ANNUAL REPORT 2006
For the Year Ended March 31, 2006

Innovative Spirit
Geared for Growth

CONTENTS
1 TEL Values

Innovative Spirit

Geared2 Consolidated Financial Highlights
4 Tokyo Electron at a Glance
6 To Our Stakeholders
9 Interview
Tetsuro Higashi, Chairman & CEO
13 Interview
Kiyoshi Sato, President & COO

Profile16 Environmental, Health and Safety Activities

supplier of semiconductor production equipment

18 Corporate Governance(SPE) and flat panel display (FPD) production

20 Board of Directors, Statutory Auditors andExecutive Officers

equipment. We provide a broad lineup of products

21 Intellectual Property Report

productivity and related services to semiconductor

Tokyo Electron Limited (TEL) is a world-leadingthat offer superior process performance and highand LCD panel manufacturers around the world.

Financial Section

An unwavering commitment to customer satisfaction

22 Management’s Discussion and Analysis

that dates back to our founding in 1963 has cemented

29 Consolidated Six-year Summary

our position as the market leader. Our competitive

30 Financial Statements

strength lies in our capability to proactively and precisely
identify real customer needs and respond to them with

44 Tokyo Electron Global Operations
45 Investor Information

cutting-edge technology and products.
With a global network that spans Japan, the U.S.,
Europe and Asia, we are opening up new frontiers for
digital networks by contributing to enhancing our customers’ production lines through untiring dedication totechnology innovation.

Disclaimer Regarding Forward-looking Statements
Matters discussed in this annual report, including forecasts offuture business performance of Tokyo Electron, management
strategies, beliefs and other statements are based on Tokyo
Electron’s assumptions in light of information that is currently
available. These forward-looking statements involve known or
unknown risks, uncertainties and other factors that could cause
actual results to differ materially from those referred to in theforward-looking statements.
Factors that have a direct or indirect impact on Tokyo Electron’s
future performance include, but are not limited to:• Economic circumstances in Japan and overseas, consumption
trends, and large fluctuations in foreign exchange rates• Changes in semiconductor and FPD markets• Changes in the demand for products and services manufactured
or offered by Tokyo Electron’s customers, such as semiconductor manufacturers, FPD manufacturers and electronics makers• Tokyo Electron’s capabilities to continue to develop and provide
products and services that respond to rapid technology innovation and changing customer needs in a timely manner
For details, please refer to Business-related and Other Risks on
page 27.

for Growth
TEL Values
We have defined and built TEL’s values over the years,
and we will continue to refine and build on them in the future.

Pride
We take pride in providing high-value products and services.
• We offer our customers cutting-edge technological products, alongwith the highest level of quality and technical service, in the pursuitof total customer satisfaction.
• We consider profit to be an important measure of value in our
products and services.

Challenge
We accept the challenge of going beyond what others are doingin pursuing our goal of becoming number one globally.
• We view changes as opportunities, and respond to them flexibly
and positively.
• We are tolerant of failure, and consider it important to learn from theprocess and results.

Ownership
We will keep ownership in mind as we think things through,and engage in thorough implementation in order to achieve
our goals.
• We always have an awareness of problems, and tackle challenges
with enthusiasm and a sense of responsibility.
• We make decisions quickly, and do what we consider to be thebest course of action.

Teamwork
We respect each other’s individuality and we place a highpriority on teamwork.
• We create a workplace with an open atmosphere and positive
communication.
• We establish relationships of trust with our business partners inorder to facilitate mutual growth.

Awareness
We must have awareness and accept responsibility for our
behavior as respectful members of society.
• We strictly comply with laws and regulations and the rules of society.
• We give top priority to safety, health, and the global environment.
• We strive to become a company that local communities hold inhigh esteem.

1

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

CONSOLIDATED FINANCIAL HIGHLIGHTSFY1999FY1997■ Decline in semiconductor capital investment
due to an oversupply of DRAM.

FY1998■ Commenced preparation
for the 300mm era,completing the Process
Technology Center (nowLeading-edge Process
Development Center) inYamanashi Prefecture,
Japan, to support equipment development for
300mm wafers.
■ Asian economic crisis
begins in second half offiscal year.

■ Semiconductor manufacturers slash
capital investment in response to the
Asian economic crisis and another DRAM
supply glut.
■ Introduced corporate governancereforms that included reduction in thenumber of directors, establishment of aCompensation Committee, andseparation of duties of directors andexecutive officers.

FY2000■ Semiconductor supply-demandbalance improves as Asian
economies recover. Capital
investment in semiconductors
picks up steam.

1997

1998

1999

2000

For the Year:Net sales .............................................................
Operating income (loss) .......................................
Income (loss) before income taxes .......................
Net income (loss) .................................................
Depreciation and amortization .............................
Capital expenditures ............................................
R&D expenses .....................................................

¥432,785
60,38954,222
29,975
10,16718,456
20,988¥455,585
63,29656,06030,00912,65233,302
26,813¥313,820
6,383
6,038
1,866
17,921
23,47826,842¥440,729
35,816
29,68919,84819,44618,99937,135At Year-end:
Total assets .........................................................
Total shareholders' equity ....................................

¥387,077
207,476¥493,600
261,009¥414,903
257,716¥499,499
273,603

Per Share:
Net income (loss) — Basic ...................................
Cash dividends ....................................................

¥ 181.97
28.00¥ 174.68
30.00

¥

10.70
12.00

¥ 113.53
14.00

Number of employees .........................................

6,277

7,287

7,835

8,946

Years ended March 31

Notes: 1. U.S. dollar amounts are translated from yen, solely
for convenience, at the prevailing exchange rate
on 31st March, 2006, of ¥117.47=U.S.$1.
2. Per share amounts for fiscal 1997 were restatedto reflect a 1.1-for-1 stock split.
3. Effective from fiscal 2005, the Company made certain changes in accounting policies as discussed
in the notes to consolidated financial statements.

Net Sales(Millions of Yen)

1,000,000
750,000

635,710

673,686

529,654500,000

417,825

460,580

250,000
0

2002

2

2003

2004

2005

2006

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

FY2005

FY2001■ Tokyo Electron selected for inclusion in the
Nikkei 225 index.
■ Market entered a period of brisk IT investment.
■ Expanded manufacturing capacity for
300mm equipment.
■ Acquired Timbre Technologies, Inc., a U.S.based firm with cutting-edge metrology
software technology.
■ Posted record net sales and net income.

FY2002■ IT bubble bursts triggering
rapid market deterioration.
■ Closures and consolidationsof manufacturing facilities.

■ Cash flow improves significantly as restructuring initiatives start to yield benefits.
■ Changed accounting policies as discussed in
the notes to consolidated financial statements.

FY2003■ Booked ¥20.6 billion in
restructuring-related expenses.
■ Established Tokyo Electron(Shanghai) Limited to start
direct operations in China.

FY2006■ Business expanded, lifted by active
investment in semiconductor memory
production facilities.
■ Revised dividend policy and reviewed
the directors’ remuneration system.
■ Established Tokyo Electron Korea
Solution Limited to strengthen postsales business in South Korea.

FY2004■ Established TEL Technology Center, America, LLC(TTCA) in the U.S. to conduct research and development of advanced semiconductor materials andprocesses (to participate in the Albany NanoTech
project, the R&D support program promoted by the
New York State Government).

Thousands of
U.S. dollars

Millions of yen

2001

2002

2003

2004

2005

2006

2006

¥723,880
121,086
99,13262,012
21,67949,403
52,911¥417,825(18,310)(22,919)(19,938)
26,29430,94653,827¥460,580
1,119(23,010)(41,554)
27,374
12,35950,123¥529,654
22,28014,936
8,297
24,963
11,00744,150¥635,710
63,98355,77561,601
21,4639,876
43,889¥673,686
75,70375,32848,006
19,17013,33549,182$5,734,965
644,446
641,256
408,663
163,191
113,517418,673¥729,511
333,281¥556,915
307,579¥524,901
252,904¥561,632
275,800¥644,320
332,165¥663,243
376,900$5,646,063
3,208,480

Yen

U.S. dollars¥ 353.76
38.00¥ (113.85)
8.00¥ (238.57)
8.00

10,236

10,171

10,053¥Net Income (Loss) per Share

46.37
10.00

¥ 343.63
45.00¥ 267.61
55.00

8,870

8,864

8,901

$

2.28
0.47

Total Shareholders’ Equity and ROE(Yen)(Millions of Yen)

400

(%)

500,000

343.6325

20.3
376,900

400,000

267.61300

20

307,579
252,904

300,000

275,800

332,165

15
13.5

200
200,000
46.37

100

10

100,000

5
3.1

0

0
–113.85–238.57

2002

2003

–300

0
–6.2

–14.8

–15

2004

2005

2006

2002

2003

■ Total shareholders' equity
ROE

3

2004

2005

2006

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

TOKYO ELECTRON AT A GLANCE

Summary of Business
Semiconductor Production Equipment

Net Sales
Effective from fiscal 2005, the Company
made certain changes in accounting policies
as discussed in the notes to consolidated
financial statements.

72.3%(Millions of yen)
700,000

673,686

FPD Production Equipment

635,710600,000

12.0%
500,000

400,000

486,883

Tokyo Electron supplies flat panel display (FPD) production equipment that is used to
manufacture displays for PCs, LCD TVs and other electronic devices. This equipment is supplied to LCD panel manufacturers concentrated in Japan and elsewherein Asia. With its outstanding products and service support, Tokyo Electron is able torespond to customers’ pursuit of high quality and lower costs.
Fiscal 2006 Overview
Sales in this division were ¥81.2 billion, an 8.2% year-on-year increase.
Due to the rapid uptake of large-screen LCD TVs by ordinary households, LCD
panel manufacturers ramped up capital investment to boost production capacity.
Sales to Taiwan were particularly strong in this environment. By generation, sixthgeneration equipment contributed significantly to sales, while sales of models forseventh-generation glass substrates rose sharply.

Computer Network

457,191

300,000

2.6%

200,000

75,038100,000

Tokyo Electron supplies a wide range of semiconductor production equipment (SPE)and provides outstanding service support to the world’s manufacturers of semiconductor devices. Tokyo Electron’s products and technologies support high productivity and diverse customer needs and are thus indispensable in the manufacture ofincreasingly sophisticated semiconductors.
Fiscal 2006 Overview
Division net sales were ¥486.9 billion, a 6.5% year-on-year increase.
The past fiscal year saw strong demand particularly for semiconductor memories
on the back of surging demand for portable music players and other digital consumer electronics, in addition to PCs and mobile phones. Reflecting this demand,
semiconductor manufacturers invested heavily in increasing production capacity. Inturn, this generated brisk inquiries for the Company’s products.

81,176

15,966

17,497

86,24986,881

2005

2006

0

Tokyo Electron delivers business solutions for the broadband era with a wide
assortment of superior network-related and other products that cater to the needs ofthe time. Backed by a worldwide marketing organization that enables the Company
to stay abreast of the latest technological developments around the globe, Tokyo
Electron provides integrated solutions from product introduction to support.
Fiscal 2006 Overview
Division sales were ¥17.5 billion, an increase of 9.6% compared to the previous
fiscal year.
Among SAN (Storage Area Network)-related products, sales were strong of fibre
channel fabric switches and other products that form the platform technologies for
network construction. With respect to network-related products, business wasstrong for products that create highly secure websites.

Electronic Components

12.9%

In this segment, Tokyo Electron Device Limited (TED) is developing a new businessparadigm consisting of two functions. One is as a distributor of a wide array ofsophisticated electronic components from around the world. The other is a “development business,” whereby TED designs and develops components on contract
according to customer needs as well as develops its own products.
Fiscal 2006 Overview
Sales in this division were ¥86.9 billion, a 0.7% year-on-year increase.
In semiconductor products, which account for approximately 90% of sales in thissegment, sales of products for factory automation and for cell phone base stations werefirm on the back of higher capital investments. Furthermore, sales of products usedin flat panel TVs and car navigation systems were solid as consumer spending grew.

Besides the aforementioned businesses, theCompany recorded sales in the Others
business of ¥1,249 million in fiscal 2006,
compared with ¥1,266 million in fiscal 2005.

4

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

Main Products

Sales by Region (Millions of yen)

• Coater/Developer• Spin-on Dielectric Coater• Plasma Etch System

31,131
69,186108,314

Dielectric Etch System, Silicon Etch System
110,646• Thermal Processing System• Single Wafer Deposition System
CVD System, Plasma Processing System
Plasma Etch System
TeliusTM• Surface Preparation System
Auto Wet Station, Single Wafer Cleaning
System, Pre-clean System, Scrubber System• Wafer Prober• Imported Products

Coater/Developer
CLEAN TRACK™ LITHIUS™

66,94871,05245,04531,12762,72593,272

112,455

142,173

2005

2006

• FPD Coater/Developer• FPD Plasma Etch/Ash System■ China & Others■ Taiwan■ Korea■ Europe■ North America■ Japan

2,162
8,977
40,36730,845

FPD Plasma Etch/Ash System
ImpressioTM

14,152

16,61821,06422,0292005

2006■ China & Others■ Taiwan■ Korea■ Japan• Business Network & Security Solutions• Storage Area Network (SAN) Solutions• Middleware Solutions• Aerospace Products

15,966F5 Networks, Inc.
BIG-IP Local Traffic Manager• Semiconductor Products• Board Computer Products• Software• Other Electronic Components

17,497

2005

2006

4,311

7,298

81,93879,583Xilinx, Inc.

2005

5

2006

■ Japan■ Overseas■ JapanTOKYO ELECTRON LIMITEDANNUAL REPORT 06

TO OUR STAKEHOLDERS

Advancingto a New Stageof GrowthFiscal 2006, the year ended March 31, 2006,
saw Tokyo Electron enter a phase of renewed
sales and earnings growth. The year was
also marked by the introduction of a rangeof new next-generation products.

Review of fiscal 2006 operating results: strengths
in semiconductor memory field drive sales andearnings growth
Consolidated operating income for fiscal 2006 rose 18.3% year
on year to ¥75.7 billion, on a net sales gain of 6.0% to ¥673.7
billion. Net income*, however, declined 22.1% to ¥48.0 billion.
* Net income for fiscal 2005 was ¥61.6 billion, mainly because ofa one-time ¥27.9 billion reversal of valuation allowance ondeferred tax assets that lifted net income.

6

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

As a company committed to boosting profits throughgrowth in working capital requirements have started to yield

meaningful contributions to our customers’ businesses, we arepositive results, as evidenced by the significant increase in freealso pleased to report a definite return to a phase of renewed

cash flows for a second consecutive year. Some of this ample

sales and earnings growth. We are on the right track toward

cash was used to retire interest-bearing debt, bringing downachieving the goals we set in our medium- to long-term growth

the debt-to-equity ratio (interest-bearing debt/shareholders’plans. We are convinced that Tokyo Electron now stands at theequity) to 17.3%. We also raised the balance of cash and cash

turning point of a new stage of growth.

equivalents to an appropriate level, putting our balance sheet
on an even stronger footing, in view of the unique nature of

Capital investment in semiconductor and LCD production

business characterized by the silicon cycle.

facilities remains high worldwide, as a true era of digital networks and mobile communications appears on the horizon.
More particularly, accelerated capital investment in Japan,

Foremost achievement in fiscal 2006: the launch of

Taiwan and Korea provided Tokyo Electron with a tailwind, due

several strategic products that will drive earnings

to our strong customer base in the region, supporting our

Growth at Tokyo Electron is underpinned by our ability toimpressive financial results. Semiconductor applications aredevelop new products. But the true growth driver is our ability

also experiencing change. The NAND flash memory, a trigger

to precisely identify new technologies that our customers require,for the revolution in memory media, drove the market. We enjoy

and to quickly develop and bring to market products that provide

a competitive edge in semiconductor production equipment for

powerful support for technological advances at our customers.

such state-of-the-art semiconductors that require advanced

In the past fiscal year, we launched a range of new prod-

process technologies. We have won a high level of customer

ucts for 65/45nm nodes, as we responded to the change toconfidence by supplying outstanding products with top caliber

even finer design rules and the use of new materials in semi-

service. This, too, underpinned our strong performance in the

conductor manufacturing processes. Another significant devel-

past fiscal year.

opment was the launch of the world’s first eighth-generation

Building a strong company with cash flow immune to

FPD production equipment for the manufacture of large-sizedmarket cycles has been an important ongoing management

LCD panels as growth in demand for large-screen LCD TVs ispriority. Initiatives to improve the asset turnover ratio and curb

fast surpassing forecasts. Our efforts to develop new products

Net Sales and Operating Income (Loss)

Interest-bearing Debt and Debt-to-Equity Ratio(Billions of Yen)

(%)

800
635.7
529.7

600
417.8

460.6

10.1

673.7
11.2

400

(Billions of Yen)

20

250

15

200

0

-4.4

-18.3

22.3

64.0

75.7

1.1

■ Net sales■ Operating income (loss)
Operating margin

2005

60

127.0
46.1

99.5
65.1

40

29.9

50

0

2004

59.8

100

5

–5

2003

151.4

50.6

–200

2002

80

150

10

0.2

100

155.8

4.2

200

(%)

0

17.3

2002

2006

Effective from fiscal 2005, the Company madecertain changes in accounting policies as discussed
in the notes to consolidated financial statements.

7■ Interest-bearing debt
Debt-to-equity ratio

2003

2004

2005

2006

20
0

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

have started to bear fruit. We feel that this was the foremost

the firm conviction that the primary mission of the Company

achievement of the past year. We expect to see a large

and its business is to provide the backbone for comfortable

increase in shipments of new products based on our unique

lifestyles. By identifying and nurturing new technologies with antechnologies from fiscal 2007 on, contributing significantly toeye on the future, Tokyo Electron will continue to contributesales and earnings growth.

profoundly to society through the supply of advanced manufacturing infrastructure to customers worldwide.

Business strategy

As a company operating on a global basis, Tokyo ElectronTokyo Electron is determined to continue its evolution torecognizes that thoughtful consideration for environmental

become an even more profitable enterprise by responding toprotection is one of today’s most important management issues.

the true needs of customers. The main thrusts of our growth

As a leading supplier of semiconductor and FPD production

strategy are to accelerate the launch of new, value-added

equipment, Tokyo Electron is committed to fulfilling its responsi-

products, strengthen cost competitiveness through the pursuit

bilities by aggressively working to lower the environmental loadsof higher productivity in our manufacturing, and offer theof its equipment, while actively promoting other environment-

world’s highest level of quality in both technology and services.

related programs.

We plan to develop a framework that smoothly integrates

In corporate governance, Tokyo Electron was quick todevelopment, manufacturing and customer service, and to

adopt concepts and systems that promote compliance, andincrease earnings and boost profit margins. We will use therealize fair, transparent management that allows the Company

cash this generates to invest in our next growth strategies.

to live up to the trust that society has placed in us.
Tokyo Electron is dedicated to providing its customers andThis will sustain a virtuous cycle of further growth.
While getting the most out of our original core technologies,

society with high-value products developed through the unwa-

we will focus on marketing and research and development withvering pursuit of technological innovation. We will achieve thisthe view to entering new fields that harbor prospects for growth.

while continuing reforms that build a foundation for sustainedTokyo Electron is committed to implementing businessgrowth, strong earnings and increased corporate value. Having

strategies that assure continuing medium- to long-term growth,

entered a renewed growth stage, Tokyo Electron is a company

and to becoming a company with a superior financial position.

to watch. We look forward to your continued support.

Provide infrastructure for the digital age throughJune 2006

untiring dedication to technological innovation
Tokyo Electron manufactures a broad range of production
equipment used in the manufacture of semiconductors, LCDs
and other cutting-edge products. These products help customers to manufacture key components that will be at the very core of

Tetsuro Higashi, Chairman & CEO

the mobile communication and digital network era. The progressof a digital society is dependent on outstanding key components and the advanced production equipment required fortheir manufacture. Tokyo Electron is managed on the basis of

Kiyoshi Sato, President & COO
8

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

I N T E R V I E W

TETSURO HIGASHI

Q&A

Chairman & CEO

How has the business environment of the semi-

conductor production equipment sector changed
in recent years, and what direction will it take inthe future?

The driving force behind semiconductor demand has changed
profoundly over the last five years. Mobile communications

and digital consumer electronics are now the core applications
in a market that, just five to six years ago, was mainly led by
PCs. Also, we have seen the steady evolution of the PC into
an item that has the features of a digital consumer product.
As a result, semiconductors are finding wider applications.
The result is a large increase in demand for semiconductors.
I expect this trend to continue to strengthen, driven by the
emergence of various new semiconductor applications.
Another important trend is the continuing evolution ofsemiconductor memory. Along with the ever-improving performance of DRAM, NAND flash memory, which has emerged as
an ideal storage media offering large capacity and low power
consumption, is stepping into the limelight. NAND flash
memory is expected to be used extensively in Third Generation (3G) mobile phones and a wide range of digital consumer
items, on the strength of its ability to store lengthy digitalmusic files and moving images. In fact, a compact PC with
NAND flash memory replacing the conventional HDD as thestorage device is just around the corner. With the shift toward
more powerful devices, the volume and value of semiconductors going into each unit is bound to increase.
Furthermore, demand for PCs and mobile phones is growing
rapidly in BRICs and other emerging markets. This geographicalexpansion will also work in favor of semiconductors, lifting
total demand.

9

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

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TOKYO ELECTRON LIMITED

Taken together, this expanding range of applications,appearance of new key devices, increasing semiconductor

ANNUAL REPORT 06

the worldwide transition from analog to digital broadcasting,which is also certain to generate explosive demand.

content ratio in various products, and the geographical expan-

LCD manufacturers are already increasing capital invest-

sion of the demand base, will push semiconductor demandment in response to this demand, and that should keep us

even further, suggesting that the semiconductor market willbusy for at least the next two years.

continue to experience dynamic growth. With this expanding

The shift toward larger mother glass, from which LCD

demand, the importance and responsibilities of semiconductor

panels are cut, is driving investment in production equipment.

production equipment (SPE) suppliers are bound to continue

However, from a long-term perspective, we must not overlook

to increase. As a leading SPE supplier, Tokyo Electron is

the fact that there is a limit to increasing the size of mothercommitted to supporting the quantitative growth and evolution

glass, which means that a new round of technology innovationof semiconductors through relentless technological innovation.

will be necessary. We are very aware of these factors, andTokyo Electron is working to develop a new business vision

How do you view the prospects for flat panel dis-that builds on our existing technologies.

play (FPD) production equipment, another coreproduct of Tokyo Electron?
The PC monitor used to be the core application for the LCD
panel. Recently, the demand for large-screen LCD TVs iswitnessing explosive growth. Since many people choose
large-screen TVs for viewing dynamic images of sports events,
I see the Beijing 2008 Olympic Games as a trigger for replacement demand directed at larger-screen LCD TVs. There is also

Three Waves of Growth in the Semiconductor Market
Increasing Semiconductor Content Ratio
Driving new lifestyles - ubiquitous access, EHS care, education

Expanding Applications
Wireless digital networks

Geographical Expansion
Beyond geographical isolation, primary driver for a nation's growth

10

TOKYO ELECTRON LIMITED

There is a concern that increasing use of semiconductors in consumer electronics could cause a

ANNUAL REPORT 06

customer satisfaction and to get a fair price for our products.
But it goes without saying that we should not minimize thedecline in semiconductor prices and this could

focus on cost reduction.

rebound on SPE suppliers in the form of pricepressure from semiconductor manufacturers.

What do you see as currently the most important

How do you plan to deal with this?

management issue?

The digital consumer market is characterized by a wide range

As a business, our goal is to continually generate a high levelof products and price volatility. In this environment, semicon-of cash flow. In this context, raising the operating margin andductor manufacturers, our customers, need to step up new

asset turnover are the most pressing management issues.

product launches to stay competitive. They have to raise

In the past fiscal year, our operating margin improved to

productivity by cutting down the lead time for the start-up of

11.2% following a harsh recession in semiconductors. But we

new production lines, shorten manufacturing cycle times andare far from satisfied with this. We will continue to make every

boost yields. Furthermore, customers’ expectations toward us

effort possible to further raise our operating margin. Raising

to come up with technological advances in semiconductor

profit margins boils down to strengthening product develop-

processes are increasing, as seen in responding to lower

ment and manufacturing capabilities, the core activities ofpower consumption demands.

any manufacturing company. In view of these considerations,

It is very clear to me that responding with revolutionary

we need to further increase our R&D spending.

new technologies and developing SPE with superior costTokyo Electron is committed to continuing to improve its

performance are the best ways to meet our customers’ realtechnology and to creating new businesses. To achieve theseneeds. If we can supply highly reliable SPE with outstanding

goals, a sound corporate culture must be passed down to

productivity and process performance, we can expect to win

future generations. Tokyo Electron was established in 1963 byWireless digital networks will drive the market(Billions of U.S. Dollars)

100

1980s

Early 1990s

Late 1990s

Early 2000s

Mainframe Computers

PCs

Mobile Phones•Digital Consumer Electronics•Automobiles, etc

Wireless Digital Networks

50■ Semiconductor CAPEX

0

85

90

•New Wireless Connectivity•High Performance Mobile Tools•Digital Broadcast & Digital TVs•Emerging Applications
Healthcare
Education
Security

95

00

11

05

TOKYO ELECTRON LIMITED10

ANNUAL REPORT 05

15

12 >> 13

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

I N T E R V I E W

a few young people full of venture spirit. That spirit has been

way to return profit to shareholders is to maximize corporate

passed down through the years, making it possible for Tokyo

value through sustained growth, continuing investment inElectron to launch innovative equipment for semiconductor

growth areas is given the highest priority in the allocation ofand LCD panel manufacturing, areas characterized by rapid

cash flow. This is because, unlike other markets, the sheer

technological change. The environment in which we operate

speed of technological innovation in the markets in whichsthas changed profoundly since we entered the 21 century,

Tokyo Electron operates is astounding.

and the speed of the technological innovation demanded has

Tokyo Electron will be quick to identify potential growth

accelerated. As the global leader in SPE, Tokyo Electron must

technologies. We also consider strategic alliances and M&As

rise to the challenge of innovating still more. We must meetas important options for acquiring new technologies andthis challenge by ensuring that a venture spirit is instilled

intellectual property rights.

throughout our organization.

Dividends to shareholders are also an important management issue. Tokyo Electron’s dividend policy is to continue

Tokyo Electron has a strong cash position throughlinking dividends to consolidated net income, with the aim of a

successful cash flow management. How do you plan

consolidated payout ratio of 20%. I am pleased to note thatto use this cash and what are your policies regard-

Tokyo Electron has increased its dividend for three consecu-

ing the sharing of profits with your shareholders?

tive years up to the fiscal year ended March 2006.

In fiscal 2006, we used part of the cash to retire debt, raise the
cash position, and other moves to strengthen our financial base.
The use of cash flow is based on our comprehensive
judgment of the operating environment and the company’s
financial position at that time. Since we believe that the best

Free Cash Flows

Cash and Cash Equivalents and Interest-bearing Debt

(Billions of Yen)

(Billions of Yen)

150

200
155.8

114.4

100

106.9

77.6

78.9
68.3

41.8
21.4
14.1

–40

7.9

115.4

99.5
53.0

48.4

42.7

65.1

50

–7.3

–0.7
–8.5

–7.5

–10.5

2003

2004

2005

2006

–35.8

2002

140.0
127.0

100

50

0

151.4

150

0

■ Operating cash flows■ Investing cash flows
Free cash flows

2002

2003

Cash and cash equivalents
Interest-bearing debt

12

2004

2005

2006

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

I N T E R V I E W

KIYOSHI SATO

Q&A

President & COO

Tokyo Electron’s share of the global market for

semiconductor wafer FAB equipment seems to berising. What is driving this growth?

Asia’s rising share of semiconductor capital investment in the
global marketplace is one reason. Various semiconductor
manufacturers such as memory manufacturers, logic IC

manufacturers and foundries are making aggressive capital
investments, anticipating future demand growth. Last year saw
brisk capital investment in manufacturing equipment for DRAM
and NAND flash memory that has high growth potential. Tokyo
Electron is well established and well known for the strong
support that it provides to customers in Asia. Its products havealso won high marks for the advanced solutions they offer for
leading-edge memory products and other high-end semiconductors. The combination of these factors is driving growth.
Looking back, surface preparation systems (cleaningsystems) is an area that showed outstanding growth last year.
The market share of our 300mm wet stations jumped from asingle-digit figure three years ago to nearly 35%; we captured
a growing share as design rules continued to shrink. Goingforward, the products that we launched in the fiscal year to
March 2006 are now ready to start contributing to the bottom
line. I am confident that Tokyo Electron will be able to further
raise its presence in the global market.

Worldwide Wafer FAB Equipment Market and TEL Market Share
(%)(Billions of U.S. Dollars)

80
60

20

10.9

11.8

23.7

Cash
Interest-bearing debt

0

2001

13.4

28.4

26.0

15

10.3

40
20

12.8

16.2

16.7

2002

2003

10
5

2004

2005

0

(Calendar Year)
Source: Gartner Dataquest (April 2006) GJ06250■
marketWafer FAB Equipment Market■ WFE
Worldwide
TEL
TELMarket
share Share
Source: Gartner Dataquest (April, 2006) GJ06250

13

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

12 >> 13

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

Many of Tokyo Electron’s products have leading

The new product lineup will meet the diversifying needs of ourmarket shares. How do you plan to increase thecustomers as design rules shrink.

share of products with lower market rankings?

This year we also introduced ExcelinerTM, an eighth-generation

Market share is important, but profit margins must be given equal

FPD coater/developer. It offers high levels of performance andattention. Tokyo Electron is not interested in a high-sales, low-reliability based on an entirely new concept.

margin strategy. That said, a certain volume of sales is needed toPlease comment on Tokyo Electron’s growth strategies.

boost profit margins to higher levels.
The key here is matching products with market needs.

The core concepts of our growth strategies are to nurture new

Customer needs are diversifying as semiconductor manufactur-

technologies and develop new products. Enhancing process

ing processes become even more sophisticated. In this environ-performance is one of the most important requirements of ourment, if we don’t focus on particular market segments, thecustomers. They demand a response to shrinking design rules

product concept will suffer and will lead to poor execution of ourand new materials, even as memory size continues to in-differentiation policy. First, we must study the market and thencrease, processors become faster and demand for lower

introduce optimized models for each market segment—

power consumption grows even stronger. On top of all this,products that precisely reflect the real needs of our customers.

customers are strongly emphasizing improved productivity forTokyo Electron is a relative latecomer to the silicon etchproduction equipment. Needless to say, quickly and correctly

market, but this is a product area where there is room to expand

identifying customers’ technology needs and creating new

our market share. We achieved a market share of more than 10%

products to address them is extremely important. Growth isin the last year and there is a clear, underlying upward trend. In

driven by the ability to introduce products with such added

the surface preparation systems market, we expanded thevalue at the right time.
From a medium- to long-term perspective, we also aim to

product line, developing the CELLESTA (single wafer cleaningTMsystem) and Certas(pre-clean system) to the wet station line.

increase the size of our business. For this, we have to develop

New Products for the 65nm and 45nm Nodes Released in 2005

New Etch Platform
TactrasTM
New Etch Chamber
SCCMTM- JI

Coarter/Developer for
Volume Immersion Technology
CLEAN TRACKTM LITHIUSTM i+
Pre-clean System
CertasTM

Plasma-enhanced
Batch Thermal CVD
TELFORMULATM IRadSingle Wafer Cleaning System
CELLESTA
New Thermal Processing System
TELINDYTM

14

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

new star products to supplement our existing product line.

take on new competition. Semiconductor production equipment

We are thus working in R&D on diversifying into new areas

with superior process performance and higher productivity iswhile giving full attention to existing technologies.

favored by customers since it helps them bring down costs.
Alliances and M&As are also options to cope with theWhat new trends do you see emerging in the SPEchanging situation. Forming alliances with or partnering withindustry? What is the key to success inuniversities and other firms is effective in accelerating productthe new environment?

development in cases where development periods tend to beFirst, a few players are increasingly dominating the semicon-

long. In some cases, M&A will also be an effective alternative.

ductor and LCD sectors, and there are few customers in theworld capable of continuously making massive investments.

Finally, can you comment on what you see as

Competition for orders is likely to become intensified in such aTokyo Electron’s corporate DNA?

market. Our sales, service and manufacturing operations must

I would say that our “Emphasis on the Customer,” passed down

provide exhaustive support to our customers, thus building

throughout our history, our “Venture Spirit” and our “Readinessbusiness relationships rooted in trust. This can only be

to Respond to Change” are the corporate genes that give Tokyo

achieved through further raising product quality and by offering

Electron its distinctive character. If you respond defensively tothe best possible customer support, in addition to quickchange, you end up retrenching, but if you adopt an aggressive

responses to customers’ real needs.

stance, you open up opportunities for growth. Tokyo Electron

Second, there is a fierce battle for growth and survival inhas grown rapidly by responding positively to changing market

the SPE industry. Major SPE suppliers, and we are no excep-

needs. This has allowed us to evolve from being an importtion, are looking to new areas to drive future growth, and thisagency and local supplier to a global player. We will further hone

could intensify competition in core product lines. We will have

our instinctive ability to respond to changing customer needs toto further hone our technology development capabilities tofind new opportunities for growth.

Accelerating R&D to Drive Growth
A High Level of R&D Expenses and a Global R&D Network

IMEC (Belgium)
Collaboration R&D with IMEC on
immersion lithography andextreme ultraviolet (EUV)
lithography

TEL Technology Center,
America, LLC(New York)

Leading-edge Process
Development Center(Nirasaki City, Yamanashi)

R&D Expenses

Kansai Technology Center(Amagasaki City, Hyogo)(Billions of Yen)

80
60

53.8

50.1

49.2

44.2

43.9

2004

2005

40
About IMECIMEC is a world-leading independent research center in nanoelectronics andnanotechnology. Its research focuses on the next generations of chips and systems,
and on the enabling technologies for ambient intelligence.

20
0

15

2002

2003

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

2006
12 >> 13

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

ENVIRONMENTAL, HEALTH AND SAFETY ACTIVITIESAs a business enterprise, Tokyo Electron has an important mission:
to give top priority to people’s health and safety and consider
environmental protection in the conduct of its business activities.

Fundamental Policy
Tokyo Electron positions environmental, health and safety activities as one of its most important management issues to achievesustained corporate growth and continued development ofsociety. With that in mind, Tokyo Electron is committed to reducing environmental loads across its activities, and to ensuring
absolute safety in the Company’s business premises and in thoseof its customers.
Tokyo Electron embodied these commitments in “TEL’s Credo
and Principles on Environmental Preservation” and “TEL’s Safety
and Health Credo and Principles” formulated in 1998. Bothstatements were reviewed and revised in May 2006 in light of thedirection the business is taking and the Company’s evolving
approach to these issues. The recent revisions clarify a road map
for environmental protection measures in product development;
they mandate evaluation of environmental issues in the design,
manufacture and utilization of our products, and disclosure of
information to stakeholders through the publication of environmental and other reports.

EHS Management
Since 1997, Tokyo Electron has developed and implemented
environmental management systems based on ISO 14001 standards, mainly for manufacturing operations, and obtained suchcertification. In fiscal 2006, Tokyo Electron Kyushu Limited completed integration of ISO 14001 certification for four plants: Saga,
Kumamoto, Koshi and Ozu, which had already been certified.

Adoption of Environmental Accounting
Tokyo Electron has introduced an environmental accounting systemthat quantifies the cost of its activities in respect of environmental
protection, and uses this as the basis for developing corporate
action policies. For more information on achievements in fiscal
2006, please see the “Environmental and Social Report 2006” to bereleased in September 2006.

Company/plantTokyo Electron AT Limited
Tokyo Electron FE Limited
Tokyo Electron Tohoku Limited
Tokyo Electron Kyushu Limited
Tokyo Electron AT Limited
Tokyo Electron Device Limited

Environmental Activities With Regard to Products
Proactive Environmentally Conscious Product Design
As clearly set forth in our revised TEL’s Credo and Principles on
Environmental Preservation, Tokyo Electron believes that promotion of product designs sensitive to the environment is vital.
Tokyo Electron has positioned promotion of energy conservationin its products, and reduction and replacement of hazardous
chemicals in its products as priority issues.
1. Energy Conservation During Equipment Use
Since many of our products are manufactured and used in clean
rooms, we take an all-inclusive approach that factors in theenergy conservation aspect of the entire system, including theequipment and the clean room. The five major targets in thisrespect are as follows:
1. Reduce energy consumption of the equipment itself
2. Reduce energy consumption of peripheral devices
3. Use equipment in ways that conserve energy
4. Reduce energy consumption of the clean room
5. Overall clean room management (planned andappropriate operation)
Tokyo Electron played a central role in developing the 2005
SEMI S23 Guide for Conservation of Energy, Utilities and Materials Used by Semiconductor Manufacturing Equipment that was
adopted as the global standard by the semiconductor industry.
2. Hazardous Substances in Products
Growing out of the concern that hazardous substances in partsand materials could affect the environment and the ecologicalsystem, regulations restricting the use of such substances in
automotive and electrical products are being tightened throughout
the world. The European Union’s WEEE*1 and RoHS*2 directives
and the China RoHS directive*3 are of particular interest to theelectronics and related industries. These directives will have an
impact on the products manufactured by Tokyo Electron. Tokyo
Electron Group is thus responding proactively by taking measureson hazardous substances in advance of regulatory requirements.
*1 Waste Electrical and Electronic Equipment*2 Restriction of the Use of Certain Hazardous Substances in electrical and electronicequipment*3 The official name of the Chinese version of RoHS is Measures to Control Pollution From
Electronic Information Products

Sagami Plant

Plant

Certification date
December 10, 1997

Certification number
1110-1997-AE-KOB-RvA

Tohoku Plant
Kumamoto/Koshi/Ozu/Saga plants
Yamanashi Plant (Fujii/Hosaka area)
Miyagi Plant
Yokohama OfficeFebruary 19, 1998
March 26, 1998
May 15, 1998
March 1, 2005
July 14, 2004

1118-1998-AE-KOB-RvA Rev.2
1120-1998-AE-KOB-RvA Rev.2
1124-1998-AE-KOB-RvA
01245-2005-AE-KOB-RvA
EC04J0144

16

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

Health and Safety Activities

Targeted Hazardous Substances
Priority 1 substances■ Cadmium: pigments, stabilization agents, resins■ Hexavalent chromium: chromium plating■ Lead: solder, paints, electrical wire insulation, free-cutting metals■ Mercury: batteries, fluorescent lamps■ PBBs: resin parts■ PBDEs: resin parts

Priority 2 substances
JIG Level A designated substances (includes many substances
for which measures are already in place)
JIG: Joint Industry Guide. The JIG is a list of chemicals that require
countermeasures, prepared jointly by U.S., European and Japa-

Tokyo Electron promotes health and safety in all of its operations.
This includes giving top priority to the health and safety of ouremployees and customers, and designing products with safety inmind. TEL’s Safety and Health Credo and Principles clearly statethat all employees are responsible for being constantly aware ofhealth and safety considerations in all their business activities.
The Company held six safety training programs for top management at group sites in fiscal 2006, with the participation of executive officers and other employees, including those of affiliates.
The program was divided into theory, practice, and discussion.
The theory included such topics as the importance of systematic
approaches to the human risk factor and risk management.
The practice section included reports from sites and on issues
from the standpoint of safety. The discussion session debatedhow best to establish a culture of safety at Tokyo Electron.

nese private-sector organizations. The substances are classified
as Level A or Level B. The Level A list contains 16 substances,such as cadmium, hexavalent chromium, lead, mercury, PBBs,
and PBDEs. The Level B list contains more than 400 substances.

This section only discusses some of Tokyo
Electron’s environmental, safety and healthTokyo Electron group has established an Action Team for
Substances Contained in Equipment comprised of representativesof manufacturing divisions. The goal is to share necessary information, seek active cooperation from suppliers, and investigate
composition and to find and promote substitutes.

activities. For further details, see“Environmental and Social Report 2006”(to be published in September 2006).
URL: http://www.tel.com/eng/about/ehs/
ehsreport/ehsreport.htm

TOPICS
control of exhaust air during standby (to reduce the load on
Approach to Reducing Environmental Burden in
the air conditioner of the clean room), shortening of the cleanNew Products
ing time with pure water, and cleaning with a lower-power unit.
Tokyo Electron is reducing the environmental burden in eachtype of equipment it produces, as appropriate for the environmental characteristics of the equipment. The auto wet station,
one of our main products, uses a large volume of pure water
during the processes to remove dust and contamination
Reducing pure water usage during standby(%)
adhering to the wafer surface. Reducing this consumption was
one of the goals during the development of the new auto wet 100
Approx. 15% savings
station EXPEDIUS. A new water-saving specification has been
set for the supply flow during standby, which reduces water
consumption by 15% compared tothe previous model. Next, a valve was
Approx. 70% savings
added to the pure water supply line toprovide intermittent supply, and thisallowed a 70% reduction compared0
to earlier models. Other new features
Earlier model
Water-conserving
Intermittent supply
we are working on at present are
specification
EXPEDIUS

17

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

CORPORATE GOVERNANCE

Fundamental Policy Concerning Corporate
Governance
Reflecting the ongoing globalization of management practices, ourfundamental policy is to strictly observe standards for corporate
ethics and comply with laws and regulations. We are also dedicatedto establishing and reinforcing internal control and risk management systems, and to maintaining the transparency and objectivityof our business activities. The primary objective of this policy is toconduct management that prioritizes the creation of corporate
value for the benefit of shareholders and all other stakeholders.

Measures Concerning Corporate Governance
Framework
Tokyo Electron regards the strengthening of corporate governance as vital to increasing its corporate value and shareholder
satisfaction. For this purpose, we concentrate on three aspects ofcorporate governance: 1) ensuring the transparency and soundnessof business operations; 2) facilitating quick decision-making andthe efficient execution of business operations; and 3) building aneffective system for the timely and suitable disclosure of information.
The Corporate Governance Framework
Tokyo Electron has 11 directors, including two external directors.
We have adopted the statutory auditor system, as we believe thatstatutory auditors are an effective means of conducting management that reflects the interests of shareholders. Accordingly, we
have four statutory auditors, two of whom are from outside thecompany. In addition, we have separated the roles of the directors and the executive officers who oversee business operations.
Additionally, we have established two committees on the board of
directors. A Compensation Committee determines the remuneration paid to the Chairman & CEO and to the President & COO.
The Nomination Committee selects candidates for directorships
for submission to the annual shareholders’ meeting, and a candidate to be elected as president by the board of directors. Throughthese measures we constantly work to improve corporate governance. The Compensation Committee and the Nomination Committee both have three members each, excluding the Chairman &CEO and the President & COO.
Tokyo Electron discloses the remuneration paid to each of therepresentative directors, since the Company regards the transparency of management to its shareholders as essential from thestandpoint of an emphasis on shareholders. The annual meetingof the shareholders held in June 2002 reduced the term of officeof Tokyo Electron directors from two years to one, in order tospeed up responsiveness to the changing operating environment
and to establish a framework for clearly defining directors’ responsibilities. In April 2003, we adopted the executive officer system tofurther clarify the roles of the board of directors and executives incharge of business operations. This system facilitates the quick
establishment and execution of business strategies.
Internal Controls and Risk Management
All activities at Tokyo Electron are based on adherence to thehighest standards of corporate ethics and compliance with laws,
regulations and international rules. To oversee and ensure this, adirector has been appointed Chief Business Ethics Director. Ethicalstandards have been established and measures are taken to seethat these standards are strictly observed. Reflecting the fact that
we now place even greater importance on internal control and risk
management systems, we have upgraded the internal audit functionsof the Global Audit Center. We have also added crisis management
functions to the General Affairs Department, including measuresinvolving business risk and operational risk. This department is
responsible for establishing the necessary internal regulations for
managing each category of risk, as well as for activities for training
and raising employees’ awareness of risk management.
The Global Audit Center, an organization that reports directly to
the President, is responsible for conducting audits of the Group’s
domestic and overseas bases. The Group’s internal control
system works to ensure that the Group’s management and otherpolicies are shared, communicates information, evaluates risks
and the effectiveness of business activities based on risk evaluation, and, if necessary, provides guidance to operating divisions.
The Global Audit Center also reports the results of its audits tomanagement on a monthly basis, and holds meetings to promoteexchanges of information with the statutory auditors and to reportits findings.
Statutory auditors, most of whom are full time auditors, attend
meetings of the board of directors, Management Committee, andDiagram of the Corporate Governance,
Internal Control System and Risk Management System
Annual Shareholders’ Meeting
Board of Nomination Committee
Directors Compensation Committee
Chief Business Ethics Director

Statutory Auditors Independent Auditors

Confirm the progress of improvements and give instructions

ChairmanPresident

Audit and improvement reports

Request for improvement
ReportAudit

Executive Officers
ReportRequest for
improvement

Risk Management
Function
Monitoring

Monitoring
Check and balance

Business Depts.

18Internal Audit Dept.
(Global Audit Center)
Audit

Administrative
Depts.

Audit
Audit

TOKYO ELECTRON LIMITED

all other important meetings, and conduct operations audits,accounting audits and risk evaluation, in addition to auditing theperformance of duties by directors.
Tokyo Electron has engaged KPMG AZSA & Co. as its independent auditor. The Company provides this independent auditor
with all required information and data to ensure that it canconduct its audits with speed and precision. The names of thecertified public accountants and the number of years they havecontinuously audited the Company’s financial statements are as
follows: Tsutomu Takahashi (one year) and Kentaro Onishi (twoyears). Five certified public accountants, six junior CPAs and one
other person assisted the above auditors during their audit.
Responsibilities of External Directors andExternal Statutory Auditors
External director Hiroshi Inoue is the President of Tokyo Broadcasting System, Inc. He was elected as an external director with
the intent of obtaining his objective opinion on decisions of theboard of directors, in light of his experience and insight as acorporate manager.
External director Yasuhiro Tsunemi was involved in researchstudies of society, technology and the economy as chief
researcher of a private-sector think tank. With his wide-ranging
insight, he was elected as an external director to objectively
secure the effectiveness of the decisions of the board of directors.
External statutory auditor Togo Tajika has extensive experiencein overseas operations, having worked overseas for anothercorporation. He was elected as an external statutory auditor tobring an objective eye to the effectiveness of audits.
External statutory auditor Hiroshi Maeda is an attorney in the
Nishimura & Partners law firm. He was also elected as anexternal statutory auditor to bring an objective eye to the effectiveness of audits.

Remuneration for Directors, Executive Officers andStatutory Auditors
The Company and its subsidiaries (excluding listed companies)
have introduced incentive systems, such as business resultsbased remuneration, and stock options linked to share prices.
Effective from fiscal 2006, the Company revised its executive
remuneration system to link remuneration more closely to consolidated net income and shareholder value and also improve
management transparency and its competitive strength.
Under the new system, retirement allowances for directors,
statutory auditors and executive officers, part of their fixed remuneration, were abolished at the end of fiscal 2005. In addition, executive
remuneration will be more closely linked to consolidated results andstock prices by clearly tying the portion of remuneration that is linked
to business performance to consolidated net income. The new19

ANNUAL REPORT 06

system consists of fixed monthly remuneration, annual cash bonuses
linked to business performance, and stock options.
Part of the remuneration for directors and executive officers of
the Company and its subsidiaries is linked to operating results,
with an upper limit of 3% of consolidated net income. The remuneration is split between annual cash bonuses and stock optionbased remuneration at a ratio of almost two to one. We believethat this system incentivizes officers to improve the Company’s
performance and share price because they share with shareholders the risk of a decrease as well as the benefits of higher earnings and a higher share price.
The Company discloses remuneration paid to each of therepresentative directors and the aggregate remuneration paid to
directors and statutory auditors in its business report. Moreover,
the aggregate remuneration paid to internal and external directors
and internal and external statutory auditors, respectively, isdisclosed in the securities report.
Remuneration for directors and statutory auditors
Amount paid to internal directors
Amount paid to external directors
Amount paid to internal statutory auditors
Amount paid to external statutory auditors¥360 million¥10 million¥51 million¥26 million

Note: The above amounts do not include annual bonuses and retirement allowances
paid to directors.

Remuneration for auditing
Amount paid for audit¥49 million

Note: The above amount is paid in accordance with an audit contract between the Company and KPMG AZSA & Co.

Shareholder Measures
Tokyo Electron mails a “Notice of Annual General Meeting of
Shareholders” to shareholders more than three weeks in advanceof the meeting, as one of its measures to vitalize these meetings
and to promote smooth and efficient voting. It also sets the dateof the Company’s meeting to avoid days on which many suchmeetings are concentrated. Shareholders are also free to casttheir votes via the Internet. Tokyo Electron also participates in the
web-based voting platform for institutional investors operated by
Investor Communications Japan Inc. (ICJ). To supplement theabove shareholder meeting-related initiatives, Tokyo Electron’s
web site carries notices, resolutions and presentation materials ofshareholders’ meetings. An English version of the “Notice ofAnnual General Meeting of Shareholders” is also provided.
Tokyo Electron holds quarterly results presentation meetings foranalysts and institutional investors as a part of its IR program.
The presentation materials used in these meetings can be viewed
on the Company’s web site. The Company backs up these
activities by holding IR road shows three or four times a year.
These road shows, led by the director responsible for IR, areprovided for the convenience of overseas investors.

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

BOARD OF DIRECTORS, STATUTORY AUDITORS AND EXECUTIVE OFFICERS(As of June 23, 2006)

Board of Directors

Tetsuro Higashi

Tetsuo Tsuneishi 2

Kiyoshi Sato

Mamoru Hara 1

Kengo Kuroiwa

Masao Kubodera

Chairman & CEO

Vice Chairman of the Board

President & COO

Corporate Director

Corporate Director

Corporate Director

Yuichi Honda 1,3

Keiichi Furugaki 2

Haruo Iwatsu 2

Hiroshi Inoue 1*

Yasuhiro Tsunemi *Corporate Director

Corporate Director

Corporate Director

Corporate Director/
President, Tokyo
Broadcasting System, Inc.

Corporate Director

Statutory Auditors

Taketoshi Itoyama

Takeo Tanaka

Togo Tajika *Hiroshi Maeda *Statutory Auditor

Statutory Auditor

Statutory Auditor

Statutory Auditor/
Nishimura & Partners

Notes:
1. Member of Compensation Committee
2. Member of Nomination Committee
3. Chief Business Ethics Director* External director, external statutory auditor

Executive Officers
Chairman & CEO

Tetsuro Higashi
Vice Chairman of the Board

Tetsuo Tsuneishi

Makoto Mizokuchi

Takashi Ito

Chiaki Yamaguchi

General Manager, Sales & Services Division,and General Manager,
Sales & Services, Japan

Deputy General Manager, SPE-2 Division,and General Manager, Etch Systems BU

General Manager, Sales & Services, Asia

Jinzaburo Sakamoto
Kenji Washino

Mitsuru Onozato

Deputy General Manager, SPE-2 Division,and General Manager, Single Wafer
Deposition BU

General Manager, FPD Division

Ben TsaiPresident & COO

Technology

Kiyoshi Sato

Vice Presidents

Senior Vice Presidents

Kengo Kuroiwa
Manufacturing & IT

Masao Kubodera

General Manager,
Computer Network Division

Hiroshi Takenaka

Yoichi Ishikawa
General Manager, Marketing

General Manager, Administration

Deputy General Manager, SPE-3 Division,and General Manager,
Thermal Processing Systems BU

Yoshikazu Nunokawa

Tsuyoshi Aruga

Yoshiteru Harada

General Manager, HR, HR Development
Center and Finance

Hikaru ItoYuichi Honda
Finance & Accounting

Deputy General Manager, SPE-1 Division,and General Manager, Clean Track BU

Haruo Iwatsu

Masaaki Hata

Hiroki Takebuchi
Corporate Strategic Planning Dept.

Katsuyuki Amano
Hirofumi Kitayama
General Manager, SPE-3 Division

Technology & Development

General Manager, SPE-1 Division

Deputy General Manager,
Sales & Services Division,and General Manager, Post Sales

Shigetoshi Hosaka
General Manager, Technology &Development Center

General Manager, SPE-4 Division

Hiroshi Tomita
Syunro Nagasawa

General Manager, MEMS Business

Deputy General Manager, SPE-4 Division,and General Manager, Test Systems BU

Kiyoshi Sunohara
General Manager, Sales & Services, North
America & Europe

Deputy General Manager, SPE-1 Division,and General Manager, Surface Preparation
Systems BU

Yasuyuki Kuriki
General Manager, Sales & Services, Korea

Kozo Hara
General Manager, SPE-2 Division

BU: Business Unit

20

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

INTELLECTUAL PROPERTY REPORT

Process and mechatronic technologies used in the manufacture ofsemiconductors and flat panel displays represent Tokyo Electron’score technologies. Tokyo Electron devotes considerable resources
to developing technologies that bolster the competitiveness of its
products. Since the beginning of the fiscal year under review, as
measures to raise profitability, Tokyo Electron has been promoting
three themes: (1) launching new products imbuing high added
value, (2) raising manufacturing capabilities, and (3) expanding
after-sales businesses. Protecting the intellectual property rights of
independently developed proprietary technologies and products isvital in this context to ensure the smooth growth of businesses.
The integration of our intellectual property strategy with ourtechnological and product strategies is thus important to realizing
maximum benefits from development efforts.
With the increasing division of roles between semiconductor
manufacturers and SPE suppliers, Tokyo Electron is playing an
expanding role that goes beyond the supply of production equipment and embraces processing, multiple process integration andprocess control technologies. This situation makes protection of
intellectual property rights all the more complex. Tokyo Electron
places high priority on protecting intellectual property by actively
filing patent applications for equipment schematics, software
technologies, several process management technologies for
manufacturing equipment and other patents.

Policies on Acquiring and Managing Intellectual
Property, Managing Trade Secrets and Preventing
Technology Leakage
Tokyo Electron has a set of internal rules that define the management of its intellectual property. These rules were revised basedon the purport of the Revised Patent Law that came into force lastyear. Under these rules, Tokyo Electron provides incentives forinventors and creators within Tokyo Electron. We make lump-sum
payments at the time of submission of applications for patents,
utility model rights, designs and other property rights. Bonuses arealso given as incentives if such creations are implemented at
Tokyo Electron or licensed to third parties. The latter bonuses are
scaled to the earnings record of such licenses and other rights.
We also established awards to honor inventors and creators.
Management of trade secrets is handled according to Tokyo
Electron’s “Internal Rules on Managing Technology and Marketing
Information” and “Manual for Managing Technology and Marketing
Information.” The provisions of these measures are approximately
equivalent to those of the government’s “Policies Regarding
Managing Trade Secrets” and “Policies Regarding the Preventionof Technology Leakage.”
By promoting greater cooperation with the materials and procurement divisions, Tokyo Electron is strengthening measuresagainst imitation and pirated technologies at the component level.
Furthermore, outside of Japan, Tokyo Electron is strengthening
tie-ups with local law offices in the U.S. and in Asia and actively
conducting other activities to counter imitation and pirated products. These include cooperating with Japan’s Ministry of
Economy, Trade and Industry, Japan External Trade Organization,

21

Japan Intellectual Property Association and other organizations,and participating in various activities.

Intellectual Property by Major Country
The graph in this section shows historical data on the number ofpatent applications filed in Japan by Tokyo Electron up to the endof March 2006. With it becoming more difficult to acquire patents
in Japan and other countries, Tokyo Electron is reviewing its policy
regarding the country of application, including Japan, from thestandpoint of key manufacturing bases and the markets of its
operating divisions. In particular, in addition to the recent policy ofemphasizing filing applications in the U.S., Tokyo Electron is alsostressing the need to file applications in China, South Korea,
Taiwan and other countries as a countermeasure against imitationand pirated products, mainly in East Asia.

Contribution of License-related Activities
In developing and implementing our intellectual property rights
strategy, we do not see intellectual property rights acquired byfiling applications and securing rights for proprietary products anddevelopment technologies as a source of income from licensing toother companies. Rather we view this as a method of differentiating our own products and bolstering our competitive advantages.
Semiconductor and FPD production technologies are becoming
increasingly advanced and sophisticated. To effectively develop
new products incorporating leading-edge technologies, and bringthem to market as quickly as possible, it is essential to utilize allavailable intellectual properties. Tokyo Electron places high value
on introducing cutting-edge technology and constantly enhancing
the efficiency of research and development, and on quickly
launching new products. We also respect the intellectual property
rights of others, just as we do our own, and effectively use themthrough licensing.
Tokyo Electron is also exploring the feasibility of licensing or
selling its proprietary technology to third parties in other businessfields and to cooperating partners.
Number of Patent Applications
Applications (overseas)

Applications (domestic)

500

1,000

400

800

300

600

200

400

100

200

0

2001
U.S.

2002
South Korea

2003

2004
Taiwan

2005
China

2006
Europe0Japan

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

MANAGEMENT’S DISCUSSION AND ANALYSIS

Financial results in this MD&A refer to fiscal 2006, the year ended March 31, 2006. Percentage comparisons refer to year-on-yearchanges from fiscal 2005.
Effective from fiscal 2005, the Company made certain changes in accounting policies and segment classifications as discussed in thenotes to consolidated financial statements.
■ The policy for revenue recognition of semiconductor and FPD production equipment was changed from the time of shipment of
products to, in principle, the time of confirmation of set-up and testing of products.
■ The accounting treatment of after-sale repair expenses incurred during the warranty period for semiconductor and FPD production
equipment was changed. In the past, the Company charged such expenses to income as incurred. Effective from the fiscal year ended
March 31, 2005, the Company provides accrued warranty expenses for estimated expenses, calculated on the basis of after-salerepair expenses incurred in the past.
■ In past fiscal years, Tokyo Electron’s businesses were classified as a single segment. Effective from the fiscal year ended March 31,
2005, however, Tokyo Electron’s businesses were reclassified into two segments, “Industrial Electronic Equipment” and “Electronic
Components,” based on the similarities between products and services as well as sales methods.

Sales and Income

22

673.7

716.7
635.7

262.5

0

287.3

240.7
232.7

200

02 03 04

05

06

190.5

400

242.3

231.3

270.1

600

411.2

476.0
403.0

800

■ Domestic (Previous policies)■ Overseas (Previous policies)■ Domestic (New policies)■ Overseas (New policies)

Operating Income (Loss) and Operating Margin(Billions of Yen)

(%)

100

80

11.9

75.7

85.2

20

60

16

12
11.2

10.1

40

8
4.2

0

〜

–20

–4.4

4

22.3

1.1

20
–18.3

Gross Profit, SG&A Expenses and Operating Income
The cost of sales was ¥484.0 billion, an increase of 5.3% compared to the previous fiscal
year, and gross profit was ¥189.7 billion, an increase of 7.9% over the previous fiscal year.
As a result, the gross profit margin was 28.2%, an improvement of 0.5 percentage point, due
mainly to higher sales of semiconductor production equipment .
Selling, general and administrative (SG&A) expenses were ¥114.0 billion, an increase of
1.9% from the previous fiscal year, and the ratio of SG&A expenses to net sales was 17.0%.
R&D expenses included in general and administrative expenses increased 12.1% to ¥49.2 billion.

529.7

417.8

1,000

460.6

(Billions of Yen)

64.0

Sales
Consolidated net sales increased 6.0% from the previous fiscal year to ¥673.7 billion.
By region, sales of semiconductor production equipment in Japan and the United States
exceeded the previous year by a wide margin and were also solid in South Korea and Taiwan.
In addition, sales of FPD production equipment in Taiwan remained strong. As a result, net salesin Japan were up 12.8% over the previous fiscal year to ¥262.5 billion, and overseas net sales
were up 2.0% to ¥411.2 billion. Overseas net sales accounted for 61.0% of consolidated net
sales, down from the 63.4% recorded in the previous fiscal year.
Consolidated orders received during the fiscal year increased 7.0% over the previous fiscal
year to ¥721.6 billion, and the consolidated order backlog at the end of the fiscal year
increased 15.3% to ¥361.0 billion. Both figures were historical records.

Domestic and Overseas Sales

186.5

Operating Environment
The overall global economic picture during the past fiscal year was favorable, led by brisk U.S.
and Chinese economies, despite concerns about the economic impact from damage wreakedby major hurricanes in the U.S. and high crude oil prices. In Japan, there were continued signsof a steady recovery, including robust capital expenditure and an improvement in the employment situation bolstered by strong corporate performances.
With regard to the electronics industry, in which the Company participates, sales werestrong of digital consumer electronics, such as portable music players, digital cameras, DVDrecorders and flat panel TVs, expanding demand for semiconductors. PCs and mobile phones
are starting to make rapid inroads into newly developed emerging markets, including the
BRICs countries, which is also lifting semiconductor demand. In response to this favorable
environment, semiconductor manufacturers and LCD panel manufacturers made substantial
capital investments.

0.2

02 03 04

0

05

06

〜–5

■ Operating Income (Loss) (Previous policies)
Operating Margin (Previous policies)■ Operating Income (New policies)
Operating Margin (New policies)ANNUAL REPORT 06

Despite this increase in R&D expenses, there was only a slight overall increase in total SG&A
expenses due to lower depreciation and tighter control over variable expenses.
As a result of the above and other factors, operating income for fiscal 2006 was ¥75.7
billion, up 18.3% year on year. The operating margin was 11.2%, an increase of 1.1 percentage points.

R&D Expenses(Billions of Yen)

Research and Development
R&D expenses, as noted above, were ¥49.2 billion in fiscal 2006, up 12.1% from the previous
fiscal year.
In semiconductor production equipment, in addition to design rule shrink, customers aredemanding responses to new materials for realizing higher speeds and lower power consumption.
In the past fiscal year, Tokyo Electron focused on the development of technologies and productsthat respond to these customer needs. As a result of ongoing R&D efforts, the Company wasable to launch new products in five of six product categories. In FPD production equipment, thefocus was on the development of equipment designed for large glass substrates. Tokyo Electron
was successful in launching new models for handling eighth-generation glass substrates.
Another important R&D theme was lowering the environmental load of production equipment
based on their individual environmental characteristics. A certain portion of the R&D budget isallocated for this purpose.
In addition to R&D spending to develop new technologies and products in existing areas of operation, the Company also invested in creating new businesses derived from its core technologies.

04

05

49.2

43.9

45

44.2

53.8

60
50.1

30

15

0

02

03

06

Cash Dividend per Share
(Yen)
55

60

45

TOKYO ELECTRON LIMITED

45

Other Income (Expenses) and Net Income
Net non-operating expenses were ¥0.4 billion, since there were no significant extraordinary
gains or losses during fiscal 2006 while the net non-operating expenses of the previous fiscal
year were ¥8.2 billion due to ¥12.5 billion of provision for warranty expenses for the prior year.
Income before income taxes was ¥75.3 billion, up 35.1%.
Net income was ¥48.0 billion, down 22.1%, mainly because of a one-time ¥27.9 billion
reversal of valuation allowance on deferred tax assets that lifted net income in the previous
fiscal year. Net income per share was ¥267.61 (net income per share was ¥343.63 in theprevious fiscal year).

30

8

10

0

8

15

02

03

04

05

06

Dividend Policy and Dividend
The fundamental policy regarding return of profit to shareholders is to pay dividends linked tobusiness performance and backed by earnings. Effective from fiscal 2006, the Company
adopted a new dividend policy that aims at a payout ratio of 20% of consolidated net income.
In line with this policy, the Company declared a cash dividend per share of ¥55, up ¥10 fromthe previous fiscal year. This translates into a dividend payout ratio of 20.6% on aconsolidated basis.
(Millions of Yen)

2002

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥417,825
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,555
Gross profit margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27.7%
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . 133,865
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(18,310)
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4.4)%
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
(22,919)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19,938)

2003

2004

2005

2006

¥460,580
134,040
29.1%
132,9211,119
0.2%(23,010)(41,554)¥529,654
140,155
26.5%
117,875
22,2804.2%
14,9368,297¥635,710
175,91327.7%
111,930
63,983
10.1%
55,77561,601¥673,686
189,732
28.2%
114,02975,70311.2%
75,32848,006

Effective from fiscal 2005, the Company made certain changes in accounting policies as discussed in the notes to consolidated financial statements.

23

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

Performance by Segment

Semiconductor Production Equipment Sales■ Semiconductor Production Equipment
Sales to external customers were ¥486.9 billion, a 6.5% year-on-year increase.
Despite some slightly pessimistic views at the beginning of the fiscal year, shipments of PCs
and mobile phones remained strong, and portable music players and automotive electronic
products have been experiencing rapid growth. As a result, there was strong demand for
NAND flash memory, DRAM and other semiconductors used in these electronic devices.
Reflecting this demand, semiconductor manufacturers invested heavily in increasing production capacity and developing cutting-edge semiconductors. In turn, this generated brisk
inquiries for the Company’s products.
By equipment type, backed by strong capital investment by semiconductor memory manufacturers, particularly in Asia, sales increased of etch systems, thermal processing systems,
CVD systems, and surface preparation systems. Tokyo Electron saw sales growth of CLEAN
TRACK™ LITHIUS™, a coater/developer compatible with next-generation design rule technologies; of EXPEDIUS, a new auto wet station; and of TeliusTM, a plasma etch systemequipped with SCCM™–JI, the latest etch chamber.
In terms of wafer diameter, 85% of sales were for 300mm wafer plants and 15% of sales
were for 200mm wafer plants.
Division orders declined 2.1% to ¥499.9 billion, and the order backlog at the end of fiscal
2006 was ¥249.2 billion, up 5.5% compared to the end of the previous fiscal year.

200

361.0

303.6

300

284.2

400

100

0

02

03

04

05

06

■ Previous policies■ New policies
Since fiscal 2005, sales of FPD production
equipment have been shown separately from SPE
Division sales, in which they were previously
included. In the above graph, SPE sales for fiscal
2004 and prior years exclude FPD production
equipment sales on a non-consolidated basis forthe convenience of readers. (These figures are
unaudited.)

FPD Production Equipment Sales(Billions of Yen)

60

40

64.8

61.1

75.0

80

81.2

100

41.4

■ FPD Production Equipment
Sales to external customers were ¥81.2 billion, an 8.2% year-on-year increase.
In conjunction with the shift to digital and high-definition broadcasting, large-screen flat
panel TVs, including LCD TVs, are rapidly finding their way into homes. Given this, LCD panel
manufacturers ramped up capital investment to develop cutting-edge display panels andboost production capacity. In this environment, sales rose of FPD production equipment,
particularly in Taiwan. By generation, FPD production equipment for sixth-generation glass
substrates contributed significantly to sales, while sales of FPD production equipment forseventh-generation glass substrates rose sharply.
Division orders received increased 82.2% to ¥113.5 billion, and the order backlog at the endof fiscal 2006 was ¥99.1 billion, up 48.4% compared to the end of the previous fiscal year.

457.2

500

486.9

(Billions of Yen)

Industrial Electronic Equipment Segment
Due to continued strong net sales in the mainstay SPE Division, net sales (including intersegment sales) during the past fiscal year were ¥587.8 billion, an increase of 6.8% over theprevious fiscal year. Operating income rose 19.4% to ¥72.6 billion. The operating margin was
12.3%, up 1.3 percentage points.

20

0

02

03

04

05

06

■ Previous policies■ New policies
Since fiscal 2005, sales of FPD production
equipment have been shown separately from SPE
Division sales, in which they were previously
included. In the above graph, FPD production
equipment sales for fiscal 2004 and prior years areon a non-consolidated basis, while those fromfiscal 2005 are on a consolidated basis.

Computer Network Sales(Billions of Yen)

24

25

17.5

03

18.4

02

16.0

15

17.2

20
17.0

■ Computer Network
Sales to external customers were ¥17.5 billion, an increase of 9.6% compared to the previous
fiscal year.
Among SAN (Storage Area Network)-related products, which account for 40% of net sales
in this division, sales were strong of fibre channel fabric switches and fibre channel host bus
adapters, which form the platform technologies for network construction. With respect tonetwork-related products, the website construction business, centered on products that makepossible the creation of highly secure websites, recorded solid sales, and sales related tosupport and maintenance increased.
Division orders received increased 13.5% to ¥18.7 billion and the order backlog at the endof the fiscal year was ¥5.3 billion, up 28.7%.

10

5

0

04

05

06

ANNUAL REPORT 06

The Computer Network Division (excluding Aero Component Business) is scheduled to betransferred to Tokyo Electron Device Limited by simple separation through absorption in
October 2006.

Electronic Components Sales(Billions of Yen)

40

86.9

Electronic Components Segment (Tokyo Electron Device Limited)
Net sales in this segment, including intersegment sales, for fiscal 2006 rose 0.2% to ¥88.3
billion. Operating income was flat at ¥3.1 billion, and the operating margin was 3.5%. Sales toexternal customers were ¥86.9 billion, a 0.7% year-on-year increase.
Semiconductor products represented 88.6% of segment sales, board computer products
4.7%, software 3.6% and other electronic components 3.1%. In semiconductor products,
sales of products for factory automation-related equipment and for cell phone base stations
were firm on the back of higher capital investments. Furthermore, sales of products used inflat panel TVs and car navigation systems were solid as consumer spending grew.
This segment is working to expand its customer base by focusing on sales of high valueadded products, such as custom ICs and general-purpose ICs (analog ICs), that require
advanced technical support. At the same time, efforts are being made to expand contract
design services, whereby Tokyo Electron Device Limited undertakes the design of semiconductors while raising the profile of its proprietary products under the inrevium brand.

86.2

80
73.7

■ Others
Other sales largely comprise in-house services, such as insurance and travel services. Sales forfiscal 2006 declined 1.4% year on year to ¥1.2 billion.

84.2

100

77.4

TOKYO ELECTRON LIMITED

04

05

06

60

20

0

02

03

The above graph shows the sales to externalcustomers

Business segment information(Millions of Yen)

2006

Industrial
electronicequipment

Net sales and operating income
Net sales(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . ¥586,805(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . .
1,004

Total

Eliminations
andcorporate

Consolidated¥86,881
1,409¥673,686
2,413¥–(2,413)¥673,686–

Electronic
components

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

587,80988,290676,099(2,413)

673,686

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

515,241

85,190600,431(2,448)597,683

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72,5683,100

75,66835

75,703

Assets, depreciation and amortization expenses andcapital expenditure
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥626,838
Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . .
20,512
Loss on impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . .
419
Capital expenditure, including intangible and other assets . . . . .
16,223¥37,089258–
144¥663,927
20,770419
16,367¥ (684)–––¥663,243
20,770419
16,36725

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

Financial Position and Cash Flows

Working Capital and Current Ratio(Billions of Yen)

4.0
3.2
2.8

600

2.4

03

315.9

288.6

02

261.5

243.9

0

2.0

195.7

200

04

1.0

05

06

0

■ Working Capital
Current Ratio

Shareholders’ Equity and Shareholders’ Equity Ratio(Billions of Yen)

(%)

80

800

600

56.8

55.2
48.2 49.1

60

51.6

0

332.2

275.8

252.9

02

03

40

376.9

400

200

Capital Expenditures and Depreciation
Capital expenditures were ¥13.3 billion, an increase of 35.0% compared to the previous fiscal
year. The cost of evaluation equipment and measuring devices for semiconductor production
equipment and FPD production equipment-related research and development, in addition to
IT-related investments, were the most significant items of capital expenditures. Depreciation
and amortization expenses declined 10.7% to ¥19.2 billion.

3.0

2.6

2.2

400

307.6

Assets, Liabilities and Shareholders’ Equity
Total assets as of March 31, 2006 were ¥663.2 billion, ¥18.9 billion higher than as of March 31,
2005.
Current assets at the end of the fiscal year increased by ¥22.3 billion to ¥517.5 billion.
Major changes included increases in cash and cash equivalents of ¥24.6 billion, decreased
trade notes and accounts receivable of ¥3.5 billion, and increased inventories of ¥2.3 billion.
As the Company focused on shortening the asset turnover period, the turnover period of tradenotes and accounts receivable (excluding non-trade accounts receivable) shortened from 99
days to 92 days and inventory turnover improved from 93 days to 89 days.
Net property, plant and equipment decreased by ¥3.7 billion to ¥94.7 billion. The major
reason for this was further equipment depreciation.
Investments and other assets increased by ¥0.3 billion to ¥51.0 billion, the net result of a¥4.5 billion increase in investment securities due to a valuation gain as the stock market
rallied and a decline in deferred income taxes and intangible assets.
Total liabilities as of March 31, 2006 were ¥281.6 billion, ¥26.1 billion lower than as ofMarch 31, 2005.
Continuing from the previous fiscal year, the Company concentrated on reducing interestbearing debt. As a result, interest-bearing debt, including short-term borrowings, the current
portion of corporate bonds, long-term debt and corporate bonds, declined ¥34.4 billion to¥65.1 billion. This reflected a ¥30.0 billion drop in straight corporate bonds and a ¥4.3 billion
decline in bank borrowings. The result was a marked improvement in the debt-to-equity ratio
from 29.9% to 17.3%.
Shareholders’ equity increased ¥44.7 billion to ¥376.9 billion, due mainly to favorable businessresults, which pushed up retained earnings by ¥37.8 billion. As a result, shareholders’ equity,
as a percentage of total assets, improved by 5.2 percentage points to 56.8%, but the returnon average total shareholders’ equity (ROE) declined 6.8 percentage points to 13.5%.

(Times)

800

20

04

05

06

0

■ Shareholders' Equity
Shareholders' Equity Ratio

Capital Expenditures and Depreciation and Amortization(Billions of Yen)

0

02

03

04

05

■ Capital Expenditures■ Depreciation and Amortization

26

13.3

9.9

10

11.0

12.4

20

19.2

21.5

25.0

27.4

26.3

30

30.9

40

06

ANNUAL REPORT 06

Free Cash Flows(Billions of Yen)

106.9

120

68.3

90

60

–0.7

30
14.1

Cash FlowsNet cash provided by operating activities was ¥78.9 billion, ¥35.5 billion lower compared tothe previous fiscal year. The principal sources of cash from operating activities included
income before income taxes of ¥75.3 billion, depreciation and amortization of ¥19.2 billion, adecrease in trade notes and accounts receivable of ¥5.1 billion, and an increase in trade notes
and accounts payable of ¥6.7 billion. The principal uses of cash from operating activities
included a decrease in customer advances of ¥9.5 billion and payment of income taxes of¥19.5 billion.
Net cash used in investing activities was ¥10.5 billion, ¥3.1 billion more than in the previous
fiscal year. The principal use of cash was ¥8.6 billion for the purchase of property, plant andequipment, mainly for the purchase of evaluation, measuring and other equipment for researchand development.
Net cash used in financing activities was ¥43.4 billion, ¥9.1 billion more than in the previous
fiscal year. The principal uses of cash were ¥30.0 billion for the redemption of the 9th series of
unsecured straight bonds, ¥5.5 billion in repayment of long-term debt, and dividend paymentsof ¥9.8 billion.
As a result, cash and cash equivalents at March 31, 2006 were ¥140.0 billion, an increaseof ¥24.6 billion from the end of the previous fiscal year.

41.8

TOKYO ELECTRON LIMITED

03

04

0

〜

–30

02

05

06

Free Cash Flows=Cash Flows From Operating
Activities+Cash Flows From Investing Activities

Business-related and Other Risks
The following are possible risks that may have an impact on Tokyo Electron’s business performance, stock price, or financial position.
(1) Impact of Fluctuating Foreign Exchange Rates
Success in the development of overseas operations has increased the share of sales generated overseas. As a rule, Tokyo Electron
conducts export transactions on a yen basis to avert exposure to foreign currency risks. However, some exports are denominated inforeign currencies. In these cases, Tokyo Electron hedges foreign currency risk by using a forward foreign exchange contract when anorder is received or by other means. However, foreign exchange rate risks can arise from fluctuations in prices due to sudden foreignexchange movements, which could have an indirect adverse effect on Tokyo Electron’s business performance.
(2) Impact From Research and Development
Through ongoing and proactive R&D investment and activities in cutting-edge technologies—miniaturization, vacuum, plasma, thermalprocessing, coating/developing, cleaning, wafer-transfer and clean technologies—Tokyo Electron has created advanced technologies.
At the same time, by quickly bringing to market new products incorporating these technologies, Tokyo Electron has successfully captured
a high market share in each of the product fields it has entered and generated a high profit margin. However, delays in the launch of new
products and other factors could adversely affect Tokyo Electron’s business performance.
(3) Impact From Changes in the Semiconductor Market
Tokyo Electron has achieved a high profit margin by concentrating resources in high-tech fields, including semiconductor production
equipment, where technological innovation is rapid but Tokyo Electron can effectively use its strengths. Although technological change is
responsible for the semiconductor market’s rapid growth, Tokyo Electron has actively undertaken structural reforms to be able to generate
profits under any circumstances, such as when the market contracts temporarily due to imbalance of supply and demand. However, ordercancellations, excess capacity and personnel and increased inventories resulting from an unexpectedly large market contraction could
adversely affect Tokyo Electron’s business performance.

27

TOKYO ELECTRON LIMITEDANNUAL REPORT 06(4) Impact From Concentration of Transactions on Particular Customers
Tokyo Electron has been successful at increasing transactions with the leading semiconductor manufacturers worldwide, including thosein Japan, through the provision of products featuring outstanding, cutting-edge technology and of services offering a high level of customer
satisfaction. However, Tokyo Electron’s sales may from time to time be temporarily concentrated on particular customers due to thetiming of large capital investments of major semiconductor manufacturers. The resulting escalation in sales competition could adversely
affect Tokyo Electron’s business performance.
(5) Safety-related Impacts
Tokyo Electron’s basic philosophy is to always bear in mind safety and health in the execution of business activities, including development,
manufacturing, sales, services and management. In accordance with this philosophy, Tokyo Electron works actively and continuously to
improve the safety of its products and to eliminate any harmful impact on health. However, harm to customers, order cancellations orother circumstances resulting from safety problems or other problems related to Tokyo Electron’s products could adversely affect
Tokyo Electron’s business performance.
(6) Impact From Quality Issues
Tokyo Electron actively develops outstanding, cutting-edge technologies for incorporation in new products that are brought quickly tomarket. At the same time, Tokyo Electron works to establish a quality assurance system, efforts that include obtaining ISO 9001 certification, as well as to establish a world-class service system. These actions have resulted in a large number of customers adopting Tokyo
Electron’s products. However, because Tokyo Electron’s products are based on cutting-edge technologies, and due to other factors,
many of the technologies developed are in unfamiliar fields. The occurrence of unforeseen defects or other issues could adversely affect
Tokyo Electron’s business performance.
(7) Impact of Intellectual Property Rights
In order to distinguish its products and make them more competitive, Tokyo Electron has promoted its R&D strategy for the early development of cutting-edge technologies together with its business and intellectual property strategies. This approach has enabled Tokyo
Electron to obtain sole possession of many proprietary technologies that have been instrumental to Tokyo Electron’s ability to capture ahigh market share and generate high profit margins in each of its product fields. However, Tokyo Electron’s products incorporate andoptimize many of these proprietary cutting-edge technologies. There may be cases, whereby avoiding the use of third-party technologies
and intellectual property rights, Tokyo Electron’s business performance could be adversely affected.
(8) Other Risks
Tokyo Electron is actively involved in reforming the corporate structure so that it can generate profits even when markets contract.
These reforms have entailed creating new high-growth, high-return businesses and pursuing higher earnings from existing businesses.
At the same time, Tokyo Electron has promoted activities to preserve the environment and worked to restructure its compliance and risk
management systems. However, as long as it conducts business activities, as with peer companies or companies in different industries,
Tokyo Electron is subject to the effect of many other factors. These include the world and regional economic environments, natural disasters, war, terrorism, unavoidable occurrences (such as infectious diseases), financial or stock markets, government or other regulations,
supply systems of suppliers, market conditions for products and real estate, the ability to recruit personnel in Japan and overseas, competition over standardization, and loss of key personnel. Any of these factors could adversely affect Tokyo Electron’s business performance.

28

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

CONSOLIDATED SIX-YEAR SUMMARYTokyo Electron Limited and Subsidiaries
Years ended March 31, 2006, 2005, 2004, 2003, 2002 and 2001

Thousands of
U.S. dollars

Millions of yen

2006

2006

2005

2004

2003

2002

2001

Net sales1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Semiconductor production equipment2 . . . . .
FPD production equipment2 . . . . . . . . . . . . . .
Computer network2 . . . . . . . . . . . . . . . . . . . .
Electronic components . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . .

$5,734,965
4,144,743
691,040
148,951
739,599
10,632644,446
641,256
408,663¥673,686
486,883
81,176
17,49786,881
1,249
75,70375,32848,006¥635,710
457,191
75,03815,96686,2491,266
63,98355,77561,601¥529,654
425,747–
18,44884,2291,230
22,28014,9368,297¥460,580
364,689–
17,19377,3801,318
1,119(23,010)(41,554)¥417,825
325,715–
17,03173,658
1,421(18,310)(22,919)(19,938)¥723,880
619,001–
14,054
89,211
1,614
121,086
99,13262,012

Domestic sales . . . . . . . . . . . . . . . . . . . . . . . . . .
Overseas sales . . . . . . . . . . . . . . . . . . . . . . . . . .

2,234,883
3,500,082

262,532
411,154

232,678
403,032

242,318
287,336

190,513
270,067

186,516
231,309299,272
424,608

Depreciation and amortization . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . .
R&D expenses . . . . . . . . . . . . . . . . . . . . . . . . . .

163,191
113,517418,673

19,17013,33549,182

21,4639,876
43,88924,963
11,00744,15027,374
12,35950,123

26,29430,94653,827

21,67949,403
52,911

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . .

5,646,063
3,208,480

663,243
376,900

644,320
332,165

561,632
275,800

524,901
252,904

556,915
307,579

729,511333,281

8,901

8,864

8,870

10,053

10,171

10,236

Number of employees . . . . . . . . . . . . . . . . . . . .
U.S. dollars

Net income (loss) per share of common stock:3
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per share of common stock . . .

$

2.28
2.28
0.47

Number of shares outstanding (thousands) . . . .
Number of shareholders . . . . . . . . . . . . . . . . . . .

Yen¥ 267.61
267.3255.00¥ 343.63
343.54
45.00

¥

46.37
45.78
10.00

¥ (238.57)–
8.00¥ (113.85)–
8.00¥ 353.76
344.75
38.00

180,611
46,272

180,61160,857

180,61160,873

175,698
49,259175,691
37,116

175,691
42,781(14.8)
0.2
48.2
0.85

(6.2)
(4.4)
55.2
0.65

20.4
16.7
45.7
1.18

¥ 41,080¥ 70,719

Percent

ROE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity ratio . . . . . . . . . . . . . . . . . .
Asset turnover (times) . . . . . . . . . . . . . . . . . . . . .

13.5
11.2
56.8
1.03

20.3
10.1
51.6
1.05

3.1
4.2
49.1
0.97

¥ 75,687¥ 71,718¥ 59,713

U.S. dollars

Net sales per employee . . . . . . . . . . . . . . . . . . .

$ 644,309

Thousands of yen¥ 45,815

1 Until 2004, revenue from Semiconductor and FPD (Flat Panel Display) production equipment had been recognized at the time of shipment. But starting from 2005, such revenue
is principally recognized at the time of the confirmation of set-up and testing of products.
2 Until 2004, the FPD division had been included in Semiconductor production equipment. The Computer systems division was renamed the Computer network division
starting from April 1, 2000.
3 From 2003, the Company applied “Accounting Standards Regarding Net Income per Share (Business Accounting Standards No. 2)” and “Practical Guidelines for Applying
Accounting Standards Regarding Net Income per Share (Practical Guidelines for Applying Accounting Standards No. 4)” released by the Accounting Standards Board of Japan (ASBJ).
4 Dilution is not assumed for the years ended March 31, 2003 and 2002.

29

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

CONSOLIDATED BALANCE SHEETSTokyo Electron Limited and Subsidiaries
March 31, 2006 and 2005ASSETS

Thousands of
U.S. dollars

Millions of yen

2006

2005

2006

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥140,024¥115,420$1,191,998

Trade notes and accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

169,038

172,488

1,438,989

Current assets:

Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(165)

(114)

(1,403)Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

163,746

161,489

1,393,938

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,356

18,173

181,802

Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,48927,730199,953

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

517,488495,186

4,405,277

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18,15018,351

154,504

Property, plant and equipment:

Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

112,225

111,119955,351

Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

94,76490,497806,712Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,216

1,786

18,863

Total property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

227,355

221,753

1,935,430

Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

132,617

123,337

1,128,941

Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

94,73898,416806,489

Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,86010,381

126,502

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,175

15,313112,153

Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,71018,612

142,246

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,272

6,412

53,396

Total investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51,01750,718434,297

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥663,243¥644,320$5,646,063

Investments and other assets:

See accompanying Notes to Consolidated Financial Statements.

30

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

LIABILITIES AND SHAREHOLDERS’ EQUITY

Thousands of
U.S. dollars

Millions of yen

2006

2005

2006

Current liabilities:
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥

2,100
24,500¥976
35,476$

17,877
208,564

Trade notes and accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75,84270,472645,627

Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33,81142,970287,824

Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22,895

13,357

194,902

Accrued employees’ bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,231

8,645

87,093

Accrued warranty expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,21913,106

104,024

Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,02921,609170,504

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

201,627

206,611

1,716,415

Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38,50063,000327,743

Accrued pension and severance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38,751

36,382329,880

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,743

1,751

23,349Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

281,621

307,7442,397,387

Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,722

4,411

40,19654,961

54,961

467,874

Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78,07978,023

664,670

Contingent liabilities

Shareholders’ equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Authorized: 300,000,000 shares
Issued: 180,610,911 shares as of March 31, 2006 and 2005

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

249,938

212,094

2,127,676

Unrealized gains on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,118

2,133

43,565

Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,921

997

33,381

Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(15,117)(16,043)(128,686)

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

376,900

332,165

3,208,480

Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥663,243¥644,320$5,646,063

2,336,475 and 2,529,672 shares as ofMarch 31, 2006 and 2005, respectively

31

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

CONSOLIDATED STATEMENTS OF INCOME
Tokyo Electron Limited and Subsidiaries
Years ended March 31, 2006 and 2005

Thousands of
U.S. dollars

Millions of yen

2006

2005

2006

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥673,686¥635,710$5,734,965

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

483,954459,797

4,119,814

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

189,732

175,913

1,615,151

Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

114,029

111,930

970,705

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75,70363,983644,446

Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

504

236

4,289

Interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(687)(1,094)(5,846)

Income from development grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,537

2,194

13,081

Foreign exchange losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,676)(723)(14,266)

Gain on refund for foreign indirect taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

855

–

7,282

Loss on impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(419)

–

(3,566)

Gain on return of substitutional portion of employees’ pension fund . . . . . . . . . . . . . . . . . . .

–

7,084

–

Other income (expenses):

Provision for warranty expenses for prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–(12,470)–

Loss on business reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–(2,783)–

Loss on impairment of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(94)

(573)

(804)

Loss on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(658)(1,388)(5,604)

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

263

1,309

2,244

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75,32855,775641,256

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,18915,540248,490

Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,352)(21,970)(20,025)

Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

485

604

4,128

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 48,006¥ 61,601$ 408,663

Income taxes:

Per share of common stock:

Yen

U.S. dollars

Net income — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 267.61¥ 343.63

Net income — diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

267.32343.54

2.28

Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55.00

45.00

0.47

See accompanying Notes to Consolidated Financial Statements.

32

$

2.28

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYTokyo Electron Limited and Subsidiaries
Years ended March 31, 2006 and 2005

Thousands of
U.S. dollars

Millions of yen

2006

2005

2006

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 54,961¥ 54,961$ 467,874

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54,961

54,961

467,874

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78,02378,023

664,196

Gain on sale of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

56

–

474

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78,07978,023

664,670

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

212,094

154,343

1,805,515

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48,006

61,601

408,663

Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(9,796)(3,743)(83,391)

Directors’ bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(350)

(107)

(2,973)

Effect of newly consolidated subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(16)

–

(138)

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

249,938

212,094

2,127,676

Common stock

Capital surplus

Retained earnings

Unrealized gains on securities
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,133

2,396

18,155

Net changes during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,985

(263)

25,410

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,118

2,133

43,565

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

997

(720)

8,488

Net changes during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,924

1,717

24,893

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,921

997

33,381

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(16,043)(13,203)(136,568)

Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(39)(2,840)(330)

Resale for stock option plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

965

–

8,212

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(15,117)(16,043)(128,686)

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥376,900¥332,165$3,208,480

Foreign currency translation adjustments

Treasury stock, at cost

See accompanying Notes to Consolidated Financial Statements.

33

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

CONSOLIDATED STATEMENTS OF CASH FLOWSTokyo Electron Limited and Subsidiaries
Years ended March 31, 2006 and 2005

Thousands of
U.S. dollars

Millions of yen

2006

2005

2006

Cash flows from operating activities:
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 75,328¥ 55,775$ 641,256

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19,17021,463

163,191

Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,600

1,600

13,622

Loss on impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

419

–

3,566

Increase in accrued pension and severance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,340

5,158

19,919

Increase in accrued employees’ bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,587

2,258

13,503

Increase (decrease) in accrued warranty expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(985)

13,106(8,387)

Interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

687

1,094

5,846

Gain on refund for foreign indirect taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(855)

–

(7,282)

Loss on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

658

1,388

5,604

Gain on return of substitutional portion of employees’ pension fund . . . . . . . . . . . . . . . . . . .

–(7,084)–

Loss on business reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–

2,783

–

Decrease in trade notes and accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,144

59,115

43,790

Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5,467)(59,914)(46,542)

Increase (decrease) in trade notes and accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,743(7,440)57,402

Increase (decrease) in customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(9,505)30,816(80,911)

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,751

1,482

14,910Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

98,615

121,600

839,487

Receipts from interest and dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

503

241

4,281

Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(739)(1,159)(6,289)Payment for business reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–(1,558)–

Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(19,525)(4,774)(166,213)

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78,854

114,350

671,266(8,601)(8,680)(73,218)

Cash flows from investing activities:
Payment for purchase of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,280

3,798

10,893

Payment for acquisition of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,611)(1,780)(22,224)

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(605)

(788)

(5,148)Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(10,537)(7,450)(89,697)

1,037(5,864)

8,831

Cash flows from financing activities:
Increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5,476)(1,754)(46,613)

Redemption of unsecured bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(30,000)(20,000)(255,384)(Increase) decrease in treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

982(2,840)8,356

Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(9,796)(3,743)(83,391)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(167)

(143)

(1,431)

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(43,420)(34,344)(369,632)

Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .

(341)

214

(2,899)Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24,556

72,770209,038

Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115,420

42,650982,550

Effect of newly consolidated subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48

_

410

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥140,024¥115,420$1,191,998

See accompanying Notes to Consolidated Financial Statements.

34

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tokyo Electron Limited and Subsidiaries

as a component of shareholders’ equity. Other securities without market value
are valued at cost using the weighted average method.
The cost of sold securities is calculated using the weighted average method.

1. Basis of Presentation of Consolidated Financial Statements
The accompanying consolidated financial statements of Tokyo Electron
Limited (hereinafter “the Company”) and its subsidiaries (hereinafter collectively
referred to as “Tokyo Electron”) have been prepared in accordance with theprovisions set forth in the Japanese Securities and Exchange Law and its related
accounting regulations, and in conformity with accounting principles generally
accepted in Japan, which are different in certain respects as to application anddisclosure requirements of International Financial Reporting Standards.
The accounts of overseas subsidiaries are based on their accounting
records maintained in conformity with generally accepted accounting principles
prevailing in the respective countries of domicile.
The accompanying consolidated financial statements have been
restructured and translated into English from the statutory Japanese language
consolidated financial statements. Some supplementary information included in
the statutory Japanese language consolidated financial statements, which is
not required for fair presentation, is not presented in the accompanying consolidated financial statements.
U.S. dollar amounts included herein are solely for the convenience of readers and are presented at the rate of ¥117.47 to $1.00, the approximate rate asof March 31, 2006. The translation should not be construed as a representation that the Japanese yen amounts shown could be converted into U.S.
dollars at that or any other rate.

(d) Inventories
Inventories other than raw materials are stated principally at cost, which isdetermined principally by the individual method. Raw materials are stated principally at cost, which is determined principally by the moving-average method.
(e) Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation of buildings,
machinery and equipment of the Company and its domestic subsidiaries iscomputed under the declining balance method, except for buildings acquired
subsequent to March 31, 1998 which were depreciated under the straight-line
method based on the estimated useful lives of assets. The straight-line method ismainly applied for its foreign subsidiaries over the estimated useful lives of assets.
Estimated useful lives of property, plant and equipment are as follows:
Buildings
2 to 60 years
Machinery and equipment
2 to 17 years(f) Intangible assets
Intangible assets, which primarily comprise of capitalized costs for computer
software and goodwill, are amortized by the straight-line method over theirestimated useful lives. Capitalized costs for computer software for internal use
are amortized over a period of two to five years. Goodwill is evaluated on an
individual basis and amortized over a period not exceeding 20 years.

2. Summary of Significant Accounting Policies(g) Impairment of fixed assets
Tokyo Electron evaluates the carrying value of fixed assets to be held for use
in the business.
If the carrying value of a fixed asset is impaired, a loss is recognized basedon the amount by which the carrying value exceeds its recoverable amount,higher of the net selling price or the value in use of the assets, which are determined using the fair value less disposal costs and the total amount of discounted cash flows generated from the continuing use of the individual assets
or the asset group and the disposal of these assets, respectively.
The Company adopted “Accounting Standard for Impairment of Fixed
Assets”, issued by the Business Accounting Deliberation Council and theimplementation guidance for the accounting standard for impairment of fixed
assets (the Financial Accounting Standard Implementation Guidance No. 6
issued by the Accounting Standard Board of Japan), effective from the fiscal
year beginning April 1, 2005.
As a result of this change, impairment losses on fixed assets amounting to¥419 million ($3,566 thousand) were recognized for the year ended March 31,
2006, and therefore income before income taxes decreased by the sameamount as compared with before the change.

(a) Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its 24 subsidiaries.
The investments in affiliates in which the Company’s ownership is 20% to
50% are accounted for by the equity method.
All significant inter-company accounts, transactions and unrealized profits orlosses have been eliminated in consolidation.
The fiscal year of all entities is March 31, except for two foreign subsidiaries,
which use a December 31 year-end, and no significant transactions werenoted between the different fiscal year-ends.
(b) Foreign currency translation
All assets and liabilities denominated in foreign currencies are translated into
Japanese yen at the year-end rates, except for those hedged by forward
exchange contracts, which are translated at the contracted rates.
Revenue and expense items are translated at the rates that approximate
those rates prevailing at the time of the transactions.
The balance sheet accounts of the foreign subsidiaries are translated into
Japanese yen at the rates of exchange in effect at the balance sheet date,
except for shareholders’ equity accounts, which are translated at the historicalrates. Revenue and expense accounts of the foreign subsidiaries are translated
at average rates of exchange in effect during the year. Resulting translation
adjustments are presented as a component of shareholders’ equity and minority interests in the consolidated financial statements.

(h) Allowance for doubtful accounts
The allowance for doubtful accounts is provided at an amount determinedbased on the historical experience of bad debts with respect to ordinary
receivables, and an estimate of uncollectible amounts determined by reference
to specific doubtful receivables from customers which are experiencing
financial difficulties.

(c) Investment securities
Tokyo Electron is required to examine the intent of holding each security andclassify those securities as trading securities, held-to-maturity debt securities
or other securities. Tokyo Electron has no trading or held-to-maturity debt
securities. Other securities with market prices are valued at fair market value
prevailing at the balance sheet date. The differences between the book andmarket prices of other securities, net of applicable income taxes, are presented(i) Accrued pension and severance costs
The Company and its domestic subsidiaries provide an accrual for employees’ pension and severance costs based on the projected benefit obligationand pension assets on the account settlement date. Prior service costs arecharged to income on a straight-line basis, beginning from the fiscal year in

35

TOKYO ELECTRON LIMITEDANNUAL REPORT 06(o) Per share information
Net income per share is computed based on the weighted average numberof shares of common stock outstanding during each year.
The Company applies “Accounting Standards Regarding Net Income per
Share (Business Accounting Standards No. 2)” and “Practical Guidelines for
Applying Accounting Standards Regarding Net Income per Share (Practical
Guidelines for Applying Accounting Standards No. 4)” released by the
Accounting Standards Board of Japan.
Dividends per share have been presented on an accrual basis and include,in each fiscal year ended March 31, dividends approved or to be approved
after March 31 but applicable to the year then ended.

which they are incurred, over a fixed number of years (four years) within the
average remaining years of service of employees when the differences occur.
Actuarial differences are charged to income on a straight-line basis, beginningfrom the fiscal year after they are recognized, over a fixed number of years (fouryears) within the average remaining years of service of employees when the
differences occur.
The annual provision for accrued pension and severance costs for directors
and statutory auditors of the Company and its domestic subsidiaries is calculated in accordance with internal regulations.
The Company and certain domestic subsidiaries decided to discontinue theseverance pay for directors and statutory auditors after April 1, 2005, and at
the shareholders’ meetings on June 24, 2005 it was resolved that the severance pay for their directors and statutory auditors until March 31, 2005 would
be paid at the termination of their service. As discussed in note 9, the accruals
for the severance costs for directors and statutory auditors were included in
accrued pension and severance costs in the consolidated balance sheets.

(p) Research and development expenses
Research and development expenses are charged to income as incurred,
and amounted to ¥49,182 million ($418,673 thousand) and ¥43,889 million forthe years ended March 31, 2006 and 2005, respectively.
(q) Cash equivalents
For purposes of the consolidated statements of cash flows, Tokyo Electron
considers all highly-liquid instruments purchased with original maturities ofthree months or less to be cash equivalents.

( j) Accrued warranty expenses
Tokyo Electron’s products are generally subject to warranty, and Tokyo
Electron accrues such estimated costs when product revenue is recognized.
To prepare for future repairs during warranty periods, estimated after-salerepair expenses over the warranty period are accrued based on the historicalratio of actual repair expenses to corresponding sales.

(r) Reclassifications
Certain reclassifications have been made to the prior year’s consolidated
financial statements to conform with the presentation used for the year ended
March 31, 2006. These changes had no impact on previously reported resultsof operations or shareholders’ equity.

(k) Leases
Noncancelable leases are primarily accounted for as operating leases(whether such leases are classified as operating or finance leases), except forleases that have transfer of ownership condition to the lessee at the end of thelease which are accounting for as finance leases.

3. Changes in Accounting Policies(a) Revenue recognition
Until the year ended March 31, 2004, revenue from Semiconductor and FPD
production equipment was recognized at the time of shipment. Effective fromthe year ended March 31, 2005, the Company changed its method of revenue
recognition in which such equipment sales revenue is principally recognized at
the time of the confirmation of set-up and testing of products. This change isintended to reflect the actual situation of revenue more appropriately, corresponding to the fact that the process from the shipment of products to theconfirmation of set-up and testing of products has shown a marked tendency
to become longer, and review of post-shipment business processes has madeit possible to provide a complete set of data upon the confirmation of set-up
and testing of products.
The effect of this change was to decrease net sales, operating income andincome before income taxes by ¥80,956 million, ¥20,541 million and ¥20,563
million, respectively, for the year ended March 31, 2005 as compared with thecorresponding amounts which would have been recorded if the previous
method had been followed.

(l) Derivatives and hedge accounting
The Company and a domestic subsidiary make use of derivatives in order tomanage certain risks arising from adverse fluctuations in foreign currency
exchange rates. The amount of derivatives is limited to the extent of foreign
currency assets, liabilities and actual orders, and the Company does not tradein derivatives for speculative purposes.
Derivatives are carried at fair value with changes in unrealized gain or loss
charged or credited to income, except for those which meet the criteria fordeferred hedge accounting under which unrealized gain or loss is deferred as
an asset or a liability. Receivables and payables hedged by qualified forward
foreign exchange contracts are translated at the corresponding foreignexchange contract rates.
(m) Income taxes
Income taxes of the Company and its domestic subsidiaries consist of
corporate income taxes, local inhabitants’ taxes and enterprise tax. Tokyo
Electron records deferred tax assets and liabilities, which are measured using
the enacted tax rates and laws which will be in effect when the differences are
expected to reverse, on temporary differences between the carrying amountsof assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.

(b) Accrued warranty expenses
Until the year ended March 31, 2004, after-sale repair expenses incurred
during the warranty period for Semiconductor and FPD production equipment
were charged to income as incurred. Effective from the year ended March 31,
2005, the Company changed its method to account for after-sale repair
expenses by implementing accrued warranty expenses for such equipment,
calculated on the basis of after-sale repair expenses incurred in the past. Thischange is intended to make periodic income more appropriate by matchingafter-sale repair expenses with revenues when products are sold, with theincreased importance on after-sale service. A complete set of historical data on
actual after-sale repair expenses, as well as remaining warranty period compiled, has made possible the calculation of accrued warranty expenses.

(n) Revenue recognition
Revenue from Semiconductor and FPD (Flat Panel Display) production
equipment is principally recognized at the time of the confirmation of set-up
and testing of products. Revenue from such equipment not requiring substantial installation is recognized at the time of shipment. Revenue from otherproducts, such as electronic components, is recognized at the time of shipment. Service revenue from maintenance is recognized ratably over the term of
the maintenance contract.

36

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

The effect of this change was to decrease operating income and income
before income taxes by ¥635 million and ¥13,106 million, respectively, for theyear ended March 31, 2005 as compared with the corresponding amounts
which would have been recorded if the previous method had been followed.
The provision for accrued warranty expenses related to revenues recognized inprior years were recorded as other expense in the accompanying consolidated
statement of income for the year ended March 31, 2005.

5. Inventories

2006

2005

2006

Finished products . . . . . . . . . . . . . . .
Work in process, raw materials
and supplies . . . . . . . . . . . . . . . . . . .

¥ 95,564¥102,418$ 813,514

68,182

59,071

580,424(c) Business segment
Tokyo Electron is involved in the manufacture and sale of industrial electronic products. In the past, Tokyo Electron’s business was classified as asingle segment based on its sales method.
Effective from the year ended March 31, 2005, the segment classification waschanged and separated into two segments: “industrial electronic equipment”
and “electronic components”, which were determined based on the types of
products and service, as well as sales methods. The new classification of thebusiness segments reflects more appropriately the businesses of Tokyo Electron.

Total . . . . . . . . . . . . . . . . . . . . . . . . .

¥163,746¥161,489$1,393,938

Inventories as of March 31, 2006 and 2005 are as follows:

6. Impairment of Fixed Assets
For the fixed asset impairment test, the Company generally groups fixed
assets used for normal operations at a business unit level of which profits arereasonably controllable. Also, the Company assesses the recoverability of
individual assets not used in normal operations or that are idle.
The Company recorded impairment losses for the lands used for employees’ welfare of ¥419 million ($3,566 thousand) in 2006. These charges wererecorded in other income (expenses) in the consolidated statement of income.

4. Investment Securities
Investment securities, which solely comprise of other securities, as of March
31, 2006 and 2005 are as follows:

7. Pledged Assets
Tokyo Electron did not hold any assets pledged as collateral as of March 31,
2006 and 2005.

Millions of yen

2006:

Cost

Securities with market prices
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥5,348114¥13,940
119

Securities without market value
Unlisted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,708
23

778
23

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥7,193¥14,860

Carrying value

8. Short-term Borrowings and Long-term Debt
Short-term borrowings are represented by 365-day notes issued by Tokyo
Electron to banks and bore interest at the average annual rate of 1.58% and1.80% as of March 31, 2006 and 2005, respectively.
Long-term debt as of March 31, 2006 and 2005 is as follows:
Millions of yen

Millions of yen

2005:

Thousands of
U.S. dollars

Millions of yen

Cost

2006

2005

–
20,00030,000¥ 30,000
20,00030,000

4,500

4,500

38,3085,500
3,000(24,500)

5,500
8,476
(35,476)

46,821
25,538(208,564)¥ 38,500¥ 63,000$ 327,743

Carrying value

Securities with market prices
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥5,484114¥ 9,059
115

Securities without market value
Unlisted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,712
23

1,184
23

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥7,333¥10,381

2006:

Cost

Thousands of U.S. dollars

Thousands of
U.S. dollars

1.30% unsecured bonds due 2005 . .
0.42% unsecured bonds due 2006 . .
0.72% unsecured bonds due 2008 . .
1.59% unsecured bonds withwarrants due 2006 . . . . . . . . . . . . . .
0.86% unsecured bonds withwarrants due 2007 . . . . . . . . . . . . . .
Other loans from banks . . . . . . . . . . .
Current portion . . . . . . . . . . . . . . . . . .

¥Total . . . . . . . . . . . . . . . . . . . . . . . . .

2006

$

–
170,256
255,384

Carrying value

Securities with market prices
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$45,528
968$118,670
1,015

Securities without market value
Unlisted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,545
194

6,623
194

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$61,235$126,502

As of March 31, 2006, Tokyo Electron has unused lines of credit amounting
to ¥113,500 million ($966,204 thousand).
The maturities of long-term debt are summarized as follows:
Millions ofyenYear ending March 31

37

Thousands of
U.S. dollars

2006

2006

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . .

¥24,500
8,500
30,000––$208,564
72,359255,384––

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥63,000$536,307

TOKYO ELECTRON LIMITEDNet pension cost of the plans is as follows:

9. Accrued Pension and Severance Costs
Prior to January 2005, the Company and its domestic subsidiaries had
noncontributory retirement and severance benefit plans that provided forpension or lump-sum payment benefits to employees who retired or terminatedtheir employment for reasons other than dismissal for cause. In addition, themajority of the employees of the Company and its domestic subsidiaries werecovered by a contributory pension plan, whose benefits were based on lengthof service and certain other factors. This pension plan included a substitutional
portion representing the government social security welfare pension.
In January 2004, following the enactment of changes to the Japanese
Welfare Pension Insurance Law, the Company and its domestic subsidiaries
obtained an approval from the Japanese Ministry of Health, Labor and Welfare
for exemption from the future benefit obligation with respect to the substitutional portion of the Welfare Pension Insurance Scheme. After obtaining theapproval, in January 2005, these companies obtained another approval for
separation of the remaining benefit obligation of the substitutional portion thatwas related to past employees services. The transfer to the government wascompleted on July 22, 2005.
The Company and its domestic subsidiaries accounted for the transitional
provisions in accordance with paragraph 44-2 of the JICPA Accounting
Committee Report No. 13, “Practical Guideline for Accounting of Retirement
Benefits (Interim Report),” and recognized a gain of ¥7,084 million, upon thereceipt of the second approval in January 2005, as “Gain on return on substitutional portion of employees’ pension fund” in the consolidated statement ofincome for the year ended March 31, 2005.
In January 2005, following the approval for separation of the substitutional
portion, the Company and its domestic subsidiaries amended the contributory
pension plan to a cash balance pension plan. Additionally, the Company andits domestic subsidiaries amended the noncontributory retirement and severance benefit plans. The net effect of these plan amendments was to increase
the benefit obligation by ¥3,799 million, and the resulting prior service cost wasamortized over four years.
The additional gain derived from the difference in the fair value of plan
assets between approval date and transfer completion date was recorded forthe year ended March 31, 2006. The effect of the additional gain to the consolidated financial statements was not material.
Certain foreign subsidiaries have a noncontributory retirement and severance benefit plan that provided for pension or lump-sum payment benefits toemployees who retire or terminate their employment for reasons other thandismissal for cause.
The funded status of the defined benefit plans, a substantial portion of which
consists of domestic benefit plans, as of March 31, 2006 and 2005 is as follows:
Millions of yen

2005

2006

Benefit obligation . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . .

¥(64,689)
24,962¥(59,984)
18,388$(550,690)
212,500

Unrecognized benefit obligation . . . . .
Unrecognized actuarial difference . . .
Unrecognized prior service cost . . . . .

(39,727)(1,496)
3,188(41,596)
1,249
4,714

(338,190)(12,731)
27,140¥(38,035)¥(35,633)

Millions of yen

Thousands of
U.S. dollars

2006

2005

2006

Service cost . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . .
Amortization of actuarial difference . . .
Amortization of prior service cost . . . .

¥4,757
1,186
(276)
1,876
1,526

¥4,724
1,397
(317)
4,677
350

$40,488
10,095(2,348)15,973
12,993

Net pension cost . . . . . . . . . . . . . . . .
Gain on return of substitutional
portion of employees’ pension fund . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .

9,069

10,831

77,201–(24)(7,084)––(199)

Net . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥9,045¥3,747$77,002

Significant assumptions of domestic pension plans used to determine theseamounts are as follows:
2006

Allocation method of benefit obligation . . . . . . . . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected rate of return on plan assets . . . . . . . . . . . .
Amortization period of prior service cost . . . . . . . . . .
Amortization period of actuarial difference . . . . . . . . .

2005

Straight-line method
2.00%
2.00%
2.00%
1.50%
4 years
4 years
4 years
4 years

10. Income Taxes
Significant components of the deferred tax assets and liabilities of Tokyo
Electron as of March 31, 2006 and 2005 are as follows:
Thousands of
U.S. dollars

Millions of yen

2006

2005

2006

¥ 15,134¥13,469$128,834

8,298
4,737
4,140
3,653
1,954
1,555
1,123

6,293
5,333
3,498
2,501
3,751
1,030
2,082

70,64140,32635,24031,095
16,634
13,234
9,564

1,002
4,955

1,104
4,690

8,533
42,176

Total gross deferred tax assets . . . . .
Less valuation allowance . . . . . . . . . .

46,551(2,848)43,751(2,112)396,277(24,239)

Total deferred tax assets . . . . . . . . . .
Deferred tax liabilities
Net unrealized gains on securities . . .
Undistributed earnings offoreign subsidiaries . . . . . . . . . . . . . .
Reserves under Special Taxation
Measures Law, etc. . . . . . . . . . . . . .
Prepaid start-up expenses . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .

43,703

41,639372,038(3,480)(1,443)(29,623)(2,766)(2,444)(23,544)(2,547)(1,856)(288)(2,568)(2,783)(254)(21,685)(15,804)(2,449)Deferred tax assets
Accrued pension andseverance costs . . . . . . . . . . . . . . . .
Elimination of unrealized profit
on inventories . . . . . . . . . . . . . . . . . .
Accrued warranty expenses . . . . . . . .
Accrued employees’ bonuses . . . . . .
Depreciation and amortization . . . . . .
Devaluation of inventories . . . . . . . . . .
Accrued business taxes . . . . . . . . . . .
Net operating loss carryforwards . . . .
Elimination of unrealized profit
on fixed assets . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .

Thousands of
U.S. dollars

2006

Amount recognized in the
consolidated balance sheets(Note) . . . . . . . . . . . . . . . . . . . . . . . .

ANNUAL REPORT 06

Total gross deferred tax liabilities . . . .

(10,937)(9,492)(93,105)

Net deferred tax assets . . . . . . . . . . .

¥ 32,766¥32,147$278,933

Effective from the year ended March 31, 2006, the Company and its whollyowned domestic subsidiaries adopted the tax consolidation for national
corporate tax purposes.
The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the period in which those temporary
differences become deductible. For assessment of the realizability of deferred$(323,781)

Note: The annual provision for accrued pension and severance costs for directors and statutory
auditors (¥716 million ($6,095 thousand) in 2006 and ¥749 million in 2005) is not included in
the above.

38

TOKYO ELECTRON LIMITED

tax assets, management considers the scheduled reversal of deferred tax
liabilities, future taxable income, tax planning strategies and level of net
operating loss carryforwards, if any, in accordance with accounting principles
generally accepted in Japan.
In 2005, the Company and its certain subsidiaries utilized a significant portionof net operating loss carryforwards as of March 31, 2004 with operating income
earned under the favorable semiconductor industry and significant portion ofvaluation allowance of ¥31,431 million as of March 31, 2004 was reversed.
Management believes Tokyo Electron will realize the benefits of deferred tax
assets, net of remaining valuation allowance as of March 31, 2005.
In 2006, based on the level of historical taxable income and future taxable
income over the periods which the deferred tax assets are deductible,
management believes Tokyo Electron will realize the benefits of these deferred
tax assets, net of valuation allowance as of March 31, 2006.

to retained earnings for the years ended March 31, 2006 and 2005 represent
dividends paid out during those years. The total amount of legal reserve andadditional paid-in capital of the Company has reached to 25% of common
stock, and therefore, the Company is not required to provide legal reserve any
more. Appropriations are not accrued in the financial statements for the period
to which they relate, but are recorded in the subsequent accounting period
when the approval has been obtained. Retained earnings at March 31, 2006
include amounts representing the year-end cash dividends of ¥30 ($0.26) per
share and bonuses to directors approved at the shareholders’ meeting held on
June 23, 2006.
Under the Japanese Commercial Code, the entire amount of the issue priceof shares is required to be designated as common stock, although a company
may, by a resolution of the board of directors, designate an amount notexceeding one-half of the issue price of the new shares as additional paid-in
capital, which is included in capital surplus.

The Company is subject to a corporate tax, an inhabitant tax and a deductible business tax, which in the aggregate resulted in a statutory income tax rateof approximately 40.69% for the years ended March 31, 2006 and 2005. The
aggregate statutory income tax rate was reduced from the year ended March
31, 2005 due to the revised local tax law. As of March 31, 2004, the Company
and its domestic subsidiaries applied the reduced aggregate statutory income
tax rate of 40.69% for calculating deferred tax assets and liabilities that are
expected to be recovered or settled in the years commencing on April 1, 2004or later. The effects of the reduction in the tax rate were not material to theconsolidated financial statements.
Significant components of the difference between the statutory and effective
tax rates for the years ended March 31, 2006 and 2005 are as follows:
2006

2005

Statutory tax rate in Japan . . . . . . . . . . . . . . . . . . . . .
Adjustments:
Tax credits for research and development costs, etc. . .
Change in valuation allowanceother than net operating loss carryforwards . . . . . . .
Elimination of unrealized profit on inventories . . . . . . .
Utilization of net operating loss carryforwards . . . . . . .
Increase in deferred tax liabilities on undistributed
earnings of foreign subsidiaries . . . . . . . . . . . . . . . .
Others, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40.69%

40.69%(5.70)(2.81)

0.95(0.94)–(24.79)(3.17)(27.77)

0.43
0.20

4.38
1.94

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35.63%(11.53)%

ANNUAL REPORT 06

The Japanese Corporate Law enforced on May 1, 2006 provides that earnings in an amount equal to 10% of appropriations of retained earnings that arepaid in cash shall be appropriated as a capital surplus or a legal reserve until the
total amount of legal reserve and capital surplus equal 25% of common stock.
At the shareholders’ meeting on June 23, 2006, in accordance with theJapanese Corporate Law, the Company altered the articles to allow for the
distribution of earnings to shareholders on dates, other than the mid-term andyear-end by a resolution of the board of directors.

12. Stock-based Compensation
Tokyo Electron has two types of stock-based compensation plans as incentive plans for directors and selected employees. The stock-based compensation plans include stock options (“Stock option plan”) and bonds withdetachable warrants (“Warrant plan”).
Stock option plan
The Company’s shareholders have approved annual stock option plans for
directors and selected employees since the year ended March 31, 1999. In
addition, a stock option plan for statutory auditors was additionally approved at
the Company’s shareholders’ meeting in June 2005. The cumulative number ofshares authorized up to the year ended March 31, 2004 totaled 2,131,900,
with the weighted average exercise price of ¥7,909. Options to purchase 85,200
and 92,000 shares were authorized and granted at exercise prices of ¥1($0.01) and ¥6,468 ($55.06), respectively for the year ended March 31, 2006.
Options to purchase 799,700 shares were authorized and granted at an exercise price of ¥5,884 for the year ended March 31, 2005. The options under theplans vest immediately with restriction on exercise up to two or three years
after the date of grant, and have an exercise period of eight or twenty years fromthe date of grant.

11. Shareholders’ Equity
The Japanese Commercial Code provides that an amount equal to at least
10% of cash dividends and other cash appropriations shall be appropriatedand set aside as a legal reserve until the total amount of legal reserve andadditional paid-in capital, which is included in capital surplus in the accompanying consolidated balance sheets, equals 25% of common stock. The total
amount of legal reserve and additional paid-in capital may be used to eliminate
or reduce a deficit by a resolution of the shareholders’ meeting or may becapitalized by a resolution of the board of directors. On condition that the total
amount of legal reserve and additional paid-in capital remains being equal to or
exceeding 25% of common stock, they are available for distribution by the
resolution of the shareholders’ meeting. Legal reserve as of March 31, 2006
amounted to ¥5,660 million ($48,183 thousand), and is included in retained
earnings in the accompanying consolidated financial statements.
The maximum amount that the Company can distribute as dividends is
calculated based on the non-consolidated financial statements of the Company in accordance with Japanese Commercial Code. Cash dividends charged

Warrant plan
In June 2000 and June 2001, the Company issued unsecured bonds withdetachable warrants. Upon issuance of the unsecured bonds with detachable
warrants, the Company purchased all of the detachable warrants and distributed them to the directors and selected employees. By exercising the warrant,
directors and selected employees can purchase the common stock of theCompany, the numbers of which were 319,829 shares and 572,439 shares atthe exercise price of ¥14,070 and ¥9,608 for warrants issued in June 2000 andJune 2001, respectively. As noted above, the stock option plan granted stock
options at exercise price of ¥1 and to be in accordance with the Warrant plan,

39

TOKYO ELECTRON LIMITEDthe exercise prices of these warrants were adjusted to ¥14,064 ($120) and¥9,604 ($82), respectively. The number of outstanding granted options
increased by 283 shares as a result of this adjustment to the exercise price of
the warrant.
The warrants vest immediately with restriction on exercise up to two years
after the date of grant, and have exercise period of six years from the date of
grant. For financial reporting purposes, these transactions were accounted foras an issuance of debt to third parties and separately as the issuance of
warrants to directors and selected employees.

ANNUAL REPORT 06

14. Contingent Liabilities
Tokyo Electron did not have any material contingent liabilities as of March
31, 2006.

15. Derivative Financial Instruments
The Company and a domestic subsidiary have entered into forward foreignexchange contracts in order to hedge risks of adverse fluctuations in foreign
currency exchange rates associated with export-import transactions, but do
not enter into such transactions for speculative purposes. The Company andthe domestic subsidiary are exposed to credit risk in the event of nonperformance by the counterparties to the derivative transactions, but any such loss
would not be material because the Company and the domestic subsidiary
enter into those transactions only with financial institutions with high credit
ratings. Execution and management of all derivative transactions are conducted pursuant to the internal management rule for derivatives by the financedivision and the effectiveness of derivative transactions is reported on a semiannual basis to the board of directors.
The estimated fair values of the derivative financial instruments as of March
31, 2006 and 2005 are as follows:

As of April 1, 2004, outstanding granted stock options, including the warrant
plan, were 2,680,590 shares, with a weighted-average exercise price of¥8,790. For the year ended March 31, 2005, 67,770 shares of the options
were forfeited with no exercise. For the year ended March 31, 2006, 28,705
shares of the options were forfeited and 198,900 shares of the options were
exercised. As of March 31, 2006, outstanding granted stock options, including
the warrant plan, were 3,362,398 shares with a weighted-average exercise
price of ¥8,014 ($68.22).

13. Leases

Millions of yen

Pro forma information of leased property such as acquisition cost, accumulated depreciation, obligation under finance leases, and depreciation expenseof finance leases that do not transfer ownership of leased property to thelessee on an “as if capitalized” basis for the years ended March 31, 2006 and2005 are as follows:
Leased assets not recorded in the consolidated balance sheets:

2006:

Sell U.S. dollars . . . . . . . . . . . . . .
Buy U.S. dollars . . . . . . . . . . . . . .

2006

2005

2006

Acquisition cost . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . .

¥1,448797¥1,216704$12,325
6,782

Net leased property . . . . . . . . . . . . . .

¥ 651

¥ 512

$ 5,543

2005:

Sell U.S. dollars . . . . . . . . . . . . . .
Buy U.S. dollars . . . . . . . . . . . . . .

2006:

Sell U.S. dollars . . . . . . . . . . . . . .
Buy U.S. dollars . . . . . . . . . . . . . .

Thousands of
U.S. dollars

2006

2005

2006

Due within one year . . . . . . . . . . . . . .
Due over one year . . . . . . . . . . . . . . .

¥247
404

¥296
216

$2,104
3,439

Total . . . . . . . . . . . . . . . . . . . . . . . . .

¥651

¥512

$5,543Thousands of
U.S. dollars

2006

2005

2006

Due within one year . . . . . . . . . . . . . .
Due over one year . . . . . . . . . . . . . . .

¥ 690
696

¥ 514
668

$ 5,875
5,927

Total . . . . . . . . . . . . . . . . . . . . . . . . .

¥1,386¥1,182$11,80245,872
1,909

46,313
1,922

(441)
13

Contract amount––

Fair value

Unrealized
gains (losses)

–
–

–
–

Contract amount

Fair value

Unrealized
gains (losses)

390,500
16,251

394,253
16,364(3,753)113

The contract amounts of the forward foreign exchange contracts presented
above exclude those entered into to hedge receivables and payables denominated in foreign currencies which have been translated and are reflected attheir corresponding contracted rates in the accompanying consolidatedbalance sheets. In addition, the disclosure of the fair value for derivatives,
which are accounted for as hedges is omitted.

Lease payments relating to finance leases accounted for as operating leases
amounted to ¥318 million ($2,709 thousand) and ¥292 million, which approximated the corresponding depreciation on the respective leased property
computed by the straight-line method over the lease terms for the years ended
March 31, 2006 and 2005, respectively.
Future minimum lease payments on non-cancelable operating leases:
Millions of yen

Unrealized
gains (losses)

Thousands of U.S. dollars

Future minimum lease payments:
Millions of yen

Fair value

Millions of yen

Thousands of
U.S. dollars

Millions of yen

Contract amount40

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

16. Segment Information
Business segment information as of and for the years ended March 31, 2006 and 2005 is as follows:
Millions of yen

2006:

Industrial
electronicequipment

Electronic
components

Total

Eliminations
andcorporate

Consolidated

1. Net sales and operating income
Net sales(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥586,805
1,004¥86,881
1,409¥673,686
2,413¥–(2,413)¥673,686–

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

587,809515,241

88,29085,190676,099
600,431(2,413)(2,448)673,686
597,983

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72,5683,100

75,66835

75,703

2. Assets, depreciation and amortization expenses and capital expenditure
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditure, including intangible and other assets . . . . . . . . . . . . . . . . . . .

¥626,838
20,512419
16,223¥37,089258–
144¥663,927
20,770419
16,367¥ (684)–––¥663,243
20,770419
16,3672005:

Industrial
electronicequipment

Electronic
components

Total

Eliminations
andcorporate

Consolidated

1. Net sales and operating income
Net sales(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥549,461
1,053¥86,249
1,831¥635,710
2,884

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

550,514489,724

88,08084,973Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60,7902. Assets, depreciation and amortization expenses and capital expenditure
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditure, including intangible and other assets . . . . . . . . . . . . . . . . . . .

¥609,296
22,77312,0882006:

Industrial
electronicequipment

Electronic
components

1. Net sales and operating income
Net sales(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,995,366
8,542

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Millions of yen¥–(2,884)¥635,710–

638,594
574,697(2,884)(2,970)635,710
571,727

3,107

63,897

86

63,983¥35,988290
603¥645,284
23,063
12,691¥ (964)–(348)¥644,320
23,063
12,343

Total

Eliminations
andcorporate

Consolidated$739,599
11,997$5,734,965
20,539$–(20,539)$5,734,965–

5,003,908
4,386,149

751,596725,206

5,755,504
5,111,355(20,539)(20,836)

5,734,965
5,090,519

617,759

26,390644,149297

644,446

Thousands of U.S. dollars

2. Assets, depreciation and amortization expenses and capital expenditure
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,336,159$315,731$5,651,890$ (5,827)$5,646,063
Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
174,617
2,196
176,813–
176,813
Loss on impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,566
–
3,566
–
3,566
Capital expenditure, including intangible and other assets . . . . . . . . . . . . . . . . . . .
138,104
1,224
139,328–
139,328
Note: 1. Method of classifying business segments: Business segments are classified after considering similarities in types of products and service, as well as sales methods.
2. Major products in each business segment:
Business segment
Industrial electronic equipment
Electronic components

Major products
Semiconductor production equipment, FPD production equipment, computer systems and networks and others
Semiconductor products, boards, software and other electronic components

3. Change in accounting policies(1) Effective from the year ended March 31, 2005, Tokyo Electron changed its method of revenue recognition to the confirmation of set-up and testing of products basis.
The effect of this change was to decrease net sales and operating income for the industrial electronic equipment segment by ¥80,956 million and ¥20,541 million,
respectively, for the year ended March 31, 2005, as compared with the corresponding amounts which would have been recorded if the previous method had been
followed. The change did not affect the figures of the electronic components segment.
(2) Effective from the year ended March 31, 2005, Tokyo Electron changed its method to account for after-sale repair expenses by implementing accrued warranty
expenses for Semiconductor and FPD production equipment. The effect of this change was to decrease operating income for the industrial electronic equipment
segment by ¥635 million for the year ended March 31, 2005, as compared with the corresponding amounts which would have been recorded if the previous method
had been followed. The change did not affect the figures of the electronic components segment.

41

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

Geographical segment information as of and for the year ended March 31, 2006 is as follows:
Millions of yen

Japan

Other regions

Total

Eliminations
andcorporate

1. Net sales and operating income
Net sales(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥602,564
61,443664,007588,933
75,074¥ 71,122
43,811
114,933
107,6397,294¥673,686
105,254778,940
696,572
82,368¥–(105,254)(105,254)(98,589)(6,665)¥673,686–
673,686
597,983
75,703

2. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥636,559¥ 85,730¥722,289¥ (59,046)¥663,243

Eliminations
andcorporate

Consolidated

2006:

Consolidated

Thousands of U.S. dollars

2006:

Japan

Other regions

Total

1. Net sales and operating income
Net sales(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,129,517
523,050
5,652,567
5,013,476
639,091$605,448
372,955
978,403916,31262,091$5,734,965
896,005
6,630,970
5,929,788
701,182$–(896,005)(896,005)(839,269)(56,736)$5,734,965–
5,734,965
5,090,519
644,446

2. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,418,909$729,800$6,148,709$(502,646)$5,646,063

Note: 1. For the reporting of geographical segment information, net sales and operating income are separated based on the location of the Company and its subsidiaries. Assets
are separated by geographic location.
2. Others comprises primarily of the United States of America, Europe and Korea.

17. Subsequent Event

Total assets and sales outside Japan comprised less than 10% of theconsolidated total assets and sales as of and for the year ended March 31,
2005. Accordingly, geographical segment information has not been disclosed.

Grant of stock options under the stock option plans
On May 12, 2006, the Company’s board of directors decided to submit a
resolution to the shareholders’ meeting for approval of the issuance of stock
subscription rights to directors and selected employees of Tokyo Electron.
This issuance of stock subscription rights is intended to enable the grant ofstock options. Under this stock option plan, the options to purchase the sharesof the Company at an exercise price of ¥1 ($0.01), up to 65,000 shares will be
granted to directors and selected employees of the Company and its domestic
subsidiaries and senior directors of foreign subsidiaries, and the options topurchase the shares of the Company at an exercise price of ¥1 ($0.01), up to
8,000 shares will be granted to directors and selected employees of foreignsubsidiaries. This grant of stock options was approved at the annual general
meeting of the shareholders of the Company on June 23, 2006.

Domestic and overseas sales for the years ended March 31, 2006 and 2005
are as follows:
Millions of yen

Net sales

Thousands of
U.S. dollars

2006

2005

2006

Japan . . . . . . . . . . . . . . . . . . . . . . . .
Taiwan . . . . . . . . . . . . . . . . . . . . . . . .
United States of America . . . . . . . . . .
Korea . . . . . . . . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . .

¥262,532
150,322
93,314
83,571
83,947¥232,678
141,493
62,76985,203
113,567$2,234,883
1,279,664
794,365
711,424714,629

Total . . . . . . . . . . . . . . . . . . . . . . . . .

¥673,686¥635,710$5,734,965

Note: 1. For the reporting of domestic and overseas sales, overseas sales (other thanJapan) include export sales of the Company and its domestic subsidiaries andsales of the foreign subsidiaries, except for export sales to Japan.
2. Others comprises primarily of Singapore, Ireland and China.

42

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

INDEPENDENT AUDITORS’ REPORTTo the Board of Directors ofTokyo Electron Limited:
We have audited the accompanying consolidated balance sheets of Tokyo Electron Limited and subsidiaries as ofMarch 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity and cash flows
for the years then ended, expressed in Japanese yen. These consolidated financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Tokyo Electron Limited and subsidiaries as of March 31, 2006 and 2005, and the results of their operations
and their cash flows for the years then ended in conformity with accounting principles generally accepted in Japan.
As discussed in note 2 (g) to the consolidated financial statements, the Company adopted “Accounting Standard for
Impairment of Fixed Assets”, issued by the Business Accounting Deliberation Council, for the year beginning April 1, 2005.
As discussed in note 3 to the consolidated financial statements, the Company changed its method of revenue recognition, accrued warranty expenses, and the classification of business segments in the year ended March 31, 2005.
The accompanying consolidated financial statements as of and for the year ended March 31, 2006 have been translated into United States dollars solely for the convenience of the reader. We have recomputed the translation and, in
our opinion, the consolidated financial statements expressed in yen have been translated into United States dollars
on the basis set forth in note 1 to the consolidated financial statements.

Tokyo, Japan
June 23, 2006

43

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

TOKYO ELECTRON GLOBAL OPERATIONS(As of July 1, 2006)

All locations marked on the map include branches and offices of affiliated companies listed below.

JAPAN

AMERICATOKYO ELECTRON LIMITEDTOKYO ELECTRON U.S. HOLDINGS, INC.

World Headquarters

TOKYO ELECTRON AMERICA, INC.

TBS Broadcast Center
3-6 Akasaka 5-chome, Minato-ku, Tokyo 107-8481
Tel: 03-5561-7000
Fax: 03-5561-7400
URL: http://www.tel.com

TOKYO ELECTRON MASSACHUSETTS, LLC
TEL TECHNOLOGY CENTER, AMERICA, LLC
TIMBRE TECHNOLOGIES, INC.
TEL VENTURE CAPITAL, INC.

TOKYO ELECTRON AT LIMITEDTOKYO ELECTRON TOHOKU LIMITEDEUROPETOKYO ELECTRON TS LIMITEDTOKYO ELECTRON EUROPE LIMITEDTOKYO ELECTRON KYUSHU LIMITEDTOKYO ELECTRON ISRAEL LIMITEDTOKYO ELECTRON SOFTWARE TECHNOLOGIES LIMITEDTOKYO ELECTRON FE LIMITEDASIATOKYO ELECTRON DEVICE LIMITEDTOKYO ELECTRON KOREA LIMITEDTOKYO ELECTRON BP LIMITEDTOKYO ELECTRON KOREA SOLUTION LIMITEDTOKYO ELECTRON AGENCY LIMITEDTOKYO ELECTRON TAIWAN LIMITEDTOKYO ELECTRON (SHANGHAI) LIMITEDTOKYO ELECTRON (SHANGHAI) LOGISTIC CENTER LIMITED44

TOKYO ELECTRON LIMITEDANNUAL REPORT 06

INVESTOR INFORMATION(As of March 31, 2006)

for Growth

Administrator of Shareholders’ Register:

Corporate Name:Tokyo Electron Limited

The Chuo Mitsui Trust and Banking Co., Ltd.
33-1 Shiba 3-chome, Minato-ku, Tokyo 105-8574, Japan

Established:
For Further Information, Contact:

November 11, 1963

Investor Relations
Corporate Communications Department
Tokyo Electron Limited
TBS Broadcast Center
3-6 Akasaka 5-chome, Minato-ku
Tokyo 107-8481
Tel: +81-3-5561-7003
Fax: +81-3-5561-7400
http://www.tel.com

Annual General Meeting of Shareholders:June

Common Stock:
Stock trading unit
Authorized
Issued and outstanding
Number of shareholders

100 shares
300,000,000 shares
180,610,911 shares
46,272

Principal Shareholders:Common Stock Listed on:
The Tokyo Stock Exchange 1st Section (#8035)

Distribution of Ownership Among Shareholders:Foreign institutions and others
90,081,184 shares
49.88%
Japanese financial institutions
57,747,864 shares
31.97%
Individuals and others
18,407,945 shares
10.19%
Other Japanese corporations
12,037,443 shares
6.67%
Treasury stock
2,336,475 shares
1.29%

The Master Trust Bank of Japan, Ltd. (Trust Account)
The Chase Manhattan Bank, NA London
Tokyo Broadcasting System, Inc.
Japan Trustee Services Bank, Ltd. (Trust Account)
The Dai-ichi Mutual Life Insurance Company
State Street Bank and Trust Company
State Street Bank and Trust Company 505103
The Bank of Tokyo-Mitsubishi UFJ, Ltd.
JPMCB Omnibus US Pension Treaty JASDEC 380052
Japan Trustee Services Bank, Ltd. (Trust Account No. 4)

Number of shares
held (thousands)

Voting shareratio (%)

15,296
10,736
10,227
9,403
4,800
4,639
4,337
3,000
2,939
2,497

8.46
5.94
5.66
5.20
2.65
2.56
2.40
1.66
1.62
1.38

Shares of less than one thousand have been rounded down in the “Number of shares held”

Stock Price Range:(Yen)(Thousands of shares)

10,000

8,000

6,000
60,0004,000
40,0002,000

0 April 2003

20,000March 2004

March 2005

45

March 2006 0

TOKYO ELECTRON LIMITEDANNUAL REPORT 2006

World Headquarters
TBS Broadcast Center, 3-6 Akasaka 5-chome,
Minato-ku, Tokyo 107-8481, Japan
Tel.+81-3-5561-7000 http://www.tel.com

Printed in Japan on recycled paper
PR44–132