MANAGEMENT’S DISCUSSION AND ANALYSIS

Unless otherwise indicated, financial results referred to in this
MD&A refer to fiscal 2005, the year ended March 31, 2005.
Percentage comparisons, unless otherwise indicated, refer to yearon-year changes from fiscal 2004.

Sales and Income
Operating Environment
During fiscal 2005, there were concerns that the world economy
would slow due to a rise in the prices of raw materials resulting
from soaring crude oil prices and other factors. Nevertheless, theU.S. economy showed steady growth, backed by pump-priming
measures leading up to the presidential election. In Asia, theChinese economy continued to grow rapidly, while the South Korean
and Taiwanese economies also recorded healthy growth. Meanwhile, the Japanese economy continued to perform strongly as awhole, due chiefly to growth in consumer spending and corporate
capital expenditure.
In the electronics industry, the digital consumer electronics market,
which includes DVD recorders and flat-panel TVs, remained buoyant,partly as an effect of the Summer Olympic Games in Athens, Greece.
In addition, the market was driven by demand for PCs to replace older
models, as well as by demand from consumers upgrading their mobile
phones to third-generation models. The market for semiconductors,
FPD, and other electronic components used in these products also
grew steadily as a result. These trends, together with the silicon cycle
reaching a peak and other factors, combined to create a favorable
business environment for Tokyo Electron.

Changes in Accounting Policies
Effective from fiscal 2005, the Company changed the method forrevenue recognition from semiconductor and FPD production equipment from the time of shipment to, in principle, the time of confirmation of set-up and testing of products. This change is intended tomore appropriately reflect actual revenue of the Company. There are
two reasons for this change. First, lead times from the shipment of
products to the confirmation of set-up and testing are becoming
markedly longer. Second, revisions to post-shipment businessprocesses have made it possible to provide a complete set of data
upon the confirmation of set-up and testing of products.
Also beginning in fiscal 2005, the Company changed how it
recognizes after-sale repair expenses incurred during the warranty
period for semiconductor and FPD production equipment. In pastfiscal years, these expenses were charged to income as incurred.
However, effective from the fiscal year ended March 31, 2005,
Tokyo Electron provides accrued warranty expenses for estimatedexpenses calculated on the basis of after-sale repair expenses
incurred in the past. This change is intended to make income
statements more appropriate by matching after-sales repair
expenses with revenues when products are sold. The change wasmade because a complete set of historical data on these
expenses and remaining warranty periods has been compiled
and because the after-sale business has gained importance froma customer satisfaction perspective.

Comparison of Consolidated Results Under the New Accounting Policies With Previous Accounting Policies(Millions of Yen)
Fiscal 2004
Previous
Policies

Fiscal 2005
Previous
Policies (A)Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥529,654

YoY
ChangeFiscal 2005
New
Policies (B)Difference(B-A)¥716,666

35.3%¥635,710¥–80,956

Industrial electronic equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .

445,425

630,41741.5%

549,461–80,956

Semiconductor/FPD production equipment . . . . . . . . . . . . . . . . .

425,747

613,18544.0%

532,229–80,956

Semiconductor production equipment (SPE) . . . . . . . . . . . . . . .

–516,318–

457,191–59,127–21,829

FPD production equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–96,867–75,038Computer network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18,44815,966–13.5%

15,9660

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

1,230

1,266

3.0%

1,266

0

Electronic components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

84,22986,2492.4%

86,2490–21,254

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

140,155

197,16740.7%

175,913

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

117,875

112,007–5.0%

111,930–77

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

22,28085,160282.2%

63,983–21,177

Other income (expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–7,344

4,284–158.3%–8,208–12,492

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

14,93689,444498.9%

55,775–33,669

Note: Sales were not disclosed separately for SPE and FPD production equipment until fiscal 2004.
There was no effect on Computer network division and Electronic components segment of changes in accounting policies.

Change to the Classification of Business Segmentsbillion. Results reflect strategic actions taken by LCD panel manufacturers to increase their supply capacity to popularize and grow salesof flat-panel TVs through price reductions and mass production.
Sales in the Computer Network Division for fiscal 2005 fell
13.5% to ¥16.0 billion, while sales in the Electronic Components
Division rose 2.4% to ¥86.2 billion.
By region, net sales for fiscal 2005 in Japan were ¥232.7
billion. Under the previous accounting policies, sales fell 0.7% to¥240.7 billion. Overseas sales for fiscal 2005 were ¥403.0 billion
and, under the previous accounting policies, rose 65.7% to ¥476.0
billion. Overseas sales for fiscal 2005 accounted for 63.4% ofconsolidated net sales, up from 54.2% in the previous fiscal year.
Consolidated orders received for fiscal 2005 increased by 3.1%
to ¥674.2 billion. Order backlogs as of March 31, 2005 were¥313.1 billion. Under the previous accounting policies, orderbacklogs were ¥232.2 billion, down 15.5% year on year.

Tokyo Electron is engaged in the manufacture and sale of industrial
electronic products. Until previous fiscal years, Tokyo Electron’sbusinesses were classified as a single segment based on thesales formation. Effective from the fiscal year ended March 31,
2005, however, Tokyo Electron’s businesses have been reclassified
into two segments, “Industrial Electronic Equipment” and “Electronic
Components,” based on the similarities between products andservices as well as sales methods.
This change was made to present more appropriately the actual
state of Tokyo Electron’s businesses following the change in themethod of revenue recognition in the “Industrial Electronic Equipment” segment from the time of shipment to the time of the confirmation of set-up and testing of products.

Sales
Consolidated net sales for fiscal 2005 were ¥635.7 billion. Under theprevious accounting policies, net sales rose 35.3% to ¥716.7 billion.
Sales of Tokyo Electron’s core SPE Division for fiscal 2005 were¥457.2 billion. Under the previous accounting policies, division
sales were ¥516.3 billion. The sales in this division reflected alarge volume of orders from semiconductor manufacturers in Japan,
South Korea, Taiwan and elsewhere in Asia. This was the result ofgrowth in demand for DRAMs, flash memories and system LSIs forPCs, mobile phones, digital consumer electronics and other accessdevices in line with the development of communications infrastructure.
Sales of FPD production equipment for fiscal 2005 were ¥75.0
billion. Under the previous accounting policies, sales were ¥96.9

Cost of Sales, Selling, General and Administrative(“SG&A”) Expenses and Operating Income

476.0
403.0

43.9

44.1

20

01 02 03 04

05

–50

190.5

53.8

50

0

186.5

52.9

85.2
64.0

22.3

1.1

287.3

40

240.7
232.7

0

60

100

242.3

299.3

400

270.1

231.3

600

200

–18.3

150
424.6

800

121.1

716.7
635.7

529.7

(Billions of Yen)

460.6

R&D Expenses(Billions of Yen)
417.8

Operating Income(Billions of Yen)
723.9

Domestic and Overseas Sales

50.1

Cost of sales for fiscal 2005 rose 18.0% to ¥459.8 billion. Grossprofit was ¥175.9 billion, representing a gross profit ratio to net
sales of 27.7%. Under the previous accounting policies, cost of
sales rose 33.4% to ¥519.5 billion, and gross profit increased by
40.7% to ¥197.2 billion. The gross profit ratio was 27.5%. The
higher gross profit mainly reflects an increase in net sales and an
improved gross profit margin in the SPE Division.
SG&A expenses for fiscal 2005 decreased by 5.0% to ¥111.9
billion, and SG&A expenses to net sales were 17.6%. Under the■ Domestic (Previous policies)■ Overseas (Previous policies)■ Domestic (New policies)■ Overseas (New policies)

01 02 03 04

05

0

01 02 03 04 05

TOKYO ELECTRON LIMITEDANNUAL REPORT 05■ (Previous policies)■ (New policies)

20 >> 21

Performance by Segment
Industrial Electronic Equipment Segment

previous accounting policies, SG&A expenses decreased 5.0% to¥112.0 billion, and represented 15.6% of net sales. The main
reasons for the decrease in SG&A expenses were a reduction of¥2.2 billion in personnel expenses as a result of a headcountreduction carried out as part of structural reforms in fiscal 2004,
and a ¥2.4 billion decrease in depreciation and amortization due
to curbs on capital expenditures. R&D expenses for fiscal 2005
included in general and administrative expenses declined 0.6% to¥43.9 billion, and represented 6.9% of net sales.
As a result of the above and other factors, operating income forfiscal 2005 was ¥64.0 billion. Under the previous accounting
policies, operating income increased by ¥62.9 billion from ¥22.3
billion to ¥85.2 billion.

Net sales, including the inter segment sales, for fiscal 2005 were
¥550.5 billion due to strong sales in the mainstay SPE Division.
Under the new accounting policies, the gross profit ratio to thesegment sales for fiscal 2005 was 29.9%, operating income was¥60.8 billion and the operating income ratio was 11.0%.

Other Income and Expenses and Net Income
Net non-operating expenses were ¥8.2 billion, despite Tokyo
Electron booking a gain of ¥7.1 billion on return of substitutional
portion of employees’ pension fund. This mainly reflected losses on
business reorganization of ¥2.8 billion, and ¥12.5 billion for
accrued warranty expenses for previous fiscal years. As a result,income before income taxes was ¥55.8 billion. Under the previous
accounting policies, income before income taxes rose ¥74.5 billion,
from ¥14.9 billion to ¥89.4 billion.
Net income for fiscal 2005 dramatically increased to ¥61.6 billion,
increasing by ¥53.3 billion from fiscal 2004, reflecting in part acontribution from reversal of valuation allowance on deferred tax
assets that amounted to ¥22.0 billion. Net income per share was¥343.63, compared with ¥46.37 a year earlier. Tokyo Electron
increased cash dividends by ¥35.0 per share to ¥45.0 per share; thepayout ratio was 13.1% on a consolidated basis and 23.9% on a
non-consolidated basis.

(Billions of Yen)

50.0

800

■ Cash dividends per Share■ Payout ratio (Non-consolidated basis)
Note: The payout ratio of FY2002 and FY2003
are not indicated due to net loss on a
non-consolidated basis.

0

01 02 03 04■ (Previous policies)■ (New policies)

05

175.4

0 JapanU.S.

■ 2004■ 2005 (Previous policies)

EuropeSouth Korea■ (New policies)

Taiwan

44.0
38.7

0

19.9

01 02 03 04 05

40.9
39.5

10.0

10

200

50.6

20.0
60

0

141.5

400

23.9

100.5

21.6

20

90.7
85.2

120

61.4

30.0

33.9
40.6
31.1

30

600

80.0
62.7

40.0

141.9
141.5
133.5

40

180

17.6

619.0

45

10

8

8

38

47.4

613.2
532.2

(Billions of Yen)
425.7

(%)

(Yen)

364.7

Semiconductor and FPD Production Equipment
Business’ Sales by Geographic Region

325.7

Semiconductor and FPD Production
Equipment Business’ Sales

Cash Dividends per Shareand Payout Ratio

50

Semiconductor and FPD Production Equipment
Semiconductor Production Equipment
Division sales for fiscal 2005 were ¥457.2 billion. Under theprevious accounting policies, division sales were ¥516.3 billion.
During the year ended March 31, 2005, Tokyo Electron received asteady stream of orders from Japanese semiconductor manufacturers, who specialize in system LSIs. These products are embedded
in digital consumer electronics, one of the driving forces of thecurrent economic recovery. A large number of orders were also
received from South Korean and Taiwanese semiconductor manufacturers, who are actively making investments, backed by strong
demand for DRAM and flash memory.
In terms of trends by equipment type, sales of all product categories, including coaters/developers, etch systems, thermal
processing systems, CVD systems, wafer probers and surface
preparation systems, increased as the market for semiconductor
production equipment expanded. Tokyo Electron expanded sales of
new products, in particular, such as the TELFORMULA™, a thermal
processing system, the CLEAN TRACK™ LITHIUS™, a coater/developer compatible with next-generation semiconductor production
technology, and the EXPEDIUS, a surface preparation system.

China

Southeast
Asia

FPD Production Equipment
Sales in this division for fiscal 2005 were ¥75.0 billion. During
fiscal 2005, orders were brisk for Tokyo Electron’s dry process andphoto process systems as LCD panel manufacturers took strategic
actions to increase production capacity to popularize flat-panel TVs
and expand the market.
Orders received for fiscal 2005 were ¥62.3 billion and orderbacklogs as of March 31, 2005 were ¥66.8 billion. From fiscal
2005, orders received and order backlogs for this business aredisclosed on a consolidated basis.
Computer Network
Division sales for fiscal 2005 declined 13.5% from fiscal 2004 to¥16.0 billion, despite Tokyo Electron’s efforts to increase sales ofstorage area network (“SAN”: high-speed networks that connect
external storage systems or storage systems with computers)
solutions, network solutions and broadband solutions.
In SAN-related products, which account for 71% of division
sales, fibre channel fabric switches and fibre channel host bus
adapters, both of which are technological platforms for network

construction, recorded firm growth in sales. During the year, Tokyo
Electron bolstered its backup solutions, such as by securing theright to sell ADIC’s products and introducing high-compression
backup disks and other products. Tokyo Electron also began salesof storage data encryption products in Japan. These moves weremade against a backdrop of demand for better data protection.
Network security countermeasures are attracting the attention ofbusinesses from the standpoint of preventing the unauthorized
disclosure of personal and corporate information.
In network-related products, the website construction businessturned in a solid performance, particularly in F5 Networks, Inc’s
products that facilitate the construction of highly secure websites.
The network construction business also made a solid start. Thisbusiness facilitates secure access through the provision of securesockets layer-virtual private network products. At the same time,
Tokyo Electron made inroads in business to corporations by adding
to its lineup CipherTrust, Inc’s new products, which block spamand fraudulent e-mail.
Orders received for fiscal 2005 were ¥16.5 billion, on a par withthe previous fiscal year, and order backlogs were ¥4.1 billion, up
13.6% from fiscal 2004.
OthersSales for fiscal 2005 rose 3.0% to ¥1.3 billion. Orders received forfiscal 2005 were flat at ¥1.3 billion.

Electronic Components Segment
This segment is the responsibility of Tokyo Electron Device
Limited, a consolidated subsidiary.

20

84.2

77.4

73.7

89.2

16.0

18.4

(Billions of Yen)
17.2

(Billions of Yen)
17.0

Electronic Components
Segment’s Sales

14.1

Computer Network
Division’s Sales

86.2

In terms of wafer diameter, Tokyo Electron focused on 300mm
wafers as many semiconductor manufacturers moved to invest in
300mm wafer plants. As a result, sales of these products accounted for around 70% of total sales of semiconductor production equipment.
Orders received in this division for fiscal 2005 were ¥510.5 billion
and order backlogs as of March 31, 2005 were ¥236.2 billion. Fromfiscal 2005, orders received and order backlogs for this business aredisclosed on a consolidated basis.

90

15
60
10
30
5

0

01 02 03 04 05

0

01 02 03 04 05

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

22 >> 23

In fiscal 2005, the business concentrated on sales activities
that closely targeted customer needs through 16 sales offices
nationwide, including three newly established bases in the cities of
Kyoto, Hamamatsu and Mishima. Furthermore, Tokyo Electron
worked to raise the profile of its proprietary products under the
inrevium brand by developing ICs, boards, software and otherproducts that reflect market needs. At the same time, efforts weremade to expand design services, whereby Tokyo Electron undertakes the design of customized ICs and other products on acontract basis. As a result, net sales in this segment including theinter segment sales for fiscal 2005, which handles semiconductor
products, board computer products, software and general electronic components, rose 2.7% to ¥88.1 billion. The gross profit
ratio to the segment sales for fiscal 2005 edged down from 13.3%
to 13.2%, while operating income was flat at ¥3.1 billion and theoperating margin declined from 3.7% to 3.5%.
Segment orders received for fiscal 2005 fell 3.0% from fiscal
2004 to ¥83.6 billion. Order backlogs as of March 31, 2005 were
¥6.1 billion, 30.3% less than the amount as of March 31, 2004.
Sales of semiconductor products for fiscal 2005, which accountfor 88% of segment sales, rose 2.9% from fiscal 2004. This result
reflects firm overall sales of products for digital consumer electronics. Sales of ASICs and other customized ICs for fiscal 2005,
which require advanced technological capabilities, grew for use inflat-panel PDP and LCD TVs. Furthermore, sales of dedicated ICs
for mobile phones also grew.
Sales of board computer products for fiscal 2005 rose 11.0%
from fiscal 2004 on the back of healthy sales of PC motherboards
for FA-related equipment and voice processing boards forcommunications equipment. Software sales from fiscal 2004
declined 9.1% from fiscal 2004, despite efforts to expand sales ofoperating systems and tools for embedded system equipment,
particularly POS terminals. Sales of other electronic components
declined by 1.6% even as Tokyo Electron worked to expand sales,
particularly of switching power supplies, LCDs and panel PCs.
Looking ahead, Tokyo Electron continues to aim to become theleading technology trading company, trusted by customers andsuppliers alike. Tokyo Electron’s approach, as it strives to achieve
this goal, will be to focus on providing thorough technical support
for value-added products such as custom ICs and to beef up
development of own-brand inrevium products and contract design
services. In addition, actions will be taken to expand business in
the rest of Asia and the Pacific region. One recent development
was the start of operations in April 2005 at a subsidiary established in Hong Kong in fiscal 2005.

Financial Position and Cash Flows
Financial Position
Current assets as of March 31, 2005 were ¥495.2 billion, ¥92.2
billion higher than the amount as of March 31, 2004. In terms ofthe major changes, cash and cash equivalents increased ¥72.8
billion due in part to the early collection of trade notes andaccounts receivable. Trade notes and accounts receivable
improved ¥58.6 billion from March 31, 2004 despite the upward
trend in sales. This reflected efforts to collect trade notes andaccounts receivable as well as the change in revenue recognition50

Debt-to-Equity Ratio(Times)

288.6

261.5

195.7

(Times)
243.9

309.8

9.9

11.0

(Billions of Yen)
12.4

(Billions of Yen)
30.9

Working Capital andCurrent Ratio

49.4

Capital Expenditures for Property,
Plant and Equipment

400

4.0

0.80

3.0

0.60

3.2

40

0.60
2.8

300

0.62
0.46

2.4

30

2.3

0.51

2.2

200

2.0

0.40
0.30

20
100

10
0

01 02 03 04 05

0

1.0

01 02 03 04 05■ Working Capital■ Current Ratio

0

0.20

0

01 02 03 04 05

Debt-to-Equity Ratio = Interest-bearing Debt/
Shareholders’ Equity as of Fiscal Year-end

¥13.1 billion were recorded following the change in the accounting
policy for after-sale repair.
Non-current liabilities as of March 31, 2005 decreased by ¥39.3
billion to ¥101.1 billion, reflecting factors such as the 9th series of
unsecured straight bonds of ¥30.0 billion becoming due within one year.
Shareholders’ equity increased ¥56.4 billion to ¥332.2 billion.
As a percentage of total assets, shareholders’ equity rose 2.5
percentage points from 49.1% to 51.6%. Return on average total
shareholders’ equity (“ROE”) increased by 17.2 percentage points
from 3.1% to 20.3%.

policies from the time of shipment to the time of confirmation of
set-up and testing of products. Furthermore, inventories increased¥56.3 billion due to the change in revenue recognition policies,
although Tokyo Electron saw benefits from measures taken to
reduce inventories. Deferred tax assets for fiscal 2005 increased¥15.3 billion due to the reversal of valuation allowance ondeferred tax assets.
Excluding non-trade accounts receivable, trade notes and accounts
receivable turnover based on figures at the end of the fiscal year
improved from 159 days to 114 days due to the early collection of
trade notes and accounts receivable as part of structural reforms
and the shortening of the number of days that are required to obtainconfirmation of set-up and testing of products at customers fabs.
Inventory turnover improved from 72 days to 56 days. Both the tradenotes and accounts receivable and inventory turnovers are computed
based on net sales at year-end under the previous accounting policies.
Property, plant and equipment as of March 31, 2005 decreasedby ¥10.4 billion to ¥98.4 billion, the result mainly of the depreciation of equipment. During fiscal 2005, the Company made aninvestment of ¥9.9 billion in property, plant and equipment,
primarily for the purchase of evaluation equipment.
As a result of the above and other changes, total assets as ofMarch 31, 2005 increased by ¥82.7 billion to ¥644.3 billion.
Current liabilities as of March 31, 2005 rose ¥65.1 billion to¥206.6 billion. This mainly reflected an increase of ¥30.8 billion incustomer advances, mostly due to a change in the accounting
policy for revenues recognition, and increases of ¥10.1 billion and¥10.0 billion in income taxes payable and straight bonds due within
one year, respectively. In addition, accrued warranty expenses ofCash Flows

20.4

49.1

100
200

15

40.0

50

3.1

0

0

–6.2

20.0

106.9

–91.8

20.3

51.6
45.7

–0.7

150

400
48.2

41.8

30

55.2

60.0

332.2

(Billions of Yen)

275.8

(%)
252.9

Free Cash Flows(Billions of Yen)
307.6

Shareholders’ Equity and ROE

(%)

333.3

Shareholders’ Equity Ratio

14.1

Net cash provided by operating activities for fiscal 2005 increased
sharply from ¥7.9 billion to ¥114.4 billion. This mainly reflected
income before income taxes of ¥55.8 billion, depreciation and amortization of ¥21.5 billion and an increase in customer advances of¥30.8 billion, as well as the benefits of efforts to achieve the earlycollection of trade notes and accounts receivable and other factors.
Investing activities used net cash of ¥7.5 billion in fiscal 2005,
compared with ¥8.5 billion in fiscal 2004. The main component was
outflows of ¥8.7 billion for the acquisition of evaluation equipment.
Financing activities used net cash of ¥34.3 billion in fiscal 2005,
compared with ¥10.3 billion in fiscal 2004. This increase mainlyreflected the redemption of the 7th series of unsecured corporate
bonds of ¥20.0 billion and debt repayments as Tokyo Electron
continued to reduce debt, as well as dividends paid.
As a result, cash and cash equivalents as of March 31, 2005
were ¥115.4 billion, ¥72.8 billion higher than the ¥42.7 billion asof March 31, 2004.

–50
–14.8

–15
–100

0

01 02 03 04 05

01 02 03 04 05■ Shareholders’ Equity
■ ROE

–30

–150

01 02 03 04 05

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

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

24 >> 25

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 toforeign 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
foreign exchange 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,thermal-processing, 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 productfields 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 togenerate profits under any circumstances, such as when the market
contracts temporarily due to imbalance of supply and demand.
However, order cancellations, excess capacity and personnel andincreased inventories resulting from an unexpectedly large market
contraction could adversely affect Tokyo Electron’s business performance.
(4) Impact From Concentration of Transactions on Particular Customers

Tokyo Electron has been successful at increasing transactions withthe leading semiconductor manufacturers worldwide, including thosein Japan, through the provision of products featuring outstanding,cutting-edge technology and of services offering a high level ofcustomer satisfaction. However, Tokyo Electron’s sales may fromtime to time be temporarily concentrated on particular customers dueto the timing 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 andcontinuously to improve the safety of its products and to eliminate
any harmful impact on health. However, harm to customers, ordercancellations or other 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
to market. At the same time, Tokyo Electron works to establish aquality 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 otherfactors, 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 hasenabled Tokyo Electron to obtain sole possession of many proprietary technologies that have been instrumental to Tokyo Electron’sability to capture a high market share and generate high profit
margins in each of its product fields. However, Tokyo Electron’s
products incorporate and optimize many of these proprietary
cutting-edge technologies. There may be cases, therefore, 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, highreturn 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 ofmany 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 ofsuppliers, market conditions for products and real estate, theability to recruit personnel in Japan and overseas, competition overstandardization, and loss of key personnel. Any of these factors
could adversely affect Tokyo Electron’s business performance.