Market Review with President Tetsuro Higashi

Overall, how would you
describe the fiscal year
ended March 2002?

The semiconductor production equipment industry experienced the worst down
cycle since this business began. We have gone through several downward swings inthe past, but none have been as severe as this current down cycle in scale and speed.
In response, we initiated a variety of measures to try and minimize its negative impact,
but still it was the most difficult year the Company has experienced. In fact, it has madeus realize that we have to change to a more responsive and efficient organization.
Despite the difficult conditions throughout the year, we were successful in launching several key products that were in the market spotlight. Furthermore, TEL was recognized as an industry leader in 300mm equipment, which chipmakers are in the processof shifting to. The Company also made good progress in developing next generation
technologies.

In your opinion, whatchanges are going on in theindustry?

Looking at the major trends, the semiconductor industry is moving from a PCcentric age to a pervasive age in product applications. As part of this trend, DRAMs andother chips are becoming much cheaper and lifecycles of chips are becoming much
shorter, reflecting the shorter lifecycles of the end products they are used in. This trend
will have a stronger impact as we leave the PC-centric age and a wide array of communications-enabled information devices, such as personal digital electronics products
and digital household appliances enter the market.
The significance of this trend for semiconductor production equipment suppliersis that we are being asked to supply the semiconductor industry with equipment of thehighest technology and quality that can produce chips at low cost. Moreover, to copewith shortened lifecycles, chipmakers want equipment to ramp-up quickly and to flexibly
adapt to markets. In short, our customers are going to be making much harsher
demands on us regarding tool specifications and product capability.

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Another major trend among the semiconductor industries of Japan, Europe andthe United States is a significant change in production strategies. Companies areincreasingly outsourcing the production of products that are not considered core business to foundries in Taiwan and other Asian areas. This trend can be viewed as simply
progressive specialization within the industry, but it is going to affect the role of production equipment suppliers like us to some extent. We are being required to support thisstrategy with our process development, process integration, and processes control
capabilities, moving us even closer to the boundary between equipment manufacturers
and chipmakers.

In light of such trends, what
advantages do you havethat can be leveraged inyour business?

The first points that come to mind are our world class technologies and powerfulmarketing capabilities that anticipate the needs of our customers around the world.
Marketing is not the sole domain of our marketing group, our sales and field engineeringgroups cooperate in a unified effort where everyone has a role to play. Developing thecustomer needs recognized through this process into individual products has led to thecreation of our current extensive and highly competitive product lines.
Process integration capabilities will be key to the future success for semiconductor production equipment suppliers. Such capabilities are best realized if one has abroad line up of products, similar to those of TEL. Process integration is a core element
within our products providing a high centripetal force. We have a high degree of flexibility that can incorporate the products of other suppliers providing an optimal solution to
our customers. In addition, our Process Technology Center in Yamanashi Prefecture
has drawn the attention of global customers as one of the most-advanced applicationlaboratories in the industry. This facility combined with a series of key equipment makes
process integration possible, and we have established a competence that provides
powerful support for the product differentiation strategies for each of our customers.

Would you give us someof the highlights from yourproduct development
programs?

Preparations have been completed for the shift to 300mm equipment in almost all
product categories, subsequently our market share of this equipment will exceed thatfor 200mm equipment. One product that is close to volume production is the plasmaetch system Telius™. Compared with the 200mm model, the 300mm model is morecompact and employs a unique platform featuring a parallel transferring system.
Because of its high productivity, Telius™ has made a sensational debut in the market.
Another highly innovative new product is the high-speed thermal processing system TELFORMULA™. Featuring a flexible batch system that can accommodate one to25 wafers, this equipment is designed to be scalable and adaptable to changes in thevolume and variety of products. TELFORMULA™ has drawn significant attention fromthe market because it provides for the current need in the market by delivering higher
productivity through shortened production cycle time. This is the optimal tool for use in
the manufacture of system on chip (SOC) devices, demand for which is increasing withthe spread of digital consumer appliances in the respective markets.
In addition, we have recently launched a plasma nitridation system that creates9high-quality nitrated gate dielectric films. The system has been very well received byflash memory and logic chip customers, even though it was launched very recently. Its
extensibility to other applications makes this system a highly promising product for newmarket development.

Will you tell us more about
the products you are
currently developing for thefuture?

Among the BEOL (interconnect) processes, for which equipment sales are
expected to grow, the intermetal dielectric film formation is a key process within thislarge latent market. Taking advantage of our specialty technologies, we have developed
an SOD coater to address this market. We expect the market for this SOD coater toshow real expansion from the 100-nanometer generation. Additionally, we are working
with customers and materials suppliers to investigate new breakthroughs in this field.
We are also strengthening our advanced process control (APC) technologies. We are in the midst of developing products incorporating OpticalDigital ProfilometryTM, a technology of the recently acquired TimbreTechnologies, into our own products and evaluation by our customers isunderway. Of course, the strategy that we have for APC goes much further—
we have just moved to the starting line. However, I think we have taken thefirst major step into a field that will be an important factor in differentiating
semiconductor production equipment makers in the future.
Work on 70-nanometer and below processes is ongoing. We areresearching and developing ways to put supercritical cleaning technologies
from Supercritical Systems, a company we acquired two years ago, to practical use. Furthermore, through a business alliance with a key stepper manufacturer, we have begun developing lithography processes utilizing F2
excimer lasers.

What are the issues
facing TEL?

If the use of digital consumer products becomes as wide spread a market as thatof personal computers, the increased demand for semiconductors and new semiconductor production equipment will result in the Company having to supply its customers
with innovative products and technologies at lower costs. To rephrase this, for TEL toachieve higher profits, it will be absolutely necessary for us to create added value throughour technological differentiation at a highly competitive price and the lowest cost.
I believe that the semiconductor production equipment market will continue tohave an extremely bright future supported by a huge demand for semiconductors and aneed for advanced technology. There also is no doubt in my mind that the industry willagain experience cyclical downswings of the market, regardless of the magnitude. For
that reason, I am committed to introducing reforms to build operations that can earnprofits and sustain the highest level of R&D even under poor market conditions.
To address such market demands, we are introducing an IT-aided production
system aimed at raising production efficiency. This process will take another two years
to complete at our domestic factories. When completed, however, we will have a structure that can match the maximum amount of demand during times of expansion and

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can minimize the impact of contractions in the market. It will be able to maximize ourprofitability under either good or bad market conditions. To facilitate our transition to ahighly profitability structure, we implemented organization changes in June. On theadministrative side, our focus will be on achieving operational efficiency through a small
but skillful organization. In addition, we plan to optimize our material sourcing on a global basis. Subsequently, we are stepping up our activity to target cost reductions
through the maximization of productivity and production efficiency.

What direction does TEL
intend to take from a global
perspective?

In April of this year, we established a service support base in Shanghai, beginning
direct operations in China. We took this action in consideration of the importance ofChina as a growth market. From this operation, we intend to provide the highest quality
technical support services to our customers in China. The fact that TEL has major R&D
activity in nearby Japan makes TEL extremely attractive to customers in China andAsian countries, positioning TEL as a valuable supplier.
In terms of sales and services, we have already completed the expansion of ournetwork and are recognized as a global supplier. Now we are seeking out regional
resources with competitive advantages around the world to merge them with our own
corporate resources. Our software-related R&D bases in the United States, a leader in
global software technology, are a good example of our strategy. Deriving new competitive power from global regional strengths, we plan to reinforce our unique identity
throughout the world.

The FPD production
equipment market seems
brisk, doesn’t it?

Yes, I expect demand to remain robust throughout the entire year in 2002.
Because the FPD production equipment market basically demonstrates the same cyclical nature as semiconductor production equipment market, it is possible that the market may soften temporarily, but in the medium- to long-term it is certain that this market
will grow substantially.
One of the reasons for the current boom is that demand for LCD screens for PCmonitors is growing substantially. Another trend is the progressive transition by manufacturers to larger glass panels, the substrate for LCD screens.
As we have been quick to respond to this market trend, shipments of our FPD production equipment for larger glass panels
are steadily growing. Moreover, our equipment is also adaptablefor organic electroluminescent (EL) display manufacture. TEL’s
products account for a major global share of the FPD production
equipment in the areas of FPD coater/developer and etch/ash
systems. We intend to take full advantage of the business
opportunities arising from this emerging market.

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