Dr. Elisabeth Sun - Investor Relations Lora Ho - Vice President, Chief Financial Officer and Spokesperson Dr. Mark Liu - Senior Vice President, Advanced Technology Business Dr. Morris Chang - Chairman and Chief Executive Officer

Randy Abrams - Credit Suisse Bhavin Shah - JPMorgan Bill Lu - Morgan Stanley Dan Heyler - Banc of America Pranab Sumar - Daiwa Securities Mehdi Hosseini - FBR Donald Lu - Goldman Sachs Steven Pelayo - HSBC Christopher Muse - Barclays Capital

Welcome to TSMC’s Q209 results webcast conference call. This conference call is being webcast live via the TSMC website at www.tsmc.com and only in audio mode. (Operator Instructions) I would now like to turn the conference over to Dr. Elisabeth Sun, TSMC’s head of investor relations. Please proceed. Dr. Elisabeth Sun: Thank you. Good morning and good evening, everyone. Welcome to TSMC’s second quarter 2009 conference call. Joining us on the call are Dr. Morris Chang, TSMC’s Chairman and Chief Executive Officer; Ms. Lora Ho, our Vice President and Chief Financial Office; and Dr. Mark Liu, TSMC’s Senior Vice President and Head of Advanced Technology Business Organization. The format for today's conference call will be as follows: first, Lora will summarize our operations in the second quarter and give you our guidance for the third quarter. After that, Dr. Liu will report on progress we are making on the yield and ramp-up of 40-nanometer technology. Then, TSMC’s Chairman, Dr. Chang, will provide his general remarks on the business outlook and a couple of key messages. Then we will open the floor for questions. For those participants who do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's quarterly review presentation. I would like to remind all listeners that the following discussions may contain forward-looking statements that are subject to significant risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements. Information as to those factors that could cause actual results to differ materially from TSMC's forward-looking statements may be found in TSMC's annual report on Form 20-F filed with the United States Securities and Exchange Commission on April 17, 2009 and such other documents as TSMC may file with or submit to the SEC from time to time. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Now, I would like to turn the call over to Lora.

Thank you, Elisabeth. Good morning and good evening to everyone. Welcome to our second quarter 2009 earnings conference call. First, I will go over the highlights of our second quarter and then I will give you the outlook for the third quarter 2009. Please refer to the quarterly financial summary slides on our website. All dollar figures are in NT dollars unless otherwise stated. First, the highlights of the second quarter on page four -- semiconductor has [bottomed] in the first quarter as a result of improved demand outlook, customers launching new products, and inventory restocking, second quarter saw a sharp rebound. Therefore, our second quarter results have experienced significant increase no matter in sales, margins, and profits. Net sales were NT$72.21 billion, 87.9% increase over last quarter. However, it did not go back to last year’s second quarter level and still declined 15.8% year over year. Second quarter wafer shipments was 1.97 million 8-inch equivalent wafers, representing 121% sequential growth but 15.4% decline year over year. Gross margin and operating margin were 46.2% and 33.9% respectively, comparing with last quarter, it was an increase of 27.3 percentage points and 30.8 percentage points respectively. Comparing with year-ago quarter, gross margin increased slightly but operating margin declined slightly. EPS for second quarter 09 was $0.94. Our ROE went back to 21.4% from prior quarters 1.3%. Let’s take a closer look at our income statement. The sequential jump in gross margin was primarily due to increased utilization rate as a result of higher production activities. The sequential increase in operating expenses was primarily due to increasing 32, 28, and 22-nanometer R&D activities and more factory space for [opening expenses] and higher profit sharing expense as a result of better profitability in the second quarter. Non-operating income increased by $800 million, mainly due to higher disposal gains of financial assets and receiving litigation compensation, partially offset by lower interest income. For long-term investments as a result of improved business activities among invested companies, in the second quarter it was NT$110 million of investment income comparing with NT$810 million of investment loss in the prior quarter. For net margins, it was 32.9%, representing 29 percentage point increase from last quarter’s 3.9 and a 0.3 percentage point increase from year-ago quarter. On page six, since our gross margin has changed significantly in the past two quarters, I would like to elaborate what caused the changes both on a sequential and year-over-year basis. On a sequential basis, gross margin increased 27 percentage points, primarily due to a sharp increase in utilization rate that accounted for [48] percentage point for gross margin improvement. This improvement was partially offset by several factors. First, the percentage of non-wafer related business, mainly mask and [inaudible] business. [Our] total sales in the first quarter were much higher than second quarter, or any other quarter under normal business conditions. Under normal business conditions, non-wafer related business accounts 10% to 12% of TSMC total sales. However, in the first quarter, since TSMC's wafer business declined significantly but the non-wafer related business did not decline so much. The percentage of non-wafer related business over total sales climbed up to nearly 20% [instead], but in second quarter, the percentage of non-wafer related business has returned to normal level. Since non-wafer related business has enjoyed a higher gross margin, the lower level in second quarter has resulted in negative impact to gross margin on a sequential basis. Other offsetting factors include a one-time item in costs, increase in employee profit sharing, impact of inventory valuation, and appreciation of NT$ dollar. On a year-over-year basis, gross margin increased 0.6 percentage points. The increase was primarily due to NT$ more than 8% depreciation over the past year, which represented 3.7 percentage point contribution to year-over-year gross margin improvement. However, that increase was offset by low utilization rate compared with year-ago quarter, which resulted in a negative 4.1 percentage point impact to gross margin. Other offsetting factors including impact on inventory valuations and one-time cost reductions. In this table, [one may tell] in this volatile business environment, our structure profitability, which is measured by our standard gross margin, has not changed significantly. Though wafer price continued to decline, our efforts in control costs have offset the impact from price declines. Page seven -- now let’s examine our revenue by application. Across the board, wafer sales increased sequentially. It was an increase of 100%, 128%, and 99% Q-over-Q for communications, computers, and consumer applications respectively. Overall, revenue from communications, computers, and consumer applications accounted for 45%, 28%, and 21% of our wafer sales in the second quarter 09. In terms of revenue by technology, total wafer sales from advanced technologies remain at the same level as last quarter, accounting for 65% of total wafer sales. For 40-nanometer, it exceeded 1% of total wafer sales in the second quarter. We forecast it will experience significant growth in the second half of this year. For 65-nanometer, revenue contribution over total wafer sales increased 5 percentage points from first quarter, while 90-nanometer and [inaudible] decreased 2 percentage points and 3 percentage points respectively. On page 9, now let’s move on to the balance sheet and cash flow statements. We ended second quarter with NT$247 billion in cash and short-term investments, NT$17 billion more than last quarter. Due to increasing business activities, those accounts receivable and inventory increase on a sequential basis, accounts receivable increased NT$20 billion to NT$33 billion and inventory increased NT$4 billion to NT$19 billion. Accounts receivable days and inventory turnover days --

Ladies and gentlemen, please stand by. Your conference will resume shortly. Please proceed.

On page 9, now let’s move on to the balance sheet and cash flow statements. We ended second quarter with NT$247 billion in cash and short-term investments, NT$17 billion more than last quarter. Due to increasing business activities, both accounts receivable and inventory increase on a sequential basis. Accounts receivable increased NT$20 billion to NT$33 billion and inventory increased NT$4 billion to NT$19 billion. Accounts receivable days and inventory turnover days were lower than last quarter, representing 30 and 42 days respectively. For current quarter liabilities, it has sequential increase by NT$84 billion. This was primarily due to the accrued payable of cash dividend to be distributed in August. Our balance sheet remained very strong. In cash [flow], total cash [flow] -- total cash inflow generated by operating activities was NT$24.5 billion, slightly lower than prior quarter, although net income increased significantly. This was mainly due to higher business activities in the second quarter, which resulted in a substantial increase of accounts receivable and therefore a large increase in working capital. Capital expenditure was NT$7.4 billion, increased from prior quarter. In sum, our ending cash balance was NT$240 billion, NT$16 billion more than prior quarter. Free cash flow was NT$17 billion, NT$2 billion lower than prior quarter. On page 11, let’s turn to capacity and CapEx. Total installed capacity was about 2.5 million 8-inch equivalent wafers in the second quarter. For 2009, overall capacity is forecast to be around 9.94 million 8-inch equivalent wafers, a 6% increase over 2008. Advanced technology capacity is forecast to increase by 10% year over year, reaching 41% of total capacity in 2009. For capital expenditure, we spent $224 million during the second quarter and $390 million year-to-date. Our CapEx in 2009 will increase from last year. Around 80% of the money will be spent for 40 and 65 capacity increase, both in the front-end and also in the back-end process. A large majority of the spending is second half loaded in order to meet increasing demand from leading edge technologies in the second half of this year and also the next year. Now please go to page 13 -- now let me give you our outlook for the third quarter of 2009. Both our macroeconomic forecasts and the booking trend indicate that we will have a good third quarter. Based on current business expectations and a forecast exchange rate of 32.84, we expect our consolidated revenue in the third quarter of 2009 to come in between NT$88 billion and NT$90 billion. In terms of margins, we expect our third quarter gross margin to be between 46.5% and 48.5%; operating profit margin to be between 35% and 37%. 2009 capital expenditure will be around $2.3 billion. This concludes my remarks today. Now I will turn the call to Dr. Mark Liu for his remarks on 40-nanometer. Dr. Mark Liu: Good evening. This is Mark Liu. I would like to give you a summary of the work we have done on the 40-nanometer. At first, I am pleased to tell you that we made a major improvement in the 40-nanometer yield in the past quarter. Compared with three months ago, our average yields is approximately doubled during this period of time. And our engineers, in fact, 12, have made a detailed calculation of the process technology, open up the process window, and we also identified several tiny defects that were not able to be observed using the technology before. And these yields have been showing up for customers and today we are already in the ramp-up stage. TSMC indeed encountered initial difficulty in the 40-nanometer technology. We have leading the industry defined the 40 nanometer technology as an industry standard in this generation. However, this generation indeed, we aggressively moved the feature size 1.5 generation from 65 to 40 in two years. And also we introduced two major materials and one major lithography change. The lithography change we changed from the dry lithography to immersion lithography and the dielectric we introduced ELK, extreme low-K material from the dielectric for inter-connect. And also we introduced a new material of silicon [germanium] in the transistor to increase the transistor mobility and therefore its speed. These new changes compared with the 65-nanometer where we have only the 193 nanometer lithography change has been a major one. Therefore, we have work -- [encountered many initial issues]. In the past quarter, I personally also enlisted three directors from among the TSMC's R&D resources. Two of them are module directors and one of the integration directors. Along with their resources, with factory engineers we studied in further detail about the fundamental module design and we made improvements since then. We have increased the yield in the past quarter and we currently -- several activities already in place to move the yield forward. We expect the defect density reduction pace will continue through September. And currently we are confident that we can meet the August yield targets for our customers. And we are working on the implementation of the module improvement to meet the September yield targets. The factory currently is focused on the ramping. In the meantime, we opened up the phase four facility and this opened space for the fast paced 40-nanometer ramp-up. Last month we have output 6,000 wafers, 12-inch, for 40-nanometer. And this quarter we expect to output 30,000 40-nanometer 12-inch wafers. And going forward, we are looking to review our technology development and the transfer methodology to cope with this increasing complexity and we believe that several actions are already in place for 32-nanometer to improve the learning curve for the future technologies. Above is my report. If you have questions, we can answer you later. Dr. Morris Chang: Good morning. This is Morris Chang. I will give a few comments now and then we will open the floor for questions. First, on end-market demand and semiconductor industry outlook, the major electronic system shipment in the second quarter was better or close to seasonal. And as a result, we are raising our full-year estimates for the end equipment market. For PCs, we are raising our full-year estimate from minus 8% down compared to last year to minus 4% year-on-year. For handsets, we are revising the year estimate from minus 12% to minus 9%. For digital consumer electronics, we are raising our full-year estimate from minus 7% to minus 4% year-on-year. The second point -- we do expect close to seasonal growth in the third quarter for the SC market, that being about 9% growth from second quarter. Major electronic system shipments are expected to be in line or below seasonal growth in the third quarter. For PCs, we expect the growth in the third quarter will be plus 7%. For handsets, we expect the growth to be plus 8%. For digital consumer electronics, we expect the growth to be plus 7%. Thirdly, we are raising the semiconductor forecast growth for full year 2009 from minus 20% to minus 17%. We still expect the foundry sector to under-perform the semiconductor market by 2 or 3 percentage points. In other words, we are expecting that the foundry market will probably be down 19% or 20% from last year. Now, for the fourth quarter, our expectations have also been raised. We now expect -- we now think that even if there is a small dip, a dip from the third quarter, it will be a small one, certainly in the less than 10% range. On supply chain inventory, from the forecasts from the reports to date, the inventory situation at our customers continued to get healthier in the second quarter. Most customers have reduced their inventory levels in both absolute terms and in days of inventory. At fabless customers, the days of inventory are very close to the lows observed in the last several years. For IDM customers, the situation is more mixed and there may be some further reductions during the second half of ’09. However, as you will know, and as Lora has pointed out just a few minutes ago, about 80% of our business is with fabless customers where we think that the days of inventory are close to the low levels, to the lows that were observed in the last several years. On technology, Dr. Liu, Mark Liu has already commented on 45-nanometer situation. Suffice it to say that much progress has been made and we expect that further progress will be made in the next few months. On 32, 28, we have had a major effort going for some time now and we are on track in the technology development of 32 28. We have obtained excellent 64-megabit SRAM use and transistor performance for both polysilicon and high K metal gate technologies. We have several customers committed product plans to our 32G and 28 LPT technologies, and new tape-outs will begin in early first quarter 2010. We also have over 10 customers committed to our 28-nanometer high K metal gate technology platforms and new tape-outs will start in late 2010 and early 2011. We have also had a large effort started on 22-nanometers for some time now, and we now have a good early baseline of 22-nanometer high K metal gate transistors. Now, on the more [inaudible] front, as you probably know, many IDMs are closing fabs. Our estimate is that over 20 fabs will be closed by IDM this year. We plan to take full advantage of this opportunity and we are participating actively in discussion with the -- with some of the IDMs in helping them to close their fabs and transfer the business, the fab business, to us. We are also committing considerable resources in our R&D to support the development of the relevant technologies that will be needed by those IDM customers who are planning to close their fabs. This is the first time in four years now that I am participating in this call as the CEO and there may be questions as to whether we have a new strategy or new strategies. And I think it would be incorrect to say that I have new strategies because even as the Chairman, I had a hand in the strategy of the company. However, what is new is that I now have the opportunity and the first half responsibility of pushing my thinking, my strategies vigorously. And you probably already have noticed some signs of that. We are -- number one, we are very actively increasing our R&D resources and we are trying to expand the effectiveness of our R&D resources. Mark has just remarked that in the progress that was made last quarter on 40-nanometers, he had enlisted the help of several important people from R&D. And had we not increased the R&D resources, that kind of help would have been very hard to come by. Now, as a percent of revenue, our R&D expenses had been running at the 6% to 7% level in past years. Now this year, it will run at about 7.8% of revenue. Although this year’s revenue is low, therefore the R&D as a percent of revenue is correspondingly high. We still expect that our R&D dollars will continue to increase into next year. Now, in percentage, it may not be higher than 7.8% but it will be close. I do think that R&D at 7% to 8% of revenue will be the norm in future years. Another point you may have noticed is that we have increased our capital spending estimate from $1.5 billion, which we announced a few months ago, to $2.3 billion that Lora just announced now. Now, the reason is number one, an increase in our forecast demand; number two, we are modeling at a slightly lower utilization in order not to lose any opportunities that will come by when the capacity is pressed. We have modeled our utilization now at a slightly lower, just a few points lower utilization level on the advanced technologies. Now, 80% of the $2.3 billion will be for the advanced technologies, primarily 40-nanometer technology at this point. All in all, I am very happy to report that the outlook has become brighter in the last few months and that our confidence in raising our momentum has also increased. Thank you. I think that we are now open for questions. Dr. Elisabeth Sun: Yes, this concludes our prepared statements. Operator, please open the floor for questions.

(Operator Instructions) Your first question comes from the line of Randy Abrams with Credit Suisse. Randy Abrams - Credit Suisse: Good evening. This afternoon, Morris, you laid out that new ventures could potentially be a NT$10 billion to NT$15 billion opportunity for things like solar and LED and other ventures. Could you talk about your investment commitment or CapEx plans? And do you expect to go through aggressive acquisition strategies, or do the growth organically? Dr. Morris Chang: This is a capital plan on new businesses? Randy Abrams - Credit Suisse: Yeah, capital plan and acquisition strategy. Dr. Morris Chang: Well, we really don’t have concrete plans at this point yet. Recall that Rick Tsai has been in his new job as pushing new businesses and forming new businesses for only about a month-and-a-half, and he has been -- during this period, he has been actively looking and studying both the solar and the LED fields but primarily the solar cell fields. Now in fact, I may say that he has requested NT$50 million of capital just as a starter and without any specific purpose in mind yet and I have already approved that. Of course, my approval is subject to the board’s confirmation of my approval but we don’t have -- this is just for -- the $50 million is just for starter and it’s also at this point for unspecified purposes and for unidentified purposes. But we want to have it ready just in case we have any opportunity. This is an exploratory effort. Now, I do expect that in the future, the new businesses will include acquisitions but again, it’s too early to identify any concrete projects at this point. Randy Abrams - Credit Suisse: Okay, and there’s been a bit of warming in cross-trade relationships between China and Taiwan. Could you talk about your perspective on if some of the restrictions on below 0.18 and 12-inch are loosened, do you have the motivation or incentive to expand in China or is your view to prioritize some mega-fabs in Taiwan and China will still be pretty modest in terms of investment? Dr. Morris Chang: We have very ambitious plans for the Chinese market, not so much as a manufacturing base but we have very ambitious plans for expanding our sales in China. Now, if a manufacturing -- if we do have a manufacturing base there already, of course, it’s relatively mainstream, mature technology and also it’s 8-inch fab, therefore the new direction that the government, the Taiwan government has already given, which of course will allow basically M minus one or M minus two generation technologies in China, I think is a very welcome move by us. We welcome that very much. Now, as I said, we have ambitious plans to expand our sales in China and if increasing our manufacturing activity in China accompanies that sales expansion purpose, then we will do it. Randy Abrams - Credit Suisse: Okay. Thank you. I’ll step back in queue.

Your next question comes from the line of Bhavin Shah with JPMorgan. Bhavin Shah - JPMorgan: I just have one question on the [inaudible] strategy of targeting slightly lower utilization and also the comment you made about basically trying to capture most of the opportunity side that you have. What does it mean for pricing? I guess 12 months ago or something, TSMC laid out a strategy of trying to maintain pricing. Obviously through the downturn that was tough but going forward, can you give us some comments on the pricing strategy? Dr. Morris Chang: Yes. We do have a pricing strategy and in fact, you brought up the effort we made 12 months ago to make, to keep the pricing more stable in this year. Even though it did not achieve the complete objective but we did manage to make the pricing more stable. If one compares the price drops not only this year but also last year, remember we announced -- actually we -- even before we announced our attempt to make the pricing more stable this year, we were already engaged in effort to keep the pricing more stable last year. So if you look at the price drop on a technology by technology point of view, then you will -- I found that our price drop was in the over 10% a year range. It was different by technology but overall it was 13%, 14%, 15% a year in 05, 06, and in 07. But in ’08, last year, and ’09 this year, the pricing drop on a technology by technology, node by node basis has decreased to 10% or 11%, has decreased considerably in the last year-and-a-half. And we have a long-term roadmap of pricing, so let me just say that our return on equity goal is unaltered and it’s -- in fact, I consider it to be unalterable. It’s above 20% return on equity and the expansion in capacity I believe will actually help our profitability, otherwise I wouldn’t be even doing it. Bhavin Shah - JPMorgan: And just one more question and then I’ll pass it on -- if you look at Q4 with a target of 10% revenues from 40 and 45, could you say the bulk of it will be 45 or would it be a more even split? Dr. Morris Chang: I think the bulk of it will be 40 and Mark is nodding his head to agree with me. The bulk of it will be 40. Bhavin Shah - JPMorgan: Okay. Thank you.

Your next question comes from the line of Bill Lu with Morgan Stanley. Bill Lu - Morgan Stanley: Good evening. I just have a couple of follow-up questions from this afternoon -- Dr. Chang, you had said earlier today that CapEx requirements for 40-nanometers is roughly $60 million per thousand wafers a month. Dr. Morris Chang: Yes. Bill Lu - Morgan Stanley: Just as a point of reference, could you talk about how that compares with 65-nanometers when that was at roughly the same stage? Dr. Morris Chang: 65-nanometers was about $50 million per thousand wafers per month. Bill Lu - Morgan Stanley: Okay, so this increase of roughly 20%, I guess with 40-nanometer yield being a little bit lower now, costs being a little bit higher, are we going to price accordingly or how do we appropriate that? Dr. Morris Chang: Right now, the profitability of 40-nanometer is certainly not what we expect it to be in the long-term. This is the start-up phase of 40-nanometers and the yield is lower than where we want it, so the profitability is certainly not nearly as good as that on 65, or others, or other nodes. But we do expect that when the yields improve, as I know they will improve, and as yields have always improved along the experience curve in each and every node in the past, then I think that the 40-nanometer profitability will be going up to the standard that we expect, the standard of the 65 and 90 and what not. Bill Lu - Morgan Stanley: Okay, thank you. And then just a question for Lora -- with the increase in capital spending, can you give us some guidance on depreciation for the rest of this year as well as for 2010 please? Thank you.

For this year, our depreciation with the CapEx guidance will remain the same as last year, which will be around NT$81 billion. In terms of 2010, although we don’t have a capital expenditure forecast at this moment, but I believe even we have the number, it will be very similar to 09 or slightly lower with the depreciation coming down from 12-inch. Dr. Morris Chang: Well actually, I have kept that in mind all the time. At the increase CapEx that we announced just today, our CapEx is still below our depreciation this year.

Your next question comes from the line of Dan Heyler with Banc of America. Dan Heyler - Banc of America: Thank you. I had just two questions, the first one for Dr. Chang regarding ROE, where you’ve been sticking to a 20% ROE for quite some time; however, if we were to look at your return on invested capital, it had been increasing in a significant fashion over the last six years since really 01. It’s been on a long-term up-trend. The ROE apparently is being held down by your large cash balance and cash generation from of course falling CapEx to sales. I’m wondering if you could give a more relevant metric in terms of where the return on invested capital could go over the next few years -- will it be on an up-trend, do you anticipate that it may level off? Dr. Morris Chang: We have looked at -- Lora, I think perhaps you can give some color to that question. We have actually, Dan -- we internally, we look at return on invested capital all the time. Now, but as for our side communication, I have thought that the return on equity parameter is perhaps more easily understandable and I think it’s more easily benchmarkable but internally we have looked at the return on invested capital all the time now. And Lora, do you want to add something to this?

Dan, if I can give you 2007 and 2008 as a reference -- in 2008, our ROE for the whole year was 20.7% and our model shows ROIC was 35%. For 2007, with an ROE of 21.9%, our ROE was 35.4%, so you can see there’s around 14 percentage point difference between the two. Of course, in the future as we gradually manage the capital with the dividend payout, but I think the ROE, ROIC target is similar if the company performance is similar. Dan Heyler - Banc of America: Okay, thanks. And then the follow-up on that would be from a driver of ROIC standpoint I’m wondering what’s your through-the-cycle utilization targets are, whether or not those have changed that you have been phenomenal at bringing up there through the cycle utilization from mid-80s to mid-90s, given the emphasis now to give a bit more leeway and flexibility on advanced technologies, would there be any change to your target on a through-the-cycle basis?

Dan, there’s two parts of the ROIC, number one being the profit margin; the other one is asset productivity. So profit margin, as we have talked a long time that the structural profitability is very important for us, for any node. And another node drives ROIC is to make sure we have very high asset productivity, so the ramping speed of each node is very important to drive the company-wide ROICs. Our [inaudible] will be our focus in the future for every node we wrote into a new technology. Dan Heyler - Banc of America: Okay, but what about average utilization, do you want to give a target there? Dr. Morris Chang: Average utilization, did you say? Dan Heyler - Banc of America: Yeah. Dr. Morris Chang: Yes, yes -- let me -- all right. The model utilization in the past was 100% and as I said, now we are modeling it at a slightly lower level and by that I mean 95%, 96%. Dan Heyler - Banc of America: Okay, and that won’t change your structural profitability target? We can still see that go up? Dr. Morris Chang: No, it does not change our profitability target. Now, the thing is that while we -- in the past we were modeling our utilization at 100%. We always use a different utilization model, a utilization number to calculate our ROIC. And as you very well know, the utilization does fluctuate. It doesn’t matter really where you try to model it, it fluctuates from time to time and -- now, in the past few years experience, we found that we did lose more business because we were out of capacity. We did lose more profit because we lost the business when we were out of capacity. Then we made profit when the capacity was full. So you’ve got to factor all those into consideration and my judgment is that by having a little more capacity available, a few percentage points more capacity available, we will gain more and our actual ROIC will be higher as a result. Dan Heyler - Banc of America: Thank you. Dr. Morris Chang: I don’t know whether I have convinced you or not because this is an issue that involves both intuitive judgment and just mathematical calculations. Dan Heyler - Banc of America: Yes, that makes sense. Dr. Morris Chang: Dan? Dan Heyler - Banc of America: Yeah, it does, assuming we can keep the customers and retain customers, you would be the best judge of knowing whether or not they left on lack of capacity. It certainly seems as though the dual sourcing picks up when your capacity hits 95%, so -- Dr. Morris Chang: Now we are on the same wavelength, Dan. Dan Heyler - Banc of America: Thank you.

Your next question comes from the line of Pranab Sumar with Daiwa Securities. Pranab Sumar - Daiwa Securities: Thank you for taking my question. My first question is a bit on capital intensity side. Could you give us some color, like whether your capital intensity will go up to 25% in the modeling purpose on a long-term basis? And secondly whether it will be below somehow -- always try to manage with your depreciation?

The question is on capital intensity? Pranab Sumar - Daiwa Securities: Yeah, going up a bit this year and to 25%, 26% level and whether -- are you going to maintain the same level going forward?

Going forward, we don’t know yet but with the Chairman just made his comment, I think our capital intensity is more likely to be above 20% than lower than 20% going forward. Pranab Sumar - Daiwa Securities: And color on the budget for 2009, what should we put for modeling purposes -- R&D budget, sorry.

R&D budget -- you are asking the R&D budget? Pranab Sumar - Daiwa Securities: Yes, for 2009.

For 2009 -- we estimate R&D, the expense will account for 7.8% of total revenue this year. Pranab Sumar - Daiwa Securities: Okay, so I’ll calculate out from revenue then. Anyway, last one is on the competition from IDM [inaudible], especially, Chairman, would you be able to make some comments at 32-nanometer, 28-nanometer how you are feeling competition from IDM [inaudible] and whether any difference on your technology versus their technology? Dr. Morris Chang: Any difference between the IDM 28, 32 and our 28, 32 -- is that your question? Pranab Sumar - Daiwa Securities: Yes, sir. Dr. Morris Chang: Well, perhaps Mark, you should answer that question. Dr. Mark Liu: Yes, we are -- we have developed the -- we are approaching the 32, 28 from both approaches. In the end of 2009, we will introduce 32-nanometer with silicon oxy-nitride gate. In 2010, end of 2010, we will introduce the high K metal gate on 28-nanometer. So we think our technology is competitive with IDM technology but most importantly, the 32-nanometer customers already engaged, designs already ongoing. On our 28-nanometer high K metal gate, we have already 10 customers engaged in the designs. So we expect for this customer engagement and future business approach, we are on the same track, on the right track. Dr. Morris Chang: I think he is asking whether there is any technological -- Pranab Sumar - Daiwa Securities: -- get last or get first, are you going to put in on 28-nanometer high K metal gate? Dr. Mark Liu: Yes, we have a different architecture in terms of the gate first and gate last. Pranab Sumar - Daiwa Securities: Are you going to use both technologies or only one technology? Dr. Mark Liu: I beg your pardon? Pranab Sumar - Daiwa Securities: Are you going to use the gate last process or gate first process? Dr. Mark Liu: We will use the gate last process. Pranab Sumar - Daiwa Securities: Okay. Thank you.

Your next question comes from the line of Mehdi Hosseini with FBR. Mehdi Hosseini - FBR: Thank you for taking my question. As a follow-up to the previous commentary regarding ready-made technologies, I want to hear Chairman Chang’s comment on your customers’ affordability to pay for the 32-nanometer and 28-nanometer. Do you think that collectively as more fabs are taken out, do you think that IDM and the fabless companies would be able to pay enough so that you would realize return on investment? And I have a follow-up. Dr. Morris Chang: Well, your question was -- it doesn’t seem to me that their ability to pay for 32, 28 has anything to do with their intention to close their legacy fabs. Was that your question, the connection? Mehdi Hosseini - FBR: Well, that was -- not necessarily. Let me rephrase my question -- do you think that your customers collectively, would they be able to afford to pay for 32 and 28-nanometer? Dr. Morris Chang: Well, we haven’t even priced 32, 28 yet. Well, I guess we have in some cases, I’m sorry, yes. I take back what just said. In some cases we have priced 32, 28. And clearly those customers that receive the prices indicate that they were able to afford it. Mehdi Hosseini - FBR: And -- Dr. Morris Chang: And I think that’s primarily because our price was very rational. It was -- it followed the old paradigm of the increased value of 32, 28 to the customers and we in fact split the value, the added value with the customer. Mehdi Hosseini - FBR: And I want to explore the non-wafer business, especially solar and LED. Is this your -- you have already committed $50 million. Are we just in a discovery or evaluation phase or have you already set your mind on this, trying to increase the non-wafer business to more than 20% in the long-term? Dr. Morris Chang: We are in the evaluation and study phase. I think that we have passed beyond the discovery phase. We are in the evaluation and study phase. Mehdi Hosseini - FBR: Okay. And would it be fair to say that maybe this is going to attempt to use some of TSMC's older fabs, try to find different applications for either solar or LED? Dr. Morris Chang: No, that’s not using old fabs may be a by-product of this effort of the new businesses but it’s not the reason at all, it’s not the motivation at all. Mehdi Hosseini - FBR: Thank you very much.

Your next question comes from the line of Donald Lu with Goldman Sachs. Donald Lu - Goldman Sachs: I have a question on one of the gross margin analysis showing on the presentation. There is a line there called declined standard margin. I remember Lora has mentioned that is basically the gross margin at the same utilization rate. I just want to confirm whether that’s the case.

Donald, the standard margin means the margin at 85% utilization rate, you are right. Donald Lu - Goldman Sachs: Okay, so that -- basically this chart shows even with the downturn that the margin structure basically remains flat.

Yes, you can see the breakdown of the extended margins -- there’s a price [inaudible] and it makes three factors, the price decline offset by the cost improvement basically for the Q-over-Q and year over year numbers. Donald Lu - Goldman Sachs: Sure, sure. I have another question for Dr. Chang here -- I think just in the last week, it seems like every fab, every foundry is talking about raising CapEx, sometimes quite aggressively. And then you have a new competitor building a new fab, and would that mean the pricing erosion going forward, especially for the leading edge technologies would get worse? Dr. Morris Chang: Well, Donald, the new foundry, the [Gogoy] foundry, their new fab is for 28, 32, and the increased capital spending of ours is on -- primarily on 40, 45. So we are not starting a capacity war and therefore a price war at all. Now, [Gogoy] foundry I think is building their new fab and I think that relatively speaking, I think the size is still reasonably modest by our standards. It’s a -- as I understand it, it’s a 28,000 wafers per month fab. Of the 28, 32-nanometer variety and it will be completed in three years. And they have certainly thrown the first stake on the ground on 28, 32-nanometer capacity and we have really not even started to do it yet. We have not started to build 28, 32-nanometer capacity seriously yet. We only have a sort of an R&D line in place for 28, 32. And so I think that -- I don’t worry about the [Gogoy] foundry’s fab on prices -- at this point, I don’t. Certainly it would not have any impact on 40, 45-nanometer pricing, nor would it have any impact on the even older technologies pricing. Now, as to other companies increasing capital, I believe that most of their increase is also on 40, 45 and now the ratio of their increase, we keep in mind the ratio of capacity and we keep track of that and I think that at this point, I think that the ratio is still a rational one. Donald Lu - Goldman Sachs: Great.

Your next question comes from the line of Steven Pelayo with HSBC. Steven Pelayo - HSBC: Thank you. Dr. Chang, in the afternoon you spoke about the competition being committed to capacity and closing off their retreat, does this change your thinking in the medium and longer term relative to pricing, especially in light of your efforts to try to stabilize pricing trends over the past year or so? Dr. Morris Chang: IDM closed fabs, will it change pricing? Well, I think that it will certainly -- it may have an effect and I emphasize that it may have an effect on legacy technology pricing, on mainstream -- what we call mainstream technology pricing, which is in our 8-inch fab, 0.13 microns and upwards. Now, the reason it will have an effect is that obviously the IDMs do not feel that their manufacturing cost is competitive and it’s a burden with them and they want the foundries to take over, so now I believe that the first foundry that they look at is us, is TSMC. And now, only if they cannot find an attractive deal from us, then they will go around and ask other foundries. So I don’t think that any auction has started yet on this thing, so no, it’s a -- I think it’s a situation, it’s an opportunity that’s also has some business risks involved and we -- as I said, we are going to participate in it actively but we also keep in mind that our ROE goal of 20% or above is unalterable. Steven Pelayo - HSBC: Okay, thank you. One more question -- you also spoke in the afternoon about the foundry market in 2010 being a make-up year and that foundries will outperform the overall semiconductor market, and then perhaps in 2011 exceeding the 2008 peak. Foundry outperformance or underperformance is obviously due to inventory builds or just increased chip outsourcing. I guess I’m trying to quantify the outperformance here, or the potential outperformance. I realize it’s tough to figure out the inventory build or purge side but have you thought about or can you help me understand the quantifying, just what increased outsourcing, that dollar opportunity could mean in 2010 and 2011? Dr. Morris Chang: I’m sorry, I didn’t quite understand the question. I think you were saying, you were talking about the outperformance of foundry and you pointed out that the outperformance -- any outperformance of the foundry sector is due to increased outsourcing, and I agree with that, I agree with that. But then what’s the question? Steven Pelayo - HSBC: I was saying that any outperformance -- Dr. Morris Chang: Oh, quantify, quantify -- well, we just got through talking about IDM is trying to close down their old fabs. That I think is hard to quantify because if the IDMs cannot find an attractive alternative to their own fab, then they will not unload their fabs and we will have less outsourcing. But regardless, I think that outsourcing will increase and that is why I think that at least in the mid-term future, I think the foundry sector will tend to outperform the semiconductor market, at least in the mid-term future, which is I would say at least five years. I would think that the foundry segment will outperform the semiconductor market. As far as next year is concerned, I think that the foundry will outperform the semiconductor market for both the increased outsourcing reason and also we have something to make up because this year, the foundry segment will under-perform the semiconductor market. And that’s because of the de-stocking that happened in the first quarter. I pointed out this afternoon that in the first quarter, the semiconductor market dropped 30% year over year, first quarter of this year compared to first quarter of last year, whereas the foundry sector dropped more than 50%. With that kind of a start, the whole year record will be under-performance by the foundry sector versus the whole semiconductor market, so that’s something that the foundry sector will make up next year. Steven Pelayo - HSBC: Okay, if I could just maybe follow-up one last question here, really presenting it a different way -- if there were about 20 fabs closed this year by IDM, do you have any idea what those revenues generated by those fabs may have represented, so I could try to get an idea for the potential for foundries to gain that? Dr. Morris Chang: I don’t think -- well, let me say that the 20 fabs, that is our estimate and some of them are small, some of them mid-sized, and some of them are very small. But I would say that in total, I probably wouldn’t consider them to be a big deal, if I may describe it that way. Because most of them are, as I said, mid-sized to small and some of them are even 6-inch fabs, while many of them are indeed 8-inch fabs. So in terms of revenue, I would say that they are not a big deal for the total foundry sector. They will be rather important for the mature technology, the legacy technology part of the foundry business. Dr. Elisabeth Sun: Operator, I think in the interest of time, we will only allow one call to raise his or her question.

Your next question comes from the line of Christopher Muse with Barclays Capital. Christopher Muse - Barclays Capital: Thank you for taking my question. I guess first question, Dr. Chang, you talked about a $60 million revenue opportunity at 40-nanometer per 1K and 50 at 1K 65-nanometer, I guess that increased $10 million spend, can you share where that’s coming from? I’m assuming it’s about $3 million to $4 million on immersion. Where else out of that $10 million do you see that incremental spend? Dr. Morris Chang: Oh, $50 million per thousand -- $50 million for 65 and $60 million for 45 -- Mark, would you? Dr. Mark Liu: Yes, half of this comes from the transistor complexity with the silicon [germanian] and strain layers. There are multiple thin films involved in this intricate device, while the other is lithography and the back-end would be similar than previous generations. Christopher Muse - Barclays Capital: And how about the intensity of process control? Is that part of the transistor complexity and an up-tick there? Dr. Mark Liu: Can you tell me your question again? Christopher Muse - Barclays Capital: Sorry -- in terms of inspection metrology, given the transistor complexity, is that part of that spend or where exactly is it coming from? Dr. Mark Liu: The metrology is part of the spend. Christopher Muse - Barclays Capital: Okay, helpful. And then I guess a follow-up for Lora -- I think it was around your depreciation comments and I’m not sure whether you are referring to CapEx or depreciation but I thought I heard you say 2010 will be flat or lower. Was that depreciation or CapEx?

Depreciation. Christopher Muse - Barclays Capital: Okay, great. And then I guess last question for Mark Liu, I appreciate your comments on the 40-nanometer yield challenges. I was wondering if you could elaborate on your defect reduction methodology, where the problems lie and how you are resolving them, and what gives you the confidence you can get the yields that you are targeting in September? Dr. Mark Liu: Okay, in this generation, what we find, what’s important is the design, layout styles because in our products, we do see the design has a -- because a different product has a different yield showing and it ranged quite widely and we find that for those products, the yield is low is mainly because of the design, layout dependence. What we call design for manufacturing. That is in plain English is when the design cannot be completely described by the design rule, we have additional algorithm software to optimize the layout so that it gets the best yield. In terms of the [inaudible], the metrology is important. We find that only the leading edge metrology can detect any defects and as we come upon with several new mode of defects that we were just able to detect and remove. Christopher Muse - Barclays Capital: Very good. Thank you. Dr. Elisabeth Sun: Thank you for your participation. We are looking forward to talk to you next quarter. I wish you have a good day and good evening. Bye-bye.

Before we conclude TSMC's 2Q09 results webcast conference call today, please be advised that the replay of the conference call will only be accessible through TSMC's website at www.tsmc.com. Thank you all and you may now disconnect. Good day.