TAIWAN SEMICONDUCTOR CO., LTD. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2010 and 2009 (With Independent Auditors Report

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1 TAIWAN SEMICONDUCTOR CO., LTD. AND SUBSIDIARIES Consolidated Financial Statements 2010 and 2009 (With Independent Auditors Report Thereon)

2 Independent Auditors Report The Board of Directors Taiwan Semiconductor Co., Ltd.: We have audited the consolidated balance sheet of Taiwan Semiconductor Co., Ltd. and subsidiaries as of 2010 and 2009, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the year ended 2010 and These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the consolidated financial statements of certain subsidiaries and long-term investments under equity method, certain consolidated subsidiaries and long-term investments under equity method included in the consolidated financial statements were audited by other auditors. Certain subsidiaries their total revenue amounted to $14,670 thousand for the year ended 2009, constituting 0.002% of the total consolidated revenue, and the total net loss amounted to $38,938 thousand, constituting (20.10)% of the total consolidated net income. Certain long-term investments under equity method recognized investment loss amounted to $28,549 thousand for the year ended 2009, constituting (14.74)% of the total consolidated net income. As above mentioned, Taiwan Semiconductor Co., Ltd. and subsidiaries recognized the investment loss of $28,549 thousand for the year ended 2009, which was recorded by Sun Materials Technology Co., Ltd. as long-term equity investments under the equity method. The recognition investment loss amounted to $15,364 thousand was according to the financial statements of Sun Materials Technology Co., Ltd. as of 2008 and 2007, which was the ratification thereof by the general meeting of shareholders, and the recognized investment loss was according to the report of other auditors; the other related investment loss was $13,185 thousand, based on the investee s financial statements as of September 15, 2009 and was audited by other auditor. We conducted our audit in accordance with the Regulations Governing Auditing and Certification of Financial Statements by Certified Public Accountants and Republic of China generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used in consolidated financial statements and significant accounting estimates made by management, as well as evaluating the overall presentation of consolidated financial statements. We believe that our audit and the reports of the other auditors provide a reasonable basis for our opinion.

3 In our opinion, based on our audit and the reports of the other auditors, the consolidated financial statements referred to in the first paragraph present fairly, in all material respects, the consolidated financial position of Taiwan Semiconductor Co., Ltd. and subsidiaries as of 2010 and 2009, and the results of their consolidated operations and their consolidated cash flows for the year then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China. As stated in note 3 to the consolidated financial statements, effective January 1, 2009, Taiwan Semiconductor Co., Ltd. and subsidiaries adopted the newly revised Statement of Financial Accounting Standards No. 10, Inventories According to SFAS, fixed production overheads must be allocated on the basis of the normal capacity of the production equipment instead of the actual capacity, and the subsequently measurement of ending inventories changed from the lower of cost and market value to the lower of cost or net realizable value. The adoption of this standard resulted in a decrease in net income and earnings per share of $78,824 thousand and $0.32, respectively, for the year ended March 15, 2011 The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with the accounting principles and practices generally accepted in Taiwan, the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in Taiwan, the Republic of China. The auditors report and the accompanying financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language auditors report and financial statements, the Chinese version shall prevail.

4 Consolidated Balance Sheets 2010 and 2009 (In thousands of New Taiwan dollars) December31, 2010 December31, 2009 Assets Amount % Amount % Current assets: Cash and cash equivalents (note 4(a)) $ 1,255, $ 1,045, Financial assets at fair value through profit or loss current (note 4(c)) ,462 2 Notes and accounts receivable, net (note 4(b)) 1,336, ,163, Accounts receivable, net-related parties (note 5) Other financial assets current (note 5) 128, ,021 2 Inventories (note 4(d)) 1,352, ,313, Prepaid expenses and other current assets (note 4(m)) 154, , ,227, ,917, Funds and investments: Other financial assets non-current Available-for-sale financial assets non-current (note 4(c)) 3,967-7,020 - Financial assets carried at cost non-current (note 4(c)) 17,316-31,460-21,283-38,487 - Property, plant and equipment (note 4(f)): Land 454, ,724 1 Buildings and improvements 1,201, ,066, Machinery and equipment 2,703, ,687, Transportation equipment 15,376-12,154 - Office equipment and others 174, ,821 3 Leased assets 319, , ,869, ,367, Less: accumulated depreciation 1,751, ,713, Less: accumulated impairment 3,961-4,686 - Prepayment for purchases of machinery and equipment and construction in progress 151, ,323-3,265, ,675, Intangible assets: Proprietary technology (note 4(g)) Land use right (note 4(g)) 13,000-14,102 - Deferred pension costs ,494-15,739 - Other assets: Refundable deposits 17,695 16,494 - Deferred expenses 41, ,207 1 Deferred income tax assets non-current (note 4(m)) 19,350-33,073 - Refundable deposits and other assets , ,973 1 Total assets $ 7,606, ,734, Liabilities and Stockholders Equity Amount % Amount % Current liabilities: Short term borrowings (note 4(h)) $ 298,547 4 $ 336,422 5 Financial liabilities at fair value through profit or loss current (note 4(c)) Notes and accounts payable 936, , Accrued expenses and other current liabilities (note 4(f)) 521, ,105 5 Other payable-related parties(note 5) Long-term borrowings due within one year (note 4(i)) 16,400-12,200-1,772, ,524, Long-term liabilities: Bonds payable (note 4(j)) 123, ,674 2 Long-term borrowings (note 4(i)) 143, ,583 1 Capital lease liabilities non-current (note 4(f)) 341, , , ,479 8 Other liabilities: Accrued pension liabilities (note 4(k)) 44, ,044 1 Deferred income tax liabilities and others (note 4(m)) 30,828-14,806-75, ,850 1 Total liabilities 2,456, ,075, Stockholders equity: Common stock (note 4(n)) 2,439, ,439, Capital surplus (note 4(n)) Capital surplus from common stock in excess of par value 827, , Other capital surplus 183, , ,010, , Retained earnings (note 4(n)) Legal reserve 249, ,353 4 Unappropriated earnings 812, , ,062, , Other adjustments to stockholders equity: Accumulated translation adjustment 117, ,782 3 Unrecognized pension cost (8,962) - (1,715) - Unrealized loss on available-for sale financial assets (11,944) - (8,891) - Treasury stock (note 4(m)) (14,552) , ,176 3 Minority interest 554, ,077 5 Total stockholders equity 5,149, ,658, Commitments and contingencies (note 7) Total liabilities and stockholders equity $ 7,606, ,734, See accompanying notes to consolidated financial statements.

5 Consolidated Statements of Income For the year ended 2010 and 2009 (Expressed in thousands of New Taiwan dollars, except for net income per common share) December31, Amount % Amount % Sales revenue (note 5) $ 6,859, ,830, Less: Sales returns and allowances 132, ,332 4 Net sales 6,726, ,648, Cost of goods sold 4,865, ,582, Gross profit 1,861, ,066, Operating expenses (note 4(n)and note 5): Selling 497, , Administrative 267, ,511 6 Research and development 89, , , , Operating income 1,006, ,457 4 Non-operating income: Interest income 4,164-3,724 - Gain on disposal of investments (note 4(c)(e)) 7, ,097 6 Exchange gain ,470 - Gain on bad debt recoveries Gain on recoveries of fixed assets impairment Gain on valuation of financial assets 167-6,235 - Gain on valuation of financial liabilities (note 4(j)) ,559 - Other income 27,433-34, , ,774 7 Non-operating expenses: Interest expense (note 4(f)(j)) 31,408-61,272 1 Investment loss under equity-method (note 4(e)) ,549 1 Loss on disposal of property, plant and equipment 25,445-20,442 - Foreign exchange loss (note 4(c)) 113, Impairment loss (note 4(c)) 6,865-93,858 2 Other loss(note 4(j)) 11,840-56, , ,060 5 Income before income taxes 858, ,171 6 Income tax expenses (note 4(m)) 212, ,435 2 Consolidated net income $ 646, ,736 4 Consolidated net income attributed to: Parent company stockholders $ 521, ,033 3 Minority interest 125, ,703 1 Consolidated net income $ 646, ,736 4 Net income per common share: Before taxes After taxes Before taxes After taxes Basic EPS (note 4(o)) $ Diluted Earnings Per Share(note 4(o)) $ See accompanying notes to consolidated financial statements.

6 Consolidated Statements of Changes in Stockholders Equity For the year ended 2010 and 2009 (Expressed in thousands of New Taiwan dollars) Common stock Capital surplus Legal reserve Retained Earnings Unappropriated earnings Accumulated translation adjustment Unrecognized pension cost Unrealized loss on available-forsale financial assets Treasury stock Minority interest Total stockholders equity Balance at January 1, 2009 $ 2,481,919 1,054, , , ,344 (3,719) (14,356) (89,856) 231,507 4,468,411 Appropriation of earnings: Provision of legal reserve - - 1,241 (1,241) Wrie-off of treasury stock (42,250) (7,825) , Effect of purchase of convertible corporate bonds to write off stock option - (52,476) (52,476) Conversion of convertible bonds Transfer of treasury stocks to employees - 40, ,781-79,981 Adjustment arising from changes in percentage of ownership in investees - (35,789) (35,789) Consolidated net income for the year ended , , ,736 Accumulated translation adjustment (64,562) (64,562) Changes in unrealized loss on available-for-sale financial assets , ,465 Changes in unrecognized pension cost , ,004 Changes in minority interest ,867 60,867 Balance at ,439, , , , ,782 (1,715) (8,891) - 360,077 4,658,550 Appropriation of earnings: Provision of legal reserve ,603 (12,603) Cash dividends (97,599) (97,599) Effect of purchase of convertible corporate bonds to write off stock option - (202) (202) Purchase of treasury stocks (14,552) - (14,552) Adjustment arising from changes in percentage of ownership in investees - 11, ,459 Consolidated net income for the year ended , , ,314 Accumulated translation adjustment (113,500) (113,500) Changes in unrealized loss on available-for-sale financial assets (3,053) - - (3,053) Changes in unrecognized pension cost (7,247) (7,247) Changes in minority interest ,829 69,829 Balance at 2009 $ 2,439,968 1,010, , , ,282 (8,962) (11,944) (14,522) 554,941 5,149,999 See accompanying notes to consolidated financial statements.

7 Consolidated Statements of Cash Flows For the year ended 2010 and 2009 (Expressed in thousands of New Taiwan dollars) Cash flows from operating activities: Consolidated net income $ 646, ,736 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation expense 294, ,401 Amortization expense 18,721 25,581 Provision (reversal) for doubtful accounts (758) 25,991 Allowance for sales returns and discounts 4,420 - Cost of stock-based compensation 9,900 40,290 Amortization of discount on bonds payable 3,696 17,621 Amortization of expense on bonds payable issuance Difference between net period pension and funded (6,846) 3,271 Loss on market price decline, disposal, and slow-moving inventories (gain from price recovery) (69,817) 91,611 Investment loss under equity method - 28,549 Loss on disposal of fixed assets 25,445 16,553 Gain on disposal investment (7,198) (1,773) Gain on disposal the long-term investment under equity method - (235,669) Gain on valuation of financial assets and liabilities (561) (17,794) Impairment loss of financial assets 6,865 29,424 Impairment loss of nonfinancial assets - 64,434 Gain on reversal of impairment loss of nonfinancial assets (493) - Loss on puchase of bonds payable 3 41,812 Other adjustment 17,809 18,909 Changes of operation assets and liabilities, net Changes of operating assets,net Decrease in trading financial assets 101, ,774 Increase in notes receivable (19,875) (2,657) Increase in accounts receivable (156,822) (226,209) Decrease in accounts receivable-related parties 3 3,953 Decrease (increase) in other receivable 9,897 (3,732) Decrease in inventory 30,472 88,845 Decrease (increase) in prepaid expense (33,432) 3,278 Decrease (increase) in prepayments (3,879) 138,226 Increase in other current assets - (126,131) Decrease (increase) in other financial assets 13,977 (41,660) Decrease in deferred income tax assets 41,230 64,925 Changes of operating liabilities, net Increase (decrease) in trading financial liabilities (26) 621 Increase (decrease) in notes payable (19,223) 21,366 Increase in accounts payable 155, ,987 Increase (decrease) in income tax payable 39,351 (58,185) Increase in accrued expenses 74,929 90,397 Decrease in other payables-related parties (499) (3,296) Increase in unearned receipts Increase in other current liabilities (22,243) 25,517 Increase in deferred income tax liabilities 30, Increase (decrease) in accrued pension liabilities 4,291 4,858 Net cash provided by operating activities 1,188,510 1,161,688 Cash flows from investing activities: Aqusition of available-for-sale financial assets - 12,285 Price of disposal the financial assets under cost method 9, ,888 Return cash of financial assets under cost method by capital deduction 1,279 1,800 Price of disposal the long-term investment under equity method - 285,483 Purchase of property, plant and equipment (971,910) (221,393) Price of selling property, plant and equipment 57,297 58,721 Decrease (increase) in refundable deposit (1,202) 7,402 Increase in deferred expenses (21,052) (21,602) Decrease in restricted assets - 34,838 Decrease (increase) in other assets (180) 805 Net cash provided by (used in) investing activities (925,798) 286,227 Cash flows from financing activities: Decrease in short-term borrowings (37,875) (226,254) Redemption and repurchase convertible bonds payable (2,729) (1,086,324) Increase in long-term borrowings 164,000 - Decrease in long-term borrowings (51,883) (12,220) Decrease in guarantee deposit received - (10) Decrease in lease payable (7,226) (9,155) Decrease in other liabilities 50,677 (54,681) Payments of cash dividends (111,642) - Cost of repurchase treasury stock (14,552) - Transfer of treasury stock to employee - 39,691 Change of minority interest 71,388 (43,593) Net cash by (used in) financing activities 60,158 (1,392,526) Effect of exchange rate changes (112,761) (64,138) Effect of consolidated entities changes - 47,840 Net increase in cash and cash equivalents 210,109 39,091 Cash and cash equivalents at beginning of period 1,045,329 1,006,238 Cash and cash equivalents at end of period $ 1,255,438 1,045,329 Supplemental disclosures of cash flow information: Cash payment of interest $ 9,547 29,228 Less: capitalized interest (825) (2,269) Cash payments of interest (excluding capitalized interest) $ 8,722 26,959 Cash payments of income tax $ 100,417 56,350 Supplementary disclosures of non-cash investing and financing activities: Long-term borrowings due within one year $ 16,400 12,200 Adjutment of lease assets $ 4,273 11,214 See accompanying notes to consolidated financial statements.

8 Notes to Consolidated Financial Statements 2010 and 2009 (Amounts expressed in thousands of New Taiwan dollars, except for per share information and unless otherwise noted) 1. Organization and Principal Activities Taiwan Semiconductor Co., Ltd. (the Company) was incorporated in January 1979 under the Company Act of the Republic of China. Its major business activities are the manufacture and sale of rectifiers and bar code printers. The Company s common stock has been officially listed and traded on the GreTai Securities Market starting from February In order to improve operating efficiency and industry competitiveness from specialization, the Company restructured its business and organization. The Company separated its bar code printer business unit from itself and transferred it to establish TSC Auto ID Technology Co., Ltd. (TSC Auto ID). The board of directors meeting approved August 1, 2007, as the record date of the split. The spun-off bar code printer business unit s business value was $150,000, comprising related assets amounting to $357,957 and liabilities amounting to $207,957. TSC Auto ID categorically assumed all assets and liabilities and related rights and obligations after the record date of the split. TSC Auto ID issued common stock of $150,000, with par value of $10 NT dollars, to the Company as acquisition cost. As of 2010 and 2009, the Consolidated Company had 2,538 and 2,200 employees, respectively. The Company and the subsidiaries consolidated in the preparation of the consolidated financial statements are referred to as the Consolidated Company. 2. Summary of Significant Accounting Policies The accompanying consolidated financial statements are prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the ROC. The significant accounting policies and measurement basis adopted in preparing the accompanying consolidated financial statements are summarized as follows:

9 2 (a) Status of consolidation (1) For the purpose of preparing consolidated financial statements at the end of each quater, an entity is deemed a subsidiary if the Company directly or indirectly owns over 50% of its voting stock or has the power to control it. The consolidated subsidiaries are summarized below: Percentage of the direct and indirect ownership Name of by the Company at December 31 Investor Name of Investee Nature of Operations 1. The Company Ever Energetic Int l. Ltd. (Ever Energetic) Holding company 2. The Company Ever Winner Int l. Co., Ltd. (Ever Winner) Holding company 3. The Company Skyrise Int l. Ltd. (Skyrise) Holding company 4. The Company Taiwan Semiconductor Europe GmbH (TSCE) Rectifiers trading 5. The Company Taiwan Semiconductor Japan Ltd. (TSCJ) Rectifiers trading 6. The Company Taiwan Semiconductor (H.K.) Co., Ltd. (TSCH) Rectifiers trading 7. The Company TSC Auto ID Technology Co., Ltd. (TSC Auto ID) Manufacture and sale of bar code printers 8. The Company Advanced Technology Corporation (AET) Manufacture and sale of wafer 9. Ever Energetic TSC America, Inc. (TSCA) Rectifiers trading 10. Ever Energetic Taiwan Semiconductor (H.K.) Co., Ltd. (TSCH) Rectifiers trading 11. Ever Winner TSC America, Inc. (TSCA) Rectifiers trading 12. Ever Winner Taiwan Semiconductor (H.K.) Co., Ltd. (TSCH) Rectifiers trading 13. Ever Winner Shanghai Great Technology Trading Co., Ltd Rectifiers trading (TSCC) 14. TSCH TAIWANSEMI (Shenzhen) Co., Ltd. (TSCZ) Rectifiers trading 15. TSCH Yangxin Everwell Electronic Co., Ltd. (Yangxin Everwell) Manufacture and sale of rectifiers 16. TSCH Tianjin Everwell Technology Co., Ltd. (Tianjin Everwell) Manufacture and sale of wafer 17. TSC Auto ID TSC Auto ID Technology EMEA GmbH (TSCAE) Bar code printers trading (note) 18. TSC Auto ID TSC Auto ID (H.K.) Ltd. (TSC HK) Bar code printers trading and holding company 19. TSC Auto ID TSC Auto Technology America Inc. (TSCAA) Bar code printers trading 20. TSC HK Tianjin TSC Auto ID Technology Co., Ltd. (TTSC) Manufacture and sale of bar code printers (note) The subsidiary changed its name from TSC Printer Europe GmbH (TSCP) to TSC Auto ID Technology EMEA GmbH (TSCAE) on November 26, 2009.

10 3 (2) The additions and reductions of subsidiaries in the 2010 consolidated financial statements are shown below: In order to simplify the its investment structure, the Company sold all holding shares of UEISB in October Additionally, the Company carried out the procedure for capital reduction, made up the losses amounting to $89,056 (USD2,776) and refunded capital to the shareholders amounting to $7,378 (USD230). Skyrise decreased its by $89,056 (US$2,776) to offset a deficit and refunded long-term investments refund $7,378 (US$230) to its shareholders in December In addition, Skyrise decreased its capital by $1,590 (US$50) to offset a deficit in January 2010 TSC Auto ID issued new shares for cash recent years. The Company s holding percentage was changed when not puchased the new shares by original holding percentage. The Company sold shares of TSC Auto ID, and the employees of TSC Auto ID began to exercise the emplyee stock option in the 4 th quater of In 2010, TSC Auto ID issued new shares for cash, and the Company purchased by original holding percentage. As of 2010, the Company s holding percentage in TSC Auto ID decreased to 38.45%. (b) Accounting principles and consolidation policy The consolidated financial statements include the accounts of the Company and subsidiaries in which the Company directly or indirectly owns greater than 50 percent of the subsidiary s voting shares or is able to exercise control over the subsidiary s operations and financial policies. All significant inter-company balances and transactions are eliminated in consolidation. The shares held by minority interest shareholders are reflected in the minority interest. The difference between the net purchase price and the net equity of an acquired subsidiary is accounted for as goodwill or consolidated debit or credit (included in other assets or other liabilities on the accompanying consolidated balance sheets) and is not amortized. (c) Foreign currency transactions and translation The Company and subsidiaries record transactions in their respective local currencies. Nonderivative foreign currency transactions are recorded at the exchange rates prevailing at the transaction dates. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated into local currencies using the exchange rates on that date. The resulting exchange gains or losses from settlement of such transactions or translations of foreign monetary assets or liabilities are reflected in the statements of income. Non-monetary assets and liabilities denominated in foreign currencies are measured at the historical exchange rates prevailing at the transaction dates.

11 4 Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into local currencies at the exchange rate at the date that the fair value was determined. The resulting exchange gains or losses from non-monetary assets and liabilities recognized at fair value through profit or loss are reflected in the statements of income. The resulting exchange gains or losses from non-monetary assets recognized at fair value in equity are reflected in the statements of changes in stockholders equity. The resulting exchange gains or losses from long-term equity investments and long-term payables of the Company and subsidiaries foreign subsidiaries are recorded after deducting the effect of income tax and reflected as accumulated translation adjustment under stockholders equity. (d) Distinction between current and non-current items Assets to be realized within 12 months subsequent to the balance sheet date or to be available for sale during the normal course of an operating cycle are classified as current assets. Liabilities to be redeemed within 12 months subsequent to the balance sheet date, and obligations incurred but to be redeemed during the normal course of an operating cycle are classified as current liabilities. Items not classified as current assets (liabilities) are classified as non-current assets (liabilities). (e) Impairment of assets The Company and subsidiaries assess at each balance sheet date whether there is any indication that an asset (individual asset or cash-generating unit) may have been impaired. If any such indication exists, the Company and subsidiaries estimate the recoverable amount of the asset. The Company and subsidiaries recognize impairment loss for an asset whose carrying value is higher than the recoverable amount. The Company and subsidiaries reverse impairment losses recognized in prior periods for assets if there is any indication that the impairment loss recognized no longer exists or has decreased. The carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in prior periods. (f) Cash equivalents The Company and subsidiaries consider all highly liquid investments, such as investments in short-term bills, with a maturity of three months or less to be cash equivalents. (g) Financial instruments The Company and subsidiaries use trade-date accounting for financial instrument transactions. The financial instruments are initially recognized at fair value plus transaction costs, except for the financial instruments held for trading. The derivative financial instruments held by the Company are intended to hedge the exchange risks of operating, financing and investing activities. In accordance with this policy, the derivative financial instruments held or issued by

12 5 the Company are for hedging purposes. If the derivative instruments do not meet the specific criteria for hedge accounting treatment, then the derivative instruments are classified as financial assets held for trading. These financial instruments are evaluated at fair value, and any changes are recognized through current profit or loss. Subsequent to initial recognition of financial instruments, the Company and subsidiaries classify them into the following categories according to the purpose of holding: (1) Financial assets (liabilities) at fair value through profit or loss: Financial assets (liabilities) are classified as held for trading if they have been acquired principally for the purpose of selling or repurchasing in the near term. The derivative financial instruments held by the Company and subsidiaries, except for those designated as effective hedging instruments, are classified into this category. (2) Available-for-sale financial assets: Available-for-sale financial assets are carried at fair value. Unrealized gain or loss (net of tax) on available-for-sale financial assets is recognized directly in equity. If there is objective evidence that a financial asset is impaired, the Company and subsidiaries recognize the impairment loss for adjustment under stockholders equity. For available-for-sale equity instruments, if the amount of the impairment decreases in a subsequent period, the write-down cannot be reversed; and for available-for-sale debt instruments, if the decrease can be objectively related to an event occurring after the impairment was recognized; the previously recognized impairment loss should be reversed through profit or loss. (3) Financial assets carried at cost: Equity instruments without quoted market prices in an active market and whose fair value cannot be reliably measured are initially measured at cost. If there is objective evidence that financial assets carried at cost are impaired, the Company and subsidiaries recognize the impairment loss in the current period. However, the impairment losses may not be reversed subsequently. (h) Allowance for doubtful accounts An allowance for doubtful accounts is provided based on past collecting experience, the credit rating of customers, credit accounts receivable aging analysis, the expected collectibility of accounts receivable, and consideration of internal credit policy. (i) Other financial assets These consist of income tax refund receivables and other receivables that represent the Company and subsidiaries ownership or contractual rights to receive cash or financial assets from another

13 6 enterprise, and are assessed by their collectability. Assets held for trading or temporarily and to be realized within 12 months subsequent to the balance sheet date are classified as other financial assets current. (j) Inventories The cost of inventories shall comprise all costs of purchase, costs of conversion, and the costs incurred in bringing the inventories to their present location and condition. The cost of inventories is based on the weighted-average-cost method. The allocation of fixed production overheads to the finished goods and work in progress is based on the normal capacity of the production facilities. Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities. Subsequently, inventories shall be measured at the lower of cost or net realizable value, and compared separately. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses at the end of the period. (k) Long-term equity investments under equity method Long-term equity investments in investees whereby the Company, directly or indirectly, has controlling interest over their operating, financial, and dividend policies and owns more than 20% (or owns less than 20% but can exercise significant influence) of the investees voting shares are accounted for under the equity method. If an investee company issues new share and the Company and subsidiaries do not acquire new shares in proportion to their original ownership percentage, the equity in the investee s net assets will be changed. The Company and subsidiaries adjust the change to capital surplus, but if the balance of capital surplus arising from long-term investments is insufficient, the shortage is debited to retained earnings. All significant inter-company transaction gains or losses with investees accounted for under the equity method are deferred. These gains or losses are recognized in the year that the gain or loss is realized. (l) Property, plant, and equipment, and leased assets Property, plant, and equipment Property, plant, and equipment are stated at cost. Interest costs related to the construction of property, plant and equipment are capitalized and included in the cost of the related asset. Repairs and maintenance are charged to expenses as incurred. Costs associated with significant additions, improvements, and replacements to property, plant and equipment are capitalized. Gains or losses on the disposal of property, plant and equipment are accounted for as nonoperating income or expenses in the consolidated statements of income.

14 7 Depreciation of property, plant, and equipment is provided for by using the straight-line method over the estimated useful lives of the respective assets. Assets still in use after full depreciation may continue to be depreciated based on the remaining estimated economic lives and salvage values. The economic useful lives of major property, plant and equipment are as follows: (1) Buildings and improvements: 3~55 years. (2) Machinery and equipment: 2~15 years. (3) Transportation equipment: 3~5 years. (4) Office equipment and others: 3~15 years. Leased assets The Company takes the lowest fair value, total rental payable (minus the amount paid by the lessor), discounted rental price, or guaranteed residual value of leased assets, and uses the straight-line method (except for leased land) to recognize depreciation in accordance with the estimated useful life. (m) Intangible assets Other than an intangible asset acquired by way of a government grant, which should be measured at its fair value, an intangible asset shall be measured initially at cost. After initial recognition, an intangible asset shall be measured at its cost plus revaluation increment revalued in accordance with the laws, less any accumulated amortization and any accumulated impairment losses. The depreciable amount of capitalized development expenditure is determined after deducting its residual value. Amortization is recognized as an expense on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The useful lives of the intangible assets are as follows: (1) Proprietary technology: 5 years (2) Land use right: amortized over the contract terms The residual value, the amortization period, and the amortization method for an intangible asset with a finite useful life shall be reviewed at least at each financial year-end. Any changes shall be accounted for as changes in accounting estimates.

15 8 (n) Deferred expenses The purchase costs of software are recorded as deferred expenses and are amortized on the straight-line basis over the estimated economic useful lives from the date that they are available for use. (o) Retirement plan In compliance with the ROC Labor Standards Act, the Company s and domestic subsidiaries employee defined benefit retirement plans cover all regular employees. According to these plans, employees are eligible for retirement or are required to retire after meeting certain age or service requirements. Payments of employee retirement benefits are based on the number of service years and the last six months average salary before the emploee s retirement. Each employee will earn two months salary for the first fifteen years of service, and one month s salary for each year of service thereafter. The maximum retirement benefit is forty-five months of salary. Under this retirement plan, the Company is responsible for the entire pension payment. The Labor Pension Act of the ROC ( the Act ) become effective from July 1, In accordance with the Act, employees who elect to follow the Act and employees who are employed after the effective date of the Act adopt a defined contribution scheme, whereby the Company makes monthly contributions to the employees individual pension fund accounts of no less than 6% of the employees monthly wages. An actuarial valuation of pension liability is performed as of the year-end date, and a minimum pension liability is provided for the amount of the accumulated benefit obligation in excess of the fair value of plan assets, and is recognized as net periodic pension costs. Net periodic pension costs include service costs, interest cost and pension gain or loss in the current period over the employees average remaining service years. The Company contributes 2% of wages and salaries to the pension fund maintained with Bank of Taiwan (formerly the Central Trust of China) on a monthly basis. Payment of employee retirement benefits will be paid firstly from the pension fund. Accrual of pension expense and recognition of pension liability for managers is based on actuarial reports. In accordance with the Act, the Company and domestic subsidiaries which adopt a defined contribution scheme make monthly contributions to the employees individual pension fund accounts of 6% of the employees monthly wages and recognize the contribution as current pension expense. Because the foreign holding companies have not actually hired employees, they have not established retirement plans. Other consolidated subsidiaries adopt defined contribution retirement plans according to local regulations and recognize contributions as current expenses.

16 9 (p) Convertible bonds Convertible bonds issued by the Company create both a financial liability and stock options to convert to equity for holders; in conformity with SFAS No. 36 Financial Instruments: Disclosure and Presentation, they are recorded as hybrid financial instruments. At the time of issuance, the original cost of issuance is allocated to both the liability and equity component of the convertible bond. The liability component of the convertible bond is determined by the fair value of similar liabilities which are unrelated to the equity component-stock option. The difference between the total amount of convertible bonds and the liability component is recorded as capital surplus-stock option. Any change in fair value of the equity component of the convertible bonds is not recognized. The interest on the convertible bond is calculated by using the effective interest method and is amortized over the contract term and recorded as current expense. The embedded derivative financial liabilities are measured at fair value, and any changes are reflected in current profit or loss. When the bondholders request conversion, the Company will adjust the liability component first and recognize it as net income or loss after valuing at the fair value. The stock issuance shall be accounted for on the basis of the fair value of the liability component and stock option. The Company classified the price reset option of the convertible bonds as financial liabilities held for trading purposes. The options without resetting clauses are recognized as equity. In accordance with Interpretation (98) Ji-Mi No. 046 and Interpretation (97) Ji-Mi No. 331 issued by the Accounting Research and Development Foundation (ARDF), when the price is reset according to market price, decreases in fair value are transferred to shareholders equity. (q) Share-based payment The employee stock options of TSC Auto ID granted before January 1, 2008, are accounted for in accordance with Interpretations (92) Ji-Mi No. 070, 071 and 072 issued by the ARDF and are not required to adopt SFAS 39 retrospectively. Service cost for employee stock options granted before that date is recognized using the intrinsic value method, and pro-forma disclosures of net income and earnings per share are still required to be prepared under the fair value method. (r) Treasury stock The outstanding shares of the Company purchased back by its should be recorded as treasury stock at the purchasing cost before such shares are retired. If treasury stock is disposed of afterward, the difference is recorded as capital surplus when the disposal price is higher than the carrying amount; when the situation is reversed, the difference is recorded as a reduction of capital surplus generated from treasury stock transactions, and any insufficiency is applied to retained earnings. The carrying amount of the treasury stock is calculated by using the weighted-average method, and determined individually by each repurchasing reason.

17 10 When retiring treasury stock, common stock and capital surplus derived from paid-in capital in excess of par value should be eliminated proportionally. If the carrying amount of retired treasury stock is higher than the eliminated amount of common stock and capital surplus, then the difference is recorded as a reduction of capital surplus derived from treasury stock, with any insufficiency applied to retained earnings; when the situation is reversed, the difference is recorded as capital surplus. (s) Revenue recognition Revenue is recognized when titles of the products and the risks and rewards of ownership are transferred to the customers. Related costs and expenses matching the revenues are recognized as incurred. Allowances for estimated sales returns and discounts are provided in the period the related revenue is recognized based on historical experience. (t) Employees bonuses and directors and supervisors remuneration Starting on January 1, 2008, employees bonuses and directors and supervisors remuneration appropriated by the Company and its domestic subsidiaries are accounted for by Interpretation (96) Ji-Mi No. 052 issued by the ARDF and are recorded as either operating costs or operating expenses. Any differences between the amount approved in the shareholders meeting and recognized in the financial statements are accounted for as changes in accounting estimates and recognized as profit or loss. (u) Income taxes Income tax is computed on an accounting income basis. Deferred income taxes are determined based on differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect during the years in which the differences are expected to reverse. The income tax effects resulting from taxable temporary differences are recognized as deferred income tax liabilities. The income tax effects resulting from deductible temporary differences, net operating loss carryforwards, and income tax credits are recognized as deferred income tax assets. The realization of deferred income tax assets is evaluated, and if it is considered more likely than not that the deferred tax assets will not be realized, a valuation allowance is recognized accordingly. Classification of deferred income tax assets or liabilities as current or non-current is based on the classification of the related asset or liability. If the deferred income tax asset or liability is not directly related to a specific asset or liability, then the classification is based on the expected realization date of such asset or liability. Income tax expense is reduced by the purchasing of machinery for automation of production and production technology, research and development costs, and personnel training expenditures in the year in which the credits arise.

18 11 According to the ROC Income Tax Act, undistributed earnings of the Company and domestic subsidiaries are subject to an additional 10% corporate income surtax. The surtax is charged to income tax expense after the appropriation of earnings is approved by the stockholders in the following year. Income tax of the Company and subsidiaries is based on the tax laws of various countries. Income tax is declared on an individual company basis. Income tax expense of the Company and subsidiaries is the sum of income tax expense of the companies included in the consolidation. (v) Earnings per share Earnings per share of common stock are computed as net income (loss) divided by the weightedaverage number of common shares outstanding during the period. The convertible bonds, employee stock options, and the employees bonuses which were settled by issuing shares and not approved by a shareholders meeting are deemed to be potenitial common shares. If the potential common stock possesses diluting effects, then diluted earnings per share shall be disclosed in addition to basic earnings per share. For the purpose of calculating diluted earnings per share, the potential common shares should be deemed to have been converted into common stock at the beginning of the period, and the effect on the net income attributable to additional common shares outstanding should be considered accordingly. Earnings per share are retroactively computed for the increase in stock resulting from retained earnings or capital surplus. 3. Reasons for and Effect of Accounting Changes Effective January 1, 2009, the Company and subsidiaries adopted the revised SFAS No. 10, Inventories. According to SFAS No. 10, fixed production overheads must be allocated on the basis of the normal capacity of the production facilities instead of the actual capacity, and the subsequently measurement of ending inventories were changed from the lower of cost or market value to the lower of cost or net realizable value. The adoption of this standard resulted in a decrease in net income and earnings per share of $78,824 thousand and $0.32, respectively, for the year ended Significant Account Disclosures (a) Cash and cash equivalents Cash on hand $ 1, Checking and savings accounts 1,252,236 1,043,686 Time deposits 2, $ 1,255,438 1,045,329

19 12 (b) Notes and accounts receivable third parties Notes receivable $ 42,997 23,123 Accounts receivable 1,316,291 1,155,949 Less: allowance for doubtful accounts (18,084) (15,323) allowance for sales return and discount (4,420) - $ 1,336,784 1,163,749 (c) Financial assets As of 2010 and 2009, various financial assets held by the Company were as follows: Financial assets at fair value through profit or loss Financial assets held for trading: Foreign listed stocks $ - 23,429 Beneficiary certificates mutual funds - 75,033 $ - 98,462 Available-for-sale financial assets non-current: Foreign listed stocks $ 3,967 7,020 Financial assets carried at cost non-current: Zowie Technology Co. $ 1,805 2,061 Applied Wireless Identification Group, Inc. (AWID) First Bio Venture Capital Co ,097 World Bio Venture Capital Co. 8,149 10,453 Ascendax Venture Co. 6,000 12,000 Great Wall Semiconductor Co. (GWS) Taiwan Hi-Tech Co Applied Nanotechnologies, Inc. (ANI) - 4,158 $ 17,316 31,460 Financial liabilities at fair value through profit or loss Financial liabilities held for trading: Current: Forward exchange contracts $ Interest rate swap contracts $

20 13 Permanent impairment loss on financial assets carried at cost amounting to $6,865 was recognized in 2010, after the Company determined that the investments in Zowie, AWID, First Bio, World Bio, GWS, and ANI were impaired with little indication of recovery. Permanent impairment loss on financial assets carried at cost amounting to $29,424 was recognized in 2009, after the Company determined that the investments in Zowie, AWID, EM, World Bio, Ascendax and GWS were impaired with little indication of recovery. The Company sold the shares of Ascendax Venture amounting to $6,000 to simplify the non-core investment business in December, 2010, which increased gains on disposal of the investment amounting to $3,907 The Company entered into derivative contracts to avoid risk due to the exchange. The derivative instruments that did not meet the specific criteria for hedge accounting treatment and were classified as financial assets and liabilities held for trading were as follows: (1) As of 2010 and 2009, the forward exchange contracts held by the Company were as follows: 2010 Item Currency Period Contract amount Book value Derivative financial liabilities forward exchange contracts: Selling forward USD January 2010 ~ January 2011 USD 204 thousand $ Item Currency Period Contract amount Book value Derivative financial liabilities forward exchange contracts: Selling forward USD May 2009 ~ May USD1,000 thousand 2010 $ 249 Selling forward USD November 2009 ~ USD 275 thousand November Selling forward USD December 2009 ~ USD 240 thousand December Total $ 627

21 14 (2) As of 2010 and 2009, the Interest rate swap contracts held by the Company were as follows: 2010 Item Currency Period Contract amount Book value (d) Inventories Derivative financial liabilities Rate swap contracts USD January 2010 ~ January 2011 USD 201 thousand $ Item Currency Period Contract amount Book value Derivative financial USD November 2009 ~ USD 275 thousand $ 29 liabilities Rate November 2010 swap contracts Rate swap contracts USD December 2009 ~ December 2010 USD 240 thousand 65 Total $ Finished goods $ 606, ,439 Less: provision for obsolescence and devaluation (47,064) (121,164) 558, ,275 Work in process 224, ,990 Less: provision for obsolescence and devaluation (26,022) (21,700) 198, ,290 Raw material and supplies 438, ,501 Less: provision for obsolescence and devaluation (18,111) (14,456) 420, ,045 Inventories in transit 174, ,609 $ 1,352,564 1,313,219 The Company and subsidiaries recognized related gain or loss about inventories amounted to a gain of $69,586 and a loss of $89,493 for the year ended 2010 and 2009, respectively. Decrease in provision for obsolescence and devaluation in the amounts of $76,224 was booked in the reduction of the costs of sales for the year ended Writedown of inventories to net realizable value in the amounts of $77,190 was included in the costs of sales for the year ended 2009.