3. Market Analysis Although the worldwide IC market contracted 10% in 1996, it rebounded in 1997 to register growth of 5.6%. Revenue in the memory market continued to decline, slipping 13% due to falling per-bit prices. However, logic component markets had growth rates between 10% to 20%. In 1998 the worldwide IC market is predicted to register overall growth of around 5% to 10%. The memory market is forecast to grow in 1998, fueled by the emergence of new applications, and double-digit growth rates are expected in the logic component markets. Over the years, TSMC has strategically managed its exposure in the memory market by limiting the proportion of memory manufacturing services to a certain percentage of total sales revenue. This policy has proven successful and in 1996 shielded the company from near free fall in the memory market. In 1997, the same policy also protected the company while the memory market continued to contract. TSMC will maintain this same policy in 1998 even as we work to expand our share of the emerging market for embedded memory products. In 1997 TSMC's customer base increased in the markets for Internet, digital consumer electronics, and wireless communication markets. Some of these new customers utilized very large volumes of wafers in 1997 and are expected to benefit TSMC increasingly over the next several years. Through 1998, TSMC will continue its marketing efforts,targeting customers in high growth segments of the logic component markets. In the long run, we at TSMC believe that foundry services will play an increasingly important role in the manufacturing sector of the worldwide IC industry. Fabless companies already depend on foundries, and integrated device manufacturers (IDMs) are expected to evolve into stronger and stronger business connections with foundries for IC manufacturing. Industry forecasts predict that by the year 2000, 15% of the world's IC production will come from foundries, and the level will reach 20%~25% by the year 2006. TSMC believes that it is in an ideal position to benefit from the current trend toward dis-integration and sales are expected to benefit positively from the rapid increase in sales of low-priced personal computers and multimedia products. Consumer demand is expected to impel our customers to integrate their chips and thus create a need for the higher capacity of our advanced technologies. TSMC hopes to be able to maintain high average selling prices for wafers as the company's production capacity evolves through more and more advanced technologies. TSMC fully understands that we may face a serious competition in the future. Therefore, to ensure TSMC's continuing leadership and profitability in 1998 and beyond, we determine to establish closer partnerships with customers and to provide the most advanced technologies and the most comprehensive services. In terms of the most state-of-the-art technologies, we will focus on the following technology offerings: (1) Advanced CMOS Logic Process TSMC began mass production using the 0.35um CMOS Logic process in early 1997 and by the end of the same year began using 0.3um. In early 1998, 0.25um CMOS Logic process will enter volume production, and the 0.18um CMOS Logic process will enter volume production in early 1999. The move into these advanced technologies will help TSMC customers develop extremely high performance highly-integrated chips and thus remain competitive in both performance and price. (2) Advanced Mixed-Signal Process To meet the demand for communication and consumer ICs in the mixed-signal market, by early 1997 TSMC had successfully developed the 0.35um double-poly, quadruple-metal process. This process makes it easier for TSMC customers to integrate digital-signal processors and/or media-processor chips with analog circuitry developed in the fast-growing multimedia market. The 0.25um mixed-signal process will be available in early 1998. (3) Advanced SRAM/Embedded SRAM Processes TSMC's 0.3um high-speed SRAM process became available to customers in 1997. The 0.25um process was ready in late 1997, and will begin mass-production in early 1998. On the embedded SRAM, the company has completed the development of the 0.35um triple-poly, quadruple-metal process and is already providing it to customers. The 0.25um Embedded SRAM will be ready at the same time as the 0.25um Logic. (4) Advanced DRAM/Embedded DRAM Processes In 1997, TSMC completed development of the 0.32um DRAM process. In the same year, TSMC also finished the development of the 0.35um embedded DRAM solution for production and will be formally released for production in 1998. This process offers great opportunities for TSMC customers in the markets of graphics, disk storage, communications, and consumer electronics. The 0.25um DRAM and embedded DRAM processes will also be introduced in second half of 1999. (5) Advanced Flash/Embedded Flash Memory Processes In 1997 TSMC finished the development of both the 0.5um logic-based double-poly, triple-metal, split-gate embedded Flash memory and the 0.5um mixed-mode triple-poly, triple-metal, split-gate embedded Flash memory processes. The embedded Flash memory process will help customers integrate Flash with logic, especially in uC, DSP, and other applications requiring high integration. The 0.35um Flash/embedded Flash memory development will be completed and available for production in 1998. TSMC also will have the 0.25um Flash/embedded process available in early 1999. (6) BiCMOS Process For customers manufacturing devices used in mass storage and wireless communication, TSMC began offering 0.8um BiCMOS (12 GHz) in 1996. (7) Design Services TSMC completed development of 0.35um standard-cell libraries in 1997. The 0.25um version will be ready in the first quarter of 1998. In addition, the 0.25um version of design kits and IP/megacells such as ADC/DAC, PLL, DSP core will be available in 1998 to help TSMC customers reduce time-to-the-market and to develop system-on-a-chip designs.