##### 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 1934ORþ
    
    ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008ORo
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from __________ to __________ORo
    
    SHELL COMPANY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Date of event requiring this
shell company report __________
 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




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##### 



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
    
    
    22ITEM 5.
    
    OPERATING AND FINANCIAL REVIEWS AND PROSPECTS
    
    
    22ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    37ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    44ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    47ITEM 9.
    
    THE OFFER AND LISTING
    
    
    49ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    49ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
    
    
    64ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    66PART II
    
    
    66ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    66ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    66ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    66ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    68ITEM 16B.
    
    CODE OF ETHICS
    
    
    68ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    68ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    69ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    69ITEM 16F.
    
    CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
    
    
    70ITEM 16G.
    
    CORPORATE GOVERNANCE
    
    
    70PART III
    
    
    74ITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    74ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    74ITEM 19.
    
    EXHIBITS
    
    
    75EX-3.2 RULES AND PROCEDURES OF BOARD OF DIRECTORS MEETINGSEX-12.1 CERTIFICATION OF CEO - RULE 13A-14(A)EX-12.2 CERTIFICATION OF CFO - RULE 13A-14(A)EX-13.1 CERIFICATION 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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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 retain 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.
  1




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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 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008NT$
    
    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
    
    
    257,213
    
    
    
    266,565
    
    
    
    317,407
    
    
    
    322,630
    
    
    
    333,158
    
    
    
    10,170Cost of sales
    
    
    (141,394
    )
    
    
    (148,362
    )
    
    
    (161,597
    )
    
    
    (180,280
    )
    
    
    (191,408
    )
    
    
    (5,843
    )Gross profit
    
    
    115,819
    
    
    
    118,203
    
    
    
    155,810
    
    
    
    142,350
    
    
    
    141,750
    
    
    
    4,327Operating expenses
    
    
    (27,337
    )
    
    
    (27,234
    )
    
    
    (28,545
    )
    
    
    (30,628
    )
    
    
    (37,315
    )
    
    
    (1,139
    )Income from operations
    
    
    88,482
    
    
    
    90,969
    
    
    
    127,265
    
    
    
    111,722
    
    
    
    104,435
    
    
    
    3,188Non-operating income and gains(1)
(8)
    
    
    8,506
    
    
    
    9,399
    
    
    
    9,839
    
    
    
    11,934
    
    
    
    10,822
    
    
    
    330Non-operating expenses and
losses(1) (8)
    
    
    (5,022
    )
    
    
    (6,105
    )
    
    
    (3,742
    )
    
    
    (2,014
    )
    
    
    (3,785
    )
    
    
    (116
    )Income before income tax and minority
interest
    
    
    91,966
    
    
    
    94,263
    
    
    
    133,362
    
    
    
    121,642
    
    
    
    111,472
    
    
    
    3,402Income tax benefit (expense)
    
    
    363
    
    
    
    (630
    )
    
    
    (7,774
    )
    
    
    (11,710
    )
    
    
    (10,949
    )
    
    
    (334
    )Income before cumulative effect of
changes in accounting principles
    
    
    92,329
    
    
    
    93,633
    
    
    
    125,588
    
    
    
    109,932
    
    
    
    100,523
    
    
    
    3,068Cumulative effect of changes in
accounting principles
    
    
    
    
    
    
    
    
    
    
    1,607
    
    
    
    
    
    
    
    
    
    
    
    Income before minority interest
    
    
    92,329
    
    
    
    93,633
    
    
    
    127,195
    
    
    
    109,932
    
    
    
    100,523
    
    
    
    3,068Minority interest in loss (income) of
subsidiaries
    
    
    (13
    )
    
    
    (58
    )
    
    
    (185
    )
    
    
    (755
    )
    
    
    (590
    )
    
    
    (18
    )Net income attributable to shareholders
of the parent
    
    
    92,316
    
    
    
    93,575
    
    
    
    127,010
    
    
    
    109,177
    
    
    
    99,933
    
    
    
    3,050Basic earnings per share(2)
    
    
    3.43
    
    
    
    3.48
    
    
    
    4.72
    
    
    
    4.06
    
    
    
    3.86
    
    
    
    0.12Diluted earnings per share(2)
    
    
    3.43
    
    
    
    3.48
    
    
    
    4.72
    
    
    
    4.06
    
    
    
    3.83
    
    
    
    0.12Basic earnings per ADS
equivalent(2)
    
    
    17.15
    
    
    
    17.41
    
    
    
    23.61
    
    
    
    20.32
    
    
    
    19.28
    
    
    
    0.59
 2




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Year ended and as of December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008NT$
    
    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)
    
    
    17.15
    
    
    
    17.40
    
    
    
    23.59
    
    
    
    20.30
    
    
    
    19.14
    
    
    
    0.58Basic weighted average shares
outstanding(2)
    
    
    26,914
    
    
    
    26,871
    
    
    
    26,897
    
    
    
    26,871
    
    
    
    25,910
    
    
    
    25,910Diluted weighted average
shares
outstanding(2)
    
    
    26,917
    
    
    
    26,882
    
    
    
    26,920
    
    
    
    26,892
    
    
    
    26,107
    
    
    
    26,107U.S. GAAPNet sales
    
    
    260,035
    
    
    
    267,028
    
    
    
    317,979
    
    
    
    323,221
    
    
    
    334,340
    
    
    
    10,206Cost of sales(3)
    
    
    (154,785
    )
    
    
    (161,808
    )
    
    
    (179,175
    )
    
    
    (202,046
    )
    
    
    (203,734
    )
    
    
    (6,219
    )Operating
expenses(3)
    
    
    (32,191
    )
    
    
    (32,764
    )
    
    
    (37,050
    )
    
    
    (44,775
    )
    
    
    (44,424
    )
    
    
    (1,356
    )Income from operations
    
    
    73,059
    
    
    
    72,456
    
    
    
    101,754
    
    
    
    76,400
    
    
    
    86,182
    
    
    
    2,631Income before income tax and
minority interest
    
    
    76,838
    
    
    
    75,983
    
    
    
    106,647
    
    
    
    85,973
    
    
    
    91,884
    
    
    
    2,805Income tax expense
    
    
    (508
    )
    
    
    (483
    )
    
    
    (10,954
    )
    
    
    (14,012
    )
    
    
    (10,062
    )
    
    
    (307
    )Cumulative effect of changes
in accounting principles
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    76,253
    
    
    
    75,418
    
    
    
    95,711
    
    
    
    71,658
    
    
    
    81,473
    
    
    
    2,487Income attributable to common
shareholders
    
    
    76,253
    
    
    
    75,418
    
    
    
    95,711
    
    
    
    71,658
    
    
    
    81,473
    
    
    
    2,487Basic earnings per
share(4)
    
    
    3.01
    
    
    
    2.95
    
    
    
    3.70
    
    
    
    2.73
    
    
    
    3.17
    
    
    
    0.10Diluted earnings per
share(4)
    
    
    3.01
    
    
    
    2.95
    
    
    
    3.69
    
    
    
    2.72
    
    
    
    3.15
    
    
    
    0.10Basic earnings per ADS
equivalent(4)
    
    
    15.07
    
    
    
    14.75
    
    
    
    18.49
    
    
    
    13.63
    
    
    
    15.85
    
    
    
    0.48Diluted earnings per ADS
equivalent(4)
    
    
    15.07
    
    
    
    14.75
    
    
    
    18.47
    
    
    
    13.62
    
    
    
    15.73
    
    
    
    0.48Basic weighted average shares
outstanding(4)
    
    
    25,292
    
    
    
    25,558
    
    
    
    25,882
    
    
    
    26,278
    
    
    
    25,698
    
    
    
    25,698Diluted weighted average
shares
outstanding(4)
    
    
    25,296
    
    
    
    25,569
    
    
    
    25,905
    
    
    
    26,299
    
    
    
    25,894
    
    
    
    25,894Balance Sheet Data:R.O.C. GAAPWorking capital(1)
    
    
    120,574
    
    
    
    177,179
    
    
    
    213,457
    
    
    
    201,116
    
    
    
    195,812
    
    
    
    5,977Long-term
investments(1)
    
    
    38,058
    
    
    
    42,383
    
    
    
    53,895
    
    
    
    36,461
    
    
    
    39,982
    
    
    
    1,220Properties
    
    
    258,911
    
    
    
    244,823
    
    
    
    254,094
    
    
    
    260,252
    
    
    
    243,645
    
    
    
    7,437
 3




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Year ended and as of December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    US$(in millions, except for percentages,earnings per share and per ADS, and operating data)Goodwill
    
    
    7,116
    
    
    
    6,011
    
    
    
    5,985
    
    
    
    5,988
    
    
    
    6,044
    
    
    
    184Total assets
    
    
    499,454
    
    
    
    519,510
    
    
    
    587,485
    
    
    
    570,865
    
    
    
    558,917
    
    
    
    17,061Long term bank borrowing
    
    
    1,915
    
    
    
    663
    
    
    
    654
    
    
    
    1,722
    
    
    
    1,420
    
    
    
    43Long-term bonds payable
    
    
    19,500
    
    
    
    19,500
    
    
    
    12,500
    
    
    
    12,500
    
    
    
    4,500
    
    
    
    137Guaranty deposit-in and other
liabilities(5)
    
    
    15,079
    
    
    
    17,986
    
    
    
    18,333
    
    
    
    17,251
    
    
    
    15,817
    
    
    
    483Total liabilities
    
    
    100,413
    
    
    
    73,271
    
    
    
    78,347
    
    
    
    80,179
    
    
    
    78,544
    
    
    
    2,398Capital stock
    
    
    232,520
    
    
    
    247,300
    
    
    
    258,297
    
    
    
    264,271
    
    
    
    256,254
    
    
    
    7,822Cash dividend on common shares
    
    
    12,160
    
    
    
    46,504
    
    
    
    61,825
    
    
    
    77,489
    
    
    
    76,881
    
    
    
    2,347Shareholders equity
attributable to shareholders
of the parent
    
    
    398,965
    
    
    
    445,631
    
    
    
    507,981
    
    
    
    487,092
    
    
    
    476,377
    
    
    
    14,541Minority interest in
subsidiaries
    
    
    76
    
    
    
    608
    
    
    
    1,157
    
    
    
    3,594
    
    
    
    3,996
    
    
    
    122U.S. GAAPGoodwill
    
    
    46,757
    
    
    
    46,993
    
    
    
    46,940
    
    
    
    46,926
    
    
    
    47,028
    
    
    
    1,436Total assets
    
    
    536,286
    
    
    
    558,919
    
    
    
    626,108
    
    
    
    610,843
    
    
    
    599,484
    
    
    
    18,299Total liabilities
    
    
    108,416
    
    
    
    80,962
    
    
    
    92,549
    
    
    
    94,021
    
    
    
    84,424
    
    
    
    2,577Capital Stock
    
    
    232,520
    
    
    
    247,300
    
    
    
    258,297
    
    
    
    264,271
    
    
    
    256,254
    
    
    
    7,822Shareholders equity
attributable to common
shareholders of the parent
    
    
    427,125
    
    
    
    477,297
    
    
    
    532,403
    
    
    
    513,228
    
    
    
    511,089
    
    
    
    15,601Minority interest in
subsidiaries
    
    
    745
    
    
    
    660
    
    
    
    1,156
    
    
    
    3,594
    
    
    
    3,971
    
    
    
    121
 Year ended and as of December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008NT$
    
    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
    
    
    45%
    
    
    
    44%
    
    
    
    49%
    
    
    
    44%
    
    
    
    42%
    
    
    
    42%Operating margin
    
    
    34%
    
    
    
    34%
    
    
    
    40%
    
    
    
    35%
    
    
    
    31%
    
    
    
    31%Net margin
    
    
    36%
    
    
    
    35%
    
    
    
    40%
    
    
    
    34%
    
    
    
    30%
    
    
    
    30%Capital expenditures
    
    
    81,095
    
    
    
    79,879
    
    
    
    78,737
    
    
    
    84,001
    
    
    
    59,223
    
    
    
    1,808Depreciation and amortization
    
    
    69,819
    
    
    
    75,649
    
    
    
    73,715
    
    
    
    80,005
    
    
    
    81,512
    
    
    
    2,488Cash provided by operating
activities(1)
    
    
    153,523
    
    
    
    157,225
    
    
    
    204,997
    
    
    
    183,766
    
    
    
    221,494
    
    
    
    6,761Cash used in investing
activities(1)
    
    
    (148,359
    )
    
    
    (77,652
    )
    
    
    (119,724
    )
    
    
    (70,689
    )
    
    
    (8,042
    )
    
    
    (245
    )Cash used in financing
activities
    
    
    (32,181
    )
    
    
    (57,969
    )
    
    
    (63,783
    )
    
    
    (135,410
    )
    
    
    (115,393
    )
    
    
    (3,522
    )Net cash inflow (outflow)
    
    
    (28,687
    )
    
    
    22,181
    
    
    
    21,353
    
    
    
    (22,851
    )
    
    
    99,628
    
    
    
    3,041Operating Data:Wafer (200mm equivalent)
shipment(6)
    
    
    5,008
    
    
    
    5,622
    
    
    
    7,215
    
    
    
    8,005
    
    
    
    8,467
    
    
    
    8,467Billing Utilization
Rate(7)
    
    
    105%
    
    
    
    94%
    
    
    
    102%
    
    
    
    93%
    
    
    
    88%
    
    
    
    88%
 4




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##### Table of Contents



(1)
    
    As a result of the adoption of the 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.(2)
    
    Retroactively adjusted for all subsequent stock dividends and employee stock
bonuses.(3)
    
    Amounts in 2006, 2007 and 2008 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.h. to our consolidated financial
statements for additional details about this new accounting standard. Amounts in 2004 and 2005
reflect the reclassification of NT$232 million and NT$159 million, respectively, from net
non-operating income/expenses to operating expenses.(4)
    
    Retroactively adjusted for all subsequent stock dividends.(5)
    
    Consists of other long term payables and total other liabilities.(6)
    
    In thousands.(7)
    
    Billing Utilization Rate is equal to annual wafer shipment divided by annual
capacity. 2007 and 2008 capacity include wafers committed by Vanguard.(8)
    
    The specified 2004, 2005, 2006 and 2007 amounts for gains/losses on settlement and
disposal of financial assets at fair value through profit or loss were reclassified into
valuation gains/losses on financial instruments for comparison purposes. Such reclassification
resulted in a change of non-operating income and gains from NT$8,581 million and NT$9,705
million to NT$8,506 million and NT$9,839 million and a change in non-operating expenses and
losses from NT$5,097 million and NT$3,608 million to NT$5,022 million and NT$3,742 million for
the years ended December 31, 2004 and 2006, respectively. Exchange Rates
   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
    
    
    
    32.432008
    
    
    31.51
    
    
    
    33.55
    
    
    
    29.99
    
    
    
    32.76October 2008
    
    
    32.70
    
    
    
    33.50
    
    
    
    32.14
    
    
    
    32.97November 2008
    
    
    33.10
    
    
    
    33.42
    
    
    
    32.77
    
    
    
    33.29December 2008
    
    
    33.11
    
    
    
    33.55
    
    
    
    32.45
    
    
    
    32.76January 2009
    
    
    33.37
    
    
    
    33.70
    
    
    
    32.82
    
    
    
    33.70February 2009
    
    
    34.24
    
    
    
    35.00
    
    
    
    33.61
    
    
    
    35.00March 2009
    
    
    34.30
    
    
    
    35.21
    
    
    
    33.75
    
    
    
    33.87April 2009
(through April 10, 2009)
    
    
    33.52
    
    
    
    33.88
    
    
    
    33.05
    
    
    
    33.78
 
 (1)
    
    Annual averages calculated from month-end rates and monthly averages calculated from
daily closing rates. 5




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##### Table of Contents



Capitalization and Indebtedness
  Reasons for the Offer and Use of Proceeds
  Risk Factors
  Risks Relating to Our Business
 Recent global systemic economic and financial crisis could negatively affect our business, results
of operations, and financial condition.
  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.
  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.
  6




---



##### Table of Contents



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 capacity and the streamlining of our production facilities
effectively, our competitiveness may be weakened.
  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;
    
    market conditions for financing activities of semiconductor companies; and
    
    social, economic, financial, political and other conditions in Taiwan and
elsewhere.
 7




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##### Table of Contents



We may not be able to implement our planned growth, development or maintain our leading position if
we are unable to recruit and retain qualified executives, managers and skilled technical and service
personnel or suffer production disruptions caused by labor disputes.
  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.
  8




---



##### 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.
  9




---



##### Table of Contents



Any failure to achieve and maintain effective internal controls could have a material adverse
effect on our business and results of operations.
    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.
  10




---



##### Table of Contents



Fluctuations in exchange rates could result in foreign exchange losses.
  Fluctuations in inflationary and deflationary market expectations could negatively affect demand
for our products and services, which may harm our financial results.
  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.
  11




---



##### 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 market value of our shares may fluctuate due to the volatility of, and government intervention
in, the R.O.C. securities market.
  
 ITEM 4. INFORMATION ON THE COMPANY
 Our History and Structure
   12




---



##### Table of Contents



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




---



##### Table of Contents



Current mostadvanced technologyYear of
    
    for volume
    
    Monthly capacity(3)(4)Fab(1)
    
    commencement
    
    production(2)
    
    2004
    
    2005
    
    2006
    
    2007
    
    20082
    
    
    1990
    
    
    
    0.45
    
    
    
    47,584
    
    
    
    47,584
    
    
    
    50,506
    
    
    
    51,685
    
    
    
    51,6093(5)
    
    
    1995
    
    
    
    0.15
    
    
    
    83,300
    
    
    
    83,300
    
    
    
    89,900
    
    
    
    90,500
    
    
    
    92,4005
    
    
    1997
    
    
    
    0.15
    
    
    
    42,500
    
    
    
    42,500
    
    
    
    51,500
    
    
    
    55,800
    
    
    
    54,2006
    
    
    2000
    
    
    
    0.11
    
    
    
    73,000
    
    
    
    73,000
    
    
    
    83,400
    
    
    
    94,000
    
    
    
    95,1007(7)
    
    
    1995
    
    
    
    0.35
    
    
    
    13,400
    
    
    
    13,400
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    1998
    
    
    
    0.15
    
    
    
    76,500
    
    
    
    76,500
    
    
    
    83,500
    
    
    
    89,400
    
    
    
    91,60010
    
    
    2004
    
    
    
    0.18
    
    
    
    500
    
    
    
    15,600
    
    
    
    32,000
    
    
    
    31,000
    
    
    
    43,00011
    
    
    1998
    
    
    
    0.15
    
    
    
    32,500
    
    
    
    33,500
    
    
    
    35,500
    
    
    
    35,500
    
    
    
    35,50012
    
    
    2001
    
    
    
    0.040
    
    
    
    60,300
    
    
    
    106,875
    
    
    
    131,175
    
    
    
    160,755
    
    
    
    167,91014
    
    
    2004
    
    
    
    0.055
    
    
    
    6,750
    
    
    
    46,125
    
    
    
    79,650
    
    
    
    133,279
    
    
    
    179,258SSMC(6)
    
    
    2000
    
    
    
    0.15
    
    
    
    13,400
    
    
    
    16,700
    
    
    
    17,700
    
    
    
    20,700
    
    
    
    24,600Total
    
    
    
    
    
    
    
    
    
    
    449,734
    
    
    
    555,084
    
    
    
    654,831
    
    
    
    762,619
    
    
    
    835,177
 
 (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, 2004, December 31, 2005, December 31, 2006, December 31, 2007 and December 31,
2008. 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 Management and Technology Upgrade Plans
  14




---



##### Table of Contents



(1)
 
    
    adding capacity to our 300mm wafer fabs;
    
    Fab 12 facilities; and
    
    development of process technologies in 32-nanometer nodes and below and other
research and development projects.
  
 (1)
    
    Translated from weighted average exchange rate of NT$31.406 to US$1. Markets and Customers
  Year ended December 31,2006
    
    2007
    
    2008Customer Type
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage(in millions, except percentages)Fabless semiconductor
companies/systems
companies
    
    NT$
    229,168
    
    
    
    72.2
    %
    
    NT$
    215,662
    
    
    
    66.8
    %
    
    NT$
    236,542
    
    
    
    71.0
    %Integrated device
manufacturers
    
    
    88,239
    
    
    
    27.8
    %
    
    
    106,968
    
    
    
    33.2
    %
    
    
    96,616
    
    
    
    29.0
    %Total
    
    NT$
    317,407
    
    
    
    100.0
    %
    
    NT$
    322,630
    
    
    
    100.0
    %
    
    NT$
    333,158
    
    
    
    100.0
    %
  Year ended December 31,2006
    
    2007
    
    2008Region
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage(in millions, except percentages)North America
    
    NT$
    247,895
    
    
    
    78.1
    %
    
    NT$
    247,832
    
    
    
    76.8
    %
    
    NT$
    246,537
    
    
    
    74.0
    %Asia
    
    
    43,167
    
    
    
    13.6
    %
    
    
    45,128
    
    
    
    14.0
    %
    
    
    52,472
    
    
    
    15.7
    %Europe
    
    
    26,345
    
    
    
    8.3
    %
    
    
    29,670
    
    
    
    9.2
    %
    
    
    34,149
    
    
    
    10.3
    %Total
    
    NT$
    317,407
    
    
    
    100.0
    %
    
    NT$
    322,630
    
    
    
    100.0
    %
    
    NT$
    333,158
    
    
    
    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.
 Mixed-Signal/RF Semiconductors. SM
 16




---



##### Table of Contents



Memory Semiconductors.
 CMOS Image Sensor Semiconductors.
 High Voltage Semiconductors.
  Year ended December 31,2006
    
    2007
    
    2008Semiconductor Type
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage
    
    Net Sales
    
    Percentage(in millions, except percentages)CMOSLogic
    
    NT$
    240,278
    
    
    
    75.7
    %
    
    NT$
    234,354
    
    
    
    72.6
    %
    
    NT$
    243,884
    
    
    
    73.2
    %Memory
    
    
    3,174
    
    
    
    1.0
    %
    
    
    5,156
    
    
    
    1.6
    %
    
    
    1,839
    
    
    
    0.6
    %Mixed-Signal(1)
    
    
    71,734
    
    
    
    22.6
    %
    
    
    80,247
    
    
    
    24.9
    %
    
    
    84,648
    
    
    
    25.4
    %BiCMOS(2)
    
    
    1,904
    
    
    
    0.6
    %
    
    
    2,517
    
    
    
    0.8
    %
    
    
    2,460
    
    
    
    0.7
    %Others
    
    
    317
    
    
    
    0.1
    %
    
    
    356
    
    
    
    0.1
    %
    
    
    327
    
    
    
    0.1
    %Total
    
    NT$
    317,407
    
    
    
    100.0
    %
    
    NT$
    322,630
    
    
    
    100.0
    %
    
    NT$
    333,158
    
    
    
    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




---



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Multi-project Wafers Program (CyberShuttle).
  Customer Service
  
    
    customer-oriented culture through multi-level interaction with customers;
    
    ability to deliver wafers of consistent quality, competitive ramp-up speed
and efficient yield improvement;
    
    responsiveness to customers issues and requirements, such as engineering
change orders and special wafer handling;
    
    flexibility in manufacturing processes, supported by our competitive
technical capability and efficient production planning;
    
    dedication to help reduce customer costs through collaboration and services,
such as our multi-project wafer program, which combines multiple designs on a single
mask set for increased cost-saving;
    
    availability of eFoundry, the online service which provides in real-time
necessary information in design, engineering, and logistics throughout customers
product life cycle; and
    
    provision of Virtual fab, designed to provide transparent information and
seamless services to our customers such as the availability of key information,
management of on-time delivery and flexibility in scheduling and capacity.
 18




---



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Research and Development
     Equipment
   Raw Materials
  19




---



##### Table of Contents



Competition
  Environmental Regulation
    20




---



##### Table of Contents



Electricity and Water
  Risk Management
  Our
Subsidiaries and Affiliates
 Vanguard International Semiconductor Corporation (VIS).
 WaferTech in the United States.
 Systems on Silicon Manufacturing Company Pte. Ltd. (SSMC).
 Global Unichip Corporation (GUC).
 21




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##### Table of Contents



Operations in Mainland China.
 VisEra Technologies Company, Ltd. (VisEra).
 Xintec, Inc. (Xintec).
 
 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;
    
    technology migration; and
    
    fluctuation in foreign currency exchange rate.
  Pricing.
 22




---



##### Table of Contents



Production Capacity.
    Technology Migration.
  Year ended December 31,2006
    
    2007
    
    2008Percentage of
    
    Percentage of
    
    Percentage oftotal wafer
    
    total wafer
    
    total waferResolution
    
    revenue(1)
    
    revenue(1)
    
    revenue(1)£ 65 nanometer
    
    
    
    
    
    
    6
    %
    
    
    21
    %90 nanometer
    
    
    23
    %
    
    
    26
    %
    
    
    26
    %0.13 micron
    
    
    26
    %
    
    
    23
    %
    
    
    17
    %0.15 micron
    
    
    10
    %
    
    
    9
    %
    
    
    6
    %0.18 micron
    
    
    22
    %
    
    
    20
    %
    
    
    17
    %0.25 micron
    
    
    8
    %
    
    
    7
    %
    
    
    5
    %0.35 micron
    
    
    6
    %
    
    
    5
    %
    
    
    5
    %3 0.5 micron
    
    
    5
    %
    
    
    4
    %
    
    
    3
    %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. Critical Accounting Policies
  Revenue Recognition.
 23




---



##### Table of Contents



Allowances for Doubtful Accounts.
  Inventory valuation.
  Valuation allowance for deferred tax assets.
 24




---



##### 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.
    25




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##### 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.
    Valuation of investments accounted for using the equity method.
  Accounting for investments in private and publicly-traded securities.
 26




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Results of Operations
  For the year ended December 31,2006
    
    2007
    
    2008Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100
    %Cost of sales
    
    
    (50.9
    )%
    
    
    (55.9
    )%
    
    
    (57.5
    )%Gross profit
    
    
    49.1
    %
    
    
    44.1
    %
    
    
    42.5
    %Operating expensesGeneral and administrative
    
    
    (2.7
    )%
    
    
    (2.8
    )%
    
    
    (3.3
    )%Sales and marketing
    
    
    (1.2
    )%
    
    
    (1.2
    )%
    
    
    (1.4
    )%Research and development
    
    
    (5.1
    )%
    
    
    (5.5
    )%
    
    
    (6.4
    )%Total operating expenses
    
    
    (9.0
    )%
    
    
    (9.5
    )%
    
    
    (11.1
    )%Income from operations
    
    
    40.1
    %
    
    
    34.6
    %
    
    
    31.4
    %Non-operating income and gains
    
    
    3.1
    %
    
    
    3.7
    %
    
    
    3.2
    %Non-operating expenses and losses
    
    
    (1.2
    )%
    
    
    (0.6
    )%
    
    
    (1.1
    )%Income before income tax and minority interest
    
    
    42.0
    %
    
    
    37.7
    %
    
    
    33.5
    %Income tax expense
    
    
    (2.4
    )%
    
    
    (3.6
    )%
    
    
    (3.3
    )%Income before cumulative effect of changes in
accounting principles
    
    
    39.6
    %
    
    
    34.1
    %
    
    
    30.2
    %Cumulative effect of changes in accounting principles
    
    
    0.5
    %
    
    
    
    
    
    
    Income before minority interest
    
    
    40.1
    %
    
    
    34.1
    %
    
    
    30.2
    %Minority interest in income of subsidiaries
    
    
    (0.1
    )%
    
    
    (0.3
    )%
    
    
    (0.2
    )%Net income
    
    
    40.0
    %
    
    
    33.8
    %
    
    
    30.0
    %
 Year to Year Comparisons
 Net Sales and Gross Margin
 For the year ended December 31,% Change
    
    
    
    
    
    
    
    
    
    % Change2006
    
    2007
    
    from 2006
    
    2008
    
    from 2007NT$
    
    NT$
    
    
    
    
    
    NT$
    
    US$(in millions)
    
    
    
    
    
    (in millions)Net sales
    
    
    317,407
    
    
    
    322,630
    
    
    
    1.6%
    
    
    
    333,158
    
    
    
    10,170
    
    
    
    3.3%Cost of sales
    
    
    (161,597
    )
    
    
    (180,280
    )
    
    
    11.6%
    
    
    
    (191,408
    )
    
    
    (5,843
    )
    
    
    6.2%Gross profit
    
    
    155,810
    
    
    
    142,350
    
    
    
    (8.6)%
    
    
    
    141,750
    
    
    
    4,327
    
    
    
    (0.4)%Gross margin
percentage
    
    
    49.1%
    
    
    
    44.1%
    
    
    
    
    
    
    
    42.5%
    
    
    
    42.5%
    
    
    
    
 Net Sales
  27




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Gross Margin
   28




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Operating Expenses
 For the Year Ended December 31% Change
    
    
    
    
    
    
    
    
    
    % Change2006
    
    2007
    
    from 2006
    
    2008
    
    from 2007NT$
    
    NT$
    
    
    
    
    
    NT$
    
    US$(in millions)
    
    
    
    
    
    (in millions)Research and
development
    
    
    16,076
    
    
    
    17,946
    
    
    
    11.6%
    
    
    
    21,481
    
    
    
    656
    
    
    
    19.7%General and
administrative
    
    
    8,717
    
    
    
    8,964
    
    
    
    2.8%
    
    
    
    11,097
    
    
    
    339
    
    
    
    23.8%Sales and marketing
    
    
    3,752
    
    
    
    3,718
    
    
    
    (0.9)%
    
    
    
    4,737
    
    
    
    144
    
    
    
    27.4%Total operating
expenses
    
    
    28,545
    
    
    
    30,628
    
    
    
    7.3%
    
    
    
    37,315
    
    
    
    1,139
    
    
    
    21.8%Percentage of net
sales
    
    
    9.0%
    
    
    
    9.5%
    
    
    
    
    
    
    
    11.1%
    
    
    
    11.1%
    
    
    
    Income from
operations
    
    
    127,265
    
    
    
    111,722
    
    
    
    (12.2)%
    
    
    
    104,435
    
    
    
    3,188
    
    
    
    (6.5)%Operating Margin
    
    
    40.1%
    
    
    
    34.6%
    
    
    
    
    
    
    
    31.4%
    
    
    
    31.4%
    
    
    
    
  Research and Development Expenses
   General and Administrative, Sales and Marketing Expenses
   29




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##### Table of Contents



Non-Operating Income and Expenses
 For the Year Ended December 31% Change
    
    
    
    
    
    
    
    
    
    % Change2006(1)
    
    2007(1)
    
    from 2006
    
    2008
    
    from 2007NT$
    
    NT$
    
    
    
    
    
    NT$
    
    US$(in millions)
    
    
    
    
    
    (in millions)Non-operating
income and gains
    
    
    9,839
    
    
    
    11,934
    
    
    
    21.3
    %
    
    
    10,822
    
    
    
    330
    
    
    
    (9.3
    )%Non-operating
expenses and losses
    
    
    (3,742
    )
    
    
    (2,014
    )
    
    
    (46.2
    )%
    
    
    (3,785
    )
    
    
    (116
    )
    
    
    87.9
    %Net non-operating
income (expenses)
    
    
    6,097
    
    
    
    9,920
    
    
    
    62.7
    %
    
    
    7,037
    
    
    
    214
    
    
    
    (29.1
    )%
 
 (1)
    
    The 2006 and 2007 amounts for gains/losses on settlement and disposal of financial assets at
fair value through profit or loss were reclassified into valuation gains/losses on financial
instruments for comparison purposes. Such reclassification resulted in a change of
non-operating income and gains from NT$9,705 million to NT$9,839 million and a change in
non-operating expenses and losses from NT$3,608 million to NT$3,742 million for the year ended
December 31, 2006.   30




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##### Table of Contents



Income Tax Benefit (Expense)
 For the Year Ended December 31% Change
    
    
    
    
    
    
    
    
    
    % Change2006
    
    2007
    
    from 2006
    
    2008
    
    from 2007NT$
    
    NT$
    
    
    
    
    
    NT$
    
    US$(in millions)
    
    
    
    
    
    (in millions)Income tax expense
    
    
    (7,774
    )
    
    
    (11,710
    )
    
    
    50.6%
    
    
    
    (10,949
    )
    
    
    (334
    )
    
    
    (6.5)%Cumulative effect
of changes in
accounting
principles
    
    
    1,607
    
    
    
    
    
    
    
    (1)%
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    127,010
    
    
    
    109,177
    
    
    
    (14.0)%
    
    
    
    99,933
    
    
    
    3,050
    
    
    
    (8.5)%Net margin
    
    
    40.0%
    
    
    
    33.8%
    
    
    
    
    
    
    
    30.0%
    
    
    
    30.0%
    
    
    
    
 
 (1)
    
    Not meaningful.   Cumulative Effect of Changes in Accounting Principles
  Liquidity and Capital Resources
  For the year ended December 31,2006
    
    2007
    
    2008NT$
    
    NT$
    
    NT$
    
    US$(in millions)
    
    (in millions)
    
    (in millions)Net cash provided by operating activities
    
    
    204,997
    
    
    
    183,766
    
    
    
    221,494
    
    
    
    6,761Net cash used in investing activities
    
    
    (119,724
    )
    
    
    (70,689
    )
    
    
    (8,042
    )
    
    
    (245
    )Net cash used in financing activities
    
    
    (63,783
    )
    
    
    (135,410
    )
    
    
    (115,393
    )
    
    
    (3,522
    )Net increase/(decrease) in cash
    
    
    21,353
    
    
    
    (22,851
    )
    
    
    99,628
    
    
    
    3,041
 Operating Activities
  31




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##### Table of Contents



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




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##### Table of Contents



Cash Requirements
  Long-term debtNT$(in millions)During 2009
    
    
    8,222During 2010
    
    
    917During 2011
    
    
    212During 2012
    
    
    4,675During 2013 and thereafter
    
    
    117
  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)
    
    
    14,143
    
    
    
    8,222
    
    
    
    1,129
    
    
    
    4,792
    
    
    
    Capital Lease Obligations(2)
    
    
    804
    
    
    
    50
    
    
    
    92
    
    
    
    662
    
    
    
    Operating Leases(3)
    
    
    4,906
    
    
    
    557
    
    
    
    919
    
    
    
    815
    
    
    
    2,615Other Payments(4)
    
    
    10,675
    
    
    
    1,127
    
    
    
    968
    
    
    
    8,580
    
    
    
    Capital Purchase or other Purchase
Obligations(5)
    
    
    11,647
    
    
    
    10,985
    
    
    
    544
    
    
    
    
    
    
    
    118Total Contractual Cash Obligations(6)
    
    
    42,175
    
    
    
    20,941
    
    
    
    3,652
    
    
    
    14,849
    
    
    
    2,733
 
 (1)
    
    Includes loan payable and bond payable but excludes relevant interest payments which
are not expected to be material in any given period in the future. See notes 15 and 16 to our
consolidated financial statements for further information regarding interest rates and future
repayment of long-term debts.(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, 2008, 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$207 million in 2008 and we
estimate that we will contribute approximately NT$198 million to the pension fund in 2009. See
note 18 to our consolidated financial statements for additional details regarding our pension
plan.  33




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##### Table of Contents



(1)
  
 (1)
    
    Translated from weighted average exchange rate of NT$31.406 to US$1. U.S. GAAP Reconciliation
  For the year ended December 31,2006
    
    2007
    
    2008NT$
    
    NT$
    
    NT$
    
    US$(in NT$ millions)Net income in accordance with:R.O.C. GAAP
    
    
    127,010
    
    
    
    109,177
    
    
    
    99,933
    
    
    
    3,050U.S. GAAP
    
    
    95,711
    
    
    
    71,658
    
    
    
    81,473
    
    
    
    2,487Shareholders equity
attributable to the
shareholders of the parent in
accordance with:R.O.C. GAAP
    
    
    507,981
    
    
    
    487,092
    
    
    
    476,377
    
    
    
    14,541U.S. GAAP
    
    
    532,403
    
    
    
    513,228
    
    
    
    511,089
    
    
    
    15,601
   34




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##### Table of Contents



35




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##### Table of Contents



Taxation
    Off-Balance Sheet Arrangements
  Inflation & Deflation
  36




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##### Table of Contents



Recent Accounting Pronouncements
     
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Executive Officers
 MANAGEMENT
     37




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##### Table of Contents



.
  YearsTerm
    
    with ourName
    
    Position with our company
    
    Expires
    
    companyMorris Chang
    
    Chairman
    
    
    2009
    
    
    
    22F.C. Tseng
    
    Vice Chairman
    
    
    2009
    
    
    
    22Stan Shih
    
    Director
    
    
    2009
    
    
    
    9National Development Fund(1)
    
    Director
    
    
    2009
    
    
    
    22Sir Peter Leahy Bonfield
    
    Director
    
    
    2009
    
    
    
    7Lester Carl Thurow
    
    Director
    
    
    2009
    
    
    
    7Carleton (Carly) S. Fiorina
    
    Director
    
    
    2009
    
    
    
    3Rick Tsai
    
    Director, President & Chief Executive Officer
    
    
    2009
    
    
    
    19Stephen Tso
    
    Senior Vice President & Chief Information Officer
    
    
    
    
    
    
    12Mark Liu
    
    Senior Vice President of Advanced Technology Business
    
    
    
    
    
    
    15C.C. Wei
    
    Senior Vice President of Mainstream Technology
Business
    
    
    
    
    
    
    11M.C. Tzeng
    
    Vice President of Mainstream Technology Business
    
    
    
    
    
    
    22Richard Thurston
    
    Vice President & General Counsel
    
    
    
    
    
    
    7Lora Ho
    
    Vice President, Chief Financial Officer and
Spokesperson
    
    
    
    
    
    
    10P.H. Chang
    
    Vice President of Corporate Human Resources
    
    
    
    
    
    
    9W.J. Lo
    
    Vice President of Research and Development
    
    
    
    
    
    
    5Jason Chen
    
    Vice President of Worldwide Sales and Marketing
    
    
    
    
    
    
    4Fu-Chieh Hsu
    
    Vice President of Design and Technology Platform
    
    
    
    
    
    
    3Jack Sun
    
    Vice President of Research and Development
    
    
    
    
    
    
    12Y.P. Chin
    
    Vice President of Advanced Technology Business
    
    
    
    
    
    
    22N.S. Tsai
    
    Vice President of Quality and Reliability
    
    
    
    
    
    
    20Rick Cassidy
    
    Vice President & President of TSMC North America
    
    
    
    
    
    
    12
 
 (1)
    
    The former representative Mr. Chintay Shih resigned on November 10, 2008 and as of
the date of this filing, the National Development Fund is still in the process of selecting a
new representative to replace Mr. Chintay Shih. Morris Chang
 F.C. Tseng
 38




---



##### Table of Contents



Stan Shih
 Sir Peter Leahy Bonfield
 Lester Carl Thurow
 Carleton (Carly) S. Fiorina
 Rick Tsai
 Stephen Tso
 Mark Liu
 C.C. Wei
 39




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##### Table of Contents



M.C. Tzeng
 Richard Thurston
 Lora Ho
 P.H. Chang
 W.J. Lo
 Jason Chen
 Fu-Chieh Hsu
 Jack Sun
 Y.P. Chin
 N.S. Tsai
 40




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##### Table of Contents



Rick Cassidy
  Share Ownership
  Percentage ofTotal
    
    Number ofNumber of
    
    Outstanding
    
    Common SharesCommon
    
    Common
    
    Underlying StockName of Shareholders
    
    Shares Owned(2)
    
    Shares
    
    Options(3)Morris Chang, Chairman
    
    
    118,047,697
    
    
    
    0.46
    %
    
    
    F.C. Tseng, Vice Chairman
    
    
    36,234,509
    
    
    
    0.14
    %
    
    
    Stan Shih, Director
    
    
    1,472,922
    
    
    
    0.01
    %
    
    
    National Development Fund, Director(1)
    
    
    1,645,482,861
    
    
    
    6.42
    %
    
    
    Lester Carl Thurow, Director
    
    
    
    
    
    
    
    
    
    
    Sir Peter Leahy Bonfield, Director
    
    
    
    
    
    
    
    
    
    
    Carleton (Carly) S. Fiorina, Director
    
    
    
    
    
    
    
    
    
    
    Rick Tsai, Director, President & CEO
    
    
    34,018,636
    
    
    
    0.13
    %
    
    
    822,429Stephen Tso, Senior Vice President & Chief Information
Officer
    
    
    15,264,895
    
    
    
    0.06
    %
    
    
    417,285Mark Liu, Senior Vice President
    
    
    13,382,351
    
    
    
    0.05
    %
    
    
    822,429C.C. Wei, Senior Vice President
    
    
    9,027,433
    
    
    
    0.04
    %
    
    
    275,505M.C. Tzeng, Vice President
    
    
    7,446,038
    
    
    
    0.03
    %
    
    
    Richard Thurston, Vice President & General Counsel
    
    
    2,648,215
    
    
    
    0.01
    %
    
    
    87,274Lora Ho, Vice President & CFO & Spokesperson
    
    
    6,264,160
    
    
    
    0.02
    %
    
    
    P.H. Chang, Vice President
    
    
    4,734,391
    
    
    
    0.02
    %
    
    
    W.J. Lo, Vice President
    
    
    3,000,337
    
    
    
    0.01
    %
    
    
    Jason Chen, Vice President
    
    
    2,274,970
    
    
    
    0.01
    %
    
    
    Fu-Chieh Hsu, Vice President
    
    
    2,079,727
    
    
    
    0.01
    %
    
    
    Jack Sun, Vice President
    
    
    5,498,216
    
    
    
    0.02
    %
    
    
    127,101Y.P. Chin, Vice President
    
    
    6,970,076
    
    
    
    0.03
    %
    
    
    N.S. Tsai, Vice President
    
    
    1,829,088
    
    
    
    0.01
    %
    
    
    Rick Cassidy, Vice President
    
    
    
    
    
    
    
    
    
    
    1,448,664
 
 (1)
    
    Represents shares held by the National Development Fund of the Executive Yuan. The
former representative of the National Development Fund, Mr. Chintay Shih, resigned on November
10, 2008. As of the date of this filing, the National Development Fund is still in the process
of selecting a new representative to replace Mr. Chintay Shih.(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
28, 2009.(3)
    
    The numbers of the common shares underlying the stock options were adjusted for the
stock dividends distributed in 2004, 2005, 2006, 2007 and 2008, according to the terms of the
2002 Employee Stock Option Plan. The options were granted to certain of our officers except
Rick Cassidy as a result of their voluntary selection to exchange part of their profit sharing
to stock options.. Compensation
  41




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##### Table of Contents



Board Practices
 General
  Audit Committee
     Compensation Committee
    Employees
  42




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##### Table of Contents



As of December 31,Function
    
    2006
    
    2007
    
    2008Managers
    
    
    2,313
    
    
    
    2,520
    
    
    
    2,618Professionals
    
    
    8,222
    
    
    
    8,814
    
    
    
    8,830Assistant Engineers/Clericals
    
    
    893
    
    
    
    844
    
    
    
    824Technicians
    
    
    10,818
    
    
    
    10,842
    
    
    
    10,571Total
    
    
    22,246
    
    
    
    23,020
    
    
    
    22,843
  As of December 31,Location of Facility and Principal Offices
    
    2006
    
    2007
    
    2008Hsinchu Science Park, Taiwan
    
    
    14,772
    
    
    
    14,892
    
    
    
    14,635Tainan Science Park, Taiwan
    
    
    5,035
    
    
    
    5,360
    
    
    
    5,500China
    
    
    1,180
    
    
    
    1,457
    
    
    
    1,397North America
    
    
    1,204
    
    
    
    1,255
    
    
    
    1,252Europe
    
    
    26
    
    
    
    27
    
    
    
    28Japan
    
    
    28
    
    
    
    27
    
    
    
    29Korea
    
    
    1
    
    
    
    2
    
    
    
    2Total
    
    
    22,246
    
    
    
    23,020
    
    
    
    22,843
      43




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##### Table of Contents



Outstanding Stock Options under the 2002 Employee Stock Option PlanNumber ofCommon SharesUnderlyingUnexercised
    
    Option AdjustedOptions
    
    Exercise PriceName
    
    Grant Date
    
    (#)
    
    (NT$)
    
    Expiration DateRick Tsai
    
    03/07/2003
    
    
    822,429
    
    
    
    24.2
    
    
    03/06/2013Mark Liu
    
    03/07/2003
    
    
    822,429
    
    
    
    24.2
    
    
    03/06/2013Stephen Tso
    
    03/07/2003
    
    
    417,285
    
    
    
    24.2
    
    
    03/06/2013C.C. Wei
    
    03/07/2003
    
    
    275,505
    
    
    
    24.2
    
    
    03/06/2013Jack Sun
    
    03/07/2003
    
    
    127,101
    
    
    
    24.2
    
    
    03/06/2013Richard Thurston
    
    03/07/2003
    
    
    87,274
    
    
    
    24.2
    
    
    03/06/2013Rick Cassidy
    
    08/22/2002
    
    
    524,394
    
    
    
    30.7
    
    
    08/21/201206/06/2003
    
    
    924,270
    
    
    
    33.9
    
    
    06/05/2013
   
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 Major Shareholders
  Percentage of TotalNumber of Common
    
    OutstandingNames of Shareholders
    
    Shares Owned
    
    Common SharesNational Development Fund(1)
    
    
    1,645,482,861
    
    
    
    6.4Capital Research Global Investors(2)
    
    
    1,814,720,550
    
    
    
    7.1Directors and executive officers as a group(3)
    
    
    270,193,661
    
    
    
    1.1
 
 (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. The former
representative of the National Development Fund, Mr. Chintay Shih, resigned on November 10,
2008. As of the date of this filing, the National Development Fund is still in the process of
selecting a new representative to replace Mr. Chintay Shih. 44




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##### Table of Contents



(2)
    
    According to the Schedule 13G/A of Capital Research Global Investors (CRGI) filed
with the Securities and Exchange Commission on February 17, 2009, CRGI beneficially owned
1,814,720,550 common shares as of February 9, 2009. We do not have further information with
respect to CRGIs ownership in us subsequent to CRGIs Schedule 13G filed on February 17,
2009.(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 projects. 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.
    
    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)
  45




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##### Table of Contents



Vanguard International Semiconductor Corporation
   Systems on Silicon Manufacturing Company Pte. Ltd. (SSMC)
   VisEra Technologies Company, Ltd.
  46




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##### Table of Contents



ITEM 8. FINANCIAL INFORMATION
 Consolidated Financial Statements and Other Financial Information
  Legal Proceedings
     47




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##### Table of Contents



Dividends and Dividend Policy
  Cash Dividends
    
    Stock dividends
    
    Total shares issued as
    
    Outstanding commonPer Share
    
    Per 100 shares
    
    stock dividends
    
    shares at year endNT$2004
    
    
    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)
    
    
    25,627,103,7152008
    
    
    3.0251
    
    
    
    0.50417
    (3)
    
    
    128,135,520
    (3)
    
    
    25,625,437,256
 
 (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.(3)
    
    40% of the stock dividends were paid out of retained earnings and 60% were from
capitalization of capital surplus.     48




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##### Table of Contents



ITEM 9. THE OFFER AND LISTING
  Taiwan Stock Exchange
    
    New York Stock Exchange(1)Closing price percommon share(2)
    
    
    
    
    
    Closing price per ADS(2)Average daily
    
    
    
    
    
    
    
    
    
    Average dailyTrading volume
    
    
    
    
    
    
    
    
    
    Trading volume (in(in thousands of
    
    
    
    
    
    
    
    
    
    thousands ofHigh
    
    Low
    
    shares)(2)
    
    High
    
    Low
    
    ADSs)(2)(NT$)
    
    (NT$)
    
    
    
    
    
    (US$)
    
    (US$)2004
    
    
    45.53
    
    
    
    31.39
    
    
    
    57,756
    
    
    
    8.14
    
    
    
    5.32
    
    
    
    7,7422005
    
    
    53.33
    
    
    
    35.92
    
    
    
    54,656
    
    
    
    8.69
    
    
    
    6.15
    
    
    
    8,2462006
    
    
    60.92
    
    
    
    46.65
    
    
    
    42,411
    
    
    
    10.27
    
    
    
    7.30
    
    
    
    9,7602007
    
    
    68.82
    
    
    
    55.15
    
    
    
    62,215
    
    
    
    11.22
    
    
    
    8.70
    
    
    
    13,925First Quarter
    
    
    63.89
    
    
    
    56.80
    
    
    
    65,054
    
    
    
    10.61
    
    
    
    9.28
    
    
    
    12,776Second Quarter
    
    
    66.84
    
    
    
    59.67
    
    
    
    54,236
    
    
    
    10.73
    
    
    
    9.39
    
    
    
    15,255Third Quarter
    
    
    68.82
    
    
    
    55.62
    
    
    
    61,175
    
    
    
    11.22
    
    
    
    8.70
    
    
    
    14,748Fourth Quarter
    
    
    61.28
    
    
    
    55.15
    
    
    
    68,259
    
    
    
    10.30
    
    
    
    8.86
    
    
    
    12,9002008
    
    
    65.43
    
    
    
    36.80
    
    
    
    62,826
    
    
    
    11.37
    
    
    
    5.85
    
    
    
    17,440First Quarter
    
    
    63.54
    
    
    
    46.76
    
    
    
    66,492
    
    
    
    10.60
    
    
    
    7.63
    
    
    
    17,513Second Quarter
    
    
    65.43
    
    
    
    58.26
    
    
    
    63,119
    
    
    
    11.37
    
    
    
    9.73
    
    
    
    15,002Third Quarter
    
    
    61.20
    
    
    
    51.00
    
    
    
    62,683
    
    
    
    10.67
    
    
    
    8.65
    
    
    
    19,842Fourth Quarter
    
    
    52.50
    
    
    
    36.80
    
    
    
    59,468
    
    
    
    9.32
    
    
    
    5.85
    
    
    
    17,408October
    
    
    52.50
    
    
    
    38.30
    
    
    
    65,365
    
    
    
    9.32
    
    
    
    6.36
    
    
    
    22,828November
    
    
    48.00
    
    
    
    36.80
    
    
    
    57,980
    
    
    
    8.38
    
    
    
    5.85
    
    
    
    15,801December
    
    
    46.00
    
    
    
    37.05
    
    
    
    55,121
    
    
    
    8.39
    
    
    
    6.34
    
    
    
    13,1292009January
    
    
    46.25
    
    
    
    39.60
    
    
    
    52,455
    
    
    
    8.40
    
    
    
    6.99
    
    
    
    20,160February
    
    
    46.05
    
    
    
    41.80
    
    
    
    69,056
    
    
    
    8.69
    
    
    
    7.34
    
    
    
    23,590March
    
    
    52.40
    
    
    
    44.60
    
    
    
    71,393
    
    
    
    9.32
    
    
    
    7.45
    
    
    
    23,396April (through
April 16,
2009)
    
    
    53.00
    
    
    
    50.20
    
    
    
    76,023
    
    
    
    10.29
    
    
    
    9.38
    
    
    
    24,703
 
 (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 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, a
NT$2.9995 cash dividend per share and a 0.49991% stock dividend in July 2007 and a
NT$3.0251 cash dividend per share and a 0.50417% stock dividend in July 2008.  
 ITEM 10. ADDITIONAL INFORMATION
 Description of Common Shares
 49




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General
    Dividends and Distributions
     50




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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.
  Meetings of Shareholders
  Voting Rights
     51




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Other Rights of Shareholders
   Register of Shareholders and Record Dates
   Annual Financial Statements
  52




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Acquisition of Common Shares by Us
     Liquidation Rights
  Transaction Restrictions
  Material Contracts
   Foreign Investment in the R.O.C.
   53




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54




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
    
    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 Over-the-Counter (GreTai) Securities Market (as
applicable) or held by such person for deposit in the depositary receipt facility.
   
    
    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.
   55




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##### Table of Contents




    
    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.
  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.
  56




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Voting of Deposited Securities
      57




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58




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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
  Capital Gains
 Subscription Rights
  Securities Transaction Tax
 Estate and Gift Tax
 Tax Treaty
 59




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##### Table of Contents



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;
    
    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.
  60




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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
     61




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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.
   
    
    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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Non-U.S. Holders
  63




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Information reporting and backup withholding
  Documents on Display
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
  Interest Rate Risks:
  As of December 31, 2008Expected Maturity Dates
    
    
    As of December 31, 20072013 and
    
    
    
    
    
    
    Aggregate
    
    
    
    
    
    
    Aggregate2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    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
    
    
    
    
    
    
    2.89%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.89%(2)
    
    
    
    
    
    
    
    4.64%(2)
    
    
    
    NT$-denominated debtVariable rate
    
    NT$
    222
    
    
    NT$
    258
    
    
    NT$
    212
    
    
    NT$
    175
    
    
    NT$
    117
    
    
    NT$
    984
    
    
    NT$
    984
    
    
    NT$
    1,352
    
    
    NT$
    1,352Average interest rate
    
    
    1.31%
    
    
    
    1.46%
    
    
    
    1.66%
    
    
    
    1.77%
    
    
    
    1.85%
    
    
    
    1.57%(2)
    
    
    
    
    
    
    
    2.88%(2)Fixed rate
    
    NT$
    8,000
    
    
    
    
    
    
    
    
    
    
    NT$
    4,500
    
    
    
    
    
    
    NT$
    12,500
    
    
    NT$

12,612(1)
    
    
    NT$
    12,502
    
    
    NT$

12,672(1)Average interest rate
    
    
    2.75%
    
    
    
    
    
    
    
    
    
    
    
    3.00%
    
    
    
    
    
    
    
    2.84%(2)
    
    
    
    
    
    
    
    2.84%(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. 64




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Foreign Currency Risk:
  As of December 31, 2008
    
    
    As ofExpected Maturity Dates
    
    
    December 31, 2007Forward Exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Aggregate
    
    
    
    
    
    
    AggregateAgreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2013 and
    
    
    
    
    
    
    Fair
    
    
    
    
    
    
    Fair(in millions)
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    thereafter
    
    
    Total
    
    
    Value(1)
    
    
    Total
    
    
    Value(1)(Sell US$/Buy NT$) Contract amount
    
    US$
    138.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    US$
    138.9
    
    
    NT$
    0.4
    
    
    US$
    111
    
    
    NT$
    5Average contractual exchange rate (against NT dollars)
    
    
    32.82
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32.82
    
    
    
    
    
    
    
    32.49
    
    
    
    (Buy NT$/Sell EUR$) Contract amount
    
    EUR$
    1.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EUR$
    1.5
    
    
    NT$
    (6.5)
    
    
    EUR$
    48
    
    
    NT$
    (184)Average contractual exchange rate (against NT$
dollars)
    
    
    42.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42.1
    
    
    
    
    
    
    
    43.55
    
    
    
    
 As of December 31, 2008
    
    
    As ofExpected Maturity Dates
    
    
    December 31, 2007Forward Exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Aggregate
    
    
    
    
    
    
    AggregateAgreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2013 and
    
    
    
    
    
    
    Fair
    
    
    
    
    
    
    Fair(in millions)
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    thereafter
    
    
    Total
    
    
    Value(1)
    
    
    Total
    
    
    Value(1)(Buy JPY/Sell US$) Contract amount
    
    US$
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    US$
    0.1
    
    
    NT$
    0
    
    
    
    
    
    
    
    Average contractual exchange rate
(against US dollars)
    
    
    90.08
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90.08
    
    
    
    
    
    
    
    
    
    
    
    (Sell RMB/Buy USD)
Contract amount
    
    RMB
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    RMB
    55
    
    
    NT$
    (1.3)
    
    
    
    
    
    
    
    Average contractual
exchange rate
(against NT$
dollars)
    
    
    6.88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.88
    
    
    
    
    
    
    
    
    
    
    
    
 As of December 31, 2008
    
    
    As ofExpected Maturity Dates
    
    
    December 31, 2007Cross Currency
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Aggregate
    
    
    
    
    
    
    AggregateSwap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2013 and
    
    
    
    
    
    
    Fair
    
    
    
    
    
    
    Fair(in millions)
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    thereafter
    
    
    Total
    
    
    Value(1)
    
    
    Total
    
    
    Value(1)(Sell US$/Buy NT$)
Contract amount
    
    US$
    307
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    US$
    975
    
    
    NT$
    (28)Range of interest
rate paid
    
    
    0.54% -      5%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Range of interest
rate received
    
    
    0% - 3.83%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (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. 65




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Other Market Risk.
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures.
 66




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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
   67




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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
  68




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2007
    
    2008NT$
    
    NT$(In thousands)Audit Fees
    
    
    82,399
    
    
    
    82,412Audit Related Fees
    
    
    811
    
    
    
    1,023Tax Fees
    
    
    
    
    
    
    160Total
    
    
    83,210
    
    
    
    83,595
 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
  69




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Issuer Purchases of Equity Securities
 (d) MaximumNumber (orApproximateDollar Value) of(a) Total
    
    
    
    
    
    
    (c) Total Number of
    
    
    Common SharesNumber of
    
    
    (b) Average
    
    
    Common Shares Purchased
    
    
    that May Yet BeCommon
    
    
    Price Paid per
    
    
    as Part of Publicly
    
    
    PurchasedShares
    
    
    Common
    
    
    Announced Plans or
    
    
    Under the PlansPeriod
    
    Purchased
    
    
    Share
    
    
    Programs
    
    
    or ProgramsMay, 2008
(from May 14, 2008 to May 31,2008 )
    
    
    5,441,000
    
    
    
    64.90
    
    
    
    5,441,000
    
    
    
    494,559,000June, 2008
(from June 1, 2008 to June 30, 2008)
    
    
    211,233,000
    
    
    
    64.26
    
    
    
    211,233,000
    
    
    
    283,326,000Total
    
    
    216,674,000
    
    
    
    64.28
    
    
    
    216,674,000
    
    
    
    August, 2008
(from Aug. 13, 2008 to Aug. 31,
2008)
    
    
    213,020,000
    
    
    
    60.03
    
    
    
    213,020,000
    
    
    
    69,980,000September, 2008
(from Sep. 1, 2008 to Sep. 2, 2008)
    
    
    65,855,000
    
    
    
    56.38
    
    
    
    65,855,000
    
    
    
    4,125,000Total
    
    
    278,875,000
    
    
    
    59.17
    
    
    
    278,875,000
    
    
    
    
 
 ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
  
 ITEM 16G. CORPORATE GOVERNANCE
     NYSE Standards for US Companiesunder Listed Company ManualSection 303A


    TSMC Corporate PracticesNYSE Section 303A.01requires
a NYSE-listed company to have
a majority of independent
directors on its board of
directors.
    

Taiwan law does not require a board of directors of publicly traded companies to consist of a majority of independent directors. Taiwan law requires public companies
meeting certain criteria to have at least two independent directors but no less than one fifth of the total number of directors on its board of directors. In addition,
Taiwan law requires public companies to disclose
 70




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NYSE Standards for US Companiesunder Listed Company ManualSection 303A
    

TSMC Corporate Practicesinformation pertaining to their directors, including their independence status. Please see TSMCs annual report for the
relevant year filed with the Taiwan authorities and the U.S. SEC (both of which are available online at www.tsmc.com) for information on the total number of TSMC
directors and directors who would be considered independent under NYSE Section 303A.02 and Taiwan law.NYSE Section 303A.02
establishes general standards
to evaluate directors
independence (no director
qualifies as independent
unless the board of directors
affirmatively determines that
the director has no material
relationship with the listed
company either directly or as
a partner, shareholder or
officer of an organization
that has a relationship with
the listed company).
    
    Taiwan law establishes comparable standards to evaluate director independence. For further information, please consult TSMCs Taiwan Annual Report for the relevant year.NYSE Section 303A.03requires
non-management directors to
meet at regularly scheduled
executive meetings that are
not attended by management.
    
    Taiwan law does not contain such a requirement. Except for meetings of sub-committees of the board of directors and those held by managing directors, Taiwan law does
not allow separate meetings of part but not all of the board of directors.NYSE Section 303A.04requires
listed companies to have a
nominating/corporate
governance committee comprised
entirely of independent
directors which committee
shall have a written charter
establishing certain minimum
responsibilities as set forth
in NYSE Section 303A.04(b)(i)
and providing for an annual
evaluation of the committees
performance.
    
    Taiwan law does not contain such a requirement. Taiwan law requires directors to be nominated either by the shareholders or by the entire board of directors.NYSE Section 303A.05(a)
requires listed companies to
have a compensation committee
comprised entirely of
independent directors.
    
    Taiwan law does not require the board of directors to establish a compensation committee. Nevertheless, TSMC has established a compensation committee. Please see TSMCs
annual report for the relevant year filed with the Taiwan authorities and the U.S. SEC (both of which are available online at www.tsmc.com) for further information
regarding the composition and functions of its compensation committee.NYSE Section 303A.05(b)
requires a compensation
committees charter to
establish certain minimum
responsibilities and to
provide for an annual
evaluation of the committees
performance.
    
    Taiwan law does not contain such a requirement. Nevertheless, TSMCs compensation committee charter contains the same responsibilities as those provided under NYSE
Section 303A.05(b)(i) and mandates the committee to review the adequacy of its charter annually.NYSE Section 303A.06requires
listed companies to have an
audit committee that satisfies
the requirements of Rule 10A-3
under the Securities Exchange
Act of 1934 (the Exchange
Act). Foreign private issuers
must satisfy the requirements
of Rule 10A-3 under the
Exchange Act by July 31, 2005.
    

Taiwan law requires public companies meeting certain criteria to have an audit committee that satisfies comparable standards (which has yet been promulgated) or public
companies may voluntarily elect to establish an audit committee. TSMC has voluntarily elected to establish an audit committee. Please see TSMCs annual report for the
relevant year filed with the Taiwan authorities and the U.S. SEC (both of which are available online at www.tsmc.com) for further information regarding the composition
of its audit committee. TSMCs audit committee members are all financially literate and are assisted by a financial expert consultant.
 71




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NYSE Standards for US Companiesunder Listed Company ManualSection 303A
    

TSMC Corporate PracticesNYSE Section 303A.07(a)
requires an audit committee to
consist of at least three
board members. All of its
members shall be financially
literate or must acquire such
financial knowledge within a
reasonable period and at least
one of its members shall have
experience in accounting or
financial administration.
    
    Taiwan law requires all independent directors of a public company to be members of the audit committee if the company has established such a committee of which at least
one shall have accounting or financial expertise. Please see TSMCs annual report for the relevant year filed with the Taiwan authorities and the U.S. SEC (both of
which are available online at www.tsmc.com) for further information regarding the composition of its audit committee. TSMCs audit committee members are all financially
literate and are assisted by a financial expert consultant.NYSE Section 303A.07(a)
requires that if an audit
committee member is
simultaneously a member of the
audit committee of more than
three public companies, and
the listed company does not
limit the number of audit
committees on which its
members may serve, then, in
each case the board of that
company shall determine
whether the simultaneous
service would prevent such
member from effectively
serving on the listed
companys audit committee, and
shall report its decision in
the annual proxy statement of
the company or in the
companys annual report on
Form 10-K filed with the SEC.
    
    Taiwan law does not contain such requirement. Taiwan law requires all independent directors of a public company to be members of the audit committee if the company has
established such a committee. Taiwan law forbids an independent director from serving as an independent director on a total of four or more Taiwan public companies.NYSE Section 303A.07(b)All
members of the audit committee
are required to be
independent.
    
    Taiwan law requires all independent directors of a public company to be members of the audit committee if the company has established such a committee.NYSE Section 303A.07(c)
requires an audit committee to
have a written charter
establishing the duties and
responsibilities of its
members, including the duties
and responsibilities required,
at a minimum, by Section
10A-3(b)(1) of the Exchange
Act.
    
    Taiwan law requires comparable standards. TSMC currently has a written audit committee charter containing the same duties and responsibilities as those provided under
Section 10A-3(b)(1) of the Exchange Act.NYSE Section
303A.07(c)(iii)(B) and (C)
establishes audit committee
objectives: (i) to discuss the
annual audited financial
statements and the quarterly
financial statements of the
company with management and
the independent auditor,
including the information
disclosed under the heading
Managements Discussion and
Analysis of Financial
Condition and Results of
Operations; and (ii) to
discuss the companys press
releases relating to its
earnings as well as the
financial information and
guidelines relating to its
earnings that are supplied to
analysts and rating agencies.
    
    TSMCs written audit committee charter establishes the same audit committee objectives.NYSE Section
303A.07(c)(iii)(G)requires an
audit committee to establish
clear policies for hiring
external auditors employees.
    
    Taiwan law does not contain such requirement. But, consistent with the Sarbanes-Oxley Act of 2002, TSMCs written audit committee charter contains such requirement.NYSE Section 303A.07(d)
requires each company to have
an internal audit function
that provides to the
management and to the audit
committee regular assessments
on the companys risk
management processes and
internal control system.
    
    Taiwan law requires public companies to establish an internal audit department. Internal auditors are subject to strict qualification standards under Taiwan law, which
require the board of directors to approve the head of a companys internal audit department. TSMCs internal audit department has substantially the same
responsibilities as provided under NYSE Section 303A.07(d).
 72




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NYSE Standards for US Companiesunder Listed Company ManualSection 303A
    
    TSMC Corporate PracticesNYSE Section 303A.08requires
each company to give to
shareholders the opportunity
to vote on all equity based
compensation plans and
material revisions thereto
with certain exceptions.
    
    Taiwan law imposes a similar requirement. TSMC currently has in place two equity based compensation plans. First, TSMCs employee stock option plans (ESOPs) are
required to be approved by the board of directors. Shareholders approval is not required if the number of options granted under the relevant ESOP does not exceed the
reservation made in TSMCs Articles of Incorporation. Otherwise, any change to such reservation in the Articles requires shareholders approval. Second, TSMCs
employees profit sharing requires shareholders approval.NYSE Section 303A.09requires
public companies to adopt and
disclose corporate governance
guidelines, including several
issues for which such
reporting is mandatory, and to
include such information on
the companys website (which
website should also include
the charters of the audit
committee, the nominating
committee, and the
compensation committee.)
    
    Under Taiwan law, if a listed company has adopted corporate governance guidelines, it must inform investors how to access such guidelines.NYSE Section 303A.09requires
the board of directors to make
a self-assessment of its
performance at least once a
year to determine if it or its
committees function
effectively and report
thereon.
    
    Taiwan law does not contain such requirement.NYSE Section 303A.10provides
for the adoption of a Code of
Business Conduct and Ethics
and sets out the topics that
such code must contain.
    
    Taiwan law does not contain such requirement. But, because of sound corporate governance principles, TSMC has adopted such a Code of Business Conduct and Ethics, which
complies with the Sarbanes-Oxley Acts requirements concerning financial officers and CEO accountability.NYSE Section 303A.12(a)
requires the CEO, on a yearly
basis, to certify to the NYSE
that he or she knows of no
violation by the company of
NYSE rules relating to
corporate governance.
    
    Taiwan law does not contain such a requirement. But, in order to comply with relevant SEC regulations, TSMCs CEO is required to certify in TSMCs 20-F annual report
that, to his or her knowledge the information contained therein fairly represents in all material respects the financial condition and results of operation of TSMC.NYSE Section 303A.12(b)
requires the CEO to notify the
NYSE in writing whenever any
executive officer of the
company becomes aware of any
substantial non-fulfillment of
any applicable provision under
NYSE Section 303A.
    
    Taiwan law does not contain such requirement. But, in order to be consistent with the corporate governance principles established under the Sarbanes-Oxley Act of 2002,
TSMCs CEO complies with the notice provision as set forth under NYSE Section 303A.12(b).NYSE Section 303A.12(c)
requires each listed company
to submit an executed Written
Affirmation annually to the
NYSE and Interim Written
Affirmation each time a change
occurs in the board or any of
the committees subject to
Section 303A.
    
    Taiwan law does not contain such requirement. But, in order to comply with the corporate governance principles established under the Sarbanes-Oxley Act of 2002, TSMC
will comply with NYSE Section 303A.12(c).
 73




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PART III
 
 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-3Consolidated Statements of Changes in Shareholders Equity
    
    F-5Consolidated Statements of Cash Flows
    
    F-6Notes to Consolidated Financial Statements
    
    F-9
 74




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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(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(1)
    
    Rules for Election of Directors, as amended and restated on May 7, 2007.3.2
    
    Rules and Procedures of Board of Directors Meetings, as adopted on June 13,
20083.3(3)
    
    Rules and Procedures of Shareholders Meetings, as amended and restated on
May 7, 2002.4.1(3)
    
    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(4)
    
    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(4)
    
    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(4)
    
    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(3)
    
    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(3)
    
    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(4)
    
    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(2)
    
    Technology Cooperation Agreement between Taiwan Semiconductor Manufacturing
Company Ltd. and Philips Electronics N.V., as amended and restated on
June 20, 2004.4.9a(5)
    
    Taiwan Semiconductor Manufacturing Company Limited 2002 Employee Stock
Option Plan, as revised by the board of directors on March 4, 2003.4.9aa(6)
    
    Taiwan Semiconductor Manufacturing Company Limited 2003 Employee Stock
Option Plan.4.9aaa(7)
    
    Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock
Option Plan.
 75




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##### Table of Contents



4.9aaaa(2)
    
    Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock
Option Plan, as revised on February 22, 2005.4.9b(5)
    
    TSMC North America 2002 Employee Stock Option Plan, as revised on June 5,
2003.4.9bb(6)
    
    TSMC North America 2003 Employee Stock Option Plan.4.9c(5)
    
    Wafer Tech, LLC 2002 Employee Stock Option Plan, as revised on June 5, 2003.4.9cc(6)
    
    Wafer Tech, LLC 2003 Employee Stock Option Plan.4.9ccc(7)
    
    Wafer Tech, LLC 2004 Employee Stock Option Plan.4.9cccc(2)
    
    Wafer Tech, LLC 2004 Employee Stock Option Plan, as revised on February 22,
2005.+4.10(8)
    
    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(10)
    
    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(10)
    
    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(9)
    
    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(9)
    
    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, 2007, filed by TSMC on April 15, 2008.(2)
    
    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.(3)
    
    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.(4)
    
    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.(5)
    
    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. 76




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##### Table of Contents



(6)
    
    Previously filed in TSMCs registration statement on Form S-8, filed by TSMC
on October 20, 2003.(7)
    
    Previously filed in TSMCs registration statement on Form S-8, filed by TSMC
on January 6, 2005.(8)
    
    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.(9)
    
    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.(10)
    
    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. 77




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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 31ASSETS
    
    Notes
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    US$(Note 3)CURRENT ASSETSCash and cash equivalents
    
    
    2, 5
    
    
    $
    94,986.5
    
    
    $
    194,613.8
    
    
    $
    5,940.6Financial assets at fair value through profit or loss
    
    
    2, 6, 24
    
    
    
    1,632.4
    
    
    
    55.7
    
    
    
    1.7Available-for-sale financial assets
    
    
    2, 7, 24
    
    
    
    66,688.4
    
    
    
    10,898.7
    
    
    
    332.7Held-to-maturity financial assets
    
    
    2, 8, 24
    
    
    
    11,526.9
    
    
    
    5,882.0
    
    
    
    179.5Notes and accounts receivable, net
    
    
    2, 9, 25
    
    
    
    42,413.3
    
    
    
    18,496.6
    
    
    
    564.6Receivables from related parties
    
    
    25
    
    
    
    10.9
    
    
    
    0.4
    
    
    
    0.0Other receivables from related parties
    
    
    25
    
    
    
    243.6
    
    
    
    99.9
    
    
    
    3.0Other financial assets
    
    
    26
    
    
    
    1,515.5
    
    
    
    1,911.7
    
    
    
    58.4Inventories, net
    
    
    2, 10
    
    
    
    23,862.3
    
    
    
    14,876.6
    
    
    
    454.1Deferred income tax assets, net
    
    
    2, 19
    
    
    
    5,572.3
    
    
    
    3,969.3
    
    
    
    121.2Prepaid expenses and other current assets
    
    
    
    
    
    
    1,370.2
    
    
    
    1,813.7
    
    
    
    55.4Total current assets
    
    
    
    
    
    
    249,822.3
    
    
    
    252,618.4
    
    
    
    7,711.2LONG-TERM INVESTMENTS
    
    
    2, 7, 8, 11, 12, 24Investments accounted for using equity method
    
    
    
    
    
    
    22,517.3
    
    
    
    18,907.2
    
    
    
    577.1Available-for-sale financial assets
    
    
    
    
    
    
    1,400.7
    
    
    
    2,032.7
    
    
    
    62.0Held-to-maturity financial assets
    
    
    
    
    
    
    8,697.7
    
    
    
    15,426.2
    
    
    
    470.9Financial assets carried at cost
    
    
    
    
    
    
    3,845.6
    
    
    
    3,615.4
    
    
    
    110.4Total long-term investments
    
    
    
    
    
    
    36,461.3
    
    
    
    39,981.5
    
    
    
    1,220.4PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    2, 13, 26
    
    
    
    260,252.2
    
    
    
    243,645.4
    
    
    
    7,437.3INTANGIBLE ASSETSGoodwill
    
    
    2
    
    
    
    5,987.6
    
    
    
    6,044.4
    
    
    
    184.5Deferred charges, net
    
    
    2, 14
    
    
    
    7,923.6
    
    
    
    7,125.8
    
    
    
    217.5Total intangible assets
    
    
    
    
    
    
    13,911.2
    
    
    
    13,170.2
    
    
    
    402.0OTHER ASSETSDeferred income tax assets, net
    
    
    2, 19
    
    
    
    7,313.3
    
    
    
    6,636.9
    
    
    
    202.6Refundable deposits
    
    
    
    
    
    
    2,777.8
    
    
    
    2,767.2
    
    
    
    84.5Others
    
    
    2
    
    
    
    327.1
    
    
    
    97.0
    
    
    
    2.9Total other assets
    
    
    
    
    
    
    10,418.2
    
    
    
    9,501.1
    
    
    
    290.0TOTAL ASSETS
    
    
    
    
    
    $
    570,865.2
    
    
    $
    558,916.6
    
    
    $
    17,060.9December 31LIABILITIES AND SHAREHOLDERS EQUITY
    
    Notes
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    US$(Note 3)CURRENT LIABILITIESFinancial liabilities at fair value through profit or loss
    
    
    2, 6, 24
    
    
    $
    249.3
    
    
    $
    85.2
    
    
    $
    2.6Accounts payable
    
    
    
    
    
    
    11,574.9
    
    
    
    5,553.2
    
    
    
    169.5Payable to related parties
    
    
    25
    
    
    
    1,503.4
    
    
    
    489.9
    
    
    
    14.9Income tax payable
    
    
    2, 19
    
    
    
    11,126.1
    
    
    
    9,331.8
    
    
    
    284.8Bonuses payable to employees, directors and supervisors
    
    
    4, 20
    
    
    
    
    
    
    
    15,369.7
    
    
    
    469.2Payables to contractors and equipment suppliers
    
    
    
    
    
    
    6,256.7
    
    
    
    7,998.8
    
    
    
    244.2Accrued expenses and other current liabilities
    
    
    17, 28
    
    
    
    17,714.8
    
    
    
    9,755.8
    
    
    
    297.8Current portion of bonds payable and bank loans
    
    
    15, 16, 27
    
    
    
    280.8
    
    
    
    8,222.4
    
    
    
    251.0Total current liabilities
    
    
    
    
    
    
    48,706.0
    
    
    
    56,806.8
    
    
    
    1,734.0LONG-TERM LIABILITIESBonds payable
    
    
    15
    
    
    
    12,500.0
    
    
    
    4,500.0
    
    
    
    137.4Long-term bank loans
    
    
    16, 26
    
    
    
    1,722.2
    
    
    
    1,420.5
    
    
    
    43.4Other long-term payables
    
    
    17, 28
    
    
    
    9,410.0
    
    
    
    9,548.2
    
    
    
    291.4Obligations under capital leases
    
    
    2
    
    
    
    652.3
    
    
    
    722.3
    
    
    
    22.0Total long-term liabilities
    
    
    
    
    
    
    24,284.5
    
    
    
    16,191.0
    
    
    
    494.2OTHER LIABILITIESAccrued pension cost
    
    
    2, 18
    
    
    
    3,665.5
    
    
    
    3,701.6
    
    
    
    113.0Guarantee deposits
    
    
    28
    
    
    
    2,243.0
    
    
    
    1,484.5
    
    
    
    45.3Deferred credits
    
    
    2, 25
    
    
    
    1,236.9
    
    
    
    316.5
    
    
    
    9.7Others
    
    
    
    
    
    
    43.8
    
    
    
    43.7
    
    
    
    1.3Total other liabilities
    
    
    
    
    
    
    7,189.2
    
    
    
    5,546.3
    
    
    
    169.3Total liabilities
    
    
    
    
    
    
    80,179.7
    
    
    
    78,544.1
    
    
    
    2,397.5COMMITMENTS AND CONTINGENCIES
    
    
    28EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENTCapital stock  NT$10 par value
    
    
    20, 22Authorized: 28,050,000 thousand sharesIssued: 26,427,104 thousand shares in 200725,625,437 thousand shares in 2008
    
    
    
    
    
    
    264,271.1
    
    
    
    256,254.4
    
    
    
    7,822.2Capital surplus
    
    
    2, 20
    
    
    
    53,732.7
    
    
    
    49,875.2
    
    
    
    1,522.4Retained earnings
    
    
    20
    
    
    
    218,864.5
    
    
    
    170,053.7
    
    
    
    5,190.9Unrealized gain/loss on financial instruments
    
    
    24
    
    
    
    681.0
    
    
    
    (287.3
    )
    
    
    (8.8
    )Cumulative translation adjustments
    
    
    
    
    
    
    (1,072.9
    )
    
    
    481.1
    
    
    
    14.7Treasury stock - 834,096 thousand shares
    
    
    2, 22
    
    
    
    (49,385.0
    )
    
    
    
    
    
    
    Total equity attributable to shareholders of the parent
    
    
    
    
    
    
    487,091.4
    
    
    
    476,377.1
    
    
    
    14,541.4MINORITY INTEREST IN SUBSIDIARIES
    
    
    2
    
    
    
    3,594.1
    
    
    
    3,995.4
    
    
    
    122.0Total shareholders equity
    
    
    
    
    
    
    490,685.5
    
    
    
    480,372.5
    
    
    
    14,663.4TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    $
    570,865.2
    
    
    $
    558,916.6
    
    
    $
    17,060.9
   F-2




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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
    
    
    2006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)NET SALES
    
    
    
    
    
    $
    317,407.2
    
    
    $
    322,630.6
    
    
    $
    333,157.7
    
    
    $
    10,169.6COST OF SALES
    
    
    2, 25
    
    
    
    161,597.1
    
    
    
    180,280.4
    
    
    
    191,408.1
    
    
    
    5,842.7GROSS PROFIT
    
    
    
    
    
    
    155,810.1
    
    
    
    142,350.2
    
    
    
    141,749.6
    
    
    
    4,326.9OPERATING EXPENSES
    
    
    25Research and development
    
    
    
    
    
    
    16,076.4
    
    
    
    17,946.3
    
    
    
    21,480.9
    
    
    
    655.7General and administrative
    
    
    
    
    
    
    8,716.7
    
    
    
    8,963.8
    
    
    
    11,096.6
    
    
    
    338.7Marketing
    
    
    
    
    
    
    3,752.3
    
    
    
    3,718.2
    
    
    
    4,736.7
    
    
    
    144.6Total operating expenses
    
    
    
    
    
    
    28,545.4
    
    
    
    30,628.3
    
    
    
    37,314.2
    
    
    
    1,139.0INCOME FROM OPERATIONS
    
    
    
    
    
    
    127,264.7
    
    
    
    111,721.9
    
    
    
    104,435.4
    
    
    
    3,187.9NON-OPERATING INCOME AND GAINSInterest income
    
    
    2
    
    
    
    4,542.1
    
    
    
    5,651.7
    
    
    
    5,373.8
    
    
    
    164.0Foreign exchange gain, net
    
    
    2
    
    
    
    
    
    
    
    80.9
    
    
    
    1,227.7
    
    
    
    37.5Technical service income
    
    
    25, 28
    
    
    
    571.5
    
    
    
    590.4
    
    
    
    1,182.0
    
    
    
    36.1Settlement income
    
    
    28
    
    
    
    979.2
    
    
    
    985.1
    
    
    
    951.2
    
    
    
    29.0Gain on settlement and disposal of financial assets, net
    
    
    2, 24
    
    
    
    133.5
    
    
    
    874.7
    
    
    
    721.0
    
    
    
    22.0Equity in earnings of equity method investees, net
    
    
    2, 11
    
    
    
    2,347.2
    
    
    
    2,507.9
    
    
    
    701.5
    
    
    
    21.4Rental income
    
    
    25
    
    
    
    224.3
    
    
    
    378.6
    
    
    
    166.3
    
    
    
    5.1Gain on disposal of property, plant and equipment and other
assets
    
    
    2, 25
    
    
    
    421.1
    
    
    
    91.2
    
    
    
    100.9
    
    
    
    3.1Subsidy income
    
    
    2
    
    
    
    334.5
    
    
    
    364.3
    
    
    
    8.0
    
    
    
    0.2Valuation gain on financial instruments, net
    
    
    2, 6, 24
    
    
    
    
    
    
    
    63.0
    
    
    
    
    
    
    
    Others
    
    
    25
    
    
    
    285.7
    
    
    
    346.0
    
    
    
    389.0
    
    
    
    11.9Total non-operating income and gains
    
    
    
    
    
    
    9,839.1
    
    
    
    11,933.8
    
    
    
    10,821.4
    
    
    
    330.3NON-OPERATING EXPENSES AND LOSSESLoss on impairment of financial assets
    
    
    2, 7,12,24
    
    
    
    279.7
    
    
    
    54.2
    
    
    
    1,560.1
    
    
    
    47.6Valuation loss on financial instruments, net
    
    
    2, 6, 24
    
    
    
    1,745.0
    
    
    
    
    
    
    
    1,081.0
    
    
    
    33.0Interest expense
    
    
    
    
    
    
    890.6
    
    
    
    842.2
    
    
    
    615.0
    
    
    
    18.8Loss on impairment of idle assets
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    210.5
    
    
    
    6.4Provision for litigation loss
    
    
    28h
    
    
    
    
    
    
    
    1,008.6
    
    
    
    99.1
    
    
    
    3.0Loss on disposal of property, plant and equipment
    
    
    2
    
    
    
    241.4
    
    
    
    6.2
    
    
    
    0.6
    
    
    
    Foreign exchange loss, net
    
    
    
    
    
    
    400.9
    
    
    
    
    
    
    
    
    
    
    
    Others
    
    
    
    
    
    
    184.0
    
    
    
    102.5
    
    
    
    218.3
    
    
    
    6.7Total non-operating expenses and losses
    
    
    
    
    
    
    3,741.6
    
    
    
    2,013.7
    
    
    
    3,784.6
    
    
    
    115.5INCOME BEFORE INCOME TAX
    
    
    
    
    
    
    133,362.2
    
    
    
    121,642.0
    
    
    
    111,472.2
    
    
    
    3,402.7INCOME TAX EXPENSE
    
    
    2, 19
    
    
    
    7,773.7
    
    
    
    11,709.6
    
    
    
    10,949.0
    
    
    
    334.2
  F-3




---



##### 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
    
    
    2006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)NET INCOME BEFORE CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES
    
    
    
    
    
    $
    125,588.5
    
    
    $
    109,932.4
    
    
    $
    100,523.2
    
    
    $
    3,068.5CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES, NET OF TAX
BENEFIT OF NT$82.1 MILLION
    
    
    
    
    
    
    1,606.7
    
    
    
    
    
    
    
    
    
    
    
    NET INCOME
    
    
    
    
    
    $
    127,195.2
    
    
    $
    109,932.4
    
    
    $
    100,523.2
    
    
    $
    3,068.5ATTRIBUTABLE TO:Shareholders of the parent
    
    
    
    
    
    $
    127,009.7
    
    
    $
    109,177.1
    
    
    $
    99,933.2
    
    
    $
    3,050.5Minority interests
    
    
    
    
    
    
    185.5
    
    
    
    755.3
    
    
    
    590.0
    
    
    
    18.0$
    127,195.2
    
    
    $
    109,932.4
    
    
    $
    100,523.2
    
    
    $
    3,068.5BASIC EARNINGS PER SHARE
    
    
    2, 23Before income tax
    
    
    
    
    
    $
    5.01
    
    
    $
    4.50
    
    
    $
    4.28
    
    
    $
    0.13After income tax
    
    
    
    
    
    $
    4.72
    
    
    $
    4.06
    
    
    $
    3.86
    
    
    $
    0.12DILUTED EARNINGS PER SHARE
    
    
    2, 23
    
    
    $
    5.00
    
    
    $
    4.50
    
    
    $
    4.25
    
    
    $
    0.13Before income tax
    
    
    
    
    
    $
    4.72
    
    
    $
    4.06
    
    
    $
    3.83
    
    
    $
    0.12After income taxBASIC EARNINGS PER EQUIVALENT ADS
    
    
    2Before income tax
    
    
    
    
    
    $
    25.04
    
    
    $
    22.49
    
    
    $
    21.39
    
    
    $
    0.65After income tax
    
    
    
    
    
    $
    23.61
    
    
    $
    20.32
    
    
    $
    19.28
    
    
    $
    0.59DILUTED EARNINGS PER EQUIVALENT ADS
    
    
    2Before income tax
    
    
    
    
    
    $
    25.02
    
    
    $
    22.48
    
    
    $
    21.23
    
    
    $
    0.65After income tax
    
    
    
    
    
    $
    23.59
    
    
    $
    20.30
    
    
    $
    19.14
    
    
    $
    0.58BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING (THOUSANDS)
    
    
    2, 23
    
    
    
    26,896,606
    
    
    
    26,870,684
    
    
    
    25,909,643DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING (THOUSANDS)
    
    
    2, 23
    
    
    
    26,920,168
    
    
    
    26,892,336
    
    
    
    26,106,676
  (With Deloitte & Touche audit report dated April 6, 2009)
    
    (Concluded)
 F-4




---



##### 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, 2006
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (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
    
    
    
    490,685.5Appropriations of prior years earningsBonus to employees  in cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,939.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,939.9
    )
    
    
    
    
    
    
    (3,939.9
    )Bonus to employees  in stock
    
    
    393,988
    
    
    
    3,939.9
    
    
    
    
    
    
    
    (3,939.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends to shareholders  NT$3.00 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,881.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,881.3
    )
    
    
    
    
    
    
    (76,881.3
    )Stock dividends to shareholders  NT$0.02 per share
    
    
    51,254
    
    
    
    512.5
    
    
    
    
    
    
    
    (512.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bonus to directors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (176.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (176.9
    )
    
    
    
    
    
    
    (176.9
    )Capital surplus transferred to capital stock
    
    
    76,881
    
    
    
    768.8
    
    
    
    (768.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income in 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,933.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,933.2
    
    
    
    590.0
    
    
    
    100,523.2Adjustment arising from changes in percentage of ownership in equity method investees
    
    
    
    
    
    
    
    
    
    
    (137.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137.1
    )
    
    
    11.8
    
    
    
    (125.3
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,554.0
    
    
    
    
    
    
    
    1,554.0
    
    
    
    (68.8
    )
    
    
    1,485.2Issuance of stock from exercising employee stock options
    
    
    6,027
    
    
    
    60.3
    
    
    
    166.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    227.2
    
    
    
    
    
    
    
    227.2Cash dividends received by subsidiaries from TSMC
    
    
    
    
    
    
    
    
    
    
    102.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102.3
    
    
    
    
    
    
    
    102.3Valuation loss on available-for-sale financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (826.2
    )
    
    
    
    
    
    
    
    
    
    
    (826.2
    )
    
    
    (17.0
    )
    
    
    (843.2
    )Equity in the valuation loss on available-for-sale financial assets held by equity method investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142.1
    )
    
    
    
    
    
    
    
    
    
    
    (142.1
    )
    
    
    
    
    
    
    (142.1
    )Treasury stock repurchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,427.5
    )
    
    
    (30,427.5
    )
    
    
    
    
    
    
    (30,427.5
    )Treasury stock retired
    
    
    (1,329,817
    )
    
    
    (13,298.2
    )
    
    
    (3,220.8
    )
    
    
    (63,293.5
    )
    
    
    
    
    
    
    
    
    
    
    79,812.5
    
    
    
    
    
    
    
    
    
    
    
    Decrease in minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114.7
    )
    
    
    (114.7
    )BALANCE, DECEMBER 31, 2008
    
    
    25,625,437
    
    
    $
    256,254.4
    
    
    $
    49,875.2
    
    
    $
    170,053.7
    
    
    $
    (287.3
    )
    
    $
    481.1
    
    
    $
    
    
    
    $
    476,377.1
    
    
    $
    3,995.4
    
    
    $
    480,372.5BALANCE, DECEMBER 31, 2008 (IN MILLIONS OF US$- Note 3)
    
    
    
    
    
    $
    7,822.2
    
    
    $
    1,522.4
    
    
    $
    5,190.9
    
    
    $
    (8.8
    )
    
    $
    14.7
    
    
    $
    
    
    
    $
    14,541.4
    
    
    $
    122.0
    
    
    $
    14,663.4
 
 F-5




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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 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)CASH FLOWS FROM OPERATING ACTIVITIESNet income attributable to shareholders of the parent
    
    $
    127,009.7
    
    
    $
    109,177.1
    
    
    $
    99,933.2
    
    
    $
    3,050.5Net income attributable to minority interest
    
    
    185.5
    
    
    
    755.3
    
    
    
    590.0
    
    
    
    18.0Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    73,715.2
    
    
    
    80,005.4
    
    
    
    81,512.2
    
    
    
    2,488.2Amortization of premium/discount of financial assets
    
    
    2.4
    
    
    
    (117.2
    )
    
    
    (93.4
    )
    
    
    (2.9
    )Loss on impairment of financial assets
    
    
    279.7
    
    
    
    54.2
    
    
    
    1,560.1
    
    
    
    47.6Gain on disposal of available-for-sale financial assets, net
    
    
    (90.8
    )
    
    
    (610.2
    )
    
    
    (637.2
    )
    
    
    (19.5
    )Equity in earnings of equity method investees, net
    
    
    (2,347.2
    )
    
    
    (2,507.9
    )
    
    
    (701.5
    )
    
    
    (21.4
    )Dividends received from equity method investees
    
    
    614.6
    
    
    
    625.1
    
    
    
    1,661.1
    
    
    
    50.7Gain on disposal of financial assets carried at cost, net
    
    
    (16.2
    )
    
    
    (264.5
    )
    
    
    (83.8
    )
    
    
    (2.6
    )Gain on disposal of property, plant and equipment and other assets, net
    
    
    (179.7
    )
    
    
    (85.0
    )
    
    
    (100.3
    )
    
    
    (3.1
    )Deferred income tax
    
    
    121.6
    
    
    
    943.8
    
    
    
    2,279.4
    
    
    
    69.6Loss on idle assets
    
    
    44.1
    
    
    
    
    
    
    
    210.5
    
    
    
    6.4Net changes in operating assets and liabilities:Decrease (increase) in:Financial assets and liabilities at fair value through profit or loss
    
    
    340.2
    
    
    
    (187.1
    )
    
    
    1,412.6
    
    
    
    43.1Notes and accounts receivable, net
    
    
    6,447.3
    
    
    
    (10,977.0
    )
    
    
    23,916.7
    
    
    
    730.1Receivables from related parties
    
    
    440.9
    
    
    
    629.5
    
    
    
    10.5
    
    
    
    0.3Other receivables from related parties
    
    
    341.1
    
    
    
    13.2
    
    
    
    143.7
    
    
    
    4.4Other financial assets
    
    
    (738.7
    )
    
    
    842.1
    
    
    
    (426.0
    )
    
    
    (13.0
    )Inventories
    
    
    (3,702.4
    )
    
    
    (2,226.1
    )
    
    
    8,985.7
    
    
    
    274.3Prepaid expenses and other current assets
    
    
    (170.5
    )
    
    
    290.4
    
    
    
    (443.5
    )
    
    
    (13.5
    )Increase (decrease) in:Accounts payable
    
    
    (1,487.1
    )
    
    
    3,218.3
    
    
    
    (6,021.7
    )
    
    
    (183.8
    )Payables to related parties
    
    
    (572.4
    )
    
    
    (375.7
    )
    
    
    (1,013.5
    )
    
    
    (30.9
    )Income tax payable
    
    
    3,931.0
    
    
    
    3,179.7
    
    
    
    (1,794.3
    )
    
    
    (54.8
    )Bonuses payable to employees, directors and supervisors
    
    
    
    
    
    
    
    
    
    
    15,369.7
    
    
    
    469.2Accrued expenses and other current liabilities
    
    
    862.4
    
    
    
    913.9
    
    
    
    (3,954.5
    )
    
    
    (120.7
    )Accrued pension cost
    
    
    65.7
    
    
    
    125.5
    
    
    
    36.1
    
    
    
    1.1Deferred credits
    
    
    (99.3
    )
    
    
    343.9
    
    
    
    (858.2
    )
    
    
    (26.2
    )Net cash provided by operating activities
    
    
    204,997.1
    
    
    
    183,766.7
    
    
    
    221,493.6
    
    
    
    6,761.1CASH FLOWS FROM INVESTING ACTIVITIESAcquisitions of:Available-for-sale financial assets
    
    
    (119,291.7
    )
    
    
    (87,550.2
    )
    
    
    (85,273.9
    )
    
    
    (2,603.0
    )Held-to-maturity financial assets
    
    
    (18,554.0
    )
    
    
    
    
    
    
    (16,523.3
    )
    
    
    (504.4
    )Investments accounted for using equity method
    
    
    (2,613.0
    )
    
    
    (5,803.8
    )
    
    
    (55.9
    )
    
    
    (1.7
    )Financial assets carried at cost
    
    
    (511.6
    )
    
    
    (911.3
    )
    
    
    (463.2
    )
    
    
    (14.1
    )Property, plant and equipment
    
    
    (78,737.3
    )
    
    
    (84,001.0
    )
    
    
    (59,222.6
    )
    
    
    (1,807.8
    )Proceeds from disposal or redemption of:Available-for-sale financial assets
    
    
    91,620.4
    
    
    
    94,908.7
    
    
    
    138,515.0
    
    
    
    4,228.2Held-to-maturity financial assets
    
    
    10,410.0
    
    
    
    17,325.1
    
    
    
    15,634.6
    
    
    
    477.2Financial assets carried at cost
    
    
    126.5
    
    
    
    410.5
    
    
    
    199.4
    
    
    
    6.1Property, plant and equipment and other assets
    
    
    518.7
    
    
    
    60.5
    
    
    
    194.9
    
    
    
    6.0Proceeds from return of capital by investees
    
    
    
    
    
    
    
    
    
    
    2,345.9
    
    
    
    71.6Increase in deferred charges
    
    
    (1,414.8
    )
    
    
    (3,059.2
    )
    
    
    (3,395.3
    )
    
    
    (103.6
    )Decrease (increase) in refundable deposits
    
    
    (1,224.5
    )
    
    
    (1,434.9
    )
    
    
    10.6
    
    
    
    0.3Net cash paid for acquisition of subsidiaries
    
    
    
    
    
    
    (404.4
    )
    
    
    
    
    
    
    Increase in other assets
    
    
    (52.1
    )
    
    
    (228.8
    )
    
    
    (8.1
    )
    
    
    (0.3
    )Net cash used in investing activities
    
    
    (119,723.4
    )
    
    
    (70,688.8
    )
    
    
    (8,041.9
    )
    
    
    (245.5
    )
  F-6




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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 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)CASH FLOWS FROM FINANCING ACTIVITIESDecrease in short-term bank loans
    
    $
    (328.5
    )
    
    $
    (89.7
    )
    
    $
    
    
    
    $
    Repayments of:Bonds payable
    
    
    
    
    
    
    (7,000.0
    )
    
    
    
    
    
    
    Long-term bank loans
    
    
    (5.5
    )
    
    
    (196.2
    )
    
    
    (468.4
    )
    
    
    (14.3
    )Increase in long-term bank loans
    
    
    
    
    
    
    653.0
    
    
    
    98.4
    
    
    
    3.0Increase (decrease) in guarantee deposits
    
    
    920.7
    
    
    
    (1,574.1
    )
    
    
    (758.5
    )
    
    
    (23.1
    )Cash dividends
    
    
    (61,742.7
    )
    
    
    (77,387.3
    )
    
    
    (76,779.0
    )
    
    
    (2,343.7
    )Cash bonus paid to employees
    
    
    (3,432.1
    )
    
    
    (4,572.8
    )
    
    
    (3,939.9
    )
    
    
    (120.3
    )Bonus to directors and supervisors
    
    
    (257.4
    )
    
    
    (285.8
    )
    
    
    (176.9
    )
    
    
    (5.4
    )Proceeds from exercise of employee stock options
    
    
    575.1
    
    
    
    436.8
    
    
    
    227.2
    
    
    
    6.9Repurchase of treasury stock
    
    
    
    
    
    
    (45,413.4
    )
    
    
    (33,481.0
    )
    
    
    (1,022.0
    )Increase (decrease) in minority interests
    
    
    487.0
    
    
    
    19.0
    
    
    
    (114.7
    )
    
    
    (3.5
    )Net cash used in financing activities
    
    
    (63,783.4
    )
    
    
    (135,410.5
    )
    
    
    (115,392.8
    )
    
    
    (3,522.4
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    21,490.3
    
    
    
    (22,332.6
    )
    
    
    98,058.9
    
    
    
    2,993.2EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
    
    (136.8
    )
    
    
    (518.1
    )
    
    
    1,568.4
    
    
    
    47.9CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    96,483.7
    
    
    
    117,837.2
    
    
    
    94,986.5
    
    
    
    2,899.5CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    117,837.2
    
    
    $
    94,986.5
    
    
    $
    194,613.8
    
    
    $
    5,940.6SUPPLEMENTAL INFORMATIONInterest paid
    
    $
    951.5
    
    
    $
    922.1
    
    
    $
    676.3
    
    
    $
    20.6Income tax paid
    
    $
    3,630.0
    
    
    $
    7,585.7
    
    
    $
    10,477.0
    
    
    $
    319.8INVESTING AND FINANCING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMSAcquisition of property, plant and equipment
    
    $
    80,675.3
    
    
    $
    78,890.0
    
    
    $
    60,978.5
    
    
    $
    1,861.4Decrease (increase) in payables to contractors and equipment suppliers
    
    
    (1,702.5
    )
    
    
    5,111.0
    
    
    
    (1,742.1
    )
    
    
    (53.2
    )Increase in obligations under capital leases
    
    
    (235.5
    )
    
    
    
    
    
    
    (13.8
    )
    
    
    (0.4
    )Cash paid
    
    $
    78,737.3
    
    
    $
    84,001.0
    
    
    $
    59,222.6
    
    
    $
    1,807.8Repurchase of treasury stock
    
    $
    
    
    
    $
    48,466.9
    
    
    $
    30,427.5
    
    
    $
    928.8Increase in accrued expenses and other current liabilities
    
    
    
    
    
    
    (3,053.5
    )
    
    
    3,053.5
    
    
    
    93.2Cash paid
    
    $
    
    
    
    $
    45,413.4
    
    
    $
    33,481.0
    
    
    $
    1,022.0NONCASH FINANCING ACTIVITIESCurrent portion of bonds payable and long-term liabilities
    
    $
    7,004.1
    
    
    $
    280.8
    
    
    $
    8,222.4
    
    
    $
    251.0Current portion of other long-term payables (under accrued expenses and
other current liabilities)
    
    
    617.9
    
    
    
    3,735.9
    
    
    
    1,126.5
    
    
    
    34.4Current portion of other payables to related parties (under payables to
related parties)
    
    
    688.6
    
    
    
    
    
    
    
    
    
    
    
    
  F-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)
  NT$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
    
    $
    404.4
  (With Deloitte & Touche audit report dated April 6, 2009)
    
    (Concluded)
 F-8




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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 on February 21, 1987 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 a dedicated foundry in the semiconductor industry which 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.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe consolidated financial statements are presented in conformity with 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 31Name of Investor
    
    Name of Investee
    
    2007
    
    2008
    
    RemarkTSMC
    
    TSMC North America
    
    
    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 China Company Limited
(TSMC China)
    
    
    100
    %
    
    
    100
    %
    
    Chi Cherng Investment Co.,
Ltd. (Chi Cherng)
    
    
    36
    %
    
    
    
    
    
    TSMC and Hsin Ruey
held in aggregate a
100% ownership of
Chi Cherng as of
December 31, 2007.
In July 2008, Chi
Cherng was merged
by Hsin Ruey.
  F-9




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##### Table of Contents



Percentage of OwnershipDecember 31Name of Investor
    
    Name of Investee
    
    2007
    
    2008
    
    RemarkHsin Ruey Investment Co., Ltd.
(Hsin Ruey)
    
    
    36
    %
    
    
    
    
    
    TSMC and Chi Cherng
held in aggregate a
100% ownership of
Hsin Ruey as of
December 31, 2007.
In August 2008,
Hsin Ruey was
merged by TSMC.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)
    
    
    37
    %
    
    
    36
    %
    
    GUC became a
consolidated entity
of TSMC. TSMC has
a controlling
interest over the
financial,
operating and
personnel hiring
decisions of GUC.XinTec Inc. (XinTec)
    
    
    43
    %
    
    
    42
    %
    
    TSMC obtained three
out of five
director positions
in March 2007 and
TSMC has a
controlling
interest in 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)
    
    
    51
    %
    
    
    51
    %
    
    Growth Fund Limited (Growth Fund)
    
    
    
    
    
    
    100
    %
    
    Newly established.VTAF III, VTAF II
and Emerging
Alliance
    
    VentureTech Alliance Holdings,
L.L.C. (VTA Holdings)
    
    
    100
    %
    
    
    100
    %
    
    GUC
    
    Global Unichip Corporation-NA
(GUC-NA)
    
    
    100
    %
    
    
    100
    %
    
    Global Unichip Japan Co., Ltd.
(GUC-Japan)
    
    
    100
    %
    
    
    100
    %
    
    Global Unichip Europe B.V.
(GUC-Europe)
    
    
    
    
    
    
    100
    %
    
    Newly established.TSMC Partners
    
    TSMC Design Technology Canada
Inc. (TSMC Canada)
    
    
    100
    %
    
    
    100
    %
    
    
  F-10




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Use of Estimates
  Classification of Current and Noncurrent Assets and Liabilities
  F-11




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Cash Equivalents
  Financial Assets/Liabilities at Fair Value Through Profit or Loss
   Available-for-sale Financial Assets
      Held-to-maturity Financial Assets
   F-12




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Allowance for Doubtful Receivables
  Revenue Recognition and Allowance for Sales Returns and Others
   Inventories
  Investments Accounted for Using Equity Method
  F-13




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Financial Assets Carried at Cost
   Property, Plant and Equipment, Assets Leased to Others and Idle Assets
     F-14




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Intangible Assets
    Pension Costs
  Government Subsidies
  Income Tax
      Stock-based Compensation
  F-15




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##### Table of Contents



Treasury Stock
   Foreign-currency Transactions
   Translation of Foreign-currency Financial Statements
  Concentration of Credit Risk
  Fair Values of Financial Instruments
 
 Earnings Per Share
  F-16




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Recent Accounting Pronouncements
  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, 2008, which was NT$32.76
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 CHANGESEffect of Adopting the Newly Released and Revised R.O.C. SFASsEffective January 1, 2008, the Company adopted Interpretation
2007-052, Accounting for Bonuses to Employees, Directors and
Supervisors issued in March 2007 by the ARDF, which requires
companies to record bonuses paid to employees, directors and
supervisors as an expense rather than as an appropriation of earnings.
The adoption of this interpretation resulted in a decrease in net
income and earnings per share of NT$12,827.6 millions and NT$0.50,
respectively, for the year ended December 31, 2008.Effective January 1, 2008, the Company adopted Statement of Financial
Accounting Standards No. 39, Accounting for Share-based Payment,
which requires companies to record share-based payment transactions in
the financial statements at fair value. Such a change in accounting
principle did not have any effect on the Companys consolidated
financial statements as of and for the year ended December 31, 2008.5.
    
    CASH AND CASH EQUIVALENTS
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Cash and deposits in banks
    
    $
    84,105.4
    
    
    $
    185,943.5Repurchase agreements collaterized by government bonds
    
    
    10,067.8
    
    
    
    8,670.3Asset-backed commercial papers
    
    
    522.1
    
    
    
    Corporate notes
    
    
    291.2
    
    
    
    $
    94,986.5
    
    
    $
    194,613.8
 F-17




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##### Table of Contents



6.
    
    FINANCIAL ASSETS/LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Trading financial assetsPublicly traded stocks
    
    $
    1,590.2
    
    
    $
    13.3Forward exchange contracts
    
    
    6.6
    
    
    
    28.4Cross currency swap contracts
    
    
    35.6
    
    
    
    14.0$
    1,632.4
    
    
    $
    55.7Trading financial liabilitiesForward exchange contracts
    
    $
    185.6
    
    
    $
    35.8Cross currency swap contracts
    
    
    63.7
    
    
    
    49.4$
    249.3
    
    
    $
    85.2
   Contract AmountMaturity Date
    
    (In Millions )December 31, 2007Sell US$/Buy NT$
    
    January 2008
    
    US$111.0/NT$3,605.8Sell EUR/Buy NT$
    
    February 2008 to July 2008
    
    EUR 48.0/NT$2,090.6
 Contract AmountMaturity Date
    
    (In Millions )December 31, 2008Sell US$/buy NT$
    
    January 2009 to February 2009
    
    US$138.9/NT$4,558.7Sell EUR/buy NT$
    
    January 2009
    
    EUR1.5/NT$63.2Sell RMB/buy US$
    
    January 2009 to April 2009
    
    RMB55.0/US$8.0Sell US$/buy JPY
    
    January 2009 to February 2009
    
    US$0.1/JPY11.8
  Range ofContract Amount
    
    Range of
    
    Interest RatesMaturity Date
    
    (in Millions)
    
    Interest Rates Paid
    
    ReceivedDecember 31, 2007January 2008 to February 2008
    
    US$975.0/NT$31,630.2
    
    3.53%-5.60%
    
    0.02%-3.01%December 31, 2008January 2009
    
    US$307.0/NT$10,061.2
    
    0.54%-5.00%
    
    0.00%-3.83%
  F-18




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##### Table of Contents



7.   AVAILABLE-FOR-SALE FINANCIAL ASSETS
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Agency bonds
    
    $
    8,635.8
    
    
    $
    5,696.5Corporate bonds
    
    
    10,745.1
    
    
    
    3,279.1Corporate issued asset-backed securities
    
    
    5,357.1
    
    
    
    2,334.9Money market funds
    
    
    19,212.1
    
    
    
    1,000.1Government bonds
    
    
    7,767.6
    
    
    
    340.9Publicly traded stocks
    
    
    905.3
    
    
    
    279.9Structured time deposits
    
    
    499.4
    
    
    
    Open-end mutual funds
    
    
    14,966.7
    
    
    
    68,089.1
    
    
    
    12,931.4Current portion
    
    
    (66,688.4
    )
    
    
    (10,898.7
    )$
    1,400.7
    
    
    $
    2,032.7
 F-19




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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, 2007Step-up callable deposits
Domestic 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.For the years ended December 31, 2007 and 2008, the loss on impairment of available-for-sale
financial assets was recognized nil and NT$934.6 million, respectively.
 8.
    
    HELD-TO-MATURITY FINANCIAL ASSETS
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Corporate bonds
    
    $
    10,900.2
    
    
    $
    18,158.7Government bonds
    
    
    7,824.4
    
    
    
    1,506.5Structured time deposits
    
    
    1,500.0
    
    
    
    1,643.020,224.6
    
    
    
    21,308.2Current portion
    
    
    (11,526.9
    )
    
    
    (5,882.0
    )$
    8,697.7
    
    
    $
    15,426.2
 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, 2007Step-up callable deposits
Domestic deposits
    
    $
    1,500.0
    
    
    $
    5.6
    
    
    
    1.77%-1.83
    %
    
    April 2008 to October 2008December 31, 2008Step-up callable deposits
Foreign deposits
    
    $
    1,643.0
    
    
    $
    0.7
    
    
    
    4.82
    %
    
    December 2011
 As of December 31, 2008, the principal of the structured time deposits that resided in banks
located in Hong Kong amounted to US$50.0 million.
 F-20




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##### Table of Contents



9.
    
    RECEIVABLES, NET
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Notes receivable
    
    $
    59.0
    
    
    $
    5.9Accounts receivable
    
    
    47,145.1
    
    
    
    25,017.447,204.1
    
    
    
    25,023.3Allowance for doubtful receivables
    
    
    (701.8
    )
    
    
    (455.7
    )Allowance for sales returns and others
    
    
    (4,089.0
    )
    
    
    (6,071.0
    )(4,790.8
    )
    
    
    (6,526.7
    )$
    42,413.3
    
    
    $
    18,496.6
 Changes in the allowances are summarized as follows:


Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)Allowance for doubtful receivablesBalance, beginning of year
    
    $
    980.6
    
    
    $
    749.9
    
    
    $
    701.8Provision
    
    
    54.7
    
    
    
    3.0
    
    
    
    14.9Write-off
    
    
    (285.4
    )
    
    
    (51.1
    )
    
    
    (261.0
    )Balance, end of year
    
    $
    749.9
    
    
    $
    701.8
    
    
    $
    455.7Allowance for sales returns and othersBalance, beginning of year
    
    $
    4,317.4
    
    
    $
    2,870.8
    
    
    $
    4,089.0Effect of inclusion of newly consolidated subsidiaries
    
    
    
    
    
    
    12.9
    
    
    
    Provision
    
    
    5,382.2
    
    
    
    5,705.6
    
    
    
    8,825.7Write-off
    
    
    (6,828.8
    )
    
    
    (4,500.3
    )
    
    
    (6,843.7
    )Balance, end of year
    
    $
    2,870.8
    
    
    $
    4,089.0
    
    
    $
    6,071.0


10.
    
    INVENTORIES


December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Finished goods
    
    $
    4,321.9
    
    
    $
    5,863.6Work in process
    
    
    17,346.9
    
    
    
    9,078.7Raw materials
    
    
    1,862.5
    
    
    
    1,082.7Supplies and spare parts
    
    
    1,261.7
    
    
    
    1,153.024,793.0
    
    
    
    17,178.0Allowance for losses
    
    
    (930.7
    )
    
    
    (2,301.4
    )$
    23,862.3
    
    
    $
    14,876.6


F-21



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##### Table of Contents



Changes in the allowance are summarized as follows:
 Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)Balance, beginning of year
    
    $
    1,685.8
    
    
    $
    1,004.9
    
    
    $
    930.7Effect of inclusion of newly consolidated subsidiaries
    
    
    
    
    
    
    16.3
    
    
    
    Provision
    
    
    172.1
    
    
    
    165.4
    
    
    
    1,660.9Write-offs
    
    
    (853.0
    )
    
    
    (255.9
    )
    
    
    (290.2
    )Balance, end of year
    
    $
    1,004.9
    
    
    $
    930.7
    
    
    $
    2,301.4
 11.
    
    INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD
 December 312007
    
    
    2008% of
    
    
    
    
    
    
    % ofCarrying
    
    
    Owner-
    
    
    Carrying
    
    
    Owner-Amount
    
    
    ship
    
    
    Amount
    
    
    shipNT$
    
    
    
    
    
    
    NT$(In Millions)
    
    
    
    
    
    
    (In Millions)Vanguard International Semiconductor Corporation (VIS)
    
    $
    11,220.1
    
    
    
    37
    
    
    $
    9,787.3
    
    
    
    37Systems on Silicon Manufacturing Company Pte Ltd.
(SSMC)
    
    
    9,092.7
    
    
    
    39
    
    
    
    6,808.2
    
    
    
    39VisEra Holding Company (VisEra Holding)
    
    
    2,204.5
    
    
    
    49
    
    
    
    2,277.1
    
    
    
    49Aiconn Technology Corporation (Aiconn)
    
    
    
    
    
    
    
    
    
    
    34.6
    
    
    
    44$
    22,517.3
    
    
    
    
    
    
    $
    18,907.2
 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%.For the years ended December 31, 2006, 2007 and 2008, net equity in earnings of equity method
investees of NT$2,347.2 million, NT$2,507.9 million and NT$701.5 million was recognized,
respectively. The related equity in earnings of equity method investees was determined based on
the audited financial statements of the investees for the same periods as the Company.As of December 31, 2007 and 2008, fair values of publicly traded stocks in investments accounted
for using equity method (VIS) was NT$15,189.2 million and NT$4,680.3 million, respectively.Movements of the difference between the cost of investment and the Companys share in investees
net assets allocated to depreciable assets were as follows:
 Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)Balance, beginning of year
    
    $
    
    
    
    $
    952.2
    
    
    $
    2,589.7Additions
    
    
    1,010.8
    
    
    
    1,968.6
    
    
    
    Amortization
    
    
    (58.6
    )
    
    
    (331.1
    )
    
    
    (599.1
    )Balance, end of year
    
    $
    952.2
    
    
    $
    2,589.7
    
    
    $
    1,990.6
 As of December 31, 2007 and 2008, the ending balances of the aforementioned difference allocated
to goodwill were both NT$1,061.9 million.
 F-22




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##### Table of Contents



12.
    
    FINANCIAL ASSETS CARRIED AT COST
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Non-publicly traded stocks
    
    $
    3,462.4
    
    
    $
    3,453.4Mutual funds
    
    
    383.2
    
    
    
    162.0$
    3,845.6
    
    
    $
    3,615.4
 For the years ended December 31, 2007 and 2008, the loss on impairment of financial assets
carried at cost was recognized NT$54.2 million and NT$625.5 million, respectively.
 13.
    
    PROPERTY, PLANT AND EQUIPMENT
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)CostLand improvements
    
    $
    942.2
    
    
    $
    953.9Buildings
    
    
    118,640.1
    
    
    
    132,250.0Machinery and equipment
    
    
    646,419.4
    
    
    
    697,498.8Office equipment
    
    
    11,829.6
    
    
    
    12,430.8Leased assets
    
    
    652.3
    
    
    
    722.3778,483.6
    
    
    
    843,855.8Advance payments and construction in progress
    
    
    21,868.2
    
    
    
    18,605.9800,351.8
    
    
    
    862,461.7Accumulated depreciationLand improvements
    
    
    262.7
    
    
    
    295.9Buildings
    
    
    63,239.9
    
    
    
    72,681.7Machinery and equipment
    
    
    467,665.1
    
    
    
    535,962.3Office equipment
    
    
    8,796.8
    
    
    
    9,693.8Leased assets
    
    
    135.1
    
    
    
    182.6540,099.6
    
    
    
    618,816.3Net
    
    $
    260,252.2
    
    
    $
    243,645.4
 Depreciation expense on property, plant and equipment was NT$71,225.2 million, NT$77,171.3
million and NT$78,736.8 million for the years ended December 31, 2006, 2007 and 2008,
respectively.The Company entered into agreements to lease buildings that qualify as capital leases. The term
of the leases ranged from December 2003 to December 2013. The future minimum lease payments as
of December 31, 2008 is NT$803.6 million.
 F-23




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##### Table of Contents



14.
    
    DEFERRED CHARGES, NET
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Technology license fees
    
    $
    5,819.1
    
    
    $
    4,125.2Software and system design costs
    
    
    1,449.6
    
    
    
    1,801.8Others
    
    
    654.9
    
    
    
    1,198.8$
    7,923.6
    
    
    $
    7,125.8
 Amortization expense on deferred charges was NT$2,472.4 million, NT$2,793.0 million and
NT$2,716.3 million for the years ended December 31, 2006, 2007 and 2008, respectively.As of December 31, 2008, the Companys estimated aggregate amortization expense for each of
the five succeeding fiscal years and thereafter is as follows:
 AmountNT$Year
    
    (In Millions)2009
    
    $
    1,827.22010
    
    
    1,636.12011
    
    
    1,499.02012
    
    
    647.62013
    
    
    410.12014 and thereafter
    
    
    1,105.8$
    7,125.8
 15.
    
    BONDS PAYABLE
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Domestic unsecured bonds:Issued in January 2002 and repayable in 2009 and 2012 in two
installments, 2.75% and 3.00% interest payable annually, respectively
    
    $
    12,500.0
    
    
    $
    12,500.0Current portion
    
    
    
    
    
    
    (8,000.0
    )$
    12,500.0
    
    
    $
    4,500.0
 F-24




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##### Table of Contents



As of December 31, 2008, future principal repayments for the bonds payable 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 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Secured loans:Repayable from August 2009 in 17 quarterly installments, annual
interest at 2.91%-2.99% in 2007 and 2.56 %- 3.67 % in 2008
    
    $
    630.0
    
    
    $
    728.4US$20.0 million, repayable in full in one lump sum payment in
November 2010, annual interest at 5.88% in 2007 and 3.62 % in 2008
    
    
    648.9
    
    
    
    658.7Repayable from December 2007 in 8 semi-annual installments,
annual interest at 2.39%-3.20% in 2007 and 2.42 %- 3.23 % in 2008
    
    
    456.8
    
    
    
    168.8Repayable from May 2007 in 16 quarterly installments, annual
interest at 2.48%-2.85% in 2007 and 2.42 %- 3.00 % in 2008
    
    
    54.6
    
    
    
    37.8Repayable from March 2007 in 12 quarterly installments, annual
interest at 2.79%-3.16% in 2007 and 2.53 %- 3.21 % in 2008
    
    
    124.9
    
    
    
    32.5Repayable from April 2005 in 16 quarterly installments, annual
interest at 2.51%-2.85% in 2007 and 2.42 %- 3.00 % in 2008
    
    
    45.0
    
    
    
    9.0Repayable from February 2005 in 17 quarterly installments, annual
interest at 2.65%-4.53% in 2007 and 2.56 %- 3.15 % in 2008
    
    
    40.7
    
    
    
    7.7Unsecured loans:Science Park Administration (SPA) SOC loan, repayable from
October 2003 in 20 quarterly installments, interest-free
    
    
    2.1
    
    
    
    2,003.0
    
    
    
    1,642.9Current portion
    
    
    (280.8
    )
    
    
    (222.4
    )$
    1,722.2
    
    
    $
    1,420.5
 Pursuant to the loan agreements, financial ratios calculated based on annual audited financial
statements of TSMC China as well as semi-annual and annual financial statements of XinTec must
comply with predetermined financial covenants. As of December 31, 2008, TSMC China and XinTec
were in compliance with all such financial covenants.
 F-25




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##### Table of Contents



As of December 31, 2008, future principal repayments for the long-term bank loans were as
follows:
 AmountNT$Year of Repayment
    
    (In Millions)2009
    
    $
    222.42010
    
    
    916.92011
    
    
    212.32012
    
    
    174.82013 and thereafter
    
    
    116.5$
    1,642.9
 17.
    
    OTHER LONG-TERM PAYABLES
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Payables for acquisition of property, plant and equipment (Note 28i)
    
    $
    7,908.5
    
    
    $
    8,579.7Payables for royalties
    
    
    5,174.7
    
    
    
    2,095.013,083.2
    
    
    
    10,674.7Current portion (classified under accrued expenses and other current
liabilities)
    
    
    (3,673.2
    )
    
    
    (1,126.5
    )$
    9,410.0
    
    
    $
    9,548.2
   AmountNT$Year of Payment
    
    (In Millions)2009
    
    $
    1,126.52010
    
    
    541.32011
    
    
    427.22012
    
    
    2013 and thereafter
    
    
    8,579.7$
    10,674.7
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##### Table of Contents



18.
    
    PENSION PLANSThe pension mechanism under the Labor Pension 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. Furthermore, TSMC North America, TSMC China and TSMC Europe and TSMC Canada are required by local regulations to
make monthly contributions at certain percentages of the basic salary of their employees. Pursuant to the aforementioned
Act and local regulations, the Company recognized pension costs of NT$679.9 million, NT$725.8 million and NT$779.6 million
for the years ended December 31, 2006, 2007 and 2008, respectively.TSMC, GUC and XinTec have defined benefit plans under the Labor Standards Law that provide benefits based on an employees
service years and average monthly salary for the six-month period prior to retirement. The aforementioned companies
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 (the Committee) and deposited in the Committees name in the
Bank of Taiwan (originally the Central Trust of China, which was dissolved after merger with 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, 2006,
2007 and 2008 are summarized as follows:
 Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)Projected benefit obligationBalance, beginning of year
    
    $
    5,976.9
    
    
    $
    6,956.1
    
    
    $
    6,043.7Effect of inclusion of newly consolidated subsidiaries
    
    
    
    
    
    
    19.0
    
    
    
    Service cost
    
    
    178.5
    
    
    
    184.2
    
    
    
    151.7Interest cost
    
    
    164.2
    
    
    
    156.4
    
    
    
    171.3Plan amendments
    
    
    
    
    
    
    
    
    
    
    (173.7
    )Actuarial loss (gain)
    
    
    653.4
    
    
    
    (1,257.0
    )
    
    
    1,396.8Benefits paid
    
    
    (16.9
    )
    
    
    (15.0
    )
    
    
    (29.0
    )Balance, end of year
    
    $
    6,956.1
    
    
    $
    6,043.7
    
    
    $
    7,560.8Plan assetsBalance, beginning of year
    
    $
    1,691.6
    
    
    $
    1,958.6
    
    
    $
    2,239.0Effect of inclusion of newly consolidated subsidiaries
    
    
    
    
    
    
    17.0
    
    
    
    Actual return of plan assets
    
    
    44.7
    
    
    
    69.0
    
    
    
    70.7Employer contribution
    
    
    233.1
    
    
    
    209.4
    
    
    
    206.9Benefits paid
    
    
    (10.8
    )
    
    
    (15.0
    )
    
    
    (29.0
    )Balance, end of year
    
    $
    1,958.6
    
    
    $
    2,239.0
    
    
    $
    2,487.6
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Other information of defined benefit plans was as follows:
 a.
    
    Components of net periodic pension cost
 Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)Service cost
    
    $
    178.5
    
    
    $
    184.3
    
    
    $
    151.7Interest cost
    
    
    164.2
    
    
    
    156.4
    
    
    
    171.3Projected return on plan assets
    
    
    (49.4
    )
    
    
    (51.3
    )
    
    
    (68.4
    )Amortization
    
    
    12.0
    
    
    
    35.8
    
    
    
    4.5Net periodic pension cost
    
    $
    305.3
    
    
    $
    325.2
    
    
    $
    259.1
 b.
    
    Reconciliation of funded status of the plans and accrued pension cost at December 31, 2007
and 2008
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Benefit obligationVested benefit obligation
    
    $
    120.2
    
    
    $
    114.9Nonvested benefit obligation
    
    
    3,479.1
    
    
    
    4,182.5Accumulated benefit obligation
    
    
    3,599.3
    
    
    
    4,297.4Additional benefits based on future salaries
    
    
    2,444.4
    
    
    
    3,263.4Projected benefit obligation
    
    
    6,043.7
    
    
    
    7,560.8Fair value of plan assets
    
    
    (2,239.0
    )
    
    
    (2,487.6
    )Funded status
    
    
    3,804.7
    
    
    
    5,073.2Unrecognized net transition obligation
    
    
    (109.9
    )
    
    
    (101.3
    )Prior service cost
    
    
    
    
    
    
    169.2Unrecognized net loss
    
    
    (42.0
    )
    
    
    (1,439.5
    )Accrued pension cost
    
    $
    3,652.8
    
    
    $
    3,701.6Vested benefit
    
    $
    120.1
    
    
    $
    126.3
 c.
    
    Actuarial assumptions at December 31, 2007 and 2008:
 Discount rate used in determining present values
    
    
    2.75%-3.00
    %
    
    
    2.00%-2.50
    %Future salary increase rate
    
    
    2.00%-3.00
    %
    
    
    2.00%-3.00
    %Expected rate of return on plan assets
    
    
    2.50%-3.00
    %
    
    
    2.25%-2.50
    %
 d.
    
    Expected benefit payments
 AmountNT$(In Millions)2009
    
    $
    83.92010
    
    
    13.22011
    
    
    19.92012
    
    
    34.62013
    
    
    46.42014 and thereafter
    
    
    866.5
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##### Table of Contents



e.
    
    TSMC, GUC and XinTec expect to make contributions to their pension funds in 2009 of
NT$192.9 million, NT$2.6 million and NT$2.4 million, respectively.
 Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)f.      Contributions to the Funds for the
year
    
    $
    233.1
    
    
    $
    209.4
    
    
    $
    206.9g.      Payments from the Funds for
the year
    
    $
    7.4
    
    
    $
    15.0
    
    
    $
    29.0
 h.
    
    Plan assets allocation
 Under 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, 2007
and 2008, 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 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)CurrentDomestic
    
    $
    7,395.2
    
    
    $
    10,595.9
    
    
    $
    8,580.7Foreign
    
    
    283.1
    
    
    
    170.6
    
    
    
    82.87,678.3
    
    
    
    10,766.5
    
    
    
    8,663.5DeferredDomestic
    
    
    173.7
    
    
    
    976.9
    
    
    
    2,307.2Foreign
    
    
    (78.3
    )
    
    
    (33.8
    )
    
    
    (21.7
    )95.4
    
    
    
    943.1
    
    
    
    2,285.5Income tax expense
    
    $
    7,773.7
    
    
    $
    11,709.6
    
    
    $
    10,949.0
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##### Table of Contents



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 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)Income tax expense based on income before income tax
statutory rates
    
    $
    34,786.3
    
    
    $
    30,829.4
    
    
    $
    27,970.4The effect of the following:Tax-exempt income
    
    
    (12,281.4
    )
    
    
    (7,668.4
    )
    
    
    (9,670.5
    )Temporary and permanent differences
    
    
    (2,817.1
    )
    
    
    (150.9
    )
    
    
    2,122.8Others
    
    
    
    
    
    
    
    
    
    
    44.1Additional tax at 10% on unappropriated earnings
    
    
    1,170.1
    
    
    
    2,710.9
    
    
    
    13.9Cumulative effect of changes in accounting principles
    
    
    (82.1
    )
    
    
    
    
    
    
    Net operating loss carryforwards used
    
    
    (38.4
    )
    
    
    (814.1
    )
    
    
    (205.2
    )Income tax credits used
    
    
    (12,731.0
    )
    
    
    (13,899.6
    )
    
    
    (11,109.3
    )Income tax currently payable
    
    $
    8,006.4
    
    
    $
    11,007.3
    
    
    $
    9,166.2
 c.
    
    Income tax expense consisted of the following:
 Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)Income tax currently payable
    
    $
    8,006.4
    
    
    $
    11,007.3
    
    
    $
    9,166.2Other income tax adjustments
    
    
    (328.2
    )
    
    
    (240.8
    )
    
    
    (502.7
    )Net change in deferred income tax assetsInvestment tax credits
    
    
    3,914.8
    
    
    
    5,122.5
    
    
    
    1,060.6Temporary differences
    
    
    (2,181.5
    )
    
    
    (800.4
    )
    
    
    (2,129.1
    )Net operating loss carryforwards
    
    
    1,412.9
    
    
    
    841.5
    
    
    
    411.4Valuation allowance
    
    
    (3,050.7
    )
    
    
    (4,220.5
    )
    
    
    2,942.6Income tax expense
    
    $
    7,773.7
    
    
    $
    11,709.6
    
    
    $
    10,949.0
 d.
    
    Net deferred income tax assets consisted of the following:
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Current deferred income tax assetsInvestment tax credits
    
    $
    5,372.7
    
    
    $
    2,885.7Temporary differences
    
    
    674.2
    
    
    
    1,556.5Valuation allowance
    
    
    (474.6
    )
    
    
    (472.9
    )$
    5,572.3
    
    
    $
    3,969.3
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December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Noncurrent deferred income tax assetsInvestment tax credits
    
    $
    9,885.5
    
    
    $
    11,311.9Net operating loss carryforwards
    
    
    3,963.1
    
    
    
    3,589.0Temporary differences
    
    
    (2,848.1
    )
    
    
    (1,628.3
    )Valuation allowance
    
    
    (3,687.2
    )
    
    
    (6,635.7
    )7,313.3
    
    
    
    6,636.9
 As of December 31, 2008, the net operating loss carryforwards were generated by WaferTech,
TSMC Development and TSMC Technology and Mutual-Pak 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, 2007 and 2008 was NT$3,012.8 million and
NT$521.6 million, respectively.The estimated creditable ratio for distribution of TSMCs earnings of 2007 and 2008 was 9.83% and 0.51%, 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, 2008, 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
    
    $
    22.2
    
    
    $
    
    
    
    
    2008233.9
    
    
    
    5.9
    
    
    
    20096,178.4
    
    
    
    114.7
    
    
    
    20104,664.2
    
    
    
    4,664.2
    
    
    
    20112,664.2
    
    
    
    2,664.2
    
    
    
    2012$
    13,762.9
    
    
    $
    7,449.0Statute for Upgrading Industries
    
    Research and development
expenditures
    
    $
    1,009.8
    
    
    $
    
    
    
    
    20081,173.4
    
    
    
    
    
    
    
    20093,263.4
    
    
    
    673.8
    
    
    
    20102,825.1
    
    
    
    2,825.1
    
    
    
    20113,188.7
    
    
    
    3,188.7
    
    
    
    2012$
    11,460.4
    
    
    $
    6,687.6
 Total
    
    
    RemainingCreditable
    
    
    Creditable
    
    
    ExpiryLaw/Statute
    
    Item
    
    Amount
    
    
    Amount
    
    
    YearNT$
    
    
    NT$(In Millions)Statute for Upgrading Industries
    
    Personnel training expenditures
    
    $
    22.0
    
    
    $
    
    
    
    
    200923.8
    
    
    
    23.2
    
    
    
    201037.0
    
    
    
    37.0
    
    
    
    20110.8
    
    
    
    0.8
    
    
    
    2012$
    83.6
    
    
    $
    61.0
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##### Table of Contents



h.
    
    The profits generated from the following projects of TSMC, GUC and XinTec are exempt
from income tax for a five-year period:
 Tax-Exemption PeriodConstruction of Fab 14  Module A
    
    
    2006 to 2010Construction of Fab 12  Module B and expansion of Fab 14  Module A
    
    
    2007 to 2011Construction of Fab 14  Module B and expansion of Fab 12 and others
    
    
    2008 to 20122003 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 2006.
 20.
    
    SHAREHOLDERS EQUITYCommon Stock, Capital Surplus and EarningsAs of December 31, 2008, 1,092,053 thousand ADSs of TSMC were traded
on the NYSE. The number of common shares represented by the ADSs was
5,460,265 thousand (one ADS represents five common shares).Capital surplus can only be used to offset a deficit under the Company
Law. However, the capital surplus generated from donations and the
excess of the issuance price over the par value of capital stock
(including the stock issued for new capital, mergers, convertible
bonds and the surplus from treasury stock transactions) may be
appropriated as stock dividends, which are limited to a certain
percentage of TSMCs paid-in capital. Also, the capital surplus from
long-term investment may not be used for any purpose.Capital surplus consisted of the following:
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)From merger
    
    $
    24,003.6
    
    
    $
    22,805.4Additional paid-in capital
    
    
    19,526.5
    
    
    
    17,962.5From convertible bonds
    
    
    9,360.4
    
    
    
    8,893.2From long-term investments
    
    
    351.2
    
    
    
    214.1From treasury stock transactions
    
    
    491.0
    
    
    
    $
    53,732.7
    
    
    $
    49,875.2
 As of December 31, 2007 and 2008, retained earnings consisted of:
 December 312007
    
    
    2008NT$
    
    
    NT$(In Millions)Unappropriated earnings
    
    $
    161,828.3
    
    
    $
    102,337.4Legal capital reserve
    
    
    56,406.7
    
    
    
    67,324.4Special capital reserve
    
    
    629.5
    
    
    
    391.9$
    218,864.5
    
    
    $
    170,053.7
 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:
 a.
    
    Legal capital reserve at 10% of the profits left over, until the accumulated legal
capital reserve equals TSMCs paid-in capital;b.
    
    Special capital reserve in accordance with relevant laws or regulations or as requested
by the authorities in charge;
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##### Table of Contents



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 subjected to shareholders approval in the following year.For the year ended December 31, 2008, TSMC has recorded bonuses to employees and directors with
a charge to earnings of approximately 15% of net income. If the actual amounts subsequently
resolved by the shareholders differ from the proposed amounts by the Board of Directors, the
differences are recorded in the year of shareholders resolution as a change in accounting
estimate. If stock bonuses are resolved to be distributed to employees, the number of shares is
determined by dividing the amount of bonuses by the closing price (after considering the effect
of cash and stock dividends) of the shares on the day preceding the shareholders meeting.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 2006 and 2007 had been approved in TSMCs shareholders
meetings held on May 7, 2007, and June 13, 2008, respectively. The appropriations of earnings
of 2008 were approved by the Board of Directors on February 10, 2009. The appropriations of
earnings of 2008 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 2006
    
    
    Year 2007
    
    
    Year 2008
    
    
    Year 2006
    
    
    Year 2007
    
    
    Year 2008NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Legal capital reserve
    
    $
    12,701.0
    
    
    $
    10,917.7
    
    
    $
    9,993.3Special capital reserve
    
    
    (11.2
    )
    
    
    (237.7
    )
    
    
    (391.9
    )Bonus to employees  in cash
    
    
    4,572.8
    
    
    
    3,939.9
    
    
    
    Bonus to employees  in stock
    
    
    4,572.8
    
    
    
    3,939.9
    
    
    
    Cash dividends to shareholders
    
    
    77,489.1
    
    
    
    76,881.3
    
    
    
    76,876.3
    
    
    
    3.00
    
    
    
    3.00
    
    
    
    3.00Stock dividends to shareholders
    
    
    516.6
    
    
    
    512.5
    
    
    
    512.5
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.02Bonus to directors and supervisors
    
    
    285.8
    
    
    
    176.9
    
    
    
    $
    100,126.9
    
    
    $
    96,130.5
    
    
    $
    86,990.2
 Bonus to employees that will be paid in cash and in stock as
well as bonus to directors in the amounts of NT$7,495.0 million,
NT$7,495.0 million and NT$158.1 million for 2008, respectively, had
been charged against earnings and the amount was consistent with the
resolutions of meeting of the Board of Directors held on February 10,
2009.TSMCs shareholders meeting held on May 7, 2007 and June 13, 2008 also resolved to distribute
stock dividends out of capital surplus in the amount of NT$774.9 and NT$768.8 million,
respectively. The Board of Directors also resolved to distribute stock dividends out of capital
surplus in the amount of NT$768.8 million on February 10, 2009. The amounts of the
appropriations of earnings for 2008, bonus to employees and directors, 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.
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The amounts of the appropriations of earnings for 2006 and 2007 were consistent with the
resolutions of the meetings of the Board of Directors held on February 6, 2007 and February 19,
2008, respectively. If the above bonus to employees, directors and supervisors had been paid
entirely in cash and charged to earnings of 2006 and 2007, the basic earnings per share (after
income tax) for the years ended December 31, 2006 and 2007 shown in the respective financial
statements would have decreased from NT$3.84 to NT$4.14 and NT$4.56 to NT$4.93, respectively.
The shares distributed as a bonus to employees represented 1.77% and 1.49% of TSMCs total
outstanding common shares as of December 31, 2006 and 2007, 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 PLANSTSMCs Employee Stock Option Plans, consisting of 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 of TSMC 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 canceled had expired as of December 31, 2008.Information about TSMCs outstanding stock options for the years ended
December 31, 2006, 2007 and 2008 was as follows:
 Weighted-averageNumber of
    
    ExerciseOptions
    
    Price(In Thousands)
    
    (NT$)Year 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 canceled
    
    
    (1,045
    )
    
    
    45.9Balance, end of year
    
    
    41,875
    
    
    
    37.4Year ended December 31, 2008Balance, beginning of year
    
    
    41,875
    
    
    $
    35.6Options granted
    
    
    767
    
    
    
    35.2Options exercised
    
    
    (6,027
    )
    
    
    37.7Options canceled
    
    
    (381
    )
    
    
    46.5Balance, end of year
    
    
    36,234
    
    
    
    35.3
 The number of outstanding options and exercise prices have been adjusted to reflect the
appropriations of earnings by TSMC in accordance with the plans. The options granted included
the result of the aforementioned adjustment.
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##### Table of Contents



As of December 31, 2008, 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$)$24.2-$33.9
    
    
    25,633
    
    
    
    4.15
    
    
    $
    31.0
    
    
    
    25,633
    
    
    $
    31.038.2-  50.4
    
    
    10,601
    
    
    
    5.89
    
    
    
    45.8
    
    
    
    8,669
    
    
    
    45.536,234
    
    
    
    
    
    
    
    35.3
    
    
    
    34,302
    
    
    
    34.6
 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 of GUC 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 of GUC 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.Information about GUCs outstanding stock options for the years ended December 31, 2006, 2007
and 2008 was as follows:
 Weighted-averageNumber of
    
    ExerciseOptions
    
    Prices (NT$)Year 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
    
    
    
    60.3Year ended December 31, 2008Balance, beginning of year
    
    
    7,598
    
    
    $
    60.3Options granted
    
    
    284
    
    
    
    14.8Options exercised
    
    
    (2,115
    )
    
    
    14.0Options canceled
    
    
    (210
    )
    
    
    168.4Balance, end of year
    
    
    5,557
    
    
    
    66.6
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The number of outstanding options and exercise prices have been adjusted to reflect the
appropriation of earnings by GUC in accordance with the plans. The options granted were the
result of the aforementioned adjustment.As of December 31, 2008, information about GUCs outstanding and exercisable options was as
follows:
 Options OutstandingWeighted-
    
    
    
    
    
    Options Exercisableaverage
    
    Weighted-
    
    
    
    
    
    Weighted-RANGE OF
    
    
    
    
    
    Remaining
    
    average
    
    
    
    
    
    averageExercise
    
    Number of
    
    Contractual
    
    Exercise
    
    Number of
    
    ExercisePrice (NT$)
    
    Options
    
    Life (Years)
    
    Price (NT$)
    
    Options
    
    Price (NT$)$8.9-$10.5
    
    
    1,450
    
    
    
    2.75
    
    
    $
    9.2
    
    
    
    343
    
    
    $
    9.916.4
    
    
    2,361
    
    
    
    2.67
    
    
    
    16.4
    
    
    
    528
    
    
    
    16.4182.0
    
    
    1,746
    
    
    
    5.00
    
    
    
    182.0
    
    
    
    
    
    
    
    5,557
    
    
    
    
    
    
    
    66.6
    
    
    
    871
    
    
    
    13.9
 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 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 options for the years ended December 31, 2007 and 2008
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
    
    
    
    15.1Year ended December 31, 2008Balance, beginning of year
    
    
    9,642
    
    
    $
    15.1Options granted
    
    
    (728
    )
    
    
    12.4Options canceled
    
    
    (1,472
    )
    
    
    15.5Balance, end of year
    
    
    7,442
    
    
    
    14.8
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The exercise prices have been adjusted to reflect the appropriation of earnings by XinTec in
accordance with the plans.
  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$)$12.4-$14.3
    
    
    4,050
    
    
    
    7.90
    
    
    $
    12.7
    
    
    
    1,425
    
    
    $
    12.415.4-  19.4
    
    
    3,392
    
    
    
    8.73
    
    
    
    17.4
    
    
    
    
    
    
    
    7,442
    
    
    
    
    
    
    
    14.8
    
    
    
    1,425
    
    
    
    12.4
 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.
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No compensation cost was recognized under the intrinsic value method for the years ended
December 31, 2006, 2007 and 2008. Had the Company used the fair value based method to evaluate
the options using the Black-Scholes model, the assumptions and pro forma results of the Company
for the years ended December 31, 2006, 2007 and 2008 would have been as follows:
 Year Ended December 312006
    
    2007
    
    2008Assumptions:TSMC
    
    Weighted average fair value of grants
    
    
    
    
    
    
    
    
    
    
    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
    
    
    3.73
    
    
    
    63.74
    
    
    
    Expected dividend yield
    
    
    
    
    
    
    0.00%-0.60
    %
    
    
    0.00%-0.60
    %Expected volatility
    
    
    22.65%-41.74
    %
    
    
    22.65%-45.47
    %
    
    
    22.65%-45.47
    %Risk free interest rate
    
    
    2.23%-2.56
    %
    
    
    2.12%-2.56
    %
    
    
    2.12%-2.56
    %Expected life
    
    3-6 years
    
    3-6 years
    
    3-6 yearsXinTec
    
    Weighted average fair value of grants
    
    
    
    
    
    
    2.84
    
    
    
    Expected dividend yield
    
    
    
    
    
    
    0.80
    %
    
    
    0.80
    %Expected volatility
    
    
    
    
    
    
    31.79%-47.42
    %
    
    
    31.79%-47.42
    %Risk free interest rate
    
    
    
    
    
    
    1.88%-2.45
    %
    
    
    1.88%-2.45
    %Expected life
    
    
    
    
    
    3 years
    
    3 years
 Year Ended December 312006
    
    2007
    
    2008NT$
    
    NT$
    
    NT$(In Millions)Net income attributable to shareholders of the parent:As reported
    
    $
    127,009.7
    
    
    $
    109,177.1
    
    
    $
    99,933.2Pro forma
    
    
    126,887.2
    
    
    
    109,054.9
    
    
    
    100,037.6Earnings per share (EPS)  after income tax (NT$):Basic EPS as reported
    
    
    4.72
    
    
    
    4.06
    
    
    
    3.86Pro forma basic EPS
    
    
    4.72
    
    
    
    4.06
    
    
    
    3.86Diluted EPS as reported
    
    
    4.72
    
    
    
    4.06
    
    
    
    3.83Pro forma diluted EPS
    
    
    4.71
    
    
    
    4.06
    
    
    
    3.83
 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 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.
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##### Table of Contents



22.
    
    TREASURY STOCK
 (Shares in Thousands)Beginning
    
    
    
    
    
    
    Stock
    
    
    
    
    
    
    EndingShares
    
    
    Addition
    
    
    Dividends
    
    
    Retirement
    
    
    SharesYear 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
    
    
    
    
    
    
    
    834,096Year ended December 31, 2008Parent company stock held by subsidiaries
    
    
    34,096
    
    
    
    
    
    
    
    171
    
    
    
    34,267
    
    
    
    Repurchase under share buyback plan
    
    
    800,000
    
    
    
    495,549
    
    
    
    
    
    
    
    1,295,549
    
    
    
    834,096
    
    
    
    495,549
    
    
    
    171
    
    
    
    1,329,816
    
    
    
    
 As of December 31, 2007, the book value of the treasury stock was NT$49,385.0 million; the
market value was NT$51,713.9 million. 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 on November 13, 2007 and approved a share buyback
plan to repurchase the 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. TSMC had repurchased 800,000 thousand common shares. All the treasury
stock repurchased under this share buyback plan was retired on February 2008.TSMC held a meeting of the Board of Directors on May 13, 2008 and approved a share buyback plan
to repurchase the TSMCs common shares up to 500,000 thousand shares listed on the TSE during
the period from May 14, 2008 to July 13, 2008 for the buyback price in the range from NT$48.25
to NT$100.50. TSMC had repurchased 216,674 thousand common shares. All the treasury stock
repurchased under this share buyback plan was retired on
August 2008.TSMC held a meeting of the Board of Directors on August 12, 2008 and approved a share buyback
plan to repurchase the TSMCs common shares up to 283,000 thousand shares listed on the TSE
during the period from August 13, 2008 to October 12, 2008 for the buyback price in the range
from NT$42.85 to NT$86.20. TSMC had repurchased 278,875 thousand common shares. All the
treasury stock repurchased under this share buyback plan was retired
in November 2008.TSMC merged Chi Cherng and Hsin Ruey in the third quarter of 2008. TSMCs common shares held by
Chi Cherng and Hsin Ruey in the number of 34,267 thousand shares were retired on August 2008.
 F-39




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##### Table of Contents



23.
    
    EARNINGS PER SHARE
 Year Ended December 312006
    
    
    2007
    
    
    2008Before
    
    
    After
    
    
    Before
    
    
    After
    
    
    Before
    
    
    AfterIncome Tax
    
    
    Income Tax
    
    
    Income Tax
    
    
    Income Tax
    
    
    Income Tax
    
    
    Income TaxBasic EPSIncome before cumulative effect of changes in
accounting principles attributable to shareholders
of the parent
    
    $
    4.96
    
    
    $
    4.66
    
    
    $
    4.50
    
    
    $
    4.06
    
    
    $
    4.28
    
    
    $
    3.86Cumulative effect of changes in accounting
principles attributable to shareholders of the
parent
    
    
    0.05
    
    
    
    0.06
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income attributable to shareholders of the parent
    
    $
    5.01
    
    
    $
    4.72
    
    
    $
    4.50
    
    
    $
    4.06
    
    
    $
    4.28
    
    
    $
    3.86Diluted EPSIncome before cumulative effect of changes in
accounting principles attributable to shareholders
of the parent
    
    $
    4.95
    
    
    $
    4.66
    
    
    $
    4.50
    
    
    $
    4.06
    
    
    $
    4.25
    
    
    $
    3.83Cumulative effect of changes in accounting
principles attributable to shareholders of the
parent
    
    
    0.05
    
    
    
    0.06
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income attributable to shareholders of the parent
    
    $
    5.00
    
    
    $
    4.72
    
    
    $
    4.50
    
    
    $
    4.06
    
    
    $
    4.25
    
    
    $
    3.83
  EPSAmounts (Numerator)
    
    
    
    
    
    
    Before
    
    
    AfterBefore
    
    
    After
    
    
    Number of
    
    
    Income
    
    
    IncomeIncome Tax
    
    
    Income Tax
    
    
    Shares
    
    
    Tax
    
    
    TaxNT$
    
    
    NT$
    
    
    (Denominator)
    
    
    NT$
    
    
    NT$(In Millions)
    
    
    (In Thousands)Year ended December 31, 2006Basic EPSEarnings attributable to shareholders of the parent
    
    $
    134,698.7
    
    
    $
    127,009.7
    
    
    
    26,896,606
    
    
    $
    5.01
    
    
    $
    4.72Effect of dilutive potential common stocks
    
    
    
    
    
    
    
    
    
    
    23,562Diluted EPSEarnings attributable to shareholders of the parent
(including effect of dilutive potential common stocks)
    
    $
    134,698.7
    
    
    $
    127,009.7
    
    
    
    26,920,168
    
    
    $
    5.00
    
    
    $
    4.72Year ended December 31, 2007Basic EPSEarnings attributable to shareholders of the parent
    
    $
    120,890.7
    
    
    $
    109,177.1
    
    
    
    26,870,684
    
    
    $
    4.50
    
    
    $
    4.06Effect of dilutive potential common stocks
    
    
    
    
    
    
    
    
    
    
    21,652Diluted EPSEarnings attributable to shareholders of the parent
(including effect of dilutive potential common stocks)
    
    $
    120,890.7
    
    
    $
    109,177.1
    
    
    
    26,892,336
    
    
    $
    4.50
    
    
    $
    4.06Year ended December 31, 2008Basic EPSEarnings attributable to shareholders of the parent
    
    $
    110,847.8
    
    
    $
    99,933.2
    
    
    
    25,909,643
    
    
    $
    4.28
    
    
    $
    3.86Effect of dilutive potential common sharesBonus to employees
    
    
    
    
    
    
    
    
    
    
    181,943Stock options
    
    
    
    
    
    
    
    
    
    
    15,090Diluted EPSEarnings attributable to shareholders of the parent
(including effect of dilutive potential common stocks)
    
    $
    110,847.8
    
    
    $
    99,933.2
    
    
    
    26,106,676
    
    
    $
    4.25
    
    
    $
    3.83
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##### Table of Contents



As discussed in Note 3, effective January 1, 2008, the Company adopted Interpretation 2007-052
that requires companies to record bonuses paid to employees as an expense rather than as an
appropriation of earnings. If the Company may settle the obligation by cash, by issuing share,
or in combination of both cash and shares, potential shares from bonus to employees which will
be settled in shares should be included in the weighted average number of shares outstanding in
calculation of diluted EPS, if the shares have a dilutive effect. The number of shares is
estimated by dividing the amount of bonus to employees by the closing price (after consideration
of the dilutive effect of dividends) of the common shares on the balance sheet date. Such
dilutive effect of the potential shares needs to be included in the calculation of diluted EPS
until the shares of employee bonus are resolved in the shareholders meeting in the following
year.The average number of shares outstanding for EPS calculation has been retroactively adjusted for
the issuance of stock dividends and employee stock bonuses. This adjustment caused the basic
after income tax EPS for the year ended December 31, 2006 and 2007 to decrease from NT$4.93 to
NT$4.72 and NT$4.14 to NT$4.06, respectively. This adjustment caused diluted after income tax
EPS for the year ended December 31, 2006 and 2007 to decrease from NT$4.92 to NT$4.72 and
NT$4.14 to NT$4.06, respectively.24.
    
    DISCLOSURES FOR FINANCIAL INSTRUMENTS
 a.
    
    Fair values of financial instruments were as follows:
 December 312007
    
    2008Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair ValueNT$
    
    NT$
    
    NT$
    
    NT$(In Millions)
    
    (In Millions)AssetsFinancial assets at fair value through profit or
loss
    
    $
    1,632.4
    
    
    $
    1,632.4
    
    
    $
    55.7
    
    
    $
    55.7Available-for-sale financial assets
    
    
    68,089.1
    
    
    
    68,089.1
    
    
    
    12,931.4
    
    
    
    12,931.4Held-to-maturity financial assets
    
    
    20,224.6
    
    
    
    20,192.2
    
    
    
    21,308.2
    
    
    
    21,457.0LiabilitiesFinancial liabilities at fair value through profit
or loss
    
    
    249.3
    
    
    
    249.3
    
    
    
    85.2
    
    
    
    85.2Bonds payable (including current portion)
    
    
    12,500.0
    
    
    
    12,670.0
    
    
    
    12,500.0
    
    
    
    12,612.4Long-term bank loans (including current
portion)
    
    
    2,003.0
    
    
    
    2,003.0
    
    
    
    1,642.9
    
    
    
    1,642.9Other long-term payables (including current
portion)
    
    
    13,083.2
    
    
    
    13,083.2
    
    
    
    10,674.7
    
    
    
    10,674.7Obligations under capital leases
    
    
    652.3
    
    
    
    652.3
    
    
    
    722.3
    
    
    
    722.3
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##### Table of Contents



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, refundable deposits, payables, and
payables to contractors and equipment suppliers and guarantee deposits. The carrying
amounts of these financial instruments approximate their fair values due to their short
maturities.2)
    
    Except for derivatives and structured time deposits, fair values of financial
assets at fair value through profit or loss, available-for-sale and held-to-maturity
financial assets were based on their quoted market prices.3)
    
    For those derivatives and structured time deposits with no quoted market
prices, their fair values are determined using valuation techniques incorporating
estimates and assumptions that were consistent with prevailing market conditions.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.
    
    The changes in fair value of derivatives contracts which were outstanding as of
December 31, 2007 and 2008 estimated using valuation techniques were recognized as
valuation losses of NT$207.1 million and NT$42.7 million, respectively.d.
    
    Movements of the unrealized gain/loss on financial instruments for the years ended
December 31, 2007 and 2008 were as follows:
 Year Ended December 31, 2007FromFrom
    
    
    Available-Available-
    
    
    for-salefor-sale
    
    
    FinancialFinancial
    
    
    Assets Held byAssets
    
    
    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
 Year Ended December 31, 2008FromFrom
    
    
    Available-Available-
    
    
    for-salefor-sale
    
    
    FinancialFinancial
    
    
    Assets Held byAssets
    
    
    Investees
    
    
    TotalBalance, beginning of year
    
    $
    627.8
    
    
    $
    53.2
    
    
    $
    681.0Recognized directly in shareholders equity
    
    
    738.6
    
    
    
    (142.1
    )
    
    
    596.5Removed from shareholders equity and recognized in
earnings
    
    
    (1,564.8
    )
    
    
    
    
    
    
    (1,564.8
    )Balance, end of year
    
    $
    (198.4
    )
    
    $
    (88.9
    )
    
    $
    (287.3
    )
 e.
    
    Information about financial risk
 1)
    
    Market risk. The publicly traded stocks categorized as financial assets at
fair value through profit or loss are exposed to market price fluctuations. The
derivative financial instruments categorized as financial assets/liabilities at fair
value through profit or loss are mainly used to hedge the exchange rate fluctuations of
foreign-currency assets and liabilities; therefore, the market risk of derivatives will
be offset by the foreign exchange risk of these hedged items. Available-for-sale
financial assets held by the Company are mainly
fixed-interest-rate debt securities; therefore, the fluctuations in market interest rates
would result in changes in fair value of these debt securities. Subject to recent
turmoil in the global financial market, the Company evaluated its financial assets and
determined that certain impairment for its asset-backed securities is
other-than-temporary. The Company had appropriately recognized related impairment
losses.
 F-42




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##### Table of Contents



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. Subject to recent turmoils in the global financial market, the Company
evaluated the financial instruments for any possible counter-party or third-party
default. As a result of the evaluation, the Company determined that certain financial
instruments are exposed to credit risk and had appropriately recognized related
impairment losses.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.d.
    
    OthersRelated parties over which the Company exercises significant influence
but with which the Company had no material transactions.
 Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)For the yearSalesVIS
    
    $
    14.4
    
    
    $
    59.2
    
    
    $
    80.1VisEra
    
    
    99.4
    
    
    
    739.9
    
    
    
    30.8SSMC
    
    
    6.5
    
    
    
    2.9
    
    
    
    1.9Philips
    
    
    4,025.0
    
    
    
    
    
    
    
    Others
    
    
    42.0
    
    
    
    
    
    
    
    $
    4,187.3
    
    
    $
    802.0
    
    
    $
    112.8PurchasesSSMC
    
    $
    6,820.6
    
    
    $
    5,468.4
    
    
    $
    4,441.8VIS
    
    
    3,919.6
    
    
    
    4,208.2
    
    
    
    3,260.2VisEra
    
    
    
    
    
    
    0.6
    
    
    
    0.5$
    10,740.2
    
    
    $
    9,677.2
    
    
    $
    7,702.5
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##### Table of Contents



Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)Manufacturing expensesVisEra
    
    $
    
    
    
    $
    63.9
    
    
    $
    133.1VIS
    
    
    
    
    
    
    0.4
    
    
    
    Philips (see Note 28a)
    
    
    755.9
    
    
    
    
    
    
    
    $
    755.9
    
    
    $
    64.3
    
    
    $
    133.1Research and development expensesVisEra
    
    $
    
    
    
    $
    43.1
    
    
    $
    0.5Non-operating income and gainsVIS (primarily technical service income, see Note 28f)
    
    $
    261.2
    
    
    $
    346.3
    
    
    $
    296.2SSMC (primarily technical service income, see Note 28e)
    
    
    315.0
    
    
    
    290.6
    
    
    
    244.9VisEra
    
    
    246.2
    
    
    
    321.8
    
    
    
    101.6$
    822.4
    
    
    $
    958.7
    
    
    $
    642.7As of December 31ReceivablesVisEra
    
    $
    1.0
    
    
    $
    10.9
    
    
    $
    0.4Philips
    
    
    250.9
    
    
    
    
    
    
    
    Others
    
    
    0.4
    
    
    
    
    
    
    
    $
    252.3
    
    
    $
    10.9
    
    
    $
    0.4Other receivablesSSMC
    
    $
    69.6
    
    
    $
    84.8
    
    
    $
    56.9VIS
    
    
    121.9
    
    
    
    118.7
    
    
    
    43.0VisEra
    
    
    59.0
    
    
    
    40.1
    
    
    
    Others
    
    
    6.4
    
    
    
    
    
    
    
    $
    256.9
    
    
    $
    243.6
    
    
    $
    99.9As of December 31PayablesVIS
    
    $
    719.8
    
    
    $
    839.6
    
    
    $
    317.9SSMC
    
    
    459.3
    
    
    
    655.1
    
    
    
    162.8VisEra
    
    
    
    
    
    
    8.7
    
    
    
    9.2Philips
    
    
    688.6
    
    
    
    
    
    
    
    $
    1,867.7
    
    
    $
    1,503.4
    
    
    $
    489.9Other long-term payablesPhilips (see Note 28a)
    
    $
    403.4
    
    
    $
    
    
    
    $
    Deferred creditsVisEra
    
    $
    124.4
    
    
    $
    62.2
    
    
    $
    
 The sales prices and payment terms to related parties were not significantly different from
those of sales to third parties. For other related party transactions, prices and terms were
determined in accordance with mutual agreements.
 F-44




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TSMC deferred the net gains (classified under deferred credits) derived from sales of property,
plant and equipment to VisEra, and then recognized such gains (classified under 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. The lease agreement between TSMC and VisEra expired in April 2008.26.
    
    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 312007
    
    
    2008Other financial assets
    
    $
    48.9
    
    
    $
    33.4Property, plant and equipment, net
    
    
    5,733.3
    
    
    
    4,032.6$
    5,782.2
    
    
    $
    4,066.0
 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 December 2008 to December 2028 and
can be renewed upon expiration.The Company entered into lease agreements for its office premises and
certain equipment located in the United States, Europe, Japan, China
and Taiwan. These operating leases expire between 2009 and 2018 and
can be renewed upon expiration.As of December 31, 2008, future lease payments were as follows:
 Year
    
    AmountNT$(In Millions)2009
    
    $
    556.62010
    
    
    489.12011
    
    
    430.22012
    
    
    421.02013 and thereafter
    
    
    3,009.0$
    4,905.9
 Rent expense for the years ended December 31, 2006, 2007 and 2008 was NT$1,368.2 million,
NT$1,398.3 million and NT$1,620.6 million, respectively.28.
    
    SIGNIFICANT COMMITMENTS AND CONTINGENCIESSignificant commitments and contingencies of the Company as of
December 31, 2008, 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 the 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.
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##### Table of Contents



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.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, 2008, TSMC had a total of US$43.4 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.
TSMC and Philips (now NXP B.V.) 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.
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##### Table of Contents



e.
    
    TSMC provides technical services to SSMC under a Technical Cooperation Agreement (the
Agreement) effective March 30, 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.
    
    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.g.
    
    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$175.0 million over six years to resolve TSMC,
TSMC North America and WaferTechs claims. As of December 31, 2008,
SMIC had paid US$120.0 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.h.
    
    In April 2004, UniRAM Technology, Inc. (UniRAM) filed an
action against MoSys Inc., TSMC and TSMC North America in the U.S.
District Court for the Northern District of California, alleging
patent infringement and trade secret misappropriation and seeking
injunctive relief and damages. TSMC appealed after the United States
District Court for the Northern District of California rendered
judgment in favor of UniRAM in May 2008. In the third quarter of
2008, TSMC and TSMC North America had reached agreement with UniRAM to
settle the dispute. In accordance with the settlement, the judgment
has been vacated and the claims asserted by UniRAM are fully and
finally settled. As of December 31, 2008, TSMC had accounted for the
result of the settlement in accordance with the aforementioned
settlement agreement.i.
    
    The Company entered into an agreement with a counterparty in
2003 whereby TSMC China is obligated to purchase certain property,
plant and equipment at the agreed-upon price within the contract
period. If the purchase is not completed, TSMC China is obligated to
compensate the counterparty for the loss incurred. The property,
plant and equipment have been in use by TSMC China since 2004 and are
being depreciated over their estimated service lives. The related
obligation totaled NT$7,908.5 million and NT$8,579.7 million as of
December 31, 2007 and 2008, respectively, which is included in other
long-term payables on the Companys consolidated balance sheets.
 F-47




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29.
    
    SEGMENT FINANCIAL INFORMATION
 a.
    
    Industry financial informationThe Company operates in one industry. Therefore, the disclosure of industry financial
information is not applicable to the Company.b.
    
    Geographic information:
 AdjustmentsNorth America
    
    
    
    
    
    
    andand Others
    
    
    Taiwan
    
    
    Elimination
    
    
    ConsolidatedNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Year ended December 31, 2006Sales 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    587,485.2Year 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
    )
    
    $
    322,630.6Year ended December 31, 2007Gross 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
  F-48




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##### Table of Contents



AdjustmentsNorth America
    
    
    
    
    
    
    andand Others
    
    
    Taiwan
    
    
    Elimination
    
    
    ConsolidatedNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Year ended December 31, 2008Sales to other than consolidated entities
    
    $
    193,727.6
    
    
    $
    139,430.1
    
    
    $
    
    
    
    $
    333,157.7Sales among consolidated entities
    
    
    16,280.8
    
    
    
    194,731.5
    
    
    
    (211,012.3
    )
    
    
    Total sales
    
    $
    210,008.4
    
    
    $
    334,161.6
    
    
    $
    (211,012.3
    )
    
    $
    333,157.7Gross profit
    
    $
    2,114.1
    
    
    $
    140,540.3
    
    
    $
    (904.8
    )
    
    $
    141,749.6Operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,314.2
    )Non-operating income and gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,821.4Non-operating expenses and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,784.6
    )Income before income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    111,472.2Net income attributable to minority
interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    590.0Identifiable assets
    
    $
    122,781.6
    
    
    $
    425,545.2
    
    
    $
    (29,391.7
    )
    
    $
    518,935.1Long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,981.5Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    558,916.6
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c.
    
    Net sales
 Year Ended December 31Areas
    
    2006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)Taiwan
    
    $
    34,483.2
    
    
    $
    42,876.0
    
    
    $
    44,663.5United States
    
    
    155,166.0
    
    
    
    163,242.2
    
    
    
    203,998.8Asia and others
    
    
    105,808.9
    
    
    
    84,802.0
    
    
    
    57,610.5Europe
    
    
    27,425.4
    
    
    
    37,416.0
    
    
    
    35,710.6322,883.5
    
    
    
    328,336.2
    
    
    
    341,983.4Sales returns and allowances
    
    
    (5,476.3
    )
    
    
    (5,705.6
    )
    
    
    (8,825.7
    )Net sales
    
    $
    317,407.2
    
    
    $
    322,630.6
    
    
    $
    333,157.7
 The net sales information is presented by billed regions.d.
    
    Major customers representing at least 10% of gross sales
 Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    %
    
    
    NT$
    
    
    %
    
    
    NT$
    
    
    %(In Millions)Customer A
    
    $
    33,950.4
    
    
    
    11
    
    
    $
    37,731.0
    
    
    
    11
    
    
    $
    46,523.1
    
    
    
    14
 e.
    
    Net sales by product categories:
 Year Ended December 31Product Category
    
    2006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$(In Millions)Wafer fabrication
    
    $
    286,452.0
    
    
    $
    293,431.3
    
    
    $
    295,535.9Mask making
    
    
    15,317.1
    
    
    
    16,984.5
    
    
    
    19,081.8Others
    
    
    15,638.1
    
    
    
    12,214.8
    
    
    
    18,540.0$
    317,407.2
    
    
    $
    322,630.6
    
    
    $
    333,157.7
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30.
    
    SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTINGPRINCIPLES FOLLOWED BY THE COMPANY AND GENERALLY ACCEPTEDACCOUNTING 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. 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.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. 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, NT$2,260.3 million
and NT$983.4 million in 2006, 2007 and 2008 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, 2006, 2007 and 2008.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, 2006, 2007 and 2008. 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
assessed for impairment in accordance with the provisions of the standard and R.O.C. SFAS
No. 35.f.
    
    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, prior to January 1, 2008, 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.
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Prior to January 1, 2008, 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.Effective January 1, 2008, the Company adopted
Interpretation 2007-052, Accounting for Bonuses to
Employees, Directors and Supervisors issued in
March 2007 by the ARDF, which requires companies to
record bonuses paid to employees, directors and
supervisors as an expense rather than as an
appropriation of 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 before the shareholders
meeting.Accordingly, as of December 31, 2008, the Company is
no longer required to record the first reconciling
adjustment as referred above. However, the Company
recorded the second reconciling adjustment to
reflect the additional compensation expense
recognized in 2008 for 2007 bonuses paid in stock,
which was measured at the fair market value on the
date of stock distribution. Starting from January
1, 2009, the only U.S. GAAP reconciling adjustment
for the bonuses paid in stock will be the difference
of the market value of TSMCs common stock between
the date of stock distribution and the date before
the shareholders meeting.g.
    
    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 of the overfunded or underfunded
status at the date of adoption and hereafter give
rise to a U.S. GAAP difference in the actuarial
computation and the related amortization.
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h.
    
    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 31d 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
were granted or modified in the period from January
1, 2004 to December 31, 2007 are 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, 2006, 2007 and
2008.Effective January 1, 2008, the Company adopted
Statement of Financial Accounting Standards No. 39,
Accounting for Share-based Payment, which is
similar in many respects to U.S. SFAS No. 123R and
requires companies to record share-based payment
transactions in the financial statements at fair
value for the employee stock option plans that were
granted or modified after December 31, 2007. The
Company did not grant or modify employee stock
options since January 1, 2008.i.
    
    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 on January 1 2006, the carry
interest accrued for the trading marketable security
is recognized as an expense while 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.j.
    
    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 issuance.
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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. 128 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).k.
    
    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.
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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 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, 2006, 2007, and 2008. 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 312006
    
    
    2007
    
    
    2008NT$
    
    
    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
    
    $
    127,009.7
    
    
    $
    109,177.1
    
    
    $
    99,933.2
    
    
    $
    3,050.5Adjustments:a.  Marketable securities1.   Realization of unrealized loss
on marketable securities
    
    
    (262.0
    )
    
    
    (52.3
    )
    
    
    (98.0
    )
    
    
    (3.0
    )2.   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
    
    
    (42.6
    )
    
    
    (69.9
    )
    
    
    (16.4
    )
    
    
    (0.5
    )c.  Reversal of depreciation on assets
impaired under U.S. GAAP
    
    
    1,391.5
    
    
    
    1,408.4
    
    
    
    675.6
    
    
    
    20.6d.  10% tax on undistributed earnings
    
    
    (3,278.0
    )
    
    
    (2,260.3
    )
    
    
    983.4
    
    
    
    30.0
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Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions Except Per Share Amounts)e.  Bonuses to employees, directors and
supervisors1.   Current year accrual
    
    $
    (9,488.6
    )
    
    $
    (8,232.8
    )
    
    $
    
    
    
    $
    2.   Fair market value adjustment of
prior year accrual
    
    
    (18,016.4
    )
    
    
    (28,352.0
    )
    
    
    (20,369.3
    )
    
    
    (621.8
    )f.   Pension expense
    
    
    3.9
    
    
    
    3.9
    
    
    
    4.3
    
    
    
    0.1g.  Stock-based compensation1.   Stock-based compensation
    
    
    (471.7
    )
    
    
    (373.9
    )
    
    
    215.7
    
    
    
    6.62.   Cumulative effect of change in
accounting principle for adopting
U.S. SFAS 123R
    
    
    37.9
    
    
    
    
    
    
    
    
    
    
    
    h.  Adjustment of carry interest
    
    
    170.4
    
    
    
    
    
    
    
    
    
    
    
    Income tax effect of U.S. GAAP
adjustments
    
    
    98.3
    
    
    
    (41.9
    )
    
    
    (96.4
    )
    
    
    (2.9
    )Minority interest effect of U.S. GAAP
adjustments
    
    
    165.0
    
    
    
    451.3
    
    
    
    241.1
    
    
    
    7.4Net adjustment
    
    
    (31,299.0
    )
    
    
    (37,519.5
    )
    
    
    (18,460.0
    )
    
    
    (563.5
    )Net income based on U.S. GAAP
    
    $
    95,710.7
    
    
    $
    71,657.6
    
    
    $
    81,473.2
    
    
    $
    2,487.0Basic earnings per common share based on
U.S. GAAPIncome before cumulative effect of
changes in accounting principles
    
    $
    3.70
    
    
    $
    2.73
    
    
    $
    3.17
    
    
    $
    0.10Cumulative effect of changes in
accounting principles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    3.70
    
    
    $
    2.73
    
    
    $
    3.17
    
    
    $
    0.10Diluted earnings per common share based
on U.S. GAAPIncome before cumulative effect of
changes in accounting principles
    
    $
    3.69
    
    
    $
    2.72
    
    
    $
    3.15
    
    
    $
    0.10Cumulative effect of changes in
accounting principles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    3.69
    
    
    $
    2.72
    
    
    $
    3.15
    
    
    $
    0.10
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Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions Except Per Share Amounts)Basic earnings per ADSIncome before cumulative effect of
changes in accounting principles
    
    $
    18.48
    
    
    $
    13.63
    
    
    $
    15.85
    
    
    $
    0.48Cumulative effect of changes in
accounting principles
    
    
    0.01
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    18.49
    
    
    $
    13.63
    
    
    $
    15.85
    
    
    $
    0.48Diluted earnings per ADSIncome before cumulative effect of
changes in accounting principles
    
    $
    18.47
    
    
    $
    13.62
    
    
    $
    15.73
    
    
    $
    0.48Cumulative effect of changes in
accounting principles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    18.47
    
    
    $
    13.62
    
    
    $
    15.73
    
    
    $
    0.48Basic number of weighted average shares
outstanding under U.S. GAAP
(in thousands)
    
    
    25,881,690
    
    
    
    26,277,790
    
    
    
    25,697,579Diluted number of weighted average
shares outstanding under U.S. GAAP
(in thousands)
    
    
    25,905,253
    
    
    
    26,299,442
    
    
    
    25,894,469
 December 312007
    
    
    2008NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Shareholders equityEquity attributable to shareholders of the parent based on
R.O.C. GAAP
    
    $
    487,091.4
    
    
    $
    476,377.1
    
    
    $
    14,541.4Adjustments:a.  U.S. GAAP adjustments on equity-method investees
    
    
    (432.5
    )
    
    
    (485.0
    )
    
    
    (14.8
    )b.  Impairment of long-lived assets1.   Loss on impairment of assets
    
    
    (10,573.7
    )
    
    
    (10,709.6
    )
    
    
    (326.9
    )2.   Reversal of depreciation on assets impaired
under
U.S. GAAP
    
    
    9,878.6
    
    
    
    10,709.6
    
    
    
    326.9c.  10% tax on undistributed earnings
    
    
    (5,538.3
    )
    
    
    (4,530.6
    )
    
    
    (138.3
    )d.  Goodwill1.   Carrying amount difference from 68% equity
interest in TASMCs share acquisition
    
    
    52,212.7
    
    
    
    52,212.7
    
    
    
    1,593.82.   Reversal of amortization of goodwill recognized
under R.O.C. GAAP
    
    
    (11,274.1
    )
    
    
    (11,228.9
    )
    
    
    (342.8
    )
  F-59




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##### Table of Contents



December 312007
    
    
    2008NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)e.  Bonuses to employees, directors and supervisors
    
    $
    (8,175.3
    )
    
    $
    
    
    
    $
    f.  Accrued pension cost
    
    
    (39.9
    )
    
    
    (35.6
    )
    
    
    (1.1
    )g. Accrual for deferred pension loss under US SFAS
No. 158
    
    
    (87.5
    )
    
    
    (1,288.9
    )
    
    
    (39.3
    )Income tax effect of U.S. GAAP adjustments
    
    
    166.6
    
    
    
    68.4
    
    
    
    2.1Minority interest effect of U.S. GAAP adjustments
    
    
    0.1
    
    
    
    
    
    
    
    Net increase in equity attributable to shareholders of the
parent
    
    
    26,136.7
    
    
    
    34,712.1
    
    
    
    1,059.6Equity attributable to shareholders of the parent based on
U.S. GAAP
    
    $
    513,228.1
    
    
    $
    511,089.2
    
    
    $
    15,601.0
  Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Changes in equity attributable to shareholders
of the parent based on U.S. GAAPBalance, beginning of year
    
    $
    477,297.2
    
    
    $
    532,403.0
    
    
    $
    513,228.1
    
    
    $
    15,666.3Net income for the year
    
    
    95,710.7
    
    
    
    71,657.6
    
    
    
    81,473.2
    
    
    
    2,487.0Unrealized gain (loss) on available-for-sale
marketable securitiesTSMC
    
    
    338.7
    
    
    
    290.9
    
    
    
    (728.2
    )
    
    
    (22.2
    )Equity-method investees
    
    
    151.1
    
    
    
    (119.2
    )
    
    
    (142.1
    )
    
    
    (4.3
    )Common shares issued as bonus to employeesTSMC
    
    
    21,431.1
    
    
    
    32,776.7
    
    
    
    24,213.8
    
    
    
    739.2Equity-method investees
    
    
    51.6
    
    
    
    78.7
    
    
    
    52.0
    
    
    
    1.6Adjustment arising from changes of ownership
percentage in investees
    
    
    186.1
    
    
    
    (85.6
    )
    
    
    (138.9
    )
    
    
    (4.3
    )Translation adjustments
    
    
    (549.1
    )
    
    
    93.4
    
    
    
    1,616.9
    
    
    
    49.3Treasury stock repurchased by the Company
    
    
    
    
    
    
    (48,466.9
    )
    
    
    (30,427.5
    )
    
    
    (928.8
    )Cash dividends received by subsidiaries from
parent company
    
    
    82.3
    
    
    
    101.8
    
    
    
    102.3
    
    
    
    3.1Cash dividends to common shareholders
    
    
    (61,825.1
    )
    
    
    (77,489.1
    )
    
    
    (76,881.3
    )
    
    
    (2,346.8
    )Stock-based compensation
    
    
    326.2
    
    
    
    233.4
    
    
    
    (252.6
    )
    
    
    (7.7
    )Issuance of stock from exercising stock options
    
    
    575.2
    
    
    
    436.9
    
    
    
    227.2
    
    
    
    6.9
  F-60




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##### Table of Contents



Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    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 (loss) and transition
obligationTSMC
    
    
    
    
    
    
    1,303.8
    
    
    
    (1,201.4
    )
    
    
    (36.7
    )Equity-method investees
    
    
    
    
    
    
    12.7
    
    
    
    (52.3
    )
    
    
    (1.6
    )Balance, end of year
    
    $
    532,403.0
    
    
    $
    513,228.1
    
    
    $
    511,089.2
    
    
    $
    15,601.0
    December 312007
    
    
    2008NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)AssetsCurrent assets
    
    $
    249,822.3
    
    
    $
    252,618.4
    
    
    $
    7,711.2Long-term investments
    
    
    36,028.8
    
    
    
    39,496.5
    
    
    
    1,205.6Property, plant and equipment, net
    
    
    259,557.0
    
    
    
    243,645.4
    
    
    
    7,437.3Goodwill
    
    
    46,926.2
    
    
    
    47,028.2
    
    
    
    1,435.5Other assets
    
    
    18,508.4
    
    
    
    16,695.3
    
    
    
    509.7Total assets
    
    $
    610,842.7
    
    
    $
    599,483.8
    
    
    $
    18,299.3LiabilitiesCurrent liabilities
    
    $
    62,419.5
    
    
    $
    61,361.7
    
    
    $
    1,873.1Long-term liabilities
    
    
    24,284.5
    
    
    
    16,191.0
    
    
    
    494.3Other liabilities
    
    
    7,316.6
    
    
    
    6,870.8
    
    
    
    209.7Minority interest in subsidiaries
    
    
    3,594.0
    
    
    
    3,971.1
    
    
    
    121.2Equity attributable to shareholders of the parent
    
    
    513,228.1
    
    
    
    511,089.2
    
    
    
    15,601.0Total liabilities and shareholders equity
    
    $
    610,842.7
    
    
    $
    599,483.8
    
    
    $
    18,299.3
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##### Table of Contents



Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Net sales
    
    $
    317,978.7
    
    
    $
    323,221.0
    
    
    $
    334,339.6
    
    
    $
    10,205.7Cost of sales
    
    
    179,174.2
    
    
    
    202,045.7
    
    
    
    203,733.9
    
    
    
    6,219.0Gross profit
    
    
    138,804.5
    
    
    
    121,175.3
    
    
    
    130,605.7
    
    
    
    3,986.7Operating expenses
    
    
    37,050.1
    
    
    
    44,775.0
    
    
    
    44,423.4
    
    
    
    1,356.0Income from operations
    
    
    101,754.4
    
    
    
    76,400.3
    
    
    
    86,182.3
    
    
    
    2,630.7Non-operating income, net
    
    
    4,892.3
    
    
    
    9,573.1
    
    
    
    5,701.9
    
    
    
    174.1Income before income tax, minority
interest and cumulative effect of changes
in accounting principles
    
    
    106,646.7
    
    
    
    85,973.4
    
    
    
    91,884.2
    
    
    
    2,804.8Income tax expense
    
    
    10,953.4
    
    
    
    14,011.8
    
    
    
    10,062.0
    
    
    
    307.1Net income before minority interest and
cumulative effect of changes in accounting
principles
    
    $
    95,693.3
    
    
    $
    71,961.6
    
    
    $
    81,822.2
    
    
    $
    2,497.7Cumulative effect of changes in accounting
principles
    
    $
    37.9
    
    
    $
    
    
    
    $
    
    
    
    $
    Net income attributable to shareholders of the
parent
    
    $
    95,710.7
    
    
    $
    71,657.6
    
    
    $
    81,473.2
    
    
    $
    2,487.0Net income attributable to minority interest
    
    
    20.5
    
    
    
    304.0
    
    
    
    349.0
    
    
    
    10.7
 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 actuarial
loss and transition obligation of the defined benefit pension plan.
 F-62




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##### Table of Contents



Statements of comprehensive income for the years ended December 31, 2006, 2007 and 2008 are as
follows:
 Year Ended December 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Net income attributable to shareholders of the
parent based on U.S. GAAP
    
    $
    95,710.7
    
    
    $
    71,657.6
    
    
    $
    81,473.2
    
    
    $
    2,487.0Other comprehensive income (loss), net of
tax:Adjustment of unrealized gain (loss) on
financial instrumentsTSMC
    
    
    338.7
    
    
    
    290.9
    
    
    
    (728.2
    )
    
    
    (22.2
    )Equity-method investees
    
    
    151.1
    
    
    
    (119.2
    )
    
    
    (142.1
    )
    
    
    (4.3
    )Translation adjustments
    
    
    (549.1
    )
    
    
    93.4
    
    
    
    1,616.9
    
    
    
    49.3Changes in actuarial gain /loss and
transition obligationTSMC
    
    
    
    
    
    
    1,303.8
    
    
    
    (1,201.4
    )
    
    
    (36.7
    )Equity-method investees
    
    
    
    
    
    
    12.7
    
    
    
    (52.3
    )
    
    
    (1.6
    )Comprehensive income
    
    $
    95,651.4
    
    
    $
    73,239.2
    
    
    $
    80,966.1
    
    
    $
    2,471.5
  December 312007
    
    
    2008NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Cumulative translation adjustment
    
    $
    (1,201.1
    )
    
    $
    415.8
    
    
    $
    12.7Unrealized gain on financial instruments
    
    
    583.0
    
    
    
    (287.3
    )
    
    
    (8.8
    )Actuarial loss and transition obligation
    
    
    (56.5
    )
    
    
    (1,310.2
    )
    
    
    (40.0
    )Total accumulated other comprehensive loss
    
    $
    (674.6
    )
    
    $
    (1,181.7
    )
    
    $
    (36.1
    )
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##### Table of Contents



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, 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 312006
    
    
    2007
    
    
    2008NT$
    
    
    NT$
    
    
    NT$
    
    
    US$(Note 3)(In Millions)Net cash inflow (outflow) from:Operating activities
    
    $
    199,536.9
    
    
    $
    173,886.5
    
    
    $
    214,396.6
    
    
    $
    6,544.5Investing activities
    
    
    (117,032.1
    )
    
    
    (67,241.4
    )
    
    
    (5,820.2
    )
    
    
    (177.7
    )Financing activities
    
    
    (61,014.5
    )
    
    
    (128,977.7
    )
    
    
    (110,517.5
    )
    
    
    (3,373.6
    )Change in cash and cash equivalents
    
    
    21,490.3
    
    
    
    (22,332.6
    )
    
    
    98,058.9
    
    
    
    2,993.2Cash and cash equivalents at the beginning of
year
    
    
    96,483.7
    
    
    
    117,837.2
    
    
    
    94,986.5
    
    
    
    2,899.5Effect of exchange rate changes
    
    
    (136.8
    )
    
    
    (518.1
    )
    
    
    1,568.4
    
    
    
    47.9Cash and cash equivalents at the end of year
    
    $
    117,837.2
    
    
    $
    94,986.5
    
    
    $
    194,613.8
    
    
    $
    5,940.6
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##### Table of Contents



31.
    
    ADDITIONAL DISCLOSURES REQUIRED BY U.S. GAAP
 a.
    
    Recent accounting pronouncementsOn January 1, 2008 the Company adopted 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. The
adoption of U.S. SFAS No. 157 did not have material impact on the Companys results of
operations and financial position.In February 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB
Statement No. 157 (FSP 157-2), which delays the effective date of SFAS No. 157 to January
1, 2009, for all non-financial assets and non-financial liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a recurring basis
(at least annually). The Company believes that the adoption of the delayed items of SFAS
No. 157 will not have material impact on the Companys results of operations and financial
position.In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active (FSP 157-3). which clarifies the application
of Statement 157 in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. The Company believes the adoption of FSP 157-3 will not have
material impact on the Companys results of operations and financial position.In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133 (U.S. SFAS No. 161), which
requires additional disclosures about the objectives of derivative instruments and hedging
activities, the method of accounting for such instruments under SFAS No. 133 and its related
interpretations, and a tabular disclosure of the effects of such instruments and related
hedged items on our financial position, financial performance, and cash flows. SFAS No. 161
is effective for the Company beginning January 1, 2009. The Company believes the adoption
of SFAS No. 161 will not have material impact on its results of operations and financial
position.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 adoption of SFAS No. 141R will change the accounting treatment of the
Company for business combinations on a prospective basis. The Company believes the adoption
of SFAS 160 will not have material impact on its results of operations and financial
position.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 did not
elect the fair value option for any eligible financial asset of liability.
 F-65




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##### Table of Contents



b.
    
    Fair ValueOn January 1, 2008, the Company adopted 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.SFAS No. 157 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a
liability in an orderly transaction between market participants at the measurement date and in the principal or most
advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market
participants would use in pricing the asset or liability, not on assumptions specific to the Company.In addition to defining fair value, SFAS No. 157 expands the disclosure requirements around fair value and establishes
a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to
which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of
the three levels which is determined by the lowest level input that is significant to the fair value measurement in its
entirety. These levels are:Level 1  Use unadjusted quoted prices in active markets for identical assets or liabilities.Level 2  Use observable inputs other than Level 1 prices such as quoted prices for identical or similar instruments
in markets that are not active, quoted prices for similar instruments in active markets, and model-based valuation in which
all significant inputs are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.Level 3  Use inputs that are generally unobservable and reflect the use of significant management judgments and
estimates.The following section describes the valuation methodologies
the Company uses to measure financial assets and liabilities at fair
value.For investments other than forward and cross currency swap contract, the Company uses quoted prices in active markets
for identical assets to determine fair value where applicable. This pricing methodology applies to our Level 1 investments
such as agency bonds, corporate bonds, money market funds, government bonds and publicly traded stocks. If quoted prices
in active markets for identical assets are not available, then the Company uses quoted prices that are observable and can
be corroborated with other observable market data for identical assets in less active markets. These investments are
included in Level 2 and primarily consist of corporate issued asset-backed securities. For the year ended December 31,
2008, none of the Companys financial assets measured at
fair value on a recurring basis was determined by using significant unobservable inputs and
classified as Level 3.For forward and cross currency swap contract, fair values are estimated using industry standard valuation models.
These models use market-based observable inputs including interest rate curves, foreign exchange rates, and forward and
spot prices for currencies to project fair value. The forward and cross currency swap contract financial assets and
liabilities are included in Level 2.
 F-66




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##### Table of Contents



The following table presents our assets and liabilities measured at fair value on a recurring basis as of December 31,
2008:
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)AssetsDerivative financial assetsForward and Cross currency swap contract
    
    $
    
    
    
    $
    42.4
    
    
    $
    
    
    
    $
    42.4Marketable securities  tradingPublicly traded stocks
    
    
    13.3
    
    
    
    
    
    
    
    
    
    
    
    13.3Marketable securities  available-for-saleAgency bonds
    
    
    5,696.5
    
    
    
    
    
    
    
    
    
    
    
    5,696.5Corporate bonds
    
    
    3,241.1
    
    
    
    38.0
    
    
    
    
    
    
    
    3,279.1Corporate issued asset-backed securities
    
    
    
    
    
    
    2,334.9
    
    
    
    
    
    
    
    2,334.9Money market funds
    
    
    1,000.1
    
    
    
    
    
    
    
    
    
    
    
    1,000.1Government bonds
    
    
    340.9
    
    
    
    
    
    
    
    
    
    
    
    340.9Publicly traded stocks
    
    
    279.9
    
    
    
    
    
    
    
    
    
    
    
    279.9Total
    
    $
    10,571.8
    
    
    $
    2,415.3
    
    
    $
    
    
    
    $
    12,987.1LiabilitiesDerivative financial liabilitiesForward and Cross currency swap contract
    
    $
    
    
    
    $
    85.2
    
    
    $
    
    
    
    $
    85.2
 The table below sets out the balances for those assets required to be measured at fair
value on a nonrecurring basis and the associated losses recognized during the year ended
December 31, 2008:
 December 31,
    
    
    
    
    
    
    
    
    
    
    
    Total2008
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    

LossesNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Financial assets carried at cost
    
    $
    3,615.4
    
    
    $
    
    
    
    $
    
    
    
    $
    3,615.4
    
    
    $
    (625.5
    )
 Financial assets carried at cost consist primarily of
non-publicly traded stocks. The Company reviews the carrying values of financial assets carried at cost when impairment
indicators are present. Due to the absence of quoted market price, the fair values are
determined significantly based on management judgment with the best information available. The
Company calculates these fair values using the market approach which includes recent financing
activities, valuation of comparable companies, technology development stage, market condition
and other economic factors as their fair value inputs. When the market approach is not
available, the Company uses the income approach which includes the discounted cash flow and
other economic factors as inputs.
 F-67




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##### Table of Contents



c.
    
    Marketable securities
  December 312007
    
    2008NT$
    
    NT$(In Millions)Marketable securities  trading  publicly traded stock
    
    $
    1,590.2
    
    
    $
    13.3Marketable securities  available-for-sale
    
    
    68,089.1
    
    
    
    12,931.4Marketable securities  held-to-maturity
    
    
    20,224.6
    
    
    
    21,308.2
   F-68




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##### Table of Contents



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
    )
    
    $
    21,589.6Money market funds
    
    
    19,212.1
    
    
    
    
    
    
    
    
    
    
    
    19,212.1Government bonds
    
    
    15,559.8
    
    
    
    90.0
    
    
    
    (24.5
    )
    
    
    15,625.3Open-end mutual funds
    
    
    14,694.1
    
    
    
    272.6
    
    
    
    
    
    
    
    14,966.7Agency bonds
    
    
    8,529.9
    
    
    
    111.3
    
    
    
    (5.4
    )
    
    
    8,635.8Corporate issued asset-backed securities
    
    
    5,930.6
    
    
    
    17.1
    
    
    
    (590.6
    )
    
    
    5,357.1Structured time deposits
    
    
    2,000.0
    
    
    
    
    
    
    
    (10.6
    )
    
    
    1,989.4Publicly traded stocks
    
    
    102.6
    
    
    
    802.7
    
    
    
    
    
    
    
    905.3Total
    
    $
    87,706.5
    
    
    $
    1,353.9
    
    
    $
    (779.1
    )
    
    $
    88,281.3Categorized 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
 December 31, 2008Gross
    
    
    Gross
    
    
    EstimatedUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Corporate bonds
    
    $
    21,449.4
    
    
    $
    93.2
    
    
    $
    (117.2
    )
    
    $
    21,425.4Agency bonds
    
    
    5,583.1
    
    
    
    118.5
    
    
    
    (5.1
    )
    
    
    5,696.5Corporate issued asset-backed securities
    
    
    2,752.4
    
    
    
    
    
    
    
    (417.5
    )
    
    
    2,334.9Government bonds
    
    
    1,883.1
    
    
    
    34.8
    
    
    
    (51.6
    )
    
    
    1,866.3Structured time deposits
    
    
    1,643.0
    
    
    
    142.3
    
    
    
    
    
    
    
    1,785.3Money market funds
    
    
    1,000.1
    
    
    
    
    
    
    
    
    
    
    
    1,000.1Publicly traded stocks
    
    
    118.7
    
    
    
    161.2
    
    
    
    
    
    
    
    279.9Total
    
    $
    34,429.8
    
    
    $
    550.0
    
    
    $
    (591.4
    )
    
    $
    34,388.4
  F-69




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December 31, 2008Gross
    
    
    Gross
    
    
    EstimatedAdjusted
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueNT$
    
    
    NT$
    
    
    NT$
    
    
    NT$(In Millions)Categorized as:Current assetsAvailable-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    10,898.7Held-to-maturity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,888.2Long-term investmentsAvailable-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,032.7Held-to-maturity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,568.8$
    34,388.4
   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
    
    $
    6,960.9
    
    
    $
    (88.0
    )
    
    $
    6,019.9
    
    
    $
    (29.2
    )
    
    $
    12,980.8
    
    
    $
    (117.2
    )Corporate issued
asset-backed
securities
    
    
    688.4
    
    
    
    (45.7
    )
    
    
    1,450.0
    
    
    
    (371.8
    )
    
    
    2,138.4
    
    
    
    (417.5
    )Agency bonds
    
    
    593.2
    
    
    
    (4.5
    )
    
    
    135.8
    
    
    
    (0.6
    )
    
    
    729.0
    
    
    
    (5.1
    )Government bonds
    
    
    
    
    
    
    
    
    
    
    616.0
    
    
    
    (51.6
    )
    
    
    616.0
    
    
    
    (51.6
    )$
    8,242.5
    
    
    $
    (138.2
    )
    
    $
    8,221.7
    
    
    $
    (453.2
    )
    
    $
    16,464.2
    
    
    $
    (591.4
    )
  F-70




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Cost
    
    
    Fair ValueNT$
    
    
    NT$(In Millions)Due in one year or less
    
    $
    6,380.1
    
    
    $
    6,377.6Due after one year through two years
    
    
    14,903.0
    
    
    
    15,016.5Due after two years through five years
    
    
    5,520.6
    
    
    
    5,548.2Due after five years
    
    
    6,507.3
    
    
    
    6,166.1$
    33,311.0
    
    
    $
    33,108.4
 d.
    
    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. In December 2007, the
SEC issued Staff Accounting Bulletin No. 110 (SAB No. 110) amends the
SECs views discussed in SAB 107 regarding the use of the simplified
method in developing estimates of the expected life of stock options
in accordance with SFAS No. 123R. The amendment allowed the continued
use, subject to specific criteria, of the simplified method in
estimating the expected life of stock options granted after December
31, 2008. The Company did not grant any employee stock options since
then.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.
 F-71




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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, 2008.The weighted average remaining contractual term and aggregate
intrinsic value of options under the foregoing plans as of December
31, 2008 were as follows:
 WeightedAverageRemainingContractual
    
    AggregateTerm
    
    Intrinsic Value(In Years)
    
    NT$(In Millions)TSMC:Options outstanding
    
    
    4.7
    
    
    $
    349.3Options exercisable
    
    
    4.6
    
    
    
    349.3GUC:Options outstanding
    
    
    3.3
    
    
    
    390.1Options exercisable
    
    
    2.2
    
    
    
    89.0XinTec:Options outstanding
    
    
    8.2
    
    
    
    12.2Options exercisable
    
    
    7.8
    
    
    
    4.6
     F-72




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e.
    
    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 and
2008, 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.f.
    
    Subsidy incomeThe subsidy income of NT$334.5 million, NT$364.3 million and NT$8.0
million recognized in the years ended December 31, 2006, 2007 and
2008, 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.g.
    
    Settlement incomeSettlement income of NT$979.2 million, NT$985.1 million and NT$951.2
million was recognized in the years ended December 31, 2006, 2007 and
2008, 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-73