 2,216 US$ 2,147 US$ 2,274 US$ 3,653 (Continued) 37 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note Chase Manhattan Corp. New Chase Manhattan Corp. New Chase Manhattan Corp. New Cit Group Hldgs Inc. Cit Group Inc. New Consolidated Edison Inc. Credit Suisse First Boston Usa Deere John Cap Corp. Mtn Bk Ent Depfa Acs Bank Fleet Boston Corp. Ge Global Ins Hldg Corp. General Dynamics Corp. General Elec Cap Corp. Mtn General Elec Cap Corp. Mtn General Elec Cap Corp. Mtn General Re Corp. Genworth Finl Inc. Hancock John Global Fdg Ii Mtn Hancock John Global Fdg Mtn Hartford Finl Svcs Group Inc. Hbos Plc Medium Term Sr Nts Heller Finl Inc. Hewlett Packard Co. Household Fin Corp. Household Fin Corp. Ing Sec Life Instl Fdg International Business Machs Intl Lease Fin Corp. Mtn JP Morgan Chase Keycorp Mtn Book Entry Lehman Brothers Hldgs Inc. Lehman Brothers Hldgs Inc. Lehman Brothers Hldgs Inc. Lehman Brothers Hldgs Inc. Lehman Brothers Hldgs Inc. Massmutual Global Fdg Ii Mtn Metropolitan Life Golbal Mtn Mgic Invt Corp. Mizuho Fin (Cayman) Monumental Global Fdg Ii Monunmetal Global Fdg Ii Mony Group Inc. Morgan Stanley Morgan Stanley National City Corp. Nationwide Life Global Fdg I Oracle Corp. / Ozark Hldg Inc. Pepsico Inc. Mtn Book Entry Praxair Inc. Premark Intl Inc. Pricoa Global Fdg I Mtn - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 1,520 US$ 2,099 US$ 3,483 US$ 2,982 US$ 2,435 US$ 2,990 US$ 2,229 US$ 2,215 US$ 20,402 US$ 2,620 US$ 1,914 US$ 2,133 US$ 3,978 US$ 3,047 US$ 2,118 US$ 3,263 US$ 3,279 US$ 5,111 US$ 993 US$ 1,336 US$ 3,001 US$ 1,950 US$ 1,884 US$ 2,950 US$ 3,046 US$ 2,582 US$ 3,555 US$ 2,985 US$ 2,001 US$ 3,053 US$ 1,643 US$ 490 US$ 989 US$ 3,052 US$ 1,060 US$ 3,737 US$ 3,366 US$ 1,059 US$ 2,148 US$ 1,494 US$ 2,000 US$ 2,137 US$ 5,531 US$ 1,951 US$ 3,488 US$ 3,631 US$ 2,019 US$ 3,607 US$ 3,111 US$ 2,679 US$ 3,462 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A US$ 1,520 US$ 2,099 US$ 3,483 US$ 2,982 US$ 2,435 US$ 2,990 US$ 2,229 US$ 2,215 US$ 20,402 US$ 2,620 US$ 1,914 US$ 2,133 US$ 3,978 US$ 3,047 US$ 2,118 US$ 3,263 US$ 3,279 US$ 5,111 US$ 993 US$ 1,336 US$ 3,001 US$ 1,950 US$ 1,884 US$ 2,950 US$ 3,046 US$ 2,582 US$ 3,555 US$ 2,985 US$ 2,001 US$ 3,053 US$ 1,643 US$ 490 US$ 989 US$ 3,052 US$ 1,060 US$ 3,737 US$ 3,366 US$ 1,059 US$ 2,148 US$ 1,494 US$ 2,000 US$ 2,137 US$ 5,531 US$ 1,951 US$ 3,488 US$ 3,631 US$ 2,019 US$ 3,607 US$ 3,111 US$ 2,679 US$ 3,462 38 (Continued) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Principal Finl Group Australia Protective Life Secd Trs Mtn Sbc Communications Inc. Sbc Communications Inc. Simon Ppty Group LP Simon Ppty Group LP Sp Powerassests Ltd. Global Suntrust Bk Atlanta Ga Medium Unitedhealth Group Inc. Wachovia Corp. New Washington Post Co. Wells Fargo + Co. New Med Trm Corporate issued asset-backed securities Americredit Auto Rec Tr Americredit Automobile Rec Tr Americredit Automobile Receiva Atlantic City Elc Trns Fdgllc Banc Amer Coml Mtg Inc. Banc Amer Fdg 2006 I Tr Bear Stearns Adjustable Rate Bear Stearns Arm Tr Bear Stearns Arm Tr Bear Stearns Arm Tr Bear Stearns Coml Mtg Secs Inc. Bear Stearns Coml Mtg Secs Inc. Capital One Auto Fin Tr Capital One Auto Fin Tr Capital One Multi Asset Exec Capital One Multi Asset Execut Capital One Multi Asset Execut Capital One Prime Auto Receiva Capitial One Prime Auto Receiv Cbass Tr Cendant Rent Car Fdg Aesop LLC. Chase Mtg Fin Tr Chase Mtg Fin Tr Chase Mtg Fin Tr Chase Mtge Finance Corp. Cit Equip Coll Tr Citicorp Mtg Secs Credit Suisse First Boston Mtg Credit Suisse First Boston Mtg Credit Suisse First Boston Mtg Daimlerchrysler Auto Tr Daimlerchrysler Auto Tr Deere John Owner Tr First Franklin Mtg Ln Tr First Horizon First Un Natl Bk Coml Mtg Tr First Un Natl Bk Coml Mtg Tr - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 1,008 US$ 3,484 US$ 3,372 US$ 711 US$ 2,513 US$ 1,010 US$ 993 US$ 3,482 US$ 1,408 US$ 3,168 US$ 3,018 US$ 4,413 US$ 1,001 US$ 894 US$ 1,176 US$ 162 US$ 4,591 US$ 3,762 US$ 110 US$ 3,081 US$ 1,951 US$ 247 US$ 3,179 US$ 5,099 US$ 906 US$ 3,685 US$ 9,118 US$ 3,991 US$ 2,995 US$ 3,498 US$ 464 US$ 1,297 US$ 2,663 US$ 887 US$ 1,745 US$ 2,605 US$ 1,678 US$ 4,033 US$ 261 US$ 1,738 US$ 6,842 US$ 6,704 US$ 4,337 US$ 1,698 US$ 2,488 US$ 1,659 US$ 45 US$ 2,595 US$ 5,172 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Note Market Value or Net Asset Value (US$ in Thousands) US$ 1,008 US$ 3,484 US$ 3,372 US$ 711 US$ 2,513 US$ 1,010 US$ 993 US$ 3,482 US$ 1,408 US$ 3,168 US$ 3,018 US$ 4,413 US$ 1,001 US$ 894 US$ 1,176 US$ 162 US$ 4,591 US$ 3,762 US$ 110 US$ 3,081 US$ 1,951 US$ 247 US$ 3,179 US$ 5,099 US$ 906 US$ 3,685 US$ 9,118 US$ 3,991 US$ 2,995 US$ 3,498 US$ 464 US$ 1,297 US$ 2,663 US$ 887 US$ 1,745 US$ 2,605 US$ 1,678 US$ 4,033 US$ 261 US$ 1,738 US$ 6,842 US$ 6,704 US$ 4,337 US$ 1,698 US$ 2,488 US$ 1,659 US$ 45 US$ 2,595 US$ 5,172 (Continued) 39 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note First Un Natl Bk Coml Mtg Tr Gs Mtg Secs Corp. Home Equity Mortgage Trust Home Equity Mtg Tr 2006 4 Hyundai Auto Receivables Tr JP Morgan Mtg Tr JP Morgan Mtg Tr JP Morgan Mtg Tr Lb Ubs Coml Mtg Tr Nomura Asset Accep Corp. Residential Asset Mtg Prods Residential Fdg Mtg Secs I Inc. Residential Fdg Mtg Secs I Inc. Sequoia Mtg Tr Sequoia Mtg Tr Sequoia Mtg Tr Terwin Mtg Tr Tiaa Seasoned Coml Mtg Tr Usaa Auto Owner Tr Wamu Mtg Wamu Mtg Pass Through Ctfs Washington Mut Mtg Secs Corp. Wells Fargo Finl Auto Owner Tr Wells Fargo Mtg Backed Secs Wells Fargo Mtg Backed Secs Wells Fargo Mtg Backed Secs Wells Fargo Mtg Bkd Secs Wells Fargo Mtg Bkd Secs Whole Auto Ln Tr Government bonds United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts Wi Treasury Sec Money market funds Ssga Cash Mgmt Global Offshore - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets Available-for-sale financial assets Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 2,186 US$ 1,709 US$ 2,659 US$ 970 US$ 1,519 US$ 888 US$ 910 US$ 863 US$ 3,884 US$ 1,542 US$ 2,200 US$ 1,594 US$ 3,454 US$ 265 US$ 340 US$ 433 US$ 3,317 US$ 4,016 US$ 4,998 US$ 3,242 US$ 166 US$ 2,422 US$ 4,956 US$ 3,816 US$ 3,865 US$ 3,931 US$ 3,029 US$ 1,763 US$ 1,828 US$ 5,070 US$ 5,613 US$ 42,509 US$ 5,160 US$ 3,359 US$ 7,758 US$ 25,924 US$ 9,735 US$ 6,500 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A US$ 2,186 US$ 1,709 US$ 2,659 US$ 970 US$ 1,519 US$ 888 US$ 910 US$ 863 US$ 3,884 US$ 1,542 US$ 2,200 US$ 1,594 US$ 3,454 US$ 265 US$ 340 US$ 433 US$ 3,317 US$ 4,016 US$ 4,998 US$ 3,242 US$ 166 US$ 2,422 US$ 4,956 US$ 3,816 US$ 3,865 US$ 3,931 US$ 3,029 US$ 1,763 US$ 1,828 US$ 5,070 US$ 5,613 US$ 42,509 US$ 5,160 US$ 3,359 US$ 7,758 US$ 25,924 US$ 9,735 US$ 6,500 US$ 592,180 N/A US$ 592,180 (Concluded) 40 TABLE 2 Taiwan Semiconductor Manufacturing Company Limited 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 30, 2007 (Amounts in Thousands of New Taiwan Dollars, Unless Otherwise Specified) Company Name Marketable Securities Type and Name Financial Statement Account Counter-party The Company Open-end mutual funds NITC Bond Fund Available-for-sale finan- National Investment Trust Co., Ltd. cial assets Fuh Hwa Bond NITC Taiwan Bond ING Taiwan Bond Fund Prudential Financial Bond Fund President James Bond JF Taiwan Bond Fund ING Taiwan Income Bond Fund Taishin Lucky Fund AIG Taiwan Bond Fund Cathay Bond Fund Dresdner Bond DAM Fund JF Taiwan First Bond Fund HSBC Taiwan Money Management ING Taiwan Select Bond Fund Shinkong Chi-Shin Fund TIIM High Yield Fund JIH SUN Bond Fund Mega Diamond Bond Fund Polaris De-Bao Fund Government bond 2003 Government Bond Series B 2004 Government Bond Series B 2006 Government Bond Series D 2004 Government Bond Series G 2005 Government Bond Series A 2002 Government Bond Series B 2004 Kaohsiung Municipal Series A 2004 Kaohsiung Municipal Series B Fuh Hwa Investment Trust Co., Ltd National Investment Trust Co., Ltd. ING Securities Investment Trust Co., Ltd Prudential Financial Securities Investment Trust Enterprise Uni-President Assets Management Corp. JF Asset Management (Taiwan) Ltd. ING Securities Investment Trust Co., Ltd Taishin Investment Trust Co., Ltd AIG Global Asset management Corporation (Taiwan) Ltd. Cathay Securities Investment Trust Co., Ltd Allianz Global Investors Taiwan Ltd. JF Asset Management (Taiwan) Limited HSBC Asset Management (Taiwan) Ltd. ING Securities Investment Trust Co., Ltd Shinkong Investment Trust Co., Ltd Taiwan International Investment man- agement JIH SUN Securities Investment Trust Co., Ltd Mega Investment Trust Co., Ltd Polaris Internationa Securities Investment Trust Co., Ltd Available-for-sale finan- Chung Shing Bills Finance Corp. and cial assets several financial institutions Held-to-maturity finan- Chung Shing Bills Finance Corp. and cial assets several financial institutions Beginning Balance Acquisition Disposal (Note 2) Ending Balance Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) on Disposal (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) (Note 3) - - - - - - - - - - - - - - - - - - - - - - - - - - - - 22,219 $ 3,655,939 - $ - 9,980 $ 1,650,000 $ 1,621,826 $ 28,174 12,239 $ 2,045,935 125,122 93,312 175,156 103,751 1,667,908 1,314,669 2,639,459 1,516,294 41,289 23,884 85,581 - 556,000 340,000 1,300,000 - 33,414 14,180 175,156 20,445 450,000 200,000 2,656,012 300,000 442,919 197,557 2,604,862 295,582 7,081 2,443 51,150 4,418 132,997 103,016 85,581 83,306 1,801,674 1,474,856 1,310,030 1,236,728 65,496 1,010,426 77,128 1,200,000 65,496 1,016,917 1,000,599 16,318 77,128 1,208,799 85,145 63,947 78,624 78,629 1,299,088 1,012,377 806,386 1,002,595 32,507 - - 54,469 500,000 - - 700,000 58,603 9,326 9,679 78,629 900,000 150,000 100,000 1,008,733 883,347 145,851 98,476 1,000,000 16,653 4,149 1,524 8,733 59,049 54,621 68,945 54,469 915,252 878,682 718,556 705,033 109,720 1,265,092 60,126 700,000 109,720 1,271,995 1,251,264 20,731 60,126 703,824 95,553 66,826 34,093 76,593 62,183 44,685 1,107,206 939,082 506,250 868,076 890,660 554,863 17,082 42,360 - - - - 200,000 600,000 - - - - 58,316 73,862 6,677 76,593 62,183 44,685 680,000 1,044,083 100,000 872,639 896,299 557,263 668,136 1,026,603 98,059 857,682 879,940 550,724 11,864 17,480 1,941 14,957 16,359 6,539 54,319 35,324 27,416 - - - 88,165 1,202,901 - - 88,165 1,209,618 1,200,000 9,618 139,333 63,273 1,602,947 701,069 94,744 17,862 1,100,000 200,000 234,077 81,135 2,721,023 909,936 2,700,000 900,000 21,023 9,936 - - - - - - - - 998,288 999,779 - - 3,049,919 350,399 620,000 249,998 - - - - - - - - 1,348,634 200,280 400,778 201,561 - - - - - - - - - - - - - - - - - 3,050,000 350,000 620,000 250,000 - - - 3,050,000 350,000 620,000 250,000 - - - - - - - - - - - - - - - - - - - 639,542 504,206 413,504 - - - - - - 2,349,163 1,197,121 399,733 200,065 - - - - (Continued) 41 Company Name Marketable Securities Type and Name Financial Statement Account Counter-party Beginning Balance Acquisition Disposal (Note 2) Ending Balance Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) on Disposal (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) (Note 3) Corporate bond Taiwan Power Company Available-for-sale finan- Chung Shing Bills Finance Corp. cial assets Taiwan Power Company Held-to-maturity finan- cial assets Nan Ya Plastics Corporation CPC Corporation, Taiwan Formosa Plastic Corporation Stock VIS XinTec Capital VTAF II VTAF III TSMC Global Agency bonds Fed Hm Ln Pc Pool 1g1282 Fed Hm Ln Pc Pool 1g1411 Fed Hm Ln Pc Pool 1g1616 Fed Hm Ln Pc Pool 1g1921 Fed Hm Ln Pc Pool 1g2162 Fed Hm Ln Pc Pool 1g2593 Fed Hm Ln Pc Pool 1j0410 Fed Hm Ln Pc Pool 847628 Fed Hm Ln Pc Pool G12009 Federal Home Ln Mtg Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal National Mort Assoc Federal Natl Mtg Assn Federal Natl Mtg Assn Mtn Fnma Pool 691283 Fnma Pool 813641 Fnma Pool 825398 Fnma Pool 888249 Fnma Pool 888388 42 Investee accounted for using equity method Investee accounted for using equity method Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Investment accounted for using equity method Investee with a controlling financial interest Subsidiary - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ 1,046,799 4,080,391 2,773,810 1,451,378 516,663 - - - - - $ - - - - - 442,262 5,741,870 173,979 4,927,865 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 91,703 1,357,890 733,130 228,005 - - - - - - - US$ 3,796 - - US$ 3,917 US$ 4,464 US$ 8,535 US$ 3,743 - - - US$ 4,290 - - US$ 3,720 US$ 4,224 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 310,157 729,914 US$ 4,378 US$ 4,424 US$ 4,436 US$ 4,404 US$ 5,757 US$ 5,600 US$ 6,024 - US$ 3,935 US$ 6,513 - - - - US$ 3,868 US$ 4,354 US$ 3,250 - US$ 3,733 US$ 3,486 - - US$ 4,822 US$ 6,530 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ 150,000 $ 150,000 $ - 1,460,000 1,460,000 970,000 250,000 136,000 970,000 250,000 136,000 - - - - - - - - - - - - - - - - - - - - US$ 4,329 US$ 4,276 US$ 5,749 US$ 5,587 US$ 5,650 US$ 3,101 US$ 3,603 US$ 5,270 US$ 3,257 US$ 3,194 US$ 6,783 US$ 3,511 US$ 3,258 US$ 3,626 - US$ 3,170 US$ 3,489 - US$ 3,004 US$ 3,606 US$ 4,402 US$ 6,270 - US$ 4,280 US$ 4,277 US$ 5,723 US$ 5,557 US$ 5,644 US$ 3,091 US$ 3,563 US$ 5,247 US$ 3,225 US$ 3,175 US$ 6,743 US$ 3,492 US$ 3,246 US$ 3,622 - US$ 3,159 US$ 3,464 - US$ 2,989 US$ 3,555 US$ 4,364 US$ 6,217 - US$ 49 US$ (1) US$ 26 US$ 30 US$ 6 US$ 10 US$ 40 US$ 23 US$ 32 US$ 19 US$ 40 US$ 19 US$ 12 US$ 4 - US$ 11 US$ 25 - US$ 15 US$ 51 US$ 38 US$ 53 - - - - - $ 899,200 2,630,064 1,804,346 1,200,318 391,134 616,240 11,024,568 91,703 1,501,521 - - - - - - - - - - - - - - - - - - - - - - - - - - 1,170,841 906,536 US$ 4,077 US$ 3,618 - - - - - - - - - - - - - - US$ 2,844 - - US$ 3,442 - - US$ 60 - (Continued) Beginning Balance Acquisition Disposal (Note 2) Ending Balance Company Name Marketable Securities Type and Name Financial Statement Account Counter-party Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) on Disposal (US$ in Thousands) Shares/Units (In Thousands) Fnma Pool 888738 Fnma Pool 888793 Fnma Pool 900296 Fed Home Ln Bank Federal Farm Cr Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Mtn Federal Home Ln Mtg Disc Nts Federal Home Loan Bank Federal Home Loan Bank Federal Home Loan Bank Federal Home Loan Bank Federal Home Loan Banks Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Corporate bonds American Express Co Available-for-sale financial assets Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ - - - - - US$ 4,920 US$ 2,991 US$ 12,279 - US$ 6,905 US$ 5,898 - - - - - US$ 7,506 US$ 5,948 US$ 6,440 - - - - - - - US$ 8,049 US$ 4,365 US$ 5,915 US$ 19,766 - - - - US$ 10,467 US$ 7,868 US$ 14,974 US$ 3,943 - - - - - US$ 6,511 - - US$ 3,452 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 5,062 US$ 5,823 US$ 4,336 US$ 5,035 US$ 3,411 - - - US$ 5,365 - - US$ 18,951 US$ 5,098 US$ 4,494 US$ 8,983 US$ 8,137 - - - US$ 6,000 US$ 3,199 US$ 21,985 US$ 5,075 US$ 5,083 US$ 4,518 US$ 3,453 US$ 21,356 - - - US$ 4,595 US$ 4,982 US$ 4,500 US$ 5,102 - - - - US$ 6,500 US$ 4,982 US$ 8,458 US$ 4,997 US$ 4,994 - US$ 4,368 US$ 4,500 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ - US$ - US$ - - - - - US$ 4,938 US$ 3,027 US$ 12,367 US$ 5,532 US$ 6,947 US$ 6,032 - - US$ 4,610 US$ 9,000 US$ 8,235 US$ 7,500 US$ 5,966 US$ 6,453 - US$ 3,236 - US$ 5,158 US$ 4,981 - US$ 3,472 US$ 8,201 US$ 4,440 US$ 5,933 US$ 19,844 US$ 4,652 US$ 5,093 US$ 4,509 - US$ 10,477 US$ 7,926 US$ 14,993 US$ 3,957 US$ 6,505 US$ 5,002 US$ 8,542 US$ 5,027 US$ 5,024 US$ 6,514 US$ 4,319 - - - - - US$ 4,872 US$ 2,987 US$ 12,233 US$ 5,365 US$ 6,881 US$ 5,907 - - US$ 4,494 US$ 8,983 US$ 8,137 US$ 7,490 US$ 5,930 US$ 6,410 - US$ 3,199 - US$ 5,075 US$ 5,083 - US$ 3,453 US$ 8,081 US$ 4,364 US$ 5,885 US$ 19,702 US$ 4,595 US$ 4,982 US$ 4,500 - US$ 10,459 US$ 7,834 US$ 14,931 US$ 3,950 US$ 6,500 US$ 4,982 US$ 8,458 US$ 4,997 US$ 4,994 US$ 6,516 US$ 4,368 - - - - - US$ 66 US$ 40 US$ 134 US$ 167 US$ 66 US$ 125 - - US$ 116 US$ 17 US$ 98 US$ 10 US$ 36 US$ 43 - US$ 37 - US$ 83 US$ (102) - US$ 19 US$ 120 US$ 76 US$ 48 US$ 142 US$ 57 US$ 111 US$ 9 - US$ 18 US$ 92 US$ 62 US$ 7 US$ 5 US$ 20 US$ 84 US$ 30 US$ 30 US$ (2) US$ (49) - US$ 3,466 US$ 3,431 US$ 35 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Amount (US$ in Thousands) (Note 3) US$ 4,935 US$ 5,697 US$ 3,276 US$ 5,175 US$ 3,511 - - - - - - US$ 19,023 US$ 5,134 - - - - - - - - US$ 22,342 - - US$ 4,621 - US$ 21,500 - - - - - - US$ 5,169 - - - - - - - - - - - - - (Continued) 43 Beginning Balance Acquisition Disposal (Note 2) Ending Balance Company Name Marketable Securities Type and Name Financial Statement Account Counter-party Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) on Disposal (US$ in Thousands) Shares/Units (In Thousands) American Honda Fin Corp Mtn Bank One Corp Bear Stearns Cos Inc Bp Cap Mkts P L C Burlington Res Inc Chase Manhattan Corp New Chase Manhattan Corp New Citigroup Fdg Inc Credit Suisse First Boston Usa Deere John Cap Corp Deere John Cap Corp Depfa Acs Bank Emerson Elec Co European Invt Bk European Invt Bk Federal Home Ln Bks General Elec Cap Corp Mtn General Elec Cap Corp Mtn General Elec Cap Corp Mtn Genworth Finl Inc Goldman Sachs Group Inc Goldman Sachs Group Inc Hartford Finl Svcs Group Inc Hbos Plc Medium Term Sr Nts Household Fin Corp Hsbc Fin Corp Hsbc Fin Corp Hsbc Fin Corp Mtn International Business Machs Intl Lease Fin Corp Mtn J P Morgan Chase + Co Key Bk Na Med Term Nts Bk Entr Lehman Brothers Hldgs Inc Lehman Brothers Hldgs Inc Marshall + Ilsley Corp Massmutual Global Fdg Ii Mtn Mbna America Bank Na Y Merrill Lynch + Co Inc Merrill Lynch + Co Inc Metropolitan Life Global Mtn Metropolitan Life Golbal Mtn Morgan Stanley Nucor Corp Public Svc Elec Gas Co Slm Corp Medium Term Nts Vodafone Airtouch Plc Wachovia Corp New Wachovia Corp New Wachovia Corp New Washington Mut Bk Fa 44 Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 3,092 US$ 3,365 US$ 3,379 - - US$ 5,077 - - - US$ 4,928 - - US$ 3,215 US$ 3,970 US$ 6,057 US$ 7,937 US$ 8,759 - US$ 8,282 - US$ 4,989 US$ 3,456 US$ 5,037 US$ 3,205 - US$ 3,028 - US$ 5,096 - US$ 4,138 US$ 3,298 US$ 4,401 US$ 3,150 - US$ 8,420 - US$ 6,403 US$ 3,453 US$ 4,865 US$ 3,369 - US$ 2,126 US$ 3,797 US$ 3,682 US$ 8,998 US$ 4,449 - - US$ 2,040 US$ 3,997 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 6,220 - - US$ 4,496 US$ 3,648 - US$ 3,480 US$ 4,587 US$ 3,175 - US$ 5,900 US$ 19,985 - - - - - US$ 4,816 US$ 2,993 US$ 3,250 - - - - US$ 3,120 - US$ 4,468 - US$ 3,496 - - - - US$ 3,150 - US$ 3,647 - - - - US$ 3,325 US$ 3,337 - - - - US$ 3,100 US$ 3,491 US$ 1,534 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 6,297 US$ 6,220 US$ 77 US$ 3,422 US$ 3,395 US$ 4,575 - US$ 3,536 - US$ 4,591 US$ 3,105 US$ 4,945 US$ 6,005 - US$ 3,217 US$ 3,973 US$ 6,317 US$ 7,964 US$ 8,793 US$ 4,816 US$ 8,414 - US$ 5,011 US$ 3,471 US$ 5,023 US$ 3,215 - US$ 3,028 US$ 4,469 US$ 5,114 - US$ 4,161 US$ 3,288 US$ 4,435 US$ 3,152 - US$ 8,487 - US$ 6,490 US$ 3,464 US$ 4,880 US$ 3,452 - - US$ 3,790 US$ 3,735 US$ 9,008 US$ 4,403 - US$ 3,484 US$ 3,563 US$ 3,998 US$ 3,325 US$ 3,340 US$ 4,496 - US$ 3,565 - US$ 4,587 US$ 3,175 US$ 4,899 US$ 5,900 - US$ 3,222 US$ 3,930 US$ 5,994 US$ 7,937 US$ 8,716 US$ 4,816 US$ 8,268 - US$ 4,941 US$ 3,453 US$ 5,048 US$ 3,182 - US$ 3,028 US$ 4,468 US$ 5,066 - US$ 4,118 US$ 3,310 US$ 4,393 US$ 3,150 - US$ 8,453 - US$ 6,437 US$ 3,426 US$ 4,842 US$ 3,361 - - US$ 3,811 US$ 3,684 US$ 8,949 US$ 4,477 - US$ 3,491 US$ 3,582 US$ 4,000 US$ US$ 97 US$ 55 US$ 79 - (29) - US$ 4 US$ (70) 46 US$ US$ 105 - US$ (5) US$ 43 US$ 323 US$ 27 US$ 77 - US$ 146 - US$ 70 US$ 18 US$ (25) US$ 33 - - US$ 1 US$ 48 - US$ 43 US$ (22) US$ 42 US$ 2 - US$ 34 - US$ 53 US$ 38 US$ 38 US$ 91 - - US$ (21) US$ 51 US$ 59 US$ (74) - (7) US$ US$ (19) (2) US$ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Amount (US$ in Thousands) (Note 3) US$ 3,107 - - - US$ 3,653 US$ 1,520 US$ 3,483 - - - - US$ 20,402 - - - - - - US$ 3,047 US$ 3,279 - - - - US$ 3,046 - - - US$ 3,555 - - - - US$ 3,052 - US$ 3,737 - - - - US$ 3,366 US$ 5,531 - - - - US$ 3,168 - - - (Continued) Company Name Marketable Securities Type and Name Financial Statement Account Counter-party Beginning Balance Acquisition Disposal (Note 2) Ending Balance Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) on Disposal (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) (Note 3) Corporate issued asset-backed securities American Home Mtg Assets Tr Available-for-sale financial assets Americredit Automobile Rec Tr Ba Cr Card Tr Banc Amer Coml Mtg Inc Bear Stearns Coml Mtg Secs Inc Capital Auto Receivables Asset Capital One Multi Asset Exec Capital One Prime Auto Rec Capital One Prime Auto Receiva Caterpillar Finl Asset Tr Cendant Rent Car Fdg Aesop Llc Credit Suisse First Boston Mtg Credit Suisse First Boston Mtg First Un Natl Bk Coml Mtg Tr Ford Credit Auto Owner Trust Gsamp Tr Harley Davidson Motorcycle Tr Hertz Veh Fing Llc Honda Auto Receivables Hyundai Auto Receivables Tr Lb Ubs Coml Mtg Tr Lb Ubs Coml Mtg Tr Mbna Cr Card Master Nt Tr Mbna Master Cr Card Tr Ii Merrill Lynch Mtg Invs Inc Nissan Auto Receivables Providian Gateway Owner Tr Stuctured Adj Rate Mtg Ln Tr Tiaa Seasoned Coml Mtg Tr Tw Hotel Fdg 2005 Llc Usaa Auto Owner Tr Usaa Auto Owner Tr Wamu Mtg Wamu Mtg Pass Thru Ctfs Tr Wells Fargo Finl Auto Owner Tr Wells Fargo Mtg Backed Secs Wells Fargo Mtg Backed Secs Government bonds United States Treas Nt United States Treas Nt United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ - US$ 3,269 US$ 4,300 - - US$ 3,243 - US$ 3,981 - US$ 8,142 US$ 9,297 - - - US$ 4,324 US$ 4,251 US$ 5,825 US$ 5,319 - US$ 3,928 US$ 3,493 - - US$ 7,605 US$ 5,887 US$ 3,928 US$ 3,942 - - US$ 4,103 - US$ 4,238 - - US$ 4,986 - - - - - - - - - - US$ 5,936 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 3,382 - - US$ 4,591 US$ 5,259 - US$ 8,998 - US$ 3,500 - - US$ 7,613 US$ 7,637 US$ 5,188 - - - - US$ 3,373 - - US$ 3,884 US$ 4,500 - - - - US$ 3,981 US$ 4,171 - US$ 4,999 - US$ 3,656 US$ 4,854 - US$ 3,935 US$ 4,008 US$ 42,302 US$ 5,059 US$ 60,837 US$ 6,837 US$ 8,073 US$ 33,800 US$ 25,041 US$ 11,676 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 3,187 US$ 3,380 US$ (193) US$ 3,196 US$ 4,260 - - US$ 3,243 - US$ 3,995 - US$ 8,181 US$ 4,493 - - - US$ 4,321 US$ 3,868 US$ 3,933 US$ 5,278 US$ 3,381 US$ 3,460 US$ 3,177 - US$ 4,449 US$ 7,552 US$ 4,630 US$ 3,928 US$ 3,961 US$ 3,786 - US$ 3,325 - US$ 4,260 - US$ 3,760 US$ 3,535 - - US$ 3,216 US$ 4,350 - - US$ 3,232 - US$ 3,999 - US$ 8,089 US$ 4,433 - - - US$ 4,310 US$ 4,241 US$ 3,904 US$ 5,284 US$ 3,373 US$ 3,443 US$ 3,101 - US$ 4,500 US$ 7,653 US$ 4,988 US$ 3,943 US$ 3,911 US$ 3,887 - US$ 3,338 - US$ 4,246 - US$ 4,048 US$ 3,515 - - US$ US$ (20) US$ (90) - - 11 - US$ (4) - US$ 92 60 US$ - - - US$ 11 US$ (373) US$ 29 US$ (6) 8 US$ US$ 17 76 US$ - US$ (51) US$ (101) US$ (358) US$ (15) US$ 50 US$ (101) - US$ (13) - 14 - US$ (288) 20 US$ - - US$ US$ 42,891 US$ 42,302 US$ 589 US$ 5,007 US$ 34,754 US$ 7,052 US$ 3,037 US$ 34,440 US$ 25,606 US$ 6,121 US$ 5,936 US$ 5,059 US$ 34,896 US$ 6,837 US$ 3,036 US$ 33,800 US$ 25,041 US$ 6,092 US$ 5,944 US$ (52) US$ (142) US$ 215 US$ 1 US$ 640 US$ 565 US$ 29 US$ (8) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ - - - US$ 4,591 US$ 5,099 - US$ 9,118 - US$ 3,498 - US$ 2,663 US$ 6,842 US$ 6,704 US$ 5,172 - - - - - - - US$ 3,884 - - - - - - US$ 4,016 - US$ 4,998 - US$ 3,242 - - US$ 3,816 US$ 3,931 - - US$ 25,924 - US$ 5,070 - - US$ 5,613 - (Continued) 45 Beginning Balance Acquisition Disposal (Note 2) Ending Balance Company Name Marketable Securities Type and Name Financial Statement Account Counter-party Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) on Disposal (US$ in Thousands) Shares/Units (In Thousands) United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts Us Treas Nts Us Treasury Nts Us Treasury Nts Us Treasury Nts Us Treasury Nts Wi Treasury Sec Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 12,350 - - - - US$ 60,929 - - - - - US$ 4,009 - US$ 56,526 - - US$ 4,834 - US$ 5,467 - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 12,876 US$ 6,957 US$ 15,113 US$ 10,746 US$ 5,078 - US$109,310 US$ 46,901 US$ 20,692 US$ 34,573 - US$ 19,628 US$ 26,131 US$146,634 US$ 16,788 US$271,758 - US$ 29,438 US$131,185 US$ 8,596 US$ 14,102 - US$ 30,867 - US$ 10,362 US$ 59,595 - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 13,318 US$ 12,876 US$ 442 US$ 6,935 US$ 10,313 US$ 10,768 US$ 5,170 US$ 12,363 US$ 67,657 US$ 44,003 US$ 21,138 US$ 34,574 US$ 60,813 US$ 19,903 US$ 26,501 US$ 139,925 US$ 16,766 US$ 271,969 US$ 4,019 US$ 20,089 US$ 187,636 8,552 US$ US$ 14,203 US$ 4,927 US$ 31,573 US$ 5,517 US$ 10,369 US$ 53,577 US$ 6,957 US$ 10,056 US$ 10,746 US$ 5,078 US$ 12,295 US$ 67,440 US$ 43,603 US$ 20,692 US$ 34,573 US$ 61,165 US$ 19,628 US$ 26,131 US$ 138,892 US$ 16,788 US$ 271,758 US$ 3,996 US$ 19,959 US$ 187,804 8,596 US$ US$ 14,102 US$ 4,827 US$ 30,867 US$ 5,456 US$ 10,362 US$ 53,189 US$ (22) US$ 257 US$ 22 US$ 92 US$ 68 US$ 217 US$ 400 US$ 446 US$ 1 US$ (352) US$ 275 US$ 370 US$ 1,033 US$ (22) US$ 211 US$ 23 US$ 130 US$ (168) US$ (44) US$ 101 US$ 100 US$ 706 US$ 61 US$ 7 US$ 388 - - - - - - - - - - - - - - - - - - - - - - - - - - Note 1: The shares/units and amount of marketable securities acquired do not include stock dividends from investees. Note 2: The data for marketable securities disposed, exclude bonds maturities. Note 3: The ending balance includes the amortization of premium/discount on bonds investments, unrealized valuation gains/losses on financial assets or equity in earnings of equity method investees. Amount (US$ in Thousands) (Note 3) US$ - - US$ 5,160 - - - US$ 42,509 US$ 3,359 - - - - - US$ 7,758 - - - US$ 9,735 - - - - - - - US$ 6,500 (Concluded) 46 TABLE 3 Taiwan Semiconductor Manufacturing Company Limited ACQUISITION OF INDIVIDUAL REAL ESTATE PROPERTIES AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) Company Name Types of Property Transaction Date Transaction Amount Payment Term Counter-party Nature of Relationships The Company Fab January 4, 2007 $ 198,000 By the construction progress Lead Fu Industry Corp. - Prior Transaction of Related Counter-party Relationships Transfer Date Amount Price Reference Purpose of Acquisition Other Terms N/A N/A N/A Public bidding Manufacturing purpose None Owner N/A TABLE 4 Taiwan Semiconductor Manufacturing Company Limited and Investees TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars) Company Name Related Party Nature of Relationships Transaction Details Abnormal Transaction Notes/Accounts Payable or Receivable Purchases/Sales Amount % to Total Payment Terms Unit Price (Note) Payment Terms (Note) Ending Balance % to Total Note The Company TSMC-North America GUC TSMC-Shanghai WaferTech TSMC-Shanghai SSMC VIS Subsidiary Investee with a controlling financial interest Subsidiary Indirect subsidiary Subsidiary Investee accounted for using equity method Investee accounted for using equity method GUC TSMC-North America Same parent company Sales Sales Sales Purchases Purchases Purchases Purchases Purchases XinTec VisEra OmniVision Same president Parent company of director (represented for Sales Sales XinTec) $ 192,846,641 795,232 155,799 8,774,750 5,828,541 5,468,410 4,188,107 1,766,788 1,050,497 1,813,412 61 - - 18 12 11 9 54 31 54 Net 30 days after invoice date Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after invoice date/net 45 days after monthly closing Net 45 days after shipping Net 45 days after shipping - - - - - - - - - - - - - - - - - - - - $ 26,626,880 74,003 - (784,280) (596,581) (655,029) (838,584) (139,402) 10,120 431,801 60 - - 6 5 5 7 16 2 84 Note: The terms of sales to related parties are not significantly different from those to third parties. For purchase transactions, prices are determined in accordance with the related contractual agreements and no other similar transaction could be compared with. 47 TABLE 5 Taiwan Semiconductor Manufacturing Company Limited and Investees RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars) Company Name Related Party Nature of Relationships Ending Balance Turnover Days (Note) Amounts Action Taken Overdue The Company XinTec TSMC-North America TSMC-Shanghai GUC VisEra OmniVision Subsidiary Subsidiary Investee with a controlling financial interest $ 26,725,765 151,037 118,749 Same president Parent company of director (represented for 10,120 431,801 XinTec) Note: The calculation of turnover days excludes other receivables from related parties. 41 - - 69 43 $ 8,164,297 - 8,081 Accelerate demand on account receivable - Accelerate demand on account receivable 1,075 - Accelerate demand on account receivable - Amounts Received in Subsequent Period Allowance for Bad Debts $ $ 4,521,960 - - - - - - - - - 48 TABLE 6 Taiwan Semiconductor Manufacturing Company Limited NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES OVER WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars) Investor Company Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2007 December 31, 2007 December 31, 2006 Shares (In Thousands) Percentage of Ownership Carrying Value (Note 1) Net Income (Losses) of the Investee Equity in the Earnings (Losses) (Note 2) Note The Company TSMC Global TSMC International Tortola, British Virgin Islands Tortola, British Virgin Islands Investment activities Providing investment in companies involved in the $ 42,327,245 31,445,780 $ 42,327,245 31,445,780 1 987,968 100 100 $ 44,204,188 27,688,565 $ 2,321,568 562,155 $ 2,321,568 562,155 Subsidiary Subsidiary 13,047,681 8,119,816 616,240 36 11,024,568 4,321,071 1,085,203 Investee accounted for using VIS SSMC Hsin-Chu, Taiwan design, manufacture, and other related business in the semiconductor industry Research, design, development, manufacture, packag- ing, testing and sale of memory integrated circuits, LSI, VLSI and related parts Singapore Fabrication and supply of integrated circuits 8,840,895 8,840,895 463 - TSMC-Shanghai Shanghai, China Manufacturing and sales of integrated circuits at the order of and pursuant to product design specifica- tions provided by customers 12,180,367 12,180,367 TSMC Partners TSMC-North America Tortola, British Virgin Islands San Jose, California, U.S.A. Investment activities Sales and marketing of integrated circuits and semi- 10,350 333,718 10,350 333,718 300 11,000 XinTec VTAF II VTAF III GUC Emerging Alliance Chi Cherng Hsin Ruey TSMC-Japan TSMC-Europe TSMC-Korea Taoyuan, Taiwan Wafer level chip size packaging service 1,357,890 - 91,703 conductor devices Cayman Islands Cayman Islands Hsin-Chu, Taiwan Cayman Islands Taipei, Taiwan Taipei, Taiwan Yokohama, Japan Amsterdam, the Netherlands Seoul, Korea Investing in new start-up technology companies Investing in new start-up technology companies Researching, developing, manufacturing, testing and marketing of integrated circuits Investing in new start-up technology companies Investment activities Investment activities Marketing activities Marketing activities Marketing activities 1,095,622 973,459 386,568 1,019,042 300,000 300,000 83,760 15,749 13,656 785,465 243,545 386,568 1,418,717 300,000 300,000 83,760 15,749 13,656 - - 42,572 - - - 6 - 80 Note 1: The treasury stock is deducted from the carrying value. Note 2: Equity in earnings/losses of investees include the effect of unrealized gross profit from affiliates. equity method 9,092,741 3,552,556 1,180,962 Investee accounted for using 8,622,715 (959,387) (957,835) Subsidiary equity method 4,734,180 2,255,647 302,505 253,276 302,505 253,276 Subsidiary Subsidiary 1,501,521 501,174 182,265 Investee with a controlling 1,170,841 906,536 823,552 467,873 173,429 171,658 104,929 88,702 16,436 140,497 (41,533) 732,585 137,202 59,407 58,751 3,531 31,366 2,140 137,687 (40,702) 251,198 136,516 8,573 7,822 3,531 31,366 2,140 financial interest Subsidiary Subsidiary Investee with a controlling financial interest Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary 39 100 100 100 43 98 98 37 99 36 36 100 100 100 49 TABLE 7 Taiwan Semiconductor Manufacturing Company Limited INFORMATION OF INVESTMENT IN MAINLAND CHINA FOR THE YEAR ENDED DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars, Unless Otherwise Specified) Investee Company Main Businesses and Products Total Amount of Paid-in Capital (RMB in Thousand) Method of Investment TSMC (Shanghai) Company Limited Manufacturing and sales of integrated circuits at the order of and pursuant to product design specifications pro- vided by customers $ (RMB 12,180,367 3,070,623) (Note 1) Accumulated Outflow of Investment from Taiwan as of January 1, 2007 (US$ in Thousand) Investment Flows Outflow (US$ in Thousand) Inflow $ (US$ 12,180,367 371,000) $ - $ - Accumulated Outflow of Investment from Taiwan as of December 31, 2007 (US$ in Thousand) $ (US$ 12,180,367 371,000) Percentage of Ownership 100% Equity in the Earnings (Losses) (Note 2) Carrying Value as of December 31, 2007 Accumulated Inward Remittance of Earnings as of December 31, 2007 Accumulated Investment in Mainland China as of December 31, 2007 (US$ in Thousand) Investment Amounts Authorized by Investment Commission, MOEA (US$ in Thousand) $ (957,835) $ 8,622,715 $ - $ (US$ 12,180,367 371,000) $ (US$ 12,180,367 371,000) Upper Limit on Investment (US$ in Thousand) $ (US$ 12,180,367 371,000) Note 1: Direct investments US$371,000 thousand in TSMC-Shanghai. Note 2: Amount was recognized based on the reviewed financial statements. 50 8. Consolidated Financial Statements for the Years Ended December 31, 2007 and 2006 and Independent Auditors' Report REPRESENTATION LETTER The entities that are required to be included in the combined financial statements of Taiwan Semiconductor Manufacturing Company Limited as of and for the year ended December 31, 2007, under the Criteria Governing the Preparation of Affiliation Reports, Consolidated Business Reports and Consolidated Financial Statements of Affiliated Enterprises are the same as those included in the consolidated financial statements prepared in conformity with the revised Statement of Financial Accounting Standards No. 7, "Consolidated Financial Statements". In addition, the information required to be disclosed in the combined financial statements is included in the consolidated financial statements. Consequently, Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries do not prepare a separate set of combined financial statements. Very truly yours, TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LIMITED By MORRIS CHANG Chairman January 10, 2008 51 INDEPENDENT AUDITORS' REPORT Notice to Readers The Board of Directors and Shareholders Taiwan Semiconductor Manufacturing Company Limited 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 We have audited the accompanying consolidated balance sheets of Taiwan Semiconductor standards, procedures and practices to audit such consolidated financial statements are those Manufacturing Company Limited and subsidiaries as of December 31, 2007 and 2006, and the generally accepted and applied in the Republic of China. 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 For the convenience of readers, the auditors' report and the accompanying financial statements have management. Our responsibility is to express an opinion on these consolidated financial statements been translated into English from the original Chinese version prepared and used in the Republic of based on our audits. China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors' report and We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements financial statements shall prevail. by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Limited and subsidiaries as of December 31, 2007 and 2006, and the results of their consolidated operations and their consolidated cash flows for the years then ended in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting with respect to financial accounting standards, and accounting principles generally accepted in the Republic of China. January 10, 2008 52 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES 2007 2006 Amount % Amount % Financial liabilities at fair value through profit or loss (Notes 2, 3 and 5) Notes and accounts payable Payables to related parties (Note 25) Income tax payable (Notes 2 and 18) Accrued expenses and other current liabilities (Notes 16 and 28) Payables to contractors and equipment suppliers Current portion of bonds payable and long-term liabilities (Notes 14, 15 and 26) $ 249,313 11,574,882 1,503,376 11,126,128 17,714,763 6,256,732 280,813 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2007 AND 2006 (In Thousands of New Taiwan Dollars, Except Par Value) $ ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Financial assets at fair value through profit or loss (Notes 2, 3 and 5) Available-for-sale financial assets (Notes 2, 3 and 6) Held-to-maturity financial assets (Notes 2 and 7) Receivables from related parties (Note 25) Notes and accounts receivable Allowance for doubtful receivables (Notes 2 and 8) Allowance for sales returns and others (Notes 2 and 8) Other receivables from related parties (Note 25) Other financial assets (Note 26) Inventories, net (Notes 2 and 9) Deferred income tax assets, net (Notes 2 and 18) Prepaid expenses and other current assets Total current assets LONG-TERM INVESTMENTS (Notes 2, 3, 6, 7, 10 and 11) Investments accounted for using equity method Available-for-sale financial assets Held-to-maturity financial assets Financial assets carried at cost Total long-term investments PROPERTY, PLANT AND EQUIPMENT (Notes 2, 12 and 26) Cost Land and land improvements Buildings Machinery and equipment Office equipment Leased assets Accumulated depreciation Advance payments and construction in progress Net property, plant and equipment INTANGIBLE ASSETS Goodwill (Note 2) Deferred charges, net (Notes 2 and 13) Total intangible assets OTHER ASSETS Deferred income tax assets, net (Notes 2 and 18) Refundable deposits Others Total other assets TOTAL 2007 Amount 94,986,488 1,632,387 66,688,368 11,526,946 10,885 47,204,126 (701,807) (4,089,035) 243,620 1,515,527 23,862,260 5,572,334 1,370,230 249,822,329 22,517,289 1,400,691 8,697,726 3,845,619 36,461,325 942,197 118,640,027 646,419,427 11,829,640 652,296 778,483,587 (540,099,567) 21,868,167 260,252,187 5,987,582 7,923,601 13,911,183 7,313,283 2,777,769 327,150 10,418,202 2006 Amount $ 117,837,192 1,206,854 67,523,858 8,510,823 252,339 34,957,650 (749,888) (2,870,802) 256,863 2,356,542 21,430,728 8,013,992 1,591,017 260,317,168 15,000,891 6,648,485 28,973,495 3,272,280 53,895,151 844,644 112,595,124 579,825,289 10,646,725 612,941 704,524,723 (463,038,084) 12,607,551 254,094,190 5,984,993 5,936,915 11,921,908 5,802,142 1,331,245 123,355 7,256,742 % 16 - 12 2 - 8 - (1) - - 4 1 - 42 4 - 2 1 7 - 21 113 2 - 136 (94) 4 46 1 2 3 1 1 - 2 % 20 - 12 2 - 6 - (1) - 1 4 1 - 45 2 1 5 1 9 - 19 99 2 - 120 (79) 2 43 1 1 2 1 - - 1 Total current liabilities LONG-TERM LIABILITIES Bonds payable (Note 14) Long-term bank loans (Notes 15 and 26) Other long-term payables (Notes 16 and 28) Other payables to related parties (Notes 25 and 28) Obligations under capital leases (Note 2) Total long-term liabilities OTHER LIABILITIES Accrued pension cost (Notes 2 and 17) Guarantee deposits (Note 28) Deferred credits (Notes 2 and 25) Others Total other liabilities Total liabilities EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT Capital stock - $10 par value Authorized: 28,050,000 thousand shares in 2007 27,050,000 thousand shares in 2006 Issued: 26,427,104 thousand shares in 2007 25,829,688 thousand shares in 2006 Capital surplus (Notes 2 and 20) Retained earnings (Note 20) Appropriated as legal capital reserve Appropriated as special capital reserve Unappropriated earnings Others (Notes 2, 3, 22 and 24) Cumulative translation adjustments Unrealized gain on financial instruments Treasury stock: 834,096 thousand shares in 2007 33,926 thousand shares in 2006 Equity attributable to shareholders of the parent MINORITY INTERESTS (Note 2) Total shareholders' equity - 2 1 2 3 1 - 9 2 - 2 - - 4 1 - - - 1 $ 10,864 7,934,388 1,867,728 7,946,473 11,328,350 10,768,591 7,004,137 46,860,531 12,500,000 653,959 8,703,267 403,375 612,941 22,873,542 3,540,060 3,817,132 1,177,138 78,640 8,612,970 - 1 - 2 2 2 1 8 2 - 2 - - 4 1 1 - - 2 48,706,007 12,500,000 1,722,196 9,409,978 - 652,296 24,284,470 3,665,522 2,243,009 1,236,873 43,774 7,189,178 80,179,655 14 78,347,043 14 264,271,037 53,732,682 56,406,684 629,550 161,828,337 218,864,571 (1,072,853) 680,997 (49,385,032) (49,776,888) 487,091,402 3,594,169 490,685,571 46 9 10 - 28 38 - - (8) (8) 85 1 86 258,296,879 54,107,498 43,705,711 640,742 152,778,079 197,124,532 (1,191,165) 561,615 (918,075) (1,547,625) 507,981,284 1,156,832 509,138,116 44 9 7 - 26 33 - - - - 86 - 86 The accompanying notes are an integral part of the consolidated financial statements. 53 $ 570,865,226 100 $ 587,485,159 100 TOTAL $ 570,865,226 100 $ 587,485,159 100 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In Thousands of New Taiwan Dollars, Except Consolidated Earnings Per Share) 2007 2006 Amount % Amount % GROSS SALES (Notes 2 and 25) $ 328,336,172 $ 322,883,499 SALES RETURNS AND ALLOWANCES (Note 2) 5,705,576 5,476,328 NET SALES 322,630,596 100 317,407,171 100 COST OF SALES (Notes 19 and 25) GROSS PROFIT OPERATING EXPENSES (Notes 19 and 25) Research and development General and administrative Marketing Total operating expenses 180,280,385 142,350,211 17,946,322 8,963,836 3,718,146 30,628,304 56 44 5 3 1 9 161,597,081 155,810,090 16,076,432 8,716,653 3,752,311 28,545,396 51 49 5 3 1 9 Foreign exchange loss, net (Note 2) Others Total non-operating expenses and losses INCOME BEFORE INCOME TAX INCOME TAX EXPENSE (Notes 2 and 18) NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF TAX BENEFIT OF NT$82,062 THOUSAND (Note 3) NET INCOME INCOME FROM OPERATIONS 111,721,907 35 127,264,694 40 ATTRIBUTABLE TO: Shareholders of the parent Minority interests EARNINGS PER SHARE (NT$, Note 23) Basic earnings per share Diluted earnings per share NON-OPERATING INCOME AND GAINS Interest income (Note 2) Equity in earnings of equity method investees, net (Notes 2 and 10) Settlement income (Note 28) Gain on settlement and disposal of financial instruments, net (Notes 2, 5 and 24) Technical service income (Notes 25 and 28) Rental income (Note 25) Subsidy income (Note 2) Valuation gain on financial instruments, net (Notes 2, 5 and 24) Gain on disposal of property, plant and equipment and other assets (Notes 2 and 25) Foreign exchange gain, net (Note 2) Others (Note 25) Total non-operating income and gains NON-OPERATING EXPENSES AND LOSSES Provision for litigation loss (Note 28k) Interest expense Loss on impairment of financial assets (Note 2) Loss on disposal of property, plant and equipment (Note 2) Loss on settlement and disposal of financial instruments, net (Notes 2, 5 and 24) Valuation loss on financial instruments, net (Notes 2, 5 and 24) 5,651,700 2,507,869 985,114 633,109 590,391 378,643 364,321 304,578 91,210 80,922 345,946 11,933,803 1,008,635 842,242 54,208 6,190 - - 2 1 1 - - - - - - - - 4 1 - - - - - 4,542,149 2,347,153 979,214 - 571,500 224,290 334,478 - 421,051 - 285,757 9,705,592 - 890,602 279,690 241,397 798,610 812,937 2 1 - - - - - - - - - 3 - 1 - - - - (Continued) 54 2007 Amount $ - 102,409 2,013,684 121,642,026 (11,709,626) 109,932,400 - 109,932,400 109,177,093 755,307 109,932,400 2007 $ $ $ % - - 1 38 (4) 34 - 34 34 - 34 2006 Amount $ 400,863 183,979 3,608,078 133,362,208 (7,773,711) 125,588,497 1,606,749 127,195,246 127,009,731 185,515 127,195,246 2006 $ $ $ % - - 1 42 (2) 40 - 40 40 - 40 Income Attributable to Shareholders of the Parent Income Attributable to Shareholders of the Parent Before Income Tax After Income Tax Before Income Tax After Income Tax $ 4.59 4.58 $ $ $ 4.14 4.14 $ $ 5.11 5.10 $ $ 4.82 4.81 The accompanying notes are an integral part of the consolidated financial statements. (Concluded) Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In Thousands of New Taiwan Dollars, Except Dividends Per Share) Capital Stock Retained Earnings Others Shares (In Thousands) Capital Surplus Amount Legal Capital Reserve Special Capital Reserve Unappropriated Earnings Total Cumulative Translation Adjustments Unrealized Gain (Loss) on Financial Instruments Treasury Stock Total Minority Interests Total Shareholders' Equity Total Equity Attributable to Shareholders of the Parent BALANCE, JANUARY 1, 2006 24,730,025 $247,300,246 $ 57,117,886 $ 34,348,208 $ 2,226,427 $106,196,399 $142,771,034 $ (640,742) $ - $ (918,075) $ (1,558,817) $445,630,349 $ 608,359 $446,238,708 Appropriations of prior year's earnings Legal capital reserve Reversal of special capital resercve Bonus to employees - in cash Bonus to employees - in stock Cash dividends to shareholders - NT$2.50 per share Stock dividends to shareholders - NT$0.15 per share Bonus to directors and supervisors Capital surplus transferred to capital stock Net income in 2006 Adjustment arising from changes in percentage of own- ership in equity method investees Translation adjustments Issuance of stock from exercising employee stock options Cash dividends received by subsidiaries from parent company Valuation gain on available-for-sale financial assets Equity in the valuation gain on available-for-sale finan- cial assets held by equity method investees Increase in minority interests BALANCE, JANUARY 1, 2007 Appropriations of prior year's earnings Legal capital reserve Reversal of special capital reserve Bonus to employees - in cash Bonus to employees - in stock Cash dividends to shareholders - NT$3.00 per share Stock dividends to shareholders - NT$0.02 per share Bonus to directors and supervisors Capital surplus transferred to capital stock Net income in 2007 Adjustment arising from changes in percentage of own- ership in equity method investees Translation adjustments Issuance of stock from exercising employee stock options Cash dividends received by subsidiaries from parent company Valuation gain on available-for-sale financial assets Equity in the valuation loss on available-for-sale finan- cial assets held by equity method investees Treasury stock repurchased by the Company Increase in minority interests - - - 343,213 - 370,950 - 370,950 - - - - - - 3,432,129 - 3,709,504 - 3,709,504 - - - - - - - - (3,709,504) - - - 187,095 - 14,550 145,496 429,701 - - - - - - - - 82,320 - - - 9,357,503 - - - - - - - - - (1,585,685) - - - - - - - (9,357,503) 1,585,685 (3,432,129) (3,432,129) (61,825,061) (3,709,504) (257,410) - 127,009,731 - - (3,432,129) (3,432,129) (61,825,061) (3,709,504) (257,410) - 127,009,731 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (550,423) - - - - - - - - - - - - - - - - - - 386,017 175,598 - - - - - - - - - - - - - - - - - - - - - - - - - - - - (3,432,129) - (61,825,061) - (257,410) - 127,009,731 - - - - - - - - 185,515 - - (3,432,129) - (61,825,061) - (257,410) - 127,195,246 - (550,423) 187,095 (550,423) - (126,206) 187,095 (676,629) - 575,197 - 575,197 - 386,017 175,598 - 82,320 386,017 175,598 - - 2,147 - 487,017 82,320 388,164 175,598 487,017 25,829,688 258,296,879 54,107,498 43,705,711 640,742 152,778,079 197,124,532 (1,191,165) 561,615 (918,075) (1,547,625) 507,981,284 1,156,832 509,138,116 - - - 457,280 - 51,659 - 77,489 - - - - - - 4,572,798 - 516,594 - 774,891 - - - - - - - - - - (774,891) - (28,639) - 10,988 109,875 326,952 - - - - - - - - - - 101,762 - - - - 12,700,973 - - - - - - - - - (11,192) - - - - - - - (12,700,973) 11,192 (4,572,798) (4,572,798) (77,489,064) (516,594) (285,800) - 109,177,093 - - (4,572,798) (4,572,798) (77,489,064) (516,594) (285,800) - 109,177,093 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 118,312 - - - - - - - - - - - - - - - - - - - 241,821 (122,439) - - - - - - - - - - - - - - - - - - - - - - - - - (4,572,798) - (77,489,064) - (285,800) - 109,177,093 - 118,312 (28,639) 118,312 - - - - - - - - 755,307 31,862 (99,318) - - (4,572,798) - (77,489,064) - (285,800) - 109,932,400 3,223 18,994 - 436,827 - 436,827 - 241,821 101,762 241,821 - 19,487 101,762 261,308 - (48,466,957) - (122,439) (48,466,957) - (122,439) (48,466,957) - - - 1,729,999 (122,439) (48,466,957) 1,729,999 BALANCE, DECEMBER 31, 2007 26,427,104 $264,271,037 $ 53,732,682 $ 56,406,684 $ 629,550 $161,828,337 $218,864,571 $ (1,072,853) $ 680,997 $(49,385,032) $(49,776,888) $487,091,402 $ 3,594,169 $490,685,571 The accompanying notes are an integral part of the consolidated financial statements. 55 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In Thousands of New Taiwan Dollars) 2007 2006 2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES Net income attributable to shareholders of the parent Net income attributable to minority interests Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of premium/discount of financial assets Loss on impairment of financial assets Gain on disposal of available-for-sale financial assets, net Equity in earnings of equity method investees, net Dividends received from equity method investees Gain on disposal of financial assets carried at cost, net Gain on disposal of property, plant and equipment and other assets, net Deferred income tax Loss on idle assets Net changes in operating assets and liabilities: Decrease (increase) in: Financial assets and liabilities at fair value through profit or loss Receivables from related parties Notes and accounts receivable Allowance for doubtful receivables Allowance for sales returns and others Other receivables from related parties Other financial assets Inventories Prepaid expenses and other current assets Increase (decrease) in: Notes and accounts payable Payables to related parties Income tax payable Accrued expenses and other current liabilities Accrued pension cost Deferred credits $ 109,177,093 755,307 $ 127,009,731 185,515 80,005,395 (117,159) 54,208 (610,167) (2,507,869) 625,130 (264,503) (85,020) 943,797 - (187,084) 629,467 (12,134,176) (48,126) 1,205,277 13,243 842,136 (2,226,106) 290,434 3,218,255 (375,731) 3,179,655 913,872 125,462 343,878 73,715,242 2,399 279,690 (90,826) (2,347,153) 614,567 (16,210) (179,654) 121,590 44,072 340,176 440,927 8,124,625 (230,706) (1,446,611) 341,047 (738,745) (3,702,425) (170,576) (1,487,064) (572,441) 3,931,022 862,428 65,676 (99,310) Proceeds from disposal or redemption of: Available-for-sale financial assets Held-to-maturity financial assets Financial assets carried at cost Property, plant and equipment and other assets Increase in deferred charges Increase in refundable deposits Net cash paid for acquisition of subsidiaries Increase in other assets Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term bank loans Increase in long-term bank loans Repayments of: Bonds payable Long-term bank loans Increase (decrease) in guarantee deposits Cash dividends Cash bonus paid to employees Bonus to directors and supervisors Repurchase of treasury stock Proceeds from exercise of employee stock options Increase in minority interests Net cash used in financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR Net cash provided by operating activities 183,766,668 204,996,986 CASH AND CASH EQUIVALENTS, END OF YEAR CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Available-for-sale financial assets Held-to-maturity financial assets Investments accounted for using equity method Financial assets carried at cost Property, plant and equipment 56 (87,550,197) - (5,803,826) (911,323) (84,000,985) (119,291,685) (18,554,027) (2,613,009) (511,632) (78,737,265) (Continued) SUPPLEMENTAL INFORMATION Interest paid Income tax paid INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS Acquisition of property, plant and equipment Decrease (increase) in payables to contractors and equipment suppliers Increase in other long-term payables Cash paid $ $ $ $ $ $ 94,908,666 17,325,120 410,465 60,535 (3,059,155) (1,434,895) (404,445) (228,747) $ 91,620,367 10,410,000 126,465 518,705 (1,414,742) (1,224,443) - (52,086) (70,688,787) (119,723,352) (89,720) 653,000 (7,000,000) (196,173) (1,574,131) (77,387,302) (4,572,798) (285,800) (45,413,373) 436,827 19,004 (135,410,466) (22,332,585) (518,119) 117,837,192 94,986,488 922,079 7,585,727 78,889,954 5,111,031 - 84,000,985 (328,500) - - (5,489) 920,702 (61,742,741) (3,432,129) (257,410) - 575,197 487,017 (63,783,353) 21,490,281 (136,796) 96,483,707 117,837,192 951,450 3,630,029 80,675,310 (1,702,555) (235,490) 78,737,265 (Continued) 56 $ $ $ $ $ Repurchase of treasury stock Increase in accrued expenses and other current liabilities Cash paid NONCASH FINANCING ACTIVITIES Current portion of bonds payable and long-term liabilities Current portion of other payables to related parties (under payables to related parties) Current portion of other long-term payables and other liabilities (under accrued expenses and other current liabilities) 2007 48,466,957 (3,053,584) 45,413,373 280,813 - 3,735,875 $ $ $ $ $ 2006 - - - 7,004,137 688,591 617,892 $ $ $ $ $ The Company acquired controlling interests in XinTec Inc. (XinTec) and Mutual-Pak Technology Co., Ltd. (Mutual-Pak) in March 2007 and July 2007, respectively, and consolidated the revenue/income and expenses/losses of the two companies from the respective acquisition dates. Fair values of assets acquired and liabilities assumed were as follows: Current assets Property, plant and equipment Other assets Current liabilities Long-term liabilities Net amount Purchase price for XinTec and Mutual-Pak Less: Cash balance of XinTec and Mutual-Pak at acquisition Net cash paid for acquisition of XinTec and Mutual-Pak The accompanying notes are an integral part of the consolidated financial statements. $ $ $ $ 3,101,718 2,339,546 436,692 (1,937,407) (701,855) 3,238,694 1,413,585 (1,009,140) 404,445 (Concluded) Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) 1. GENERAL Taiwan Semiconductor Manufacturing Company Limited (TSMC), a Republic of China (R.O.C.) corporation, was incorporated as a venture among the Government of the R.O.C., acting through the Development Fund of the Executive Yuan; Philips Electronics N.V. and certain of its affiliates (Philips); and certain other private investors. On September 5, 1994, its shares were listed on the Taiwan Stock Exchange (TSE). On October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs). TSMC is engaged mainly in the manufacturing, selling, packaging, testing and computer-aided designing of integrated circuits and other semiconductor devices and the manufacturing of masks. As of December 31, 2007 and 2006, TSMC and its subsidiaries had 25,258 and 22,969 employees, respectively. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements are presented in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the R.O.C. For the convenience of readers, the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the R.O.C. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language consolidated financial statements shall prevail. Significant accounting policies are summarized as follows: Principles of Consolidation The accompanying consolidated financial statements include the accounts of all directly and indirectly majority owned subsidiaries of TSMC, and the accounts of investees in which TSMC's ownership percentage is less than 50% but over which TSMC has a controlling interest. All significant intercompany balances and transactions are eliminated upon consolidation. 57 The consolidated entities were as follows: Name of Investor Name of Investee Percentage of Ownership December 31, 2007 December 31, 2006 Remark Name of Investor Name of Investee Percentage of Ownership December 31, 2007 December 31, 2006 Remark TSMC North America (TSMC-NA) TSMC Japan Limited (TSMC-Japan) TSMC Korea Limited (TSMC-Korea) Taiwan Semiconductor Manufacturing Company Europe B.V. (TSMC-Europe) TSMC International Investment Ltd. (TSMC International) TSMC Global, Ltd. (TSMC Global) TSMC (Shanghai) Company Limited (TSMC-Shanghai) Chi Cherng Investment Co., Ltd. (Chi Cherng) 100% 100% 100% 100% 100% 100% 100% 36% 100% 100% 100% 100% 100% 100% 100% 36% Hsin Ruey Investment Co., Ltd. 36% 36% (Hsin Ruey) - - - - - - - TSMC and Hsin Ruey held in aggregate a 100% ownership of Chi Cherng. As of December 31, 2007, Chi Cherng held 17,032 thousand common shares in TSMC (approximately 0.06% of issued common shares). TSMC and Chi Cherng held in aggregate a 100% ownership of Hsin Ruey. As of December 31, 2007, Hsin Ruey held 17,064 thousand common shares in TSMC (approximately 0.06% of issued common shares). VentureTech Alliance Fund III, L.P. (VTAF III) VentureTech Alliance Fund II, L.P. (VTAF II) 98% 98% 98% 98% Emerging Alliance Fund, L.P. (Emerging 99.5% 99.5% Alliance) - - - XinTec Inc. (XinTec) 43% - TSMC obtained three out of five direc- tor positions in March 2007, and TSMC has a controlling interest over XinTec. TSMC Partners, Ltd. (TSMC Partners) TSMC International TSMC Technology, Inc. (TSMC Technology) TSMC Development, Inc. (TSMC Development) InveStar Semiconductor Development Fund, Inc. (ISDF) InveStar Semiconductor Development Fund, Inc. (II) LDC (ISDF II) 100% 100% 100% 97% 97% 100% 100% 100% 97% 97% TSMC Development WaferTech, LLC (WaferTech) 99.996% 99.996% - - - - - - VTAF III Mutual-Pak Technology Co., Ltd. 51% 13% VTAF III acquired a controlling interest (Mutual-Pak) in Mutual-Pak in July 2007. VTAF III, VTAF II and Emerging Alliance VentureTech Alliance Holdings, LLC (VTA 100% - Newly established. Holdings) GUC Global Unichip Corp.-North America (GUC-NA) Global Unichip Japan Co., Ltd. (GUC- Japan) 100% 100% 100% 100% - - Global Unichip Corporation (GUC) 37% 38% GUC became a consolidated entity of TSMC Partners TSMC Design Technology Canada, Inc. 100% - Newly established. TSMC as GUC's president was assigned by TSMC and TSMC has a controlling interest over the financial, operating and personnel hiring deci- sions of GUC. (Continued) (TSMC Canada) (Concluded) TSMC 58 The following diagram presents information regarding the relationship and ownership percentages between TSMC and its subsidiaries as of December 31, 2007: TSMC 100% 100% 100% 100% 100% 100% 100% 36% 36% 98% 98% 99.5% 37% 43% 100% TSMC-NA TSMC-Japan TSMC-Korea TSMC-Europe TSMC International TSMC Global TSMC- Shanghai Chi Cherng 64% 64% Hsin Ruey VTAF III VTAF II Emerging Alliance GUC XinTec TSMC Partners 100% 100% 97% 97% 51% 100% 100% 100% TSMC Technology TSMC Development ISDF ISDF II Mutual-Pak VTA Holdings GUC-NA GUC-Japan TSMC Canada 80.78% 9.71% 9.51% 99.996% WaferTech TSMC-NA is engaged in selling and marketing of integrated circuits and semiconductor devices. TSMC together with its subsidiaries are hereinafter referred to collectively as the "Company". TSMC-Japan, TSMC-Korea and TSMC-Europe are engaged mainly in marketing activities. TSMC International is engaged in investment in companies involved in the design, manufacture, and other Minority interests in the aforementioned subsidiaries are presented as a separate component of related business in the semiconductor industry. TSMC Global, TSMC Partners, TSMC Development, Chi shareholders' equity. Cherng and Hsin Ruey are engaged in investing activities. TSMC-Shanghai is engaged in the manufacturing and selling of integrated circuits pursuant to the orders from and product design Use of Estimates specifications provided by customers. Emerging Alliance, VTAF II, VTAF III, VTA Holdings, ISDF, and The preparation of consolidated financial statements in conformity with the aforementioned ISDF II are engaged in investing in new start-up technology companies. TSMC Canada and TSMC guidelines, law and principles requires management to make reasonable assumptions and estimates Technology are engaged mainly in engineering support activities. WaferTech is engaged in the of matters that are inherently uncertain. The actual results may differ from management's estimates. manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices. GUC is engaged in researching, developing, manufacturing, testing and Classification of Current and Noncurrent Assets and Liabilities marketing of integrated circuits. GUC-NA and GUC-Japan are engaged in providing products Current assets are assets held for trading purposes and assets expected to be converted to cash, sold consulting in North America and Japan, respectively. XinTec is engaged in the provision of wafer or consumed within one year from the balance sheet date. Current liabilities are obligations incurred packaging service. Mutual-Pak is engaged in the manufacturing and selling of electronic parts, and for trading purposes and obligations expected to be settled within one year from the balance sheet researching, developing and testing of RFID. date. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively. 59 Cash Equivalents If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, Repurchase agreements collateralized by government bonds, asset-backed commercial papers, in a subsequent period, the amount of the impairment loss decreases, for equity securities, the corporate notes, and treasury bills acquired with maturities of less than three months from the date previously recognized impairment loss is reversed to the extent of the decrease and recorded as an of purchase are classified as cash equivalents. The carrying amount approximates fair value. adjustment to shareholders' equity; for debt securities, the amount of the decrease is recognized in earnings, provided that the decrease is clearly attributable to an event which occurred after the Financial Assets/Liabilities at Fair Value Through Profit or Loss impairment loss was recognized. Derivatives that do not meet the criteria for hedge accounting and financial assets acquired principally for the purpose of selling them in the near term are initially recognized at fair value, with Held-to-maturity Financial Assets transaction costs expensed as incurred. The derivatives and financial assets are remeasured at fair Financial instruments for which the Company has a positive intention and ability to hold to maturity value subsequently with changes in fair value recognized in earnings. A regular way purchase or sale are categorized as held-to-maturity financial assets and are carried at amortized cost under the of financial assets is accounted for using settlement date accounting. effective interest method except for structured time deposits which are carried at acquisition cost. Fair value is determined as follows: Publicly-traded stocks - closing prices at the end of the year; attributable to the acquisition. Gains or losses are recognized at the time of derecognition, derivatives - using valuation techniques incorporating estimates and assumptions that are consistent impairment or amortization. A regular way purchase or sale of financial assets is accounted for using Those financial assets are initially recognized at fair value plus transaction costs that are directly with prevailing market conditions. When the fair value is positive, the derivative is recognized as a settlement date accounting. financial asset; when the fair value is negative, the derivative is recognized as a financial liability. Available-for-sale Financial Assets If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases and the decrease is clearly Investments designated as available-for-sale financial assets include debt securities and equity attributable to an event which occurred after the impairment loss was recognized, the previously securities. Available-for-sale financial assets are initially recognized at fair value plus transaction costs recognized impairment loss is reversed to the extent of the decrease. The reversal may not result in a that are directly attributable to the acquisition. Changes in fair value from subsequent carrying amount that exceeds the amortized cost that would have been determined as if no remeasurement are reported as a separate component of shareholders' equity. The corresponding impairment loss had been recognized. accumulated gains or losses are recognized in earnings when the financial asset is derecognized from the balance sheet. A regular way purchase or sale of financial assets is accounted for using settlement Allowance for Doubtful Receivables date accounting. An allowance for doubtful receivables is provided based on a review of the collectibility of notes and accounts receivable. The Company determines the amount of the allowance for doubtful receivables Fair value is determined as follows: Structured time deposits - using valuation techniques; open-end by examining the aging analysis of outstanding notes and accounts receivable and current trends in mutual funds and money market funds - net asset value at the end of the year; publicly-traded stocks the credit quality of its customers as well as its internal credit policies. - closing prices at the end of the year; and other debt securities - average of bid and asked prices at the end of the year. Revenue Recognition and Allowance for Sales Returns and Others The Company recognizes revenue when evidence of an arrangement exists, the rewards of ownership Cash dividends are recognized as investment income upon resolution of shareholders of an investee and significant risk of the goods has been transferred to the buyer; price is fixed or determinable, and but are accounted for as a reduction to the original cost of investment if such dividends are declared collectibility is reasonably assured. Provisions for estimated sales returns and others are generally on the earnings of the investee attributable to the period prior to the purchase of the investment. recorded in the period the related revenue is recognized, based on historical experience, Stock dividends are recorded as an increase in the number of shares held and do not affect management's judgment, and any known factors that would significantly affect the allowance. investment income. The cost per share is recalculated based on the new total number of shares. Any difference between the initial carrying amount of a debt security and the amount due at maturity is amortized using the effective interest method, with the amortization recognized in earnings. 60 Sales prices are determined using fair value taking into account related sales discounts agreed to by Gains or losses on sales from the Company to equity method investees are deferred in proportion to the Company and its customers. Sales agreements typically provide that payment is due 30 days from the Company's ownership percentages in the investees until such gains or losses are realized through invoice date for a majority of the customers and 30 to 45 days after the end of the month in which transactions with third parties. The entire amount of the gains or losses on sales to investees over sales occur for some customers. Since the receivables from sales are collectible within one year and which the Company has a controlling interest is deferred until such gains or losses are realized such transactions are frequent, fair value of the receivables is equivalent to the nominal amount of through subsequent sales of the related products to third parties. Gains or losses on sales from equity the cash to be received. Inventories method investees to the Company are deferred in proportion to the Company's ownership percentages in the investees until they are realized through transactions with third parties. Gains or losses on sales between equity method investees are deferred in proportion to the multiplication of Inventories are stated at the lower of cost or market value. Inventories are recorded at standard cost the Company's weighted-average ownership percentages in the investees. Such gains or losses are and adjusted to the approximate weighted-average cost at the balance sheet date. Market value recorded until they are realized through transactions with third parties. represents replacement cost for raw materials, supplies and spare parts and net realizable value for work in process and finished goods. The Company assesses the impact of changing technology on its If an investee's functional currency is a foreign currency, differences will result from the translation of inventories on hand and writes off inventories that are considered obsolete. Year-end inventories are the investee's financial statements into the reporting currency of the Company. Such differences are evaluated for estimated excess quantities and obsolescence based on a demand forecast within a charged or credited to cumulative translation adjustments, a separate component of shareholders' specific time horizon, which is generally 180 days or less. Estimated losses on scrap and slow-moving equity. items are recognized and included in the allowance for losses. Financial Assets Carried at Cost Investments Accounted for Using Equity Method Investments for which the Company does not exercise significant influence and that do not have a Investments in companies wherein the Company exercises significant influence over the operating quoted market price in an active market and whose fair value cannot be reliably measured, such as and financial policy decisions are accounted for using the equity method. The Company's share of the non-publicly traded stocks and mutual funds, are carried at their original cost. The costs of non- net income or net loss of an investee is recognized in the "equity in earnings/losses of equity method publicly traded stocks and mutual funds are determined using the weighted-average method. If there investees, net" account. Prior to January 1, 2006, the difference, if any, between the cost of is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A investment and the Company's proportionate share of the investee's equity was amortized by the subsequent reversal of such impairment loss is not allowed. straight-line method over five years, with the amortization recorded in the "equity in earnings/losses of equity method investees, net" account. Effective January 1, 2006, pursuant to the revised The accounting treatment for cash dividends and stock dividends arising from financial assets carried Statement of Financial Accounting Standards No. 5, "Long-term Investments Accounted for Using the at cost is the same as that for cash and stock dividends arising from available-for-sale financial assets. Equity Method" (SFAS No. 5), the cost of an investment shall be analyzed and the cost of investment in excess of the fair value of identifiable net assets acquired, representing goodwill, shall not be Property, Plant and Equipment, Assets Leased to Others and Idle Assets amortized and instead shall be tested for impairment annually. If the fair value of identifiable net Property, plant and equipment and assets leased to others are stated at cost less accumulated assets acquired exceeds the cost of investment, the excess shall be proportionately allocated as depreciation. Properties covered by agreements qualifying as capital leases are carried at the lower of reductions to fair values of non-current assets (except for financial assets other than investments the leased equipment's market value or the present value of the minimum lease payments at the accounted for using the equity method and deferred income tax assets). When an indication of inception date of the lease, with the corresponding amount recorded as obligations under capital impairment is identified, the carrying amount of the investment is reduced, with the related leases. When an indication of impairment is identified, any excess of the carrying amount of an asset impairment loss recognized in earnings. over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and When the Company subscribes for additional investee's shares at a percentage different from its recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would existing ownership percentage, the resulting carrying amount of the investment in the investee differs have been determined, net of depreciation, as if no impairment loss had been recognized. Significant from the amount of the Company's share of the investee's equity. The Company records such a additions, renewals and betterments incurred during the construction period are capitalized. difference as an adjustment to long-term investments with the corresponding amount charged or Maintenance and repairs are expensed as incurred. credited to capital surplus. 61 Depreciation is computed using the straight-line method over the following estimated service lives: Government Subsidies Land improvements - 20 years; buildings - 10 to 20 years; machinery and equipment - 3 to 10 years; Income-related subsidies from governments are recognized in earnings when the requirements for office equipment - 3 to 15 years; and leased assets - 20 years. subsidies are met. Upon sale or disposal of property, plant and equipment and assets leased to others, the related cost Income Tax and accumulated depreciation are deducted from the corresponding accounts, with any gain or loss The Company applies intra-period and inter-period allocations for its income tax whereby (1) a recorded as non-operating gains or losses in the period of sale or disposal. portion of current year's income tax expense is allocated to the cumulative effect of changes in accounting principles; and (2) deferred income tax assets and liabilities are recognized for the tax When property, plant and equipment are determined to be idle or useless, they are transferred to idle effects of temporary differences, net operating loss carryforwards and unused tax credits. Valuation assets at the lower of the net realizable value or carrying amount. Depreciation on the idle assets is allowances are provided to the extent, if any, that it is more likely than not that deferred income tax provided continuously, and the idle assets are tested for impairment on a periodical basis. assets will not be realized. A deferred tax asset or liability is classified as current or noncurrent in Intangible Assets accordance with the classification of its related asset or liability. 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 either Goodwill represents the excess of the consideration paid for acquisition over the fair value of current or noncurrent based on the expected length of time before it is realized or settled. identifiable net assets acquired. Prior to January 1, 2006, goodwill was amortized using the straight- line method over the estimated life of 10 years. Effective January 1, 2006, pursuant to the newly Any tax credits arising from purchases of machinery, equipment and technology, research and revised Statement of Financial Accounting Standards No. 25, "Business Combinations - Accounting development expenditures, personnel training expenditures, and investments in important Treatment under Purchase Method" (SFAS No. 25), goodwill is no longer amortized and instead is technology-based enterprises are recognized using the flow-through method. tested for impairment annually. If an event occurs or circumstances change which indicated that the fair value of goodwill is more likely than not below its carrying amount, an impairment loss is Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax recognized. A subsequent reversal of such impairment loss is not allowed. provision. Deferred charges consist of technology license fees, software and system design costs and other Income tax on unappropriated earnings (excluding earnings from foreign consolidated subsidiaries) at charges. The amounts are amortized over the following periods: Technology license fees - the shorter a rate of 10% is expensed in the year of shareholder approval which is the year subsequent to the of the estimated life of the technology or the term of the technology transfer contract; software and year the earnings are generated. system design costs and other charges - 2 to 5 years. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If The R.O.C. government enacted the Alternative Minimum Tax Act (the AMT Act), which became the recoverable amount increases in a subsequent period, the previously recognized impairment loss effective on January 1, 2006. The alternative minimum tax (AMT) imposed under the AMT Act is a would be reversed and recognized as a gain. However, the adjusted amount may not exceed the supplemental tax levied at a rate of 10% which is payable if the income tax payable determined carrying amount that would have been determined, net of amortization, as if no impairment loss had pursuant to the Income Tax Law is below the minimum amount prescribed under the AMT Act. The been recognized. taxable income for calculating the AMT includes most of the tax-exempt income under various laws and statutes. TSMC and subsidiaries domiciled in the R.O.C. have considered the impact of the AMT Effective January 1, 2007, the Company adopted the newly released Statement of Financial Act in the determination of their tax liabilities. Accounting Standards No. 37, "Accounting for Intangible Assets". The Company had reassessed the useful lives and the amortization method of its recognized intangible assets at the effective date. Stock-based Compensation Expenditures related to research activities and those related to development activities that do not Employee stock option plans that are amended or have options granted on or after January 1, 2004 meet the criteria for capitalization are charged to expenses when incurred. are accounted for by the interpretations issued by the Accounting Research and Development Pension Costs Foundation of the Republic of China. The Company adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee For employees who participate in defined contribution pension plans, pension costs are recorded vesting period. based on the actual contributions made to employees' individual pension accounts during their service periods. For employees who participate in defined benefit pension plans, pension costs are recorded based on actuarial calculations. 62 Treasury Stock 3. ACCOUNTING CHANGES Treasury stock is stated at cost and shown as a deduction in shareholders' equity. When TSMC retires treasury stock, the treasury stock account is reduced and the common stock as well as the capital On January 1, 2006, the Company adopted the newly released Statements of Financial Accounting surplus - additional paid-in capital are reversed on a pro rata basis. When the book value of the Standards No. 34, "Financial Instruments: Recognition and Measurement" (SFAS No. 34) and No. 36, treasury stock exceeds the sum of the par value and additional paid-in capital, the difference is "Financial Instruments: Disclosure and Presentation". charged to capital surplus - treasury stock transactions and to retained earnings for any remaining amount. TSMC's stock held by its subsidiaries is treated as treasury stock and reclassified from The Company had categorized its financial assets and liabilities upon initial adoption of the newly investments accounted for using equity method to treasury stock. The gains resulted from disposal of released SFASs. The adjustments made to the carrying amounts of the financial instruments the treasury stock held by subsidiaries and cash dividends received by subsidiaries from TSMC are categorized as financial assets or liabilities at fair value through profit or loss were included in the recorded under capital surplus - treasury stock transactions. cumulative effect of changes in accounting principles; the adjustments made to the carrying amounts of those categorized as available-for-sale financial assets were recognized as adjustments to Foreign-currency Transactions shareholders' equity. Foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign-currency transactions or The effect of adopting the newly released SFASs is summarized as follows: monetary assets and liabilities denominated in foreign currencies are recognized in earnings. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with the resulting gains or losses recognized in earnings. Translation of Foreign-currency Financial Statements The financial statements of foreign subsidiaries are translated into New Taiwan dollars at the following exchange rates: Assets and liabilities - spot rates at year-end; shareholders' equity - historical rates; income and expenses - average rates during the year. The resulting translation adjustments are recorded as a separate component of shareholders' equity. Financial assets or liabilities at fair value through profit or loss Available-for-sale financial assets Recognized as Cumulative Effect of Changes in Accounting Principles (Net of Tax) Recognized as a Separate Component of Shareholders' Equity $ $ 1,606,749 - 1,606,749 $ $ - 306,531 306,531 The adoption of the newly released SFASs resulted in a decrease in net income before cumulative effect of changes in accounting principles of NT$1,083,574 thousand, an increase in net income of NT$523,175 thousand, and an increase in basic earnings per share (after income tax) of NT$0.02, for Recent Accounting Pronouncements the year ended December 31, 2006. In March 2007, the Accounting Research and Development Foundation of the R.O.C. issued an interpretation that requires companies to record the bonus paid to directors, supervisors and employees as an expense rather than an appropriation of earnings. This interpretation should be applied to financial statements for fiscal years beginning on or after January 1, 2008. Effective January 1, 2006, the Company adopted the newly revised SFAS No. 5 and SFAS No. 25, which prescribe that investment premiums, representing goodwill, be assessed for impairment at least on an annual basis instead of being amortized. Such a change in accounting principle did not have a material effect on the Company's consolidated financial statements as of and for the year ended The Accounting Research and Development Foundation of the R.O.C. also issued Statement of December 31, 2006. Financial Accounting Standards No. 39, "Accounting for Share-based Payment" (SFAS No. 39) in August 2007, which requires companies to record share-based payment transactions in the financial statements at fair value. SFAS No. 39 should be applied to financial statements for fiscal years beginning on or after January 1, 2008. The Accounting Research and Development Foundation of the R.O.C. revised Statement of Financial Accounting Standards No. 10, "Accounting for Inventories" (SFAS No. 10) in November 2007, which requires inventories to be stated at the lower of cost or net realizable value item by item. Inventories are recorded by the specific identification method, first-in, first-out method or weighted average method. The last-in, first-out method is no longer permitted. The revised SFAS No. 10 should be applied to financial statements for the fiscal years beginning on or after January 1, 2009. Early adoption is permitted. 63 4. CASH AND CASH EQUIVALENTS Outstanding cross currency swap contracts as of December 31, 2007 and 2006: December 31 December 31, 2007 Maturity Date Contract Amount (In Thousands) Range of Interest Rates Paid Range of Interest Rates Received Cash and deposits in banks Repurchase agreements collaterized by government bonds Asset-backed commercial papers Corporate notes Treasury bills $ 2007 84,105,377 10,067,843 522,116 291,152 - $ 2006 85,496,085 31,241,594 - 1,026,522 72,991 $ 94,986,488 $ 117,837,192 5. FINANCIAL ASSETS/LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS January 2008 to February 2008 US$ 975,000 3.53% - 5.60% 0.02% - 3.01% December 31, 2006 January 2007 to February 2007 US$ 820,000 3.19% - 5.91% 0.90% - 3.25% For the years ended December 31, 2007 and 2006, net losses arising from derivative financial instruments were NT$924,969 thousand (including realized settlement losses of NT$684,122 thousand and valuation losses of NT$240,847 thousand) and NT$1,613,366 thousand (including realized settlement losses of NT$1,647,103 thousand and valuation gain of NT$33,737 thousand), Trading financial assets Publicly-traded stocks Cross currency swap contracts Forward exchange contracts Trading financial liabilities Forward exchange contracts Cross currency swap contracts December 31 2007 2006 6. AVAILABLE-FOR-SALE FINANCIAL ASSETS respectively. $ $ $ $ 1,590,188 35,567 6,632 1,632,387 185,583 63,730 249,313 $ $ $ $ 1,162,253 44,601 - 1,206,854 113 10,751 10,864 Money market funds Open-end mutual funds Corporate bonds Agency bonds Government bonds Corporate issued asset-backed securities Publicly-traded stocks Structured time deposits The Company entered into derivative contracts during the years ended December 31, 2007 and 2006 Current portion to manage exposures due to the fluctuations of foreign exchange rates. The derivative contracts entered into by the Company did not meet the criteria for hedge accounting prescribed by SFAS No. 34. Therefore, the Company did not apply hedge accounting treatment for its derivative financial contracts. Outstanding forward contracts as of December 31, 2007 and 2006: Maturity Date Contract Amount (In Thousands) January 2008 February 2008 to July 2008 US$ 111,000 EUR 48,000 classified as cash equivalents. January 2007 JPY 38,610 December 31, 2007 Sell US$/Buy NT$ Sell EUR$/Buy NT$ December 31, 2006 Sell JPY$/Buy US$ 64 December 31 $ 2007 19,212,110 14,966,675 10,745,145 8,635,796 7,767,637 5,357,032 905,254 499,410 68,089,059 (66,688,368) $ 2006 667,828 26,147,276 16,494,244 12,691,612 6,921,532 10,541,679 208,930 499,242 74,172,343 (67,523,858) $ 1,400,691 $ 6,648,485 In 2004, the Company entered into investment management agreements with three well-known financial institutions (fund managers) to manage its investment portfolios. In accordance with the investment guidelines and terms specified in these agreements, the securities invested by the fund managers cannot be below a pre-defined credit rating. The investment portfolios included securities such as corporate bonds, agency bonds, government bonds, asset-backed securities and others. Securities acquired with maturities of less than three months from the date of purchase were Structured time deposits categorized as available-for-sale financial assets consisted of the following: The amount of interest earned from the callable range accrual deposits is based on a pre-defined December 31, 2007 Step-up callable deposits Domestic deposits December 31, 2006 Step-up callable deposits Domestic deposits Principal Amount Carrying Amount Interest Rate Maturity Date range as determined by the 3-month or 6-month LIBOR plus an agreed upon rate ranging between 2.10% and 3.45%. Based on the terms of the contracts, if the 3-month or 6-month LIBOR moves outside of the pre-defined range, the interest paid to the Company is at a fixed rate between zero and 1.5%. Under the terms of the contracts, the bank has the right to cancel the contracts prior to the $ 500,000 $ 499,410 1.76% March 2008 maturity date. $ 500,000 $ 499,242 1.76% March 2008 As of December 31, 2007, no structured time deposit resided in banks located in foreign countries. As of December 31, 2006, the principal of the deposits that resided in banks located in Hong Kong and Singapore amounted to US$80,000 thousand and US$20,000 thousand, respectively. The interest rate of the step-up callable deposits was pre-determined by the Company and the banks. 8. ALLOWANCES FOR DOUBTFUL RECEIVABLES, SALES RETURNS AND OTHERS 7. HELD-TO-MATURITY FINANCIAL ASSETS Movements of the allowance for doubtful receivables were as follows: Corporate bonds Government bonds Structured time deposits Current portion December 31 2007 10,900,247 7,824,425 1,500,000 20,224,672 (11,526,946) $ 2006 13,742,541 12,070,657 11,671,120 37,484,318 (8,510,823) 8,697,726 $ 28,973,495 $ $ Balance, beginning of year Effect of inclusion of newly consolidated subsidiaries Provision Write-off Balance, end of year Years Ended December 31 2007 749,888 45 2,964 (51,090) 701,807 $ $ 2006 980,594 - 54,713 (285,419) 749,888 $ $ Movements of the allowance for sales returns and others were as follows: Balance, beginning of year Effect of inclusion of newly consolidated subsidiaries Provision Write-off Balance, end of year Years Ended December 31 2007 2,870,802 12,956 5,773,383 (4,568,106) 4,089,035 $ $ 2006 4,317,413 - 5,382,146 (6,828,757) 2,870,802 $ $ As of December 31, 2007 and 2006, structured time deposits categorized as held-to-maturity financial assets consisted of the following: Principal Amount Interest Receivable Range of Interest Rates Maturity Date December 31, 2007 Step-up callable deposits Domestic deposits December 31, 2006 Step-up callable deposits Domestic deposits Callable range accrual deposits Domestic deposits Foreign deposits $ 1,500,000 $ 5,585 1.77% - 1.83% April 2008 to October 2008 $ 4,500,000 $ 13,928 1.40% - 1.83% June 2007 to October 2008 3,911,520 3,259,600 4,808 4,998 (See below) (See below) September 2009 to December 2009 October 2009 to January 2010 $ 11,671,120 $ 23,734 65 9. INVENTORIES, NET Finished goods Work in process Raw materials Supplies and spare parts Allowance for losses December 31 $ 2007 4,321,870 17,346,862 1,862,543 1,261,715 24,792,990 (930,730) $ 2006 5,146,839 14,688,719 1,673,982 926,120 22,435,660 (1,004,932) $ 23,862,260 $ 21,430,728 10. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD December 31 2007 2006 Carrying Amount % of Ownership Carrying Amount % of Ownership As of December 31, 2007 and 2006, fair values of publicly traded stocks in investments accounted for using equity method were NT$15,189,200 thousand and NT$11,027,066 thousand, respectively. Movements of the difference between the cost of investment and the Company's share in investees' net assets allocated to depreciable for the years ended December 31, 2007 and 2006 were as follows: Balance, beginning of year Addition Reduction Balance, end of year Years Ended December 31 2007 952,159 1,968,622 (331,039) 2,589,742 $ $ 2006 - 1,010,846 (58,687) 952,159 $ $ Movements of the aforementioned difference allocated to goodwill for the years ended December 31, 2007 and 2006 were as follows: Vanguard International Semiconductor Corporation (VIS) Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) VisEra Holding Company (VisEra Holding) $ 11,220,101 9,092,741 2,204,447 37 39 49 $ 5,931,755 7,960,869 1,108,267 27 39 49 Balance, beginning of year Addition Balance, end of year $ 22,517,289 $ 15,000,891 In November 2006, the Company acquired 81 thousand shares in SSMC for SGD115,227 thousand from EDB Investments Pte Ltd. under a Shareholders Agreement. After the acquisition, the number of SSMC shares owned by the Company increased to 463 thousand and the Company's percentage of ownership increased from 32% to 39%. In August 2007, the Company acquired 169,600 thousand shares in VIS for NT$4,927,865 thousand. After the acquisition, the Company's percentage of ownership in VIS increased from 27% to 37%. For the years ended December 31, 2007 and 2006, net equity in earnings of NT$2,507,869 thousand and NT$2,347,153 thousand were recognized, respectively. The related equity in earnings of equity method investees were determined based on the audited financial statements of the investees for the same periods as the Company. 11. FINANCIAL ASSETS CARRIED AT COST Non-publicly traded stocks Mutual funds 66 Years Ended December 31 2007 213,984 773,365 987,349 December 31 2007 3,462,372 383,247 3,845,619 $ $ $ $ $ $ $ $ 2006 - 213,984 213,984 2006 2,924,350 347,930 3,272,280 12. PROPERTY, PLANT AND EQUIPMENT Cost Land and land improvements Buildings Machinery and equipment Office equipment Leased asset Total Accumulated depreciation Land and land improvements Buildings Machinery and equipment Office equipment Leased asset Total Advance payments and construction in progress Net Cost Land and land improvements Buildings Machinery and equipment Office equipment Leased asset Total Accumulated depreciation Land and land improvements Buildings Machinery and equipment Office equipment Leased asset Total Advance payments and construction in progress Net Balance, Beginning of Year Effect of Inclusion of Newly Consolidated Subsidiaries Additions Sale or Disposal Reclassification Effect of Exchange Rate Changes Balance, Ending of Year Year Ended December 31, 2007 $ 844,644 112,595,124 579,825,289 10,646,725 612,941 704,524,723 234,377 54,288,225 400,579,587 7,839,303 96,592 463,038,084 12,607,551 $ $ $ $ $ $ 254,094,190 101,518 71,053 2,430,982 547,188 - 3,150,741 - 1,111 584,690 76,238 - 662,039 480,580 Balance, Beginning of Year $ 851,225 105,832,028 510,922,064 9,670,611 597,669 627,873,597 206,408 46,560,127 344,431,001 6,862,502 64,569 398,124,607 15,074,302 $ $ $ $ $ $ $ $ $ $ - 5,522,828 63,828,487 1,064,259 - 70,415,574 29,798 8,901,910 67,018,215 1,232,781 31,429 77,214,133 8,474,380 $ $ $ $ $ - (31,836) (504,132) (350,611) - (886,579) - (30,957) (255,143) (350,147) - (636,247) - $ $ $ $ $ - (11,518) 241,750 (78,898) - 151,334 - 2,709 (156,839) (2,362) - (156,492) 288,805 Year Ended December 31, 2006 Additions Sale or Disposal Reclassification - 7,595,171 74,313,257 1,236,205 - 83,144,633 29,499 8,465,728 61,516,317 1,190,650 29,682 71,231,876 (2,469,323) $ $ $ $ $ - (964,370) (4,876,809) (204,200) - (6,045,379) - (748,011) (4,748,334) (203,404) - (5,699,749) - $ $ $ $ $ - 2,393 (235,999) (40,550) - (274,156) - 81 (235,908) (6,423) - (242,250) - $ $ $ $ $ $ $ $ $ $ $ (3,965) 494,376 597,051 977 39,355 1,127,794 (1,472) 76,924 (105,438) 939 7,097 (21,950) 16,851 942,197 118,640,027 646,419,427 11,829,640 652,296 778,483,587 262,703 63,239,922 467,665,072 8,796,752 135,118 540,099,567 21,868,167 $ 260,252,187 Effect of Exchange Rate Changes Balance, Ending of Year $ (6,581) 129,902 (297,224) (15,341) 15,272 (173,972) (1,530) 10,300 (383,489) (4,022) 2,341 (376,400) 2,572 844,644 112,595,124 579,825,289 10,646,725 612,941 704,524,723 234,377 54,288,225 400,579,587 7,839,303 96,592 463,038,084 12,607,551 $ 244,823,292 $ 254,094,190 67 13. DEFERRED CHARGES, NET Balance, Beginning of Year Effect of Inclusion of Newly Consolidated Subsidiaries Additions Amortization Disposal Reclassification Effect of Exchange Rate Changes Balance, Ending of Year Year Ended December 31, 2007 Technology license fee Software and system design costs Others Total $ $ $ 4,132,174 1,669,781 134,960 $ 201,941 2,778 29,779 $ 3,515,908 1,275,329 311,827 $ (1,739,949) (929,920) (124,209) $ - (321) (134) $ (296,423) (569,648) 296,423 $ 5,497 1,604 6,204 5,819,148 1,449,603 654,850 5,936,915 $ 234,498 $ 5,103,064 $ (2,794,078) $ (455) $ (569,648) $ 13,305 $ 7,923,601 Technology license fee Software and system design costs Others Total Balance, Beginning of Year Additions Amortization Reclassification Effect of Exchange Rate Changes Balance, Ending of Year Year Ended December 31, 2006 $ $ $ 5,099,227 1,737,384 169,639 $ 402,001 1,012,741 - $ (1,365,685) (1,083,083) (37,113) $ - 1,139 - $ (3,369) 1,600 2,434 4,132,174 1,669,781 134,960 7,006,250 $ 1,414,742 $ (2,485,881) $ 1,139 $ 665 $ 5,936,915 14. BONDS PAYABLE 15. LONG-TERM BANK LOANS Domestic unsecured bonds: Issued in December 2000 and repayable in December 2007, 5.36% inter- est payable annually $ - $ 4,500,000 December 31 2007 2006 Issued in January 2002 and repayable in January 2007, 2009 and 2012 in three installments, 2.60%, 2.75% and 3.00% interest payable annually, respectively Current portion Secured loans: US$20,000 thousand, repayable in full in one lump sum payment in November 2010, annual interest at 5.88% in 2007 and 5.91% in 2006 Repayable from August 2009 in 17 quarterly installments, annual interest at 2.91%-2.99% 12,500,000 12,500,000 - 15,000,000 19,500,000 (7,000,000) Repayable from December 2007 in 8 semi-annual installments, annual interest at 2.39%-3.20% Repayable from March 2007 in 12 quarterly installments, annual interest at 2.79%-3.16% $ 12,500,000 $ 12,500,000 Repayable from May 2007 in 16 quarterly installments, annual interest at As of December 31, 2007, future principal repayments for the bonds payable were as follows: Year of Repayment 2009 2012 68 Amount 8,000,000 4,500,000 12,500,000 $ $ 2.48%-2.85% Repayable from April 2005 in 16 quarterly installments, annual interest at 2.51%-2.85% Repayable from February 2005 in 17 quarterly installments, annual inter- est at 2.65%-4.53% Unsecured loans: Science Park Administration (SPA) SOC loan, repayable from October 2003 in 20 quarterly installments, interest-free SPA DSP loan, repayable from July 2002 in 20 quarterly installments, interest-free Current portion December 31 2007 2006 $ 648,941 $ 651,871 630,000 456,750 124,944 54,641 44,975 40,670 2,088 - 2,003,009 (280,813) - - - - - - 4,873 1,352 658,096 (4,137) $ 1,722,196 $ 653,959 Pursuant to the loan agreements, financial ratios calculated based on annual audited financial 17. PENSION PLANS statements of TSMC-Shanghai as well as semi-annual and annual financial statements of XinTec must comply with certain financial covenants. As of December 31, 2007, TSMC-Shanghai and XinTec were The Labor Pension Act (the Act) became effective on July 1, 2005. The employees of TSMC, GUC, and in compliance with all such financial covenants. XinTec who were subject to the Labor Standards Law prior to July 1, 2005 were allowed to choose to be subject to the pension mechanism under the Act with their seniority as of July 1, 2005 retained or As of December 31, 2007, future principal repayments for the long-term bank loans were as follows: continue to be subject to the pension mechanism under the Labor Standards Law. Employees who Year of Repayment 2008 2009 2010 2011 2012 and thereafter 16. OTHER LONG-TERM PAYABLES Payables for acquisition of property, plant and equipment (Note 28l) Payables for royalties Current portion (classified under accrued expenses and other current liabilities) December 31 2007 7,908,516 5,174,644 13,083,160 (3,673,182) 9,409,978 $ $ Amount 280,813 302,090 947,453 220,653 252,000 2,003,009 2006 7,431,371 1,889,788 9,321,159 (617,892) 8,703,267 $ $ $ $ joined TSMC, GUC, XinTec and Mutual-Pak after July 1, 2005 can only be subject to the pension mechanism under the Act. The pension mechanism under the Act is deemed a defined contribution plan. Pursuant to the Act, TSMC, GUC, XinTec and Mutual-Pak have made monthly contributions equal to 6% of each employee's monthly salary to employees' pension accounts starting from July 1, 2005. Furthermore, TSMC-NA, TSMC-Shanghai, TSMC-Europe and TSMC Canada are required by local regulations to make contributions at certain percentages of the monthly basic salary of their employees. Pursuant to the aforementioned Act and local regulations, the Company recognized pension costs of NT$725,789 thousand and NT$679,919 thousand for the years ended December 31, 2007 and 2006, respectively. TSMC, GUC and XinTec have defined benefit plans under the Labor Standards Law that provide benefits based on an employee's length of service and average monthly salary for the six-month period prior to retirement. TSMC, GUC and XinTec contribute an amount equal to 2% of salaries paid each month to their respective pension funds (the Funds), which are administered by the pension fund monitoring committees (the Committees) and deposited in the name of the Committees in the Bank of Taiwan (originally the Central Trust of China, which was merged into the Bank of Taiwan on July 1, 2007). The payables for royalties were primarily attributable to several license arrangements that TSMC Pension information on the defined benefit plans is summarized as follows: entered into for certain semiconductor-related patents. As of December 31, 2007, future payments for other long-term payables were as follows: a. Components of net periodic pension cost for the year Year of Payment 2008 2009 2010 2011 2012 and thereafter $ Amount 3,673,182 582,027 497,676 421,759 7,908,516 $ 13,083,160 Service cost Interest cost Projected return on plan assets Amortization Net periodic pension cost 2007 184,275 156,391 (51,309) 35,853 325,210 $ $ 2006 178,460 164,168 (49,399) 12,096 305,325 $ $ 69 b. Reconciliation of funded status of the plans and accrued pension cost at December 31, 2007 and 18. INCOME TAX 2006 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 transition obligation Unrecognized net loss Accrued pension cost Vested benefit c. Actuarial assumptions at December 31, 2007 and 2006 Discount rate used in determining present values Future salary increase rate Expected rate of return on plan assets d. Contributions to the Funds for the year e. Payments from the Funds for the year 70 2007 2006 income tax currently payable was as follows: a. A reconciliation of income tax expense based on "income before income tax" at statutory rates and $ $ $ $ $ 120,146 3,479,132 3,599,278 2,444,451 6,043,729 (2,238,997) 3,804,732 (109,873) (41,995) 3,652,864 120,146 2007 2.75% - 3.00% 2.00% - 3.00% 2.50% - 3.00% 2007 209,423 2007 15,003 $ $ $ $ $ 102,920 3,883,344 3,986,264 2,969,830 6,956,094 (1,958,595) 4,997,499 (118,420) (1,339,019) 3,540,060 106,645 2006 2.25% - 3.50% 2.00% - 3.00% 2.50% 2006 233,111 2006 7,407 Income tax expense based on "income before income tax" at statutory rates The effect of the following: Tax-exempt income Temporary and permanent differences Cumulative effect of changes in accounting principles Additional tax at 10% on unappropriated earnings Investment tax credits used Years Ended December 31 2007 2006 $ 30,829,431 $ 34,786,278 (7,668,367) (150,946) - 2,710,909 (14,713,748) (12,281,413) (2,817,104) (82,062) 1,170,108 (12,769,386) Income tax currently payable $ 11,007,279 $ 8,006,421 b. Income tax expense consisted of the following: Income tax currently payable Other income tax adjustments Net change in deferred income tax assets Investment tax credits Temporary differences Net operating loss carryforwards Valuation allowance Years Ended December 31 $ 2007 11,007,279 (240,779) 5,122,450 (800,374) 841,502 (4,220,452) $ 2006 8,006,421 (328,152) 3,914,757 (2,181,558) 1,412,946 (3,050,703) Income tax expense $ 11,709,626 $ 7,773,711 c. Net deferred income tax assets consisted of the following: Current deferred income tax assets, net Investment tax credits Temporary differences Valuation allowance Noncurrent deferred income tax assets, net Investment tax credits Temporary differences Net operating loss carryforwards Valuation allowance December 31 2007 $ $ $ $ 5,372,761 674,154 (474,581) 5,572,334 9,885,452 (2,848,052) 3,963,123 (3,687,240) 7,313,283 2006 7,870,800 584,210 (441,018) 8,013,992 12,252,389 (3,580,754) 4,816,846 (7,686,339) 5,802,142 $ $ $ $ As of December 31, 2007, the net operating loss carryforwards were generated by WaferTech, g. The profits generated from the following projects of TSMC, GUC and XinTec are exempt from TSMC Development and TSMC Technology and would expire on various dates through 2026. income tax for a four- or five-year period: d. Integrated income tax information: The balance of the imputation credit account (ICA) of TSMC as of December 31, 2007 and 2006 was NT$3,012,848 thousand and NT$828,612 thousand, respectively. The estimated creditable ratio for distribution of TSMC's earnings of 2007 and 2006 was 1.86% and 5.23%, respectively. Construction of Fab 12 - Module A Construction of Fab 14 - Module A Construction of Fab 14 - Module B 2003 plant expansion of GUC 2003 plant expansion of XinTec Tax-exemption Period 2004 to 2007 2006 to 2010 2007 to 2011 2007 to 2011 2007 to 2011 h. The tax authorities have examined income tax returns of TSMC through 2004. The imputation credit allocated to the shareholders is based on its balance as of the date of dividend distribution. The estimated creditable ratio may change when the actual distribution of 19. LABOR COST, DEPRECIATION AND AMORTIZATION imputation credit is made. e. All of TSMC's earnings generated prior to December 31, 1997 have been appropriated. f. As of December 31, 2007, investment tax credits of TSMC, GUC, XinTec and Mutual-Pak consisted of the following: Law/Statute Item Statute for Upgrading Industries Purchase of machinery and equip- ment Statute for Upgrading Industries Research and development expendi- tures Statute for Upgrading Industries Personnel training expenditures Total Creditable Amount Remaining Creditable Amount Expiry Year $ 306,118 3,202,103 6,044,032 6,625,081 3,703,939 $ - 24,335 14,328 6,625,081 3,703,939 $ 19,881,273 $ 10,367,683 $ $ 1,295,681 2,599,538 1,546,606 1,887,404 1,749,252 - 6,600 1,078,326 1,887,404 1,749,252 $ 9,078,481 $ 4,721,582 $ $ 16,379 16,218 46,353 42,271 500 - 20 46,353 42,271 500 $ 121,721 $ 89,144 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Statute for Upgrading Industries Investments in important technolo- $ 79,804 $ 79,804 2010 gy-based enterprises Labor cost Salary Labor and health insurance Pension Meal Welfare Others Depreciation Amortization Labor cost Salary Labor and health insurance Pension Meal Welfare Others Depreciation Amortization Year Ended December 31, 2007 Classified as Cost of Sales Classified as Operating Expenses $ $ 11,990,153 685,922 646,999 463,453 249,133 176,192 $ 7,562,966 416,131 404,128 180,474 266,412 226,747 Total 19,553,119 1,102,053 1,051,127 643,927 515,545 402,939 $ 14,211,852 $ 9,056,858 $ 23,268,710 $ 73,070,781 $ 1,849,917 $ 4,100,533 $ 943,064 $ 77,171,314 $ 2,792,981 Year Ended December 31, 2006 Classified as Cost of Sales Classified as Operating Expenses $ $ 1,713,445 714,170 627,731 460,980 236,022 226,032 $ 6,692,437 404,845 369,398 173,185 211,272 217,045 Total 18,405,882 1,119,015 997,129 634,165 447,294 443,077 $ 13,978,380 $ 8,068,182 $ 22,046,562 $ 67,685,744 $ 1,436,908 $ 3,539,472 $ 1,035,482 $ 71,225,216 $ 2,472,390 71 20. SHAREHOLDERS' EQUITY TSMC's Articles of Incorporation also provide that profits of TSMC may be distributed by way of cash dividend and/or stock dividend. However, distribution of profits shall be made preferably by way of As of December 31, 2007, 1,132,867 thousand ADSs of TSMC were traded on the NYSE. The cash dividend. Distribution of profits may also be made by way of stock dividend; provided that the number of common shares represented by the ADSs was 5,664,337 thousand (one ADS represents ratio for stock dividend shall not exceed 50% of the total distribution. five common shares). Capital surplus can only be used to offset a deficit under the Company Law. However, the capital in the financial statements of that year. surplus generated from donations and the excess of the issuance price over the par value of capital stock (including the stock issued for new capital, mergers, convertible bonds and the surplus from TSMC no longer has supervisors since January 1, 2007. The required duties of supervisors are being treasury stock transactions) may be appropriated as stock dividends, which are limited to a certain fulfilled by the Audit Committee. Any appropriations of the profits are recorded in the year of shareholder approval and given effect to percentage of TSMC's paid-in capital. Capital surplus consisted of the following: From merger Additional paid-in capital From convertible bonds From treasury stock transactions From long-term investments Donations December 31 $ 2007 24,003,546 19,526,492 9,360,424 490,950 351,215 55 $ 2006 24,003,546 19,974,431 9,360,424 389,188 379,854 55 The appropriation for legal capital reserve shall be made until the reserve equals TSMC's paid-in capital. The reserve may be used to offset a deficit, or be distributed as dividends and bonuses for the portion in excess of 50% of the paid-in capital if TSMC has no unappropriated earnings and the reserve balance has exceeded 50% of TSMC's paid-in capital. The Company Law also prescribes that, when the reserve has reached 50% of TSMC's paid-in capital, up to 50% of the reserve may be transferred to capital. A special capital reserve equivalent to the net debit balance of the other components of shareholders' equity (for example, cumulative translation adjustments and unrealized loss on financial assets, but excluding treasury stock) shall be made from unappropriated earnings pursuant to existing $ 53,732,682 $ 54,107,498 regulations promulgated by the Securities and Futures Bureau (SFB). Any special reserve appropriated may be reversed to the extent that the net debit balance reverses. TSMC's Articles of Incorporation provide that, when allocating the net profits for each fiscal year, TSMC shall first offset its losses in previous years and then set aside the following items accordingly: The appropriations of earnings for 2006 and 2005 had been approved in TSMC's shareholders' meetings held on May 7, 2007 and May 16, 2006, respectively. The appropriations and dividends per a. Legal capital reserve at 10% of the profits left over, until the accumulated legal capital reserve has equaled TSMC's paid-in capital; b. Special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in charge; c. Bonus to directors and bonus to employees of TSMC of not more than 0.3% and not less than 1% of the remainder, respectively. Directors who also serve as executive officers of TSMC are not entitled to receive the bonus to directors. TSMC may issue stock bonuses to employees of an affiliated company meeting the conditions set by the Board of Directors or, by the person duly authorized by the Board of Directors; d. Any balance left over shall be allocated according to the resolution of the shareholders' meeting. share were as follows: Legal capital reserve Special capital reserve Bonus to employees - in cash Bonus to employees - in stock Cash dividends to shareholders Stock dividends to shareholders Bonus to directors and supervisors Appropriation of Earnings Dividends Per Share (NT$) For Fiscal Year 2006 For Fiscal Year 2005 For Fiscal Year 2006 For Fiscal Year 2005 $ 12,700,973 (11,192) 4,572,798 4,572,798 77,489,064 516,594 285,800 $ 9,357,503 (1,585,685) 3,432,129 3,432,129 61,825,061 3,709,504 257,410 $100,126,835 $ 80,428,051 $ 3.00 0.02 $ 2.50 0.15 72 The shareholders' meeting held on May 7, 2007 also resolved to distribute stock dividends out of Information about TSMC's outstanding options for the years ended December 31, 2007 and 2006 capital surplus in the amount of NT$774,891 thousand. was as follows: The amounts of the appropriations of earnings for 2006 and 2005 were consistent with the resolutions of the meetings of the Board of Directors held on February 6, 2007 and February 14, 2006, respectively. If the above bonus to employees, directors and supervisors had been paid entirely in cash and charged to earnings of 2006 and 2005, the basic earnings per share (after income tax) for the years ended December 31, 2006 and 2005 shown in the respective financial statements would have decreased from NT$4.93 to NT$4.56 and NT$3.79 to NT$3.50, respectively. The shares distributed as a bonus to employees represented 1.77% and 1.39% of TSMC's total outstanding common shares as of December 31, 2006 and 2005, respectively. As of January 10, 2008, the Board of Directors had not resolved the appropriation for earnings of 2007. The information about the appropriations of bonus to employees, directors and supervisors is available at the Market Observation Post System website. Under the Integrated Income Tax System that became effective on January 1, 1998, R.O.C. resident shareholders are allowed a tax credit for their proportionate share of the income tax paid by TSMC on earnings generated since January 1, 1998. 21. STOCK-BASED COMPENSATION PLANS Year ended December 31, 2007 Balance, beginning of year Options granted Options exercised Options cancelled Balance, end of year Year ended December 31, 2006 Balance, beginning of year Options granted Options exercised Options cancelled Balance, end of year Number of Options (In Thousands) Weighted-average Exercise Price (NT$) $ $ 52,814 1,094 (10,988) (1,045) 41,875 67,758 2,758 (14,550) (3,152) 52,814 37.9 37.9 39.8 45.9 37.4 39.4 40.1 40.1 43.7 39.6 The number of outstanding options and exercise prices have been adjusted to reflect the appropriations of earnings in accordance with the plans. The options granted were the result of the aforementioned adjustment. As of December 31, 2007, information about TSMC's outstanding and exercisable options was as TSMC's Employee Stock Option Plans, under the TSMC 2004 Plan, TSMC 2003 Plan, and TSMC 2002 Plan, were approved by the SFB on January 6, 2005, October 29, 2003 and June 25, 2002, respectively. The maximum number of options authorized to be granted under the TSMC 2004 Plan, follows: TSMC 2003 Plan and TSMC 2002 Plan was 11,000 thousand, 120,000 thousand and 100,000 thousand, respectively, with each option eligible to subscribe for one common share when exercisable. The options may be granted to qualified employees of TSMC or any of its domestic or foreign subsidiaries, in which TSMC's shareholding with voting rights, directly or indirectly, is more than fifty percent (50%). The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. Under the terms of the plans, the options are granted at an exercise price equal to the closing price of TSMC's common shares listed on the TSE on the grant date. Options of the plans that had never been granted or had been granted but subsequently cancelled had expired as of December 31, 2007. Range of Exercise Price (NT$) Number of Options (In Thousands) Options Outstanding Weighted-average Remaining Contractual Life (Years) Options Exercisable Weighted-average Exercise Price (NT$) Number of Options (In Thousands) Weighted-average Exercise Price (NT$) $25.9 - $36.4 $38.9 - $51.3 28,527 13,348 41,875 $ 5.16 6.89 33.1 46.6 37.4 $ 28,528 6,838 35,366 33.1 46.4 35.6 73 GUC's Employee Stock Option Plans, consisting of the GUC 2003 Plan and GUC 2002 Plan, were The number of outstanding options and exercise prices have been adjusted to reflect the distribution approved by its Board of Directors on January 23, 2003 and July 1, 2002, respectively. The maximum of earnings by GUC in accordance with the plans. The options granted shown above included options number of options authorized to be granted under the GUC 2003 Plan and GUC 2002 Plan was resulting from the aforementioned adjustment and options newly granted in accordance with the 7,535 and 5,000, respectively, with each option eligible to subscribe for one thousand common plans. shares when exercisable. The options may be granted to qualified employees of GUC. The options of all the plans are valid for six years and exercisable at certain percentages subsequent to the second As of December 31, 2007, information about GUC's outstanding and exercisable options was as anniversary of the grant date. follows: Moreover, the GUC 2007 Plan, GUC 2006 Plan, and GUC 2004 Plan were approved by the SFB on November 28, 2007, July 3, 2006, and August 16, 2004 to grant a maximum of 1,999 options, 3,665 options and 2,500 options, respectively, with each option eligible to subscribe for one thousand common shares when exercisable. The options may be granted to qualified employees of GUC or any of its subsidiaries. Except for the options of the GUC 2006 Plan which are valid until August 15, 2011, the options of the other two GUC option Plans are valid for six years. Options of all three Plans are exercisable at certain percentages subsequent to the second anniversary of the grant date. Range of Exercise Price (NT$) Number of Options Options Outstanding Weighted-average Remaining Contractual Life (Years) Options Exercisable Weighted-average Exercise Price (NT$) Number of Options Weighted-average Exercise Price (NT$) $9.6 - $10.5 17.7 194.0 2,247 3,418 1,933 7,598 $ 0.58 - 3.75 3.67 6.00 10.0 17.7 194.0 60.3 $ 850 - - 850 10.2 - - 10.2 Information about GUC's outstanding options for the years ended December 31, 2007 and 2006 was Number of Options Weighted-average Exercise Price (NT$) $ $ 7,342 2,053 (1,563) (234) 7,598 7,132 3,689 (2,862) (617) 7,342 14.0 183.6 10.2 13.5 60.3 10.7 19.5 10.5 12.1 14.0 XinTec's Employee Stock Option Plans, consisting of the XinTec 2007 Plan and XinTec 2006 Plan, were approved by the SFB on June 26, 2007 and July 3, 2006, respectively. The maximum number of options authorized to be granted under the XinTec 2007 Plan and XinTec 2006 Plan was 6,000 thousand each, with each option eligible to subscribe for one common share of XinTec when exercisable. The options may be granted to qualified employees of XinTec or any of its subsidiaries. The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. Information about XinTec's outstanding options for the year ended December 31, 2007 was as follows: Year ended December 31, 2007 Balance, beginning of year Options granted Options cancelled Balance, end of year Number of Options (In Thousands) Weighted-average Exercise Price (NT$) $ 4,968 5,555 (881) 9,642 13.0 17.3 14.1 15.1 as follows: Year ended December 31, 2007 Balance, beginning of year Options granted Options exercised Options cancelled Balance, end of year Year ended December 31, 2006 Balance, beginning of year Options granted Options exercised Options cancelled Balance, end of year 74 The number of outstanding options and exercise prices have been adjusted to reflect the distribution 22. TREASURY STOCK of earnings by XinTec in accordance with the plans. As of December 31, 2007, information about XinTec's outstanding and exercisable options was as follows: Range of Exercise Price (NT$) Number of Options (In Thousands) Options Outstanding Weighted-average Remaining Contractual Life (Years) Options Exercisable Weighted-average Exercise Price (NT$) Number of Options (In Thousands) Weighted-average Exercise Price (NT$) Year ended December 31, 2007 Parent company stock held by subsidiaries Repurchase under share buyback plan $12.7 - $20.0 9,642 8.75 - 9.96 $ 15.1 - $ - Year ended December 31, 2006 Beginning Shares Addition Stock Dividends Ending Shares (Shares in Thousands) 33,926 - - 800,000 33,926 800,000 170 - 170 34,096 800,000 834,096 No compensation cost was recognized under the intrinsic value method for the years ended December 31, 2007 and 2006. Had the Company used the fair value based method to evaluate the options granted after January 1, 2004 using the Black-Scholes model, the assumptions and pro forma results of the Company would have been as follows: 2007 2006 Assumptions: TSMC GUC XinTec Expected dividend yield Expected volatility Risk free interest rate Expected life Expected dividend yield Expected volatility Risk free interest rate Expected life Expected dividend yield Expected volatility Risk free interest rate Expected life Net income attributable to shareholders of the parent: As reported Pro forma Earnings per share (EPS) - after income tax (NT$): Basic EPS as reported Pro forma basic EPS Diluted EPS as reported Pro forma diluted EPS 1.00% - 3.44% 43.77% - 46.15% 3.07% - 3.85% 5 years 0.00% - 0.60% 22.65% - 45.47% 2.12% - 2.56% 3 - 6 years 0.80% 31.79% - 47.42% 1.88% - 2.45% 3 years 109,177,093 109,089,016 4.14 4.14 4.14 4.14 $ $ 1.00% - 3.44% 43.77% - 46.15% 3.07% - 3.85% 5 years - 22.65% - 41.74% 2.23% - 2.56% 3 - 6 years - - - - $ $ 127,009,731 126,887,247 4.82 4.81 4.81 4.81 Parent company stock held by subsidiaries 32,938 - 988 33,926 As of December 31, 2007 and 2006, the book value of the treasury stock was NT$49,385,032 thousand and NT$918,075 thousand, respectively; the market value was NT$51,713,947 thousand and NT$2,290,026 thousand, respectively. The Company's common shares held by subsidiaries were treated as treasury stock and the holders are entitled to the rights of shareholders, with the exception of voting rights. TSMC held a meeting of the Board of Directors and approved a share buyback plan to repurchase TSMC's common shares up to 800,000 shares listed on the TSE during the period from November 14, 2007 to January 13, 2008 for the buyback price in the range from NT$43.2 to NT$94.2. As of December 31, 2007, TSMC had repurchased 800,000 thousand common shares for a total cost of NT$48,466,957 thousand. All the treasury stock repurchased will be retired in 2008. 23. EARNINGS PER SHARE Years Ended December 31 2007 2006 Before Income Tax After Income Tax Before Income Tax After Income Tax Basic EPS (NT$) Income before cumulative effect of changes in accounting principles attributable to shareholders of the parent $ 4.59 $ 4.14 $ 5.05 $ 4.76 Cumulative effect of changes in accounting principles attributable to shareholders of the parent - - 0.06 0.06 Income attributable to shareholders of the parent $ 4.59 $ 4.14 $ 5.11 $ 4.82 Diluted EPS (NT$) Income before cumulative effect of changes in accounting principles attributable to shareholders of the parent $ 4.58 $ 4.14 $ 5.04 $ 4.75 Cumulative effect of changes in accounting principles attributable to shareholders of the parent - - 0.06 0.06 Income attributable to shareholders of the parent $ 4.58 $ 4.14 $ 5.10 $ 4.81 75 Consolidated EPS is computed as follows: b. Methods and assumptions used in estimating fair values of financial instruments Amounts (Numerator) Before Income Tax After Income Tax Number of Shares (Denominator) (In Thousands) EPS (NT$) Before Income Tax After Income Tax 1) The aforementioned financial instruments do not include cash and cash equivalents, receivables, other financial assets, payables, and payables to contractors and equipment suppliers. The carrying amounts of these financial instruments approximate their fair values due to their short maturities. Year ended December 31, 2007 Basic EPS Income attributable to shareholders of the parent Effect of dilutive potential common stock - stock options $120,890,678 - $109,177,093 - 26,346,582 21,668 $ 4.59 $ 4.14 2) Fair values of financial assets at fair value through profit or loss, available-for-sale and held-to- maturity financial assets other than derivatives and structured time deposits were based on their Diluted EPS Income attributable to shareholders of the parent (including effect of dilutive potential common stock) $120,890,678 $109,177,093 26,368,250 $ 4.58 $ 4.14 Year ended December 31, 2006 Basic EPS quoted market prices. 3) Fair values of derivatives and structured time deposits were determined using valuation techniques incorporating estimates and assumptions that were consistent with prevailing market conditions. Income attributable to shareholders of the parent Effect of dilutive potential common stock - stock options $134,698,725 - $127,009,731 - 26,374,757 24,101 $ 5.11 $ 4.82 4) Fair value of bonds payable was based on their quoted market price. Diluted EPS Income attributable to shareholders of the parent (including effect of dilutive potential common stock) $134,698,725 $127,009,731 26,398,858 $ 5.10 $ 4.81 5) Fair values of long-term bank loans, other long-term payables and obligations under capital leases were based on the present value of expected cash flows, which approximate their carrying amounts. c. The changes in fair value during the years ended December 31, 2007 and 2006 of financial assets/liabilities at fair value through profit or loss, including derivatives estimated using valuation techniques and publicly-traded stocks, were recognized as losses of NT$240,847 thousand and gains of NT$33,737 thousand, respectively. d. As of December 31, 2007 and 2006, financial assets exposed to fair value interest rate risk were NT$87,450,676 thousand and NT$111,492,332 thousand, respectively; financial liabilities exposed to fair value interest rate risk were NT$249,313 thousand and NT$10,864 thousand, respectively. As of December 31, 2006, financial assets exposed to cash flow interest rate risk were NT$7,171,120 thousand. 24. DISCLOSURES FOR FINANCIAL INSTRUMENTS a. Fair values of financial instruments were as follows: December 31 2007 2006 Carrying Amount Fair Value Carrying Amount Fair Value Assets Financial assets at fair value through profit or loss Available-for-sale financial assets Held-to-maturity financial assets $ 1,632,387 68,089,059 20,224,672 $ 1,632,387 68,089,059 20,192,188 $ 1,206,854 74,172,343 37,484,318 $ 1,206,854 74,172,343 37,375,517 Liabilities Financial liabilities at fair value through profit or loss Bonds payable (including current portion) Long-term bank loans (including current portion) Other long-term payables (including current portion) Obligations under capital leases 249,313 12,500,000 2,003,009 13,083,160 652,296 249,313 12,669,987 2,003,009 13,083,160 652,296 10,864 19,500,000 658,096 10,413,125 612,941 10,864 19,817,149 658,096 10,413,125 612,941 76 e. Movements of the unrealized gain/loss on financial instruments for the years ended December 31, 3) Liquidity risk. The Company has sufficient operating capital to meet cash needs upon settlement 2007 and 2006 were as follows: of derivative financial instruments, bonds payable and bank loans. Therefore, the liquidity risk is Year Ended December 31, 2007 Valuation Gain on Available-for-sale Financial Assets Equity in Valuation Gain on Available-for- sale Financial Assets Held by Investees low. 4) Cash flow interest rate risk. The Company mainly invests in fixed-interest-rate debt securities. Total Therefore, cash flows are not expected to fluctuate significantly due to changes in market Balance, beginning of year Recognized directly in shareholders' equity Removed from shareholders' equity and recognized in earnings $ 386,017 849,823 (608,002) $ 175,598 (122,439) - $ 561,615 727,384 (608,002) interest rates. 25. RELATED PARTY TRANSACTIONS Balance, end of year $ 627,838 $ 53,159 $ 680,997 Except as disclosed in the consolidated financial statements and other notes, the following is a Year Ended December 31, 2006 Valuation Gain on Available-for-sale Financial Assets Equity in Valuation Gain on Available-for- sale Financial Assets Held by Investees summary of significant related party transactions: a. Philips, one of the major shareholders of TSMC, which has become a non-related party since Total March, 2007. b. Investees of TSMC Balance, beginning of year Recognized directly in shareholders' equity Removed from shareholders' equity and recognized in earnings $ 302,376 174,212 (90,571) $ - 175,598 - $ 302,376 349,810 (90,571) Balance, end of year $ 386,017 $ 175,598 $ 561,615 VIS (accounted for using equity method) SSMC (accounted for using equity method) f. Information about financial risk 1) Market risk. The publicly-traded stocks categorized as financial assets at fair value through profit or loss are exposed to market price fluctuations. The derivative financial instruments categorized as financial assets/liabilities at fair value through profit or loss are mainly used to hedge the exchange rate fluctuations of foreign-currency assets and liabilities; therefore, the market risk of derivatives will be offset by the foreign exchange risk of these hedged items. Available-for-sale financial assets held by the Company are mainly fixed-interest-rate debt securities; therefore, the fluctuations in market interest rates would result in changes in fair value of these debt securities. 2) Credit risk. Credit risk represents the potential loss that would be incurred by the Company if the counter-parties or third-parties breached contracts. Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk. The counter-parties or third-parties to the foregoing financial instruments are reputable financial institutions, business organizations, and government agencies. Management believes that the Company's exposure to default by those parties is low. c. VisEra Technology Company, Ltd. (VisEra), an indirect investee accounted for using equity method by TSMC d. Others: Related parties over which the Company exercises significant influence but with which the Company had no material transactions For the year Sales VisEra VIS SSMC Philips Others Purchases SSMC VIS VisEra 2007 2006 Amount % Amount % $ 739,879 59,163 2,928 - - $ 801,970 $ 5,468,410 4,208,207 594 $ 9,677,211 - - - - - - 3 2 - 5 $ 99,367 14,454 6,514 4,024,990 42,008 $ 4,187,333 $ 6,820,632 3,919,566 - $ 10,740,198 - - - 1 - 1 4 3 - 7 (Continued) 77 2007 2006 Amount % Amount % The terms of sales to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices were determined in accordance with mutual agreements. $ 63,933 366 - $ 64,299 $ 43,056 $ 346,260 321,819 290,586 $ 958,665 - - - - - 3 3 2 8 $ - - 755,904 $ 755,904 $ - $ 261,245 246,242 314,953 $ 822,440 - - - - - 3 2 3 8 $ 10,885 - - 100 - - $ 1,033 250,919 387 - 99 1 $ 10,885 100 $ 252,339 100 $ 118,749 84,778 40,093 - 49 35 16 - $ 121,911 69,568 58,989 6,395 47 27 23 3 TSMC deferred the gains (classified under deferred credits) derived from sales of property, plant and equipment to VisEra, and then recognized such gains (classified under the non-operating income and gains) over the depreciable lives of the disposed assets. TSMC leased certain buildings and facilities to VisEra. The related rental income was classified under non-operating income. The lease terms and prices were determined in accordance with mutual agreements. 26. PLEDGED OR MORTGAGED ASSETS The Company provided certain assets as collateral mainly for long-term bank loans and land lease agreements, which were as follows: Other financial assets Property, plant and equipment, net 27. SIGNIFICANT LONG-TERM LEASES December 31 2007 48,929 5,733,263 5,782,192 $ $ 2006 52,858 4,293,595 4,346,453 $ $ The Company leases several parcels of land and office premises from the SPA and Jhongli Industrial $ 243,620 100 $ 256,863 100 Park Service Center. These operating leases expire on various dates from March 2008 to December 2027 and can be renewed upon expiration. $ 839,624 655,029 8,723 - 56 44 - - $ 719,832 459,305 - 688,591 38 25 - 37 $ 1,503,376 100 $ 1,867,728 100 The Company entered into lease agreements for its office premises and certain equipment located in the United States, Japan, Shanghai and Taiwan. These operating leases expire between 2008 and 2016 and can be renewed upon expiration. As of December 31, 2007, future lease payments were as follows: $ - $ 62,175 - 1 $ 403,375 100 Year $ 124,350 11 (Concluded) 2008 2009 2010 2011 2012 and thereafter Amount 556,943 544,866 458,770 319,274 2,582,888 4,462,741 $ $ Manufacturing expenses - technical assistance fees VisEra VIS Philips Research and development expenses VisEra Non-operating income and gains VIS (primarily technical service income; see Note 28h) VisEra SSMC (primarily technical service income; see Note 28e) As of December 31 Receivables VisEra Philips Others Other receivables VIS SSMC VisEra Others Payables VIS SSMC VisEra Philips Other long-term payables Philips (see Note 28a) Deferred credits VisEra 78 28. SIGNIFICANT COMMITMENTS AND CONTINGENCIES e. 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 Significant commitments and contingencies of the Company as of December 31, 2007, excluding computed at a specific percentage of net selling price of all products sold by SSMC. The those disclosed in other notes, were as follows: Agreement shall remain in force for ten years and may be automatically renewed for successive periods of five years each unless pre-terminated by either party under certain conditions. a. On June 20, 2004, TSMC and Philips (Philips parted with its semiconductor company which was renamed as NXP B.V. in September 2006) amended the Technical Cooperation Agreement, which f. Under a Technology Transfer Agreement (TTA) with National Semiconductor Corporation (National) was originally signed on May 12, 1997. The amended Technical Cooperation Agreement is for five entered into on June 27, 2000, TSMC shall receive payments for the licensing of certain years beginning from January 1, 2004. Upon expiration, this amended Technical Cooperation technology to National. The agreement was to remain in force for ten years and could be Agreement will be terminated and will not be automatically renewed; however, the patent cross automatically renewed for successive periods of two years thereafter unless either party gives license arrangement between TSMC and Philips (now NXP B.V.) will survive the expiration of the written notice for early termination under certain conditions. In January 2003, TSMC and National amended Technical Cooperation Agreement. Under this amended Technical Cooperation entered into a Termination Agreement whereby the TTA was terminated. Under the Termination Agreement, TSMC will pay Philips (now NXP B.V.) royalties based on a fixed amount mutually Agreement, TSMC will be relieved of any further obligation to transfer any additional technology. agreed-on, rather than under a certain percentage of TSMC's annual net sales. TSMC and Philips In addition, TSMC granted National an option to request prior to January 2008 the transfer of (now NXP B.V.) agreed to cross license the patents owned by each party. TSMC also obtained certain technologies under the same terms and conditions as the terminated TTA. National did not through Philips (now NXP B.V.) a number of cross patent licenses. make such request by the deadline, therefore the option has expired in January 2008. b. Under a technical cooperation agreement with ITRI, the R.O.C. Government or its designee g. In December 2003, TSMC entered into a Technology Development and License Agreement with approved by TSMC can use up to 35% of TSMC's capacity if TSMC's outstanding commitments to Freescale Semiconductor, Inc. to jointly develop 65-nm SOI (silicon on insulator) technology. TSMC its customers are not prejudiced. The term of this agreement is for five years beginning from will also license related 90-nm SOI technology from Freescale Semiconductor, Inc. Any intellectual January 1, 1987 and is automatically renewed for successive periods of five years unless otherwise properties arising out of the co-development project shall be jointly owned by the parties. In terminated by either party with one year prior notice. The agreement was automatically renewed accordance with the agreement, TSMC will pay royalties to Freescale Semiconductor, Inc. and will in 1992, 1997, 2002 and on January 1, 2007. share a portion of the costs associated with the joint development project. c. Under several foundry agreements, TSMC shall reserve a portion of its production capacity for h. TSMC provides a technology transfer to VIS under a Manufacturing License and Technology certain major customers that have guarantee deposits with TSMC. As of December 31, 2007, Transfer Agreement entered into on April 1, 2004. TSMC receives compensation for such TSMC had a total of US$68,391 thousand of guarantee deposits. technology transfer in the form of royalty payments from VIS computed at specific percentages of net selling price of certain products sold by VIS. VIS agreed to reserve its certain capacity to d. Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March manufacture for TSMC certain products at prices as agreed by the parties. 30, 1999, the parties formed a joint venture company, SSMC, which is an integrated circuit foundry in Singapore. TSMC's equity interest in SSMC was 32%. Nevertheless, Philips parted with i. Effective January 1, 2006, The Company entered into the Joint Technology Cooperation Agreement its semiconductor company which was renamed as NXP B.V. in September 2006. TSMC and NXP with Philips (now NXP B.V.), Freescale Semiconductor, Inc. and STMicroelectronics to jointly B.V. purchased all the SSMC shares owned by EDB Investments Pte Ltd. pro rata according to the develop 45-nm and beyond advanced CMOS Logic and e-DRAM technologies. The Company will Shareholders Agreement on November 15, 2006. After the purchase, TSMC and NXP B.V. currently contribute process technologies and share a portion of the costs associated with this joint own approximately 39% and 61% of the SSMC shares respectively. The Company and Philips (now development project. This agreement was to expire on December 31, 2008, but the Company has NXP) committed to buy specific percentages of the production capacity of SSMC. TSMC and ended its participation in the project. For the Company, this agreement will terminate as of January Philips (now NXP B.V.) are required, in the aggregate, to purchase up to 70% of SSMC's capacity, 26, 2008. but TSMC alone is not required to purchase more than 28% of the capacity. If any party defaults on the commitment and the capacity utilization of SSMC fall below a specific percentage of its j. TSMC, TSMC-North America and WaferTech filed a series of lawsuits in late 2003 and 2004 capacity, the defaulting party is required to compensate SSMC for all related unavoidable costs. against Semiconductor Manufacturing International Corporation, SMIC (Shanghai) and SMIC Americas (aggregately referring to as "SMIC"). The lawsuits alleged that SMIC infringed multiple TSMC, TSMC-North America and WaferTech patents and misappropriated TSMC, TSMC-North America and WaferTech's trade secrets. These suits were settled out of court on January 30, 2005. As part of the settlement, Semiconductor Manufacturing International Corporation shall pay 79 US$175 million over six years to resolve TSMC, TSMC-North America and WaferTech's claims. As of 29. ADDITIONAL DISCLOSURES December 31, 2007, SMIC had paid US$90 million in accordance with the terms of this settlement agreement. In August 2006, TSMC, TSMC-North America and WaferTech filed a lawsuit against Following are the additional disclosures required by the SFB for TSMC and its investees: SMIC in Alameda County Superior Court in California for breach of aforementioned settlement agreement, breach of promissory notes and trade secret misappropriation, seeking injunctive relief a. Financing provided: None; and monetary damages. In September 2006, SMIC filed a cross-complaint against TSMC, TSMC- North America and WaferTech in the same court, alleging TSMC, TSMC-North America and b. Endorsement/guarantee provided: None; WaferTech of breach of the settlement agreement and implied covenant of good faith and fair dealing, in response to TSMC, TSMC-North America and WaferTech's August complaint. In c. Marketable securities held: Please see Table 1 attached; November 2006, SMIC filed a complaint with Beijing People's High Court against TSMC, TSMC- North America and WaferTech alleging defamation and breach of good faith. The California State d. Marketable securities acquired and disposed of at costs or prices of at least NT$100 million or 20% Superior Court of Alameda County issued an Order on TSMC, TSMC-North America and of the paid-in capital: Please see Table 2 attached; WaferTech's pre-trial motion for a preliminary injunction against SMIC on September 7, 2007. In the Order, the Court found "TSMC has demonstrated a significant likelihood that it will ultimately e. Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of the prevail on the merits of its claim for breach of certain paragraphs of the (2005) Settlement paid-in capital: Please see Table 3 attached; Agreement" with SMIC. The Court also found "TSMC has demonstrated a significant probability of establishing that SMIC retains and is using TSMC Information in SMIC's 0.13um and smaller f. Disposal of individual real estate properties at prices of at least NT$100 million or 20% of the paid- technologies, and there is significant threat of serious irreparable harm to TSMC if SMIC were to in capital: None; disclose or transfer that information before final resolution of the case." Therefore, the Court ordered that, effective immediately, SMIC must provide advance notice and an opportunity for g. Total purchases from or sales to related parties amounting to at least NT$100 million or 20% of TSMC, TSMC-North America and WaferTech to object before disclosing items enumerated in the the paid-in capital: Please see Table 4 attached; Court Order to SMIC's third party partners. The Court, however, did not grant a preliminary injunction as requested by TSMC, TSMC-North America and WaferTech. The result of the above- h. Receivable from related parties amounting to at least NT$100 million or 20% of the paid-in mentioned litigation cannot be determined at this time. capital: Please see Table 5 attached; k. In April 2004, UniRAM Technology, Inc. filed an action with the US District Court in the Northern i. Names, locations, and related information of investees over which TSMC exercises significant District of California against TSMC and TSMC North America, alleging patent infringement and influence: Please see Table 6 attached; trade secret misappropriation and seeking injunctive relief and damages. A jury in the District Court made a verdict in September 2007, awarding US$30.5 million to the plaintiff. TSMC intends j. Information on investment in Mainland China to pursue remedies against this verdict. l. TSMC-Shanghai entered into an agreement with a certain foreign company. In accordance with capital, method of investment, information on inflow or outflow of capital, percentage of the agreement, TSMC-Shanghai is obligated to purchase certain property, plant and equipment at ownership, equity in the net gain or net loss, ending balance, amount received as dividends the agreed-upon price within the contract period. If the purchase is not completed, TSMC- from the investee, and the limitation on investee: Please see Table 7 attached. 1) The name of the investee in mainland China, the main businesses and products, its issued Shanghai is obligated to compensate the counterparty for the loss incurred. m. Amounts available under unused letters of credit as of December 31, 2007 were NT$36,589 unrealized gain or loss, and other related information which is helpful to understand the impact thousand. of investment in mainland China on financial reports: Please see Table 8 attached. 2) Significant direct or indirect transactions with the investee, its prices and terms of payment, k. Intercompany relationships and significant intercompany transactions: Please see Table 8 attached. 80 30. SEGMENT FINANCIAL INFORMATION a. Industry financial information The Company is engaged mainly in the manufacturing, selling, packaging and testing of integrated circuits. Therefore, the disclosure of industry financial information is not applicable to c. Export sales Area Asia Europe and others Years Ended December 31 2007 2006 $ 40,609,413 34,518,668 $ 62,434,071 23,764,877 $ 75,128,081 $ 86,198,948 the Company. b. Geographic information: 2007 North America and Others Taiwan Adjustments and Elimination Consolidated d. Major customers representing at least 10% of gross sales The export sales information is based on the amounts billed to customers within the areas. Sales to other than consolidated entities Sales among consolidated entities $ 193,066,238 18,084,068 $ 129,564,358 194,035,526 $ - (212,119,594) $ 322,630,596 - Total sales $ 211,150,306 $ 323,599,884 $ (212,119,594) $ 322,630,596 Customer A Years Ended December 31 2007 Amount $ 37,731,028 2006 Amount $ 33,950,441 % 11 % 11 Gross profit Operating expenses Non-operating income and gains Non-operating expenses and losses Income before income tax Identifiable assets Long-term investments Total assets 2006 $ 3,895,144 $ 139,227,508 $ (772,441) $ 145,483,411 $ 439,675,938 $ (50,755,448) $ 142,350,211 (30,628,304) 11,933,803 (2,013,684) $ 121,642,026 $ 534,403,901 36,461,325 $ 570,865,226 Sales to other than consolidated entities Sales among consolidated entities $ 191,511,929 18,998,614 $ 125,895,242 191,345,140 $ - (210,343,754) $ 317,407,171 - Total sales $ 210,510,543 $ 317,240,382 $ (210,343,754) $ 317,407,171 Gross profit Operating expenses Non-operating income and gains Non-operating expenses and losses Income before income tax Identifiable assets Long-term investments Total assets $ 5,641,405 $ 150,498,038 $ (329,353) $ 133,341,631 $ 441,339,388 $ (41,091,011) $ 155,810,090 (28,545,396) 9,705,592 (3,608,078) $ 133,362,208 $ 533,590,008 53,895,151 $ 587,485,159 81 TABLE 1 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries MARKETABLE SECURITIES HELD DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars, Unless Otherwise Specified) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account The Company 82 Open-end mutual funds NITC Bond Fund Fuh Hwa Bond NITC Taiwan Bond ING Taiwan Bond Fund Prudential Financial Bond Fund President James Bond JF Taiwan Bond Fund ING Taiwan Income Fund Taishin Lucky Fund AIG Taiwan Bond Fund Cathay Bond Fund Dresdner Bond DAM Fund JF First Bond Fund HSBC Taiwan Money Management Fund INVESCO Bond Fund Government bond 2003 Government Bond Series B 2004 Government Bond Series B 2006 Government Bond Series D 2004 Government Bond Series G 2006 Government Bond Series D 2003 Government Bond Series B 2003 Asian Development Bank Govt. Bond 2003 Government Bond Series F 2003 Government Bond Series H European Investment Bank Bonds 2003 European Bank for Reconstruction and Development Govt. Bond Series A Corporate bond Hua Nan Bank Cathay Bank Taiwan Power Company Formosa Petrochemical Corporation Formosa Petrochemical Corporation Taiwan Power Company Nan Ya Plastics Corporation CPC Corporation, Taiwan China Steel Corporation Formosa Plastic Corporation Shanghai commercial & Saving Bank - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets Available-for-sale financial assets Held-to-maturity financial assets Available-for-sale financial assets Held-to-maturity financial assets December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note 12,239 132,997 103,016 85,581 83,306 77,128 59,049 54,621 68,945 54,469 60,126 54,319 35,324 27,416 27,176 $ 2,045,935 1,801,674 1,474,856 1,310,030 1,236,728 1,208,799 915,252 878,682 718,556 705,033 703,824 639,542 504,206 413,504 410,054 - - - - - - - - - - - - - - - - - - - - - - 2,349,163 1,197,121 399,733 200,065 3,651,840 1,647,947 855,088 799,049 400,709 379,829 89,963 1,573,338 1,180,440 899,200 399,264 3,581,667 2,630,064 1,804,346 1,200,318 1,000,000 391,134 292,718 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A $ 2,045,935 1,801,674 1,474,856 1,310,030 1,236,728 1,208,799 915,252 878,682 718,556 705,033 703,824 639,542 504,206 413,504 410,054 2,349,163 1,197,121 399,733 200,065 3,647,566 1,647,413 875,103 797,744 399,825 400,000 90,000 1,573,338 1,180,440 899,200 399,264 3,547,308 2,629,939 1,796,764 1,199,461 987,430 391,011 292,648 (Continued) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note Stocks TSMC Global TSMC International VIS SSMC TSMC Partners TSMC-North America XinTec GUC TSMC-Japan TSMC-Europe TSMC-Korea United Industrial Gases Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Hontung Venture Capital Co., Ltd. Fund Horizon Ventures Fund Crimson Asia Capital Capital TSMC-Shanghai VTAF II VTAF III Emerging Alliance Chi Cheng Hsin Ruey Stocks TSMC VIS Chi Cherng Subsidiary Investment accounted for using 1 $ 44,204,188 100 $ 44,204,188 equity method Subsidiary Investee accounted for using equity method Investee accounted for using equity method Subsidiary Subsidiary Investee with a controlling financial interest Investee with a controlling financial interest Subsidiary Subsidiary Subsidiary - - - - - - Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Financial assets carried at cost Financial assets carried at cost Investment accounted for using equity method 987,968 616,240 27,688,565 11,024,568 463 9,092,741 300 11,000 91,703 42,572 6 - 80 16,783 10,500 4,000 2,633 - - - - - - - - 4,734,180 2,255,647 1,501,521 823,552 104,929 88,702 16,436 193,584 105,000 40,000 26,329 312,949 70,298 8,622,715 1,170,841 906,536 467,873 173,429 171,658 Parent Company Investee accounted for using equity Available-for-sale financial assets Investments accounted for using 17,032 5,082 1,055,984 109,815 method equity method 100 36 39 100 100 43 37 100 100 100 10 7 2 10 12 1 27,688,565 14,974,643 8,123,596 4,734,180 2,255,647 1,419,627 9,344,632 104,929 88,702 16,436 305,599 321,254 52,690 20,536 312,949 70,298 100 8,621,163 98 98 99 36 36 - - 1,166,386 896,703 467,873 631,993 Treasury stock of NT$458,564 thousand is deducted from the carrying value 631,169 Treasury stock of NT$459,511 thousand is deducted from the carrying value 1,055,984 123,491 (Continued) 83 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note Stocks TSMC VIS Stocks InveStar InveStar II TSMC Development TSMC Technology Stocks WaferTech Common stock VisEra Holding Company TSMC Canada Common stock Pixim, Inc. RichWave Technology Corp. Global Investment Holding Inc. Preferred stock Audience, Inc. Axiom Microdevices, Inc. Miradia, Inc. Mobilygen Mosaic Systems, Inc. Next IO, Inc. Optichron, Inc. Optimal Corporation Pixim, Inc. Teknovus, Inc. Capital VentureTech Alliance Holdings Common stock Yobon Sentelic Leadtrend RichWave Technology Corp. Preferred stock 5V Technologies, Inc. Hsin Ruey TSMC International TSMC Development TSMC Partners Emerging Alliance VTAF II 84 Parent Company Investee accounted for using equity Available-for-sale financial assets Investments accounted for using 17,064 3,748 1,057,963 85,718 - - 1,057,963 91,067 method equity method Subsidiary Subsidiary Subsidiary Subsidiary Investments accounted for using 8,721 US$ 42,038 97 US$ 42,038 equity method 43,048 1 1 US$ 57,594 US$ 674,084 6,592 US$ 97 100 100 US$ 57,594 US$ 674,084 6,592 US$ Subsidiary Investments accounted for using - US$ 227,469 100 US$ 227,469 equity method Investee accounted for using equity Investments accounted for using 43,000 US$ 67,948 49 US$ 67,948 method Subsidiary equity method 2,300 US$ 2,877 100 US$ 2,877 Financial assets carried at cost 1,036 4,247 10,800 US$ US$ $ 275 1,648 100,000 - 13 6 US$ US$ $ 275 1,648 100,000 Financial assets carried at cost 1,654 1,000 3,040 1,415 2,481 800 714 - 3,606 6,977 US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ 250 1,000 1,000 750 12 500 1,000 229 862 1,327 equity method Financial assets carried at cost 1,875 1,200 1,265 1,043 US$ US$ US$ US$ 919 2,040 660 730 1 1 3 1 6 4 3 - 2 2 10 13 15 5 2 US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ 250 1,000 1,000 750 12 500 1,000 229 862 1,327 - US$ US$ US$ US$ 919 2,040 660 730 Subsidiary Investments accounted for using - - - - - - - - - - - - - - - - - - - - Financial assets carried at cost 2,357 US$ 1,768 11 US$ 1,768 (Continued) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note Ageia Technologies, Inc. Aquantia Corporation Audience, Inc. Axiom Microdevices, Inc. Beceem Communications GemFire Corporation Impinj, Inc. Miradia, Inc. Mobilygen Next IO, Inc. Optichron, Inc. Pixim, Inc. Power Analog Microelectronics QST Holding, LLC Teknovus, Inc. Tzero Technologies, Inc. Xceive Capital VentureTech Alliance Holdings - - - - - - - - - - - - - - - - - Financial assets carried at cost 2,030 1,786 2,989 5,044 650 600 475 3,416 569 216 1,050 3,279 3,039 - 1,599 730 714 2,074 US$ 2,273 US$ US$ 814 US$ 2,088 US$ 1,600 US$ 68 US$ 1,000 US$ 3,106 149 US$ US$ 182 US$ 1,844 US$ 641 US$ 2,409 145 US$ US$ 454 US$ 1,500 US$ 1,000 Subsidiary Investments accounted for using - - equity method 2 5 2 4 1 1 - 3 1 - 2 2 13 3 - 2 2 10 US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ 2,074 2,273 814 2,088 1,600 68 1,000 3,106 149 182 1,844 641 2,409 145 454 1,500 1,000 - VTAF III Common stock Mutual-pak Technology Co., Ltd. Subsidiary Investments accounted for using 4,590 US$ 1,672 51 US$ 1,672 equity method Preferred stock Advasense Sensors, Inc. Auramicro, Inc. Exclara, Inc. (Formerly Synpitec, Inc.) M2000, Inc. Neoconix, Inc. Powervation, Ltd. Quellan, Inc Silicon Technical Services, LLC Tilera, Inc. Validity Sensors, Inc. Convertible bond GTBF, Inc. Capital VentureTech Alliance Holdings Common stock Monolithic Power Systems, Inc. Memsic, Inc. Capella Microsystems (Taiwan), Inc InveStar - - - - - - - - - - - Financial assets carried at cost Subsidiary Investments accounted for using equity method 1,929 2,500 14,513 3,000 2,458 191 3,106 1,055 1,698 6,424 - - US$ 1,834 US$ 750 US$ 2,412 US$ 3,000 US$ 4,000 US$ 2,930 US$ 3,500 US$ 1,208 US$ 2,360 US$ 2,545 6 17 19 5 6 19 6 2 3 3 US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ 1,834 750 2,412 3,000 4,000 2,930 3,500 1,208 2,360 2,545 US$ 1,500 N/A US$ 1,500 - - - - Financial assets at fair value through profit or loss Available-for-sale financial assets Financial assets carried at cost 1,352 US$ 29,024 1,364 530 US$ 13,812 154 US$ 80 7 9 2 - US$ 29,024 US$ US$ 13,812 154 (Continued) 85 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note Preferred stock Integrated Memory Logic, Inc. IP Unity, Inc. NanoAmp Solutions, Inc. Sonics, Inc. Common stock Monolithic Power Systems, Inc Rich Tek Technology Corp. Geo Vision, Inc. Memsic, Inc. Rich Tek Technology Corp. Geo Vision, Inc. eLCOS Microdisplay Technology, Ltd. EoNEX Technologies, Inc. Sonics, Inc. Epic Communication, Inc. EON Technology, Corp. Goyatek Technology, Corp. Trendchip Technologies Corp. Capella Microsystems (Taiwan), Inc Ralink Technology (Taiwan), Inc. Auden Technology MFG. Co., Ltd Preferred stock Alchip Technologies Limited eLCOS Microdisplay Technology, Ltd. FangTek, Inc. Kilopass Technology, Inc. NanoAmp Solutions, Inc. Sonics, Inc. Agency bonds Fed Hm Ln Pc Pool 1b1225 Fed Hm Ln Pc Pool 1b2566 Fed Hm Ln Pc Pool 1b2632 Fed Hm Ln Pc Pool 1b2642 Fed Hm Ln Pc Pool 1b2776 Fed Hm Ln Pc Pool 1b2792 Fed Hm Ln Pc Pool 1b2810 Fed Hm Ln Pc Pool 1b7453 Fed Hm Ln Pc Pool 1g0038 Fed Hm Ln Pc Pool 1g0053 Fed Hm Ln Pc Pool 1g0104 Fed Hm Ln Pc Pool 1g1282 Fed Hm Ln Pc Pool 1g1411 Fed Hm Ln Pc Pool 1h2520 Fed Hm Ln Pc Pool 1h2524 Fed Hm Ln Pc Pool 780870 Fed Hm Ln Pc Pool 781959 InveStar II Tsmc Global 86 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Financial assets carried at cost Financial assets at fair value through profit or loss Available-for-sale financial assets Financial assets carried at cost Financial assets carried at cost Available-for-sale financial assets 2,872 1,008 541 1,844 US$ 1,221 494 US$ US$ 853 US$ 3,530 864 US$ 18,561 152 6 1,145 261 15 270 55 2,220 191 4,243 2,088 1,000 534 2,383 1,049 6,128 3,500 6,931 3,887 375 2,115 - - - - - - - - - - - - - - - - - US$ 1,371 59 US$ US$ 11,594 US$ 2,362 135 US$ US$ 27 US$ 3,048 32 US$ US$ 37 US$ 1,175 545 US$ 574 US$ 210 US$ 791 US$ 223 US$ US$ 2,950 US$ 3,500 US$ 3,250 US$ 2,000 US$ 1,500 US$ 3,082 139 US$ 157 US$ 178 US$ 234 US$ 340 US$ 223 US$ US$ 296 US$ 2,805 296 US$ 367 US$ US$ 142 US$ 4,077 US$ 3,618 US$ 2,669 US$ 1,970 US$ 721 US$ 3,834 9 1 2 2 3 - - 7 - - 1 5 - 1 6 7 4 2 3 4 15 8 16 6 1 6 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 1,221 US$ 494 US$ US$ 853 US$ 3,530 US$ 18,561 US$ 1,371 59 US$ US$ 11,594 US$ 2,362 135 US$ US$ 27 US$ 3,048 32 US$ US$ 37 US$ 1,175 545 US$ 574 US$ 210 US$ 791 US$ 223 US$ US$ 2,950 US$ 3,500 US$ 3,250 US$ 2,000 US$ 1,500 US$ 3,082 139 US$ 157 US$ 178 US$ 234 US$ 340 US$ 223 US$ US$ 296 US$ 2,805 296 US$ 367 US$ US$ 142 US$ 4,077 US$ 3,618 US$ 2,669 US$ 1,970 US$ 721 US$ 3,834 (Continued) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note Fed Hm Ln Pc Pool 782785 Fed Hm Ln Pc Pool 782837 Fed Hm Ln Pc Pool 782968 Fed Hm Ln Pc Pool 783022 Fed Hm Ln Pc Pool 783026 Fed Hm Ln Pc Pool B19205 Fed Hm Ln Pc Pool E89857 Fed Hm Ln Pc Pool G11295 Fed Hm Ln Pc Pool M80855 Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal Home Ln Mtg Corp. Federal National Mort Assoc Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Gtd Fnma Pool 255883 Fnma Pool 555549 Fnma Pool 555715 Fnma Pool 632399 Fnma Pool 662401 Fnma Pool 667766 Fnma Pool 680932 Fnma Pool 681393 Fnma Pool 685116 Fnma Pool 691283 Fnma Pool 694287 Fnma Pool 703711 Fnma Pool 725095 Fnma Pool 730033 Fnma Pool 740934 Fnma Pool 742232 Fnma Pool 750798 Fnma Pool 773246 Fnma Pool 790828 Fnma Pool 793932 Fnma Pool 794040 Fnma Pool 795548 Fnma Pool 799664 Fnma Pool 799868 Fnma Pool 804764 Fnma Pool 804852 Fnma Pool 804962 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 254 US$ US$ 494 US$ 1,147 536 US$ 303 US$ US$ 7,103 US$ 1,347 US$ 1,126 US$ 2,942 US$ 1,784 US$ 1,832 US$ 2,360 US$ 2,742 US$ 2,178 US$ 3,665 US$ 2,136 US$ 3,275 US$ 3,044 US$ 2,844 US$ 2,059 US$ 2,194 US$ 2,011 US$ 3,567 US$ 1,717 US$ 3,126 US$ 1,385 171 US$ 390 US$ US$ 560 US$ 1,310 US$ 1,110 US$ 2,388 US$ 599 US$ 3,442 20 US$ US$ 467 US$ 1,023 169 US$ US$ 1,110 23 US$ 22 US$ US$ 229 US$ 2,009 438 US$ 608 US$ 234 US$ 94 US$ 32 US$ 396 US$ 330 US$ 388 US$ N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 254 US$ US$ 494 US$ 1,147 536 US$ 303 US$ US$ 7,103 US$ 1,347 US$ 1,126 US$ 2,942 US$ 1,784 US$ 1,832 US$ 2,360 US$ 2,742 US$ 2,178 US$ 3,665 US$ 2,136 US$ 3,275 US$ 3,044 US$ 2,844 US$ 2,059 US$ 2,194 US$ 2,011 US$ 3,567 US$ 1,717 US$ 3,126 US$ 1,385 171 US$ 390 US$ US$ 560 US$ 1,310 US$ 1,110 US$ 2,388 US$ 599 US$ 3,442 20 US$ US$ 467 US$ 1,023 169 US$ US$ 1,110 23 US$ 22 US$ US$ 229 US$ 2,009 438 US$ 608 US$ 234 US$ 94 US$ 32 US$ 396 US$ 330 US$ 388 US$ (Continued) 87 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note Fnma Pool 805163 Fnma Pool 806642 Fnma Pool 806721 Fnma Pool 814418 Fnma Pool 815626 Fnma Pool 819423 Fnma Pool 821129 Fnma Pool 888249 Fnma Pool 888499 Fnma Pool 888502 Fnma Pool 888507 Fnma Pool 888515 Fnma Pool 888519 Fnma Pool 888527 Fnma Pool 888738 Fnma Pool 888793 Fnma Pool 900296 Gnma Ii Pool 081150 Gnma Ii Pool 081153 Fed Home Ln Bank Federal Farm Cr Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Mtg Disc Nts Federal Home Loan Bank Federal Home Loan Banks Federal Natl Mtg Assn Federal Natl Mtg Assn Medium Federal Natl Mtg Assn Mtn Federal Natl Mtg Assn Mtn Federal Natl Mtg Assn Mtn Federal Natl Mtg Assn Mtn Tennessee Valley Auth Corporate bonds Abbott Labs American Gen Fin Corp. American Gen Fin Corp. Mtn American Gen Fin Corp. Mtn American Honda Fin Corp. Mtn Ameritech Capital Funding Co. Amgen Inc. Anz Cap Tr I Atlantic Richfield Co. Axa Finl Inc. Beneficial Corp. Mtn Bk Entry - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 408 US$ 777 US$ 635 US$ US$ 343 US$ 2,301 538 US$ 512 US$ US$ 60 US$ 2,438 US$ 236 911 US$ US$ 1,730 123 US$ US$ 69 US$ 4,935 US$ 5,697 US$ 3,276 US$ 470 US$ 1,423 US$ 5,175 US$ 3,511 US$ 8,977 US$ 8,939 US$ 4,965 US$ 5,969 US$ 4,980 US$ 19,023 US$ 5,134 US$ 22,342 US$ 4,621 US$ 21,500 US$ 5,169 US$ 3,512 US$ 2,982 US$ 3,171 US$ 3,398 US$ 3,066 US$ 6,068 US$ 1,510 US$ 3,139 US$ 3,451 US$ 1,962 US$ 3,107 US$ 489 US$ 2,978 US$ 984 US$ 2,216 US$ 2,147 US$ 2,274 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 408 US$ 777 US$ 635 US$ US$ 343 US$ 2,301 538 US$ 512 US$ US$ 60 US$ 2,438 US$ 236 911 US$ US$ 1,730 US$ 123 US$ 69 US$ 4,935 US$ 5,697 US$ 3,276 US$ 470 US$ 1,423 US$ 5,175 US$ 3,511 US$ 8,977 US$ 8,939 US$ 4,965 US$ 5,969 US$ 4,980 US$ 19,023 US$ 5,134 US$ 22,342 US$ 4,621 US$ 21,500 US$ 5,169 US$ 3,512 US$ 2,982 US$ 3,171 US$ 3,398 US$ 3,066 US$ 6,068 US$ 1,510 US$ 3,139 US$ 3,451 US$ 1,962 US$ 3,107 US$ 489 US$ 2,978 US$ 984 US$ 2,216 US$ 2,147 US$ 2,274 88 (Continued) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note Burlington Res Inc. Chase Manhattan Corp. New Chase Manhattan Corp. New Chase Manhattan Corp. New Cit Group Hldgs Inc. Cit Group Inc. New Consolidated Edison Inc. Credit Suisse First Boston Usa Deere John Cap Corp. Mtn Bk Ent Depfa Acs Bank Fleet Boston Corp. Ge Global Ins Hldg Corp. General Dynamics Corp. General Elec Cap Corp. Mtn General Elec Cap Corp. Mtn General Elec Cap Corp. Mtn General Re Corp. Genworth Finl Inc. Hancock John Global Fdg Ii Mtn Hancock John Global Fdg Mtn Hartford Finl Svcs Group Inc. Hbos Plc Medium Term Sr Nts Heller Finl Inc. Hewlett Packard Co. Household Fin Corp. Household Fin Corp. Ing Sec Life Instl Fdg International Business Machs Intl Lease Fin Corp. Mtn JP Morgan Chase Keycorp Mtn Book Entry Lehman Brothers Hldgs Inc. Lehman Brothers Hldgs Inc. Lehman Brothers Hldgs Inc. Lehman Brothers Hldgs Inc. Lehman Brothers Hldgs Inc. Massmutual Global Fdg Ii Mtn Metropolitan Life Golbal Mtn Mgic Invt Corp. Mizuho Fin (Cayman) Monumental Global Fdg Ii Monunmetal Global Fdg Ii Mony Group Inc. Morgan Stanley Morgan Stanley National City Corp. Nationwide Life Global Fdg I Oracle Corp. / Ozark Hldg Inc. Pepsico Inc. Mtn Book Entry Praxair Inc. Premark Intl Inc. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 3,653 US$ 1,520 US$ 2,099 US$ 3,483 US$ 2,982 US$ 2,435 US$ 2,990 US$ 2,229 US$ 2,215 US$ 20,402 US$ 2,620 US$ 1,914 US$ 2,133 US$ 3,978 US$ 3,047 US$ 2,118 US$ 3,263 US$ 3,279 US$ 5,111 US$ 993 US$ 1,336 US$ 3,001 US$ 1,950 US$ 1,884 US$ 2,950 US$ 3,046 US$ 2,582 US$ 3,555 US$ 2,985 US$ 2,001 US$ 3,053 US$ 1,643 490 US$ US$ 989 US$ 3,052 US$ 1,060 US$ 3,737 US$ 3,366 US$ 1,059 US$ 2,148 US$ 1,494 US$ 2,000 US$ 2,137 US$ 5,531 US$ 1,951 US$ 3,488 US$ 3,631 US$ 2,019 US$ 3,607 US$ 3,111 US$ 2,679 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A US$ 3,653 US$ 1,520 US$ 2,099 US$ 3,483 US$ 2,982 US$ 2,435 US$ 2,990 US$ 2,229 US$ 2,215 US$ 20,402 US$ 2,620 US$ 1,914 US$ 2,133 US$ 3,978 US$ 3,047 US$ 2,118 US$ 3,263 US$ 3,279 US$ 5,111 US$ 993 US$ 1,336 US$ 3,001 US$ 1,950 US$ 1,884 US$ 2,950 US$ 3,046 US$ 2,582 US$ 3,555 US$ 2,985 US$ 2,001 US$ 3,053 US$ 1,643 490 US$ US$ 989 US$ 3,052 US$ 1,060 US$ 3,737 US$ 3,366 US$ 1,059 US$ 2,148 US$ 1,494 US$ 2,000 US$ 2,137 US$ 5,531 US$ 1,951 US$ 3,488 US$ 3,631 US$ 2,019 US$ 3,607 US$ 3,111 US$ 2,679 (Continued) 89 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Pricoa Global Fdg I Mtn Principal Finl Group Australia Protective Life Secd Trs Mtn Sbc Communications Inc. Sbc Communications Inc. Simon Ppty Group LP Simon Ppty Group LP Sp Powerassests Ltd. Global Suntrust Bk Atlanta Ga Medium Unitedhealth Group Inc. Wachovia Corp. New Washington Post Co. Wells Fargo + Co. New Med Trm Corporate issued asset-backed securities Americredit Auto Rec Tr Americredit Automobile Rec Tr Americredit Automobile Receiva Atlantic City Elc Trns Fdgllc Banc Amer Coml Mtg Inc. Banc Amer Fdg 2006 I Tr Bear Stearns Adjustable Rate Bear Stearns Arm Tr Bear Stearns Arm Tr Bear Stearns Arm Tr Bear Stearns Coml Mtg Secs Inc. Bear Stearns Coml Mtg Secs Inc. Capital One Auto Fin Tr Capital One Auto Fin Tr Capital One Multi Asset Exec Capital One Multi Asset Execut Capital One Multi Asset Execut Capital One Prime Auto Receiva Capitial One Prime Auto Receiv Cbass Tr Cendant Rent Car Fdg Aesop LLC. Chase Mtg Fin Tr Chase Mtg Fin Tr Chase Mtg Fin Tr Chase Mtge Finance Corp. Cit Equip Coll Tr Citicorp Mtg Secs Credit Suisse First Boston Mtg Credit Suisse First Boston Mtg Credit Suisse First Boston Mtg Daimlerchrysler Auto Tr Daimlerchrysler Auto Tr Deere John Owner Tr First Franklin Mtg Ln Tr First Horizon First Un Natl Bk Coml Mtg Tr - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 3,462 US$ 1,008 US$ 3,484 US$ 3,372 US$ 711 US$ 2,513 US$ 1,010 US$ 993 US$ 3,482 US$ 1,408 US$ 3,168 US$ 3,018 US$ 4,413 US$ 1,001 US$ 894 US$ 1,176 US$ 162 US$ 4,591 US$ 3,762 US$ 110 US$ 3,081 US$ 1,951 US$ 247 US$ 3,179 US$ 5,099 US$ 906 US$ 3,685 US$ 9,118 US$ 3,991 US$ 2,995 US$ 3,498 US$ 464 US$ 1,297 US$ 2,663 US$ 887 US$ 1,745 US$ 2,605 US$ 1,678 US$ 4,033 US$ 261 US$ 1,738 US$ 6,842 US$ 6,704 US$ 4,337 US$ 1,698 US$ 2,488 US$ 1,659 US$ 45 US$ 2,595 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Note Market Value or Net Asset Value (US$ in Thousands) US$ 3,462 US$ 1,008 US$ 3,484 US$ 3,372 US$ 711 US$ 2,513 US$ 1,010 US$ 993 US$ 3,482 US$ 1,408 US$ 3,168 US$ 3,018 US$ 4,413 US$ 1,001 US$ 894 US$ 1,176 US$ 162 US$ 4,591 US$ 3,762 US$ 110 US$ 3,081 US$ 1,951 US$ 247 US$ 3,179 US$ 5,099 US$ 906 US$ 3,685 US$ 9,118 US$ 3,991 US$ 2,995 US$ 3,498 US$ 464 US$ 1,297 US$ 2,663 US$ 887 US$ 1,745 US$ 2,605 US$ 1,678 US$ 4,033 US$ 261 US$ 1,738 US$ 6,842 US$ 6,704 US$ 4,337 US$ 1,698 US$ 2,488 US$ 1,659 US$ 45 US$ 2,595 90 (Continued) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2007 Shares/Units (In Thousands) Carrying Value (US$ in Thousands) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousands) Note First Un Natl Bk Coml Mtg Tr First Un Natl Bk Coml Mtg Tr Gs Mtg Secs Corp. Home Equity Mortgage Trust Home Equity Mtg Tr 2006 4 Hyundai Auto Receivables Tr JP Morgan Mtg Tr JP Morgan Mtg Tr JP Morgan Mtg Tr Lb Ubs Coml Mtg Tr Nomura Asset Accep Corp. Residential Asset Mtg Prods Residential Fdg Mtg Secs I Inc. Residential Fdg Mtg Secs I Inc. Sequoia Mtg Tr Sequoia Mtg Tr Sequoia Mtg Tr Terwin Mtg Tr Tiaa Seasoned Coml Mtg Tr Usaa Auto Owner Tr Wamu Mtg Wamu Mtg Pass Through Ctfs Washington Mut Mtg Secs Corp. Wells Fargo Finl Auto Owner Tr Wells Fargo Mtg Backed Secs Wells Fargo Mtg Backed Secs Wells Fargo Mtg Backed Secs Wells Fargo Mtg Bkd Secs Wells Fargo Mtg Bkd Secs Whole Auto Ln Tr Government bonds United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts Wi Treasury Sec Money market funds Ssga Cash Mgmt Global Offshore - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Available-for-sale financial assets Available-for-sale financial assets Available-for-sale financial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 5,172 US$ 2,186 US$ 1,709 US$ 2,659 US$ 970 US$ 1,519 US$ 888 US$ 910 US$ 863 US$ 3,884 US$ 1,542 US$ 2,200 US$ 1,594 US$ 3,454 US$ 265 US$ 340 US$ 433 US$ 3,317 US$ 4,016 US$ 4,998 US$ 3,242 US$ 166 US$ 2,422 US$ 4,956 US$ 3,816 US$ 3,865 US$ 3,931 US$ 3,029 US$ 1,763 US$ 1,828 US$ 5,070 US$ 5,613 US$ 42,509 US$ 5,160 US$ 3,359 US$ 7,758 US$ 25,924 US$ 9,735 US$ 6,500 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A US$ 5,172 US$ 2,186 US$ 1,709 US$ 2,659 US$ 970 US$ 1,519 US$ 888 US$ 910 US$ 863 US$ 3,884 US$ 1,542 US$ 2,200 US$ 1,594 US$ 3,454 US$ 265 US$ 340 US$ 433 US$ 3,317 US$ 4,016 US$ 4,998 US$ 3,242 US$ 166 US$ 2,422 US$ 4,956 US$ 3,816 US$ 3,865 US$ 3,931 US$ 3,029 US$ 1,763 US$ 1,828 US$ 5,070 US$ 5,613 US$ 42,509 US$ 5,160 US$ 3,359 US$ 7,758 US$ 25,924 US$ 9,735 US$ 6,500 US$ 592,180 N/A US$ 592,180 (Concluded) 91 TABLE 2 Taiwan Semiconductor Manufacturing Company Limited 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 30, 2007 (Amounts in Thousands of New Taiwan Dollars, Unless Otherwise Specified) Company Name Marketable Securities Type and Name Financial Statement Account Counter-party The Company Open-end mutual funds NITC Bond Fund Available-for-sale finan- National Investment Trust Co., Ltd. cial assets Fuh Hwa Bond NITC Taiwan Bond ING Taiwan Bond Fund Prudential Financial Bond Fund President James Bond JF Taiwan Bond Fund ING Taiwan Income Bond Fund Taishin Lucky Fund AIG Taiwan Bond Fund Cathay Bond Fund Dresdner Bond DAM Fund JF Taiwan First Bond Fund HSBC Taiwan Money Management ING Taiwan Select Bond Fund Shinkong Chi-Shin Fund TIIM High Yield Fund JIH SUN Bond Fund Mega Diamond Bond Fund Polaris De-Bao Fund Government bond 2003 Government Bond Series B 2004 Government Bond Series B 2006 Government Bond Series D 2004 Government Bond Series G 2005 Government Bond Series A 2002 Government Bond Series B 2004 Kaohsiung Municipal Series A 2004 Kaohsiung Municipal Series B Fuh Hwa Investment Trust Co., Ltd National Investment Trust Co., Ltd. ING Securities Investment Trust Co., Ltd Prudential Financial Securities Investment Trust Enterprise Uni-President Assets Management Corp. JF Asset Management (Taiwan) Ltd. ING Securities Investment Trust Co., Ltd Taishin Investment Trust Co., Ltd AIG Global Asset management Corporation (Taiwan) Ltd. Cathay Securities Investment Trust Co., Ltd Allianz Global Investors Taiwan Ltd. JF Asset Management (Taiwan) Limited HSBC Asset Management (Taiwan) Ltd. ING Securities Investment Trust Co., Ltd Shinkong Investment Trust Co., Ltd Taiwan International Investment man- agement JIH SUN Securities Investment Trust Co., Ltd Mega Investment Trust Co., Ltd Polaris Internationa Securities Investment Trust Co., Ltd Available-for-sale finan- Chung Shing Bills Finance Corp. and cial assets several financial institutions Held-to-maturity finan- cial assets 92 Beginning Balance Acquisition Disposal (Note 2) Ending Balance Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) or Disposal (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) (Note 3) - - - - - - - - - - - - - - - - - - - - - - - - - - - - 22,219 $ 3,655,939 - $ - 9,980 $ 1,650,000 $ 1,621,826 $ 28,174 12,239 $ 2,045,935 125,122 93,312 175,156 103,751 1,667,908 1,314,669 2,639,459 1,516,294 41,289 23,884 85,581 - 556,000 340,000 1,300,000 - 33,414 14,180 175,156 20,445 450,000 200,000 2,656,012 300,000 442,919 197,557 2,604,862 295,582 7,081 2,443 51,150 4,418 132,997 103,016 85,581 83,306 1,801,674 1,474,856 1,310,030 1,236,728 65,496 1,010,426 77,128 1,200,000 65,496 1,016,917 1,000,599 16,318 77,128 1,208,799 85,145 63,947 78,624 78,629 1,299,088 1,012,377 806,386 1,002,595 32,507 - - 54,469 500,000 - - 700,000 58,603 9,326 9,679 78,629 900,000 150,000 100,000 1,008,733 883,347 145,851 98,476 1,000,000 16,653 4,149 1,524 8,733 59,049 54,621 68,945 54,469 915,252 878,682 718,556 705,033 109,720 1,265,092 60,126 700,000 109,720 1,271,995 1,251,264 20,731 60,126 703,824 95,553 66,826 34,093 76,593 62,183 44,685 1,107,206 939,082 506,250 868,076 890,660 554,863 17,082 42,360 - - - - 200,000 600,000 - - - - 58,316 73,862 6,677 76,593 62,183 44,685 680,000 1,044,083 100,000 872,639 896,299 557,263 668,136 1,026,603 98,059 857,682 879,940 550,724 11,864 17,480 1,941 14,957 16,359 6,539 54,319 35,324 27,416 - - - 88,165 1,202,901 - - 88,165 1,209,618 1,200,000 9,618 139,333 63,273 1,602,947 701,069 94,744 17,862 1,100,000 200,000 234,077 81,135 2,721,023 909,936 2,700,000 900,000 21,023 9,936 - - - - - - - - 998,288 999,779 - - 3,049,919 350,399 620,000 249,998 - - - - - - - - 1,348,634 200,280 400,778 201,561 - - - - - - - - - - - - - - - - - 3,050,000 350,000 620,000 250,000 - - - 3,050,000 350,000 620,000 250,000 - - - - - - - - - - - - - - - - - - - 639,542 504,206 413,504 - - - - - - 2,349,163 1,197,121 399,733 200,065 - - - - (Continued) Company Name Marketable Securities Type and Name Financial Statement Account Counter-party Beginning Balance Acquisition Disposal (Note 2) Ending Balance Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) on Disposal (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) (Note 3) Corporate bond Taiwan Power Company Available-for-sale finan- Chung Shing Bills Finance Corp. cial assets Taiwan Power Company Held-to-maturity finan- cial assets Nan Ya Plastics Corporation CPC Corporation, Taiwan Formosa Plastic Corporation Stock VIS XinTec Capital VTAF II VTAF III TSMC Global Agency bonds Fed Hm Ln Pc Pool 1g1282 Fed Hm Ln Pc Pool 1g1411 Fed Hm Ln Pc Pool 1g1616 Fed Hm Ln Pc Pool 1g1921 Fed Hm Ln Pc Pool 1g2162 Fed Hm Ln Pc Pool 1g2593 Fed Hm Ln Pc Pool 1j0410 Fed Hm Ln Pc Pool 847628 Fed Hm Ln Pc Pool G12009 Federal Home Ln Mtg Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Investee accounted for using equity method Investee accounted for using equity method Available-for-sale finan- cial assets - - - - - - - - - - - - - - - - - - - - - - - - Investment accounted for using equity method Investee with a controlling financial interest Subsidiary - - - - - - - - - - - - - - - - - - - - $ 1,046,799 4,080,391 2,773,810 1,451,378 516,663 - - - - - $ - - - - - 442,262 5,741,870 173,979 4,927,865 - - - - - - - - - - - - - - - - - - - 91,703 1,357,890 733,130 228,005 - - - - - - - US$ 3,796 - - US$ 3,917 US$ 4,464 US$ 8,535 US$ 3,743 - - - - - - - - - - - - - - - - - - 310,157 729,914 US$ 4,378 US$ 4,424 US$ 4,436 US$ 4,404 US$ 5,757 US$ 5,600 US$ 6,024 - US$ 3,935 US$ 6,513 - - - - US$ 3,868 - - - - - - - - - - - - - - - - - - - - - - - - $ 150,000 $ 150,000 $ - 1,460,000 1,460,000 970,000 250,000 136,000 970,000 250,000 136,000 - - - - - - - - - - - - - - - - - - - - US$ 4,329 US$ 4,276 US$ 5,749 US$ 5,587 US$ 5,650 US$ 3,101 US$ 3,603 US$ 5,270 US$ 3,257 US$ 3,194 US$ 6,783 US$ 3,511 US$ 3,258 - US$ 4,280 US$ 4,277 US$ 5,723 US$ 5,557 US$ 5,644 US$ 3,091 US$ 3,563 US$ 5,247 US$ 3,225 US$ 3,175 US$ 6,743 US$ 3,492 US$ 3,246 - US$ 49 US$ (1) US$ 26 US$ 30 US$ 6 US$ 10 US$ 40 US$ 23 US$ 32 US$ 19 US$ 40 US$ 19 US$ 12 - - - - - $ 899,200 2,630,064 1,804,346 1,200,318 391,134 616,240 11,024,568 91,703 1,501,521 - - - - - - - - - - - - - - - - - 1,170,841 906,536 US$ 4,077 US$ 3,618 - - - - - - - - - - - - - (Continued) 93 Beginning Balance Acquisition Disposal (Note 2) Ending Balance Company Name Marketable Securities Type and Name Financial Statement Account Counter-party Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) on Disposal (US$ in Thousands) Shares/Units (In Thousands) Federal Home Ln Mtg Corp Available-for-sale finan- cial assets Federal National Mort Assoc Federal Natl Mtg Assn Federal Natl Mtg Assn Mtn Fnma Pool 691283 Fnma Pool 813641 Fnma Pool 825398 Fnma Pool 888249 Fnma Pool 888388 Fnma Pool 888738 Fnma Pool 888793 Fnma Pool 900296 Fed Home Ln Bank Federal Farm Cr Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Bks Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Federal Home Ln Mtg Corp Mtn Federal Home Ln Mtg Disc Nts Federal Home Loan Bank Federal Home Loan Bank Federal Home Loan Bank Federal Home Loan Bank Federal Home Loan Banks Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn 94 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ - - US$ 4,290 - - US$ 3,720 US$ 4,224 - - - - - - - US$ 4,920 US$ 2,991 US$ 12,279 - US$ 6,905 US$ 5,898 - - - - - US$ 7,506 US$ 5,948 US$ 6,440 - - - - - - - US$ 8,049 US$ 4,365 US$ 5,915 US$ 19,766 - - - - US$ 10,467 US$ 7,868 US$ 14,974 US$ 3,943 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 4,354 US$ 3,250 - US$ 3,733 US$ 3,486 - - US$ 4,822 US$ 6,530 US$ 5,062 US$ 5,823 US$ 4,336 US$ 5,035 US$ 3,411 - - - US$ 5,365 - - US$ 18,951 US$ 5,098 US$ 4,494 US$ 8,983 US$ 8,137 - - - US$ 6,000 US$ 3,199 US$ 21,985 US$ 5,075 US$ 5,083 US$ 4,518 US$ 3,453 US$ 21,356 - - - US$ 4,595 US$ 4,982 US$ 4,500 US$ 5,102 - - - - US$ 6,500 US$ 4,982 US$ 8,458 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 3,626 US$ 3,622 US$ 4 - US$ 3,170 US$ 3,489 - US$ 3,004 US$ 3,606 US$ 4,402 US$ 6,270 - - - - - US$ 4,938 US$ 3,027 US$ 12,367 US$ 5,532 US$ 6,947 US$ 6,032 - - US$ 4,610 US$ 9,000 US$ 8,235 US$ 7,500 US$ 5,966 US$ 6,453 - US$ 3,236 - US$ 5,158 US$ 4,981 - US$ 3,472 US$ 8,201 US$ 4,440 US$ 5,933 US$ 19,844 US$ 4,652 US$ 5,093 US$ 4,509 - US$ 10,477 US$ 7,926 US$ 14,993 US$ 3,957 US$ 6,505 US$ 5,002 US$ 8,542 - US$ 3,159 US$ 3,464 - US$ 2,989 US$ 3,555 US$ 4,364 US$ 6,217 - - - - - US$ 4,872 US$ 2,987 US$ 12,233 US$ 5,365 US$ 6,881 US$ 5,907 - - US$ 4,494 US$ 8,983 US$ 8,137 US$ 7,490 US$ 5,930 US$ 6,410 - US$ 3,199 - US$ 5,075 US$ 5,083 - US$ 3,453 US$ 8,081 US$ 4,364 US$ 5,885 US$ 19,702 US$ 4,595 US$ 4,982 US$ 4,500 - US$ 10,459 US$ 7,834 US$ 14,931 US$ 3,950 US$ 6,500 US$ 4,982 US$ 8,458 - US$ 11 US$ 25 - US$ 15 US$ 51 US$ 38 US$ 53 - - - - - US$ 66 US$ 40 US$ 134 US$ 167 US$ 66 US$ 125 - - US$ 116 US$ 17 US$ 98 US$ 10 US$ 36 US$ 43 - US$ 37 - US$ 83 US$ (102) - US$ 19 US$ 120 US$ 76 US$ 48 US$ 142 US$ 57 US$ 111 US$ 9 - US$ 18 US$ 92 US$ 62 US$ 7 US$ 5 US$ 20 US$ 84 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Amount (US$ in Thousands) (Note 3) US$ - US$ 2,844 - - US$ 3,442 - - US$ 60 - US$ 4,935 US$ 5,697 US$ 3,276 US$ 5,175 US$ 3,511 - - - - - - US$ 19,023 US$ 5,134 - - - - - - - - US$ 22,342 - - US$ 4,621 - US$ 21,500 - - - - - - US$ 5,169 - - - - - - - (Continued) Company Name Marketable Securities Type and Name Financial Statement Account Counter-party Beginning Balance Acquisition Disposal (Note 2) Ending Balance Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) on Disposal (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) (Note 3) Federal Natl Mtg Assn Available-for-sale finan- cial assets Available-for-sale finan- cial assets Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Federal Natl Mtg Assn Corporate bonds American Express Co American Honda Fin Corp Mtn Bank One Corp Bear Stearns Cos Inc Bp Cap Mkts P L C Burlington Res Inc Chase Manhattan Corp New Chase Manhattan Corp New Citigroup Fdg Inc Credit Suisse First Boston Usa Deere John Cap Corp Deere John Cap Corp Depfa Acs Bank Emerson Elec Co European Invt Bk European Invt Bk Federal Home Ln Bks General Elec Cap Corp Mtn General Elec Cap Corp Mtn General Elec Cap Corp Mtn Genworth Finl Inc Goldman Sachs Group Inc Goldman Sachs Group Inc Hartford Finl Svcs Group Inc Hbos Plc Medium Term Sr Nts Household Fin Corp Hsbc Fin Corp Hsbc Fin Corp Hsbc Fin Corp Mtn International Business Machs Intl Lease Fin Corp Mtn J P Morgan Chase + Co Key Bk Na Med Term Nts Bk Entr Lehman Brothers Hldgs Inc Lehman Brothers Hldgs Inc Marshall + Ilsley Corp Massmutual Global Fdg Ii Mtn Mbna America Bank Na Y Merrill Lynch + Co Inc Merrill Lynch + Co Inc Metropolitan Life Global Mtn Metropolitan Life Golbal Mtn - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ - - US$ 6,511 - - US$ 3,452 US$ 3,092 US$ 3,365 US$ 3,379 - - US$ 5,077 - - - US$ 4,928 - - US$ 3,215 US$ 3,970 US$ 6,057 US$ 7,937 US$ 8,759 - US$ 8,282 - US$ 4,989 US$ 3,456 US$ 5,037 US$ 3,205 - US$ 3,028 - US$ 5,096 - US$ 4,138 US$ 3,298 US$ 4,401 US$ 3,150 - US$ 8,420 - US$ 6,403 US$ 3,453 US$ 4,865 US$ 3,369 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 4,997 US$ 4,994 - US$ 4,368 US$ 4,500 - US$ 6,220 - - US$ 4,496 US$ 3,648 - US$ 3,480 US$ 4,587 US$ 3,175 - US$ 5,900 US$ 19,985 - - - - - US$ 4,816 US$ 2,993 US$ 3,250 - - - - US$ 3,120 - US$ 4,468 - US$ 3,496 - - - - US$ 3,150 - US$ 3,647 - - - - US$ 3,325 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 5,027 US$ 4,997 US$ 30 US$ 5,024 US$ 6,514 US$ 4,319 - US$ 4,994 US$ 6,516 US$ 4,368 - US$ 30 US$ (2) US$ (49) - US$ 3,466 US$ 3,431 US$ 35 US$ 6,297 US$ 3,422 US$ 3,395 US$ 4,575 - US$ 3,536 - US$ 4,591 US$ 3,105 US$ 4,945 US$ 6,005 - US$ 3,217 US$ 3,973 US$ 6,317 US$ 7,964 US$ 8,793 US$ 4,816 US$ 8,414 - US$ 5,011 US$ 3,471 US$ 5,023 US$ 3,215 - US$ 3,028 US$ 4,469 US$ 5,114 - US$ 4,161 US$ 3,288 US$ 4,435 US$ 3,152 - US$ 8,487 - US$ 6,490 US$ 3,464 US$ 4,880 US$ 3,452 - US$ 6,220 US$ 3,325 US$ 3,340 US$ 4,496 - US$ 3,565 - US$ 4,587 US$ 3,175 US$ 4,899 US$ 5,900 - US$ 3,222 US$ 3,930 US$ 5,994 US$ 7,937 US$ 8,716 US$ 4,816 US$ 8,268 - US$ 4,941 US$ 3,453 US$ 5,048 US$ 3,182 - US$ 3,028 US$ 4,468 US$ 5,066 - US$ 4,118 US$ 3,310 US$ 4,393 US$ 3,150 - US$ 8,453 - US$ 6,437 US$ 3,426 US$ 4,842 US$ 3,361 - US$ US$ 77 US$ 97 US$ 55 US$ 79 - (29) - US$ 4 US$ (70) US$ 46 US$ 105 - US$ (5) US$ 43 US$ 323 US$ 27 US$ 77 - US$ 146 - US$ 70 US$ 18 US$ (25) US$ 33 - - US$ 1 US$ 48 - US$ 43 US$ (22) US$ 42 US$ 2 - US$ 34 - US$ 53 US$ 38 US$ 38 US$ 91 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ - - - - - - US$ 3,107 - - - US$ 3,653 US$ 1,520 US$ 3,483 - - - - US$ 20,402 - - - - - - US$ 3,047 US$ 3,279 - - - - US$ 3,046 - - - US$ 3,555 - - - - US$ 3,052 - US$ 3,737 - - - - US$ 3,366 (Continued) 95 Beginning Balance Acquisition Disposal (Note 2) Ending Balance Company Name Marketable Securities Type and Name Financial Statement Account Counter-party Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) on Disposal (US$ in Thousands) Shares/Units (In Thousands) Available-for-sale finan- cial assets Morgan Stanley Nucor Corp Public Svc Elec Gas Co Slm Corp Medium Term Nts Vodafone Airtouch Plc Wachovia Corp New Wachovia Corp New Wachovia Corp New Washington Mut Bk Fa Corporate issued asset-backed securities American Home Mtg Assets Tr Available-for-sale finan- cial assets Americredit Automobile Rec Tr Ba Cr Card Tr Banc Amer Coml Mtg Inc Bear Stearns Coml Mtg Secs Inc Capital Auto Receivables Asset Capital One Multi Asset Exec Capital One Prime Auto Rec Capital One Prime Auto Receiva Caterpillar Finl Asset Tr Cendant Rent Car Fdg Aesop Llc Credit Suisse First Boston Mtg Credit Suisse First Boston Mtg First Un Natl Bk Coml Mtg Tr Ford Credit Auto Owner Trust Gsamp Tr Harley Davidson Motorcycle Tr Hertz Veh Fing Llc Honda Auto Receivables Hyundai Auto Receivables Tr Lb Ubs Coml Mtg Tr Lb Ubs Coml Mtg Tr Mbna Cr Card Master Nt Tr Mbna Master Cr Card Tr Ii Merrill Lynch Mtg Invs Inc Nissan Auto Receivables Providian Gateway Owner Tr Stuctured Adj Rate Mtg Ln Tr Tiaa Seasoned Coml Mtg Tr Tw Hotel Fdg 2005 Llc Usaa Auto Owner Tr Usaa Auto Owner Tr Wamu Mtg Wamu Mtg Pass Thru Ctfs Tr Wells Fargo Finl Auto Owner Tr Wells Fargo Mtg Backed Secs Wells Fargo Mtg Backed Secs 96 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 2,126 US$ 3,797 US$ 3,682 US$ 8,998 US$ 4,449 - - US$ 2,040 US$ 3,997 - US$ 3,269 US$ 4,300 - - US$ 3,243 - US$ 3,981 - US$ 8,142 US$ 9,297 - - - US$ 4,324 US$ 4,251 US$ 5,825 US$ 5,319 - US$ 3,928 US$ 3,493 - - US$ 7,605 US$ 5,887 US$ 3,928 US$ 3,942 - - US$ 4,103 - US$ 4,238 - - US$ 4,986 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 3,337 - - - - US$ 3,100 US$ 3,491 US$ 1,534 - US$ 3,382 - - US$ 4,591 US$ 5,259 - US$ 8,998 - US$ 3,500 - - US$ 7,613 US$ 7,637 US$ 5,188 - - - - US$ 3,373 - - US$ 3,884 US$ 4,500 - - - - US$ 3,981 US$ 4,171 - US$ 4,999 - US$ 3,656 US$ 4,854 - US$ 3,935 US$ 4,008 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ - US$ - US$ - US$ 3,790 US$ 3,735 US$ 9,008 US$ 4,403 - US$ 3,484 US$ 3,563 US$ 3,998 US$ 3,811 US$ 3,684 US$ 8,949 US$ 4,477 - US$ 3,491 US$ 3,582 US$ 4,000 US$ (21) US$ 51 US$ 59 (74) US$ - (7) US$ US$ (19) US$ (2) US$ 3,187 US$ 3,380 US$ (193) US$ 3,196 US$ 4,260 - - US$ 3,243 - US$ 3,995 - US$ 8,181 US$ 4,493 - - - US$ 4,321 US$ 3,868 US$ 3,933 US$ 5,278 US$ 3,381 US$ 3,460 US$ 3,177 - US$ 4,449 US$ 7,552 US$ 4,630 US$ 3,928 US$ 3,961 US$ 3,786 - US$ 3,325 - US$ 4,260 - US$ 3,760 US$ 3,535 - - US$ 3,216 US$ 4,350 - - US$ 3,232 - US$ 3,999 - US$ 8,089 US$ 4,433 - - - US$ 4,310 US$ 4,241 US$ 3,904 US$ 5,284 US$ 3,373 US$ 3,443 US$ 3,101 - US$ 4,500 US$ 7,653 US$ 4,988 US$ 3,943 US$ 3,911 US$ 3,887 - US$ 3,338 - US$ 4,246 - US$ 4,048 US$ 3,515 - - US$ (20) (90) US$ - - US$ 11 - US$ (4) - US$ 92 US$ 60 - - - US$ 11 US$ (373) US$ 29 US$ (6) US$ 8 US$ 17 US$ 76 - US$ (51) US$ (101) US$ (358) US$ (15) US$ 50 US$ (101) - US$ (13) - US$ 14 - US$ (288) US$ 20 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Amount (US$ in Thousands) (Note 3) US$ 5,531 - - - - US$ 3,168 - - - - - - US$ 4,591 US$ 5,099 - US$ 9,118 - US$ 3,498 - US$ 2,663 US$ 6,842 US$ 6,704 US$ 5,172 - - - - - - - US$ 3,884 - - - - - - US$ 4,016 - US$ 4,998 - US$ 3,242 - - US$ 3,816 US$ 3,931 (Continued) Company Name Marketable Securities Type and Name Financial Statement Account Counter-party Beginning Balance Acquisition Disposal (Note 2) Ending Balance Nature of Relationship Shares/Units (In Thousands) Amount (US$ in Thousands) Shares/Units (In Thousands) (Note 1) Amount (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) Carrying Value (US$ in Thousands) Gain (Loss) on Disposal (US$ in Thousands) Shares/Units (In Thousands) Amount (US$ in Thousands) (Note 3) Government bonds United States Treas Nt United States Treas Nt United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts United States Treas Nts Us Treas Nts Us Treasury Nts Us Treasury Nts Us Treasury Nts Us Treasury Nts Wi Treasury Sec Available-for-sale finan- cial assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ - - - - - - - - US$ 5,936 - - - - - US$ 12,350 - - - - US$ 60,929 - - - - - US$ 4,009 - US$ 56,526 - - US$ 4,834 - US$ 5,467 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 42,302 US$ 5,059 US$ 60,837 US$ 6,837 US$ 8,073 US$ 33,800 US$ 25,041 US$ 11,676 - US$ 12,876 US$ 6,957 US$ 15,113 US$ 10,746 US$ 5,078 - US$ 109,310 US$ 46,901 US$ 20,692 US$ 34,573 - US$ 19,628 US$ 26,131 US$ 146,634 US$ 16,788 US$ 271,758 - US$ 29,438 US$ 131,185 US$ 8,596 US$ 14,102 - US$ 30,867 - US$ 10,362 US$ 59,595 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ 42,891 US$ 42,302 US$ 589 US$ 5,007 US$ 34,754 US$ 7,052 US$ 3,037 US$ 34,440 US$ 25,606 US$ 6,121 US$ 5,936 US$ 13,318 US$ 6,935 US$ 10,313 US$ 10,768 US$ 5,170 US$ 12,363 US$ 67,657 US$ 44,003 US$ 21,138 US$ 34,574 US$ 60,813 US$ 19,903 US$ 26,501 US$ 139,925 US$ 16,766 US$ 271,969 US$ 4,019 US$ 20,089 US$ 187,636 US$ 8,552 US$ 14,203 US$ 4,927 US$ 31,573 US$ 5,517 US$ 10,369 US$ 53,577 US$ 5,059 US$ 34,896 US$ 6,837 US$ 3,036 US$ 33,800 US$ 25,041 US$ 6,092 US$ 5,944 US$ 12,876 US$ 6,957 US$ 10,056 US$ 10,746 US$ 5,078 US$ 12,295 US$ 67,440 US$ 43,603 US$ 20,692 US$ 34,573 US$ 61,165 US$ 19,628 US$ 26,131 US$ 138,892 US$ 16,788 US$ 271,758 US$ 3,996 US$ 19,959 US$ 187,804 US$ 8,596 US$ 14,102 US$ 4,827 US$ 30,867 US$ 5,456 US$ 10,362 US$ 53,189 US$ (52) US$ (142) US$ 215 US$ 1 US$ 640 US$ 565 US$ 29 US$ (8) US$ 442 US$ (22) US$ 257 US$ 22 US$ 92 US$ 68 US$ 217 US$ 400 US$ 446 US$ 1 US$ (352) US$ 275 US$ 370 US$ 1,033 US$ (22) US$ 211 US$ 23 US$ 130 US$ (168) US$ (44) US$ 101 US$ 100 US$ 706 US$ 61 US$ 7 US$ 388 Note 1: The shares/units and amount of marketable securities acquired do not include stock dividends from investees. Note 2: The data for marketable securities disposed, exclude bonds maturities. Note 3: The ending balance includes the amortization of premium/discount on bonds investments, unrealized valuation gains/losses on financial assets or equity in earnings of equity method investees. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$ - - US$ 25,924 - US$ 5,070 - - US$ 5,613 - - - US$ 5,160 - - - US$ 42,509 US$ 3,359 - - - - - US$ 7,758 - - - US$ 9,735 - - - - - - - US$ 6,500 (Concluded) 97 TABLE 3 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries ACQUISITION OF INDIVIDUAL REAL ESTATE PROPERTIES AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) Company Name Types of Property Transaction Date Transaction Amount Payment Term Counter-party Nature of Relationships The Company Fab January 4, 2007 $ 198,000 By the construction progress Lead Fu Industry Corp. - Prior Transaction of Related Counter-party Relationships Transfer Date Amount Price Reference Purpose of Acquisition Other Terms N/A N/A N/A Public bidding Manufacturing purpose None Owner N/A TABLE 4 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars) Company Name Related Party Nature of Relationships Transaction Details Abnormal Transaction Notes/Accounts Payable or Receivable Purchases/Sales Amount % to Total Payment Terms Unit Price (Note) Payment Terms (Note) Ending Balance % to Total Note The Company TSMC-North America GUC TSMC-Shanghai WaferTech TSMC-Shanghai SSMC VIS Subsidiary Investee with a controlling financial interest Subsidiary Indirect subsidiary Subsidiary Investee accounted for using equity method Investee accounted for using equity method GUC TSMC-North America Same parent company Sales Sales Sales Purchases Purchases Purchases Purchases Purchases XinTec VisEra OmniVision Same president Parent company of director (represented for Sales Sales XinTec) $ 192,846,641 795,232 155,799 8,774,750 5,828,541 5,468,410 4,188,107 1,766,788 1,050,497 1,813,412 61 - - 18 12 11 9 54 31 54 Net 30 days after invoice date Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after invoice date/net 45 days after monthly closing Net 45 days after shipping Net 45 days after shipping - - - - - - - - - - - - - - - - - - - - $ 26,626,880 74,003 - (784,280) (596,581) (655,029) (838,584) (139,402) 10,120 431,801 60 - - 6 5 5 7 16 2 84 Note: The terms of sales to related parties are not significantly different from those to third parties. For purchase transactions, prices are determined in accordance with the related contractual agreements and no other similar transaction could be compared with. 98 TABLE 5 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars) Company Name Related Party Nature of Relationships Ending Balance Turnover Days (Note) Amounts Action Taken Overdue The Company XinTec TSMC-North America TSMC-Shanghai GUC VisEra OmniVision Subsidiary Subsidiary Investee with a controlling financial interest $ 26,725,765 151,037 118,749 Same president Parent company of director (represented for 10,120 431,801 XinTec) Note: The calculation of turnover days excludes other receivables from related parties. 41 - - 69 43 $ 8,164,297 - 8,081 Accelerate demand on account receivable - Accelerate demand on account receivable 1,075 - Accelerate demand on account receivable - Amounts Received in Subsequent Period Allowance for Bad Debts $ $ 4,521,960 - - - - - - - - - 99 TABLE 6 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES OVER WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars) Investor Company Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2007 December 31, 2007 December 31, 2006 Shares (In Thousands) Percentage of Ownership Carrying Value (Note 1) Net Income (Losses) of the Investee Equity in the Earnings (Losses) (Note 2) Note The Company TSMC Global TSMC International Tortola, British Virgin Islands Tortola, British Virgin Islands Investment activities Providing investment in companies involved in the $ 42,327,245 31,445,780 $ 42,327,245 31,445,780 1 987,968 100 100 $ 44,204,188 27,688,565 $ 2,321,568 562,155 $ 2,321,568 562,155 Subsidiary Subsidiary Hsin-Chu, Taiwan Research, design, development, manufacture, 13,047,681 8,119,816 616,240 36 11,024,568 4,321,071 1,085,203 Investee accounted for using design, manufacture, and other related business in the semiconductor industry VIS SSMC Singapore Fabrication and supply of integrated circuits 8,840,895 8,840,895 packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts 463 - equity method 9,092,741 3,552,556 1,180,962 Investee accounted for using 8,622,715 (959,387) (957,835) Subsidiary equity method 4,734,180 2,255,647 302,505 253,276 302,505 253,276 Subsidiary Subsidiary 1,501,521 501,174 182,265 Investee with a controlling 1,170,841 906,536 823,552 467,873 173,429 171,658 104,929 88,702 16,436 140,497 (41,533) 732,585 137,202 59,407 58,751 3,531 31,366 2,140 137,687 (40,702) 251,198 136,516 8,573 7,822 3,531 31,366 2,140 financial interest Subsidiary Subsidiary Investee with a controlling financial interest Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary 39 100 100 100 43 98 98 37 99 36 36 100 100 100 TSMC-Shanghai Shanghai, China Manufacturing and sales of integrated circuits at the order of and pursuant to product design specifica- tions provided by customers 12,180,367 12,180,367 TSMC Partners TSMC-North America Tortola, British Virgin Islands San Jose, California, U.S.A. Investment activities Sales and marketing of integrated circuits and 10,350 333,718 10,350 333,718 300 11,000 XinTec VTAF II VTAF III GUC Emerging Alliance Chi Cherng Hsin Ruey TSMC-Japan TSMC-Europe TSMC-Korea Taoyuan, Taiwan Wafer level chip size packaging service 1,357,890 - 91,703 semiconductor devices Cayman Islands Cayman Islands Hsin-Chu, Taiwan Cayman Islands Taipei, Taiwan Taipei, Taiwan Yokohama, Japan Amsterdam, the Netherlands Seoul, Korea Investing in new start-up technology companies Investing in new start-up technology companies Researching, developing, manufacturing, testing and marketing of integrated circuits Investing in new start-up technology companies Investment activities Investment activities Marketing activities Marketing activities Marketing activities 1,095,622 973,459 386,568 1,019,042 300,000 300,000 83,760 15,749 13,656 785,465 243,545 386,568 1,418,717 300,000 300,000 83,760 15,749 13,656 - - 42,572 - - - 6 - 80 Note 1: The treasury stock is deducted from the carrying value. Note 2: Equity in earnings/losses of investees include the effect of unrealized gross profit from affiliates. 100 TABLE 7 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries INFORMATION OF INVESTMENT IN MAINLAND CHINA FOR THE YEAR ENDED DECEMBER 31, 2007 (Amounts in Thousands of New Taiwan Dollars, Unless Otherwise Specified) Investee Company Main Businesses and Products Total Amount of Paid-in Capital (RMB in Thousand) Method of Investment TSMC (Shanghai) Company Limited Manufacturing and sales of integrated circuits at the order of and pur- suant to product design specifica- tions provided by customers $ (RMB 12,180,367 3,070,623) (Note 1) Accumulated Outflow of Investment from Taiwan as of January 1, 2007 (US$ in Thousand) $ 12,180,367 (US$ 371,000) Investment Flows Outflow (US$ in Thousand) Inflow $ - $ - Accumulated Outflow of Investment from Taiwan as of December 31, 2007 (US$ in Thousand) $ (US$ 12,180,367 371,000) Percentage of Ownership 100% Equity in the Earnings (Losses) (Note 2) Carrying Value as of December 31, 2007 Accumulated Inward Remittance of Earnings as of December 31, 2007 Accumulated Investment in Mainland China as of December 31, 2007 (US$ in Thousand) Investment Amounts Authorized by Investment Commission, MOEA (US$ in Thousand) $ (957,835) $ 8,622,715 $ - $ (US$ 12,180,367 371,000) $ (US$ 12,180,367 371,000) Upper Limit on Investment (US$ in Thousand) $ (US$ 12,180,367 371,000) Note 1: Direct investments US$371,000 thousand in TSMC-Shanghai. Note 2: Amount was recognized based on the reviewed financial statements. 101 TABLE 8 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries INTERCOMPANY RELATIONSHIPS AND SIGNIFICANT INTERCOMPANY TRANSACTIONS (Amounts in Thousands of New Taiwan Dollars, Unless Otherwise Specified) A. FOR THE YEAR ENDED DECEMBER 31, 2007 Company Name Counter Party Nature of Relationship (Note 1) Financial Statements Item Intercompany Transactions Amount Terms (Note 2) Percentage of Consolidated Total Gross Sales or Total Assets TSMC TSMC-NA 1 Sales $ 192,846,641 No. 0 1 2 3 TSMC-Shanghai TSMC-Japan TSMC-Europe TSMC-Korea GUC TSMC Technology WaferTech TSMC Canada TSMC Technology TSMC International TSMC International TSMC Partners GUC TSMC-NA Receivables from related parties Other receivables from related parties Payables to related parties 1 Sales Purchases Gain on disposal of property, plant and equipment Technical service income Other receivables from related parties Payables to related parties Deferred credits Marketing expenses - commission Payables to related parties Marketing expenses - commission Payables to related parties Marketing expenses - commission Sales General and administrative expenses - rental expense Research and development expenses Receivables from related parties Payables to related parties Payables to related parties Research and development expenses Sales Purchases Payables to related parties Research and development expenses Deferred royalty income Other receivables Deferred revenue Purchases 1 1 1 1 1 1 1 3 3 3 Manufacturing overhead Payables to related parties 3 Operating expenses 26,626,880 98,885 13,392 155,799 5,828,541 216,267 121,771 151,037 596,581 510,564 220,858 18,449 316,748 37,046 26,818 795,232 6,139 56,887 74,003 7,411 39,403 354,423 10,301 8,774,750 784,280 129,665 640,658 9,901,544 8,773,454 1,766,788 189,410 139,402 60,010 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 59% 5% - - - 2% - - - - - - - - - - - - - - - - - - 3% - - - 2% 2% 1% - - - (Continued) Note 1: No. 1 represents the transactions from parent company to subsidiary. No. 3 represents the transactions between subsidiaries. GUC-NA Note 2: The terms of intercompany sales are not significantly different from those to third parties. For other intercompany transactions, prices are determined in accordance with mutual agreements. 102 B. FOR THE YEAR ENDED DECEMBER 31, 2006 No. 0 Company Name Counter Party Nature of Relationship (Note 1) Financial Statements Item Intercompany Transactions Amount Terms (Note 2) Percentage of Consolidated Total Gross Sales or Total Assets TSMC TSMC-NA 1 Sales $ 190,459,073 TSMC-Shanghai TSMC-Japan TSMC-Europe GUC TSMC Technology WaferTech TSMC Development TSMC Technology TSMC International WaferTech TSMC-NA GUC-NA Receivables from related parties Other receivables from related parties Payables to related parties 1 Sales Purchases Gain on disposal of property, plant and equipment Technical service income Proceeds from disposal of property, plant and equipment Other receivables from related parties 1 1 1 1 1 3 3 3 3 3 Payables to related parties Deferred credits Marketing expenses - commission Payables to related parties Marketing expenses - commission Payables to related parties Sales General and administrative expenses - rental expense Research and development expenses Receivables from related parties Payables to related parties Other receivables from related parties Payables to related parties Sales Purchases Payables to related parties Interest income Deferred royalty income Other receivables Deferred revenue Receivables from related parties Purchases Manufacturing overhead Payables to related parties 3 Operating expenses 16,461,956 59,547 27,455 61,951 4,405,843 179,498 98,797 401,561 123,853 478,714 723,661 254,758 20,295 236,454 22,158 755,710 14,606 39,421 155,216 2,117 3,785 42,389 34,517 12,530,552 864,733 8,029 643,679 10,003,652 8,814,830 1,366 920,045 330,129 301,507 41,984 1 2 3 4 TSMC International TSMC Partners TSMC Technology GUC Note 1: No. 1 represents the transactions from parent company to subsidiary. No. 3 represents the transactions between subsidiaries. Note 2: The terms of intercompany sales are not significantly different from those to third parties. For other intercompany transactions, prices are determined in accordance with mutual agreements. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 60% 3% - - - 1% - - - - - - - - - - - - - - - - - - 4% - - - 3% 3% - - - - - (Concluded) 103 9. U.S. GAAP Financial Information Please be advised that our 2007 full annual report that includes complete U.S. GAAP reconciled financial statements and footnotes will be available when we file Form 20-F with the U.S. SEC. Our Form 20-F, or our 2007 full annual report, can be found at the U.S. SEC and on TSMC's website no later than June 30, 2008. Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries U.S. GAAP RECONCILIATIONS OF SHAREHOLDERS' EQUITY December 31, 2006 and 2007 (In Thousand New Taiwan Dollars) U.S. GAAP RECONCILIATIONS OF NET INCOME For the Years Ended December 31, 2006 and 2007 (In Thousand New Taiwan Dollars) Equity attributable to shareholders of the parent based on R.O.C. GAAP $ 487,091,402 $ 507,981,284 Net income attributable to shareholders of the parent based on R.O.C. GAAP $ 109,177,093 $ 127,009,731 2007 2006 2007 2006 Adjustments - U.S. GAAP adjustments on equity-method investees - Impairment of long-lived assets - Loss on impairment of assets - Reversal of depreciation on assets impaired under U.S. GAAP - 10% tax on undistributed earnings - Goodwill - Carrying amount difference for 68% equity interest in TASMC s share acquisition - Reversal of amortization of goodwill recognized under R.O.C. GAAP - Bonuses to employees, directors and supervisors - Accrued pension cost - Accrual for accumulated other comprehensive income under U.S. SFAS No. 158 - The adoption of U.S. SFAS No. 158 - Deferred pension loss - Income tax effect of U.S. GAAP adjustments - Minority interest effect of U.S. GAAP adjustments (432,568) (10,573,746) 9,878,553 (5,538,280) 52,212,732 (11,274,122) (8,175,257) (39,911) - (87,487) 166,633 121 26,136,668 (445,102) - Marketable securities Adjustments (10,657,618) 8,561,791 (3,278,020) 52,212,732 (11,257,528) (9,488,556) (43,783) (1,391,322) - 208,967 121 24,421,682 - Realization of unrealized loss on marketable securities - Reversal of cumulative effect of changes in accounting principle for adopting R.O.C. SFAS No. 34 - U.S. GAAP adjustments on equity-method investees - Reversal of depreciation on assets impaired under U.S. GAAP - 10% tax on undistributed earnings - Bonuses to employees, directors and supervisors - Current year accrual - Fair market value adjustment of prior year accrual - Pension expense - Stock-based compensation - Stock-based compensation - Cumulative effect of changes in accounting principle for adopting U.S. SFAS 123R - Adjustment of carrying interest - Income tax effect of U.S. GAAP adjustments - Minority interest effect of U.S. GAAP adjustments (52,316) - (69,842) 1,408,372 (2,260,260) (8,232,842) (28,352,026) 3,872 (373,900) - - (41,847) 451,278 (37,519,511) (262,032) (1,606,749) (42,590) 1,391,478 (3,278,020) (9,488,556) (18,016,360) 3,871 (471,696) 37,935 170,380 98,320 164,997 (31,299,022) Equity attributable to shareholders of the parent based on U.S. GAAP $ 513,228,070 $ 532,402,966 Net income attributable to common shareholders of the parent based on U.S. GAAP $ 71,657,582 $ 95,710,709 104 C O N TACT INFORMAT I O N TSMC Spokesperson Name: Lora Ho Title: Vice President & CFO Tel: 886-3-5636688 Email: spokesperson@tsmc.com Fax: 886-3-5637000 Deputy Spokesperson Name: J.H. Tzeng Title: Deputy Director, Public Relations Tel: 886-3-5055028 Email: jhtzeng@tsmc.com Fax: 886-3-5670121 TSMC Investor Relations Name: Elizabeth Sun Title: Director, Investor Relations Tel: 886-3-5682085 Email: invest@tsmc.com Fax: 886-3-5797337 Auditors Company: Deloitte & Touche Auditors: Hung-Wen Huang, Ming-Cheng Chang Address: 12F, 156, Sec. 3, Min-Sheng E. Rd., Taipei, Taiwan 105, R.O.C. Tel: 886-2-25459988 Website: http://www.deloitte.com.tw Fax: 886-2-25459966 Common Share Transfer Agent and Registrar Company: The Transfer Agency Department of Chinatrust Commercial Bank Address: 5F, 83, Sec. 1, Chung-Ching S. Rd., Taipei, Taiwan 100, R.O.C. Tel: 886-2-21811911 Website: http://www.chinatrust.com.tw Fax: 886-2-23116723 ADR Depositary Bank Company: Citibank, N.A. Depositary Receipts Services Address: 388 Greenwich Street, New York, NY 10013, U.S.A. Website: http://www.citigroup.com/adr Tel: 1-877-2484237 (toll free) Tel: 1-781-5754555 (out of US) Fax: 1-201-3243284 E-mail: citibank@shareholders-online.com TSMC's depositary receipts of the common shares are listed on New York Stock Exchange (NYSE) under the symbol TSM. The information relating to TSM is available at http://www.nyse.com and http://newmops.tse.com.tw Corporate Headquarters & Fab 12 8, Li-Hsin Rd. 6, Hsinchu Science Park, Hsinchu, Taiwan 300-77, R.O.C. Tel: 886-3-5636688 Fax: 886-3-5637000 Fab 2, Fab 5 121, Park Ave. 3, Hsinchu Science Park, Hsinchu, Taiwan 300-77, R.O.C. Fax: 886-3-5781546 Tel: 886-3-5636688 Fab 3 9, Creation Rd. 1, Hsinchu Science Park, Hsinchu, Taiwan 300-77, R.O.C. Fax: 886-3-5781548 Tel: 886-3-5636688 Fab 6 1, Nan-Ke North Rd., Tainan Science Park, Tainan, Taiwan 741-44, R.O.C. Fax: 886-6-5052057 Tel: 886-6-5056688 Fab 8 25, Li-Hsin Rd., Hsinchu Science Park, Hsinchu, Taiwan 300-77, R.O.C. Tel: 886-3-5636688 Fax: 886-3-5662051 Fab 14 1-1, Nan-Ke North Rd., Tainan Science Park, Tainan, Taiwan 741-44, R.O.C. Fax: 886-6-5051262 Tel: 886-6-5056688 TSMC North America 2585 Junction Avenue, San Jose, CA 95134, U.S.A. Tel: 408-382-8000 Fax: 408-382-8008 TSMC Europe B.V. World Trade Center, Zuidplein 60, 1077 XV Amsterdam, The Netherlands Fax: 31-20-3059911 Tel: 31-20-3059900 TSMC Japan Limited 21F, Queen's Tower C, 2-3-5, Minatomirai, Nishi-ku Yokohama, 220-6221, Japan Tel: 81-45-6820670 Fax: 81-45-6820673 TSMC (Shanghai) Company Limited 4000, Wen Xiang Road, Songjiang, Shanghai, China Postcode: 201616 Tel: 86-21-57768000 Fax: 86-21-57762525 TSMC Korea Limited 15F, AnnJay Tower, 718-2, Yeoksam-dong, Gangnam-gu, Seoul135-080, Korea Tel: 82-2-20511688 Fax: 82-2-20511669 TSMC Liaison Office in India 1st Floor, Pine Valley, Embassy Golf-Links Business Park Bangalore-560071, India Tel: 91-99809-91826 Fax: 91-80-41764568 TSMC Design Technology Canada Inc. 349 Terry Fox Drive, Kanata, ON K2K 2V6, Canada Tel: 1-613-5667067 Fax: 1-613-2713643 Copyright © 2008 by Taiwan Semiconductor Manufacturing Company, Ltd. All rights reserved.