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Dear Shareholders,

In 2012 TSMC achieved record revenue and net profit, despite a decline in world semiconductor industry revenue related to slower global economic growth. Our performance was driven largely by the growing global demand for mobile IC products, such as tablets and smartphones. Designers of these products are rapidly migrating to 28-nanometer technology, where TSMC has commanded a very strong position among the semiconductor foundry players.

As we continued to expand our technology leadership with multiple years of intensified R&D and capital investment, our leadership position in mobile IC was strengthened by our close partnerships with customers, who count on TSMC to deliver the advanced technology nodes that enable their innovative designs with higher speed, lower power consumption and smaller form factor. We believe TSMC is well positioned to meet the strong demand for mobile products in the next several years.

In 2012 we accelerated the installation of 28-nanometer capacity and production at an unprecedented pace in order to meet customers' strong demand. As a result, TSMC's shipment of 28-nanometer wafers increased thirty-fold in 2012 from its 2011 level. Other achievements in 2012 include:

2012 Financial Performance

Consolidated revenue totaled NT$506.25 billion, an increase of 18.5 percent over NT$427.08 billion in 2011. Net income was NT$166.16 billion and diluted earnings per share were NT$6.41, both increased 23.8 percent from the 2011 level of NT$134.20 billion net income and NT$5.18 diluted EPS.

In US dollars, TSMC generated net income of US$5.62 billion on consolidated revenue of US$17.12 billion, compared with net income of US$4.57 billion on consolidated revenue of US$14.54 billion for 2011.

Gross profit margin was 48.1 percent compared with 45.4 percent in 2011, and operating profit margin reached 35.8 percent compared with 33.1 percent a year earlier. Net profit margin was 32.8 percent, an increase of 1.4 percentage points from the previous year's 31.4 percent.

Technological Developments

We are augmenting our strong position in 28-nanometer technology with the development of our 20-nanometer System-on-Chip (20-SoC) and 16-nanometer FinFET, or field-effect transistor with three-dimensional architecture. Both 20-nanometer and 16-nanometer FinFET are making progress in R&D and represent state-of-the-art leading-edge technologies, not just in foundry but in the whole semiconductor industry. In November 2012, we began to accept customers' test chips for our 20-nanometer SoC technology, and volume production is scheduled to begin in 2014. In 2012, we completed the 16-nanometer FinFET technology definition and began development, and we successfully taped out process development test vehicle and demonstrated functional yield on the FinFET-based SRAM bit-cells. Risk production of TSMC's 16-FinFET is expected to follow 20-SoC by one year. This is a somewhat faster cadence than our previous generations, enabled by the similarity in interconnect density shared between 20-SoC and 16-FinFET. At the same time, pathfinding for 10-nanometer node has started with multiple patterning on immersion scanners. Innovative processes are being developed to deal with the unique challenges of this technology node.

TSMC became the world's first foundry to provide a full system integration, turn-key solution to customers in 2012. Our backend technologies included advanced interconnect, production-ready fine pitch silicon interposer with through silicon via (TSV) and chip stacking, and advanced wafer-level-chip scale packaging (WLCSP). We can offer customers design tools, technology and mass production capability.

TSMC has gained important customer wins and segment share not only through manufacturing excellence, but also through other key competitive advantages, not the least of which is our open design ecosystem, the Open Innovation Platform®    (OIP). OIP becomes an even more important competitive advantage for TSMC as customers engage the exploration-solution-validation design cycle at 20- and 16-nanometer geometries, which represent a new frontier in precision technology manufacturing.

Corporate Developments

To accelerate the development of key next-generation lithographic technology, in August 2012 TSMC joined the ASML Holding N.V. Customer Co-Investment Program. The program's scope includes development of extreme ultraviolet (EUV) lithography technology and 450-millimeter lithography tools. Under the agreement with ASML, TSMC made an investment of €838 million to acquire 5 percent of ASML's equity, and will commit €277 million, spread over five years, to ASML's R&D program.

Honors and Awards

TSMC in 2012 received numerous honors and awards for our efforts in sustainability, corporate governance, investor relations, and innovation from Corporate Governance Asia, EuroMoney, FinanceAsia, Institutional Investor, IR Magazine, CommonWealth Magazine, and Global Views Magazine.

As a leader in green manufacturing, we were honored that TSMC's Fab 12, Phases 1 and 2, manufacturing facility earned the world's first LEED1    "Platinum" certification for a semiconductor wafer fab.

Dow Jones Sustainability Indexes (DJSI) not only included TSMC in its index for the 12th    consecutive year, but also named TSMC the semiconductor sector leader for the second time since 2010, highlighting our dedication to corporate social responsibility, leadership in adopting international sustainability management standards, and continued innovation in the economic, environmental, and social dimensions.

Outlook

Innovations in mobile computing products have changed the way people live, and advancement of semiconductor technologies enabled these changes. Through our efforts in the past 25 years, TSMC has achieved technology leadership, manufacturing excellence, and the trust of our customers. Allied with our customers, suppliers, and ecosystem partners, we believe TSMC is well positioned to expand the technology frontier, enable innovations further, and to fulfill our mission as the trusted technology and capacity provider for the global logic IC industry for years to come.

Morris Chang

Morris Chang

Chairman and Chief Executive Officer

Footnote 1:  LEED stands for the "Leadership in Energy and Environmental Design," a rating system run by the U.S. Green Building Council that conducts the certification process.