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Achievements

Semiconductor production equipment (SPE) — an industry that enters a new stage ofgrowth on upturns in the silicon cycle. Having been through what is said to be theworst slump in the history of the semiconductor industry, our industry is now in themidst of a notable recovery, and the direction and potential of new markets arebecoming visible. Against this backdrop, Tokyo Electron (TEL)’s establishedtechnological strengths and strategic marketing are helping its performance growth
outstrip that of the recovery in the industry.

A Performance Rebound that Exceeds that ofMarket Recovery

18.4% growth

During the calendar year 2003, TEL’s Wafer Fab Equipment sales surged 18.4% from the same period in 2002, substantiallyoutperforming the 3.6% growth in the global Wafer Fab Equipment market. Starting from the second half of 2003, the semiconductor
manufacturers began to invest robustly in memory chips and in chips for digital consumer electronics, one of the key drivers of thefuture. Our overwhelming technology leadership in these arenas enabled us to fully enjoy the benefits of the recovery.

CY2003 Growth of Wafer Fab Equipment Shipments Worldwide(Billions of U.S. Dollars)

15+2.2%
11.8

105

12.0

+18.4%
1.70CY2002

2.0

Tokyo ElectronCY2003

Top 10 suppliers

Source: Gartner Dataquest (April, 2004) GJ04312
Equipment sales only, excludes service and spare parts sales

Notes: 1. Growth rates described here are based on surveys by Gartner Dataquest.
2. TEL’s Wafer Fab Equipment sales are equivalent to its Semiconductor Production Equipment sales excluding the sales of wafer probers.

Composition of SPE Regional Sales
100%
8.2

80%

22.6

8.720.4
29.1

8.0Europe

11.9North America

8.8

China, Southeast Asia

11.1

6.6

60%

7.7

23.6

6.8
21.2

Taiwan

18.4
18.6

40%

20%

9.7

31.7

14.4
7.1

15.7

29.7

26.7

33.3

Japan0%FY2001

FY2002

FY2003

FY2004

Note: Sales of FPD production equipment are included.

8Tokyo Electron

www.tel.com

Korea

Asia

TEL Basic Data

Booming SPE Sales in Asia

CY2003 Growth of Wafer Fab Equipment Shipments in Japan and Asia/Pacific79.6 % growth in Japan
16.6 % growth in Asia/Pacific(Billions of U.S. Dollars)

60+0.9%Japan

Asia/Pacific4.81 4.86

+46.2%
40
3.14

20+79.6%
0.35+16.6%

2.15

0.70 0.82

0.62

CY20020Our high presence in Asia, including Japan, made it possible
for us to achieve our high-level recovery during the past year.
On the threshold of the 21st century, many semiconductor
manufacturers began shifting their mass-production bases toAsia to enable low cost production. Moreover, Japanese
semiconductor manufacturers regained momentum byrevising their product strategies.

CY2003
TokyoElectronTokyo
Electron

Top 10suppliers

Top 10suppliers

These trends propelled TEL’s performance upward thanks toour powerful marketing/sales and service network in Asia.

Source: Gartner Dataquest (April, 2004) GJ04313
Equipment sales only, excludes service and spare parts sales

The Wafer Fab Equipment market in CY2003 grew 34.0% inJapan, and 3.4% in the rest of Asia. TEL’s sales growth inthese regions significantly outperformed the average growth.

Note: Growth rates described here are based on surveys by Gartner Dataquest.

Equipment for Handling 300mm Wafers –No.1 Market Share in Multi-segments

No. 1Market Shares of TEL Products for 300mm WafersCoater/developer
FY2002300mm product sales

FY2004

Thermalprocessingsystem

Dielectricetchsystem

Cleaning system

Metal CVD
system
0%

25%

Wafer
prober50%

75%

To reduce overall chip manufacturing costs, semiconductor
manufacturers have now shifted their capital investment
from 200mm to 300mm wafer equipment. Anticipating thefull-scale start of the 300mm era in the wake of the market
recovery, we have been focusing our efforts on building acompetitive 300mm product lineup. Over the past twoyears, all of TEL’s 300 mm wafer products havesubstantially increased their market shares as shown in thechart.

100%

300mm product market share
Note: Product market shares are based on surveys by TEL

Proportion of New Orders Received
200mm Equipment Vs. 300mm Equipment
100%

80%

60%

5552

4548

FY2002

FY200340200mm equipment

60

300mm equipment

83

40%

20%
170%
FY2001

FY2004

Annual Report 2004

9AchievementsAfter the collapse of the IT bubble, TEL carried out various groupwide restructuring
measures to downsize costs and surplus assets to accommodate with current scaleof the business. We accelerated all our business cycles through such efforts asshortening production leadtime and development period, aiming to be able torespond quickly to changes in market needs and achieve high operating efficiency.

Inventory Turnover Accelerated by 39 Days
(FY2002 Vs. FY2004)-39 days

To improve TEL’s cash flow, we have thoroughly pursued inventory reduction. While working to restore the healthy status of
inventories by writing-off obsolete ones, we also strengthened efforts to sell our accumulated in-stock products. As a result,inventory assets fell by ¥22.2 billion compared with the end of FY2002. The inventory turnover period contracted dramatically to 72
days from 111 days. The reduction of production leadtime project currently under way is also proceeding smoothly, and our near-termgoal 60 days is well within sight.

Inventories and Inventory Turnover(Days)
1118972(Billions of Yen)

529.7

500

460.6
(Billions of Yen)

417.8

150
127.4

250

111.8

105.2

0
FY2002TEL Basic Data

FY2003100Inventory
Turnover Period

50

Consolidated
Net Sales

0

Inventories at
end of FY

FY2004

Selling, General and Administrative Expenses and Percentage to Sales
(%)
32.1
28.9
22.3
(Billions of Yen)

529.7500460.6(Billions of Yen)

417.8

150
133.9

132.9
117.9

250

100
5000
FY200210Tokyo Electron

www.tel.com

FY2003

FY2004

SG&A Expenses
Percentage to Sales
Consolidated
Net Sales
SG&A Expenses

Note:
From FY2004, some of fieldengineering related expenses
previously included in SG&A
expenses were reclassified to costof goods sold. Disregarding thereclassification for the purpose ofcomparison with performances inprevious fiscal years yields an
SG&A to net sales ratio of 25.0%.

Fixed Cost Reduced by 14 Billion Yen(FY2004)

14 billion yen

Over the last three years, we have been reducing our fixed costs, which had increased along with the sharp growth in the market up to2000. In FY2004, we cut fixed costs by ¥14 billion mainly through reductions in labor costs and depreciation expenses. In addition, wereduced our R&D costs by adhering to “selection-and-focus” strategies. Among the measures taken were an exit from a business nolonger core for us and consolidation of our production bases in Japan and the United States. Furthermore, commencing with the past fiscalyear, we have been reviewing and optimizing our manufacturing processes with the goal of decreasing manufacturing costs by 30% overthree years.

Operational Efficiency Boosted(FY2001/3Q Vs. FY2004/4Q)

18.5% up

Number of Employee and Consolidated Net Sales per Person(Millions of Yen)
59.7

60
50

45.8
(Billions of Yen)

41.1

529.7

500

40460.6
417.8
10,171

10,053
8,870

250

0
FY2002

FY2003

Consolidated
Net Salesper Person

FY2004

Consolidated
Net Sales
Number ofEmployee

Our production levels began to rise sharply from the second halfof the past fiscal year, along with the beginnings of a recovery inthe capital investment sentiment of semiconductor
manufacturers. In response, TEL shortened production leadtimes
by revising its product designs and manufacturing processes—
and was successful in expanding production volume without
adding personnel. Consolidated net sales for the third quarter ofthe fiscal year ended March 2001, our record sales year, and forthe fourth quarter of the past fiscal year were both around thelevel of ¥180 billion. However, we were able to get through thisproduction ramp-up period with approximately 1,400 lessworkers than three years ago. This represents an 18.5%
increase in operational efficiency with substantial improvementin productivity from the third quarter of FY2001.

Quarterly Operating Margin(%)
30

20
12.2
8.3

105.1

2.6

1.5

3.4

00.5

-1.6

-10-6.7-20-9.4

-15.2
-23.3

-30

FY2002

FY2003

Annual Report 2004

FY2004

11

The Challenge to Become a Highly Profitable Company



As a medium-to-long-term goal, TEL has set itself the challenge of building a highprofit structure that meets world-class standards. By implementing a growth strategy
to expand sales, the source of profits, while also proceeding simultaneously with acost reduction program, TEL aims to become a company that earns large returns
when the market is robust, yet maintains stable returns during correction periods.

Setting a Growth Strategy that Adjusts to Market Changes
In the past, TEL has achieved growth by evolving in response to advances in the electronics industry or changes in the external environment.
Now, yet another new trend has occurred in our business environment. In addition to personal computers and mobile devices, the keydrivers of growth in the semiconductor market over the past decade, a new wave of digital consumer electronics has emerged as anotherdriving force.
In setting a growth strategy that responds to this new wave in the market, TEL is moving forward to its next stage of development. Becauseof the short cycle between generations of digital consumer products, manufacturing equipment for semiconductors used in these end
products needs to be scalable and adaptable to enable a shorter chip manufacturing cycle. Moreover, high-speed and highly-functional
semiconductors that will make PC and mobile communications stress-free and more fun to use, require new evolutional manufacturing
technologies. In response, TEL is accelerating the development of new products and new process technologies that meet the diversifying
and increasingly sophisticated needs of semiconductor manufacturers.

TEL Four Decades of Innovations(Billions of Yen)
800

600

Spread of Internet
Applications

Mainframe computer

PCMobilephone

Digital consumer electronics
Automotive, etc

TEL consolidated net sales
Globalization

400
Distributor and manufacturerof original products
200

Further growth
driven by
new applications

Trading company withtechnological services
0FY 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

TEL Basic Data

FY2004 Technology Highlights• Volume production commenced of CLEAN TRACKLITHIUS, a new model of coater/developer• Liquid immersion technology alliance formed• MEMS business marketing started• Mask coater/developer CLEAN TRACK ACT M launched

12Tokyo Electron

www.tel.com

A prediction – The Semiconductor Market will Grow 41 percent in Four Years(CY2003 Vs. CY2007)
The driving force behind the growth in the semiconductor
market in the latter half of the 1990s was the expansion in thepersonal computer market along with the spread of theInternet and the growth in the mobile phone market. The
future growth in the market is expected to be more robust,
driven by not only the personal computer and mobile phonemarkets, but by more digital electronics products, automotiveelectronics, and other new applications for semiconductors.
We should also consider that quantity growth of semiconductor
chips and bit growth of memories will far outstrip the sales
growth rate.

Semiconductor Demand Forecast by End-applications(Billions of U.S. Dollars)

250

235

218

207

191

200

166150141100
5002002

2003

2004

2005
2006
Forecasts

Industrial & others
AutomotiveCommunication
PC, other data processing
Consumer electronics

2007

Source: JEITA (May, 2004)

Operating Margin Target is to Surpass Previous Record andGo on to Attain World-class Heights in Profitability
As expressed by the term “cyclical growth”, semiconductorrelated industry is a business that grows through acontinuous process of boom and bust. With the broadeningof the fields in which semiconductors are used, the volatility
is expected to subside—but the cycle will remain. Facingthese circumstances, TEL’s target is to first surpass its
highest recorded operating margin, and then go on to attainnew world-class heights in profitability as its ultimate goal.
In its drive toward this goal, TEL will:

TEL Operating Margin
(%)
2520

16.7%

1510Structuralreform50• strengthen its R&D, further differentiating its existingproducts and accelerating its new product launches;• reinforce its post-sales service business, expanding
profitability; and• continue to pursue the structural reforms begun last year,
maintaining its lean structure.

-5FY 86878889909192

9394

95

969798

9900

01

02

03

04

SPE Industry
recession

recession

recession

recession

By carrying out with these strategies, the Company is aiming
to achieve a high-profit structure on a global level.

New Products of Recent Years

2000

2002

2002

2004

2004

Plasma Etch System
TeliusThermal Processing
SystemTELFORMULA

Plasma Processing
SystemTrias SPA

Coater/Developer
CLEAN TRACKLITHIUS

Mask
Coater/Developer
CLEAN TRACK ACT M

Annual Report 2004

13