Elizabeth Sun - Head of IR Lora Ho - CFO and Vice President Morris Chang - Chairman and CEO

Pranab Sumar - Daiwa Securities Randy Abrams - Credit Suisse Michael Chow (ph) - Dodge Bank CJ Muse - Barclays Capital Dan Heyler - Banc of America-Merrill Lynch

Welcome to TSMC's third quarter '09 results webcast conference call. This call is being webcast live via the TSMC website at www.tsmc.com and only in audio mode. Your dial-in lines are also in listen-only mode. I would now like to turn the conference over to Dr. Elizabeth Sun, TSMC's head of investor relations.

Thank you. Good morning and good evening, everyone. Welcome to TSMC's third quarter 2009 conference call. Joining us on the call are Dr. Morris Chang, our Chairman and Chief Executive Officer, and Miss Lora Ho, our Vice President and Chief Financial Officer. The format for today’s conference call will be as follows: first, Lora will summarize our operations in the third quarter and give you our guidance for the fourth quarter. 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 to 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 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 17th, 2009, and such other documents that 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. And now I would like to turn the call over to Lora.

Thank you, Elizabeth. Good morning and good evening to everyone. Welcome to our third quarter 2009 earnings conference call. First, I will go over the highlights of our third quarter and then I will give you the outlook of the fourth quarter 2009. Please refer to the quarterly financial summary slides on our website. All dollar figures are in NT dollars unless stated otherwise. Now, let me go over some highlights for the third quarter. On page four, in the third quarter our business sees continued improvement across all segments. With increased utilization rate we delivered improved margins and profits. Compared with the second quarter, our profitability has recovered back to the level before the financial crisis. Net sales were $89.9 billion NT, 21.2% increase over the last quarter and declined only 3.3% year over year. Third quarter wafer shipments were 2.45 million 8-inch equivalent wafers, representing a 24% sequential growth and a 1.4% increase year over year. Gross margin and operating margin were 47.7% and 35.6% respectively. Compared with last quarter it was an increase of 1.5 percentage points and 1.7 percentage points. Comparing with year over quarter, gross margin and operating margin increased 1.4 and 0.2 percentage points respectively. EPS for third quarter '09 was $1.18. Our ROE went up to 27.3% from prior quarter's 21.4%. Let's take a look at our income statement. Our gross margin rate was 47.7% representing a 1.5 percentage point increase from last quarter. The improvement was primarily due to increased utilization rate and continued cost improvement partially offset by unfavorable exchange rate. Operating expense increased 1.7 billion from second quarter reflecting increased research activities in our 28 and 22 nm technologies. We also register a higher legal fee and a one-time donation for Type I relief programs. Now operating income was 0.52 billion lower than 1.15 billion in second '09. The sequential decline was primarily due to the absence of litigation compensation and the less interest in column. Net investment gain was $415 million NT, higher than $106 million NT of prior quarter mainly due to continued business improvement among invested companies. Net margin was 34%, representing 1.1 percentage point increase both sequentially and from a year ago quarter. On page six, now let's examine our revenue by application. On a quarter on quarter basis we saw wafer sales increase the board, computer growth most with a 29% sequential increase followed by communications 25% and consumers 11%. Overall, revenue from communications, computer, and consumer applications, accounted for 46%, 30%, and 18% respectively. In terms of revenue by technology, total wafer sales from advanced technologies accounted for 67% of our total wafer sales, representing a two percentage point increase from last quarter. Moreover, 40 nm and 65 nm combined accounted for 35% of our total wafer revenue. For 40 nm, revenue was more than quadrupled compared with the second quarter, accounting for 4% of our total wafer sales. For 65 nm, revenue contributions were 31%, a 3 percentage point increase from last quarter. Meanwhile, 90 nm and 0.13 nm represented at 18% and 14% of our total wafer sales respectively. Now let's move onto the balance sheet and cash flow statements. We ended the third quarter with $180 billion in cash and short-term investments, down from $247 billion in the prior quarter, primarily due to the payments of cash dividends which also led to the decrease in all current liabilities. Accounts receivable days and inventory turnover days were 36 and 41 days respectively. Our next (inaudible) asset turnover was 1.6 times. In cash flow, total cash inflow generated by operating activities reached $47 billion compared with $25 billion in last quarter. The sequential increase was mainly due to increased business activities. In terms of cash out flow we paid $77 billion for cash dividends; capital expenditure was $32 billion. Meanwhile, roughly $22 billion was used to purchase short-term marketable securities mainly for fixed-income instruments. In sum, our ending balance was $157 billion, down $83 billion from prior quarter. Now let's turn to capacity and CapEx on page 10. Total installed capacity was about 2.44 million 8-inch equivalent wafers in the third quarter, a small decline from the prior quarter. The decrease was due to capacity migration into advanced notes. For 2009, overall capacity is forecast to be around 9.96 million 8-inch equivalent wafers, a 6% increase over 2008 and advanced technology capacity is forecast to increase by 11% year over year, reaching 42% of total capacity in 2009. For CapEx, we spent $971 million US during the quarter and $1.4 billion US year to date. In order to meet the rapidly growing demand in 40 and 65 nm technologies and in the end of this year and moving to 2010, we will be more aggressive in capacity investment in 12-inch advanced technology. Now let me give you our outlook for the fourth quarter of 2009. Based on current business expectations and a forecast exchange rate of $32.1, we expect our consolidated revenue in fourth quarter of '09 to come in between $90 and $92 billion NT. In terms of margins, we expect fourth quarter gross margin to be between 47%-48.5%. Operating margins will be between 35.5%-37%. 2009 capital expenditure will be increased to around $2.7 billion US. This concludes my remarks today. Now I will turn the call over to Dr. Morris Chang, our Chairman and CEO, for his remarks.

Hi everybody, this is Morris Chang. I would like to make a few general remarks before we start the Q&A. First, I want to talk about customer inventory. Our customer inventory remained lean in third quarter. For most of our (inaudible) customers, if we measure the inventory in absolute dollars, then the inventories were about flat at the end of the third quarter compared to the second quarter. Only a few customers’ inventory dollars increased in the third quarter. If we measure the inventory in basis of inventory BOI, they continued to decline and in fact appear to be low relative to third quarter historical averages. As far as IBM customers are concerned, the majority of their inventories came down in third quarter also and BOI the same way came down. Relative to third quarter history, most of the IBM's customers BOI are kept at medium to low levels. In summary, our customers’ inventory at the end of third quarter looks lean. Inventory dollars were flat from the previous quarter and BOI has come down. End market environment for fourth quarter now appears quite positive and we expect world semiconductor market to grow by a low single digit percentage sequentially in fourth quarter. We have revised upwards our full year estimate for the electronics system unit as follows. PC will grow 2% year over year as compared to our earlier forecast of a decline by 4%. Handsets will decline 5% year over year as compared to our earlier forecast of a 9% decline. Digital consumer electronics will be barely down within 1% of last year's level. Based on semiconductors' strong sequential growth in second quarter and third quarter and a further growth in fourth quarter, we now raised our forecast of semiconductor market to be a decline of 12% for the full year of 2009. This is a smaller decline rate compared to a decline of 17% that we forecast earlier. We expect foundries to underperform the semiconductor market, but by only a couple of points. Our outlook for the global economy in 2010 continues to improve. We now expect world GDP to recover and be above last year's level next year. The FC (ph) market will take a bit longer to recover, but will get to last year's levels sometime between 2010 and 2011. Finally, we expect 2010 to be a record year for TSMC. I know that some concerns have been expressed as to whether there will be surplus capacity as the result of foundries adding capital spending, and there have been questions as to whether growth will come at the expense of profit. In the past few months I have talked often about growth. I want to clarify what I mean by growth. It means profit growth and not just revenue growth. I will explain (inaudible) ROE at 20% or above is our long-term profit goal at TSMC. In the past many years, our ROE normally exceeded 20%. Going forward we will not lower our standard. In the future, in good years such as next year, I certainly expect our ROE to be above 20%. As Lora has mentioned in her speech that we have raised our capital spending to about $3.7 billion for this year — this increase in capital spending is the anticipation of the growth that will follow. We have collected some data and did a statistical analysis. We found that there is a very good correlation between capital spending and growth for us. Capital spending tended to lead growth by one to two quarters, so with increased capital spending, we certainly expect that our future growth profit and our future growth will follow. In the real situation we have been out of capacity in the advanced mode which cover 0.13 microns and below, 0.13 microns, and the more advanced technologies. We have been out of capacity on those notes for two solid quarters now. In spite of our redoubled efforts to increase capacity which started at around June-July, we are still out of capacity. In fact, for those advanced notes, we're out of capacity as far as the eyes can see. This is, of course, the immediate motivation of our capital spending increase. Since we based our increase in capital expenditure on our partners' forecasts and crosschecked it with our market research, we do not see an over capacity situation. I want to emphasize that this condition specifically applies to us and I am not commenting on other companies' capital spending. The next question is if other companies have excess capacity, wouldn't price be a factor to them? The answer is yes, to some extent. Again, the fact that we are partners with our customers makes the difference. The commodity market such as memory, DRAM, flash — if the industry has over capacity then everybody’s price gets affected. But in a custom market, which ours is to a very significant extent, our price will be less affected by a general industry over capacity. Over the years we have tried our best to advance the (inaudible) moderation of our market. We've tried to do it by three things; technology leadership, manufacturing excellence, and the partnership concept. In the main I think we have succeeded very well and I intend to continue to do that. As far as capital intensity goes, I have often felt that it is a very odd ratio. The denominator is current sales and the numerator is capital spending, but the denominator does not depend on the numerator. Although it's an odd ratio, it does signal long-term significance and shows the long-term trend of the (inaudible). Since 2001, the growth of semiconductors has slowed down. As a result, the foundry industry (inaudible) has also slowed down, although the foundry industry growth is still greater than the semiconductor market growth. As the long-term growth slows down, capital intensity does decrease. Back in the '90s, capital intensity was around 40%-50%. In the last few years it's been consistently less than and it's now around 30%. On a short-term basis, capital intensity will vary. For instance, this year our capital intensity will be greater than 30%, but that's going to be rewarded by a higher growth in the next few years than the average for the last few years. Now I want to talk about the 40-45 nm technology progress. Since we reported on that, three months ago, we have fulfilled most of the expectations that we had at that time. However, new problems have also cropped up, but these new problems are logistical problems. They have to do with the ramp up of new production equipment. We have had to not only increase the yields, but also have had to ramp up the wafer start on 40-45 nm in the last six months and the ramp up speed has been unprecedented. Lots of new tools were brought in and they added a complexity to production and the problems that I just mentioned that have cropped up recently had to do with two (inaudible 00:23:30) matching. However, as I said, we consider these to be logistical problems and we are in the process of resolving them very quickly. I believe most of these problems will be resolved by the end of this quarter. In spite of (inaudible) problems, output on 40 nm has increased dramatically. 40/45 nm wafer revenue exceeded the 4% of total wafer revenue in the third quarter and is on track to reach about 10% of wafer revenue in the fourth quarter. Because of the reduction in the two chamber matching problems, the 40/45 nm problem did affect the gross margin in the third quarter to the extent of about 1.5 percentage points. And because the problems have not been completely resolved in the fourth quarter, the problem will further affect the fourth quarter gross margin to the extent of about 2 percentage points, but we have taken, of course, the fourth quarter impact into account in our guidance. This concludes my prepared remarks and we can start the question-and-answer.

This concludes our prepared statements. Operator, please open the floor to questions.

At this time we will open the floor for questions. (Operator's Instructions) The first question comes from the line of Pranab Sumar with Daiwa Securities. Pranab Sumar - Daiwa Securities: Thank you for taking my questions. First question is for Dr. Chang. What is your forecast about the global semiconductor industry for 2010? And you indicated a global semiconductor industry recovery might lack (inaudible) recovery, it seems like, from your previous comment. Why is it so defamoral?

I heard the first question so let me answer that first. I think our current forecast for the 2010 semiconductor market is that it will be up 10% from 2009. And what was the second? Pranab Sumar - Daiwa Securities: You said that global GDP will reach 2010 in comparison to 2008 level, but semiconductor industry might take a bit longer time sometime in 2010 and '11, somewhere in between. Why does the semiconductor industry lack global GDP in your opinion?

I think that actually in mind there is a couple of reasons. I think that the first reason is that the world GDP is recovering faster than we anticipated. I think that half a year ago our expectation was that the world GDP would not recover back to the '08 level until '11, and now as I said this evening, we think that next year the world GDP will recover to the '08 level. The second reason is that I really think that China, a consumption of semiconductors in China, has been very strong and stronger than expected. And of course, the world GDP covers China GDP as well, but the semiconductor in China is proportionately even stronger than the China GDP. So those two are the reason why I think the semiconductor market is recovering faster than we expected at nine months or even six months ago. Pranab Sumar - Daiwa Securities: Okay, thank you. And my second question is the LED side. You mentioned about the investment of $46 million in the LED business, could you elaborate what type of margin expectation you could expect from this business? Because even the industry leader like Cree, they have a 44% cross margin deficit which is at the highest now, whereas the other chip leaders markets are always below 30%.

Do we expect any growth on the LED? Pranab Sumar - Daiwa Securities: Basically, yeah.

It's too early. I think that right now the board of directors is just in the process of examining a investment proposal made by the management — an investment proposal of $46 million in a pilot plan of LED. And so it is too early to comment on your question. Pranab Sumar - Daiwa Securities: Good. Okay, thank you.

Your next question comes from the line of Randy Abrams with Credit Suisse. Randy Abrams - Credit Suisse: Yes. Hi, good evening. I want to see if you can talk about the PC segment. It is doing a lot better than the other end markets in the third quarter, but then again in fourth quarter as well, and I wanted to see if you could talk about the drivers for that acceleration through year end if it's new products from market share or if some of that relates to 40 nm yields?

In a little bit we'll answer that question. Lora has got the data.

Okay, Randy. I think your question is with respect to fourth quarter PCs' growth driver, right? Randy Abrams - Credit Suisse: Yeah.

Okay. Well, actually we expect PC shipment to be slightly below its fourth quarter seasonality at about 9% sequential growth compared to a seasonal average of 13%. If you look at a couple of players who have already provided their fourth quarter guidance, I think their sequential increase was below seasonal or can be characterized as being modest. Randy Abrams - Credit Suisse: Okay. So it is actually below normal. Could you actually go over the other segments; what you expect for fourth quarter and also seasonal?

Right. We also expect the shipment for handsets to grow about 10% sequentially versus the seasonal of 20% and of course the growth in the developed regions will be moderate in the Christmas season. Emerging markets, emerging regions remain still the major growth driver, but there is a weaker seasonality after China's October Golden Week, and then in India there is also slowing new subscriber growth. And in the digital consumer area we expect the shipment to grow 55% sequentially and just slightly above the average of 49% and of course we expect pretty aggressive price promotion that will stimulate the demand in the holiday season. We think applications such as game, DVD, set-top box; those will be performing quite well. Randy Abrams - Credit Suisse: Okay. But I guess what I wanted to ask was at the TSMC level, or maybe if you could start what you’re seeing in your end markets for fourth quarter. And I think within your end markets, PCs are actually doing very well or at least better even through fourth quarter. So I am curious from a TSMC perspective what you are seeing in the end market?

Right. Randy, if you have read our earnings release, we also said in the fourth quarter we expect computer to perform strongly and so PC graphics, PC chip sets will increase. Communications, we think it is going to take a pause in this quarter after two very strong consecutive quarter growth and consumers, because we are on the supply chain's high end, the upper end of the supply chain, so the consumer related applications will decline according to its seasonal pattern. Randy Abrams - Credit Suisse: Okay. Thank you. And I guess a second question just on operating expense. I think at the midpoint of guidance it will be down about 100 basis points sequentially. Could you talk about how that splits out R&D and SG&A for that decline and off of fourth quarter, how do you expect operating expenses to grow into next year?

Operating expenses in third quarter represented nearly 12% of the revenue. Of that number, R&D expense roughly around 6% and SG&A 4%-5%. Going forward and I do see the whole year pattern, operating expenses representing roughly 12% of revenue, we believe that trend will continue to next year. Our revenue growth, we will continue to invest more R&D so at that part will be representing 7%-8% of our revenue and SG&A will be 4%-5% so altogether around 12%. Randy Abrams - Credit Suisse: Okay. Thank you.

Your next question comes from the line of Michael Chow (ph) from Dodge Bank. Michael Chow - Dodge Bank: Hi, good evening. Dr. Chang, I want to know if you could give some color on depreciation for next year? Thank you.

Depreciation for next year, Lora?

As we have not finalized the CapEx number for the next year, so we don't have a depreciation yet. But as you know, this year depreciation was essentially flat with last year with increasing capital expenditure for '09 and maybe going beyond '10 the depreciation will be slightly higher than 2009, but we don't have a number yet.

What was it this year?

It was 81 billion and same number for last year. Michael Chow - Dodge Bank: Thank you.

Your next question comes from the line of CJ Muse with Barclays Capital. CJ Muse - Barclays Capital: Good evening, thank you for taking my question. I guess first question, you talked about forex expectations reaching roughly 10% of revenues in 4Q. I was hoping you could shed some light on what your expectations are for percentage of revenues in 2010 and what that would mean in terms of new capacity at that node?

Yeah. We — now — we have not made our detailed plan yet, but first of all, of course it is going to be considerably higher than 10% next year, the 40/45. And I think that for the whole year it will climb during the year. And by the end of next year I expect that it will reach about 20% of our total revenue. CJ Muse - Barclays Capital: That's helpful. And then I guess considering that backdrop, what are your initial thoughts for CapEx in 2010? I heard in the prepared remarks more aggressive from 300 mm spend and I guess if you could shed any more light on what the plans there are as well as what the linearity looks like?

The linearity of the increase? CJ Muse - Barclays Capital: Sorry, linearity of CapEx spending throughout 2010.

As we are seeing strong demand in leading-edge technologies across the board, not only on 40 nm, but also on 65 nm and some 90 nm and also 0.13 microns as well. So we are adding capacity now and we are going to continue adding capacity. So 2010 CapEx most likely will be front-end loaded.

It actually depends on the outlook of 2011 as well and as you know, early in the year this year we pegged our CapEx at 1.5 billion and now we are talking about 2.7 for this year. And so now Lora's answer is correct as far as we can tell right now, but if the outlook of 2011 changes, then we may adjust the outcome. CJ Muse - Barclays Capital: That's helpful. If I could sneak in one last question, again in your prepared remarks you talked about customer inventory being very lean. I guess considering that backdrop, and I know clearly there's some uncertainty as to what transpires in Q4 in terms of inventory build, but what does that backdrop give you in terms of visibility to Q1? Does that suggest that we could see better than typical seasonality or still very early?

I think that the first quarter is seasonally down and if you look at the past seven or eight years, first quarter has been, on the average, down by about 5% from the fourth quarter and my feeling right now, I really don't see anything vastly different from that in the fourth quarter. CJ Muse - Barclays Capital: That’s very helpful. Thank you.

Your next question comes from the line of Dan Heyler with Banc of America-Merrill Lynch. Dan Heyler - Banc of America-Merrill Lynch: Thank you. Good evening, Dr. Chang. I had a couple of followups on the questions today as we ran out of time there. I wanted to followup first on the ROE question. I know I realize it is difficult to give targets for next year, but as I look at your asset productivity snap back quarter on quarter from 1.3 to 1.6, and also the relatively high OP margin plus ROE now at 27%, that's the second highest quarter in history. So I'm wondering why there's somewhat of a reluctance to suggest that next year or soon you'll be able to achieve record high ROE. Is there some risk factor you think, to achieving that I'm not aware of? What are your thoughts there?

Well, Dan, I made the comment I think mainly in relation to revenue and profit dollars when I said that the next year will be a record. Now as far as ROE is concerned, that involves a couple of other variables and I really haven't taken the time to look at that, but apparently you have and if your characterizations indicate that the ROE will be record, well I will gladly accept it at this point. Dan Heyler - Banc of America-Merrill Lynch: (Laughs) Okay, thanks. And then the other question — well I guess there is another element there in terms of, of course, the dividend payout as well. I guess that would be one element there. And on that front, either for Elizabeth or Lora, could you give some color on policy? You historically have talked about a dividend payout as a nominal value increasing, but any thoughts on a payout ratio to give better clarity as to what your dividend would be?

Dan, you know we had a very serious commitment about maintaining our cash dividend levels in the past few years. We have said we will pay no less than $3 going forward. We are still in that position. Dan Heyler - Banc of America-Merrill Lynch: Okay, great. And then finally —

Now remember, we actually raised the dividend to this very high level as I figure, I guess our dividend yield is now 5%. And that's a very high level for a company. I actually was rather unhappy about it because we really, when we raise the dividend to that level, we didn't feel that we should invest in capacity more and now I think this year is different from the circumstances a few years ago and also we are also reserving some cash, although we don't really know how much we would reserve yet, in for the new businesses because the new businesses really haven't started to invest yet. But we still feel very good about the $3 level and we intend to at least maintain it. Dan Heyler - Banc of America-Merrill Lynch: Okay. I just was thinking it would be somewhat easier to model as a percentage about quarter revenues for modeling purposes, but I totally understand your policy there. My second question was on the comment about semiconductor industry reaching '08 levels by 2010 under, I guess, TSMC in there. I am wondering if you could maybe be a little more specific as to — because obviously second half of '08 was down. So at what point do you think TSM would be back to say, first half '08 levels or the semi industry, either way, whatever works for you?

Well, when will we return to the first half level of ’08 that was your question? Dan Heyler - Banc of America-Merrill Lynch: Yeah. I mean roughly you were running — yeah, TSM was running about 88 billion at that point.

Well, I mean that will require a quarter by quarter — but you know, just simply indicating — I really thought by indicating that next year will be a record year, I really think I have said enough for the time being, Dan. I really don’t' want to — in fact, we haven't analyzed or planned the next year quarter by quarter yet and you really are asking me to give it to you quarter by quarter and it's not month by month, you know? I can't do that. But I will still stand on my statement that I expect next year to be, on a whole year basis, to be a record year. Dan Heyler - Banc of America-Merrill Lynch: Right. Okay, fair enough. It just seemed like that 10% number was a little low on that scenario, but I'll come back later to you guys specifically on that. Thanks again.

Well, Dan, if you have more questions you can ask now. Otherwise, I think we can conclude the conference call today. Well, operator, there appears to be no other questions so I think we can conclude today's conference call.

Before we conclude TMSC's third quarter 2009 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.