Welcome to TSMC's Fourth Quarter 2006 Results Webcast Conference Call. Today's event is chaired by Ms. Lora Ho, Chief Financial Officer and Vice President, and Dr. Rick Tsai, Chief Executive Officer and President. This conference 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. At the conclusion of the management's presentation we will be opening the floor for questions. At that time further instructions will be provided as to the procedure to follow if you will like to ask any questions. Please be advised 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. Once again, the URL is www.tsmc.com. I would now like to turn the conference over to Dr. Elizabeth Sun, TSMC's Head of Investor Relations, for the cautionary statement before the main presentation by Ms. Ho and Dr. Tsai.

Good morning and good evening to all participants. This is Elizabeth Sun, Head of Investor Relations for TSMC. Before we begin, I would like to state that management's comments about TSMC's current expectations made during this conference call are forward-looking statements subject to significant risks and uncertainties, and that actual results may 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 20, 2006, 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 statements whether as a result of new information, future events, or otherwise. And now, I would like to turn the conference call over to Miss Lora Ho, our Chief Financial Officer and Vice President.

Thank you, Elizabeth. Good morning and good evening to everyone. Welcome to our fourth quarter 2006 Earnings Call. I will start today's call with highlights from our fourth quarter results, and then give you an overview of our expectations for the first quarter of 2007. Please also refer to the quarterly financial summary slides on our website. All dollar figures are in NT dollars unless otherwise stated. With that, let's start with slide number 5. Total revenue for the quarter was NT$75 billion, down 5% year-over-year and down 9% sequentially, on a quarter-over-quarter basis as a result of inventory corrections, revenue from consumer, communications and computer applications declined by 31%, 17% and 2% respectively. In terms of revenue by, revenue for advanced technologies accounted for 48% of wafer revenues with 90-nanometer accounting for 22% and 65-nanometer approaching 1% of the total wafer sales. Gross margin reached a midpoint of our guidance at 46% for the quarter, 3.9 percentage points lower than in the previous quarter, mainly due to lower capacity utilization. Total operating expenses in the fourth quarter was slightly lower than last -- previous quarter, mostly due to reduction in 65 related expenditure as we enter into the volume production for 65-nanometer. In addition, G&A expenses also declined quarter-over-quarter mainly due to the reduction of fab opening expense for Fab 14 Phase II, which commenced commercially production in the fourth quarter. Operating margin was 36.6% for the fourth quarter '06 close to the high end of our guidance. Diluted EPS were $1.08 down 18% year-over-year and down 14% quarter-over-quarter. I will leave most of the balance sheet and cash flow items for you to review; however, let me make a few comments. TSMC continued to generate strong cash flow, free cash flow from our operations. Cash generated from operations was NT$63 billion in quarter, and we spent NT$18 billion in CapEx. As a result, we ended the quarter with NT$195 billion in total cash and marketable securities, up NT$31 billion from Q3. On a q-over-q basis, our accounts receivable turnover days were 43 days. [Compared with] the previous quarter, our inventory turnover days increased by 2 days to reach 50 days. Now, let me turn to CapEx and capacity; total installed capacity for the fourth quarter was 1.9 million 8-inch equivalent wafers, in line with our previous expectations. The full year 2006 capacity was slightly above 7 million 8-inch equivalent wafers, and 18.6% increase over 2005. We expect our first quarter 2007 capacity to be slightly below 1.98 million pieces or 1.7 sequential declines due to a shorter working days and some fab -- undertake some maintenance. Our full year 2006 CapEx totaled US$2.5 million slightly below the US$2.6 that we have guided in the previous quarter. Page 10 through page 13 of the slide breakdown our sales by technology, application, geography and customer, which I will not go through in detail. Finally let me go over some of the highlights for the whole year 2006. Following a record year of 2005, we managed to post a 19% top line growth despite an inventory adjustment period in the second half of 2006. In addition to our strong growth in top line we continue to improve our profitability, compared to 2005 our 2006 gross margin improved by 4.8 percentage points and our net income and EPS improved by 36%. 2006 also marked the 9th consecutive year that TSMC delivered positive free cash flow. We generate over NT$200 billion in operating cash flows and we return over NT$60 billion in cash dividend to our shareholders. Our return on equity was 26.6% for the year 2006, 4.4 percentage points higher than 2005. With that let me turn to the outlook for the first quarter of '07. Based on current business and the foreign exchange rate expectations, we expect consolidated revenue to be between 62 to NT$64 billion. Our expectation for gross margin in the first quarter is between 37 and 39%. The operating profit margin is expected to be between 26 to 28%. Total 2007 capital expenditure will be in the range of US$2.6 to US$2.8 billion. This concludes my remark today. Now let me switch to Dr. Tsai for his comments.

Thank you, Lora. Since there are many questions on near-term outlook and outlook for the whole year of 2007, as well as our view and position on via cash utilization, stock buyback, Philips' stock sale and the capital reduction issues. So, what I would like to do is before the formal Q&A session, I would like to give you, what I believe we are going to see, at the beginning of the session. So, let me start with the near-term outlook. Obviously, from the guidance you just heard from Lora that we are having a quite challenging quarter in the first quarter of 2007. And how do we look at that going forward? To make it clear, the management sees the first quarter to be in the bottom of this inventory correction period, and believes that we will see, we will see the start of the recovery by the end of March. Now, why do we say that? Well, we are looking at the things from several different aspects. Let me start from the macro point of view. We've been watching the US economy quite closely since there has been quite a bit of uncertainty during the past half year also. I think what we see so far is US economy was doing fairly well, especially in the fourth quarter last year, is now, I believe the fourth quarter GDP growth should be better than previously expected. Oil price has also come down quite significantly, with no sign of moving up any time soon, which certainly has given consumers a lot more expendable income. In addition, one of the most important factors during the last half year was the housing correction in the US, of which as many people fear to that may impact the consumer spending in an adverse manner. However, order data have shown that the housing correction oil significant has not impacted consumer spending, what people have feared before. Now, we've been also looking at several leading economic indicators, which also point towards the direction that we just described, that is the US economy is in the moderate good growth mode with a low inflation risk. Now, let's then moving downwards, let's take a look at the electronics end market demand. Because that's where our, the chip set we made for our customers are going. And in short, there seems to be no major issues, from the end market demand point of view for the electronic products. The most important indicator obviously is the holiday season sales. The data we are seeing for the major US electronic stores in the holiday season, for example, Best Buy and Circuit City have shown their sales to have grown at a rate better than the forecast. And of course, I also hope that the upcoming Chinese New Year will create some significant demand also. So the important thing why are we talking about those two aspects -- because we have correction in the business. The first thing we want to know is, if the demand has a significant weakening or not? And from the data we have seen so far, we feel comfortable to say that the demand from the end market is in a reasonably good shape. Now, so let's move to the inventory situation, after all that is the main reason that we are seeing a major correction starting in the fourth quarter last year, and lasting into first quarter this year. Now, we are going to look at the inventory situation among different segments, let me first remark on the handset chips. Things now are -- handset sales now are by far has the largest of volume in the market. As we have reported in our last Investor Conference, that the handset chips was going into an inventory excess mode in the fourth quarter. Last year, we also said we expected the inventory excess too last into the first quarter this year. I think, during the infilling time, there have been much data and also the reports from different handset chipmakers, which all have (inaudible). And we certainly as a result have been impacted quite severely by this inventory situation in the handset chips. However, having discussed with several key players in the handset chipmakers, I haven't talked to all of them but I did have talk to several of them. We also believe that inventory correction situation should largely be downwards after the end of this quarter. In addition, the supply chain mainly the handset makers who are the customers of the handset chips showed their inventory to be in a good shape. Now, let me move to the PC segment. The PC unit shipment overall last year in 2006, [is now] down as well, as that of 2007, but we all remember in the first -- early in the year, the PC shipments has been pretty slow. It started to pick up, its paces in the second half of the year, in the third quarter and fourth quarter. However, the shipment in the fourth quarter overall grew at a significant rate, still it's below the seasonal pattern. As a result, there is certain inventory buildup in the supply chain. The customers -- our customers have been reacting again quite swiftly and with a very efficient PC supply chain, which would build over the years we believe this inventory level will go back to normal in another couple of months. As to the consumer electronics which are a lot more diverse because it consists of TV, DVD, camera, game console, et cetera, et cetera. It's more difficult to forecast. However, from what we can tell, the consumer electronics seems to going through a rather normal seasonal first quarter, we do not see particular issue there. So, in short, from inventory level point of view, it would still go into a correction period, correction phase in the fourth quarter and continue to be consumed in the first quarter of 2007, while we do expect the overall inventory levels to go down to the normal level by the end of the quarter. Lastly, I will like to comment from our booking point of view. After all, these are the real numbers that would decide what will happen to our business in the short-term. We have been watching our booking number very closely and carefully, obviously. I would say some -- the customers -- some customers are now putting in some of their needs, of course not every one of them. The situation has changed somewhat compared to say three months earlier, where three months earlier, you would not find any customer who wanted to go in anyway. We are seeing our bookings to show a gradual and a steady improvement. I would say, the booking now is coming in on schedule, in line with our internal forecast. So with all those factors, we believe that again in the first quarter that we are reaching our bottom and we will start to see the recovery in our business by the end of the quarter. Now, let me comment on the year 2007 overall, for the semiconductor industry as a whole. In short, we see some moderate growing year for the semiconductor industry this year. The growth rate will be in the mid single-digit range. Again, why do we say that? First of all, the first quarter of the year is certainly a difficult one, not only for TSMC, but also for many of the semiconductor makers, I would say probably for most of the semiconductor makers. And this first quarter obviously will have some impact on the overall growth rate for the whole year. Now, if you look at the unit shipment for the different products, in the PC area, we believe that the unit shipment will grow by about 11% in 2007 compared to about 10% in the year 2006. So, from PC point of view, I think the shipment will remain -- the growth of the shipment will remain above the same, compared to last year. For handset, however, the shipment we will see -- we believe will grow by about 10% to 11% this year compared to 21% growth rate of year 2006. Obviously there is some significant difference between the two. Of course, in 2006 the total shipment was about 965 to 975 million units. A 10 to 11% of that number is still very, very large number, by any means. Again for consumer electronics, we are looking at a roughly 17% growth compared to 27% in 2006. So, as a whole you can see that the electronics business will continue to grow at a significant clip. In 2007, overall that rate is somewhat lower compared to 2006. And as a result, with the slower first quarter, we are now forecasting a more moderate, mid-single digit growth for the semiconductor industry as a whole. So to conclude our outlook, I would say that our first quarter is certainly a very challenging one. However, I am quite -- I am still quite proud that we can still deliver a very strong operating profit at 26% to 28%. And with our strong position in technology, manufacturing and customer partnership, I believe our management will strive for much better results going forward starting in the second quarter and in the second half of this year. We will do our utmost to make that happen. So let me move into the financial sides of the questions, in particular on the cash utilization, stock buyback, Philips stock sales, and capital reduction. Let me first say that TSMC, one of the TSMC position on cash utilization was to dramatically increase our cash dividend starting in year 2004. If you remember that we started to give a significant cash dividend of NT$0.60 in 2004 followed by NT$2 in 2005 and NT$2.5 in 2006 per share. We expect this cash dividend to continue in the future. Now, on the Philips stock, it is well known now to most of you that Philips has desired to sell down their TSMC holding for now for quite some time. And their timing happens to converge quite well with our surplus cash position, not only for now but also for quite a few years in the future. So, this actually is giving us an opportunity to do several things together. What do we like to do is to reduce the total share outstanding first and secondly to remove the sort of overhead. And third to use our cash productively only one stroke, only in one stroke. Therefore we have been working very closely with Philips in the past several months to divide the plan to accomplish what we've just mentioned, those three objectives. The work is continuing, however we are not able now to announce any details and specifics yet. Of course we will do that once we know that we have a clear plan and the execution. But again, rest assured that TSMC is working closely with Philips so that we can have an efficient and responsible plan, so that we can do the best for our shareholders. No capital reduction which has been discussed quite a bit recently in, at least in Taiwan. TSMC actually had a look at capital reduction several times in the past internally of course, and it's still, and we still regard cash reduction with a possibility in the future. However at present cash capital reduction is on the backburner. We do not have a plan to do cash reduction, capital -- I am sorry capital reduction any time soon because there maybe some better alternative as we just talked about earlier on the stock buyback, Philips stock buyback. So again I want to assure all shareholders and investors that TSMC continues to work very hard on our very strong cash position through cash dividend, through working with Philips so that we can achieve the best possible shareholders returns, now in the future. Now Elizabeth, I will like to return the floor over to you.

All right, operator I think we can open the floor to questions.

(Operator Instructions). Our first question comes from Bhavin Shah of JPMorgan.

Yes, thank you. Rick, I had a question on the revenue growth outlook that you offered for the industry and how it is linked to TSMC? If you look at – whether you look at past 3 or 4 years its sort of the recent era of semiconductor industry after the 2000 bubble, your both your volume and revenue growth have significantly outpaced the industry. In fact your volume growth has been almost as much as 3 times the industry and revenue growth has been higher by at least 4 to 5 percentage points. So when you mention, when you have a guidance, sort of when you forecast for 5% revenue growth for semiconductor industry, can we continue to assume that you would outpace the industry at a similar pace like you have done in last two years?

Bhavin, now I would say no, right now. Our current forecast does not support that. However, I would -- well, I think there is opportunity there, but at this moment, I would not say so.

Now, focusing on the profitability a little bit. It seems that your gross margin in first quarter, is maybe about a percent or two below what one would assume it to be for a given revenue level. In other words, given the revenue guidance you have for Q1? At least, I would have expected the gross margin to be about a percent or two higher. So -- and that, when I couple that with a -- while you don't release ASPs anymore, I think people can make similar assumptions that ASPs are still coming up. Is there a step down in margins that you are going to experience going forward, or there is no such trend?

I think the margin of course, it's (inaudible) both by price and utilization. I would say the first quarter is a difficult one, it's a difficult one, from both aspects. So -- but I would expect of course, both to improve going forward in the second quarter and second half. I certainly expect our gross margin to back up quite significantly.

Right. Yeah, I realize that. I guess what I am referring to is whether for a given revenue level, there is any deterioration in profitability? In other words, revenue is down, so obviously the margin has to be down. But is it down more so than what the revenue level should imply, because you are experiencing higher competition or something --?

I think it's -- you are probably can say that the gross margin will be down a little bit for the similar revenue because of the competition and also because of some of the products we are making, new products we are making.

I see. Talking about the new products, you had talked about 65 nanometer reaching about 5% in the second quarter, is that still visible?

Hello Bhavin. I don't think we will reach 5% in second quarter. I think we will strive to do that in the third quarter. I think the current correction slowdown -- the migration somewhat. But I think -- but we've said before somewhere between that timeframe, before.

(Operator Instructions). Your next question comes from Randy Abrams with Credit Suisse. Please proceed sir.

Two follow-on for the questions just on pricing, and you mentioned that it will improve in second quarter. Is that a function of leading edge, whether it's initial 65 nanometer, or just a ramp back of 90 nanometer? Is that the factor that you're factoring in for pricing and when you look at the environment, is it too early to gauge on 65 nanometer on the pricing, you said that 90 nanometer tougher pricing. Is it too early to make a call on how 65 nanometer pricing is shaping out?

I think you can say that pricing for 90 nanometer is pretty tough. However we expect that to stabilize somewhat later on. 65 nanometer pricing I think right now -- yeah, it's because of volume that's just getting started this year while it's more difficult to gauge. You will -- ask for any of the technology node in its early phase, you will be more volatile, because of the small volume.

Okay. And could you talk a little bit about your China investment plans. Now that they -- you are [seeing] the restriction of 0.18 micron. What's the potential timeline for getting approval and then ramping up additional capacity in China to take advantage of that opportunity?

We are now in the process of applying for the 0.18 micron with the Government agency here. We do not expect problems, I think it should be done in maybe in a month, but Chinese New Year is coming, so that would delay somewhat. But I don't see really any issue there. Once approved, it will be -- the process can be set up and qualified very quickly, because some of the -- the equipments there are capable of doing that. And our processes are very mature. So, we will be able to I believe to start providing loads, 0.18 micron services to our customers in China, I hope some time in the first half of the year.

Our next question comes from Mehdi Hosseini with Friedman, Billings, Ramsey. Please proceed.

Yes, thank you. I have two questions, regarding your commentary on the PC chipset, there were some excess inventory in the supply chain. How would you characterize the graphics chipset in Q1? And also regarding your commentary on the semiconductor industry revenue growth, if your revenue growth is not going to as much as 7%, while your CapEx is going to be up 6% to 8%? So, there is going to be a significant pressure on the margin. So, if you could help us understand the magnitude of that margin pressure? Will be great, thank you.

I think for graphic chips you probably can view that as same way as the overall PC chips from inventory point of view. That will be my guess.

So, there is some inventory for graphic chipset in the supply chain?

I cannot say that sure. I believe there is some, but I cannot tell you who and what.

Sure.

But I believe there is some yes

Sure.

Your next question? You said CapEx or capacity increase or. Can you repeat the question? I am sorry? What was your second question?

Mr. Mehdi your line is open.

Hello? Mehdi?

Thank you. Our next question comes from the line of Timothy Arcuri with Citigroup. Please proceed.

Thanks a lot. I have a couple of questions. First of all, can you give us some idea of what the loading for the CapEx looks like for the year? It looks like you are coming off of a number roughly that annualizes to maybe $2.4 billion and you are guiding to a number of little bit higher than that for the year. So, how should we think about, how the CapEx lays out through the year?

As we said the CapEx will be ranging from $2.6 to $2.8. I would like to give you a little bit more detail on that number. Firstly, on that $2.6 to $2.8 number actually we are planning to spend around $0.5 billion, -- 500 million in fab building and capacity, as you can imagine those capacity will now come out in year 2008. So, we have said that capacity (inaudible) CapEx as well is the strategic issue. We will look at multiple years instead of only one year. Also for the total number, how does that spread out in a year, I would say it will be slightly back-end loaded and the pattern will be very similar to the 2006.

You mean the capacity increase -- you mean?

No, capacity increase it will be also very similar to 2006, and in 2006 we had increase around 18% of our capacity. In 2007, it will be similar but somewhat lower.

Right. Okay, great. And then I guess, just a quick follow-up. Just from kind of a top-level perspective, your CapEx now has been flat for about three years '04, '05, '06. And there has been a huge move to several big chipmakers going fabless and we have seen a record IC unit environment during the last couple of years. So, I am wondering are there a lot of efficiencies that you are getting out of your CapEx that you weren't getting a few years ago, and if that's the case, will that persist going forward?

I would say yes, we are getting higher and higher efficiency out of CapEx. So, you probably can calculate from the equivalent capacity per CapEx, so, of course, the productivity improvements and the commercial terms. Do we expect to continue, I would say so, yes, that's one of the most important cost management mechanism and I think our people all the way from R&D to manufacturing are committed to that.

Thanks a lot. If I can just sneak in one more quick one, what percentage of the full year CapEx has been allocated in terms of equipment orders already?

It's really depending on the lead time of the equipment. I think for the first half of the year and for those more meantime equipment, it's pretty much down. So, [and so forth] on the other equipment, the average in lead time was 4 to 5 months in average and we will have to see there -- when (inaudible) company, and all is the delivery going to happen. So there is still some room for adjustment.

Excellent, thanks.

Our next question comes from Mehdi Hosseini with Friedman, Billings, Ramsey. Please proceed.

Yes. Thank you. I got cut off. Going back to my previous question, let me clarify. If I take the midpoint of your CapEx, it seems to be up about to 7%, and your commentary regarding the overall semiconductor industry suggests that your revenue growth maybe below 7% in 2007. So, it seems to me that there is going to be significant pressure on the gross margin throughout the year, so if you could provide some more color on this that would be great?

Yes, there is obviously -- first quarter, you are seeing already the margin pressure. One of the most important reason is the utilization, as we all know. So, because -- if you look at the CapEx of course, convert into the capacity. The first quarter capacity number we have published just now, if you compare that to the first quarter of 2006, you will see, I think roughly 13 to 14% increase. Of course, because of the severe -- I mean our growth capacity was basically built sometime back in the third quarter, early third quarter time last year. So, obviously some of our old capacity is not being utilized this quarter. This situation will improve as we move on to the second quarter, but there is still probably a certain underutilization of the added additional capacity. I think in the second half we should see much better, much higher utilization. But overall, you are right, the gross margin will be suppressed somewhat, certainly in the first half.

Our next question comes from Shailesh Jaitly with Nomura Securities. Please proceed.

Yeah hi. My first question actually relates to the linearity of the current quarter. In articulating the guidance for 1Q, what proportion of the revenue do you expect to come from March -- in the month of March in 1Q?

We don't comment on monthly revenue, I think quarterly revenue should give you a good enough picture of what is going to happen in the coming three months.

But, Lora when I look at your 1Q, do you expect every single month to see sequential month-on-month improvements as we progress for the quarter?

As Rick has mentioned, we are expecting a recovery on late first quarter. So, I would say that we believe, Shailesh, from March, we are going to see some recovery.

Okay. And if you were to just go back three months, and at that time when you were guiding about 4Q, obviously there was no guidance provided at that time for 1Q. But internally, you would have known basically what exactly you are seeing. Based on the numbers that you see today, were you disappointed in anyway internally? And if at all, where were the disappointments -- or the areas of disappointment? Or the 16% revenue decline is pretty much inline what you thought, let's say, three months back?

Well, we are certainly not happy with our first quarter guidance. That's for sure. I guess you are asking whether we were seeing this three months earlier. The answer should be, no, we are not seeing such magnitude. However, I think the correction in the wireless area has been more severe than we expected.

Yeah. I think just to understand a bit clearer right on the wireless space, because all the chip manufacturers who have talked about the wireless space, but definitely you see the product mix to be one of the major issue this year, with the market moving quite aggressively towards the single chip, the revenue growth is lot milder as compared to the unit growth. I was wondering, how is it going to filter through for TSMC products to that year, even though when you see the units coming back?

I think overall, for wireless, for the handset, there has been persistent pressure in price at the end market. Of course, the more concentration in the low end cell phone make that even more difficult. We are seeing that pressure to our customers. What we've been doing of course is to move us together with our customers to move down the technology curve, to produce more chips at a lower cost. I think our cost improvement effort also has worked quite well from both [yields] and the wafer cost point of view. So, we are managing that, but I also must say that the pressure continues to be quite high from the handset segment.

Our next question comes from Mark FitzGerald with Banc of America Securities. Please proceed.

Thank you. Two questions, can you just give us a quick update on the NOR opportunities here and what it means for your in 2007? And how you are going to execute on it?

The NOR flash, we have been working things about last year for one partner, for the other one, we have been working for it, we have been working together for actually for the last few years. Both are now in the ramping mode. I think both are now contributing significant revenue and profits. We expect the overall NOR flash to contribute what do we call our mid single digit percent of our total revenue in year 2007. We certainly expect this business to continue to grow next year and forward.

And then just switching gears quickly, we heard a lot about the cost to design here, as we go to these next technology node 65 and 45. Is there -- do you see this cause any impact in terms of the number of your customers? And the timeframe in which they are going to these next technology nodes slowing down? And is there anything you can do to address the cost of design here to help customers lower that?

No, I think that the cost to design has been a issue for a while. Of course, it probably gets more significant as we move down the curve, the technology curve. But we've been working with our customers, not just in the 65 and 45, we started pretty much at 90-nanometer end earlier. But the effort now is also getting higher and bigger. One, what we have been doing is that we have been working to setup together with EDA vendors and the IP suppliers for our design infrastructure. We also develop a quite a bit of IP ourselves for our customers. We also have a very large design service team internally, and with some of our invested design service company. We will place our customers on ways to minimize their mask costs, overall for, to reduce their NRE. We have spent a lot of time on the design for manufacturing point of view also. We do everything to shorten their design cycle and to shorten their time-to-market. And I will say in encouraging manner, for 65-nanometers, we now have some redundance of customers engaging with us and covers both from a very big ones, big IDMs and big fabless all the way to mid size to even small size customers. I believe some of those small size customers are now able to utilize the leading edge technology to create their differentiation, to add more value, and they are able -- they are also capable of doing that both from technical and business point of view. And we are working under quite a lot of -- I have a design organization of more than 400 people now, just internally in TSMC. We will continue spending that effort from both budget and account point of view.

Thank you.

Our next question comes from Robert Maire with Needham. Please proceed.

Yes, a couple of questions. In terms of utilization, it sounds like utilization will bottom sometime in Q1 from your comments, I think I got that. Perhaps you could elaborate on that a little bit more in terms of utilization for the leading edge, 90 nanometer technology and perhaps below versus the others. Are we both going to see a bottom and at what sort of rates do you expect to sort of bottom out? Would it be longer? Would it take longer to see a bottom in the more trailing edge technologies? And related to that I've heard of design activity picking up in 65 nanometer that tape-outs are increasing and such. What are you seeing in the near term in that regard?

Okay. For 90 nanometer, we do expect that [digitization] to bottom in first quarter. And, I think the trend is fairly similar, [that cost] different technology nodes, first quarter and second quarter. Yeah 65 nanometer [purchasing], being yet very new technology node and so sometimes it's change from one customers or two will impact the whole thing quite a bit. So, it's more difficult to give you total answer but, I think the pattern is about the same.

And your expectation for where things bottom at? Are we bottoming at 75% utilization overall and maybe a higher rate for 90 or similar rates for 90 and the rest?

We do not comment specific numbers, for digitization. But, again as I said to you, in first quarter 90 nanometer and other technologies had a bigger line with where we are bottoming out. And, from a design activity point of view, for 65 nanometer, we do agree with that segment. I think actually compared to 90 nanometer, I believe the number of customers, that's where the range of the applications both become more -- I would say more robust. Some of the big customers are now moving into 65 nanometer, quite a bit more aggressively compared to the pace in 90 nanometer.

I would assume your CapEx is aimed at supporting that 65 nanometer robustness, is that accurate?

Yes.

Thank you.

Our next question comes from Bhavin Shah with JPMorgan. Please proceed.

Yes, just wanted to follow-up on that 65 nanometer. The slower ramp, is that -- can you just elaborate what's driving that, is that slower adoption of new products or -- because you didn't mention that some customers are beginning to pull in orders. So is that not for new products?

Bhavin you are talking about 65 nanometer slow ramp?

Yes Rick.

Okay. I think for the overall for the handset chipmakers overall, the 65 nanometer ramp, I guess in part due to the correction, has been somewhat slower than expected. But on the other hand, I think this is probably couple of month to a quarter phenomenon not more than a quarter. I think that the run, the pace of the run will accelerate but definitely starting in the second quarter timeframe. I mean we have, other applications are moving in also, I think some or the other applications utilizing 65-nanometer sooner than they did in the 90-nanometer node.

Can you give some examples, is that possible?

I will give you a punch, but a follow-up -- you know quite well the base plan, the application processor, graphics are moving in rather quickly. But in addition, I think the, some of the consumer applications are now moving to 65 faster, our digital TVs, so we are seeing that also for the digital cameras, storage, networking, UWVs. It is, if I try to remember what the equivalent time for 90-nanometer, I don't think the applications were as broad as they are now.

Okay.

Oh, I didn't mention [FPTA] of course

Right, right. And the other question was just another clarification on my first question on your growth versus industry. You mentioned as of now you don't see a difference. In other words, you see your growth basically the same as industry, is that what you meant or?

Bhavin, you are actually asking me to forecast for the whole year. I just cannot do that now. Sorry about it.

All right.

Next question.

Our next question comes from Ivan Goh with Dresdner Kleinwort. Please proceed.

Hi, I have one question. Just looking at your capacity growth in 2006, you grew to 18.6% but in unit terms you grew close to 30%. Now you are forecasting capacity growth of in 2007 of similar magnitude as similar or lower magnitude compared to 2006. Just based on that capacity growth do you have some kind of a, some kind of a target as to what kind of wafer growth you would --you are targeting? I am just asking that because if you look at your guidance for 2007 you say the semiconductor industry would grow at a mid single digit and you don't think you will grow substantially more than that. So, is -- do you expect, so, in other words, do you expect pricing to come down substantially in 2007?

Again, I think a little bit, a little tricky when you look at the capacity growth in the yearly -- on a yearly basis compared to on a quarter, I mean quarterly basis. You can say on a yearly basis we grow our capacity by certain percentage like, little below last year's. And you wonder why we are not growing as much. However, if you look at from quarterly point of view, again if you compare a point in the first quarter this year to the first quarter last year there is a significant growth in capacity, unfortunately not being utilized, unfortunately. I wish they were but they are not. And as a result they are not contributing to our revenue actually pulling down our profit, again unfortunately. And if you go to the second quarter this will improve, this situation will improve but still, by the way last year first quarter and second quarter, our utilization was higher than 100% also. So it's just kind of put salt on your scar, that type of thing. So again, if we move to second quarter, the situation continues but at of course, a better fashion. But in the second half we believe -- certainly that's what we expect, the added capacity will be fully utilized in the second half.

And a question on your comment that you don't think you will exceed the semiconductor growth this year substantially. Two questions on that, firstly is this, do you think this is a permanent change in your, in TSMC's situation that going forward, you don't think that you will significantly exceed the industry growth. And secondly, just wanted to find out based on your forecast what are the reasons why you will not significantly exceed the industry growth?

Well, for the, your first question, the answer of course is the very firm. Certainly I do not expect that to be the case going forward. Our goal is to grow at a faster rate than the industry. Of course that growth is kind of a average over the year and we do expect our growth rate to be higher. And we are doing everything, and we are doing many things to continue the higher growth rate. On this year, I think the -- okay and I would say the first half, the first quarter numbers does hurt. I think of course the pricing pressure had certain impact from revenue point of view. However, I think our cost improvement efforts will actually continue and accelerate and I think that will render our gross margin somewhat better than compared to the revenue point of view.

Our next question comes from Pranab Kumar with Daiwa Research. Please Proceed.

Thank you for taking the questions. I have two questions. First is on your margin side, you said that new product introduction is also affecting the margin and based on 2007, how long do you think that effect will continue. Do you think that by fourth quarter of 2007 or it may continue until 2008 that type of margin erosions? And second one is on the NOR Flash business, do you think that NOR Flash technology roadmap has to compete with other memory technology roadmap to remain competitive if so, when will you move to 65-nanometer and will it lead to significant higher CapEx in 2008 period suppose you have to compete with other memory technology with this NOR Flash?

Pranab, I think for new product the ramp goes on. I think it will help to reduce the cost and improve the margin. For NOR Flash, I think the competitive pressure of course is still very high, probably not as high as the NAND Flash, but still we are working already on 65-nanometer technology together with our partner. We are of course, we are going to – we are close to production of 90-nanometer, 80-nanometer, 55-nanometer is in development. We will, I think, embark upon 45-nanometer. I fairly assume we are going to leverage. We are somewhat different of course from the other Flash especially NAND Flash makers because we are moving from the logic manufacturing. So, our logic technology right now is in the 45-nanometers so, we are going to leverage the all the knowledge that we have learnt in the 45-nanometer logic technology development, and use them in the Flash technology area.

Okay and 45 will be, I presume it will be the immersion technology, you must only take affirmation?

Yes, 45-nanometer we will use quite extensively immersion lithography technology.

NOR 45 can we expect it will start by beginning of 2008?

For NOR?

NOR yeah.

No, I think, probably no, I don't have that of head of my -- of the top of my head but I don't think we will do that probably a couple of quarters afterwards.

Okay, thank you.

Operator, in the interest of time, we will allow one last caller.

Our final question comes from [Matt Gable with Weiss Advisors]. Please proceed.

Hi, thanks. Could you give some color on what happens with margins in Q2 on a sequential basis, I didn't quite understand last time it was explained?

We did not talk about any forecast or guidance for Q2. What we have said is I believe the inventory correction will come to the end in the first quarter and we are going to see by the end of first quarter, we are going to see the recovery and we also said the utilization in the margin will be better in second quarter.

Okay. Thank you, I appreciate it.

Ms. Ho, there are no more questions at this time.

Thanks for everybody for your participation. Thank you very much for your time. We are going to see you next quarter. Bye, bye.

Before we conclude TSMC's fourth quarter 2006 results web cast 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 have a good day.