##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the fiscal
year ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from 
to
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission file number 1-14700
 
 (Exact Name of Registrant as Specified in Its Charter)
 Taiwan Semiconductor Manufacturing Company Limited
(Translation of Registrants Name Into English)
    
    Republic of China
(Jurisdiction of Incorporation or Organization)
 (Address of Principal Executive Offices)
 
  Name of Each ExchangeTitle of Each Class
    
    on Which RegisteredCommon Shares, par value NT$10.00 each
    
    The New York Stock Exchange, Inc.*
 
 
 
   þ o
 o þ
 þ o
  þ o o
 o þ
 o þ
 *
    
    Not for trading, but only in connection with the listing on the New York Stock Exchange,
Inc. of American Depositary Shares representing such Common Shares




---



##### 



TABLE
OF CONTENTS
 Taiwan
Semiconductor Manufacturing Company Limited
 PageCAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
    
    
    1PART I
    
    
    
    
    2ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    2ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    2ITEM 3.
    
    KEY INFORMATION
    
    
    2ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    12ITEM 4A.
    
    UNRESOLVED STAFF COMMENTS
    
    
    21ITEM 5.
    
    OPERATING AND FINANCIAL REVIEWS AND PROSPECTS
    
    
    21ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    36ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    43ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    47ITEM 9.
    
    THE OFFER AND LISTING
    
    
    48ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    49ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
    
    
    64ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    65ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    65ITEM 14.
    
    MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    65ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    66ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    67ITEM 16B.
    
    CODE OF ETHICS
    
    
    67ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    67ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    68ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    68ITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    69ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    69ITEM 19.
    
    EXHIBITS
    
    
    70EX-1.1 ARTICLES OF INCORPORATIONEX-3.1 RULES FOR ELECTION OF DIRECTORSEX-12.1 CERTIFICATION OF CEO - RULE 13a-14(a)EX-12.2 CERTIFICATION OF CFO - RULE 13a-14(a)EX-13.1 CERTIFICATION OF CEO - RULE 13a-14(b)EX-13.2 CERTIFICATION OF CFO - RULE 13a-14(b)EX-99.1 CONSENT OF DELOITTE & TOUCHE
   -i-




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##### Table of Contents



CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
   
    
    the volatility of the semiconductor and microelectronics industry;
    
    overcapacity in the semiconductor industry;
    
    the increased competition from other companies and our ability to retain and
increase our market share;
    
    our ability to develop new technologies successfully and remain a technological
leader;
    
    our ability to maintain control over expansion and facility modifications;
    
    our ability to generate growth and profitability;
    
    our ability to hire and maintain qualified personnel;
    
    our ability to acquire required equipment and supplies necessary to meet business
needs;
    
    our reliance on certain major customers;
    
    the political stability of our local region; and
    
    general local and global economic conditions.




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##### Table of Contents



PART I
 
 ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
  
 ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3.
    
    KEY INFORMATION
 Selected Financial and Operating Data
  Year ended and as of December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    US$(in millions, except for percentages,earnings per share and per ADS, and operating data)Income Statement Data:R.O.C. GAAPNet sales
    
    
    202,997
    
    
    
    257,213
    
    
    
    266,565
    
    
    
    317,407
    
    
    
    322,630
    
    
    
    9,948Cost of sales
    
    
    (128,113
    )
    
    
    (141,394
    )
    
    
    (148,362
    )
    
    
    (161,597
    )
    
    
    (180,280
    )
    
    
    (5,559
    )Gross profit
    
    
    74,884
    
    
    
    115,819
    
    
    
    118,203
    
    
    
    155,810
    
    
    
    142,350
    
    
    
    4,389Operating expenses
    
    
    (23,583
    )
    
    
    (27,337
    )
    
    
    (27,234
    )
    
    
    (28,545
    )
    
    
    (30,628
    )
    
    
    (944
    )Income from operations
    
    
    51,301
    
    
    
    88,482
    
    
    
    90,969
    
    
    
    127,265
    
    
    
    111,722
    
    
    
    3,445Non-operating income and gains(1)
    
    
    5,669
    
    
    
    8,581
    
    
    
    9,399
    
    
    
    9,705
    
    
    
    11,934
    
    
    
    368Non-operating expenses and
losses(1)
    
    
    (5,791
    )
    
    
    (5,097
    )
    
    
    (6,105
    )
    
    
    (3,608
    )
    
    
    (2,014
    )
    
    
    (62
    )Income before income tax and minority
interest
    
    
    51,179
    
    
    
    91,966
    
    
    
    94,263
    
    
    
    133,362
    
    
    
    121,642
    
    
    
    3,751Income tax benefit (expense)
    
    
    (3,923
    )
    
    
    363
    
    
    
    (630
    )
    
    
    (7,774
    )
    
    
    (11,710
    )
    
    
    (361
    )Income before cumulative effect of changes
in accounting principles
    
    
    47,256
    
    
    
    92,329
    
    
    
    93,633
    
    
    
    125,588
    
    
    
    109,932
    
    
    
    3,390Cumulative effect of changes in accounting
principles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,607
    
    
    
    
    
    
    
    Income before minority interest
    
    
    47,256
    
    
    
    92,329
    
    
    
    93,633
    
    
    
    127,195
    
    
    
    109,932
    
    
    
    3,390Minority interest in loss (income) of
subsidiaries
    
    
    3
    
    
    
    (13
    )
    
    
    (58
    )
    
    
    (185
    )
    
    
    (755
    )
    
    
    (23
    )Net income attributable to shareholders of
the parent
    
    
    47,259
    
    
    
    92,316
    
    
    
    93,575
    
    
    
    127,010
    
    
    
    109,177
    
    
    
    3,367Basic earnings per share(2)
    
    
    1.78
    
    
    
    3.50
    
    
    
    3.55
    
    
    
    4.82
    
    
    
    4.14
    
    
    
    0.13Diluted earnings per share(2)
    
    
    1.78
    
    
    
    3.50
    
    
    
    3.55
    
    
    
    4.81
    
    
    
    4.14
    
    
    
    0.13Basic earnings per ADS
equivalent(2)
    
    
    8.89
    
    
    
    17.49
    
    
    
    17.76
    
    
    
    24.08
    
    
    
    20.72
    
    
    
    0.64
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##### Table of Contents



Year ended and as of December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    US$(in millions, except for percentages,earnings per share and per ADS, and operating data)Diluted earnings per ADS
equivalent(2)
    
    
    8.89
    
    
    
    17.49
    
    
    
    17.75
    
    
    
    24.06
    
    
    
    20.70
    
    
    
    0.64Basic weighted average shares
outstanding(2)
    
    
    26,470
    
    
    
    26,391
    
    
    
    26,349
    
    
    
    26,375
    
    
    
    26,347
    
    
    
    26,347Diluted weighted average shares
outstanding(2)
    
    
    26,479
    
    
    
    26,396
    
    
    
    26,360
    
    
    
    26,399
    
    
    
    26,368
    
    
    
    26,368U.S. GAAPNet sales
    
    
    203,600
    
    
    
    260,035
    
    
    
    267,028
    
    
    
    317,979
    
    
    
    323,221
    
    
    
    9,967Cost of sales(3)
    
    
    (133,493
    )
    
    
    (154,785
    )
    
    
    (161,808
    )
    
    
    (179,175
    )
    
    
    (202,046
    )
    
    
    (6,230
    )Operating expenses(3)
    
    
    (27,369
    )
    
    
    (32,191
    )
    
    
    (32,764
    )
    
    
    (37,050
    )
    
    
    (44,775
    )
    
    
    (1,381
    )Income from operations
    
    
    42,738
    
    
    
    73,059
    
    
    
    72,456
    
    
    
    101,754
    
    
    
    76,400
    
    
    
    2,356Income before income tax and minority interest
    
    
    42,441
    
    
    
    76,838
    
    
    
    75,983
    
    
    
    106,647
    
    
    
    85,973
    
    
    
    2,651Income tax expense
    
    
    (3,881
    )
    
    
    (508
    )
    
    
    (483
    )
    
    
    (10,954
    )
    
    
    (14,012
    )
    
    
    (432
    )Cumulative effect of changes in accounting
principles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    Net income
    
    
    38,661
    
    
    
    76,253
    
    
    
    75,418
    
    
    
    95,711
    
    
    
    71,658
    
    
    
    2,210Cumulative preferred dividends
    
    
    (184
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income attributable to common shareholders
    
    
    38,477
    
    
    
    76,253
    
    
    
    75,418
    
    
    
    95,711
    
    
    
    71,658
    
    
    
    2,210Basic earnings per share(4)
    
    
    1.54
    
    
    
    3.03
    
    
    
    2.97
    
    
    
    3.72
    
    
    
    2.74
    
    
    
    0.08Diluted earnings per share(4)
    
    
    1.54
    
    
    
    3.03
    
    
    
    2.96
    
    
    
    3.71
    
    
    
    2.74
    
    
    
    0.08Basic earnings per ADS
equivalent(4)
    
    
    7.70
    
    
    
    15.15
    
    
    
    14.83
    
    
    
    18.58
    
    
    
    13.70
    
    
    
    0.42Diluted earnings per ADS
equivalent(4)
    
    
    7.70
    
    
    
    15.15
    
    
    
    14.82
    
    
    
    18.56
    
    
    
    13.69
    
    
    
    0.42Basic weighted average shares
outstanding(4)
    
    
    24,971
    
    
    
    25,170
    
    
    
    25,434
    
    
    
    25,757
    
    
    
    26,149
    
    
    
    26,149Diluted weighted average shares
outstanding(4)
    
    
    24,981
    
    
    
    25,174
    
    
    
    25,445
    
    
    
    25,778
    
    
    
    26,170
    
    
    
    26,170Balance Sheet Data:R.O.C. GAAPWorking capital(1) (5)
    
    
    136,121
    
    
    
    120,574
    
    
    
    177,179
    
    
    
    213,457
    
    
    
    201,116
    
    
    
    6,202Long-term investments(1)
    
    
    10,748
    
    
    
    38,058
    
    
    
    42,383
    
    
    
    53,895
    
    
    
    36,461
    
    
    
    1,124Properties
    
    
    211,854
    
    
    
    258,911
    
    
    
    244,823
    
    
    
    254,094
    
    
    
    260,252
    
    
    
    8,025Goodwill
    
    
    8,721
    
    
    
    7,116
    
    
    
    6,011
    
    
    
    5,985
    
    
    
    5,988
    
    
    
    185Total assets
    
    
    407,401
    
    
    
    499,454
    
    
    
    519,510
    
    
    
    587,485
    
    
    
    570,865
    
    
    
    17,603Long term bank borrowing
    
    
    8,800
    
    
    
    1,915
    
    
    
    663
    
    
    
    654
    
    
    
    1,722
    
    
    
    53Long-term bonds payable
    
    
    30,000
    
    
    
    19,500
    
    
    
    19,500
    
    
    
    12,500
    
    
    
    12,500
    
    
    
    385Guaranty deposit-in and other
liabilities(5)(6)
    
    
    8,876
    
    
    
    15,079
    
    
    
    17,986
    
    
    
    18,333
    
    
    
    17,251
    
    
    
    532Total liabilities
    
    
    78,098
    
    
    
    100,413
    
    
    
    73,271
    
    
    
    78,347
    
    
    
    80,179
    
    
    
    2,472Capital stock
    
    
    202,666
    
    
    
    232,520
    
    
    
    247,300
    
    
    
    258,297
    
    
    
    264,271
    
    
    
    8,149Cash dividend on common shares
    
    
    
    
    
    
    12,160
    
    
    
    46,504
    
    
    
    61,825
    
    
    
    77,489
    
    
    
    2,389Shareholders equity attributable to
shareholders of the parent
    
    
    329,214
    
    
    
    398,965
    
    
    
    445,631
    
    
    
    507,981
    
    
    
    487,092
    
    
    
    15,020Minority interest in subsidiaries
    
    
    89
    
    
    
    76
    
    
    
    608
    
    
    
    1,157
    
    
    
    3,594
    
    
    
    111U.S. GAAPGoodwill
    
    
    47,287
    
    
    
    46,757
    
    
    
    46,993
    
    
    
    46,940
    
    
    
    46,926
    
    
    
    1,447Total assets
    
    
    439,853
    
    
    
    536,286
    
    
    
    558,919
    
    
    
    626,108
    
    
    
    610,843
    
    
    
    18,836Total liabilities
    
    
    81,977
    
    
    
    108,416
    
    
    
    80,962
    
    
    
    92,549
    
    
    
    94,021
    
    
    
    2,899Capital Stock
    
    
    202,666
    
    
    
    232,520
    
    
    
    247,300
    
    
    
    258,297
    
    
    
    264,271
    
    
    
    8,149Mandatory redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity attributable to common
shareholders of the parent
    
    
    357,173
    
    
    
    427,125
    
    
    
    477,297
    
    
    
    532,403
    
    
    
    513,228
    
    
    
    15,826Minority interest in subsidiaries
    
    
    703
    
    
    
    745
    
    
    
    660
    
    
    
    1,156
    
    
    
    3,594
    
    
    
    111
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Year ended and as of December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    US$(in millions, except for percentages,earnings per share and per ADS, and operating data)Other Financial Data:R.O.C. GAAPGross margin
    
    
    37
    %
    
    
    45
    %
    
    
    44
    %
    
    
    49
    %
    
    
    44
    %
    
    
    44
    %Operating margin
    
    
    25
    %
    
    
    34
    %
    
    
    34
    %
    
    
    40
    %
    
    
    35
    %
    
    
    35
    %Net margin
    
    
    23
    %
    
    
    36
    %
    
    
    35
    %
    
    
    40
    %
    
    
    34
    %
    
    
    34
    %Capital expenditures
    
    
    37,871
    
    
    
    81,095
    
    
    
    79,879
    
    
    
    78,737
    
    
    
    84,001
    
    
    
    2,590Depreciation and amortization
    
    
    69,161
    
    
    
    69,819
    
    
    
    75,649
    
    
    
    73,715
    
    
    
    80,005
    
    
    
    2,467Cash provided by operating
activities(1)
    
    
    116,037
    
    
    
    153,523
    
    
    
    157,225
    
    
    
    204,997
    
    
    
    183,766
    
    
    
    5,667Cash used in investing
activities(1)(7)
    
    
    (53,702
    )
    
    
    (148,359
    )
    
    
    (77,652
    )
    
    
    (119,724
    )
    
    
    (70,689
    )
    
    
    (2,180
    )Cash used in financing activities(7)
    
    
    (27,073
    )
    
    
    (32,181
    )
    
    
    (57,969
    )
    
    
    (63,783
    )
    
    
    (135,410
    )
    
    
    (4,175
    )Net cash inflow (outflow)
    
    
    35,199
    
    
    
    (28,687
    )
    
    
    22,181
    
    
    
    21,353
    
    
    
    (22,851
    )
    
    
    (705
    )Operating Data:Wafer (200mm equivalent) shipment(8)
    
    
    3,700
    
    
    
    5,008
    
    
    
    5,622
    
    
    
    7,215
    
    
    
    8,005
    
    
    
    8,005Billing Utilization Rate(9)
    
    
    92
    %
    
    
    105
    %
    
    
    94
    %
    
    
    102
    %
    
    
    93
    %(10)
    
    
    93
    %(10)
 
 (1)
    
    As a result of the adoption of the newly released R.O.C. Statements of Financial Accounting
Standards No. 34, Financial Instruments: Recognition and Measurement (R.O.C. SFAS No. 34),
and R.O.C. Statements of Financial Accounting Standards No. 36, Financial Instruments:
Disclosure and Presentation (R.O.C. SFAS No. 36), the balances in 2004 and 2005 were
reclassified to be consistent with the classification used in our consolidated financial
statements for 2006 included herein. Amounts in 2004 reflect the reclassification of NT$2,565
million gains from non-operating expenses and losses to non-operating income and gains, NT$44
million from long-term investments to current investments in marketable financial instruments,
and NT$372 million from cash used in investing activities to cash provided by operating
activities. Amounts in 2005 reflect the reclassification of NT$2,331 million gains from
non-operating expenses and losses to non-operating income and gains, NT$46 million from
long-term investments to current investments in marketable financial instruments, and NT$212
million from cash used in investing activities to cash provided by operating activities.
Balance in 2003 was not reclassified accordingly. See note 4 to our consolidated financial
statements for additional details about these new accounting standards.(2)
    
    Retroactively adjusted for all subsequent stock dividends and employee stock bonuses.(3)
    
    Amounts in 2006 include share-based compensation expenses as a result of the adoption of U.S.
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,
effective January 1, 2006. See note 30.i. to our consolidated financial statements for
additional details about this new accounting standard. Amounts in 2003 and 2005 reflect the
reclassification of NT$1,625 million and NT$159 million, respectively, from net non-operating
expenses to operating expenses. Amounts in 2004 reflect the reclassification of NT$232 million
from net non-operating income to operating expenses.(4)
    
    Retroactively adjusted for all subsequent stock dividends.(5)
    
    Amounts in 2003 reflect the reclassification of NT$727 million from current liabilities to
long-term liabilities.(6)
    
    Consists of other long term payables and total other liabilities.(7)
    
    Amounts in 2003 reflect the reclassification of NT$300 million from cash used in investing
activities to cash used in financing activities.(8)
    
    In thousands.(9)
    
    Billing Utilization Rate is equal to annual wafer shipment divided by annual capacity.(10)
    
    Capacity includes wafers committed by Vanguard. Exchange Rates
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NT dollars per U.S. dollarAverage(1)
    
    High
    
    Low
    
    Period-End2003
    
    
    34.41
    
    
    
    34.98
    
    
    
    33.72
    
    
    
    33.992004
    
    
    33.37
    
    
    
    34.16
    
    
    
    31.74
    
    
    
    31.742005
    
    
    32.16
    
    
    
    33.77
    
    
    
    30.65
    
    
    
    32.802006
    
    
    32.51
    
    
    
    33.31
    
    
    
    31.28
    
    
    
    32.592007
    
    
    32.82
    
    
    
    33.41
    
    
    
    32.26
    
    
    
    32.43October 2007
    
    
    32.55
    
    
    
    32.61
    
    
    
    32.39
    
    
    
    32.39November 2007
    
    
    32.33
    
    
    
    32.39
    
    
    
    32.26
    
    
    
    32.26December 2007
    
    
    32.41
    
    
    
    32.53
    
    
    
    32.30
    
    
    
    32.43January 2008
    
    
    32.36
    
    
    
    32.49
    
    
    
    32.15
    
    
    
    32.15February 2008
    
    
    31.61
    
    
    
    32.03
    
    
    
    30.90
    
    
    
    30.92March 2008
    
    
    30.58
    
    
    
    31.09
    
    
    
    29.99
    
    
    
    30.37April 2008
(through April 14, 2007)
    
    
    30.38
    
    
    
    30.52
    
    
    
    30.29
    
    
    
    30.31
 
 (1)
    
    Annual averages calculated from month-end rates.  Capitalization and Indebtedness
  Reasons for the Offer and Use of Proceeds
  Risk Factors
  Risks Relating to Our Business
 Since we are dependent on the highly cyclical semiconductor and microelectronics industries, which
have experienced significant and sometimes prolonged periods of downturns and overcapacity, our
revenues, earnings and margins may fluctuate significantly.
  -5-




---



##### Table of Contents



Decreases in demand and average selling prices for products that contain semiconductors may
adversely affect demand for our products and may result in a decrease in our revenues and earnings.
  If we are unable to compete effectively in the highly competitive foundry segment of the
semiconductor industry, we may lose customers and our profit margin and earnings may decrease.
  If we are unable to remain a technological leader in the semiconductor industry, we may become less
competitive.
  If we are unable to manage our expansion and the modification of our production facilities
effectively, our growth prospects may be limited.
  We may not be able to implement our planned growth or development if we are unable to accurately
forecast and sufficiently meet our future capital requirements.
  
    
    our future financial condition, results of operations and cash flow;
    
    general market conditions for financing activities by semiconductor companies; and
    
    social, economic, financial, political and other conditions in Taiwan and
elsewhere.
 -6-




---



##### Table of Contents



We may not be able to implement our planned growth or maintain our leading position if we are
unable to recruit and retain qualified management and skilled technical and service personnel.
  We may be unable to obtain in a timely manner and at a reasonable cost the equipment necessary for
us to remain competitive.
  Our revenue and profitability may decline if we are unable to obtain adequate supplies of raw
materials in a timely manner and at reasonable prices.
  If the Ministry of Economic Affairs uses a substantial portion of our production capacity, we will
not be able to service our other customers.
  Any inability to obtain, preserve and defend our technologies and intellectual property rights
could harm our competitive position.
  -7-




---



##### Table of Contents



We are subject to the risk of loss due to explosion and fire because some of the materials we use
in our manufacturing processes are highly combustible.
  Any impairment charges may have a material adverse effect on our net income.
    The loss of or significant curtailment of purchases by any of our largest customers could adversely
affect our results of operations.
  -8-




---



##### Table of Contents



Any failure to achieve and maintain effective internal controls could have a material adverse
effect on our business, results of operations and the market price of our common shares and ADSs.
    Our global manufacturing, design and sales activities subject us to risks associated with legal,
political, economic or other conditions or developments in various jurisdictions, including in
particular the Republic of China (R.O.C.), which could negatively affect our business and
financial status and therefore the market value of your investment.
   Our results of operations could be materially adversely affected by natural
disasters or interruptions in the supply of utilities (such as water or electricity) in the
locations in which we, our customers or suppliers operate.
  -9-




---



##### Table of Contents



Fluctuations in exchange rates could result in foreign exchange losses.
  Risks Relating to Ownership of ADSs
 Your voting rights as a holder of ADSs will be limited.
   You may not be able to participate in rights offerings and may experience dilution of your
holdings.
   -10-




---



##### Table of Contents



The value of your investment may be reduced by possible future sales of common shares or ADSs by us
or our shareholders.
   
    
    The plans initial step occurred on March 12, 2007, when Philips sold approximately
US$1.75 billion worth of our common shares over the Taiwan Stock Exchange through
block trades to a few institutional investors in Taiwan.
    
    The plans second step was a sale by Philips in a public offering registered with
the U.S. Securities and Exchange Commission of approximately US$2.56 billion worth of
our common shares in the form of ADSs on May 18, 2007. It is the intention of TSMC and
Philips that no further ADS offerings will be conducted in respect of Philips
shareholding in TSMC.
    
    For the third step of the plan, we conducted a share repurchase program from
November 14, 2007 to December 31, 2007, in the amount of approximately US$1.5 billion,
and subsequently canceled 800 million common shares that had been repurchased. During
the same period, Philips also disposed 800 million of our common shares by selling
them in the open market. After the completion of this third step, Philips held
approximately 5.1% of our total outstanding common shares as of February 29, 2008.
    
    Lastly, the plans fourth step calls for us to conduct, subject to maintaining our
current annual cash dividend per share, additional share repurchase and cancellation
programs between 2008 and 2010. Philips has informed us that it intends to tender its
remaining equity interest in us at such time. Philips may also consider selling its
remaining equity interest in us to specified long-term investors mutually agreeable to
Philips and us.
   The market value of our shares may fluctuate due to the volatility of, and government intervention
in, the R.O.C. securities market.
  -11-




---



##### Table of Contents



ITEM 4.
    
    INFORMATION ON THE COMPANY
 Our History and Structure
  Vanguard International Semiconductor Corporation (VIS).
 WaferTech in the United States.
 Systems on Silicon Manufacturing Company Pte. Ltd. (SSMC).
 Global Unichip Corporation (GUC).
 Operations in Mainland China.
 VisEra Technologies Company, Ltd. (VisEra).
 Xintec, Inc. (Xintec).
  -12-




---



##### Table of Contents



Our Principal Office
  Business Overview of the Company
    Our Facilities
   Manufacturing Capacity and Technology
 SM SM SM
 -13-




---



##### Table of Contents



Current mostadvanced technologyYear of
    
    for volume
    
    Monthly capacity(3)(4)Fab(1)
    
    commencement
    
    production(2)
    
    2003
    
    2004
    
    2005
    
    2006
    
    20072
    
    1990
    
    0.45
    
    
    42,977
    
    
    
    47,584
    
    
    
    47,584
    
    
    
    50,506
    
    
    
    51,6853(5)
    
    1995
    
    0.18
    
    
    71,600
    
    
    
    83,300
    
    
    
    83,300
    
    
    
    89,900
    
    
    
    90,5005
    
    1997
    
    0.15
    
    
    37,800
    
    
    
    42,500
    
    
    
    42,500
    
    
    
    51,500
    
    
    
    55,8006
    
    2000
    
    0.13
    
    
    63,500
    
    
    
    73,000
    
    
    
    73,000
    
    
    
    83,400
    
    
    
    94,0007(7)
    
    1995
    
    0.35
    
    
    11,800
    
    
    
    13,400
    
    
    
    13,400
    
    
    
    
    
    
    
    8
    
    1998
    
    0.15
    
    
    63,500
    
    
    
    76,500
    
    
    
    76,500
    
    
    
    83,500
    
    
    
    89,40010
    
    2004
    
    0.18
    
    
    
    
    
    
    500
    
    
    
    15,600
    
    
    
    32,000
    
    
    
    31,00011
    
    1998
    
    0.15
    
    
    30,000
    
    
    
    32,500
    
    
    
    33,500
    
    
    
    35,500
    
    
    
    35,50012
    
    2001
    
    0.055
    
    
    31,797
    
    
    
    60,300
    
    
    
    106,875
    
    
    
    131,175
    
    
    
    160,75514
    
    2004
    
    0.055
    
    
    
    
    
    
    6,750
    
    
    
    46,125
    
    
    
    79,650
    
    
    
    133,279SSMC(6)
    
    2000
    
    0.18
    
    
    9,600
    
    
    
    13,400
    
    
    
    16,700
    
    
    
    17,700
    
    
    
    20,700Total
    
    
    
    
    
    
    362,574
    
    
    
    449,734
    
    
    
    555,084
    
    
    
    654,831
    
    
    
    762,619
 
 (1)
    
    Fab 2 produces 150mm wafers. Fabs 3, 5, 6, 8, 10, Fab 11 (WaferTech) and SSMC produce 200mm
wafers. Fab 12 and Fab 14 produce 300mm wafers. Fabs 2, 3, 5, 8 and 12 are located in Hsinchu
Science Park. Fab 6 and Fab 14 are located in the Tainan Science Park. WaferTech is located in
the United States, SSMC is located in Singapore and Fab 10 is located in Shanghai.(2)
    
    In microns, as of year-end.(3)
    
    Estimated capacity in 200mm equivalent wafers as of year-end for the total technology range
available for production. Actual capacity during each year will be lower as new production
capacity is phased in during the course of the year.(4)
    
    Under an agreement with Vanguard, TSMC is required to use its best commercial efforts to
maintain utilization of a fixed amount of reserved capacity and will not increase or decrease
the stipulated quantity by more than 5,000 wafers per month. Please see Item 7. Major
Shareholders and Related Party Transaction  Related Party Transactions  Vanguard
International Semiconductor Corporation for a discussion of certain of the Vanguard contract
terms. The amounts to be used at Vanguard are not included in our monthly capacity figures.(5)
    
    Fab 4, which commenced operation in 1999 with initial technology of 0.5 micron, was
consolidated into Fab 3 during the fourth quarter of 2001.(6)
    
    Represents that portion of the total capacity that we had the option to utilize as of
December 31, 2003, December 31, 2004, December 31, 2005, December 31, 2006 and December 31,
2007. This fab commenced production in September 2000.(7)
    
    Fab 7 was decommissioned in June 2006 as we integrated its manufacturing facility as a part
of Fab 12s operation.    Capacity Expansion and Technology Upgrade Plans
  -14-




---



##### Table of Contents




    
    ramping up production at Fab 12 (Phase III), Fab 14 (Phase II) and Fab 10;
    
    Fab 12 and Fab 14 facilities;
    
    capacity expansion for mask and back-end operations; and
    
    development of process technologies in 45-nanometer and below and other research
and development projects.
  Markets and Customers
  Year ended December 31,2005
    
    2006
    
    2007Customer Type
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage(in millions, except percentages)Fabless
semiconductor
companies/systems
companies
    
    NT$
    187,662
    
    
    
    70.4
    %
    
    NT$
    229,168
    
    
    
    72.2
    %
    
    NT$
    215,662
    
    
    
    66.8
    %Integrated device
manufacturers
    
    
    78,903
    
    
    
    29.6
    %
    
    
    88,239
    
    
    
    27.8
    %
    
    
    106,968
    
    
    
    33.2
    %Total
    
    NT$
    266,565
    
    
    
    100.0
    %
    
    NT$
    317,407
    
    
    
    100.0
    %
    
    NT$
    322,630
    
    
    
    100.0
    %
  Year ended December 31,2005
    
    2006
    
    2007Region
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage(in millions, except percentages)North America
    
    NT$
    205,255
    
    
    
    77.0
    %
    
    NT$
    247,895
    
    
    
    78.1
    %
    
    NT$
    247,832
    
    
    
    76.8
    %Asia
    
    
    40,785
    
    
    
    15.3
    %
    
    
    43,167
    
    
    
    13.6
    %
    
    
    45,128
    
    
    
    14.0
    %Europe
    
    
    20,525
    
    
    
    7.7
    %
    
    
    26,345
    
    
    
    8.3
    %
    
    
    29,670
    
    
    
    9.2
    %Total
    
    NT$
    266,565
    
    
    
    100.0
    %
    
    NT$
    317,407
    
    
    
    100.0
    %
    
    NT$
    322,630
    
    
    
    100.0
    %
    -15-




---



##### Table of Contents



Commitments by Customers.
  The Semiconductor Fabrication Process
  Our Foundry Services
 Range of Services.
 Fabrication Processes.
 Types of Semiconductors We Manufacture.
  Logic Semiconductors.
 -16-




---



##### Table of Contents



Mixed-Signal/RF Semiconductors. SM
 Memory Semiconductors
 CMOS Image Sensor Semiconductors
 High Voltage Semiconductors.
  Year ended December 31,2005
    
    2006
    
    2007Semiconductor Type
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage(in millions, except percentages)CMOSLogic
    

    NT$199,657
    


    
    
    74.9
    %
    

    NT$240,278
    

    
    
    75.7
    %
    

    NT$234,354
    

    
    
    72.6
    %Memory
    
    
    2,133
    
    
    
    0.8
    %
    
    
    3,174
    
    
    
    1.0
    %
    
    
    5,156
    
    
    
    1.6
    %Mixed-Signal(1)
    
    
    63,442
    
    
    
    23.8
    %
    
    
    71,734
    
    
    
    22.6
    %
    
    
    80,247
    
    
    
    24.9
    %BiCMOS(2)
    
    
    1,066
    
    
    
    0.4
    %
    
    
    1,904
    
    
    
    0.6
    %
    
    
    2,517
    
    
    
    0.8
    %Others
    
    
    267
    
    
    
    0.1
    %
    
    
    317
    
    
    
    0.1
    %
    
    
    356
    
    
    
    0.1
    %Total
    
    NT$266,565
    

    
    
    100.0
    %
    
    NT$317,407
    

    
    
    100.0
    %
    
    NT$322,630
    

    
    
    100.0
    %
 
 (1)
    
    Mixed-signal semiconductors made with the CMOS process.(2)
    
    Mixed-signal and other semiconductors made with the BiCMOS process. Design and Technology Platforms.
    -17-




---



##### Table of Contents



Multi-project Wafers Program (CyberShuttle).
  Customer Service
  
    
    firmly established customer-oriented culture, which emphasizes close interaction
with our customers on a multifaceted basis, from senior management, sales and
marketing, customer service staff to product and line engineers in the fabs and
research and development staff;
    
    ability to deliver ordered wafers of consistent quality, on time and in the desired
quantities;
    
    responsiveness to customers requirements in terms of engineering change orders and
special wafer handling;
    
    flexibility in manufacturing processes, order size requirements and design changes,
attributable in part to our technical capability and ability to plan and manage
effectively many production runs;
    
    ability to reduce customer costs through the sharing, to the extent permissible, of
ever increasing silicon verification costs through our multi-project wafer service,
which combines multiple designs on a single mask set;
    
    eFoundry service which features real-time on-line information exchange throughout
product design, engineering and logistic phases, including WIP (work in progress)
performance reports for both in-house and subcontracted activities, for the processes
of handling, assembly and final testing, before the products are shipped to our
customers; and
    
    Virtual fab, which is a customer service program designed to make our
manufacturing services as transparent and easy to deal with for our customers as their
own in-house fabs, with well coordinated resource management. The Virtual fab
provides customers with the benefits of in-house fabs, including confidentiality of
proprietary information, quality of service and products, on-time delivery and
flexibility in scheduling and capacity.
 -18-




---



##### Table of Contents



Research and Development
 SM
    Equipment
   Raw Materials
  -19-




---



##### Table of Contents



Competition
  Environmental Regulation
    -20-




---



##### Table of Contents



Electricity and Water
  Risk Management
  
 ITEM 4A.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 5.
    
    OPERATING AND FINANCIAL REVIEWS AND PROSPECTS
 Overview
   
    
    the worldwide demand for semiconductor products;
    
    pricing;
    
    the worldwide semiconductor production capacity as well as our production capacity;
    
    capacity utilization;
 -21-




---



##### Table of Contents




    
    technology migration; and
    
    fluctuation in foreign currency exchange rate.
 Substantial Fixed Costs for Production Capacity.
 Technology Migration.
  Year ended December 31,2005
    
    2006
    
    2007Percentage of total wafer
    
    Percentage of total wafer
    
    Percentage of total waferResolution
    
    revenue(1)
    
    revenue(1)
    
    revenue(1)£65 nanometer
    
    
    
    
    
    
    
    
    
    
    6
    %90 nanometer
    
    
    9
    %
    
    
    23
    %
    
    
    26
    %0.13 micron
    
    
    36
    %
    
    
    26
    %
    
    
    23
    %0.15 micron
    
    
    9
    %
    
    
    10
    %
    
    
    9
    %0.18 micron
    
    
    24
    %
    
    
    22
    %
    
    
    20
    %0.25 micron
    
    
    10
    %
    
    
    8
    %
    
    
    7
    %0.35 micron
    
    
    6
    %
    
    
    6
    %
    
    
    5
    %30.5 micron
    
    
    6
    %
    
    
    5
    %
    
    
    4
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Percentages represent wafer revenue by technology as a percentage of total revenue from
wafer sales, which exclude revenue not associated with wafer sales, such as revenue from
testing and masks. Total wafer revenue excludes sales returns and allowances. Pricing.
 Critical Accounting Policies
  -22-




---



##### Table of Contents



Revenue recognition.
  Allowances for doubtful accounts.
  Inventory valuation.
  Valuation allowance for deferred tax assets.
 -23-




---



##### Table of Contents



Valuation of long-lived assets and intangible assets.
 
    
    significant under performance relative to historical or projected future operating
results;
    
    significant changes in the manner of our use of the acquired assets or our overall
business strategy; and
    
    significant unfavorable industry or economic trends.
    -24-




---



##### Table of Contents



Goodwill .
 
    
    significant decline in our stock price for a sustained period; and
    
    significant decline in our market capitalization relative to net book value.
    Accounting for investments in private and publicly-traded securities.
  Results of Operations
  -25-




---



##### Table of Contents



For the year ended December 31,2005
    
    2006
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    (55.7
    )%
    
    
    (50.9
    )%
    
    
    (55.9
    )%Gross profit
    
    
    44.3
    %
    
    
    49.1
    %
    
    
    44.1
    %Operating expensesGeneral and administrative
    
    
    (3.4
    )%
    
    
    (2.7
    )%
    
    
    (2.8
    )%Sales and marketing
    
    
    (1.6
    )%
    
    
    (1.2
    )%
    
    
    (1.2
    )%Research and development
    
    
    (5.3
    )%
    
    
    (5.1
    )%
    
    
    (5.5
    )%Total operating expenses
    
    
    (10.3
    )%
    
    
    (9.0
    )%
    
    
    (9.5
    )%Income from operations
    
    
    34.0
    %
    
    
    40.1
    %
    
    
    34.6
    %Non-operating income and gains
    
    
    3.5
    %
    
    
    3.0
    %
    
    
    3.7
    %Non-operating expenses and losses
    
    
    (2.2
    )%
    
    
    (1.1
    )%
    
    
    (0.6
    )%Income before income tax and minority interest
    
    
    35.3
    %
    
    
    42.0
    %
    
    
    37.7
    %Income tax benefit (expense)
    
    
    (0.2
    )%
    
    
    (2.4
    )%
    
    
    (3.6
    )%Income before cumulative effect of changes in
accounting principles
    
    
    35.1
    %
    
    
    39.6
    %
    
    
    34.1
    %Cumulative effect of changes in accounting principles
    
    
    
    
    
    
    0.5
    %
    
    
    Income before minority interest
    
    
    35.1
    %
    
    
    40.1
    %
    
    
    34.1
    %Minority interest in loss (income) of subsidiaries
    
    
    0.0
    %
    
    
    (0.1
    )%
    
    
    (0.3
    )%Net income
    
    
    35.1
    %
    
    
    40.0
    %
    
    
    33.8
    %
 Year to Year Comparisons
 Net Sales and Gross Margin
 For the Year Ended December 31,% Change
    
    
    
    
    
    
    
    
    
    % Change2005
    
    2006
    
    from 2005
    
    2007
    
    from 2006NT$
    
    NT$
    
    
    
    
    
    NT$
    
    US$(in millions)
    
    
    
    
    
    (in millions)Net sales
    
    
    266,565
    
    
    
    317,407
    
    
    
    19.1
    %
    
    
    322,630
    
    
    
    9,948
    
    
    
    1.6
    %Cost of sales
    
    
    (148,362
    )
    
    
    (161,597
    )
    
    
    8.9
    %
    
    
    (180,280
    )
    
    
    (5,559
    )
    
    
    11.6
    %Gross profit
    
    
    118,203
    
    
    
    155,810
    
    
    
    31.8
    %
    
    
    142,350
    
    
    
    4,389
    
    
    
    (8.6
    )%Gross margin percentage
    
    
    44.3
    %
    
    
    49.1
    %
    
    
    
    
    
    
    44.1
    %
    
    
    44.1
    %
    
    
    
 Net Sales
   -26-




---



##### Table of Contents



Gross Margin
   Operating Expenses
 For the Year Ended December 31% Change
    
    
    
    
    
    
    
    
    
    % Change2005
    
    2006
    
    from 2005
    
    2007
    
    from 2006NT$
    
    NT$
    
    
    
    
    
    NT$
    
    US$(in millions)
    
    
    
    
    
    (in millions)Research and development
    
    
    14,017
    
    
    
    16,076
    
    
    
    14.7
    %
    
    
    17,946
    
    
    
    553
    
    
    
    11.6
    %General and administrative
    
    
    9,085
    
    
    
    8,717
    
    
    
    (4.1
    )%
    
    
    8,964
    
    
    
    276
    
    
    
    2.8
    %Sales and marketing
    
    
    4,132
    
    
    
    3,752
    
    
    
    (9.2
    )%
    
    
    3,718
    
    
    
    115
    
    
    
    (0.9
    )%Total operating expenses
    
    
    27,234
    
    
    
    28,545
    
    
    
    4.8
    %
    
    
    30,628
    
    
    
    944
    
    
    
    7.3
    %Percentage of net sales
    
    
    10.3
    %
    
    
    9.0
    %
    
    
    
    
    
    
    9.5
    %
    
    
    9.5
    %
    
    
    Income from operations
    
    
    90,969
    
    
    
    127,265
    
    
    
    39.9
    %
    
    
    111,722
    
    
    
    3,445
    
    
    
    (12.2
    )%Operating Margin
    
    
    34.0
    %
    
    
    40.1
    %
    
    
    
    
    
    
    34.6
    %
    
    
    34.6
    %
    
    
    
  -27-




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##### Table of Contents



Research and Development Expenses
   General and Administrative, Sales and Marketing Expenses
   Non-Operating Income and Expenses
 For the Year Ended December 31% Change
    
    
    
    
    
    
    
    
    
    % Change2005(1)
    
    2006(1)
    
    from 2005
    
    2007
    
    from 2006NT$
    
    NT$
    
    
    
    
    
    NT$
    
    US$(in millions)
    
    
    
    
    
    (in millions)Non-operating income and gains
    
    
    9,399
    
    
    
    9,705
    
    
    
    3.3
    %
    
    
    11,934
    
    
    
    368
    
    
    
    23.0
    %Non-operating expenses and losses
    
    
    (6,105
    )
    
    
    (3,608
    )
    
    
    (40.9
    )%
    
    
    (2,014
    )
    
    
    (62
    )
    
    
    (44.2
    )%Net non-operating income (expenses)
    
    
    3,294
    
    
    
    6,097
    
    
    
    85.1
    %
    
    
    9,920
    
    
    
    306
    
    
    
    62.7
    %
 
 (1)
    
    As a result of the adoption of the newly released R.O.C. SFAS No. 34 and R.O.C. SFAS No.
36, the amounts for the fiscal year ended December 31, 2005 were reclassified for comparison
purposes. Such reclassifications resulted in a change of non-operating income and gains from
NT$7,068 million to NT$9,399 million for the year ended December 31, 2005, and in a change of
non-operating expenses and losses from NT$3,773 million to NT$6,105 million for the year ended
December 31, 2005. See note 4 to our consolidated financial statements for additional details
about these new accounting standards.  -28-




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##### Table of Contents



Income Tax Benefit (Expense)
 For the Year Ended December 31% Change
    
    
    
    
    
    
    
    
    
    % Change2005
    
    2006
    
    from 2005
    
    2007
    
    from 2006NT$
    
    NT$
    
    
    
    
    
    NT$
    
    US$(in millions)
    
    
    
    
    
    (in millions)Income tax benefit (expense)
    
    
    (630
    )
    
    
    (7,774
    )
    
    
    1,132.8
    %
    
    
    (11,710
    )
    
    
    (361
    )
    
    
    50.6
    %Cumulative effect of
changes in accounting
principles
    
    
    
    
    
    
    1,607
    
    
    
    (1)
    %
    
    
    
    
    
    
    
    
    
    
    (1)
    %Net income
    
    
    93,575
    
    
    
    127,010
    
    
    
    35.7
    %
    
    
    109,177
    
    
    
    3,367
    
    
    
    (14.0
    )%Net margin
    
    
    35.1
    %
    
    
    40.0
    %
    
    
    
    
    
    
    33.8
    %
    
    
    33.8
    %
    
    
    
 
 (1)
    
    Not meaningful.   -29-




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##### Table of Contents



Cumulative Effect of Changes in Accounting Principles
  Liquidity and Capital Resources
  For the year ended December 31,2005(1)
    
    2006
    
    2007NT$
    
    NT$
    
    NT$
    
    US$(in millions)
    
    (in millions)Net cash provided by
operating activities
    
    
    157,225
    
    
    
    204,997
    
    
    
    183,766
    
    
    
    5,667Net cash used in
investing activities
    
    
    (77,652
    )
    
    
    (119,724
    )
    
    
    (70,689
    )
    
    
    (2,180
    )Net cash used in financing activities
    
    
    (57,969
    )
    
    
    (63,783
    )
    
    
    (135,410
    )
    
    
    (4,175
    )Net increase/(decrease)
in cash
    
    
    22,181
    
    
    
    21,353
    
    
    
    (22,851
    )
    
    
    (705
    )
 
 (1)
    
    As a result of the adoption of the newly released R.O.C. SFAS No. 34 and SFAS No. 36, the
amounts for the fiscal year ended December 31, 2005 were reclassified for comparison purposes.
Such reclassifications resulted in a change of net cash provided by operating activities from
NT$157,013 million to NT$157,225 million for the year ended December 31, 2005, and in a change
of net cash used in investing activities from NT$77,440 million to NT$77,652 million for the
year ended December 31, 2005. See note 4 to our consolidated financial statements for
additional details about these new accounting standards. Operating Activities
    -30-




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##### Table of Contents



Investing Activities
  
    
    ramping up production at Fab 12 (Phases II and III), Fab 14 (Phase II) and Fab 10;
    
    capacity expansion for mask operations;
    
    developing process technologies which include 32- and 45-nanometer nodes; and
    
    other research and development projects.
   Financing Activities
    -31-




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##### Table of Contents



Cash Requirements
  Long-term debtNT$(in millions)During 2008
    
    
    281During 2009
    
    
    8,302During 2010
    
    
    947During 2011
    
    
    221During 2012 and thereafter
    
    
    4,752
  Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 Years(in NT$ millions)Long-Term Debt(1)
    
    
    14,503
    
    
    
    281
    
    
    
    9,249
    
    
    
    4,872
    
    
    
    101Capital Lease Obligations(2)
    
    
    726
    
    
    
    4
    
    
    
    83
    
    
    
    81
    
    
    
    558Operating Leases(3)
    
    
    4,463
    
    
    
    557
    
    
    
    1,004
    
    
    
    623
    
    
    
    2,279Other Payments(4)
    
    
    13,083
    
    
    
    3,673
    
    
    
    1,080
    
    
    
    422
    
    
    
    7,908Capital Purchase or other Purchase
Obligations(5)
    
    
    36,831
    
    
    
    35,736
    
    
    
    1,092
    
    
    
    3
    
    
    
    Total Contractual Cash Obligations(6)
    
    
    69,606
    
    
    
    40,251
    
    
    
    12,508
    
    
    
    6,001
    
    
    
    10,846
 
 (1)
    
    Includes loan payable and bond payable but excludes relevant interest payments.(2)
    
    Capital lease obligations represent our commitment for leases of property, which are
described in note 13 to our consolidated financial statements.(3)
    
    Operating lease obligations are described in note 27 to our consolidated financial
statements.(4)
    
    Includes royalty and license payments, as well as payables for acquisition of property, plant
and equipment, but excludes payments that vary based upon our net sales of certain products
and our sales volume of certain other products.(5)
    
    Represents commitments for construction or purchase of equipment, raw material and other
property or services. These commitments are not recorded on our balance sheet as of December
31, 2007, as we have not received related goods or taken title of the property.(6)
    
    Minimum pension funding requirement is not included since such amounts have not been
determined. We made pension contributions of approximately NT$209 million in 2007 and we
estimate that we will contribute approximately NT$204 million to the pension fund in 2008. See
note 18 to our consolidated financial statements for additional details regarding our pension
plan.  -32-




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##### Table of Contents



U.S. GAAP Reconciliation
  Year ended and as of December 31,2005
    
    2006
    
    2007NT$
    
    NT$
    
    NT$
    
    US$(in NT$ millions)Net income in accordance with:R.O.C. GAAP
    
    
    93,575
    
    
    
    127,010
    
    
    
    109,177
    
    
    
    3,367U.S. GAAP
    
    
    75,418
    
    
    
    95,711
    
    
    
    71,658
    
    
    
    2,210Shareholders equity attributable to the shareholders of the parent in accordance with:R.O.C. GAAP
    
    
    445,631
    
    
    
    507,981
    
    
    
    487,092
    
    
    
    15,020U.S. GAAP
    
    
    477,297
    
    
    
    532,403
    
    
    
    513,228
    
    
    
    15,826
   -33-




---



##### Table of Contents



-34-




---



##### Table of Contents



Taxation
    Off-Balance Sheet Arrangements
  Inflation
  Recent Accounting Pronouncements
   -35-




---



##### Table of Contents



ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Executive Officers
 MANAGEMENT
       -36-




---



##### Table of Contents



YearsTerm
    
    with ourName
    
    Position with our company
    
    Expires
    
    companyMorris Chang
    
    Chairman
    
    
    2009
    
    
    
    21F.C. Tseng
    
    Vice Chairman
    
    
    2009
    
    
    
    21Stan Shih
    
    Director
    
    
    2009
    
    
    
    8Chintay Shih
    
    Director (Representative of the National Development Fund)
    
    
    2009
    
    
    
    11Sir Peter Leahy Bonfield
    
    Director
    
    
    2009
    
    
    
    6Lester Carl Thurow
    
    Director
    
    
    2009
    
    
    
    6Carleton (Carly) S. Fiorina
    
    Director
    
    
    2009
    
    
    
    2Rick Tsai
    
    Director, President & Chief Executive Officer
    
    
    2009
    
    
    
    18Stephen Tso
    
    Senior Vice President & Chief Information Officer
    
    
    
    
    
    
    11Kenneth Kin(1)
    
    Senior Vice President of Special Projects
    
    
    
    
    
    
    7Mark Liu
    
    Senior Vice President of Advanced Technology Business
    
    
    
    
    
    
    14C.C. Wei
    
    Senior Vice President of Mainstream Technology Business
    
    
    
    
    
    
    10Richard Thurston
    
    Vice President & General Counsel
    
    
    
    
    
    
    6M.C. Tzeng
    
    Vice President of Mainstream Technology Business
    
    
    
    
    
    
    21Lora Ho
    
    Vice President, Chief Financial Officer and Spokesperson
    
    
    
    
    
    
    9P.H. Chang
    
    Vice President of Corporate Human Resources
    
    
    
    
    
    
    8W.J. Lo
    
    Vice President of Research and Development
    
    
    
    
    
    
    4Jason Chen
    
    Vice President of Worldwide Sales and Marketing
    
    
    
    
    
    
    3Fu-Chieh Hsu
    
    Vice President of Design and Technology Platform
    
    
    
    
    
    
    2Jack Sun
    
    Vice President of Research and Development
    
    
    
    
    
    
    11Y.P. Chin
    
    Vice President of Advanced Technology Business
    
    
    
    
    
    
    21N.S. Tsai
    
    Vice President of Quality and Reliability
    
    
    
    
    
    
    19
 
 (1)
    
    On February 29, 2008, TSMC announced that it has approved the request of Dr. Kenneth Kin,
former Senior Vice President of Worldwide Sales and Service, to retire at the end of this
year. Morris Chang
 F.C. Tseng
 Stan Shih
 -37-




---



##### Table of Contents



Chintay Shih
 Sir Peter Leahy Bonfield
 Lester Carl Thurow
 Carleton (Carly) S. Fiorina
 Rick Tsai
 Stephen Tso
 Kenneth Kin
 Mark Liu
 C.C. Wei
 -38-




---



##### Table of Contents



Richard Thurston
 M.C. Tzeng
 Lora Ho
 P.H. Chang
 W.J. Lo
 Jason Chen
 Fu-Chieh Hsu
 Jack Sun
 Y.P. Chin
 N.S. Tsai
  -39-




---



##### Table of Contents



Share Ownership
  Percentage ofTotal
    
    Number ofOutstanding
    
    Common SharesNumber of Common
    
    Common
    
    UnderlyingName of Shareholders
    
    Shares Owned(2)
    
    Shares
    
    Stock Options(3)Morris Chang, Chairman
    
    
    116,637,208
    
    
    
    0.46
    %
    
    
    805,873F.C. Tseng, Vice Chairman
    
    
    36,602,589
    
    
    
    0.14
    %
    
    
    Stan Shih, Director
    
    
    1,465,534
    
    
    
    0.01
    %
    
    
    Chintay Shih, Director(1)
    
    
    1,637,228,303
    
    
    
    6.39
    %
    
    
    Lester Carl Thurow, Director
    
    
    0
    
    
    
    0.00
    %
    
    
    Sir Peter Leahy Bonfield, Director
    
    
    0
    
    
    
    0.00
    %
    
    
    Carleton (Carly) S. Fiorina, Director
    
    
    0
    
    
    
    0.00
    %
    
    
    Rick Tsai, Director, President & CEO
    
    
    31,261,025
    
    
    
    0.12
    %
    
    
    805,873Stephen Tso, Senior Vice President & Chief
Information Officer
    
    
    14,262,599
    
    
    
    0.06
    %
    
    
    408,885Kenneth Kin, Senior Vice President
    
    
    6,030,912
    
    
    
    0.02
    %
    
    
    391,112Mark Liu, Senior Vice President
    
    
    12,181,439
    
    
    
    0.05
    %
    
    
    805,873C.C. Wei, Senior Vice President
    
    
    8,044,114
    
    
    
    0.03
    %
    
    
    269,959Richard Thurston, Vice President & General
Counsel
    
    
    3,360,833
    
    
    
    0.01
    %
    
    
    85,517M.C. Tzeng, Vice President
    
    
    7,057,682
    
    
    
    0.03
    %
    
    
    Lora Ho, Vice President & CFO & Spokesperson
    
    
    5,681,674
    
    
    
    0.02
    %
    
    
    P.H. Chang, Vice President
    
    
    3,775,456
    
    
    
    0.01
    %
    
    
    W.J. Lo, Vice President
    
    
    2,095,378
    
    
    
    0.01
    %
    
    
    Jason Chen, Vice President
    
    
    1,782,270
    
    
    
    0.01
    %
    
    
    Fu-Chieh Hsu, Vice President
    
    
    1,350,874
    
    
    
    0.01
    %
    
    
    Jack Sun, Vice President
    
    
    5,070,698
    
    
    
    0.02
    %
    
    
    124,542Y.P. Chin, Vice President
    
    
    5,694,537
    
    
    
    0.02
    %
    
    
    N.S. Tsai, Vice President
    
    
    1,969,556
    
    
    
    0.01
    %
    
    
    
 
 (1)
    
    Represents shares held by the National Development Fund of the Executive Yuan.(2)
    
    Except for the number of shares held by the National Development Fund of the Executive Yuan,
the disclosed number of shares owned by the directors and executive officers does not include
any common shares held in ADS form by such individuals as such individual ownership of ADSs
has not been disclosed to shareholders or otherwise made public and each of these individuals
owns less than one percent of all common shares outstanding as of February 29, 2008.(3)
    
    The stock options granted to our officers on March 7, 2003 under the 2002 Stock Option Plan
all have an adjusted exercise price of NT$25.9 and all will expire on March 6, 2013 if not
previously exercised. The options were granted to certain of our officers as a result of their
voluntary selection to exchange part of their profit sharing to stock options. The number of
common shares underlying stock options include additional shares due to stock dividends
distributed in 2004, 2005, 2006 and 2007. Compensation
  -40-




---



##### Table of Contents



Board Practices
 General
  Audit Committee
     Compensation Committee
    Employees
  -41-




---



##### Table of Contents



As of December 31,Function
    
    2005
    
    2006
    
    2007Managers
    
    
    2,077
    
    
    
    2,313
    
    
    
    2,520Professionals
    
    
    7,769
    
    
    
    8,222
    
    
    
    8,814Assistant Engineers/Clericals
    
    
    950
    
    
    
    893
    
    
    
    844Technicians
    
    
    10,700
    
    
    
    10,818
    
    
    
    10,842Total
    
    
    21,496
    
    
    
    22,246
    
    
    
    23,020
  As of December 31,Location of Facility and Principal Offices
    
    2005
    
    2006
    
    2007Hsinchu Science Park, Taiwan
    
    
    14,869
    
    
    
    14,772
    
    
    
    14,892Tainan Science Park, Taiwan
    
    
    4,543
    
    
    
    5,035
    
    
    
    5,360China
    
    
    860
    
    
    
    1,180
    
    
    
    1,457North America
    
    
    1,171
    
    
    
    1,204
    
    
    
    1,255Europe
    
    
    23
    
    
    
    26
    
    
    
    27Japan
    
    
    30
    
    
    
    28
    
    
    
    27Korea
    
    
    0
    
    
    
    1
    
    
    
    2Total
    
    
    21,496
    
    
    
    22,246
    
    
    
    23,020
     -42-




---



##### Table of Contents



Common Shares Issuable under2002 Employee StockOption Plan (December 31,
    
    2003 Employee Stock
    
    2004 Employee StockName
    
    2006 vesting)
    
    Option Plan
    
    Option PlanMorris Chang
    
    
    805,873
    
    
    
    
    
    
    
    Rick Tsai
    
    
    805,873
    
    
    
    
    
    
    
    Mark Liu
    
    
    805,873
    
    
    
    
    
    
    
    Stephen Tso
    
    
    408,885
    
    
    
    
    
    
    
    Kenneth Kin
    
    
    391,112
    
    
    
    
    
    
    
    C.C. Wei
    
    
    269,959
    
    
    
    
    
    
    
    Jack Sun
    
    
    124,542
    
    
    
    
    
    
    
    Richard Thurston
    
    
    85,517
    
    
    
    
    
    
    
    
   
 ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 Major Shareholders
  -43-




---



##### Table of Contents



Percentage of TotalNumber of Common
    
    Outstanding CommonNames of Shareholders
    
    Shares Owned
    
    SharesNational Development Fund(1)
    
    
    1,637,228,303
    
    
    
    6.4
    %Capital Research Global Investors(2)
    
    
    1,365,596,200
    
    
    
    5.2
    %Philips
    
    
    1,311,490,224
    
    
    
    5.1
    %Directors and executive officers as a group(3)
    
    
    264,324,378
    
    
    
    1.0
    %
 
 (1)
    
    Excludes any common shares that may be owned by other funds controlled by the R.O.C.
government. The National Development Fund was previously named Development Fund. One of our
eight directors is a representative of the National Development Fund.(2)
    
    According to the Schedule 13G of Capital Research Global Investors (CRGI) filed with the
Securities and Exchange Commission on February 11, 2008, CRGI beneficially owned 1,365,596,200
common shares as of February 11, 2008. We do not have further information with respect to
CRGIs ownership in us subsequent to CRGIs Schedule 13G filed on February 11, 2008.(3)
    
    Excludes ownership of the National Development Fund.     Related Party Transactions
 Industrial Technology Research Institute
  
    
    A technical cooperation agreement signed in 1987 between ITRI and TSMC whereby ITRI
granted TSMC the license to use its metal-oxide-semiconductor technology and related
patents and copyrights to manufacture silicon MOS wafers and agreed to provide certain
associated assets and relevant technical assistance and information to us, in exchange
for a limited license from us for certain improvements and refinements related to
earlier research and development protects. The agreement also provides that the R.O.C.
Ministry of Economic Affairs, or the entity designated by the R.O.C. Ministry of
Economic Affairs, has an option to purchase up to 35% of certain of our capacity as
agreed in the agreement on favorable terms and conditions, provided that the exercise
of such option would not prejudice TSMCs outstanding customer commitments. The
original term of this agreement was for five years beginning January 1, 1987, is to be
automatically renewed for successive periods of five years unless otherwise terminated
by either party with one year prior notice. The agreement was automatically renewed in
1992, 1997, 2002, and on January 1, 2007.
 -44-




---



##### Table of Contents




    
    A patent license agreement dated September 29, 2005 exists between ITRI and TSMC
whereby ITRI grants TSMC the exclusive license to use certain patents in connection
with semiconductor technology in exchange for a fixed royalty payment. The term of
this agreement is from the effectiveness of the agreement to the end of the patent
term for each of the patents concerned.
    
    From time to time, we provide foundry services to ITRI. In 2005 and 2006, we had
total sales to ITRI of NT$90 million and NT$42 million, respectively, representing
less than 1% of our net sales in each year.
 Koninklijke Philips Electronics N.V. and its Affiliates (Philips)
  
    
    On December 31, 1986, we entered into a technology cooperation agreement with
Philips pursuant to which Philips initially had provided us with certain process and
technical information for the production of unencapsulated MOS integrated circuits in
wafer form. This agreement was amended on May 12, 1997 and extended for ten years. The
agreement was further modified on June 20, 2004 and extended to December 31, 2008 (the
Technology Cooperation Agreement). Under the June 20, 2004 amendments, which took
retroactive effect on January 1, 2004, we agreed with Philips to cross license certain
patents to each other on a non-exclusive, royalty-free basis. In addition, Philips
obtained coverage for TSMC under certain of its patent cross licensing arrangements
with other companies (as identified in the agreement) and TSMC has been paying the
agreed upon consideration. The Technology Cooperation Agreement will not be
automatically renewed upon expiration. However, the patent cross license arrangement
between TSMC and Philips will survive the expiration of Technical Cooperation
Agreement and had been assigned by Philips to NXP.
    
    In 2005 and 2006, we had total sales to Philips and its affiliates of NT$3,299
million and NT$4,025 million, representing 1.2% and 1.3% of our total net sales in
2005 and 2006, respectively. Subsequent to the sale by Philips in September 2006 of an
80.1% equity interest in Philips Semiconductors to a consortium of private equity
investors, Philips Semiconductors was renamed as NXP and ceased to be a related party
of us.
    
    Effective January 1, 2006, we entered into a Joint Technology Cooperation Agreement
with Philips, Freescale Semiconductor, Inc. and ST Microelectronics to jointly develop
45-nanometers and beyond advanced CMOS Logic and e-DRAM technologies. We will
contribute process technologies and share a portion of the costs associated with this
joint development project. This agreement was terminated on January 26, 2008.
 Vanguard International Semiconductor Corporation
   -45-




---



##### Table of Contents



Systems on Silicon Manufacturing Company Pte. Ltd. (SSMC)
   VisEra Technologies Company, Ltd.
   -46-




---



##### Table of Contents



ITEM 8.
    
    FINANCIAL INFORMATION
 Consolidated Financial Statements and Other Financial Information
  Legal Proceedings
     Dividends and Dividend Policy
  -47-




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##### Table of Contents



Cash Dividends
    
    Stock dividends
    
    Total shares issued
    
    Outstanding commonPer Share
    
    Per 100 shares
    
    as stock dividends
    
    shares at year endNT$2003
    
    
    
    
    
    
    8.00000
    
    
    
    1,489,830,940
    
    
    
    20,266,618,9842004
    
    
    0.6037
    
    
    
    14.08668
    
    
    
    2,837,326,658
    
    
    
    23,251,963,6932005
    
    
    1.9998
    
    
    
    4.99971
    
    
    
    1,162,602,422
    
    
    
    24,730,024,6472006
    
    
    2.4991
    
    
    
    2.99903
    (1)
    
    
    741,900,740
    (1)
    
    
    25,829,687,8462007
    
    
    2.9995
    
    
    
    0.49991
    (2)
    
    
    129,148,440
    (2)
    
    
    25,627,103,715
 
 (1)
    
    50% of the stock dividends were paid out of retained earnings and 50% were from
capitalization of capital surplus.(2)
    
    40% of the stock dividends were paid out of retained earnings and 60% were from
capitalization of capital surplus.      
 ITEM 9.
    
    THE OFFER AND LISTING
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Taiwan Stock Exchange
    
    New York Stock Exchange(1)Closing price percommon share(2)
    
    
    
    Closing price per ADS(2)Average dailyTrading volume
    
    
    
    
    
    
    
    
    
    Average daily(in thousands of
    
    
    
    
    
    
    
    
    
    Trading volume (inHigh
    
    Low
    
    shares)(2)
    
    High
    
    Low
    
    thousands of ADSs)(2)(NT$)
    
    (NT$)
    
    
    
    
    
    (US$)
    
    (US$)2003
    
    
    50.41
    
    
    
    26.24
    
    
    
    57,902
    
    
    
    9.46
    
    
    
    4.34
    
    
    
    9,0712004
    
    
    48.29
    
    
    
    33.30
    
    
    
    57,467
    
    
    
    8.52
    
    
    
    5.57
    
    
    
    7,6732005
    
    
    56.57
    
    
    
    38.10
    
    
    
    54,382
    
    
    
    9.10
    
    
    
    6.44
    
    
    
    8,2042006
    
    
    64.63
    
    
    
    49.49
    
    
    
    42,198
    
    
    
    10.75
    
    
    
    7.64
    
    
    
    9,711First Quarter
    
    
    60.29
    
    
    
    52.23
    
    
    
    44,385
    
    
    
    9.86
    
    
    
    8.47
    
    
    
    9,706Second Quarter
    
    
    61.88
    
    
    
    49.49
    
    
    
    49,368
    
    
    
    10.16
    
    
    
    7.64
    
    
    
    9,513Third Quarter
    
    
    57.96
    
    
    
    50.35
    
    
    
    37,099
    
    
    
    9.53
    
    
    
    7.69
    
    
    
    93,498Fourth Quarter
    
    
    64.63
    
    
    
    55.68
    
    
    
    38,320
    
    
    
    10.75
    
    
    
    9.09
    
    
    
    10,2752007First Quarter
    
    
    67.77
    
    
    
    60.25
    
    
    
    64,727
    
    
    
    11.10
    
    
    
    9.72
    
    
    
    12,712Second Quarter
    
    
    70.9
    
    
    
    63.29
    
    
    
    53,964
    
    
    
    11.23
    
    
    
    9.83
    
    
    
    15,178Third Quarter
    
    
    73.0
    
    
    
    59.0
    
    
    
    60,868
    
    
    
    11.74
    
    
    
    9.11
    
    
    
    14,674Fourth Quarter
    
    
    65.0
    
    
    
    58.5
    
    
    
    67,916
    
    
    
    10.78
    
    
    
    9.27
    
    
    
    12,835October
    
    
    65.0
    
    
    
    60.6
    
    
    
    58,502
    
    
    
    10.78
    
    
    
    9.71
    
    
    
    15,121November
    
    
    64.2
    
    
    
    58.5
    
    
    
    64,796
    
    
    
    10.50
    
    
    
    9.27
    
    
    
    13,535December
    
    
    62.7
    
    
    
    58.8
    
    
    
    81,048
    
    
    
    10.30
    
    
    
    9.40
    
    
    
    9,4722008January
    
    
    60.5
    
    
    
    49.6
    
    
    
    69,659
    
    
    
    9.57
    
    
    
    7.99
    
    
    
    17,272February
    
    
    63.6
    
    
    
    59.9
    
    
    
    52,593
    
    
    
    10.24
    
    
    
    9.11
    
    
    
    14,375March
    
    
    67.4
    
    
    
    59.9
    
    
    
    66,525
    
    
    
    11.10
    
    
    
    9.63
    
    
    
    20,636April (through April 14, 2008)
    
    
    65.0
    
    
    
    61.8
    
    
    
    43,714
    
    
    
    10.66
    
    
    
    10.19
    
    
    
    17,638
 
 (1)
    
    Trading in ADSs commenced on October 8, 1997 on the New York Stock Exchange. Each ADS
represents the right to receive five common shares.(2)
    
    As adjusted for a 8.00000% stock dividend in July 2003, a NT$0.6037 cash dividend per
share and a 14.08668% stock dividend in July 2004, a NT$1.9998 cash dividend per share and a
4.99971% stock dividend in July 2005, a NT$2.4991 cash dividend per share and a 2.99903%
stock dividend in July 2006 and a NT$2.9995 cash dividend per share and a 0.49991% stock
dividend in July 2007.  
 ITEM 10.
    
    ADDITIONAL INFORMATION
 Description of Common Shares
  General
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##### Table of Contents



Dividends and Distributions
     Preemptive Rights and Issues of Additional Common Shares
  
    
    offerings by shareholders of outstanding shares; and
    
    offerings of new shares through a private placement approved at a shareholders
meeting.
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Meetings of Shareholders
  Voting Rights
     Other Rights of Shareholders
   -51-




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##### Table of Contents



Register of Shareholders and Record Dates
   Annual Financial Statements
  Acquisition of Common Shares by Us
     Liquidation Rights
  -52-




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##### Table of Contents



Transaction Restrictions
  Material Contracts
   Foreign Investment in the R.O.C.
      -53-




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##### Table of Contents



Depositary Receipts.
    
    
    dividends on or free distributions of shares;
    
    the exercise by holders of existing depositary receipts of their pre-emptive rights
in connection with capital increases for cash; or
    
    if permitted under the deposit agreement and custody agreement, the deposit of
common shares purchased by any person directly or through a depositary bank on the
Taiwan Stock Exchange or the GreTai Securities Market (as applicable) or held by such
person for deposit in the depositary receipt facility.
  -54-




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##### Table of Contents




    
    open a securities trading account with a local securities brokerage firm;
    
    remit funds; and
    
    exercise rights on securities and perform other matters as may be designated by the
holder.
   
    
    the net payment indicated on the withholding tax voucher issued by the tax
authority;
    
    the net investment gains as indicated on the holders certificate of tax payment;
or
    
    the aggregate transfer price as indicated on the income tax return for transfer of
tax-deferred dividend shares, whichever is applicable.
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##### Table of Contents



Direct Share Offerings
  Overseas Corporate Bonds
  
    
    converted by bondholders, other than citizens of the PRC and entities organized
under the laws of the PRC, into shares of R.O.C. companies; or
    
    subject to R.O.C. Financial Supervisory Commission approval, converted into
depositary receipts issued by the same R.O.C. company or by the issuing company of the
exchange shares, in the case of exchangeable bonds.
  Exchange Controls in the R.O.C.
    Voting of Deposited Securities
  -56-




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##### Table of Contents



Taxation
 R.O.C. Taxation
  
    
    an individual who is not an R.O.C. citizen, who owns ADSs and who is not physically
present in the R.O.C. for 183 days or more during any calendar year; or
    
    a corporation or a non-corporate body that is organized under the laws of a
jurisdiction other than the R.O.C. for profit-making purposes and has no fixed place of
business or other permanent establishment in the R.O.C.
  Dividends.
 -58-




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##### Table of Contents



Capital Gains.
 Subscription Rights.
  Securities Transaction Tax.
 Estate and Gift Tax .
 Tax Treaty.
 United States Federal Income Taxation
  
    
    dealers in securities;
    
    traders in securities that elect to use a mark-to-market method of accounting for
their securities holdings;
    
    tax-exempt organizations;
 -59-




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##### Table of Contents




    
    life insurance companies;
    
    persons liable for alternative minimum tax;
    
    persons that actually or constructively own 10% or more of our voting stock;
    
    persons that hold common shares or ADSs as part of a straddle or a hedging or
conversion transaction; or
    
    persons whose functional currency is not the U.S. dollar.
    
    
    a citizen or resident of the United States;
    
    a domestic corporation, or other entity subject to United States federal income tax
as a domestic corporation;
    
    an estate whose income is subject to United States federal income tax regardless of
its source; or
    
    a trust if a United States court can exercise primary supervision over the trusts
administration and one or more United States persons are authorized to control all
substantial decisions of the trust.
 We urge you to consult your own tax advisor regarding the United States federal, state and local
tax consequences of owning and disposing of common shares or ADSs in your particular circumstances.
 Taxation of Dividends
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##### Table of Contents



Pro rata
  Taxation of Capital Gains
  Passive Foreign Investment Company Rules
   
    
    at least 75% of our gross income for the taxable year is passive income; or
    
    at least 50% of the value, determined on the basis of a quarterly average, of our
assets is attributable to assets that produce or are held for the production of passive
income.
 -61-




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##### Table of Contents




    
    any gain you realize on the sale or other disposition of your common shares or ADSs;
and
    
    any excess distribution that we make to you (generally, any distributions to you
during a single taxable year that are greater than 125% of the average annual
distributions received by you in respect of the common shares or ADSs during the three
preceding taxable years or, if shorter, your holding period for the common shares or
ADSs).
  
    
    the gain or excess distribution will be allocated ratably over your holding period
for the common shares or ADSs,
    
    the amount allocated to the taxable year in which you realized the gain or excess
distribution will be taxed as ordinary income,
    
    the amount allocated to each prior year, with certain exceptions, will be taxed at
the highest tax rate in effect for that year, and
    
    the interest charge generally applicable to underpayments of tax will be imposed in
respect of the tax attributable to each such year.
     -62-




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##### Table of Contents



Non-U.S. Holders
  Information reporting and backup withholding
  Documents on Display
  -63-




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##### Table of Contents



Item 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
  Interest Rate Risks:
  As of December 31, 2007Expected Maturity Dates
    
    As of December 31, 20062012 and
    
    
    
    
    
    Aggregate
    
    
    
    
    
    Aggregate2008
    
    2009
    
    2010
    
    2011
    
    thereafter
    
    Total
    
    Fair Value
    
    Total
    
    Fair ValueLong-term debt (in millions)US$-denominated debtVariable rate
    
    
    
    
    
    
    
    
    
    US$
    20
    
    
    
    
    
    
    US$20
    
    US$20
    
    US$20
    
    US$20Average interest rate
    
    
    
    
    
    
    
    
    
    
    4.64
    %
    
    
    
    
    
    4.64%(2)
    
    
    
    5.43%(2)
    
    NT$-denominated debtVariable rate
    
    NT$
    279
    
    
    NT$
    302
    
    
    NT$
    298
    
    
    NT$221
    
    NT$252
    
    NT$1,352
    
    NT$1,352
    
    
    
    Average interest rate
    
    
    2.93
    %
    
    
    2.89
    %
    
    
    2.82
    %
    
    2.88%
    
    2.90%
    
    2.88%(2)
    
    Fixed rate
    
    NT$
    2
    
    
    NT$
    8,000
    
    
    
    
    
    
    
    
    NT$4,500
    
    NT$12,502
    
    NT$12,672(1)
    
    NT$19,506
    
    NT$19,823(1)Average interest rate
    
    
    0.00
    %
    
    
    2.75
    %
    
    
    
    
    
    
    
    3.00%
    
    2.84%(2)
    
    
    
    3.39%(2)
    
    
 
 (1)
    
    Represents the present value of expected cash flow discounted using the interest rate TSMC
may obtain for similar long-term debts.(2)
    
    Average interest rates under Total are the weighted average of the average interest rates
of each year for loan outstanding. Foreign Currency Risk:
  As of December 31, 2007
    
    As ofForward Exchange
    
    Expected Maturity Dates
    
    December 31, 2006Contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2012 and
    
    
    
    
    
    Aggregate
    
    
    
    
    
    Aggregate(in millions)
    
    2008
    
    2009
    
    2010
    
    2011
    
    thereafter
    
    Total
    
    Fair Value(1)
    
    Total
    

Fair Value(1)(Sell US$/Buy NT$)
Contract amount
    
    US$
    111
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    0
    
    US$111
    
    NT$5
    
    
    
    Average contractual
exchange rate
(against NT
dollars)
    
    
    32.49
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    0
    
    32.49
    
    0
    
    
    
    (Buy NT$/Sell EUR$)
Contract amount
    
    EUR$
    48
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    0
    
    EUR$48
    
    NT$(184)
    
    
    
    Average contractual
exchange rate
(against NT$
dollars)
    
    
    43.55
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    0
    
    43.55
    
    0
    
    
    
    
 -64-




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##### Table of Contents



As of December 31, 2007
    
    As ofForeign Exchange
    
    Expected Maturity Dates
    
    December 31, 2006Contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2012 and
    
    
    
    
    
    Aggregate
    
    
    
    
    
    Aggregate(in millions)
    
    2008
    
    2009
    
    2010
    
    2011
    
    thereafter
    
    Total
    
    Fair Value(1)
    
    Total
    
    Fair Value(1)(Buy JPY/Sell US$)
Contract amount
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    0
    
    0
    
    0
    
    US$0.3
    
    NT$(0.1)Average contractual
exchange rate
(against US
dollars)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    0
    
    0
    
    0
    
    117.52
    
    
 As of December 31, 2007
    
    As ofExpected Maturity Dates
    
    December 31, 2006AggregateCross Currency Swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2012 and
    
    
    
    
    
    Aggregate
    
    
    
    
    
    Fair(in millions)
    
    2008
    
    2009
    
    2010
    
    2011
    
    thereafter
    
    Total
    
    Fair Value(1)
    
    Total
    
    Value(1)(Sell US$/Buy NT$)
Contract amount
    
    US$975
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    US$975
    
    NT$(28)
    
    US$820
    
    (NT$33.85)Range of interest rate paid
    
    3.53%-5.6%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Range of interest rate received
    
    0.02%-3.01%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Fair value represents the amount of the receivable from or payable to the counter-parties if
the contracts were terminated on the balance sheet date. Other Market Risk.
  
 ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  -65-




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##### Table of Contents



ITEM 15.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures.
 Managements Annual Report on Internal Control Over Financial Reporting.
  Changes in Internal Control Over Financial Reporting.
 Attestation Report of the Registered Public Accounting Firm.
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
   -66-




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##### Table of Contents



Internal
ControlIntegrated Framework
  
  
 ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B.
    
    CODE OF ETHICS
  invest@tsmc.com
 
 ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  -67-




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##### Table of Contents



2006
    
    2007NT$
    
    NT$(In thousands)Audit Fees
    
    
    59,570
    
    
    
    82,399Audit Related Fees
    
    
    4,813
    
    
    
    811Tax Fees
    
    
    964
    
    
    
    Total
    
    
    65,347
    
    
    
    83,210
 Audit Fees.
 Audit-Related Fees.
 Tax Fees.
  
 ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
  -68-




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##### Table of Contents



Issuer Purchases of Equity Securities
 (c) Total Number of
    
    (d) Maximum Number (orCommon Shares
    
    Approximate Dollar Value)(a) Total Number of
    
    (b) Average Price Paid
    
    Purchased as Part of
    
    of Common Shares that MayCommon Shares
    
    per Common
    
    Publicly Announced
    
    Yet Be Purchased Under
thePeriod
    
    Purchased
    
    Share
    
    Plans or Programs
    
    Plans or ProgramsNovember, 2007
(from Nov. 14,
2007 to Nov. 30,
2007)
    
    
    209,601,000
    
    
    
    60.32
    
    
    
    209,601,000
    
    
    
    590,399,000December, 2007
(from Dec. 1, 2007
to Dec. 31, 2007)
    
    
    590,399,000
    
    
    
    60.68
    
    
    
    590,399,000
    
    
    
    Total
    
    
    800,000,000
    
    
    
    60.58
    
    
    
    800,000,000
    
    
    
    
 
 ITEM 17.
    
    FINANCIAL STATEMENTS
  
 ITEM 18.
    
    FINANCIAL STATEMENTS
  PageConsolidated Financial Statements of Taiwan Semiconductor Manufacturing
Company Limited and SubsidiariesReport of Independent Registered Public Accounting Firm
    
    F-1Consolidated Balance Sheets
    
    F-2Consolidated Statements of Income
    
    F-4Consolidated Statements of Changes in Shareholders Equity
    
    F-6Consolidated Statements of Cash Flows
    
    F-7Notes to Consolidated Financial Statements
    
    F-10
 -69-




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##### Table of Contents



ITEM 19.
    
    EXHIBITS
 (a)
    
    
    See Item 18 for a list of the financial statements filed as part of this annual report.(b)
    
    
    Exhibits to this Annual Report:1.1
    
    
    Articles of Incorporation of Taiwan Semiconductor Manufacturing Company Limited, as
amended and restated on May 7, 2007.2b.1
    
    
    The Company hereby agrees to furnish to the Securities and Exchange Commission, upon
request, copies of instruments defining the rights of holders of long-term debt of the
Company and its subsidiaries.3.1
    
    
    Rules for Election of Directors, as amended and restated on May 7, 2007.3.2(2)
    
    Rules and Procedures of Shareholders Meetings, as amended and restated on May 7, 2002.4.1(2)
    
    Land Lease with Southern Taiwan Science Park Administration (formerly Tainan
Science Park Administration) relating to the fabs located in Tainan Science Park
(effective August 1, 1997 to July 31, 2017) (in Chinese with English summary).4.2(3)
    
    Land Lease with Southern Taiwan Science Park Administration (formerly Tainan
Science Park Administration) relating to the fabs located in Tainan Science Park
(effective May 1, 1998 to April 30, 2018) (in Chinese with English summary).4.3(3)
    
    Land Lease with Southern Taiwan Science Park Administration (formerly Tainan
Science Park Administration) relating to the fabs located in Tainan Science Park
(effective November 1, 1999 to October 31, 2019) (in Chinese with English summary).4.4(3)
    
    Land Lease with Hsinchu Science Park Administration relating to Fab 7 (effective
December 4, 1989 to December 3, 2009) (in Chinese with English summary).4.5(2)
    
    Land Lease with Hsinchu Science Park Administration relating to the Fab 7
(effective July 1, 1995 to June 30, 2015) (in Chinese with English summary).4.6(2)
    
    Land Lease with Hsinchu Science Park Administration relating to Fab 8 (effective
March 15, 1997 to March 14, 2017) (in Chinese with English summary).4.7(3)
    
    Land Lease with Hsinchu Science Park Administration relating to Fab 12 (Phase I)
(effective December 1, 1999 to November 30, 2019) (in Chinese with English summary).+4.8a(1)
    
    Technology Cooperation Agreement between Taiwan Semiconductor Manufacturing
Company Ltd. and Philips Electronics N.V., as amended and restated on June 30, 2004.4.9a(4)
    
    Taiwan Semiconductor Manufacturing Company Limited 2002 Employee Stock Option
Plan, as revised by the board of directors on March 4, 2003.4.9aa(5)
    
    Taiwan Semiconductor Manufacturing Company Limited 2003 Employee Stock
Option Plan.
 -70-




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##### Table of Contents



4.9aaa(6)
    
    Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock
Option Plan.4.9aaaa(1)
    
    Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock
Option Plan, as revised on February 22, 2005.4.9b(4)
    
    TSMC North America 2002 Employee Stock Option Plan, as revised on June 5,
2003.4.9bb(5)
    
    TSMC North America 2003 Employee Stock Option Plan.4.9c(4)
    
    Wafer Tech, LLC 2002 Employee Stock Option Plan, as revised on June 5, 2003.4.9cc(5)
    
    Wafer Tech, LLC 2003 Employee Stock Option Plan.4.9ccc(6)
    
    Wafer Tech, LLC 2004 Employee Stock Option Plan.4.9cccc(1)
    
    Wafer Tech, LLC 2004 Employee Stock Option Plan, as revised on February 22,
2005.+4.10(7)
    
    Shareholders Agreement, dated as of March 15, 1999, by and among EDB
Investments Pte. Ltd., Koninklijke Philips Electronics N.V. and Taiwan
Semiconductor Manufacturing Company Ltd..4.11(9)
    
    Land Lease with Hsinchu Science Park Administration relating to Fabs 2 and
5 and Corporate Headquarters (effective April 1, 1988 to March 31, 2008) (in
Chinese with English summary).4.12(9)
    
    Land Lease with Hsinchu Science Park Administration relating to Fabs 3 and
4 (effective May 16, 1993 to May 15, 2013) (in Chinese with English summary).4.13(8)
    
    Land Lease with Hsinchu Science Park Administration relating to Fab 12
(Phase II) (effective May 1, 2001 to December 31, 2020) (English summary).4.14(8)
    
    Land Lease with Southern Taiwan Science Park Administration relating to
fabs located in Tainan Science Park (effective November 1, 2000 to October 31,
2020) (English summary).12.1
    
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) under the
Exchange Act.12.2
    
    
    Certification of Chief Financial Officer required by Rule 13a-14(a) under the
Exchange Act.13.1
    
    
    Certification of Chief Executive Officer required by Rule 13a-14(b) under the
Exchange Act.13.2
    
    
    Certification of Chief Financial Officer required by Rule 13a-14(b) under the
Exchange Act.99.1
    
    
    Consent of Deloitte & Touche.
 
 (1)
    
    Previously filed in TSMCs annual report on Form 20-F for the
fiscal year ended December 31, 2004, filed by TSMC on May 16, 2005. -71-




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##### Table of Contents



(2)
    
    Previously filed in TSMCs annual report on Form 20-F for the
fiscal year ended December 31, 2001, filed by TSMC on May 9, 2002.(3)
    
    Previously filed in TSMCs annual report on Form 20-F for the
fiscal year ended December 31, 1999, filed by TSMC on June 29, 2000.(4)
    
    Previously filed in TSMCs annual report on Form 20-F for the
fiscal year ended December 31, 2002, filed by TSMC on June 23, 2003.(5)
    
    Previously filed in TSMCs registration statement on Form S-8,
filed by TSMC on October 20, 2003.(6)
    
    Previously filed in TSMCs registration statement on Form S-8,
filed by TSMC on January 6, 2005.(7)
    
    Previously filed in TSMCs annual report on Form 20-F for the
fiscal year ended December 31, 1998, filed by TSMC on April 30, 1999.(8)
    
    Previously filed in TSMCs annual report on Form 20-F for the
fiscal year ended December 31, 2003, filed by TSMC on May 28, 2004.(9)
    
    Previously filed in TSMCs registration statement on Form F-1,
filed by TSMC on September 15, 1997.+
    
    Contains portions for which confidential treatment has been requested. -72-




---



##### Table of Contents



EXHIBIT INDEX
 (a)
    
    See Item 18 for a list of the financial statements filed as part of this annual report.(b)
    
    Exhibits to this Annual Report:1.1
    
    
    Articles of Incorporation of Taiwan Semiconductor Manufacturing Company Limited, as
amended and restated on May 7, 2008.2b.1
    
    
    The Company hereby agrees to furnish to the Securities and Exchange Commission, upon
request, copies of instruments defining the rights of holders of long-term debt of the
Company and its subsidiaries.3.1
    
    
    Rules for Election of Directors, as amended and restated on May 7, 2007.3.2(2)
    
    Rules and Procedures of Shareholders Meetings, as amended and restated on May 7, 2002.4.1(2)
    
    Land Lease with Southern Taiwan Science Park Administration (formerly Tainan
Science Park Administration) relating to the fabs located in Tainan Science Park
(effective August 1, 1997 to July 31, 2017) (in Chinese with English summary).4.2(3)
    
    Land Lease with Southern Taiwan Science Park Administration (formerly Tainan
Science Park Administration) relating to the fabs located in Tainan Science Park
(effective May 1, 1998 to April 30, 2018) (in Chinese with English summary).4.3(3)
    
    Land Lease with Southern Taiwan Science Park Administration (formerly Tainan
Science Park Administration) relating to the fabs located in Tainan Science Park
(effective November 1, 1999 to October 31, 2019) (in Chinese with English summary).4.4(3)
    
    Land Lease with Hsinchu Science Park Administration relating to Fab 7 (effective
December 4, 1989 to December 3, 2009) (in Chinese with English summary).4.5(2)
    
    Land Lease with Hsinchu Science Park Administration relating to the Fab 7
(effective July 1, 1995 to June 30, 2015) (in Chinese with English summary).4.6(2)
    
    Land Lease with Hsinchu Science Park Administration relating to Fab. 8 (effective
March 15, 1997 to March 14, 2017) (in Chinese with English summary).4.7(3)
    
    Land Lease with Hsinchu Science Park Administration relating to Fab 12 (Phase I)
(effective December 1, 1999 to November 30, 2019) (in Chinese with English summary).+4.8(1)
    
    Technology Cooperation Agreement between Taiwan Semiconductor Manufacturing
Company Ltd. and Philips Electronics N.V., as amended and restated on June 20, 2004.4.9a(4)
    
    Taiwan Semiconductor Manufacturing Company Limited 2002 Employee Stock Option
Plan, as revised by the board of directors on March 4, 2003.4.9aa(5)
    
    Taiwan Semiconductor Manufacturing Company Limited 2003 Employee Stock
Option Plan.4.9aaa(6)
    
    Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock




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##### Table of Contents



Option Plan.4.9aaaa(1)
    
    Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock
Option Plan, as revised on February 22, 2005.4.9b(4)
    
    TSMC North America 2002 Employee Stock Option Plan, as revised on June 5,
2003.4.9bb(5)
    
    TSMC North America 2003 Employee Stock Option Plan.4.9c(4)
    
    WaferTech, LLC 2002 Employee Stock Option Plan, as revised on June 5, 2003.4.9cc(5)
    
    Wafer Tech, LLC 2003 Employee Stock Option Plan.4.9ccc(6)
    
    Wafer Tech, LLC 2004 Employee Stock Option Plan.4.9cccc(1)
    
    Wafer Tech, LLC 2004 Employee Stock Option Plan, as revised on February
22, 2005.+4.10(7)
    
    Shareholders Agreement, dated as of March 15, 1999, by and among EDB
Investments Pte. Ltd., Koninklijke Philips Electronics N.V. and Taiwan
Semiconductor Manufacturing Company Ltd..4.11(9)
    
    Land Lease with Hsinchu Science Park Administration relating to Fabs 2 and
5 and Corporate Headquarters (effective April 1, 1988 to March 31, 2008) (in
Chinese with English summary).4.12(9)
    
    Land Lease with Hsinchu Science Park Administration relating to Fabs 3 and
4 (effective May 16, 1993 to May 15, 2013) (in Chinese with English summary).4.13(8)
    
    Land Lease with Hsinchu Science Park Administration relating to Fab 12
(Phase II) (effective May 1, 2001 to December 31, 2020) (English summary).4.14(8)
    
    Land Lease with Southern Taiwan Science Park Administration relating to
fabs located in Tainan Science Park (effective November 1, 2000 to October 31,
2020) (English summary).12.1
    
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) under the
Exchange Act.12.2
    
    
    Certification of Chief Financial Officer required by Rule 13a-14(a) under the
Exchange Act.13.1
    
    
    Certification of Chief Executive Officer required by Rule 13a-14(b) under the
Exchange Act.13.2
    
    
    Certification of Chief Financial Officer required by Rule 13a-14(b) under the
Exchange Act.99.1
    
    
    Consent of Deloitte & Touche.
 
 (1)
    
    Previously filed in TSMCs annual report on Form 20-F for the fiscal year
ended December 31, 2004, filed by TSMC on May 16, 2005.(2)
    
    Previously filed in TSMCs annual report on Form 20-F for the fiscal year ended




---



##### Table of Contents



December 31, 2001, filed by TSMC on May 9, 2002.(3)
    
    Previously filed in TSMCs annual report on Form 20-F for the fiscal year ended
December 31, 1999, filed by TSMC on June 29, 2000.(4)
    
    Previously filed in TSMCs annual report on Form 20-F for the fiscal year
ended December 31, 2002, filed by TSMC on June 23, 2003.(5)
    
    Previously filed in TSMCs registration statement on Form S-8, filed by
TSMC on October 20, 2003.(6)
    
    Previously filed in TSMCs registration statement on Form S-8, filed by
TSMC on January 6, 2005.(7)
    
    Previously filed in TSMCs annual report on Form 20-F for the fiscal year
ended December 31, 1998, filed by TSMC on April 30, 1999.(8)
    
    Previously filed in TSMCs annual report on Form 20-F for the fiscal year
ended December 31, 2003, filed by TSMC on May 28, 2004.(9)
    
    Previously filed in TSMCs registration statement on Form F-1, filed by
TSMC on September 15, 1997.+
    
    Contains portions for which confidential treatment has been requested.




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##### Table of Contents



SIGNATURES
   TAIWAN SEMICONDUCTOR MANUFACTURING
COMPANY LIMITEDBy:
    /s/ Lora HoName:
    Lora HoTitle:
    Vice President and Chief Financial Officer




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      Internal Control-Integrated Framework
 
 
 F-1




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##### Table of Contents



Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
 
 CONSOLIDATED BALANCE SHEETS  (In Millions of New Taiwan or U.S. Dollars, Except Par Value)
 December 31Notes
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    US$(Note 3)ASSETSCURRENT
ASSETSCash and cash equivalents
    
    2, 5
    
    $
    117,837.2
    
    
    $
    94,986.5
    
    
    $
    2,929.0Financial assets at fair value through profit or loss
    
    2, 4, 6
    
    
    1,206.9
    
    
    
    1,632.4
    
    
    
    50.3Available-for-sale financial assets
    
    2, 4, 7
    
    
    67,523.9
    
    
    
    66,688.4
    
    
    
    2,056.4Held-to-maturity financial assets
    
    2, 8
    
    
    8,510.8
    
    
    
    11,526.9
    
    
    
    355.4Notes and accounts receivable, net
    
    2, 9
    
    
    31,337.0
    
    
    
    42,413.3
    
    
    
    1,307.9Receivables from related parties
    
    25
    
    
    252.3
    
    
    
    10.9
    
    
    
    0.3Other receivables from related parties
    
    25
    
    
    256.9
    
    
    
    243.6
    
    
    
    7.5Other financial assets
    
    4, 26
    
    
    2,356.5
    
    
    
    1,515.5
    
    
    
    46.7Inventories, net
    
    2, 10
    
    
    21,430.7
    
    
    
    23,862.3
    
    
    
    735.8Deferred income tax assets, net
    
    2, 19
    
    
    8,014.0
    
    
    
    5,572.3
    
    
    
    171.8Prepaid expenses and other current assets
    
    4
    
    
    1,591.0
    
    
    
    1,370.2
    
    
    
    42.3Total current assets
    
    
    
    
    260,317.2
    
    
    
    249,822.3
    
    
    
    7,703.4LONG-TERM INVESTMENTS
    
    2, 4 , 7, 8, 11, 12Investments accounted for using equity method
    
    
    
    
    15,000.9
    
    
    
    22,517.3
    
    
    
    694.3Available-for-sale financial assets
    
    
    
    
    6,648.5
    
    
    
    1,400.7
    
    
    
    43.2Held-to-maturity financial assets
    
    
    
    
    28,973.5
    
    
    
    8,697.7
    
    
    
    268.2Financial assets carried at cost
    
    
    
    
    3,272.3
    
    
    
    3,845.6
    
    
    
    118.6Total long-term investments
    
    
    
    
    53,895.2
    
    
    
    36,461.3
    
    
    
    1,124.3PROPERTY, PLANT AND EQUIPMENT, NET
    
    2, 13, 25, 26
    
    
    254,094.2
    
    
    
    260,252.2
    
    
    
    8,025.0INTANGIBLE ASSETSGoodwill
    
    2
    
    
    5,985.0
    
    
    
    5,987.6
    
    
    
    184.7Deferred charges, net
    
    2, 14
    
    
    5,936.9
    
    
    
    7,923.6
    
    
    
    244.3Total intangible assets
    
    
    
    
    11,921.9
    
    
    
    13,911.2
    
    
    
    429.0OTHER ASSETSDeferred income tax assets, net
    
    2, 19
    
    
    5,802.1
    
    
    
    7,313.3
    
    
    
    225.5Refundable deposits
    
    
    
    
    1,331.2
    
    
    
    2,777.8
    
    
    
    85.7Others
    
    
    
    
    123.4
    
    
    
    327.1
    
    
    
    10.1Total other assets
    
    
    
    
    7,256.7
    
    
    
    10,418.2
    
    
    
    321.3TOTAL ASSETS
    
    
    
    $
    587,485.2
    
    
    $
    570,865.2
    
    
    $
    17,603.0
 F-2




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##### Table of Contents



December 31Notes
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    US$(Note 3)LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESFinancial liabilities at fair value through profit or loss
    
    2, 4, 6
    
    $
    10.9
    
    
    $
    249.3
    
    
    $
    7.7Notes and accounts payable
    
    
    
    
    7,934.4
    
    
    
    11,574.9
    
    
    
    356.9Payable to related parties
    
    25
    
    
    1,867.7
    
    
    
    1,503.4
    
    
    
    46.4Income tax payable
    
    2, 19
    
    
    7,946.5
    
    
    
    11,126.1
    
    
    
    343.1Payables to contractors and equipment suppliers
    
    
    
    
    10,768.6
    
    
    
    6,256.7
    
    
    
    192.9Accrued expenses and other current liabilities
    
    2, 17
    
    
    11,328.3
    
    
    
    17,714.8
    
    
    
    546.2Current portion of bonds payable and long-term liabilities
    
    15, 16
    
    
    7,004.1
    
    
    
    280.8
    
    
    
    8.7Total current liabilities
    
    
    
    
    46,860.5
    
    
    
    48,706.0
    
    
    
    1,501.9LONG-TERM LIABILITIESBonds payable
    
    15
    
    
    12,500.0
    
    
    
    12,500.0
    
    
    
    385.4Long-term bank loans
    
    16
    
    
    654.0
    
    
    
    1,722.2
    
    
    
    53.1Other long-term payables
    
    17, 28
    
    
    8,703.3
    
    
    
    9,410.0
    
    
    
    290.2Other payables to related parties
    
    25, 28
    
    
    403.4
    
    
    
    
    
    
    
    Obligations under capital leases
    
    2
    
    
    612.9
    
    
    
    652.3
    
    
    
    20.1Total long-term liabilities
    
    
    
    
    22,873.6
    
    
    
    24,284.5
    
    
    
    748.8OTHER LIABILITIESAccrued pension cost
    
    2, 18
    
    
    3,540.1
    
    
    
    3,665.5
    
    
    
    113.0Guarantee deposits
    
    28
    
    
    3,817.1
    
    
    
    2,243.0
    
    
    
    69.2Deferred credits
    
    2, 25
    
    
    1,177.1
    
    
    
    1,236.9
    
    
    
    38.1Others
    
    
    
    
    78.7
    
    
    
    43.8
    
    
    
    1.4Total other liabilities
    
    
    
    
    8,613.0
    
    
    
    7,189.2
    
    
    
    221.7Total liabilities
    
    
    
    
    78,347.1
    
    
    
    80,179.7
    
    
    
    2,472.4COMMITMENTS AND CONTINGENCIES
    
    28
 December 31Notes
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    US$(Note 3)EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENTCapital stock  NT$10 par valueAuthorized: 27,050,000 thousand shares in 200628,050,000 thousand shares in 2007Issued: 25,829,688 thousand shares in 200626,427,104 thousand shares in 2007
    
    
    
    
    258,296.9
    
    
    
    264,271.1
    
    
    
    8,149.0Capital surplus
    
    2, 20
    
    
    54,107.5
    
    
    
    53,732.7
    
    
    
    1,656.9Retained earnings
    
    20
    
    
    197,124.5
    
    
    
    218,864.5
    
    
    
    6,748.8Unrealized gain on financial instruments
    
    2, 4
    
    
    561.6
    
    
    
    681.0
    
    
    
    21.0Cumulative translation adjustments
    
    2
    
    
    (1,191.1
    )
    
    
    (1,072.9
    )
    
    
    (33.1
    )Treasury
stock  33,926 thousand shares in 2006834,096 thousand shares in 2007
    
    2, 22
    
    
    (918.1
    )
    
    
    (49,385.0
    )
    
    
    (1,522.8
    )Total equity attributable to shareholders of the parent
    
    
    
    
    507,981.3
    
    
    
    487,091.4
    
    
    
    15,019.8MINORITY INTEREST IN SUBSIDIARIES
    
    2
    
    
    1,156.8
    
    
    
    3,594.1
    
    
    
    110.8Total shareholders equity
    
    
    
    
    509,138.1
    
    
    
    490,685.5
    
    
    
    15,130.6TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    $
    587,485.2
    
    
    $
    570,865.2
    
    
    $
    17,603.0The accompanying notes are an integral part of the consolidated financial statements.
 F-3




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##### Table of Contents



Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
 
 CONSOLIDATED STATEMENTS OF INCOME
(In Millions of New Taiwan or U.S. Dollars, Except Earnings Per Share that are in New Taiwan or U.S. Dollars)
 Year Ended December 31Notes
    
    2005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)NET SALES
    
    2, 25, 29
    
    $
    266,565.1
    
    
    $
    317,407.2
    
    
    $
    322,630.6
    
    
    $
    9,948.5COST OF SALES
    
    25
    
    
    148,362.2
    
    
    
    161,597.1
    
    
    
    180,280.4
    
    
    
    5,559.1GROSS PROFIT
    
    
    
    
    118,202.9
    
    
    
    155,810.1
    
    
    
    142,350.2
    
    
    
    4,389.4OPERATING EXPENSES
    
    25Research and development
    
    
    
    
    14,016.5
    
    
    
    16,076.4
    
    
    
    17,946.3
    
    
    
    553.4General and administrative
    
    
    
    
    9,085.5
    
    
    
    8,716.7
    
    
    
    8,963.8
    
    
    
    276.4Marketing
    
    
    
    
    4,132.3
    
    
    
    3,752.3
    
    
    
    3,718.2
    
    
    
    114.6Total operating expenses
    
    
    
    
    27,234.3
    
    
    
    28,545.4
    
    
    
    30,628.3
    
    
    
    944.4INCOME FROM OPERATIONS
    
    
    
    
    90,968.6
    
    
    
    127,264.7
    
    
    
    111,721.9
    
    
    
    3,445.0NON-OPERATING INCOME AND GAINSInterest income
    
    2, 4
    
    
    2,806.2
    
    
    
    4,542.1
    
    
    
    5,651.7
    
    
    
    174.3Equity in earnings of equity method investees, net
    
    2, 11
    
    
    1,433.2
    
    
    
    2,347.2
    
    
    
    2,507.9
    
    
    
    77.3Settlement income
    
    28
    
    
    964.7
    
    
    
    979.2
    
    
    
    985.1
    
    
    
    30.4Gain on settlement and disposal of financial instruments, net
    
    2, 4
    
    
    
    
    
    
    
    
    
    
    633.1
    
    
    
    19.5Technical service income
    
    25, 28
    
    
    462.6
    
    
    
    571.5
    
    
    
    590.4
    
    
    
    18.2Rental income
    
    2
    
    
    0.9
    
    
    
    224.3
    
    
    
    378.6
    
    
    
    11.7Subsidy income
    
    2
    
    
    321.9
    
    
    
    334.5
    
    
    
    364.3
    
    
    
    11.2Valuation gain on financial instruments, net
    
    2, 6
    
    
    
    
    
    
    
    
    
    
    304.6
    
    
    
    9.4Gain on disposal of property, plant and equipment and other
assets
    
    2, 25
    
    
    342.8
    
    
    
    421.1
    
    
    
    91.2
    
    
    
    2.8Foreign exchange gain, net
    
    2, 4
    
    
    2,610.0
    
    
    
    
    
    
    
    80.9
    
    
    
    2.5Others
    
    25
    
    
    457.1
    
    
    
    285.7
    
    
    
    346.0
    
    
    
    10.7Total non-operating income and gains
    
    
    
    
    9,399.4
    
    
    
    9,705.6
    
    
    
    11,933.8
    
    
    
    368.0NON-OPERATING EXPENSES AND LOSSESProvision for litigation loss
    
    28
    
    
    
    
    
    
    
    
    
    
    1,008.6
    
    
    
    31.1Interest expense
    
    4
    
    
    1,413.4
    
    
    
    890.6
    
    
    
    842.2
    
    
    
    26.0Loss on impairment of financial assets
    
    2
    
    
    128.9
    
    
    
    279.7
    
    
    
    54.2
    
    
    
    1.7Loss on disposal of property, plant and equipment
    
    2
    
    
    60.1
    
    
    
    241.4
    
    
    
    6.2
    
    
    
    0.2Valuation loss on financial instruments, net
    
    2, 4, 6
    
    
    337.2
    
    
    
    812.9
    
    
    
    
    
    
    
    Loss on settlement and disposal of financial instruments, net
    
    2, 4, 6
    
    
    3,602.8
    
    
    
    798.6
    
    
    
    
    
    
    
    Foreign exchange loss, net
    
    2
    
    
    
    
    
    
    400.9
    
    
    
    
    
    
    
    Others
    
    
    
    
    562.3
    
    
    
    184.0
    
    
    
    102.5
    
    
    
    3.1Total non-operating expenses and losses
    
    
    
    
    6,104.7
    
    
    
    3,608.1
    
    
    
    2,013.7
    
    
    
    62.1INCOME BEFORE INCOME TAX
    
    
    
    
    94,263.3
    
    
    
    133,362.2
    
    
    
    121,642.0
    
    
    
    3,750.9INCOME TAX EXPENSE
    
    2, 19
    
    
    630.6
    
    
    
    7,773.7
    
    
    
    11,709.6
    
    
    
    361.1NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES
    
    
    
    
    93,632.7
    
    
    
    125,588.5
    
    
    
    109,932.4
    
    
    
    3,389.8CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF
TAX BENEFIT OF NT$82.1 MILLION
    
    4
    
    
    
    
    
    
    1,606.7
    
    
    
    
    
    
    
    NET INCOME
    
    
    
    $
    93,632.7
    
    
    $
    127,195.2
    
    
    $
    109,932.4
    
    
    $
    3,389.8
  F-4




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##### Table of Contents



Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
 CONSOLIDATED STATEMENTS OF INCOME
(In Millions of New Taiwan or U.S. Dollars, Except Earnings Per Share that are in New Taiwan or
U.S. Dollars)
 Year Ended December 31Notes
    
    2005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)ATTRIBUTABLE TO:Shareholders of the parent
    
    
    
    $
    93,575.0
    
    
    $
    127,009.7
    
    
    $
    109,177.1
    
    
    $
    3,366.5Minority interest
    
    2
    
    
    57.7
    
    
    
    185.5
    
    
    
    755.3
    
    
    
    23.3$
    93,632.7
    
    
    $
    127,195.2
    
    
    $
    109,932.4
    
    
    $
    3,389.8BASIC EARNINGS PER SHARE
    
    2, 23Before income tax
    
    
    
    $
    3.58
    
    
    $
    5.11
    
    
    $
    4.59
    
    
    $
    0.14After income tax
    
    
    
    $
    3.55
    
    
    $
    4.82
    
    
    $
    4.14
    
    
    $
    0.13DILUTED EARNINGS PER SHARE
    
    2, 23
    
    $
    3.57
    
    
    $
    5.10
    
    
    $
    4.58
    
    
    $
    0.14Before income tax
    
    
    
    $
    3.55
    
    
    $
    4.81
    
    
    $
    4.14
    
    
    $
    0.13After income taxBASIC EARNINGS PER EQUIVALENT ADS
    
    2Before income tax
    
    
    
    $
    17.88
    
    
    $
    25.54
    
    
    $
    22.94
    
    
    $
    0.71After income tax
    
    
    
    $
    17.76
    
    
    $
    24.08
    
    
    $
    20.72
    
    
    $
    0.64DILUTED EARNINGS PER EQUIVALENT ADS
    
    2Before income tax
    
    
    
    $
    17.87
    
    
    $
    25.51
    
    
    $
    22.92
    
    
    $
    0.71After income tax
    
    
    
    $
    17.75
    
    
    $
    24.06
    
    
    $
    20.70
    
    
    $
    0.64BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING (THOUSANDS)
    
    2, 23
    
    
    26,349,396,
    
    
    
    26,374,757
    
    
    
    26,346,582DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING (THOUSANDS)
    
    2, 23
    
    
    26,359,727
    
    
    
    26,398,858
    
    
    
    26,368,250
  The accompanying notes are an integral part of the consolidated financial statements.
    
    (Concluded)
 F-5




---



##### Table of Contents



Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(In Millions of New Taiwan Dollars, Except Dividends Per Share)
 Equity Attributable to Shareholders of the ParentCapital Stock
    
    
    
    
    
    
    
    
    
    
    Unrealized(NT$10 Par Value)
    
    
    
    
    
    
    
    
    
    
    Gain (Loss)
    
    
    Cumulative
    
    
    
    
    
    
    
    
    
    
    Minority
    
    
    TotalCommon Stock
    
    
    Capital
    
    
    Retained
    
    
    on Financial
    
    
    Translation
    
    
    Treasury
    
    
    
    
    
    
    Interest in
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Surplus
    
    
    Earnings
    
    
    Instruments
    
    
    Adjustments
    
    
    Stock
    
    
    Total
    
    
    Subsidiaries
    
    
    Equity(Thousands)
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$BALANCE, JANUARY 1, 2005
    
    
    23,251,964
    
    
    $
    232,519.6
    
    
    $
    56,537.3
    
    
    $
    113,730.0
    
    
    $
    
    
    
    $
    (2,226.4
    )
    
    $
    (1,595.2
    )
    
    $
    398,965.3
    
    
    $
    75.7
    
    
    $
    399,041.0Appropriations of prior years earningsBonus to employees  in cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,086.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,086.2
    )
    
    
    
    
    
    
    (3,086.2
    )Bonus to employees  in stock
    
    
    308,622
    
    
    
    3,086.2
    
    
    
    
    
    
    
    (3,086.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends to shareholders  NT$2.00 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,504.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,504.1
    )
    
    
    
    
    
    
    (46,504.1
    )Stock dividends to shareholders  NT$0.50 per share
    
    
    1,162,602
    
    
    
    11,626.0
    
    
    
    
    
    
    
    (11,626.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bonus to directors and supervisors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (231.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (231.5
    )
    
    
    
    
    
    
    (231.5
    )Net income in 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,575.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,575.0
    
    
    
    57.7
    
    
    
    93,632.7Adjustment arising from changes in percentage of ownership in equity method investees
    
    
    
    
    
    
    
    
    
    
    71.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71.4
    
    
    
    
    
    
    
    71.4Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,585.7
    
    
    
    
    
    
    
    1,585.7
    
    
    
    (51.8
    )
    
    
    1,533.9Issuance of stock from exercising employee stock options
    
    
    6,837
    
    
    
    68.4
    
    
    
    202.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270.9
    
    
    
    
    
    
    
    270.9Cash dividends received by subsidiaries from TSMC
    
    
    
    
    
    
    
    
    
    
    84.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84.3
    
    
    
    
    
    
    
    84.3Treasury stock transactions  sales of parent companys stock held by subsidiaries
    
    
    
    
    
    
    
    
    
    
    222.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    677.1
    
    
    
    899.5
    
    
    
    
    
    
    
    899.5Increase in minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    526.8
    
    
    
    526.8BALANCE, DECEMBER 31, 2005
    
    
    24,730,025
    
    
    
    247,300.2
    
    
    
    57,117.9
    
    
    
    142,771.0
    
    
    
    
    
    
    
    (640.7
    )
    
    
    (918.1
    )
    
    
    445,630.3
    
    
    
    608.4
    
    
    
    446,238.7Appropriations of prior years earningsBonus to employees  in cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,432.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,432.1
    )
    
    
    
    
    
    
    (3,432.1
    )Bonus to employees  in stock
    
    
    343,213
    
    
    
    3,432.1
    
    
    
    
    
    
    
    (3,432.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends to common shareholders  NT$2.50 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,825.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,825.1
    )
    
    
    
    
    
    
    (61,825.1
    )Stock dividends to common shareholders  NT$0.15 per share
    
    
    370,950
    
    
    
    3,709.5
    
    
    
    
    
    
    
    (3,709.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bonus to directors and supervisors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (257.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (257.4
    )
    
    
    
    
    
    
    (257.4
    )Capital surplus transferred to capital stock
    
    
    370,950
    
    
    
    3,709.5
    
    
    
    (3,709.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income in 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,009.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,009.7
    
    
    
    185.5
    
    
    
    127,195.2Adjustment arising from changes in percentage of ownership in equity method investees
    
    
    
    
    
    
    
    
    
    
    187.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187.1
    
    
    
    
    
    
    
    187.1Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (550.4
    )
    
    
    
    
    
    
    (550.4
    )
    
    
    (126.2
    )
    
    
    (676.6
    )Issuance of stock from exercising employee stock options
    
    
    14,550
    
    
    
    145.6
    
    
    
    429.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    575.3
    
    
    
    
    
    
    
    575.3Cash dividends received by subsidiaries from TSMC
    
    
    
    
    
    
    
    
    
    
    82.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82.3
    
    
    
    
    
    
    
    82.3Valuation gain on available-for-sale financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    386.0
    
    
    
    
    
    
    
    
    
    
    
    386.0
    
    
    
    2.1
    
    
    
    388.1Equity in the valuation gain on available-for-sale financial assets held by equity
method investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175.6
    
    
    
    
    
    
    
    
    
    
    
    175.6
    
    
    
    
    
    
    
    175.6Increase in minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    487.0
    
    
    
    487.0BALANCE, DECEMBER 31, 2006
    
    
    25,829,688
    
    
    
    258,296.9
    
    
    
    54,107.5
    
    
    
    197,124.5
    
    
    
    561.6
    
    
    
    (1,191.1
    )
    
    
    (918.1
    )
    
    
    507,981.3
    
    
    
    1,156.8
    
    
    
    509,138.1Appropriations of prior years earningsBonus to employees  in cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,572.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,572.8
    )
    
    
    
    
    
    
    (4,572.8
    )Bonus to employees  in stock
    
    
    457,280
    
    
    
    4,572.8
    
    
    
    
    
    
    
    (4,572.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash
dividends to shareholders NT$3.00 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,489.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,489.1
    )
    
    
    
    
    
    
    (77,489.1
    )Stock dividends to shareholders  NT$0.02 per share
    
    
    51,659
    
    
    
    516.6
    
    
    
    
    
    
    
    (516.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bonus to directors and supervisors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (285.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (285.8
    )
    
    
    
    
    
    
    (285.8
    )Capital surplus transferred to capital stock
    
    
    77,489
    
    
    
    774.9
    
    
    
    (774.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income in 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,177.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,177.1
    
    
    
    755.3
    
    
    
    109,932.4Adjustment arising from changes in percentage of ownership in equity method investees
    
    
    
    
    
    
    
    
    
    
    (28.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28.7
    )
    
    
    31.9
    
    
    
    3.2Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118.2
    
    
    
    
    
    
    
    118.2
    
    
    
    (99.3
    )
    
    
    18.9Issuance of stock from exercising employee stock options
    
    
    10,988
    
    
    
    109.9
    
    
    
    327.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436.9
    
    
    
    
    
    
    
    436.9Cash dividends received by subsidiaries from TSMC
    
    
    
    
    
    
    
    
    
    
    101.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101.8
    
    
    
    
    
    
    
    101.8Valuation gain on available-for-sale financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    241.8
    
    
    
    
    
    
    
    
    
    
    
    241.8
    
    
    
    19.5
    
    
    
    261.3Equity in the valuation loss on available-for-sale financial assets held by equity
method investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (122.4
    )
    
    
    
    
    
    
    
    
    
    
    (122.4
    )
    
    
    
    
    
    
    (122.4
    )Treasury stock repurchased by the Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,466.9
    )
    
    
    (48,466.9
    )
    
    
    
    
    
    
    (48,466.9
    )Increase in minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,729.9
    
    
    
    1,729.9BALANCE, DECEMBER 31, 2007
    
    
    26,427,104
    
    
    $
    264,271.1
    
    
    $
    53,732.7
    
    
    $
    218,864.5
    
    
    $
    681.0
    
    
    $
    (1,072.9
    )
    
    $
    (49,385.0
    )
    
    $
    487,091.4
    
    
    $
    3,594.1
    
    
    $
    490,685.5BALANCE, DECEMBER 31, 2007 (IN MILLIONS OF US$  Note 3)
    
    
    
    
    
    $
    8,149.0
    
    
    $
    1,656.9
    
    
    $
    6,748.8
    
    
    $
    21.0
    
    
    $
    (33.1
    )
    
    $
    (1,522.8
    )
    
    $
    15,019.8
    
    
    $
    110.8
    
    
    $
    15,130.6
 
 F-6




---



##### Table of Contents



Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions of New Taiwan or U.S. Dollars)
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)CASH FLOWS FROM OPERATING ACTIVITIESNet income attributable to shareholders of the parent
    
    $
    93,575.0
    
    
    $
    127,009.7
    
    
    $
    109,177.1
    
    
    $
    3,366.5Net income attributable to minority interest
    
    
    57.7
    
    
    
    185.5
    
    
    
    755.3
    
    
    
    23.3Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    75,649.4
    
    
    
    73,715.2
    
    
    
    80,005.4
    
    
    
    2,467.0Amortization of premium/discount of financial assets
    
    
    120.9
    
    
    
    2.4
    
    
    
    (117.2
    )
    
    
    (3.6
    )Loss on impairment of financial assets
    
    
    128.9
    
    
    
    279.7
    
    
    
    54.2
    
    
    
    1.7Loss (gain) on disposal of available-for-sale financial assets, net
    
    
    150.1
    
    
    
    (90.8
    )
    
    
    (610.2
    )
    
    
    (18.8
    )Equity in earnings of equity method investees, net
    
    
    (1,433.2
    )
    
    
    (2,347.2
    )
    
    
    (2,507.9
    )
    
    
    (77.3
    )Dividends received from equity method investees
    
    
    668.5
    
    
    
    614.6
    
    
    
    625.1
    
    
    
    19.3Gain on disposal of investments accounted for using equity method
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    Gain on disposal of financial assets carried at cost, net
    
    
    (14.7
    )
    
    
    (16.2
    )
    
    
    (264.5
    )
    
    
    (8.2
    )Gain on disposal of property, plant and equipment and other assets, net
    
    
    (282.6
    )
    
    
    (179.7
    )
    
    
    (85.0
    )
    
    
    (2.6
    )Deferred income taxes
    
    
    (3,353.0
    )
    
    
    121.6
    
    
    
    943.8
    
    
    
    29.1Loss on idle assets
    
    
    131.8
    
    
    
    44.1
    
    
    
    
    
    
    
    Donation of idle assets
    
    
    7.2
    
    
    
    
    
    
    
    
    
    
    
    Net changes in operating assets and liabilities:Decrease (increase) in:Financial assets and liabilities at fair value through profit or loss
    
    
    72.8
    
    
    
    340.2
    
    
    
    (187.1
    )
    
    
    (5.8
    )Notes and accounts receivable, net
    
    
    (10,601.0
    )
    
    
    6,447.3
    
    
    
    (10,977.0
    )
    
    
    (338.5
    )Receivables from related parties
    
    
    (101.9
    )
    
    
    440.9
    
    
    
    629.5
    
    
    
    19.4Other receivables from related parties
    
    
    (88.0
    )
    
    
    341.1
    
    
    
    13.2
    
    
    
    0.4Other financial assets
    
    
    (306.0
    )
    
    
    (738.7
    )
    
    
    842.1
    
    
    
    26.0Inventories, net
    
    
    (2,006.2
    )
    
    
    (3,702.4
    )
    
    
    (2,226.1
    )
    
    
    (68.6
    )Prepaid expenses and other current assets
    
    
    120.1
    
    
    
    (170.5
    )
    
    
    290.4
    
    
    
    9.0Increase (decrease) in:Notes and accounts payable
    
    
    2,088.6
    
    
    
    (1,487.1
    )
    
    
    3,218.3
    
    
    
    99.2Payables to related parties
    
    
    (1,629.2
    )
    
    
    (572.4
    )
    
    
    (375.7
    )
    
    
    (11.6
    )Income tax payable
    
    
    3,611.5
    
    
    
    3,931.0
    
    
    
    3,179.7
    
    
    
    98.0Accrued expenses and other current liabilities
    
    
    181.7
    
    
    
    862.4
    
    
    
    913.9
    
    
    
    28.2Accrued pension cost
    
    
    360.1
    
    
    
    65.7
    
    
    
    125.5
    
    
    
    3.9Deferred credits
    
    
    117.3
    
    
    
    (99.3
    )
    
    
    343.9
    
    
    
    10.6Net cash provided by operating activities
    
    
    157,225.2
    
    
    
    204,997.1
    
    
    
    183,766.7
    
    
    
    5,666.6CASH FLOWS FROM INVESTING ACTIVITIESAcquisitions of:Available-for-sale financial assets
    
    
    (99,436.2
    )
    
    
    (119,291.7
    )
    
    
    (87,550.2
    )
    
    
    (2,699.7
    )Held-to-maturity financial assets
    
    
    (14,199.1
    )
    
    
    (18,554.0
    )
    
    
    
    
    
    
    Investments accounted for using equity method
    
    
    (621.9
    )
    
    
    (2,613.0
    )
    
    
    (5,803.8
    )
    
    
    (179.0
    )Financial assets carried at cost
    
    
    (456.9
    )
    
    
    (511.6
    )
    
    
    (911.3
    )
    
    
    (28.1
    )Property, plant and equipment
    
    
    (79,878.7
    )
    
    
    (78,737.3
    )
    
    
    (84,001.0
    )
    
    
    (2,590.2
    )Proceeds from disposal or redemption of:Available-for-sale financial assets
    
    
    102,577.8
    
    
    
    91,620.4
    
    
    
    94,908.7
    
    
    
    2,926.6Held-to-maturity financial assets
    
    
    14,595.4
    
    
    
    10,410.0
    
    
    
    17,325.1
    
    
    
    534.2Investments accounted for using equity method
    
    
    65.1
    
    
    
    
    
    
    
    
    
    
    
    Financial assets carried at cost
    
    
    76.1
    
    
    
    126.5
    
    
    
    410.5
    
    
    
    12.7Property, plant and equipment and other assets
    
    
    480.7
    
    
    
    518.7
    
    
    
    60.5
    
    
    
    1.9Increase in deferred charges
    
    
    (856.0
    )
    
    
    (1,414.8
    )
    
    
    (3,059.2
    )
    
    
    (94.3
    )Decrease (increase) in refundable deposits
    
    
    0.8
    
    
    
    (1,224.5
    )
    
    
    (1,434.9
    )
    
    
    (44.2
    )Net cash paid for acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    (404.4
    )
    
    
    (12.5
    )Decrease (increase) in other assets
    
    
    0.7
    
    
    
    (52.1
    )
    
    
    (228.8
    )
    
    
    (7.1
    )Net cash used in investing activities
    
    
    (77,652.2
    )
    
    
    (119,723.4
    )
    
    
    (70,688.8
    )
    
    
    (2,179.7
    )
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##### Table of Contents



Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions of New Taiwan or U.S. Dollars)
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)CASH FLOWS FROM FINANCING ACTIVITIESRepayments of:Short-term bank loans
    
    $
    (54.5
    )
    
    $
    (328.5
    )
    
    $
    (89.7
    )
    
    $
    (2.8
    )Bonds payable
    
    
    (10,500.0
    )
    
    
    
    
    
    
    (7,000.0
    )
    
    
    (215.8
    )Long-term bank loans
    
    
    (1,337.4
    )
    
    
    (5.5
    )
    
    
    (196.2
    )
    
    
    (6.0
    )Increase in long-term bank loans
    
    
    
    
    
    
    
    
    
    
    653.0
    
    
    
    20.1Increase (decrease) in guarantee deposits
    
    
    2,483.5
    
    
    
    920.7
    
    
    
    (1,574.1
    )
    
    
    (48.5
    )Cash dividends
    
    
    (46,419.8
    )
    
    
    (61,742.7
    )
    
    
    (77,387.3
    )
    
    
    (2,386.3
    )Cash bonus paid to employees
    
    
    (3,086.2
    )
    
    
    (3,432.1
    )
    
    
    (4,572.8
    )
    
    
    (141.0
    )Bonus to directors and supervisors
    
    
    (231.5
    )
    
    
    (257.4
    )
    
    
    (285.8
    )
    
    
    (8.8
    )Proceeds from:Exercise of employee stock options
    
    
    270.9
    
    
    
    575.1
    
    
    
    436.8
    
    
    
    13.5Disposal of treasury stock
    
    
    899.5
    
    
    
    
    
    
    
    
    
    
    
    Repurchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (45,413.4
    )
    
    
    (1,400.4
    )Increase in minority interests
    
    
    6.8
    
    
    
    487.0
    
    
    
    19.0
    
    
    
    0.5Net cash used in financing activities
    
    
    (57,968.7
    )
    
    
    (63,783.4
    )
    
    
    (135,410.5
    )
    
    
    (4,175.5
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    21,604.3
    
    
    
    21,490.3
    
    
    
    (22,332.6
    )
    
    
    (688.6
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
    
    348.9
    
    
    
    (136.8
    )
    
    
    (518.1
    )
    
    
    (16.0
    )EFFECT OF FIRST INCLUSION FOR CONSOLIDATION OF CERTAIN SUBSIDIARIES
    
    
    228.1
    
    
    
    
    
    
    
    
    
    
    
    CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    74,302.4
    
    
    
    96,483.7
    
    
    
    117,837.2
    
    
    
    3,633.6CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    96,483.7
    
    
    $
    117,837.2
    
    
    $
    94,986.5
    
    
    $
    2,929.0SUPPLEMENTAL INFORMATIONInterest paid
    
    $
    1,378.6
    
    
    $
    951.5
    
    
    $
    922.1
    
    
    $
    28.4Income tax paid
    
    $
    341.7
    
    
    $
    3,630.0
    
    
    $
    7,585.7
    
    
    $
    233.9INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMSAcquisition of property, plant and equipment
    
    $
    56,166.2
    
    
    $
    80,675.3
    
    
    $
    78,890.0
    
    
    $
    2,432.6Decrease (increase) in payables to contractors and equipment suppliers
    
    
    24,361.7
    
    
    
    (1,702.5
    )
    
    
    5,111.0
    
    
    
    157.6Increase in other long-term payables
    
    
    (649.2
    )
    
    
    (235.5
    )
    
    
    
    
    
    
    Cash paid
    
    $
    79,878.7
    
    
    $
    78,737.3
    
    
    $
    84,001.0
    
    
    $
    2,590.2Repurchase of treasury stock
    
    $
    
    
    
    $
    
    
    
    $
    48,466.9
    
    
    $
    1,494.6Increase in accrued expenses and other current liabilities
    
    
    
    
    
    
    
    
    
    
    (3,053.5
    )
    
    
    (94.2
    )Cash paid
    
    $
    
    
    
    $
    
    
    
    $
    45,413.4
    
    
    $
    1,400.4NON-CASH FINANCING ACTIVITIESCurrent portion of long-term liabilities
    
    $
    5.5
    
    
    $
    7,004.1
    
    
    $
    280.8
    
    
    $
    8.7Current portion of other long-term payables (under accrued expenses and
other current liabilities)
    
    
    869.1
    
    
    
    617.9
    
    
    
    3,735.9
    
    
    
    115.2Current portion of other payables to related parties (under payables to
related parties)
    
    
    694.0
    
    
    
    688.6
    
    
    
    
    
    
    
    
  F-8




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##### Table of Contents



Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions of New Taiwan or U.S. Dollars)
  Current assets
    
    $
    3,101.7Property, plant and equipment
    
    
    2,339.6Other assets
    
    
    436.7Current liabilities
    
    
    (1,937.4
    )Long-term liabilities
    
    
    (701.9
    )Net amount
    
    $
    3,238.7Purchase price for Xintec and Mutual-Pak
    
    $
    1,413.5Less: Cash balance of Xintec and Mutual-Pak at acquisition
    
    
    (1,009.1
    )Net cash paid for acquisition of Xintec and Mutual-Pak
    
    $
    404.4The accompanying notes are an integral part of the consolidated financial statements.
    
    (Concluded)
 F-9




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##### Table of Contents



Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    GENERALTaiwan 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.2.
    
    SIGNIFICANT ACCOUNTING POLICIESThe 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.Significant accounting policies are summarized as follows:Principles of ConsolidationThe 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.The consolidated entities were as follows:
 Percentage of OwnershipDecember 31,
    
    December 31,Name of Investor
    
    Name of Investee
    
    2006
    
    2007
    
    RemarkTSMC
    
    TSMC North America (TSMC-NA)
    
    
    100
    %
    
    
    100
    %
    
    TSMC Japan Limited (TSMC-Japan)
    
    
    100
    %
    
    
    100
    %
    
    TSMC Korea Limited (TSMC-Korea)
    
    
    100
    %
    
    
    100
    %
    
    Taiwan Semiconductor
Manufacturing Company Europe
B.V. (TSMC-Europe)
    
    
    100
    %
    
    
    100
    %
    
    TSMC International Investment
Ltd. (TSMC International)
    
    
    100
    %
    
    
    100
    %
    
    TSMC Global, Ltd. (TSMC Global)
    
    
    100
    %
    
    
    100
    %
    
    TSMC (Shanghai) Company
Limited (TSMC-Shanghai)
    
    
    100
    %
    
    
    100
    %
    
    Chi Cherng Investment Co.,
Ltd. (Chi Cherng)
    
    
    36
    %
    
    
    36
    %
    
    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).
 F-10




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##### Table of Contents



Percentage of OwnershipDecember 31,
    
    December 31,Name of Investor
    
    Name of Investee
    
    2006
    
    2007
    
    RemarkHsin Ruey Investment Co., Ltd.
(Hsin Ruey)
    
    
    36
    %
    
    
    36
    %
    
    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)
    
    
    98
    %
    
    
    98
    %
    
    VentureTech Alliance Fund II,
L.P. (VTAF II)
    
    
    98
    %
    
    
    98
    %
    
    Emerging Alliance Fund, L.P.
(Emerging Alliance)
    
    
    99.5
    %
    
    
    99.5
    %
    
    Global Unichip Corporation (GUC)
    
    
    38
    %
    
    
    37
    %
    
    GUC became a
consolidated entity
of TSMC as GUCs
president was
assigned by TSMC
and TSMC has a
controlling
interest over the
financial,
operating and
personnel hiring
decisions of GUC.Xintec Inc. (Xintec)
    
    
    
    
    
    
    43
    %
    
    TSMC obtained three
out of five
director positions
in March 2007, and
TSMC has a
controlling
interest over
Xintec.TSMC Partners, Ltd.
(TSMC Partners)
    
    
    100
    %
    
    
    100
    %
    
    TSMC International
    
    TSMC Technology, Inc. (TSMC
Technology)
    
    
    100
    %
    
    
    100
    %
    
    TSMC Development, Inc.
(TSMC Development)
    
    
    100
    %
    
    
    100
    %
    
    InveStar Semiconductor
Development Fund, Inc.
(ISDF)
    
    
    97
    %
    
    
    97
    %
    
    InveStar Semiconductor
Development Fund, Inc.
(II) LDC (ISDF II)
    
    
    97
    %
    
    
    97
    %
    
    TSMC Development
    
    WaferTech, LLC (WaferTech)
    
    
    99.996
    %
    
    
    99.996
    %
    
    VTAF III
    
    Mutual-Pak Technology Co.,
Ltd. (Mutual-Pak)
    
    
    13
    %
    
    
    51
    %
    
    VTAF III acquired a
controlling
interest in
Mutual-Pak in July 2007.VTAF III,
VTAF II
and Emerging
Alliance
    
    VentureTech Alliance Holdings,
LLC (VTA Holdings)
    
    
    
    
    
    
    100
    %
    
    Newly established.GUC
    
    Global Unichip Corp.-North
America (GUC-NA)
    
    
    100
    %
    
    
    100
    %
    
    Global Unichip Japan
Co., Ltd. (GUC-Japan)
    
    
    100
    %
    
    
    100
    %
    
    TSMC Partners
    
    TSMC Design Technology
Canada, Inc. (TSMC Canada)
    
    
    
    
    
    
    100
    %
    
    Newly established.
   F-11




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Use of Estimates
  Classification of Current and Noncurrent Assets and Liabilities
  Cash Equivalents
  Financial Assets/Liabilities at Fair Value Through Profit or Loss
  F-12




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Available-for-sale Financial Assets
      Held-to-maturity Financial Assets
   Allowance for Doubtful Receivables
  F-13




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Revenue Recognition and Allowance for Sales Returns and Others
   Inventories
  Investments Accounted for Using Equity Method
    F-14




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Financial Assets Carried at Cost
   Property, Plant and Equipment, Assets Leased to Others and Idle Assets
     Intangible Assets
  F-15




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more likely than not below its carrying amount, an impairment loss is 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
charges. The amounts are amortized over the following periods: Technology license fees  the
shorter of the estimated life of the technology or the term of the technology transfer
contract; software and 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 recoverable amount increases in a
subsequent period, the previously recognized impairment loss would be reversed and recognized
as a gain. However, the adjusted amount may not exceed the carrying amount that would have
been determined, net of amortization, as if no impairment loss had been recognized.Effective January 1, 2007, the Company adopted the newly released Statement of Financial
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. Expenditures related to research activities and those related to development
activities that do not meet the criteria for capitalization are charged to expenses when
incurred.Pension CostsFor employees who participate in defined contribution pension plans, pension costs are recorded
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.Government SubsidiesIncome-related subsidies from governments are recognized in earnings when the requirements for
subsidies are met.Income TaxThe Company applies intra-period and inter-period allocations for its income tax whereby (1) a
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 effects of temporary differences, net operating loss carryforwards and unused tax
credits. Valuation allowances are provided to the extent, if any, that it is more likely than
not that deferred income tax assets will not be realized. A deferred tax asset or liability is
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
liability in the financial statements, then it is classified as either current or noncurrent
based on the expected length of time before it is realized or settled.Any tax credits arising from purchases of machinery, equipment and technology, research and
development expenditures, personnel training expenditures, and investments in important
technology-based enterprises are recognized using the flow-through method.Adjustments of prior years tax liabilities are added to or deducted from the current years
tax provision.Income tax on unappropriated earnings (excluding earnings from foreign consolidated
subsidiaries) at a rate of 10% is expensed in the year of shareholder approval which is the
year subsequent to the year the earnings are generated.The R.O.C. government enacted the Alternative Minimum Tax Act (the AMT Act), which became
effective on January 1, 2006. The alternative minimum tax (AMT) imposed under the AMT Act is a
supplemental tax levied at a rate of 10% which is payable if the income tax payable determined
pursuant to the Income Tax Law is below the minimum amount prescribed under the AMT Act. The
taxable income for
 F-16




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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 Act in the determination of their tax liabilities.Stock-based CompensationEmployee 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
Foundation of the Republic of China. (the ARDF). The Company adopted the intrinsic value
method and any compensation cost determined using this method is recognized in earnings over
the employee vesting period.Treasury StockTreasury 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 surplus  additional paid-in capital are reversed on a pro rata basis. When the
book value of the treasury stock exceeds the sum of the par value and additional paid-in
capital, the difference is 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 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 TSMC are recorded under capital surplus 
treasury stock transactions.Foreign-currency TransactionsForeign-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 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 StatementsThe 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.Concentration of Credit RiskFinancial instruments that potentially subject the Company to significant concentrations of
credit risk consist principally of cash and cash equivalents, receivables, investments and
deposits. The Company limits its exposure to credit loss by depositing its cash and cash
equivalents with high credit rating financial institutions. The Companys sales are primarily
denominated in U.S. dollars. Sales to top ten customers represented 52%, 53% and 51% of the
consolidated sales for the years ended December 31, 2005, 2006 and 2007, respectively. The
Company routinely assesses the financial strength of substantially all customers. The
financial condition of the counter-party to investments and deposits is assessed by management
on a regular basis.Fair Values of Financial InstrumentsThe carrying amount of cash equivalents approximates fair value due to the short period of time
to maturity. Fair values of investments in equity or debt securities and derivative financial
instruments are based on quoted market prices or pricing models using current market data.
Receivables, other financial assets, payables and short-term loans are financial instruments
with carrying amounts that approximate fair values.
 F-17




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Fair value of long-term loans with floating interest rates is their carrying amount. Fair value of long-term loans with fixed
interest rates is the present value of expected cash flows discounted using the interest rate
the Company may obtain for similar long-term loans. For the Companys investment portfolio
without immediately available market quotes, management believes that the carrying amount of
the portfolio approximates the fair value at December 31, 2006 and 2007. Management believes
that the differences between the estimated fair values and carrying amounts of these financial
instruments were not significant at December 31, 2006 and 2007.
 Earnings Per ShareEarnings per share is computed by dividing income attributable to shareholders of the parent by
the weighted-average number of shares outstanding in each year, which is retroactively adjusted
to the beginning of the year for stock dividends and stock bonuses issued subsequently.
Earnings per equivalent ADS is calculated by multiplying earnings per share by five (one ADS
represents five common shares).Recent Accounting PronouncementsIn March 2007, the ARDF 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. Based on managements reasonable estimate, the
Company believes that the adoption of this standard will result in a charge to earnings of
approximately 15% of the net income for 2008. However, the actual percentage to be paid in
profit sharing bonuses is subject to the approval of the Companys shareholders.The ARDF also issued Statement of Financial Accounting Standards No. 39, Accounting for
Share-based Payment (R.O.C. SFAS No. 39) in August 2007, which requires companies to measure
share-based payment transactions at fair value and charge such amount to earnings. R.O.C. SFAS
No. 39 should be applied to financial statements for fiscal years beginning on or after January
1, 2008. The adoption of R.O.C. SFAS No. 39 will change the Companys accounting treatment for shares-based payment on a prospective basis beginning in the first quarter of 2008.The ARDF revised Statement of Financial Accounting Standards No. 10, Accounting for
Inventories (R.O.C. 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 required to be
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 R.O.C. SFAS No. 10
should be applied to financial statements for the fiscal years beginning on or after January 1,
2009. Early adoption is permitted. The Company is currently evaluating the impact that the
adoption of R.O.C. SFAS No. 10 will have on its results of operation and financial positions
and is not yet in a position to determine such effect.3.
    
    U.S. DOLLAR AMOUNTSThe Company maintains its accounts and expresses its consolidated financial statements in New
Taiwan dollars. For convenience only, U.S. dollar amounts presented in the accompanying
consolidated financial statements have been translated from New Taiwan dollars at the noon
buying rate in The City of New York for cable transfers in New Taiwan dollars as certified for
customs purposes by the Federal Reserve Bank of New York as of December 31, 2007, which was
NT$32.43 to US$1.00. The convenience translations should not be construed as representations
that the New Taiwan dollar amounts have been, could have been, or could in the future be,
converted into U.S. dollars at this or any other rate of exchange.4.
    
    ACCOUNTING CHANGES
 a.
    
    Effect of adopting the newly released and revised R.O.C. SFASs
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##### Table of Contents



On January 1, 2006, the Company adopted the newly released Statements of Financial
Accounting Standards No. 34, Financial Instruments: Recognition and Measurement (R.O.C.
SFAS No. 34) and No. 36, Financial Instruments: Disclosure and Presentation.The Company had categorized its financial assets and liabilities upon initial adoption of
the newly released R.O.C. SFASs. The adjustments made to the carrying amounts of the
financial instruments categorized as financial assets or financial liabilities at fair
value through profit or loss were included in the 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 shareholders equity.The effect of adopting the newly released R.O.C. SFASs is summarized as follows:
 Recognized asCumulativeEffect of
    
    
    Recognized as aChanges in
    
    
    SeparateAccounting
    
    
    Component ofPrinciples
    
    
    Shareholders(Net of Tax)
    
    
    EquityFinancial assets or liabilities at fair value through profit or loss
    
    $
    1,606.7
    
    
    $
    Available-for-sale financial assets
    
    
    
    
    
    
    306.5$
    1,606.7
    
    
    $
    306.5
 The adoption of the newly released R.O.C. SFASs resulted in a decrease in net income before
cumulative effect of changes in accounting principles of NT$1,083.5 million, an increase in
net income of NT$523.2 million, and an increase in basic earnings per share (after income
tax) of NT$0.02 for the year ended December 31, 2006.Effective January 1, 2006, the Company adopted the newly revised R.O.C. 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 December 31, 2006.
 b.
    
    ReclassificationsUpon adoption of R.O.C. SFAS No. 34, certain accounts in the consolidated financial
statements as of and for the year ended December 31, 2005 were reclassified to conform to
the consolidated financial statements as of and for the years ended December 31, 2006 and
2007. The previously issued consolidated financial statements as of and for the year ended
December 31, 2005 were not required to be restated.Certain accounting policies prior to the adoption of R.O.C. SFAS No. 34 are summarized as
follows:
 1)
    
    Short-term investmentsShort-term investments that were publicly-traded, easily converted to cash, and not
acquired for the purpose of controlling the investees or establishing close business
relationship with the investees were carried at the lower of cost or market value at
the balance sheet date, with any temporary decline in value charged to current income.
The market value of publicly-traded stocks was determined using the average-closing
prices for the last month of the year.2)
    
    Derivative financial instruments
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The Company entered into forward exchange contracts to manage foreign exchange
exposures on foreign-currency-denominated assets and liabilities. The contracts were
recorded in New Taiwan dollars at the current rate of exchange at the contract date.
The differences in the New Taiwan dollar amounts translated using the current rates and
the amounts translated using the contracted forward rates were amortized over the terms
of the forward contracts using the straight-line method. At the end of each year, the
receivables or payables arising from forward contracts were restated using the
prevailing exchange rates with the resulting differences credited or charged to
income. In addition, the receivables and payables related to the same forward
contracts were netted with the resulting amount presented as either an asset or a
liability. Any resulting gain or loss upon settlement was credited or charged to
income in the year of settlement.The Company entered into cross currency swap contracts to manage currency exposures on
foreign-currency-denominated assets and liabilities. The principal amount was recorded
using the current rates of exchange at the contract date. The differences in the New
Taiwan dollar amounts translated using the current rates and the amounts translated
using the contracted rates were amortized over the terms of the contracts using the
straight-line method. At the end of each year, the receivables or payables arising
from cross-currency swap contracts were restated using prevailing exchange rate with
the resulting differences credited or charged to income. In addition, the receivables
and payables related to the contracts of the same counter party were netted with the
resulting amount presented as either an asset or a liability. The difference in
interest computed pursuant to the contracts on each settlement date or the balance
sheet date was recorded as an adjustment to the interest income or expense associated
with the hedged items. Any resulting gain or loss upon settlement was credited or
charged to income in the year of settlement.The Company entered into interest rate swap contracts to manage exposures to changes in
interest rates on existing assets or liabilities. These transactions were accounted
for on an accrual basis, in which the cash settlement receivable or payable was
recorded as an adjustment to interest income or expense associated with the hedged
items.Certain accounts in the consolidated financial statements for the year ended December
31, 2005 have been reclassified to conform to the classifications prescribed by R.O.C.
SFAS No. 34. The reclassifications of the whole or a part of the account balances of
certain accounts are summarized as follows:
 Before
    
    
    AfterReclassification
    
    
    ReclassificationNT$
    
    
    NT$(In Millions)Statement of incomeInterest income
    
    $
    3,069.4
    
    
    $
    2,806.2Foreign exchange gain, net
    
    
    3.0
    
    
    
    2,610.0Interest expense
    
    
    (2,662.5
    )
    
    
    (1,413.4
    )Unrealized valuation loss on short-term investments
    
    
    (337.2
    )
    
    
    Loss on disposal of investment, net
    
    
    (9.9
    )
    
    
    Valuation loss on financial instruments, net
    
    
    
    
    
    
    (337.2
    )Loss on settlement and disposal of financial instruments, net
    
    
    
    
    
    
    (3,602.8
    )$
    62.8
    
    
    $
    62.8
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5.
    
    CASH AND CASH EQUIVALENTS
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Cash and deposits in banks
    
    $
    85,496.1
    
    
    $
    84,105.4Repurchase agreements collaterized by government bonds
    
    
    31,241.6
    
    
    
    10,067.8Asset-backed commercial papers
    
    
    
    
    
    
    522.1Corporate notes
    
    
    1,026.5
    
    
    
    291.2Treasury bills
    
    
    73.0
    
    
    
    $
    117,837.2
    
    
    $
    94,986.5
 6.
    
    FINANCIAL ASSETS/LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Trading financial assetsPublicly-traded stocks
    
    $
    1,162.3
    
    
    $
    1,590.2Cross currency swap contracts
    
    
    44.6
    
    
    
    35.6Forward exchange contracts
    
    
    
    
    
    
    6.6$
    1,206.9
    
    
    $
    1,632.4Trading financial liabilitiesForward exchange contracts
    
    $
    0.1
    
    
    $
    185.6Cross currency swap contracts
    
    
    10.8
    
    
    
    63.7$
    10.9
    
    
    $
    249.3
 The Company entered into derivative contracts during the years ended December 31, 2006 and 2007
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 R.O.C. SFAS No. 34. Therefore, the Company did not apply hedge accounting treatment for its
derivative financial contracts.Outstanding forward contracts as of December 31, 2006 and 2007:
 ContractAmountMaturity Date
    
    (in Millions)December 31, 2006Sell JPY/Buy US$
    
    January 2007
    
    JPY
    
    
    38.6December 31, 2007Sell US$/Buy NT$
    
    January 2008
    
    US$
    
    
    111.0Sell EUR/Buy NT$
    
    February 2008 to July 2008
    
    EUR
    
    
    48.0
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##### Table of Contents



Outstanding cross currency swap contracts as of December 31, 2006 and 2007:
 Maturity Date
    
    Contract
    
    Range of
    
    Range ofAmount
    
    Interest Rates
    
    Interest Rates(in Millions)
    
    Paid
    
    ReceivedDecember 31, 2006January 2007 to February 2007
    
    US$820.0
    
    3.19%-5.91%
    
    0.90%-3.25%December 31, 2007January 2008 to February 2008
    
    US$975.0
    
    3.53%-5.60%
    
    0.02%-3.01%
 For the years ended December 31, 2006 and 2007, net losses arising from derivative financial
instruments were NT$1,613.4 million (including realized settlement losses of NT$1,647.1 million
and valuation gains of NT$33.7 million) and NT$924.9 million (including realized settlement
losses of NT$684.1 million and valuation losses of NT$240.8 million), respectively.The Company did not enter into any interest rate swap contracts during the years ended December
31, 2006 and 2007. The Company rescinded all interest rate swap contracts in the first quarter
of 2005 before their original maturities. The rescission loss of NT$28.3 million has been
reclassified and included in the loss on settlement and disposal of financial instruments
account
 7.
    
    AVAILABLE-FOR-SALE FINANCIAL ASSETS
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Money market funds
    
    $
    667.8
    
    
    $
    19,212.1Open-end mutual funds
    
    
    26,147.3
    
    
    
    14,966.7Corporate bonds
    
    
    16,494.3
    
    
    
    10,745.1Agency bonds
    
    
    12,691.6
    
    
    
    8,635.8Government bonds
    
    
    6,921.5
    
    
    
    7,767.6Corporate issued asset-backed securities
    
    
    10,541.7
    
    
    
    5,357.1Publicly-traded stocks
    
    
    208.9
    
    
    
    905.3Structured time deposits
    
    
    499.3
    
    
    
    499.474,172.4
    
    
    
    68,089.1Current portion
    
    
    (67,523.9
    )
    
    
    (66,688.4
    )$
    6,648.5
    
    
    $
    1,400.7
 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 classified as cash equivalents.
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##### Table of Contents



Structured time deposits categorized as available-for-sale financial assets consisted of the
following:
 Principal
    
    
    CarryingAmount
    
    
    Amount
    
    
    Interest Rates
    
    
    Maturity DateNT$
    
    
    NT$(In Millions)December 31, 2006Step-up callable depositsDomestic deposits
    
    $
    500.0
    
    
    $
    499.3
    
    
    
    1.76
    %
    
    March 2008December 31, 2007Step-up callable depositsDomestic deposits
    
    $
    500.0
    
    
    $
    499.4
    
    
    
    1.76
    %
    
    March 2008
 The interest rate of the step-up callable deposits was pre-determined by the Company and the
banks.
 8.
    
    HELD-TO-MATURITY FINANCIAL ASSETS
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Corporate bonds
    
    $
    13,742.5
    
    
    $
    10,900.2Government bonds
    
    
    12,070.7
    
    
    
    7,824.4Structured time deposits
    
    
    11,671.1
    
    
    
    1,500.037,484.3
    
    
    
    20,224.6Current portion
    
    
    (8,510.8
    )
    
    
    (11,526.9
    )$
    28,973.5
    
    
    $
    8,697.7
 Structured time deposits categorized as held-to-maturity financial assets consisted of the
following:
 Range ofPrincipal
    
    
    Interest
    
    
    InterestAmount
    
    
    Receivable
    
    
    Rates
    
    Maturity DateNT$
    
    
    NT$(In Millions)December 31, 2006Step-up callable depositsDomestic deposits
    
    $
    4,500.0
    
    
    $
    13.9
    
    
    1.40%-1.83%
    
    June 2007 to October 2008Callable range accrual
depositsDomestic deposits
    
    
    3,911.5
    
    
    
    4.8
    
    
    (See below)
    
    September 2009 to December 2009Foreign deposits
    
    
    3,259.6
    
    
    
    5.0
    
    
    (See below)
    
    October 2009 to January 2010$
    11,671.1
    
    
    $
    23.7December 31, 2007Step-up callable depositsDomestic deposits
    
    $
    1,500.0
    
    
    $
    5.6
    
    
    1.77%-1.83%
    
    April 2008 to October 2008
 The amount of interest earned from the callable range accrual deposits is based on a
pre-defined 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
 F-23




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##### Table of Contents



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 maturity date.As of December 31, 2006, the principal of the deposits that resided in banks located in Hong Kong and Singapore amounted to US$80.0 million and US$20.0 million, respectively.
As of December 31, 2007, no structured time deposit resided in banks located in foreign countries.9.
    
    RECEIVABLES, NET
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Notes receivable
    
    $
    60.3
    
    
    $
    59.0Accounts receivable
    
    
    34,897.4
    
    
    
    47,145.134,957.7
    
    
    
    47,204.1Allowance for doubtful receivables
    
    
    (749.9
    )
    
    
    (701.8
    )Allowance for sales returns and others
    
    
    (2,870.8
    )
    
    
    (4,089.0
    )(3,620.7
    )
    
    
    (4,790.8
    )$
    31,337.0
    
    
    $
    42,413.3
 Changes in the allowances are summarized as follows:
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Allowance for doubtful receivablesBalance, beginning of year
    
    $
    982.8
    
    
    $
    980.6
    
    
    $
    749.9Effect of inclusion of newly consolidated subsidiaries
    
    
    3.5
    
    
    
    
    
    
    
    Additions
    
    
    1.1
    
    
    
    54.7
    
    
    
    3.0Deductions
    
    
    (6.8
    )
    
    
    (285.4
    )
    
    
    (51.1
    )Balance, end of year
    
    $
    980.6
    
    
    $
    749.9
    
    
    $
    701.8Allowance for sales returns and othersBalance, beginning of year
    
    $
    3,342.5
    
    
    $
    4,317.4
    
    
    $
    2,870.8Effect of inclusion of newly consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    12.9Additions
    
    
    5,805.5
    
    
    
    5,382.2
    
    
    
    5,773.4Deductions
    
    
    (4,830.6
    )
    
    
    (6,828.8
    )
    
    
    (4,568.1
    )Balance, end of year
    
    $
    4,317.4
    
    
    $
    2,870.8
    
    
    $
    4,089.0
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10.
    
    INVENTORIES, NET
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Finished goods
    
    $
    5,146.8
    
    
    $
    4,321.9Work in process
    
    
    14,688.7
    
    
    
    17,346.9Raw materials
    
    
    1,674.0
    
    
    
    1,862.5Supplies and spare parts
    
    
    926.1
    
    
    
    1,261.722,435.6
    
    
    
    24,793.0Allowance for losses
    
    
    (1,004.9
    )
    
    
    (930.7
    )$
    21,430.7
    
    
    $
    23,862.3
 Changes in the allowance are summarized as follows:
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Balance, beginning of year
    
    $
    1,577.5
    
    
    $
    1,685.8
    
    
    $
    1,004.9Effect of inclusion of newly consolidated subsidiaries
    
    
    0.2
    
    
    
    
    
    
    
    16.3Additions
    
    
    159.0
    
    
    
    172.1
    
    
    
    165.4Write-offs
    
    
    (50.9
    )
    
    
    (853.0
    )
    
    
    (255.9
    )Balance, end of year
    
    $
    1,685.8
    
    
    $
    1,004.9
    
    
    $
    930.7
 11.
    
    INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD
 December 312006
    
    
    2007% of
    
    
    
    
    
    
    % ofCarrying
    
    
    Owner-
    
    
    Carrying
    
    
    Owner-Amount
    
    
    ship
    
    
    Amount
    
    
    shipNT$
    
    
    
    
    
    
    NT$(In Millions)
    
    
    
    
    
    
    (In Millions)Vanguard International Semiconductor Corporation (VIS)
    
    $
    5,931.7
    
    
    
    27
    
    
    $
    11,220.1
    
    
    
    37Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)
    
    
    7,960.9
    
    
    
    39
    
    
    
    9,092.7
    
    
    
    39VisEra Holding Company (VisEra Holding)
    
    
    1,108.3
    
    
    
    49
    
    
    
    2,204.5
    
    
    
    49$
    15,000.9
    
    
    
    
    
    
    $
    22,517.3
 In November 2006, the Company acquired 81 thousand shares in SSMC for SGD115.2 million 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$4,927.9 million.
After the acquisition, the Companys percentage of ownership in VIS increased from 27% to 37%.
 F-25




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##### Table of Contents



For the years ended December 31, 2005, 2006 and 2007, net equity in earnings of NT$1,433.2
million, NT$2,347.2 million and NT$2,507.9 million 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, 2006 and 2007, fair values of publicly traded stocks included in investments
accounted for using equity method were NT$11,027.1 million and NT$ 15,189.2 million,
respectively.Movements of the difference between the cost of investment and the Companys share in
investees net assets allocated to depreciable assets for the years ended December 31, 2006 and
2007 were as follows:
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Balance, beginning of year
    
    $
    
    
    
    $
    
    
    
    $
    952.2Additions
    
    
    
    
    
    
    1,010.8
    
    
    
    1,968.6Depreciation/Amortization
    
    
    
    
    
    
    (58.6
    )
    
    
    (331.1
    )Balance, end of year
    
    $
    
    
    
    $
    952.2
    
    
    $
    2,589.7
 Movements of the aforementioned difference allocated to goodwill for the years ended December
31, 2006 and 2007 were as follows:
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Balance, beginning of year
    
    $
    
    
    
    $
    
    
    
    $
    213.9Additions
    
    
    
    
    
    
    213.9
    
    
    
    773.4Balance, end of year
    
    $
    
    
    
    $
    213.9
    
    
    $
    987.3
 12.
    
    FINANCIAL ASSETS CARRIED AT COST
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Non-publicly traded stocks
    
    $
    2,924.4
    
    
    $
    3,462.4Mutual funds
    
    
    347.9
    
    
    
    383.2$
    3,272.3
    
    
    $
    3,845.6
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##### Table of Contents



13.
    
    PROPERTY, PLANT AND EQUIPMENT, NET
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)CostLand improvements
    
    $
    844.7
    
    
    $
    942.2Buildings
    
    
    112,595.1
    
    
    
    118,640.1Machinery and equipment
    
    
    579,825.3
    
    
    
    646,419.4Office equipment
    
    
    10,646.7
    
    
    
    11,829.6Leased assets
    
    
    612.9
    
    
    
    652.3704,524.7
    
    
    
    778,483.6Advance payments and construction in progress
    
    
    12,607.6
    
    
    
    21,868.2717,132.3
    
    
    
    800,351.8Accumulated depreciationLand improvements
    
    
    234.4
    
    
    
    262.7Buildings
    
    
    54,288.2
    
    
    
    63,239.9Machinery and equipment
    
    
    400,579.6
    
    
    
    467,665.1Office equipment
    
    
    7,839.3
    
    
    
    8,796.8Leased assets
    
    
    96.6
    
    
    
    135.1463,038.1
    
    
    
    540,099.6Net
    
    $
    254,094.2
    
    
    $
    260,252.2
 Depreciation expense on property, plant and equipment was NT$71,385.8 million, NT$71,225.2
million and NT$77,171.3 million for the years ended December 31, 2005, 2006 and 2007,
respectively.The Company entered into agreements to lease buildings that qualify as capital leases. The
term of the leases is from December 2003 to December 2013. The future minimum lease payments
as of December 31, 2007 is NT$ 725.7 million.
 14.
    
    DEFERRED CHARGES, NET
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Technology license fees
    
    $
    4,132.2
    
    
    $
    5,819.1Software and system design costs
    
    
    1,669.8
    
    
    
    1,449.6Others
    
    
    134.9
    
    
    
    654.9$
    5,936.9
    
    
    $
    7,923.6
 Amortization expense on deferred charges was NT$4,341.3 million, NT$2,472.4 million and
NT$2,793.0 million for the years ended December 31, 2005, 2006 and 2007, respectively.As of December 31, 2007, the Companys estimated aggregate amortization expense for each of the
five succeeding fiscal years and thereafter is as follows:
 AmountNT$Year
    
    (In Millions)2008
    
    $
    2,345.32009
    
    
    1,507.82010
    
    
    1,354.42011
    
    
    807.72012
    
    
    504.82013 and thereafter
    
    
    1,403.6$
    7,923.6
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15.
    
    BONDS PAYABLE
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Domestic unsecured bonds:Issued in December 2000 and repayable in December 2007, 5.36% interest payable annually
    
    $
    4,500.0
    
    
    $
    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
    
    
    15,000.0
    
    
    
    12,500.019,500.0
    
    
    
    12,500.0Current portion
    
    
    (7,000.0
    )
    
    
    $
    12,500.0
    
    
    $
    12,500.0
 As of December 31, 2007, future principal repayments for the Companys bonds were as follows:
 AmountNT$Year of Repayment
    
    (In Millions)2009
    
    $
    8,000.02012
    
    
    4,500.0$
    12,500.0
 16.
    
    LONG-TERM BANK LOANS
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Secured loans:US$20.0 million, repayable in full in one lump sum payment in
November 2010, annual interest at 5.91% in 2006 and
5.88% in 2007
    
    $
    651.9
    
    
    $
    648.9Repayable from August 2009 in 17 quarterly installments, annual
interest at 2.91%-2.99
    
    
    
    
    
    
    630.0Repayable from December 2007 in 8 semi-annual installments,
annual interest at 2.39%-3.20%
    
    
    
    
    
    
    456.8Repayable from March 2007 in 12 quarterly installments, annual
interest at 2.79%-3.16%
    
    
    
    
    
    
    124.9Repayable from May 2007 in 16 quarterly installments, annual
interest at 2.48%-2.85%
    
    
    
    
    
    
    54.6Repayable from April 2005 in 16 quarterly installments, annual
interest at 2.51%-2.85%
    
    
    
    
    
    
    45.0Repayable from February 2005 in 17 quarterly installments, annual
interest at 2.65%-4.53%
    
    
    
    
    
    
    40.7Unsecured loans:
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December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Science Park Administration (SPA) SOC loan, repayable from
October 2003 in 20 quarterly installments, interest-free
    
    
    4.9
    
    
    
    2.1SPA DSP loan, repayable from July 2002 in 20 quarterly
installments, interest-free
    
    
    1.3
    
    
    
    658.1
    
    
    
    2,003.0Current portion
    
    
    (4.1
    )
    
    
    (280.8
    )$
    654.0
    
    
    $
    1,722.2
 Pursuant to the loan agreements, financial ratios calculated based on annual audited financial
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 in compliance with all such financial covenants.As of December 31, 2007, future principal repayments under the Companys long-term bank loans
were as follows:
 AmountNT$Year of Repayment
    
    (In Millions)2008
    
    $
    280.82009
    
    
    302.12010
    
    
    947.52011
    
    
    220.62012 and thereafter
    
    
    252.0$
    2,003.0
 17.
    
    OTHER LONG-TERM PAYABLES
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Payables for acquisition of property, plant and equipment (Note 28l)
    
    $
    7,431.4
    
    
    $
    7,908.5Payables for royalties
    
    
    1,889.8
    
    
    
    5,174.79,321.2
    
    
    
    13,083.2Current portion (under accrued expenses and other current liabilities)
    
    
    (617.9
    )
    
    
    (3,673.2
    )$
    8,703.3
    
    
    $
    9,410.0
 The payables for royalties were primarily attributable to several license arrangements that the
Company entered into for certain semiconductor-related patents.As of December 31, 2007, future payments for other long-term payables were as follows:
 AmountNT$Year of Payment
    
    (In Millions)2008
    
    $
    3,673.22009
    
    
    582.02010
    
    
    497.72011
    
    
    421.82012 and thereafter
    
    
    7,908.5$
    13,083.2
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18.
    
    PENSION PLANSThe Labor Pension Act (the Act) became effective on July 1, 2005. The
employees of TSMC, GUC, and 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 continue to be subject to the pension
mechanism under the Labor Standards Law. Employees who 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 and TSMC-Europe and TSMC Canada are required by
local regulations to make contributions, at a certain percentage of
the monthly basic salary of their employees. Pursuant to the
aforementioned Act and local regulations, the Company has made monthly
contributions and recognized pension costs of NT$305.3 million,
NT$679.9 million and NT$725.8 million for the years ended December 31,
2005, 2006 and 2007, 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 Labor Pension Fund Supervisory
Committee established by the government (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).TSMC, GUC, Xintec and Mutual-Pak use December 31 as the measurement
date for their pension plans.Changes in projected benefit obligation and plan assets for the years
ended December 31, 2005, 2006 and 2007 are summarized as follows:
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Projected benefit obligationBalance, beginning of year
    
    $
    4,904.1
    
    
    $
    5,976.9
    
    
    $
    6,956.1Effect of inclusion of newly consolidated subsidiaries
    
    
    16.1
    
    
    
    
    
    
    
    19.0Service cost
    
    
    470.9
    
    
    
    178.5
    
    
    
    184.2Interest cost
    
    
    163.8
    
    
    
    164.2
    
    
    
    156.4Actuarial loss (gain)
    
    
    436.6
    
    
    
    653.4
    
    
    
    (1,257.0
    )Benefits paid
    
    
    (14.6
    )
    
    
    (16.9
    )
    
    
    (15.0
    )Balance, end of year
    
    $
    5,976.9
    
    
    $
    6,956.1
    
    
    $
    6,043.7Plan assetsBalance, beginning of year
    
    $
    1,447.5
    
    
    $
    1,691.6
    
    
    $
    1,958.6Effect of inclusion of newly consolidated subsidiaries
    
    
    7.6
    
    
    
    
    
    
    
    17.0
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Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Actual return of plan assets
    
    
    18.7
    
    
    
    44.7
    
    
    
    69.0Employer contribution
    
    
    226.2
    
    
    
    233.1
    
    
    
    209.4Benefits paid
    
    
    (8.4
    )
    
    
    (10.8
    )
    
    
    (15.0
    )Balance, end of year
    
    $
    1,691.6
    
    
    $
    1,958.6
    
    
    $
    2,239.0
 Other information of defined benefit plans was as follows:
 a.
    
    Components of net periodic pension cost
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Service cost
    
    $
    470.9
    
    
    $
    178.5
    
    
    $
    184.3Interest cost
    
    
    163.8
    
    
    
    164.2
    
    
    
    156.4Projected return on plan assets
    
    
    (49.8
    )
    
    
    (49.4
    )
    
    
    (51.3
    )Amortization
    
    
    8.3
    
    
    
    12.0
    
    
    
    35.8Net periodic pension cost
    
    $
    593.2
    
    
    $
    305.3
    
    
    $
    325.2
 b.
    
    Reconciliation of funded status of the plans and accrued pension cost
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Benefit obligationVested benefit obligation
    
    $
    102.9
    
    
    $
    120.2Nonvested benefit obligation
    
    
    3,883.4
    
    
    
    3,479.1Accumulated benefit obligation
    
    
    3,986.3
    
    
    
    3,599.3Additional benefits based on future salaries
    
    
    2,969.8
    
    
    
    2,444.4Projected benefit obligation
    
    
    6,956.1
    
    
    
    6,043.7Fair value of plan assets
    
    
    (1,958.6
    )
    
    
    (2,239.0
    )Funded status
    
    
    4,997.5
    
    
    
    3,804.7Unrecognized net transition obligation
    
    
    (118.4
    )
    
    
    (109.9
    )Unrecognized net loss
    
    
    (1,339.0
    )
    
    
    (42.0
    )Accrued pension cost
    
    $
    3,540.1
    
    
    $
    3,652.8Vested benefit
    
    $
    106.6
    
    
    $
    120.1
 c.
    
    Actuarial assumptions:
 Discount rate used in determining present values
    
    2.25%-3.50%
    
    2.75%-3.00%Future salary increase rate
    
    2.00%-3.00%
    
    2.00%-3.00%Expected rate of return on plan assets
    
    2.50%
    
    2.50%-3.00%
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##### Table of Contents



d.
    
    Expected benefit payments
 AmountNT$(In Millions)2008
    
    $
    87.12009
    
    
    21.92010
    
    
    32.22011
    
    
    58.22012
    
    
    54.92013 and thereafter
    
    
    776.8
 e.
    
    TSMC, GUC and Xintec expect to make contributions to their pension funds in 2008 of
NT$199.0 million, NT$2.2 million and NT$2.7 million, respectively.
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)f.
    
    Contributions to the Funds
    
    $
    226.2
    
    
    $
    233.1
    
    
    $
    209.4g.
    
    Payments from the Funds
    
    $
    8.4
    
    
    $
    7.4
    
    
    $
    15.0
 h.
    
    Plan assets allocationUnder the Labor Standards Law, the government is responsible for the
administration of the Funds and determination of the investment strategies and
policies. As of December 31, 2006 and 2007, the asset allocation was primarily in
cash, equity securities and debt securities. Furthermore, under the Labor Standards
Law, the rate of return on assets shall not be less than the average interest rate on
a two-year time deposit published by the local banks. The government is responsible
for any shortfall in the event that the rate of return is less than the required rate
of return.
 19.
    
    INCOME TAX
 a.
    
    Income tax expense consisted of:
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)CurrentDomestic
    
    $
    3,531.8
    
    
    $
    7,395.2
    
    
    $
    10,595.9Foreign
    
    
    485.3
    
    
    
    283.1
    
    
    
    170.64,017.1
    
    
    
    7,678.3
    
    
    
    10,766.5DeferredDomestic
    
    
    (3,295.7
    )
    
    
    173.7
    
    
    
    976.9Foreign
    
    
    (90.8
    )
    
    
    (78.3
    )
    
    
    (33.8
    )(3,386.5
    )
    
    
    95.4
    
    
    
    943.1Income tax expense
    
    $
    630.6
    
    
    $
    7,773.7
    
    
    $
    11,709.6
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b.
    
    A reconciliation of income tax expense based on income before income tax at
statutory rates and income tax currently payable was as follows:
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Income tax expense based on income before income tax
statutory rates
    
    $
    23,658.5
    
    
    $
    34,786.3
    
    
    $
    30,829.4Tax effect of the following:Tax-exempt income
    
    
    (12,243.4
    )
    
    
    (12,281.4
    )
    
    
    (7,668.4
    )Temporary and permanent differences
    
    
    1,123.7
    
    
    
    (2,817.1
    )
    
    
    (150.9
    )Additional tax at 10% on unappropriated earnings
    
    
    1,494.8
    
    
    
    1,170.1
    
    
    
    2,710.9Cumulative effect of changes in accounting principles
    
    
    
    
    
    
    (82.1
    )
    
    
    Investment tax credits used
    
    
    (10,133.8
    )
    
    
    (12,769.4
    )
    
    
    (14,713.7
    )Income tax currently payable
    
    $
    3,899.8
    
    
    $
    8,006.4
    
    
    $
    11,007.3
 c.
    
    Income tax expense consisted of the following:
 Income tax currently payable
    
    $
    3,899.8
    
    
    $
    8,006.4
    
    
    $
    11,007.3Other income tax adjustments
    
    
    117.3
    
    
    
    (328.2
    )
    
    
    (240.8
    )Net change in deferred income tax assetsInvestment tax credits
    
    
    1,965.9
    
    
    
    3,914.8
    
    
    
    5,122.5Net operating loss carryforwards
    
    
    690.6
    
    
    
    1,412.9
    
    
    
    841.5Temporary differences
    
    
    (2,402.4
    )
    
    
    (2,181.5
    )
    
    
    (800.4
    )Adjustment in valuation allowance
    
    
    (3,640.6
    )
    
    
    (3,050.7
    )
    
    
    (4,220.5
    )Income tax expense
    
    $
    630.6
    
    
    $
    7,773.7
    
    
    $
    11,709.6
 d.
    
    Net deferred income tax assets consisted of the following:
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Current deferred income tax assetsInvestment tax credits
    
    $
    7,870.8
    
    
    $
    5,372.7Temporary differences
    
    
    584.2
    
    
    
    674.2Valuation allowance
    
    
    (441.0
    )
    
    
    (474.6
    )$
    8,014.0
    
    
    $
    5,572.3Noncurrent deferred income tax assetsInvestment tax credits
    
    $
    12,252.3
    
    
    $
    9,885.5Net operating loss carryforwards
    
    
    4,816.8
    
    
    
    3,963.1Temporary differences
    
    
    895.5
    
    
    
    1,204.0Valuation allowance
    
    
    (7,686.3
    )
    
    
    (3,687.2
    )10,278.3
    
    
    
    11,365.4Noncurrent deferred income tax liabilitiesTemporary differencesDepreciation
    
    
    (4,475.7
    )
    
    
    (4,051.0
    )Others
    
    
    (0.5
    )
    
    
    (1.1
    )(4,476.2
    )
    
    
    (4,052.1
    )Net noncurrent deferred income tax assets
    
    $
    5,802.1
    
    
    $
    7,313.3
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As of December 31, 2007, the net operating loss carryforwards were generated by
WaferTech, TSMC Development and TSMC Technology and would expire on various dates through
2026.
 e.
    
    Integrated income tax information:The balance of the imputation credit account (ICA) of TSMC as of December 31, 2006 and 2007 was NT$828.6 million and
NT$3,012.8 million, respectively.The estimated creditable ratio for distribution of TSMCs earnings of 2006 and 2007 was 5.23% and 1.86%, respectively.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 imputation credit is made.f.
    
    All of TSMCs earnings generated prior to December 31, 1997 have been appropriated.g.
    
    As of December 31, 2007, investment tax credits of TSMC, GUC, Xintec and Mutual-Pak
consisted of the following:
 Total
    
    
    RemainingCreditable
    
    
    Creditable
    
    
    ExpiryLaw/Statute
    
    Item
    
    
    Amount
    
    
    Amount
    
    
    YearNT$
    
    
    NT$(In Millions)Statute for
Upgrading Industries
    

Purchase of machinery and equipment
    
    $
    306.1
    
    
    $
    
    
    
    
    20073,202.1
    
    
    
    24.4
    
    
    
    20086,044.0
    
    
    
    14.3
    
    
    
    20096,625.1
    
    
    
    6,625.1
    
    
    
    20103,703.9
    
    
    
    3,703.9
    
    
    
    2011$
    19,881.2
    
    
    $
    10,367.7Statute for
Upgrading Industries
    

Research
and development expenditures
    
    $
    1,295.7
    
    
    $
    
    
    
    
    20072,599.5
    
    
    
    6.6
    
    
    
    20081,546.6
    
    
    
    1,078.3
    
    
    
    20091,887.4
    
    
    
    1,887.4
    
    
    
    20101,749.3
    
    
    
    1,749.3
    
    
    
    2011$
    9,078.5
    
    
    $
    4,721.6Statute for
Upgrading Industries
    
    Personnel training expenditures
    
    $
    16.4
    
    
    $
    
    
    
    
    200716.2
    
    
    
    
    
    
    
    200846.3
    
    
    
    46.3
    
    
    
    200942.3
    
    
    
    42.3
    
    
    
    20100.5
    
    
    
    0.5
    
    
    
    2011$
    121.7
    
    
    $
    89.1Statute for
Upgrading Industries
    

Investments in important technology-based enterprises
    
    $
    79.8
    
    
    $
    79.8
    
    
    
    2010
 h.
    
    The profits generated from the following projects of TSMC, GUC and Xintec are exempt
from income tax for a four- or five-year period:
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##### Table of Contents



Tax-Exemption PeriodConstruction of Fab 12  Module A
    
    2004 to 2007Construction of Fab 14  Module A
    
    2006 to 2010Construction of Fab 14  Module B
    
    2007 to 20112003 plant expansion of GUC
    
    2007 to 20112003 plant expansion of Xintec
    
    2007 to 2011
 i.
    
    The tax authorities have examined income tax returns of TSMC through 2004.
 20.
    
    SHAREHOLDERS EQUITY
 Common Stock, Capital Surplus and EarningsAs of December 31, 2007, 1,132.9 million ADSs of TSMC were traded on the NYSE. The number of common shares represented by
the ADSs was 5,664.3 million (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 percentage of TSMCs paid-in capital.As of December 31, 2006 and 2007, capital surplus consisted of the following:
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)From merger
    
    $
    24,003.6
    
    
    $
    24,003.6Additional paid-in capital
    
    
    19,974.4
    
    
    
    19,526.5From convertible bonds
    
    
    9,360.4
    
    
    
    9,360.4From treasury stock transactions
    
    
    389.2
    
    
    
    491.0From long-term investments
    
    
    379.9
    
    
    
    351.2Donations
    
    
    
    
    
    
    $
    54,107.5
    
    
    $
    53,732.7
 As of December 31, 2006 and 2007, retained earnings consisted of:
 December 312006
    
    
    2007NT$
    
    
    NT$(In Millions)Unappropriated earnings
    
    $
    152,778.1
    
    
    $
    161,828.3Legal capital reserve
    
    
    43,705.7
    
    
    
    56,406.7Special capital reserve
    
    
    640.7
    
    
    
    629.5Total
    
    $
    197,124.5
    
    
    $
    218,864.5
 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:
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##### Table of Contents



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.
 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 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.Any appropriations of the profits are recorded in the year of shareholder approval and given
effect to in the financial statements of that year.TSMC no longer has supervisors since January 1, 2007. The required duties of supervisors are
being fulfilled by the Audit Committee.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 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.The appropriations of earnings for 2005 and 2006 had been approved in TSMCs shareholders
meetings held on May 16, 2006, and May 7, 2007, respectively. The appropriations of earnings of
2007 were approved by the Board of Directors on February 19, 2008. The appropriations of
earnings of 2007 have not yet been resolved by the shareholders. The appropriations and
dividends per share were as follows:
 Appropriations of Earnings
    
    
    Dividends Per ShareFor Fiscal
    
    
    For Fiscal
    
    
    For Fiscal
    
    
    For Fiscal
    
    
    For Fiscal
    
    
    For FiscalYear 2005
    
    
    Year 2006
    
    
    Year 2007
    
    
    Year 2005
    
    
    Year 2006
    
    
    Year 2007NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Legal capital reserve
    
    $
    9,357.5
    
    
    $
    12,701.0
    
    
    $
    10,917.7Special capital reserve
    
    
    (1,585.7
    )
    
    
    (11.2
    )
    
    
    (237.7
    )Bonus to employees  in cash
    
    
    3,432.1
    
    
    
    4,572.8
    
    
    
    3,939.9Bonus to employees  in stock
    
    
    3,432.1
    
    
    
    4,572.8
    
    
    
    3,939.9Cash dividends to shareholders
    
    
    61,825.1
    
    
    
    77,489.1
    
    
    
    76,881.3
    
    
    
    2.50
    
    
    
    3.00
    
    
    
    3.00Stock dividends to shareholders
    
    
    3,709.5
    
    
    
    516.6
    
    
    
    512.5
    
    
    
    0.15
    
    
    
    0.02
    
    
    
    0.02Bonus to directors and supervisors
    
    
    257.4
    
    
    
    285.8
    
    
    
    176.9$
    80,428.0
    
    
    $
    100,126.9
    
    
    $
    96,130.5
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TSMCs shareholders meeting held on May 7, 2007 also resolved to
distribute stock dividends out of capital surplus in the amount of
NT$774.9 million. The Board of Directors also resolved to
distribute stock dividends out of capital surplus in the amount of
NT$768.8 million on February 19, 2008. The amounts of the
appropriations of earnings for 2007 and the stock dividends to be
distributed out of capital surplus have not yet been resolved by the
shareholders. However, the Company Law prescribes that TSMC, as a
holder of treasury stock, shall not participate in the
appropriations of earnings. Therefore, the actual cash dividend per
share and stock dividend per share are slightly more than those in
the aforementioned resolutions.The amounts of the appropriations of earnings for 2005 and 2006 are
consistent with the resolutions of the meetings of the Board of
Directors held on February 14, 2006 and February 6, 2007,
respectively. If the above bonus to employees, directors and
supervisors had been paid entirely in cash and charged to earnings
of 2005 and 2006, the basic earnings per share (after income tax)
for the years ended December 31, 2005 and 2006 shown in the
respective financial statements would have decreased from NT$3.79 to
NT$3.50 and NT$4.93 to NT$4.56, respectively.The shares distributed as a bonus to employees represented 1.39% and 1.77% of TSMCs total
outstanding common shares as of December 31, 2005 and 2006, respectively.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
 TSMCs Employee Stock Option Plans, under the TSMC 2002 Plan, TSMC
2003 Plan, and TSMC 2004 Plan, were approved by the SFB on June 25,
2002, October 29, 2003 and January 6, 2005, respectively. The maximum
number of options authorized to be granted under the TSMC 2002 Plan,
TSMC 2003 Plan and TSMC 2004 Plan was 100,000 thousand, 120,000
thousand and 11,000 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.Information about TSMCs outstanding stock options for the years ended
December 31, 2005, 2006 and 2007 was as follows:
 Weighted-averageNumber of
    
    ExerciseOptions
    
    Price(In Thousands)
    
    (NT$)Year ended December 31, 2005Balance, beginning of year
    
    
    64,367
    
    
    $
    40.5Options granted
    
    
    14,864
    
    
    
    48.4Options exercised
    
    
    (6,837
    )
    
    
    39.6
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Weighted-averageNumber of
    
    ExerciseOptions
    
    Price(In Thousands)
    
    (NT$)Options canceled
    
    
    (4,636
    )
    
    
    44.1Balance, end of year
    
    
    67,758
    
    
    
    42.1Year ended December 31, 2006Balance, beginning of year
    
    
    67,758
    
    
    $
    39.4Options granted
    
    
    2,758
    
    
    
    40.1Options exercised
    
    
    (14,550
    )
    
    
    40.1Options canceled
    
    
    (3,152
    )
    
    
    43.7Balance, end of year
    
    
    52,814
    
    
    
    39.6Year ended December 31, 2007Balance, beginning of year
    
    
    52,814
    
    
    $
    37.9Options granted
    
    
    1,094
    
    
    
    37.9Options exercised
    
    
    (10,988
    )
    
    
    39.8Options cancelled
    
    
    (1,045
    )
    
    
    45.9Balance, end of year
    
    
    41,875
    
    
    
    37.4
 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 included the
result of the aforementioned adjustment.As of December 31, 2007, information about TSMCs outstanding and exercisable options was as
follows:
 Options OutstandingWeighted-
    
    
    
    
    
    Options Exercisableaverage
    
    Weighted-
    
    
    
    
    
    Weighted-Range of
    
    Number of
    
    Remaining
    
    average
    
    Number of
    
    averageExercise
    
    Options (in
    
    Contractual
    
    Exercise
    
    Options (in
    
    ExercisePrice (NT$)
    
    Thousands)
    
    Life (Years)
    
    Price (NT$)
    
    Thousands)
    
    Price (NT$)$25.9- $36.4
    
    
    28,527
    
    
    
    5.16
    
    
    $
    33.1
    
    
    
    28,528
    
    
    $
    33.138.9 - 51.3
    
    
    13,348
    
    
    
    6.89
    
    
    
    46.6
    
    
    
    6,838
    
    
    
    46.441,875
    
    
    
    
    
    
    
    37.4
    
    
    
    35,366
    
    
    
    35.6
 GUCs Employee Stock Option Plans, consisting of the GUC 2002 Plan and GUC 2003 Plan, were
approved by its Board of Directors on July 1, 2002 and January 23, 2003, respectively. The
maximum number of options authorized to be granted under the GUC 2002 Plan and GUC 2003 Plan was
5,000 and 7,535, respectively, with each option eligible to subscribe
for one thousand common 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 anniversary of the grant date.Moreover, the GUC 2004 Plan, GUC 2006 Plan, and GUC 2007 Plan were approved by the SFB on August
16, 2004, July 3, 2006, and November 28, 2007 to grant a maximum of 2,500 options, 3,665 options
and 1,999 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.
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Information about GUCs outstanding stock options for the years ended December 31, 2005, 2006
and 2007 was as follows:
 Weighted-averageExerciseNumber of
    
    PricesOptions
    
    (NT$)Year ended December 31, 2005Balance, beginning of year
    
    
    7,889
    
    
    $
    10.5Options granted
    
    
    2,499
    
    
    
    11.0Options exercised
    
    
    (2,641
    )
    
    
    10.5Options canceled
    
    
    (615
    )
    
    
    10.6Balance, end of year
    
    
    7,132
    
    
    
    10.7Year ended December 31, 2006Balance, beginning of year
    
    
    7,132
    
    
    $
    10.7Options granted
    
    
    3,689
    
    
    
    19.5Options exercised
    
    
    (2,862
    )
    
    
    10.5Options canceled
    
    
    (617
    )
    
    
    12.1Balance, end of year
    
    
    7,342
    
    
    
    14.0Year ended December 31, 2007Balance, beginning of year
    
    
    7,342
    
    
    $
    14.0Options granted
    
    
    2,053
    
    
    
    183.6Options exercised
    
    
    (1,563
    )
    
    
    10.2Options canceled
    
    
    (234
    )
    
    
    13.5Balance, end of year
    
    
    7,598
    
    
    
    60.3
 The number of outstanding options and exercise prices have been adjusted to reflect the
distribution of earnings by GUC in accordance with the plans. The options granted shown above
included options resulting from the aforementioned adjustment and options newly granted in
accordance with the plans.As of December 31, 2007, information about GUCs outstanding and exercisable options was as
follows:
 Options OutstandingWeighted-
    
    
    
    
    
    Options Exercisableaverage
    
    Weighted-
    
    
    
    
    
    Weighted-Range of
    
    Number of
    
    Remaining
    
    average
    
    Number of
    
    averageExercise
    
    Options
    
    Contractual
    
    Exercise
    
    Options
    
    ExercisePrice (NT$)
    
    
    
    
    
    Life (Years)
    
    Price (NT$)
    
    
    
    
    
    Price (NT$)$9.6-$10.5
    
    
    2,247
    
    
    
    0.58-3.75
    
    
    $
    10.0
    
    
    
    850
    
    
    $
    10.217.7
    
    
    3,418
    
    
    
    3.67
    
    
    
    17.7
    
    
    
    
    
    
    194.0
    
    
    1,933
    
    
    
    6.00
    
    
    
    194.0
    
    
    
    
    
    
    7,598
    
    
    
    
    
    
    
    60.3
    
    
    
    850
    
    
    
    10.2
 Xintecs Employee Stock Option Plans, consisting of the Xintec 2006 Plan and Xintec 2007 Plan,
were approved by the SFB on July 3, 2006 and June 26, 2007, respectively. The maximum number of
options
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##### Table of Contents



authorized to be granted under the Xintec 2006 Plan and Xintec 2007 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 stock options for the year ended December 31, 2007 was as
follows:
 Weighted-Number of
    
    averageOptions
    
    Exercise(in Thousands)
    
    Price (NT$)Year ended December 31, 2007Balance, beginning of year
    
    
    4,968
    
    
    $
    13.0Options granted
    
    
    5,555
    
    
    
    17.3Options canceled
    
    
    (881
    )
    
    
    14.1Balance, end of year
    
    
    9,642
    
    
    
    15.1
 The number of outstanding options and exercise prices have been adjusted to reflect the
distribution 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:
 Options OutstandingWeighted-
    
    
    
    
    
    Options Exercisableaverage
    
    Weighted-
    
    
    
    Weighted-Range of
    
    Number of
    
    Remaining
    
    average
    
    Number of
    
    averageExercise
    
    Options (in
    
    Contractual
    
    Exercise
    
    Options (in
    
    ExercisePrice (NT$)
    
    Thousands)
    
    Life (Years)
    
    Price (NT$)
    
    Thousands)
    
    Price (NT$)$12.7-$20.0
    
    
    9,642
    
    
    8.75-9.96
    
    $
    15.1
    
    
    
    
    $
 The requisite service period under the TSMC 2002 Plan, 2003 Plan, and 2004 Plan is 4 years,
which is the same as the vesting period. Based on the vesting schedule, 50% of the options vest
two years after the date of grant, 25% of the options vest three years after the date of grant,
and the remaining 25% of the options vest four years after the date of grant. If employment is
terminated voluntarily by an employee or by the Company, any vested options must be exercised
within three months of the employment termination date. For the GUC 2002 Plan, 2003 Plan, 2004
Plan, 2006 Plan and 2007 Plan, the requisite service period is also four years, which is the
same as the vesting period. Based on the vesting schedule, 50% of the options vest two years
after the date of grant and 50% of the options vest four years after the date of grant. If
employment is terminated voluntarily by an employee or by the Company, any vested options must
be exercised within three days of the employment termination date. For the Xintec 2006 Plan and
2007 Plan, the requisite service period is also 4 years, with 50% of the options vested two
years after the date of grant, 25% of the options vested three years after the date of grant,
and the remaining 25% of the options vested four years after the date of grant. If employment is
terminated voluntarily by an employee or by the Company, any vested options must be exercised
within three months of the employment termination date.No compensation cost was recognized under the intrinsic value method for the years ended
December 31, 2005, 2006 and 2007. 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 for the years ended December 31, 2005, 2006 and 2007 would have
been as follows:
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##### Table of Contents



Year Ended December 312005
    
    2006
    
    2007Assumptions:TSMC
    
    Weighted average fair value of grants
    
    
    17.69
    
    
    
    
    
    
    Expected dividend yield
    
    
    1.00%-3.44%
    
    
    
    1.00%-3.44%
    
    
    
    1.00%-3.44%Expected volatility
    
    
    43.77%-46.15%
    
    
    
    43.77%-46.15%
    
    
    
    43.77%-46.15%Risk free interest rate
    
    
    3.07%-3.85%
    
    
    
    3.07%-3.85%
    
    
    
    3.07%-3.85%Expected life
    
    5 years
    
    5 years
    
    5 yearsGUC
    
    Weighted average fair value of grants
    
    
    3.32
    
    
    
    3.73
    
    
    
    63.74Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    0.00%-0.60%Expected volatility
    
    
    22.65%-28.02%
    
    
    
    22.65%-41.74%
    
    
    
    22.65%-45.47%Risk free interest rate
    
    
    2.56%
    
    
    
    2.23%-2.56%
    
    
    
    2.12%-2.56%Expected life
    
    6 years
    
    3-6 years
    
    3-6 yearsXintec
    
    Weighted average fair value of grants
    
    
    
    
    
    
    
    
    
    
    2.84Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    0.80%Expected volatility
    
    
    
    
    
    
    
    
    
    
    31.79%-47.42%Risk free interest rate
    
    
    
    
    
    
    
    
    
    
    1.88%-2.45%Expected life
    
    
    
    
    
    
    
    
    
    3 years
 Year Ended December 312005
    
    2006
    
    2007NT$
    
    NT$
    
    NT$(In Millions)Net income attributable to shareholders of the parent:As reported
    
    
    93,575.0
    
    
    $
    127,009.7
    
    
    $
    109,177.1Pro forma
    
    
    93,456.5
    
    
    
    126,887.2
    
    
    
    109,089.0Consolidated earnings per share (EPS)  after income tax (NT$):Basic EPS as reported
    
    
    3.55
    
    
    
    4.82
    
    
    
    4.14Pro forma basic EPS
    
    
    3.55
    
    
    
    4.81
    
    
    
    4.14Diluted EPS as reported
    
    
    3.55
    
    
    
    4.81
    
    
    
    4.14Pro forma diluted EPS
    
    
    3.55
    
    
    
    4.81
    
    
    
    4.14
 The expected volatility is determined based on the historical stock price trends. The expected
life computation is based on business environment and the option plan itself. The risk-free
interest rate for periods within the contractual life of the option is based on the U.S.
treasury yield curve in effect at the time of grant. The dividend yield is based on the
anticipated future cash dividends yield at the time of grant.
 22.
    
    TREASURY STOCK
 Beginning
    
    
    
    
    
    Stock
    
    EndingShares
    
    Addition
    
    Dividends
    
    Shares(Shares in Thousands)Year ended December 31, 2006Parent company stock held by subsidiaries
    
    
    32,938
    
    
    
    
    
    
    
    988
    
    
    
    33,926Year ended December 31, 2007Parent company stock held by subsidiaries
    
    
    33,926
    
    
    
    
    
    
    
    170
    
    
    
    34,096Repurchase under share buyback plan
    
    
    
    
    
    
    800,000
    
    
    
    
    
    
    
    800,00033,926
    
    
    
    800,000
    
    
    
    170
    
    
    
    834,096
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As of December 31, 2006 and 2007, the book value of the treasury stock was NT$ 918.1
million and NT$49,385.0 million, respectively; the market value was NT$2,290.0 million and NT$
51,713.9 million, respectively. TSMC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 thousand 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$48,466.9 million. All the treasury stock repurchased will be retired in 2008.23.
    
    EARNINGS PER SHARE
 Year Ended December 312005
    
    
    2006
    
    
    2007Before
    
    
    After
    
    
    Before
    
    
    After
    
    
    Before
    
    
    AfterIncome
    
    
    Income
    
    
    Income
    
    
    Income
    
    
    Income
    
    
    IncomeTax
    
    
    Tax
    
    
    Tax
    
    
    Tax
    
    
    Tax
    
    
    TaxBasic EPSIncome before cumulative effect of changes in
accounting principles attributable to shareholders
of the parent
    
    $
    3.58
    
    
    $
    3.55
    
    
    $
    5.05
    
    
    $
    4.76
    
    
    $
    4.59
    
    
    $
    4.14Cumulative effect of changes in accounting
principles attributable to shareholders of the
parent
    
    
    
    
    
    
    
    
    
    
    0.06
    
    
    
    0.06
    
    
    
    
    
    
    
    Income attributable to shareholders of the parent
    
    $
    3.58
    
    
    $
    3.55
    
    
    $
    5.11
    
    
    $
    4.82
    
    
    $
    4.59
    
    
    $
    4.14Diluted EPSIncome before cumulative effect of changes in
accounting principles attributable to shareholders
of the parent
    
    $
    3.57
    
    
    $
    3.55
    
    
    $
    5.04
    
    
    $
    4.75
    
    
    $
    4.58
    
    
    $
    4.14Cumulative effect of changes in accounting
principles attributable to shareholders of the
parent
    
    
    
    
    
    
    
    
    
    
    0.06
    
    
    
    0.06
    
    
    
    
    
    
    
    Income attributable to shareholders of the parent
    
    $
    3.57
    
    
    $
    3.55
    
    
    $
    5.10
    
    
    $
    4.81
    
    
    $
    4.58
    
    
    $
    4.14
 EPS was computed as follows:
 Number of
    
    
    EPSAmounts (Numerator)
    
    
    Shares
    
    
    Before
    
    
    AfterBefore
    
    
    After
    
    
    (Denominator)
    
    
    Income
    
    
    IncomeIncome Tax
    
    
    Income Tax
    
    
    (In Thousands)
    
    
    Tax
    
    
    TaxNT$
    
    
    NT$
    
    
    
    
    
    NT$
    
    
    NT$(In Millions)Year ended December 31, 2005Basic EPSIncome available to shareholders of the parent
    
    $
    94,214.6
    
    
    $
    93,575.0
    
    
    
    26,349,396
    
    
    $
    3.58
    
    
    $
    3.55Effect of dilutive potential common stock  stock options
    
    
    
    
    
    
    
    
    
    
    10,331Diluted EPSIncome available to shareholders of the parent
(including effect of dilutive potential common stock)
    
    $
    94,214.6
    
    
    $
    93,575.0
    
    
    
    26,359,727
    
    
    $
    3.57
    
    
    $
    3.55Year ended December 31, 2006Basic EPS
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##### Table of Contents



Number of
    
    
    EPSAmounts (Numerator)
    
    
    Shares
    
    
    Before
    
    
    AfterBefore
    
    
    After
    
    
    (Denominator)
    
    
    Income
    
    
    IncomeIncome Tax
    
    
    Income Tax
    
    
    (In Thousands)
    
    
    Tax
    
    
    TaxNT$
    
    
    NT$
    
    
    
    
    
    NT$
    
    
    NT$(In Millions)Income available to shareholders of the parent
    
    $
    134,698.7
    
    
    $
    127,009.7
    
    
    
    26,374,757
    
    
    $
    5.11
    
    
    $
    4.82Effect of dilutive potential common stock  stock options
    
    
    
    
    
    
    
    
    
    
    24,101Diluted EPSIncome available to shareholders of the parent
(including effect of dilutive potential common stock)
    
    $
    134,698.7
    
    
    $
    127,009.7
    
    
    
    26,398,858
    
    
    $
    5.10
    
    
    $
    4.81Year ended December 31, 2007Basic EPSIncome available to shareholders of the parent
    
    $
    120,890.7
    
    
    $
    109,177.1
    
    
    
    26,346,582
    
    
    $
    4.59
    
    
    $
    4.14Effect of dilutive potential common stock  stock options
    
    
    
    
    
    
    
    
    
    
    21,668Diluted EPSIncome available to shareholders of the parent
(including effect of dilutive potential common stock)
    
    $
    120,890.7
    
    
    $
    109,177.1
    
    
    
    26,368,250
    
    
    $
    4.58
    
    
    $
    4.14
 24.
    
    DISCLOSURES FOR FINANCIAL INSTRUMENTS
 a.
    
    Fair values of financial instruments were as follows:
 December 312006
    
    
    2007Carrying
    
    
    
    
    
    
    CarryingAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)
    
    
    (In Millions)AssetsFinancial assets at fair value through profit or loss
    
    $
    1,206.9
    
    
    $
    1,206.9
    
    
    $
    1,632.4
    
    
    $
    1,632.4Available-for-sale financial assets
    
    
    74,172.4
    
    
    
    74,172.4
    
    
    
    68,089.1
    
    
    
    68,089.1Held-to-maturity financial assets
    
    
    37,484.3
    
    
    
    37,375.5
    
    
    
    20,224.6
    
    
    
    20,192.2LiabilitiesFinancial liabilities at fair value through profit or loss
    
    
    10.9
    
    
    
    10.9
    
    
    
    249.3
    
    
    
    249.3Bonds payable (including current portion)
    
    
    19,500.0
    
    
    
    19,817.1
    
    
    
    12,500.0
    
    
    
    12,670.0Long-term bank loans (including current portion)
    
    
    658.1
    
    
    
    658.1
    
    
    
    2,003.0
    
    
    
    2,003.0Other long-term payables (including current portion)
    
    
    10,413.1
    
    
    
    10,413.1
    
    
    
    13,083.2
    
    
    
    13,083.2Obligations under capital leases
    
    
    612.9
    
    
    
    612.9
    
    
    
    652.3
    
    
    
    652.3
 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.2)
    
    Fair values of financial assets/liabilities 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 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.
 F-43




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##### Table of Contents



4)
    
    Fair value of bonds payable was based on their quoted market price.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.
    
    Gains and losses recognized for the changes in fair value of derivatives estimated
using valuation techniques during the years ended December 31, 2006 and 2007 were NT$33.7
million and NT$240.8 million, respectively.d.
    
    As of December 31, 2006 and 2007, financial assets exposed to fair value interest rate
risk were NT$111,492.3 million and NT$87,450.6 million, respectively; financial liabilities
exposed to fair value interest rate risk were NT$10.9 million and NT$249.3 million,
respectively. As of December 31, 2006, financial assets exposed to cash flow interest rate
risk were NT$7,171.1 million.e.
    
    Movements of the unrealized gain/loss on financial instruments for the years ended
December 31, 2006 and 2007 were as follows:
 Year Ended December 31, 2006Equity inValuationValuation
    
    
    Gain onGain on
    
    
    Available-Available-
    
    
    for-salefor-sale
    
    
    FinancialFinancial
    
    
    Assets HeldAssets
    
    
    by Investees
    
    
    TotalBalance, beginning of year
    
    $
    302.4
    
    
    $
    
    
    
    $
    302.4Recognized directly in shareholders equity
    
    
    174.2
    
    
    
    175.6
    
    
    
    349.8Removed from shareholders equity and recognized in earnings
    
    
    (90.6
    )
    
    
    
    
    
    
    (90.6
    )Balance, end of year
    
    $
    386.0
    
    
    $
    175.6
    
    
    $
    561.6
 Year Ended December 31, 2007Equity inValuationValuation
    
    
    Gain onGain on
    
    
    Available-Available-
    
    
    for-salefor-sale
    
    
    FinancialFinancial
    
    
    Assets HeldAssets
    
    
    by Investees
    
    
    TotalBalance, beginning of year
    
    $
    386.0
    
    
    $
    175.6
    
    
    $
    561.6Recognized directly in shareholders equity
    
    
    849.8
    
    
    
    (122.4
    )
    
    
    727.4Removed from shareholders equity and recognized in earnings
    
    
    (608.0
    )
    
    
    
    
    
    
    (608.0
    )Balance, end of year
    
    $
    627.8
    
    
    $
    53.2
    
    
    $
    681.0
 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
 F-44




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##### Table of Contents



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.3)
    
    Liquidity risk. The Company has sufficient operating capital to meet cash
needs upon settlement of derivative financial instruments, bonds payable and bank
loans. Therefore, the liquidity risk is low.4)
    
    Cash flow interest rate risk. The Company mainly invests in
fixed-interest-rate debt securities. Therefore, cash flows are not expected to
fluctuate significantly due to changes in market interest rates.
 25.
    
    RELATED PARTY TRANSACTIONSExcept as disclosed in the consolidated financial statements and other
notes, the following is a summary of significant related party
transactions:
 a.
    
    Philips, one of the major shareholders of TSMC, which has become a non-related party
since March, 2007.b.
    
    Investees of TSMCVIS (accounted for using equity method)
SSMC (accounted for using equity method)c.
    
    VisEra Technology Company, Ltd. (VisEra), an indirect investee accounted for using
equity method by TSMCd.
    
    Omnivision International Holding, Ltd. (Omnivision), originally a
shareholder holding a 25% equity interest in VisEra. Because VisEra
has not been a consolidated entity of the Company since November 2005,
Omnivision is no longer considered a related party.e.
    
    Others: Related parties over which the Company exercises significant
influence but with which the Company had no material transactions
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)For the yearSalesVisEra
    
    $
    
    
    
    $
    99.4
    
    
    $
    739.9VIS
    
    
    12.3
    
    
    
    14.4
    
    
    
    59.2SSMC
    
    
    195.3
    
    
    
    6.5
    
    
    
    2.9Philips
    
    
    3,298.8
    
    
    
    4,025.0
    
    
    
    
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##### Table of Contents



Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Omnivision
    
    
    2,489.2
    
    
    
    
    
    
    
    Others
    
    
    285.1
    
    
    
    42.0
    
    
    
    $
    6,280.7
    
    
    $
    4,187.3
    
    
    $
    802.0PurchasesSSMC
    
    $
    5,729.7
    
    
    $
    6,820.6
    
    
    $
    5,468.4VIS
    
    
    4,142.4
    
    
    
    3,919.6
    
    
    
    4,208.2VisEra
    
    
    
    
    
    
    
    
    
    
    0.6$
    9,872.1
    
    
    $
    10,740.2
    
    
    $
    9,677.2Manufacturing expenses  technical assistance feesVisEra
    
    $
    
    
    
    $
    
    
    
    $
    63.9VIS
    
    
    
    
    
    
    
    
    
    
    0.4Philips (see Note 28a)
    
    
    581.1
    
    
    
    755.9
    
    
    
    $
    581.1
    
    
    $
    755.9
    
    
    $
    64.3Research and development expensesVisEra
    
    $
    
    
    
    $
    
    
    
    $
    43.1Proceeds from disposal of property, plant and equipmentVisEra
    
    $
    534.3
    
    
    $
    
    
    
    $
    Non-operating income and gainsVIS (primarily technical service income, see Note 28h)
    
    $
    210.7
    
    
    $
    261.2
    
    
    $
    346.3VisEra
    
    
    308.1
    
    
    
    246.2
    
    
    
    321.8SSMC (primarily technical service income, see Note 28e)
    
    
    316.2
    
    
    
    315.0
    
    
    
    290.6$
    835.0
    
    
    $
    822.4
    
    
    $
    958.7At end of yearReceivablesVisEra
    
    $
    
    
    
    $
    1.0
    
    
    $
    10.9Philips
    
    
    573.6
    
    
    
    250.9
    
    
    
    Others
    
    
    119.7
    
    
    
    0.4
    
    
    
    $
    693.3
    
    
    $
    252.3
    
    
    $
    10.9Other receivablesVIS
    
    $
    74.5
    
    
    $
    121.9
    
    
    $
    118.7SSMC
    
    
    149.2
    
    
    
    69.6
    
    
    
    84.8VisEra
    
    
    374.2
    
    
    
    59.0
    
    
    
    40.1Others
    
    
    
    
    
    
    6.4
    
    
    
    $
    597.9
    
    
    $
    256.9
    
    
    $
    243.6PayablesVIS
    
    $
    563.2
    
    
    $
    719.8
    
    
    $
    839.6SSMC
    
    
    485.9
    
    
    
    459.3
    
    
    
    655.1VisEra
    
    
    
    
    
    
    
    
    
    
    8.7Philips
    
    
    694.0
    
    
    
    688.6
    
    
    
    $
    1,743.1
    
    
    $
    1,867.7
    
    
    $
    1,503.4
 F-46




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##### Table of Contents



Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Other long-term payablesPhilips (see Note 28a)
    
    $
    1,100.5
    
    
    $
    403.4
    
    
    $
    Deferred creditsVisEra
    
    $
    186.5
    
    
    $
    124.4
    
    
    $
    62.2
 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.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 ASSETSThe Company provided certain assets as collateral mainly for long-term
bank loans and land lease agreements, which were as follows:
 December 312006
    
    
    2007Other financial assets
    
    $
    52.9
    
    
    $
    48.9Property, plant and equipment, net
    
    
    4,293.6
    
    
    
    5,733.3$
    4,346.5
    
    
    $
    5,782.2
 27.
    
    SIGNIFICANT LONG-TERM LEASESThe Company leases several parcels of land and office premises from
the SPA and Jhongli Industrial Park Service Center. These operating
leases expire on various dates from March 2008 to December 2027 and
can be renewed upon expiration.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:
 Year
    
    AmountNT$(In Millions)2008
    
    $
    556.92009
    
    
    544.92010
    
    
    458.72011
    
    
    319.32012 and thereafter
    
    
    2,582.9$
    4,462.7
 F-47




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Rent expense for the years ended December 31, 2005, 2006 and 2007 was NT$949.4 million,
NT$1,368.2 million and NT$1,398.3 million, respectively.28.
    
    SIGNIFICANT COMMITMENTS AND CONTINGENCIESSignificant commitments and contingencies of the Company as of December
31, 2007, excluding those disclosed in other notes, were as follows:
 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 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 TSMC and Philips (now NXP B.V.) will survive
the expiration of the amended Technical Cooperation Agreement. Under this amended
Technical Cooperation Agreement, TSMC will pay Philips (now NXP B.V.) royalties based on a
fixed amount mutually agreed-on, rather than under a certain percentage of TSMCs annual
net sales. TSMC and Philips (now NXP B.V.) agreed to cross license the patents owned by
each party. TSMC also obtained through Philips (now NXP B.V.) a number of cross patent
licenses.b.
    
    Under a technical cooperation agreement with ITRI, the R.O.C. Government or its
designee approved by TSMC can use up to 35% of TSMCs capacity if TSMCs 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
five years unless otherwise terminated by either party with one year prior notice. The
agreement was automatically renewed in 1992, 1997, 2002 and on January 1, 2007.c.
    
    Under several foundry agreements, TSMC shall reserve a portion of its production
capacity for certain major customers that have guarantee deposits with TSMC. As of
December 31, 2007, TSMC had a total of US$68.4 million of guarantee deposits.d.
    
    Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd.
on March 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 its semiconductor company which was renamed as NXP B.V. in September
2006. TSMC and NXP B.V. purchased all the SSMC shares owned by EDB Investments Pte Ltd.
pro rata according to the Shareholders Agreement on November 15, 2006. After the purchase,
TSMC and NXP B.V. currently own approximately 39% and 61% of the SSMC shares respectively.
The Company and Philips (now NXP) committed to buy specific percentages of the production
capacity of SSMC. TSMC and Philips (now NXP B.V.) are required, in the aggregate, to
purchase up to 70% of SSMCs capacity, 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 capacity, the defaulting party is required
to compensate SSMC for all related unavoidable costs.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
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.f.
    
    Under a Technology Transfer Agreement (TTA) with National Semiconductor Corporation
(National) entered into on June 27, 2000, TSMC 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
 F-48




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##### Table of Contents



under certain conditions. In January 2003, TSMC and National entered into a Termination
Agreement whereby the TTA was terminated. Under the Termination Agreement, TSMC will be relieved of
any further obligation to transfer any additional technology. In addition, TSMC granted
National an option to request prior to January 2008 the transfer of certain technologies
under the same terms and conditions as the terminated TTA. National did not make such
request by the deadline, therefore the option has expired in January 2008.g.
    
    In December 2003, TSMC entered into a Technology Development and License Agreement with
Freescale Semiconductor, Inc. to jointly develop 65-nm SOI (silicon on insulator)
technology. TSMC will also license related 90-nm SOI technology from Freescale
Semiconductor, Inc. Any intellectual properties arising out of the co-development project
shall be jointly owned by the parties. In accordance with the agreement, TSMC will pay
royalties to Freescale Semiconductor, Inc. and will share a portion of the costs associated
with the joint development project.h.
    
    TSMC provides a technology transfer to VIS under a Manufacturing License and Technology
Transfer Agreement entered into on April 1, 2004. TSMC receives compensation for such
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 manufacture for TSMC certain products at prices as agreed by the
parties.i.
    
    Effective January 1, 2006, The Company entered into the Joint Technology Cooperation
Agreement with Philips (now NXP B.V.), Freescale Semiconductor, Inc. and STMicroelectronics
to jointly develop 45-nm and beyond advanced CMOS Logic and e-DRAM technologies. The
Company will contribute process technologies and share a portion of the costs associated
with this joint development project. This agreement was to expire on December 31, 2008,
but the Company has ended its participation in the project. For the Company, this
agreement had terminated as of January 26, 2008.j.
    
    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 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 US$175 million over six years to resolve TSMC, TSMC-North
America and WaferTechs claims. As of 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 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 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 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 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 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 the Order, the Court found TSMC has demonstrated a significant likelihood that it will ultimately
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 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
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 TSMC, TSMC-North America and WaferTech to object before
disclosing items enumerated in the 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-mentioned litigation cannot be
determined at this time.
 F-49




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##### Table of Contents



k.
    
    In April 2004, UniRAM Technology, Inc. filed an action with the US District Court in the Northern District of California
against TSMC and TSMC North America, alleging patent infringement and 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 to pursue remedies against this verdict. As a result of the verdict, TSMC accrued the full amount of the award,
US$30.5 million, which is reported as a separate line item in the income statement.l.
    
    The Company entered into an agreement with a counterparty in 2003 whereby the Company is obligated to purchase certain
property, plant and equipment at the agreed-upon price within the contract period. If the purchase is not completed, the
Company is obligated to compensate the counterparty for the loss incurred. The Property, plant and equipment have been in use
by the Company since 2004 and are being depreciated over their estimated service lives. The related obligation totaled
NT$7,431.4 million and NT$7,908.5 million as of December 31, 2006 and 2007, respectively, which is included in other long-term
payables on the Companys consolidated balance sheets.m.
    
    Amounts available under unused letters of credit as of December 31, 2007 were NT$36.6 million.
 29.
    
    SEGMENT FINANCIAL INFORMATION
 a.
    
    Industry financial informationThe 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 the Company.b.
    
    Geographic information:
 North
    
    
    
    
    
    
    AdjustmentsAmerica
    
    
    
    
    
    
    andand Others
    
    
    Taiwan
    
    
    Elimination
    
    
    ConsolidatedNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Year ended December 31, 2005Sales to other than consolidated entities
    
    $
    152,517.8
    
    
    $
    114,047.3
    
    
    $
    
    
    
    $
    266,565.1Sales among consolidated entities
    
    
    13,513.2
    
    
    
    152,132.5
    
    
    
    (165,645.7
    )
    
    
    Total sales
    
    $
    166,031.0
    
    
    $
    266,179.8
    
    
    $
    (165,645.7
    )
    
    $
    266,565.1Gross profit
    
    $
    2,858.1
    
    
    $
    115,722.2
    
    
    $
    (377.4
    )
    
    $
    118,202.9Operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,234.3
    )Non-operating income and gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,399.4Non-operating expenses and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,104.7
    )Income before income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    94,263.3Net income attributable to minority
interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    57.7Identifiable assets
    
    $
    92,904.4
    
    
    $
    430,084.0
    
    
    $
    (45,861.3
    )
    
    $
    477,127.1Long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,382.5Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    519,509.6Year ended December 31, 2006
 F-50




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##### Table of Contents



North
    
    
    
    
    
    
    AdjustmentsAmerica
    
    
    
    
    
    
    andand Others
    
    
    Taiwan
    
    
    Elimination
    
    
    ConsolidatedNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Sales to other than consolidated entities
    
    $
    191,511.9
    
    
    $
    125,895.3
    
    
    $
    
    
    
    $
    317,407.2Sales among consolidated entities
    
    
    18,998.6
    
    
    
    191,345.1
    
    
    
    (210,343.7
    )
    
    
    Total sales
    
    $
    210,510.5
    
    
    $
    317,240.4
    
    
    $
    (210,343.7
    )
    
    $
    317,407.2Gross profit
    
    $
    5,641.4
    
    
    $
    150,498.0
    
    
    $
    (329.3
    )
    
    $
    155,810.1Operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,545.4
    )Non-operating income and gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,705.6Non-operating expenses and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,608.1
    )Income before income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    133,362.2Net income attributable to minority
interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    185.5Identifiable assets
    
    $
    133,341.6
    
    
    $
    441,339.4
    
    
    $
    (41,091.0
    )
    
    $
    533,590.0Long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,895.2Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    587,485.2
  North
    
    
    
    
    
    
    AdjustmentsAmerica
    
    
    
    
    
    
    andand Others
    
    
    Taiwan
    
    
    Elimination
    
    
    ConsolidatedNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Year ended December 31, 2007Sales to other than consolidated entities
    
    $
    193,066.2
    
    
    $
    129,564.4
    
    
    $
    
    
    
    $
    322,630.6Sales among consolidated entities
    
    
    18,084.1
    
    
    
    194,035.5
    
    
    
    (212,119.6
    )
    
    
    Total sales
    
    $
    211,150.3
    
    
    $
    323,599.9
    
    
    $
    (212,119.6
    )
    
    $
    322,630.6Gross profit
    
    $
    3,895.1
    
    
    $
    139,227.5
    
    
    $
    (772.4
    )
    
    $
    142,350.2Operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,628.3
    )Non-operating income and gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,933.8Non-operating expenses and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,013.7
    )Income before income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    121,642.0Net income attributable to minority
interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    755.3Identifiable assets
    
    $
    145,483.4
    
    
    $
    439,675.9
    
    
    $
    (50,755.4
    )
    
    $
    534,403.9Long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,461.3Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    570,865.2
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c.
    
    Net sales
 Year Ended December 31Areas
    
    2005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Taiwan
    
    $
    30,908.7
    
    
    $
    34,483.2
    
    
    $
    42,876.0United States
    
    
    119,792.3
    
    
    
    155,166.0
    
    
    
    163,242.2Asia and others
    
    
    102,977.9
    
    
    
    105,808.9
    
    
    
    84,802.0Europe
    
    
    18,122.8
    
    
    
    27,425.4
    
    
    
    37,416.0271,801.7
    
    
    
    322,883.5
    
    
    
    328,336.2Sales returns and allowances
    
    
    (5,236.6
    )
    
    
    (5,476.3
    )
    
    
    (5,705.6
    )Net sales
    
    $
    266,565.1
    
    
    $
    317,407.2
    
    
    $
    322,630.6
 The net sales information is presented by billed regions.d.
    
    Major customers representing at least 10% of gross sales
 Year Ended December 312005
    
    2006
    
    2007NT $
    
    %
    
    NT $
    
    %
    
    NT $
    
    %(In Millions)Customer A
    
    $
    24,718.3
    
    
    
    9
    
    
    $
    33,950.4
    
    
    
    11
    
    
    $
    37,731.0
    
    
    
    11Customer B
    
    
    29,855.4
    
    
    
    11
    
    
    
    25,214.9
    
    
    
    8
    
    
    
    29,502.8
    
    
    
    9
 e.
    
    Net sales by product categories:
 Year Ended December 31Product Category
    
    2005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$(In Millions)Wafer fabrication
    
    $
    239,576.6
    
    
    $
    286,452.0
    
    
    $
    293,431.3Mask making
    
    
    14,448.5
    
    
    
    15,317.1
    
    
    
    16,984.5Others
    
    
    12,540.0
    
    
    
    15,638.1
    
    
    
    12,214.8$
    266,565.1
    
    
    $
    317,407.2
    
    
    $
    322,630.6
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30.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING
PRINCIPLES FOLLOWED BY THE COMPANY AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES OF AMERICAThe accompanying financial statements have been prepared in accordance with accounting
principles generally accepted in the Republic of China (R.O.C. GAAP), which differ in the
following respects from accounting principles generally accepted in the United States of America
(U.S. GAAP):
 a.
    
    Marketable securitiesUnder R.O.C. GAAP, prior to January 1, 2006, marketable securities were carried at the lower
of aggregate cost or market value, and debt securities were carried at cost, with only
unrealized losses recognized. Effective January 1, 2006, the Company adopted R.O.C. SFAS
No. 34, Financial Instruments: Recognition and Measurement, and No. 36, Financial
Instruments: Disclosure and Presentation. Financial instruments including debt securities
and equity securities are categorized as financial assets or liabilities at fair value
through profit or loss (FVTPL), available-for-sale or held-to-maturity securities. FVTPL
has two sub-categories, financial assets designated on initial recognition as one to be
measured at fair value, and those that are classified as held for trading, which are also
measured at fair value with fair value changes recognized in profit and loss. These
classifications are similar to those required by U.S. Statement of Financial Accounting
Standards (U.S. SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities.Under U.S. SFAS No.115, debt and equity securities that have readily determinable fair
values are classified as either trading, available-for-sale or held-to-maturity securities.
Debt securities that the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and reported at amortized cost. Debt and equity
securities that are bought and traded for short-term profit are classified as trading
securities and reported at fair value, with unrealized gains and losses included in
earnings. Debt and equity securities not classified as either held-to-maturity or trading
are classified as available-for-sale securities and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
shareholders equity.Upon adoption of R.O.C. SFAS No. 34 and No. 36 on January 1, 2006, the Company recorded an
accumulated effect of changes in accounting principles of NT$1,606.7 million to adjust the
carrying amount of trading securities, which were recorded at the lower of aggregate cost or
market value, to fair market value, which is a one-time reconciling adjustment between U.S.
GAAP and R.O.C. GAAP in 2006.Upon adoption of R.O.C. SFAS No. 34 and No. 36, the Company also adjusted the carrying
amount of the marketable securities categorized as available-for-sale, which were carried at
the lower of aggregate cost or market with unrealized losses included in earnings, to fair
market value on January 1, 2006. Therefore, prior to January 1 2006, unrealized gains and
losses included in shareholders equity associated with available-for-sale marketable
securities under R.O.C. GAAP were different from those under U.S. GAAP.The Company classified money market funds as available-for-sale marketable securities under
both R.O.C. GAAP and U.S. GAAP.
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b.
    
    Equity-method investeesThe Companys proportionate share of the net income (loss) from an equity-method investee
may differ if the equity-method investees net income (loss) under R.O.C. GAAP differs from
that under U.S. GAAP. Such differences between R.O.C. GAAP and U.S. GAAP would result in
adjustments to investments accounted for using equity method and the equity in earnings
(losses) of equity-method investees recorded in net income.c.
    
    Impairment of long-lived assetsUnder U.S. GAAP, an impairment loss is recognized when the carrying amount of an asset or a
group of assets is not recoverable from the expected future cash flows and the impairment
loss is measured as the difference between the fair value and the carrying amount of the
asset or group of assets. The impairment loss is recorded in earnings and cannot be
reversed subsequently. Effective January 1, 2002, long-lived assets (excluding goodwill and
other indefinite lived assets) held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.Under R.O.C. GAAP, for purposes of evaluating the recoverability of long-lived assets,
assets purchased for use in the business but subsequently determined to have no use were
written down to fair value and recorded as either idle assets or assets held for
disposition. Under R.O.C. GAAP, effective January 1, 2005, the Company is required to
recognize an impairment loss when an indication is identified that the carrying amount of an
asset or a group of assets is not recoverable from the expected future cash flows. However,
if the recoverable amount increases in a future period, the amount previously recognized as
impairment would be reversed and recognized as a gain. The adjusted amount may not exceed
the carrying amount that would have been determined, net of depreciation, if no impairment
loss had been recognized. Accordingly, the depreciation basis of long-lived assets impaired
prior to January 1, 2005 under U.S. GAAP is different from the depreciation basis under
R.O.C. GAAP. The impairment loss recognized in 2005 was NT$121.3 million. However, no
impairment charges have been recorded by the Company since 2006.d.
    
    10% tax on unappropriated earningsIn the R.O.C., a 10% tax is imposed on unappropriated earnings (excluding earnings from
foreign consolidated subsidiaries). For R.O.C. GAAP purposes, the Company records the 10%
tax on unappropriated earnings in the year of shareholders approval. Starting from 2002,
the American Institute of Certified Public Accountants International Practices Task Force
concluded that in accordance with Emerging Issues Task Force (EITF) 95-10, Accounting for
tax credits related to dividends in accordance with SFAS 109, the 10% tax on unappropriated
earnings should be accrued under U.S. GAAP during the period the earnings arise and adjusted
to the extent that distributions are approved by the shareholders in the following year.
The adjustment had no effect on the income tax expense under U.S. GAAP in 2005 as a result
of a corresponding reduction in the valuation allowance as the previously reserved tax
credits became utilizable due to the additional tax. To the extent the Company does not
have sufficient tax credits to offset the 10% tax, additional tax expense would be
recognized under U.S. GAAP. The net effects of the adjustment of 10% tax on unappropriated
earnings were NT$3,278.0 million and NT$2,260.3 million in 2006 and 2007 under U.S. GAAP,
respectively.
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e.
    
    Goodwill and intangible assetsUnder R.O.C. GAAP, goodwill was recorded for the excess of the purchase price over the net
tangible assets for the purchase of a 32% equity interest in TSMC-Acer Semiconductor
Manufacturing Corporation (TASMC) in 1999 and was amortized over ten years. Under U.S.
GAAP, the goodwill was amortized over five years.Goodwill was not recorded under R.O.C. GAAP for the acquisition of the remaining 68% equity
interest in TASMC in June 2000, because under R.O.C. GAAP goodwill from a business
combination in the form of a share exchange was charged to capital surplus. Under U.S.
GAAP, the acquisition cost is the fair value of the shares issued in exchange and the
difference between the acquisition cost and the sum of the fair values of the net tangible
and identifiable intangible assets acquired is recorded as goodwill. Accordingly, the
goodwill from the acquisition of the remaining 68% equity interest in TASMC was recorded for
U.S. GAAP purposes and was amortized over the estimated life of five years.Effective January 1, 2002, the Company adopted U.S. SFAS No. 142, Goodwill and Other
Intangible Assets and ceased amortization of goodwill which is now assessed for impairment
annually or more frequently if impairment indicators arise. In accordance with U.S. SFAS
No. 142, the Company had completed its goodwill impairment test at the reporting unit level
and found no impairment as of December 31, 2005, 2006 and 2007.Effective January 1, 2005, the Company adopted R.O.C. SFAS No. 35, Accounting for
Impairment of Assets which required the Company to evaluate impairment of an asset group,
including goodwill allocated to such group. The Company found no impairment as of December
31, 2005, 2006 and 2007. Effective January 1, 2006, the Company adopted R.O.C. SFAS No. 25
(revised 2005), Business Combinations which is similar to U.S. SFAS No. 142. Upon
adoption of R.O.C. SFAS No.25, the Company ceased amortization of goodwill which is now
assed for impairment in accordance with the provisions of the standard and R.O.C. SFAS No.
35.f.
    
    Derivative financial instrumentsUnder R.O.C. GAAP, prior to January 1, 2006, the receivables or payables
arising from forward contracts were restated using the prevailing exchange
rates with the resulting differences credited or charged to earnings. In
addition, the receivables and payables related to forward contracts were
netted with the resulting amount presented as either an asset or a
liability. The receivables and payables arising from cross-currency swap
contracts and interest rate swap contracts that were related to the
contracts of the same counter party were netted with the resulting amount
presented as either an asset or a liability. The difference in interest
computed pursuant to the contracts on each settlement date or the balance
sheet date was recorded as an adjustment to the interest income or expense
associated with the hedged items. The notional amounts of foreign
currency option contracts entered into for hedging purposes were not
recognized as an asset or a liability on contract dates. The premiums
paid or received for the options bought or written was amortized and
charged to earnings on a straight-line basis over the term of the related
contract. Any resulting gain or loss upon settlement was credited or
charged to earnings in the year of settlement. Effective January 1, 2006,
the Company adopted R.O.C. SFAS No. 34, Financial Instruments:
Recognition and Measurement, and derivatives that do not qualify for
hedge accounting are recorded as financial assets or liabilities at FVTPL
and measured at fair value as described in Note 2.Under U.S. GAAP, derivative instruments are accounted for in accordance
with U.S. SFAS No. 133, as amended, which requires all entities to
recognize derivative instruments as assets and liabilities on the balance
sheet at fair value. If certain conditions are met, entities may elect to
designate a derivative instrument as a hedging instrument. The derivative
instruments used by the Company do not qualify for hedge accounting under
U.S. SFAS No.133. Therefore, under U.S. GAAP, derivatives have
historically been, and continue to be, recorded on the balance sheet at
fair value, with changes in fair value recognized in earnings. There is
no GAAP difference on the accounting treatment of derivative instruments
since January 1, 2006.
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g.
    
    Bonuses to employees, directors and supervisorsAccording to R.O.C. regulations and TSMCs Articles of Incorporation, a
portion of the Companys distributable earnings should be set aside as
bonuses to employees, directors and supervisors. Bonuses to directors and
supervisors are usually paid in cash. However, bonuses to employees may
be paid in cash or stock, or a combination of both. Under R.O.C. GAAP,
the bonuses, including stock bonuses which are valued at the par value of
NT$10 each, are treated as appropriations of retained earnings and are
charged to retained earnings after such bonuses are formally approved by
the shareholders in the following year.Under U.S. GAAP, such bonuses are treated as compensation expense and are
charged to earnings. The amount of compensation expense related to stock
bonuses is determined based on the market value of TSMCs common stock at
the date of stock distribution in the following year. The total amount of
the aforementioned bonuses to be paid in the following year is initially
accrued based on managements estimate pursuant to TSMCs Articles of
Incorporation in the year to which it relates. Any difference between the
amount initially accrued and the market value of the bonuses upon the
payment of cash and the issuance of shares is recognized in the year of
approval by shareholders. Subsidiaries registered in the R.O.C. follow
the same accounting treatment as TSMC.The Company records two separate U.S. GAAP reconciling adjustments
relating to bonuses paid to employees, directors and supervisors each
year. The first reconciling adjustment, referred to as Bonuses to
employees, directors and supervisors  current year accrual, records the
full bonuses earned in the current year, in an amount equal to the product
of the total net income for the current year multiplied by the percentage
set forth based on managements estimate pursuant to TSMCs Articles of
Incorporation. The second reconciling adjustment, referred to as Fair
market value adjustment of prior year accrual, is made in the following
year to record the additional compensation expense for prior-year bonuses
paid in stock, which is measured at the fair market value on the date of
stock distribution.h.
    
    Pension benefitsU.S. SFAS No. 87, Employers Accounting for Pensions requires the
Company to determine the accumulated pension obligation and the pension
expense on an actuarial basis. The Company adopted U.S. SFAS No. 87 at
the beginning of 1993 for U.S. GAAP purposes.U.S. SFAS No. 87 was amended by U.S. SFAS No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans (U.S. SFAS No.
158) on September 29, 2006, which requires employers to recognize the
overfunded or underfunded status of a defined benefit pension plan as an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur
through comprehensive income. U.S. SFAS No. 158 defines the funded status
of a benefit plan as the difference between the fair value of the plan
assets and the projected benefit obligation. Previously unrecognized
items such as gains or losses, prior service credits and the transition
asset or obligation are required to be recognized in other comprehensive
income and subsequently recognized through net periodic benefit cost
pursuant to the recognition and amortization provisions of U.S. SFAS No.
87.R.O.C. SFAS No. 18 is similar in many respects to U.S. SFAS No. 87 and was
adopted by the Company in 1996. However, R.O.C. SFAS No. 18 does not
require a company to recognize the overfunded or underfunded status of a
defined benefit pension plan as an asset or liability in the statement of
financial position.The difference in the date of adoption gives rise to a U.S. GAAP
difference in the actuarial computation for transition obligation and the
related amortization.
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i.
    
    Stock-based compensationEffective January 1, 2006, the Company adopted the fair value recognition provisions of U.S.
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
(U.S. SFAS No. 123R), and the modified prospective transition method and therefore has not
restated the results for prior periods. Under the transition method, stock-based
compensation expense for the year ended December 31, 2006 includes compensation expense for
all unvested stock-based compensation awards granted prior to January 1, 2006 that are
expected to vest, based on the grant date fair value estimated in accordance with the
original provision of U.S. SFAS No. 123, Accounting for Stock-Based Compensation (U.S.
SFAS No. 123) or the intrinsic value described in the next paragraph. Upon an employees
termination, unvested awards are forfeited, which affects the quantity of options to be
included in the calculation of stock-based compensation expense. Forfeitures do not include
vested options that expire unexercised. Stock-based compensation expense for all
stock-based compensation awards granted after January 1, 2006 is based on the grant-date
fair value estimate in accordance with the provisions of U.S. SFAS No. 123R. The Company
recognizes these compensation costs using the graded vesting method over the requisite
service period of the award, which is generally the option vesting term of four years.
Prior to the adoption of U.S. SFAS No. 123R, the Company recognized stock-based compensation
expense in accordance with U.S. Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (U.S. APB 25). See Note 31c for additional stock-based
compensation disclosures.Certain characteristics of the stock options granted under the TSMC 2002 Plan and GUC 2004
Plan are not reasonably estimable using appropriate valuation methodologies as prescribed
under U.S. SFAS No. 123 and have been accounted for using the variable accounting method.
Upon the adoption of U.S. SFAS No. 123R, the Company continued to account for these stock
options based on their intrinsic value, remeasured at each reporting date through the date
of exercise or settlement.Under R.O.C. GAAP, employee stock option plans that are amended or have options granted on
or after January 1, 2004 must be accounted for by the interpretations issued by the ARDF.
The Company adopted the intrinsic value method and any compensation expense determined using
this method is recognized over the vesting period. No stock-based compensation expense was
recognized under R.O.C. GAAP for the years ended December 31, 2005, 2006 and 2007.j.
    
    Carry interestFor marketable security investments of InveStar Semiconductor Development
Fund, Inc. (ISDF) managed by fund managers, the Company is required by the
investment management contract to pay carry interest based on the net
realized gain (an amount of annual company profits after accumulated
adjusted cost of capital and net of management fees) multiplied by certain
percentages. Therefore, the Company estimates and accrues for such
expense during the year.Under R.O.C. GAAP, carry interest expense was not accrued prior to 2006 as
the marketable security investments were carried at the lower of cost or
market and no unrealized gains were recognized prior to disposal of
investments. After adoption of ROC SFAS No. 34 and 36, the carry interest
accrued for the trading marketable security is recognized as an expense.
However, the carry interest accrued for the available-for-sale marketable
security is recognized as an adjustment of unrealized gain under the
shareholders equity.Under U.S. GAAP, the Company accrued an expense of NT$193.3 million in
2005 and reversed such accrual in 2006 since the expense was recorded
under R.O.C. GAAP starting from 2006.
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k.
    
    Earnings per shareUnder R.O.C. GAAP, earnings per share is calculated as described in Notes
2 and 23. Under U.S. GAAP, earnings per share is calculated by dividing
net income by the average number of shares outstanding in each period,
adjusted retroactively for any stock dividends issued and stock splits
subsequently. Other shares issued from unappropriated earnings, such as
stock bonuses to employees, are included in the calculation of
weighted-average number of shares outstanding from the date of occurrence.Under both R.O.C. GAAP and U.S. GAAP, the unvested stock options are
included in the diluted EPS calculation using the treasury stock method if
the inclusion of such would be dilutive. The accounting for stock options
under R.O.C GAAP is generally the same as U.S. APB 25 in all material
aspects, which uses intrinsic value to account for the stock-based
compensation. However, under U.S. GAAP, upon the adoption of SFAS No.
123R, the denominator used to calculate diluted EPS is likely to be
different from the denominator used under U.S. APB 25 and R.O.C. GAAP.U.S. SFAS No.123R paragraphs 66 and 67 state that the shares or stock
options shall be treated as contingently issuable shares in accordance
with U.S. SFAS No. 128, Earnings per share. The statement provides
guidance on applying the treasury stock method for equity instruments
granted in share-based payment transactions in determining diluted
earnings per share. In applying the treasury stock method, the assumed
proceeds shall be the sum of (a) the exercise price, (b) the amount of
compensation cost attributed to future services and not yet recognized,
and (c) the amount of excess tax benefits that would be credited to
additional paid-in capital assuming exercise of the options. Therefore,
the number of shares included in the denominator of the diluted EPS
calculation under U.S. SFAS No. 123R will be different from that under
R.O.C. GAAP. Earnings per equivalent American Depository Share (ADS) is
calculated by multiplying earnings per share by five (one ADS represents
five common shares).l.
    
    Consolidated entitiesUnder R.O.C. GAAP, the Company adopted R.O.C. SFAS No. 7, Consolidated
Financial Statements, which requires that 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. Partially owned,
non-controlled equity investees are accounted for under the equity method.
The standard is similar to Accounting Research Bulletin No. 51
Consolidated Financial Statements (U.S. ARB No. 51).U.S. FASB Interpretation No. 46R (Revised December 2003), Consolidation
of Variable Interest Entities (U.S. FIN 46R), which clarifies U.S. ARB
No. 51 and replaces FASB Interpretation No. 46 Consolidation of Variable
Interest Entities, addresses consolidation by business enterprises of
variable interest entities. The interpretation states that if an
enterprise absorbs a majority of the expected losses or receives a
majority of the expected residual rewards, or both, of a Variable Interest
Entity (VIE) through its variable interests, it is identified as the
primary beneficiary and is required to consolidate the VIE.Under U.S. GAAP, the Company consolidated the accounts of VisEra for the
year ended December 31, 2004 and for the ten months period ended October
31, 2005 based on the majority voting interest rule pursuant to U.S. ARB
No. 51 and U.S. FIN 46R. Subsequent to October 31, 2005, however, VisEra
was no longer treated as a consolidated subsidiary of the Company. The
Company believes that this accounting treatment is appropriate under U.S.
GAAP because: (i) the Company lost its control over VisEra in November
2005 due to changes in the investment structure through which VisEra
became a subsidiary of VisEra Holdings (Cayman), in which the Company owns
only a 50% equity interest; (ii) Cayman is not a VIE as defined in
paragraph 5 of FIN 46R; (iii) Cayman is not a majority owned subsidiary of
the Company that would require consolidation under U.S. ARB No. 51; and
(iv) the
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Company does not otherwise have control over Cayman. Therefore, the Company deconsolidated VisEra
as of November 1, 2005.Under U.S. GAAP, the Company consolidated the accounts of GUC for the years ended December
31, 2005, 2006, and 2007. GUC is a business entity and an independent operation, which
satisfies the exemption defined in paragraph 4h of U.S. FIN 46R. Therefore, GUC does not
fall under the scope of U.S. FIN46R, and the Company follows U.S. ARB No. 51 as well as
Regulation S-X Rule 1-02(g) to determine whether a parent-subsidiary relationship existed.In December 2004, the ARDF revised R.O.C. SFAS No. 7, which was required to be adopted by
the Company on January 1, 2005. The revised R.O.C. SFAS No. 7 requires the Company to
consolidate all investees over which the Company has a controlling interest. As a result of
the adoption of this standard, subsequent to December 31, 2004, there has been no difference
between R.O.C. GAAP and U.S. GAAP with respect to consolidated entities of the Company.The following reconciles net income and shareholders equity under R.O.C. GAAP as reported
in the consolidated financial statements to the net income and shareholders equity
determined under U.S. GAAP, giving effect to the differences listed above.
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions Except Per Share Amounts)Net incomeNet income attributable to shareholders of
the parent based on R.O.C. GAAP
    
    $
    93,575.0
    
    
    $
    127,009.7
    
    
    $
    109,177.1
    
    
    $
    3,366.5Adjustments:a. Marketable securities1. Adjustment of unrealized gain on
trading securities
    
    
    1,062.0
    
    
    
    
    
    
    
    2. Reversal (realization) of
unrealized loss on marketable
securities
    
    
    337.2
    
    
    
    (262.0
    )
    
    
    (52.3
    )
    
    
    (1.6
    )3. Reversal of cumulative effect of
change in accounting principle
for adopting R.O.C. SFAS No. 34
    
    
    
    
    
    
    (1,606.7
    )
    
    
    
    
    
    
    b. U.S. GAAP adjustments on
equity-method investees
    
    
    (161.9
    )
    
    
    (42.6
    )
    
    
    (69.9
    )
    
    
    (2.1
    )c. Reversal of depreciation on assets
impaired under U.S. GAAP
    
    
    1,398.7
    
    
    
    1,391.5
    
    
    
    1,408.4
    
    
    
    43.4d. 10% tax on undistributed earnings
    
    
    
    
    
    
    (3,278.0
    )
    
    
    (2,260.3
    )
    
    
    (69.7
    )e. Reversal of amortization of goodwill
recognized under R.O.C. GAAP
    
    
    1,220.3
    
    
    
    
    
    
    
    
    
    
    
    f.  Adjustment to market value for
derivative financial instruments
    
    
    (225.3
    )
    
    
    
    
    
    
    
    
    
    
    
  F-59




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Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions Except Per Share Amounts)g. Bonuses to employees, directors and
supervisors1. Current year accrual
    
    $
    (7,121.7
    )
    
    $
    (9,488.6
    )
    
    $
    (8,232.8
    )
    
    $
    (253.9
    )2. Fair market value adjustment of
prior year accrual
    
    
    (13,795.4
    )
    
    
    (18,016.4
    )
    
    
    (28,352.0
    )
    
    
    (874.2
    )h. Pension expense
    
    
    (9.9
    )
    
    
    3.9
    
    
    
    3.9
    
    
    
    0.1i.  Stock-based compensation1. Stock-based compensation
    
    
    (791.4
    )
    
    
    (471.7
    )
    
    
    (373.9
    )
    
    
    (11.5
    )2. Cumulative effect of change in
accounting principle for adopting
U.S. SFAS 123R
    
    
    
    
    
    
    37.9
    
    
    
    
    
    
    
    j.  Adjustment of carry interest
    
    
    (193.3
    )
    
    
    170.4
    
    
    
    
    
    
    
    Income tax effect of U.S. GAAP
adjustments
    
    
    147.8
    
    
    
    98.3
    
    
    
    (41.9
    )
    
    
    (1.3
    )Minority interest effect of U.S. GAAP
adjustments
    
    
    (23.8
    )
    
    
    165.0
    
    
    
    451.3
    
    
    
    13.9Net adjustment
    
    
    (18,156.7
    )
    
    
    (31,299.0
    )
    
    
    (37,519.5
    )
    
    
    (1,156.9
    )Net income based on U.S. GAAP
    
    $
    75,418.3
    
    
    $
    95,710.7
    
    
    $
    71,657.6
    
    
    $
    2,209.6Basic earnings per common share based on
U.S. GAAPIncome before cumulative effect of
changes in accounting principles
    
    $
    2.97
    
    
    $
    3.71
    
    
    $
    2.74
    
    
    $
    0.08Cumulative effect of changes in
accounting principles
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    Net income
    
    $
    2.97
    
    
    $
    3.72
    
    
    $
    2.74
    
    
    $
    0.08Diluted earnings per common share based
on U.S. GAAPIncome before cumulative effect of
changes in accounting principles
    
    $
    2.96
    
    
    $
    3.71
    
    
    $
    2.74
    
    
    $
    0.08Cumulative effect of changes in
accounting principles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    2.96
    
    
    $
    3.71
    
    
    $
    2.74
    
    
    $
    0.08Basic earnings per ADSIncome before cumulative effect of
changes in accounting principles
    
    $
    14.83
    
    
    $
    18.57
    
    
    $
    13.70
    
    
    $
    0.42Cumulative effect of changes in
accounting principles
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    Net income
    
    $
    14.83
    
    
    $
    18.58
    
    
    $
    13.70
    
    
    $
    0.42
  F-60




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Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions Except Per Share Amounts)Diluted earnings per ADSIncome before cumulative effect of
changes in accounting principles
    
    $
    14.82
    
    
    $
    18.56
    
    
    $
    13.69
    
    
    $
    0.42Cumulative effect of changes in
accounting principles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    14.82
    
    
    $
    18.56
    
    
    $
    13.69
    
    
    $
    0.42Basic number of weighted average shares
outstanding under U.S. GAAP
(in thousands)
    
    
    25,434,207
    
    
    
    25,756,825
    
    
    
    26,148,636Diluted number of weighted average
shares outstanding under U.S. GAAP
(in thousands)
    
    
    25,444,538
    
    
    
    25,778,163
    
    
    
    26,169,636
  December 312006
    
    
    2007NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Shareholders equityEquity attributable to shareholders of the parent based on
R.O.C. GAAP
    
    $
    507,981.3
    
    
    $
    487,091.4
    
    
    $
    15,019.8Adjustments:a. U.S. GAAP adjustments on equity-method investees
    
    
    (445.1
    )
    
    
    (432.5
    )
    
    
    (13.3
    )b. Impairment of long-lived assets1. Loss on impairment of assets
    
    
    (10,657.7
    )
    
    
    (10,573.7
    )
    
    
    (326.1
    )2. Reversal of depreciation on assets impaired
under U.S. GAAP
    
    
    8,561.8
    
    
    
    9,878.6
    
    
    
    304.6c. 10% tax on undistributed earnings
    
    
    (3,278.0
    )
    
    
    (5,538.3
    )
    
    
    (170.8
    )d. Goodwill1. Carrying amount difference from 68% equity
interest in TASMCs share acquisition
    
    
    52,212.7
    
    
    
    52,212.7
    
    
    
    1,610.02. Reversal of amortization of goodwill recognized
under R.O.C. GAAP
    
    
    (11,257.5
    )
    
    
    (11,274.1
    )
    
    
    (347.7
    )
  F-61




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##### Table of Contents



December 312006
    
    
    2007NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)e. Bonuses to employees, directors and supervisors
    
    $
    (9,488.5
    )
    
    $
    (8,175.3
    )
    
    $
    (252.1
    )f.  Accrued pension cost
    
    
    (43.8
    )
    
    
    (39.9
    )
    
    
    (1.2
    )g. Accrual for accumulated other comprehensive income
under U.S. SFAS No. 1581. The adoption of U.S. SFAS No. 158
    
    
    (1,391.3
    )
    
    
    
    
    
    
    2. Deferred pension loss
    
    
    
    
    
    
    (87.5
    )
    
    
    (2.7
    )Income tax effect of U.S. GAAP adjustments
    
    
    209.0
    
    
    
    166.6
    
    
    
    5.2Minority interest effect of U.S. GAAP adjustments
    
    
    0.1
    
    
    
    0.1
    
    
    
    Net increase in equity attributable to shareholders of the
parent
    
    
    24,421.7
    
    
    
    26,136.7
    
    
    
    805.9Equity attributable to shareholders of the parent based on
U.S. GAAP
    
    $
    532,403.0
    
    
    $
    513,228.1
    
    
    $
    15,825.7
  Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Changes in equity attributable to shareholders
of the parent based on U.S. GAAPBalance, beginning of year
    
    $
    427,124.8
    
    
    $
    477,297.2
    
    
    $
    532,403.0
    
    
    $
    16,417.0Net income for the year
    
    
    75,418.3
    
    
    
    95,710.7
    
    
    
    71,657.6
    
    
    
    2,209.6Unrealized gain (loss) on available-for-sale
marketable securitiesTSMC
    
    
    (133.3
    )
    
    
    338.7
    
    
    
    290.9
    
    
    
    9.0Equity-method investees
    
    
    (221.4
    )
    
    
    151.1
    
    
    
    (119.2
    )
    
    
    (3.7
    )Common shares issued as bonus to employeesTSMC
    
    
    16,881.6
    
    
    
    21,431.1
    
    
    
    32,776.7
    
    
    
    1,010.7Equity-method investees
    
    
    54.4
    
    
    
    51.6
    
    
    
    78.7
    
    
    
    2.4Adjustment arising from changes of ownership
percentage in investees
    
    
    73.2
    
    
    
    186.1
    
    
    
    (85.6
    )
    
    
    (2.7
    )Translation adjustments
    
    
    1,574.5
    
    
    
    (549.1
    )
    
    
    93.4
    
    
    
    2.9Treasury stock repurchased by the Company
    
    
    
    
    
    
    
    
    
    
    (48,466.9
    )
    
    
    (1,494.5
    )Proceeds from sales of treasury stock
    
    
    899.5
    
    
    
    Cash dividends received by subsidiaries from
parent company
    
    
    84.3
    
    
    
    82.3
    
    
    
    101.8
    
    
    
    3.1Cash dividends to common shareholders
    
    
    (46,504.1
    )
    
    
    (61,825.1
    )
    
    
    (77,489.1
    )
    
    
    (2,389.4
    )Stock-based compensation
    
    
    896.4
    
    
    
    326.2
    
    
    
    233.4
    
    
    
    7.2Issuance of stock from exercising stock
options
    
    
    270.9
    
    
    
    575.2
    
    
    
    436.9
    
    
    
    13.5Adjustment of prior year accrual of 10% tax on
undistributed earnings
    
    
    878.1
    
    
    
    
    
    
    
    
    
    
    
    
  F-62




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Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Adjustment of pension cost upon adoption of
U.S. SFAS No. 158TSMC
    
    $
    
    
    
    $
    (1,391.3
    )
    
    $
    
    
    
    $
    Equity-method investees
    
    
    
    
    
    
    18.3
    
    
    
    
    
    
    
    Changes in actuarial gain and transition
obligationTSMC
    
    
    
    
    
    
    
    
    
    $
    1,303.8
    
    
    $
    40.2Equity-method investees
    
    
    
    
    
    
    
    
    
    
    12.7
    
    
    
    0.4Balance, end of year
    
    $
    477,297.2
    
    
    $
    532,403.0
    
    
    $
    513,228.1
    
    
    $
    15,825.7
  The following U.S. GAAP condensed balance sheets as of December 31, 2006 and 2007, and
statements of operations for the years ended December 31, 2005, 2006 and 2007 have been derived
from the audited consolidated financial statements and reflect the adjustments presented above.Certain accounts have been reclassified to conform to U.S. GAAP. Technical service income is
included in sales with the related costs included in cost of sales. Provision for litigation
loss, gains and losses on disposal of property, plant and equipment and other assets, rental
income with related costs, losses on idle assets due to decreasing demand for products produced
using those assets and certain other items in non-operating income (expense) are included in
operating expenses.
 December 312006
    
    
    2007NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)AssetsCurrent assets
    
    $
    260,317.2
    
    
    $
    249,822.3
    
    
    $
    7,703.4Long-term investments
    
    
    53,450.1
    
    
    
    36,028.8
    
    
    
    1,111.0Property, plant and equipment, net
    
    
    251,998.4
    
    
    
    259,557.0
    
    
    
    8,003.6Goodwill
    
    
    46,940.2
    
    
    
    46,926.2
    
    
    
    1,447.0Other assets
    
    
    13,402.5
    
    
    
    18,508.4
    
    
    
    570.7Total assets
    
    $
    626,108.4
    
    
    $
    610,842.7
    
    
    $
    18,835.7LiabilitiesCurrent liabilities
    
    $
    59,627.1
    
    
    $
    62,419.5
    
    
    $
    1,924.8Long-term liabilities
    
    
    22,873.5
    
    
    
    24,284.5
    
    
    
    748.8Other liabilities
    
    
    10,048.1
    
    
    
    7,316.6
    
    
    
    225.6Minority interest in subsidiaries
    
    
    1,156.7
    
    
    
    3,594.0
    
    
    
    110.8Equity attributable to shareholders of the parent
    
    
    532,403.0
    
    
    
    513,228.1
    
    
    
    15,825.7Total liabilities and shareholders equity
    
    $
    626,108.4
    
    
    $
    610,842.7
    
    
    $
    18,835.7
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##### Table of Contents



Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Net sales
    
    $
    267,027.7
    
    
    $
    317,978.7
    
    
    $
    323,221.0
    
    
    $
    9,966.7Cost of sales
    
    
    161,808.4
    
    
    
    179,174.2
    
    
    
    202,045.7
    
    
    
    6,230.2Gross profit
    
    
    105,219.3
    
    
    
    138,804.5
    
    
    
    121,175.3
    
    
    
    3,736.5Operating expenses
    
    
    32,763.6
    
    
    
    37,050.1
    
    
    
    44,775.0
    
    
    
    1,380.6Income from operations
    
    
    72,455.7
    
    
    
    101,754.4
    
    
    
    76,400.3
    
    
    
    2,355.9Non-operating income, net
    
    
    3,526.9
    
    
    
    4,892.3
    
    
    
    9,573.1
    
    
    
    295.2Income before income tax, minority
interest and cumulative effect of changes
in accounting principles
    
    
    75,982.6
    
    
    
    106,646.7
    
    
    
    85,973.4
    
    
    
    2,651.1Income tax expense
    
    
    482.8
    
    
    
    10,953.4
    
    
    
    14,011.8
    
    
    
    432.1Net income before minority interest and
cumulative effect of changes in accounting
principles
    
    
    75,499.8
    
    
    
    95,693.3
    
    
    
    71,961.6
    
    
    
    2,219.0Cumulative effect of changes in accounting
principles
    
    
    
    
    
    
    37.9
    
    
    
    
    
    
    
    Net income attributable to shareholders of the
parent
    
    
    75,418.3
    
    
    
    95,710.7
    
    
    
    71,657.6
    
    
    
    2,209.6Net income attributable to minority interest
    
    
    81.5
    
    
    
    20.5
    
    
    
    304.0
    
    
    
    9.4
 The Company reports comprehensive income (loss) in accordance with U.S. SFAS No. 130, Reporting
Comprehensive Income for U.S. GAAP purposes. U.S. SFAS No. 130 requires that in addition to net
income (loss), a company should report other comprehensive income (loss) consisting of the
changes in equity of the company during the year from transactions and other events and
circumstance from nonowner sources. It includes all changes in equity during the year except
those resulting from investments by shareholders and distribution to shareholders. The
components of other comprehensive income for the Company consist of unrealised gains and losses
relating to the translation of financial statements maintained in foreign currencies, unrealized
gains and losses relating to the Companys investments in available-for-sale securities and
changes in the funded status of the defined benefit pension plan.
 F-64




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Statements of comprehensive income for the years ended December 31, 2005, 2006 and 2007 are as
follows:
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Net income attributable to shareholders of the
parent based on U.S. GAAP
    
    $
    75,418.3
    
    
    $
    95,710.7
    
    
    $
    71,657.6
    
    
    $
    2,209.6Other comprehensive income (loss), net of
tax:Adjustment of unrealized gain (loss) on
financial instrumentsTSMC
    
    
    (133.3
    )
    
    
    338.7
    
    
    
    290.9
    
    
    
    9.0Equity-method investees
    
    
    (221.4
    )
    
    
    151.1
    
    
    
    (119.2
    )
    
    
    (3.7
    )Translation adjustments
    
    
    1,574.5
    
    
    
    (549.1
    )
    
    
    93.4
    
    
    
    2.9Changes in actuarial loss and transition
obligationTSMC
    
    
    
    
    
    
    
    
    
    
    1,303.8
    
    
    
    40.2Equity-method investees
    
    
    
    
    
    
    
    
    
    
    12.7
    
    
    
    0.4Comprehensive income
    
    $
    76,638.1
    
    
    $
    95,651.4
    
    
    $
    73,239.2
    
    
    $
    2,258.4
 The components of accumulated other comprehensive income (loss) were as follows:
 December 312006
    
    
    2007NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Cumulative translation adjustment
    
    $
    (1,294.5
    )
    
    $
    (1,201.1
    )
    
    $
    (37.0
    )Unrealized gain on financial instruments
    
    
    411.3
    
    
    
    583.0
    
    
    
    18.0Actuarial loss and transition obligation
    
    
    (1,373.0
    )
    
    
    (56.5
    )
    
    
    (1.8
    )Total accumulated other comprehensive loss
    
    $
    (2,256.2
    )
    
    $
    (674.6
    )
    
    $
    (20.8
    )
 F-65




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The Company applies R.O.C. SFAS No. 17, Statement of Cash Flows. Its objectives and
principles are similar to those set out in U.S. SFAS No. 95, Statement of Cash Flows. The
principal differences between the two standards relate to classification. Cash flows from
investing activities for changes in deferred charges, refundable deposits and other
assets-miscellaneous, and cash flows from financing activities for changes in guarantee
deposits, other liabilities and cash bonuses paid to employees, directors and supervisors are
reclassified to operating activities under U.S. SFAS No. 95. Summarized cash flow data by
operating, investing and financing activities in accordance with U.S. SFAS No. 95 are as
follows:
 Year Ended December 312005
    
    
    2006
    
    
    2007NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Net cash inflow (outflow) from:Operating activities
    
    $
    155,445.3
    
    
    $
    199,536.9
    
    
    $
    173,886.5
    
    
    $
    5,361.9Investing activities
    
    
    (76,730.2
    )
    
    
    (117,032.1
    )
    
    
    (67,241.4
    )
    
    
    (2,073.4
    )Financing activities
    
    
    (57,111.7
    )
    
    
    (61,014.5
    )
    
    
    (128,977.7
    )
    
    
    (3,977.1
    )Change in cash and cash equivalents
    
    
    21,603.4
    
    
    
    21,490.3
    
    
    
    (22,332.6
    )
    
    
    (688.6
    )Cash and cash equivalents at the beginning of
year
    
    
    74,531.4
    
    
    
    96,483.7
    
    
    
    117,837.2
    
    
    
    3,633.6Effect of exchange rate changes
    
    
    348.9
    
    
    
    (136.8
    )
    
    
    (518.1
    )
    
    
    (16.0
    )Cash and cash equivalents at the end of year
    
    $
    96,483.7
    
    
    $
    117,837.2
    
    
    $
    94,986.5
    
    
    $
    2,929.0
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31.
    
    ADDITIONAL DISCLOSURES REQUIRED BY U.S. GAAP
 a.
    
    Recent accounting pronouncements
 In December 2007, the FASB issued U.S. SFAS No. 141R, Business Combination (U.S. SFAS No.
141R) and U.S. SFAS No. 160, Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51 (U.S. SFAS No. 160). U.S. SFAS No. 141R requires
most of the assets acquired and liabilities assumed in the business combination to be
measured at fair value, as of the acquisition date. In addition, the net assets of
non-controlling interests share of the acquired subsidiaries should be recognized at fair
value. U.S. SFAS No. 160 requires the Company to include non-controlling interests as a
separate component of shareholders equity, instead of a liability or temporary equity.
U.S. SFAS No. 141R is effective for the Company for business combination consummated on or
after January 1, 2009 and U.S. SFAS No. 160 is effective for the Company beginning after
January 1, 2009. The Company is currently evaluating the effect that the adoption of U.S.
SFAS No. 141R and SFAS No. 160 will have on its results of operation and financial position
and is not yet in a position to determine such effect.
 In February 2007, the FASB issued U.S. SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (U.S. SFAS No. 159). U.S. SFAS No. 159 allows the
Company to elect to measure certain financial assets and liabilities at fair value through
earnings. This statement is effective for the Company beginning January 1, 2008. The
Company believes that the adoption of U.S. SFAS No. 159 has no material impact on its
results of operations and financial position.
 In June 2007, the FASB ratified EITF No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development Activities
(EITF 07-3). EITF 07-3 requires that the nonrefundable advance payments for goods or
services that will be used or rendered for future research and development activities be
deferred and capitalized. Such amounts should be recognized as an expense as the goods are
delivered or the related services are performed. This statement is effective for the
Company beginning January 1, 2008. The Company believes that the adoption of EITF 07-3
will have no material impact on its results of operations and financial position.
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In September 2006, the FASB issued U.S. SFAS No. 157, Fair Value Measurements (U.S. SFAS
No. 157), which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. U.S. SFAS No. 157 does not require any
new fair value measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the information. This
statement is effective for the Company beginning January 1, 2008. In November 2007, the
FASB provided a one year deferral for the implementation of U.S. SFAS No. 157 for other
nonfinancial assets and liabilities. The Company believes that the adoption of U.S. SFAS
No. 157 has no material impact on its results of operations and financial position.
 b.
    
    Marketable securities
 As of December 31, 2006 and 2007, marketable securities by category were as follows:
 December 312006
    
    2007NT$
    
    NT$(In Millions)Marketable securities  trading
    
    $
    1,162.3
    
    
    $
    1,590.2Marketable securities  available-for-sale
    
    
    74,172.4
    
    
    
    68,089.1Marketable securities  held-to-maturity
    
    
    37,484.3
    
    
    
    20,224.6
 The Company uses the average cost method for trading securities and available-for-sale
securities when determining their cost basis. Proceeds from sales of available-for-sale
securities for the years ended December 31, 2005, 2006 and 2007 were NT$102,577.8 million,
NT$91,620.4 million and NT$94,908.7 million, respectively. Net realized losses on these
sales were NT$137.9 million and NT$190.3 million for the years ended December 31, 2005 and
2006, respectively, and net realized gains on these sales were NT$557.9 million for the
year ended December 31, 2007.
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As of December 31, 2006 and 2007, available-for-sale and held-to-maturity securities of the
Company were as follows:
 December 31, 2006Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Corporate bonds
    
    $
    30,389.3
    
    
    $
    53.5
    
    
    $
    (192.8
    )
    
    $
    30,250.0Corporate issued asset-backed securities
    
    
    10,600.9
    
    
    
    14.5
    
    
    
    (73.7
    )
    
    
    10,541.7Open-end mutual funds
    
    
    25,768.7
    
    
    
    378.6
    
    
    
    
    
    
    
    26,147.3Agency bonds
    
    
    12,735.8
    
    
    
    10.4
    
    
    
    (54.6
    )
    
    
    12,691.6Government bonds
    
    
    18,996.2
    
    
    
    137.5
    
    
    
    (78.2
    )
    
    
    19,055.5Money market funds
    
    
    667.8
    
    
    
    
    
    
    
    
    
    
    
    667.8Publicly traded stocks
    
    
    89.0
    
    
    
    119.9
    
    
    
    
    
    
    
    208.9Structured time deposits
    
    
    12,171.1
    
    
    
    
    
    
    
    (186.0
    )
    
    
    11,985.1Total
    
    $
    111,418.8
    
    
    $
    714.4
    
    
    $
    (585.3
    )
    
    $
    111,547.9Categorized as:Current assetsAvailable-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    67,523.9Held-to-maturity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,522.6Long-term investmentsAvailable-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,648.5Held-to-maturity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,852.9$
    111,547.9
 December 31, 2007Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Corporate bonds
    
    $
    21,677.4
    
    
    $
    60.2
    
    
    $
    (148.0
    )
    
    $
    21,589.6Corporate issued asset-backed securities
    
    
    5,930.6
    
    
    
    17.1
    
    
    
    (590.6
    )
    
    
    5,357.1Open-end mutual funds
    
    
    14,694.1
    
    
    
    272.6
    
    
    
    
    
    
    
    14,966.7Agency bonds
    
    
    8,529.9
    
    
    
    111.3
    
    
    
    (5.4
    )
    
    
    8,635.8Government bonds
    
    
    15,559.8
    
    
    
    90.0
    
    
    
    (24.5
    )
    
    
    15,625.3Money market funds
    
    
    19,212.1
    
    
    
    
    
    
    
    
    
    
    
    19,212.1Publicly traded stocks
    
    
    102.6
    
    
    
    802.7
    
    
    
    
    
    
    
    905.3Structured time deposits
    
    
    2,000.0
    
    
    
    
    
    
    
    (10.6
    )
    
    
    1,989.4Total
    
    $
    87,706.5
    
    
    $
    1,353.9
    
    
    $
    (779.1
    )
    
    $
    88,281.3
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December 31, 2007Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Categorized as:Current assetsAvailable-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    66,688.4Held-to-maturity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,509.7Long-term investmentsAvailable-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,400.7Held-to-maturity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,682.5$
    88,281.3
  The following table shows the gross unrealized losses and fair value of the investments
with unrealized losses that are not deemed to be other-than-temporary impaired, aggregated
by investment category and length of time that have been in a continuous unrealized loss
position as of December 31, 2007:
 Less than 12 Months
    
    
    12 Months or Greater
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Corporate bonds
    
    $
    7,464.1
    
    
    $
    (114.8
    )
    
    $
    9,667.4
    
    
    $
    (33.2
    )
    
    $
    17,131.5
    
    
    $
    (148.0
    )Corporate issued
Asset-backed
securities
    
    
    2,901.2
    
    
    
    (590.6
    )
    
    
    
    
    
    
    
    
    
    
    2,901.2
    
    
    
    (590.6
    )Government bonds
    
    
    4,988.9
    
    
    
    (3.9
    )
    
    
    6,765.9
    
    
    
    (20.6
    )
    
    
    11,754.8
    
    
    
    (24.5
    )Agency bonds
    
    
    742.3
    
    
    
    (5.4
    )
    
    
    
    
    
    
    
    
    
    
    742.3
    
    
    
    (5.4
    )Structured time
deposits
    
    
    993.1
    
    
    
    (6.9
    )
    
    
    996.3
    
    
    
    (3.7
    )
    
    
    1,989.4
    
    
    
    (10.6
    )$
    17,089.6
    
    
    $
    (721.6
    )
    
    $
    17,429.6
    
    
    $
    (57.5
    )
    
    $
    34,519.2
    
    
    $
    (779.1
    )
 The gross unrealized losses related to bonds and asset-backed securities were due to fair
value fluctuations in an unstable United States credit environment. The Company has the
intent and ability to hold the investments for a sufficient period of time to allow for
recovery in market value.
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As of December 31, 2007, the amortized cost and fair value of the Companys available-for-sale
and held-to-maturity investments in debt securities by contractual maturity were as follows:
 AmortizedCost
    
    
    Fair ValueNT$
    
    
    NT$(In Millions)Due in one year or less
    
    $
    21,472.6
    
    
    $
    21,466.6Due after one year through two years
    
    
    17,181.3
    
    
    
    17,280.4Due after two years through five years
    
    
    6,925.1
    
    
    
    6,892.6Due after five years
    
    
    8,118.7
    
    
    
    7,557.6$
    53,697.7
    
    
    $
    53,197.2
 Total appreciation of trading marketable securities held by the Company as of December 31,
2006 and 2007 was NT$964 million and NT$1,486.0 million, respectively. Total appreciation
as of December 31, 2005 included a gain of NT$221 million that resulted from the transfer of
formerly unquoted available-for-sale securities to trading securities as they became
marketable. There was no such transfer for the years ended December 31, 2006 and 2007.c.
    
    Stock-based compensation plansEffective January 1, 2006, TSMC adopted the fair value recognition provisions of U.S. SFAS
No. 123R, using the modified prospective transition method and therefore has not restated
the results for prior periods. Under the transition method, stock-based compensation
expense in the year ended December 31, 2006 includes stock-based compensation expense for
all share-based payment awards granted prior to, but not yet vested as of January 1, 2006,
based on the grant-date fair value estimated in accordance with the original provision of
U.S. SFAS No. 123, Accounting for Stock-Based Compensation (U.S. SFAS No. 123). In
addition, the stock-based compensation expense also includes intrinsic value of certain
outstanding share-based awards for which it was not possible to reasonably estimate their
grant-date fair value under the requirement of U.S. SFAS No. 123. Stock-based compensation
expense for all share-based payment awards granted after January 1, 2006 is based on the
grant-date fair value estimated in accordance with the provision of U.S. SFAS No. 123R. The
Company recognizes these compensation costs using the graded vesting method over the
requisite service period of the award, which is generally a four-year vesting period. The
adoption of U.S. SFAS No. 123R resulted in a cumulative gain from accounting change of
NT$37.9 million, which reflects the net cumulative impact of estimating future forfeitures
in the determination of period expense, rather than recording forfeitures when they occur as
previously permitted. Prior to the adoption of U.S. SFAS No. 123R, the Company accounted
for awards granted under the intrinsic value method prescribed by U.S. APB 25 and related
interpretations, and provided the required pro forma disclosures prescribed by U.S. SFAS No.
123. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB No. 107)
regarding the SECs interpretation of U.S. SFAS No. 123R and the value of share-based
payments for public companies. TSMC has applied the provisions of SAB No. 107 in its
adoption of U.S. SFAS No. 123R.As a result of adopting U.S. SFAS No. 123R, income before income tax and cumulative effect
of changes in accounting principles and net income for the year ended December 31, 2006 were
NT$73.1 million and NT$67.1 million, respectively, lower than if the Company had continued
to account for stock-based compensation under U.S. APB 25.
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The following table reflects the reported and pro forma net income and basic and diluted net
earnings per share or ADS for the years ended December 31, 2005 in accordance with the fair
value based method provision of U.S. SFAS 123:
 Year EndedDecember 312005NT$(In Millions ExceptPer Share Amounts)Net income based on U.S. GAAP, as reported
    
    $
    75,418.3Add: Stock-based compensation expense (gain) included in reported
net income attributable to shareholders of the parent under U.S.
APB 25, net of tax
    
    
    753.5Less: Stock-based compensation expense determined under U.S.
SFAS No. 123, net of tax
    
    
    (846.8
    )Pro forma net income attributable to shareholders of the parent
    
    $
    75,325.0Earnings per share:Pro forma basic earnings per share
    
    $
    2.96Pro forma diluted earnings per share
    
    
    2.96Basic earnings per share as reported
    
    
    2.97Diluted earnings per share as reported
    
    
    2.96Pro forma basic earnings per ADS
    
    
    14.81Pro forma diluted earnings per ADS
    
    
    14.80Basic earnings per ADS as reported
    
    
    14.83Diluted earnings per ADS as reported
    
    
    14.82
 The fair values of the options granted under the TSMC 2002 Plan and GUC 2004 Plan were not
reasonably estimable using appropriate valuation methodologies as prescribed under U.S. SFAS
No. 123 because the terms of such plans included a provision for a reduction in the exercise
price in the event TSMC or GUC issues additional common shares or issues ADSs at a price
lower than the exercise price of a granted stock option. Accordingly, the expenses for the
stock options granted under the TSMC 2002 Plan and GUC 2004 Plan were determined using the
variable accounting method. Upon adoption of U.S. SFAS No. 123R, the Company continued to
account for these stock options based on their intrinsic value, remeasured at each reporting
date through the date of exercise or other settlement.Please refer to Note 21 of the Consolidated Financial Statements for other general terms of
TSMCs, GUCs and Xintecs Employee Stock Option Plans, such as the maximum contractual term
and the number of shares authorized for each stock option plan, as well as the supplemental
information such as outstanding options as of December 31, 2007.The weighted average remaining contractual term and aggregate intrinsic value of options
under the foregoing plans as of December 31, 2007 were as follows:
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WeightedAverageRemainingContractual
    
    AggregateTerm
    
    Intrinsic Value(In Years)
    
    NT$(In Millions)TSMC:Options outstanding
    
    
    5.7
    
    
    $
    1,031.1Options exercisable
    
    
    5.5
    
    
    
    932.0GUC:Options outstanding
    
    
    4.0
    
    
    
    1,209.9Options exercisable
    
    
    2.0
    
    
    
    177.9Xintec:Options outstanding
    
    
    8.8
    
    
    
    13.4Options exercisable
    
    
    
    
    
    
    
 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic
value (the difference between TSMCs or GUCs stock closing price on the last trading date
of the year ended December 31, 2007 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had all option
holders exercised their options on December 31, 2007.The number of options expected to vest for the years ended December 31, 2006 and 2007 was
23,093 thousand shares and 16,937 thousand shares, respectively.Total intrinsic value of options exercised in the years ended December 31, 2006 and 2007 was
NT$332.2 million and NT$741.9 million, respectively. Total fair value of options vested,
net of taxes, during the years ended December 31, 2006 and 2007 was NT$528.8 million and
NT$574.5 million, respectively.As of December 31, 2007, there was NT$279.3 million of unrecognized compensation cost
related to stock-based compensation plans. The unrecognized compensation cost is expected
to be recognized over a weighted average period of 2.4 year.d.
    
    Uncertainty in income taxesOn January 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  An interpretation of
FASB Statement No. 109 (U.S. FIN 48), which clarifies the accounting
for uncertainty in income taxes by prescribing a more-likely-than-not
threshold for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. U.S. FIN 48
also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
As a result of the implementation of U.S. FIN 48, the Company did not
recognize any cumulative effect adjustment impacting retained earnings
as of the beginning of fiscal year 2007. As of December 31, 2007,
there was no material uncertain tax position or unrecognized tax
benefit identified by the Company. The Company does not expect there
will be any significant change in this tax position on unrecognized
tax benefits within 12 months of the reporting date.
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e.
    
    Subsidy incomeThe subsidy income of NT$321.9 million, NT$334.5 million and NT$364.3
million recognized in the years ended December 31, 2005, 2006 and
2007, respectively, represented payments granted by the government of
the Peoples Republic of China in connection with the Companys
investment in Mainland China. Under R.O.C. GAAP, such government
grants are recorded as non-operating income when received. In the
absence of specific U.S. GAAP accounting guidance, the Company applied
the International Accounting Standard 20, Accounting for Government
Grants and Disclosure of Government Assistance. Therefore the
subsidy income was recognized when received as non-operating income
under U.S. GAAP as well.f.
    
    Settlement incomeSettlement income of NT 964.7 million, NT$979.2 million and NT$985.1
million was recognized in the years ended December 31, 2005, 2006 and
2007, respectively, under the settlement agreement with Semiconductor
Manufacturing Company Limited (SMIC). The dispute settlement is not a
component of the activities that constitute the Companys ongoing
major or central operations and therefore is classified as
non-operating income in accordance with U.S. FASB Standard of
Financial Accounting Concept (SFAC) No. 6, Elements of Financial
Statements.Under paragraph 84 (g) of U.S. FASB SFAC No. 5, Recognition and
Measurement in Financial Statements of Business Enterprises, the
Company recognized such settlement income on a cash basis due to the
Companys serious doubt as to its collectibility at the time the
settlement agreement was consummated. The Company continues to
analyze the recognition of the remaining settlement income based on
its collectibility, and will evaluate SMICs reported financial
condition, capital resources and liquidity condition on a regular
basis.
 F-74