Message from the President

Accelerating the Business Process

Kiyoshi SatoPresident & CEO

In the fiscal year ended March 31, 2003, there were encouraging signs of a recovery in the semiconductor industry driven
primarily by digital consumer products, such as DVD players
and digital cameras. Nevertheless, there continued to be little
growth in the markets for personal computers (PCs) andmobile phones, which are major users of semiconductors. In
response, semiconductor manufacturers remained cautious,
continuing their adjustments in capital investments that they
began in 2001.
In dealing with these conditions, TEL strengthened its sales
and support activities in Asia, including Japan, and worked to
expand sales of new products. As a result of these efforts, consolidated net sales climbed 10.2%, to ¥460.6 billion. At thesame time, TEL continued its efforts to cut fixed costs, such aspersonnel, outsourcing, and business activity expenses.
Moreover, working together, the entire organization strove toboost overall operational efficiency, including implementing
measures to relocate manufacturing and R&D bases.
Reflecting these efforts, operating income improved substantially from the ¥18.3 billion loss of the previous fiscal year, to a
positive ¥1.1 billion. Unfortunately, due to the booking ofexpenses for structural reforms, an explanation of which follows, and the reversal of deferred tax assets, TEL posted a lossof ¥41.6 billion for the fiscal year under review. Despite thisperformance, the Company has announced cash dividends of¥8.0 per share.

Pushing Through Structural Reforms
TEL views the next one or two years as a period of preparationfor our next major growth stage. Based on the following threepoints, we are pushing ahead with structural reforms.
• We will readjust our asset and cost bases to suit the current

business climate.
• Further growth of our business will require an expanded
product lineup, for which we will have to focus more clearlyon R&D activities, while also improving the efficiency of ourprograms.
• To reinforce our competitive advantage in the market, wewill build a structure that accelerates our business processes
by enabling quick responses to the increasingly rapidchanges in the business environment. We believe that speed
will be the most important success factor in our semiconductor production equipment business.

Asset and Cost Reductions
One of the starting points for structural reforms is the reduction of assets and costs. In our development of global operations, which preceded the worldwide structural changes in thesemiconductor industry, TEL successfully expanded its customer base while also increasing our share of individual customers’ business. This achievement was reflected in sales
growth. Examining these results, we can see that the contribution to semiconductor production equipment sales by ouroverseas segment, which was approximately 30% in the early
1990s, has risen to 70% today, reversing position with sales inJapan.
During the 1990s, capital investment in semiconductor production equipment grew at a high average rate of about 20%.
In 2000, the year-over-year base growth rate ballooned to 70%
more than the previous fiscal year under the influence of the IT
bubble market. To cope with this growth, we proceeded to
upgrade and expand our domestic manufacturing and overseas service bases. The following sharp 40% contraction in thatmarket has had a significant impact on our current businessTokyo Electron 3

structure. In the fiscal year ended March 2002, we cut fixed
costs, such as labor cost of contract workers and employees by
about ¥30.0 billion, followed by another about ¥10.0 billion in
the fiscal year under review. However, it has not been enoughto produce sufficient profit levels. Looking out into the future,
the markets for volume applications of semiconductors, suchas PCs and mobile phones, remained sluggish, and it will taketime for digital consumer products to reach the same level ofdemand for chips. Consequently, it is difficult to see how themarket could recover to an annual growth rate of around 20%
in the short term. There are also several factors that point tolower growth rates. The number of semiconductor manufacturers is declining because of the ongoing consolidations andbusiness alliances in the industry. In addition, with the introduction of 300mm wafer production lines and increased
throughput has meant that the same volume of semiconductor
manufacturing can be done with fewer machines.
In consideration of these conditions, we are pressing forwardwith reductions in personnel and inventories and the elimination of overlapping investment to convert to a more efficientbusiness structure. Our overall goal is to establish a structure
under which we can earn sufficient profits even given the current size of the market. At the end of the fiscal year underreview, we booked restructuring-related expenses of ¥20.6 billion. During the current fiscal year, we plan to reduce personnel by approximately one thousand people worldwide. In
addition, we will also reorganize our R&D functions and ourproduction and field service bases.
In addition to these measures, we will undertake a fundamental revision of our R&D, production, sales, and service operations, working to cut costs at all levels. For specific measures,
please see the reports by our Executive Officers (pages 10to 15).

Targeting Optimum Global Operations
The previously mentioned asset and cost reductions do not
imply that we are going to downsize our business.
Furthermore, it does not mean that we are going to cease ourglobalization efforts. We will continue to pursue further globalization to achieve the optimum allocation of resources. As oneexample, we are reorganizing our overseas R&D bases, withthe Albany NanoTech Project as their core, to acquire leading-4

Annual Report 2003 — Innovations Aheadedge technologies and strengthen our ability to bring products to market.
As part of our sales efforts, we established Tokyo Electron
Shanghai in the city of the same name to boost our businessdevelopment efforts in the People’s Republic of China.
Operations began in April 2002 with a staff of approximately
70 people. Due to rapid growth in its customer base, our support service structure expanded to approximately 150 people
during the fiscal year. In the short-term, there is concern aboutsome issues such as the influence of severe acute respiratory
syndrome (SARS); but in the medium- to long-term, we anticipate growth in capital investment for semiconductor production equipment in China. To keep pace with this growth, weplan to expand our facilities and workforce as required to supply our customers with parts for semiconductor and flat panel
display (FPD) production equipment, technical services, andtraining.

Expanding our Product Lineup
For further growth, we need to expand our product lineup, notonly for the transistor formation processing market that has
played such a prominent role in our history, but also in thewiring processing market. We see strong growth potential inthis market because the degree of multi-layered wiring isadvancing in conjunction with the increasingly high degree ofsophistication and integration in devices. Despite the steady
introduction of advanced new materials, such as low constantinterconnect dielectric film and copper wiring, 65-nanometer
design rules still pose a significant R&D challenge. In addressing this fundamental issue, we are examining the process integration possibilities, or determining how to combine different
process units to meet the required specifications. We consider
some of the essential factors in developing this market to betechnologies and infrastructure to test and verify this integration, the ability to form business alliances with companies producing equipment that we do not, and the support of thecustomers that are actually designing these devices.
In addition to our dielectric etch system and SOD coater, weare focusing our efforts on developing film formation equipment and supercritical cleaning equipment. Using our products and the advanced technology evaluation and researchfacilities of our new Process Technology Center in YamanashiPrefecture as the core, we plan to work with other equipment
and material manufacturers to develop an environment thatassists with our customers’ process integration requirements.

Further Innovations from Accelerating Business
Processes
Our highest priority is on accelerating business processes. We
are not seeking 20% or 30% improvements as in the past, weare looking to double and triple our pace.
Digital consumer products are the next drivers of growth in
the semiconductor application market, following in the stepsof PCs and mobile phones. However, because of the nature ofconsumer products, the product life cycle is becoming shorter.
In response, semiconductor and semiconductor production
equipment manufacturers must speed up all of their businessprocesses. We expect that the turnover of digital consumer
products will be two to three times faster than that of computer products. Because our operations will have to match that
pace, we are considering a variety of measures to improve
operational speed in each of our functions.

tive office, and the overseas product sales division in Japan. I
have been the senior manager in charge of all products sold in
the U.S. market and a business unit manager for our own
products. My major short-term goal is to utilize my accumulated experience gained from working in and managing different
sections of the value chain to establish a high profit structure
through structural reforms and a quick response management
organization. After building the business foundation for our
next growth stage, I intend to turn my attention to promoting
TEL’s further development as a market leader based on newproduct launches and new business model development.
Through these efforts, I will strive to expand shareholder value
and satisfy the expectations of all stakeholders.
The torch has been passed to a new generation at TEL. At thisjuncture, I would ask that our shareholders support us asstrongly as they have in the past.

June 2003

Effective April this year, we have replaced our former corporate senior staff (CSS) system with an executive officer system.
Through its introduction, we have separated the roles of theboard of directors and operating bodies more clearly thanbefore. In addition to strengthening corporate governance,
one of our goals in setting up this system is to speed up thedecision-making process to enable faster determination andimplementation of strategies. Executive officers are responsible for each of our business functions—R&D, manufacturing,sales, service, and administration—and have been assigned abroad scope of authority for daily business decisions. By delegating responsibility for daily operations to executive officers, I
will be focusing my energies on the administration and management of the overall TEL Group. I expect that accelerating
our business processes will generate new business innovations
for the Group.

The Next Growth Stage
During my more than twenty years career, I have served in avariety of divisions and positions. I have worked in administration, the support services section of an overseas representa-

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