1998 was a poor year for the world semiconductor industry. Oversupply led to price deterioration, which resulted in an 8.4% decrease in the size of the market from 1997 levels. Nevertheless, TSMC managed to achieve a 14.3% growth in sales revenue to reach a record high of NT$50.23 billion, with profits of NT$15.34 billion and earnings per share of NT$2.54. Although our bottom line was inevitably affected by the unfavorable environment and hence was decreased by 14.6% from 1997, our profitability of 30.5% nevertheless outperformed most of the semiconductor manufacturing companies in the world.

In 1998, our achievements and leadership qualities were well recognized by prestigious publications in Taiwan as well as elsewhere in the world. Commonwealth magazine in Taiwan and Far Eastern Economic Review, Asian Business and AsiaMoney have all ranked TSMC as Taiwan's number one company for 1998.

TSMC's world-class performance clearly shows that we are meeting the challenges of an increasingly competitive environment and maintaining our strong leadership position in the foundry industry.

Technology Leadership

An important way TSMC sustains leadership and increases barriers to competition is through new technology development. TSMC R&D leads the IC foundry industry and now matches worldwide IC industry leaders in the development and introduction of the latest generation of technologies.

In 1998, we made significant breakthroughs in many new manufacturing process technologies, such as 0.18µm logic process, copper interconnect process, and embedded process for rapidly developing system-on-a-chip applications. Our 0.18µm logic process has the most aggressive design rules in the world, as well as very advanced low voltage, high performance transistors. TSMC is also the first dedicated foundry to provide the advanced copper interconnect process as a fully design-rule-compatible option in 0.18µm logic technology. All these efforts demonstrate TSMC's commitment to providing customers with the earliest possible access to the latest technology.

Capacity Expansion

In 1998, we anticipated increased demand for our deep submicron processes and expanded our installed monthly capacity by nearly 28% (from 119,700 to 153,000 8-inch equivalent wafers by the end of the year). Most of these additions were in the 0.35µm and 0.25µm process technologies, ensuring that leading edge production capacity would be in place well ahead of customer demand. However due to the downturn in the worldwide semiconductor industry, our actual total output in 1998 was 1.2 million, on a par with 1997 levels.

In late 1998, we saw a strong upsurge in orders, and we expect the increasing trend to continue into 1999, in line with industry forecasts for a recovery in 1999 after the 1998 slump. We are confident that our current installed capacity, supplemented by equipment upgrades in current facilities and additional capacity installed in 1999 will sufficiently accommodate customer demand for wafers.

Global Presence

TSMC is the only foundry to provide customers several unique sites around the globe as sources to assure adequate production capacity. By the end of 1998. TSMC was operating five fabs at our Hsin-Chu site. Our sixth fab is currently under construction in southern Taiwan's Tainan County. Our joint venture fab in the U.S., WaferTech, began volume production in mid-1998. In September 1998, we further enhanced our global presence when we announced a joint venture plan with Philips Semiconductor and Singapore EDB investments. This new joint venture fab in Singapore is another example of our commitment to operating as a "second source" within one company and is consistent with our long-term capacity expansion strategy.

In 1998, TSMC's customer base remained solid around the globe, with U.S. companies purchasing 57% of our total output, the Asian market 32%, and European-based companies 11%.

Public Service

While never losing concentration on our core business, we devote ourselves to marking TSMC a good corporate citizen. We understand that the success of the company very much depends on the well being of the society and environment where the company is established. As one demonstration of our commitment, in April, 1998 the TSMC Culture and Education Foundation was formed to support activities in Taiwan that promote education, technology, art and culture, and the development of our local communities.

Vision and Future Outlook

TSMC's vision is "to be the most reputable, service-oriented and maximum-total-benefits silicon foundry in the world, and thus earn the reward of also being the largest and most profitable." To fulfill this vision, we maintain a consistent focus on our foundry business and concentrate on our commitment to being our customers' Virtual Fab.

In 1999, the IC industry is expected to experience an overall rebound after the 1998 slump. In the long run, foundry services will play an important role in IC manufacturing worldwide. Fabless design houses already depend on foundries, and integrated device manufacturers (IDMs) are expected to evolve stronger and stronger business connections with foundries for IC manufacturing. We believe that our Virtual Fab strategy enables us to provide the best available service to our customers and will thus secure our number one position in the IC foundry industry for many years to come.

In closing, we would like to thank all of our customers, shareholders and employees for your continued support and dedication.

Morris Chang, Chairman
F.C. Tseng, President