20-F 1 h02077e20vf.htm UNITED MICROELECTRONICS CORPORATION United Microelectronics Corporation
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 20-F
 
(Mark One)
     
o   Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
or
     
þ   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2007.
or
     
o   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
or
     
o   Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of event requiring this shell company report                     
Commission file number 001-15128
 
United Microelectronics Corporation
(Exact Name of Registrant as Specified in its Charter)
 
Taiwan, Republic of China
(Jurisdiction of Incorporation or Organization)
No. 3 Li-Hsin Road II, Hsinchu Science Park,
Hsinchu City, Taiwan, Republic of China
(Address of Principal Executive Offices)
Peter Courture, telephone: +1 (650) 968-8855, peter@courture.com,
Law + 978 Highlands Circle, Los Altos, CA 94024, USA
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on which Registered
American Depositary Shares, as evidenced by American Depositary Receipts, each representing 5 Common Shares   New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
 
     Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
     13,214,494,883 Common Shares of Registrant issued as of December 31, 2007 (including 704,298,951 treasury shares)
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ          No o
     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o          No þ
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ          No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o
     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
     U.S. GAAP o
     International Financial Reporting Standards as issued by the International Accounting Standards Board o Other þ
     Indicate by check mark which financial statement item the registrant has elected to follow.
     Item 17 o   Item 18 þ
     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes o          No þ
 
 

 


 

UNITED MICROELECTRONICS CORPORATION
FORM 20-F ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 2007
Table of Contents
             
        Page
 
           
SUPPLEMENTAL INFORMATION     1  
 
           
        3  
 
           
  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS     3  
  OFFER STATISTICS AND EXPECTED TIMETABLE     3  
  KEY INFORMATION     3  
  INFORMATION ON THE COMPANY     21  
  UNRESOLVED STAFF COMMENTS     38  
  OPERATING AND FINANCIAL REVIEW AND PROSPECTS     38  
  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES     57  
  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     61  
  FINANCIAL INFORMATION     62  
  THE OFFER AND LISTING     63  
  ADDITIONAL INFORMATION     65  
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     83  
  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     86  
 
           
        86  
 
           
  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES     86  
  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
    86  
  CONTROLS AND PROCEDURES     86  
  A. AUDIT COMMITTEE FINANCIAL EXPERT     88  
  B. CODE OF ETHICS     88  
  C. PRINCIPAL ACCOUNTANT FEES AND SERVICES     88  
  D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES     88  
  E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS     89  
 
           
        89  
 
           
  FINANCIAL STATEMENTS     89  
  FINANCIAL STATEMENTS     89  
  EXHIBITS     90  
 EX-1.1 ARTICLES OF INCORPORATION
 EX-8.1 LIST OF SIGNIFICANT SUBSIDIARIES
 EX-12.1 CERTIFICATION OF CEO PURSUANT TO SEC 302
 EX-12.2 CERTIFICATION OF CFO PURSUANT TO SEC 302
 EX-13.1 CERTIFICATION OF CEO PURSUANT TO SEC 906
 EX-13.2 CERTIFICATION OF CFO PURSUANT TO SEC 906
 EX-15.1 CONSENT OF ACCOUNTING FIRM

 


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SUPPLEMENTAL INFORMATION
     The references to “United Microelectronics,” “we,” “us,” “our” and “our company” in this annual report refer to United Microelectronics Corporation and its consolidated subsidiaries, unless the context suggests otherwise. The references to “United Semiconductor”, “United Silicon”, “UTEK Semiconductor” and “United Integrated Circuits” are to United Semiconductor Corporation, United Silicon Incorporated, UTEK Semiconductor Corporation and United Integrated Circuits Corporation, respectively. The references to “Taiwan” and “ROC” refer to Taiwan, Republic of China. The references to “shares” and “common shares” refer to our common shares, par value NT$10 per share, and “ADSs” refers to our American depositary shares, each representing five common shares. The ADSs are issued under the Deposit Agreement, dated as of September 21, 2000, as amended, supplemented or modified from time to time, among United Microelectronics, Citibank N.A. and the holders and beneficial owners from time to time of American Depositary Receipts issued thereunder. “ROC GAAP” means the generally accepted accounting principles in the Republic of China and “US GAAP” means the generally accepted accounting principles in the United States. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.
     We publish our financial statements in New Taiwan dollars, the lawful currency of the ROC. In this annual report, “NT$” and “NT dollars” mean New Taiwan dollars, “$,” “US$” and “U.S. dollars” mean United States dollars, “¥” means Japanese Yen, “SGD$” means Singapore dollars and “” means Euro.
FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT
MAY NOT BE REALIZED
     Our disclosure and analysis in this annual report contain or incorporate by reference some forward-looking statements. Our forward-looking statements contain information regarding, among other things, our financial condition, future expansion plans and business strategy. We have based these forward-looking statements on our current expectations and projections about future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Although we believe that these expectations and projections are reasonable, such forward-looking statements are inherently subject to risks, uncertainties and assumptions about us, including, among other things:
    our dependence on frequent introduction of new product services and technologies based on the latest developments;
 
    the intensely competitive semiconductor, communications, consumer electronics and PC industries and markets;
 
    risks associated with our international business activities;
 
    our dependence on key personnel;
 
    general economic and political conditions, including those related to the semiconductor, communications, consumer electronics and PC industries;
 
    natural disasters, such as earthquakes and droughts, which are beyond our control;
 
    possible disruptions in commercial activities caused by natural and human-induced disasters and outbreaks of contagious diseases;
 
    fluctuations in foreign currency exchange rates;
 
    additional disclosures we make in our previous and future Form 20-F annual reports and Form 6-K periodic reports to the U.S. Securities and Exchange Commission; and

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    those other risks identified in the “Item 3. Key Information—D. Risk Factors” section of this annual report.
     The words “may”, “will”, “is/are likely to,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify a number of these forward-looking statements. We do not and will not undertake the obligation to update or revise any forward-looking statements contained in this annual report whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur and our actual results could differ materially from those anticipated in these forward-looking statements.
GLOSSARY
     
ASIC
  Application Specific Integrated Circuit. A custom-designed integrated circuit that performs specific functions which would otherwise require a number of off-the-shelf integrated circuits to perform.
 
   
Cell
  Semiconductor structure in an electrical state which can store a bit of information, mainly used as the building block of memory array.
 
   
Die
  A piece of a semiconductor wafer containing the circuitry of an unpackaged single chip.
 
   
DRAM
  Dynamic Random Access Memory. A type of volatile memory product that is used in electronic systems to store data and program instructions. It is the most common type of RAM and must be refreshed with electricity hundreds of times per second or else it will fade away.
 
   
FPGA
  Field Programmable Gate Array. A programmable integrated circuit.
 
   
Integrated circuit
  Entire electronic circuit built on a single piece of solid substrate and enclosed in a small package. The package is equipped with leads needed to electrically integrate the integrated circuit with a larger electronic system. Monolithic and hybrid integrated circuits are distinguished by the type of substrate used.
 
   
Interconnect
  The conductive path made from copper or aluminum that is required to achieve connection from one circuit element to the other circuit elements within a circuit.
 
   
Mask
  Photomask. A piece of glass on which an integrated circuit circuitry design is laid out.
 
   
Memory
  A group of integrated circuits that a computer uses to store data and programs, such as ROM, RAM, DRAM and SRAM.
 
   
Micron
  A unit of spatial measurement that is one-millionth of a meter.
 
   
Nanometer
  A unit of spatial measurement that is one-billionth of a meter.
 
   
PC
  Personal computer.
 
   
RAM
  Random Access Memory. A type of volatile memory forming the main memory of a computer where applications and files are run.
 
   
ROM
  Read-Only Memory. Memory that is programmed by the manufacturer and cannot be changed. Typically, ROM is used to provide start-up data when a computer is first turned on.

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Scanner
  A photolithography tool used in the production of semiconductor devices. This camera-like step-and-scan tool projects the image of a circuit from a master image onto a photosensitized silicon wafer.
 
   
Semiconductor
  A material with electrical conducting properties in between those of metals and insulators. Essentially, semiconductors transmit electricity only under certain circumstances, such as when given a positive or negative electric charge. Therefore, a semiconductor’s ability to conduct can be turned on or off by manipulating those charges and this allows the semiconductor to act as an electric switch. The most common semiconductor material is silicon, used as the base of most semiconductor chips today because it is relatively inexpensive and easy to create.
 
   
SoC
  System-on-Chip. A chip that incorporates functions currently performed by several chips on a cost-effective basis.
 
   
SOI
  Silicon-On-Insulator. Silicon wafer consisting of a thin layer of oxide, on top of which semiconductor devices are built.
 
   
SRAM
  Static Random Access Memory. A type of volatile memory product that is used in electronic systems to store data and program instructions. Unlike the more common DRAM, it does not need to be refreshed.
 
   
Transistor
  Tri-terminal semiconductor device in which input signal (voltage or current depending on the type of transistor) controls output current. An individual circuit that can amplify or switch electric current. This is the building block of all integrated circuits.
 
   
Volatile memory
  Memory products which lose their data content when the power supply is switched off.
 
   
Wafer
  Thin, round, flat piece of silicon that is the base of most integrated circuits.
 
   
8-inch wafer equivalents
  Standard unit describing the equivalent amount of 8-inch wafers produced after conversion, used to quantify levels of wafer production for purposes of comparison. Figures of 8-inch wafer equivalents are derived by converting the number of wafers of all dimensions (e.g., 6-inch, 8-inch and 12-inch) into their equivalent figures for 8-inch wafers. 100 6-inch wafers are equivalent to 56.25 8-inch wafers. 100 12-inch wafers are equivalent to 225 8-inch wafers.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
     Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
     Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
     The selected balance sheet data as of December 31, 2006 and 2007 and the selected statements of income and cash flow data for the years ended December 31, 2005, 2006 and 2007 are derived from our audited consolidated financial statements included elsewhere in this annual report. The selected balance sheet data as of December 31, 2003, 2004 and 2005 and the selected statements of income and cash flow data for the years ended December 31, 2003 and 2004 are derived from our audited consolidated financial statements not included in this annual report.

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     Our financial statements have been prepared and presented in accordance with ROC GAAP, which differs in many material respects from US GAAP. For the discussion of these differences, see Note 35 to our audited consolidated financial statements included elsewhere in this annual report. Some of the items in the statements of income, cash flow and balance sheets have been reconciled to US GAAP and are set forth below. The summary financial data set forth below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our financial statements and the notes to those statements included elsewhere in this annual report.
                                                 
    Year Ended December 31,
    2003   2004   2005   2006   2007
    NT$   NT$   NT$   NT$   NT$   US$
            (in millions , except per share and per ADS data)        
Consolidated Statement of Income Data:
                                               
ROC GAAP
                                               
Net operating revenues
    95,704       129,191       100,316       112,004       113,311       3,494  
Costs of goods sold
    73,938       92,393       90,643       90,638       89,768       2,768  
 
                                               
Gross profit
    21,766       36,798       9,673       21,366       23,543       726  
 
                                               
Operating expenses:
                                               
Sales and marketing
    2,171       2,775       3,739       3,366       4,069       125  
General and administrative
    3,996       4,853       4,387       3,422       3,724       115  
Research and development
    5,859       7,364       9,634       9,419       9,631       297  
 
                                               
Total operating expenses
    12,026       14,992       17,760       16,207       17,424       537  
 
                                               
Operating income (loss)
    9,740       21,806       (8,087 )     5,159       6,119       189  
Net non-operating income
    4,956       9,938       13,693       31,428       13,551       418  
 
                                               
Income before income tax and minority interest
    14,696       31,744       5,606       36,587       19,670       607  
Income tax expense
    (980 )     (374 )     (67 )     (3,261 )     (2,809 )     (87 )
Cumulative effect of changes in accounting principles (the net amount after deducted tax expense $0)(1)
                (113 )     (1,189 )            
Minority interest loss
    304       473       1,601       482       101       3  
 
                                               
Net income
    14,020       31,843       7,027       32,619       16,962       523  
 
                                               
Earnings per share:(2)(3)
                                               
Basic
    0.75       1.68       0.38       1.81       1.09       0.03  
Diluted(5)
    0.73       1.65       0.37       1.75       1.06       0.03  
Shares used in earnings per share calculation:(3)
                                               
Basic
    18,788       18,995       18,647       18,051       15,618       15,618  
Diluted(5)
    19,218       19,298       18,934       18,675       16,073       16,073  
Earnings per ADS:(3)
                                               
Basic
    3.75       8.40       1.90       9.05       5.45       0.17  
Diluted(5)
    3.65       8.25       1.85       8.75       5.30       0.16  
 
                                               
US GAAP
                                               
Net operating revenues
    95,704       129,191       96,782       112,004       113,311       3,494  
Costs of goods sold
    (77,473 )     (96,895 )     (89,743 )     (93,326 )     (92,081 )     (2,839 )
Operating income (loss)
    5,632       (24,681 )     (29,072 )     2,162       (20,061 )     (619 )
Net income (loss)
    12,331       (14,237 )     (15,669 )     21,797       (9,264 )     (286 )
Other comprehensive income (loss)
    14,636       (16,451 )     23,708       (8,194 )     (4,863 )     (150 )
Comprehensive income (loss)
    26,967       (30,688 )     8,039       13,602       (14,127 )     (436 )
Earnings (losses) per share:(2)(4)
                                               
Basic
    0.81       (0.92 )     (1.01 )     1.48       (0.66 )     (0.02 )
Diluted(5)
    0.80       (0.92 )     (1.01 )     1.44       (0.66 )     (0.02 )
Shares used in earnings (loss) per share calculation:(4)
                                               
Basic
    15,184       15,444       15,488       14,689       13,971       13,971  
Diluted(5)
    15,456       15,444       15,488       15,207       13,971       13,971  
Earnings (loss) per ADS:(4)
                                               
Basic
    4.06       (4.61 )     (5.06 )     7.42       (3.32 )     (0.10 )
Diluted(5)
    3.99       (4.61 )     (5.06 )     7.18       (3.32 )     (0.10 )

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    Year Ended December 31,
    2003   2004   2005   2006   2007
    NT$   NT$   NT$   NT$   NT$   US$
    (in million)
Consolidated Balance Sheet Data:
                                               
ROC GAAP
                                               
Current assets
    154,322       132,936       144,863       132,344       81,111       2,501  
Long-term investment
    38,859       32,712       30,797       71,964       69,813       2,153  
Property, plant and equipment
    149,557       192,024       159,114       151,828       137,219       4,231  
Total assets
    354,514       376,305       347,049       367,653       299,558       9,237  
Current liabilities
    44,140       36,598       36,960       36,104       45,288       1,396  
Long-term debt (excluding current portion)
    60,334       61,288       41,692       30,383       7,495       231  
Total liabilities
    107,203       101,202       82,429       70,251       56,561       1,744  
Stockholders’ equity
    232,233       266,374       258,284       291,165       236,467       7,292  
US GAAP
                                               
Cash and cash equivalents
    89,196       55,558       63,508       61,649       47,678       1,470  
Working capital(6)
    108,539       96,690       105,846       95,927       35,273       1,088  
Total assets
    486,307       452,630       426,706       401,628       310,614       9,578  
Total liabilities
    107,533       101,599       83,943       71,226       56,795       1,751  
Stockholders’ equity
    363,736       342,420       336,425       324,162       247,302       7,626  
                                                 
    Year Ended December 31,
    2003   2004   2005   2006   2007
    NT$   NT$   NT$   NT$   NT$   US$
    (in millions , except per share and per ADS data)
Other Consolidated Data:
                                               
ROC GAAP
                                               
Cash flow:
                                               
Capital expenditure
    24,820       81,110       22,163       33,240       28,299       873  
Cash provided by operating activities
    49,625       72,490       45,046       47,078       48,079       1,483  
Cash used in investing activities
    (24,114 )     (72,380 )     (7,487 )     (16,511 )     (21,799 )     (672 )
Cash provided (used) by financing activities
    17,581       (16,137 )     (29,592 )     (45,056 )     (72,694 )     (2,242 )
Net increase (decrease) in cash and cash equivalents
    43,869       (17,390 )     7,245       (14,774 )     (46,175 )     (1,424 )
Gross profit margin
    22.7 %     28.5 %     9.6 %     19.1 %     20.8 %     20.8 %
Operating profit (loss) margin
    10.2 %     16.9 %     (8.1 )%     4.6 %     5.4 %     5.4 %
Net profit margin
    14.6 %     24.6 %     7.0 %     29.1 %     15.0 %     15.0 %
Capacity utilization rate (on an actual basis)
    84.8 %     90.8 %     72.4 %     79.5 %     81.9 %     81.9 %
Dividends declared per share (7)
    0.4       0.8       1.1       0.5       0.7       0.02  
US GAAP
                                               
Cash flow:
                                               
Capital expenditure
    24,827       81,127       22,163       33,240       28,299       873  
Cash provided by operating activities
    49,543       72,312       45,019       46,339       45,739       1,410  
Cash used in investing activities
    (32,923 )     (88,402 )     (6,036 )     (9,691 )     10,405       321  
Cash provided (used) by financing activities
    17,587       (16,124 )     (29,565 )     (38,222 )     (70,354 )     (2,169 )
Net increase (decrease) in cash and cash equivalents
    34,977       (33,639 )     7,951       (1,859 )     (13,971 )     (431 )
Gross profit margin
    19.0 %     25.0 %     7.3 %     16.7 %     18.7 %     18.7 %
Operating profit (loss) margin
    5.9 %     (19.1 )%     (30.0 )%     1.9 %     (17.7 %)     (17.7 %)
Net profit (loss) margin
    12.9 %     (11.0 )%     (16.2 )%     19.5 %     (8.2 %)     (8.2 %)
 
(1)   Refer to Note 3 to the audited consolidated financial statements included elsewhere in this annual report.
 
(2)   Earnings (losses) per share is calculated by dividing net income by the weighted average number of shares outstanding during the year.
 
(3)   Retroactively adjusted for all subsequent stock dividends and employee stock bonuses.
 
(4)   Retroactively adjusted for all subsequent stock dividends and capital reduction completed in 2007.
 
(5)   Diluted securities include convertible bonds and employee stock options.
 
(6)   Working capital equals current assets minus current liabilities.
 
(7)   Dividends declared per share are in connection with earnings and accumulated additional paid-in capital.
 
(8)   Refer to Note 35 to the audited consolidated financial statements included elsewhere in this annual report.

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Currency Translations and Exchange Rates
     In portions of this annual report, we have translated New Taiwan dollar amounts into U.S. dollars for the convenience of readers. The rate we used for the translations was NT$32.43 = US$1.00, which was the noon buying rate announced by the Federal Reserve Bank of New York on December 31, 2007. The translation does not mean that New Taiwan dollars could actually be converted into U.S. dollars at that rate. The following table shows the noon buying rates for New Taiwan dollars expressed in New Taiwan dollar per US$1.00.
                                 
                            At
    Average(1)   High   Low   Period-End
2003
    34.40       34.98       33.72       33.99  
2004
    33.27       34.16       31.74       31.74  
2005
    32.13       33.77       30.65       32.80  
2006
    32.51       33.31       31.28       32.59  
2007
    32.85       33.41       32.26       32.43  
October
    32.55       32.61       32.39       32.39  
November
    32.33       32.40       32.26       32.26  
December
    32.41       32.43       32.30       32.43  
2008      (through April 30)
    31.23       32.49       29.99       30.45  
January
    32.36       32.49       32.15       32.15  
February
    31.61       32.03       30.90       30.92  
March
    30.58       31.09       29.99       30.37  
April (through April 30)
    30.35       30.52       30.26       30.45  
 
Source: Federal Reserve Statistical Release, Board of Governors of the Federal Reserve System.
 
(1)   Determined by averaging the rates on the last business day of each month during the relevant period for annual periods and the rates on each business day for monthly periods.
B. Capitalization and Indebtedness
     Not applicable.
C. Reasons for the Offer and Use of Proceeds
     Not applicable.
D. Risk Factors
     Our business and operations are subject to various risks, many of which are beyond our control. If any of the risks described below actually occurs, our business, financial condition or results of operations could be seriously harmed.
Risks Related to Our Business and Financial Condition
Our operating results fluctuate from quarter to quarter, which makes it difficult to predict our future performance.
     Our revenues, expenses and results of operations have varied significantly in the past and may fluctuate significantly from quarter to quarter in the future due to a number of factors, many of which are beyond our control. Our business and operations have at times in the past been negatively affected by, and are expected to continue to be subject to the risk of, the following factors:
    the seasonality and cyclical nature of both the semiconductor industry and the markets served by our customers;
 
    our customers’ adjustments in their inventory;

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    the loss of a key customer or the postponement of orders from a key customer;
 
    the rescheduling and cancellation of large orders;
 
    our ability to obtain equipment, raw materials, electricity, water and other required utilities on a timely and economic basis;
 
    outbreaks of contagious diseases, including severe acute respiratory syndrome and avian flu;
 
    environmental events, such as fires and earthquakes, or industrial accidents; and
 
    technological changes.
     Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, you should not rely on quarter-to-quarter comparisons to predict our future performance. Unfavorable changes in any of the above factors may seriously harm our business, financial condition and results of operations. In addition, our operating results may be below the expectations of public market analysts and investors in some future periods. In this event, the price of the shares or ADSs may underperform or fall.
The seasonality and cyclical nature of the semiconductor industry and periodic overcapacity make us particularly vulnerable to significant and sometimes prolonged economic downturns.
     The semiconductor industry has historically been highly cyclical and, at various times, has experienced significant downturns. Since most of our customers operate in semiconductor-related industries, variations in order levels from our customers can result in volatility in our revenues and earnings. Because our business is, and will continue to be, largely dependent on the requirements of semiconductor companies for our services, downturns in the semiconductor industry will lead to reduced demand for our services. For example, the semiconductor industry experienced a slowdown in most of 2005 until early 2006 to reflect industry-wide inventory correction.
     Our net operating revenues are also typically affected by seasonal variations in market conditions that contribute to the fluctuation of the average selling prices of semiconductor services and products. The seasonal sales trends for semiconductor services and products closely mirror those for consumer electronics, communication, and computer sales. We generally experience seasonal lows in the demand for semiconductor services and products during the first half of the year, primarily as a result of inventory correction by our customers. Any change in the general seasonal variations, which we cannot anticipate may result in materially adverse effects on our revenues, operations and businesses.
A decrease in demand for or selling prices of communication devices, consumer electronics and PCs may decrease the demand for our services and reduce our margins.
     Our customers generally use the semiconductors produced in our fabs in a wide variety of applications. We derive a significant percentage of our operating revenues from customers who use our manufacturing services to make semiconductors for communication devices, consumer electronics and PCs. The communications and PC markets experienced a sudden and substantial market downturn and inventory correction in most part of 2005. This downturn resulted in a reduced demand for our services and hence decreased our revenues and earnings. Any significant decrease in the demand for communication devices, consumer electronics or PCs may further decrease the demand for our services. In addition, if the average selling prices of communication devices, consumer electronics or PCs decline significantly, we will be pressured to further reduce our selling prices, which may reduce our revenues and, therefore, reduce our margins significantly. As demonstrated by the downturn in demand for high technology products, market conditions can change rapidly, without apparent warning or advance notice. In such instances, our customers will experience inventory buildup and/or difficulties in selling their products and, in turn, will reduce or cancel orders for wafers from us. The timing, severity and recovery of these downturns cannot be predicted accurately or at all. When they occur, our business, profitability and price of the shares and ADSs are likely to suffer.

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Overcapacity in the semiconductor industry may reduce our revenues, earnings and margins.
     The prices that we can charge our customers for our services are significantly related to the overall worldwide supply of integrated circuits and semiconductor products. The overall supply of semiconductor products is based in part on the capacity of other companies, which is outside of our control. Periods of overcapacity, if we are unable to offset the adverse effects of overcapacity through, among other things, our technology and product mix, we may have to lower the prices we charge our customers for our services and/or we may have to operate at significantly less than full capacity. Such actions could reduce our margin and weaken our financial condition and results of operations. We cannot give any assurance that an increase in the demand for foundry services in the future will not lead to overcapacity again in the near future, which could materially adversely affect our revenues, earnings and margins.
Any problem in the semiconductor outsourcing infrastructure can adversely affect our net operating revenues and profitability.
     Many of our customers depend on third parties to provide mask tooling, assembly and test services. If these customers cannot timely obtain these services on reasonable terms, they may not order any foundry services from us. This may significantly reduce our net operating revenues and negatively affect our profitability.
We may be unable to implement new technology as it becomes available, which may result in our loss of customers and market share.
     The semiconductor industry is developing rapidly and the related technology is constantly evolving. If we do not anticipate the technology evolution and rapidly adopt new and innovative technology, we may not be able to produce sufficiently advanced products at competitive prices. There is a risk that our competitors may adopt new technology before we do, resulting in our loss of market share. If we are unable to begin offering these products on a competitive and timely basis, we may lose to our competitors providing similar technologies to customers, which may cause our net operating revenues to decline unless we can replace lost customers with new customers.
We may be unable to provide leading technology to our customers if we lose the support of our technology partners.
     Enhancing our manufacturing process technologies is critical to our ability to provide services for our customers. We intend to continue to advance our process technologies through internal research and development and alliances with other companies. Although we have an internal research and development team focused on certain customers developing new semiconductor manufacturing process technologies, we are dependent on our technology partners to advance our portfolio of process technologies. We currently have patent cross-licensing agreements with several companies, including Agere Systems Inc., or Agere (which was acquired by LSI Logic Corporation, or LSI, in December 2006), International Business Machines Corporation, or IBM, Texas Instruments Incorporated, or Texas Instruments, Freescale Semiconductor Inc., or Freescale and Renesas Technology Corp., or Renesas. We also depend upon mask and equipment vendors to supply our technology development teams with the masks and equipment needed to continuously develop more advanced processing technologies. If we are unable to continue any of our joint development arrangements, patent cross-licensing agreements and other agreements, on mutually beneficial economic terms, if we re-evaluate the technological and economic benefits of such relationships, if we are unable to enter into new technology alliances with other leading semiconductor suppliers, or if we fail to secure masks and equipment from our vendors in a timely manner sufficient to support our ongoing technology development, we may lose important customers because we are unable to continue providing our customers with leading edge mass-producible process technologies.
Our business may suffer if we cannot compete successfully in our industry.
     The worldwide semiconductor foundry industry is highly competitive. We compete with dedicated foundry service providers such as Taiwan Semiconductor Manufacturing Company Limited, Semiconductor Manufacturing International (Shanghai) Corporation and Chartered Semiconductor Manufacturing Ltd., as well as the foundry operation services of some integrated device manufacturers, such as IBM and Toshiba Corporation, or Toshiba. Integrated device manufacturers principally manufacture and sell their own proprietary semiconductor products, but may also offer foundry service. Other competitors such as Samsung, DongbuAnam Semiconductor, Grace Semiconductor Manufacturing Corp., X-FAB Semiconductors Foundries AG and Silterra Malaysia Sdn. Bhd. have initiated efforts to develop substantial new foundry capacity. New entrants in the foundry business are likely to initiate a trend of competitive pricing and create potential overcapacity in legacy technology. Some of our competitors have greater access to capital and substantially greater production, research and development, marketing and other resources than we do. As a result, these companies may be able to compete more aggressively over a longer period of time than we can.

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     The principal elements of competition in the wafer foundry market include:
    technical competence;
 
    time-to-volume production and cycle time;
 
    time-to-market;
 
    research and development quality;
 
    available capacity;
 
    manufacturing yields;
 
    customer service;
 
    price;
 
    management expertise; and
 
    strategic alliances.
     Our ability to compete successfully also depends on factors partially outside of our control, including product availability and industry and general economic trends. If we cannot compete successfully in our industry, our business may suffer.
Our profit margin may substantially decline if we are unable to continuously improve our manufacturing yields, maintain high capacity utilization and optimize the technology mix of our silicon wafer production.
     Our ability to maintain our profitability depends, in part, on our ability to:
    maintain our capacity utilization, that is, the wafer-out quantity of 8-inch wafer equivalents divided by estimated total 8-inch equivalent capacity in a specified period. The estimated capacity numbers may differ depending upon equipment delivery schedules, pace of migration to more advanced process technologies and other factors affecting production ramp-ups;
 
    maintain or improve our manufacturing yield, that is, the percentage of usable manufactured devices on a wafer; and
 
    optimize the technology mix of our production, that is, the relative number of wafers manufactured utilizing different process technologies.
     Our manufacturing yields directly affect our ability to attract and retain customers, as well as the price of our services. Our capacity utilization affects our operating results because a large percentage of our operating costs are fixed. Our technology mix affects utilization of our equipment and process technologies, which can affect our margins. If we are unable to continuously improve our manufacturing yields, maintain high capacity utilization or optimize the technology mix of our wafer production, our profit margin may substantially decline.

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We may not be able to implement our planned growth if we are unable to obtain the financing necessary to fund the substantial capital expenditures we expect to incur.
     Our business and the nature of our industry require us to make substantial capital expenditures leading to a high level of fixed costs. We expect to incur significant capital expenditures in connection with our growth plans. These capital expenditures will be made in advance of any additional sales to be generated by new or upgraded fabs as a result of these expenditures. Given the fixed-cost nature of our business, we have in the past incurred, and may in the future incur, operating losses if our revenues do not adequately offset our capital expenditures. Additionally, our actual expenditures may exceed our planned expenditures for a variety of reasons, including changes in:
    our growth plan;
 
    our process technology;
 
    market conditions;
 
    interest rates;
 
    exchange rate fluctuations; and
 
    prices of equipment.
     We cannot assure you that additional financing will be available on satisfactory terms, if at all. If adequate funds are not available on satisfactory terms, we may be forced to curtail our expansion plans or delay the deployment of our services, which could result in a loss of customers and limit the growth of our business.
We depend on a small number of customers for a significant portion of our net operating revenues and a loss of some of these customers would result in the loss of a significant portion of our net operating revenues.
     We have been largely dependent on a small number of customers for a substantial portion of our business. In 2007, our top ten customers accounted for 59.3% of our net operating revenues. Our top two customers each accounted for 13.7% and 13.2%, respectively, of our net operating revenues in 2007. We expect that we will continue to be dependent upon a relatively limited number of customers for a significant portion of our net operating revenues. We cannot assure you that our net operating revenues generated from these customers, individually or in the aggregate, will reach or exceed historical levels in any future period. Loss or cancellation of business from significant changes in scheduled deliveries to, or decreases in the prices of services sold to, any of these customers could significantly reduce our net operating revenues.
Our customers generally do not place purchase orders far in advance, which makes it difficult for us to predict our future revenues, adjust production costs and allocate capacity efficiently on a timely basis.
     Our customers generally do not place purchase orders far in advance (usually two months before shipment). In addition, due to the cyclical nature of the semiconductor industry, our customers’ purchase orders have varied significantly from period to period. As a result, we do not typically operate with any significant backlog. The lack of significant backlog makes it difficult for us to forecast our revenues in future periods. Moreover, our expense levels are based in part on our expectations of future revenues and we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls. We expect that in the future our net operating revenues in any quarter will continue to be substantially dependent upon purchase orders received in that quarter.

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Our inability to obtain, preserve and defend intellectual property rights could harm our competitive position.
     Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our proprietary technology and to secure critical processing technology that we do not own at commercially reasonable terms. We cannot assure you that in the future we will be able to independently develop, or secure from any third party, the technology required for upgrading our production facilities. Our failure to successfully obtain such technology may seriously harm our competitive position.
     Our ability to compete successfully also depends on our ability to operate without infringing on the proprietary rights of others. We have no means of knowing what patent applications have been filed in the United States until they are granted. The semiconductor industry, because of the complexity of the technology used and the multitude of patents, copyrights and other overlapping intellectual property rights, is characterized by frequent litigation regarding patent, trade secret and other intellectual property rights. It is common for patent owners to assert their patents against semiconductor manufacturers. We have received from time to time communications from third parties asserting patents that cover certain of our technologies and alleging infringement of intellectual property rights of others, and we expect to continue to receive such communications in the future. We do not believe that we are currently infringing on any patent rights. In the event any third party were to make a valid claim against us or our customers, we could be required to:
    seek to acquire licenses to the infringed technology which may not be available on commercially reasonable terms, if at all;
 
    discontinue using certain process technologies, which could cause us to stop manufacturing certain semiconductors;
 
    pay substantial monetary damages; or
 
    seek to develop non-infringing technologies, which may not be feasible.
     Any one of these developments could place substantial financial and administrative burdens on us and hinder our business. Litigation, which could result in substantial costs to us and diversion of our resources, may also be necessary to enforce our patents or other intellectual property rights or to defend us or our customers against claimed infringement of the rights of others. If we fail to obtain necessary licenses or if litigation relating to patent infringement or other intellectual property matters occurs, it could hurt our reputation as a technology leader in our industry and prevent us from manufacturing particular products or applying particular technologies, which could reduce opportunities to generate revenues.
Two of our former executives were charged with criminal offenses and our company was fined for violations of the Act Governing Relations Between Peoples of the Taiwan Area and the Mainland Area in connection with our alleged involvement in the operation of Hejian Technology (Suzhou) Co., Ltd., a semiconductor manufacturer in China.
     Hejian Technology (Suzhou) Co., Ltd., or Hejian, a semiconductor manufacturer in Suzhou, China, was set up in December 2001. Soon after the establishment of Hejian, there were various rumors that Hejian was set up by us, which we denied immediately because we did not inject any capital into nor did we transfer any technology to Hejian.
     In early 2006, Hsinchu District Prosecutor’s Office brought criminal charges with the Hsinchu District Court against our former Chairman, Robert H. C. Tsao and our former Vice Chairman, John Hsuan in connection with their alleged breach of fiduciary duties and certain violations of the ROC Commercial Accounting Act. Prior to such charges, both our former Chairman and former Vice Chairman resigned from their respective positions with our company. The Hsinchu District Court found our former Chairman and formal Vice Chairman not guilty in October 2007, and the Prosecutor’s office filed an appeal with the Taiwan High Court in November 2007. The case is still pending in the Taiwan High Court.

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     The ROC Financial Supervisory Commission, or the ROC FSC, a regulatory authority that supervises securities, banking, futures, and insurance activities in Taiwan, also began their investigation into any violation of ROC securities laws by us. In April 2005, our former Chairman was fined (1) in the amount of NT$2.4 million by the ROC FSC for our delay in making timely public disclosure (within two days) regarding the information relating to Hejian, which was resolved in our board meeting on March 4, 2005 (the “March 4 Resolution”), and (2) in the amount of NT$0.6 million for our failure to disclose the information regarding the assistance we had provided to Hejian. Our former Chairman’s appeal in relation to such fines was overruled in early 2006, and a lawsuit had been filed by our former Chairman with the Taipei Administrative High Court. In December 2007, the Taipei Administrative High Court revoked the ROC FSC’s decision and ruled in favor of our former Chairman. In January 2008, the ROC FSC filed an appeal with the Supreme Administrative Court. The case is still pending in the Supreme Administrative Court.
     In connection with the March 4 Resolution, our company was also fined in the amount of NT$30,000 by the Taiwan Stock Exchange for a delay in making public disclosure. After our former Chairman and former Vice Chairman were indicted by the prosecutor, our company was found by the ROC Ministry of Economic Affairs (the “ROC MOEA”) to be in violation of the Act Governing Relations Between Peoples of the Taiwan Area and the Mainland Area and fined in the amount of NT$5 million for our alleged illegal investment in Hejian. Our appeal to the ROC MOEA in relation to such fines was denied in late 2006. We filed an administrative lawsuit in December 2006 with the Taipei Administrative High Court. In July 2007, the Taipei Administrative High Court revoked the ROC MOEA’s decision and ruled in favor of us. In August 2007, the ROC MOEA filed an appeal with the Supreme Administrative Court. The case is still pending in the Supreme Administrative Court.
We have been offered a 15% interest in a holding company that owns Hejian, but such investment may not materialize.
     ROC law prohibits investment in China by Taiwanese makers of semiconductors without government approval. In March 2005, the Chairman of the holding company of Hejian offered us a 15% interest in the holding company of Hejian. Immediately after we received the offer, we filed an application with the Investment Commission for their executive guidance and disclosed our receipt of such offer to investors and the public. As of the date of this annual report, we have not entered into any agreement to formalize the terms and conditions in connection with the transfer of the 15% interest. Pending ROC regulatory approval, we will endeavor to include this 15% interest in our assets, which will then be reflected on our financial statements. We cannot assure you at present that the ROC government will approve our acceptance of this 15% interest, or if such acceptance is approved by the ROC government, the agreement that formalizes the terms and conditions will be on the terms that are favorable to us.
Our operations and business will suffer if we lose one or more of our key personnel without adequate replacements.
     Our future success to a large extent depends on the continued service of our Chairman and key executive officers. We do not carry key person insurance on any of our personnel. If we lose the services of any of our Chairman or key executive officers, it could be difficult to find and integrate replacement personnel in a short period of time, which could harm our operations and the growth of our business.
We may have difficulty attracting and retaining skilled employees, who are critical to our future success.
     The success of our business depends upon attracting and retaining experienced executives, engineers and other employees to implement our strategy. The competition for skilled employees is intense. We expect demand for personnel in Taiwan to increase in the future as new wafer fabrication facilities and other businesses are established in Taiwan. We do not have long-term employment contracts with any of our employees. If we were unable to retain our existing personnel or attract, assimilate and recruit new experienced personnel in the future, it could seriously disrupt our operations and delay or restrict the growth of our business.

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Our transactions with affiliates and shareholders may hurt our profitability and competitive position.
     We have provided foundry services to several of our affiliates and shareholders. These transactions were conducted on an arm’s-length basis. Other than capacity commitments to our former foundry venture partners, we currently do not provide any preferential treatment to any of these affiliates and shareholders. However, we may in the future reserve or allocate our production capacity to these companies if there is a shortage of foundry services in the market to enable these companies to maintain their operations and/or to protect our investments in them. This reservation or allocation may reduce our capacity available for our other customers, which may damage our relationships with other customers and discourage them from using our services. This may hurt our profitability and competitive position.
We could experience a loss in investor confidence in the reliability of our financial statements if we restate our financial statements again in the future, thus could negatively impact the market price of the shares or ADSs.
     Subsequent to the filing of our initial annual report on Form 20-F for the year ended December 31, 2004, and in the process of addressing certain comments received from the Securities and Exchange Commission on such initial annual report, we discovered that certain US GAAP-related financial information was miscalculated. As a result, we restated our consolidated financial statements for the years ended December 31, 2002, 2003 and 2004 with respect to certain US GAAP financial information relating to non-cash charges and adjustments to goodwill, derivative instruments and employee stock bonuses. We filed our restated financial statements in an amendment to our annual report on Form 20-F/A for the year ended December 31, 2004 on February 13, 2006. If we are required to revise, amend or restate our financial statements again in the future, we could experience a loss in investor confidence in the reliability of our financial statements, which could negatively impact the market price of the shares or ADSs.
The differences between ROC and U.S. accounting standards affect the amount of our net income.
     Our financial statements are prepared under ROC GAAP, which differ in certain significant respects from US GAAP. For example, ROC GAAP does not require the recognition of the market value of our shares distributed as bonuses to our employees in the calculation of net income. As a result, our net income (loss) in 2005, 2006 and 2007 under US GAAP was NT$(15,669) million, NT$21,797 million and NT$(9,264) million (US$(286) million), respectively, as compared to net income under ROC GAAP of NT$7,027 million, NT$32,619 million and NT$16,962 million (US$523 million) in 2005, 2006 and 2007, respectively. For a discussion of these differences, see Note 35 to our audited consolidated financial statements included elsewhere in this annual report.
Any future outbreak of contagious diseases may materially and adversely affect our business and operations, as well as our financial condition and results of operations.
     Any future outbreak of contagious diseases, such as avian influenza or severe acute respiratory syndrome, may disrupt our ability to adequately staff our business and may generally disrupt our operations. If any of our employees is suspected of having contracted any contagious disease, we may under certain circumstances be required to quarantine such employees and the affected areas of our premises. Therefore, we may have to temporarily suspend part of or all of our operations. Furthermore, any future outbreak may restrict the level of economic activity in affected regions, including Taiwan, which may also adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak of contagious diseases would not have a material adverse effect on our financial condition and results of operations.
Risks Relating to Manufacturing
Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities and other disruptions that can significantly increase our costs and delay product shipments to our customers.
     Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified to improve manufacturing yields and product performance. Impurities or other difficulties in the manufacturing process or defects with respect to equipment or supporting facilities can lower manufacturing yields, interrupt production or result in losses of products in process. As system complexity has increased and process technology has become more advanced, manufacturing tolerances have been reduced and requirements for precision have become even more demanding. Although we have been enhancing our manufacturing capabilities and efficiency, from time to time we have experienced production difficulties that have caused delivery delays and quality control problems, as is common in the semiconductor industry. In the past we have encountered the following problems:

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    capacity constraints due to changes in product mix or the delayed delivery of equipment critical to our production, including scanners, steppers and chemical stations;
 
    construction delays during expansions of our clean rooms and other facilities;
 
    difficulties in increasing production at new and existing facilities;
 
    difficulties in upgrading or expanding existing facilities;
 
    manufacturing execution system or automatic transportation system failure;
 
    changing or upgrading our process technologies; and
 
    raw materials shortages and impurities.
     We cannot guarantee that we will be able to increase our manufacturing capacity and efficiency in the future to the same extent as in the past.
We may have difficulty in ramping up production in accordance with our schedule, which could cause delays in product deliveries and decreases in manufacturing yields.
     As is common in the semiconductor industry, we have from time to time experienced difficulties in ramping up production at new or existing facilities or effecting transitions to new manufacturing processes. As a result, we have suffered delays in product deliveries or reduced manufacturing yields. We may encounter similar difficulties in connection with:
    the migration to more advanced process technologies, such as 65- and 45-nanometer process technology;
 
    the joint development with vendors for more powerful tools (both in production and inspection) needed in the future to meet advanced process technology requirements; and
 
    the adoption of new materials in our manufacturing processes.
     We may face construction delays, interruptions, infrastructure failure and delays in upgrading or expanding existing facilities, or changing our process technologies, any of which might adversely affect our production schedule. Our failure to follow our production schedule could delay the time required to recover our investments and seriously affect our profitability.
Our production schedules could be delayed and we may lose customers if we are unable to obtain raw materials and equipment in a timely manner.
     We depend on our suppliers for raw materials. To maintain competitive manufacturing operations, we must obtain from our suppliers, in a timely manner, sufficient quantities of quality materials at acceptable prices. Although we source our raw materials from several suppliers, a small number of these suppliers account for a substantial amount of our supply of raw materials because of the consistent quality of these suppliers’ wafers. For example, in 2007, we purchased a majority of our silicon wafers from three makers, Shin-Etsu Handotai Corporation, or Shin-Etsu, MEMC Electronic Materials, Inc. and Sumco Croup (including Sumco Corporation and Formosa Sumco Technology Corporation). We do not have long-term contracts with most of our suppliers. From time to time, our suppliers have extended lead time or limited the supply of required materials to us because of capacity constraints. Consequently, from time to time, we have experienced difficulty in obtaining the quantities of raw materials we need on a timely basis.

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     In addition, from time to time we may reject materials that do not meet our specifications, resulting in declines in output or manufacturing yields. We cannot assure you that we will be able to obtain sufficient quantities of raw materials and other supplies in a timely manner. If the supply of materials is substantially diminished or if there are significant increases in the costs of raw materials, we may be forced to incur additional costs to acquire sufficient quantities of raw materials to sustain our operations, which may increase our marginal costs and reduce profitability.
     We also depend on a limited number of manufacturers and vendors that make and maintain the complex equipment we use in our manufacturing processes. We also rely on these manufacturers and vendors to improve our technology to meet our customers’ demands as technology improves. In periods of unpredictable and highly diversified market demand, the lead time from order to delivery of this equipment can be as long as six to 12 months. If there are delays in the delivery of equipment or if there are increases in the cost of equipment, it could cause us to delay our introduction of new manufacturing capacity or technologies and delay product deliveries, which may result in the loss of customers and revenues.
We may be subject to the risk of loss due to fire because the materials we use in our manufacturing processes are highly flammable.
     We use highly flammable materials such as silane and hydrogen in our manufacturing processes and may therefore be subject to the risk of loss arising from fires. The risk of fire associated with these materials cannot be completely eliminated. We maintain insurance policies to reduce losses caused by fire, including business interruption insurance. While we believe that our insurance coverage for damage to our property and business interruption due to fire is consistent with semiconductor industry practice, our insurance coverage is subject to deductibles and self-insured retention and may not be sufficient to cover all of our potential losses. If any of our fabs were to be damaged or cease operations as a result of a fire, it would temporarily reduce manufacturing capacity and reduce revenues.
We and many of our customers and suppliers are vulnerable to natural disasters and other events outside of our control, which may seriously disrupt our operations.
     Most of our assets and many of our customers and suppliers are located in certain parts of Taiwan. Our operations and the operations of our customers and suppliers are vulnerable to earthquakes, floods, droughts, power losses and similar events that affect the locations of our operations. The occurrence of any of these events could interrupt our services and cause severe damages to wafers in process, or cause significant business interruptions. Although we maintain property and business interruption insurance for such risks, there is no guarantee that future damages or business loss from earthquakes will be covered by such insurance, that we will be able to collect from our insurance carriers, should we choose to claim under our insurance policies, or that such coverage will be sufficient. In addition, insufficient quantity of power supplies to the Hsinchu Science Park has occasionally occurred, and has disrupted our operations.
Our operations may be delayed or interrupted and our business could suffer if we violate environmental regulations.
     We are always subject to environmental regulations and a failure or a claim that we have failed to comply with these environmental regulations could cause delays in our production and capacity expansion and affect our public image, either of which could harm our business. In addition, as environmental regulations are becoming more comprehensive and stringent, we may incur a greater amount of capital expenditures in technology innovation and materials substitution in order to comply with such regulations, which may adversely affect our results of operations.

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Disruptions in the international trading environment may seriously decrease our international sales.
     A substantial portion of our net operating revenues is derived from sales to customers located in countries other than those where our fabs are located, including Taiwan, Singapore and Japan. In 2005, 2006 and 2007, sales to our overseas customers accounted for 56.9%, 65.8% and 62.0%, respectively, of our net operating revenues. We expect sales to customers outside of Taiwan, Singapore and Japan to continue to represent a significant portion of our net operating revenues. The success and profitability of our international activities depend on certain factors beyond our control, such as general economic conditions, labor conditions, political stability, tax laws, import duties and foreign exchange controls of the countries in which we sell our products, and the political and economic relationships between Taiwan, Singapore and Japan and these countries. As a result, our manufacturing services will continue to be vulnerable to disruptions in the international trading environment, including adverse changes in foreign government regulations, political unrest and international economic downturns.
     These disruptions in the international trading environment affect the demand for our manufacturing services and change the terms upon which we provide our manufacturing services overseas, which could seriously decrease our international sales.
Political, Economic and Regulatory Risks
We face substantial political risks associated with doing business in Taiwan, particularly due to the tense relationship between the ROC and the People’s Republic of China, or the PRC, that could negatively affect the value of your investment.
     Our principal executive offices and most of our assets and operations are located in Taiwan. Accordingly, our business, financial condition and results of operations and the market price of our shares and the ADSs may be affected by changes in ROC governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments in or affecting Taiwan which are outside of our control. Taiwan has a unique international political status. Since 1949, Taiwan and the Chinese mainland have been separately governed. The PRC claims that it is the sole government in China and that Taiwan is part of China. Although significant economic and cultural relations have been established during recent years between the ROC and the PRC, relations have often been strained. The PRC government has refused to renounce the use of military force to gain control over Taiwan and, in March 2005, further passed an Anti-Secession Law that authorizes non-peaceful means and other necessary measures should Taiwan move to gain independence from the PRC. Past developments in relations between the ROC and the PRC have on occasions depressed the market prices of the securities of companies in the ROC. Such initiatives and actions are commonly viewed as having a detrimental effect to reunification efforts between the ROC and the PRC. Relations between the ROC and the PRC and other factors affecting military, political or economic conditions in Taiwan could materially and adversely affect our financial condition and results of operations, as well as the market price and the liquidity of our securities.
Our business depends on the support of the ROC government, and a decrease in this support may increase our labor costs and decrease our net income after tax.
     The ROC government has been very supportive of technology companies such as us. For instance, the ROC’s labor laws and regulations do not require employees of semiconductor companies, including our company, to be unionized, and permit these employees to work shifts of 10 hours each day on a two-days-on, two-days-off basis. We cannot assure you, however, that these labor laws and regulations will not change in the future. In the event that the ROC government requires our employees to be unionized or decreases the number of hours our employees may work in a given day, our labor costs may increase significantly which could result in lower margins.
     We, like many ROC technology companies, have benefited from substantial tax incentives provided by the ROC government. In 2007, such incentives resulted in a tax credit in the amount of NT$926 million (US$29 million). If these incentives are curtailed or eliminated, our net income after tax may decrease substantially.

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The trading price of the shares and ADSs may be adversely affected by the general activities of the Taiwan Stock Exchange and U.S. stock exchanges, the trading price of our shares, increases in interest rates and the economic performance of Taiwan.
     Our shares are listed on the Taiwan Stock Exchange. The trading price of our ADSs may be affected by the trading price of our shares on the Taiwan Stock Exchange and the economic performance of Taiwan. The Taiwan Stock Exchange is smaller and, as a market, more volatile than the securities markets in the United States and a number of European countries. The Taiwan Stock Exchange has experienced substantial fluctuations in the prices and volumes of sales of listed securities, and there are currently limits on the range of daily price movements on the Taiwan Stock Exchange. The Taiwan Stock Exchange is particularly volatile during times of political instability, such as when relations between Taiwan and the PRC are strained. Moreover, the Taiwan Stock Exchange has experienced problems such as market manipulation, insider trading and payment defaults, and the government of Taiwan has from time to time intervened in the stock market by purchasing stocks listed on the Taiwan Stock Exchange. The recurrence of these or similar problems could decrease the market price and liquidity of the shares and ADSs.
     From September 19, 2000, the commencement date of the listing of our ADSs on the New York Stock Exchange, or the NYSE, to December 31, 2007, the daily reported closing prices of our ADSs ranged from US$14.88 per ADS to US$2.85 per ADS. The market price of the ADSs may also be affected by general trading activities on the U.S. stock exchanges, which recently have experienced significant price volatility with respect to shares of technology companies. Fluctuation in interest rates and other general economic conditions may also have an effect on the market price of the ADSs.
Currency fluctuations could increase our costs relative to our revenues, which could adversely affect our profitability.
     More than half of our net operating revenues are denominated in currencies other than New Taiwan dollars, primarily U.S. dollars and Japanese Yen. On the other hand, more than half of our costs of direct labor, raw materials and overhead are incurred in New Taiwan dollars. Although we hedge a portion of the resulting net foreign exchange position through the use of forward exchange contracts, we are still affected by fluctuations in exchange rates among the U.S. dollar, the Japanese Yen, the New Taiwan dollar and other currencies. Any significant fluctuation in exchange rates may be harmful to our financial condition. In addition, fluctuations in the exchange rate between the U.S. dollar and the New Taiwan dollar will affect the U.S. dollar value of the ADSs and the U.S. dollar value of any cash dividends we pay, which could have a corresponding effect on the market price of the ADSs.
Our future tax obligations may adversely affect our profitability.
     The ROC government enacted the ROC Income Basic Tax Act, also known as the “Minimum Income Tax Statute”, or the Statute, which became effective on January 1, 2006 and imposes an alternative minimum tax, or AMT. The AMT is designed to remedy the current excessive tax incentives for individuals and businesses. The AMT imposed under the Statute is a supplemental tax which is payable if the income tax payable pursuant to the ROC Income Tax Act is below the minimum amount prescribed under the Statute. For the purpose of calculating the AMT, the taxable income defined under the Statute includes most income that is exempted from income tax under various legislations, such as those providing tax holidays and investment tax credits. For businesses, the incomes which previously enjoyed tax-exemption privileges under relevant tax regulations, such as the Act for the Establishment and Administration of the Science Parks and the Statute for Upgrading Industries will be subject to the new AMT system for the calculation of business taxpayers’ aggregate incomes. The AMT rate for business entities is 10%. Under the Statute, a company will be subject to a 10% AMT if its annual taxable income under the Statute exceeds NT$2 million. However, the Statute grandfathered certain tax exemptions granted prior to the enactment of the AMT. For example, businesses already qualified for five-year tax holidays and having obtained the applicable permission issued by the competent authority before December 31, 2005 may continue to enjoy tax incentives, and the income exempted thereunder will not to be added to the taxable income for the purpose of calculating the AMT, so long as the construction of their investment projects breaks ground within one year from January 1, 2006 and is completed within three years commencing from the day immediately following their receipts of the applicable permission issued by the competent authority. In the event of the expiration of the tax exemption periods or an increase in other taxable income subject to the Statute, such 10% AMT may adversely reduce our net income after tax.

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Risks Related to the Shares and ADSs and Our Trading Markets
Restrictions on the ability to deposit shares into our ADS program may adversely affect the liquidity and price of the ADSs.
     The ability to deposit shares into our ADS program is restricted by ROC law. Under current ROC law, no person or entity, including you and us, may deposit shares into our ADS program without specific approval of the ROC FSC except for the deposit of the shares into our ADS program and for the issuance of additional ADSs in connection with:
  (1)   distribution of share dividends or free distribution of our shares;
 
  (2)   exercise of the preemptive rights of ADS holders applicable to the shares evidenced by ADSs in the event of capital increases for cash; or
 
  (3)   delivery of our shares which are purchased in the domestic market in Taiwan directly by the investor or through the depositary or are already in the possession of the investor to the custodian for deposit into our ADS program, subject to the following conditions: (a) the re-issuance is permitted under the deposit agreement and custody agreement, (b) the depositary may accept deposit of those shares and issue the corresponding number of ADSs with regard to such deposit only if the total number of ADSs outstanding after the issuance does not exceed the number of ADSs previously approved by the ROC FSC, plus any ADSs issued pursuant to the events described in (1) and (2) above and (c) this deposit may only be made to the extent previously issued ADSs have been withdrawn.
     As a result of the limited ability to deposit shares into our ADS program, the prevailing market price of our ADSs on the NYSE may differ from the prevailing market price of the equivalent number of our shares on the Taiwan Stock Exchange.
Holders of our ADSs will not have the same proposal or voting rights as the holders of our shares, which may affect the value of your investment.
     Except for treasury shares and shares held by our subsidiaries which meet certain criteria provided under the ROC Company Act, each common share is generally entitled to one vote and no voting discount will be applied. However, except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attached to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attached to the shares represented by the ADSs. The voting rights attached to the shares evidenced by our ADSs must be exercised as to all matters brought to a vote of shareholders collectively in the same manner.
     Moreover, holders of the ADSs do not have individual rights to propose any matter for shareholders’ votes at our shareholders’ meetings. However, holders of at least 51% of the ADS outstanding at the relevant record date may request the depositary to submit to us one proposal per year for consideration at our annual ordinary shareholders’ meeting, provided that such proposal meets certain submission criteria and limitations, including the language and the length of the proposal, the time of submission, the required certification or undertakings, and the attendance at the annual ordinary shareholders’ meeting. A qualified proposal so submitted by the depositary will still be subject to review by our board of directors and there is no assurance that the proposal will be accepted by our board of directors for inclusion in the agenda of our annual ordinary shareholders’ meeting. Furthermore, if we determine, at our discretion, that the proposal submitted by the depositary does not qualify, we have no obligation to notify the depositary or to allow the depositary to modify such proposal.
     Furthermore, if holders of at least 51% of the ADSs outstanding at the relevant record date instruct the depositary to vote in the same manner regarding a resolution, including election of directors and/or supervisors, the depositary will appoint our Chairman, or his designee, to represent the ADS holders at the shareholders’ meetings and to vote the shares represented by the ADSs outstanding in the manner so instructed. If by the relevant record date the depositary has not received instructions from holders of ADSs holding at least 51% of the ADSs to vote in the same manner for any resolution, then the holders will be deemed to have instructed the depositary to authorize and appoint our Chairman, or his designee, to vote all the shares represented by ADSs at his sole discretion, which may not be in your interest.

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The rights of holders of our ADSs to participate in our rights offerings may be limited, which may cause dilution to their holdings.
     We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings.
Changes in exchange controls that restrict your ability to convert proceeds received from your ownership of ADSs may have an adverse effect on the value of your investment.
     Your ability to convert proceeds received from your ownership of ADSs depends on existing and future exchange control regulations of the Republic of China. Under the current laws of the Republic of China, an ADS holder or the depositary, without obtaining further approvals from the ROC Central Bank of China, or the CBC, or any other governmental authority or agency of the Republic of China, may convert NT dollars into other currencies, including U.S. dollars, in respect of:
    the proceeds of the sale of shares represented by ADSs or received as share dividends with respect to the shares and deposited into the depositary receipt facility; and
 
    any cash dividends or distributions received from the shares represented by ADSs.
     In addition, the depositary may also convert into NT dollars incoming payments for purchases of shares for deposit in the depositary receipt facility against the creation of additional ADSs. If you withdraw the shares underlying your ADSs and become a holder of our shares, you may convert into NT dollars subscription payments for rights offerings. The depositary may be required to obtain foreign exchange approval from the CBC on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights of new shares. Although it is expected that the CBC will grant approval as a routine matter, required approvals may not be obtained in a timely manner, or at all.
     Under the Republic of China Foreign Exchange Control Law, the Executive Yuan of the Republic of China may, without prior notice but subject to subsequent legislative approval, impose foreign exchange controls or other restrictions in the event of, among other things, a material change in international economic conditions.
Our public shareholders may have more difficulty protecting their interests than they would as shareholders of a U.S. corporation.
     Our corporate affairs are governed by our articles of incorporation and by laws governing ROC corporations. The rights of our shareholders to bring shareholders’ suits against us or our board of directors under ROC law are much more limited than those of the shareholders of U.S. corporations. Therefore, our public shareholders may have more difficulty protecting their interests in connection with actions taken by our management, members of our board of directors or controlling shareholders than they would as shareholders of a U.S. corporation. Please refer to “Item 10. Additional Information—B. Memorandum and Articles of Association—Rights to Bring Shareholders’ Suits” included elsewhere in this annual report for a detailed discussion of the rights of our shareholders to bring legal actions against us or our directors under ROC law.

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Holders of our ADSs will be required to appoint several local agents in Taiwan if they withdraw shares from our ADS program and become our shareholders, which may make ownership burdensome.
     Non-ROC persons wishing to withdraw shares represented by their ADSs from our ADS program and hold our shares represented by those ADSs are required to, among other things, appoint a local agent or representative with qualifications set forth by the ROC FSC to open a securities trading account with a local brokerage firm, pay ROC taxes, remit funds and exercise shareholders’ rights. In addition, the withdrawing holders are also required to appoint a custodian bank with qualifications set forth by the ROC FSC to hold the securities in safekeeping, make confirmations, settle trades and report all relevant information. Without making this appointment and opening of the accounts, the withdrawing holders would not be able to subsequently sell our shares withdrawn from a depositary receipt facility on the Taiwan Stock Exchange. Under ROC law and regulations, citizens of the PRC are not permitted to hold our shares or withdraw shares represented by ADSs from our ADS program unless they obtain the approval from the competent authority. Due to the absence of relevant rules or guidelines, PRC persons are currently not able to conduct investments in the ROC.
You may not be able to enforce a judgment of a foreign court in the ROC.
     We are a company limited by shares incorporated under the ROC Company Act. Most of our assets and most of our directors, supervisors and executive officers and experts named in the registration statement are located in Taiwan. As a result, it may be difficult for you to enforce judgments obtained outside Taiwan upon us or such persons in Taiwan. We have been advised by our ROC counsel that any judgment obtained against us in any court outside the ROC arising out of or relating to the ADSs will not be enforced by ROC courts if any of the following situations shall apply to such final judgment:
    the court rendering the judgment does not have jurisdiction over the subject matter according to ROC law;
 
    the judgment is contrary to the public order or good morals of the ROC;
 
    the judgment was rendered by default, except where the summons or order necessary for the commencement of the action was legally served on us within the jurisdiction of the court rendering the judgment within a reasonable period of time or with judicial assistance of the ROC; or
 
    judgments of ROC courts are not recognized in the jurisdiction of the court rendering the judgment on a reciprocal basis.
We may be considered a passive foreign investment company, which could result in adverse U.S. tax consequences for U.S. investors.
     We do not believe that we were a passive foreign investment company, or PFIC, for 2007 and we do not expect to become one in the future, although there can be no assurance in this regard. Based upon the nature of our business activities, we may be classified as a passive foreign investment company for U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor.
     For example, if we are a PFIC, our U.S. investors may become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, for any taxable year we will be classified as a PFIC for U.S. tax purposes if either (i) 75% or more of our gross income in a taxable year is passive income or (ii) the average percentage of our assets (which includes cash) by value in a taxable year which produce or are held for the production of passive income is at least 50%. The calculation of the value of our assets will be based, in part, on the quarterly market value of shares and ADSs, which is subject to change. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we have raised in prior offerings. See “Taxation —U.S. Federal Income Tax Considerations For U.S. Persons — Passive foreign investment company.”

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ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
     Our legal and commercial name is United Microelectronics Corporation, commonly known as “UMC.” We were incorporated under the ROC Company Law as a company limited by shares in May 1980 and our shares were listed on the Taiwan Stock Exchange in 1985. Our principal executive office is located at No. 3 Li-Hsin Road II, Hsinchu Science Park, Hsinchu, Taiwan, Republic of China, and our telephone number is 886-3-578-2258. Our Internet website address is www.umc.com. The information on our website does not form part of this annual report. Our ADSs have been listed on the NYSE under the symbol “UMC” since September 19, 2000.
     We are one of the world’s largest independent semiconductor foundries and a leader in semiconductor manufacturing process technologies. Our primary business is the manufacture, or “fabrication”, of semiconductors, sometimes called “chips” or “integrated circuits”, for others. Using our own proprietary processes and techniques, we make chips to the design specifications of our many customers. Our company maintains a diversified customer base across industries, including communication, consumer electronics, computer, memory and others, while continuing to focus on manufacturing for high growth, large volume applications, including networking, telecommunications, Internet, multimedia, PCs and graphics. We sell and market mainly wafers which in turn are used in a number of different applications by our customers. Percentages of our net wafer sales derived from our products used in communication devices, consumer electronics, PCs, memory and other applications were 53.7%, 19.1%, 25.0%, 0.7% and 1.5%, respectively, in 2007.
     We focus on the development of leading mass-producible manufacturing process technologies. We were among the first in the foundry industry to go into commercial operation with such advanced capabilities as producing integrated circuits with line widths of 0.25, 0.18, 0.15, 0.13 micron and 90, 65 and 45 nanometer. Advanced technologies have enabled electronic products, especially in relation to computer, communication and consumer products, to integrate their functions in new and innovative methods. Networking capabilities have allowed electronic products such as computers, cell phones, televisions, PDAs, CD-ROMs and digital cameras to communicate with each other to exchange information. More powerful semiconductors are required to drive multimedia functions (e.g. processing visual data) and to resolve network bandwidth issues. At the same time, the trend toward personal electronic devices has resulted in products that are becoming physically smaller and consume less power. Process technology must also shrink the volumes of products aggressively to cater to this trend of integrating multiple functions, reducing the number of components needed for operation and lowering IC power consumption. Dedicated semiconductor foundries need to achieve this process improvement and at the same time develop multiple process technologies to satisfy the varying needs of computer, communication and consumer products. We believe our superior process technologies will enable us to continue to offer our customers significant performance benefits for their products, faster time-to-market production, cost savings and other competitive advantages.
     We provide high quality service based on our performance. In today’s marketplace, we believe it is important to make available not only the most manufacturable processes, but also the best solutions to enable customers to design integrated circuits that include entire systems on a chip. Through these efforts, we intend to be the foundry solution for SoC customer needs. To achieve this goal, we believe it is necessary to timely develop and offer the intellectual property and design support that customers need to ensure their specific design blocks work with the other design blocks of the integrated circuit system in the manner intended. Accordingly, we have a dedicated intellectual property and design support team which focuses on timely development of the intellectual property and process specific design blocks our customers need in order to develop products that operate and perform as intended. Our design service team actively cooperates with our customers and vendors of cell libraries and intellectual property offerings to identify, early in the product/market cycle, the offerings needed to ensure that these coordinated offerings are available to our customers in silicon verified form in a streamlined and easy-to-use manner. As a result, we are able to ensure the timely delivery of service offerings from the earliest time in the customer design cycle, resulting in a shorter time-to-volume production. We also provide our customers with real-time Internet access to their confidential production data, resulting in superior communication and efficiency. We further address our customers’ needs using our advanced technology and proven methodology to achieve fast cycle time, high yield, production flexibility and close customer communication. For example, we select and configure our clean rooms and equipment and develop our processes to maximize the flexibility in meeting and adapting to rapidly changing customer and industry needs. As a result, our cycle time, or the period from customer order to wafer delivery, and our responsiveness to customer request changes are among the fastest in the dedicated foundry industry. We also provide high quality service and engineering infrastructure.

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     Our production capacity is comparable to that of the largest companies in the semiconductor industry, and we believe our leading edge and high volume capability is a major competitive advantage.
     Our technology and service have attracted three principal types of foundry industry customers: fabless design companies, integrated device manufacturers and system companies. Fabless design companies design, develop and distribute proprietary semiconductor products, but do not maintain internal manufacturing capacity. Instead, these companies depend on outside manufacturing sources. Integrated device manufacturers, in contrast, traditionally integrated all functions — manufacturing as well as design, development, sales and distribution. System companies design and develop integrated circuits to be components within their end or intermediate products and generally do not maintain internal manufacturing capacity. For example, system companies market and sell cellular telephones and/or Internet appliances into which they incorporate semiconductor products.
     Our primary customers, in terms of our sales revenues, include premier integrated device manufacturers, such as Infineon, LSI Logic, STMicroelectronics, Texas Instruments, Freescale, AMD (ATI) and Philips, and leading fabless design companies, such as Broadcom, Marvell, MediaTek, Novatek, Realtek, SanDisk and Xilinx. In 2007, our company’s top ten customers accounted for 59.3% of our net operating revenues. Our top two customers accounted for 13.7% and 13.2% of our net operating revenues in 2007, respectively. We believe our success in attracting these customers is a direct result of our commitment to high quality service and our intense focus on customer needs and performance.
     Please refer to “Item 5. Operating and Financial Review and Prospects —B. Liquidity and Capital Resources” for a discussion of our capital expenditures in the past three years and the plan for the current year.
Our Strategy
     To maintain and enhance our position as a market leader, we have adopted a business strategy with a focus on a partnership business model designed to accommodate our customers’ business needs and objectives and to promote their interests as our partners. We believe that our success and profitability are inseparable from the success of our customers. The goal in this business model is to create a network of partnerships or alliances among system companies and integrated device manufacturers, intellectual property and design houses, as well as foundry companies. We believe that we and our partners will benefit from the synergy generated through such long-term partnerships or alliances and the added value to be shared among the partners. The key elements of our strategy are:
     Operate as a SoC Solution Foundry. We plan to operate as a SoC solution foundry. This involves collaborating closely with customers as well as partners throughout the entire SoC technology supply chain, including equipment, Electronic Design Automation tool and IP vendors, to work synergistically towards a SoC solution for each customer. Our implementation of our SoC solution strategy has resulted in a broad range of options available to SoC designers, including silicon-validated reference flows, in-depth IP portfolio and know-how and extensive libraries of IPs, to better provide value to their customers. Capitalizing on our advanced process technology, extensive packaging and testing capabilities and state-of-art 300mm manufacturing facilities, we believe we are in a better position to deliver integrated SoC solutions for customers than most of our competitors.
     Build up Customer-focused Partnership Business Model. We have focused on building partnership relationships with our customers, and we strive to help our customers to achieve their objectives through close cooperation. Unlike the traditional buy-and-sell relationship between a foundry and its customers, we believe our partnership business model will help us understand our customers’ requirements and, accordingly, better accommodate our customers’ needs in a number of ways, such as customized processes and services that optimize the entire value chain (not just the foundry portion) and intellectual property-related support. We believe that this business model will enable us to deliver our products to our customers at the earliest time our customers require for their design cycle, resulting in shorter time-to-market and time-to-volume production. Furthermore, we believe we will render more cost-effective services by focusing our research and development expenditures on the specific requirements of our customers. We believe our partnership business model will help us not only survive a market downturn, but also achieve a better competitive position.

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     Continue to Focus on High Growth Applications and Customers. We believe one measure of a successful foundry company is the quality of its customers. We focus our sales and marketing on customers who are established or emerging leaders in industries with high growth potential. Our customers include industry leaders such as AMD (ATI), Broadcom, Marvell, Infineon, LSI Logic, MediaTek, Novatek, Realtek, SanDisk, STMicroelectronics, Texas Instruments, Freescale, Philips and Xilinx. We seek to maintain and expand our relationships with these companies. We strive to demonstrate to these customers the superiority and flexibility of our manufacturing, technology and service capabilities and to provide them with production and design assistance. We are also making efforts to further diversify our customer portfolio by actively pursuing customers in the PC-related area in order to maintain a balanced exposure to different applications. We believe these efforts strengthen our relationships with our customers and enhance our reputation in the semiconductor industry as a leading foundry service provider.
     Maintain Our Leading Position in Mass-Producible Semiconductor Technology and Selectively Pursue Strategic Investments in New Technologies. We believe that maintaining and enhancing our leadership in mass-producible semiconductor manufacturing technology is critical to attract and retain customers. Our reputation for technological excellence has attracted both established and emerging leaders in the semiconductor industries who work closely with us on technology development. In addition, we believe our superior processing expertise has enabled us to provide flexible production schedules to meet our customers’ particular needs. We plan to continue building internal research and development expertise, to focus on process development and to establish alliances with leading semiconductor companies to accelerate access to next-generation technologies. For example, our 45-nanometer technology, which will be delivered to our customers by 2008, is expected to significantly increase the competitive advantages of our customers by providing better device performance in a smaller die size. We believe our progress in developing more advanced process technologies has benefited our customers in the fields of computers, communications, consumer electronics and others with special preferences in certain aspects of the products, such as the ultimate performance, density and power consumption.
     We also recognize every company has limited resources and that the foundry industry is ever-evolving. Accordingly, we believe we should invest in new research and development technology intelligently and in a cost-effective manner to achieve the ultimate output of the resulting technology. In doing so, we balance the rate of return of our research and development with the importance of developing a technology at the right time to enhance our competitive edge without unduly diluting our profitability. We intend to avoid investments in technologies that do not present a commercial potential for volume production. We believe that to develop the earliest and most advanced semiconductor technology without regard to its potential for near term volume production may prove costly to our operations and would not strengthen our competitive position. We perceive a benefit to defer investment in the premature equipment needed to claim the earliest advanced technology and instead to purchase a more advanced and less expensive version of equipment from vendors who design such equipment based on pre-production lessons learned from the earliest technology.
     Maintain Scale and Capacity Capabilities to Meet Customer Requirements, with a Focus on 12-inch Wafer Facilities for Future Expansion. We believe that maintaining our foundry capacity with advanced technology and facilities is critical to the maintenance of our industry leadership. Our production capacity is currently among the largest of all semiconductor foundries in the world. We intend to increase our 12-inch wafer production capacity to meet the needs of our customers and to fully capitalize on the expected growth of our industry. Our future capacity expansion plans will focus on 12-inch wafer facilities in order to maintain our technology leadership. 12-inch wafers offer manufacturing advantages over 8-inch wafers because of the greater number of chips on each wafer. In addition, 12-inch wafer facilities present a more cost-effective solution in achieving an economic scale of production. We intend to carefully monitor current market conditions in order to optimize the timing of our capital spending.

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B. Business Overview
Manufacturing Facilities
     To maintain a leading position in the foundry business, we have placed great emphasis on achieving and maintaining a high standard of manufacturing quality. As a result, we seek to design and implement manufacturing processes that produce consistent, high manufacturing yields to enable our customers to estimate, with reasonable certainty, how many wafers they need to order from us. In addition, we continuously seek to enhance our production capacity and process technology, two important factors that characterize a foundry’s manufacturing capability. Our large production capacity and advanced process technologies enable us to provide our customers with volume production and flexible and quick-to-market manufacturing services. All of our fabs operate 24 hours per day, seven days per week. Substantially all maintenance at each of the fabs is performed concurrently with production.
     The construction of our second 300mm fab in Taiwan is underway, as a step in our continuing expansion of our manufacturing complex in the Tainan Science Park in southern Taiwan. Total investment for this fab is estimated to be US$5 billion, with a maximum designed monthly production capacity of approximately 50,000 wafers. The construction of this new fab is expected to be completed by the end of 2008, and equipment is expected to be moved into this fab in early 2009.
     The following table sets forth operational data of each of our manufacturing facilities as of December 31, 2007.
                                         
    Fab 6A   Fab 8AB   Fab 8C   Fab 8D   Fab 8E   Fab 8F   Fab 8S   Fab 12A   Fab 12i   UMCJ
Commencement of volume production
  1989   1995 for the module formerly named Fab 8A; 1996 for the module formerly named Fab 8B   1998   2000   FABII 1998
FAB2A 2000
  2000   2000   2002   2004   1996
 
                                       
Estimated full capacity (1) (2)
  49,300 wafers per month   68,000 wafers per month   33,500 wafers per month   22,000 wafers per month   34,000 wafers per month   31,000 wafers per month   23,000 wafers per month   35,000 wafers per month   26,000 wafers per month   20,000 wafers per month
 
                                       
Wafer size
  6-inch (150mm)   8-inch (200mm)   8-inch (200mm)   8-inch (200mm)   8-inch (200mm)   8-inch (200mm)   8-inch (200mm)   12-inch (300mm)   12-inch (300mm)   8-inch (200mm)
 
                                       
Clean room area (3)
  5,250 sq. meters   25,029 sq. meters   19,764 sq. meters   16,589 sq. meters   21,576 sq. meters   13,812 sq. meters   8,163 sq. meters   24,860 sq. meters   26,366 sq. meters   10,367 sq. meters
 
                                       
Type of clean rooms (4)
  Class-10 @0.1um, clean tunnel   Class-0.1 @0.1um, clean tunnel   Class-0.1 @0.1um, clean tunnel   Class100 @0.3um, SMIF/mini-environment   FABII: Class-1000@0.3 um FAB2A: Class100@0.3um, SMIF/mini-environment   Class 100 @0.3um, SMIF/mini-environment   Class 1000 @0.3um, SMIF/mini-environment   Class 100 @0.3um, SMIF/mini-environment   Class 100 @0.3um, SMIF/mini-environment   Class-1 @0.1um, clean tunnel
 
(1)   Measured in original wafer size.
 
(2)   The capacity of a fab is determined based on the capacity ratings given by manufacturers of the equipment used in the fab, adjusted for, among other factors, actual output during uninterrupted trial runs, expected down time due to set up for production runs and maintenance and expected product mix.
 
(3)   “Area” represents the total area of clean rooms within a fab. Clean room area of Fab 12i area includes Module B area of 11,737 square meters.
 
(4)   “Class” represents the cleanliness of clean rooms in the fab. Class-10@0.1um means a standard of air purity under which the amount of dust is limited to fewer than 10 particles of contaminants of 0.1 micron or greater per one cubic foot per minute of air flow. Class-0.1@0.1um means a standard of air purity under which the amount of dust is limited to fewer than one particle of contaminant of 0.1 micron or greater per 10 cubic feet per minute of air flow. Class-100@0.3um means a standard of air purity under which the amount of dust is limited to fewer than 100 particles of contaminants of 0.3 micron or greater per one cubic foot per minute of air flow. Class-1000@0.3um means a standard of air purity under which the amount of dust is limited to fewer than 1,000 particles of contaminants of 0.3 micron or greater per one cubic foot per minute of air flow. The general production environment may be organized into “clean tunnels” or “mini environments”. In a clean tunnel environment, the clean room is divided into many tunnels with partitions. A higher level of cleanliness is kept inside the tunnel for production. Mini-environments within a clean room use Standard Mechanical Interface technology, or SMIF, which employs input/output devices designed to protect products from contamination while providing a standard mechanical interface to wafer production tools. Mini-environment is generally a preferred approach because it reduces building structural costs and operating costs, allows flexibility in equipment layout and facilitates the ramping-up process during capacity expansion.

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     The following table sets forth the size and primary use of our facilities and whether such facilities, including land and buildings, are owned or leased. Our land in the Hsinchu and Tainan Science Parks is leased from the ROC government.
                 
    Size       Land   Building
Location   (Land/Building)   Primary Use   (Owned or Leased)   (Owned or Leased)
    (in square meters)            
Fab 6A, 10 Innovation 1st Rd.,
Hsinchu Science Park,
Hsinchu, Taiwan 300, ROC
  27,898/34,981   6-inch wafer production   Leased (expires in December 2026)   Owned
 
               
Fab 8AB, 3 Li-Hsin 2nd Rd.,
Hsinchu Science Park,
Hsinchu, Taiwan 300, ROC.
  62,114/81,751   8-inch wafer production   Leased (expires in March 2014)   Owned
 
               
Fab 8C, 6 Li-Hsin 3rd Rd.,
Hsinchu Science Park,
Hsinchu, Taiwan 300, ROC
  9,007/28,984   8-inch wafer production   Leased (expires in March 2016)   Owned
 
               
Fab 8D, 8 Li-Hsin 3rd Rd.,
Hsinchu Science Park,
Hsinchu, Taiwan 300, ROC
  9,089/29,181   8-inch wafer production   Leased (expires in March 2016)   Owned
 
               
Fab 8E, 17 Li-Hsin Rd.,
Hsinchu Science Park,
Hsinchu, Taiwan 300, ROC
  35,000/74,067   8-inch wafer production   Leased (expires in February 2016)   Owned
 
               
Fab 8F, 3 Li-Hsin 6th Rd.,
Hsinchu Science Park,
Hsinchu, Taiwan 300, ROC.
  24,180/65,744   8-inch wafer production   Leased (expires in February 2018)   Owned
 
               
Fab 8S, 16 Creation 1st Rd.,
Hsinchu Science Park,
Hsinchu, Taiwan 300, ROC.
  20,404/65,614   8-inch wafer production   Leased (expires in December 2023)   Owned
 
               
Fab 12A, 18 Nan-Ke 2nd Rd.,
Tainan Science Park,
Sinshih, Tainan, Taiwan 741, ROC.
  56,000/165,607   12-inch wafer production   Leased (expires in October 2017)   Owned
 
               
Fab 12i, 3 Pasir
Ris Drive 12
Singapore 519528
  84,836/142,340   12-inch wafer production   Leased (expires in March 2031)   Owned
 
               
UMCJ, 1580, Yamamoto,
Tateyama-City, Chiba, Japan
  388,402/21,639   8-inch wafer production   71% owned, 29% leased (expires in June 2049)   Owned
 
               
United Tower, 3 Li-Hsin 2nd Rd.,
Hsinchu Science Park,
Hsinchu, Taiwan 300, ROC.
  5,737/85,224   Administration office   Leased (expires in March 2014)   Owned
 
               
Tunhwa South Rd. Office, 3F,
76, Sec. 2, Tunhwa S. Rd.,
Taipei, Taiwan 106, ROC
  166/2,221   Administration office   Owned   Owned
 
               
Testing Building, 1, Chin-Shan, St. 7,
Hsinchu, Taiwan 300, ROC.
  10,762/41,318   Leased to several companies   Owned   Owned

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    Size       Land   Building
Location   (Land/Building)   Primary Use   (Owned or Leased)   (Owned or Leased)
    (in square meters)            
R&D Building, 18 Nan-Ke 2nd Rd.,
Tainan Science Park,
Sinshih, Tainan, Taiwan 741, ROC.
  99,661/46,712   Research and development   Leased (expires in
December 2023)
  Owned
Process Technology
     Process technology is a set of specifications and parameters that we implement for manufacturing the critical dimensions of the patterned features of the circuitry of semiconductors. Our process technologies are currently among the most advanced in the foundry industry. These advanced technologies have enabled us to provide flexible production schedules to meet our customers’ particular needs.
     The continued enhancement of our process technologies has enabled us to manufacture semiconductor devices with smaller geometries, allowing us to produce more dice on a given wafer. We pioneered the production of semiconductor products with 0.25 and 0.18 micron process technology in 1997 and 1999, respectively, and used copper interconnect metallurgic to allow better reliability and higher conductibility than traditional aluminum interconnects. We began volume production using 0.13-micron process technology in 2002. Our extensive experience in the 0.13-micron process technology has helped smooth our transition to 90-nanometer pilot production. Our 90-nanometer process marks further advance in our technology achievements, incorporating up to nine copper metal layers, triple gate oxide and other advanced features and using chrom-less phase-shift masks. This technology has been in volume production since the second quarter of 2004 after passing several product certifications. In 2005, our research and development teams continued to work closely with the manufacturing staff to finalize our 90-nanometer technology portfolio. These collaborative efforts, performed in our best-in-class 300mm facilities, contributed to the improvement of high density 6T-SRAM yield to the maturity level of more than 90%. Our accomplishments led to multiple design awards followed by first silicon success, including a PC graphic IC and the world’s first 90-nanometer Wireless Local Area Network (WLAN) RF chip featuring a unique and specially developed inductor scheme. In addition, we were able to develop, within 6 months, several customized 90-nanometer processes tailored to our customers’ device specifications, and demonstrated product success by delivering record high yield for the first product lots. Our first fully-functional 65-nanometer wireless digital baseband customer IC was produced in July of 2005, after only a year since this research and development project began at this facility.
     Since the third quarter of 2006, we have begun the mass production of a next-generation 65-nanometer FPGA product, which features a 65% logic capacity increase over previous generation of FPGAs with triple gate oxide and 11 copper metal layers. Our 65-nanometer development team is not only independently developing our technologies in-house but is also bringing up customized process technologies to match customer specific needs. Furthermore, our 45-nanometer process technologies, which are jointly developed by us and our strategic partners and will be available to our customers by 2008, are expected to significantly increase the competitive advantages of our customers by providing better device performance in a smaller die size.
     The table below sets forth our actual process technology range, categorized by line widths, or the minimum physical dimensions of the transistor gate of integrated circuits in production by each fab, in 2007, and the estimated annual full capacity of each fab, actual total annual output and capacity utilization rates in 2005, 2006 and 2007:

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            Year Ended    
            December 31,    
            2007 Range of    
    Year of   Process   Year Ended December 31,
    Commencement of   Technologies (in   2005   2006   2007
    Operation   microns)   (in thousands of 8-inch wafer equivalents, except percentages)
 
                                       
Fab
                                       
Fab 6A
    1989       0.5       344       328       328  
Fab 8AB
    1995       0.5 to 0.25       816       816       816  
Fab 8C
    1998       0.35 to 0.15       401       400       400  
Fab 8D
    2000       0.18 to 0.09       274       252       260  
Fab 8E
    1998       0.5 to 0.18       404       406       408  
Fab 8F
    2000       0.25 to 0.15       378       372       372  
Fab 8S
    2000       0.25 to 0.15       278       276       276  
Fab 12A
    2002       0.18 to 0.065       597       754       847  
Fab 12i
    2004       0.13 to 0.065       363       413       601  
UMCJ
    1996       0.35 to 0.15       369       378       348  
Total estimated capacity
                  4,224       4,395       4,656  
Total output (actual)
                  3,059       3,495       3,813  
Capacity utilization
                  72.4 %     79.5 %     81.9 %
     The table below sets forth a breakdown of number and percentage of wafer output by process technologies in 2005, 2006 and 2007. We began commercial operation of our 0.13-micron, 90-nanometer and 65-nanometer process technologies in the first quarter of 2002, the second quarter of 2003 and the first quarter of 2006, respectively.
                                                 
    Year Ended December 31,
    2005   2006   2007
    (in thousands of 8-inch wafer equivalents, except percentages)
 
                                               
Technology
                                               
 
                                               
65 nanometers and under
                18       0.5 %     34       0.9 %
90 nanometers
    183       6.0 %     320       9.2       492       12.9  
0.13 micron
    335       10.9       477       13.6       595       15.6  
0.15 micron
    313       10.3       301       8.6       354       9.3  
0.18 micron
    489       16.0       677       19.4       784       20.5  
0.25 micron
    282       9.2       252       7.2       206       5.4  
0.35 micron
    1,045       34.1       1,004       28.7       971       25.5  
0.50 micron or higher
    412       13.5       446       12.8       377       9.9  
 
                                               
Total
    3,059       100.0 %     3,495       100.0 %     3,813       100.0 %
 
                                               
Capacity and Utilization
     The fabs in Taiwan that we own directly are named Fab 6A, Fab 8AB, Fab 8C, Fab 8D, Fab 8E, Fab 8F and Fab 8S, all of which are located in the Hsinchu Science Park in Taiwan, and Fab 12A, which is located in the Tainan Science Park in Taiwan. The fab in Singapore that is owned by our wholly-owned subsidiary, UMCSG, is named Fab 12i.
     Our average capacity utilization rate was 72.4% in 2005, 79.5% in 2006 and 81.9% in 2007.
Equipment
     Considering the performance and productivity of our manufacturing capability highly rely on the quality of our capital equipment, we generally purchase equipment that can not only meet the demand of our existing process technology, but also has the capability to be upgraded to match our future needs. The principal equipment we use to manufacture semiconductor devices are scanners/steppers, cleaners and track equipment, inspection equipment, etchers, furnaces, wet stations, strippers, implanters, sputters, CVD equipment, probers, testers and so on. We own all of the production equipment except for a few demonstration tools.

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     Our policy is to purchase high-quality equipment that demonstrates stable performance from vendors with dominate market share to ensure our continued competitiveness in the semiconductor field.
     Some of the equipment is available from a limited number of qualified vendors and/or is manufactured in relatively limited quantities, and some equipment has only recently been developed. We believe that our relationships with equipment suppliers are strong enough that we can leverage our position as a major purchaser to purchase equipment on better terms, including shorter lead time, than the terms received by several other foundries.
     Although we face the challenge of procuring the right equipment in sufficient quantity necessary for ramp-up or expansion of our fabrication facilities under constraint of short lead times, we have not in the past experienced any material problems in procuring the latest generation equipment on a timely basis even in periods of unpredictably high market demand. We manage the risks in the procurement process through timely internal communications among different divisions, efficient market information collection, early reservation of appropriate delivery slots and constant communications with our suppliers as well as by utilizing our good relationships with the vendors.
Raw Materials
     Our manufacturing processes use many raw materials, primarily silicon wafers, chemicals, gases and various types of precious sputtering targets. These raw materials are generally available from several suppliers. Our policy with respect to raw material purchases, similar to that for equipment purchases, is to select only a small number of qualified vendors who have demonstrated quality and reliability on delivery time of the raw materials. We generally do not have any long-term supply contracts with our vendors.
     Our general inventory policy is to maintain sufficient stock of each principal raw material for production and rolling forecasts of near-term requirements received from customers. In addition, we have agreements with several key material suppliers under which they hold similar levels of inventory in their warehouses for our use. However, we are not under any obligation to purchase raw material inventory that is held by our vendors for our benefit until we actually order it. We typically work with our vendors to plan our raw material requirements on a quarterly basis, with indicative pricing generally set on a quarterly basis. The actual purchase price is generally determined based on the prevailing market conditions. In the past, prices of our principal raw materials have not been volatile to a significant degree. Although we have not experienced any shortage of raw materials that had a material effect on our operations, and supplies of raw materials we use currently are adequate, shortages could occur in various critical materials due to interruption of supply or an increase in industry demand.
     The most important raw material used in our production processes is silicon wafer, which is the basic raw material from which integrated circuits are made. The principal makers for our wafers are Shin-Etsu, MEMC Electronic Materials, Inc. and Sumco Group (including Sumco Group Corporation and Formosa Sumco Technology Corporation). We have in the past obtained and believe that we will continue to be able to obtain a sufficient supply of silicon wafers. We believe that we have close working relationships with our wafer suppliers. Based on such long-term relationships, we believe that these major suppliers will use their best efforts to accommodate our demand.
     We use a large amount of water in our manufacturing process. We obtain water supplies from government-owned entities and recycle approximately 85% of the water that we use during the manufacturing process. We also use substantial amounts of dual loop electricity supplied by Taiwan Power Company in the manufacturing process. We maintain back-up generators that are capable of providing adequate amounts of electricity to maintain the required air pressure in our clean rooms in case of power interruptions. We believe our back-up devices are adequate in preventing business interruptions caused by power outages and emergency situations.

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Quality Control
     We believe that our advanced process technologies and reputation for high quality and reliable services and products have been important factors in attracting and retaining leading international and domestic semiconductor companies as customers.
     Our process technologies and fabrication facilities have been “qualified” by our customers after satisfying their stringent quality and reliability requirements. Generally, our customers perform on-site fab audits in addition to conducting their own product qualifications. These audits normally address quality management, documentation control, procurement and material incoming inspection, product final inspection, calibration and certification training systems. These audits include both data/record review and physical fabrication area tours for verification of conformity to specifications and procedures. If the audit findings are satisfactory, then the fab facility is termed “qualified” for proceeding with further product qualification and later volume production. Most of our established customers, including AMD (ATI), Conexant Systems, Kawasaki, Infineon, LSI Logic, Freescale, Broadcom, MediaTek, Novatek, Pixart, SiS, STMicroelectronics, Texas Instruments, Xilinx, NXP, Sony, Davicom, Holtek, Cypress, Faraday, nVIDIA, Atmel, AMIS, Solomon and Micronas have audited our fabrication, and our fabs have successfully passed their qualification requirements.
     Our policy is to implement quality control measures to ensure the delivery of consistent high yield production with reliable performance for our customers. We test and monitor the quality of raw materials, process and products at various stages in the manufacturing process before shipment to customers. Reliability assurance also includes in-process wafer level reliability monitoring as well as packaged level reliability compliance. Our quality control is also continually enhanced through our top down annual Policy Management and bottom up Total Quality Management, or TQM, activities, involving various independent quality control teams from our various foundries, such as Quality Improvement and Innovation Team, Employee Suggestion System and Project Management Team. We also have Quality Assurance Division and Reliability Technology and Assurance Division, which in aggregate consist of 515 engineers, technicians and other staff as of March 31, 2008. These divisions are responsible for incoming materials’ quality inspection, in process quality audit, outgoing product quality inspection, quality system and standards maintenance, reliability assurance, reliability engineering and customer queries. In addition, our efforts to observe benchmark and best practices among fabs in the industry have also contributed to the improvement of our overall quality control procedures.
     All our fabs are ISO/TS 16949:2002 certified and also registered under the Year 2000 version of ISO9001. ISO/TS 16949:2002 sets the criteria for developing a fundamental quality management system. It focuses on continual improvement, defect prevention and the reduction of variation and waste. The Year 2000 version of ISO9001 emphasizes customer satisfaction and resource management.
Services and Products
     We primarily engage in wafer fabrication for foundry customers. To optimize fabrication services for our customers, we work closely with them as they finalize circuit design and contract for the preparation of masks to be used in the manufacturing process. We also offer our customers turnkey services by providing them with subcontracted assembly and test services. We believe that this ability to deliver a variety of foundry services in addition to wafer fabrication enables us to accommodate the needs of a full array of integrated device manufacturers, system companies and fabless design customers with different in-house capabilities.
     Wafer manufacturing requires many distinct and intricate steps. Each step in the manufacturing process must be completed with precision in order for finished semiconductor devices to work as intended. The processes require taking raw wafers and turning them into finished semiconductor devices generally through five steps: circuit design, mask tooling, wafer fabrication, assembly and test. The services we offer to our customers in each of these five steps are described below.
     Circuit Design. At this initial design stage, our engineers generally work with our customers to ensure that their designs can be successfully and cost-effectively manufactured in our facilities. We have assisted an increasing number of our customers in the design process by providing them with access to our partners’ electronic design analysis tools, intellectual property and design services as well as by providing them with custom embedded memory macro-cells. In our Silicon Shuttle program, we offer customers and intellectual property providers early access to actual silicon samples with their desired intellectual property and content in order to enable early and rapid use of our advanced technologies. The Silicon Shuttle program is a multi-chip test wafer program that allows silicon verification of intellectual property elements. In the Silicon Shuttle program, several different vendors can test their intellectual property using a single mask set, greatly reducing the cost of silicon verification for us and the participating vendors. The high cost of masks for advanced processes makes this program attractive to intellectual property vendors. ARM Limited, Faraday Technology Corp., or Faraday Technology, MIPS Technologies International, Virage Logic Corporation and Virtual Silicon Technology have utilized our Silicon Shuttle program. In our Gold IP program, we coordinate with leading suppliers of intellectual property, design and ASIC services to ensure their offerings are available to our customers in an integrated, easy to use manner which matches customers’ need to our technologies. With a view to lowering customer design barriers, we expanded our design support functions from conventional design support to adding intellectual property development to complement third-party intellectual properties and to provide customers with the widest range of silicon-verified choices. Our offerings range from design libraries to basic analog mixed-mode intellectual properties which, together, have been proved helpful in shortening our customer’s design cycle time.

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     Mask Tooling. Our engineers generally assist our customers to design and/or obtain masks that are optimized for our advanced process technologies and equipment. Actual mask production is usually provided by independent third parties specializing in mask tooling.
     Wafer Fabrication. As described above, our manufacturing service provides all aspects of the wafer fabrication process by utilizing a full range of advanced process technologies. During the wafer fabrication process, we perform procedures in which a photosensitive material is deposited on the wafer and exposed to light through the mask to form transistors and other circuit elements comprising a semiconductor. The unwanted material is then etched away, leaving only the desired circuit pattern on the wafer. As part of our wafer fabrication services, we also offer wafer probing services, which test, or “probe,” individual die on the processed wafers and identify dice that fail to meet required standards. We prefer to conduct wafer probing internally to obtain speedier and more accurate data on manufacturing yield rates.
     Assembly and Testing. We offer our customers turnkey services by providing the option to purchase finished semiconductor products that have been assembled and tested. We outsource assembly and test services to leading local assembly and test service providers, including Siliconware Precision Industries Co., Ltd., or Siliconware, and Advanced Semiconductor Engineering Inc. in Taiwan. After final testing, the semiconductors are shipped to our customers’ designated locations.
Customers and Markets
     Our primary customers, in terms of our sales revenues, include premier integrated device manufacturers, such as Infineon, LSI Logic, STMicroelectronics, Texas Instruments, Freescale, AMD (ATI) and Philips, and leading fabless design companies, such as Broadcom, Marvell, MediaTek, Novatek, Realtek, SanDisk and Xilinx. Although we are not dependent on any single customer, a significant portion of our net operating revenues have been generated from sales to a few customers. Our top ten customers accounted for approximately 59.3% of our net operating revenues in 2007. Our top two customers each accounted for 13.7% and 13.2% of our net operating revenues in 2007. Set forth below is a geographic breakdown of our operating revenues in 2005, 2006 and 2007.
                         
    Year Ended December 31,
Region   2005   2006   2007
Taiwan
    43.1 %     34.2 %     38.0 %
Asia (excluding Taiwan)
    6.6       8.5       6.9  
North America
    43.4       49.7       46.9  
Europe
    6.9       7.6       8.2  
 
                       
Total
    100.0 %     100.0 %     100.0 %
 
                       
     We believe our success in attracting these end customers is a direct result of our commitment to high quality service and our intense focus on customer needs and performance. Because we are an independent semiconductor foundry, most of our operating revenue is generated by our sales of wafers. Net wafer sales represents 97.3% of our net operating revenue, and excludes revenue from testing, mask and other services. The following table presents the percentages of our net wafer sales by types of customers during the last three years.

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    Year Ended December 31,
Customer Type   2005   2006   2007
Fabless design companies
    65.2 %     62.0 %     73.7 %
Integrated device manufacturers
    34.7       38.0       26.1  
System companies
    0.1       0.0       0.2  
 
                       
Total
    100.0 %     100.0 %     100.0 %
 
                       
     We focus on providing a high level of customer service in order to attract customers and maintain their ongoing loyalty. Our culture emphasizes responsiveness to customer needs with a focus on flexibility, speed and accuracy throughout our manufacturing and delivery processes. Our customer-oriented approach is especially evident in two types of services: customer design development services and manufacturing services. We believe that our large production capacity and advanced process technology enable us to provide better customer service than many other foundries through shorter turn-around time, greater manufacturing flexibility and higher manufacturing yields.
     We work closely with our customers throughout the design development and prototyping processes. Our design support team closely interacts with customers and intellectual property vendors to facilitate the design process and to identify their specific requirements for intellectual property offerings. We are responsive to our customers’ requirements in terms of overall turn-around time and production time-to-market by, for example, helping our customers streamline their IP offering processes and delivering prototypes in a timely and easy-to-use fashion. We also maintain flexibility and efficiency in our technical capability and respond quickly to our customers’ design changes.
     For IP offerings, we work with several leading IP vendors from digital, memory and analog fields in the semiconductor industry, such as ARM Limited, Faraday Technology, Virage Logic Corporation, Rambus Inc., Chipidea Microelectronica S.A. (acquired by MIPS Technologies Inc.), Silicon Image Inc. and Synopsys Inc., to deliver quality IP blocks that have been silicon validated using our advanced processes. Our alliance programs with major electronic design automation vendors, such as Cadence, Magma, Mentor, Synopsys and Ansoft, provide our customers with digital/analog reference design procedures and easy-to-use design solutions. By continuously enhancing our IP offerings, reference design procedures and design services through collaboration with major vendors, we aim to provide complete, accurate and user-friendly SoC solutions to our customers.
     As a design moves into manufacturing production, we continue to provide ongoing customer support through all phases of the manufacturing process. The local account manager works with our customer service representative to ensure the quality of our services, drawing upon our marketing and customer engineering support teams as required.
     In 1996, we introduced our original on line service, through which we provided our customers secure access via the Internet to critical manufacturing data, including process step location, start date, estimated ship-out date and quantity as their products move through our fabs. In October 2000, we officially launched our web-based customer information service system, known as “MyUMC,” which gives our customers easy access to our foundry services by providing a total online supply chain solution. MyUMC offers 24-hour access to detailed account information such as manufacturing, engineering and design support documents through each customer’s own customized start page. Some of the features available to customers through MyUMC include:
    viewing the status of orders from the start of production to the final shipping stages;
 
    viewing design layouts to shorten customers’ tape out time;
 
    collecting customer engineering requests;

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    gathering and downloading documents for design purposes; and
 
    accessing online and in real time the same manufacturing data used by our fab engineers.
     MyUMC provides our customers with a level of information previously enjoyed only by integrated device manufacturers that conducted each step of the manufacturing and material procurement processes internally.
     To enhance our ability to provide online services to our customers, we are currently in various stages of implementing a business project that provides customers with design support through our help desk and IP/Library information and responses to their mask tooling requests. Moreover, we continuously enrich the content of UMC customers’ services website and provide customers system-to-system links over the Internet (B2B) with open technology to efficiently meet our customers’ requests.
     We price our products on a per die or per wafer basis, taking into account the complexity of the technology, the prevailing market conditions, the order size, the cycle time, the strength and history of our relationship with the customer and our capacity utilization. Our main sales office is located in Taiwan, which is in charge of our sales activities in Asia. Our sales in Europe are currently made through United Microelectronics (Europe) BV, our wholly-owned subsidiary based in Amsterdam. Our sales in North America are made through UMC Group (USA), our subsidiary located in Sunnyvale, California. In addition, we opened a customer support office in Hyderabad Technology Park, India in mid-2007.
     We designate a portion of our wafer manufacturing capacity to some of our customers primarily under two types of agreements: reciprocal commitment agreements and deposit agreements. Under a reciprocal commitment agreement, the customer agrees to pay for, and we agree to supply, a specified capacity at a specified time in the future. Under a deposit agreement, the customer makes in advance a cash deposit for an option on a specified capacity at our fabs for a similar period of time. Option deposits are credited to wafer purchase prices as shipments are made. If this customer does not use the specified capacity, it will forfeit the deposit but, in certain circumstances and with our permission, the customer may arrange for a substitute customer to utilize such capacity. We are also obligated in some cases to make available capacity to customers under other types of agreements, such as our capacity commitment arrangement with our venture partners.
     We advertise in trade journals, organize technology seminars, hold a variety of regional and international sales conferences and attend a number of industry trade fairs to promote our products and services. We also publish a bi-monthly corporate newsletter for our customers.
Competition
     The worldwide semiconductor foundry industry is highly competitive, particularly during periods of overcapacity and inventory correction. We compete internationally and domestically with dedicated foundry service providers as well as with integrated device manufacturers and final product manufacturers which have in-house manufacturing capacity or foundry operations. Some of our competitors have substantially greater production, financial, research and development and marketing resources than we have. As a result, these companies may be able to compete more aggressively over a longer period of time than we can. In addition, several new dedicated foundries have commenced operations and compete directly with us. Any significant increase in competition may erode our profit margins and weaken our earnings.
     We believe that our primary competitors in the foundry services market are Taiwan Semiconductor Manufacturing Company Limited, Semiconductor Manufacturing International (Shanghai) Corporation and Chartered Semiconductor Manufacturing Ltd., as well as the foundry operation services of some integrated device manufacturers such as IBM and Toshiba. Other competitors such as Samsung, DongbuAnam Semiconductor, Grace Semiconductor Manufacturing Corp., X-FAB Semiconductors Foundries AG and Silterra Malaysia Sdn. Bhd. have initiated efforts to develop substantial new foundry capacity, although much of such capacity involves less cost-effective production than the 12-inch fabs for which we possess technical know-how. New entrants in the foundry business are likely to initiate a trend of competitive pricing and create potential overcapacity in legacy technology. The principal elements of competition in the semiconductor foundry industry include technical competence, production speed and cycle time, time-to-market, research and development quality, available capacity, manufacturing yields, customer service and price. We believe that we compete favorably with the new competitors on each of these elements, particularly our technical competence and research and development capabilities.

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Intellectual Property
     Our success depends in part on our ability to obtain patents, licenses and other intellectual property rights covering our production processes and activities. To that end, we have acquired certain patents and patent licenses and intend to continue to seek patents on our production processes. As of December 31, 2007, we held 3,175 U.S. patents and 5,558 patents issued outside of the United States.
     Our ability to compete also depends on our ability to operate without infringing on the proprietary rights of others. The semiconductor industry is generally characterized by frequent litigation regarding patent and other intellectual property rights. As is the case with many companies in the semiconductor industry, we have from time to time received communications from third parties asserting patents that cover certain of our technologies and alleging infringement of certain intellectual property rights of others. We expect that we will receive similar communications in the future. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and devote significant management resources to the defense of these claims, which could seriously harm our company.
     In order to minimize our risks from claims based on our manufacture of semiconductor devices or end-use products whose designs infringe on others’ intellectual property rights, we in general accept orders only from companies that we believe enjoy satisfactory reputation and for products that are not identified as risky for potential infringement claims. Furthermore, we obtain indemnification rights from customers. We also generally obtain indemnification rights from equipment vendors to hold us harmless from any losses resulting from any suit or proceedings brought against our company involving allegation of infringement of intellectual property rights on account of our use of the equipment supplied by them.
     We have entered into various patent cross-licenses with major technology companies, including a number of leading international semiconductor companies such as IBM, Renesas and Freescale. We may choose to renew our present licenses or to obtain additional technology licenses in the future. Our license agreement with Texas Instruments expired in December 2007, and we are now in the process of negotiating to renew this license agreement.
Research and Development
     We spent NT$9,634 million, NT$9,419 million and NT$9,631 million (US$297 million) in 2005, 2006 and 2007, respectively, on research and development, which represented 9.6%, 8.4% and 8.5%, respectively, of our net operating revenues for these periods. Our research and development efforts are mainly focused on delivering SoC foundry solutions that consist of the world’s leading process technologies, customer support services and manufacturing techniques. These resources provide our foundry customers with improved opportunities to develop SoC products that supply the global market. Our commitment to research and development can be illustrated by our 2007 research and development expenditures, which reached approximately 8.5% of net operating revenues. In June 2007, we completed the construction of a research and development center for nanometer technologies in the Tainan Science Park. The research and development center allows for seamless application of advanced process technology in the research and development phase to the manufacturing phase, such as our 45 nanometer process technology that has been recently used to fabricate SRAM chips. Our research and development center and our new 300mm fab under construction are being built strategically adjacent to our Fab 12A to allow for easy transfers of engineering resources, technology and equipment among the facilities.
     As of March 31, 2008, we employed 1,096 professionals in our research and development activities. In addition, other management and operational personnel are also involved in research and development activities but are not separately identified as research and development professionals.

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Our Investments
     Depending on the market conditions, we intend to gradually reduce our investments through secondary equity offerings, exchangeable bond offerings and other measures available to our company.
     We sold nil, 2 million, and 78 million common shares of AU Optronics in 2005, 2006 and 2007, respectively. We issued Exchangeable Bonds of US$235 million due 2007 in May 2002, and Exchangeable Bonds of US$206 million due 2008 in July 2003. The first bonds were exchangeable, at the option of the bondholders, into common shares or American depositary shares of AU Optronics, and the second bonds were exchangeable into common shares of AU Optronics. As of December 31, 2004, all bondholders of the Exchangeable Bonds due 2008 had exercised their rights to exchange their bonds into common shares of AU Optronics. Prior to the maturity date of May 10, 2007, 99.9% of the bondholders of the Exchangeable Bonds due 2007 had exercised their rights to exchange their bonds into common shares or American depositary shares of AU Optronics. We redeemed all of the remaining bonds outstanding in the principal amount of US$0.3 million. As of December 31, 2007, we had sold all of the common shares of AU Optronics.
     In 2005, we sold 25 million common shares of Novatek for NT$3,354 million and 29 million common shares of MediaTek for NT$7,605 million. In 2006, we sold 42 million common shares of MediaTek for NT$14,259 million. In 2007, we sold 9 million common shares of MediaTek for NT$5,100 million (US$157 million). As of March 31, 2008, we held 11.32% and 0.48% in Novatek and MediaTek, respectively.
     In addition, we sold 1.95 million common shares of ITE Tech. Inc., or ITE, for NT$260 million (US$8 million) and 10.1 million common shares of Holtek Semiconductor Inc., or Holtek, for NT$720 million (US$22 million) in 2007. As of March 31,2008, we held 19.73% and 18.85% in ITE and Holtek, respectively.
     In connection with the settlement of our litigations with Silicon Integrated Systems, or SiS, we reached an agreement with SiS in late 2002 to enter into business cooperation, including, among other things, exchange of process patents, production support and our board representation in SiS. In July 2004, we acquired SiSMC, a wafer foundry company spun off from SiS in 2003. As of March 31, 2008, we held 16.24% of SiS’s outstanding share capital.
     In January 2006, we sold our 63.48% stake in Hsun Chieh Investment Co., Ltd., or Hsun Chieh, to Hsieh Yong Capital Co., Ltd. and recorded a net gain of NT$13,152 million. The percentage of our ownership in Hsun Chieh decreased from 99.97% to 36.49% after the sale. Our representative currently holds one out of three board seats of Hsun Chieh. As a result of the sale, Hsun Chieh is no longer our consolidated subsidiary.
     The net gain realized from the sale of our stake in Hsun Chieh consists of three components. The first component was a gain of NT$1,624 million calculated as the excess of cash consideration received over the net book value of the 63.48% stake sold. The second component was a gain of NT$14,149 million recorded to reclassify a portion of the additional paid-in capital from a merger which formed Hsun Chieh in 1999. This component was related to the merger of six companies which resulted in the formation of Hsun Chieh. The fair value of the net assets received was deemed to be the value of the consideration for the acquisition of the interests in the six companies and was reflected in the common stock and additional paid-in capital accounts on the balance sheet. The excess of such fair value of net assets received over the assumed liabilities and payment for shares held by the shareholders of the six companies was recorded in the additional paid-in capital account on our consolidated balance sheet. As a result of the sale of 63.48% of ownership interests in Hsun Chieh, we reversed a proportionate share of the Hsun Chieh’s additional paid-in capital account, which had a balance of NT$22,282 million on the date of disposal, and recognized a gain in the consolidated statement of income of NT$14,149 million. These two components were offset in part by a NT$2,621 million loss from a decrease in the current quoted market price of our shares held by Hsun Chieh compared to their original cost.

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Environmental Matters
     The semiconductor production process generates gaseous wastes, liquid wastes, waste water and other industrial wastes in various stages of the manufacturing process. We have installed various types of anti-pollution equipment in our fabrication facilities to reduce, treat and, where feasible, recycle the wastes generated in our manufacturing process. We receive assistance with disposal of industrial waste from the Science Park Administration and Southern Taiwan Science Park Administration. Our operations are subject to regulation and periodic monitoring by Taiwan’s Environmental Protection Administration and local environmental protection authorities.
     We believe that we have adopted anti-pollution measures for the effective maintenance of environmental protection standards consistent with the practice of the semiconductor industry in Taiwan. In 2007, we spent approximately NT$168 million (US$5 million) for pollution control equipment. Our monthly waste disposal fees were approximately NT$4.1 million (US$0.1 million), and our annual cost for environmental monitoring was approximately NT$3.1 million (US$0.1 million). We also believe that we are in compliance in all material respects with applicable environmental laws and regulations.
Environmental, Safety and Health Management Systems
     We have implemented extensive environmental, safety and health management systems. These systems enable our operations to identify applicable environmental, safety and health regulations, assist in evaluating compliance status and timely establish loss preventive and control measures. The systems we implemented in all our fabs have been certified as meeting the ISO 14001 and OHSAS 18001 standards. ISO 14001 consists of a set of standards that provide guidance to the management of organizations to achieve an effective environmental management system. Procedures are established at manufacturing locations to ensure that all accidental spills and discharges are properly addressed. OHSAS 18001 is a recognizable occupational health and safety management system standard, which may be applied to assess and certify our management systems. Our goal in implementing ISO 14001 and OHSAS 18001 systems is to continually improve our environmental, health and safety management.
Litigation
     Hejian, a semiconductor manufacturer in Suzhou, China, was set up in December 2001. Soon after the establishment of Hejian, there were various rumors that Hejian was set up by us, which we denied immediately because we did not inject any capital into nor did we transfer any technology to Hejian.
     In early 2006, Hsinchu District Prosecutor’s Office brought criminal charges with the Hsinchu District Court against our former Chairman, Robert H. C. Tsao and our former Vice Chairman, John Hsuan in connection with their alleged breach of fiduciary duties and certain violations of the ROC Commercial Accounting Act. Prior to such charges, both our former Chairman and former Vice Chairman resigned from their respective positions with our company. The Hsinchu District Court found our former Chairman and formal Vice Chairman not guilty in October 2007, and the Prosecutor’s office filed an appeal with the Taiwan High Court in November 2007. The case is still pending in the Taiwan High Court.
     The ROC FSC, a regulatory authority that supervises securities, banking, futures, and insurance activities in Taiwan, also began their investigation into any violation of ROC securities laws by us. In April 2005, our former Chairman was fined (1) in the amount of NT$2.4 million by the ROC FSC for our delay in making public disclosure timely (within two days) regarding the information relating to Hejian, which was resolved in the March 4 Resolution, and (2) in the amount of NT$0.6 million for our failure to disclose the information regarding the assistance we had provided to Hejian. Our former Chairman’s appeal in relation to such fines was overruled in early 2006, and a lawsuit had been filed by our former Chairman with the Taipei Administrative High Court. In December 2007, the Taipei Administrative High Court revoked the ROC FSC’s decision and ruled in favor of our former Chairman. In January 2008, the ROC FSC filed an appeal with the Supreme Administrative Court. The case is still pending in the Supreme Administrative Court.

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     In connection with the March 4 Resolution, our company was also fined in the amount of NT$30,000 by the Taiwan Stock Exchange for a delay in making public disclosure. After our former Chairman and former Vice Chairman were indicted by the prosecutor, our company was found by the ROC MOEA to be in violation of the Act Governing Relations Between Peoples of the Taiwan Area and the Mainland Area and fined in the amount of NT$5 million for our alleged illegal investment in Hejian. Our appeal to the ROC MOEA in relation to such fines was denied in late 2006. We filed an administrative lawsuit in December 2006 with the Taipei Administrative High Court. In July 2007, the Taipei Administrative High Court revoked the ROC MOEA’s decision and ruled in favor of us. In August 2007, the ROC MOEA filed an appeal with the Supreme Administrative Court. The case is still pending in the Supreme Administrative Court.
     In June 2005, our Singapore Branch as plaintiff issued a Writ of Summons against Tokio Marine & Fire Insurance Company (Singapore) Pte. Ltd. or Tokio Marine, as defendant under a marine cargo insurance policy for the replacement cost of a 300mm Endura System damaged in transit. We believe a chamber of that equipment was damaged in shipment and incurred a cost of approximate US$1.24 million to replace the damaged chamber. Our Singapore Branch filed suit to recover under the insurance policy on the grounds that the equipment was damaged in shipment as a result of rough handling or conditions. Tokio Marine has denied that the incident was a covered event under the policy. In April 2008, trial court entered a judgment in our favor in the amount of US$1.24 million with costs to be taxed in accordance with Singapore law. Although the time for Tokio Marine to appeal has not yet passed, Tokio Marine has paid us US $1.24 million plus interest in accordance with the judgment.
     In February 2006, Taiwan Power Company, or TPC, filed a civil litigation case in Taiwan Hsinchu District Court against us and other Taiwan companies, claiming that (1) we and the other defendants collectively pay electrical fees of NT$13.3 million with accrued interest to TPC, and (2) we pay electrical line’s fees of NT$21.2 million to TPC. The case is under trial. We believe TPC’s claims are without merit.
     In March 2006, the spouse of Mr. C.F. Shih, a workman employed by Yih-Shin Construction Co., Ltd, or Yih-Shin, one of the subcontractors engaged by us for the construction of the Fab 12A dormitory, filed a request to Taiwan Tainan Prosecutors’ Office for charges against us and other related parties in connection with Mr. Shih’s severe injury in connection with the construction work. While Taiwan Tainan Prosecutor’s Office denied this request, Mr. Shih filed a civil litigation lawsuit against us, Yih-Shin and other related parties in April 2006. Mr. Shih claimed that we, Yih-Shin and other related parties collectively pay NT$21.0 million. In addition, Mr. Shih’s mother and spouse each requested for compensatory damages of NT$0.3 million, and each of Mr. Shih’s three children requested for compensatory damages of NT$0.1 million. This lawsuit is pending Taiwan Tainan District Court’s trial.
     Due to the recent merger between LSI and Agere Systems, Inc., we have, under the applicable Alternate Payment Provisions and Supplemental Licenses with effective date January 1, 2004, or APP, between us and Agere, exercised our option to terminate its payments under the APP. As a result, under the terms of the APP, the licenses granted to Agere and Lucent under our patents and the licenses granted to us under the semiconductor patents owned by Agere, Lucent Technologies and AT&T are terminated. In light of the merger, we believe we can secure more favorable terms than those afforded under the APP, and have entered negotiations with LSI/Agere toward that goal. Based on past experience, we expect to reach a negotiated solution without a material adverse effect on the operations or financial performance of us as a whole.
     In the meantime, in April 2008, LSI filed a petition with the US International Trade Commission naming us and eighteen other companies as proposed respondents (including AMIC Technology, one of our customers). LSI’s petition is based on alleged infringement of US 5,227,335, claiming certain methods for forming nitrided glue layers for tungsten processing in semiconductor fabrication. LSI’s petition seeks an order prohibiting import and/or sale of the accused devices in the US. Under established ITC practice, the ITC has 30 days to decide whether or not to initiate an investigation on the petition.
     On April 18 2008, LSI also filed a complaint in Federal District Court in the Eastern District of Texas, alleging an infringement of the same patent by the same parties. This complaint seeks an injunction or order prohibiting the alleged infringement along with a reasonable royalty, and other damages in a trebled amount on the basis of alleged willfulness. Under the established procedure, if the ITC initiates an investigation, it is likely that this court case will be stayed pending the outcome of the ITC matter.

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     Based on an investigation of the patent involved, we believe we have meritorious defenses to LSI’s claims. Moreover, given LSI’s apparent goal to license its patents on non-discriminatory and reasonable terms, we do not expect that these legal proceedings will have a material adverse effect on our operations or financial results as a whole.
Risk Management
     Risk and safety matters are administered by our Group Risk Management and Environmental Safety Health Division, or the GRM & ESH, established in 1998. We are pursuing the goal of a highly protected risk status in the semiconductor industry through the implementation of strict engineering safety procedures, regular enforcement of safety codes and standards, and compliance of detailed industry safety guidelines. Our initiatives include promoting a culture of safety within the organization and equipping each fab with Business Continuity Plan, or BCP, programs and BCP drills to lower the risk of business interruption. The professionally-trained full-time fire brigade is on duty 24-hours a day and armed with state-of-the-art fire fighting equipment to provide services for us as well as other companies in the region and is equipped with self-developed mobile smoke discharging system in cleanrooms without dedicated smoke control systems. We have also adopted the Triple Star Audit Program of AIG Insurance, a global leader in risk management and insurance, since 1999. All fabs have been ranked as top-class following AIG’s risk evaluation and risk improvement recommendations. The audit program focuses on 20 items, including ten Physical Protection Elements and ten Human Elements. Our latest 12-inch fabs, Fab 12A and 12i, obtained triple-stars in all 20 elements in the very first Triple Star Audit.
     We believe due to our proactive efforts in earthquake risk exposure prevention, we had quick and exemplary recovery from two major earthquakes in Taiwan on September 21, 1999 and December 26, 2006, respectively. Our Hsinchu fabs and Fab 12A in Tainan sustained only minor impact to their operations from the earthquake without interruption to the power system or water service. Normal operations resumed shortly after the incidents.
     Our continuous efforts in risk improvement and mitigation programs were recognized by the “clean room risk identification and mitigation” Gold Medal we received in the National Quality Control Circle competition held by the ROC MOEA in 2005. In addition, we were awarded “Outstanding Performance Award” in Risk Management in 2006 by AIG Insurance as a result of our outstanding risk management program.
Insurance
     We maintain industrial all risk insurance for our buildings, facilities, equipment and inventories. The insurance for fabs and their equipment covers physical damage and business interruption losses up to their respective policy limits except for exclusions as defined in the policy. We purchase directors and officers liability insurance for our directors and supervisors, covering the liabilities incurred in relation to his/her/its operation of business and legally responsible for. We also maintain public liability insurance for losses to third parties arising from our business operations. We believe that our insurance coverage is adequate to cover all major types of losses relevant to the semiconductor industry practice. However, significant damage to any of our production facilities, whether as a result of fire or other causes, could seriously harm our business.
C. Organizational Structure
     The following diagram shows our corporate structure as of December 31, 2007:
             
        Percentage of Ownership
Company   Jurisdiction of Incorporation   as of December 31, 2007
 
           
UMC Group (USA)
  California, USA     100.00 %
United Microelectronics (Europe) B.V.
  The Netherlands     100.00 %
UMC Capital Corporation
  Cayman Islands     100.00 %
United Microelectronics Corp. (Samoa)
  Samoa     100.00 %
TLC Capital Co., Ltd
  Taiwan, ROC     100.00 %
UMCi Ltd.
  Singapore     100.00 %
Fortune Venture Capital Corporation
  Taiwan, ROC     99.99 %
United Microdisplay Optronics Corp.
  Taiwan, ROC     85.24 %
UMC Japan
  Japan     50.09 %
Unitruth Investment Corp.
  Taiwan, ROC     100.00 %
UMC Capital (USA)
  California, USA     100.00 %
ECP VITA Ltd.
  British Virgin Islands     100.00 %
UMO (HK) Limited
  Hong Kong     100.00 %

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D. Property, Plants and Equipment
     Please refer to “— B. Business Overview — Manufacturing Facilities” for a discussion of our property, plants and equipment.
ITEM 4A. UNRESOLVED STAFF COMMENTS
     Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
     Unless stated otherwise, the discussion and analysis of our financial condition and results of operations in this section apply to our financial information as prepared in accordance with ROC GAAP. You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and the notes to such statements included in this annual report. ROC GAAP varies in certain significant respects from US GAAP. These differences and their effects on our financial statements are described in Note 35 to our audited consolidated financial statements included in this annual report.
     For the convenience of readers, NT dollar amounts used in this section for, and as of, the year ended December 31, 2007 have been translated into U.S. dollar amounts using US$1.00 = NT$32.43, the noon buying rate of the Federal Reserve Bank of New York on December 31, 2007. The U.S. dollar translation appears in parentheses next to the relevant NT dollar amount.
Overview
     We are one of the world’s leading independent semiconductor foundries, providing comprehensive wafer fabrication services and technologies to our customers based on their designs. We manage our business and measure our results of operations based on a single industry segment.
     Our production capacity has increased modestly in the last three years from approximately 358,000 8-inch wafer equivalents in December 2005 to approximately 382,000 8-inch wafer equivalents in December 2006, to approximately 397,000 8-inch wafer equivalents in December 2007. The larger economies of scale when capacity utilization rate is high have better enabled us to reduce our per unit production cost, which improves margins. However, when capacity utilization rate is low, this increased capacity has led to higher per unit production cost and decreased margins.
     Cyclicality of the Semiconductor Industry
     As the semiconductor industry is highly cyclical, revenues varied significantly over this period. It can take several years to plan and construct a fab and bring it to operations. Therefore, during periods of favorable market conditions, semiconductor manufacturers often begin building new fabs or acquiring existing fabs in response to anticipated demand growth for semiconductors. In addition, after commencement of commercial operations, fabs can increase production volumes rapidly. As a result, large amounts of semiconductor manufacturing capacity typically become available during the same time period. Absent a proportional growth in demand, this increase in supply often results in semiconductor manufacturing overcapacity, which has led to a sharp decline in semiconductor prices and significant capacity under-utilization. With a general recovery in the worldwide semiconductor industry, our average capacity utilization rate decreased to 72.4% in 2005 but increased to 79.5% in 2006 and increased to 81.9% in 2007. We believe that our results in 2005, 2006 and 2007 reflect the ongoing uncertainty in the global economy, conservative corporate information technology spending and low visibility with respect to end market demand.

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      Pricing
     We price our products on either a per die or a per wafer basis, taking into account the complexity of the technology, the prevailing market conditions, the order size, the cycle time, the strength and history of our relationship with the customer and our capacity utilization. Because semiconductor wafer prices tend to fluctuate frequently, we in general review our pricing on a quarterly basis. As a majority of our costs and expenses are fixed or semi-fixed, fluctuations in our products’ average selling prices historically have had a substantial impact on our margins. Our average selling price decreased approximately 7.4% from 2006 to 2007, mainly due to the reduction of average selling price by our customers in spite of our shift towards higher-priced product mix using more advanced technology.
     We believe that our current level of pricing is comparable to that of other leading foundries in each respective geometry. We believe that our ability to provide a wide range of advanced foundry services and process technologies as well as large manufacturing capacity will enable us to compete effectively with other leading foundries at a comparable price level.
      Capacity Utilization Rates
     Our operating results are characterized by relatively high fixed costs. In 2005, 2006 and 2007, approximately 74.0%, 69.5% and 64.8%, respectively, of our manufacturing costs consisted of depreciation, a portion of indirect material costs, amortization of license fees and indirect labor costs. Our variable costs increased in 2007 due to (i) an increase in direct material costs from NT$7,584 million in 2006 to NT$8,803 million (US$268 million) in 2007 due to higher wafer-start quantities and (ii) an increase in costs of spare parts in Fab 12A and Fab 12i from NT$1,810 million and NT$1,296 million in 2006, respectively, to NT$2,771 million (US$84 million) and NT$2,037 million (US$62 million) in 2007, respectively, as a result of more wafer production.
     If our utilization rates increase, our costs would be allocated over a larger number of units, which generally leads to lower unit costs. As a result, our capacity utilization rates can significantly affect our margins. Our utilization rates have varied from period to period to reflect our production capacity and market demand. Due to the cyclical nature of the worldwide semiconductor industry, our average capacity utilization rate increased to 79.5% in 2006 from 72.4% in 2005 and increased to 81.9% in 2007. Utilization rates can also be affected by efficiency in production facility and product flow management. Other factors affecting utilization rates are the complexity and mix of the wafers produced, overall industry conditions, the level of customer orders, mechanical failure, disruption of operations due to expansion of operations, relocation of equipment or disruption of power supply and fire or natural disaster.
     Our production capacity is determined by us based on the capacity ratings given by manufacturers of the equipment used in the fab, adjusted for, among other factors, actual output during uninterrupted trial runs, expected down time due to set up for production runs and maintenance, expected product mix and research and development. Because these factors include subjective elements, our measurement of capacity utilization rates may not be comparable to those of our competitors.
      Change in Product Mix and Technology Migration
     Because the price of wafers processed with different technologies varies significantly, the mix of wafers that we produce is among the primary factors that affect our revenues and profitability. The value of a wafer is determined principally by the complexity of the processing technology used to produce the wafer. Production of devices with higher levels of functionality and greater system-level integration requires more manufacturing steps and generally commands higher wafer prices. The increase in price generally has more than offset associated increases in production cost once an appropriate economy of scale is reached.

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     Prices for wafers of a given level of technology generally decline over the processing technology life cycle. As a result, we have continuously been migrating to increasingly sophisticated technologies to maintain the same level of profitability. We began our volume production with 90 nanometer and 65 nanometer technologies in 2004 and 2006, respectively. We expect to see a small amount of 45 nanometer production by the second half of 2008. These types of technology migration require continuous capital and research and development investment. Because developing and acquiring advanced technologies involve substantial capital investment, we expect to continue to spend a substantial amount of capital on upgrading our technologies.
     Manufacturing Yields
     Manufacturing yield per wafer is measured by the number of functional dice on that wafer over the maximum number of dice that can be produced on that wafer. A small portion of our products is priced on a per die basis, and our high manufacturing yields have assisted us in achieving higher margins. In addition, with respect to products that are priced on a per wafer basis, we believe that our ability to deliver high manufacturing yields generally has allowed us to either charge higher prices per wafer or attract higher order volumes, resulting in higher margins.
     We continually upgrade our process technologies. At the beginning of each technological upgrade, the manufacturing yield utilizing the new technology is generally lower, sometimes substantially lower, than the yield under the current technology. The yield is generally improved through the expertise and cooperation of our research and development personnel and process engineers, as well as equipment and at times raw material suppliers. Our policy is to offer customers new process technologies as soon as the new technologies have passed our internal reliability tests.
     Investments
     Most of our investments were made to improve our market position and for strategy considerations, a significant portion of which are in foundry-related companies including fabless design customers, raw material suppliers and intellectual property vendors. In addition, we also invest in non-foundry-related businesses, such as Mega Financial Holding Co. Ltd., or Mega Financial, and ProMOS Technologies. In recent years, we have from time to time disposed of investments for financial, strategic or other purposes.
     See “Item 4. Information on the Company — B. Business Overview — Our Investments” for a description of our investments.
Treasury Share Programs
     We have from time to time announced plans, none of which was binding on us, to buy back up to a fixed amount of our shares on the Taiwan Stock Exchange at the price range set forth in the plans. As of December 31, 2005, 2006 and 2007, we purchased an aggregate of 1,278 million, 2,678 million and 2,678 million, respectively, of our shares under these plans. From February 16, 2006 to April 15, 2006, we also purchased 1,000 million of our shares for cancellation. On May 22, 2006, we announced a plan, which is not binding on us, to buy back up to 400 million of our shares on the Taiwan Stock Exchange at a price ranging from NT$13.90 to NT$32.15 per share between May 23, 2006 and July 22, 2006 to transfer to employees. We have no buy back program in 2007. Of the repurchased shares, 137 million and 97 million shares were purchased by our employees in November 2003 and December 2007, respectively; and 1,739 million shares in aggregate were cancelled as of March 31, 2008.
Critical Accounting Policies
General
     Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included in the annual report, which have been prepared in accordance with ROC GAAP. ROC GAAP varies in certain respects from US GAAP. These differences and their effects on our financial statements are described in Note 35 to our audited consolidated financial statements included in this annual report. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis and base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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     We believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
     We recognize revenue when persuasive evidence of an arrangement exists, the product or service has been delivered, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. Most of our sales transactions have shipping terms of Free on Board (FOB) or Free Carrier (FCA) shipment under which title and the risk of loss or damage are transferred to the customer upon delivery of the product to a carrier approved by the customer.
     Allowance for sales returns and discounts are estimated taking into consideration of customer complaints, historical experiences, management judgment and any other known factors that might significantly affect collectibility. Such allowances are recorded in the same period in which sales are made. Shipping and handling costs are included in sales expenses.
Accounts Receivable and Allowance for Doubtful Accounts
     The allowance for doubtful accounts is provided based on the evaluation of collectibility and aging analysis of accounts and on management’s judgment. In circumstances where the ability of a specific customer to meet its financial obligations is in doubt, a specific allowance will be provided. Considerable judgment is required in assessing the ultimate realization of these receivables including the current credit worthiness and the past collection history of each customer. If the financial conditions of our customers were to worsen, additional allowances would be required. A deterioration of economic conditions either in the ROC or in other major overseas markets may contribute to the deterioration of financial conditions of our customers, resulting in an impairment of their ability to make payments.
     The allowances for doubtful accounts accounted for 0.01% and 0.02% of our accounts receivables as of December 31, 2006 and 2007, respectively. Even if we were to change our estimated rate on allowance for doubtful receivables either upward or downward by 10%, there would not have been a material impact on our operating income.
Inventory
     Inventories are recorded at cost when acquired and stated at the lower of aggregate cost, based on the weighted average method, or market value at the balance sheet date. The market values of raw materials and supplies are determined on the basis of replacement cost while net realizable values determined by the average selling price of the most recent periods are used as market values of work-in-process and finished goods. In addition, allowances for obsolete and slow-moving inventories are determined by analyzing the age and sales condition of the inventories.
Income Taxes
     Most of our existing tax benefits arise from investment tax credits, and others from net operating loss carry-forward and temporary differences. We recognize these tax benefits as deferred tax assets. Income tax expense or benefit is recognized when there is a net change in deferred tax assets and liabilities. A valuation allowance is recorded to reduce our deferred tax assets to the extent that we believe it is more likely than not that the tax benefits will not be realized. The assessment of the valuation allowance involves subjective assumptions and estimates as it principally depends on the estimation of future taxable income and prudent and feasible tax planning strategies. If future taxable income is lower than expected due to future market conditions or other reasons or in the event we determine that we will not be able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax assets valuation allowance may be required with the adjusting amount charged to income in this period. Likewise, should future taxable income be higher than expected due to future market conditions or other reasons or in the event we determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to our deferred tax assets valuation allowance would increase income in this period.

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     On January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No.109”, or “FIN 48” for US GAAP accounting. As a result of the implementation of FIN 48, our uncertain tax positions are accounted for based on the two-step process prescribed in the interpretation. The first step is to evaluate the tax position for recognition by determining if it is more likely than not that the position will be sustained based on the technical merits. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Although FIN 48 provides further clarification of the accounting for uncertainty in income taxes recognized in the financial statements, significant management judgment must be made and used in connection with the recognition threshold and measurement attribute prescribed by FIN 48. Determination of our uncertain tax positions involves the legal and factual interpretation with respect to the application of relevant tax laws and regulations, along with our assessment of other factors including changes in facts or circumstances, changes in tax law, and/or effectively settled issues under audit. As mentioned above, the application of tax laws and regulations is inherently subject to legal and factual interpretation, judgment and uncertainty. In addition, tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the final settlement of these uncertain tax positions might be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities.
Long-lived Assets Impairment
     Pursuant to ROC GAAP effective from January 1, 2005, and US GAAP effective from January 1, 2002, we are required to review the long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the long-lived assets might not be recoverable. Such review may include assessing whether there is a significant decrease in market values of long-lived assets or significant deterioration of market conditions to indicate the carrying value of such assets may not be recovered through future cash flows, any change in the use of long-lived assets to negatively affect their fair values, and any obsolescence issues that would lead to a lower fair value determination. If there is an indication that an asset might be impaired, we proceed with a further impairment test, which is performed for asset groups related to the lowest level of identifiable independent cash flows. Due to our asset usage model and the interchangeable nature of our semiconductor manufacturing capacity, we must make subjective judgments and estimates in determining the independent cash flows that can be related to specific asset groups, including the service potential of long-lived assets through its estimated useful life, cash-flow-generating capacity, physical output capacity, potential fluctuation of economic cycle in the semiconductor industry and operating situation of the Company. Under ROC GAAP, we compare the carrying amount with the recoverable amount derived from discounted cash flow analysis to determine whether the asset is impaired and recognize impairment loss to the extent that its carrying amount exceeds its recoverable amount. If there is evidence that impairment losses recognized previously no longer exists, or has diminished, and the recoverable amount of the long-lived assets increases because of an increase in the asset’s estimated service potential, the amount of loss may be reversed to the extent that the resulting carrying value should not exceed the carrying value had no impairment loss been recognized in prior years. Under US GAAP, we compare the carrying amount with undiscounted cash flows to evaluate whether the asset is impaired and recognize an impairment loss equal to the excess of its carrying amount over its fair value derived from discounted cash flow analysis. Such impairment cannot be reversed. Having performed the above impairment tests, no impairment was recognized for the year. However, changes in the estimates of expected cash flows may result in impairment charges in the future.

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Goodwill Impairment
     Pursuant to ROC GAAP effective January 1, 2005, and US GAAP effective January 1, 2002, goodwill is subject to impairment tests on an annual basis, or more frequently whenever events occur or circumstances change indicating that goodwill might be impaired. Furthermore, goodwill shall cease to be amortized since January 1, 2006 under ROC GAAP. The assessment on impairment of goodwill is subject to significant judgment. Under ROC GAAP, such judgment includes identifying the cash generating unit (“CGU”), making assumptions for discounted cash flow analysis to derive the fair value of the CGU and properly assigning relevant assets, liabilities and goodwill to the CGU. Under US GAAP, we are required to identify the reporting unit, use the appropriate stock price to derive the fair value of reporting unit, and assign the fair value of relevant assets and liabilities to the reporting unit. Ultimately, we compare the fair value of goodwill to its carrying value and determine the impairment loss, if any. If the relevant assumptions and estimates change in the future, they will impact our goodwill impairment test.
Pension
     All of our regular employees were entitled to a defined benefit pension plan under the ROC Labor Standards Law, or Labor Standards Law, prior to July 1, 2005. Such pension plan was managed by an independently administered pension fund committee, and fund assets are deposited under the committee’s name at the Bank of Taiwan. On July 1, 2005, the ROC Labor Pension Act, or the Labor Pension Act, became effective, under which qualified employees may elect to apply the pension calculation either under the ROC Labor Standards Law or under the ROC Labor Pension Act in accordance with a new defined contribution plan. The employees that selected to apply the Labor Pension Act may have their seniority previously accrued under the Labor Standards Law retained.
     Under the defined benefit pension plan of the Labor Standards Law, we have significant pension benefit costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates and expected return on plan assets. We consider current market conditions, including changes in interest rates, in selecting these assumptions. In addition to changes resulting from fluctuations in our related headcount, changes in the related pension costs or liabilities may also occur in the future due to changes in assumptions. Under the defined contribution pension plan of the ROC Labor Pension Act, we are required to make monthly contributions to employees’ individual pension accounts and recognize expenses in the periods in which the contributions become due.
Investments in Debt and Equity Securities
     Under US GAAP and ROC GAAP, equity securities over which we exercise no significant influence or control and with readily determinable fair values and debt securities are to be classified as either trading (which are known as financial assets at fair value through profit or loss, or “FVTPL”, under ROC GAAP), available-for-sale or held-to-maturity securities. Debt securities that we have the intent and ability to hold to maturity are classified as held-to-maturity securities and reported at their amortized cost. Debt and equity securities that are bought and traded for short-term profit are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses reported in other comprehensive income under stockholders’ equity. Unrealized losses that are deemed to be other than temporary are charged to earnings. For individual securities classified as either available-for-sale or held-to-maturity, we would determine whether a decline in fair value below cost is other than temporary pursuant to guidance provided by SFAS No.115, “Accounting for Certain Investments in Debt and Equity Securities”, or “SFAS 115”, and FSP FAS 115-1/124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, or “FSP FAS 115-1/124-1”. We consider, among other factors, information concerning significant adverse changes in market conditions in which the investee operates and operating issues specific to the investee in determining whether a decline in value is temporary. In general, we consider a decline in market value below cost for a continuous period of six months to be other than temporary decline. If the decline in fair value is judged to be non-temporary, the cost basis of the individual security is written down to fair value with a charge against earnings.

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Derivative Instruments
     Certain freestanding derivative instruments such as interest rate swap and foreign exchange forward agreements are fair valued at each reporting period end. The fair values of these instruments are determined using market established valuation techniques, which involve certain key inputs such as the expected interest forward rate, expected volatility in interest rates, spot exchange rate and swap point. Any change in such key inputs could materially impact the determination of fair value of these derivative instruments.
Employee Stock Options
     Under ROC GAAP, we apply the intrinsic value method to recognize the difference between the market price of the stock at grant date and the exercise price of the employee stock option as compensation expense. Under US GAAP, for years prior to 2006, we selected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, or “APB 25” and applied the intrinsic value method for the accounting of employee stock options. We also disclosed pro forma information regarding net income and earnings per share according to SFAS No. 123, “Accounting for Share-Based Compensation”, or “SFAS 123”. The pro forma net income is determined as if the fair values of the employee stock options were used to determine the compensation expense recognized for the period. Effective January 1, 2006, we adopted the modified prospective transition method provided by SFAS No. 123(R), “Share-Based Payment”, or “SFAS 123(R)” to account for its employee stock options. For equity-settled employee stock options, the corresponding increase in equity is measured at the fair value of the options. For cash-settled employee stock options, the corresponding liability incurred is measured at the fair value of the liability and such fair value is remeasured subsequently at each reporting date through the settlement date.
     The Black-Scholes option-pricing model requires the use of input assumptions, including expected volatility, expected life, expected dividend rate and expected risk-free rate of return. We applied the historical realized volatility, which calculates volatility based on the historical stock price volatility over the time period equal to the expected term of the employee stock option, in estimating expected volatility because our shares have been publicly traded for a long time. We adopted the simplified method stated in Staff Accounting Bulletin 107 in estimating the expected term for the employee stock option. The expected term is determined as the mid-point between the vesting period and the contractual term. On the other hand, we believed that historical pattern of dividend yield should be considered for estimating the expected dividend of the underlying employee stock options. SFAS 123(R) stated that for entities based in jurisdictions outside the United States, the risk-free interest rate is the implied yield of zero-coupon government bonds currently available in the market in which the shares are primarily traded. Hence, we use the average yield of Taiwan Government Bond with the remaining term similar to the expected term as the risk-free interest rate. The estimates of option fair value are not expected to foresee future events or the values realized by employees who receive stock option at the end of plans. In addition, later events are not indicative of the rationality of the initial estimates of the fair value of options used by us.
     Employee stock options granted prior to our adoption of SFAS 123(R) that have not vested by the adoption date will be expensed over the remaining portion of the vesting period, based on the fair value on the grant date estimated in accordance with the original provisions of SFAS 123. The expense is distributed to manufacturing cost, sales and marketing, general and administrative and research and development according to the employees’ respective function. Pursuant to SFAS 123(R), we adjust employee stock option expenses on an annual basis for changes in expected forfeitures based on the examination of latest employee stock option forfeiture activity. The effect of adjusting the forfeiture rate used for expense amortization after January 1, 2006 is recognized in the corresponding period in which the expected forfeiture rate is changed.
A. Operating Results
Net Operating Revenues
     We generate our net operating revenues primarily from fabricating semiconductor devices. We also derive a small portion of our net operating revenues from wafer probe services that we perform internally as well as mask tooling services and assembly and test services that we subcontract out.

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Costs of Goods Sold
     Our costs of goods sold consist principally of:
    overhead, including depreciation and maintenance of production equipment, indirect labor costs, indirect material costs, supplies, utilities and royalties;
 
    wafer costs;
 
    direct labor costs; and
 
    service charges paid to subcontractors for mask tooling, assembly and test services.
     Our total depreciation expenses decreased from NT$51,366 million in 2005 to NT$44,256 million in 2006 and decreased to NT$37,785 million (US$1,150 million) in 2007. This was due to benefits we have received from the reduced depreciation of 200mm facilities and equipment since 2006 which were offset by increased expenditures related to the purchase of equipment and the capacity expansion in 300mm manufacturing facilities in 2005.
Operating Expenses
     Our operating expenses consist of the following:
    Sales and marketing expenses. Sales and marketing expenses consist primarily of intellectual property development expenses, salaries and related personnel expenses, wafer sample expenses and related marketing expenses. Wafer samples are actual silicon samples of our customers’ early design ideas made with our most advanced processes and provided to those customers.
 
    General and administrative expenses. General and administrative expenses consist primarily of salaries for our administrative, finance and human resource personnel, fees for professional services, and cost of computer and communication systems to support our operations.
 
    Research and development expenses. Research and development expenses consist primarily of research testing related expenses, salaries and related personnel expenses and depreciation on the equipment used for our research and development.
Non-operating Income and Expenses
     Our non-operating income principally consists of:
    interest income, which has been primarily derived from time deposits;
 
    investment income accounted for under the equity method, which has been primarily derived from the recognition of investee companies’ net income based on the percentage of their ownership we hold;
 
    gain on disposal of investments, which has been primarily derived from our disposal of long-term investments accounted for under the equity method, available-for-sale financial assets and financial assets measured at cost;
 
    dividend income, which has been primarily derived from the financial instruments of financial assets at fair value through profit or loss, available-for-sale financial assets and financial assets measured at cost; and
 
    other income, which has been primarily derived from our branch’s grant income received from the government in Singapore.

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     Our non-operating expenses principally consist of:
    loss on valuation of financial assets and liabilities, which have been primarily derived from disposal of and changes in the values of financial assets and liabilities classified as FVTPL according to ROC SFAS 34;
 
    impairment loss, which have been primarily derived from the loss recognized in our long-term investments; and
 
    loss on decline in market value and obsolescence of inventories, which have been primarily derived from an allowance for loss on decline in market value or obsolescence of inventories.
Taxation
     Based on our status as a company engaged in the semiconductor business in Taiwan, we have been granted exemptions from income taxes in Taiwan with respect to income attributable to capital increases for the purpose of purchasing equipment related to the semiconductor business for a period of four or five years following each such capital increase. This tax exemption resulted in tax savings of approximately NT$271 million, NT$176 million and NT$939 million (US$29 million) in 2005, 2006 and 2007, respectively. Our current tax rate is 25%, the same rate applicable to companies outside the Hsinchu Science Park.
     We also benefit from other tax incentives generally available to technology companies in Taiwan, including tax credits applicable against corporate income tax that range from 30% to 50% of the amount of certain research and development and employee training expenses and 5% to 20% of the amount of investment in certain qualified equipment and technology. These tax incentives resulted in tax savings of approximately NT$3,564 million, nil and NT$1,072 million (US$33 million) in 2005, 2006 and 2007, respectively.
     After taking into account the tax exemptions and tax incentives discussed above, we recorded NT$67 million, NT$3,261 million and NT$2,810 million (US$87 million) of tax expense in 2005, 2006 and 2007, respectively. Our effective income tax rate in 2007 was 14.28%.
     In 1997, the ROC Income Tax Law was amended to integrate corporate income tax and shareholder dividend tax to eliminate the double taxation effect for resident shareholders of Taiwan companies. Under the amendment, all retained earnings generated from January 1, 1998 and not distributed to shareholders as dividends in the following year will be assessed a 10% retained earnings tax. See “Item 10. Additional Information—E. ROC Tax Considerations—Dividends.” As a result, if we do not distribute all of our annual retained earnings generated beginning January 1, 1998 as either cash and/or stock dividends in the following year, these earnings will be subject to the 10% retained earnings tax. In addition, the ROC government enacted the ROC Income Basic Tax Act, also known as the “Minimum Income Tax Statute”, or the Statute, which became effective on January 1, 2006 and imposes an alternative minimum tax, or AMT. The AMT imposed under the Statute is a supplemental tax which is payable if the income tax payable pursuant to the ROC Income Tax Act is below the minimum amount prescribed under the Statute. In accordance with the Statute, a company will be subject to a 10% AMT if its annual taxable income under the Statute exceeds NT$2 million.
Comparisons of Results of Operations
     The following table sets forth some of our results of operations data as a percentage of our net operating revenues for the periods indicated.
                         
    Year Ended December 31,
    2005   2006   2007
Net operating revenues
    100.0 %     100.0 %     100.0 %
Costs of goods sold
    90.4       80.9       79.2  
 
                       
Gross profit
    9.6       19.1       20.8  
Operating expenses:
                       
Sales and marketing
    3.7       3.0       3.6  
General and administrative
    4.4       3.1       3.3  
Research and development
    9.6       8.4       8.5  
 
                       
Operating income (loss)
    (8.1 )     4.6       5.4  
Net non-operating income
    13.7       28.1       12.0  
 
                       
Income before income tax and minority interest
    5.6       32.7       17.4  
Income tax expense
    (0.1 )     (2.9 )     (2.5 )
 
                       
Cumulative effect of changes in accounting principles (the net amount after deducted tax expense)
    (0.1 )     (1.1 )      
Minority interest loss
    1.6       0.4       0.1  
 
                       
Net income
    7.0       29.1       15.0  
 
                       

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2006 Compared with 2007
     Net operating revenues. Net operating revenues increased by 1.2% from NT$112,004 million in 2006 to NT$113,311 million in 2007, largely attributable to an increase in customer demand, which resulted in a 8.3% increase in wafers sold, from 3,458 thousand wafers in 2006 to 3,745 thousand wafers in 2007, and our shift towards higher-priced product mix using more advanced technology.
     Cost of goods sold. Cost of goods sold decreased by 1.0% from NT$90,638 million in 2006 to NT$89,768 million in 2007. Our capacity utilization rate increased from 79.5% in 2006 to 81.9% in 2007.
     Gross profit and gross margin. Our gross margin fluctuation depends on the level of manufacturing capacity, wafer shipments and product mix. Gross margin increased from 19.1% in 2006 to 20.8% in 2007, which was primarily driven by higher capacity utilization in 2007. As our utilization rates increased, our costs were allocated over a larger number of units, which led to lower unit costs.
     Operating income and operating margin. Operating income increased substantially from NT$5,159 million in 2006 to NT$6,119 million (US$189 million) in 2007. Our operating margin increased from 4.6% in 2006 to 5.4% in 2007. The increase in operating margin is largely due to an increase in gross margin.
     Sales and marketing expenses. Our sales and marketing expenses increased by 20.9% from NT$3,366 million in 2006 to NT$4,069 million (US$125 million) in 2007. The increase in sales and marketing expenses was mainly due to increases in sample and mask expenses for sales promotion. Our sales and marketing expenses as a percentage of our net operating revenues increased from 3.0% in 2006 to 3.6% in 2007.
     General and administrative expenses. Our general and administrative expenses increased by 8.8% from NT$3,422 million in 2006 to NT$3,724 million (US$115 million) in 2007. The increase in general and administrative expenses was primarily due to increases in personnel related expenses as a result of increases in headcounts and salaries in 2007. Our general and administrative expenses as a percentage of our net operating revenues increased from 3.1% in 2006 to 3.3% in 2007.
     Research and development expenses. Our research and development expenses increased by 2.3% from NT$9,419 million in 2006 to NT$9,631 million (US$297 million) in 2007. The increase in research and development expenses resulted primarily from our continued development of 90-nanometer and 65-nanometer process technologies. Our research and development expenses as a percentage of our net operating revenues increased from 8.4% in 2006 to 8.5% in 2007.
     Net non-operating income. Net non-operating income substantially decreased by 56.9% from NT$31,429 million in 2006 to NT$13,551 million (US$418 million) in 2007 mainly due to the decrease in gain on disposal of investments. Gain on disposal of investments decreased from NT$28,651 million in 2006 to NT$12,041 million (US$371 million) in 2007. Our gain on disposal of investment in 2006 consists of NT$13,152 million which we recognized from our disposal of investment in Hsun Chieh in that year.

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     Net income. Due to the factors described above, we earned a net income of NT$16,962 million (US$523 million) in 2007, compared to a net income of NT$32,619 million in 2006.
2005 Compared with 2006
     Net operating revenues. Net operating revenues increased by 11.7% from NT$100,316 million in 2005 to NT$112,004 million in 2006, largely attributable to an increase in customer demand, which resulted in a 15.3% increase in wafers sold, from 2,999 thousand wafers in 2005 to 3,458 thousand wafers in 2006. The increase in our net operating revenues was attributable to an increase in our sales volume in 2006, partially offset by a 1.3% decrease in average selling price as compared to 2005 as a result of a fall in market pricing in spite of a shift towards higher-priced product mix using more advanced technology. Our 0.15 micron and more advanced technologies had contributed approximately 46.4% of our net wafer sales in 2006, as compared to 39.0% in 2005.
     Cost of goods sold. Cost of goods sold were NT$90,643 million and NT$90,638 million in 2005 and 2006, respectively. Our capacity utilization rate increased from 72.4% in 2005 to 79.5% in 2006.
     Gross profit and gross margin. Our gross margin fluctuation depends on the level of manufacturing capacity, wafer shipments and product mix. Gross margin increased from 9.6% in 2005 to 19.1% in 2006, which was primarily driven by higher capacity utilization. As our utilization rates increased from 72.4% in 2005 to 79.5% in 2006, our costs were allocated over a larger number of units, which led to lower unit costs and higher gross margin, partially offset by a decrease in average selling price.
     Operating income and operating margin. Our operating loss was NT$8,087 million in 2005 compared to an operating income of NT$5,159 million in 2006. Our operating margin increased from (8.1)% in 2005 to 4.6% in 2006. The increase in operating margin is largely due to an increase in gross margin. Operating expenses decreased by 8.7% from NT$17,760 million in 2005 to NT$16,207 million in 2006.
     Sales and marketing expenses. Our sales and marketing expenses decreased by 10% from NT$3,739 million in 2005 to NT$3,366 million in 2006. The decrease in sales and marketing expenses was mainly derived from consolidating different subsidiaries in 2006 than in 2005, partially offset by an increase in our purchase of intellectual properties from third parties to assist our customers to develop SoC. Our sales and marketing expenses as a percentage of our net operating revenues decreased from 3.7% in 2005 to 3.0% in 2006.
     General and administrative expenses. Our general and administrative expenses decreased by 22.0% from NT$4,387 million in 2005 to NT$3,422 million in 2006. The decrease in general and administrative expenses was largely due to consolidating different subsidiaries in 2006 than in 2005, as well as the absence of amortization of goodwill generated from business combinations since January 1, 2006 pursuant to the ROC SFAS 25, “Business Combination — Accounting Treatment under Purchase Method”. If we had accounted for goodwill in accordance with the requirements in the prior year, net income in 2006 would have decreased NT$859 million. Our general and administrative expenses as a percentage of our net operating revenues decreased from 4.4% in 2005 to 3.1% in 2006.
     Research and development expenses. Our research and development expenses decreased by 2.2% from NT$9,634 million in 2005 to NT$9,419 million in 2006, primarily due to the offset effect as a result of the decrease in our consolidated subsidiaries, in spite of the increase in research and development expenses of UMC in connection with its continued development of 90-nanometer and 65-nanometer process technologies. Our research and development expenses as a percentage of our net operating revenues decreased from 9.6% in 2005 to 8.4% in 2006.
     Net non-operating income. Net non-operating income substantially increased by 129.5% from NT$13,693 million in 2005 to NT$31,428 million in 2006 mainly due to the gain on disposal of investments. Gain on disposal of investments increased from NT$10,277 million in 2005 to NT$28,651 million in 2006, of which we recognized NT$13,152 million gain on disposal of investment in Hsun Chieh, one of our subsidiaries in and prior to 2005 but an equity-method investee in 2006.

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     Net income. Due to the factors described above, we incurred a net income of NT$32,619 million in 2006, compared to a net income of NT$7,027 million in 2005.
B. Liquidity and Capital Resources
     The foundry business is highly capital intensive. Our development over the past three years has required significant investments. Additional expansion for the future generally will continue to require significant cash for acquisition of plant and equipment to support increased capacities, particularly for the production of 12-inch wafers, although our expansion program will be adjusted from time to time to reflect market conditions. In addition, the semiconductor industry has historically experienced rapid changes in technology. To maintain competitiveness at the same capacity, we are required to make adequate investments in plant and equipment. In addition to our need for liquidity to support the large fixed costs of capacity expansion and the upgrading of our existing plants and equipment for new technologies, as we ramp up production of new plant capacity, we require significant working capital to support purchases of raw materials for our production and to cover variable operating costs such as salaries until production yields provide sufficiently positive margins for a fabrication facility to produce operating cash flows.
     We have financed our capital expenditure requirements with cash flows from operations as well as from bank borrowings, the issuance of bonds and equity-linked securities denominated in NT dollars and U.S. dollars and the proceeds from our ADS offering in September 2000. We incurred capital expenditures of NT$22,163 million, NT$33,240 million and NT$28,299 million (US$873 million) in 2005, 2006 and 2007, respectively, requiring a significant amount of funding from financing activities. Once a fab is in operation at acceptable capacity and yield rates, it can provide significant cash flows. Cash flows significantly exceed operating income, reflecting the significant non-cash depreciation expense. We generated cash flows from operations of NT$45,046 million, NT$47,078 million and NT$48,079 million (US$1,483 million) in 2005, 2006 and 2007, respectively.
     As of December 31, 2007, we had NT$47,678 million (US$1,470 million) of cash and cash equivalents and NT$4,805 million (US$148 million) of FVTPL.
     We believe that our working capital, cash flow from operations and unused lines of credit are sufficient for our present requirements.
     Operating Activities
     Our operating activities generated cash of NT$48,079 million (US$1,483 million) in 2007. Cash generated from our operating activities for 2007 significantly exceeded net income due to the add-back of non-cash items, such as depreciation and amortization in the amount of NT$39,168 million (US$1,208 million).
     Investment Activities
     Net cash used in our investment activities was NT$21,799 million (US$672 million) in 2007. In 2007, we used cash of NT$28,299 million (US$873 million) to purchase equipment primarily used at our fabs. This was offset by the net cash provided by acquisition and disposal of available-for-sale financial assets in the amount of NT$5,314 million (US$164 million).
     Financing Activities
     Net cash used in our financing activities was NT$72,694 million (US$2,242 million) in 2007. In 2007, we carried out a capital reduction plan, and cancelled 5,739 million or about 30% of our outstanding shares, for the purpose of increasing shareholders’ return on equity and reducing idle funds. The net cash used in the capital reduction was NT$53,844 million (US$1,660 million). We also repaid long-term loans and bonds of NT$5,355 million (US$165 million) in cash in 2007.

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     We had NT$359 million (US$11 million) outstanding short-term loans as of December 31, 2007. We had total availability under existing short-term lines of credit, which can be drawn in NT dollars, U.S. dollars, Japanese Yen, Singapore dollars and/or Euros at our discretion, of NT$12,197 million (US$376 million) as of December 31, 2007. All of our short-term loans are revolving facilities with terms of three months, six months or one year, which may be extended for terms of six months or one year each with lender consent. The weighted average annual effective interest rate under these facilities ranged between 3.43% and 5.43% as of December 31, 2007. Our obligations under our short-term loans are unsecured.
     We had bonds payable of NT$30,385 million (US$937 million) in the aggregate as of December 31, 2007.
     As of December 31, 2007, our outstanding long-term liabilities primarily consisted of:
    NT$3 billion unsecured domestic bonds due April 2008;
 
    NT$15 billion unsecured domestic bonds, consisting of two tranches: NT$7.5 billion five-year unsecured bonds with interest rates of 4.0% minus 12-month U.S. dollar LIBOR but at the minimum of 0%, and NT$7.5 billion seven-year unsecured bonds with interest rates of 4.3% minus 12-month U.S. dollar LIBOR but at the minimum of 0%; and
 
    US$381.4 million Zero Coupon Convertible Bonds due 2008.
     In October 2005, we issued US$381.4 million Zero Coupon Convertible Bonds due 2008. The proceeds of this offering have been used to purchase of raw materials abroad. The bonds are convertible at the option of the bondholders into our ADSs at an initial conversion price of US$3.814 per ADS at any time on or after November 4, 2005 and are redeemable by us under certain circumstances on or any time after April 5, 2007. The applicable conversion price will be subject to adjustments upon the occurrence of certain events set out in the indenture. The conversion price was US$4.253 per ADS effective on October 8, 2007. As none of the bondholders had exercised their conversion right prior to the maturity date, we redeemed all of the remaining bonds outstanding in the principal amount of US$381.4 million in February 2008.
     The current portion of bonds due within one year was NT$22,889 million (US$706 million).
     Capital Expenditures
     We have entered into several construction contracts for the expansion of our factory space. As of December 31, 2007, these construction contracts amounted to NT$3,152 million (US$97 million) with an unaccrued portion of the contracts of NT$1,094 million (US$34 million).
     In 2007, we spent approximately NT$28,299 million (US$873 million) primarily to purchase 8-inch and 12-inch wafer-processing equipment and other equipment for research and development and production purposes. Our initial budget for purchases of semiconductor manufacturing equipment for 2008 is approximately US$500 million to 700 million. We may adjust the amount of our capital expenditures upward or downward based on the progress of our capital projects, market conditions and our anticipation of future business outlook.
     We believe that our existing cash and cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure requirements at least through the end of 2008. We also expect to fund a portion of our capital requirements in 2008 through the cash provided by operating activities. Due to rapid changes in technology in the semiconductor industry, however, we have frequent demand for investment in new manufacturing technologies. We cannot assure you that we will be able to raise additional capital, should that become necessary, on terms acceptable to us, or at all. If financing is not available on terms acceptable to us, management intends to reduce expenditures so as to delay the need for additional financing. To the extent that we do not generate sufficient cash flows from our operations to meet our cash requirements, we may rely on external borrowings and securities offerings to finance our working capital needs or our future expansion plans. The sale of additional equity or equity-linked securities may result in additional dilution to our shareholders. Our ability to meet our working capital needs from cash flow from operations will be affected by the demand for our products and change in our product mix, which in turn may be adversely affected by several factors. Many of these factors are beyond our control, such as economic downturns and declines in the average selling prices of our products. The average selling prices of our products have been subjected to downward pressure in the past and are reasonably likely to be subject to further downward pressure in the future. We have not historically relied, and we do not plan to rely in the foreseeable future, on off-balance sheet financing arrangements to finance our operations or expansion.

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Transactions with Related Parties
     Our transactions with related parties have been conducted on arm’s-length terms. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” and Note 27 to our audited consolidated financial statements included in this annual report.
Inflation/Deflation
     We do not believe that inflation in the ROC has had a material impact on our results of operations.
US GAAP Reconciliation
     Our consolidated financial statements are prepared in accordance with ROC GAAP, which differs in certain significant respects from US GAAP. Such differences include methods of consolidation and methods for measuring the amounts shown in the financial statements, as well as additional disclosures required by US GAAP. Note 35 to our audited financial statements, included in this annual report, provides a discussion and quantification of the differences between ROC GAAP and US GAAP as they related to us. We provide a summary of some material differences included therein below.
     The following table sets forth a comparison of our net income and stockholders’ equity in accordance with ROC GAAP and US GAAP for the periods indicated.
                                 
    Year Ended December 31,
    2005   2006   2007
    NT$   NT$   NT$   US$
    (in millions)
Net income (loss)
                               
Net income, ROC GAAP
    7,027       32,619       16,962       523  
US GAAP adjustments
                               
Compensation
    (2,441 )     (2,106 )     (2,648 )     (82 )
Equity investees
    690       (56 )     (4 )      
Investment in debt and equity securities.
    169       1,037       319       10  
Exchangeable bond liabilities
    (39 )     199              
Goodwill amortization and impairment loss
    (19,333 )           (23,761 )     (733 )
Treasury stock and related disposal
    102       (10,842 )     (132 )     (4 )
Derivative instruments
    (1,612 )     1,126              
Income tax effect
    (232 )     (180 )            
 
                               
Net income (loss), US GAAP
    (15,669 )     21,797       (9,264 )     (286 )
 
                               
 
                               
Stockholders’ equity
                               
Stockholders’ equity, ROC GAAP
    258,284       291,165       236,467       7,292  
Compensation
    56       (685 )     (513 )     (16 )
Equity investees
    3,784       22       (498 )     (15 )
Investment in debt and equity securities.
    37,333       353       236       7  
Exchangeable bond liabilities
    (702 )                  
Goodwill amortization and impairment loss
    38,114       37,948       14,187       438  
Treasury stock and related disposal
          (4,476 )     (3,104 )     (96 )
Derivative instruments
    (624 )                  
Income tax effect
    180                    
Pension
          (165 )     527       16  
 
                               
Stockholders’ equity, US GAAP
    336,425       324,162       247,302       7,626  
 
                               
 
Note.    Refer to Note 35 to our audited financial statements included elsewhere in this annual report.

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     Differences between ROC GAAP and US GAAP that have a material effect on our net income and stockholders’ equity under ROC GAAP include compensation expenses, investments in debt and equity securities, goodwill, treasury stock and related disposal, derivative instruments, and pension.
Compensation Expenses
     Pursuant to our articles of incorporation, we are required, under certain circumstances, to distribute a certain percentage of unappropriated earnings as employee bonuses and remuneration to directors and supervisors. Please refer to “Item 10. Additional Information—B. Memorandum and Articles of Association—Dividends and Distributions”. Remuneration to directors and supervisors is settled in cash. For years starting from 2005, our articles of incorporation were revised to specify that employee bonuses can be settled in cash or shares or a combination of both. The number of shares distributed as employee bonuses is determined by dividing the total nominal NT dollar amount of the bonuses to be settled in shares by the par value of the shares, which is NT$10 per share, rather than their market value, which is generally been substantially higher than the par value. Under ROC GAAP, the distribution of employee bonuses and remuneration to directors and supervisors are treated as appropriation of retained earnings, and we are not required to charge, and have not charged, them to earnings. Under US GAAP, however, we are required to charge the market value of the shares and the cash amount for employee bonus remuneration as compensation expenses, correspondingly reducing our net income and earnings per share. After shareholders approve the employee bonuses in the subsequent year, adjustment of compensation expense, if any, is recorded for the difference between minimum employee bonuses accrued and the final amount paid to employees at the grant date fair value. Accordingly, our net income and earnings per share calculated under ROC GAAP and US GAAP will be different. See Note 35 to our audited consolidated financial statements.
     Under ROC GAAP, we apply the intrinsic value method to recognize the compensation expense for employee stock options. Since January 1, 2004, we also disclose pro forma net income and earnings per share as if fair value method were adopted. Under US GAAP, we applied the intrinsic value method for the accounting of employee stock options and disclosed pro forma information regarding net income and earnings per share required by SFAS 123 for years prior to 2006. Effective January 1, 2006, we adopted the modified prospective transition method provided by SFAS 123(R). As of December 31, 2007, there was NT$2,179 million (US$67 million) of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the employee stock option plan. The cost is expected to be recognized over a period of 3.5 years on a weighted-average basis. For equity-settled employee stock options, the corresponding increase in equity is measured at the grant date fair value. For cash-settled employee stock options, the corresponding liability incurred is measured at the fair value on the cash-settlement date, and is remeasured at each reporting date through the settlement date.
Investments in Debt and Equity Securities
     Under ROC GAAP, investment in restricted stock, for which sale is restricted by governmental or contractual requirement is accounted for as available-for-sale or cost-method securities. Under US GAAP, however, our restricted investment does not meet the definition of an equity security with readily determinable fair values and therefore is accounted for as cost method investment.
     When we loses our significant influence on an investment accounted for under equity method and reclassifies it as available-for-sale securities, the proportionate share of an investee’s other comprehensive income should remain as a part of the carrying amount of the investment under ROC GAAP and the dividends received from available-for-sale securities which were declared from pre-acquisition profits are deducted from the cost of the securities. Under US GAAP, the proportionate share of an investee’s other comprehensive income should be offset against the carrying amount of the investment at the time significant influence is lost, and the dividends received from available-for-sale securities are accounted for as dividend income.

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Goodwill
     Under ROC GAAP, the fair value of the net assets received is deemed to be the value of the consideration for the acquisition of the remaining interests in United Semiconductor, United Silicon, UTEK Semiconductor and United Integrated Circuits in January 2000. The acquisition cost of SiSMC was determined using the market price of the shares exchanged by us. Under US GAAP, EITF No. 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination” (“EITF 99-12”) requires that the securities exchanged should be valued based on the market prices a few days before and after the date when the terms of the acquisition are agreed to and announced. The acquisition was accounted for using the purchase method of accounting and the purchase price was determined by the market value of the shares exchanged. The difference between the fair value of the shares exchanged and the fair value of the net assets acquired created goodwill.
     Goodwill is subject to an annual impairment test or more frequently whenever events and circumstances change indicating the goodwill may be impaired. Under ROC GAAP, our assessment includes identifying the goodwill-allocated cash generating unit (“CGU”), determining the recoverable amount of CGU by using cash flow analysis, and ultimately comparing the recoverable amount with the carrying amount of CGU including goodwill. If CGU’s carrying amount is greater than its recoverable amount, an impairment loss is recognized and the written-down of goodwill cannot be reversed. Under US GAAP, we have identified only one reporting unit, whose fair value is best determined by its quoted market prices on the New York Stock Exchange (for our ADS securities) and on the Taiwan Stock Exchange (for our common stock). The fair value of the reporting unit is allocated to relevant individual asset and liability to determine the fair value of the goodwill assigned to the reporting unit. If the carrying value of the goodwill is greater than its fair value, we write down the goodwill and recognize the impairment loss. Such write-down cannot be reversed. The derived fair value of goodwill as of December 31, 2005 and 2007 were below its carrying values. As such, we recognized a goodwill impairment charge of NT$20,660 million, nil and NT$23,761 million for the years ended December 31, 2005, 2006 and 2007, respectively. The goodwill impairment charge of NT$23,761 for the year ended December 31, 2007 was based on our best estimate, and a full evaluation of the goodwill impairment is expected to be completed in 2008. There could be adjustments to the preliminary goodwill impairment charge once the full evaluation of the goodwill impairment analysis is further refined and completed. These adjustments to the impairment loss could be material. Any adjustments to our preliminary estimates as a result of completing this evaluation will be recorded in our consolidated statement of operations for the year ended December 31, 2008.
Treasury stock and related disposal
     Some of our subsidiaries and equity method investees also hold our shares as investments. Under ROC GAAP, reciprocal shareholdings held by subsidiaries, but not equity investees, are recorded as treasury stocks on our books. Under US GAAP, however, reciprocal shareholdings, whether being held by subsidiaries or equity investees, are recorded as treasury stocks on our books. During 2006, we disposed part of our investment in one of our consolidated entities in 2005. As a result, we lost our control over such entity and have accounted for it under the equity method. Under ROC GAAP, since we no longer possess controlling power over such entity, we recognized gain from disposal of investments. Under US GAAP, however, since such entity holds our shares as investments, the disposal gain related to the reciprocal shareholdings was recognized as additional paid-in capital.
Derivative Instruments
     Under US GAAP, as prescribed by SFAS 133, the embedded derivative features contained in exchangeable bonds and credit-linked deposits are bifurcated and separately accounted for, if the economic characteristics and risks of the embedded derivative instruments and the host contracts are not clearly and closely related. Those bifurcated embedded derivatives are accounted for at fair value with the changes in fair value included in earnings of the year. Freestanding derivatives such as interest rate swap agreements are recorded at fair value with changes in fair value charged to earnings unless hedge accounting has been applied. Under ROC GAAP, those derivative instruments are neither bifurcated nor required to be accounted for as a hedging instrument before the adoption of ROC SFAS 34 and SFAS 36 effective January 1, 2006. See Note 35 to our audited consolidated financial statements.

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Pension
     Under ROC GAAP, a minimum pension liability should be measured as the excess of accumulated benefit obligation over the fair value of the plan assets and allowed the unrecognized items, including prior service costs and credits, gains or losses and transition obligations and assets to be reported in disclosure shown as a plan’s funded status. Under US GAAP, SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” or “SFAS 158”, effective from the fiscal year ended December 15, 2006, replaced the requirement to report a minimum pension liability and required an employer to recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status with an offsetting adjustment to accumulated other comprehensive income, or AOCI.
Recent Accounting Pronouncements
     In November 2007, the Accounting Research and Development Foundation in Taiwan (ARDF) issued ROC SFAS No. 10, “Accounting for Inventory”, or “ROC SFAS 10”, which provides guidance on initial recognition, measurement, presentation and disclosure of inventory. Last-In-First-Out is not permitted. Idle facility expense and wasted material (spoilage) shall be recognized as current-period charges. The allocation of fixed production overheads to the costs of conversion shall be based on the normal capacity of the production facilities. Inventories are carried at the lower of cost and net realizable value. The rule of cost or net realizable value, whichever is lower, should be applied directly to each item, not to the total of the inventory. The standard is effective from January 1, 2009. We do not expect this statement to have a material impact on our consolidated financial statements.
     In August 2007, ARDF issued ROC SFAS No. 39, “Accounting for share-based payment”, or “ROC SFAS 39”, which provides guidance on accounting treatment for share-based payment. A share-based payment is a transaction in which the entity receives or acquires goods (inventories, property, plant, and equipment, intangible assets, and other non-financial assets) or services either as consideration for its equity instruments (stocks or stock options) or by incurring liabilities for amounts based on the price of the entity’s share or other equity instruments of the entity. The accounting requirement for an entity’s share-based payment depends on how the transaction will be settled. Equity-settled share-based payment transactions, in which the entity receives goods or services as consideration for equity instruments of the entity (including stocks or stock options), and cash-settled share-based payment transactions, in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services, are based on the price (or value) of the entity’s shares or other equity instruments of the entity. In addition, the fair value of the equity instruments granted is used and measured on the grant date for transactions with employees; for transactions with parties other than employees, the fair value should be measured at the date the entity receives the relevant goods or services. ROC SFAS No. 39 is effective for the entity beginning January 1, 2008. Upon adopting ROC SFAS 39, we will change our accounting treatment of share-based payment for options granted on or after January 1, 2008.
     In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”, or “SFAS 157”. SFAS 157 defines fair value, provides a framework for measuring fair value under current standards in GAAP, and requires additional disclosure about fair value measurements. In accordance with SFAS 157, the definition of fair value retains the exchange price notion, and exchange price is defined as the price in an orderly transaction between market participants to sell an asset or transfer a liability. If there is a principal market for the asset or liability, the fair value measurement should reflect that price, whether that price is directly observable or otherwise used in a valuation technique. Depending on the asset or liability being valued, the inputs used to determine fair value can range from observable inputs (i.e. prices based on market data independent from the entity) and unobservable inputs (i.e. entity’s own assumptions about the assumptions that market participants would use). SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements and will be effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-1, or FSP FAS 157-1 and FASB Staff Position No. 157-2, or FSP FAS 157-2. FSP FAS 157-1 was issued to exclude FASB Statement No. 13 “Accounting for Leases”, or “SFAS 13” and its related interpretive accounting pronouncements that address leasing transactions in order to allow it to more broadly consider the use of fair value measurements for these transactions as part of its project to comprehensively reconsider the accounting for leasing transactions. FSP FAS 157-2 was issued to postpone the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the potential impact, if any, that the adoption of SFAS 157 will have on our financial statements.

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     In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities “, or “SFAS 159”, which amends SFAS 115 and allows companies to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 also provides presentation and disclosure requirements that will enable users to compare similar types of assets and liabilities of different entities that have different measurement attributes. SFAS 159 is effective for an entity’s fiscal year beginning after November 15, 2007. We are currently evaluating the impact, if any, the adoption of SFAS 159 will have on our financial statements.
     In December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations”, or “SFAS 141(R)”. SFAS 141(R) will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. Some of the changes, such as the accounting for contingent consideration, will introduce more volatility into earnings, and may impact a company’s acquisition strategy. SFAS 141(R) is effective for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also apply the provisions of SFAS 141(R). The impact that adoption of SFAS 141(R) will have on our financial position and results of operation will be dependent upon the specific terms of any applicable future business combinations.
     In December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, or “SFAS 160”, which amends of ARB No. 51. SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. It also requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. SFAS 160 is effective for both public and private companies for fiscal years beginning on or after December 15, 2008, and early adoption is prohibited. We are currently evaluating the impact, if any, the adoption of SFAS 160 will have on our financial statements.
     In December 2007, SEC issued SAB 110, “The use of a simplified method in developing an estimate of expected term of plain vanilla share options in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment”, or “SAB 110”. In particular, the staff indicated in SAB 107 that it will accept a company’s election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more detailed external information about employee exercise behavior would, over time, become readily available to companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. The staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. SAB 110 is effective for an entity’s fiscal year beginning after January 1, 2008. This standard is not expected to have a material impact on the Company’s consolidated financial statements in the near future.

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     In March 2008, FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”, or SFAS 161. This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. This standard is not expected to have a material impact on our future consolidated financial statements.
C. Research, Development, Patents and Licenses, Etc.
     The semiconductor industry is characterized by rapid changes in technology, frequently resulting in obsolescence of process technologies and products. As a result, effective research and development is essential to our success. We invested approximately NT$9,634 million, NT$9,419 million and NT$9,631 million (US$297 million) in 2005, 2006 and 2007, respectively, in research and development, which represented 9.6%, 8.4% and 8.5%, respectively, of net operating revenues for such years. We believe that our continuous spending on research and development will help us maintain our position as a technological leader in the foundry industry. As of March 31, 2008, we employed 1,096 professionals in our research and development division.
     Our current research and development activities seek to upgrade and integrate manufacturing technologies and processes, as well as to develop embedded memory technologies, including DRAM, SRAM, 1T-SRAM, 6T-SRAM and nonvolatile memories, and advanced device technologies, including SOI and strained silicon. Although we emphasize firm-wide participation in the research and development process, we maintain a central research and development team primarily responsible for developing cost-effective technologies that can serve the manufacturing needs of our customers. Monetary incentives are provided to our employees if projects result in successful patents. We believe we have a strong foundation in research and development and intend to continue our efforts on technology developments. Our top management believes in the value of continued support of research and development efforts and intends to continue our foundry leadership position by providing customers with comprehensive technology and SoC solutions in the industry.
D. Trend Information
     Please refer to “Item 5. Operating and Financial Review and Prospects—Overview” for a discussion of the most significant recent trends in our production, sales, costs and selling prices. In addition, please refer to discussions included in this Item for a discussion of known trends, uncertainties, demands, commitments and events that we believe are reasonably likely to have a material effect on our net operating revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.
E. Off-balance Sheet Arrangements
     We do not generally provide letters of credit to, or guarantees for, or engage in any repurchase financing transactions with any entity other than our consolidated subsidiaries. We have, from time to time, entered into interest rate swaps to manage our interest rate risks on our floating rate debt instruments and foreign currency forward contracts to hedge our existing assets and liabilities denominated in foreign currencies and identifiable foreign currency purchase commitments. We do not engage in any speculative activities using derivative instruments. See “Item 11. Quantitative and Qualitative Disclosure about Market Risk.”
F. Tabular Disclosure of Contractual Obligations
     The following table sets forth our contractual obligations and commitments with definitive payment terms on a consolidated basis which will require significant cash outlays in the future as of December 31, 2007.

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    Payments Due by Period
            Less than 1                   After 5
    Total   Year   1-3 Years   4-5 Years   Years
    (consolidated) (in NT$ millions)
Long-term debt(1)
                                       
Unsecured bonds
    30,396       22,896       7,500              
Capital lease obligations(2)
                             
Operating leases obligations(3)
    3,209       296       531       492       1,890  
Purchase obligations(4)
    3,737                          
Other long-term obligations(5)
    3,820                          
Total contractual cash obligations
    41,162       27,012       8,031       4,229       1,890  
 
(1)   Assuming the convertible bonds are paid off upon maturity.
 
(2)   Represents our obligations to make lease payments for equipment.
 
(3)   Represents our obligations to make lease payments to use machineries, equipments and land on which our fabs are located, primarily in the Hsinchu Science Park and the Tainan Science Park in Taiwan and, Pasir Ris Wafer Fab Park in Singapore, and UMCJ.
 
(4)   Represents commitments for construction and purchase of raw materials. These commitments are not recorded on our balance sheet as of December 31, 2007.
 
(5)   Represents intellectual properties and royalties payable under our technology license agreements. The amounts of payments due under these agreements are determined based on fixed contract amounts.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors, Supervisors and Senior Management
     The following table sets forth the name, age, position, tenure and biography of each of our directors, supervisors and executive as of March 31, 2008. There is no family relationship among any of these persons.
     In the shareholders’ meeting held on June 12, 2006, our shareholders elected five new directors, Fu-Tai Liou, Shih-Wen Sun, Stan Hung, Chung-Laung Liu and Chun-Yen Chang, and two new supervisors, Ta-Sing Wang and Ting-Yu Lin. The newly elected directors and supervisors took their offices on June 12, 2006. Wen-Yang Chen was appointed as a representative of Hsun Chieh Investment Co. to replace Peter Chang on October 1, 2007. Chitung Liu was appointed as a representative of Silicon Integrated Systems Corp. to replace Stan Hung on December 21, 2007. The business address of our directors, supervisors and executive officers is the same as our registered address.
                     
Name   Age   Position   Years with Us
Jackson Hu (1)
    59     Chairman, Director (Representative of Hsun Chieh Investment Co.) and Chief Executive Officer     5  
Ching-Chang Wen (2)
    58     Director (Representative of Hsun Chieh Investment Co.) and President of Central Integrated Manufacturing & Technology     10  
Wen-Yang Chen (3)
    55     Director (Representative of Hsun Chieh Investment Co.) and Senior Vice President     28  
Fu-Tai Liou
    55     Director (Representative of Hsun Chieh Investment Co.) and President of Quality & Reliability Assurance     11  
Shih-Wei Sun (4)
    51     Director (Representative of Silicon Integrated Systems Corp.) and Chief Operating Officer     13  
Chitung Liu (5)
    42     Director (Representative of Silicon Integrated Systems Corp.) and Chief Financial Officer     7  
Paul S.C. Hsu (6)
    72     Independent Director     4  
Chung-Laung Liu (6)
    74     Independent Director     2  
Chun-Yen Chang (6)
    71     Independent Director     2  
Tzyy-Jang Tseng
    58     Supervisor (Representative of Hsun Chieh Investment Co., Ltd.)     7  
Ta-Hsing Wang
    35     Supervisor (Representative of Silicon Integrated Systems Corp.)     2  
Ting-Yu Lin
    47     Supervisor     2  

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(1)   Jackson Hu is a representative of Hsun Chieh Investment Co. after the shareholders’ meeting on June 12, 2006.
 
(2)   Ching-Chang Wen is a representative of Hsun Chieh Investment Co. after the shareholders’ meeting on June 12, 2006.
 
(3)   Wen-Yang Chen was appointed as a representative of Hsun Chieh Investment Co. on October 1, 2007.
 
(4)   Shih-Wei Sun is a representative of Silicon Integrated Systems Corp. after the shareholders’ meeting on June 12, 2006.
 
(5)   Chitung Liu was appointed as a representative of Silicon Integrated Systems Corp. on December 21, 2007.
 
(6)   Member of the Audit Committee.
     Jackson Hu is the Chairman, director and the Chief Executive Officer of our company. Dr. Hu is a representative of Hsun Chieh Investment Co. Dr. Hu earned his Bachelor’s degree in electrical engineering from National Taiwan University in 1971 and Master’s and Ph.D. degrees in Computer Science from the University of Illinois at Urbana-Champaign. He also obtained an MBA from Santa Clara University. Dr. Hu joined us at the beginning of 2003 as the president of our New Business Development Group and head of the Design Support Division. Prior to joining us, Dr. Hu served as the president and chief executive officer of SiRF Technology Inc. from 1996 to 2002 and the senior vice president and general manager of S3 from 1994 to 1996. Dr. Hu is also an independent director of Compal Communications, Inc.
     Ching-Chang Wen is a director and the President of Central Integrated Manufacturing & Technology of our company. Dr. Wen is a representative of Hsun Chieh Investment Co. He received a Ph.D. degree in Electrical Engineering from the University of Pennsylvania in 1979. Prior to joining United Microelectronics Corporation in 1996, Dr. Wen served as a vice president of Winbond Electronics Corp. Dr. Wen is also a director and president of UMCJ.
     Fu-Tai Liou is a director and the President of Quality & Reliability Assurance of our company. Dr. Liou is a representative of Hsun Chieh Investment Co. Dr. Liou was a director of our company from May 2001 to May 2004. Dr. Liou received a Ph.D. degree in Material Science and Engineering from the State University of New York at Stony Brook in 1979. Prior to joining United Microelectronics Corporation in 1997, Dr. Liou was a vice president of SGS-Thompson.
     Shih-Wei Sun is a director and the Chief Operating Officer of our company and is in charge of our 12” operations and Research and Development Department. Dr. Sun is a representative of Silicon Integrated Systems Corp. Dr. Sun holds a Ph.D. degree in Electronics Materials from Northwestern University in 1986.
     Wen-Yang Chen is a Senior Vice President and a director of our company and is in charge of our 6-inch and 8-inch fab operations. Mr. Chen is a representative of Hsun Chieh Investment Co. Mr. Chen holds a Master of Electronics Engineering from the National Chiao Tung University in 1986.
     Chitung Liu is a director and the Chief Financial Officer of our company. Mr. Liu is an EMBA candidate of National Taiwan University. Prior to joining our company in 2001, Mr. Liu was a managing director of UBS. Mr. Liu is also a director of Novatek Microelectronics Corp. and Fortune Venture Capital Corporation, and a supervisor of UMC Japan, TLC Capital Co., Ltd. and Nexpower Technology Corp.
     Paul S.C. Hsu is a director of our company. Professor Hsu received a Ph.D. degree in Business Administration from The University of Michigan in 1974. Professor Hsu is Far East Group Chair Professor of Management, Yuan-Ze University, Taiwan, and the Chairman of Taiwan Assessment and Evaluation Association. Professor Hsu is an independent director of Faraday Technology Corporation and Taiwan Chi Cheng Enterprise Co. and a supervisor of Far Eastern International Bank.
     Chung-Laung Liu is a newly elected director of our company. Professor Liu received a Doctor degree in Science from Massachusetts Institute of Technology in 1962. Professor Liu is the William M.W. Mong Honorary Chair Professor of National Tsing Hua University, Taiwan. Professor Liu is also the Chairman of Dramexchange Corporation, a supervisor of MediaTek Incorporation and an independent director of Mototech Technology Corporation, and Anpec Electronics Corporation.
     Chun-Yen Chang is a newly elected director of our company. Professor Chang received a Ph.D. degree in Electronics Engineering from National Chiao Tung University in 1970. Professor Chang is an academician of Academia Sinica and a chair professor and president of National Chiao Tung University, Taiwan. Professor Chang is also an independent director of Himax Technologies, Inc.

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     Tzyy Jang Tseng is a supervisor of our company. Mr. Tseng is a representative of Hsun Chieh Investment Co. Mr. Tseng received a Master’s degree in Physics from the National Tsing Hua University of Taiwan. Mr. Tseng is also the Chairman of Unimicron Technology and Subtron Technology Co., Ltd., and a supervisor of Fortune Venture Capital Corporation and a director of Harvatek Corp.
     Ta-Hsing Wang is a newly elected supervisor of our company and a representative of Silicon Integrated System Corp. Mr. Wang received an MBA degree from Columbia University. Mr. Wang is also a director of Pacific Online Limited..
     Ting-Yu Lin is a newly elected supervisor of our company. Mr. Lin received a Master degree in International Finance from Meiji University in 1993. Mr. Lin is also the Chairman of Sunrox International Inc.
B. Compensation
     The aggregate compensation paid and benefits in kind granted to our directors and supervisors in 2007 were approximately NT$12 million (US$0.4 million). The remuneration was out of our 2006 earnings distribution plan, and the distributing percentage for directors and supervisors is 0.1%, See Item 10: B. Memorandum and Articles of Association — Dividends and Distributions). Some of the remuneration was paid to the legal entities which some of our directors or supervisors represent. The aggregate compensation paid and benefits in kind granted to our executive officers in 2007 were approximately NT$221 million (US$7 million), which include NT$133 million as bonus. In 2007, some of our directors who also served as executive officers received stock options to purchase 4.1 million shares.
C. Board Practices
     All of our directors and supervisors were elected in June 2006 for a term of three years. Neither we nor any of our subsidiaries has entered into a contract with any of our directors and supervisors by which our directors or supervisors are expected to receive benefits upon termination of their employment.
     Our board of directors established an audit committee in March 2005. The audit committee was appointed by the board of directors and consisted of Jack K.C.Wang, Mao-Chung Lin, and Paul S.C. Hsu from March 2005 to June 2006. After the re-election of directors in the shareholders’ meeting on June 12, 2006, our board of directors appointed Chung-Laung Liu, Chun-Yen Chang and Paul S.C. Hsu to be the members of the audit committee. Each audit committee member is an independent director who is financially literate with accounting or related financial management expertise. The audit committee meets as often as it deems necessary to carry out its responsibilities. Pursuant to an audit committee charter, the audit committee has responsibility for, among other things, overseeing the qualifications, independence and performance of our internal audit function and independent auditors, and overseeing the accounting policies and financial reporting and disclosure practices of our company. The audit committee also has the authority to engage special legal, accounting or other consultants it deems necessary in the performance of its duties.
     In November 2003, the Securities and Exchange Commission approved changes to the NYSE’s listing standards related to the corporate governance practices of listed companies. Under these rules, listed foreign private issuers, like us, must disclose any significant ways in which their corporate governance practices differ from those followed by NYSE-listed U.S. domestic companies under the NYSE’s listing standards. A copy of the significant differences between our corporate governance practices and NYSE corporate governance rules applicable to U.S. companies is available on our website http://www.umc.com/english/investors/Corp_gov_difference.asp.
D. Employees
     As of March 31, 2008, we had 13,571 employees, which included 7,054 engineers, 5,923 technicians and 594 clerical workers performing administrative functions at our plants in Taiwan. We have in the past implemented, and may in the future evaluate the need to implement, labor redundancy plans based on the work performance of our employees.

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    As of December 31,
Employees   2005   2006   2007
Engineers
    5,745       6,774       7,046  
Technicians
    5,671       5,881       6,067  
Administrative Staff
    652       610       607  
Total
    12,068       13,265       13,720  
     Employee salaries are reviewed annually. Salaries are adjusted based on industry standards, inflation and individual performance. As an incentive, additional bonuses in cash may be paid at the discretion of management based on the performance of individuals. In addition, except under certain circumstances, ROC law requires us to reserve from 10% to 15% of any offerings of our new shares for employees’ subscription.
     Our employees participate in our profit distribution pursuant to our articles of incorporation. Employees are entitled to receive additional bonuses based on a certain percentage of our allocable surplus income. The amount allocated for employees in 2007 in relation to retained earnings in 2006 totaled NT$2,324 million (US$72 million), which was paid in cash. On March 17, 2008, the Board has proposed employee bonus from retained earnings of 2007, which includes cash of NT$287 million and stock of NT$1,146 million. The proposal will be submitted for approval in annual ordinary shareholders’ meeting on June 13, 2008. The number of shares issued as employee share bonus is calculated by valuing the shares at their par value, or NT$10 per share, rather than their fair market value. Accordingly, the value of the shares received by employees is significantly more than the cash amount employees would receive if all of the employee share bonus were paid in cash. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—US GAAP Reconciliation.”
     Our employees are not covered by any collective bargaining agreements. We believe we have a good relationship with our employees.
E. Share Ownership
     As of March 31, 2008, each of our directors, supervisors and executive officers held shares and/or ADSs of United Microelectronics, either directly for their own account or indirectly as the representative of another legal entity on our board of directors, except for Chung Laung Liu and Paul S.C. Hsu, two of our independent directors. As of March 31, 2008, none of our directors, supervisors or executive officers held, for their own account, 0.1% or more of our outstanding shares. As of April 15, 2008, our most recent record date, Hsun Chieh Investment Co. held approximately 422 million of our shares, representing approximately 3.2% of our issued shares.
     We have an Employee Stock Options Plan, pursuant to which options may be granted to our full-time regular employees, including those of our domestic and overseas subsidiaries. The exercise price for the options would be the closing price of our common shares on the Taiwan Stock Exchange on the day the options are granted, while the expiration date for such options is 6 years from the date of its issuance. In September 2002, October 2003, September 2004, December 2005 and October 2007, we obtained approvals from relevant ROC authorities for the grant of up to 1,000 million, 150 million, 150 million, 350 million and 500 million stock options, respectively, to acquire our common shares under our Employee Stock Options Plan. In October 2002, January 2003, November 2003, March 2004, July 2004, October 2004, April 2005, August 2005, September 2005, January 2006, May 2006, August 2006 and December 2007, we granted 939 million, 61 million, 57 million, 33 million, 57 million, 20 million, 23 million, 54 million, 52 million, 39 million, 42 million, 28 million and 500 million stock options, respectively, to our employees.
     According to our Employee Stock Options Plan, an option holder may exercise an increasing portion of his or her options starting two years after the grant of the options. According to the vesting schedule, 50%, 75% and 100% of such option holder’s options shall vest two, three and four years after the grant of the options, respectively. Upon a voluntary termination or termination in accordance with the ROC Labor Law, the option holder shall exercise his or her vested options within 30 days, subject to exceptions provided therein, and after the termination otherwise such options shall terminate. If termination was due to death, the heirs of such option holder have one year starting from the date of the death to exercise his or her vested options. If termination was due to retirement or occupational casualty, the option holder or his or her heirs may exercise all his or her options within a certain period as provided. The options are generally not transferable or pledgeable by the option holders. The total number of shares issuable upon exercise of option held by our directors, supervisors and executive officers as of March 31, 2008 was 41.8 million. The unit granted to each of our directors, supervisors and executive officers as a percentage of our total shares as of March 31, 2008 was less than 1%.

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
     The following table sets forth information known to us with respect to the beneficial ownership of our shares as of (i) April 15, 2008, our most recent record date and (ii) as of certain record dates in each of the preceding three years, for (1) the shareholders known by us to beneficially own more than 2% of our shares and (2) all directors, supervisors and executive officers as a group. Beneficial ownership is determined in accordance with Securities and Exchange Commission rules.
                                         
                    As of April 13,   As of April 14,   As of April 15,
    As of April 15, 2008   2007   2006   2005
    Number of   Percentage   Percentage of   Percentage of   Percentage of
    shares   of shares   shares   shares   shares
    beneficially   beneficially   beneficially   beneficially   beneficially
Name of Beneficial Owner   owned   owned   owned   owned   owned
Hsun Chieh Investment Co., Ltd.(1)
    422,364,594       3.2 %     3.2 %     3.0 %     3.1 %
Xilinx, Inc.
    0       0.0 %     0.6 %     2.2 %     2.2 %
Silicon Integrated Systems Corp.
    301,799,449       2.3 %     2.3 %     2.2 %     2.2 %
Directors, supervisors and executive officers as a group
    735,979,567       5.6 %     6.2 %     6.9 %     6.4 %
 
(1)   36.5% owned by United Microelectronics as of March 31, 2008.
     None of our major shareholders have different voting rights from those of our other shareholders. To the best of our knowledge, we are not directly or indirectly controlled by another corporation, by any foreign government or by any other natural or legal person severally or jointly.
     For information regarding our shares held or beneficially owned by persons in the United States, see “Item 9. The Offer and Listing—A. Offer and Listing Details—Market Price Information for Our American Depositary Shares” in this annual report.
B. Related Party Transactions
     From time to time we have engaged in a variety of transactions with our affiliates. We generally conduct transactions with our affiliates on an arm’s-length basis. The sales and purchase prices with related parties are determined through negotiation, generally based on market price.
     In July 2004, we acquired SiSMC, a wafer foundry company spun off from SiS in 2003. As of December 31, 2007, we held 16.26% of SiS outstanding share capital.
     The following table shows our aggregate ownership interest, on a consolidated basis, in major related fabless design companies that we enter into transactions from time to time as of December 31, 2007.
         
Name   Ownership%
AMIC Technology (Taiwan), Inc.
    25.95  
Silicon Integrated Systems Corp.
    16.26  
     We provide foundry services to these fabless design companies on arm’s-length prices and terms. We derived NT$4,221 million, NT$2,402 million and NT$2,021 million (US$62 million) of our net operating revenues in 2005, 2006 and 2007, from the provision of our foundry services to these fabless design companies.

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C. Interests of Experts and Counsel
     Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
     Please refer to Item 18 for a list of all financial statements filed as part of this annual report on Form 20-F.
     Except as described in “Item 4. Information on the Company—B. Business Overview—Litigation,” we are not currently involved in material litigation or other proceedings that may have, or have had in the recent past, significant effects on our financial position or profitability.
     As for our policy on dividend distributions, see “Item 10. Additional Information—B. Memorandum and Articles of Association—Dividends and Distributions.” The following table sets forth the cash dividends per share and stock dividends per share as a percentage of shares outstanding paid during each of the years indicated in respect of shares outstanding at the end of each such year, except as otherwise noted. On June 11, 2007, our shareholders approved a cash dividend of NT$0.7 per share for an aggregate of NT$12,461,529,283. The board of directors of our company proposed a cash dividend of NT$0.75 per share for an aggregate of NT$9,382,646,949, a stock dividend of NT$0.08 per share from retained earnings and NT$0.37 from capital reserve on March 17, 2008. The proposal will be submitted for approval in annual ordinary shareholders’ meeting on June 13, 2008.
                                 
                            Number of
                    Total Number of   Outstanding
    Cash Dividend per   Stock Dividend   Shares Issued as   Shares at Year
    Share   per Share(1)   Stock Dividend   End
    NT$   NT$        
1997
          3.0       868,629,276       4,117,758,265  
1998
          2.9       1,199,052,940       5,480,221,725  
1999
          1.5       834,140,790       6,638,054,462  
2000
          2.0       1,809,853,716       11,439,016,900  
2001
          1.5       1,715,104,035       13,169,235,416  
2002
          1.5       1,968,018,212       15,238,578,646  
2003
          0.4       607,925,145       15,941,901,463  
2004
          0.8       1,288,558,185       17,550,800,859  
2005
    0.1029       1.029       1,758,736,435       18,856,632,324  
2006
    0.409141420       0.10228530       179,031,672       19,131,192,690  
2007
    0.7       0       0       13,214,494,883  
 
(1)   We declare stock dividends in a NT dollar amount per share, but we pay the stock dividends to our shareholders in the form of shares. The amount of shares distributed to each shareholder is calculated by multiplying the dividend declared by the number of shares held by the given shareholder, divided by the par value of NT$10 per share. Fractional shares are not issued but are paid in cash.
B. Significant Changes
     There have been no significant subsequent events following the close of the last financial year up to the date of this annual report on Form 20-F that are known to us and require disclosure in this annual report for which disclosure was not made in this annual report.
     Our consolidated net operating revenues for the three months ended March 31, 2008 was NT$25,140 million (US$775 million). Our consolidated net operating revenues for the three months ended March 31, 2008 is not indicative of the results that may be expected for any subsequent period.

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ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Market Price Information for Our Shares
     Our shares have been listed on the Taiwan Stock Exchange since July 1985. There is no public market outside Taiwan for our shares. The table below shows, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the Taiwan Stock Exchange for our shares. The closing price for our shares on the Taiwan Stock Exchange on April 30, 2008 was NT$18.6 per share.
                         
                    Average
                    Daily
    Closing Price Per   Trading
    Share(1)   Volume
    High   Low   (in thousands
    NT$   NT$   of shares)
2002
    38.52       15.54       95,422.37  
2003
    26.03       14.92       121,904.89  
2004
    27.56       16.93       102,012.19  
2005
    22.05       15.58       89,939.56  
First Quarter
    18.33       16.24       87,313.40  
Second Quarter
    21.43       15.58       89,780.57  
Third Quarter
    22.05       18.96       63,890.57  
Fourth Quarter
    21.33       16.20       118,076.96  
2006
    21.86       17.02       67,590.51  
First Quarter
    19.83       17.02       98,045.17  
Second Quarter
    21.86       17.65       73,833.23  
Third Quarter
    19.20       17.02       45,218.11  
Fourth Quarter
    21.25       18.05       56,491.87  
2007
    23.45       17.15       53,166.86  
First Quarter
    21.60       18.65       54,027.04  
Second Quarter
    20.30       19.00       47,434.35  
Third Quarter
    21.00       17.15       65,808.65  
Fourth Quarter
    23.45       18.85       46,147.02  
November
    21.50       18.85       49,526.64  
December
    20.15       18.95       31,898.48  
2008 (through April 30)
    20.05       16.60       33,591.82  
First Quarter
    20.05       16.60       37,877.00  
January
    20.05       16.60       38,262.86  
February
    18.70       16.80       25,514.57  
March
    19.60       16.60       37,572.57  
Second Quarter (through April 30)
    19.40       18.10       30,103.48  
April
    19.40       18.10       30,103.48  
 
Source: Bloomberg; Taiwan Stock Exchange.
 
(1)   Information has been adjusted to give effect to 1,968,018,212 Shares and 171,132,018 Shares issued as stock dividend and employee bonus, respectively, in August 2002; 607,925,145 Shares and 57,972,672 Shares issued as stock dividend and employee bonus, respectively, in July 2003; 1,288,558,185 Shares and 111,127,354 Shares issued as stock dividend and employee bonus, respectively, in July 2004; 1,758,736,435 Shares and 197,285,530 Shares issued as stock dividend and employee bonus, respectively, in August 2005; 179,031,672 Shares, NT$7,161,266,830, 45,845,444 Shares and NT$305,636,291 issued as stock dividend, cash dividend, stock employee bonus and cash employee bonus, respectively, in August 2006; and NT$12,461,529,283 and NT$2,324,119,405 issued as cash dividend and cash employee bonus, respectively, in August 2007.
Market Price Information for Our American Depositary Shares
     Our ADSs have been listed on the NYSE under the symbol “UMC” since September 19, 2000. The outstanding ADSs are identified by the CUSIP number 910873 20 7. The table below shows, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the NYSE for our ADSs. The closing price for our ADSs on the New York Stock Exchange on April 30, 2008 was US$3.46 per ADS. Each of our ADSs represents the right to receive five shares.

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                    Average
                    ADS Daily
    Closing Price PerADS(1)   Trading
    High   Low   Volume
    US$   IS$    
2003
    4.63       2.33       4,687,638  
2004
    5.02       2.86       3,692,464  
2005
    3.90       2.73       4,279,929  
2006
    3.80       2.75       5,804,766  
First Quarter
    3.32       2.94       6,713,483  
Second Quarter
    3.80       2.86       5,581,998  
Third Quarter
    3.30       2.75       4,647,865  
Fourth Quarter
    3.57       2.96       6,290,143  
November
    3.54       2.98       5,712,129  
December
    3.57       3.23       5,878,040  
2007 (through April 30)
    4.48       2.93       6,536,888  
First Quarter
    3.77       3.12       6,816,844  
Second Quarter
    3.59       3.18       5,783,324  
Third Quarter
    3.76       2.93       7,104,648  
Fourth Quarter
    4.48       3.25       6,454,188  
November
    3.66       3.28       7,322,624  
December
    3.63       3.25       4,764,505  
2008 (through April 30)
    3.70       2.75       5,673,404  
First Quarter
    3.70       2.75       6,211,315  
January
    3.51       2.75       8,298,410  
February
    3.46       2.79       4,653,210  
March
    3.70       2.92       5,577,970  
Second Quarter (through April 30)
    3.58       3.23       4,181,923  
April
    3.58       3.23       4,181,923  
 
Sources: Bloomberg
 
(1)   Information has been adjusted to give effect to 1,968,018,212 Shares and 171,132,018 Shares issued as stock dividend and employee bonus, respectively, in August 2002; 607,925,145 Shares and 57,972,672 Shares issued as stock dividend and employee bonus, respectively, in July 2003; 1,288,558,185 Shares and 111,127,354 Shares issued as stock dividend and employee bonus, respectively, in July 2004; and 1,758,736,435 Shares and 197,285,530 Shares issued as stock dividend and employee bonus, respectively, in August 2005; and 179,031,672 Shares, NT$7,161,266,830, 45,845,444 Shares, and NT$305,636,291 issued as stock dividend, cash dividend, stock employee bonus and cash employee bonus, respectively, in August 2006; and NT$12,461,529,283 and NT$2,324,119,405 issued as cash dividend and cash employee bonus, respectively, in August 2007.
     As of March 31, 2008, there were a total of 219,682,656 ADSs listed in the NYSE. With certain limited exceptions, holders of shares that are not ROC persons are required to hold these shares through a brokerage or custodial account in the ROC. As of March 31, 2008, 1,098,413,280 ordinary shares were registered in the name of a nominee of Citibank, N.A., the depositary under the deposit agreement. Citibank, N.A. has advised us that, as of March 31, 2008, 219,491,838 ADSs representing these 1,097,459,190 shares were held of record by Cede & Co., of which 190,818 ADSs were held by U.S. registered shareholders. We have no further information as to shares held or beneficially owned by U.S. persons.
B. Plan of Distribution
     Not applicable.
C. Markets
     The principal trading markets for our shares are the Taiwan Stock Exchange and the New York Stock Exchange, on which our shares trade in the form of ADSs.

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D. Selling Shareholders
     Not applicable.
E. Dilution
     Not applicable.
F. Expenses of the Issue
     Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
     Not applicable.
B. Memorandum and Articles of Association
     The following statements summarize the material elements of our capital structure and the more important rights and privileges of shareholders conferred by ROC law and our articles of incorporation.
Objects and Purpose
     The scope of business of United Microelectronics as set forth in Article 2 of our articles of incorporation, includes (i) integrated circuits; (ii) semiconductor parts and components; (iii) parts and components of microcomputers, microprocessors, peripheral support and system products; (iv) parts and components of semiconductor memory systems products; (v) semiconductor parts and components for digital transceiver product and system products; (vi) semiconductor parts and components for telecom system and system products; (vii) testing and packaging of integrated circuits; (viii) mask production; (ix) research and development, design, production, sales, promotion and after-sale services related to our business; and (x) export/import trade related to our business.
Directors
     The ROC Company Act and our articles of incorporation provide that our board of directors is elected by shareholders and is responsible for the management of our business. As of March 31, 2008, our board of directors consisted of nine directors, out of which three are independent directors. In the annual ordinary shareholders’ meeting held on June 11, 2007, we amended our articles of incorporation to abolish the managing director mechanism. The Chairman presides at all meetings of our board of directors, and also has the authority to represent our company. The term of office for our directors is three years, and our directors are elected by our shareholders by means of cumulative voting. The election for all of the directors and supervisors was held in June 2006. The amendment to our articles of incorporation on June 11, 2007 also adopts a nomination system which provides that holders of one percent or more of the total issued and outstanding shares of our company would be entitled to submit a roster of candidates to be considered for nomination to our company’s board of directors at a shareholders’ meeting involving the election of directors. In addition, our articles of incorporation provide that our shareholders also elect three supervisors whose duties include, among other things, investigating our business and financial condition, inspecting our corporate records, calling our shareholders’ meetings under certain circumstances, representing us in negotiations with our directors and notifying, when appropriate, our board of directors to cease acting in contravention of applicable law or regulation or in contravention of our articles of incorporation. The supervisors cannot concurrently serve as our directors or officers or employees. Pursuant to the ROC Company Act, a person may serve as our director or supervisor in his or her personal capacity or as the representative of another legal entity. A legal entity that owns our shares may be elected as a director or supervisor, in which case a natural person must be designated to act as the legal entity’s representative. A legal entity that is our shareholder may designate its representative to be elected as our director or supervisor on its behalf. In the event several representatives are designated by the same legal entity, any or all of them may be elected. A director or supervisor who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of such legal entity, and the replacement director or supervisor may serve the remainder of the term of office of the replaced director or supervisor. In order to enhance corporate governance, effective from January 1, 2007, under the amended ROC Securities and Exchange Act, a legal entity shareholder of a public company is no longer permitted to appoint representatives to be elected and/or serve as directors and supervisors at the same time unless otherwise permitted by the ROC FSC. The ROC FSC granted an exemption from this restriction if the terms of such representatives began prior to January 1, 2007. As of March 31, 2008, six of our nine directors and two of our three supervisors are representatives of other legal entities, as shown in “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management.”

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     According to the Company Act, a director who has a personal interest in a matter to be discussed at the meeting of the board of directors, the outcome of which may conflict with his interests, shall abstain from voting on such matter. Our articles of incorporation, as amended on June 11, 2007, provide that the board of directors is authorized, by taking into account of the extent of his/her/its involvement of our operation activities and the value of his/her/its contribution, to determine the compensation for each director and supervisor at a comparable rate adopted by other companies of the same industry regardless of the profit received by our company. In addition, according to our articles of incorporation, we may distribute 0.1% of the balance of our earnings after deduction of payment of all taxes and dues, deduction of any past losses and may allocate 10% of our net income as a legal reserve as remuneration to directors and supervisors. Our articles of incorporation do not impose a mandatory retirement age limit for our directors. Furthermore, our articles of incorporation do not impose a shareholding qualification for each director. According to our current internal Loan Procedures, as amended in our annual shareholders’ meeting held in June 2005, we shall not extend any loan to our directors or our supervisors.
     In order to strengthen corporate governance of companies in Taiwan, effective from January 1, 2007, the amended ROC Securities and Exchange Act authorizes the ROC FSC, after considering certain factors, including the scale, shareholding structure and business nature of a public company, to require that a public company, such as our company, meet certain criteria, including having at least two independent directors but not less than one fifth of the total number of directors. The amended ROC Securities and Exchange Act grants those public companies a grace period until the expiry of the terms of the incumbent directors who took their office prior to January 1, 2007.
     In addition, pursuant to the amended ROC Securities and Exchange Act, a public company is required to either establish an audit committee (“ROC Audit Committee”) or retain supervisors, provided that the ROC FSC may, after considering the scale and business nature of a public company and other necessary situation, require the company to establish an audit committee in place of its supervisors. Currently, the ROC FSC has not promulgated such compulsory rules, and all public companies may, at their discretion, retain either an ROC Audit Committee or supervisors. We have determined to maintain the office of supervisors and will not establish an ROC Audit Committee pursuant to the ROC Securities and Exchange Act.
     According to our articles of incorporation, as amended on June 11, 2007, we may purchase directors and officers liability insurance for our directors and supervisors, covering the liabilities incurred in relation to his/her/its operation of business and legally responsible for.
Shares
     As of December 31, 2007, our authorized share capital was NT$260 billion, divided into 26 billion shares, of which 13,214,494,833 shares were issued and 12,494,809,580 shares were outstanding. All shares presently issued are fully paid and in registered form, and existing shareholders are not subject to any capital calls. We had no convertible bonds outstanding as of March 31, 2008. As of March 31, 2008, we had neither warrant nor option on our shares, except for 762 million options we granted to our employees under our Employee Stock Options Plan discussed below.
Employee Stock Option
     According to our Employee Stock Options Plan, options may be granted to our full-time regular employees, including those of our domestic and overseas subsidiaries. In September 2002, October 2003, September 2004, December 2005 and October 2007, we obtained approval by relevant ROC authorities to grant up to 1 billion, 150 million, 150 million, 350 million and 500 million stock options, respectively, to acquire our common shares under our Employee Stock Option Plan. According to the plan, an option holder may exercise an increasing portion of his or her options in time starting two years after the grant of the options. According to the vesting schedule, 50%, 75% and 100% of such option holder’s options shall vest two, three and four years after the grant of the options, respectively.

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     The table below shows the number of options granted in the past four years and the month in which they were granted:
                                                 
    October 2002   January 2003   November 2003   March 2004   July 2004   October 2004
    (in millions)
Number of Options Granted
    939       61       57       33       57       20  
Number of Options Outstanding as of March 31, 2008
    82       6       22       12       26       6  
                                                 
    April 2005   August 2005   September 2005   January 2006   May 2006   August 2006
    (in millions)
Number of Options Granted
    23       54       52       39       42       28  
Number of Options Outstanding as of March 31, 2008
    9       10       27       15       27       20  
         
    December 2007
    (in millions)
Number of Options Granted
    500  
Number of Options Outstanding as of March 31, 2008
    500  
New Shares and Preemptive Rights
     New shares may only be issued with the prior approval of our board of directors. If our issuance of any new shares will result in any change in our authorized share capital, we are required under ROC law to amend our articles of incorporation and obtain approval of our shareholders in a shareholders’ meeting. We must also obtain the approval of, or submit a registration with, the ROC FSC and the Science Park Administration. According to the ROC Company Act, when a company issues capital stock for cash, 10% to 15% of the issue must be offered to its employees. In addition, if a listed company intends to offer new shares for cash, at least 10% of the issue must also be offered to the public. This percentage can be increased by a resolution passed at a shareholders’ meeting, which will reduce the number of new shares in which existing shareholders may have preemptive rights. Unless the percentage of the shares offered to the public is increased by a resolution, existing shareholders of the company have a preemptive right to acquire the remaining 75% to 80% of the issue in proportion to their existing shareholdings. According to the Corporate Merger and Acquisition Act of the ROC, as effective on February 8, 2002, if new shares issued by our company are solely for the purpose of acquisition, share swap or spin-off, the above-mentioned restrictions, including the employee stock ownership plan, the preemptive rights of the existing shareholders and the publicity requirement of a listed company, to such issuance of new shares may not be applied.
Shareholders
     We only recognize persons registered in our register as our shareholders. We may set a record date and close our register of shareholders for specified periods to determine which shareholders are entitled to various rights pertaining to our shares.
Transfer of Shares
     Shares in registered form are transferred in book-entry form or by endorsement and delivery of the related share certificates. Transferees must have their names and addresses registered on our register in order to assert shareholder’s rights against us. Our shareholders are required to file their respective specimen seals with our share registrar, Horizon Securities Co., Ltd. Under the current ROC Company Act, a public company, such as our company, may issue individual share certificates, one master certificate or no certificate at all, to evidence common shares. Our articles of incorporation, as amended on June 11, 2007, provide that we may deliver shares in book-entry form instead of by means of issuing physical share certificates.

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Shareholders’ Meetings
     We are required to hold an annual ordinary shareholders’ meeting once every calendar year within six months from the end of each fiscal year. Our board of directors may convene an extraordinary meeting whenever the directors deem necessary, and they must do so if requested in writing by shareholders holding no less than 3% of our paid-in share capital who have held these shares for more than a year. In addition, any of our supervisors may convene a shareholders’ meeting if our board of directors does not or cannot convene a shareholders’ meeting and when such a meeting is necessary for the benefit of the shareholders. At least 15 days’ advance written notice must be given of every extraordinary shareholders’ meeting and at least 30 days’ advance written notice must be given of every annual ordinary shareholders’ meeting. Unless otherwise required by law or by our articles of incorporation, voting for an ordinary resolution requires an affirmative vote of a simple majority of those present. A distribution of cash dividends would be an example of an ordinary resolution. The ROC Company Act also provides that in order to approve certain major corporate actions, including any amendment of our articles of incorporation, dissolution, merger or spin-off, the transfer of all or an essential part of the business or assets, accept all of the business or assets of any other company which would have a significant impact in our operations, removing directors or the distribution of dividend in stock form, a special resolution may be adopted by the holders of the majority of our shares represented at a meeting of shareholders at which holders of at least two-thirds of our issued and outstanding shares are present. However, in the case of a public company, such as our company, such resolution may be adopted by the holders of at least two-thirds of the shares represented at a shareholders’ meeting at which holders of at least majority of our issued and outstanding shares are present. However, if we are the controlling company and hold no less than 90% of our subordinate company’s outstanding shares, our merger with the subordinate company can be approved by a board resolution adopted by majority consent at a meeting with two-thirds of our directors present without shareholders’ approval. In addition, according to the Corporate Merger and Acquisition Act of the ROC, if a company intends to transfer all or an essential part of its business or assets to its wholly-owned subsidiary, subject to the qualifications set forth in the said act, such transaction only needs to be approved by majority board resolution rather than super majority vote by the shareholder’s meeting as required by the ROC Company Act.
Voting Rights
     Each common share is generally entitled to one vote and no voting discount will be applied. However, treasury shares and our common shares held by (i) an entity in which we own more than 50% of the voting shares or paid-in capital, or (ii) a third party in which we and an entity controlled by us jointly own, directly or indirectly, more than 50% of the voting shares or paid-in capital are not entitled to any vote. Except as otherwise provided by law or our articles of incorporation, a resolution can be adopted by the holders of a simple majority of the total issued and outstanding shares represented at a shareholders’ meeting. The quorum for a shareholders’ meeting to discuss the ordinary resolutions is a majority of the total issued and outstanding shares. The election of directors and supervisors by our shareholders may be conducted by means of cumulative voting or other voting mechanisms adopted in our articles of incorporation. In all other matters, a shareholder must cast all his or her votes in the same manner when voting on any of these matters.
     Our shareholders may be represented at an ordinary or extraordinary shareholders’ meeting by proxy if a valid proxy form is delivered to us five days before the commencement of the ordinary or extraordinary shareholders’ meeting, unless such proxy has been revoked no later than one day before the date of the shareholders’ meeting. Voting rights attached to our shares exercised by our shareholders’ proxy are subject to the proxy regulation promulgated by the ROC FSC.
     Any shareholder who has a personal interest in a matter to be discussed at our shareholders’ meeting, the outcome of which may impair our interests, shall not vote or exercise voting rights on behalf of another shareholder on such matter.
     Holders of our ADSs generally will not be able to exercise voting rights on the shares underlying their ADSs on an individual basis.

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Dividends and Distributions
     We are not allowed under ROC law to pay dividends on our treasury shares. We may distribute dividends on our issued and outstanding shares if we have earnings. Before distributing a dividend to shareholders, among other things, we must recover any past losses, pay all outstanding taxes and set aside a legal reserve equivalent to 10% of our net income until our legal reserve equals our paid-in capital.
     At an annual ordinary shareholders’ meeting, our board of directors submits to the shareholders for their approval proposals for the distribution of dividends or the making of any other distribution to shareholders from our net income or reserves for the preceding fiscal year. Dividends are paid to shareholders proportionately. Dividends may be distributed either in cash or in shares or a combination of cash and shares, as determined by the shareholders at such meeting.
     Our articles of incorporation provide that we may distribute 0.1% of the balance of our earnings deducted by:
    payment of all taxes and dues;
 
    deduction of any past losses;
 
    allocation of 10% of our net income as a legal reserve; and
 
    as remuneration to directors and supervisors.
     The amount of no less than 5% of the residual amount after the distribution of the items illustrated above, plus, at discretion, any undistributed earnings from previous years, shall be distributed as bonus to employees. Originally, the distribution of employee bonus were in the form of new shares; while in the annual ordinary shareholders’ meeting held in June 2005, our shareholders approved an amendment of our articles of incorporation to enable the distribution of employee bonus in the form of cash or in shares. Employees eligible for such distribution may include certain qualified employees from our subordinate companies and the qualification of such employees is to be determined by our board of directors. The remaining amount may be distributed according to the distribution plan proposed by our board of directors based on our dividend policy, and submitted to the shareholders’ meeting for approval.
     In the annual ordinary shareholders’ meeting held in June 2005, our shareholders approved a change of the percentage of stock dividend issued to our shareholders, if any, to no more than 80% and cash dividend, if any, to no less than 20%.
     In addition to permitting dividends to be paid out of net income, we are permitted under the ROC Company Act to make distributions to our shareholders of additional shares by capitalizing reserves, including the legal reserve and capital surplus of premiums from issuing stock and earnings from gifts received if we do not have losses. However, the capitalized portion payable out of our legal reserve is limited to 50% of the total accumulated legal reserve, and is payable only if and to the extent the accumulated legal reserve exceeds 50% of our paid-in capital.
     For information as to ROC taxes on dividends and distributions, see “— E. ROC Tax Considerations” in this Item.
Acquisition of Our Shares by Us
     An ROC company may not acquire its own common shares, except under certain exceptions provided in the ROC Company Act or the ROC Securities and Exchange Act. Under the amendments to the ROC Company Act, which took effect on November 14, 2001, a company may purchase up to 5% of its issued common shares for transfer to employees in accordance with a resolution of its board of directors, passed by a majority vote, at a meeting with at least two-thirds of the directors present.

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     Under Article 28-2, an amendment to the ROC Securities and Exchange Act, which took effect on July 21, 2000, we may, by a board resolution adopted by majority consent at a meeting with two-thirds of our directors present, purchase up to 10% of our issued shares on the Taiwan Stock Exchange or by a tender offer, in accordance with the procedures prescribed by the ROC FSC, for the following purposes:
    to transfer shares to our employees;
 
    to transfer upon conversion of bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants issued by us; and
 
    if necessary, to maintain our credit and our shareholders’ equity; provided that the             shares so purchased shall be cancelled thereafter.
     We have from time to time announced plans, none of which was binding on us, to buy back up to a fixed amount of our shares on the Taiwan Stock Exchange at the price range set forth in the plans. As of December 31, 2005, 2006 and 2007, we purchased an aggregate of 1,278 million, 2,678 million and 0 million, respectively, of our shares under these plans. From February 16, 2006 to April 15, 2006, we also purchased 1,000 million of our shares for cancellation. Of the repurchased Shares, 137 million shares in aggregate cancelled as of May, 2005. In addition, on May 22, 2006, we announced a plan, which is not binding on us, to buy back up to 400 million of our shares on the Taiwan Stock Exchange at a price ranging from NT$13.90 to NT$32.15 per share between May 23, 2006 and July 22, 2006 to transfer to employees.
     In addition, we may not spend more than the aggregate amount of the retained earnings, the premium from issuing stock and the realized portion of the capital reserve to purchase our shares.
     We may not pledge or hypothecate any purchased shares. In addition, we may not exercise any shareholders’ rights attached to such shares. In the event that we purchase our shares on the Taiwan Stock Exchange, our affiliates, directors, supervisors, managers and their respective spouses and minor children and/or nominees are prohibited from selling any of our shares during the period in which we purchase our shares.
     In addition to the share purchase restriction, the Company Act provides that our subsidiaries may not acquire our shares or the shares of our majority-owned subsidiaries if the majority of the outstanding voting shares or paid-in capital of such subsidiary is directly or indirectly held by us.
Liquidation Rights
     In a liquidation, you will be entitled to participate in any surplus assets after payment of all debts, liquidation expenses and taxes proportionately.
Rights to Bring Shareholders’ Suits
     Under the ROC Company Act, a shareholder may bring suit against us in the following events:
    within 30 days from the date on which a shareholders’ resolution is adopted, a shareholder may file a lawsuit to annul a shareholders’ resolution if the procedure for convening a shareholders’ meeting or the method of resolution violates any law or regulation or our articles of incorporation. However, if the court is of the opinion that such violation is not material and does not affect the result of the resolution, the court may reject the shareholder’s claim.
 
    if the substance of a resolution adopted at a shareholders’ meeting contradicts any applicable law or regulation or our articles of incorporation, a shareholder may bring a suit to determine the validity of such resolution.
     Shareholders may bring suit against our directors and supervisors under the following circumstances:

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    Shareholders who have continuously held 3% or more of our issued shares for a period of one year or longer may request in writing that a supervisor institute an action against a director on our behalf. In case the supervisor fails to institute an action within 30 days after receiving such request, the shareholders may institute an action on our behalf. In the event shareholders institute an action, a court may, upon the defendant’s motion, order such shareholders to furnish appropriate security.
 
    Shareholders who hold more than 3% or more of our total issued shares may institute an action with a court to remove a director of ours who has materially violated the applicable laws or our articles of incorporation or has materially damaged the interests of our company if a resolution for removal on such grounds has first been voted on and rejected by our shareholders and such suit is filed within 30 days of such shareholders’ vote.
 
    In the event that any director, supervisor, manager or shareholder holding more than 10% of our shares or any respective spouses or minor children and/or nominees of any of them sells shares within six months after acquisition of such shares, or repurchases the shares within six months after the sale, we may claim for recovery of any profits realized from the sale and purchase. If our board of directors or our supervisors fail to claim for recovery, any shareholder may set forth a 30-day period for our board of directors or our supervisors to exercise the right. In the event our directors or our supervisors fail to exercise the right during such 30-day period, such requesting shareholder shall have the right to claim such recovery on our behalf. Our directors and supervisors shall be jointly and severally liable for damages suffered by us as a result of their failure to exercise the right of claim.
Other Rights of Shareholders
     Under the ROC Company Act and the Corporate Merger and Acquisition Act, dissenting shareholders are entitled to appraisal rights in the event of a spin-off or a merger and various other major corporate actions. Dissenting shareholders may request us to redeem all their shares at a then fair market price to be determined by mutual agreement. If no agreement can be reached, the valuation will be determined by a court. Subject to applicable law, dissenting shareholders may, among other things, exercise their appraisal rights by notifying us before the related shareholders’ meeting and/or by raising and registering their dissent at the shareholders’ meeting and also waive their voting rights.
     One or more shareholders who have held more than 3% of the issued and outstanding shares for more than one year may require our board of directors to call an extraordinary shareholders’ meeting by sending a written request to our board of directors.
     Effective from June 24, 2005, the ROC Company Law allows shareholder(s) holding 1% or more of the total issued shares of a company to, during the period of ten days or more prescribed by the company, submit one proposal in writing containing no more than three hundred words (in terms of Chinese characters) for discussion at the annual ordinary shareholders’ meeting.
Financial Statements
     For a period of at least 10 days before our annual ordinary shareholders’ meeting, we must make available our annual financial statements at our principal offices in Hsinchu, Taiwan, and our share registrar in Taipei for our shareholders’ inspection.
Transfer Restrictions
     Our directors, supervisors, managers and shareholders holding more than 10% of our shares are required to report any changes in their shareholding to us on a monthly basis. In addition, the number of shares that they can sell or transfer on the Taiwan Stock Exchange on a daily basis is limited by ROC law. Further, they may sell or transfer our shares on the Taiwan Stock Exchange only after reporting to the ROC FSC at least three days before the transfer, provided that such reporting is not required if the number of shares transferred does not exceed 10,000 in one business day.

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C. Material Contracts
Cross License Agreement, dated as of December 7, 2005, between United Microelectronics Corporation and Freescale Semiconductor, Inc.
     We entered into a five-year cross license agreement with Freescale effective as of December 7, 2005, which provides for the cross license of certain semiconductor manufacturing patents. Under this agreement, Freescale has granted to UMC and UMC’s subsidiaries, nonexclusive, worldwide, non-transferable licenses, without the right to grant sublicenses (except to sublicense subsidiaries), for manufacturing inventions of certain semiconductive devices under Freescale’s patents filed prior to December 31, 2010, and UMC has granted Freescale, royalty-free, worldwide, non-transferable licenses, without the right to grant sublicenses (except to sublicense subsidiaries) for manufacturing inventions of certain semiconductive devices under UMC’s patents filed prior to December 31,2010. UMC also agreed to pay Freescale certain royalty fees under this agreement.
Cross License Agreement, dated as of January 1, 2006, between United Microelectronics Corporation and International Business Machine Corporation.
     We entered into a five-year cross license agreement with IBM effective as of January 1, 2006, which provides for the cross license of certain semiconductor patents including process, topography and design. Under this agreement, IBM has granted to UMC and UMC’s subsidiaries, nonexclusive, non-transferable licenses, without the right to grant sublicenses, for making UMC’s and UMC’s subsidiaries’ licensed products in ROC, Japan and Singapore and selling, leasing, licensing, using and/or transferring UMC’s and UMC’s subsidiaries’ licensed products worldwide under IBM’s patents filed prior to January 1, 2011. UMC has granted IBM, royalty-free, worldwide, non-transferable licenses, without the right to grant sublicenses, for making, selling, leasing, licensing, using and/or transferring IBM’s licensed products under UMC’s patents filed prior to January 1, 2011.
Cross License Agreement, dated as of January 1, 2006, between United Microelectronics Corporation and Renesas Technology Corp.
     We entered into a five-year cross license agreement with Renesas effective as of January 1, 2006, which provides for the cross license of certain semiconductor patents including process and design. Under this agreement, Renesas has granted to UMC and UMC’s subsidiaries, nonexclusive, non-transferable licenses, without the right to grant sublicenses, for making, selling, importing and otherwise disposing of UMC’s and UMC’s subsidiaries’ licensed products under Renesas’s patents filed prior to December 31, 2010. UMC has granted Renesas, royalty-free, worldwide, non-transferable licenses, without the right to grant sublicenses, for making, selling, using and otherwise disposed of Renesas’ licensed products under UMC’s patents filed prior to December 31, 2010.
Guarantee Agreement
     We entered into a guarantee agreement with IBJ Leasing Co., Ltd., or IBJ Leasing on November 24, 2005 to guarantee the certain obligations of UMCJ under a lease agreement between UMCJ and IBJ Leasing. This guarantee agreement expired on October 31, 2006.
D. Exchange Controls
Foreign Investment and Exchange Controls in Taiwan
     We have extracted from publicly available documents the information presented in this section. Please note that citizens of the People’s Republic of China and entities organized in the People’s Republic of China are subject to special ROC laws, rules and regulations, which are not discussed in this section.
General
     Historically, foreign investments in the securities market of Taiwan were restricted. However, commencing in 1983, the Taiwan government has from time to time enacted legislation and adopted regulations to make foreign investment in the Taiwan securities market possible. Initially, only overseas investment trust funds of authorized securities investment trust enterprises established in Taiwan were permitted to invest in the Taiwan securities market. Since January 1, 1991, qualified foreign institutional investors are allowed to make investments in the Taiwan public securities market. Since March 1, 1996, non-resident foreign institutional and individual investors, called “general foreign investors,” are permitted to make direct investments in the Taiwan public securities market. On September 30, 2003, the Executive Yuan amended the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals (the “Investment Regulations”) under which the “Qualified Foreign Institutional Investors,” or QFII, designations have been abolished and the restrictions on foreign portfolio investors have been revised. According to the Investment Regulations, “Foreign Institutional Investor,” or FINI, means an entity which is incorporated under the laws of countries other than the ROC or the branch of a foreign entity which is established within the territory of the ROC, and “Foreign Individual Investor” (“FIDI”) means an overseas Chinese or a foreign natural person. In addition, the Investment Regulations also lifted some restrictions and simplified procedures of investment application.

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Foreign Ownership Limitations
     Foreign ownership of the issued share capital in a Taiwan Stock Exchange-listed company or a GreTai Securities Market-listed company has been limited to 50% in the past. Since December 30, 2000, the 50% limit has been lifted. Foreign investors can now hold such investments without any foreign ownership percentage limitations, unless the law has imposed restrictions otherwise.
     Capital remitted into Taiwan under the foreign investment guidelines may be repatriated at any time without the approval of the ROC FSC. Capital gains and income on investments may also be repatriated at any time.
Foreign Investors
     Each FINI who wishes to invest directly in the ROC securities market is required to register with the Taiwan Stock Exchange and obtain an investment identification number if the FINI is a non-resident and has no sub-investment accounts in the ROC. Except for some restrictions imposed by specific laws and regulations, the individual and aggregate foreign ownership of the issued share capital in a Taiwan Stock Exchange-listed company or a GreTai Securities Market-listed company is not restricted. An ROC custodian for a non-resident FINI is required to submit to the CBC, and the Taiwan Stock Exchange a report of trading activities, inward and outward remittance of capital and status of assets under custody and other matters every month.
     Each FIDI who wishes to invest directly in the ROC securities market is also required to register with the Taiwan Stock Exchange and obtain an investment identification number. Any non-resident FIDI who invests in the ROC securities market is subject to the limitations on investment amount as jointly determined by the ROC FSC and CBC.
Foreign Investment Approval
     Foreign investors (both institutional and individual) who wish to make direct investments in the shares of ROC companies are required to submit a “foreign investment approval” application to the Investment Commission of the Ministry of Economic Affairs (the “ROC MOEA”) or other government authority and enjoy benefits granted under the Statute for Foreigner’s Investment and the Statute for Overseas Chinese’s Investment. The Investment Commission or other government authority reviews each foreign investment approval application and approves or disapproves the application after consultation with other governmental agencies, if necessary. Any non-ROC person possessing a foreign investment approval may repatriate annual net profits and interests attributable to an approved investment. Investment capital and capital gains attributable to the investment may be repatriated with approval of the Investment Commission or other government authority.
     In addition to the general restrictions against direct investments by foreign investors in ROC companies, foreign investors are currently prohibited from investing in certain prohibited industries in Taiwan under the “Negative List.” The prohibition of the Negative List is absolute in the absence of a specific exemption from the application of the Negative List. The prohibition on direct foreign investment in the prohibited industries is absolute in the absence of a specific exemption from the application of the Negative List. Under the Negative List, some other industries are restricted so that foreign investors may directly invest only up to a specified level and with the specific approval of the relevant authority responsible for enforcing the legislation which the Negative List is intended to implement. Our business is not a restricted industry under the Negative List.

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Exchange Controls
     Taiwan’s Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designed to handle foreign exchange transactions by the Ministry of Finance and by the CBC. Current regulations favor trade-related foreign exchange transactions. Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters. All foreign currency needed for the importation of merchandise and services may be purchased from the designated foreign exchange banks.
     Aside from trade-related foreign exchange transactions, ROC companies and residents may remit to and from Taiwan foreign currencies of up to US$50 million (or its equivalent) and US$5 million, (or its equivalent) respectively in each calendar year. These limits apply to remittances involving a conversion between NT dollars and U.S. dollars or other foreign currencies. A requirement is also imposed on all private enterprises to register all medium and long-term foreign debt with the CBC.
     In addition, foreign currency earned from or needed to be paid for direct investment or portfolio investments, which are approved by the competent authorities, may be retained or sold by the investors or purchased freely from the designated bank.
     Aside from the transactions discussed above, a foreign person without an alien resident card or an unrecognized foreign entity may remit to and from Taiwan foreign currencies of up to US$100,000 per remittance without obtaining prior approval or permit if required documentation is provided to Taiwan authorities. This limit applies only to remittances involving a conversion between NT dollars and U.S. dollars or other foreign currencies.
Depositary Receipts
     In April 1992, the ROC SFB (the predecessor of the ROC FSC) began allowing ROC companies listed on the Taiwan Stock Exchange to sponsor the issuance and sale of depositary receipts evidencing depositary shares. Notifications for these issuances are still required. In December 1994, the Ministry of Finance began allowing companies whose shares are traded on the GreTai Securities Market to sponsor the issuance and sale of depositary receipts evidencing depositary shares. On October 24, 2002, the ROC SFB began allowing public companies that are not listed on the Taiwan Stock Exchange or the GreTai Securities Market to sponsor the issuance and sale of depositary receipts by way of private placements outside the ROC.
     A holder of depositary shares wishing to withdraw common shares underlying depositary shares is required to appoint a local agent or representative with qualifications set forth by the ROC FSC to, among other things, open a securities trading account with a local brokerage firm, pay ROC taxes, remit funds, and exercise shareholders’ right. In addition, the withdrawing holder is also required to appoint a custodian bank with qualifications set forth by the ROC FSC to hold the securities in safekeeping, make confirmations, settle trades and report all relevant information. Without making this appointment and the opening of accounts, the withdrawing holder would be unable to subsequently sell the common shares withdrawn from a depositary receipt facility on either the Taiwan Stock Exchange or the GreTai Securities Market.
     After the issuance of a depositary share, a holder of the depositary share may immediately, comparing to a three-month waiting period restriction which was lifted in 2003, request the depositary issuing the depositary share to cause the underlying common shares to be sold in the ROC or to withdraw the common shares represented by the depositary receipt and deliver the common shares to the holder. Citizens of the PRC are not permitted to withdraw and hold our common shares unless they obtain the approval from the competent authority. Due to the absence of relevant rules or guidelines, PRC persons are not currently able to conduct investments in the ROC.

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     No deposits of shares may be made in a depositary receipt facility and no depositary receipts may be issued against deposits without specific ROC FSC approval, unless they are:
  (1)   stock dividends;
 
  (2)   free distributions of common shares;
 
  (3)   due to the exercise by a holder of his or her preemptive rights in the event of capital increases for cash; or
 
  (4)   permitted under the deposit agreement and the custody agreement, due to the direct purchase of shares or purchase through the depositary in the domestic market or the surrender of shares under the possession of investors and then delivery of such             shares to the custodian for deposit in the depositary receipt facility, provided that the total number of depositary receipts outstanding after an issuance cannot exceed the number of issued depositary shares previously approved by the ROC FSC in connection with the offering plus any depositary shares issued pursuant to the events described in (1), (2) and (3) above. These issuances may only be made to the extent previously issued depositary shares have been withdrawn.
     A depositary may convert New Taiwan dollars from the proceeds of the sale of common shares or cash distributions received into other currencies, including U.S. dollars. A depositary must obtain foreign exchange approval from the CBC on a payment-by-payment basis for conversion into New Taiwan dollars of subscription payments for rights offerings or conversion into foreign currencies from the proceeds from the sale of subscription rights for new common shares. It is expected that the CBC will grant this approval as a routine matter.
     A holder of depositary shares may convert NT dollars into other currencies from proceeds from the sale of any underlying common shares. Proceeds from the sale of the underlying common shares withdrawn from the depositary receipt facility may be used for reinvestment in securities listed on both the Taiwan Stock Exchange and the GreTai Securities Market, provided that the investor designates a local securities firm or financial institution as agent to open an NT dollar bank account in advance.
E. Taxation
ROC Tax Considerations
     The following summarizes the principal ROC tax consequences of owning and disposing of the ADSs or shares to a holder of ADSs or shares that is not a resident of the ROC. An individual holder will be considered as not a resident of the ROC for the purposes of this section if he or she is not physically present in Taiwan for 183 days or more during any calendar year, except if the individual holder has both ROC and non-ROC nationalities and has a registered address in the ROC. An entity holder will be considered as not a resident of the ROC if it is organized under the laws of a jurisdiction other than Taiwan and has no fixed place of business or other permanent establishment or business agent in the ROC. Prospective purchasers of ADSs or shares should consult their own tax advisors concerning the tax consequences of owning ADSs or shares in the ROC and any other relevant taxing jurisdiction to which they are subject.
Dividends
     Dividends, whether in cash or shares, declared by us out of retained earnings and paid out to a holder that is not an ROC resident in respect of shares represented by ADSs are subject to ROC withholding tax at the time of distribution. The current rate of withholding for non-residents is 30% for a non-resident individual and 25% for a non-resident entity of the amount of the distribution in the case of cash dividends or of the par value of the shares distributed in the case of stock dividends. However, the rate of withholding is 20% if the non-resident holder obtains foreign investment approval pursuant to the Statute for Foreigner’s Investment or the Statute for Overseas Chinese’s Investment. Under current practice adopted by tax authorities, a 20% withholding rate is applied to a non-resident ADS holder without requiring the holder to apply for or obtain foreign investment approval. As discussed in the section “—Tax Reform” below, certain of our retained earnings will be subject to a 10% undistributed retained earnings tax. To the extent dividends are paid out of retained earnings which have been subject to the retained earnings tax, the amount of such tax will be used by us to offset a non-resident’s withholding tax liability on such dividend. Consequently, the effective rate of withholding on dividends paid out of retained earnings previously subject to the retained earnings tax may be less than 20%. There is no withholding tax with respect to stock dividends declared out of our capital reserve.

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Capital Gains
     Under current ROC law, gains realized on ROC securities transactions are primarily exempt from income tax. However, subject to the AMT Act, gains realized from various securities transactions by an ROC-resident entity and from some securities transactions by an ROC-resident individual, such as securities not listed on the Taiwan Stock Exchange or the GreTai Securities Market, shall be calculated as taxable income for the purpose of the AMT and may further be subject to income tax. In addition, transfers of ADSs by non-resident holders are not regarded as sales of ROC securities and, as a result, any gains derived therefrom are currently not subject to ROC income tax.
Securities Transaction Tax
     The ROC government imposes a securities transaction tax that will apply to sales of shares, but not to sales of ADSs. The transaction tax, which is payable by the seller, is generally levied on sales of shares at the rate of 0.3% of the sales proceeds. Withdrawals of our shares from our depositary facility are not subject to the ROC securities transaction tax.
Preemptive Rights
     Distribution of statutory preemptive rights for shares in compliance with the ROC Company Act is not subject to ROC tax. Proceeds derived from sales of statutory preemptive rights evidenced by securities by a non-resident holder may be subject to the ROC securities transaction tax, currently at the rate of 0.3% of the gross amount received. Proceeds derived from sales of statutory preemptive rights which are not evidenced by securities are subject to capital gains tax at the rate of (1) 25% of the gains realized for non-ROC entity holders and (2) 35% of the gains realized for non-ROC individual holders. Subject to compliance with the ROC law, we have sole discretion to determine whether statutory preemptive rights are evidenced by securities or not.
Estate Taxation and Gift Tax
     ROC estate tax is payable on any property within the ROC of a deceased individual who is a non-resident individual and ROC gift tax is payable on any property located within the ROC donated by any such person. Estate tax is currently payable at rates ranging from 2% of the first NT$600,000 to 50% of amounts over NT$100,000,000. Gift tax is payable at rates ranging from 4% of the first NT$600,000 to 50% of amounts over NT$45,000,000. Under ROC estate and gift tax laws, the shares will be deemed located in the ROC irrespective of the location of the owner. It is unclear whether a holder of ADSs will be considered to own shares for this purpose.
Tax Treaties
     The Republic of China does not have an income tax treaty with the United States. On the other hand, the Republic of China has income tax treaties with Indonesia, Singapore, South Africa, Australia, Vietnam, New Zealand, Malaysia, Macedonia, Swaziland, the Netherlands, the United Kingdom, Gambia, Senegal, Sweden, Belgium and Denmark, which may limit the rate of Republic of China withholding tax on dividends paid with respect to common shares in Taiwan companies. It is unclear whether a non-ROC holder of ADSs will be considered to own shares for the purposes of such treaties. Accordingly, a holder of ADSs who is otherwise entitled to the benefit of a treaty should consult its own tax advisors concerning eligibility for benefits under the treaty with respect to the ADSs.

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Tax Reform
     In order to increase Taiwan’s competitiveness, an amendment to the ROC Income Tax law was enacted on January 1, 1998, to integrate the corporate income tax and the shareholder dividend tax with the aim of eliminating the double taxation effect for resident shareholders of Taiwanese corporations.
     Under this amendment, a 10% retained earnings tax will be imposed on a company for its after-tax earnings generated after January 1, 1998 which are not distributed in the following year. The retained earnings tax so paid will further reduce the retained earnings available for future distribution. When the company declares dividends out of those retained earnings, up to a maximum amount of 10% of the declared dividends will be credited against the 20% withholding tax imposed on the non-resident holders of its shares.
U.S. Federal Income Tax Considerations For U.S. Persons
     The following is a summary of certain U.S. federal income tax consequences for beneficial owners of our shares or ADSs, that hold the shares or ADSs as capital assets and that are U.S. holders that are not citizens of the ROC, do not have a permanent establishment in the ROC and are not physically present in the ROC for 183 days or more within a calendar year. You are a U.S. holder if you are, for U.S. federal income tax purposes, any of the following:
    an individual citizen or resident of the United States;
 
    a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
 
    an estate the income of which is subject to U.S. federal income taxation regardless of its source;
 
    a trust that is subject to the primary supervision of a court within the United States and that has one or more U.S. persons with the authority to control all substantial decisions of the trust; or
 
    a trust that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
     This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in U.S. federal income tax consequences different from those discussed below. It is for general purposes only and you should not consider it to be tax advice. In addition, it is based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. This summary does not represent a detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances and does not address the effects of any state, local or non-U.S. tax laws (or other U.S. federal tax consequences, such as U.S. federal estate or gift tax consequences). In addition, it does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:
    a dealer in securities or currencies;
 
    a trader in securities if you elect to use a mark-to-market method of accounting for your securities holdings;
 
    a financial institution or an insurance company;
 
    a tax-exempt organization;
 
    a regulated investment company;

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    a real estate investment trust;
 
    a person liable for alternative minimum tax;
 
    a person holding shares or ADSs as part of a hedging, integrated or conversion transaction, constructive sale or straddle;
 
    a partnership or other pass-through entity for U.S. federal income tax purposes;
 
    a person owning, actually or constructively, 10% or more of our voting stock; or
 
    a U.S. holder whose “functional currency” is not the U.S. dollar.
     We cannot assure you that a later change in law will not alter significantly the tax considerations that we describe in this summary.
     If a partnership holds our shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our shares or ADSs, you should consult your tax advisor.
     You should consult your own tax advisor concerning the particular U.S. federal income tax consequences to you of the ownership and disposition of the shares or ADSs, as well as the consequences to you arising under the laws of any other taxing jurisdiction.
     In general, for U.S. federal income tax purposes, a U.S. person who is the beneficial owner of an ADS will be treated as the owner of the shares underlying its ADS. Accordingly, deposits or withdrawals of shares by U.S. holders for ADSs generally will not be subject to U.S. federal income tax. However, the U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the claiming of foreign tax credits by the U.S. holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the analysis of the creditability of ROC taxes and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below could be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and our company.
Taxation of Dividends
     Except as discussed below with respect to the passive foreign investment company rules, the amount of distributions (including net amounts withheld in respect of ROC withholding taxes) you receive on your shares or ADSs (other than certain pro rata distributions of shares to all shareholders) will generally be treated as dividend income to you if the distributions are made from our current and accumulated earnings and profits as calculated according to U.S. federal income tax principles. In determining the net amounts withheld in respect of ROC taxes, any reduction in the amount withheld on account of an ROC credit in respect of the 10% retained earnings tax imposed on us is not considered a withholding tax and will not be treated as distributed to you or creditable by you against your U.S. federal income tax. Such income will be includible in your gross income as ordinary income on the day you actually or constructively receive it, which in the case of an ADS will be the date actually or constructively received by the depositary. The amount of any distribution of property other than cash will be the fair market value of such property on the date it is distributed. You will not be entitled to claim a dividend received deduction with respect to distributions you receive from us.
     With respect to non-corporate U.S. holders, certain dividends received from a qualified foreign corporation in taxable years beginning prior to January 1, 2011 may be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid by that corporation on shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. U.S. Treasury Department guidance indicates that our ADSs (which are listed on the NYSE), but not our shares, are readily tradable on an established securities market in the United States. Thus, we do not believe that dividends we pay on our shares that are not backed by ADSs currently meet the conditions required for these reduced tax rates. Moreover, there can be no assurance that our ADSs will continue to be readily tradable on an established securities market in later years. Non-corporate U.S. holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. Non-corporate U.S. holders will also not be eligible for the reduced rates of taxation on dividends if we are a passive foreign investment company in the taxable year in which such dividends are paid or in the preceding taxable year. Holders should consult their own tax advisors regarding the application of these rules given their particular circumstances.

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     The amount of any dividend paid in NT dollars will equal the U.S. dollar value of the NT dollars you receive (calculated by reference to the exchange rate in effect on the date you actually or constructively receive the dividend, which in the case of an ADS will be the date actually or constructively received by the depositary), regardless of whether the NT dollars are actually converted into U.S. dollars. If the NT dollars received as a dividend are not converted into U.S. dollars on the date of receipt, you will have a basis in the NT dollars equal to their U.S. dollar value on the date of receipt. Any gain or loss you realize if you subsequently sell or otherwise dispose of the NT dollars will be ordinary income or loss from sources within the United States for foreign tax credit limitation purposes.
     Subject to certain limitations under the Code, you may be entitled to a credit or deduction against your U.S. federal income taxes for the net amount of any ROC taxes that are withheld from dividend distributions made to you. The election to receive a credit or deduction must be made annually, and applies to all foreign taxes for the applicable tax year. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends we pay with respect to shares or ADS will generally be considered passive category income from sources outside the United States. Furthermore, you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on shares or ADSs if you (1) have held the shares or ADSs for less than a specified minimum period during which you are not protected from risk of loss, or (2) are obligated to make payments related to the dividends. The rules governing the foreign tax credit are complex. We therefore urge you to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
     To the extent that the amount of any distribution you receive exceeds our current and accumulated earnings and profits for a taxable year, as determined under U.S. federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in your adjusted basis in the shares or ADSs and thereby increasing the amount of gain, or decreasing the amount of loss, you will recognize on a subsequent disposition of the shares or ADSs. The balance in excess of adjusted basis, if any, will be taxable to you as capital gain recognized on a sale or exchange. However, we do not expect to keep earnings and profits in accordance with U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed above).
     It is possible that pro rata distributions of shares or ADSs to all shareholders may be made in a manner that is not subject to U.S. federal income tax. In the event that such distributions are tax-free, the basis of any new shares or ADSs so received will generally be determined by allocating the U.S. holder’s basis in the old shares or ADSs between the old shares or ADSs and the new shares or ADSs, based on their relative fair market values on the date of distribution. For U.S. tax purposes, any such tax-free share or ADS distribution and any distributions in excess of current and accumulated earnings and profits generally would not result in foreign source income to you. Consequently, you may not be able to use the foreign tax credit associated with any ROC withholding tax imposed on such distributions unless you can use the credit against U.S. tax due on other foreign source income in the appropriate category for foreign tax credit purposes. You should consult your own tax advisors regarding all aspects of the foreign tax credit.

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Taxation of Capital Gains
     Except as discussed below with respect to the passive foreign investment company rules, when you sell or otherwise dispose of your shares or ADSs, you will generally recognize capital gain or loss in an amount equal to the difference between the U.S. dollar value of the amount realized for the shares or ADSs and your basis in the shares or ADSs, determined in U.S. dollars. If you are an individual, and the shares or ADSs being sold or otherwise disposed of are capital assets that you have held for more than one year, your gain recognized will be eligible for reduced rates of taxation. Your ability to deduct capital losses is subject to limitations. Any gain or loss you recognize will generally be treated as U.S. source gain or loss.
     If you pay any ROC securities transaction tax, such tax is not treated as an income tax for U.S. federal income tax purposes, and therefore will not be a creditable foreign tax for U.S. federal income tax purposes. However, subject to limitations under the Code, such tax may be deductible. You are urged to consult your tax advisors regarding the U.S. federal income tax consequences of these taxes.
Passive Foreign Investment Company
     Based on the current and projected composition of our income and valuation of our assets, including goodwill, we do not believe that we are currently (or that we were in 2007) a passive foreign investment company (“PFIC”) and we do not expect to become one in the future, although there can be no assurance in this regard.
     In general, a company is considered a PFIC for any taxable year if either:
    at least 75% of its gross income is passive income, which generally includes income derived from certain dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person), annuities or property transactions; or
 
    at least 50% of the value of its assets is attributable to assets that produce or are held for the production of passive income.
     The 50% of value test is based on the average of the value of our assets for each quarter during the taxable year. If we own at least 25% by value of another company’s stock, we will be treated, for purposes of the PFIC rules, as owning our proportionate share of the assets and receiving our proportionate share of the income of that company.
     In determining that we do not expect to be a PFIC, we are relying on our projected capital expenditure plans and projected revenues for the current year and for future years. In addition, our determination is based on a current valuation of our assets, including goodwill. In calculating goodwill, we have valued our total assets based on our total market value, which is based on the market value of our shares and ADSs and is subject to change. In addition, we have made a number of assumptions regarding the allocation of goodwill to active and passive assets. We believe our valuation approach is reasonable. However, it is possible that the Internal Revenue Service will challenge the valuation or allocation of our goodwill, which may also result in us being classified as a PFIC.
     In addition, the determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our asset or income composition. Because we have valued our goodwill based on the market value of our shares, a decrease in the price of our shares may also result in our becoming a PFIC.
     If we are a PFIC for any taxable year during which you hold shares or ADSs, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of shares or ADSs. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for shares or ADSs will be treated as excess distributions. Under these special tax rules:

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    the excess distribution or gain will be allocated ratably over your holding period for shares or ADSs;
 
    the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income; and
 
    the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
     If you hold shares or ADSs in any year in which we are a PFIC, you are required to file Internal Revenue Service Form 8621.
     If we are a PFIC for any taxable year and any of our non-U.S. subsidiaries is also a PFIC, a U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.
     In certain circumstances, a U.S. holder, in lieu of being subject to the PFIC rules discussed above, may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method provided that such stock is regularly traded on a qualified exchange. Under this method, any difference between the stock’s fair market value and its adjusted basis at the end of the year is accounted for by either an inclusion in income or , subject to limitations, a deduction from income, as described below. Under current U.S. Treasury Department guidance, the mark-to-market election may be available to holders of ADSs because the ADSs are listed on the NYSE, which constitutes a qualified exchange, although there can be no assurance that the ADSs will be “regularly traded” for purposes of the mark-to-market election. You should also note that only the ADSs and not the shares are listed on the NYSE. Our shares are listed on the Taiwan Stock Exchange, which must meet certain trading, listing, financial disclosure and other requirements to be treated as a qualified exchange under applicable U.S. Treasury regulations for purposes of the mark-to-market election, and no assurance can be given that the shares will be “regularly traded” for purposes of the mark-to-market election.
     If you make an effective mark-to-market election, you will include in income each year as ordinary income the excess of the fair market value of your shares or ADSs at the end of the year over your adjusted tax basis in the shares or ADSs. You will be entitled to deduct as an ordinary loss each year the excess of your adjusted tax basis in the shares or ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, any gain you recognize upon the sale or other disposition of your shares or ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount of previously included income as a result of the mark-to-market election.
     Your adjusted tax basis in shares or ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the shares or ADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You should consult your tax advisors about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances.
     Alternatively, a U.S. holder of shares or ADSs in a PFIC can sometimes avoid the rules described above by electing to treat the PFIC as a “qualified electing fund” under Section 1295 of the Code. This option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election.
     Non-corporate U.S. holders will not be eligible for reduced rates of taxation on any dividends received from us in taxable years beginning prior to January 1, 2011, if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. You should consult your own tax advisors concerning the U.S. federal income tax consequences of holding shares or ADSs if we are considered a PFIC in any taxable year.

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Information Reporting and Backup Withholding
     In general, unless you are an exempt recipient such as a corporation, information reporting will apply to dividends in respect of the shares or ADSs and to the proceeds from the sale, exchange or redemption of your shares or ADSs that are paid to you within the United States (and in some cases, outside of the United States). Additionally, if you fail to provide your taxpayer identification number, or fail either to report in full dividend and interest income or to make the necessary certifications of other exempt status, you may be subject to backup withholding.
     Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability, provided you furnish the required information to the Internal Revenue Service.
Inheritance and Gift Tax
     The ROC imposes an estate tax on a decedent who owns shares, and possibly ADSs, even if the decedent was not a citizen or resident of the ROC. See “—E. ROC Tax Considerations” in this Item. The amount of any inheritance tax paid to the ROC may be eligible for credit against the amount of U.S. federal estate tax imposed on your estate or heirs. You should consult your personal tax advisors to determine whether and to what extent you may be entitled to such credit.
     The ROC also imposes a gift tax on the donation of any property located within the ROC. Under present law, a U.S. tax credit for foreign gift taxes (such as those imposed by the ROC) is not available.
F. Dividends and Paying Agents
     Not applicable.
G. Statement by Experts
     Not applicable.
H. Documents on Display
     We have filed this annual report on Form 20-F, including exhibits, with the Securities and Exchange Commission. As allowed by the Securities and Exchange Commission, in Item 19 of this annual report, we incorporate by reference certain information we filed with the Securities and Exchange Commission. This means that we can disclose important information to you by referring you to another document filed separately with the Securities and Exchange Commission. The information incorporated by reference is considered to be part of this annual report.
     You may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the Securities and Exchange Commission’s regional offices in New York, New York and Chicago, Illinois. You can also request copies of this annual report, including the exhibits incorporated by reference in this annual report, upon payment of a duplicating fee, by writing information on the operation of the Securities and Exchange Commission’s Public Reference Room.
     The Securities and Exchange Commission also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. Our annual report and some of the other information submitted by us to the Securities and Exchange Commission may be accessed through this web site.
I. Subsidiary Information
     Not applicable.

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     Market risk is the risk of loss related to adverse changes in market prices, including interest rates and foreign exchange rates, of financial instruments. We are exposed to various types of market risks, including changes in interest rates and foreign currency exchange rates, in the normal course of business.
     We use financial instruments, including variable rate debt and swaps and forward contracts, to manage risks associated with our interest rate and foreign currency exposures through a controlled program of risk management in accordance with established policies. These policies are reviewed and approved by our board of directors. Our treasury operations are subject to internal audit on a regular basis. We do not hold or issue derivative financial instruments for speculatively purposes.
     Since export sales are primarily conducted in U.S. dollars, we had U.S. dollar-denominated accounts receivables of US$393 million as of December 31, 2007. As of the same date, we also had Japanese Yen-denominated accounts receivable of ¥5,307 million attributable to our Japanese operations. We had U.S. dollar- and Japanese Yen-denominated accounts payables of US$77 million and ¥4,640 million.
     Our primary market risk exposures relate to interest rate movements on borrowings and exchange rate movements on foreign currency-denominated capital expenditures relating to equipment used in manufacturing processes (including photo etching and chemical vapor deposition) and purchased primarily from Japan and the United States. The fair value of forward exchange contracts and interest rate swaps has been determined by obtaining the estimated amount from our bankers that would be received/(paid) to terminate the contracts.
     The following table provides information as of December 31, 2007 on our market risk sensitive financial instruments.
                 
    As of December 31, 2007
    Book Value   Fair Value
    (in NT$ millions)
Interest Rate Swaps: Trading Purpose
  $ (319 )   $ (319 )
Time Deposit: Non-Trading Purpose
  $ 35,698     $ 35,698  
Unsecured Short-term Loans: Non-Trading Purpose
  $ (359 )   $ (359 )
Bonds: Non-Trading Purpose
  $ (30,385 )   $ (29,900 )
Interest Rate Risk
     Our major market risk exposure is changing interest rates. Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations. We primarily enter into debt obligations to support general corporate purposes including capital expenditures and working capital needs. We use interest rate swaps from time to time to modify our exposure to interest rate movements and reduce borrowing costs. Interest rate swaps limit the risks of fluctuating interest rates by allowing us to convert a portion of the interest on our borrowings from a variable rate to a fixed rate. As of December 31, 2007 and 2006, we had the following interest rate swaps in effect:
                         
Notional Amount   Contract Period   Interest Rate Received   Interest Rate Paid
As of December 31, 2007
                       
 
  May 21, 2003 to   4.0% minus US$12-month     1.52 %
NT$7,500 millions
  June 24, 2008   LIBOR        
 
  May 21, 2003 to   4.3% minus US$12-month     1.48 %
NT$7,500 millions
  June 24, 2010   LIBOR        
 
                       
As of December 31, 2006
                       
 
  May 21, 2003 to   4.0% minus US$12-month     1.52 %
NT$7,500 millions
  June 24, 2008   LIBOR        
 
  May 21, 2003 to   4.3% minus US$12-month     1.48 %
NT$7,500 millions
  June 24, 2010   LIBOR        

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     The tables below provide information as of December 31, 2007 and 2006 about our financial instruments that are sensitive to changes in interest rates, including debt obligations and certain assets. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in the currencies in which the instruments are denominated.
Expected Maturity Dates
As of December 31, 2007
                         
    2008   2009   2010   2011   2012 and thereafter   Total
    (in millions, except percentages)
Time Deposit:
                       
Fixed Rate (US$)
  385                   385
Average Interest Rate
  4.3% - 5.1%                   4.3% - 5.1%
Fixed Rate (¥)
  2,260                   2,260
Average Interest Rate
  0.2% - 0.35%                   0.2% - 0.35%
Fixed Rate (NT$)
  16,652                   16,652
Average Interest Rate
  1.46% - 2.26%                   1.46% - 2.26%
Fixed Rate (Euro)
  17                   17
Average Interest Rate
  3.6%                   3.6%
Unsecured Short-term Loans:
                       
Variable Rate (US$)
  11.1               11.1   11.1
Average Interest Rate
  3.43% - 5.43%               3.43% - 5.43%   3.43% - 5.43%
Variable Rate (¥)
                       
Average Interest Rate
                       
Variable Rate (NT$)
                       
Average Interest Rate
                       
Secured Short-term Loans:
                       
Variable Rate (¥)
                       
Average Interest Rate
                       
Variable Rate (NT$)
                       
Average Interest Rate
                       
Bonds:
                       
Unsecured (NT$)
  3,000                   3,000
Fixed Rate
  5.2170%-.2850%                   5.2170%-.2850%
Unsecured (NT$)
  7,500       7,500           15,000
Variable Rate
  0%-4%       0%-4.3%           0%-4.3%
Unsecured Convertible (US$) (1)
  381                   381
Fixed Rate
  0%                   0%
Unsecured Exchangeable (US$) (1)
                       
Fixed Rate
                       
Unsecured Convertible (¥) (1)
                       
Fixed Rate
                       
Interest Rate Derivatives
                       
Interest Rate Swaps:
                       
Variable to Fixed (denomination)
  NT$7,500 million           NT$7,500 million
Average pay rate
  1.52%           1.52%
Average receive rate
  4.0% minus                   4.0% minus
 
  US$12-month LIBOR           US$12-month LIBOR
Variable to Fixed (denomination)
  NT$7,500 million   NT$7,500 million   NT$7,500 million       NT$7,500 million
Average pay rate
  1.48%   1.48%   1.48%       1.48%
Average receive rate
  4.3% minus   4.3% minus   4.3% minus           4.3% minus
 
  US$12-month LIBOR   US$12-month LIBOR   US$12-month LIBOR       US$12-month LIBOR
 
(1)   Assuming the convertible bonds and exchangeable bonds are both paid off upon maturity.

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Expected Maturity Dates
As of December 31, 2006
                             
    2007   2008   2009   2010   2011 and thereafter   Total   Fair Value
    (in millions except percentages)
Time Deposit:
                           
Fixed Rate (US$)
  147                   147   147
Average Interest Rate
  5.26%                   5.26%   5.26%
Fixed Rate (¥)
  20,602                   20,602   20,602
Average Interest Rate
  0.001%-0.25%                   0.001%-0.25%   0.001%-0.25%
Fixed Rate (NT$)
  70,732                   70,732   70,732
Average Interest Rate
  1.41%                   1.41%   1.41%
Fixed Rate (Euro)
  1                   1   1
Average Interest Rate
  3.1%                   3.1%   3.1%
Unsecured Short-term Loans:
                           
Variable Rate (US$)
  9.5                   9.5   9.5
Average Interest Rate
  5.665%-5.845%                   5.665%-5.845%   5.665%-5.845%
Variable Rate (¥) Average Interest Rate
                           
Variable Rate (NT$)
                           
Average Interest Rate
                           
Secured Short-term Loans:
                           
Variable Rate (¥)
                           
Average Interest Rate
                           
Variable Rate (NT$)
                           
Average Interest Rate Bonds:
                           
Unsecured (NT$)
  2,250   3,000               5,250   5,344
Fixed Rate
  5.2170%-5.2850%   5.2170%-.2850%               5.2170%-5.2850%   5.2170%-5.2850%
Unsecured (NT$)
      7,500       7,500       15,000   14,477
Variable Rate
      0%-4%       0%-4.3%       0%-4.3%   0%-4.3%
Unsecured Convertible (US$) (1)
      381               381   406
Fixed Rate
      0%               0%   0%
Unsecured Exchangeable (US$) (1)
  96                   96   112
Fixed Rate
  0%                   0%   0%
Unsecured Convertible(¥)
  13,420                   13,420   13,108
Fixed rate
  0%               0%   0%   0%
Interest Rate Derivatives
                           
Interest Rate Swaps:
                           
Variable to Fixed (denomination)
  NT$7,500 million   NT$7,500 million         NT$7,500 million   NT$224 million
Average pay rate
  1.52%   1.52%         1.52%   1.52%
 
  4.0% minus   4.0% minus               4.0% minus   4.0% minus
Average receive rate
  US$12-month LIBOR   US$12-month LIBOR         US$12-month LIBOR   US$12-month LIBOR
Variable to Fixed (denomination)
  NT$7,500 million   NT$7,500 million   NT$7,500 million   NT$7,500 million       NT$7,500 million   NT$402 million
Average pay rate
  1.48%   1.48%   1.48%   1.48%       1.48%   1.48%
Average receive rate
  4.3% minus   4.3% minus   4.3% minus   4.3% minus       4.3% minus   4.3 minus
 
  US$12-month LIBOR   US$12-month LIBOR   US$12-month LIBOR   US$12-month LIBOR       US$12-month LIBOR   US$12-month LIBOR
Foreign Currency Risk
     Although the majority of our transactions are in NT dollars, some transactions are based in other currencies. The primary currencies to which we are exposed are the U.S. dollar and the Japanese Yen. We have in the past, and may in the future, enter into short-term, forward exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities, and firm commitments for operating expenses and capital expenditures denominated in U.S. dollars. The purpose of entering into these hedges is to minimize the impact of foreign currency fluctuations on the results of operations. Gains and losses on foreign currency contracts and foreign currency-denominated assets and liabilities are recorded in the period of the exchange rate changes. The contracts have maturity dates that do not exceed three months.
     As of December 31, 2006 and 2007, we had nil and NT$239 million outstanding foreign currency forward contracts to sell US$/NT$, respectively. As of March 31, 2008, we had foreign currency forward contracts to sell US$/NT$ amounted US$348 million.

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     Except for the market risk mentioned above, we believe that we did not have any other material market risk as of December 31, 2007.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
     Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
     None of these events occurred in any of 2005, 2006 or 2007.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
     None.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
     As of the end of the period covered by this annual report, an evaluation has been carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that material information required to be disclosed in this annual report is recorded, processed, summarized and reported to them for assessment, and required disclosure is made within the time period specified in the rules and forms of the Securities and Exchange Commission.
Management’s Annual Report on Internal Control over Financial Reporting
     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, for our company. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007 using the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2007 based on the COSO criteria. Our independent registered public accounting firm, Ernst & Young has issued an attestation report with unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2007, which is included immediately following this report.

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Attestation Report of the Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To United Microelectronics Corporation:
We have audited United Microelectronics Corporation and Subsidiaries’ (the “Company”) internal control over financial reporting of as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, United Microelectronics Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards generally accepted in the Republic of China and the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of United Microelectronics Corporation and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007 and our report dated April 30, 2008 expressed an unqualified opinion thereon.
Ernst & Young
Taipei, Taiwan
Republic of China
April 30, 2008

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Changes in Internal Control over Financial Reporting
     There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. A. AUDIT COMMITTEE FINANCIAL EXPERT
     Our Board of Directors have determined that Paul S.C. Hsu, one of our independent directors, qualifies as audit committee financial experts and meet the independence requirement as defined in Item 16A to Form 20-F.
ITEM 16. B. CODE OF ETHICS
     In March 2005, we adopted the Code of Ethics for Directors, Supervisors and Officers and the Employee Code of Conduct. The Employee Code of Conduct, which is applicable to all employees, replaced the code of ethics filed with the Securities and Exchange Commission in our 2003 annual report on Form 20-F. We have also created a separate code of ethics applicable to our directors, supervisors and officers. A copy of each of the Code of Ethics for Directors, Supervisors and Officers and the Employee Code of Conduct are displayed on our website at http://www.umc.com/english/pdf/Code_of_Ethics.pdf and http://www.umc.com/english/pdf/Code_of_Conduct.pdf, respectively.
ITEM 16. C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
     The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Ernst & Young, our principal external auditors, for the years indicated.
                         
    For the year ended December 31,  
    2006     2007  
    NT$     NT$     US$  
    (in thousands)  
Audit Fees (1)
    118,832       91,895       2,834  
Audit-related Fees (2)
    463       1,688       52  
Tax Fees (3)
    4,016       5,967       184  
 
                 
Total
    123,311       99,550       3,070  
 
                 
 
(1)   Audit fees consist of fees associated with the annual audit, review of our quarterly financial statements, statutory audits and internal control review. They also include fees billed for those services that are normally provided by the independent accountants in connection with statutory and regulatory filings.
 
(2)   Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements but not described in footnote (1) above. These services include review of capitalization of retained earnings, employee stock option application, treasury share buy-back programs, certification of UMCi to Singapore authorities.
 
(3)   Tax fees include fees billed for professional services rendered by Ernst & Young, primarily in connection with our tax compliance activities.
     All audit and non-audit services provided by Ernst & Young were pre-approved by our audit committee.
ITEM 16 D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
     None.

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ITEM 16   E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
     Since March 2004, we have from time to time announced plans, which were not binding on us, to buy back our shares up to a certain amount on the Taiwan Stock Exchange. Set for below contains certain information regarding our share buy back programs in 2005, 2006 and 2007.
                                 
                            Maximum Number
                    Total Number of   of
                    Common Shares   Shares that May
                    Purchased as Part   Yet be
    Total Number of   Average Price Paid   of   Purchased
    Common Shares   per Common Share   Publicly Announced   Under the Plans or
Period   Purchased   (NT$)   Plans or Program   Program
May (from March 16, 2005)
    57,297,000       20.83       57,297,000       442,703,000  
June
    317,663,000       23.19       374,960,000       125,040,000  
July (to July 15, 2005)
    125,040,000       24.03       500,000,000        
                                 
                            Maximum Number
                    Total Number of   of
                    Common Shares   Shares that May
                    Purchased as Part   Yet be
    Total Number of   Average Price Paid   of   Purchased
    Common Shares   per Common Share   Publicly Announced   Under the Plans or
Period   Purchased   (NT$)   Plans or Program   Program
September (from September 30, 2005)
                      250,000,000  
October
    248,934,000       19.20       248,934,000       1,066,000  
November (to November 29, 2005)
    1,066,000       17.47       250,000,000        
                                 
                    Total Number of   Maximum Number of
                    Common Shares   Shares that May
                    Purchased as Part   Yet be
    Total Number of   Average Price Paid   of   Purchased
    Common Shares   per Common Share   Publicly Announced   Under the Plans or
Period   Purchased   (NT$)   Plans or Program   Program
February (from February 16, 2006)
    239,528,000       19.01       239,528,000       760,472,000  
March
    576,219,000       19.32       815,747,000       184,253,000  
April (to April 15, 2006)
    184,253,000       21.36       1,000,000,000        
May (from May 23, 2006)
    30,691,000       19.88       30,691,000       369,309,000  
June
    218,316,000       18.46       249,007,000       150,993,000  
July (to July 22, 2006)
    150,993,000       19.20       400,000,000        
                                 
                    Total Number of   Maximum Number of
                    Common Shares   Shares that May
                    Purchased as Part   Yet be
    Total Number of   Average Price Paid   of   Purchased
    Common Shares   per Common Share   Publicly Announced   Under the Plans or
Period   Purchased   (NT$)   Plans or Program   Program
2007
                       
PART III
ITEM 17.   FINANCIAL STATEMENTS
     The Registrant has elected to provide the financial statements and related information specified in Item 18.
ITEM 18.   FINANCIAL STATEMENTS
     The following is a list of the audited consolidated financial statements and report of independent registered public accounting firm included in this annual report beginning on page F-1.

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    Page
Consolidated Financial Statements of United Microelectronics Corporation and Subsidiaries
   
 
   
Report of Independent Registered Public Accounting Firm
  F-2
 
   
Consolidated Balance Sheets at December 31, 2006 and 2007
  F-3
 
   
Consolidated Statements of Income for each of the three years ended December 31, 2005, 2006 and 2007
  F-4
 
   
Consolidated Statements of Changes in Stockholders’ Equity for each of the three years ended December 31, 2005, 2006 and 2007
  F-5
 
   
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2005, 2006 and 2007
  F-8
 
   
Notes to the Consolidated Financial Statements
  F-10
ITEM 19.   EXHIBITS
     
Exhibit Number   Description of Exhibits
 
   
*1.1
  Articles of Incorporation of the Company as last amended on June 11, 2007
 
   
2.1
  Form of Amendment No. 1 to Deposit Agreement among the Company, and Holders and Beneficial Owners of American Depositary Shares issued thereunder, including the form of American Depositary Shares(2)
 
   
2.2
  Form of Amendment No. 2 to Deposit Agreement among the Company, and Holders and Beneficial Owners of American Depositary Shares issued thereunder, including the form of American Depositary Shares(3)
 
   
4.1
  Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, Ko-Kuan Section, No. 20-22, Hsinchu, Taiwan, ROC, the site of Fab 6A (in Chinese with English summary translation) (4)
 
   
4.2
  Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, third section of first phase, Hsinchu, Taiwan, ROC, the site of Fab 8AB and United Tower (in Chinese with English summary translation)(5)
 
   
4.3
  Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, third section of first phase, Hsinchu, Taiwan, ROC, the site of Fab 8C (in Chinese with English summary translation)(6)
 
   
4.4
  Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, third section of first phase, Hsinchu, Taiwan, ROC, the site of Fab 8D (in Chinese with English summary translation)(7)
 
   
4.5
  Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, third section of second phase, Hsinchu, Taiwan, ROC, the site of Fab 8E (in Chinese with English summary translation)(8)
 
   
4.6
  Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, Gin-Shan section, Hsinchu, Taiwan, ROC, the site of Fab 8F (in Chinese with English summary translation)(9)

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Exhibit Number   Description of Exhibits
 
   
4.7
  Lease Agreement with Southern Taiwan Science Park Administration in relation to government-owned land located at Tainan Science Park, Tainan, Taiwan, ROC, the site of Fab 12A (in Chinese with English summary translation)(10)
 
   
4.8
  Merger Agreement, entered into as of February 26, 2004, between United Microelectronics Corporation and SiS Microelectronics Corporation (English Translation) (11)
 
   
4.9
  Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, Ko-Kuan section, Hsinchu, Taiwan, ROC, the site of Fab 8S (in Chinese with English summary translation) (12)
 
   
4.10
  Lease Agreement with JTC Corporation in relation to land located at Pasir Ris Wafer Fab Park, Singapore, the site of Fab 12i (summary) (13)
 
   
*8.1
  List of Significant Subsidiaries of United Microelectronics Corporation
 
   
11.1
  Code of Ethics for Directors, Supervisors and Officers (14)
 
   
11.2
  Employee Code of Conduct (15)
 
   
*12.1
  Certification of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
*12.2
  Certification of our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
*13.1
  Certification of our Chief Executive Officer pursuant to 18 U.S.C.§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
*13.2
  Certification of our Chief Financial Officer pursuant to 18 U.S.C.§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
*15.1
  Consent of Independent Registered Public Accounting Firm
 
*   Filed here with.
 
(1)   Incorporated by reference to Exhibit (a) to the Registrant’s Registration Statement on Form F-6 (File No. 333-13796) filed with the Commission on March 2, 2006.
 
(2)   Incorporated by reference to Exhibit (a)(iii) to the Registrant’s Registration Statement on Form F-6 (File No. 333-98591) filed with the Commission on March 19, 2007.
 
(3)   Incorporated by reference to Exhibit 4.1 to Registrant’s Annual Report on Form 20-F for the fiscal year ended December 31, 2006 (File No. 001-15128) filed with the Commission on May 9, 2007.
 
(4)   Incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form F-1 (File No. 333-12444) filed with the Commission on August 28, 2000, as amended.
 
(5)   Incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form F-1 (File No. 333-12444) filed with the Commission on August 28, 2000, as amended.
 
(6)   Incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form F-1 (File No. 333-12444) filed with the Commission on August 28, 2000, as amended.
 
(7)   Incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form F-1 (File No. 333-12444) filed with the Commission on August 28, 2000, as amended..
 
(8)   Incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on F-1 (File No. 333-12444) filed with the Commission on August 28, 2000, as amended.
 
(9)   Incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on F-1, 2006 (File No. 333-12444) filed with the Commission on August 28, 2000, as amended.
 
(10)   Incorporated by reference to Exhibit 4.8 to the Registrant’s Annual Report on Form 20-F for the fiscal year ended December 31, 2003 (File No. 1-15128) filed with the Commission on June 17, 2004.
 
(11)   Incorporated by reference to Exhibit 4.9 to Registrant’s Annual Report on Form 20-F for the fiscal year ended December 31, 2006 (File No. 001-15128) filed wit the Commission on May 9, 2007.
 
(12)   Incorporated by reference to Exhibit 4.10 to Registrant’s Annual Report on Form 20-F for the fiscal year ended December 31, 2006 (File No. 001-15128) filed with the Commission on May 9, 2007.
 
(13)   Incorporated by reference to Exhibit 99.1 to the Form 6-K filed with the Commission on May 25, 2005.
 
(14)   Incorporated by reference to Exhibit 99.2 to the Form 6-K filed with the Commission on March 26, 2006.

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SIGNATURES
     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
UNITED MICROELECTRONICS CORPORATION
         
     
By:   /s/ Chitung Liu    
  Name:   Chitung Liu   
  Title:   Chief Financial Officer   
 
  Date: May 2, 2008
 
 
     
     
     
 

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UNITED MICROELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
United Microelectronics Corporation and Subsidiaries
Consolidated Financial Statements for years ended December 31, 2005, 2006 and 2007
Together with Report of Independent Registered Public Accounting Firm

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UNITED MICROELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To United Microelectronics Corporation
We have audited the accompanying consolidated balance sheets of United Microelectronics Corporation and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the Republic of China (“ROC”) and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Microelectronics Corporation and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with the requirements of the Business Entity Accounting Act and Regulation on Business Entity Accounting Handling with respect to financial accounting standards, Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China, which differ in certain respects from U.S. generally accepted accounting principles (see Note 35 to the consolidated financial statements).
As described in Note 3 to the consolidated financial statements, effective from January 1, 2006, the Company adopted the ROC Statement of Financial Accounting Standards No. 34, “Financial Instruments: Recognition and Measurement” and No. 36, “Financial Instruments: Disclosure and Presentation”.
As described in Note 3 to the consolidated financial statements, effective from January 1, 2005, the Company adopted the amendments to the ROC Statement of Financial Accounting Standards No. 5, “Accounting for Long-term Equity Investment”, adopted the amendments to the ROC Statement of Financial Accounting Standards No. 7, “Consolidated Financial Statements”, and adopted the ROC Statement of Financial Accounting Standards No. 35, “Impairment of Assets”. Effective from January 1, 2006, goodwill is no longer subject to amortization.
We also have audited, in accordance with the standards of Public Company Accounting Oversight Board (United States), United Microelectronics Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 30, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young
ERNST & YOUNG
CERTIFIED PUBLIC ACCOUNTANTS
Taipei, Taiwan
Republic of China
April 30, 2008

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UNITED MICROELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Expressed in Thousands)
                                 
            As of December 31,R:32.43
    Notes   2006   2007
        NT$   NT$   US$
Assets
                               
Current assets
                               
Cash and cash equivalents
    2, 4       93,853,208       47,678,147       1,470,186  
Financial assets at fair value through profit or loss, current
    2, 3, 5       8,538,007       4,804,935       148,163  
Held-to-maturity financial assets, current
    2, 3, 6       1,110,422              
Notes receivable
            54,381       32,712       1,009  
Accounts receivable, net
    2, 7       14,201,718       15,010,279       462,852  
Accounts receivable — related parties, net
    2, 27       150,011       348,303       10,740  
Other receivables
    2       849,742       457,148       14,096  
Inventories, net
    2, 8       10,878,182       11,867,832       365,952  
Prepaid expenses
            762,799       692,030       21,339  
Deferred income tax assets, current
    2, 25       1,945,082       219,881       6,780  
 
                               
Total current assets
            132,343,552       81,111,267       2,501,117  
 
                               
 
                               
Funds and investments
                               
Financial assets at fair value through profit or loss, noncurrent
    2, 3, 9       474,738       47,598       1,468  
Available-for-sale financial assets, noncurrent
    2, 3, 10, 15       52,311,172       50,911,643       1,569,893  
Financial assets measured at cost, noncurrent
    2, 3, 11, 15       7,515,945       8,295,679       255,803  
Long-term investments accounted for under the equity method
    2, 3, 12, 15       11,662,599       9,909,595       305,569  
Prepayment for long-term investments
                  648,360       19,993  
 
                               
Total funds and investments
            71,964,454       69,812,875       2,152,726  
 
                               
 
                               
Property, plant and equipment
    2, 3, 13, 29                          
Land
            1,879,442       1,922,230       59,273  
Buildings
            21,076,844       22,529,856       694,723  
Machinery and equipment
            415,225,873       446,198,339       13,758,814  
Transportation equipment
            90,706       85,877       2,648  
Furniture and fixtures
            2,964,369       3,429,067       105,737  
Leasehold improvements
            42,968       42,809       1,320  
 
                               
Total cost
            441,280,202       474,208,178       14,622,515  
Less : Accumulated depreciation
            (311,696,923 )     (346,920,945 )     (10,697,531 )
Add : Construction in progress and prepayments
            22,244,850       9,931,551       306,246  
 
                               
Property, plant and equipment, net
            151,828,129       137,218,784       4,231,230  
 
                               
 
                               
Goodwill
    2,3       3,498,687       3,498,687       107,884  
Deferred charges
    2       1,502,394       1,435,126       44,253  
Deferred income tax assets, noncurrent
    2,25       4,184,091       4,268,053       131,608  
Other assets — others
    2, 14, 15, 28       2,332,154       2,213,497       68,255  
 
                               
Total assets
            367,653,461       299,558,289       9,237,073  
 
                               
 
                               
Liabilities and Stockholders’ Equity
                               
Current liabilities
                               
Short-term loans
    16       342,549       359,071       11,072  
Financial liabilities at fair value through profit or loss, current
    2, 3, 17       985,267       340,230       10,491  
Accounts payable
            4,864,771       5,687,627       175,382  
Income tax payable
    2       2,071,394       1,092,129       33,677  
Accrued expenses
            7,025,328       8,214,951       253,313  
Other payables
            77,319       23,538       726  
Payable on equipment
            10,130,367       6,036,274       186,132  
Current portion of long-term liabilities
    2, 18       9,068,283       22,889,476       705,812  
Deferred income tax liabilities, current
    2, 25       62       18       1  
Other current liabilities
    29       1,538,450       645,143       19,893  
 
                               
Total current liabilities
            36,103,790       45,288,457       1,396,499  
 
                               
 
                               
Long-term liabilities
                               
Bonds payable
    2, 18       30,383,076       7,495,304       231,123  
Accrued pension liabilities
    2, 19       3,115,420       3,171,562       97,797  
Deposits-in
            12,282       14,415       444  
Deferred income tax liabilities, noncurrent
    2, 25       52,585       47,548       1,466  
Deferred credits — intercompany profits
    2       13,245       9,666       298  
Other liabilities — others
            570,174       533,638       16,455  
 
                               
Total long-term liabilities
            34,146,782       11,272,133       347,583  
 
                               
Total liabilities
            70,250,572       56,560,590       1,744,082  
 
                               
Commitments and Contingencies
    29                          
Minority interests
            6,238,018       6,530,810       201,382  
 
                               
Capital Stock
    2, 20, 21, 23       191,323,332       132,144,949       4,074,775  
Additional Paid-in Capital
    2, 20       67,707,287       66,126,806       2,039,063  
Retained earnings
    20, 23       34,795,993       31,651,091       975,982  
Cumulative translation adjustment
            (824,922 )     (866,562 )     (26,722 )
Unrealized gain or loss on financial instruments
            27,557,845       22,413,852       691,146  
Treasury stock
    2, 12, 20, 22       (29,394,664 )     (15,003,247 )     (462,635 )
 
                               
Total stockholders’ equity
            291,164,871       236,466,889       7,291,609  
 
                               
Total liabilities and stockholders’ equity
            367,653,461       299,558,289       9,237,073  
 
                               
The accompanying notes are an integral part of these consolidated financial statements

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UNITED MICROELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Expressed in Thousands, Except for Earnings per Share )
                                         
            For the year ended December 31,R:32.43
    Notes   2005   2006   2007
        NT$   NT$   NT$   US$
 
                       
Net operating revenues
    2,27       100,315,982       112,003,819       113,311,298       3,494,027  
Cost of goods sold
    2,24       (90,643,320 )     (90,638,293 )     (89,768,276 )     (2,768,063 )
 
                                       
Gross profit
            9,672,662       21,365,526       23,543,022       725,964  
 
                                       
Operating expenses
    24,27                                  
Sales and marketing expenses
            (3,738,469 )     (3,365,678 )     (4,068,984 )     (125,470 )
General and administrative expenses
            (4,387,406 )     (3,422,340 )     (3,723,916 )     (114,829 )
Research and development expenses
            (9,633,607 )     (9,418,877 )     (9,631,227 )     (296,985 )
 
                                       
 
            (17,759,482 )     (16,206,895 )     (17,424,127 )     (537,284 )
 
                                       
Operating income (loss)
            (8,086,820 )     5,158,631       6,118,895       188,680  
 
                                       
Non-operating income
                                       
Interest revenue
            1,055,138       1,562,704       1,330,418       41,024  
Investment gain accounted for under the equity method, net
    2,12       1,096,985       1,178,103       625,752       19,296  
Dividend income
            1,051,813       950,546       2,171,720       66,967  
Gain on disposal of property, plant and equipment
    2       177,397       331,767       669,076       20,631  
Gain on disposal of investments
    2       10,276,618       28,651,109       12,040,872       371,288  
Exchange gain, net
    2       295,179       316,006       137,414       4,237  
Gain on recovery of market value of inventories
    2       837,315                    
Gain on valuation of financial assets
    2       58,853       750,378              
Gain on valuation of financial liabilities
    2             306,140       20,633       636  
Other income
            1,038,821       862,750       933,808       28,795  
 
                                       
 
            15,888,119       34,909,503       17,929,693       552,874  
 
                                       
 
                                       
Non-operating expenses
                                       
Interest expense
    13       (1,098,854 )     (648,408 )     (181,262 )     (5,589 )
Loss on disposal of property, plant and equipment
    2       (218,525 )     (107,962 )     (124,071 )     (3,826 )
Loss on decline in market value and obsolescence of inventories
    2             (1,089,490 )     (372,359 )     (11,482 )
Financial expenses
            (268,985 )     (230,757 )     (137,134 )     (4,229 )
Impairment loss
    2, 3, 15       (460,542 )     (1,330,293 )     (575,784 )     (17,755 )
Loss on valuation of financial assets
                        (2,788,343 )     (85,980 )
Other losses
    2       (148,606 )     (73,799 )     (199,292 )     (6,145 )
 
                                       
 
            (2,195,512 )     (3,480,709 )     (4,378,245 )     (135,006 )
 
                                       
Income before income tax and minority interests
            5,605,787       36,587,425       19,670,343       606,548  
Income tax expense
    2,25       (67,052 )     (3,261,622 )     (2,809,874 )     (86,644 )
Cumulative effect of changes in accounting principles
    3       (112,898 )     (1,188,515 )            
Minority interests loss
            1,600,855       482,025       101,293       3,123  
 
                                       
Net income
            7,026,692       32,619,313       16,961,762       523,027  
 
                                       
 
                                       
Earnings per share-basic (in dollars)
    2,26       0.38       1.81       1.09          
 
                                       
Shares used in per share calculation — basic
            18,647,462       18,050,962       15,618,486          
 
                                       
Earnings per share-diluted (in dollars)
    2,26       0.37       1.75       1.06          
 
                                       
Shares used in per share calculation — diluted
            18,933,611       18,675,467       16,072,868          
 
                                       
The accompanying notes are an integral part of the consolidated financial statements.

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UNITED MICROELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Expressed in Thousands)
                                                                                                 
                                                            Unrealized                
    Capital           Retained Earnings   Gain/Loss on   Cumulative            
                    Collected in   Additional           Special   Unappropriated   Financial   Translation   Treasury   Minority    
    Common Stock   Shares   Advance   paid-in capital   Legal Reserve   Reserve   Earnings   Instruments   Adjustment   Stock   Interests   Total
    NT$       NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$
Balance as of January 1, 2005
    177,919,819       17,791,982       4,040       84,933,195       12,812,501       90,871       29,498,329       (424,713 )     (1,319,452 )     (37,140,714 )     8,728,877       275,102,753  
Appropriation of 2004 retained earnings
                                                                                               
Legal reserve
                            3,184,338             (3,184,338 )                              
Special reserve
                                  1,653,300       (1,653,300 )                              
Cash dividends
                                        (1,758,736 )                             (1,758,736 )
Stock dividends
    17,587,364       1,758,736                               (17,587,364 )                              
Remuneration to directors and supervisors
                                        (27,006 )                             (27,006 )
Employee bonus - stock
    1,972,855       197,286                               (1,972,855 )                              
Purchase of treasury stock
                                                          (16,378,692 )           (16,378,692 )
Cancellation of treasury stock
    (491,140 )     (49,114 )           (177,419 )                 (1,509,640 )                 2,178,199              
Net income in 2005
                                        7,026,692                         (1,600,855 )     5,425,837  
Adjustment of additional paid-in capital accounted for under the equity method
                      (28,491 )                                               (28,491 )
Changes in unrealized gain on financial instruments of investees
                                              343,724                         343,724  
Exercise of employee stock options
    954,095       95,409       36,600       654,314                                                 1,645,009  
Common stock transferred from capital collected in advance
    4,040       404       (4,040 )                                                      
Changes in cumulative translation adjustment
                                                    1,078,299                   1,078,299  
Changes in minority interests
                                                          8,878       (791,337 )     (782,459 )
 
                                                                                               
Balance as of December 31, 2005
    197,947,033       19,794,703       36,600       85,381,599       15,996,839       1,744,171       8,831,782       (80,989 )     (241,153 )     (51,332,329 )     6,336,685       264,620,238  
 
                                                                                               
(in NT$)
                                                                                               
The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents

UNITED MICROELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Expressed in Thousands)
                                                                                                 
                                                            Unrealized                
    Capital   Additional   Retained Earnings   Gain/Loss on   Cumulative            
    Common           Collected   Paid-in   Legal   Special   Unappropriated   Financial   Translation   Treasury   Minority    
    Stock   Shares   in Advance   Capital   Reserve   Reserve   Earnings   Instruments   Adjustment   Stock   Interests   Total
    NT$           NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$
Balance as of January 1, 2006
    197,947,033       19,794,703       36,600       85,381,599       15,996,839       1,744,171       8,831,782       (80,989 )     (241,153 )     (51,332,329 )     6,336,685       264,620,238  
The effect of adopting SFAS NO. 34
                                              24,097,170       11,547                   24,108,717  
Appropriation of 2005 retained earnings
                                                                                               
Legal reserve
                            702,669             (702,669 )                              
Special reserve
                                  (1,422,021 )     1,422,021                                
Cash dividends
                                        (7,161,267 )                             (7,161,267 )
Stock dividends
    895,158       89,516                               (895,158 )                              
Remuneration to directors and supervisors
                                        (6,324 )                             (6,324 )
Employee bonus — cash
                                        (305,636 )                             (305,636 )
Employee bonus — stock
    458,455       45,846                               (458,455 )                              
Capital reserve transferred to common stock
    895,158       89,516             (895,158 )                                                
Purchase of treasury stock
                                                          (27,286,339 )           (27,286,339 )
Cancellation of treasury stock
    (10,000,000 )     (1,000,000 )           (3,269,100 )                 (6,371,128 )                 19,640,228              
Adjustment of treasury stock due to loss of control over subsidiary
                      (57,972 )                 (9,198,144 )     (6,826,238 )           29,583,776             13,501,422  
Net income in 2006
                                        32,619,313                         (482,025 )     32,137,288  
Adjustment of additional paid-in capital accounted for under the equity method
                      (62,686 )                                               (62,686 )
Adjustment of funds and investments disposal
                      (14,091,043 )                             8,170                   (14,082,873 )
Cash dividends allocated to subsidaries
                      66,910                                                 66,910  
Changes in unrealized gain on available-for-sale financial assets
                                              1,066,672                         1,066,672  
Changes in unrealized gain on financial instruments of investees
                                              9,301,230                         9,301,230  
Exercise of employee stock options
    1,079,523       107,952       11,405       634,737                                                 1,725,665  
Common stock transferred from capital collected in advance
    36,600       3,660       (36,600 )                                                      
Changes in cumulative translation adjustment
                                                    (603,486 )                 (603,486 )
Changes in minority interests
                                                                383,358       383,358  
 
                                                                                               
Balance as of December 31, 2006 (in NT$)
    191,311,927       19,131,193       11,405       67,707,287       16,699,508       322,150       17,774,335       27,557,845       (824,922 )     (29,394,664 )     6,238,018       297,402,889  
 
                                                                                               
The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents

UNITED MICROELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Expressed in Thousands)
                                                                                                 
                                                            Unrealized                
    Capital   Additional   Retained Earnings   Gain/Loss on   Cumulative            
    Common           Collected   Paid-in   Legal   Special   Unappropriated   Financial   Translation   Treasury   Minority    
    Stock   Shares   in Advance   Capital   Reserve   Reserve   Earnings   Instruments   Adjustment   Stock   Interests   Total
    NT$           NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$
 
                                                                                               
Balance as of January 1, 2007
    191,311,927       19,131,193       11,405       67,707,287       16,699,508       322,150       17,774,335       27,557,845       (824,922 )     (29,394,664 )     6,238,018       297,402,889  
Appropriation of 2006 retained earnings
                                                                                               
Legal reserve
                            1,777,434             (1,777,434 )                              
Special reserve
                                  502,772       (502,772 )