To Our Shareholders

The past fiscal year was an exciting year for us at Tokyo Electron, as we witnessed
the semiconductor industry emerge from its long recession and enter a recovery
phase. Full-blown market penetration of digital consumer electronics, such as digital
cameras, DVD recorders, and FPD television sets, in addition to replacement
demand for next-generation personal computers and mobile phones, boosted
demand for semiconductor devices. Amid the notable growth of economies in Asia,
which now strongly influence the overall global economy, Japanese semiconductor
manufacturers focused their business resources on their areas of strength, buildingmomentum. Reflecting this strategy, capital investment sentiment began to buildand shifted more to Asia.
Under these circumstances, the Company’s performance also rebounded strongly inthe second half, resulting in annual consolidated net sales rising 15%, to ¥529.7billion. Profitability jumped as well. Operating income climbed to ¥22.3 billion from
¥1.1 billion and net income surged to ¥8.3 billion from a loss of ¥41.6 billion in theprior fiscal year. As a result, net income per share amounted to ¥46.37, and annual
cash dividends were ¥10.0 per share.
Strengthening our Leading Position in the Industry
Along with broadening applications of semiconductors in digital consumer electronics
and mobile devices, the demand for higher integration, faster speed, and lower
energy consumption is steadily increasing. At our customers’ semiconductor plants,full-scale, volume IC production based on 90 nanometer design rules is beginning.
Based on technology capabilities that rank at the very pinnacle of our industry, we arecontributing to the manufacture of our customers’ leading-edge devices bydeveloping highly differentiated products backed by our high-quality support services.
Semiconductor manufacturers are now investing in equipment for 300mm waferfacilities. Anticipating that this trend would further strengthen, we developed 300mm
wafer equipment and have been promoting it for the past several years.

Kiyoshi Sato
President & CEO

Moreover, centered on our Process Technology Center in Nirasaki, Yamanashi
Prefecture, we have been proceeding with joint development projects with leading
semiconductor manufacturers from around the world, with the goal of supplying ourcustomers with the most appropriate solutions for emerging and leading-edge
processes. Consequently, 300mm wafer equipment now accounts for more than
50% of our semiconductor production equipment sales. According to our surveys, inthe fiscal year under review, our semiconductor production equipment held top
share of the market in many of our product categories.
Also in the past fiscal year, the Company established TEL Technology Center,America, LLC (TTCA), in Albany, New York, as its center for research anddevelopment in North America. TTCA will handle a variety of research anddevelopment projects for both next generation processes and the semiconductor
manufacturing equipment needed by leading chip manufacturers worldwide. Thisdevelopment effort will involve a number of partners ranging from chip
manufacturers to equipment suppliers and academia.

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Strengthening our Leading
Position in the Industry
In the future, we will continue to demonstrate technological leadership as a multiproduct supplier of semiconductor production equipment and strengthen our ability
to unify and incorporate leading-edge technologies by aggressively launching new
products in the global market.
Among digital electronics products, growth expectations are particularly high for theLCD television market. This is good news for TEL, as our FPD production equipment
is essential for the production of the TFT-LCDs used in these televisions. FPD
manufacturers are currently increasing their capital investments in facilities that canprocess large glass substrates, causing orders for our related equipment to continue
at record levels. Since further innovations are expected in advanced display
technologies, we are also looking forward to business expansion in this field.
In our Electronic Components Division, which is operated by our subsidiary Tokyo
Electron Device Ltd., we market high-value-added products of world’s device
manufacturers that have application in digital electronic and mobile phone devices,along with our technology support services. In this area, we are also working to
expand sales of semi-custom design services and develop our own original products,
along with tremendous efforts in application engineering.
Following the collapse of the IT bubble, our Computer Network Division achieved
sales growth despite stagnation in the communications and network-relatedindustries. The key to this success was customer recognition of the superiority oftechnical support, system design, and other technology capabilities behind theleading-edge products we distribute. In fact, it could be said that these adverse
business conditions resulted in a strengthening of our position in the industry. In thecomputer network field, we expect to expand sales and improve profitability of ourbusiness, including higher service revenues along with the Japanese macro
economy recovery and overall CAPEX increase.
Business Structural Reforms
Commencing with the fiscal year under review, TEL has moved ahead with acompanywide structural reform plan aimed at preparing the Company, over the next
one-to-two years, for its next growth stage. Among our top priorities are eliminating
the excessive inventories built-up during the IT bubble and downsizing personnel
appropriately for current conditions. In addition, we are seeking further cost
reductions and shortening of production lead times to meet the requirements of enduse applications targeting the consumer market.

Annual Report 20043

Building Higher Profitability
During the last fiscal year, we took thorough measures to reduce inventories,
disposing unnecessary items in Japan and overseas, and refurbishing or converting
products that could be sold. As a result, despite an increase in work in processduring the second half due to higher production rates, we cut our inventory assets
and improved our inventory turnover to 72 days from 89 days as a result of the firstyear of structural reforms. In our personnel program, we initiated measures todecrease the number of employees worldwide by around 1,000, decreasing ourfixed costs.
To reduce costs and shorten production lead times, we set goals for each Business
Unit. Guided by these targets, we made fundamental revisions of our procurement,design, manufacturing, and logistics. We are also implementing a system forshortening production lead times at all plants. As we are facing substantial growth inproduction volume this fiscal year, we are convinced that reducing production leadtimes at our plants will be an especially important factor in achieving higher
production volumes without increasing fixed costs.
Although our restructuring efforts have progressed favorably during the past fiscal
year, we are still merely at the halfway point. In the current fiscal year, we are
redoubling our efforts in the second phase of the program, aiming to achieve agile
management capabilities, as well as a low-cost structure to deal with the sudden
fluctuations in our business cycles.
Building Higher Profitability
In addition to our business structural reforms, we recognize further improvement of
profitability as a top priority management issue at Tokyo Electron.
Over the past few years, we have invested approximately 10% of oursemiconductor production equipment sales in research and development, targetinghigh-value-added products. This focus is now steadily producing results. Our new
thermal processing system, TELFORMULA™, which customers started using forvolume production about two years ago, combines the advantages of a hot-wallthermal furnace with quick turnaround time. The model has earned a strong
reputation among customers for high-end thermal processing applications.
The new coater/developer, CLEAN TRACKTM LITHIUSTM, which we began
manufacturing in volume during the past fiscal year, has also been a success. Fittedwith embedded measurement devices and software technology, this model
incorporates functions that enable improved process stability. As such, the model iscompatible with the processes of 90 nanometer and beyond design rule, which are

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now beginning in earnest in the semiconductor industry. CLEAN TRACK LITHIUS isalready winning high praise from many customers, and shipments in the current
fiscal year are anticipated to equal those of the Company’s best-selling model
CLEAN TRACK ACT® series. Both of these new products are contributing to greater
profitability based on the high-value-added content they offer customers incomparison with previous models. Clearly, the demands of the market have spreadbeyond shrinking device sizes, diversifying to the application of new structures andmaterials. We believe that this field holds many opportunities to introduce new
equipment, and are determined to successively launch new products.
To buffer ourselves from the silicon cycles, establishment of a business style
ensuring stable earnings is in progress, and as part of that process, we areexpanding our services and refurbishing business. As capital investment in 300mm
equipment grows, there have been many requests from customers using 200mm
and lower equipment for relocation and refurbishing services. We will focus more on
this refurbishing business under our subsidiary Tokyo Electron FE Ltd., which isresponsible for field engineering services. We are currently creating a plan to expand
the sales of this business by 50% over the next few years.
Accelerate Innovations in Semiconductor Technology andTarget a Truly High-Quality Company
Present applications for semiconductors go beyond personal computers and mobile
phones, extending to storage-related devices, such as flash memory, and to sensors
and microcontrollers used in automobiles. Along with higher communication speeds,
the growing popularity of advanced mobile device functions, and the full-fledged
start to digital terrestrial television broadcasting, there will be explosive growth in thevolume of information being processed and accumulated globally. Naturally, this isexpected to stimulate further expansion in the semiconductor market. Current
semiconductor technology has only taken the first few steps toward its potential
goal. Although facing various technological and economic hurdles, I have no doubtthat technological innovations will enable semiconductor technology to continue toevolve. Determined to be one of the drivers of the technological innovations, theCompany will continue to pursue and supply the highest quality in the industry inboth our technology and support services. As a result, we hope to fulfill and exceed
the expectations of our shareholders, customers, employees, regional communities,and all other stakeholders. In meeting these challenges, we look forward to thecontinued support of our shareholders. I would like to thank our shareholders for thesupport you have given us, and invite you to share in the benefits as we make ourvision for the future reality.
June 2004

Kiyoshi Sato
President & CEO

Annual Report 2004

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