TOKYO ELECTRON LIMITEDANNUAL REPORT 2005
For the Year Ended March 31, 2005

ANNUAL REPORT 2005

INNOVATIVE SPIRIT GEARED FOR GROWTH

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
43AG-016

PROFILE

INVESTOR INFORMATION
Established in 1963, Tokyo Electron (“the Company”) and Tokyo Electron group(AS OF MARCH 31, 2005)(“Tokyo Electron”) are world-leading suppliers of semiconductor production
equipment (“SPE”) and related services for the semiconductor industry. Tokyo
Electron develops, manufactures and markets a broad lineup of products,
including coater/developers, plasma etch systems, thermal processing
systems, single wafer CVD systems, surface preparation systems and wafer probers.

Corporate Name:

Common Stock Listed on:

Tokyo Electron Limited

The Tokyo Stock Exchange 1st Section (#8035)

Tokyo Electron also draws on its cumulative expertise in SPE to develop, manufacture and market coater/developers and etch/ash systems for the manufacture of flat panel displays (“FPD”). Most of Tokyo Electron’s

Established:

Transfer Agent for Common Stock:

November 11, 1963

The Chuo Mitsui Trust and Banking Co., Ltd.

semiconductor and FPD production systems command world-leading shares in their respective markets.
Tokyo Electron also maintains a strong presence as a distributor, providing a wide array of semiconductor
production systems, storage area network and Internet-related products for broadband solutions, electronic

33-1 Shiba 3-chome, Minato-ku, Tokyo 105-8574, Japan

Annual General Meeting of Shareholders:
For Further Information, Contact:

June

Investor Relations

components and other products in Japan from other leading suppliers.
With a network spanning 12 countries in the U.S., Europe and Asia, Tokyo Electron provides superior
products and services to its customers, and works to maximize shareholder value.

Common Stock:

Corporate Communications Department

Stock trading unit

100 shares

Authorized

300,000,000 shares

Issued and outstanding

180,610,911 shares

Number of shareholders

60,857

Tokyo Electron Limited
TBS Broadcast Center
3-6 Akasaka 5-chome, Minato-ku
Tokyo 107-8481
Tel: +81-3-5561-7003

Distribution of Ownership Among Shareholders:Fax: +81-3-5561-7400
http://www.tel.com

Japanese financial institutions
66,816,880 shares
37.00%
Foreign institutions and others
74,864,471 shares
41.45%
Individuals and others
23,902,245 shares
13.23%
Other Japanese corporations
12,497,643 shares
6.92%
Treasury stock
2,529,672 shares
1.40%

ALWAYS LOOKING AHEAD TO NEW GROWTH
Contents
01
02
04
06
08
10
12
14
15
16
18
19

History and Prospects
Message From the Chairman
Message From the President
Powerful Strength for Firm Positioning
Making an Even Stronger Financial Position
Envisioning Further Growth By Innovative Technology
Tokyo Electron at a Glance (by Business)
Tokyo Electron at a Glance (by Geographic Region)
Intellectual Property Report
Environmental, Health and Safety Activities
Corporate Governance
Board of Directors, Statutory Auditors and Executive Officers

Financial Section
20 Management’s Discussion and Analysis
27 Consolidated Six-year Summary
28 Financial Statements
42
43

Corporate Directory
Investor Information

Disclaimer Regarding Forward-looking Statements
Matters discussed in this annual report, including forecasts of future business performance of Tokyo Electron, management strategies, beliefs and otherstatements 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 the forward-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

Quarterly Stock Price Range:(Yen)(Calendar Years)

12,00010,000

8,000

6,000

4,000

2,000

0

1Q

2Q

3Q
2002

4Q

1Q

2Q

3Q
2003

4Q

1Q

2Q

3Q
2004

TOKYO ELECTRON LIMITED

4Q

1Q
2005

ANNUAL REPORT 05

42 >> 43

HISTORY AND PROSPECTS

2003–2005
Shift to 12-inch wafer fabs
PC market enters stable growth phase
Increasing demand for digital consumer electronics
Mobile devices equipped with more functions
Limited start of terrestrial digital TV broadcasts
Popularity of flat-panel TVs increases

1995 –1997
Advances in production using equipment for 8-inch wafers
Increasing popularity of PCs
Spread of the Internet

95

96

97

98

99

00

01

02

03

04

05

06

07

08

1999 –2001

2006–2008

Production starts with equipment for 12-inch wafers
Explosive uptake of PCs and mobile phones
Increased investment in communications infrastructure

Expansion in volume production of 12-inch wafers
Increase in sophistication of digital consumer electronics
Convergence of digital consumer electronics, mobile communications
and other applications
Increase in terrestrial digital TV broadcasts
Widespread popularity of flat-panel TVs
Age of home networks and digital networks arrives

TOKYO ELECTRON LIMITEDANNUAL REPORT 05>> 01

TO OUR SHAREHOLDERSMESSAGE FROM THE CHAIRMAN

I am pleased to report a strong performance in fiscal 2005, the year ended March 31, 2005.

SEMICONDUCTOR MARKET – POISED FOR LONG-TERM GROWTH
The semiconductor industry continued to grow strongly in line with growth in the computer, personal computer (PC), mobile phone and other high-tech product markets. As a leading supplier of semiconductor production equipment (SPE), Tokyo Electron has been an integral part of this industry and has maintained aconsistent history of growth for more than 40 years.
In addition to PCs and mobile phones, semiconductors are finding an expanding application base. Alongside
DVD recorders, digital televisions and other digital consumer electronics, there is a booming market for nextgeneration digital mobile devices that integrate the functions of mobile phones, PDAs, digital cameras, digital
portable audio players and other devices. Semiconductors are also finding wider applications in automotive
electronics such as sensors, engines and power control systems, and navigation systems. Semiconductor
demand will also be boosted as analog broadcasting gradually gives way to digital television broadcastingaround the world.
Furthermore, semiconductor demand, in the past largely confined to the U.S., Europe and Japan, is
now growing rapidly around the world, from South Korea and Taiwan to the so-called BRICs countries.
The world is on the verge of a full-blown age of digital networks.

SEMICONDUCTORS AND SEMICONDUCTOR PRODUCTION EQUIPMENT SUPPORT NEW
VALUE PROPOSALS
Now that semiconductors are used en masse in digital consumer electronics products that havevirtually become commodities, there is a view in some quarters that the semiconductor industry itself
will become commoditized, thus resulting in slower growth. However, I believe that the semiconductor market will continue to expand as the semiconductor, a product of the most sophisticated technologies, adds greater value to a range of electronic products. Furthermore, semiconductor
manufacturing technology should also continue to advance due to the fusion of various new technologies. While the semiconductor market is expected to experience a mild correction this year,
it is still one of the few $200 billion-plus industries with the potential of an average annual
growth rate of around 10% over the medium to long term. As the “crude oil” of industry, I expect the semiconductor to drive the global industry. One of the most important technologies
that supports the value of semiconductors is the SPE that Tokyo Electron supplies. Throughendless technological innovations, we have been supporting the evolution of semiconductors,
namely, growing multifunctionality and high-performance, a quantitative increase by lowcost production and expansion to a wide range of applications.

CUSTOMER TRUST AND TOKYO ELECTRON’S TECHNOLOGY
Our rock solid position as the market leader rests on the hybrid technologies that wehave accumulated over the years and, equally as important, close relations withour customers rooted in mutual trust and respect. Since our foundation, we haveconsistently pursued customer satisfaction as a core value. Our marketing, service, product development and other teams work closely with customers, making
possible the exchange of information on a broad range of issues. The development of SPE draws on a whole spectrum of technologies, from electronics,
mechatronics and optics to thermodynamics and chemicals. Advanced know-how
in the integration of all these technologies is essential for manufacturing SPE. Few
other industries, if any, require this advanced level of technology synthesis. This isa blessing, too, since it provides a high barrier to entry to the SPE industry. Furthermore, our customers arealso working on differentiating semiconductor manufacturing processes in various ways to enable them todistinguish their end products from the competition. In an industry like this, only a relationship of deep trust
allows us to fully access and understand the true needs of customers. Quickly developing new technologies
to respond to customer needs improves our position in the industry. By continuing to bolster our capabilities
across the technologies used in the development of SPE as well as the know-how required to synthesize
these technologies, we have been able to enhance our position as a manufacturer and to deepen our relationship with customers as the market leader.

CORPORATE DNA SENSITIVE TO CHANGE
Tokyo Electron has the character of both a manufacturer and a distributor. Supplying technology required by
the world is common to both these functions. As a distributor, we market other manufacturers’ products withthe same commitment that we bring to our own products. We do not reject superior technology and products
developed outside Tokyo Electron. Rather, we try to actively use such technologies, because it is in our“genes” to respond sensitively to technologies and changes in the world. At the same time, as a manufacturer
we have a strong mission to develop our own products. We continue to take on the challenge of developing
new technologies and products to meet the changing needs of our customers. We have also built up a
powerful technology base to provide advanced technical support to our customers.
Breakneck technological change in the semiconductor industry means that it is a rare case indeed for any
one manufacturer to hold on to the leadership position for a long time. However, Tokyo Electron has maintained its position as a top-class SPE firm for years. This is because our distributor “genes” enable us tosense customer needs ahead of others. And our instinctive ability to respond to changing customer needs
meshes seamlessly with our strengths as a manufacturer that continues to cultivate a wide technology
base. These two aspects have been the foundation of our growth.

EXPANDING DREAMS IN AN INNOVATIVE CORPORATE CULTURE
At Tokyo Electron, a corporate culture characterized by the pursuit of innovation has been passed down theyears as part of our heritage. By innovation I do not only mean technology development. I also mean manufacturing, marketing and business processes. In other words, innovation at Tokyo Electron means transforming
our businesses to superior ones through non-traditional approaches. We feel that superior human resources are
the key to achieving this goal. We therefore make every effort to attract the best people from around the world
and let them develop in an innovative culture. We are also promoting a business leader program and strengthening
cross-divisional activities in our company to foster the development of up-and-coming younger employees.
As in the past, Tokyo Electron will continue to be innovative in both technology and business as we continually strive to raise our corporate value. Tokyo Electron is committed to living up to the expectations of
our shareholders and other stakeholders throughout the world, as a company that can support making ideas
and dreams a reality.
July 2005

Tetsuro Higashi
Chairman & CEO

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

02 >> 03

MESSAGE FROM THE PRESIDENT

Demand for PCs and mobile phones was firm in fiscal 2005. It was also a banner year for digital consumer
electronics. These factors boosted demand for semiconductors and FPD, and capital investment for theirproduction. Amid this growth, Tokyo Electron made united efforts in the development, manufacturing, marketingand servicing of our products.
I am pleased to report that the strategy was successful and we completed the year with impressive financial
results. Consolidated operating income rose ¥41.7 billion from the previous fiscal year to ¥64.0 billion,
while net sales rose 20% year on year to ¥635.7 billion. Net income rose ¥53.3 billion from the previous
fiscal year to ¥61.6 billion. As a result, net income per share increased sharply from ¥46.37 to ¥343.63.
The annual dividend was ¥45.0 per share.

NEW ACCOUNTING POLICIES STRENGTHEN FINANCIAL POSITION AND REVENUE STRUCTURE
In fiscal 2005, Tokyo Electron made two important changes in its accounting polices: the revenue recognition
policies were changed and we booked accrued warranty expenses. These changes are a response to the international harmonization of accounting standards. The changes are also intended to make our accounting information more appropriate, thereby further bolstering the financial and revenue structure of Tokyo Electron.
We now recognize revenue at the time of confirmation of set-up and testing of products instead of the timeof shipment, a change intended to bring greater precision to revenue measurement. We also expect thismove to help us benchmark the time to completion of set-up and testing of products. This in turnshould help us to reduce expenses by shortening this period. The other change was to record accrued
warranty expenses for estimated expenses for after-sales repair during the warranty period of equipment. This change is intended to make periodic profit and loss statements more appropriate bymatching the after-sales repair expenses with revenue when products are sold. This has also raised
awareness within Tokyo Electron of the importance of reducing the after-sales repair expenses.

STRUCTURAL REFORMS START BENEFITING CASH FLOWIn April 2003, Tokyo Electron launched a structural reforms program, a series of initiatives
aimed at readying our operating base for further growth. Two years into the program, tradenotes and accounts receivable and inventory turnovers have improved significantly, leading toa marked improvement in cash flow. We have also worked to reduce interest-bearing debt. As
a result, cash and cash equivalents at ¥115.4 billion exceeded interest-bearing debt as ofMarch 31, 2005, thereby strengthening our financial position.
We are committed to building a strong company immune to market fluctuations and capableof generating cash flow through ongoing structural reforms while investing for the future in
R&D and other areas.

TAKING ON THE CHALLENGE OF FURTHER STRUCTURAL REFORMSIn April 2005, we launched structural reforms Phase 2 in order to build on the improvements
made to our operations, finances and position as a manufacturer. In semiconductor and FPD
production equipment, customers are becoming more demanding about quality, as technology
becomes more sophisticated. The development of higher-quality products has resulted in
shorter start-up times at customers’ factories, higher capacity utilization rates, enhanced reliability and cost reductions. We have bolstered group-wide measures to raise awareness of andimprove product quality.
I am convinced that the introduction of new products with even higher added value is the key tothe sustained growth of Tokyo Electron. We are therefore making collective efforts to foster new
technologies and to plan and develop new products. In existing businesses, we are working to improve the performance of products to achieve clear differentiation from competition, and seeking
cost reductions through enhanced production efficiency. As a group, we are speeding up in-house
operations to further strengthen our competitive advantage and to rapidly respond to changes in thebusiness environment.

EMERGING TECHNOLOGY TRENDS
In SPE, the primary issue so far has been toward the technology for design-rule shrinkage. In addition, we now
need to focus on improvement of mass production technology, as our customers are increasingly expecting
advances in this area. Moreover, the range of materials used in semiconductor production processes is
expanding along with the transition to devices that offer higher performance and lower power consumption.
Tokyo Electron offers a broad lineup of products and has the best product development infrastructure in
the sector. We are demonstrating our leadership position in adopting semiconductor processing technology
for design-rule shrinkage, mass production technology and new materials through cooperative efforts withleading semiconductor manufacturers, consortiums and universities.

STRENGTHENING MEASURES FOR CORPORATE SOCIAL RESPONSIBILITY
Enhancing corporate governance to assure even fairer management and strengthening strategies for environment protection and safety are important issues from the standpoint of corporate social responsibility.
Amid the globalization of business management, the fundamental policy and purpose of our corporate governance activities is to ensure adherence to corporate ethics and laws and regulations. At the same time, wehave established Compensation and Nomination committees as an integral part of a program to ensure management transparency and objectivity. In addition, we will also strengthen our internal control and risk management systems and carry out activities to educate and raise employees’ awareness of these issues.
In environmental protection activities, Tokyo Electron is working to bring down the environmental loads of SPE
by reducing power consumption, making our products lead-free, reducing industrial waste and promoting recycling.

COLLECTIVE EFFORTS TO BECOME AN EXCELLENT COMPANY
In 2005, in terms of capital investment, the semiconductor industry is likely to slow down slightly from a recent
up turn because of declining capacity utilization rates at certain semiconductor manufacturers. However, expansion in markets for new applications, such as mobile devices, digital consumer electronics, automotive electronics and home servers, is expected. Fueled by a growing range of applications, semiconductors and SPE used intheir manufacture are expected to experience high growth rates over the medium and long terms. The FPD production equipment market should continue to grow, driven by explosive growth of the flat panel television market.
I have defined fiscal 2006 as a period for concentrating on new product development and further enhancing operating efficiency to ready Tokyo Electron for another leap forward. Our goal is to achieve a growth rate
exceeding that of the market in the next industry upturn.
Dynamic expansion of the semiconductor and FPD production equipment markets will intensify competitive
realignments as weaker players are driven out. Since its foundation, Tokyo Electron has been guided by thecustomer-first principle. By combining this with the technological prowess that allows us to supply equipmentthat accurately meets user needs and our commitment to provide extensive support services, Tokyo Electron
has maintained its leadership position in the industry.
Tokyo Electron is committed to continuing to improve its technology development, production and service
capabilities in order to achieve customer satisfaction and in doing so raise our corporate value and meet the
expectations of all our stakeholders. In meeting these challenges, we look forward to the continued supportof our shareholders.
July 2005

Kiyoshi Sato
President & COO
TOKYO ELECTRON LIMITEDANNUAL REPORT 05

04 >> 05

AN UNCOMPROMISING DEDICATION TO COMPLETECUSTOMER SATISFACTION
The greatest strength of Tokyo Electron is a firm commitment tocustomer satisfaction that has defined the company since its

MARKET SHARE BY PRODUCTCATEGORY
Tokyo Electron ranks among the leaders interms of market share in every category ofsemiconductor production equipment it
produces, based on Tokyo Electron data.

foundation. Our sales and marketing team identifies the trueneeds of each customer. Support service teams make sure that
our equipment is operating reliably and according to specifica-

Tokyo Electron Products World Market Share(2005)

tions at customers’ factories. Our R&D engineers take the lead indeveloping products and technologies that closely meet the

NO. 1

NO. 1

Coater/Developer

Plasma Etch System(Dielectric Etch)

NO. 1

NO. 2

Thermal Processing
SystemSingle Wafer CVD System(Non-tube LP-CVD)

NO. 2

NO. 1

Cleaning System(Wet Bench,Spray Processor, Scrubber)

Fully Automatic
Wafer Proberrequirements of each customer. Backed by the “customer-first”
stance of every element of our organization, Tokyo Electron
equipment is performing key functions at semiconductor fabs
throughout the world.

RETAINING A PROMINENT MARKET POSITION THROUGH
OUR “NUMBER ONE” STRATEGYTokyo Electron is constantly differentiating itself by creating
innovative technologies. We concentrate resources on targeted
product categories with the aim of becoming number one. This
policy has made us the leader in developing next-generation

Source: Tokyo Electron survey

technologies for various types of equipment. By acquiring exclusive know-how needed to take technologies to the next stage,
we can preserve a clear competitive edge.

POWERFUL STRENFOR FIRM POSITION

THE WORLD’S MOST ADVANCED SERVICE SUPPORT FRAMEWORK
Semiconductor and FPD production equipment depends heavily on many state-of-the-art
technologies. An equally sophisticated service support framework is essential to ensuring thestable operation of this equipment in customers’ factories. To provide this capability, Tokyo
Electron has service bases in 12 countries that help raise productivity by supplying support
closely meeting the requirements of each customer.

Worldwide Operations (As of July 1, 2005)

INCREASED MARKET SHARE IN
SPE MARKET
One measure of customer satisfaction is a
supplier’s market share. In the semiconductor
wafer fab equipment market, our share increased from 11.6% in 2003 to 12.9% in
2004. This demonstrates the excellent reputation of our high-throughput equipment andreliable support system for 300mm wafers,
which have become the industry standard.

U.S.
AlbanyAustinAlbuquerqueBeverlyBoise
Burlington
DallasFishkill

EuropeHillsboro
Los Angeles
Manassas
MarlboroughPhoenix
Richmond
Santa Clara

Avezzano
Catania
Crawley
Dresden
Grenoble
Kiryat Gat
Leixlip

Asia
Migdal HaEmek
Milan
MunichNijmegen
Paris
RoussetPundang
CheonanCheongju
Gumi
IcheonKiheung
PucheonHsin-chu

Worldwide Wafer Fab Equipment Market
and Tokyo Electron’s Market Share

Tokyo
Osaka
Iwate
Kanagawa
Yamanashi
Kumamoto
Saga
MiyagiHyogo
etc.

■ Sales & Service (including on-site)■ R&D/Manufacturing/Engineering(Calendar Year)
(%)

Japan
BeijingShanghaiSuzhouTianjin(Billions of U.S. Dollars)

15

30

10

20

5

10

0

2002

2003

2004

0

■ Wafer fab equipment market
Source: Gartner Dataquest
Tokyo Electron share(April 2005) GS05219

GTH
ING
TOKYO ELECTRON LIMITEDANNUAL REPORT 05

06 >> 07

MAKING AN EVEN ST
FINANCIAL POSITIONGREATER FINANCIAL SOUNDNESS
During the surge in IT-related demand and investments a few
years ago, Tokyo Electron added assets and costs that are nolonger suitable for today’s operating environment. To improve
operating efficiency, we have constantly worked on achieving theproper level of employees, inventories and capital expenditure.
Due to these initiatives, the days required to turn over tradenotes and accounts receivable and inventories have decreased
over the past two years even as sales climbed, producing asignificant increase in operating cash flows.

IMPROVEMENT IN THE
OPERATING INCOME MARGIN
Structural reforms have produced a substantial increase in the operating income margin.
While the cost of sales rose along with sales,
selling, general and administrative expenses
were down 5.0% due to measures to control
headcount, lower depreciation expenses bycarefully managing capital expenditures, andother factors. The result was a noteworthy
jump of 9.9 percentage points in the operating
income margin compared with fiscal 2003.

Operating Income Margin,
Consolidated Net Sales and Selling,
General and Administrative Expenses(Billions of Yen)

(%)

750

12

500

8

250

4

MORE STRUCTURAL REFORMS
For some time, we have been enacting structural reforms
aimed at reducing manufacturing lead times, cutting costs andother goals. Now, along with work involving existing themes,
we are focusing on the additional priority of further improving
quality. The objective is to use these reforms to raise profitability and build a powerful financial position that can generate consistent cash flows.

0

2003

2004

2005

0

■ Consolidated net sales
Operating income margin■ Selling, general and administrative expenses

RONGER
Trade Notes and Accounts Receivable
and Inventory Turnovers(Days)

150

100

HIGHER PRODUCTIVITY
AND EFFICIENCY50Tokyo Electron achieved a significant improvement in operating efficiency even while meeting a large increase in demand for its products
during the past fiscal year. Shorter manufacturing lead times, a review of the productdesign process and other improvements
made this possible. The result was increases
in productivity and efficiency. In particular,
consolidated net sales per employee was up aremarkable 55.0% compared with fiscal 2003.

Consolidated Net Sales per Employee,Consolidated Net Sales and Employees(Billions of Yen)

(People)15,000

900
59.7

71.0
(Millions of Yen)

45.8
10,000

600

300

0

5,000

2003

2004

■ Consolidated net sales■ Employees

2005

0

Consolidated net sales
per employee

0

2003

2005

■ Trade notes and accounts receivable turnover■ Inventory turnover

IMPROVE TRADE NOTES AND
ACCOUNTS RECEIVABLE AND
INVENTORY TURNOVERS
Inventories tend to rise in tandem withsales. However, through extensive measures
to maintain sound inventories, in terms ofvolume and composition, we have worked tohold inventories at a suitable level. Benefits
have been dramatic. Inventory turnover,based on shipments, improved from 89 days
as of March 31, 2003 to 72 days one year
later and 56 days as of March 31, 2005.
To collect receivables associated withproduct sales faster, we had to devise ways
to reduce time needed for final adjustments
following the installation of a product. We aremaking progress by standardizing our equipment and raising quality. At the same time,
we are negotiating with customers to shorten
payment terms. Trade notes and accounts
receivable turnover, on a shipment basis,
improved sharply to 114 days as of March
31, 2005 compared with 159 days as ofMarch 31, 2004 and 135 days as of March
31, 2003.

FREE CASH FLOWS GENERATION
AND DEBT REDUCTION
Success at holding accounts receivable andinventories to proper levels means that weneed less additional working capital whensales rise. Capital expenditures are also kept
at the proper level by concentrating theseinvestments mainly on R&D activities and IT
infrastructure components that can raise
productivity. Together, these actions helped
generate more than ¥100 billion in free cash
flows in fiscal 2005. This cash was proactively
used during the past fiscal year for new
product development activities and interestbearing debt reductions. We achieved
negative net debt that gave us virtually debtfree operations.

Free Cash Flows andInterest-bearing Debt
(Billions of Yen)

160

120

80

40

0

–40

2003

2004

2005

■ Free cash flows
Interest-bearing debt

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

08 >> 09

MEETING THE DEMAND FOR INVESTMENTS INTECHNOLOGY AND NEW PRODUCTS
Our customers need to make semiconductor devices withgreater scales of integration, more functions, higher speeds andlower power consumption, all at high volumes and with excellent
productivity. At the heart of our ability to meet these demands is
our Process Technology Center, which has an environment
identical to the wafer fabs of our customers. Here and at otherlocations, we work with customers from around the world,

SEMICONDUCTOR-RELATEDMARKETS STILL HAVEENORMOUS GROWTH POTENTIAL
Increasing applications for semiconductors
are fueling explosive growth in the volume ofdevices shipped. That translates into substantial demand for manufacturing equipment. At the semiconductor industry’s nextpeak, which is forecast to be around 2008,
projections show that markets for semiconductors and production equipment will be
about 30% larger than the recent peak.

Worldwide Semiconductor Revenue(Calendar Year)consortiums, universities and other partners to develop sophisti(Billions of U.S. Dollars)cated technologies. Developing semiconductor manufacturing

300

technology is becoming increasingly sophisticated. By leveraging
our technological leadership, we will continue to develop equipment that provides the solutions customers require.

200

AIMING FOR FURTHER GROWTH
Our primary goal is to attain further growth in corporate value.

100

Following up on structural reforms enacted in recent years, weplan to take initiatives to generate record earnings each time

0

98

99

00

01

02

03

04

05

the semiconductor industry reaches a cyclical peak.
Source: Gartner Dataquest (April 2005) GJ05220

NEW APPLICATIONS DRIVE
DEMAND FOR SEMICONDUCTORS
Growth of the semiconductor market has been
driven mainly by the PC. Looking ahead, themarket will be backed by a multitude of otherapplications as well, like mobile devices, automotive electronics and digital consumer electronics.

ENVISIONING FURTHBY INNOVATIVE TECHOUR GOAL – RECORD EARNINGS
We continue to concentrate on reducing costs and shortening manufacturing lead times in our ongoing
structural reform program. At the same time, we are active in two other areas to lay the groundwork
for continued growth. One is becoming more competitive by adding more value to our existing productlineup. The other is expanding after-sales businesses, such as the sale of parts and equipment
refurbish. Furthermore, we expect that the results of development projects now under way will contribute to additional earnings growth at the next stage by providing new products to new market sectors.

Scenario to Increase Profitability
2003

2004

2005

2006

Structural Reforms

2007

2008

Phase 2

2009

2010

2011

Phase 3

Image of SPE business environment

New products to new markets
Differentiate existing products
Expand post-sales service revenue
Enhance financial structure and increase profitability by improving operating efficiency

Device and Production Equipment Needs
Applications

Device Needs>>>>

Mobilecommunications

High-end servers
Graphics processors

06

07

Production Technology
Needs

Low power consumption>>

Higher circuit density>> Design-rule shrinkage

High-k gate dielectric>>

Multiple functions>>

Faster processing
speeds>>Low-k interlayer
dielectric>>>>

Improved throughput

Higher productivity

08

Forecast

Improved production
yieldsREQUIREMENTS FOR SEMICONDUCTORTECHNOLOGIES DEMANDED BY END
PRODUCTS
Cell phones and other mobile devices need to be lighterand have longer battery lives in order to smoothly handle
streaming video and other content in the coming age ofdigital networks. Networks linking these devices require
high-performance servers with massive processing powerand data storage capacity. Tokyo Electron is responding
by developing sophisticated technologies that precisely
target the requirements of end products.

“k” in high-k and low-k refers to the dielectric constant of the insulator

Semiconductor Forecast by Application, 1998-2008 (Calendar Year)
Average Growth Forecast
98-08

(%)

20
Mobile Handset

15

HIGH GROWTH
Automotive

10

Security

ConsumerPC

Medical50Military

10

20

30

40

2004 Semiconductor Revenue

50

60(Billions of U.S. Dollars)
Source: iSupply (March 2005)

ER GROWTHNOLOGYTOKYO ELECTRON LIMITEDANNUAL REPORT 05

10 >> 11

TOKYO ELECTRON AT A GLANCE(BY BUSINESS)COMPOSITION OF SALESFOR 2005

OVERVIEW OF 2005 AND BASIC STRATEGY(New policies)

INDUSTRIAL ELECTRONIC EQUIPMENT(Billions of Yen)

SEMICONDUCTORPRODUCTION
EQUIPMENT

800

600

400

71.9%

200

0

2004

2005

This division offers proprietary products and outstanding products sourced fromother companies as well as related services to customers, all of which areclosely matched to their needs. In fiscal 2005, Tokyo Electron received a steadystream of orders from manufacturers stemming from demand for system LSIs
incorporated in digital consumer electronics and robust demand for memory.
Together with the introduction of new products and other factors, this resulted
in sales of ¥457.2 billion (based on newly adopted accounting policies).
As the market leader, Tokyo Electron will continue to develop equipment
compatible with 65nm and finer design rule processes, as well as bring to market new products embracing new materials and technologies. Tokyo Electron will
also continue to set itself apart through the provision of new value, such as byincorporating metrology technology in production equipment.

■ Previous policies■ New policies

FPD PRODUCTION
EQUIPMENT11.8%

COMPUTER NETWORKThis business provides products and services drawing on the advanced technological capabilities acquired from the development of semiconductor production
equipment. In fiscal 2005, orders were brisk as LCD panel manufacturers
moved strategically to increase their supply capabilities to popularize and expand the market for flat-panel TVs. As a result, sales were ¥75.0 billion (basedon newly adopted accounting policies).
FPD production equipment will be required to handle increasingly larger
glass substrates. Tokyo Electron aims to enhance its market-leading position
by working hand in hand with customers on the development of productswith long-term growth prospects.

This business provides world-leading products and solutions for the broadband
era, such as storage area network (SAN) and Internet-related solutions. In fiscal
2005, efforts were made to expand sales of SAN, network and broadband solutions. Sales were ¥16.0 billion. Sales fell 13.5% from the previous fiscal year.
Undeterred by this performance, the business will work to provide upgraded support services and expand sales of cutting-edge products offering high added-value.

2.5%

ELECTRONIC COMPONENTS(Billions of Yen)

200

150

100

13.6%

50

0

2004

2005

Operations in this business are the responsibility of consolidated subsidiaryTokyo Electron Device Limited. This company selects and offers the world’s bestproducts from leading suppliers to deliver total solutions for customers’ needs.
In fiscal 2005, the Electronic Components segment turned in sales of ¥86.2
billion on firm growth of semiconductor products for use in digital consumer
electronics. Semiconductor products accounted for around 90% of segment
sales. As a result, segment sales rose 2.4% from the previous fiscal year.
Tokyo Electron’s goal is to become the leading technology trading company,
trusted by customers and suppliers alike. Tokyo Electron’s approach, as it
strives to achieve this goal, will be to focus on providing thorough technicalsupport for value-added products and to beef up development of own-brandproducts and contract design services.

Coater/Developer
CLEAN TRACK™ LITHIUS™

Plasma Etch System
Telius™

■ ORIGINAL PRODUCTS
Coater/Developer
Spin-on Dielectric Coater/EB Cure
Mask Coater/Developer
Plasma Etch System
Thermal Processing System
Single Wafer CVD System
SPA Plasma Processing System
Auto Wet Station
Single Wafer Processor
Wafer Scrubber System
Wafer Prober
Dicing Frame ProberIntegrated Metrology
ODP (Optical Digital Profilometry)■ DISTRIBUTED PRODUCTS
FIB/SEM System (FEI Company)
Film Metrology Tool
Yield Management Software(Yield Dynamics, Inc.)
X-ray Diffraction Measurement Equipment(Bede Scientific Instruments Ltd.)Electron-Beam Defect Inspection System(Hermes Microvision Inc.)FPD Coater/Developer
FPD Plasma Etch/Ash System

FPD Coater/Developer
CL1300FPD Plasma Etch/Ash System
IMPRESSIO■ BUSINESS NETWORK SOLUTIONS■ SAN SOLUTIONS■ ENTERPRISE SECURITY
SOLUTIONS■ AEROSPACE PRODUCTS

Brocade Communications
Systems, Inc.
Fibre Channel Integrated
Fabric Switch

F5 Networks, Inc.
Local Traffic Manager

Computer/Networks
Advanced Digital Information
Corporation (ADIC)ALAXALA Networks Corporation
Brocade Communications
Systems, Inc.
CipherTrust, Inc.
Data Domain, Inc.
DataPower Technology, Inc.

■ SEMICONDUCTOR PRODUCTS■ BOARD COMPUTER PRODUCTS■ SOFTWARE■ OTHER ELECTRONIC COMPONENTS

Fujitsu Ltd.

Xilinx, Inc.

Advanced Micro Devices, Inc.
Agilent Technologies, Inc.
Ardence, Inc.
Cavium Networks, Inc.
ChaosWare Inc.
Conexant Systems, Inc.
Cosel Co., Ltd.
Digital Electronics Corp.
Entropic Communications, Inc.
Emuzed, Inc.
ERNI Elektroapparate GmbH
Eudyna Devices Inc.

Emulex Corporation
Extreme Networks, Inc.
F5 Networks, Inc.
GoAhead Software Inc.
Hewlett-Packard Japan, Ltd.
Hitachi, Ltd.
Isilon Systems, Inc.
Juniper Networks, Inc.
McDATA Corporation
Meru Networks, Inc.
nCipher Corporation Ltd.
NeoScale Systems, Inc.
TimesTen Performance Software, Inc.
VERITAS Software Corporation

Aerospace Products
BAE SYSTEMS
Conax Florida Corp.
Scot Inc.
H. Koch & Sons Corp.
Irvin Aerospace Inc.
ITT Aerospace Controls Corp.
Pacific Cast Technologies
DIT-MCO International Corp.
McCormick Selph, Inc.
Kontron Embedded Technology, Inc.
Z Microsystems Inc.

Freescale Semiconductor, Inc.
Fujifilm Microdevices Co., Ltd.
Fujitsu Ltd.
Fujitsu Media Devices Ltd.
Infineon Technologies AG
Integrated Device Technology, Inc.
Intel Corp. (Dialogic Product)Intersil Corp.
Kopin Corp.
Legerity, Inc.
Linear Technology Corp.
Metrowerks, Inc.
Microsoft Corp.
3M (Minnesota Mining andManufacturing Co.)
Motorola, Inc.
ON Semiconductor Corp.

PFU Ltd.
Phoenix Technologies Ltd.
Pixelworks, Inc.
Portwell, Inc.
Potentia Semiconductor Corp.
Ramtron International Corp.
SafeNet, Inc.
Shinko Electric Industries Co., Ltd.
Texas Instruments Inc.
Tokyo Electron Device Ltd.
Tundra Semiconductor Corp.
Winchester Electronics
Woodhead Industries, Inc.
Xilinx, Inc.
Zarlink Semiconductor Inc.

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

12 >> 13

TOKYO ELECTRON AT A GLANCE(BY GEOGRAPHIC REGION)COMPOSITION OF SALESFOR 2005

SALES

OVERVIEW OF 2005

(Billions of Yen)

(New policies)JAPAN

The high level of sales in theprevious fiscal year continued infiscal 2005 thanks to active
investment in logic products,
system LSIs and memory for
digital consumer electronics.

300
200

36.6%

100
0

U.S.

2004

■ Previous policies■ New policies

2005

Investments increased in MPU
and other logic products,
reflecting strategic investments bymemory manufacturers andhealthy demand for PCs.

300
200

9.9%

100
0

EUROPE

2004■ Previous policies■ New policies

2005

Steady investments were made in
logic devices for MPU, onboard
automotive, communications andother applications.

300
200

4.9%

100
0

SOUTH KOREA

2004■ Previous policies■ New policies

2005

Sales increased sharply, theresult of large investments bymemory and FPD manufacturers.

300
200

13.4%

100
0

TAIWAN

2004■ Previous policies■ New policies

2005

Logic fabs and memory manufacturers made substantial investments. Capital expenditures for
FPD manufacturing equipment,
particularly for large substrates,
were also brisk.

300
200

22.2%

100
0

CHINA AND
SOUTHEAST ASIA

2004

■ Previous policies■ New policies

2005

300

Supported by broad-based demandfor devices, there was a large
volume of investments by fabs.

200

13.0%

100
0

2004

■ Previous policies■ New policies

2005

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 todeveloping technologies that bolster the competitiveness of its
products. Without protection of its intellectual property rights, Tokyo
Electron would not be able to lay claim to independently developed
technologies and products as proprietary assets. It is precisely the
integration of our intellectual property strategy with our technologicaland product strategies that allows Tokyo Electron to realize 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 for process recipe, software and other patents.

CONTRIBUTION OF LICENSE-RELATED ACTIVITIESIn developing and implementing our intellectual property rights strategy, we do not primarily 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 bring them tomarket as quickly as possible, it is essential to utilize all available
intellectual properties. Tokyo Electron places high value on introducing cutting-edge technology, on constantly enhancing the efficiencyof 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 them through 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.

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. According to these rules, Tokyo
Electron provides incentives for inventors and creators within
Tokyo Electron. We established awards to honor inventors andcreators. We also make lump-sum payments at the time of submission of applications for patents, utility model rights, designs
and other property rights. Bonuses are also given as incentives ifsuch creations are implemented at Tokyo Electron or licensed tothird parties. The latter bonuses are scaled to the earnings recordof such licenses and other rights.
Based on the Revised Patent Law that came into force in fiscal
2005, Tokyo Electron is working to make its award and bonus
systems for creations easier to understand and revising how inventors are rewarded for their contributions. The goal is to bring thesystem into conformity with the recommendations in “The Case
Studies of Procedures Under the New Employee Invention System,”
published in September 2004 by the Patent Office.
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 Prevention ofTechnology Leakage.”
By promoting greater cooperation with the materials and procurement divisions, Tokyo Electron is strengthening measures against
pirated technologies at the component level. These initiatives are notlimited to operations in Japan alone. They are to be expanded overseas through tie-ups with local law offices in the U.S. and in Asia.

INTELLECTUAL PROPERTY BY MAJOR COUNTRY
The following graph shows historical data on the number ofpatent applications filed in Japan by Tokyo Electron up to the endof March 2005. 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 addition to the recent policy of emphasizing filing applicationsin the U.S., Tokyo Electron will also stress the need to file applications in China, South Korea, Taiwan and other Asian countries.
Number of Patent Applications
Applications (overseas)

Applications (domestic)

500

1,000

400

800

300

600

200

400

100

200

0

2000
U.S.

2001

2002

South Korea

2003
TaiwanTOKYO ELECTRON LIMITED

2004

2005

China

EuropeANNUAL REPORT 05

0
Japan

14 >> 15

ENVIRONMENTAL, HEALTH AND SAFETY ACTIVITIESBASIC POLICYTokyo Electron observes socially responsible corporate management
as a means to achieve sustained corporate growth and continued
social development. Assuring safety in our own facilities and thoseof our customers and minimizing environmental loads across ouractivities are the two defining principles of our CSR policy. Tokyo
Electron aims to achieve cohesion of environmental protection andsafety by investing the required management resources from theequipment development stage onwards.
In 1997, Tokyo Electron adopted environmental management
policies based on ISO 14001 that have subsequently acquired ISO
certification for our facilities. Tokyo Electron recognizes that making
every effort to assure that everyone associated with our businesscan look forward to a comfortable, healthy and safe life is no lessimportant than the environment. Acting on this, we established theTokyo Electron Credo and Principles on Environment, Safety and
Health in 1998. At Tokyo Electron, we are aware of the importanceof the environment, health and safety. We have given them animportant place in our statement of management philosophy andactively promote these activities throughout Tokyo Electron.

ENVIRONMENTAL ACTIVITIES■ Preventing Global Warming

generated during their life cycles, we have compiled quantitative
data on such environmental burdens during each stage of a
product’s life, from manufacturing and use to disposal, and built
up a product LCA database. The ability to draw on this informationin the design of our products has made us a leading company in
our industry in energy conservation.
Since many of our products are manufactured and used in clean
rooms, we take an all-inclusive approach that factors in the energy
conservation aspect of the entire system, including the equipment
and the clean room. The five major approaches taken in this respect are as follows:
1. Reducing the energy consumption of the equipment itself
2. Reducing the energy consumption of peripheral devices
3. Using equipment in a way that conserves energy
4. Reducing the energy consumption of the clean room
5. Overall clean room management (planned andappropriate operation)
Tokyo Electron will implement environmental activities concerning ourequipment and operation of clean rooms in cooperation with customers.
Promoting these initiatives directs Tokyo Electron toward the
manufacture of energy-efficient equipment and to advisingcustomers on how to use the equipment in a way that minimizes
energy consumption.

Following ratification of the Kyoto Protocol, companies are being
asked to contribute more to prevent global warming.
5. Overall clean room management (planned and appropriate operation)
Carbon dioxide is emitted during the operation of ourequipment. It is also emitted by our manufacturing
4. Reducing the energy consumption of the clean room
facilities and from the use of energy at our offices. The
Life Cycle Assessment (LCA) method we use to quantitatively assess a product’s environmental load showed thatour products emit relatively high levels of carbon dioxide
gas during the operation stage as compared to otherstages in their life cycle. We are responding with special
Chiller 2. Reducing the energy consump- Vacuum
environmental measures to reduce such emissions.

■ Promoting Environmentally Friendly Products
We are active in incorporating environmental suggestions from our customers into our products in order tolower environmental loads during the semiconductor
manufacturing process and to eliminate use ofhazardous substances in the manufacture of ourequipment. Particular about environmental loads

Unittion of peripheral devices

1. Reducing the energy consumption of the equipment itself
3. Using equipment in a way thatconserves energy

Pump■ Lead-free Soldering Technology■ Green Procurement

European Union (EU) directives will ban the use of mercury, cadmium,lead and other hazardous substances in electrical and electronicequipment in Europe after June 2006. Although these directives
do not apply to semiconductor manufacturing equipment, Tokyo
Electron is voluntarily and systematically manufacturing lead-free
products as part of efforts to forestall further pollution.
Tokyo Electron established the Lead-free Task Team, made up ofleaders of Tokyo Electron’s firms and operating divisions, to develop lead-free soldering technology for the manufacture of ourequipment. Plans call for completing preparations for production ofequipment using lead-free solder in the year ending March 31,
2006 and starting production in January 2006.

Almost all of our materials and parts
for the manufacturing of semiconductor
production equipment are sourced
from suppliers. If we are to reduce
environmental loads across all of ourbusiness activities, components andraw materials must be produced inways that take the environment into
account. In this respect, we are making an effort to conduct procurement
based on our Green Procurement
Green Procurement Guideline
Guideline, buying only from those
suppliers who are actively making efforts to reduce environmental
impacts. In the future, we intend to start procuring materials only
from suppliers who meet specific environmental standards.

■ Introduction of Environmental Management System
Tokyo Electron’s manufacturing facilities have developed and implemented environmental management systems based on ISO 14001
and are now ISO certified. The Tokyo Electron Device Limited
Yokohama Office and the Tokyo Electron AT Limited Miyagi Plant
became ISO 14001 certified in the year ended March 31, 2005.

■ Energy Conservation Initiatives
Each of our facilities is working to prevent the greenhouse effect byreducing energy use. Energy conservation programs include those to
reduce power consumption for lighting and office equipment, andsetting air-conditioning temperature targets. Our manufacturing anddevelopment facilities systematically shut down equipment duringconsecutive holiday periods, and implement measures to reduceenergy consumption by enhancing operating efficiency.
Tokyo Electron Kyushu Limited’s Koshi Plant in February 2005
won the Kyushu Bureau of Economy, Trade and Industry Director’sPrize (Electrical Division), which is awarded to manufacturing
plants in recognition of notable achievements in energy conservation. The Koshi Plant
was cited for its
energy conservation
measures, such as
adjusting air circulation in its clean room
facilities at night andon holidays and for
reducing lighting in its
logistics areas.
Tokyo Electron Kyushu Limited, Koshi Plant■ Environmental Sustainability
ReportTokyo Electron has been publishingenvironmental reports since 2000.
We believe that it is important tostrengthen communication with the
public by providing and sharing as
much information as possible about
our environmental activities. The environmental report for the fiscal year
ended March 2005 is to be publishedin autumn 2005.

■ Safety and Health Activities

Environmental Sustainability
Report 2004

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 ensuring safety rules are adhered
to with regard to equipment.
The Tokyo Electron Credo and Principles on Environment, Safety
and Health clearly state that employees are responsible for being
constantly aware of health and safety considerations in each andevery business activity. To implement these guidelines, we conduct
risk assessments of our shipped products and each assembly andstart-up process. Where safety risk is judged to be high, we takesystematic steps to reduce it. We are also making efforts to identify
and eliminate dangers in our work processes before problems occur.

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

16 >> 17

CORPORATE GOVERNANCE

FUNDAMENTAL POLICY CONCERNINGCORPORATE GOVERNANCE

is responsible for establishing the necessary internal regulations for
managing each category of risk, as well as for activities for training andraising employees’ awareness of risk management.

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 objectivity of ourbusiness activities. The primary objective of this policy is to conduct
management that prioritizes the creation of corporate value for the
benefit of shareholders and all other stakeholders.

■ Other Corporate Governance Units
Compensation for each of the three representative directors isdisclosed in our “Notice of Annual General Meeting of Shareholders.”
This action is based on our belief that management transparency
is vital to conducting shareholder-oriented management. At theannual shareholders’ meeting held in June 2002, the term of officefor directors was shortened from two years to one. This revisionenables us to respond quickly to changes in our business environment as well as to further clarify management accountability.

MEASURES CONCERNING CORPORATE
GOVERNANCE FRAMEWORKTokyo Electron regards the strengthening of corporate governance asvital to increasing its corporate value and shareholders’ satisfaction.
For this purpose, we concentrate on three aspects of corporate governance: 1) ensuring the transparency and soundness of business operations; 2) facilitating quick decision-making and the efficient execution ofbusiness operations; and 3) building an effective system for the timely
and suitable disclosure of information.

COMPENSATION FOR DIRECTORS, EXECUTIVE OFFICERS
AND STATUTORY AUDITORS
Beginning with the fiscal year that ended in March 2005, retirement
allowances were eliminated from the compensation of directors,
statutory auditors and executive officers. This action was aimed atachieving further gains in corporate value and management transparency. Along with this revision, a part of the compensation for directors, statutory auditors and executive officers was linked to operating
results, with an upper limit of 3% of consolidated net income. As aresult, there is now clearly a higher correlation between consolidated
net income and the portion of result-linked compensation.

■ The Corporate Governance Framework
Tokyo Electron has a board of directors with twelve members,
including two external directors. We have adopted the statutory
auditor system, due to our belief that statutory auditors are aneffective means of conducting management that reflects the interestsof shareholders. Accordingly, we have four statutory auditors, twoof whom are from outside the company. In addition, we have separated the roles of the directors and executives who oversee business operations. The compensation of directors is determined by aCompensation Committee that is composed of some of the boardof directors. The Nomination Committee, which is composed of three
directors other than the president, selects candidates for director for
submission to the annual shareholders’ meeting and a candidate tobe elected as president by the board of directors. Through thesemeasures we are constantly working on improving corporate governance. In April 2003, we adopted the executive officer system tofurther clarify the roles of the board of directors and executives in chargeof business operations. This system facilitates the speedy establishment and execution of business strategies.

Compensation 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

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

Compensation for auditing
Amount paid for audit¥45 million

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

Diagram of the corporate governance,internal control system and risk management system■ Internal Controls and Risk Management
All activities at Tokyo Electron are based on adherence
to the highest standards of corporate ethics and compliance with laws, regulations and international rules. To
accomplish this, a director has been named as Chief
Business Ethics Director, to oversee ethics, and ethics
standards have been established and measures aretaken to see that these standards are strictly observed.
Reflecting the even greater importance we now place oninternal control and risk management systems, we haveupgraded the internal audit functions of the Global Audit
Center. We have also added to the General Affairs Department crisis management functions, such as measuresinvolving business risk and operational risk. This department¥297 million¥7 million¥46 million¥26 million

Annual Shareholders’ Meeting
Board ofDirectors

Nomination Committee
Compensation Committee
Chief Business Ethics Director

Statutory Auditors

Confirm the progress of improvements and give instructions

ChairmanPresident

Audit and improvement reports

Request for improvement
ReportAudit

Executive Officers
ReportInternal Audit Dept.
(Global Audit Center)

Request for
improvement

Audit

Risk Management
Function
Monitoring

Monitoring
Check and balance

Business Depts.

Administrative
Depts.

Audit
Audit

Independent Auditor

BOARD OF DIRECTORS, STATUTORY AUDITORSAND EXECUTIVE OFFICERS(AS OF JUNE 24, 2005)

BOARD OF DIRECTORSTETSURO HIGASHI
Chairman & CEO

TETSUO TSUNEISHI
Vice Chairman of the Board

KIYOSHI SATO
President & COO

MASAO KUBODERA 2
Corporate Director

HIROSUKE ISHIBASHI 1
Corporate Director

MAMORU HARA 1
Corporate Director

KENGO KUROIWA 2
Corporate Director

YUICHI HONDA 3
Corporate Director

KEIICHI FURUGAKI 2
Corporate Director

HARUO IWATSU
Corporate Director

YUKIO SUNAHARA 1
Corporate Director/
Chairman, Tokyo
Broadcasting System, Inc.

TOSHIYUKI KONDOSTATUTORY AUDITORS

Corporate Director/
Chairman of the Board,
SRL, Inc.

Notes:
1. Member of Compensation Committee
2. Member of Nomination Committee
3. Chief Business Ethics Director

TAKETOSHI ITOYAMA
Statutory Auditor

TAKEO TANAKA
Statutory Auditor

TOGO TAJIKA
Statutory Auditor

HIROSHI MAEDA
Statutory Auditor/
Nishimura & Partners

EXECUTIVE OFFICERS
Chairman & CEO
TETSURO HIGASHI
President & COO
KIYOSHI SATO
Senior Vice Presidents

VPs & General Managers
JINZABURO SAKAMOTOYASUYUKI KURIKI

Field Engineering

Business Development &Account Management, Korea

SATOSHI NAKASHIMA
Manufacturing & IT

CHIAKI YAMAGUCHIYOSHITERU HARADA

Business Development &Account Management, Asia

Administration

KIYOSHI SUNOHARA

MASAO KUBODERAYUTAKA NANASAWA

Technology & Development

HR/FinanceBusiness Development & AccountManagement, North America & Europe

HIROKI TAKEBUCHIHIKARU ITO

Corporate Strategic Planning Dept.

KATSUYUKI AMANO

Clean Track BU

Computer Network Division

MAKOTO MIZOKUCHI

TAKASHI ITOBusiness Development & AccountManagement
General Manager,
Business Development & AccountManagement, Japan

YOICHI ISHIKAWA

Etch Systems BU

Marketing

HIROSHI TAKENAKASHIGETOSHI HOSAKA

Thermal Processing Systems BU

Technology & Development Center/
Development Planning

MITSURU ONOZATO

Single Wafer Deposition BU

HIROSHI TOMITAFPDGeneral Manager, FPD Division

SYUNRO NAGASAWA

MEMS Business

KENJI WASHINO

Test Systems BU*BU: Business Unit

BEN TSAI
Technology

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

18 >> 19

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.

CONSOLIDATED SIX-YEAR SUMMARYTokyo Electron Limited and Subsidiaries
Years ended March 31, 2005, 2004, 2003, 2002, 2001 and 2000

Thousands of
U.S. dollars

Millions of yen

2005

2005

2004

2003

2002

2001

2000

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

$5,919,640
4,257,291
698,743
148,677
803,140
11,789595,800
519,373573,623¥635,710
457,191
75,03815,96686,2491,266
63,98355,77561,601¥529,654
425,747¥460,580
364,689¥417,825
325,715¥723,880
619,001¥440,729
355,103

18,44884,2291,230
22,28014,936
8,297

17,19377,3801,318
1,119(23,010)(41,554)

17,03173,658
1,421(18,310)(22,919)(19,938)

14,054
89,211
1,614
121,086
99,13262,012

12,35772,051
1,218
35,816
29,68919,848Domestic sales . . . . . . . . . . . . . . . . . . . . .
Overseas sales . . . . . . . . . . . . . . . . . . . . .

2,166,661
3,752,979

232,678
403,032

242,318
287,336

190,513
270,067

186,516
231,309299,272
424,608

183,987
256,742

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

199,856
91,967
408,686

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

26,29430,94653,827

21,67949,403
52,911

19,44618,99937,135

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

5,999,810
3,093,075

644,320
332,165

561,632
275,800

524,901
252,904

556,915
307,579

729,511333,281

499,499273,603

8,864

8,870

10,053

10,171

10,2368,946¥ (238.57) ¥ (113.85)
–
–
8.00
8.00

¥ 353.76
344.7538.00¥ 113.53
110.64
14.00

175,691
42,781

175,660
7,147

20.4
16.7
45.7
1.18

7.5
8.1
54.8
0.96

¥ 70,719¥ 49,2651

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

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

$

3.20
3.20
0.42

Yen

¥ 343.63
343.54
45.00

¥

46.37
45.78
10.00

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

180,61160,857

180,61160,873

175,698
49,259ROE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income margin . . . . . . . . . . . . . .
Shareholders’ equity ratio . . . . . . . . . . . . . .
Asset turnover (times) . . . . . . . . . . . . . . . .

20.3
10.1
51.6
1.05

3.1
4.2
49.1
0.97

(14.8)
0.2
48.2
0.85

¥ 71,718¥ 59,713¥ 45,815

175,691
37,116Percent

U.S. dollars

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

$ 667,829

(6.2)
(4.4)
55.2
0.65

Thousands of yen¥ 41,080

1 Until 2004, revenue from Semiconductor and FPD (Flat Panel Display) production equipment had been recognized at the time of shipment. From 2005, suchrevenue 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 as of April 1, 2000.
3 From 2003, 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 (ASBJ).
4 Dilution is not assumed for the years ended March 31, 2003 and 2002.

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

26 >> 27

CONSOLIDATED BALANCE SHEETSTokyo Electron Limited and Subsidiaries
March 31, 2005 and 2004ASSETS

Thousands of
U.S. dollars

Millions of yen

2005

2004

2005

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

¥115,420¥ 42,650$1,074,775

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

172,488

231,045

1,606,179

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

(114)

(155)

(1,063)Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

161,489

105,187

1,503,765

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

18,173

2,943

169,221

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

27,73021,304258,221

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

495,186

402,974

4,611,098

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

18,351

19,577

170,879

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

111,119

108,718

1,034,722

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

90,497

92,379842,697

Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,786

2,552

16,631

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

221,753

223,226

2,064,929

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

123,337

114,437

1,148,493

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

98,416

108,789

916,436

10,381

10,874

96,667

Current assets:

Property, plant and equipment:

Investments and other assets:
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,313

10,203

142,597

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

18,612

21,513

173,308

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

6,412

7,279

59,704

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

50,71849,869472,276

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

¥644,320¥561,632$5,999,810

See accompanying Notes to Consolidated Financial Statements.

LIABILITIES AND SHAREHOLDERS’ EQUITY

Thousands of
U.S. dollars

Millions of yen

2005

2004

2005

Current liabilities:
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥

976

¥

6,815

$

9,087

Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,476

21,754

330,344

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

70,47278,009656,228

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

42,97012,142400,135

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

13,357

3,273

124,383

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

8,645

6,376

80,496

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

13,106–122,038

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

21,60913,103201,223

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

206,611

141,472

1,923,934

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

63,00098,476586,647

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

36,382

38,275

338,778

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

1,751

3,662

16,304

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

307,744281,885

2,865,663

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

4,411

3,947

41,07254,961

54,961

511,791

Contingent liabilities

Shareholders’ equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Authorized: 300,000,000 shares
Issued: 180,610,911 shares as of March 31, 2005 and 2004
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78,02378,023

726,540

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

212,094

154,3431,974,987

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

2,133

2,396

19,859Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

997

(720)

9,285

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

(16,043)(13,203)(149,387)

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

332,165

275,800

3,093,075

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

¥644,320¥561,632$5,999,810

2,529,672 and 2,022,343 shares as ofMarch 31, 2005 and 2004, respectively

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

28 >> 29

CONSOLIDATED STATEMENTS OF INCOME
Tokyo Electron Limited and Subsidiaries
Years ended March 31, 2005 and 2004

Thousands of
U.S. dollars

Millions of yen

2005

2004

2005

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

¥635,710¥529,654$5,919,640

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

459,797

389,499

4,281,568

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

175,913140,155

1,638,072

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

111,930

117,875

1,042,272

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

63,98322,280595,800

Other income (expenses):
Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

236

200

2,197

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

(1,094)(1,326)(10,182)

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

2,194

113

20,432Gain on return of substitutional portion of employees’ pension fund . . . . . . . . . . . . .

7,084

–

65,962

Provision for accrued warranty expenses for previous fiscal years . . . . . . . . . . . . . .

(12,470)–(116,122)

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

(2,783)–(25,916)

Impairment of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(573)

(470)

(5,335)

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

(1,388)(1,257)(12,925)...............................................

–(2,540)–

Impairment of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–(1,933)–

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

586

(131)

5,462

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

55,775

14,936519,373

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

15,5405,108

144,710Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(21,970)

1,016(204,582)

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

604

515

5,622

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

¥ 61,601

8,297$ 573,623

Restructuring costs

Income taxes:

Per share of common stock:¥Yen

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

¥ 343.63

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

343.54

45.78

3.20

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

45.00

10.00

0.42

See accompanying Notes to Consolidated Financial Statements.

¥

U.S. dollars

46.37

$

3.20

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYTokyo Electron Limited and Subsidiaries
Years ended March 31, 2005 and 2004

Thousands of
U.S. dollars

Millions of yen

2005

2004

2005

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

¥ 54,961¥ 47,223$ 511,791

Conversion of convertible bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–

7,738

–

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

54,961

54,961

511,791

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

78,02370,285726,540

Conversion of convertible bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–

7,738

–

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

78,02378,023

726,540

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

154,343

147,465

1,437,217

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

61,601

8,297

573,623

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

(3,743)(1,409)(34,853)

Bonuses to directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(107)

(10)

(1,000)Loss on disposal of treasury stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–

(0)

–

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

212,094

154,3431,974,987

Common stock

Capital surplus

Retained earnings

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

2,396

(59)

22,306

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

(263)

2,455

(2,447)

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

2,133

2,396

19,859Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(720)

1,229

(6,703)

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

1,717(1,949)15,988

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

997

(720)

9,285

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

(13,203)(13,239)(122,946)

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

(2,840)(55)(26,441)

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

–

91

–

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

(16,043)(13,203)(149,387)

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

¥332,165¥275,800$3,093,075

Foreign currency translation adjustments

Treasury stock, at cost

See accompanying Notes to Consolidated Financial Statements.

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

30 >> 31

CONSOLIDATED STATEMENTS OF CASH FLOWSTokyo Electron Limited and Subsidiaries
Years ended March 31, 2005 and 2004

Thousands of
U.S. dollars

Millions of yen

2005

2004

2005

Cash flows from operating activities:
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued pension and severance costs . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on return of substitutional portion of employees’ pension fund . . . . . . . . . . . . .
Loss on business reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in trade notes and accounts receivable . . . . . . . . . . . . . . . . . .
Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in trade notes and accounts payable . . . . . . . . . . . . . . . . . . . .
Increase in customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued employees’ bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued warranty expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 55,775
21,463
1,600
5,158
1,094
1,388
(7,084)
2,783––
59,115(59,914)(7,440)30,816
2,258
13,106
1,482¥14,936
24,963
1,898
1,891
1,333
1,257
–
–
2,540
1,933
(61,789)(5,326)29,154
10,657
2,765–(3,741)

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receipts from interest and dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment for special retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment for business reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

121,600
241(1,159)–(1,558)(4,774)22,471193(1,307)(6,513)–(6,961)

1,132,319
2,249(10,795)–(14,506)(44,457)$

519,373
199,856
14,90048,031
10,184
12,925(65,962)
25,916––550,467(557,910)(69,284)
286,953
21,032122,038
13,800Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

114,350

7,883

1,064,810

Cash flows from investing activities:
Payment for purchase of property, plant and equipment . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . .
Payment for acquisition of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(8,680)3,798(1,780)(788)(7,530)2,391(3,200)(205)(80,822)
35,362(16,577)(7,337)

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7,450)(8,544)(69,374)

Cash flows from financing activities:
Decrease in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of unsecured bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5,864)–(1,754)–(20,000)(2,840)(3,743)(143)(1,464)(35,000)(1,922)
49,767(20,005)35(1,409)(273)(54,608)–(16,331)–(186,237)(26,441)(34,853)(1,335)(319,805)

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

(34,344)(10,271)

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

214

600

1,995

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72,77042,650(10,332)
52,982

677,626
397,149¥115,420¥ 42,650$1,074,775

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

See accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tokyo Electron Limited and Subsidiaries

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 preparedin accordance with the provisions set forth in the Japanese Securities andExchange 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 and disclosure 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, but 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 ofreaders and are presented at the rate of ¥107.39 to $1.00, the approximate rate as of March 31, 2005. 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.

2. Summary of Significant Accounting Policies(a) Principles of consolidation
The consolidated financial statements include the accounts of theCompany and its 25 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 or losses have been eliminated in consolidation.
The fiscal year of all entities ends on March 31, except for two foreignsubsidiaries, which use a December 31 year-end, and no significant transactions were noted 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 byforward 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 historical rates. Revenue and expense accounts of theforeign subsidiaries are translated at average rates of exchange in effectduring the year. Resulting translation adjustments are presented as acomponent of shareholders’ equity and minority interests in the consolidated financial statements.

(c) Investment securities
Tokyo Electron is required to examine the intent of holding each security
and classify those securities as trading securities, held-to-maturity debt
securities or other securities. Tokyo Electron has no trading or held-tomaturity debt securities. Other securities with market prices are valued
at fair market value prevailing at the balance sheet date. The differences
between the book and market prices of other securities, net of applicable
income taxes, are presented 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.
(d) Inventories
Inventories other than raw materials are stated principally at cost,which is determined principally by the individual method. Raw materials
are stated principally at cost, which is determined principally by themoving-average method.
(e) Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation ofbuildings, machinery and equipment of the Company and its domestic
subsidiaries is computed by the declining balance method, except forbuildings acquired subsequent to March 31, 1998 on which depreciationis computed by the straight-line method based on the estimated useful
lives of assets. The straight-line method is mainly applied for its foreignsubsidiaries 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
For the years ended March 31, 2005 and 2004, the Company and its
domestic subsidiaries did not adopt early the new accounting standard for
impairment of fixed assets (“Opinion Concerning Establishment of Accounting Standard for Impairment of Fixed Assets” issued by the BusinessAccounting Deliberation Council on August 9, 2002) and the implementation
guidance for the accounting standard for impairment of fixed assets (theFinancial Accounting Standard Implementation Guidance No. 6 issued by
the Accounting Standards Board of Japan on October 31, 2003). The new
accounting standard is required to be adopted in periods beginning on orafter April 1, 2005, but the standard does not prohibit earlier adoption. The
Company and its domestic subsidiaries are currently determining the impactof the adoption of the standard on the consolidated financial statements.
(f) Intangible assets
Intangible assets, which primarily comprise of capitalized costs forcomputer software and goodwill, are amortized by the straight-line method
over their estimated useful lives. Capitalized costs for computer software forinternal use are amortized over a period of two to five years. Goodwill isevaluated on an individual basis and amortized over a period not exceeding
20 years.

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

32 >> 33

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

Derivatives are carried at fair value with changes in unrealized gain orloss charged or credited to income, except for those which meet thecriteria for deferred hedge accounting under which unrealized gain orloss is deferred as an asset or a liability. Receivables and payables
hedged by qualified forward foreign exchange contracts are translated at
the corresponding foreign exchange contract rates.

(h) 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
obligation and pension assets on the account settlement date. Prior
service costs are charged to income on a straight-line basis, beginningfrom the fiscal year in which they are incurred, over a fixed number ofyears (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, beginning from the fiscal year after they arerecognized, over a fixed number of years (four years) within the averageremaining 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 also calculated to state the liability at the amount that would be
required if all directors and statutory auditors retired at the end of the
fiscal year according to internal regulations.
Tokyo Electron has recently announced to revise its executive
compensation system. With this revision, Tokyo Electron has abolishedthe system of accrued pension and severance costs for directors andstatutory auditors from the period starting April 2005. Accrued pension
and severance costs for directors and statutory auditors as of March 31,
2005 will remain until actually paid out, upon retirement of directors andstatutory auditors.

(l) 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 aremeasured using the enacted tax rates and laws which will be in effectwhen the differences are expected to reverse, on temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.

(i) 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, estimatedafter-sale repair expenses over the warranty period are accrued basedon the historical ratio of actual repair expenses to corresponding sales.
(j) Leases
Noncancelable leases are primarily accounted for as operating leases(whether such leases are classified as operating or finance leases),
except that leases which stipulate the transfer of ownership of theleased assets to the leases are accounted for as finance leases.
(k) Derivatives and hedge accounting
The Company and a domestic subsidiary make use of derivatives inorder to manage certain risks arising from adverse fluctuations in foreign
currency exchange rates. The amount of derivatives is limited to theextent of foreign currency assets, liabilities and actual orders, and theCompany does not trade in derivatives for speculative purposes.

(m) 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 other products, 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.
(n) Per share information
Net income per share is computed based on the weighted average
number of 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 andinclude, in each fiscal year ended March 31, dividends approved or to beapproved after March 31 but applicable to the year then ended.
(o) Research and development expenses
Research and development expenses are charged to income as incurred,
and amounted to ¥43,889 million ($408,686 thousand) and ¥44,150
million for the years ended March 31, 2005 and 2004, respectively.
(p) Cash equivalents
For purposes of the consolidated statements of cash flows, Tokyo
Electron considers all highly-liquid instruments purchased with original
maturities of three months or less to be cash equivalents.
(q) 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, 2005. These changes had no impact on previously
reported results of operations or shareholders’ equity.

3. Changes in Accounting Policies

4. Investment Securities(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 from the year ended March 31, 2005, the Company changed its
method of revenue recognition in which such equipment sales revenue isprincipally recognized at the time of the confirmation of set-up and testingof products. This change is intended to reflect the actual situation ofrevenue more appropriately, corresponding to the fact that the process fromthe shipment of products to the confirmation of set-up and testing ofproducts has shown a marked tendency to become longer, and review ofpost-shipment business processes has made it 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 and income before income taxes by ¥80,956 million ($753,852
thousand), ¥20,541 million ($191,278 thousand) and ¥20,563 million($191,479 thousand), respectively, for the year ended March 31, 2005
as compared with the corresponding amounts which would have beenrecorded if the previous method had been followed.

Investment securities, which solely comprises of other securities, asof March 31, 2005 and 2004 are as follows:(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 forafter-sale repair expenses by implementing accrued warranty expenses
for such equipment, calculated on the basis of after-sale repair
expenses incurred in the past. This change is intended to make periodic
income more appropriate by matching after-sale repair expenses withrevenues when products are sold, with the increased importance on
after sale service. A complete set of historical data on actual after-salerepair expenses, as well as remaining warranty period compiled, hasmade possible the calculation of accrued warranty expenses.
The effect of this change was to decrease operating income and income
before income taxes by ¥635 million ($5,916 thousand) and ¥13,106
million ($122,038 thousand), respectively, for the year ended March 31,
2005 as compared with the corresponding amounts which would have beenrecorded if the previous method had been followed. The provision for
accrued warranty expenses related to revenues recognized in prior years
were recorded as other expense in the accompanying consolidated
statement of income for the year ended March 31, 2005.

Millions of yen

2005:

Cost

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¥10,381Millions of yen

2004:

Cost

Carrying value

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

¥5,405114¥ 9,429
116

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

1,503
1

1,328
1

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

¥7,023¥10,874

Thousands of U.S. dollars

2005:

Cost

Carrying value

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

$51,073
1,059$84,354
1,073

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

15,939214

11,026214

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

$68,285$96,667

5. Inventories
Inventories as of March 31, 2005 and 2004 are as follows:
Millions of yen

2005

Thousands of
U.S. dollars

2004

2005

Finished products . . . . . . . . . . . . . . ¥102,418
Work in process, raw materials
and supplies . . . . . . . . . . . . . . . . .
59,071¥ 49,759$ 953,701

55,428550,064

Total . . . . . . . . . . . . . . . . . . . . . . . . ¥161,489¥105,187$1,503,765

6. Pledged Assets
Tokyo Electron did not hold any assets pledged as collateral as ofMarch 31, 2005 and 2004.

(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 a single segment based on its sales method.
Effective from the year ended March 31, 2005, the segment classification was changed and separated into two segments: “industrial electronic equipment” and “electronic components”, which were determinedbased on the types of products and service, as well as sales methods.
The new classification of the business segments reflects more appropriately
the businesses of Tokyo Electron.

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

34 >> 35

7. 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
1.80% and 1.13% as of March 31, 2005 and 2004, respectively.
Long-term debt as of March 31, 2005 and 2004 is as follows:
Millions of yen

Thousands of
U.S. dollars

2005

2004

–
30,00020,00030,000¥ 20,000
30,00020,00030,000

4,500

4,500

41,9035,500
8,476(35,476)

5,500
10,230(21,754)

51,21578,924(330,344)¥ 63,000¥ 98,476$ 586,647

1.39% unsecured bonds due 2004 . . .
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 . . . . . . . . . . . . . . . . . . . . . . . .

2005

$

–
279,356
186,237
279,356

As of March 31, 2005, Tokyo Electron has unused lines of credit
amounting to ¥113,106 million ($1,053,227 thousand).
The maturities of long-term debt are summarized as follows:

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 Accountingof Retirement Benefits (Interim Report),” and recognized a gain of¥7,084 million ($65,962 thousand), upon the receipt of the second
approval in January 2005, as “Gain on return on substitutional portion of
employees’ pension fund” in the consolidated statement of income forthe year ended March 31, 2005.
In January 2005, following the approval for separation of the substitutional portion, the Company and its domestic subsidiaries amended thecontributory pension plan to a cash balance pension plan. Additionally,
the Company and its domestic subsidiaries amended the noncontributory
retirement and severance benefit plans. The net effect of these planamendments was to increase the benefit obligation by ¥3,799 million($35,371 thousand), and the resulting prior service cost is amortized overfour years.
The funded status of the defined benefit plans, a substantial portionof which consists of domestic benefit plans, as of March 31, 2005 and2004 is as follows:
Thousands of
U.S. dollars

Millions of yen
Millions ofyen

Thousands of
U.S. dollars

2005

2005

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 and thereafter . . . . . . . . . . . . . . . . . . . . . . .

¥35,476
24,5008,500
30,000–$330,344
228,140
79,151
279,356–

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

¥98,476$916,991

Year ending March 31

8. Accrued Pension and Severance Costs
The Company and its domestic subsidiaries have noncontributory
retirement and severance benefit plans that provide for pension or lump-sum
payment benefits to employees who retire or terminate their employment
for reasons other than dismissal for cause. In addition, the majority of theemployees of the Company and its domestic subsidiaries are covered bya contributory pension plan, whose benefits are based on length ofservice and certain other factors. This pension plan includes a substitutional portion representing the government social security welfare pension.
Certain foreign subsidiaries have a noncontributory retirement andseverance benefit plan that provides for pension or lump-sum payment
benefits to employees who retire or terminate their employment forreasons other than dismissal for cause.
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 andWelfare for exemption from the future benefit obligation with respect tothe substitutional portion of the Welfare Pension Insurance Scheme.
After obtaining the approval, in January 2005, these companies obtained
another approval for separation of the remaining benefit obligation of thesubstitutional portion that is related to past employees services. The
transfer of pension plan assets to the Government is expected in theyear ending March 31, 2006.

2005

2004

2005

Benefit obligation . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . .
Unrecognized benefit obligation . . . .
Unrecognized actuarial difference . . .
Unrecognized prior service cost . . . . .

¥(59,984)
18,388(41,596)
1,249
4,714

¥(75,682)
23,686(51,996)
13,929492$(558,559)
171,225(387,334)
11,62843,901

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

¥(35,633)¥(37,575)$(331,805)

Note: The annual provision for accrued pension and severance costs for directors and statutory
auditors (¥749 million ($6,972 thousand) in 2005 and ¥700 million in 2004) is not included.

Net pension cost of the plans is as follows:
Thousands of
U.S. dollars

Millions of yen

2005

2004

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

¥ 4,724
1,397
(317)
4,677
350

¥ 5,909
1,733
(206)
4,034
(35)

$ 43,985
13,007(2,948)43,551
3,258

2005

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

10,831

11,435

100,853(7,084)–(65,962)

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

¥ 3,747¥11,435$ 34,891

Significant assumptions of domestic pension plans used to determine
these amounts are as follows:
2005

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 . . . . . . . .

2004

Straight-line method
2.00%
2.00%
1.50%
1.00%
4 years
4 years
4 years
4 years

9. Income Taxes
Significant components of the deferred tax assets and liabilities ofTokyo Electron as of March 31, 2005 and 2004 are as follows:
Thousands of
U.S. dollars

Millions of yen

2005

2004

2005

¥13,469¥13,470$125,426

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

208
–
3,570
2,579
2,963
17,73558,59649,65734,92732,57323,28819,385

1,104
1,030
4,690

1,286
272
3,032

10,284
9,589
43,677

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

43,751(2,112)

45,115(31,431)

407,402(19,670)

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

41,63913,684

387,732(2,783)–(25,917)(2,568)(1,877)(23,916)(2,444)(1,443)(254)–(1,630)(264)(22,754)(13,436)(2,362)

Deferred tax assets
Accrued pension andseverance costs . . . . . . . . . . . . . . .
Elimination of unrealized profit
on inventories . . . . . . . . . . . . . . . .
Accrued warranty expenses . . . . . . .
Devaluation of inventories . . . . . . . .
Accrued employees’ bonuses . . . . . .
Depreciation and amortization . . . . .
Net operating loss carryforwards . . . .
Elimination of unrealized profit
on fixed assets . . . . . . . . . . . . . . .
Accrued business taxes . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . .

Total gross deferred tax liabilities . . .

(9,492)(3,771)(88,385)

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

¥32,147¥ 9,913$299,347

As of March 31, 2004, management of Tokyo Electron consideredthat the deferred tax assets of the Company and its certain subsidiaries
would not be realizable, and had established valuation allowance of¥31,431 million. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period
in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, future taxable
income, tax planning strategies and level of net operating loss
carryforwards in making this assessment in accordance with accounting
principles generally accepted in Japan. After the utilization of significant
portion of net operating loss carryforwards with operating income earned
for the year ended March 31, 2005 and the reassessment of futuretaxable income over the periods in which the net deductible temporary
differences are expected to reverse, management believes Tokyo Electron
will realize the benefits of these deferred tax assets, net of remaining
valuation allowance as of March 31, 2005, and accordingly, has reversed
a significant portion of valuation allowance as of March 31, 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 theyears commencing on April 1, 2004 or later. The effects of the reduction in
the tax rate were not material to the consolidated financial statements.

Significant components of the difference between the statutory andeffective tax rates for the year ended March 31, 2005 were as follows:
2005

Statutory tax rate in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments:
Utilization of net operating loss carryforwards . . . . . . . . . . . . . . . . .
Change in valuation allowance other thannet operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in deferred tax liabilities on undistributed
earnings of foreign subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
Elimination of unrealized profit on inventories . . . . . . . . . . . . . . . . .
Tax credits, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Others, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40.69%(27.77)(24.79)4.38(3.17)(2.81)
1.94(11.53)The effective tax rate did not differ by more than 5.0% from the statutory tax rate for the year ended March 31, 2004.

10. Shareholders’ Equity
The Japanese Commercial Code provides that an amount equal to atleast 10% of cash dividends and other cash appropriations shall be appropriated and set aside as a legal reserve until the total amount of legal
reserve and additional paid-in capital, which is included in capital surplus
in the accompanying consolidated balance sheets, equals 25% of common stock. The legal reserve and additional paid-in capital may be used toeliminate or reduce a deficit by resolution of the shareholders’ meeting or
may be capitalized by resolution of the board of directors. On condition
that the total amount of legal reserve and additional paid-in capitalremains being equal to or exceeding 25% of common stock, they areavailable for distribution by the resolution of shareholders’ meeting. Legal
reserve as of March 31, 2005 amounts to ¥5,660 million ($52,709
thousand), and is included in retained earnings in the accompanying
consolidated financial statements.
Cash dividends charged to retained earnings for the years ended March
31, 2005 and 2004 represent dividends paid out during those years. The
total amount of legal reserve and additional paid-in capital of the Company
has been reached to 25% of common stock, and therefore, the Company
is not required to provide legal reserve any more. Provision has not been
made in the consolidated financial statements for the dividend for thesecond half year of ¥30 ($0.28) per share subsequently proposed by theboard of directors and approved by the shareholders’ meeting on June 24,
2005, in respect of the year ended March 31, 2005.
The Company issued 4,912,981 shares of common stock for theyear ended March 31, 2004 in connection with the conversion of
convertible bonds.
Conversion of convertible bonds into common stock has beenaccounted for in accordance with the provisions of the JapaneseCommercial Code by crediting one-half of the conversion price to thecommon stock account and additional paid-in capital, respectively.
Under the Japanese Commercial Code, the entire amount of the issue
price of shares is required to be accounted for as common stock, although a company may, by resolution of the board of directors, accountfor an amount not exceeding one-half of the issue price of the newshares as additional paid-in capital, which is included in capital surplus.
TOKYO ELECTRON LIMITEDANNUAL REPORT 05

36 >> 37

11. Stock-based Compensation

14. Leases

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”) andbonds with detachable warrants (“Warrant plan”).

Pro forma information of leased property such as acquisition cost,
accumulated depreciation, obligation under finance leases, and depreciation expense of finance leases that do not transfer ownership ofleased property to the lessee on an “as if capitalized” basis for theyears ended March 31, 2005 and 2004 is as follows:
Leased assets not recorded in the consolidated balance sheets:

Stock option plan
Since the year ended March 31, 1999, the Company’s shareholders
have approved annual stock option plans for directors and selected
employees. The cumulative number of shares authorized up to the year
ended March 31, 2003 totaled 1,153,600, with the weighted average
exercise price of ¥8,856. Under the stock option plans, 799,700 shares
and 978,300 shares were authorized for the years ended March 31,
2005 and 2004, respectively. Options were granted with exercise pricesof ¥5,884 ($54.79) and ¥6,794 for plans approved in August 2004 and2003, respectively. The options under the plans vest immediately withrestriction on exercise up to two years after the date of grant, and haveexercise period of eight years from the date of grant.
Warrant plan
In June 2000 and June 2001, the Company issued unsecured bonds
with detachable warrants. Upon issuance of the unsecured bonds withdetachable 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 purchasethe common stock of the Company, the original number of which were319,829 shares and 572,439 shares at the exercise price of ¥14,070
and ¥9,608 for warrants issued in June 2000 and June 2001, respectively.
The warrants vest immediately with restriction on exercise up to two
years after the date of grant, and have exercise period of six years fromthe date of grant. For financial reporting purposes, these transactions
were accounted for as an issuance of debt to third parties and separately as the issuance of warrants to directors and selected employees.
As of April 1, 2003, outstanding granted stock options, including thewarrant plan, were 1,949,784 shares, with a weighted-average exercise
price of ¥9,989. For the year ended March 31, 2004, 287,237 sharesof the options were forfeited, and 20,000 shares of the options were
exercised. For the year ended March 31, 2005, 67,747 shares of theoptions were forfeited with no exercise. As of March 31, 2005, outstanding granted stock options, including the warrant plan, were 3,352,800
shares with a weighted-average exercise price of ¥8,045 ($74.91).

12. Impairment of Goodwill
The impairment of goodwill was recognized as other expenses for theyear ended March 31, 2004, due to the devaluation in a subsidiary,Supercritical Systems, Inc.

13. Restructuring Costs
Restructuring costs for the year ended March 31, 2004, represent
impairment and disposal of property, plant and equipment and otherrelated costs due to consolidation and closure of operating bases in accordance with the implementation of the business restructuring plan.

Millions of yen

Thousands of
U.S. dollars

2005

2004

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

¥1,216704¥1,014412$11,326
6,559

2005

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

¥ 512

¥ 602

$ 4,767

Future minimum lease payments:
Millions of yen

Thousands of
U.S. dollars

2005

2004

2005

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

¥296
216

¥176
426

$2,7572,009

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

¥512

¥602

$4,766

Lease payments relating to finance leases accounted for as operatingleases amounted to ¥292 million ($2,716 thousand) and ¥178 million,
which approximated the corresponding depreciation on the respective
leased property computed by the straight-line method over the leaseterms for the years ended March 31, 2005 and 2004, respectively.
Future minimum lease payments on non-cancelable operating leases:
Millions of yen

Thousands of
U.S. dollars

2005

2004

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

¥ 514
668

¥ 721
700

$ 4,791
6,220

2005

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

¥1,182¥1,421$11,011

15. Contingent Liabilities
Tokyo Electron did not hold any material contingent liabilities as ofMarch 31, 2005.

16. Derivative Financial Instruments
The Company and a domestic subsidiary have entered into forward
foreign exchange contracts in order to hedge risks of adverse fluctuations in foreign currency exchange rates associated with export-importtransactions, but do not enter into such transactions for speculative
purposes. The Company and the domestic subsidiary are exposed tocredit risk in the event of nonperformance by the counterparties to thederivative 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 andmanagement of all derivative transactions are conducted pursuant to theinternal management rule for derivatives by the finance division and theeffectiveness of derivative transactions is reported on a semiannual
basis to the board of directors.

The estimated fair values of the derivative financial instruments as ofMarch 31, 2005 and 2004 are as follows:
Millions of yen

2005:

Sell
Buy

Contract amount

U.S. dollars . . . . . . . . . . .
U.S. dollars . . . . . . . . . . .

Fair value

Unrealized
gains (losses)

–
–

–
–

–
–

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

Millions of yen

2004:

Sell
Buy

Contract amount

U.S. dollars . . . . . . . . . . .
U.S. dollars . . . . . . . . . . .

Fair value

Unrealized
gains (losses)

4,557
6,616

36
(108)

4,594
6,725

17. Segment Information
Business segment information as of and for the years ended March 31, 2005 and 2004 is as follows:
Millions of yen

2005:

Industrial
electronicequipment

Electronic
components

Eliminations
andcorporate

Total

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

¥549,461
1,053
550,514489,724
60,790¥86,249
1,831
88,08084,973
3,107¥635,710
2,884
638,594
574,697
63,897¥–(2,884)(2,884)(2,970)86¥635,710–
635,710
571,727
63,983

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

¥609,296
22,77312,088¥35,988290
603¥645,284
23,063
12,691

¥

(964)
–
(348)

¥644,320
23,063
12,343

Consolidated

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

Major products

Industrial electronic equipment

Semiconductor production equipment, FPD production equipment, computer systems and networks and other

Electronic components

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 thischange was to decrease net sales and operating income for the industrial electronic equipment segment by ¥80,956 million ($753,852 thousand) and ¥20,541 million ($191,278
thousand), 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. Thechange 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 ($5,916 thousand) 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 change did not affect thefigures of the electronic components segment.

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

38 >> 39Millions of yen

2004:

Industrial
electronicequipment

Electronic
components

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥445,425
996
446,421427,473
18,948¥84,229
1,509
85,73882,5563,182¥529,654
2,505
532,159
510,029
22,130¥–(2,505)(2,505)(2,655)150¥529,654–
529,654507,374
22,2802. Assets, depreciation and amortization expenses and capital expenditure
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditure, including intangible and other assets . . . . . . . . . . . . . . . .

¥525,080
26,475
14,442¥37,424385
208¥562,504
26,86014,650

¥

(872)
–
–

¥561,632
26,86014,6502005:

Industrial
electronicequipment

Electronic
components

Eliminations
andcorporate

Consolidated$5,116,500
9,809
5,126,309
4,560,236
566,073$803,140
17,047820,187
791,258
28,929$5,919,640
26,856
5,946,496
5,351,494
595,002$–(26,856)(26,856)(27,654)798$5,919,640–
5,919,640
5,323,840
595,800$5,673,672
212,058
112,566$335,120
2,698
5,612

$6,008,792
214,756
118,178$ (8,982)–(3,241)$5,999,810
214,756
114,937

Consolidated

Thousands of U.S. dollars

1. Net sales and operating income
Net sales(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Assets, depreciation and amortization expenses and capital expenditure
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditure, including intangible and other assets . . . . . . . . . . . . . . . .

Domestic and overseas sales for the years ended March 31, 2005
and 2004 are as follows:
Millions of yen

Net sales

2005

Thousands of
U.S. dollars

2004

2005

Japan . . . . . . . . . . . . . . . . . . . . . . . ¥232,678
Taiwan . . . . . . . . . . . . . . . . . . . . . .
141,493
Korea . . . . . . . . . . . . . . . . . . . . . . .
85,203
Others . . . . . . . . . . . . . . . . . . . . . .
176,336¥242,318
100,458
61,412
125,466$2,166,661
1,317,563
793,404
1,642,012

Total . . . . . . . . . . . . . . . . . . . . . . . . ¥635,710¥529,654$5,919,640

Others comprises primarily of the United States of America, China andEuropean countries.
Total assets and sales outside Japan comprised less than 10% of theconsolidated total assets and sales as of and for the years ended March
31, 2005 and 2004. Accordingly, geographical segment information has
not been disclosed.

Total

18. Subsequent Event
Grant of stock options under the stock option plans
On May 12, 2005, the Company’s board of directors decided to submit a resolution to the shareholders’ meeting for approval of the issuanceof stock subscription rights to directors and selected employees ofTokyo Electron. This issuance of stock subscription rights is intended toenable the grant of stock options. Two types of stock subscription rights
will be issued. For the first right, the maximum number of the options is
90,000 shares with a planned exercise price of ¥1 ($0.01). For thesecond right, the maximum number of the options is 120,000 shares forselected employees of foreign subsidiaries, and the exercise price iscalculated by multiplying the closing price per share under an ordinary
trade of shares on the Tokyo Stock Exchange on the day preceding the
grant of the options by 1.05. This grant of stock options was approvedat the annual general meeting of the shareholders of the Company on June24, 2005.

INDEPENDENT AUDITORS’ REPORTTo the Board of Directors ofTokyo Electron Limited:

We have audited the accompanying consolidated balance sheet of Tokyo Electron Limited and subsidiaries as ofMarch 31, 2005, and the related consolidated statements of income, shareholders’ equity and cash flows for theyear then ended, expressed in Japanese yen. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audit. The accompanying consolidated financial statements of Tokyo Electron Limited andsubsidiaries as of March 31, 2004 and for the year then ended, were audited by other auditors whose report dated
June 22, 2004, expressed an unqualified opinion on those statements, before the reclassifications described innote 2-(q) to the consolidated financial statements.
We conducted our audit 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
and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2005 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, 2005, and the resultsof their operations and their cash flows for the year then ended in conformity with accounting principles generally
accepted in Japan.
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 segment in the year ended March 31, 2005.
We also audited the reclassifications described in note 2-(q) to the consolidated financial statements that wereapplied to reclassify the 2004 consolidated financial statements. In our opinion, such reclassifications areappropriate and have been properly applied.
The accompanying consolidated financial statements as of and for the year ended March 31, 2005 have beentranslated 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 UnitedStates dollars on the basis set forth in note 1 to the consolidated financial statements.

Tokyo, Japan
June 24, 2005

TOKYO ELECTRON LIMITEDANNUAL REPORT 05

40 >> 41

CORPORATE DIRECTORY(AS OF JULY 1, 2005)

JAPAN

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

World Headquarters

2400 Grove Blvd., Austin, Texas 78741, U.S.A.

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
Regional Offices
Fuchu Technology Center, Osaka Branch Office, Kyushu Branch Office,Yamanashi Regional Office (Fujii/Hosaka), Kansai Technology Center,
Nagoya Sales OfficeTOKYO ELECTRON AMERICA, INC.

TOKYO ELECTRON AT LIMITEDTEL TECHNOLOGY CENTER, AMERICA, LLC

Miyagi Plant/Head Office
1-1 Nekohazama, Nemawari, Matsushima-machi, Miyagi-gun, Miyagi 981-0203
Yamanashi Plant(Fujii)
2381-1 Kitagejo, Fujii-cho, Nirasaki City, Yamanashi 407-8511(Hosaka)
650 Mitsuzawa, Hosaka-cho, Nirasaki City, Yamanashi 407-0192(Sagami)2-41 Machiya 1-chome, Shiroyama-machi, Tsukui-gun, Kanagawa 220-0101
Tohoku Plant
52 Matsunagane, Iwayado, Esashi City, Iwate 023-1101
Kansai Technology Center
1-8 Fuso-cho, Amagasaki City, Hyogo 660-0891

TOKYO ELECTRON KYUSHU LIMITED
Saga Plant/Head Office1375-41 Nishi-Shinmachi, Tosu City, Saga 841-0074
Kumamoto Plant
2655 Tsukure, Kikuyo-machi, Kikuchi-gun, Kumamoto 869-1197
Ozu Plant
272-4 Takaono, Ozu-machi, Kikuchi-gun, Kumamoto 869-1232
Koshi Plant
1-1 Fukuhara, Koshi-machi, Kikuchi-gun, Kumamoto 861-1116

TOKYO ELECTRON SOFTWARE TECHNOLOGIES LIMITED30-7 Sumiyoshi-cho 2-chome, Fuchu City, Tokyo 183-8705
Sapporo Technology Center
Yamanashi Station
Kyushu Station

TOKYO ELECTRON FE LIMITED30-7 Sumiyoshi-cho 2-chome, Fuchu City, Tokyo 183-8705
District Offices
Sagami, Fuchu, Osaka, Miyagi, Iwate, Tsuruoka, Aizuwakamatsu, Mito, Nirasaki,
Toyama, Mie, Tsu, Higashi-Hiroshima, Kikuyo, Ozu,
Koshi, Nagasaki, Oita, Saga, Fukuyama, Saijo

TOKYO ELECTRON DEVICE LIMITED
1 Higashikata-cho, Tsuzuki-ku, Yokohama City, Kanagawa 224-0045
Branch Offices
Kitakanto Branch: Nagaoka, Tokyo
Osaka Branch: Kyoto, Okayama
Sales Offices
Sendai, Mito, Tachikawa, Yokohama, Mishima, Matsumoto, Nagoya,Hamamatsu, Fukuoka, Tokyo (Kanda), Sendai Design & Development Center,
Yokohama Design & Development Center
Overseas Offices
Tokyo Electron Device (Shanghai) Limited
Tokyo Electron Device Hong Kong Limited

TOKYO ELECTRON BP LIMITED30-7 Sumiyoshi-cho 2-chome, Fuchu City, Tokyo 183-8705
Logistic Center Narita
Logistic Center Yokohama
Kuwana Sales Office
Shinmoji Sales OfficeTOKYO ELECTRON AGENCY LIMITED30-7 Sumiyoshi-cho 2-chome, Fuchu City, Tokyo 183-8705

2400 Grove Blvd., Austin, Texas 78741, U.S.A.
Branch Offices
Albuquerque, Boise, Burlington,
Dallas, Fishkill, Hillsboro, Los Angeles, Manassas,
Marlborough, Phoenix, Richmond, Santa ClaraTOKYO ELECTRON MASSACHUSETTS, LLC
123 Brimbal Ave., Beverly, Massachusetts 01915, U.S.A.
NanoFab300 South 255 Fuller Rd., Albany, NY 12203, U.S.A.

SUPERCRITICAL SYSTEMS, INC.
2120 West Guadalupe Rd., Gilbert, Arizona 85233, U.S.A.

TIMBRE TECHNOLOGIES, INC.
2953 Bunker Hill Lane, Suite 301 Santa Clara, California 95054, U.S.A.

EUROPETOKYO ELECTRON EUROPE LIMITED
Head Office
Pioneer, Crawley Business Quarter, Fleming Way, Crawley,West Sussex RH10 9QL, England, U.K.
Branch Offices
Italian (Milan, Catania, Avezzano), French (Grenoble, Paris, Rousset),
German (Dresden), Ismaning (Munich), Irish, Netherlands

TOKYO ELECTRON ISRAEL LIMITED
5 Habarzel St., Gat 2000 Industrial Zone, Kiryat Gat, Israel
Branch OfficeMigdal HaEmek

ASIATOKYO ELECTRON KOREA LIMITED
325-230 Dongchun-Dong, Yongin City,
Kyonggi-Do, 449-120 Korea
Branch Offices
Cheonan, Cheongju, Gumi, Icheon, Kiheung, Pucheon

TOKYO ELECTRON TAIWAN LIMITED
7FI., No. 18, Pu-Ding Rd., Hsin-chu City, Taiwan 300, R.O.C.

TOKYO ELECTRON (SHANGHAI) LIMITED
No. 555 Gaosi Rd., Zhangjiang Hi-Tech Park, Shanghai 201203, China
Branch Offices
Beijing, Suzhou, Tianjin

TOKYO ELECTRON (SHANGHAI) LOGISTIC CENTER LIMITED
Level 1, No. 126 Hedan Rd., Waigaoqiao FTZ, Pudong, Shanghai 201206, China

PROFILE

INVESTOR INFORMATION
Established in 1963, Tokyo Electron (“the Company”) and Tokyo Electron group(AS OF MARCH 31, 2005)(“Tokyo Electron”) are world-leading suppliers of semiconductor production
equipment (“SPE”) and related services for the semiconductor industry. Tokyo
Electron develops, manufactures and markets a broad lineup of products,
including coater/developers, plasma etch systems, thermal processing
systems, single wafer CVD systems, surface preparation systems and wafer probers.

Corporate Name:

Common Stock Listed on:

Tokyo Electron Limited

The Tokyo Stock Exchange 1st Section (#8035)

Tokyo Electron also draws on its cumulative expertise in SPE to develop, manufacture and market coater/developers and etch/ash systems for the manufacture of flat panel displays (“FPD”). Most of Tokyo Electron’s

Established:

Transfer Agent for Common Stock:

November 11, 1963

The Chuo Mitsui Trust and Banking Co., Ltd.

semiconductor and FPD production systems command world-leading shares in their respective markets.
Tokyo Electron also maintains a strong presence as a distributor, providing a wide array of semiconductor
production systems, storage area network and Internet-related products for broadband solutions, electronic

33-1 Shiba 3-chome, Minato-ku, Tokyo 105-8574, Japan

Annual General Meeting of Shareholders:
For Further Information, Contact:

June

Investor Relations

components and other products in Japan from other leading suppliers.
With a network spanning 12 countries in the U.S., Europe and Asia, Tokyo Electron provides superior
products and services to its customers, and works to maximize shareholder value.

Common Stock:

Corporate Communications Department

Stock trading unit

100 shares

Authorized

300,000,000 shares

Issued and outstanding

180,610,911 shares

Number of shareholders

60,857

Tokyo Electron Limited
TBS Broadcast Center
3-6 Akasaka 5-chome, Minato-ku
Tokyo 107-8481
Tel: +81-3-5561-7003

Distribution of Ownership Among Shareholders:Fax: +81-3-5561-7400
http://www.tel.com

Japanese financial institutions
66,816,880 shares
37.00%
Foreign institutions and others
74,864,471 shares
41.45%
Individuals and others
23,902,245 shares
13.23%
Other Japanese corporations
12,497,643 shares
6.92%
Treasury stock
2,529,672 shares
1.40%

ALWAYS LOOKING AHEAD TO NEW GROWTH
Contents
01
02
04
06
08
10
12
14
15
16
18
19

History and Prospects
Message From the Chairman
Message From the President
Powerful Strength for Firm Positioning
Making an Even Stronger Financial Position
Envisioning Further Growth By Innovative Technology
Tokyo Electron at a Glance (by Business)
Tokyo Electron at a Glance (by Geographic Region)
Intellectual Property Report
Environmental, Health and Safety Activities
Corporate Governance
Board of Directors, Statutory Auditors and Executive Officers

Financial Section
20 Management’s Discussion and Analysis
27 Consolidated Six-year Summary
28 Financial Statements
42
43

Corporate Directory
Investor Information

Disclaimer Regarding Forward-looking Statements
Matters discussed in this annual report, including forecasts of future business performance of Tokyo Electron, management strategies, beliefs and otherstatements 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 the forward-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

Quarterly Stock Price Range:(Yen)(Calendar Years)

12,00010,000

8,000

6,000

4,000

2,000

0

1Q

2Q

3Q
2002

4Q

1Q

2Q

3Q
2003

4Q

1Q

2Q

3Q
2004

TOKYO ELECTRON LIMITED

4Q

1Q
2005

ANNUAL REPORT 05

42 >> 43

TOKYO ELECTRON LIMITEDANNUAL REPORT 2005
For the Year Ended March 31, 2005

ANNUAL REPORT 2005

INNOVATIVE SPIRIT GEARED FOR GROWTH

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
43AG-016