Annual Report 08 Tokyo Electron Limited

NOTE S TO CON S OLIDATED F INANCIAL S TATEMENT S
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 prepared in accordance withthe provisions set forth in the Financial Instruments and Exchange Law ofJapan 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 thestatutory Japanese language consolidated financial statements, which is 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 of readers
and are presented at the rate of ¥100.19 to $1.00, the approximate rate as ofMarch 31, 2008. The translation should not be construed as a representationthat the Japanese yen amounts shown could be converted into U.S. dollars atthat or any other rate.

2. Summary of Significant Accounting Policies(a) Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its 30 subsidiaries for the year ended March 31, 2008 and 2007.
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 orlosses have been eliminated in consolidation.
The fiscal year-end of all entities is March 31, except for 2 consolidated
foreign subsidiaries, 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 by forward
exchange contracts, which are translated at the contracted rates.
Revenue and expense items are translated at the rates that approximate
those prevailing at the time of the transactions.
The balance sheet accounts of 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 historicalrates. Revenue and expense accounts of foreign subsidiaries are translated ataverage rates of exchange in effect during the year. Resulting translation adjustments are presented in net assets as a component of valuation and translation
adjustments and minority interests in the consolidated financial statements.

(c) Investment securities
Tokyo Electron is required to examine the intent of holding each security andclassify those securities as trading securities, held-to-maturity debt securities orother securities. Tokyo Electron has no trading or held-to-maturity debt securities. Other securities with market prices are valued at fair market value prevailingat the balance sheet date. The differences between the book and market pricesof other securities, net of applicable income taxes, are presented in net assets
as a component of valuation and translation adjustments. 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 isdetermined principally by the specific indentification method. Raw materials
are stated principally at cost, which is determined principally by the movingaverage method.
(e) Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation of buildings,
machinery and equipment of the Company and its domestic subsidiaries iscomputed under the declining balance method, except for buildings acquired
subsequent to March 31, 1998 which are depreciated under the straight-line
method, based on the estimated useful lives of assets. Foreign subsidiaries
mainly apply the straight-line method 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(f) Intangible assets
Intangible assets, which primarily comprise of capitalized costs for computer
software and goodwill, are amortized by the straight-line method over theirestimated useful lives. Capitalized costs for computer software for internal use
are amortized over a period of 2 to 5 years. Goodwill is evaluated on an individual basis and amortized over a period not exceeding 20 years.
(g) Impairment of property, plant and equipment
Tokyo Electron evaluates the carrying value of fixed assets to be held for use
in the business.
If the carrying value of a fixed asset is impaired, a loss is recognized basedon the amount by which the carrying value exceeds its recoverable amount,being the higher of the net selling price or the value in use of the assets, which
are determined using the fair value less disposal costs and the total amount of
discounted cash flows generated from the continuing use of the individual
assets or the asset group and the disposal of the assets, respectively.
(h) Allowance for doubtful accounts
The allowance for doubtful accounts is provided at an amount determinedbased on the historical experience of bad debts with respect to ordinary
receivables, and an estimate of uncollectible amounts determined by reference to specific doubtful receivables from customers which are experiencing
financial difficulties.

43

Tokyo Electron Limited

Annual Report 08(i) 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 obligationand pension assets on the account settlement date. Prior service costs arecharged to income on a straight-line basis, beginning from the fiscal year inwhich they are incurred, over a fixed number of years (4 years) within the
average remaining years of service of employees when the changes occur.
Actuarial differences are charged to income on a straight-line basis, beginningfrom the fiscal year after they are recognized, over a fixed number of years (4years) within the average remaining years of service of employees when the
differences occur.
The provision for accrued pension and severance costs for directors andstatutory auditors of the Company and its domestic subsidiaries is calculated inaccordance with internal regulations.
The Company and certain domestic subsidiaries decided to discontinue thepayment of severance pay for directors and statutory auditors after April 1,
2005, and at the general shareholders’ meeting in June 2005, it was resolvedthat the severance pay for directors and statutory auditors until March 31,
2005 would be paid at the termination of their service and the decision
regarding the payment amount for each director and statutory auditor was
delegated to the board of directors and statutory auditors, respectively. As
discussed in note 10, the accruals for severance costs for directors andstatutory auditors are included in accrued pension and severance costs in the
consolidated balance sheets.
( j) 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, estimated after-sale repair
expenses over warranty periods are accrued based on the historical ratio of
actual repair expenses to corresponding sales.
(k) Leases
Noncancelable leases are primarily accounted for as operating leases(whether such leases are classified as operating or finance leases), except forleases that transfer ownership to the lessee at the end of the lease, which areaccounted for as finance leases.
(l) Derivatives and hedge accounting
The Company and a domestic subsidiary make use of derivatives in order tomanage certain risks arising from adverse fluctuations in foreign currency
exchange rates. The amount of derivatives is limited to the extent of foreign
currency assets, liabilities and actual orders, and the Company and the domestic subsidiary do not trade in derivatives for speculative purposes.
Derivatives are carried at fair value with changes in unrealized gain or loss
charged or credited to income, except for those which meet the criteria forhedge accounting. Unrealized gains or losses on hedging derivatives, net oftaxes, are reported in net assets as a component of valuation and translation
adjustments. Receivables and payables hedged by qualified forward foreignexchange contracts are translated at the corresponding foreign exchange
contract rates.

44(m) 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 are measured using
the enacted tax rates and laws which will be in effect when the differences are
expected to reverse, on temporary differences between the carrying amountsof assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
(n) 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 otherproducts, 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.
(o) Per share information
Net income per share and net assets per share are computed based on theweighted-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 and include,in each fiscal year ended March 31, dividends approved or to be approved
after March 31 but applicable to the year then ended.
(p) Research and development expenses
Research and development expenses are charged to income as incurredand amounted to ¥66,073 million ($659,477 thousand) and ¥56,962 million forthe years ended March 31, 2008 and 2007, respectively.
(q) Accounting standard for statement of changes in net assets
Effective from the year ended March 31, 2007, the Company and its domestic subsidiaries adopted “Accounting Standard for Statement of Changes in
Net Assets” (Statement No. 6 issued by the Accounting Standards Board ofJapan on December 27, 2005), and the “Implementation guidance for theaccounting standard for statement of changes in net assets” (the Financial
Accounting Standard Implementation Guidance No. 9 issued by the Accounting Standards Board of Japan on December 27, 2005).
(r) Cash equivalents
For purposes of the consolidated statements of cash flows, Tokyo Electron
considers all highly-liquid instruments purchased with original maturities ofthree months or less to be cash equivalents.
(s) 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, 2008.

Annual Report 08 Tokyo Electron Limited

3. Changes in Accounting Policies(a) Accounting policy for depreciation method
Effective from the year ended March 31, 2008, the Company and its domestic consolidated subsidiaries changed their depreciation method for tangible
fixed assets acquired on or after April 1, 2007 in accordance with the revision ofJapanese Corporate Tax Law (Partial Revision of Income Tax Law, Law No. 6 ofMarch 30, 2007; Partial Revision of Income Tax Law Enforcement Ordinance,
Cabinet Order No. 83 of March 30, 2007). As a result of this change, operating
income and income before income taxes decreased by ¥1,429 million ($14,263
thousand), compared with the corresponding amounts that would have beenrecorded under the previous accounting method.
(b) Accounting standard for presentation of net assets in thebalance sheet
Effective from the year ended March 31, 2007, the Company and its domestic subsidiaries adopted “Accounting Standard for Presentation of Net Assets
in the Balance Sheet” (Statement No. 5 issued by the Accounting Standards
Board of Japan on December 9, 2005), and the “Implementation guidance forthe accounting standard for presentation of net assets in the balance sheet”(the Financial Accounting Standard Implementation Guidance No. 8 issued by
the Accounting Standards Board of Japan on December 9, 2005).
The adoption of the accounting standard and the implementation guidance
had no impact on the consolidated statement of income for the year ended
March 31, 2007.

(g) Change in business segment classification
As of October 1, 2006, the Company’s computer systems and networks
business was transferred to its subsidiary, Tokyo Electron Device Limited. The
computer systems and networks business, which was previously classified aspart of the “Industrial electronic equipment” segment, was reclassified to the“Electronic components” segment, which was renamed to the “Electronic
components and computer networks” segment, to more appropriately present
the business segments in line with similarities in types of products and operations.

4. Acquisition
Tokyo Electron U.S. Holdings, Inc., a wholly-owned subsidiary of the Company, acquired all the shares of Epion Corporation (renamed TEL Epion, Inc.) in
the amount of ¥4,526 million on December 19, 2006 (see note 17). The acquisition was accounted for using the purchase method in accordance with U.S.
generally accepted accounting standards. Negative goodwill generated fromthe acquisition was deducted from the intangible assets related to the acquired
developed technology. The intangible assets, with a net amount of ¥4,985
million, are being amortized over 10 years.

5. Investment Securities
Investment securities, which solely comprise of other securities, as of March
31, 2008 and 2007 are as follows:
Millions of yen

2008:(c) Accounting standard for business combination
Effective from the year ended March 31, 2007, “Accounting Standard forBusiness Combination” issued by the Business Accounting Standards Board ofJapan was adopted. The change had no significant impact on the consolidated
financial statements.

Securities with market prices(d) Accounting standard for decrease of treasury stock and legal reserve
Effective from the year ended March 31, 2007, “Accounting Standard for
Decrease of Treasury Stock and Legal Reserve” issued by the AccountingStandards Board of Japan was adopted. The change had no impact on the
consolidated financial statements.
(e) Accounting standard for stock option
Effective from the year ended March 31, 2007, “Accounting Standard for
Stock Option” issued by the Accounting Standards Board of Japan was
adopted. Upon adoption, operating income and income before income taxes
decreased by ¥118 million compared to the amounts that would have beenrecorded under the previous accounting standards.
(f) Accounting standard for director’s bonus
Effective from the year ended March 31, 2007, “Accounting Standard for
Director’s Bonus” issued by the Accounting Standards Board of Japan was
adopted. Upon adoption, operating income and income before income taxes
decreased by ¥652 million compared to the amounts that would have beenrecorded under the previous accounting standards.

Cost

Carrying value Equity securities����������������������������������������������������

¥4,504¥8,139 Other ��������������������������������������������������������������������

100

101

 Unlisted stock��������������������������������������������������������

579

579

 Other ��������������������������������������������������������������������

18

18

Total��������������������������������������������������������������������������

¥5,201¥8,837

2007:

Cost

Securities without market prices

Millions of yen

Carrying value

Securities with market prices Equity securities����������������������������������������������������

¥4,517¥14,338 Other (Note) ����������������������������������������������������������

114

120

 Unlisted stock��������������������������������������������������������

2,015

183

 Other ��������������������������������������������������������������������

21

21

Total��������������������������������������������������������������������������

¥6,667¥14,662

Securities without market prices

Note: Bond investment trust of ¥19 million classified in prepaid expenses and other current assets
as of March 31, 2007 is included.
Thousands of U.S. dollars

2008:

Cost

Carrying value

Securities with market prices Equity securities����������������������������������������������������

$44,954$81,235 Other ��������������������������������������������������������������������

998

1,008
5,779

Securities without market prices Unlisted stock��������������������������������������������������������

5,779 Other ��������������������������������������������������������������������

180

180

Total��������������������������������������������������������������������������

$51,911$88,20245

Tokyo Electron Limited

Annual Report 08

Gross realized gains on sales of other securities are ¥135 million ($1,347
thousand) for the year ended March 31, 2008. Gross realized gains and losses
on sales of other securities are ¥1,244 million and ¥19 million, respectively, forthe year ended March 31, 2007.

6. Inventories
Inventories as of March 31, 2008 and 2007 are as follows:
Thousands of
U.S. dollars

Millions of yen

Finished products��������������������������������

As of March 31, 2008, Tokyo Electron has unused lines of credit amounting
to ¥129,736 million ($1,294,900 thousand).
The maturities of long-term debt are summarized as follows:
Millions ofyenYear ending March 31

2008

2008

2009�������������������������������������������������������������������������

¥30,000$299,431

2010�������������������������������������������������������������������������

––2011�������������������������������������������������������������������������

–

–
–

2008

2007

2008

2012�������������������������������������������������������������������������

–¥ 97,722¥102,515$  975,367

2013 and thereafter ��������������������������������������������������

––Total��������������������������������������������������������������������������

¥30,000$299,431

Work in process, raw materials
and supplies��������������������������������������

63,43092,325633,097

Total����������������������������������������������������

¥161,152¥194,840$1,608,464

7. Impairment of Property, Plant and Equipment
For assessing fixed asset impairment, the Company generally groups fixed
assets used for normal operations at a business unit level of which profits arereasonably controllable. Also, the Company assesses the recoverability of
individual assets not used in normal operations or that are idle.
During the year ended March 31, 2008, the Company determined to closethe domestic manufacturing facilities and impairment losses were recognized
mainly for buildings of ¥808 million ($8,065 thousand). These charges were
presented in other income (expenses) in the consolidated statement of income
for the year ended March 31, 2008.
No impairment loss of property, plant and equipment was recognized in 2007.

8. Pledged Assets
Tokyo Electron did not hold any assets pledged as collateral as of March 31,
2008 and 2007.

10. Accrued Pension and Severance Costs
The Company and its domestic subsidiaries have defined benefit plans (cashbalance plan and noncontributory retirement and severance benefit plans) covering substantially all their employees who meet eligibility requirements. The benefits under the plans are based on length of service and certain other factors.
The cash balance plan provides for pension or lump-sum payment benefits toemployees who retire or terminate their employment for reasons other thandismissal for cause. Under the cash balance plan, each participant has anaccount which is credited yearly based on the current rate of pay and marketrelated interest rate. The noncontributory plans provide for lump-sum payment
benefits to employees who retire or terminate their employment for reasons otherthan dismissal for cause. Certain foreign 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 forreasons other than dismissal for cause.
The funded status of the defined benefit plans, a substantial portion ofwhich consists of domestic benefit plans, as of March 31, 2008 and 2007 is
as follows:

9. Short-term Borrowings and Long-term Debt
Benefit obligation��������������������������������

Thousands of
U.S. dollars

Millions of yen

2008

2007

2008

¥ 30,000¥30,000$ 299,431

0.86% unsecured bonds withwarrants due 2007����������������������������

–

5,500

–

Other loans from banks ����������������������

–

3,000

–

Current portion������������������������������������

(30,000)(8,500)(299,431)

Total����������������������������������������������������

¥      –

¥30,000$       –Thousands of
U.S. dollars

Millions of yen

Short-term borrowings represent by 365-day notes issued by Tokyo Electron
to banks and bore interest at an average annual rate of 1.26% and 2.61% asof March 31, 2008 and 2007, respectively.
Long-term debt as of March 31, 2008 and 2007 is as follows:

0.72% unsecured bonds due 2008

Thousands of
U.S. dollars

2008

2007

2008

¥(74,733)¥(69,414)$(745,913)

Fair value of plan assets����������������������

34,29830,812

342,330

Funded status ������������������������������������

(40,435)(38,602)(403,583)

Unrecognized actuarial difference��������

618(2,113)

6,168

Unrecognized prior service cost����������

1,114

1,662

11,119Net amount recognized ����������������������

(38,703)(39,053)(386,296)

5,001

966

49,915

Amounts recognized in the consolidatedbalance sheets consist of: Prepaid pension and   severance costs (Note 1)����������������
Accrued pension and   severance costs (Note 2)����������������

(43,704)(40,019)(436,211)

Net amount recognized ����������������������

¥(38,703)¥(39,053)$(386,296)

Notes: 1 The prepaid pension and severance costs in 2008 and 2007 is included in other assets inthe consolidated balance sheets.
2 The provision for accrued pension and severance costs for directors and statutory
auditors (¥666 million ($6,647 thousand) in 2008 and ¥667 million in 2007) is not included.

46

Annual Report 08 Tokyo Electron Limited

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

Millions of yen

2008

2007

2008

Service cost����������������������������������������

¥5,198¥4,912$51,881Interest cost����������������������������������������

1,375

1,281

13,724

Expected return on plan assets ����������

(616)

(499)

(6,148)

Amortization of actuarial difference������

(629)

391

(6,278)

Amortization of prior service cost��������

950

1,526

9,482

Net pension cost ��������������������������������

¥6,278¥7,611$62,661Significant assumptions of domestic pension plans used to determine theabove amounts are as follows:2008 and 2007

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. For assessment of the realizability of deferred
tax assets, management considers the scheduled reversal of deferred tax
liabilities, future estimated taxable income, tax planning strategies and level of
net operating loss carryforwards, if any, in accordance with accounting principles generally accepted in Japan.
Based on the level of historical taxable income and future estimated taxable
income over the periods which the deferred tax assets are deductible, management believes Tokyo Electron will realize the benefits of these deferred tax
assets, net of valuation allowance, as of March 31, 2008 and 2007.
The Company is subject to a corporate tax, an inhabitants’ tax and a deductible enterprise tax, which in the aggregate resulted in a statutory income tax rateof approximately 40.69% for the years ended March 31, 2008 and 2007.

Allocation method of benefit obligation������������������������������� Straight-line method
Discount rate ���������������������������������������������������������������������

2.00%

Expected rate of return on plan assets�������������������������������

2.00%

Amortization period of prior service cost�����������������������������

4 years

Amortization period of actuarial difference���������������������������

4 years

Significant components of the difference between the statutory and effective
tax rates for the years ended March 31, 2008 and 2007 are as follows:

Statutory tax rate in Japan�������������������������������������������

2008

2007

40.69%

40.69%

Adjustments:

11. Income Taxes
Significant components of the deferred tax assets and liabilities of Tokyo
Electron as of March 31, 2008 and 2007 are as follows:
Thousands of
U.S. dollars

Millions of yen

2008

2007

2008

Accrued pension and severance costs����

¥17,529¥16,032$174,958

Elimination of unrealized profit
on inventories������������������������������������

9,018

10,46390,009Accrued employees’ bonuses��������������

5,116

5,736

51,063

Devaluation of inventories��������������������

3,158

2,713

31,520Accrued warranty expenses����������������

3,146

4,737

31,400Accrued enterprise taxes ��������������������

2,418

3,890

24,134

Net operating loss carryforwards ��������

1,564

1,966

15,610

Other��������������������������������������������������

5,995

7,579

59,837

Total gross deferred tax assets������������

47,944

53,116

478,531

Less valuation allowance ��������������������

(2,116)(1,952)(21,120)

Total deferred tax assets����������������������

45,82851,164457,411

Undistributed earnings offoreign subsidiaries����������������������������

(4,026)(3,517)(40,183)

Prepaid pension and severance costs����

(2,005)(368)(20,012)

Net unrealized gains on
investment securities ������������������������

(1,470)(3,975)(14,672)

Deferred tax assets

Deferred tax liabilities

Reserves under Special Taxation Measures Law ����������������������������������

(1,003)(1,932)(10,011)

Other��������������������������������������������������

(1,475)(1,917)(14,722)

Total gross deferred tax liabilities����������

(9,979)(11,709)(99,600)

Net deferred tax assets������������������������

¥35,849¥ 39,455$357,811

The Company and its wholly-owned domestic subsidiaries have adopted aconsolidated tax filing system for corporate tax purposes.

Tax credits for research and development costs, etc�������

(5.33)(5.21)

Difference in statutory tax rates of
consolidated subsidiaries�������������������������������������������

(1.06)(1.06)

Loss on impairment of goodwill �����������������������������������

0.98

–

Prior year’s corporate tax ���������������������������������������������

(0.95)(0.12)

Dividends from foreign subsidiaries �����������������������������

0.76

0.57

Expenses not deductible for tax purposes �������������������

0.54

0.56

Amortization of goodwill�����������������������������������������������

0.38

0.54

Increase in deferred tax liabilities on
undistributed earnings of foreign subsidiaries�������������

0.30

0.52

Gain on sale of shares of consolidated subsidiary���������

–

0.73

Others, net�������������������������������������������������������������������

0.30(0.80)

Effective tax rate�����������������������������������������������������������

36.61%

36.42%

12. Net Assets
Net assets comprises four subsections, which are shareholders’ equity, valuation and translation adjustments, share subscription rights and minority interests.
The Japanese Corporate Law (“the Law”) became effective on May 1, 2006,
replacing the Japanese Commercial Code (“the Code”). The Law is generally
applicable to events and transactions occurring after April 30, 2006 and forfiscal years ending after that date.
Under Japanese laws and regulations, the entire amount paid for new
shares is required to be designated as common stock. However, a company
may, by a resolution of the board of directors, designate an amount notexceeding one-half of the price of the new shares as additional paid-in capitalwhich is included in capital surplus.
Under the Law, in cases where dividend distribution of surplus is made, thelesser of an amount equal to 10% of the dividend or the excess, if any, of 25%of common stock over the total of additional paid-in capital and legal reserve
must be set aside as additional paid-in capital or legal reserve. Legal reserve is
included in retained earnings in the accompanying consolidated balance sheets.

47

Tokyo Electron Limited

Annual Report 08

Under the Code, companies were required to set aside an amount equal toat least 10% of the aggregate amount of cash dividends and other cash appropriations as legal reserve until the total of legal reserve and additional paid-in
capital equaled 25% of common stock.
Under the Code, legal reserve and additional paid-in capital could be
used to eliminate or reduce a deficit by a resolution of the shareholders’meeting or could be capitalized by a resolution of the board of directors.
Under the Law, both of these appropriations generally require a resolution of
the shareholders’ meeting.
Additional paid-in capital and legal reserve may not be distributed as dividends. Under the Code, however, on condition that the total amount of legal
reserve and additional paid-in capital remained equal to or exceeded 25% ofcommon stock, they were available for distribution by resolution of the shareholders’ meeting. Under the Law, all additional paid-in capital and legal reserve
may be transferred to other capital surplus and retained earnings, respectively,
which are potentially available for dividends.
The maximum amount that the Company can distribute as dividends is
calculated based on the non-consolidated financial statements of the­Company in accordance with Japanese laws and regulations.
At the general shareholders’ meeting on June 23, 2006, in accordance with
the Law, the Company altered its articles to allow for the distribution of earnings to shareholders on dates, other than the mid-term and year-end by aresolution of the board of directors.
At the board of directors’ meeting held on May 13, 2008, the distribution of
cash dividends amounting to ¥9,841 million ($98,223 thousand) was resolved.
Such appropriations have not been accrued in the consolidated financial statements as of March 31, 2008 since they are recognized in the period in which
they are resolved at the board of directors’ meeting.

13. Share Subscription Rights
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”) and bonds withdetachable warrants (“Warrant plan”).
Stock option plan
The Company’s shareholders have approved annual stock option plans for
directors and selected employees since the year ended March 31, 1999. The
cumulative number of outstanding shares authorized up to the year ended
March 31, 2006 totaled 2,691,200, with the weighted-average exercise price of¥7,225. Options to purchase 66,900 shares of the Company were authorized
and granted at an exercise price of ¥1 for the year ended March 31, 2007.
Options to purchase 100,400 shares of the Company were authorized andgranted at an exercise price of ¥1 for the year ended March 31, 2008. The
options under the plans vest immediately with restriction on exercise up to 2 or
3 years after the date of grant, and have an exercise period of 8 to 20 years
from the date of grant.
Shareholders of Tokyo Electron Device Limited (“TED”), a domestic listed
subsidiary, have approved annual stock option plans for directors andselected employees since the year ended March 31, 2005. As of April 1, 2006
and March 31, 2008, there were outstanding granted stock options for 650
shares with a weighted-average exercise price of ¥308,698 ($3,081.13).

48

Warrant plan
In June 2000 and 2001, the Company issued unsecured bonds withdetachable warrants. Upon issuance of the unsecured bonds with detachable
warrants, the Company purchased all of the detachable warrants and distributed them to directors and selected employees. As noted above, the stock
option plan granted stock options at an exercise price of ¥1 and to be inaccordance with the Warrant plan, the exercise prices of warrants issued in2001 were adjusted to ¥9,601 in 2007. The number of outstanding granted
options increased by 139 shares in 2007, as a result of this adjustment to theexercise price of the warrant.
The warrants vest immediately with restriction on exercise up to 2 years after
the date of grant, and have an exercise period of 6 years from the date of
grant. For financial reporting purposes, these transactions were accounted foras an issuance of debt to third parties and separately as the issuance of warrants to directors and selected employees.
By exercising the warrant, directors and selected employees can purchase thecommon stock of the Company, the numbers of which were 319,829 shares and572,439 shares at an exercise price of ¥14,070 and ¥9,608 for warrants issued inJune 2000 and 2001, which were forfeited and recognized a gain of ¥526 million in2007 and ¥467 million ($4,661 thousand) in 2008, respectively.
As of April 1, 2006, there were outstanding granted stock options, including
warrants, to purchase 3,367,898 shares of the Company, with a weightedaverage exercise price of ¥8,015. For the year ended March 31, 2007, options
to purchase 322,560 shares were forfeited and options to purchase 530,900
shares were exercised. For the year ended March 31, 2008, options to purchase 486,277 shares were forfeited and options to purchase 139,100 shareswere exercised. As of March 31, 2008, there were outstanding granted stock
options to purchase 2,056,500 shares with a weighted-average exercise priceof ¥6,889 ($68.76).

14. Leases
Pro forma information of leased property including acquisition cost, accumulated depreciation, obligation under finance leases, and depreciation expenseof finance leases that do not transfer ownership of leased property to thelessee on an “as if capitalized” basis for the years ended March 31, 2008 and2007 are as follows:
Leased assets not recorded in the consolidated balance sheets:
Thousands of
U.S. dollars

Millions of yen

Acquisition cost ����������������������������������

2008

2007

2008

¥1,089¥1,538$10,869

Accumulated depreciation ������������������

303

1,104

3,024

Net leased property ����������������������������

¥  786¥  434$ 7,845

Future minimum lease payments:
Thousands of
U.S. dollars

Millions of yen

2008

2007

2008

Due within one year ����������������������������

¥189

¥121

Due over one year ������������������������������

597

313

$1,886
5,959

Total����������������������������������������������������

¥786

¥434

$7,845

Annual Report 08 Tokyo Electron Limited

Lease payments relating to finance leases accounted for as operating leases
amounted to ¥156 million ($1,557 thousand) and ¥274 million, which approximated the corresponding depreciation on the respective leased property
computed by the straight-line method over the lease terms for the years ended
March 31, 2008 and 2007, respectively.
Future minimum lease payments on non-cancelable operating leases:
Thousands of
U.S. dollars

Millions of yen

Due within one year ����������������������������

2008

2007

2008

¥  661¥  733$ 6,597

Due over one year ������������������������������

628

920

6,268

Total����������������������������������������������������

¥1,289¥1,653$12,865

15. Derivative Financial Instruments
The Company and a domestic subsidiary enter into forward foreignexchange contracts in order to hedge risks of adverse fluctuations in foreign
currency exchange rates associated with export-import transactions, but do
not enter into such transactions for speculative purposes. The Company andthe domestic subsidiary are exposed to credit risk in the event of nonperformance by the counterparties to the derivative transactions, but any such risk is
considered to be immaterial because the Company and the domestic subsidiary only enter into transactions with financial institutions with high credit ratings. Execution and management of all derivative transactions are conductedpursuant to the internal management rule for derivatives by the finance divisionand the effectiveness of derivative transactions is reported on a semiannual
basis to the board of directors.
The estimated fair values of the derivative financial instruments as of March
31, 2008 and 2007 are as follows:
Millions of yen

Contract
amountFair value

Unrealized
gains (losses)

Sell U.S. dollars ����������������������������������

¥7,239¥6,847¥392

Buy U.S. dollars����������������������������������

409

386

(23)

2008:

Millions of yen

2007:

Contract
amountFair value

Unrealized
gains (losses)

Sell U.S. dollars ����������������������������������

¥41,648¥44,142¥(2,494)

Buy U.S. dollars����������������������������������

1,770

1,870

100

Thousands of U.S. dollars

2008:

Contract
amountFair value

Unrealized
gains (losses)

Sell U.S. dollars ����������������������������������

$72,253$68,340$3,913

Buy U.S. dollars����������������������������������

4,083

3,853

(230)

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

16. Other Income (Expenses)
The Company recognized goodwill generated from the acquisition of Timbre
Technologies, Inc. (“TTI”) during the year ended March 31, 2001 and thisgoodwill was being amortized over 10 years. During the year ended March
31, 2008, the Company recognized loss on impairment of goodwill in theamount of ¥4,072 million ($40,643 thousand) based on the revision to the
future plan for TTI’s business.
Gain on sale of property, plant and equipment of ¥2,365 million($23,605 thousand) for the year ended March 31, 2008 mainly consists ofgains on sale of land and buildings of overseas subsidiaries.
Equity in loss of affiliated company of ¥1,442 million, which is included inother income (expenses) for the year ended March 31, 2007, mainly consists of
the liquidation of a 42.9% owned affiliated company (e-BEAM Corporation).
19,247 shares of Tokyo Electron Device Limited, a domestic listed subsidiary, were sold for ¥4,169 million in March 2007, and a gain of ¥528 million wasrecognized for the year ended March 31, 2007. As a result, the Company’sownership interest in Tokyo Electron Device Limited decreased to 55.4%.

17. Cash Flows Information
As discussed in note 4, Tokyo Electron U.S. Holdings, Inc., acquired all theshares of Epion Corporation (renamed TEL Epion, Inc.) in December 2006. The
summary of the assets and liabilities of TEL Epion, Inc. on the date of acquisition was as follows:
Millions of
yen

2007

Current assets ���������������������������������������������������������������������������������������

¥   548

Intangible and other non-current assets�������������������������������������������������

6,159

Current liabilities�������������������������������������������������������������������������������������

(168)

Non-current liabilities �����������������������������������������������������������������������������

(2,013)Acquisition cost �������������������������������������������������������������������������������������

4,526

Cash and cash equivalents of TEL Epion, Inc. ���������������������������������������

(2)

Net payment for acquisition �������������������������������������������������������������������

¥4,52449

Tokyo Electron Limited

Annual Report 08

18. Segment Information
Business segment information as of and for the years ended March 31, 2008 and 2007 is as follows:
Millions of yen
Industrial
electronicequipment

Electronic
components
and computer
networks

Eliminations
andcorporate

Total

Consolidated

2008:

1. Net sales and operating income
Net sales(1) Sales to external customers�������������������������������������������������������������������������������������

¥794,911¥111,181¥906,092¥     –

(2) Intersegment sales or transfers �������������������������������������������������������������������������������

1,117

948

2,065

(2,065)¥906,092–

Total�����������������������������������������������������������������������������������������������������������������������������

796,028

112,129

908,157(2,065)906,092

Operating expenses�����������������������������������������������������������������������������������������������������

631,220

108,470739,690(2,096)

737,594

Operating income���������������������������������������������������������������������������������������������������������

¥164,808¥   3,659¥168,467¥    31¥168,498

Assets �������������������������������������������������������������������������������������������������������������������������

¥744,280¥ 51,459¥795,739¥(2,921)¥792,818

Depreciation and amortization expenses�����������������������������������������������������������������������

22,649365

23,014–23,014

Loss on impairment of goodwill �����������������������������������������������������������������������������������

4,072

–

4,072

–

4,072

Loss on impairment of property, plant and equipment �������������������������������������������������

808

–

808

–

808

Capital expenditures, including intangible and other assets�������������������������������������������

26,924924

27,848–27,848

2. Assets, depreciation and amortization expenses, impairment losses andcapital expenditures

Millions of yen

2007:

Industrial
electronicequipment

Electronic
components
and computer
networks

Total

Eliminations
andcorporate

Consolidated

1. Net sales and operating income
Net sales(1) Sales to external customers�������������������������������������������������������������������������������������

¥744,512¥107,463¥851,975¥     –

(2) Intersegment sales or transfers �������������������������������������������������������������������������������

2,382

1,247

3,629

(3,629)¥851,975–

Total�����������������������������������������������������������������������������������������������������������������������������

746,894

108,710855,604(3,629)851,975

Operating expenses�����������������������������������������������������������������������������������������������������

606,540

104,740

711,280(3,284)

707,996

Operating income���������������������������������������������������������������������������������������������������������

¥140,354¥   3,970¥144,324¥  (345)¥143,979

Assets �������������������������������������������������������������������������������������������������������������������������

¥728,236¥ 46,730¥774,966¥(4,452)¥770,514

Depreciation and amortization expenses�����������������������������������������������������������������������

20,061360

20,421–

20,421

Capital expenditures, including intangible and other assets�������������������������������������������

34,795274

35,069–35,069

2. Assets, depreciation and amortization expenses and capital expenditures

50

Annual Report 08 Tokyo Electron Limited

Thousands of U.S. dollars

2008:

Industrial
electronicequipment

Electronic
components
and computer
networks

Total

Eliminations
andcorporate

Consolidated

1. Net sales and operating income
Net sales(1) Sales to external customers�������������������������������������������������������������������������������������

$7,934,035$1,109,702$9,043,737$      –

(2) Intersegment sales or transfers �������������������������������������������������������������������������������

11,1499,462

20,611(20,611)$9,043,737–

Total�����������������������������������������������������������������������������������������������������������������������������

7,945,184

1,119,164

9,064,348(20,611)

9,043,737

Operating expenses�����������������������������������������������������������������������������������������������������

6,300,230

1,082,643

7,382,873(20,921)

7,361,952

Operating income���������������������������������������������������������������������������������������������������������

$1,644,954$   36,521$1,681,475$    310$1,681,785

Assets �������������������������������������������������������������������������������������������������������������������������

$7,428,686$513,614$7,942,300$(29,155)$7,913,145

Depreciation and amortization expenses�����������������������������������������������������������������������

226,060

3,643

229,703–229,703

Loss on impairment of goodwill �����������������������������������������������������������������������������������

40,643–40,643–40,643

Loss on impairment of property, plant and equipment �������������������������������������������������

8,065

–

8,065

–

8,065

Capital expenditures, including intangible and other assets�������������������������������������������

268,7289,222

277,950–

277,950

2. Assets, depreciation and amortization expenses, impairment losses andcapital expenditures

Notes:1. Method of classifying business segments: Business segments are classified after considering similarities in types of products and services, as well as sales methods.
2. Major products in each business segment:
Business segment
Industrial electronic equipment
Electronic components and computer networks

Major products
Semiconductor production equipment, FPD production equipment and others
Semiconductor products, computer networks, middleware/software, and other electronic components

3. Depreciation expenses and capital expenditures include those for long-term prepaid expenses.
4. Changes in accounting policies(1) Accounting policy for depreciation method
Effective from the year ended March 31, 2008, the Company and its domestic consolidated subsidiaries changed their depreciation method for tangible fixed assets acquired on or after
April 1, 2007 in accordance with the revision of Japanese Corporate Tax Law (Partial Revision of Income Tax Law, Law No. 6 of March 30, 2007; Partial Revision of Income Tax Law Enforcement
Ordinance, Cabinet Order No. 83 of March 30, 2007). The effect of change increased operating expenses and decreased operating income for the industrial electronic equipment segment andthe electronic components and computer networks segment by ¥1,412 million ($14,093 thousand) and ¥17 million ($170 thousand), respectively, for the year ended March 31, 2008, compared
wth the corresponding amounts that would have been recorded under the previous accounting method.
(2) Accounting standard for stock options
Effective from the year ended March 31, 2007, “Accounting Standard for Stock Option” issued by the Accounting Standards Board of Japan was adopted. The adoption of the new standards
increased operating expenses and decreased operating income for the industrial electronic equipment by ¥118 million for the year ended March 31, 2007, compared with the corresponding
amounts that would have been recorded if the previous method had been applied. The change did not affect the figures of the electronic components and computer networks segment.
(3) Accounting standard for director’s bonus
Effective from the year ended March 31, 2007, “Accounting Standard for director’s bonus” issued by the Accounting Standards Board of Japan was adopted. The effect of change increased
operating expenses and decreased operating income for the industrial electronic equipment segment and the electronic components and computer networks segment by ¥626 million and ¥26
million, respectively, for the year ended March 31, 2007, compared with the corresponding amounts that would have been recorded if the previous method had been applied.

Geographical segment information as of and for the years ended March 31, 2008 and 2007 are as follows:
Millions of yen
2008:

Japan

Other regions

Total

Eliminations
andcorporate

Consolidated

1. Net sales and operating income
Net sales(1) Sales to external customers�������������������������������������������������������������������������������������

¥806,193¥ 99,899¥  906,092¥       –

(2) Intersegment sales or transfers �������������������������������������������������������������������������������

71,96054,186

126,146(126,146)¥906,092–

Total�����������������������������������������������������������������������������������������������������������������������������

878,153

154,085

1,032,238(126,146)

906,092

Operating expenses�����������������������������������������������������������������������������������������������������

718,193

142,760

860,953(123,359)

737,594

Operating income���������������������������������������������������������������������������������������������������������

¥159,960¥ 11,325¥  171,285¥   (2,787)¥168,498

2. Assets ���������������������������������������������������������������������������������������������������������������������

¥752,739¥ 80,363¥  833,102¥ (40,284)¥792,818

Millions of yen
2007:

Japan

Other regions

Total

Eliminations
andcorporate

Consolidated

1. Net sales and operating income
Net sales(1) Sales to external customers�������������������������������������������������������������������������������������

¥749,282¥102,693¥851,975¥       –

(2) Intersegment sales or transfers �������������������������������������������������������������������������������

69,93648,526

118,462(118,462)¥851,975–

Total�����������������������������������������������������������������������������������������������������������������������������

819,218

151,219

970,437(118,462)

851,975

Operating expenses�����������������������������������������������������������������������������������������������������

683,389

140,782

824,171(116,175)

707,996

Operating income���������������������������������������������������������������������������������������������������������

¥135,829¥ 10,437¥146,266¥   (2,287)¥143,979

2. Assets ���������������������������������������������������������������������������������������������������������������������

¥740,970¥ 95,183¥836,153¥ (65,639)¥770,514

51

Tokyo Electron Limited

Annual Report 08

Thousands of U.S. dollars
2008:

Japan

Other regions

Total

Eliminations
andcorporate

Consolidated$9,043,737

1. Net sales and operating income
Net sales(1) Sales to external customers�������������������������������������������������������������������������������������

$8,046,641$  997,096$ 9,043,737$         –(2) Intersegment sales or transfers �������������������������������������������������������������������������������

718,236

540,832

1,259,068(1,259,068)–

Total�����������������������������������������������������������������������������������������������������������������������������

8,764,877

1,537,928

10,302,805(1,259,068)

9,043,737

Operating expenses�����������������������������������������������������������������������������������������������������

7,168,310

1,424,893

8,593,203(1,231,251)

7,361,952

Operating income���������������������������������������������������������������������������������������������������������

$1,596,567$  113,035$ 1,709,602$   (27,817)$1,681,785

2. Assets ���������������������������������������������������������������������������������������������������������������������

$7,513,115$  802,106$ 8,315,221$  (402,076)$7,913,145

Notes: 1. For the reporting of geographical segment information, net sales and operating income are separated based on the location of the Company and its subsidiaries. Assets are separated by geographic location.
2. Other regions comprises primarily the United States of America, Europe and Korea.
3. Changes in accounting policies(1) Accounting policy for depreciation method
Effective from the year ended March 31, 2008, the Company and its domestic consolidated subsidiaries changed their depreciation method for tangible fixed assets acquired on or after April
1, 2007 in accordance with the revision of Japanese Corporate Tax Law (Partial Revision of Income Tax Law, Law No. 6 of March 30, 2007; Partial Revision of Income Tax Law Enforcement
Ordinance, Cabinet Order No. 83 of March 30, 2007). The effect of change increased operating expenses and decreased operating income for the Japan segment by ¥1,429 million ($14,263
thousand), for the year ended March 31, 2008, compared with the corresponding amounts that would have been recorded under the previous accounting method.
(2) Accounting standard for stock options
Effective from the year ended March 31, 2007, “Accounting Standard for Stock Option” issued by the Accounting Standards Board of Japan was adopted. The adoption of the new standards
increased operating expenses and decreased operating income for the Japan segment by ¥118 million for the year ended March 31, 2007, compared with the corresponding amounts that would
have been recorded if the previous method had been applied.
(3) Accounting standard for director’s bonus
Effective from the year ended March 31, 2007, “Accounting Standard for director’s bonus” issued by the Accounting Standards Board of Japan was adopted. The effect of change increased
operating expenses and decreased operating income for the Japan segment by ¥652 million for the year ended March 31, 2007, compared with the corresponding amounts that would havebeen recorded if the previous method had been applied.

Domestic and overseas net sales by destination for the years ended March
31, 2008 and 2007 are as follows:
Millions of yen

Thousands of
U.S. dollars

2008

2007

2008

Japan��������������������������������������������������

¥323,946¥313,816$3,233,317

Taiwan ������������������������������������������������

272,221

182,918

2,717,048

United States of America ��������������������

108,760

105,717

1,085,537

Korea��������������������������������������������������

90,940122,628

907,675

Others ������������������������������������������������

110,225

126,896

1,100,160

Total����������������������������������������������������

¥906,092¥851,975$9,043,737

Net sales

Notes: 1. For the reporting of domestic and overseas sales, overseas sales (other than Japan)
include export sales of the Company and its domestic subsidiaries and sales of foreignsubsidiaries, except for export sales to Japan.
2. Others comprises primarily China, Singapore and Germany.

52

19. Subsequent Event
Grant of stock options under the stock option plans
On May 13, 2008, the Company’s board of directors decided to submit a
resolution to the general shareholders’ meeting for approval of the issuance ofstock subscription rights to directors and selected employees of Tokyo­Electron. The issuance of stock subscription rights is intended to enable thegrant of stock options. Under this stock option plan, options to purchase theshares of the Company at an exercise price of ¥1 ($0.01), up to 67,000 shares
will be granted to directors of the Company (excluding outside directors) andoptions to purchase the shares of the Company at an exercise price of ¥1($0.01), up to 150,000 shares will be granted to executive officers of the­Company, directors and executive officers of domestic subsidiaries, the chairman, presidents, vice presidents, executives (including corporate officers) andsenior executives of its overseas subsidiaries as of March 31, 2008. This grantof stock options was approved at the general meeting of the shareholders of
the Company on June 20, 2008.