Welcome to TSMC’s second quarter 2007 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 webcast at www.tsmc.com and only in audio mode. (Operator Instructions) 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. Dr. Elizabeth Sun: Thank you, Jackie. 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, 2007; TSMC's registration statement on Form F-3 filed with the SEC on May 8, 2007; 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 statements, whether as a result of new information, future events, or otherwise. And now I would like to turn the conference call over to Ms. Lora Ho, our Chief Financial Officer and Vice President.

Thank you, Elizabeth. Good morning and good evening to everyone. Welcome to our second quarter 2007 earnings conference call. First, I will go over the highlights from our second quarter results. I will then give you our outlook for the first quarter 2007. Please also refer to the quarterly financial summary slides on our website. All dollar figures are in NT dollars otherwise stated. With that, let’s start with slide number 5. As we expected, the recovery of our business, which started in March, has continued through the second quarter and the momentum is expected to last through the third quarter. Total revenue came in at the high-end of our guidance to reach NTD 75 billion, down 9% year over year and up 15% Q-over-Q. We saw recoveries across all major applications, with communication and consumer segment growing at 25% Q-over-Q while computer segment grew at 13% sequentially. In terms of revenue by technology, the recovery from advanced technologies showed slightly stronger momentum during the quarter. As a result, revenue from advanced technologies accounted for 53% of wafer revenue, up 4 percentage points from the previous quarter. In particular, our revenue from 65-nanometer increased more than four-fold and accounted for 3% of our total wafer revenue, up from 1% in the first quarter. We expect the 65-nanometer revenue will continue to grow throughout the year. Gross margin was 43% for the quarter, up 5.1 percentage points Q-over-Q, mainly due to high utilizations and the lower depreciation expenses, offset in part by a lower ASP. Total operating expenses during the quarter were slightly higher than the previous quarter, largely due to increased R&D spending on 45-nanometer and 32-nanometer related projects. Operating margin was 33% for the quarter. Earnings per share were NTD 0.96, down 25% year over year and up 35% quarter over quarter. Now let’s take a look at the balance sheet. With continued positive cash flow generated from our operations, we ended the quarter with NTD 223 billion in cash and marketable securities, NTD 16 billion higher than last quarter. Turning to capacity and CapEx, total installed capacity for the second quarter was close to 2 million 8-inch-equivalent wafers. Our third quarter capacity will be about 10% higher than the last quarter. We expect our 2007 capacity to increase by 18% to reach 8.3 million 8-inch-equivalent wafers. We spent $756 million in CapEx during this quarter. Our full-year 2007 CapEx will remain in the range of $2.6 billion to $2.8 billion. Page 10 through page 13 of the slides break down our sales by technology application, geography and customer, which I will not go over in detail. With that, let me turn to the outlook for the third quarter of ’07. Based on current business and foreign exchange rate expectations, we expect our consolidated revenue to come in between NTD 85 billion to NTD 87 billion. This represents a Q-over-Q increase of 13.5% to 16%. In terms of margins, we expect our third quarter gross margin to come in between 43% and 45%, and our operating target margin to be between 33% to 35%. This concludes my remarks today and we will now open the floor for Q&A. Dr. Elizabeth Sun: Before we start accepting the questions from everybody, we actually have received quite a few questions in advance and I believe our CEO, Dr. Risk Tsai, will make some general comments regarding these issues first. Dr. Rick Tsai: Thank you, Elizabeth. What I would like to comment on are in two areas. The first one is the near-term outlook and the second one being the ASP. So let me start with near-term outlook. As Lora just mentioned in her talk, the recovery which started in March of this year for TSMC continued into second quarter and if you look at the guidance for our third quarter, you can see that we will have a pretty good growth in the third quarter also compared to second quarter, so we feel pretty confident about the recovery being in good shape. Then we look at closely at the inventory for the semiconductor company, especially from our customer base. I think it is fair to say that the inventory level has been improving among almost all of our major customers. I am talking about in terms of DOI, days of inventory. I think overall in general, the company inventory DOI has come down roughly 6% to 7% between the end of first quarter and the end of second quarter. Some of the customer’s inventory days has really come down to the level that was even lower than two years earlier. It seems to us that the inventory has been in reasonable control, our customers have exercised very good discipline in managing their inventory, and we believe the inventory correction that has been going on during the fourth quarter and first quarter this year is definitely going away. Then we look at from an end-market demand point of view. As most of you probably know, the PC shipment in the second quarter has been pretty strong, slightly better than the historical second quarter seasonal pattern. For the handset, I think the shipments for the first-half also have been very good. We have I think -- about two times ago, we talked about the unit shipment forecast for TSMC. We looked at both PC and handset shipment growth rate to be around 10% to 11% for the year 2007. We now believe not only those numbers, 10 and 10 as a level, and we even upped the growth rate for both PC and handset by a couple of points. That is how we look at them now. For consumer electronics products, such as a game or TV or the DVD, growth has been also on track. So from that angle, I think from a demand point of view, it seems consumers have been buying continuously, even with the housing problem in the United States and also a higher gas price at the pump. Now we go back to our outlook for the semiconductor growth for the industry in 2007. We have been talking about a growth rate for 2007 to be between low-single-digits to mid-single-digits. What we believe is basically the growth rate for 2007 will be about 3% to 4% for the semiconductor industry. We maintain the view and you probably also have noted that many forecasting agencies have lowered their forecast number now to around that range. As to the foundry sector of the semiconductor industry, we believe the foundry sector will not perform as well as the semiconductor industry, mainly because of the inventory correction early in the year. If you look at the first quarter numbers for the foundry sector, you can tell very clearly they have under-performed the industry overall by quite a gap. It will be quite difficult for the whole foundry sector to grow in such a way to catch up with that of the semiconductor industry in 2007, so we do not expect the foundry industry to perform as well as the semiconductor. So if you put all those views together, I think you probably can go back and play the numbers because by the end of the meeting, you will have also a third quarter number guidance and you can calculate our view for the fourth quarter -- without giving any guidance -- our view for the fourth quarter is we do not really expect to see any significant impact in the negative direction. That is the view for the short-term, for the near-term outlook from TSMC. Now let me comment on the ASP. Many of you have asked that the wafer ASPs have declined more in the recent years -- by that, we mean 2007. We’d like to give you some of our views on that. Yes, you are right -- the wafer ASPs have declined more in recent years. Why? I think if we look at the bigger picture from an industry point of view, the first thing we have noticed is many of our customers and I probably would say most of our customers have moved into a product area that is more consumer in nature. I am talking about in a broader sense, not just TVs or DVDs or game consoles, et cetera, et cetera. Of course, those are consumer products but in a broader sense, the handsets. Most of the handsets now are purchased by the consumers and used by the consumers and not just for the -- but also for many of the -- they are for fun among different people. So all the components in the handset in a broader sense can be defined as consumer in nature. So it is pretty obvious many and most of our customers are either migrating into these sort of areas or diversifying into them. And as we also know, most of the consumer type of products, for them there are two major characteristics. One, the cost, or maybe I should say price pressure, and two, the cycle time, very short cycle time that is needed so that the people can respond to the very sometimes volatile but certainly very exciting cycles from the consumer products. As a result, TSMC has been working closely with our customers so that they can win in their end markets and because of the pricing demand in the end market, TSMC as a result have worked with our customers so that they can sell their products and they can win in their market so they can have a reasonable margin and we can have a reasonable margin. That is one of the major reasons for the ASP declining more in the recent years. Also during the past couple of years, TSMC has been looking at different other growing growth areas, which we have not penetrated before. Some growth areas have lower ASPs and some of those areas have grown quite a lot just during the last year. This contributed also to a lower mix, lower blended price for our product portfolio. Of course, the reason we have been doing that is to get higher growth in our revenue, and as a result we get a better, more net income and we have better ROE and better earnings per share. Price of course is not just determined by the end market, by of course the applications. Certainly price is a strong function of the short-term supply and demand. Price also is a function of the value proposition from a company like TSMC. The values such as technologies, and I would say differentiating technology, in particular, like the services, like the ability to enable the customer a fast time to market -- all those things together determines at the end of the price of what we sell to our customers. Now let me go to some more specifics and a short-term outlook for the pricing for the second-half of 2007. The second-half 2007 pricing decline has moderated. The [inaudible] of course has been going up since the second quarter. That certainly has helped somewhat. We expect the second-half pricing decline rate to be about 60% of the decline rate of the previous several quarters. That’s my comment on both near-term outlook and ASP. Thank you. Elizabeth.

Jackie, I think we can open the floor for questions now.

(Operator Instructions) Your first question will come from the line of Bhavin Shah from JP Morgan. You may proceed.

Thank you. I just wanted to talk a little bit about whether or not in the future there is a scope for ASP declines to be more moderate. In other words, when you look at new areas of opportunities, especially in the processors and so on, do you think there is a chance -- obviously it is too far out but do you think there is potential for the ASPs to fall at a slower pace because of that? Dr. Rick Tsai: I think that certainly probably will help the mix and the blended ASP. Whether that will raise the ASP, I think that really depends on how successful we will be in penetrating the market and in ramping the volume. We certainly are driving to penetrating that market very hard and we hope that can really help.

When you mentioned that foundries will under-perform the semiconductor industry this year, do you still expect the foundry industry to have I guess small growth? Dr. Rick Tsai: Yes, I think probably flat to -- around flat.

All right. Okay, thank you.

Thank you. Your next question will come from the line of William Dong from UBS. You may proceed, sir.

Good evening. I just wanted to touch base on the margin side and the pricing pressure. How much does your competitor play a role into the recent downward trend in pricing? Dr. Rick Tsai: I think competitors always play a role in the pricing. I would view that in the general picture of supply and demand, and also a function of how strong or how weak their capacity of being loaded -- all those things. These are all commented in our remarks earlier by --

But in terms of technology, do you feel the competitors have narrowed the gap during this transition to 90 and 65? Is that one of the reasons for more pricing pressure? Potentially, could we actually once again widen the technology gap when we go to 45? Dr. Rick Tsai: I believe the 90-nanometer technology node, the gap was narrowed somewhat. I believe also that we have done quite well at 65-nanometer. We learned a few lessons ourselves. We have done quite well in the 65-nanometer. As to the 45-nanometer, I actually believe that we are stretching, we are enlarging our gap both at the low-power and the general versions of our technology.

Thank you very much.

Thank you. Your next question will come from the line of Daniel Heyler from Merrill Lynch. You may proceed, sir.

Thank you. I have a question on your internal metrics that you are focusing on. Over the years, TSMC has talked a lot about ROE and as the business model appears to be changing somewhat due to much lower capital requirements, CapEx to sales is falling and your I guess your competition from the Logic IBM has been initiating in those cycles seem to be less volatile. Have you thought about your internal metrics? Do you still focus on ROE or are there other things that you look at to measure your internal performance?

I think for the company overall, we’ll be using ROE and we were saying to close the cycle -- above 20% as our goal for company ROE. When we do the day-to-day operations, when we manage the capacity investments for any new product, new segment we want to get into, ROIC is the one we use to measure the financial KPI. Using ROIC, actually it has two parts, the margin part and also the [inaudible] productivity. Margin is always a combination of price and cost. [inaudible] productivity is how fast we can ramp the technology in any new fab. So we’ve been monitoring [inaudible] productivity quite seriously and we are seeing there’s improvement overall for any new project, new fab we get into. [inaudible] productivity has improved over time, so we are seeing also we have steady improvement on ROIC company-wide. So I would say that ROIC has been widely used when we do some internal measurements. I cannot share with you our internal ROIC metrics. It is generally much, much higher than our weighting average of cost of capital.

You anticipated my next question because I was going to ask you if you could give some guideline in terms of perhaps a long-term ROIC target or where you think are now relative to the past? What have been the major drivers? Has it been [inaudible] productivity or margins or -- what is really driving the high returns?

We look at two things, also the margin is very important and also the per K investment on each capacity we add into the fab and how do we utilize that fab. So if you look at our history, any utilization year over year has been quite stable and improved over years. I recall recently we have looked into some statistics. In the past six, seven years, our utilization has been above 90%. If you compare that to far earlier, it was only about 85%. So the emphasis on [inaudible] productivity has been -- has helped to improve overall ROE and ROIC.

Is it fair to say that 30% to 40% through the cycle is ample, or are you looking above that?

It depends on which technology you are looking at. I think generally speaking our 8-inch fab has really a higher ROIC because the investment capital has become smaller as depreciation goes down, while the advanced technology ROIC is at a reasonable level but it will go up as we ramp more and enlarge our capacity. So company wide, everybody uses a different formula to calculate ROIC but based on our internal numbers, our ROIC for last year was 34% and this year has not been a great year but it is still in the high 20s. Going forward, we believe that number is going to maintain or even higher.

Thank you.

Thank you. Your next question will come from the line of Shailesh Jaitly from Nomura Securities. You may proceed.

Thanks for taking my question. Firstly, the nature of capacity additions, if you could comment. If I recall, last conference call you mentioned that quite a big chunk of the capacity additions were going to be on 200 MM and since then, there’s been a lot of market chatter that you could be looking at acquiring some of the existing or older assets from other companies. If you could provide some more color on that. Dr. Rick Tsai: You are asking about the 8-inch capacity?

That’s right. Dr. Rick Tsai: You are right. We talked about in the last conference call that TSMC is now paying a lot more attention to the mature technology business, mainly because there is -- it’s a good business and they can be also a growing business. As a result, we have changed our previous practices. Previously, we really have after a node passed its “peak” use, we simply stopped buying capacity for those technology nodes. We have found that through much business development work, we could generate more business. During the last -- I would say last three to six months, we have been looking at opportunities in the market. There is some report in the press, some more accurate than the others. I cannot comment on each of them but what I can say is that we are looking at opportunities. We are looking at cost-effective 8-inch equipment and when we make some decisions, we certainly will communicate to you people.

These opportunities, they are limited to Asia or are you looking beyond Asia as well? Dr. Rick Tsai: We are looking all over. The important thing is whether they are cost effective.

On 65-nanometer engagements, that is about 3% of your revenues in the current quarter. If you could comment on the number of customers that contributed to that and how it is expected to change as you get into 3Q. Dr. Rick Tsai: You’re testing our ability -- without going to the document, I think it is around -- all together around 10, give and take. Of course, there is the distribution amount. There are probably three or four, three to five large ones, some smaller ones.

Three to five you said, large ones, is it? Dr. Rick Tsai: Yes, three to five I would say have pretty good volume.

One last question that pertains to your prepared remarks, whereby you mentioned that you are seeing growth pretty much in all the three areas as we get into 3Q. You see more wireless and consumer-related. In the wireless segment, is the growth sketchy or you are seeing the growth all across the board? Because so far the words that have come, inventories have not gone down to the desired levels across the board. Dr. Rick Tsai: You are talking about wireless, you are talking about the handsets or --

I am talking about the handsets, yes. Dr. Rick Tsai: We reported basically I think the wireless, which includes handsets and some of the wireless network, has grown quite a lot in second quarter and ought to continue to grow in the third quarter, but not at as high a rate as that of the second quarter. If you go down to the detail as to who is doing better, there is a distribution. As you know, the handset makers are having significant -- maybe I should say redistribution of the market share. That certainly is having a pretty significant impact on some of the customers. Not everyone is doing well but overall, the handset growth is still pretty good.

Would it be fair to assume that your handset chip customers as a whole are tracking lower than expectations as compared to what you would have thought three months back? Dr. Rick Tsai: No, I would not say so. I’d say overall it’s about the same. Their third quarter numbers are pretty much in line as to compared to what they told us three months ago what their third quarter number would be -- again, give and take but it is not that they are changing their numbers in a significant manner one way or the other.

Thanks a lot.

Thank you. Your next question will come from the line of Mark FitzGerald from Banc of America Securities. You may proceed, sir.

Thank you. A couple of questions, the first one is I am curious if you guys have a first swag at 2008 chip growth rates. Given that you have under-performed or the foundry industry under-performs in 2007, if you think you would outperform in 2008? Dr. Rick Tsai: Mark, we have not finalized our look at 2008. I can give you some color. I don’t think I can give you any numbers now. We believe for the semiconductor industry 2008 will be better than 2007 and the foundry sector certainly will be better also. I would say we expect the foundry sector to do better next year compared to the semiconductor industry as a whole.

And just quickly on the entry into the CPU business, do you have to step up your CapEx investment or your R&D investment significantly outside of the percentages that you’ve been running at to enter that business? Dr. Rick Tsai: No, not as of now. I think currently we’ve been working with customers or potential customers based on our available technologies. We may have to tweak or modify our technology of our [system] somewhat but they are still within -- we can use the same set of equipment to achieve that. There is the possibility that we may need to add some CapEx when the high K dielectric and metal gear technologies are ready but that is a time away. So basically we are going to work in that area. Once we have the demand we will prepare the capacity that the demand requires.

One last quick one -- when you look out at the 45-nanometer technology, the design costs, particularly on the logic side, start going up very sharply. Do you see that as a hurtle for some of your fables logic manufacturers to move aggressively in there? There is some talk of a lot of logic companies staying at 65-nanometers longer than they have historically done, would stay at a node. Dr. Rick Tsai: I think the design cost is going up. I think this has been discussed on many different occasions. But on the other hand, I also believe that the engineers have been working also quite well to lower that hurtle as we move. TSMC has been investing in this area very aggressively, to lower the design barrier. Whether some customers will stay at 65-nanometer longer or not, again I think every customer, depending on where they are at a certain node, they may -- I think what I can comment is now it seems not very common but probably more common now for customers sometimes to skip nodes. Some customers will skip say, for instance, to go directly from .132 to 65 and other customers, I won’t be surprised if they are at 90 and they say hey, we probably want to jump to 45. This phenomenon does show up from time to time.

Thank you.

Thank you. Your next question will come from the line of Steven Palao from HSBC. You may proceed.

Thank you very much. Two questions, really along the same theme. First the easy one; what is your outlook for the technology mix in the third and fourth quarter? Perhaps more importantly, can you comment about the moderating ASP declines? What is your assumption behind that? In the second quarter you saw 35% plus quarter over quarter growth in 90-nanometer, which likely means the organic pricing pressure must be fairly intense and it is not just a product mix. Can you comment on that?

Your first question asked about our technology mix. In the second quarter, our advanced technology accounts for 53% of our total wafer revenue. That number is going to go up from third quarter into fourth quarter, probably about 50%. I want to mention the 65-nanometer, where we have very good progress, and in the third quarter we expect the contribution of wafer revenue will be bigger than 5% and fourth quarter will be bigger than 10%.

Okay, and then the thoughts on organic versus mix related pricing pressures in the third and fourth quarters? Dr. Rick Tsai: I think I have commented earlier that the price decline rate is about 60% of the decline rate of the previous several quarters and this price covers I think definitely for organic price.

Thank you.

Thank you. Your next question will come from the line of Donald Lu from Goldman Sachs. You may proceed.

My first question is when you say the decline of ASP is 60% of previous quarters, can you specify how many quarters? Is that from five or six quarters? The second question is what should be the new tax rate this year and also more importantly, next year after you start to include employee stock bonus into the P&L? Thanks. Dr. Rick Tsai: Donald, you asked about how many quarters, the average?

Yes, because I looked at your average quarterly ASP trend. It really jumps around, so it is kind of depends on which time period are we looking at? Dr. Rick Tsai: About five to six quarters.

Five to six -- thank you very much. Dr. Rick Tsai: And the second question?

The second question is on the tax rate.

You asked for the tax rate, especially after 2008 when employee bonus will be spent, I would suggest you use from next year, use about 10% or 11% effective tax rate, including the tax expense and offset by tax credits for your models.

So 10% to 11% effective tax rate?

That is the combination of tax expenses minus the tax credits. If you look at tax expense itself, this year is around 16%. That number is going to go up slightly in 2008 and stay at the same level or slightly down after 2009. So I would suggest you, including the tax credit, use 10%, 11% for your model.

Thank you. How about Q3 and Q4 this year?

We look at tax on a total year basis and the quarterly number doesn’t really mean anything, so you can -- we just spread out the same rate for every quarter.

Okay, great. Thank you.

Thank you. (Operator Instructions) Your next question will come from the line of [Manish Goyle] from Crest Investments. You may proceed.

My question is on the microprocessor business. Do you think the microprocessor business will have similar return characteristics relative to your corporate averages whether I look at a return on investment or I look at margins, operating margins? Where do you have to invest initially to ramp that business? Dr. Rick Tsai: Where do we need to invest? I believe, I think we talked about this somewhat earlier, I believe we have invested, at least to a very large degree, of what is needed at 45-nanometer and also going forward, 32-nanometer technology. Those are moving quite well. We are also I think accelerating our work in the high K and metal gate area, which certainly will be in the POR for 32-nanometer technology but maybe also with our 45. These are probably some of the extra investment. I’m not even sure I want to call it extra because these technologies are pretty much worth being conducted -- I mean, the development work is worth being conducted by our R&D during the past couple of years already. I think in order to move into the microprocessor arena, I think our R&D dollars that you are seeing from our financial report pretty much covers all the investment already from a development point of view. From a capacity point of view, there will be -- there may be some incremental investment from high K dielectric but overall if you look at the lithography, the big ticket items, our lithography design rules are quite competitive. There is certainly no need for us to have any additional investment from that point of view.

And on profitability? Dr. Rick Tsai: Profitability I think -- well, we are still working on that. I don’t think it would be appropriate for me to comment on that in this forum.

Can you directionally give some idea as to whether it will be dilutive or accretive to your averages? Dr. Rick Tsai: I would say probably -- certainly I would work towards of course the accretive side.

Thank you.

Thank you. Your next question will come from the line of Randy Abrams from Credit Suisse. You may proceed.

Good evening. I wanted to ask a follow-up on your operating margin guidance. For third quarter, what is driving the acceleration in operating expenses, which look like they are accelerating to grow in line with the mid-teens revenue growth?

Our operating expenses, if you look at the history normally accounts for 10% of our revenue. That trend is going to continue.

Okay, but it looks like it is accelerating sequentially, where you are guiding up about 15% for revenue but your delta between gross and operating margin, you are not necessarily getting operating leverage with that revenue growth. Dr. Rick Tsai: R&D certainly plays a role there. We have a fairly -- well, R&D expense, R&D investment continues to increase quarter to quarter, from first quarter to second quarter, second quarter to third quarter. The increment between second quarter and third quarter is higher compared to first to second. This increment will slow down somewhat from third quarter to fourth quarter. I think we probably have also some opening expenses with our Fab 14 stage three is being started up.

Thanks a lot for that. Just one question on the NOR flash business; given some of the significant price pressure in that market, is that changing your view at all in your ability to profitably address that market? Also, do you see that opportunity potentially slowing down as your customer brings up their internal 300-millimeter capacity? Dr. Rick Tsai: We’re in the business for the long haul. We really do not have an illusion when we move into the business. This is the memory business. We know that in the memory business, the price can go up and down and certainly it has gone through a period of -- I think we work, but still we work very closely with our customer and then we can go, we go through the period for both, which turn out to be mutually beneficial. It is definitely a positive, reasonable margin for us. It’s not great for sure but it is positive and reasonable. I think going forward, I think if you look at our customers’ growth plans, they are for the future, not just during the next quarter or two quarters. I think it is pretty clear that there is enough -- there is quite a bit enough upside for both of us to enjoy and to penetrate. I have no plan whatsoever to change, to have any change of course.

Thanks a lot.

Thank you. Your next question will come from the line of Daniel Heyler from Merrill Lynch. You may proceed.

A couple of quick questions; first, Lora, could you tell us what your exact third quarter depreciation and amortization number will be?

Third quarter depreciation will go up compared to second quarter.

Can you give us a number?

Actually, it will be up by about 2% compared to second quarter.

Okay, and the fourth quarter?

It will further go up about 3%.

Okay. What I was wondering is your capacity growth of 10% in the third quarter, is it fair to say that almost all of that is 65-nanometer?

Yes, mainly for the Fab 14 for advanced technologies, including 65-nanometer.

And what is the average cycle times on that? Is it running say eight to 10 weeks?

You mean cycle time?

Yes, production cycle times, on average. Dr. Rick Tsai: On average -- I think it is about -- let me think. It is less than 10 weeks for sure. It is about -- depending on the products, but the average I would say is seven weeks to maybe --

So is it fair to say, I guess the capacity that you are adding, that the wafer ends will occur this quarter since you are adding capacity now and depreciation has started, but then the actual revenues from that 10% increase, the majority of that 10% increase will occur in the fourth quarter. Am I thinking about that the right way? So therefore your carrying costs per revenue shipped are higher in the third quarter and that should reverse in the fourth quarter? Dr. Rick Tsai: I think when we recognize the capacity in our capacity chart we started the depreciation already.

So you start with the actual production, with the wafers starting production, correct? Dr. Rick Tsai: Yes.

Actually, it will start when we install the capacity in the lines.

When you install capacity?

Yes, regardless whether we use it, depreciation will start.

So as the dollars of those wafers come off the line, your actual revenue per depreciation is going to rise, right? Because you actually recognized the depreciation in the third quarter but a lot of the revenue will be recognized in the fourth quarter. Is that a fair assumption for --

Yes, that is probably true.

Okay, thanks.

Thank you. Your next question will come from the line of Mike McConnell from Pacific Crest Securities. You may proceed.

Thank you. Thank you for the comments regarding the outlook for pricing in the second-half of the year and the reasons why. I guess if I look at this from a longer term perspective, a lot of the trends you’ve talked about with the shift to consumer, the higher percentage of memory or new products that are coming into the factories and what effect that is having on pricing, I guess if we look at this from a longer term view these seem to be trends that will continue. How will the company try to stabilize pricing in the face of these trends which don’t seem like they are going to be going away anytime soon? Dr. Rick Tsai: I think the question is you have to look at margins, you have to look at return on equity, earnings per share all together. As the pricing is the main factor, we certainly -- I think the trend is there. We are not trying to say the trend will reverse. The trend is there. From a pricing point of view, what we need to really strive for is to whether to improve to continuous trends, especially in our value, whether we can get a better, higher premium. But the other major ingredient of course is the cost. Whether we can manage our fixed costs, whether we can be very productive in our capital, whether we can control our cash cost -- I think if we can manage our cost decline rate versus the price decline rate, then we have a good shot at managing our profitability. We have to manage both profitability and growth and at the end of the day, we hope to deliver to the investors a better ROE and earnings per share for all those investments.

Maybe a little bit more near-term to the second-half, you said that you thought that pricing pressure would alleviate 60% relative to the first-half of the year. Is that just a function of higher utilizations? Why the statement, I guess? What are the reasons behind that? Dr. Rick Tsai: I think usually the two reasons, one is the more seasonal pattern. Usually in first quarter we see a higher decline rate, and two basically short-term supply demand. Utilization being higher renders a more moderate pricing environment.

Final question just for a line item for modeling purposes; your best guess just with net non-operating income for Q3 and how should we look at that as far as out as we can?

You are asking for non-operating income?

Correct, for Q3.

Second quarter we have positive operating income and that will not happen in the third quarter. Third quarter non-operating income will be smaller than second quarter.

Will we be back at Q1 levels then, just directionally?

It will be smaller than Q1 and Q2 levels.

Okay. Thank you very much.

Jackie, in the interest of time, I think we will just have one question from one caller.

Thank you very much. Your next question will come from the line of Bhavin Shah. You may proceed.

A simple question -- Lora, you mentioned that you achieved using your internal measure of ROIC high 20s this year and 34% last year. And then you said you expect to achieve that in the future. What number were you referring to?

I don’t know what method you used to calculate ROIC. I have noticed that different analysts use different methodologies. Our methodology however shows 34% last year and high 20s this year. Based on our methodology, we believe that number, ROIC, is going to steadily improve year over year.

Right, so you expect to improve from high 20s, using your methodology?

Yes.

Okay, sounds great.

Jackie, I think we are done with the Q&A session.

Thank you very much. I’ll turn it right over to you for closing remarks.

Thank you all for everybody’s participation and thank you for your time. We look forward to talking to you next quarter. Bye-bye.

Thank you, ladies and gentlemen, for your participation in today’s presentation. This does conclude today’s conference call. You may disconnect and have a wonderful day.