TOKYO ELECTRON LIMITEDANNUAL REPORT 07

MANAGEMENT INTERVIEW

Question & Answer
In this section, Chairman Higashi and President Sato are asked about market trends and Tokyo
Electron’s strategies and actions.

Question 1

In fiscal 2007, Tokyo Electron posted record results. How do you evaluate
this performance?

AnswerThis reflects the benefits of our ongoing efforts to elevate profitability by theentire Tokyo Electron Group.
The figures at each level—net sales of ¥852.0 billion, operating income of ¥144.0 billion and net incomeof ¥91.3 billion—are record highs for the Company. Although we did benefit from favorable conditions in
the business environment, we view these results as a reflection of the overall strength of the Tokyo
Electron Group, and the success of our unified efforts to enhance profitability.
Two years ago, at a time when the Company’s operating margin had only just recovered to 10%,
we embarked on a medium-term business plan which set the goal of elevating operating profitability to
17% over the medium term. This would surpass the Company’s previous record high of 16.7%.
Raising the operating margin from around 10% to 17% seemed extremely ambitious, but considering
the Company’s underlying potential, we had confidence that it was an attainable goal. Sharing one goal,
the entire group made all the necessary efforts in sales, marketing, services, development and production to execute strategy. As a result, the Company posted an
operating margin for fiscal 2007 of 16.9%, and in the second
half we recorded a margin of 18.6%. On a six-month basis, at

Net Sales and Operating Margin(Billions of Yen)

(%)

18

1,200

15

600

record high of ¥103 per share.

400

635.7

success with shareholders, by raising the annual dividend to a

10.1

11.2

673.7

800

852.0

1,000

529.7

Naturally, we were glad to have the opportunity to share this

16.9

460.6

least, we have already surpassed our goal.

3

0.2

0
03

0
04

05

06

07

■ Net sales
Operating margin
Note: Effective from fiscal 2005, the Company
made certain changes in accounting
polices as discussed in the notes toconsolidated financial highlights.

8

9
6

4.2

200

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TOKYO ELECTRON LIMITED

Question 2

Specifically, what steps has Tokyo Electron taken to increase profitability?

AnswerWe implemented three specific strategies—creating new, high-value-added
products, improving manufacturing efficiency, and expanding post-sales
businesses. We have made steady progress in all three areas.
The Company’s medium-term management plan, “Innovative Challenge 20,” challenged employees andexecutives to pursue three strategies for improving profitability.
The first involved creating new, high-value-added products. As semiconductor production processes
become more sophisticated, customer needs are diversifying. What is important in this context is tointroduce models optimized for each market segment based on an understanding of customer markets.
We have brought to market some 13 new types of production equipment born from this approach overthe past 2 years. Significantly, these new models are now beginning to contribute to profitability.
The second strategy involved improving Tokyo Electron’s manufacturing efficiency in order to reduce
costs. The most essential feature of production facilities, in this business, is to raise quality. I have repeatedly stressed the importance of “quality enhancement” to our manufacturing team, as I believed thatthrough this concept, design, procurement, and manufacturing technology would certainly improve andconsequently cost reductions would follow. This has proven to be true.
The Company’s third objective was to expand post-sales businesses. Sales in Tokyo Electron’sequipment refurbishment business, in particular, have risen steadily, and as a result we have outperformed the 3-year goal of growing the post-sales businesses to ¥100.0 billion. This businessgenerates good profits, so any sales growth makes a direct contribution to increasing the Company’s
operating margin.

Post-sales Business(Billions of Yen)

60.1

60

80.0

90

91.1

112.4

120

30
0
04

05

06

07

Post-sales business: Refurbishment/Relocation,
Contract service, Parts sales

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Question 3

ANNUAL REPORT 07

Could you tell us more about the Company’s efforts to improve manufacturing capabilities? What changes have taken place?

AnswerBy reforming product development and design and through activities for
reducing wasteful processes, we have improved quality, shortened manufacturing lead times, cut costs and enhanced customer satisfaction.
By examining some quality problems that the Company experienced in the past, we learned that carefulmanagement and control of the product development and design processes from the initial stage werean extremely important factor in the manufacturing process. From the upstream processes of productdevelopment and design, Tokyo Electron now emphasizes not only a product’s functions and performance, but also factors such as reliability, productivity and ease of maintenance. Furthermore, we havegone back to the basics, re-examining every stage of the manufacturing process to identify and quantify
any elements of waste or inefficiency, and then looking for ways to eliminate such production losses.
These comprehensive efforts, on the factory floor, to reform production processes have contributed tohigher quality, shorter manufacturing lead times, reduced costs and high customer satisfaction. Nevertheless, Tokyo Electron is never satisfied with the status quo, and our task in the future is to identify ways
to make further improvements to our operations.

Question 4

Once Tokyo Electron has surpassed the interim objectives laid out in thecurrent medium-term management plan, what will you then set your sights on?

Answer

We will implement growth strategies that will allow the Company to become
even more profitable when the next peak of the silicon cycle arrives.
Achievement of a 17% operating margin is merely a signpost on the road to further success. Tokyo
Electron wants to develop even greater earnings power and use the extra profits to strengthen products
for customers. And of course, this would also mean that we will be able to return more value to shareholders, through strong earnings and higher dividends.
To reach those goals, we must first look for ways to elevate the earnings power of existing products
even further. The new products that Tokyo Electron has introduced over the past two years are moving
into a volume production phase this year. We must not only seek to reap the returns of our investmentsin these products, but also work on launching new products in a timely manner.

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TOKYO ELECTRON LIMITED

Second, we must make further improvements to manufacturing efficiency to boost the costcompetitiveness of Tokyo Electron products. Reform efforts over the past two years have yielded steady
improvements. But going a step further, we are collaborating with business partners to improve theefficiency of our supply chain and logistics activities. We aim to establish ideal manufacturing sites thatcan shorten manufacturing lead times and cut costs.
A third theme is increasing profitability through new businesses. In order to further raise profitability,
within 10 years we want to establish several new high-value-added businesses which can generate salesof as much as ¥100.0 billion. The business that is currently closest to achieving that sort of success is the
production equipment that Tokyo Electron is developing using a Radial Line Slot Antenna (RLSA) plasma
source. We are now speeding up efforts to build this business. In addition, last December Tokyo
Electron acquired Epion Corporation, a U.S.-based company that is on the cutting edge of Gas Cluster
Ion Beam technology. We plan to cultivate this as one of Tokyo Electron’s core technologies for the
future. In the growing market for Micro Electro-Mechanical Systems (MEMS), meanwhile, the Company
has already launched MEMS testers and we are making rapid strides to build this business further.
In addition to the items described above, Tokyo Electron is stepping up environmental initiatives.

Record-high Net Sales and Profits
Recovery to Operating Margin of 10%

1st Medium-Term Plan
Structural Reform Phase•Reduced fixed costs•Optimized inventories

FY2002 – FY2004

Question 5•Strengthened new product development•Improved manufacturing efficiency•Expanded post-sales business

FY2005 – FY2007

Aiming for Further Growth

FY2008 –Tokyo Electron has been working on environment-related technology in thepast. What is the Company doing now to step up these efforts?

AnswerDeveloping environment-related technology is our mission and responsibility
as the industry leader.
Early this year, I had the opportunity to participate in an environmental conference, and was able tosense the growing importance that people around the world are placing on issues such as global warming. This renewed my determination to help solve environmental issues through technological innovation.
First of all, by incorporating high-performance semiconductors and displays with high environmental efficiency in electronics products and automobiles, manufacturers can help reduce total energy

11TOKYO ELECTRON LIMITEDANNUAL REPORT 07

consumption. Tokyo Electron’s production equipment allows manufacturers to produce these more
efficient devices at a low cost, and this helps to encourage the trend towards energy efficiency. In
other words, we make a contribution by providing customers with high-performance, highly productive
equipment that allows them to make cost-efficient devices, while still making good profits. Furthermore, Tokyo Electron is actively supporting the efforts of companies that are developing power semiconductors and other products that save energy, as well as manufacturers of solar panels and otherproducts that help reduce power consumption.
In addition, Tokyo Electron is improving the energy efficiency of its own semiconductor and FPD
production equipment, and developing new products that are even more environmentally friendly. Considering the Company’s large market share, our efforts have a very important impact on trends for the industry. In this sense, we bear a heavy responsibility; by taking the lead in efforts to improve environmental
efficiency, we can exercise strong influence on the environmental impact of the entire industry.

Question 6

What are your expectations for the future growth of the semiconductor
industry, and the semiconductor production equipment industry?

AnswerSemiconductors, and in particular, memory, have become a key componentof many consumer products. Therefore, the possibilities for market growth
are boundless.
At the moment, new trends are emerging in the semiconductor industry. For example, in the memory
segment, where personal computers once solely drove market growth, today high-performance mobile
devices and digital consumer products have emerged as another driver of the memory market. The PC
is also evolving into a digital consumer product. Also, mobile functions and broadband networks thatrealize “anywhere, anytime access” are creating new markets for NAND flash memory and DRAM.

Ubiquitous Networks Are Driving
Semiconductor Demand

Ubiquitous networks
Mobile devices
PCs

Workstations
Mainframe computers

1 per company
10,000 units/year1970 –
Business

1 per office
1 million units/year

1980 –

1 per person
100 million units/year

1 per person
1 billion units/year

1990 –
Internet

Ubiquitous networks: Enabling access to the Internet and other information networks anytime, anywhere

122000 –

Several devices per person
10 billion units/year

2010 –
Individuals

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TOKYO ELECTRON LIMITED

Furthermore, these trends now mean that semiconductors are being adapted to new uses andservices, such as remote health diagnosis, on-line educational programs, and remote security services.
Meanwhile, as with developed countries, emerging markets like BRICs, Eastern Europe, Africa, theMiddle East and South America are accelerating network building as an essential condition for national
growth. With semiconductor demand expanding beyond borders, I believe that the semiconductor
production equipment industry is poised for dynamic growth in the years to come.

Question 7

Shipments of production equipment for memory seem to be brisk, but doyou have any concerns about a sudden market correction, as in the past,in the future?

AnswerAs semiconductors are finding wider applications, we think that the silicon
cycle will grow shorter, and volatility will also become steadily smaller.
Certainly, we think that the current high level of capital investment in memory is partly a reflection ofmarket expectations that Microsoft’s launch of Windows Vista will increase demand for high-speed, largecapacity DRAM. However, our view is that the “Vista effect” is not the only reason why capital investment is currently very high. Supply factors also come into play. As manufacturers retire 200mm wafer
processing equipment from DRAM manufacturing, customers need to acquire cost-effective 300mm
processing equipment to partly make up for lost 200mm capacity. For that reason, we think there islittle risk that the current surge in investment will create excess production capacity. The PC market,
which is still a primary source of demand for DRAM, has not yet reached the market penetration levels
that are enjoyed by other consumer products, such as radios and TVs. We think there is plenty ofroom for market expansion.

Expanding NAND Flash Memory Applications
Mobile PCs

MemoryNAND flash memory
Mobile Handsets
Music Players

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TOKYO ELECTRON LIMITEDANNUAL REPORT 07

Meanwhile, as NAND flash memory establishes itself as an ideal storage device for consumer electronics products, we think capital investment will continue to expand based on the large potential for
growth in demand. The market for semiconductors continues to widen, and as this continues, the overallmarket impact of a sudden drop in demand for any one application will steadily become less severe. We
expect the silicon cycle to become shorter, and the scale of fluctuation between peaks and valleys to
become smaller.
Nevertheless, we cannot control the pace of capital investment by our customers. If sudden market
corrections do occur, the stability of Company earnings will depend on how sound our underlying business foundation is. Therefore, we will continue to focus our efforts on building a sound earnings base.

Question 8

It is often said that semiconductor production equipment manufacturers areplaying a greater role in semiconductor manufacturing. In what way is thisrole expanding?

AnswerEquipment manufacturers are becoming deeply involved in efforts to develop
semiconductor process technology. Although this is a real challenge for us, italso represents an excellent business opportunity.
The performance of semiconductors has been improved by reducing geometries and increasing thenumber of interconnect layers. Since the start of the millennium, however, the types of technology developments that had driven progress in the past reached their limits, and chip manufacturers face highbarriers to further progress. In order to address their difficulties, new multilayer interconnect and etching
technologies and new materials are being introduced, and equipment makers’ involvement in the area ofsemiconductor process innovation holds the key to achieving new advances.

Existing Technology vs Innovative Technologyeg.)High-k Gate Dielectric
Low-k CVD
Next Generation Lithography

Existing Technologies
90nm

32nm
Finer Geometries

1nm= one-billionth of a meter

14

Role in Process Development

Required Technologies

Innovative Technologies
New Materials

Growing Role of Equipment Manufacturers in
Semiconductor Manufacturing Technology
Semiconductor Manufacturers

Equipment
Manufacturers
90nm

32nm
Finer Geometries

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TOKYO ELECTRON LIMITED

Particularly since semiconductors came into use in consumer electronics, chipmakers have focused
most of their development efforts on product planning, circuit design and software, and consequently
they are now increasingly dependent on equipment manufacturers to make the advances in semiconductor process technology. The important thing here is first to fully comprehend the various technologicalneeds expressed by customers, and then crystallize what the real technological needs are and provide
solutions for them. Put another way, equipment manufacturers will be required to take the initiative morein proposing process technology. This will demand an even more scientific approach than in the past on
the part of SPE manufacturers. But there are only a handful of companies in the world who possess
these capabilities—and we are one of them.
As this discussion suggests, the role of a semiconductor production equipment manufacturer isbecoming increasingly important. Although this presents us with a major challenge, we think that it alsooffers tremendous opportunities for future growth.

Question 9

What trends do you foresee in the FPD production equipment industry incoming years?

AnswerCapital investment is entering a cyclical lull in 2007. Over the medium andlonger term, however, we expect rising demand for large-screen, flat-panel
TVs to revive capital investment.
The market for FPD production equipment surpassed our expectations in 2006, expanding rapidly, but
the trend is likely to reverse in 2007—the capital investment environment is expected to remain weakthroughout the year. However, this is merely a short-term lull. We expect capital investment to reboundin 2008 and beyond.
Global demand for television sets is estimated at around 190 million units a year. LCD TVs are
steadily expanding their share of this market, but last year total shipments amounted to just 45 million
units. That suggests that there is still tremendous potential for market growth.
At present, countries around the world are shifting from analog to digital broadcasting technology
and we expect that LCD TVs will be in strong demand as people upgrade to new digital TVs. Furthermore, whereas people used to have only one TV in the house, flatter screens have made it easier to put
one in every room. Many people now have one in the living room, one in the den, one in the bedroom
and one in the kitchen. The era of one TV for every family member is coming closer. Naturally, this trend
will stimulate demand further.
We expect to see continued waves of demand for capital investment and ongoing growth, at least
for the time being.

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TOKYO ELECTRON LIMITED

Question 10
Answer

ANNUAL REPORT 07

Could you give us your thoughts on the return of profits to shareholders?
To make possible more attractive returns of profits to shareholders, we willcontinue to make investments for growth. We will also look at the appropriate allocation of capital through a balance sheet management approach.

Tokyo Electron’s basic policy on shareholder returns is to continue linking dividends to consolidated net
income. We are implementing a dividend policy that aims for a consolidated payout ratio of 20%. In fiscal
2007, the Company paid a dividend of ¥103 per share—the highest level in our history.
However, we are not content with that and hope to reward shareholders even more for their support.
Tokyo Electron has pursued cash flow management as an important theme in recent years. As a result,
we have seen a marked improvement in our ability as a company to continuously generate cash. Because
the markets where we are active are expected to experience considerable growth going forward, we intend
to use this cash to make investments for the development of new technologies and in other ways to drive
growth. There will therefore be no change in our policy of putting top priority on raising corporate value overthe medium and long terms in this way. That said, we will think
about how best to allocate the cash we generate. We think that it

Cash Dividends per Share(Yen)

is important to adopt a flexible capital structure policy, one that

120
103

balances three goals: investing for growth, strengthening our90

financial foundations and returning profits to shareholders.
60

continuously work hard to provide more shareholder return in

30
10

8

the future.

45

55

Together with these measures, we are determined that we will0
03

Question 11

04

05

06

07

Is it true that the Company has adopted a unique compensation system toincrease corporate value?

AnswerYes, our compensation system—not only for directors and executive officers, but also for ordinary employees—links pay directly to the Company’s
earnings performance.
Tokyo Electron has adopted an earnings-linked dividend policy which rewards shareholders by paying
dividends equal to 20% of consolidated net income. For people on the operations side, a similar systemlinked to earnings performance incentivizes them.

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ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDThe “annual bonus” portion of compensation for the Company’s directors and executive officers isdirectly linked to earnings results. The upper limit on these bonuses is set at 3% of consolidated net
income. About one-third of those bonuses are paid in the form of stock options (warrants with an exercise
price of ¥1, and a restricted period of three years). Therefore, if the Company’s share price rises, executives receive higher compensation than if they received the bonuses in cash, but if the share price falls, theircompensation is less than it would have been if the entire bonus was paid in cash. In other words, theCompany’s executives bear the same risks—both positive and negative—as the shareholders. Tokyo
Electron’s stock options are not based on job title, but rather, are solely a reflection of profit results.
In fiscal 2007, we also introduced a compensation system for employees which is directly linked toconsolidated operating income. Employee bonuses are paid out based on earnings results (set at 15%of operating income, before bonuses). This means that all three of the Company’s major stakeholder
groups—shareholders, executives and employees alike—have a common goal. All benefit from efforts toboost earnings and enhance corporate value.

Question 12
AnswerWhat kind of company does Tokyo Electron aim to become?
We want to create a company that is full of vision and energy, an organization in which all stakeholders can realize their goals through their involvement with Tokyo Electron.
Tokyo Electron wants to provide high value to all of its stakeholders. First of all, we are dedicated todeveloping new products and technologies that provide high value to customers, and also benefit society in general. The technical hurdles to meeting customer needs grow higher with each passing year, but
by developing and manufacturing equipment that offers superior reliability and productivity, we are
pursuing full customer satisfaction.
The most essential element in Tokyo Electron’s business success is people, our employees, and ourbasic personnel policy reflects this belief. In order to cultivate the abilities of employees, and maximize
their contributions over the medium and long term, we have established TEL University. At TEL University
we aim to foster employees who have ambition, are open-minded, and possess a risk-taking spirit that is
not constrained by fear of failure. We believe that this initiative will help us to become the industry leader
in growth potential and earnings capacity. By developing vision and energy within our company, we
hope to offer shareholders, and all stakeholders globally, an opportunity to share in our success andrealize their goals. This is the type of company we aim to be.

17