1934 Act Registration No. 1-14700

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934

Taiwan Semiconductor Manufacturing Company Ltd.

(Translation of Registrant’s Name Into English)

(Address of Principal Executive Offices)

     (Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

Form 20-F þ       Form 40-F o

     (Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

Yes o       No þ

     (If “Yes” is marked, indicated below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82:                     .)

 

 

Taiwan Semiconductor Manufacturing
Company Limited

Financial Statements for the
Three Months Ended March 31, 2007 and 2006 and
Independent Accountants’ Review Report

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

The Board of Directors and Shareholders
Taiwan Semiconductor Manufacturing Company Limited

We have reviewed the accompanying balance sheets of Taiwan Semiconductor Manufacturing Company Limited as of March 31, 2007 and 2006, and the related statements of income and cash flows for the three months then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements based on our reviews.

We conducted our reviews in accordance with Statement on Auditing Standards No. 36, “Review of Financial Statements” issued by the Auditing Standards Committee of the Accounting Research and Development Foundation of the Republic of China. A review consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the Republic of China, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting with respect to financial accounting standards, and accounting principles generally accepted in the Republic of China.

April 10, 2007

Notice to Readers

The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to review such financial statements are those generally accepted and applied in the Republic of China.

For the convenience of readers, the accountants’ review report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language accountants’ review report and financial statements shall prevail.

Taiwan Semiconductor Manufacturing Company Limited

BALANCE SHEETS
MARCH 31, 2007 AND 2006
(In Thousands of New Taiwan Dollars, Except Par Value)
(Reviewed, Not Audited)

		2007								2006
		Amount				%				Amount				%
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Notes 2 and 4)		$	119,752,168				20			$	109,989,790				20
Financial assets at fair value through profit or loss (Notes 2, 3 and 5)			159				—				58,545				—
Available-for-sale financial assets (Notes 2, 3 and 6)			26,325,390				4				58,815,063				11
Held-to-maturity financial assets (Notes 2 and 7)			6,523,668				1				9,120,093				2
Receivables from related parties (Note 23)			19,157,572				3				21,248,956				4
Notes and accounts receivable			14,682,899				3				19,986,591				4
Allowance for doubtful receivables (Note 2)			(690,931	)			—				(975,704	)			—
Allowance for sales returns and others (Note 2)			(2,476,287	)			—				(4,479,954	)			(1	)
Other receivables from related parties (Note 23)			487,266				—				683,675				—
Other financial assets			686,670				—				784,723				—
Inventories, net (Notes 2 and 8)			19,933,360				3				16,901,113				3
Deferred income taxes assets (Notes 2 and 16)			9,486,631				2				7,276,728				1
Prepaid expenses and other current assets			1,362,053				—				1,378,283				—
Total current assets			215,230,618				36				240,787,902				44
LONG-TERM INVESTMENTS (Notes 2, 6, 7, 9 and 10)
Investments accounted for using equity method			105,135,305				18				54,047,343				10
Available-for-sale financial assets			6,466,605				1				1,900,885				—
Held-to-maturity financial assets			26,697,128				5				18,677,604				4
Financial assets carried at cost			746,405				—				813,354				—
Total long-term investments			139,045,443				24				75,439,186				14
PROPERTY, PLANT AND EQUIPMENT (Notes 2, 11 and 23)
Cost Buildings			98,752,832				17				91,408,209				17
Machinery and equipment			538,459,403				91				468,724,647				86
Office equipment			8,722,604				1				7,978,549				2
			645,934,839				109				568,111,405				105
Accumulated depreciation			(435,129,667	)			(73	)			(373,690,326	)			(69	)
Advance payments and construction in progress			11,740,887				2				18,101,402				3
Net property, plant and equipment			222,546,059				38				212,522,481				39
GOODWILL (Note 2)			1,567,756				—				1,567,756				—
OTHER ASSETS
Deferred charges, net (Notes 2 and 12)			5,593,638				1				6,179,470				1
Deferred income tax assets (Notes 2 and 16)			5,001,596				1				7,064,964				2
Refundable deposits			2,576,685				—				83,642				—
Assets leased to others, net (Note 2)			65,712				—				71,446				—
Others			—				—				6,789				—
Total other assets			13,237,631				2				13,406,311				3
TOTAL		$	591,627,507				100			$	543,723,636				100
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Financial liabilities at fair value through profit or loss (Notes 2, 3 and 5)		$	133,802				—			$	354,214				—
Accounts payable			6,811,587				1				7,360,964				1
Payables to related parties (Note 23)			2,377,933				—				3,512,804				1
Income tax payable (Notes 2 and 16)			9,801,787				2				6,110,590				1
Accrued expenses and other current liabilities (Note 14)			8,497,965				1				6,886,738				1
Payables to contractors and equipment suppliers			8,694,304				2				11,621,333				2
Current portion of bonds payable (Note 13)			4,500,000				1				2,500,000				1
Total current liabilities			40,817,378				7				38,346,643				7
LONG-TERM LIABILITIES
Bonds payable (Note 13)			12,500,000				2				17,000,000				3
Other long-term payables (Note 14)			1,623,181				—				1,493,160				—
Other payables to related parties (Notes 23 and 25)			—				—				1,087,410				—
Total long-term liabilities			14,123,181				2				19,580,570				3
OTHER LIABILITIES
Accrued pension cost (Notes 2 and 15)			3,546,228				1				3,437,287				1
Guarantee deposits (Note 25)			3,424,737				1				3,215,089				1
Deferred credits (Notes 2 and 23)			1,090,364				—				1,211,019				—
Total other liabilities			8,061,329				2				7,863,395				2
Total liabilities			63,001,888				11				65,790,608				12
CAPITAL STOCK — $10 PAR VALUE
Authorized: 27,050,000 thousand shares
Issued: 25,832,959 thousand shares in 2007
24,733,053 thousand shares in 2006			258,329,592				44				247,330,530				45
CAPITAL SURPLUS (Notes 2 and 18)			54,231,465				9				57,208,367				11
RETAINED EARNINGS (Note 18)
Appropriated as legal capital reserve			43,705,711				7				34,348,208				6
Appropriated as special capital reserve			640,742				—				2,226,427				—
Unappropriated earnings			171,616,718				29				138,803,185				26
			215,963,171				36				175,377,820				32
OTHERS (Notes 2, 3 and 22)
Cumulative translation adjustments			299,332				—				(1,098,483	)			—
Unrealized gains on financial instruments			720,134				—				32,869				—
			1,019,466				—				(1,065,614	)			—
TREASURY STOCK (AT COST, Notes 2 and 20)
33,926 thousand shares in 2007 and 32,938 thousand shares in 2006			(918,075	)			—				(918,075	)			—
Total shareholders’ equity			528,625,619				89				477,933,028				88
TOTAL		$	591,627,507				100			$	543,723,636				100

The accompanying notes are an integral part of the financial statements.

Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(In Thousands of New Taiwan Dollars, Except Earnings Per Share)
(Reviewed, Not Audited)

		2007								2006
		Amount				%				Amount				%
GROSS SALES (Notes 2 and 23)		$	64,054,647							$	78,637,640
SALES RETURNS AND ALLOWANCES (Note 2)			708,058								1,344,296
NET SALES			63,346,589				100				77,293,344				100
COST OF SALES (Notes 17 and 23)			39,378,386				62				40,651,362				53
GROSS PROFIT			23,968,203				38				36,641,982				47
UNREALIZED GROSS PROFIT FROM AFFILIATES			198,973				—				—				—
REALIZED GROSS PROFIT			23,769,230				38				36,641,982				47
OPERATING EXPENSES (Notes 17 and 23)
Research and development			3,479,141				5				3,548,886				5
General and administrative			1,617,600				3				1,554,351				2
Marketing			310,529				1				671,400				—
Total operating expenses			5,407,270				9				5,774,637				7
INCOME FROM OPERATIONS			18,361,960				29				30,867,345				40
NON-OPERATING INCOME AND GAINS
Equity in earnings of equity method investees, net (Notes 2 and 9)			853,184				1				2,972,039				4
Interest income (Note 2)			652,231				1				902,043				1
Foreign exchange gain, net (Note 2)			440,867				1				—				—
Technical service income (Notes 23 and 25)			161,161				—				142,631				—
Gain on disposal of property, plant and equipment (Notes 2 and 23)			69,982				—				96,141				—
Gain on settlement and disposal of financial instruments, net (Notes 2, 5 and 22)			—				—				1,115,518				2
Others (Note 23)			170,146				—				78,440				—
Total non-operating income and gains			2,347,571				3				5,306,812				7
NON-OPERATING EXPENSES AND LOSSES
Loss on settlement and disposal of financial instruments, net (Notes 2 and 5)			480,826				1				—				—
Valuation loss on financial instruments, net (Notes 2, 5 and 22)			167,493				—				295,669				—

(Continued)

Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(In Thousands of New Taiwan Dollars, Except Earnings Per Share)
(Reviewed, Not Audited)

		2007								2006
		Amount				%				Amount				%
Interest expense		$	151,922				—			$	165,300				—
Foreign exchange loss, net (Note 2)			—				—				1,032,555				2
Others (Note 2)			14,382				—				25,292				—
Total non-operating expenses and losses			814,623				1				1,518,816				2
INCOME BEFORE INCOME TAX			19,894,908				31				34,655,341				45
INCOME TAX EXPENSE (Notes 2 and 16)			1,056,269				1				1,802,369				3
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES			18,838,639				30				32,852,972				42
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF TAX BENEFIT OF NT$82,062 THOUSAND (Note 3)			—				—				(246,186	)			—
NET INCOME		$	18,838,639				30			$	32,606,786				42

		2007								2006
		Before				After				Before				After
		Income				Income				Income				Income
		Tax				Tax				Tax				Tax
EARNINGS PER SHARE (NT$, Note 21)
Basic earnings per share		$	0.77			$	0.73			$	1.33			$	1.26
Diluted earnings per share		$	0.77			$	0.73			$	1.33			$	1.26

Certain pro forma information (after income tax) is shown as follows, based on the assumption that the Company’s stock held by subsidiaries is treated as an investment instead of treasury stock (Notes 2 and 20):

		2007				2006
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES		$	18,838,639			$	32,852,972
NET INCOME		$	18,838,639			$	32,606,786
EARNINGS PER SHARE (NT$)
Basic earnings per share		$	0.73			$	1.26
Diluted earnings per share		$	0.73			$	1.26

The accompanying notes are an integral part of the financial statements.

(Concluded)

Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(In Thousands of New Taiwan Dollars)
(Reviewed, Not Audited)

		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	18,838,639			$	32,606,786
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			18,488,096				15,974,533
Unrealized gross profit from affiliates			198,973				—
Amortization of premium/discount of financial assets			(31,517	)			(15,834	)
Gain on disposal of available-for-sale financial assets, net			(29,611	)			(261,300	)
Equity in earnings of equity method investees, net			(853,184	)			(2,972,039	)
Gain on disposal of property, plant and equipment and other assets, net			(67,949	)			(93,903	)
Deferred income taxes			(895,100	)			(568,737	)
Changes in operating assets and liabilities:
Decrease (increase) in:
Financial assets and liabilities at fair value through profit or loss			167,493				1,442,295
Receivables from related parties			(2,288,063	)			(198,352	)
Notes and accounts receivable			1,595,265				605,227
Allowance for doubtful receivables			—				(640	)
Allowance for sales returns and others			(274,778	)			209,985
Other receivables from related parties			(38,000	)			846,108
Other financial assets			(33,210	)			321,307
Inventories			(781,146	)			(643,158	)
Prepaid expenses and other current assets			(140,854	)			(206,510	)
Increase (decrease) in:
Accounts payable			667,908				(691,142	)
Payables to related parties			(948,983	)			257,542
Income tax payable			1,951,369				2,294,702
Accrued expenses and other current liabilities			343,035				(1,110,647	)
Accrued pension cost			16,112				(24,105	)
Deferred credits			(23,936	)			(23,936	)
Net cash provided by operating activities			35,860,559				47,748,182
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Available-for-sale financial assets			(2,151,253	)			(31,351,886	)
Held-to-maturity financial assets			—				(1,379,009	)
Financial assets carried at cost			(33,562	)			(5,864	)
Investments accounted for using equity method			(1,631,986	)			(19,214	)
Property, plant and equipment			(13,783,013	)			(11,114,607	)

(Continued)

Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(In Thousands of New Taiwan Dollars)
(Reviewed, Not Audited)

		2007				2006
Proceeds from disposal or redemption of:
Available-for-sale financial assets		$	2,080,000			$	16,951,250
Held-to-maturity financial assets			4,282,320				2,973,000
Property, plant and equipment and other assets			1,165				461,151
Proceeds from return of capital by investee			14,068				—
Increase in deferred charges			(992,173	)			(96,335	)
Increase in refundable deposits			(1,270,451	)			—
Net cash used in investing activities			(13,484,885	)			(23,581,514	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term bonds payable			(2,500,000	)			—
Increase (decrease) in guarantee deposits			(385,224	)			322,144
Proceeds from exercise of employee stock options			122,009				117,395
Net cash provided by (used in) financing activities			(2,763,215	)			439,539
NET INCREASE IN CASH AND CASH EQUIVALENTS			19,612,459				24,606,207
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			100,139,709				85,383,583
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	119,752,168			$	109,989,790
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid		$	420,000			$	420,000
Income tax paid		$	52,670			$	67,924
INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS
Acquisition of property, plant and equipment		$	11,807,794			$	13,876,710
Decrease (increase) in payables to contractors and equipment suppliers			1,975,219				(2,762,103	)
Cash paid		$	13,783,013			$	11,114,607
NON-CASH FINANCING ACTIVITIES
Current portion of bonds payable		$	4,500,000			$	2,500,000
Current portion of other payables to related parties (under payables to related parties)		$	—			$	685,718
Current portion of other long-term payables (under accrued expenses and other current liabilities)		$	2,371,524			$	817,530

The accompanying notes are an integral part of the financial statements.

(Concluded)

Taiwan Semiconductor Manufacturing Company Limited

NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise)
(Reviewed, Not Audited)

1. GENERAL

Taiwan Semiconductor Manufacturing Company Limited (the Company or TSMC), a Republic of China (R.O.C.) corporation, was incorporated as a venture among the Government of the R.O.C., acting through the Development Fund of the Executive Yuan; Philips Electronics N.V. and certain of its affiliates (Philips); and certain other private investors. On September 5, 1994, its shares were listed on the Taiwan Stock Exchange (TSE). On October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs).

The Company is engaged mainly in the manufacturing, selling, packaging, testing and computer-aided designing of integrated circuits and other semiconductor devices and the manufacturing of masks.

As of March 31, 2007 and 2006, the Company had 20,222 and 20,027 employees, respectively.

2. SIGNIFICANT ACCOUNTING POLICIES

The financial statements are presented in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the R.O.C.

For the convenience of readers, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the R.O.C. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail.

Significant accounting policies are summarized as follows:

     Use of Estimates

The preparation of financial statements in conformity with the aforementioned guidelines, law and principles requires management to make reasonable assumptions and estimates of matters that are inherently uncertain. The actual results may differ from management’s estimates.

     Classification of Current and Noncurrent Assets and Liabilities

Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the balance sheet date. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the balance sheet date. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively.

     Cash Equivalents

Repurchase agreements collateralized by government bonds, asset-backed commercial papers and corporate notes acquired with maturities of less than three months from the date of purchase are classified as cash equivalents. The carrying amount approximates fair value.

     Financial Assets/Liabilities at Fair Value Through Profit or Loss

Derivatives that do not meet the criteria for hedge accounting are initially recognized at fair value, with transaction costs expensed as incurred. The derivatives are remeasured at fair value subsequently with changes in fair value recognized in earnings. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

Fair value is estimated using valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. When the fair value is positive, the derivative is recognized as a financial asset; when the fair value is negative, the derivative is recognized as a financial liability.

     Available-for-sale Financial Assets

Investments designated as available-for-sale financial assets include debt securities and equity securities. Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported as a separate component of shareholders’ equity. The corresponding accumulated gains or losses are recognized in earnings when the financial asset is derecognized from the balance sheet. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

Except structured time deposits whose fair value is estimated using valuation techniques, fair values of open-end mutual funds and publicly traded stocks are determined using the net assets value and the closing-price at the end of the period, respectively. For debt securities, fair value is determined using the average of bid and asked prices at the end of the period.

Cash dividends are recognized as investment income upon resolution of shareholders of an investee but are accounted for as a reduction to the original cost of investment if such dividends are declared on the earnings of the investee attributable to the period prior to the purchase of the investment. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated based on the new total number of shares. Any difference between the initial carrying amount of a debt security and the amount due at maturity is amortized using the effective interest method, with the amortization recognized in earnings.

If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases, for equity securities, the previously recognized impairment loss is reversed to the extent of the decrease and recorded as an adjustment to shareholders’ equity; for debt securities, the amount of the decrease is recognized in earnings, provided that the decrease is clearly attributable to an event which occurred after the impairment loss was recognized.

     Held-to-maturity Financial Assets

Debt securities for which the Company has a positive intention and ability to hold to maturity are categorized as held-to-maturity financial assets and are carried at amortized cost under the effective interest method. Those financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Gains or losses are recognized at the time of derecognition, impairment or amortization. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases and the decrease is clearly attributable to an event which occurred after the impairment loss was recognized, the previously recognized impairment loss is reversed to the extent of the decrease. The reversal may not result in a carrying amount that exceeds the amortized cost that would have been determined as if no impairment loss had been recognized.

     Allowance for Doubtful Receivables

An allowance for doubtful receivables is provided based on a review of the collectibility of accounts receivable. The Company determines the amount of allowance for doubtful receivables by examining the aging analysis of outstanding accounts receivable and current trends in the credit quality of its customers as well as its internal credit policies.

     Revenue Recognition and Allowance for Sales Returns and Others

The Company recognizes revenue when evidence of an arrangement exists, shipment is made, price is fixed or determinable, and collectibility is reasonably assured. Revenues from the design and manufacture of photo masks, which are used as manufacturing tools in the fabrication process, are recognized when the photo masks are qualified by customers. Provisions for estimated sales returns and others are generally recorded in the period the related revenue is recognized based on historical experience, management’s judgment, and any known factors that would significantly affect the allowance.

Sales prices are determined using fair value taking into account related sales discounts agreed to by the Company and its customers. Sales agreements typically provide that payment is due 30 days from invoice date for a majority of the customers and 30 to 45 days after the end of the month in which sales occur for some customers. Since the receivables from sales are collectible within one year and such transactions are frequent, fair value of the receivables is equivalent to the nominal amount of the cash to be received.

     Inventories

Inventories are stated at the lower of cost or market value. Inventories are recorded at standard cost and adjusted to the approximate weighted-average cost at the balance sheet date. Market value represents replacement cost for raw materials, supplies and spare parts and net realizable value for work in process and finished goods. The Company assesses the impact of changing technology on its inventories on hand and writes off inventories that are considered obsolete. Period-end inventories are evaluated for estimated excess quantities and obsolescence based on a demand forecast within a specific time horizon, which is generally 180 days or less. Estimated losses on scrap and slow-moving items are recognized and included in the allowance for losses.

     Investments Accounted for Using Equity Method

Investments in companies wherein the Company exercises significant influence over the operating and financial policy decisions are accounted for using the equity method. The Company’s share of the net income or net loss of an investee is recognized in the “equity in earnings/losses of equity method investees, net” account. Prior to January 1, 2006, the difference, if any, between the cost of investment and the Company’s proportionate share of the investee’s equity was amortized by the straight-line method over five years, with the amortization recorded in the “equity in earnings/losses of equity method investees, net” account. Effective January 1, 2006, pursuant to the revised Statement of Financial Accounting Standards No. 5, “Long-term Investments in Equity Securities” (SFAS No. 5), the cost of an investment shall be analyzed and the cost of investment in excess of the fair value of identifiable net assets acquired, representing goodwill, shall not be amortized and instead shall be tested for impairment annually. If the fair value of identifiable net assets acquired is in excess of the cost of investment, the excess shall be proportionately allocated as reductions to the fair value of non-current assets. The accounting treatment for the investment premiums acquired before January 1, 2006 is the same as that for goodwill which is no longer being amortized; while investment discounts continue to be amortized over the remaining periods. When an indication of impairment is identified, the carrying amount of the investment is reduced, with the related impairment loss recognized in earnings.

When the Company subscribes for additional investee’s shares at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment in the investee differs from the amount of the Company’s share of the investee’s equity. The Company records such a difference as an adjustment to long-term investments with the corresponding amount charged or credited to capital surplus.

Gains or losses on sales from the Company to equity method investees are deferred in proportion to the Company’s ownership percentage in the investees until such gains or losses are realized through transactions with third parties. The entire amount of the gains or losses on sales to investees over which the Company has a controlling interest is deferred until such gains or losses are realized through subsequent sales of the related products to third parties. Gains or losses on sales from equity method investees to the Company are deferred in proportion to the Company’s ownership percentages in the investees until they are realized through transactions with third parties.

Gains or losses on sales between equity method investees are deferred in proportion to the Company’s weighted-average ownership percentages in the investees that record such gains or losses until they are realized through transactions with third parties.

If an investee’s functional currency is a foreign currency, translation adjustments will result from the translation of the investee’s financial statements into the reporting currency of the Company. Such adjustments are accumulated and reported as a separate component of shareholders’ equity.

     Financial Assets Carried at Cost

Investments for which the Company does not exercise significant influence and that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are carried at their original cost, such as non-publicly traded stocks and mutual funds. The costs of non-publicly traded stocks and mutual funds are determined using the weighted-average method. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is not allowed.

The accounting treatment for cash dividends and stock dividends arising from financial assets carried at cost is the same as that for cash and stock dividends arising from available-for-sale financial assets.

     Property, Plant and Equipment and Assets Leased to Others

Property, plant, and equipment and assets leased to others are stated at cost less accumulated depreciation. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, as if no impairment loss had been recognized. Significant additions, renewals and betterments incurred during the construction period are capitalized. Maintenance and repairs are expensed as incurred.

Depreciation is computed using the straight-line method over the following estimated service lives: buildings — 10 to 20 years; machinery and equipment — 5 years; and office equipment — 3 to 5 years.

Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are deducted from the corresponding accounts, with any gain or loss recorded as non-operating gains or losses in the period of sale or disposal.

     Goodwill

Goodwill represents the excess of the consideration paid for acquisition over the fair value of identifiable net assets acquired. Prior to January 1, 2006, goodwill was amortized using the straight-line method over the estimated life of 10 years. Effective January 1, 2006, pursuant to the newly revised Statement of Financial Accounting Standards No. 25, “Business Combinations — Accounting Treatment under Purchase Method” (SFAS No. 25), goodwill is no longer amortized and instead is tested for impairment annually. If an event occurs or circumstances change which indicated that the fair value of goodwill is more likely than not below its carrying amount, an impairment loss is recognized. A subsequent reversal of such impairment loss is not allowed.

     Deferred Charges

Deferred charges consist of technology license fees, software and system design costs and other charges. The amounts are amortized over the following periods: Technology license fees — the shorter of the estimated life of the technology or the term of the technology transfer contract; software and system design costs and other charges — 3 years. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the previously recognized impairment loss would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of amortization, as if no impairment loss had been recognized.

     Research and Development

Expenditures arising from research activities and those related to development activities that do not meet the criteria for capitalization are charged to expense when incurred.

     Pension Costs

For employees under defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees’ individual pension accounts during their service periods. For employees under defined benefit pension plans, pension costs are recorded based on actuarial calculations.

     Income Tax

The Company applies intra-period and inter-period allocations for its income tax, whereby (1) a portion of current period’s income tax expense is allocated to the cumulative effect of changes in accounting principles; and (2) deferred income tax assets and liabilities are recognized for the tax effects of temporary differences and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as either current or noncurrent based on the expected length of time before it is realized or settled.

Any tax credits arising from purchases of machinery, equipment and technology, research and development expenditures, personnel training expenditures, and investments in important technology-based enterprises are recognized using the flow-through method.

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

Income tax on unappropriated earnings at a rate of 10% is expensed in the year of shareholder approval which is the year subsequent to the year the earnings are generated.

The R.O.C. government enacted the Alternative Minimum Tax Act (the AMT Act), which became effective on January 1, 2006. The alternative minimum tax (AMT) imposed under the AMT Act is a supplemental tax levied at a rate of 10% which is payable if the income tax payable determined pursuant to the Income Tax Law is below the minimum amount prescribed under the AMT Act. The taxable income for calculating the AMT includes most of the income that is exempted from income tax under various laws and statutes. The Company has considered the impact of the AMT Act in the determination of its tax liabilities.

     Stock-based Compensation

Employee stock option plans that are amended or have options granted on or after January 1, 2004 are accounted for by the interpretations issued by the Accounting Research and Development Foundation. The Company adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee vesting period.

     Treasury Stock

The Company’s stock held by subsidiaries is treated as treasury stock and reclassified from investments accounted for using equity method to treasury stock. The gains resulted from disposal of the treasury stock held by subsidiaries and cash dividends received by subsidiaries from the Company are recorded under capital surplus — treasury stock transactions.

     Foreign-currency Transactions

Foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in earnings. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with the resulting gains or losses recognized in earnings.

3. ACCOUNTING CHANGES

On January 1, 2006, the Company adopted the newly released Statements of Financial Accounting Standards No. 34, “Financial Instruments: Recognition and Measurement” (SFAS No. 34) and No. 36, “Financial Instruments: Disclosure and Presentation”.

The Company had categorized its financial assets and liabilities upon initial adoption of the newly released SFASs. The adjustments made to the carrying amounts of the financial instruments categorized as financial assets or financial liabilities at fair value through profit or loss were included in the cumulative effect of changes in accounting principles; the adjustments made to the carrying amounts of those categorized as available-for-sale financial assets were recognized as adjustments to shareholders’ equity.

The effect of adopting the newly released SFASs is summarized as follows:

		Recognized as
		Cumulative
		Effect of				Recognized as
		Changes in				a Separate
		Accounting				Component of
		Principles				Shareholders’
		(Net of Tax)				Equity
Financial assets or liabilities at fair value through profit or loss		$	(246,186	)		$	—
Available-for-sale financial assets			—				—
		$	(246,186	)		$	—

The adoption of the newly released SFASs resulted in a decrease in net income before cumulative effect of changes in accounting principles of NT$295,669 thousand, a decrease in net income of NT$541,855 thousand, and a decrease in basic earnings per share (after income tax) of NT$0.02, for the three months ended March 31, 2006.

Effective January 1, 2006, the Company adopted the newly revised SFAS No. 5 and SFAS No. 25, which prescribe that investment premiums, representing goodwill, be assessed for impairment at least on an annual basis instead of being amortized. Such a change in accounting principle did not have a material effect on the Company’s financial statements as of and for the three months ended March 31, 2006.

4. CASH AND CASH EQUIVALENTS

		March 31
		2007				2006
Cash and deposits in banks		$	77,169,400			$	48,126,259
Repurchase agreements collaterized by government bonds			41,985,407				61,427,311
Asset-backed commercial papers			597,361				—
Corporate notes			—				436,220
		$	119,752,168			$	109,989,790

5. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

		March 31
		2007				2006
Derivatives — financial assets
Forward exchange contracts		$	—			$	2,254
Cross currency swap contracts			159				56,291
		$	159			$	58,545
Derivatives — financial liabilities
Forward exchange contracts		$	18,717			$	6,597
Cross currency swap contracts			115,085				347,617
		$	133,802			$	354,214

The Company entered into derivative contracts during the three months ended March 31, 2007 and 2006 to manage exposures due to fluctuations of foreign exchange rates. The derivative contracts entered into by the Company did not meet the criteria for hedge accounting prescribed by SFAS No. 34. Therefore, the Company discontinued applying hedge accounting treatment for its derivative contracts.

     Outstanding forward exchange contracts as of March 31, 2007 and 2006:

				Contract
				Amount
		Maturity Date		(in Thousands)
March 31, 2007
Sell EUR/Buy US$		April 2007		EUR 23,000
March 31, 2006
Sell EUR/Buy US$		April 2006		EUR 30,500

     Outstanding cross currency swap contracts as of March 31, 2007 and 2006:

		Contract		Range of		Range of
		Amount		Interest Rates		Interest Rates
Maturity Date		(in Thousands)		Paid		Received
March 31, 2007
April 2007 to June 2007		US$835,000		2.65%-5.35%		1.65%-5.16%
March 31, 2006
April 2006 to June 2006		US$2,311,000		2.91%-5.65%		0.10%-2.04%

For the three months ended March 31, 2007 and 2006, net losses and net gains arising from derivative financial instruments were NT$677,929 thousand (including realized settlement losses of NT$510,436 thousand and valuation losses of NT$167,493 thousand) and NT$558,549 thousand (including realized settlement gains of NT$854,218 thousand and valuation losses of NT$295,669 thousand), respectively.

6. AVAILABLE-FOR-SALE FINANCIAL ASSETS

		March 31
		2007				2006
Open-end mutual funds		$	23,976,854			$	19,085,320
Corporate bonds			4,163,115				11,961,405
Government bonds			4,152,738				4,884,533
Structured time deposits			499,288				499,091
Agency bonds			—				13,154,575
Corporate issued asset-backed securities			—				10,936,373
Corporate notes			—				97,863
Money market funds			—				90,509
Publicly-traded stocks			—				6,279
			32,791,995				60,715,948
Current portion			(26,325,390	)			(58,815,063	)
		$	6,466,605			$	1,900,885

In 2004, the Company entered into investment management agreements with three well-known financial institutions (fund managers) to manage its investment portfolios. In accordance with the investment guidelines and terms specified in these agreements, the securities invested by the fund managers cannot be below a pre-defined credit rating. In the second half year of 2006, the Company transferred investment portfolios managed by the fund managers of US$1,277,789 thousand to TSMC Global Ltd. (TSMC-Global), a subsidiary of TSMC. The transferred investment portfolios held by TSMC Global are still being managed by the same fund managers in accordance with the aforementioned investment guidelines and terms.

Structured time deposits categorized as available-for-sale financial assets consisted of the following:

		Principal				Carrying
		Amount				Amount				Interest Rate				Maturity Date
March 31, 2007
Step-up callable deposits
Domestic deposits		$	500,000			$	499,288				1.76	%		March 2008
March 31, 2006
Step-up callable deposits
Domestic deposits		$	500,000			$	499,091				1.76	%		March 2008

The interest rate of the step-up callable deposits was pre-determined by the Company and the banks.

7. HELD-TO-MATURITY FINANCIAL ASSETS

		March 31
		2007				2006
Corporate bonds		$	13,426,614			$	9,288,167
Structured time deposits			11,117,800				10,641,200
Government bonds			8,676,382				7,868,330
			33,220,796				27,797,697
Current portion			(6,523,668	)			(9,120,093	)
		$	26,697,128			$	18,677,604

Structured time deposits categorized as held-to-maturity financial assets consisted of the following:

		Principal				Interest				Range of
		Amount				Receivable					Interest Rates			Maturity Date
March 31, 2007
Step-up callable deposits
Domestic deposits		$	4,500,000			$	13,593				1.50%-1.83	%		June 2007 to October 2008
Callable range accrual deposits
Domestic deposits			3,970,680				14,752			(See below)				September 2009 to December 2009
Foreign deposits			2,647,120				7,390			(See below)				October 2009 to December 2009
		$	11,117,800			$	35,735

(Continued)

		Principal								Range of
		Amount				Interest Receivable				Interest Rates				Maturity Date
March 31, 2006
Step-up callable deposits
Domestic deposits		$	3,500,000			$	16,881				1.40%-2.01	%		June 2007 to March 2009
Callable range accrual deposits
Domestic deposits			3,895,200				14,553			(See below)				September 2009 to December 2009
Foreign deposits			3,246,000				12,433			(See below)				October 2009 to January 2010
		$	10,641,200			$	43,867

(Concluded)

The amount of interest earned by the Company for the callable range accrual deposits is based on a pre-defined range as determined by the 3-month or 6-month LIBOR plus an agreed upon rate ranging between 2.10% and 3.45%. Based on the terms of the contracts, if the 3-month or 6-month LIBOR moves outside of the pre-defined range, the interest paid to the Company is at a fixed rate between zero and 1.5%. Under the terms of the contracts, the bank has the right to cancel the contracts prior to the maturity date.

As of March 31, 2007 and 2006, the principal of the deposits that resided in banks located in Hong Kong amounted to US$60,000 thousand and US$80,000 thousand, respectively; those resided in banks located in Singapore amounted to US$20,000 thousand.

8. INVENTORIES, NET

		March 31
		2007				2006
Finished goods		$	3,477,094			$	3,075,200
Work in process			15,567,178				12,192,651
Raw materials			1,197,164				1,899,428
Supplies and spare parts			449,237				795,070
			20,690,673				17,962,349
Allowance for losses			(757,313	)			(1,061,236	)
		$	19,933,360			$	16,901,113

9. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

		March 31
		2007								2006
						% of								% of
		Carrying				Owner-				Carrying				Owner-
		Amount				ship				Amount				ship
TSMC Global (Note 6)		$	43,771,405				100			$	—				—
TSMC International Investment Ltd. (TSMC International)			26,934,392				100				25,985,340				100
TSMC (Shanghai) Company Limited (TSMC-Shanghai)			9,127,747				100				9,352,101				100
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)			8,134,439				39				4,629,413				32
Vanguard International Semiconductor Corporation (VIS)			5,999,943				27				5,541,044				27
TSMC Partners, Ltd. (TSMC Partners)			4,572,167				100				4,106,947				100
TSMC North America (TSMC-North America)			2,107,864				100				1,826,618				100
Xintec Inc. (Xintec)			1,370,453				43				—				—
VentureTech Alliance Fund II, L.P. (VTAF II)			801,222				98				630,569				98
Emerging Alliance Fund, L.P. (Emerging Alliance)			779,280				99				1,250,283				99
Global UniChip Corporation (GUC)			692,434				38				451,841				45
VentureTech Alliance Fund III, L.P. (VTAF III)			438,480				98				—				—
Chi Cherng Investment Co., Ltd. (Chi Cherng)			118,167				36				78,197				36
Hsin Ruey Investment Co., Ltd. (Hsin Ruey)			116,793				36				77,470				36
TSMC Japan Limited (TSMC-Japan)			98,799				100				94,218				100
Taiwan Semiconductor Manufacturing Company Europe B.V. (TSMC-Europe)			56,633				100				23,302				100
TSMC Korea Limited (TSMC-Korea)			15,087				100				—				—
		$	105,135,305							$	54,047,343

In November 2006, the Company acquired 81 thousand shares in SSMC from EDB Investments Pte Ltd. under a Shareholders Agreement. After the acquisition, the number of SSMC shares owned by the Company increased from 382 thousand to 463 thousand; the percentage of ownership increased from 32% to 39%.

In January 2007, the Company acquired 90,526 thousand shares in Xintec, representing 43% of the total common shares, for NT$1,357,890 thousand.

For the three months ended March 31, 2007 and 2006, net equity in earnings of NT$853,184 thousand and NT$2,972,039 thousand was recognized, respectively. The carrying amounts of the investments accounted for using the equity method and the related equity in earnings or losses of equity method investees were determined based on the reviewed financial statements of the investees as of and for the same periods ended as the Company.

10. FINANCIAL ASSETS CARRIED AT COST

		March 31
		2007				2006
Non-publicly traded stocks		$	364,913			$	472,500
Mutual funds			381,492				340,854
		$	746,405			$	813,354

11. PROPERTY, PLANT AND EQUIPMENT

     Accumulated depreciation consisted of the following:

		March 31
		2007				2006
Buildings		$	51,483,606			$	44,728,744
Machinery and equipment			377,026,674				323,087,400
Office equipment			6,619,387				5,874,182
		$	435,129,667			$	373,690,326