ANNUAL REPORT 2007
For the Year Ended March 31, 2007

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

Inspiration and innovation. Together, they are an immutable force.
The moment we see greatness, we are inspired. Compelled by our very nature to press
onward and upward.
At TEL, we respect that force. We embrace it. We foster an atmosphere of creativity,
pride and encouragement. When inspiration sparks, innovation is not far behind.

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDPROFILETokyo Electron Limited (TEL) is a world-leading supplier of semiconductor production equipment (SPE) and flat panel
display (FPD) production equipment. We provide a broad lineup of products that offer superior process performance andhigh productivity and related services to semiconductor and LCD panel manufacturers around the world.
An unwavering commitment to customer satisfaction that dates back to our founding in 1963 has cemented our position
as the market leader. Our competitive strength lies in our capability to proactively and precisely identify real customer needs
and respond to them with cutting-edge technology and products.
With a global network that spans Japan, the U.S., Europe and Asia, we are opening up new frontiers for digital networks
by contributing to enhancing our customers’ production lines through untiring dedication to technology innovation.

CONTENTS
2

Consolidated Financial Highlights

24
26
29

Research and Development
Corporate Governance
Board of Directors, Statutory Auditor
and Executive Officers

468

To Our Stakeholders
Tetsuro Higashi, Chairman & CEO
Kiyoshi Sato, President & COO
Management Interview

30

Environmental, Health andFeature32

Safety Activities
Intellectual Property Report

18

CLEAN TRACK™ LITHIUS Pro™

20

Tokyo Electron at a Glance

22

Review of Operations

33
59
60

Financial Section
Subsidiaries and Affiliates
Investor Information

Disclaimer Regarding Forward-looking Statements
Matters discussed in this annual report, including forecasts of future business performance of Tokyo Electron, management strategies, beliefs and otherstatements are based on Tokyo Electron’s assumptions in light of information that is currently available. These forward-looking statements involve known
or unknown risks, uncertainties and other factors that could cause actual results to differ materially from those referred to in the forward-looking statements.
Factors that have a direct or indirect impact on Tokyo Electron’s future performance include, but are not limited to:• Economic circumstances in Japan and overseas, consumption trends, and large fluctuations in foreign exchange rates• Changes in semiconductor and FPD markets• Changes in the demand for products and services manufactured or offered by Tokyo Electron’s customers, such as semiconductor manufacturers, FPD
manufacturers and electronics makers• Tokyo Electron’s capabilities to continue to develop and provide products and services that respond to rapid technology innovation and changing customer needs in a timely manner
For details, please refer to Business-related and Other Risks on page 42.

1

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

CONSOLIDATED FINANCIAL HIGHLIGHTS

Thousands of
U.S. dollars

Millions of yen

2003

2004

2005

2006

2007

2007

¥460,580
1,119(41,554)(14.8)¥529,654
22,2808,297
3.1¥635,710
63,98361,601
20.3¥673,686
75,70348,00613.5¥851,975
143,979
91,26321.8$7,217,072
1,219,643
773,087¥524,901¥561,632¥644,320¥663,243¥770,514$6,527,013

252,904

275,800

332,165

376,900

469,811

3,979,762

Years ended March 31

For the Year:Net sales ...........................................
Operating income ..............................
Net income (loss) ...............................
ROE ..................................................
At Year-end:
Total assets .......................................
Total net assets(Total shareholders’ equity) ..............

Yen

Per Share:
Net income (loss)—Basic ...................
Cash dividends ..................................

¥ (238.57)
8.00

¥

46.37
10.00

U.S. dollars¥ 343.63
45.00¥ 267.61
55.00¥ 511.27
103.00

$

4.33
0.87

Notes: 1. U.S. dollar amounts are translated from yen, solely for convenience, at the prevailing exchange rate on 31st March, 2007, of ¥118.05=U.S.$1.
2. Effective from fiscal 2005, Tokyo Electron changed its method of revenue recognition upon receiving customer confirmation of product set-up and testing of products
for Semiconductor and FPD production equipment. The effect of this change decreased net sales, operating income and income before income taxes by ¥80,956
million, ¥20,541 million and ¥20,563 million, respectively, for fiscal 2005, compared with the corresponding amounts which would have been recorded if the previous
method had been applied.
3. Effective from fiscal 2005, Tokyo Electron changed its method to account for after-sale repair expenses by recording accrued warranty expenses for Semiconductor
and FPD production equipment. The effect of this change decreased operating income and income before income taxes by ¥635 million and ¥13,106 million, respectively, for the year ended March 31, 2005, compared with the corresponding amounts which would have been recorded if the previous method had been applied.

ROE(Millions of Yen)

(Millions of Yen)

(Yen)

(%)

1,000,000

150,000

600

30

120,000

06

07

1,119

0
05

03

04

13.5

10
3.1

0

–238.57

–10
–14.8

–300
05

06

07

–20
03

04

05

06

07

03

04

05

Note: Effective from fiscal 2005, the Company made certain changes in accounting polices as discussed in the above notes to consolidated financial highlights.

2

21.8

20.3

20

0
–150

22,280

0

46.37

150

75,70363,98360,00030,00004

343.63300
90,000200,00003

450

267.61

673,686

529,654400,000

460,580

600,000

635,710800,000

511.27Net Income (Loss) per Share—Basic143,979

Operating Income

851,975

Net Sales

06

07

ANNUAL REPORT 07

TOKYO ELECTRON LIMITED

Record-High Sales and Earnings
FY2007 results

Net sales

Operating income

Net income

Cash dividends per share

Operating marginDebt-to-equity ratio

ROE

852.0
144.0
91.3
103
16.9
8.7
21.8

Year-on-year changebillion yen

Up

26.5

%

billion yen

Up

90.2

%

billion yen

Up

90.1

%

yen

Up

48

yen

%

Up

5.7

points

%

Down

8.6

points%Up

8.3

points3

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

TO OUR STAKEHOLDERS

Creating High Corporate Value by building a company that is full of
Vision and Energy

Tetsuro Higashi, Chairman & CEO

4

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDIn fiscal 2007, the year ended March 31, 2007, Tokyo Electron

conductors and FPDs—Tokyo Electron’s core customers—are

far surpassed initial targets, with net sales of ¥852.0 billion,

shifting their focus to developing basic architecture and soft-

operating income of ¥144.0 billion and net income of ¥91.3

ware for a new generation of products. In turn, they have comebillion. All of these figures were new record highs for the Com-to rely on equipment manufacturers, such as Tokyo Electron, topany. In accordance with our efforts to return profits to share-develop and enhance the process and manufacturing technolo-

holders, we also paid the largest dividends in our history,

gies that have a significant bearing on the performance of theirincreasing the dividend by ¥48 from last year to ¥103 persemiconductors and FPDs in terms of achieving faster speed,

share. We wish to thank you for your continued support.

lower power consumption, and reduced environmental impact.

Over the past year, we made significant strides in improving

At Tokyo Electron, we are dedicated to becoming the trusted

the quality of the Company. We improved our development

equipment manufacturer of choice for our customers, providing

capabilities, manufacturing skills, and management efficiency,

technology to help create a society of the future that reflects theand as a result, increased operating income by 90.2% compareddreams and aspirations of its inhabitants today. Our people willwith fiscal 2006.

make the difference, and by supporting their development we

We are entering an era in which people around the world

aim to build a company full of vision and energy. Furthermore,can communicate freely with others beyond time and borders—we will continuously return profits, an indicator of our contri-a Wireless Digital Network era. The semiconductor industry andbution to society, to all our stakeholders—shareholders,the flat panel display (FPD) industry are drivers of this change,customers, employees and society in general.

and the technologies that support them are steadily becoming

I would like to thank stakeholders for your continuing sup-more important, offering companies in this sector strong oppor-

port in helping Tokyo Electron to grow, expand, and fulfill ourtunities for growth. In this context, the manufacturers of semi-ambitious goals.

Tetsuro Higashi, Chairman & CEO

5

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

TO OUR STAKEHOLDERS

Contributing to our customers and society through the Unwavering
Pursuit of Technological Innovation

Kiyoshi Sato, President & COO

6

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDTokyo Electron is making successful progress in the effort toequipment and new businesses that can support further

enhance earnings power. In fiscal 2007, we recorded thegrowth. Our goal isn’t only to pursue expansion in terms of thestrongest earnings performance in Company history. Thissheer size of the Company. We also aim to drive growth inperformance was partly supported by a favorable businessprofits by providing high-performance, high-quality products

environment. However, it was the concerted efforts of ourbased on state-of-the-art technology.

global employees, under the medium-term business plan that

2. Addressing Environmental Issues

began 2 years ago, that enabled Tokyo Electron to exceed its

Today, global warming is one of the most important challenges

objective of boosting the operating margin to 17% during thethat we all face. One of the solutions is to find the right balance

latter half of fiscal 2007 (14.9% in the first half, 18.6% in the

between conserving energy and maintaining economic growth.

second half). Our success in enhancing our product planning,

At Tokyo Electron, we believe that technology holds the answer.

development capabilities and total quality management are

Through diligent efforts to reduce the environmental impact of

now being reflected in concrete earnings figures. Furthermore,

all Tokyo Electron products, we are introducing new technologi-

the reduction of interest-bearing debt has given the Company

cal solutions that will help customers cut their energy consump-a more flexible financial position, and prepared a solid founda-tion. Looking around the world, we can see materials andtion for future growth.

components that are truly revolutionary in their ability to reduce

The future objectives of the Tokyo Electron Group are
as follows:
1. Continued Growthenergy consumption, but have failed to be commercialized due
to technological hurdles and limitations that make mass production difficult. Tokyo Electron is working to develop new types ofTokyo Electron ranks as the world’s second-largest manufac-

production equipment that will allow customers to manufacture

turer of semiconductor production equipment (SPE) in terms ofthese products effectively, inexpensively, and in large quantities.

sales, but the Company’s market share is only 10%. There isThis dedication to addressing environmental issues is not only astill plenty of room for improvement and expansion. Throughreflection of a company’s responsibility to society; it is also a

R&D efforts, the Company will challenge itself to develop new

mission for any company, and for society itself.
As we make steady progress on the strategic plans that
underlie Tokyo Electron’s medium and long-term growth scenario, I wish to thank all of the Company’s stakeholders for yourgenerous and continuing support.

Kiyoshi Sato, President & COO

7

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

MANAGEMENT INTERVIEW

Question & Answer
In this section, Chairman Higashi and President Sato are asked about market trends and Tokyo
Electron’s strategies and actions.

Question 1

In fiscal 2007, Tokyo Electron posted record results. How do you evaluate
this performance?

AnswerThis reflects the benefits of our ongoing efforts to elevate profitability by theentire Tokyo Electron Group.
The figures at each level—net sales of ¥852.0 billion, operating income of ¥144.0 billion and net incomeof ¥91.3 billion—are record highs for the Company. Although we did benefit from favorable conditions in
the business environment, we view these results as a reflection of the overall strength of the Tokyo
Electron Group, and the success of our unified efforts to enhance profitability.
Two years ago, at a time when the Company’s operating margin had only just recovered to 10%,
we embarked on a medium-term business plan which set the goal of elevating operating profitability to
17% over the medium term. This would surpass the Company’s previous record high of 16.7%.
Raising the operating margin from around 10% to 17% seemed extremely ambitious, but considering
the Company’s underlying potential, we had confidence that it was an attainable goal. Sharing one goal,
the entire group made all the necessary efforts in sales, marketing, services, development and production to execute strategy. As a result, the Company posted an
operating margin for fiscal 2007 of 16.9%, and in the second
half we recorded a margin of 18.6%. On a six-month basis, at

Net Sales and Operating Margin(Billions of Yen)

(%)

18

1,200

15

600

record high of ¥103 per share.

400

635.7

success with shareholders, by raising the annual dividend to a

10.1

11.2

673.7

800

852.0

1,000

529.7

Naturally, we were glad to have the opportunity to share this

16.9

460.6

least, we have already surpassed our goal.

3

0.2

0
03

0
04

05

06

07

■ Net sales
Operating margin
Note: Effective from fiscal 2005, the Company
made certain changes in accounting
polices as discussed in the notes toconsolidated financial highlights.

8

9
6

4.2

200

12

ANNUAL REPORT 07

TOKYO ELECTRON LIMITED

Question 2

Specifically, what steps has Tokyo Electron taken to increase profitability?

AnswerWe implemented three specific strategies—creating new, high-value-added
products, improving manufacturing efficiency, and expanding post-sales
businesses. We have made steady progress in all three areas.
The Company’s medium-term management plan, “Innovative Challenge 20,” challenged employees andexecutives to pursue three strategies for improving profitability.
The first involved creating new, high-value-added products. As semiconductor production processes
become more sophisticated, customer needs are diversifying. What is important in this context is tointroduce models optimized for each market segment based on an understanding of customer markets.
We have brought to market some 13 new types of production equipment born from this approach overthe past 2 years. Significantly, these new models are now beginning to contribute to profitability.
The second strategy involved improving Tokyo Electron’s manufacturing efficiency in order to reduce
costs. The most essential feature of production facilities, in this business, is to raise quality. I have repeatedly stressed the importance of “quality enhancement” to our manufacturing team, as I believed thatthrough this concept, design, procurement, and manufacturing technology would certainly improve andconsequently cost reductions would follow. This has proven to be true.
The Company’s third objective was to expand post-sales businesses. Sales in Tokyo Electron’sequipment refurbishment business, in particular, have risen steadily, and as a result we have outperformed the 3-year goal of growing the post-sales businesses to ¥100.0 billion. This businessgenerates good profits, so any sales growth makes a direct contribution to increasing the Company’s
operating margin.

Post-sales Business(Billions of Yen)

60.1

60

80.0

90

91.1

112.4

120

30
0
04

05

06

07

Post-sales business: Refurbishment/Relocation,
Contract service, Parts sales

9TOKYO ELECTRON LIMITED

Question 3

ANNUAL REPORT 07

Could you tell us more about the Company’s efforts to improve manufacturing capabilities? What changes have taken place?

AnswerBy reforming product development and design and through activities for
reducing wasteful processes, we have improved quality, shortened manufacturing lead times, cut costs and enhanced customer satisfaction.
By examining some quality problems that the Company experienced in the past, we learned that carefulmanagement and control of the product development and design processes from the initial stage werean extremely important factor in the manufacturing process. From the upstream processes of productdevelopment and design, Tokyo Electron now emphasizes not only a product’s functions and performance, but also factors such as reliability, productivity and ease of maintenance. Furthermore, we havegone back to the basics, re-examining every stage of the manufacturing process to identify and quantify
any elements of waste or inefficiency, and then looking for ways to eliminate such production losses.
These comprehensive efforts, on the factory floor, to reform production processes have contributed tohigher quality, shorter manufacturing lead times, reduced costs and high customer satisfaction. Nevertheless, Tokyo Electron is never satisfied with the status quo, and our task in the future is to identify ways
to make further improvements to our operations.

Question 4

Once Tokyo Electron has surpassed the interim objectives laid out in thecurrent medium-term management plan, what will you then set your sights on?

Answer

We will implement growth strategies that will allow the Company to become
even more profitable when the next peak of the silicon cycle arrives.
Achievement of a 17% operating margin is merely a signpost on the road to further success. Tokyo
Electron wants to develop even greater earnings power and use the extra profits to strengthen products
for customers. And of course, this would also mean that we will be able to return more value to shareholders, through strong earnings and higher dividends.
To reach those goals, we must first look for ways to elevate the earnings power of existing products
even further. The new products that Tokyo Electron has introduced over the past two years are moving
into a volume production phase this year. We must not only seek to reap the returns of our investmentsin these products, but also work on launching new products in a timely manner.

10

ANNUAL REPORT 07

TOKYO ELECTRON LIMITED

Second, we must make further improvements to manufacturing efficiency to boost the costcompetitiveness of Tokyo Electron products. Reform efforts over the past two years have yielded steady
improvements. But going a step further, we are collaborating with business partners to improve theefficiency of our supply chain and logistics activities. We aim to establish ideal manufacturing sites thatcan shorten manufacturing lead times and cut costs.
A third theme is increasing profitability through new businesses. In order to further raise profitability,
within 10 years we want to establish several new high-value-added businesses which can generate salesof as much as ¥100.0 billion. The business that is currently closest to achieving that sort of success is the
production equipment that Tokyo Electron is developing using a Radial Line Slot Antenna (RLSA) plasma
source. We are now speeding up efforts to build this business. In addition, last December Tokyo
Electron acquired Epion Corporation, a U.S.-based company that is on the cutting edge of Gas Cluster
Ion Beam technology. We plan to cultivate this as one of Tokyo Electron’s core technologies for the
future. In the growing market for Micro Electro-Mechanical Systems (MEMS), meanwhile, the Company
has already launched MEMS testers and we are making rapid strides to build this business further.
In addition to the items described above, Tokyo Electron is stepping up environmental initiatives.

Record-high Net Sales and Profits
Recovery to Operating Margin of 10%

1st Medium-Term Plan
Structural Reform Phase•Reduced fixed costs•Optimized inventories

FY2002 – FY2004

Question 5•Strengthened new product development•Improved manufacturing efficiency•Expanded post-sales business

FY2005 – FY2007

Aiming for Further Growth

FY2008 –Tokyo Electron has been working on environment-related technology in thepast. What is the Company doing now to step up these efforts?

AnswerDeveloping environment-related technology is our mission and responsibility
as the industry leader.
Early this year, I had the opportunity to participate in an environmental conference, and was able tosense the growing importance that people around the world are placing on issues such as global warming. This renewed my determination to help solve environmental issues through technological innovation.
First of all, by incorporating high-performance semiconductors and displays with high environmental efficiency in electronics products and automobiles, manufacturers can help reduce total energy

11TOKYO ELECTRON LIMITEDANNUAL REPORT 07

consumption. Tokyo Electron’s production equipment allows manufacturers to produce these more
efficient devices at a low cost, and this helps to encourage the trend towards energy efficiency. In
other words, we make a contribution by providing customers with high-performance, highly productive
equipment that allows them to make cost-efficient devices, while still making good profits. Furthermore, Tokyo Electron is actively supporting the efforts of companies that are developing power semiconductors and other products that save energy, as well as manufacturers of solar panels and otherproducts that help reduce power consumption.
In addition, Tokyo Electron is improving the energy efficiency of its own semiconductor and FPD
production equipment, and developing new products that are even more environmentally friendly. Considering the Company’s large market share, our efforts have a very important impact on trends for the industry. In this sense, we bear a heavy responsibility; by taking the lead in efforts to improve environmental
efficiency, we can exercise strong influence on the environmental impact of the entire industry.

Question 6

What are your expectations for the future growth of the semiconductor
industry, and the semiconductor production equipment industry?

AnswerSemiconductors, and in particular, memory, have become a key componentof many consumer products. Therefore, the possibilities for market growth
are boundless.
At the moment, new trends are emerging in the semiconductor industry. For example, in the memory
segment, where personal computers once solely drove market growth, today high-performance mobile
devices and digital consumer products have emerged as another driver of the memory market. The PC
is also evolving into a digital consumer product. Also, mobile functions and broadband networks thatrealize “anywhere, anytime access” are creating new markets for NAND flash memory and DRAM.

Ubiquitous Networks Are Driving
Semiconductor Demand

Ubiquitous networks
Mobile devices
PCs

Workstations
Mainframe computers

1 per company
10,000 units/year1970 –
Business

1 per office
1 million units/year

1980 –

1 per person
100 million units/year

1 per person
1 billion units/year

1990 –
Internet

Ubiquitous networks: Enabling access to the Internet and other information networks anytime, anywhere

122000 –

Several devices per person
10 billion units/year

2010 –
Individuals

ANNUAL REPORT 07

TOKYO ELECTRON LIMITED

Furthermore, these trends now mean that semiconductors are being adapted to new uses andservices, such as remote health diagnosis, on-line educational programs, and remote security services.
Meanwhile, as with developed countries, emerging markets like BRICs, Eastern Europe, Africa, theMiddle East and South America are accelerating network building as an essential condition for national
growth. With semiconductor demand expanding beyond borders, I believe that the semiconductor
production equipment industry is poised for dynamic growth in the years to come.

Question 7

Shipments of production equipment for memory seem to be brisk, but doyou have any concerns about a sudden market correction, as in the past,in the future?

AnswerAs semiconductors are finding wider applications, we think that the silicon
cycle will grow shorter, and volatility will also become steadily smaller.
Certainly, we think that the current high level of capital investment in memory is partly a reflection ofmarket expectations that Microsoft’s launch of Windows Vista will increase demand for high-speed, largecapacity DRAM. However, our view is that the “Vista effect” is not the only reason why capital investment is currently very high. Supply factors also come into play. As manufacturers retire 200mm wafer
processing equipment from DRAM manufacturing, customers need to acquire cost-effective 300mm
processing equipment to partly make up for lost 200mm capacity. For that reason, we think there islittle risk that the current surge in investment will create excess production capacity. The PC market,
which is still a primary source of demand for DRAM, has not yet reached the market penetration levels
that are enjoyed by other consumer products, such as radios and TVs. We think there is plenty ofroom for market expansion.

Expanding NAND Flash Memory Applications
Mobile PCs

MemoryNAND flash memory
Mobile Handsets
Music Players

13

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

Meanwhile, as NAND flash memory establishes itself as an ideal storage device for consumer electronics products, we think capital investment will continue to expand based on the large potential for
growth in demand. The market for semiconductors continues to widen, and as this continues, the overallmarket impact of a sudden drop in demand for any one application will steadily become less severe. We
expect the silicon cycle to become shorter, and the scale of fluctuation between peaks and valleys to
become smaller.
Nevertheless, we cannot control the pace of capital investment by our customers. If sudden market
corrections do occur, the stability of Company earnings will depend on how sound our underlying business foundation is. Therefore, we will continue to focus our efforts on building a sound earnings base.

Question 8

It is often said that semiconductor production equipment manufacturers areplaying a greater role in semiconductor manufacturing. In what way is thisrole expanding?

AnswerEquipment manufacturers are becoming deeply involved in efforts to develop
semiconductor process technology. Although this is a real challenge for us, italso represents an excellent business opportunity.
The performance of semiconductors has been improved by reducing geometries and increasing thenumber of interconnect layers. Since the start of the millennium, however, the types of technology developments that had driven progress in the past reached their limits, and chip manufacturers face highbarriers to further progress. In order to address their difficulties, new multilayer interconnect and etching
technologies and new materials are being introduced, and equipment makers’ involvement in the area ofsemiconductor process innovation holds the key to achieving new advances.

Existing Technology vs Innovative Technologyeg.)High-k Gate Dielectric
Low-k CVD
Next Generation Lithography

Existing Technologies
90nm

32nm
Finer Geometries

1nm= one-billionth of a meter

14

Role in Process Development

Required Technologies

Innovative Technologies
New Materials

Growing Role of Equipment Manufacturers in
Semiconductor Manufacturing Technology
Semiconductor Manufacturers

Equipment
Manufacturers
90nm

32nm
Finer Geometries

ANNUAL REPORT 07

TOKYO ELECTRON LIMITED

Particularly since semiconductors came into use in consumer electronics, chipmakers have focused
most of their development efforts on product planning, circuit design and software, and consequently
they are now increasingly dependent on equipment manufacturers to make the advances in semiconductor process technology. The important thing here is first to fully comprehend the various technologicalneeds expressed by customers, and then crystallize what the real technological needs are and provide
solutions for them. Put another way, equipment manufacturers will be required to take the initiative morein proposing process technology. This will demand an even more scientific approach than in the past on
the part of SPE manufacturers. But there are only a handful of companies in the world who possess
these capabilities—and we are one of them.
As this discussion suggests, the role of a semiconductor production equipment manufacturer isbecoming increasingly important. Although this presents us with a major challenge, we think that it alsooffers tremendous opportunities for future growth.

Question 9

What trends do you foresee in the FPD production equipment industry incoming years?

AnswerCapital investment is entering a cyclical lull in 2007. Over the medium andlonger term, however, we expect rising demand for large-screen, flat-panel
TVs to revive capital investment.
The market for FPD production equipment surpassed our expectations in 2006, expanding rapidly, but
the trend is likely to reverse in 2007—the capital investment environment is expected to remain weakthroughout the year. However, this is merely a short-term lull. We expect capital investment to reboundin 2008 and beyond.
Global demand for television sets is estimated at around 190 million units a year. LCD TVs are
steadily expanding their share of this market, but last year total shipments amounted to just 45 million
units. That suggests that there is still tremendous potential for market growth.
At present, countries around the world are shifting from analog to digital broadcasting technology
and we expect that LCD TVs will be in strong demand as people upgrade to new digital TVs. Furthermore, whereas people used to have only one TV in the house, flatter screens have made it easier to put
one in every room. Many people now have one in the living room, one in the den, one in the bedroom
and one in the kitchen. The era of one TV for every family member is coming closer. Naturally, this trend
will stimulate demand further.
We expect to see continued waves of demand for capital investment and ongoing growth, at least
for the time being.

15

TOKYO ELECTRON LIMITED

Question 10
Answer

ANNUAL REPORT 07

Could you give us your thoughts on the return of profits to shareholders?
To make possible more attractive returns of profits to shareholders, we willcontinue to make investments for growth. We will also look at the appropriate allocation of capital through a balance sheet management approach.

Tokyo Electron’s basic policy on shareholder returns is to continue linking dividends to consolidated net
income. We are implementing a dividend policy that aims for a consolidated payout ratio of 20%. In fiscal
2007, the Company paid a dividend of ¥103 per share—the highest level in our history.
However, we are not content with that and hope to reward shareholders even more for their support.
Tokyo Electron has pursued cash flow management as an important theme in recent years. As a result,
we have seen a marked improvement in our ability as a company to continuously generate cash. Because
the markets where we are active are expected to experience considerable growth going forward, we intend
to use this cash to make investments for the development of new technologies and in other ways to drive
growth. There will therefore be no change in our policy of putting top priority on raising corporate value overthe medium and long terms in this way. That said, we will think
about how best to allocate the cash we generate. We think that it

Cash Dividends per Share(Yen)

is important to adopt a flexible capital structure policy, one that

120
103

balances three goals: investing for growth, strengthening our90

financial foundations and returning profits to shareholders.
60

continuously work hard to provide more shareholder return in

30
10

8

the future.

45

55

Together with these measures, we are determined that we will0
03

Question 11

04

05

06

07

Is it true that the Company has adopted a unique compensation system toincrease corporate value?

AnswerYes, our compensation system—not only for directors and executive officers, but also for ordinary employees—links pay directly to the Company’s
earnings performance.
Tokyo Electron has adopted an earnings-linked dividend policy which rewards shareholders by paying
dividends equal to 20% of consolidated net income. For people on the operations side, a similar systemlinked to earnings performance incentivizes them.

16

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDThe “annual bonus” portion of compensation for the Company’s directors and executive officers isdirectly linked to earnings results. The upper limit on these bonuses is set at 3% of consolidated net
income. About one-third of those bonuses are paid in the form of stock options (warrants with an exercise
price of ¥1, and a restricted period of three years). Therefore, if the Company’s share price rises, executives receive higher compensation than if they received the bonuses in cash, but if the share price falls, theircompensation is less than it would have been if the entire bonus was paid in cash. In other words, theCompany’s executives bear the same risks—both positive and negative—as the shareholders. Tokyo
Electron’s stock options are not based on job title, but rather, are solely a reflection of profit results.
In fiscal 2007, we also introduced a compensation system for employees which is directly linked toconsolidated operating income. Employee bonuses are paid out based on earnings results (set at 15%of operating income, before bonuses). This means that all three of the Company’s major stakeholder
groups—shareholders, executives and employees alike—have a common goal. All benefit from efforts toboost earnings and enhance corporate value.

Question 12
AnswerWhat kind of company does Tokyo Electron aim to become?
We want to create a company that is full of vision and energy, an organization in which all stakeholders can realize their goals through their involvement with Tokyo Electron.
Tokyo Electron wants to provide high value to all of its stakeholders. First of all, we are dedicated todeveloping new products and technologies that provide high value to customers, and also benefit society in general. The technical hurdles to meeting customer needs grow higher with each passing year, but
by developing and manufacturing equipment that offers superior reliability and productivity, we are
pursuing full customer satisfaction.
The most essential element in Tokyo Electron’s business success is people, our employees, and ourbasic personnel policy reflects this belief. In order to cultivate the abilities of employees, and maximize
their contributions over the medium and long term, we have established TEL University. At TEL University
we aim to foster employees who have ambition, are open-minded, and possess a risk-taking spirit that is
not constrained by fear of failure. We believe that this initiative will help us to become the industry leader
in growth potential and earnings capacity. By developing vision and energy within our company, we
hope to offer shareholders, and all stakeholders globally, an opportunity to share in our success andrealize their goals. This is the type of company we aim to be.

17

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

FEATURE

CLEAN TRACK™ LITHIUS Pro™
Born of Challenging the Limits
Role of Coater/Developer

the CLEAN TRACK™ LITHIUS Pro™. The reason is that, amid

Finer geometries are essential to realizing a high level of ICa shift toward expanding production volume per machine, it

integration. Playing a central role in achieving finer design rules

had become apparent that customers were seeking improvedis the lithography process. This process is performed by expo-

performance from coater/developers; the development of high-sure equipment (stepper/scanner), which projects circuit pat-end exposure equipment was already progressing in response

terns onto the wafer that is coated and developed withto this need. With market competition escalating, the ability tophotoresist (photosensitizing agent) by a coater/developer.

constantly respond to the market ahead of rivals is essential.

Coater/developers, along with exposure equipment, must
accommodate a diverse range of customer demands, andThis sense of urgency served as the impetus for the development of the CLEAN TRACK™ LITHIUS Pro™.

therefore require sophisticated coating and processing technologies alongside high reliability.

Indefatigable Research, Then on to
the Next Challenge

Creation of CLEAN TRACK™ LITHIUS Pro™

First, in trying to reduce the footprint, we cut the unit area by

We formally announced the CLEAN TRACK™ LITHIUS Pro™ at

25% over the existing level. Next, we developed a wafer trans-

Semicon Japan 2006, held in December 2006, to the surpriseport system that increased throughput by 30%. By overcomingof many customers.

the seemingly contradictory issue of reducing the footprint while

The reason is that the CLEAN TRACK™ LITHIUS Pro™

increasing throughput, we boosted the productivity per foot-builds on the cutting-edge functions and advanced processes

print by 75%, which is clearly tied to greater productivity forof the existing CLEAN TRACK™ LITHIUS™ to not only boost

customers. We also increased reliability while also enhancing

throughput by 30% but also to reduce the footprint by 25%

maintainability, including equipment adjustments.

and improve the productivity per footprint by 75%. These

The CLEAN TRACK™ LITHIUS Pro™ is designed to enableattributes are clearly tied to higher productivity for customers.

adjustments for time-related changes in equipment operations

The existing CLEAN TRACK™ LITHIUS™ already achieves

without having to involve an engineer, thus maximizing thehigh productivity and processing stability, underpinning aperiod of production contribution. Moreover, the equipment ismarket sales share of 80%. It is only natural therefore that therepeatedly load tested to ensure the highest possible levels ofannouncement of the CLEAN TRACK™ LITHIUS Pro™, with its

stability and reliability.

even greater capabilities, was met with great surprise.

As such, the CLEAN TRACK™ LITHIUS Pro™ was born

Actually, immediately after the start of mass shipments ofin anticipation of customer needs, and is the crystallization of

CLEAN TRACK™ LITHIUS™, we were already making steadythe indefatigable pursuit of product and technology develop-

headway on the development of next-generation equipment,

ment by project members from sales, marketing, development, and manufacturing units.

Throughput
Toward and Beyond

Over 30%
Increase
CLEAN TRACK™ LITHIUS Pro™

Over 25%
Reduction

Footprint
CLEAN TRACK™ LITHIUS™

200WPH
CLEAN TRACK™ LITHIUS Pro™

CLEAN TRACK™ LITHIUS™

Throughput / Footprint

Improved
CLEAN TRACK™ LITHIUS Pro™

throughput
to footprint ratioby 75%

CLEAN TRACK™ LITHIUS™

18

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDCLEAN TRACK™ LITHIUS Pro™

Hikaru Ito: Former VP & Deputy General Manager, SPE-1 Division and General Manager, CLEAN TRACK BU(From June 2007, Corporate Director, Senior VP & Deputy General Manager, SPE-2 Division and General Manager, Etch Systems BU)

Aggressively Addressing Market Needs Ahead of the Competition
Given the changes in thetions would be selected and what should be dropped,

market in recent years,

which brought the concept into focus. Productivity isrequests to increase equip-

increasing in exposure equipment, but machine down-timement reliability and produc-even for an instant causes damage to the customer. Thus,

tivity will surely exceed previous levels. To meet user needs inachieving even greater reliability became our mission.

this kind of era, we decided to implement a model change,
and achieved unparalleled development speed.

Born of this process, the CLEAN TRACK™ LITHIUS Pro™,
is an extremely compact yet highly productive product.

During the project, the key focus was the creation of a

Not content with an 80% share of this market, we willconcept that conformed to the desires of users. Conse-

pursue further improvements in our technology development

quently, in the initial phase of development, there werecapabilities and manufacturing technology capabilities tomany long and repeated discussions about what specifica-

launch new products in the global market in a timely manner.

Masami Akimoto: Senior VP & General Manager, Development
A Challenge-Oriented Mindset Produces More Highly Skilled andMotivated Employees
The drive to doggedly

pursued a design concept from the early development stage

pursue a theme and anof minimizing the frequency of problems as well as repair time

unshakable will are essential

after coming on line. As a result, I think we were able toto developing market-

deliver equipment that offers enhanced reliability and thatleading products. For this, we pursued this project behindclosed doors, including the use of a special room for develop-

contributes to greater productivity for customers.
We learned that people who are prepared to take up thement. In the initial phase, 15 development engineers werechallenge of making the impossible possible will grow andinvolved, and 30 were involved at the prototype stage, whicheven become leaders. TEL Values* are fostered throughis an exceedingly small number of people. I believe that theparticipation in projects, not through mere words alone.

shared mentality among this group increased motivation andsped up the pace of development.
In the development process, one of the primary focuses
was increasing quality. Because it is not feasible to improve
quality substantially once mass production has begun, we* TEL Values are aimed at sustaining the Company’s progress anddynamism. They validate the TEL-way, which is the driving force behind
the Company’s growth and a set of fixed ideals to be passed on.

19

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

TOKYO ELECTRON AT A GLANCE
Summary of Business

Semiconductor Production Equipment
Tokyo Electron supplies a wide range of semiconductor production equipment(SPE) and provides outstanding service support to the world’s manufacturers ofsemiconductor devices. Tokyo Electron’s products and technologies support
high productivity and diverse customer needs and are thus indispensable in the
manufacture of increasingly sophisticated semiconductors.
Tokyo Electron develops, manufactures and sells on a global basis
coaters/developers, plasma etch systems, thermal processing systems,
single wafer deposition systems and surface preparation systems that are
essential for wafer processing processes, as well as wafer probers used in
testing processes. Many of the Company’s products command top global
market shares.

Net Sales(Millions of yen)

FPD Production Equipment

900,000

851,975
800,000

700,000

673,686

Tokyo Electron supplies flat-panel display (FPD) production equipment that isused to manufacture displays for PCs, LCD TVs and other electronic devices
to LCD panel manufacturers along with technical support. Specifically, Tokyo
Electron develops, manufactures and sells FPD coater/developers and FPD
plasma etch/ash systems. The size of substrates handled by this equipment
is increasing by the year along with the growing popularity of large-screen
LCD TVs. With its outstanding products and service support, Tokyo Electron
is able to respond to customer needs for high quality and lower cost.

600,000

Electronic Components
642,625500,000

486,883
400,000

In this segment, Tokyo Electron Device Limited (TED) is developing a new
business paradigm consisting of two functions. One is as a distributor of awide array of sophisticated electronic components from around the world.
The other is a “development business,” whereby TED provides optimal
solutions to customers, from the first stage of planning to design, development and manufacturing, taking advantage of its strong product development
and marketing capabilities.

300,000

Computer Network
200,000

81,176

100,766

100,000

086,881

88,294

17,497

19,1692006

2007

Besides the aforementioned businesses, theCompany recorded sales in the Others
business of ¥1,121 million in fiscal 2007,
compared with ¥1,249 million in fiscal 2006.

20

Tokyo Electron delivers business solutions for the broadband era with a wide
assortment of superior network-related and other products that cater to theneeds of the time. Backed by a worldwide marketing organization thatenables the Company to stay abreast of the latest technological developments around the globe, Tokyo Electron provides integrated solutions fromproduct introduction to support.

ANNUAL REPORT 07

Main ProductsTOKYO ELECTRON LIMITED

Share of Net Sales• Coater/Developer• Spin-on Dielectric Coater• Plasma Etch System
Dielectric Etch System, Silicon Etch System• Thermal Processing System• Single Wafer Deposition System

75.4%

CVD System, Plasma Processing System• Surface Preparation System
Auto Wet Station, Single Wafer Cleaning
System, Pre-clean System, Scrubber System• Wafer Prober• Imported Products

Coater/Developer
CLEAN TRACK™ LITHIUS Pro™

Thermal Processing System
TELINDY™

• FPD Coater/Developer• FPD Plasma Etch/Ash System

11.8%
FPD Plasma Etch/Ash System
Impressio™

• Semiconductor Products• Board Computer Products• Other Electronic Components

10.4%
Tokyo Electron Device Limited
inrevium™

Xilinx, Inc.

• Business Network & Security Solutions• Storage Area Network Solutions• Middleware/Software Solutions

2.2%
F5 Networks, Inc.

Brocade Communications Systems, Inc.

21

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

REVIEW OF OPERATIONS
Semiconductor Production Equipment
Fiscal 2007 Review
Division net sales were ¥642.6 billion, up 32.0% year on year.

Sales by Region

Japan

11

The past fiscal year saw significant interest in our products from semiconductor
manufacturers due to rising demand for memory devices for PCs, mobile phones and(%)

China & Others

27
Taiwan22

other digital consumer electronics. With expectations of higher demand for PCs dueto the launch of Microsoft’s new operating system, Windows Vista™, and for semi-

17

16
North
America7

conductors to support increasingly sophisticated mobile devices and other applicaKorea

tions, semiconductor manufacturers increased capital expenditures, mainly for DRAM
and NAND flash memory. This division sought to capitalize on these trends with thelaunch of a stream of new products. The result of these efforts was higher sales,

EuropeSemiconductor Production Equipment Sales(Billions of Yen)

800
642.6

600

manufacturers, particularly in Asia, sales of coater/developers, etch systems, ther-

200

303.6

increase in sales. By model, Tokyo Electron saw sales growth of CLEAN TRACK™

361.0

400

mal processing systems, CVD systems and cleaning systems recorded large

486.9

By equipment type, backed by strong capital investment by semiconductor memory

457.2

particularly of mainstay products.

LITHIUS™, a coater/developer compatible with next-generation design rule technolo0

gies, new TELINDY™ thermal processing systems, EXPEDIUS™ automated wet stations, and Telius™, a plasma etch system equipped with an SCCM™ –JI etch chamber.

New Products Released in FY2007
Coater/Developer
CLEAN TRACK™ LITHIUS Pro™

Plasma Etch System

Thermal Processing System

Dielectric Etch
Tactras™ Vigus™

Thermal PECVDTELINDY™ IRad™

Single Wafer CVD
Trias™ LT Ti/TiN

Surface Preparation System

Auto Wet Station
EXPEDIUS™+

Wafer Prober
Precio™

22

03

04

05

06

07

■ Previous policies■ New policies
Notes: 1. Since fiscal 2005, sales of FPD
production equipment have beenshown separately from SPE Division
sales, in which they were previously
included. In the above graph, SPE
sales for fiscal 2004 and prior years
exclude FPD production equipment
sales on a non-consolidated basis
for the convenience of readers.
(These figures are unaudited.)
2. Effective from fiscal 2005, theCompany made certain changes inaccounting polices as discussed in
the notes to consolidated financial
highlights.

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDFPD Production Equipment
Sales by Region

Fiscal 2007 Review
Sales in this division were ¥100.8 billion, up 24.1% year on year.

Japan

6

During the past year, LCD panel manufacturers increased investment to develop stateof-the-art display panels and ramp up production capacity in response to the rapid(%)

Others37
Taiwan41

uptake of LCD TVs by ordinary consumers, which is being driven by the shift to digital
broadcasting and high-definition (HDTV) broadcasts.

16

Responding to this operating environment, Tokyo Electron engaged in product
Korea

development and sales activities designed to stay abreast of market trends and cater tocustomer needs. In fiscal 2007, for example, the Company introduced Exceliner™, an
FPD coater/developers. This new product is designed to process eighth-generation large

FPD Production Equipment Sales(Billions of Yen)120

this division reached a record high, with contribution of sales growth mainly in Japan.
Notes: 1. Since fiscal 2005, sales of FPD production equipment have been shown separately from SPE Division sales,in which they were previously included. In the right graph, FPD production equipment sales for fiscal 2004
and prior years are on a non-consolidated basis, while those from fiscal 2005 are on a consolidated basis.
2. Effective from fiscal 2005, the Company made certain changes in accounting polices as discussed in thenotes to consolidated financial highlights.

03

04

81.2

75.0

60

As a result of prevailing market conditions and Tokyo Electron’s response, sales in

64.8

sales eclipsed initial forecasts to reach a record high in this division.

90

61.1

system. As a result of prevailing market conditions and Tokyo Electron’s response,

100.8

glass substrates and follows the launch of Impressio™, an FPD plasma etch/ash

30
0
05

06

07

■ Previous policies■ New policies

Electronic Components
Fiscal 2007 Overview
Sales in this division were ¥88.3 billion, 1.6% higher year on year.

Electronic Components Sales

In semiconductor products, the main line in this division, the Company reported firm

100
86.2

86.9

88.3

60

84.2

80

tions, as client companies increased capital expenditures. Sales of dedicated ICs for

77.4

sales of custom ICs for medical equipment and memory ICs for cell phone base sta-

(Billions of Yen)

04

05

06

07

use in multifunction printers were also higher. In software, sales of operating systems for
POS terminals were healthy, as were sales of other electronic components such as
switching power supplies, LCDs, and panel PCs for other industrial equipment.

40
20
0
03

Computer Network
Computer Network Sales(Billions of Yen)

Sales of network and storage equipment were strong, driven by buoyant capital investment by companies seeking to enhance corporate internal control and personal information security. Sales of IT-related software and maintenance services also grew.

19.2

17.5

16.0

15

18.4

20
17.2

Fiscal 2007 Overview
Division sales were ¥19.2 billion, an increase of 9.6% compared to theprevious fiscal year.

105This business has been handled by Tokyo Electron Device Limited, since October 2006.
0
03

04

05

06

07

23

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

RESEARCH AND DEVELOPMENT
The objectives of Tokyo Electron’s group-wide R&D efforts are to

One example is the Company’s work on a new type offurther enhance the Company’s competitiveness in the coreplasma source known as Radial Line Slot Antenna (RLSA) for

businesses of semiconductor and FPD production equipment, anduse in film deposition and etching processes of semiconductor

to develop the new products and businesses that will support the

manufacturing. In June 2007, the Company established Tokyo

Company’s further growth in years to come.

Electron Technology Development Institute, Inc., in order toaccelerate efforts to commercialize this technology. In

Broad research themes for semiconductor
production equipment

December 2006, Tokyo Electron acquired U.S.-based company

Semiconductor manufacturers, our customers, require production

unique low-energy ion control technology known as Gas

equipment that allows them to achieve finer geometries, higher

Cluster Ion Beam. Tokyo Electron plans to cultivate these as

speed, lower power consumption and higher productivity. SPE

the Company’s core technologies, and expects them to foster

manufacturers are playing an increasingly important role in sup-new innovation in semiconductor production.

porting semiconductor manufacturers in this regard. We believe

Epion Corporation (now TEL Epion, Inc.), which boasts a

In addition, the Company is continuing to make advances in theTokyo Electron’s competitiveness is based on our capability tofield of Micro Electro-Mechanical Systems (MEMS), as part of its

provide production equipment that can realize the process perfor-

efforts to develop future technologies.

mance customers require. Thus, Tokyo Electron collaborates
closely with customers in developing new production equipment.

Promoting more effective R&D via consortia andties with industry and academia

Accelerating R&D efforts to develop new
businesses that can support future growth

The scope of research and development that Tokyo Electronneeds to address is expanding.

In addition to efforts to enhance existing products, Tokyo Electron

In order to make these research efforts more effective, Tokyois also developing new products and businesses that can contrib-

Electron has been working in collaboration with universities, andute to future growth from a medium- to long-term perspective.

making active efforts in industry consortia as well as projects that
include manufacturers and academic institutions.

Accelerating R&D to Drive Growth

IMEC (Belgium)
Collaboration R&D with IMEC on
immersion lithography andextreme ultraviolet (EUV) lithography

TEL Technology Center,
America, LLC

Leading-edge Process
Development Center(Nirasaki City, Yamanashi)Tokyo Electron Technology
Development Institute, Inc.
(Sendai City, Miyagi)

Kansai Technology Center(Amagasaki City, Hyogo)

R&D Expenses(Billions of Yen)

80

04

05

57.0

49.2

43.9

40

44.2

About IMECIMEC is a world-leading independent research center in nanoelectronics andnanotechnology. Its research focuses on the next generations of chips and systems,
and on the enabling technologies for ambient intelligence.

50.1

60

20
0
03

24

06

07

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDIn Japan, one example is the semiconductor industry’s MIRAI
project (Millennium Research for Advanced Information Technology). Overseas, Tokyo Electron is participating in the International
SEMATECH project, in the United States; the Albany NanoTech
project, promoted by the New York State Government; as wellas collaborating with IMEC in Belgium. In February 2007, the Company became a new member of the Semiconductor Research
Corporation (SRC), a semiconductor research consortium which
unites leading semiconductor-related manufacturers with worldclass universities.

Unearthing the world’s most promisingtechnologies
Tokyo Electron’s growth strategy, over the longer term, calls for
the Company to “pursue new innovations” and “create anddevelop new businesses.” The Company is supplementing its own
in-house research activities with efforts to identify, evaluate and utilize
promising technologies developed outside the Company. In July
2006, Tokyo Electron established TEL Venture Capital, Inc. toidentify, evaluate and utilize promising new technologies on a global
scale. TEL Venture Capital is based in California’s Silicon Valley,
which is home to many start-ups and venture capital firms.

Tokyo Electron’s R&D Framework(As of June 2007)

Product development in existing SPE and FPD business units
Tokyo Electron AT Limited

Etch system, CVD system, FPD Etch/ash system

Tokyo Electron Kyushu Limited

Coater/developer, Cleaning system, FPD Coater/developer

Tokyo Electron Tohoku Limited

Thermal processing system

Tokyo Electron TS Limited

Wafer proberR&D for new and advanced technologies
Tokyo Electron Technology Development Center

Research and development

Tokyo Electron Leading-edge Process Development Center

Process development

Tokyo Electron Software Technologies Limited

Software technology

Tokyo Electron Technology Development Institute, Inc.

RLSA plasma technology

TEL Technology Center, America, LLC.

Process development

Timbre Technologies, Inc.

Integrated Metrology

TEL Epion, Inc.

Gas Cluster Ion Beam technology

Identification of promising technologies
TEL Venture Capital, Inc.

25

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

CORPORATE GOVERNANCE
Tokyo Electron maintains a management philosophy that puts
emphasis on maximizing corporate value and enhancing shareholder satisfaction. To this end, the Company is striving toenhance corporate governance by building an optimal corporate
governance structure and managing it effectively. Efforts in thisregard are founded on three basic principles.
Tokyo Electron’s Basic Principles of Corporate Governance
1. Ensure the transparency and soundness of business operations
2. Facilitate quick decision-making and the efficient execution ofbusiness operations
3. Disclose information in a timely and suitable manner

directorships for submission to the annual shareholders’ meeting,as well as candidates for CEO, which it submits to the board of
directors for approval. Each of these committees is composed ofmembers of the board of directors, excluding the Chairman &CEO and the President & COO.
The Board of Statutory Auditors
The Company has four statutory auditors, two of whom are outside
auditors. The statutory auditors not only attend meetings of theboard of directors and other important business meetings, theyalso conduct operations audits, accounting audits and risk evaluation, in addition to auditing the performance of duties by directors.
During fiscal 2007, the board of statutory auditors met five times.

The Corporate Governance Framework
Tokyo Electron uses the statutory auditor system, and has also
adopted the executive officer system to separate the businessexecution function from the board of directors.
The Board of Directors
The board of directors consists of 13 directors, two of whom areexternal directors. During fiscal 2007, the board of directors met
on 14 occasions. In order to ensure that the Company can
respond quickly to changing business conditions, and to moreclearly define management accountability, the term of office fordirectors is set at one year.
The board of directors has two committees: the Compensation
Committee and the Nomination Committee, whose activities areintended to improve corporate governance. The Compensation
Committee proposes the remuneration to be paid to the Chairman& CEO and the President & COO to the board of directors forapproval. The Nomination Committee selects candidates for

The Executive Officer System
In order to further clarify the roles of the board of directors andexecutives in charge of business operations, Tokyo Electron
adopted the executive officer system in April 2003. This systempromotes fast decision-making and the quick establishment andexecution of business strategies.

Internal Controls and Risk Management
In order to enhance corporate value and ensure that all businessactivities are carried out responsibly, in the interests of all stakeholders, Tokyo Electron is taking steps to strengthen its internal
control systems, and make them more effective. The Company isimplementing specific activities based on the basic policy forinternal control systems established in May 2006. It is also making
progress on a project to develop a system of internal control overfinancial reporting which is based on the Financial Instruments
and Exchange Law.

Diagram of the Corporate Governance,
Internal Control System and Risk Management System
Annual Shareholders’ Meeting
Board of Nomination Committee
Directors Compensation Committee
Chief Business Ethics Director

Statutory Auditors

Independent Auditors

Confirm the progress of improvements and give instructions

ChairmanPresident
Request for improvement

Audit and improvement reports

ReportExecutive Officers

Report
Audit

ReportReportRequest for
improvement

Request for
improvement

Internal Audit Dept.
(Global Audit Center)

Audit

Risk Management
Function

Request for
improvement
Monitoring
Monitoring
Check and balance
Administrative

Business Depts.

26

Depts.

Audit
Audit

Internal Audit Department (Global
Audit Center)
The Global Audit Center oversees theinternal auditing activities of Tokyo
Electron and its corporate group. The
Center is responsible for auditing thebusiness activities of domestic andoverseas bases of the Group, as wellas their compliance and systems, andevaluating the effectiveness of internal
control systems. When necessary, theGlobal Audit Center also provides
guidance to operating divisions. The
Center reports the results of its audits
to Company management on a regularbasis, and organizes meetings toreport its findings and exchange
information with the statutory auditors.

ANNUAL REPORT 07

Risk Management Function
The General Affairs Department is responsible for crisis management, including measures involving business risk and operationalrisk, as well as for establishing the necessary internal regulations for
managing each risk category and activities for training and raising
employees’ awareness of risk management. These internal regulations include compliance standards, risk management regulations,rules governing the handling of personal information, standards for
managing documents, guidelines for the timely disclosure of important information, and rules to prevent insider trading.
Coordination Between Statutory Auditors and Internal
Audit Department
The Global Audit Center, which is responsible for internal
auditing activities, makes regular reports to Company management on the results of its audits, and holds periodic meetings(25 times a year) to report its findings and exchange information with the statutory auditors.
Coordination Between Statutory Auditors andIndependent Auditors
Tokyo Electron has engaged KPMG AZSA & Co. as its independent auditor. The Company provides the independent auditor
with all required information and data to ensure that it canconduct its audits efficiently and effectively.
The statutory auditors obtain reports from KPMG AZSA & Co.
describing a summary of audit plans during the fiscal year. They
also receive opinions for the half-year and annual audits of thefinancial statements.

Compliance Framework
Trust is the cornerstone of Tokyo Electron’s business foundation.
The fundamental requirements for maintaining trust are rigorous
conformity to ethical standards and compliance with the law, by
individual employees and by each of our organizations.
The Group maintains high standards of ethics and a clear
awareness of compliance, placing the utmost priority on compliance with laws, regulations and international business standards
in all of its corporate activities.
Ethical Standards, Ethics Committee and Chief Business
Ethics Director
Recognizing the need to establish uniform standards to govern allof its global business activities, in 1998, the Company formulated
the “Tokyo Electron Code of Ethics,” which concretely describes
the Company’s basic views on ethics. The same year, the Company established the Ethics Committee, which is responsible forpromoting business ethics awareness, and appointed a Chief
Business Ethics Director to supervise these efforts.

TOKYO ELECTRON LIMITEDIn June 2007, the Tokyo Electron Code of Ethics was rewritten
to make it easier to understand, and to reflect the changing
ethical norms of the current era.
Compliance Regulations
In 2004, the Company established compliance regulations basedon its ethical standards. These regulations are intended to ensurethat all individuals who take part in business activities for theGroup clearly understand the pertinent laws, regulations, international standards and internal company rules, and continuously
apply these rules in all of their activities.
Compliance Education for Employees
Information on compliance issues is available to employees via the
Company intranet. The Company also conducts web-based
training programs for employees, and takes other steps to promote broad awareness of compliance.
Internal Reporting System: hotline
In the event that an employee becomes aware of any activity which
may violate laws, regulations or principles of business ethics, theCompany operates an internal reporting system (hotline) that
employees may use to report their concerns. Strict confidentiality is
maintained to protect the whistleblower, and ensure that they are
not subject to any disadvantage or repercussions.
Protection of Personal Information
Following the full introduction of Japan’s personal information protection law, the Company formulated a basic directive and regulations toprotect personal information. The Company conducts training
programs to educate employees on how to handle such information,and to ensure that the rules and policies are widely understood. The
Company uses software to monitor any personal information stored
on PCs provided to employees in Japan, and has installed servers
exclusively for storing personal information, among other actions.

Remuneration for Directors, Executive Officers
and Statutory Auditors
The Company and its subsidiaries (excluding listed companies)
have introduced incentive systems, such as business resultsbased remuneration, and stock options linked to share prices.
Effective from fiscal 2006, the Company revised its executive
remuneration system to link remuneration more closely to financial
performance and shareholder value and also improve management transparency and its competitive strength.
New Remuneration System for Executives
1. The remuneration for Company directors and executive officers
is composed of two elements: a fixed monthly salary, and anannual bonus which is linked to earnings performance.
2. The total amount of performance-linked remuneration (annual
bonuses) for directors and executive officers of the Group is set

27

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

at a maximum of 3% of consolidated net income. This remuneration is split between cash bonuses and stock-based
remuneration (stock options), at a ratio of roughly two to one.
The stock-based remuneration takes the form of new stock
warrant contracts with an exercise price of one yen per share.
This is because current securities and exchange regulations
make it difficult to introduce and implement direct share issuance, or the sort of transfer-restricted shares that are used incountries such as the United States. The restricted period on
exercising stock options is set at three years.
3. The earnings-linked remuneration (annual bonuses) of external
directors does not include stock options.
4. In order to ensure that statutory auditors maintain full independence from management pressures, the compensation of
statutory auditors consists of a fixed monthly salary only.
5. Retirement allowances for directors, statutory auditors andexecutive officers were abolished at the end of fiscal 2005, aspart of the revisions to Tokyo Electron’s remuneration systemfor executives.
Performance-linked remuneration comprises a relatively large
share of executives’ total remuneration. Tokyo Electron thinksthat this will give executives a strong incentive to improve theCompany’s earnings performance and elevate the share price,
since they share in both the benefits and the risks experienced
by shareholders.
Disclosure of the Individual Compensation ofRepresentative Directors
In order to increase transparency and reflect shareholders’ interests, Tokyo Electron discloses the remuneration paid to each
representative director (Chairman & CEO and President & COO), as
well as the aggregate remuneration paid to directors and statutory
auditors, in its business report, which is sent to shareholders alongwith the Notice of Annual General Meeting of Shareholders.

Disclosure Policy
Tokyo Electron is committed to disclosing information about theCompany in a fair, prompt and accurate manner, to ensure that all
stakeholders, including shareholders and other investors, canobtain an accurate, in-depth understanding of the Company andits activities, and evaluate the Company’s corporate value appropriately. The Company also solicits feedback from its stakeholders
as part of its information disclosure activities, and uses the feedback as a point of reference to guide corporate management.
Information Disclosure Standards
Tokyo Electron complies fully with the Securities and Exchange
Law, and the rules on timely disclosure established by the Tokyo
Stock Exchange.
Furthermore, even when the information is not subject toregulations on timely disclosure, the Company discloses theinformation proactively, in a fair, prompt and accurate manner if

28

the information is deemed useful in providing stakeholders with anaccurate understanding of the Company.
Disclosure Practices
If it is subject to the rules on timely disclosure (material information), Tokyo Electron will release the information simultaneously ina press release, and via the Tokyo Stock Exchange’s “Timely
Disclosure Network” (TDnet), and will post the information on its
website as soon as possible, following the official announcement.
Even when it does not fall into the category of “material
information,” the Company will voluntarily disclose information
which may be of interest to stakeholders, in a fair, accurate,and easy-to-understand manner, either on its website or inprinted form, through various means of communication.
Tokyo Electron conducts meetings to discuss its financial
results with securities analysts and investors; these meetings arealso open to members of the press. The company makes audio
and video recordings of its fiscal year-end and mid-term financial
results meetings, and posts these recordings on the Company’s
website. All of the documents distributed at its quarterly financial
results meetings are also posted on the website.
To ensure that foreign investors have fair and equal access to theinformation, in principle, the Company strives to disclose all information simultaneously in Japanese and English. However, due tothe time required for translation, there may be cases where theposting of English information to the website is delayed slightly.
IR Spokespersons
To ensure that information is accurate and disclosure is fair, theCompany’s major investor relations activities will be undertaken
by official IR spokespersons—either the CEO, the COO, the IR
director, or representatives of the IR department. In principle,
information on the Company shall not be provided to the press, orto persons connected with the securities market, by any executive
or employee of Tokyo Electron acting alone other than official IR
spokespersons. When necessary, IR spokespersons may formallyappoint other executives or employees to speak on their behalf.

Shareholder Measures
Tokyo Electron mails a “Notice of Annual General Meeting of
Shareholders” to shareholders more than three weeks in advanceof the meeting, as one of its measures to vitalize these meetings
and to promote smooth and efficient voting. It also sets the dateof the Company’s meeting to avoid days on which many suchmeetings are concentrated. Shareholders are also free to casttheir votes via the Internet. Tokyo Electron also participates in the
web-based voting platform for institutional investors operated by
Investor Communications Japan Inc. (ICJ). To supplement theabove shareholder meeting-related initiatives, Tokyo Electron’s
website carries notices, resolutions and presentation materials ofshareholders’ meetings. An English version of the “Notice ofAnnual General Meeting of Shareholders” is also provided.

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDBOARD OF DIRECTORS, STATUTORY AUDITORS AND EXECUTIVE OFFICERS(As of June 22, 2007)

Board of Directors

Tetsuro Higashi

Tetsuo Tsuneishi 2

Kiyoshi Sato

Haruo Iwatsu 2Mamoru Hara 1

Masao Kubodera

Yuichi Honda 1, 3

Chairman & CEO

Vice Chairman of the Board

President & COO

Executive Vice President

Corporate Director

Corporate Director

Corporate Director

Hirofumi Kitayama 2

Hiroshi Takenaka

Kenji Washino 2

Hikaru Ito 1

Hiroshi Inoue *Yasuhiro Tsunemi 1, *Corporate Director

Corporate Director

Corporate Director

Corporate Director

Corporate Director/
President, Tokyo
Broadcasting System, Inc.

Corporate Director

Statutory Auditors

Takeo Tanaka

Mitsutaka Yoshida

Togo Tajika *Hiroshi Maeda *Statutory Auditor

Statutory Auditor

Statutory Auditor

Statutory Auditor/
Nishimura & Partners

Notes:
1. Member of Compensation Committee
2. Member of Nomination Committee
3. Chief Business Ethics Director* External director, external statutory auditor

Executive Officers
Chairman & CEO

Tetsuro Higashi
Vice Chairman of the Board

Tetsuo Tsuneishi
IR, Legal, Intellectual Property,
Customer Relations

President & COO

Kiyoshi Sato
Executive Vice President

Senior Vice Presidents

Yoshiteru Harada

Jinzaburo Sakamoto

General Manager, Manufacturing (Quality)
and General Manager, SPE-3 Division

General Manager, Administration

Deputy General Manager, Sales &Services Division (Global Services),and General Manager, Post Sales

Yoshikazu Nunokawa
Takashi Ito

General Manager, HR/Finance

Deputy General Manager, SPE-1 Division,and General Manager, Clean Track BU

Masaaki Hata

General Manager, Marketing

Kenji Washino

Deputy General Manager, SPE-1 Division,and General Manager, Surface Preparation
Systems BU

Yoshinori Inoue

Deputy General Manager, SPE-2 Division,and General Manager, Single Wafer
Deposition BU

Kiyoshi Sunohara

General Manager, MEMS

Shunro Nagasawa

Shigetoshi Hosaka

Hikaru Ito

Deputy General Manager, SPE-4 Division,and General Manager, Test Systems BU

Deputy General Manager, SPE-2 Division,and General Manager, Etch Systems BU

General Manager, Technology &Development Center, Leading-edge
Process Development Center

Hideyuki Tsutsumi

Haruo Iwatsu
General Manager, Development &Manufacturing

Vice Presidents

Hirofumi Kitayama

General Manager, Sales & Services, Japan

Hiroshi Takenaka
Deputy General Manager, SPE-3 Division,and General Manager, Thermal Processing
Systems BU

Yasuyuki Kuriki

Hiroki Takebuchi

General Manager, Sales & Services, Asia

General Manager, Sales & Services, Korea

Chiaki Yamaguchi

Corporate Strategic Planning,
HR Development Center

Mitsuru Onozato
General Manager, FPD Division

Masami Akimoto

BU: Business Unit

General Manager, Development

29

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

ENVIRONMENTAL, HEALTH AND SAFETY ACTIVITIESTokyo Electron’s corporate values include placing the highest
priority on people’s health and safety and taking the global environment into account when conducting business activities.

Fundamental Policy
Tokyo Electron positions environmental, health and safety activities as one of its most important management issues to achievesustained corporate growth and continued development ofsociety. With that in mind, Tokyo Electron is committed to reducing environmental loads across its activities, and to ensuring
absolute safety in the Company’s business premises and in thoseof its customers.
Tokyo Electron embodied these commitments in “TEL’s Credo
and Principles on Environmental Preservation” and “TEL’s Safety
and Health Credo and Principles” formulated in 1998. The former
statement was reviewed and revised in May 2006 in light of thedirection the business is taking and the Company’s evolving
approach to these issues. The recent revisions clarify a road map
for environmental protection measures in product development;
they mandate evaluation of environmental issues in the design,
manufacture and utilization of our products, and disclosure of
information to stakeholders through the publication of environmental and other reports.

EHS Management
Since 1997, Tokyo Electron has developed and implemented environmental management systems based on ISO 14001 standards,
mainly for manufacturing operations, and obtained such certification.

Adoption of Environmental Accounting
Tokyo Electron has introduced an environmental accounting
system that quantifies the cost of its activities in respect of environmental protection, and uses this as the basis for developing
corporate action policies. For more information on achievements
in fiscal 2007, please see the “Environmental and Social Report2007” to be released in October 2007.

Product-related Environmental Initiatives
Proactive Environmentally Conscious Product Design
As clearly set forth in our revised TEL’s Credo and Principles on
Environmental Preservation, Tokyo Electron believes that promotion of product designs sensitive to the environment is vital. Tokyo
Electron has positioned promotion of energy conservation in its

products, and reduction and replacement of hazardous chemicals
in its products as priority issues.
1. Energy Conservation During Equipment Use
Since many of our products are manufactured and used in clean
rooms, we take an all-inclusive approach that factors in theenergy conservation aspect of the entire system, including theequipment and the clean room. The five major targets in thisrespect are as follows:
1. Reduce energy consumption of the equipment
2. Reduce energy consumption of peripheral devices
3. Use equipment in ways that conserve energy
4. Reduce energy consumption of the clean room
5. Overall clean room management (planned and appropriate
operation)
Tokyo Electron played a central role in developing the SEMIS23 Guide for Conservation of Energy, Utilities and Materials Usedby Semiconductor Manufacturing Equipment that was adopted as
the global standard by the semiconductor industry. Tokyo
Electron assesses the energy consumption of its products inaccordance with these guidelines.
2. Hazardous Substances in Products
Growing out of the concern that hazardous substances in partsand materials could affect the environment and the ecologicalsystem, regulations restricting the use of such substances in
automotive and electrical products are being tightened throughout
the world. In July 2006, for example, the RoHS*1 directive cameinto force in Europe. Having determined that its semiconductor
production equipment could be exempt from these directives as
they fall within the definition of “large-scale stationary industrial
tools,” Tokyo Electron has prepared a written statement to that
effect. Regarding the China RoHS directive*2 issued in March
2007, Tokyo Electron has achieved complete compliance. Tokyo
Electron Group is acting in advance of regulatory requirements
and has established the Chemical Substance Measures Team toshare necessary information. The team comprises representativesof manufacturing divisions. In addition, Tokyo Electron Group isseeking active cooperation from suppliers, and investigating
substances contained in products and finding and promoting
substitutes. In fiscal 2007, Tokyo Electron Group formulated aschedule for the complete elimination of six substances specified
by the RoHS directive.
*1 Restriction of the Use of Certain Hazardous Substances in electrical and electronic equipment*2 The official name of the Chinese version of RoHS is Measures to Control Pollution From
Electronic Information Products

ISO-14001-Certified Plants and Offices
Company/plantTokyo Electron AT Limited
Tokyo Electron PS Limited
Tokyo Electron Tohoku Limited
Tokyo Electron Kyushu Limited
Tokyo Electron AT Limited
Tokyo Electron Device Limited

30

Plant
Sagami Plant

Certification date
December 10, 1997

Certification number
1110-1997-AE-KOB-RvA

Tohoku Plant
Kumamoto/Koshi/Ozu/Saga plants
Yamanashi Plant (Fujii/Hosaka area)
Miyagi Plant
Yokohama OfficeFebruary 19, 1998
March 26, 1998
May 15, 1998
March 1, 2005
July 14, 2004

1118-1998-AE-KOB-RvA
1120-1998-AE-KOB-RvA
1124-1998-AE-KOB-RvA
01245-2005-AE-KOB-RvA
EC04J0144

ANNUAL REPORT 07

Health and Safety Activities
Tokyo Electron promotes health and safety in all of its operations.
This includes giving top priority to the health and safety of ouremployees and customers, and designing products with safety inmind. TEL’s Safety and Health Credo and Principles clearly statethat all employees are responsible for being constantly aware ofhealth and safety considerations in all their business activities.
Continuing on from fiscal 2006 when the Company held safety
training programs for top management, in fiscal 2007 the Company ran safety training for middle management. Targeted at
department managers, section heads, group leaders and othermid-level management personnel, this training included discussion of case studies. The Company also introduced a training
technique called team resource management (TRM) for on-siteleaders. The goal of this training is to get workers to appreciatethat communication and teamwork, which people usually do not
pay much attention to, is actually extremely important and difficult
to achieve.

TOKYO ELECTRON LIMITEDOne example is efforts to give back to local communities. Our
philosophy states, “We place the highest priority on gaining thetrust and acceptance of customers, suppliers, investors, andcommunities around the world” and “We therefore strive to be afaithful and cooperative member of the communities and nations
where we do business.” In line with this philosophy, we engage inactivities to contribute to society and build relationships of trustwith governments and local communities around our facilities.
These activities are conducted not just in Japan but also abroad.
For further details, see “Environmental and Social Report 2007”(to be published in October 2007).
URL: http://www.tel.com/eng/citizenship/ehsreport.htm

Communicating With Stakeholders
Tokyo Electron Group actively promotes communication with all
stakeholders. To develop environmental, health and safety initiatives, we believe that it is vital to share information as much as
possible with all parties related to our business activities and toreceive feedback.

TOPICS
Reducing Nitrogen Used by Thermal Processing Systems
In the loading area of the thermal processing system, where
wafers are loaded for input into the reactor furnace, the oxygen content is kept at a low level by injecting nitrogen toprevent the surface of the wafer from oxidizing naturally. In theprevious model, the inflow volume of nitrogen was kept at a
certain level, but for TELINDY™, we have made it possible toconstantly monitor the oxygen content in the loading area tocontrol it, and so we can optimize the inflow volume of nitrogen according to the oxygen content at each of the wafer

Reducing the amount of nitrogen used by
the thermal processing systemGas
supply box

TELINDYTM

Oxygen meter

Nitrogen(optimizing the inflow volume)(Constantly monitoring
the oxygen content)

Reactorfurnace

Loading
area

processing stages. This has enabled us to reduce the use of
nitrogen by approximately 60% compared with the amountused by the previous model.
Tokyo Electron Kyushu Plants Trees to Protect theWatershed
In March 2007, Tokyo Electron Kyushu planted trees on Mt.
Tawara in Aso to create
a forest to protect thewatershed. Based on a
5-year plan, this was thesecond time trees havebeen planted by thecompany. Many Tokyo
Electron Kyushu
employees and family
Tokyo Electron Kyushu employees and family
members participated.
members plant trees on Mt. Tawara, Aso.
Later, after the hard
work was over, participants enjoyed a barbeque and the children present took part in a quiz to test and foster their knowledge of environmental issues.

31

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

INTELLECTUAL PROPERTY REPORT
Process and mechatronic technologies used in the manufacture ofsemiconductors and flat panel displays represent Tokyo Electron’score technologies. Tokyo Electron devotes considerable resources
to developing technologies that bolster the competitiveness of its
products. Since the fiscal year ended March 31, 2006, as measures to raise profitability, Tokyo Electron has been promoting
three themes: (1) launching new products imbuing high added
value, (2) raising manufacturing capabilities, and (3) expanding
post-sales businesses. Protecting the intellectual property rights of
independently developed proprietary technologies and products isvital in this context to ensure the smooth growth of businesses.
The integration of our intellectual property strategy with ourtechnological and product strategies is thus important to realizing
maximum benefits from development efforts.
Recently, Tokyo Electron has been developing technologies incooperation with semiconductor manufacturers, its customers.
Amid this development, the areas to be protected by intellectual
property rights are diversifying. Tokyo Electron actively files patentapplications for protecting intellectual properties such as software
technologies, process management technologies for multiple
manufacturing equipment and other technologies.

Policies on Acquiring and Managing Intellectual
Property, Managing Trade Secrets and Preventing
Technology Leakage
Tokyo Electron has a set of internal rules that define the management of its intellectual property. These rules were revised basedon the purport of the Revised Patent Law that came into force twoyears ago. Under these rules, Tokyo Electron provides incentives
for inventors and creators within Tokyo Electron. We make lumpsum payments at the time of submission of applications for patents, utility model rights, designs and other property rights.
Bonuses are also given as incentives if such creations are implemented at Tokyo Electron or licensed to third parties. We havealso established an incentive scheme, including awards to motivate inventors and creators.
Management of trade secrets is handled according to Tokyo
Electron’s “Internal Rules on Managing Technology and Marketing
Information” and “Manual for Managing Technology and Marketing
Information.” The provisions of these measures are approximately
equivalent to those of the government’s “Policies Regarding
Managing Trade Secrets” and “Policies Regarding the Preventionof Technology Leakage” (both issued by the Ministry of Economy,
Trade and Industry). Furthermore, to raise the effectiveness of
trade secret management, Tokyo Electron runs an in-housetraining program and ensures that it monitors the subsequent
status of trade secret handling.
By promoting greater cooperation with the materials and procurement divisions, Tokyo Electron is strengthening measuresagainst imitation and pirated technologies at the component level.
Furthermore, outside of Japan, Tokyo Electron is strengthening
tie-ups with local law offices in the U.S. and in Asia and actively
conducting other activities to counter imitation and pirated products. These include cooperating with Japan’s Ministry of

32

Economy, Trade and Industry, Japan External Trade Organization,
Japan Intellectual Property Association and other organizations,and participating in various activities.

Status of Intellectual Property Application
The graph in this section shows historical data on the number ofpatent applications filed worldwide by Tokyo Electron up to theend of March 2007. Tokyo Electron is reviewing its strategy
regarding the country of application, including Japan, from thestandpoint of key manufacturing bases and the markets of its
operating divisions. In particular, in addition to the recent emphasis on filing applications in the U.S., Tokyo Electron is also stressing the need to file applications in China, South Korea, Taiwan andother countries as a countermeasure against imitation and pirated
products, mainly in East Asia.

Contribution of License-related Activities
In developing and implementing our intellectual property rights
strategy, we do not see intellectual property rights acquired byfiling applications and securing rights for proprietary products anddevelopment technologies as a source of income from licensing toother companies. Rather we view this as a method of differentiating our own products and bolstering our competitive advantages.
Semiconductor and FPD production technologies are becoming increasingly advanced and sophisticated. To effectively
develop new products incorporating leading-edge technologies,
and bring them to market as quickly as possible, it is essential toutilize all available intellectual properties. Tokyo Electron places
high value on introducing cutting-edge technology and constantly enhancing the efficiency of research and development,
and on quickly launching new products. We also respect the
intellectual property rights of others, just as we do our own, andeffectively use them through licensing.
Tokyo Electron is also exploring the feasibility of licensing or
selling its proprietary technology to third parties in other businessfields and to cooperating partners.

Number of Patent Applications(Applications)

1,000
800
600
400
200
0

02

03
U.S.

04
South Korea

05
Taiwan

06
China

07
EuropeJapan

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDFINANCIAL SECTION

34
36
44
46
47
48
49
58

Consolidated Eleven-year Summary
Financial Review
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Net Assets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors’ Report

33

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

CONSOLIDATED ELEVEN-YEAR SUMMARYTokyo Electron Limited and Subsidiaries
Years ended March 31
Thousands of
U.S. dollars

2007

2007

2006

2005

Net sales1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Semiconductor production equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FPD production equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electronic components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,217,072
5,443,671
853,592
162,380
747,936
9,493
1,219,643
1,223,333
773,087¥ 851,975
642,625
100,766
19,16988,294
1,121
143,979
144,414
91,263¥ 673,686
486,883
81,176
17,49786,881
1,249
75,70375,32848,006¥ 635,710
457,191
75,03815,96686,2491,266
63,98355,77561,601

Domestic sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overseas sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,658,334
4,558,738

313,816
538,159

262,532
411,154

232,678
403,032

Depreciation and amortization7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
R&D expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

159,427
229,808
482,522

18,82027,12956,962

19,17013,33549,182

21,4639,876
43,889Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net assets (Total shareholders’ equity) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,527,013
3,979,762

770,514469,811663,243
376,900

644,320
332,165

9,528

8,901

8,864

4.33
4.32
21.80

¥ 511.27
509.84
2,573.72¥ 267.61
267.32
2,112.30¥ 343.63
343.54
1,863.28

0.87
0.87

103.00103.00

55.00
55.00

45.00
45.00

Number of shares outstanding (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

180,61141,289180,611
46,272

180,61160,857

ROE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset turnover (times) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21.8
16.9
59.7
1.20

13.5
11.2
56.8
1.03

20.3
10.1
51.6
1.05

¥ 89,418¥ 75,687¥ 71,718

Number of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. dollars

Net income (loss) per share of common stock:3
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets per share of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per share of common stock
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$U.S. dollars

Net sales per employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 757,459

1 Until fiscal 2004, the FPD (Flat Panel Display) division had been included in Semiconductor production equipment. The Computer systems division was renamed theComputer network division on April 1, 2000.
2 Capital expenditures before fiscal 1999 represent the gross increase in property, plant and equipment, intangible assets and other depreciable assets. Capital expenditures
after 2000 only represent the gross increase in property, plant and equipment.
3 Per share amounts before the year ended March 1998 have been restated to reflect a 1.1-for-1 stock split.
From fiscal 2003, the Company applied “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 (ASBJ).
4 Dilution is not assumed for the years ended March 2003, 2002 and 1999.
5 Effective from fiscal 2005, Tokyo Electron changed its method of revenue recognition upon receiving customer confirmation of product set-up and testing of products for
Semiconductor and FPD production equipment. The effect of this change decreased net sales, operating income and income before income taxes by ¥80,956 million,¥20,541 million and ¥20,563 million, respectively, for fiscal 2005, compared with the corresponding amounts which would have been recorded if the previous method
had been applied.
6 Effective from fiscal 2005, Tokyo Electron changed its method to account for after-sale repair expenses by recording accrued warranty expenses for Semiconductor and
FPD production equipment. The effect of this change decreased operating income and income before income taxes by ¥635 million and ¥13,106 million, respectively, forthe year ended March 31, 2005, compared with the corresponding amounts which would have been recorded if the previous method had been applied.
7 Amortization of goodwill is not included in depreciation and amortization.

34

ANNUAL REPORT 07

TOKYO ELECTRON LIMITED

Millions of yen

2004

2003

2002

2001

2000

1999

1998

1997

¥ 529,654
425,747–
18,44884,2291,230
22,28014,9368,297¥ 460,580
364,689–
17,19377,3801,318
1,119(23,010)(41,554)¥ 417,825
325,715–
17,03173,658
1,421(18,310)(22,919)(19,938)¥ 723,880
619,001–
14,054
89,211
1,614
121,086
99,13262,012¥ 440,729
355,103–
12,35772,051
1,218
35,816
29,68919,848¥ 313,820
242,240–
12,87857,734
968
6,383
6,038
1,866

¥ 455,585
380,184–
15,26260,139–63,296
62,83430,009¥ 432,785
355,877–
14,40862,500–60,38960,487
29,975242,318
287,336

190,513
270,067

186,516
231,309299,272
424,608

183,987
256,742

149,838
163,982

230,550
225,035

256,808
175,977

24,963
11,00744,15027,374
12,35950,123

26,29430,94653,827

21,67949,403
52,911

19,44618,99937,135

17,921
23,47826,842

12,65233,302
26,813

10,16718,456
20,988561,632
275,800

524,901
252,904

556,915
307,579

729,511333,281

499,499273,603

414,903257,716

493,600
261,009

387,077
207,476

8,870

10,053

10,171

10,236

8,946

7,835

7,287

6,277

10.70
10.70
1,477.93¥ 174.68
168.43
1,495.20¥ 181.97
172.74
1,381.47

Yen

¥

46.37
45.78
1,543.73¥ (238.57)–
1,456.23¥ (113.85)–
1,756.73¥ 353.76
344.75
1,901.38¥ 113.53
110.64
1,560.27

¥

10.00
10.00

8.00
8.00

8.00
8.00

38.00
38.00

14.00
14.00

12.00
12.00

30.00
30.00

28.00
25.45

180,61160,873

175,698
49,259175,691
37,116

175,691
42,781

175,660
7,147

174,624
8,576

174,569
9,562

150,189
11,097

3.1
4.2
49.1
0.97

(14.8)
0.2
48.2
0.85

(6.2)
(4.4)
55.2
0.65

20.4
16.7
45.7
1.18

7.5
8.1
54.8
0.96

0.7
2.0
62.1
0.69

12.8
13.9
52.9
1.03

15.4
14.0
53.6
1.10

¥ 59,713¥ 45,815¥ 41,080¥ 70,719¥ 49,265¥ 40,054¥ 62,520¥ 68,948

Percent

Thousands of yen

35

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

FINANCIAL REVIEW
Financial results in this section refer to the Company’s performance for fiscal 2007, the year ended March 31, 2007. Percentage comparisons refer to year-on-year changes from fiscal 2006.
The Company adopted the following revised accounting standards and business segment.
■ Effective from fiscal 2005, the policy for revenue recognition of semiconductor and FPD production equipment was changed from the timeof shipment of products to, in principle, the time of confirmation of set-up and testing of products. The effect of this change decreased net
sales, operating income and income before income taxes by ¥80,956 million, ¥20,541 million and ¥20,563 million, respectively, for fiscal
2005, compared with the corresponding amounts which would have been recorded if the previous method had been applied.
■ Effective from fiscal 2005, the accounting treatment of after-sale repair expenses incurred during the warranty period for semiconductor
and FPD production equipment was changed. In the past, the Company charged such expenses to income as incurred. Effective from thefiscal year ended March 31, 2005, the Company provides accrued warranty expenses for estimated expenses, calculated on the basis ofafter-sale repair expenses incurred in the past. The effect of this change decreased operating income and income before income taxes by¥635 million and ¥13,106 million, respectively, for the year ended March 31, 2005, compared with the corresponding amounts which
would have been recorded if the previous method had been applied.
■ On October 1, 2006, Tokyo Electron’s computer networks division was transferred to Tokyo Electron Device Limited. Accordingly, sales
from computer networks, which formerly had been included in the industrial electronic equipment segment, are now included as part ofthe electronic components and computer networks segment (formerly the electronic components segment), effective from fiscal 2007.

Sales and Income
Operating Environment
During the fiscal year ended March 31, 2007, the US economy was affected by a housing slump during the latter half of the year, but consumer spending and capital investment remained firm. In Asia, strong exports and brisk capital investment supported high economic growthin China, while both South Korea and Taiwan also registered favorable results. In Japan, meanwhile, the economy continued to recover on
the back of aggressive capital investment and increased exports, mainly driven by good performing companies.
In the electronics industry, in which the Company participates, rising demand for digital consumer electronics, such as large flat-panel TVs,
as well as rising market penetration for mobile phones and PCs in emerging economies, created a healthy business environment. These
trends prompted manufacturers of semiconductors and flat-panel displays to invest aggressively in new plant and equipment.
(Millions of Yen)

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2003

2004

2005

2006

2007

¥460,580
134,040
29.1%
132,9211,119
0.2%(23,010)(41,554)¥529,654
140,155
26.5%
117,875
22,2804.2%
14,9368,297¥635,710
175,91327.7%
111,930
63,983
10.1%
55,77561,601¥673,686
189,732
28.2%
114,02975,70311.2%
75,32848,006¥851,975
272,649¥32.0%
128,670
143,979
16.9%
144,414
91,263

Effective from fiscal 2005, the Company made certain changes in accounting policies as discussed in this financial review.

36

ANNUAL REPORT 07

TOKYO ELECTRON LIMITED

Sales
Consolidated net sales grew 26.5% year on year, to a new record high of ¥852.0 billion, supported by rapid growth in sales of semiconductor and FPD production equipment. By region, sales of semiconductor production equipment grew sharply in Japan, South Korea andTaiwan, while sales in other regions were steady. Sales of FPD production equipment were driven primarily by demand from Japan andTaiwan. As a result, net sales in Japan rose 19.5% year on year, to ¥313.8 billion, while overseas net sales increased by 30.9%, to ¥538.2
billion. Overseas net sales increased as a share of consolidated net sales, to 63.2% compared with 61.0% in fiscal 2006.
Meanwhile, consolidated orders received increased by 35.4% year on year, to ¥977.2 billion, and the consolidated order backlog at theend of fiscal 2007 rose 34.7%, to ¥486.3 billion. Both figures were historical records.

Gross Profit, SG&A Expenses and Operating Income
The cost of sales increased by 19.7% year on year, to ¥579.3 billion, and gross profit jumped 43.7%, to ¥272.6 billion. The gross profit margin
improved by 3.8 percentage points, to 32.0%, the result mainly of the launch of new products, which pushed up average unit prices, a decline
in warranty expenses and after-warranty expenses, and improvements to production efficiency which lowered the cost of sales.
Selling, general and administrative (SG&A) expenses increased by 12.8% year on year, to ¥128.7 billion, but the ratio of SG&A expenses to
net sales improved to 15.1%, compared with 17.0% in fiscal 2006. R&D expenses, which are included in general and administrative
expenses, rose by ¥7.8 billion, to ¥57.0 billion and were the major reason for the increase in SG&A expenses.
As a result, operating income grew 90.2% year on year, to ¥144.0 billion. The operating margin improved by 5.7 percentage points, to16.9%. Both of these figures were new record highs for the Company.

Research and Development
R&D expenses, as noted earlier, rose 15.8% year on year, to ¥57.0 billion.
In semiconductor production equipment, R&D efforts focused on the development of new technologies and products that respond torising market demands, not only for equipment that responds to finer designs rules of semiconductor devices, but also for responses to newmaterials for realizing higher speeds and lower power consumption. As a result of ongoing R&D efforts, the Company launched new semiconductor production equipment in all six product categories. In FPD production equipment, the focus remained on the development ofequipment designed for large glass substrates.
Another important R&D theme was lowering the environmental load of production equipment based on their individual characteristics. A
certain portion of the R&D budget is allocated for this purpose.
In addition to R&D spending to develop new technologies and products in existing areas of operation, the Company also invested increating new businesses derived from its core technologies such as applying RLSA plasma source, which has superior features, to equipment, and MEMS-related equipment.

48.0

10

11.2

■
■

0.2

03

04

–25
0
05

06

07

8.3

0
-41.6

75.7

85.2
64.0

07

22.3

0

■ Domestic (Previous policies)■ Overseas (Previous policies)■ Domestic (New policies)■ Overseas (New policies)

25

4.2
1.1

06

10.1

313.8

262.5

05

61.6

411.2

476.0
403.0

287.3

04

0
03

50

16.9

50
240.7
232.7

190.5

200

75
20

100

11.9

242.3

400

270.1

600

91.3

100

800

Net Income (Loss)

144.0

30

538.2 852.0(Billions of Yen)

150

1,000

673.7

(%)

716.7
635.7

(Billions of Yen)
529.7

Operating Income and Operating Margin(Billions of Yen)
460.6

Domestic and Overseas Sales

–50
03

04

05

06

07

Operating Income (Previous policies)
Operating Margin (Previous policies)
Operating Income (New policies)
Operating Margin (New policies)

37

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

Other Income (Expenses) and Net Income
As was the case in the previous fiscal year, there were no major extraordinary gains or losses. In fiscal 2007, net non-operating income was¥0.4 billion, compared with net non-operating expenses of ¥0.4 billion in fiscal 2006. As a result, income before income taxes rose 91.7%
year on year, to ¥144.4 billion.
Net income grew 90.1% year on year, to ¥91.3 billion, a record for the Company. Net income per share increased from ¥267.61 in theprevious fiscal year, to ¥511.27 in fiscal 2007.

Dividend Policy and Dividend
The fundamental policy regarding return of profit to shareholders is to pay dividends linked to business performance and backed by earnings. Since fiscal 2006, the Company has applied a new dividend policy that aims at a payout ratio of 20% of consolidated net income. On
this basis, the Company increased the cash dividend per share by ¥48, to ¥103 per share. On a consolidated basis, this represented a
dividend payout ratio of 20.1%.

Performance by Segment
Industrial Electronic Equipment Segment
Segment sales (including intersegment sales) rose 30.7% year on year in fiscal 2007, to ¥746.9 billion. Segment operating income grew
96.2%, to ¥140.4 billion, and the operating margin improved by 6.3 percentage points, to 18.8%.
Semiconductor Production Equipment
Sales to external customers in fiscal 2007 increased 32.0% year on year, to ¥642.6 billion.
Increased market penetration for digital consumer electronics and increasing global demand for mobile phones and PCs boasted demandfor DRAM, flash memory and other semiconductor memory used in these devices. The launch of Microsoft’s new PC operating system,
Windows Vista™, and expectations for growing demand for semiconductors due to the increasing functionality of digital consumer electronics and mobile equipment led semiconductor memory manufacturers to step up investment in production equipment. This favorable business environment stimulated inquiries for production equipment.
By equipment type, backed by strong capital investment by semiconductor memory manufacturers, particularly in Asia, sales of coater/developers, etch systems, thermal processing systems, CVD systems and cleaning systems recorded large increases in sales. By model,
Tokyo Electron saw sales growth of CLEAN TRACK™ LITHIUS™, a coater/developer compatible with next-generation design rule technologies, new TELINDY™ thermal processing systems, EXPEDIUS™ automated wet stations, and Telius™, a plasma etch system equipped withan SCCM™-JI etch chamber.

103

57.0
49.2

43.9

45

44.2

90

30

60

15

30

55

90

120
50.1

120

128.7

60

114.0

(Yen)

150

111.9

Cash Dividend per Share

(Billions of Yen)

117.9

R&D Expenses(Billions of Yen)

132.9

Selling, General and Administrative Expenses

0

0
03

38

04

05

06

07

10

30

8

45

60

03

04

0
03

04

05

06

07

05

06

07

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDIn terms of wafer diameter, 89% of sales were for 300mm wafer plants and 11% of sales were for 200mm wafer plants.
Division orders rose 60.1% year on year, to ¥800.4 billion, and the order backlog at the end of fiscal 2007 grew 63.3% compared with theend of the previous fiscal year, to ¥407.0 billion.
FPD Production Equipment
Sales to external customers rose 24.1% year on year, to ¥100.8 billion. LCD TVs and other flat-panel TVs are seeing rapidly increasing
demand stimulated by the shift to digital broadcasting technology and high-definition (HDTV) broadcasts, as well as falling unit prices. In
response, LCD panel manufacturers in Japan and other parts of Asia made investments to develop high-performance, large-screen display
panels and to increase production capacity. In light of these circumstances, the Company worked to develop and market products that
address market trends and needs. In fiscal 2007, the Company introduced Exceliner™ FPD coater/developers designed to process eighthgeneration large glass substrates, following in the footsteps of Impressio™ FPD etch/ash system.
Although sales were brisk, the supply-demand balance for LCD panels began to weaken in the latter half of fiscal 2007, causing orders todrop off. Division orders received declined by 41.0% year on year, to ¥66.9 billion, and the order backlog fell 34.2%, to ¥65.2 billion at theend of fiscal 2007.
OthersOther sales consist primarily of in-house services, such as insurance and travel services. Sales in this segment declined by 10.3% year on
year, to ¥1.1 billion.

Electronic Components and Computer Networks (Tokyo Electron Device Limited)
Net sales in this segment, including intersegment sales, amounted to ¥108.7 billion. Operating income declined by 5.1%, to ¥4.0 billion, andthe operating margin declined 0.3 percentage points, to 3.7%.
On October 1, 2006, Tokyo Electron’s computer networks division was transferred to Tokyo Electron Device Limited. Accordingly, sales
from computer networks, which formerly had been included in the industrial electronic equipment segment, are now included as part of theelectronic components and computer networks segment (formerly the electronic components segment), effective from fiscal 2007.

Semiconductor Production Equipment SalesFPD Production Equipment Sales(Billions of Yen)

(Billions of Yen)

361.0

03

04

■ Previous policies■ New policies

05

06

07

60

100.8

03

04

81.2

90
75.0

486.9

0

120

64.8

200

303.6

400

457.2

600

Notes: 1. Since fiscal 2005, sales of FPD
production equipment havebeen shown separately fromSPE Division sales, in which
they were previously included.
In the left graph, SPE sales forfiscal 2004 and prior years
exclude FPD production
equipment sales on a nonconsolidated basis for theconvenience of readers.
(These figures are unaudited.)
2. Effective from fiscal 2005,
the Company made certainchanges in accounting
polices as discussed in thisfinancial review.

61.1

642.6

800

30

0
05

06

Notes: 1. Since fiscal 2005, sales of
FPD production equipment
have been shown separatelyfrom SPE Division sales, inwhich they were previously
included. In the left graph,
FPD production equipment
sales for fiscal 2004 andprior years are on a nonconsolidated basis, while
those from fiscal 2005 areon a consolidated basis.
2. Effective from fiscal 2005,
the Company made certainchanges in accounting
polices as discussed in thisfinancial review.

07■ Previous policies■ New policies

39

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

Electronic Components
Sales to external customers rose 1.6% year on year in fiscal 2007, to ¥88.3 billion. The main strategic market for domestic operations is theindustrial equipment industry, and sales focus on custom ICs, general-purpose (analog) ICs and other high value-added products that
require advanced technical support. Meanwhile, the Company concentrated on increasing orders for contract design services and developing products for industrial equipment to increase sales of Tokyo Electron Device’s inrevium brand products. Overseas, consolidated subsidiary Tokyo Electron Device Hong Kong Limited opened a new base in Singapore in order to provide better support to Japanese customers who
have production facilities abroad.
Computer Networks
Sales to external customers rose 9.6% year on year in fiscal 2007, to ¥19.2 billion. Demand from corporations for products that can enhance
security and internal control have led to a surge in capital investment, which elevated sales of network and storage equipment.
The computer networks business and electronic components business have common customers. Also, both businesses are engaged
in distribution businesses that handle state-of-the-art products mainly of overseas suppliers. Therefore, Tokyo Electron transferred thecomputer networks operation to Tokyo Electron Device, in order to capture greater synergies, expand the scale of the distribution business and raise earnings.

Business Segment Information
Millions of yen

2007:

Industrial
electronicequipment

Electronic
components
and computer
networks

1. Net sales and operating income
Net sales(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥744,512
2,382
746,894606,540
140,354

2. Assets, depreciation and amortization
expenses and capital expenditure
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . .
Capital expenditure, including intangible and other assets . . . . . .

¥728,236
20,061
34,795Working Capital and Current Ratio

Total

Eliminations
andcorporate

Consolidated¥107,463
1,247
108,710
104,740
3,970¥851,975
3,629
855,604
711,280
144,324¥–(3,629)(3,629)(3,283)(346)¥851,975–
851,975
707,996
143,979¥ 46,730
360
274¥774,966
20,42135,069¥(4,452)––¥770,514
20,42135,069Interest-Bearing Debt, Cash and Cash Equivalents, D/E Ratio

Equity and Equity Ratio(Billions of Yen)

(Times)(Billions of Yen)(%)

(Billions of Yen)

(%)

800

4.0

200

80

800

80

600

3.0

150

60

600

0
03

04

■ Working Capital
Current Ratio

05

06

03
■
■

0

460.2

0

59.7

51.6
376.9

200

49.1

332.2

20

48.2

275.8

400

252.9

42.7

04

40

17.3

40

20

8.7

0

07

60
56.8

40.2

134.4

140.0
65.1

50

99.5
115.4

1.0

127.0

100

29.9

0

40

2.0
384.5

315.9

288.6

261.5

200

2.7

2.2

195.7

400

2.6
2.4

46.1

53.0

2.8

151.4

59.8

05

Interest Bearing Debt
Cash and Cash Equivalent
D/E Ratio

06

07

0
03

04

■ Equity
Equity Ratio

05

06

07

ANNUAL REPORT 07

TOKYO ELECTRON LIMITED

Financial Position and Cash Flows
Assets, Liabilities and Net Assets
At March 31, 2007, total assets stood at ¥770.5 billion, an increase of ¥107.3 billion from the end of March 2006. Current assets increasedby ¥92.9 billion, to ¥610.4 billion. This partly reflected an increase in trade notes and accounts receivable of ¥59.7 billion due to higher sales.
In addition, the surge in orders during the second half caused inventories to increase by ¥31.1 billion.
Net property, plant and equipment rose ¥10.2 billion year on year, to ¥104.9 billion, mainly reflecting the purchase of buildings and land.
Investments and other assets rose ¥4.2 billion, to ¥55.2 billion. A major factor was the acquisition of U.S.-based Epion Corporation (at acost of ¥4.5 billion), which increased intangible assets.
Total liabilities increased by ¥20.1 billion, to ¥300.7 billion. Rising orders, and the associated increase in procurement, caused trade notes
and accounts payable to increase by ¥21.0 billion, to ¥96.8 billion. In addition, the increase in taxable income produced a ¥22.8 billion yearon-year rise in income taxes payable, to ¥45.7 billion. Total interest-bearing debt, which includes short term borrowings, the current portionof corporate bonds, long-term debt and corporate bonds, was ¥40.2 billion. This reflected the redemption of ¥20.0 billion in unsecured
straight bonds, as well as ¥4.5 billion in unsecured bonds with warrants. The debt-to-equity ratio (interest-bearing debt / equity) consequently improved to 8.7%, compared with 17.3% at the end of fiscal 2006.
Total net assets was bolstered by the strong earnings posted in fiscal 2007, with retained earnings rising by ¥78.1 billion year on year. Net
assets thus increased by ¥87.2 billion, to ¥469.8 billion at the fiscal year-end. As a result, the equity ratio rose 2.9 percentage points, to59.7%, and return on equity (ROE) improved by 8.3 percentage points year on year, to 21.8%.

Capital Expenditures*1 and Depreciation and Amortization*2
Capital expenditures increased by 103.4% to ¥27.1 billion. Major capital expenditure items included the purchase of land and buildings for a
new research and development center in Sendai, Miyagi Prefecture; expansion work on the Company’s production facility in Matsushima,
Miyagi Prefecture; and the construction of a new office building at the Company’s South Korean subsidiary. In addition, the Company
acquired new capital equipment to help enhance research and development. Depreciation and amortization expenses declined 1.8% year on
year, to ¥18.8 billion.
*1 Capital expenditures only represent the gross increase in property, plant and equipment.
*2 Depreciation and amortization does not include amortization of goodwill.

ROE and ROA

Capital Expenditures and Depreciation and Amortization

Free Cash Flows(%)(Billions of Yen)

(Billions of Yen)

40

120

–20

–14.8

03

05

06

07

■ Return on equity ratio (ROE)
Return on assets ratio (ROA)
ROA=(Operating income+Interest and dividend income)/
Average total assetsx100

14.1

–0.7

05

30
0

〜

0
04

68.3

27.1

04

13.3

9.9

10

–10

11.0

0.2

60
18.8

3.1

19.2

20

12.4

0

11.7

21.5

10.7

4.1

90

30
25.0

10

20.2

27.4

13.5

106.9

21.8

20.3

20

29.0

30

–30
03

■ Capital Expenditures■ Depreciation and Amortization

06

07

03

04

05

06

07

Free Cash Flows=Cash Flows From Operating
Activities+Cash Flows From Investing Activities

41

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

Cash Flows
Cash flow from operating activities in fiscal 2007 was ¥54.3 billion, ¥24.6 billion less than in fiscal 2006. The main sources of cash were¥144.4 billion from income before income taxes, depreciation and amortization of ¥18.8 billion and a ¥17.2 billion increase in trade notes andaccounts payable. The main uses of cash, meanwhile, included a ¥58.4 billion increase in trade notes and accounts receivable, a ¥31.6
billion increase in inventories, a ¥12.5 billion decline in customer advances, and ¥37.8 billion for the payment of income taxes.
Investing activities used net cash of ¥25.3 billion, ¥14.8 billion more than in fiscal 2006. The main use of cash was ¥25.2 billion for thepurchase of property, plant and equipment intended to promote the Company’s future growth. The acquisition of U.S.-based Epion
Corporation used a further ¥4.5 billion in cash. On the other hand, in order to improve the liquidity of Tokyo Electron Devices’ shares, theCompany generated ¥4.2 billion in cash by selling some shares in this subsidiary, which is listed on the Second Section of the Tokyo
Stock Exchange.
Financing activities used net cash of ¥34.7 billion, ¥8.7 billion less than the outflow in fiscal 2006. The Company used ¥20.0 billion in cash
to redeem its unsecured straight bond issue #10, and ¥4.5 billion to redeem its #4 issue of unsecured bonds with warrants. The Company
also used ¥12.8 billion in cash to pay dividends.
As a result, the balance of cash and cash equivalents declined by ¥5.6 billion year on year, to ¥134.4 billion at the end of March 2007.

Business-related and Other Risks
The following are possible risks that may have an impact on Tokyo Electron’s business performance, stock price, or financial position.
(1) Impact of Fluctuating Foreign Exchange Rates
Success in the development of overseas operations has increased the share of sales generated overseas. As a rule, Tokyo Electron conducts export transactions on a yen basis to avert exposure to foreign currency risks. However, some exports are denominated in foreign
currencies. In these cases, Tokyo Electron hedges foreign currency risk by using a forward foreign exchange contract when an order isreceived or by other means. However, foreign exchange rate risks can arise from fluctuations in prices due to sudden foreign exchange
movements, which could have an indirect adverse effect on Tokyo Electron’s business performance.
(2) Impact From Research and Development
Through ongoing and proactive R&D investment and activities in cutting-edge technologies—miniaturization, vacuum, plasma, thermalprocessing, coating/developing, cleaning, wafer-transfer and clean technologies—Tokyo Electron has created advanced technologies. At thesame time, by quickly bringing to market new products incorporating these technologies, Tokyo Electron has successfully captured a highmarket share in each of the product fields it has entered and generated a high profit margin. However, delays in the launch of new products
and other factors could adversely affect Tokyo Electron’s business performance.
(3) Impact From Changes in the Semiconductor Market
Tokyo Electron has achieved a high profit margin by concentrating resources in high-tech fields, including semiconductor production equipment, where technological innovation is rapid but Tokyo Electron can effectively use its strengths. Although technological change is responsible for the semiconductor market’s rapid growth, Tokyo Electron has actively undertaken structural reforms to be able to generate profits
under any circumstances, such as when the market contracts temporarily due to imbalance of supply and demand. However, order cancellations, excess capacity and personnel and increased inventories resulting from an unexpectedly large market contraction could adversely
affect Tokyo Electron’s business performance.
(4) Impact From Concentration of Transactions on Particular Customers
Tokyo Electron has been successful at increasing transactions with the leading semiconductor manufacturers worldwide, including those inJapan, through the provision of products featuring outstanding, cutting-edge technology and of services offering a high level of customer
satisfaction. However, Tokyo Electron’s sales may from time to time be temporarily concentrated on particular customers due to the timingof large capital investments of major semiconductor manufacturers. The resulting escalation in sales competition could adversely affect
Tokyo Electron’s business performance.

42

ANNUAL REPORT 07

TOKYO ELECTRON LIMITED(5) Safety-related Impacts
Tokyo Electron’s basic philosophy is to always bear in mind safety and health in the execution of business activities, including development,
manufacturing, sales, services and management. In accordance with this philosophy, Tokyo Electron works actively and continuously to
improve the safety of its products and to eliminate any harmful impact on health. However, harm to customers, order cancellations or othercircumstances resulting from safety problems or other problems related to Tokyo Electron’s products could adversely affect Tokyo
Electron’s business performance.
(6) Impact From Quality Issues
Tokyo Electron actively develops outstanding, cutting-edge technologies for incorporation in new products that are brought quickly tomarket. At the same time, Tokyo Electron works to establish a quality assurance system, efforts that include obtaining ISO 9001 certification,
as well as to establish a world-class service system. These actions have resulted in a large number of customers adopting Tokyo Electron’s
products. However, because Tokyo Electron’s products are based on cutting-edge technologies, and due to other factors, many of thetechnologies developed are in unfamiliar fields. The occurrence of unforeseen defects or other issues could adversely affect Tokyo Electron’sbusiness performance.
(7) Impact of Intellectual Property Rights
In order to distinguish its products and make them more competitive, Tokyo Electron has promoted its R&D strategy for the early development of cutting-edge technologies together with its business and intellectual property strategies. This approach has enabled Tokyo Electron
to obtain sole possession of many proprietary technologies that have been instrumental to Tokyo Electron’s ability to capture a high market
share and generate high profit margins in each of its product fields. However, Tokyo Electron’s products incorporate and optimize many ofthese proprietary cutting-edge technologies. There may be cases, whereby avoiding the use of third-party technologies and intellectual
property rights, Tokyo Electron’s business performance could be adversely affected.
(8) Other Risks
Tokyo Electron is actively involved in reforming the corporate structure so that it can generate profits even when markets contract. These
reforms have entailed creating new high-growth, high-return businesses and pursuing higher earnings from existing businesses. At the sametime, Tokyo Electron has promoted activities to preserve the environment and worked to restructure its compliance and risk management
systems. However, as long as it conducts business activities, as with peer companies or companies in different industries, Tokyo Electron is
subject to the effect of many other factors. These include the world and regional economic environments, natural disasters, war, terrorism,
unavoidable occurrences (such as infectious diseases), financial or stock markets, government or other regulations, supply systems ofsuppliers, market conditions for products and real estate, the ability to recruit personnel in Japan and overseas, competition over standardization, and loss of key personnel. Any of these factors could adversely affect Tokyo Electron’s business performance.

43

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

CONSOLIDATED BALANCE SHEETSTokyo Electron Limited and Subsidiaries
March 31, 2007 and 2006ASSETS

Thousands of
U.S. dollars

Millions of yen

2007

2006

2007

Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade notes and accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥134,390
228,688(127)
194,840
28,32624,246¥140,024
169,038(165)
163,746
21,35623,489$1,138,414
1,937,220(1,077)1,650,490
239,947
205,385

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

610,363

517,488

5,170,379

Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,495
121,318
96,547
6,062

18,150112,225
94,764
2,216

173,618
1,027,685
817,846
51,349Total property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

244,422
139,492

227,355
132,6172,070,498
1,181,637

Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104,930

94,738888,861

Investments and other assets:
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,643
13,691
19,4007,487

14,86013,175
16,7106,272

124,040
115,977
164,330
63,426

Total investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55,22151,017467,773

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥770,514¥663,243$6,527,013

See accompanying Notes to Consolidated Financial Statements.

44

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDLIABILITIES AND NET ASSETS

Thousands of
U.S. dollars

Millions of yen

2007

Current liabilities:
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade notes and accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued employees’ bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued warranty expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥

2006

2007

1,712
8,500
96,847
21,95745,657
14,131
14,11422,937¥

2,100
24,50075,84233,811
22,895
10,231
12,21919,015$

14,50672,003820,388
185,995
386,762
119,704
119,560
194,296

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

225,855

200,613

1,913,214

Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued pension and severance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30,00040,686
4,162

38,50038,751
2,743

254,130
344,649
35,258

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

300,703

280,6072,547,251

54,961

54,961

465,576

78,347
328,027(12,168)

78,079249,938(15,117)663,674
2,778,708(103,073)

5,853
(177)
5,333
584
9,051

5,118
–
3,921
1,014
4,722

49,582(1,502)45,175
4,949
76,673

Total net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

469,811382,6363,979,762

Total liabilities and net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥770,514¥663,243$6,527,013

Contingent liabilities

Net assets:
Shareholders’ equity
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Authorized: 300,000,000 shares
Issued: 180,610,911 shares as of March 31, 2007 and 2006
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,812,976 and 2,336,475 shares as ofMarch 31, 2007 and 2006, respectively
Valuation and translation adjustments
Unrealized gains on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred gains or losses on hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share subscription rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

CONSOLIDATED STATEMENTS OF INCOME
Tokyo Electron Limited and Subsidiaries
Years ended March 31, 2007 and 2006
Thousands of
U.S. dollars

Millions of yen

2007

2006

2007

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 851,975
579,326¥ 673,686
483,954$7,217,072
4,907,462

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

272,649
128,670

189,732
114,0292,309,610
1,089,967

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

143,979

75,703

1,219,643

Other income (expenses):
Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue from development grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on refund for foreign indirect taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of shares of consolidated subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in loss of affiliated company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on reversal of forfeited warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .

910
(421)
2,640
(3,373)
–
–
1,225
528
(1,442)
526
(834)

504
(687)
1,537
(1,676)
855
(419)
–
–
(403)
–
(658)

7,712
(3,564)22,365(28,581)––
10,381
4,475(12,212)
4,458(7,066)

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

676

572

5,722

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

144,41475,3281,223,333

Income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60,132(7,535)29,189(2,352)509,380(63,825)

Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

554

485

4,691

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 91,263¥ 48,006$ 773,087

Per share of common stock:
Net income — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income — diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See accompanying Notes to Consolidated Financial Statements.

46

Yen

¥ 511.27
509.84
2,573.72
103.00U.S. dollars¥ 267.61
267.32
2,112.30
55.00

$

4.33
4.32
21.80
0.87

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDCONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETSTokyo Electron Limited and Subsidiaries
Years ended March 31, 2007 and 2006

Commonstock

CapitalsurplusRetainedearnings

TreasurystockMillions of yen
Valuation and translation adjustments
DeferredForeign
Unrealized
gains orcurrency
gains onlosses on translation
securities
hedges adjustments

Balance as of March 31, 2005 . . . . . . . .

¥54,961¥78,023¥212,094¥(16,043)¥2,133

Cash dividends . . . . . . . . . . . . . . . . . . .
Bonuses to directors . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Repurchase of treasury stocks . . . . . . . .
Disposal of treasury stocks . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . .

–
–
–
–
–
–

–
–
–
–
56
–

(9,796)(349)
48,006
–
–
(17)

–
–
–
(39)
965
–

–
–
–
–
–
2,985

Balance as of March 31, 2006 . . . . . . . .

¥54,961¥78,079¥249,938¥(15,117)¥5,118Cash dividends . . . . . . . . . . . . . . . . . . .
Bonuses to directors . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Repurchase of treasury stocks . . . . . . . .
Disposal of treasury stocks . . . . . . . . . .
Sale of shares of consolidated
subsidiary and others . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . .

–
–
–
–
–

–
–
–
–
268

(12,843)(331)
91,263
–
–

–
–
–
(64)
3,013

–
–
–
–
–

–
–

–
–

–
–

–
–

Balance as of March 31, 2007 . . . . . . . .

¥54,961¥78,347¥328,027¥(12,168)

Shareholders’ equity

Commonstock

Balance as of March 31, 2006 . . . . . . . . $465,576
Cash dividends . . . . . . . . . . . . . . . . . . .
Bonuses to directors . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Repurchase of treasury stocks . . . . . . . .
Disposal of treasury stocks . . . . . . . . . .
Sale of shares of consolidated
subsidiary and others . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . .

CapitalsurplusRetainedearnings

Total
net assets¥ 997¥1,043¥4,411¥337,619

–
–
–
–
–
–

–
–
–
–
–
2,924

–
–
–
–
–
(29)

–
–
–
–
–
311

(9,796)(349)
48,006
(39)
1,021
6,174

–

¥3,921¥1,014¥4,722¥382,636

–
–
–
–
–

–
–
–
–
–

–
–
–
–
–

–
–
–
–
–

(12,843)(331)
91,263
(64)
3,281

–
735

–
(177)

–
1,412

–
(430)

4,329
–

4,329
1,540

¥5,853¥(177)¥5,333¥ 584¥9,051¥469,811

Treasurystock

Thousand of U.S. dollars
Valuation and translation adjustments
DeferredForeign
Unrealized
gains orcurrency
gains onlosses ontranslation
securities
hedgesadjustments

Sharesubscription
rightsMinority
interests

Total
net assets$39,998 $3,241,302¥$(128,054)$43,351–$33,217$ 8,587

–
–
–
–
–

–
–
–
–
2,269

(108,795)(2,806)
773,087
–
–

–
–
–
(544)
25,525

–
–
–
–
–

–
–
–
–
–

–
–
–
–
–

–
–
–
–
–

–
–
–
–
–

(108,795)(2,806)
773,087(544)
27,794

–
–

–
–

–
–

–
–

–
6,231

–
(1,502)–
11,958–(3,638)36,675–36,675
13,049$663,674 $2,778,708$(103,073)$49,582$(1,502)$45,175$ 4,949$76,673 $3,979,762

Balance as of March 31, 2007 . . . . . . . . $465,576$661,405 $2,117,222

Minority
interests–

Shareholders’ equity

¥

Share
subscription
rights$See accompanying Notes to Consolidated Financial Statements.

47

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

CONSOLIDATED STATEMENTS OF CASH FLOWSTokyo Electron Limited and Subsidiaries
Years ended March 31, 2007 and 2006
Thousands of
U.S. dollars

Millions of yen

2007

2006

2007

Cash flows from operating activities:
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued pension and severance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued employees’ bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in accrued warranty expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on refund for foreign indirect taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of shares of consolidated subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in loss of affiliated company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on reversal of forfeited warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in trade notes and accounts receivable . . . . . . . . . . . . . . . . . . . . . .
Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in prepaid consumption tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in trade notes and accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥144,414
18,820
1,974
–
1,926
3,900
1,614
421
–
(1,225)
(528)
1,442
(526)
834
(58,352)(31,585)(1,775)
17,236(12,459)
5,551¥ 75,328
19,170
1,600
419
2,340
1,587
(985)
687
(855)
–
–
403
–
658
5,144
(5,467)2,657
6,743(9,505)(1,309)$1,223,333
159,427
16,725–
16,31533,03913,672
3,564–(10,381)(4,475)
12,212(4,458)7,066(494,301)(267,556)(15,033)
146,006(105,541)
47,023

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receipts from interest and dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

91,682853(453)(37,785)

98,615503(739)(19,525)776,637
7,229(3,836)(320,081)

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54,29778,854459,949

Cash flows from investing activities:
Payment for purchase of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment for acquisition of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment for acquisition of consolidated subsidiary, net of cash acquired . . . . . . . . . . . .
Proceeds from sale of shares in consolidated subsidiary . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(25,154)
1,069(2,462)(4,524)
4,169
2,460
(851)

(8,601)
1,280(2,611)
–
–
36
(641)

(213,078)
9,054(20,860)(38,325)
35,311
20,841(7,202)

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(25,293)(10,537)(214,259)

Cash flows from financing activities:
Increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of unsecured bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in treasury stock, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(404)–(24,500)
3,217(12,843)
(189)

1,037
(5,476)(30,000)
982(9,796)(167)(3,424)–(207,539)
27,250(108,795)(1,599)Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(34,719)(43,420)(294,107)

Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . .

81

(341)

690

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of newly consolidated subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5,634)140,024–

24,556
115,420
48(47,727)
1,186,141–

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥134,390¥140,024$1,138,414

See accompanying Notes to Consolidated Financial Statements.

48

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 with theprovisions set forth in the Japanese Securities and Exchange Law and its related
accounting regulations, and in conformity with accounting principles generally
accepted in Japan, which are different in certain respects as to application anddisclosure 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
the statutory 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 ¥118.05 to $1.00, the approximate rate asof March 31, 2007. The translation should not be construed as a representation that the Japanese yen amounts shown could be converted into U.S.
dollars at that 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.
The 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 of all entities is March 31, except for two foreign subsidiaries,
which use a December 31 year-end, and no significant transactions werenoted 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 rates prevailing at the time of the transactions.
The balance sheet accounts of the 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
or other 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 withoutmarket 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 individual method. Raw materials are stated principally at cost, which is determined principally by the moving-average 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 is computed under the declining balance method, except for buildings
acquired subsequent to March 31, 1998 which were depreciated under thestraight-line method based on the estimated useful lives of assets. The
straight-line method is mainly applied by its foreign subsidiaries over theestimated 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 two to five years. Goodwill is evaluated on an
individual basis and amortized over a period not exceeding 20 years.
(g) Impairment of fixed assets
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,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 these assets, respectively.
The Company adopted “Accounting Standard for Impairment of Fixed
Assets”, issued by the Business Accounting Deliberation Council and theimplementation guidance for the accounting standard for impairment of fixed
assets (the Financial Accounting Standard Implementation Guidance No. 6
issued by the Accounting Standard Board of Japan), effective from the fiscal
year beginning April 1, 2005.
As a result of this change, loss on impairment of fixed assets amounting to¥419 million was recognized for the year ended March 31, 2006, and therefore
income before income taxes decreased by the same amount as comparedwith before the change.
(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.
(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 (four years) within the
average remaining years of service of employees when the differences occur.

49

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

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 (fouryears) 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 theseverance pay for directors and statutory auditors after April 1, 2005, and at
the general shareholders’ meetings in June 2005, it was resolved that the severance pay for their directors and statutory auditors until March 31, 2005 would
be paid at the termination of their service and decision of payment amount foreach director and statutory auditor was delegated to board meeting of directors and statutory auditors, respectively. As discussed in note 10, the accruals
for the severance costs for directors and statutory auditors were 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-salerepair expenses over the warranty period are accrued based on the historicalratio 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 have transfer of ownership condition to the lessee at the end of thelease which are accounting 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 thedomestic 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. As described in note 3 (a), unrealized gains or losses on
hedging derivatives, net of taxes as of March 31, 2007 are reported in net
assets as a component of valuation and translation adjustments in accordancewith newly adopted “Accounting Standard for Presentation of Net Assets in the
Balance Sheet” effective from the year ended March 31, 2007. Unrealized
gains or losses on hedging derivatives as of March 31, 2006 were deferred as
the assets or liabilities without considering the related income tax effects inaccordance with presentation rule and accounting standards which had beeneffective until the year ended March 31, 2006. Receivables and payables
hedged by qualified forward foreign exchange contracts are translated at thecorresponding foreign exchange contract rates.
(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

50

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
the weighted 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 incurred,
and amounted to ¥56,962 million ($482,522 thousand) and ¥49,182 million forthe years ended March 31, 2007 and 2006, 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 the new accounting standard, “Accounting Standard forStatement of Changes in Net Assets” (Statement No.6 issued by the AccountingStandards Board of Japan on December 27, 2005), and the implementation
guidance for the accounting standard for statement of changes in net assets (theFinancial Accounting Standard Implementation Guidance No.9 issued by the
Accounting Standards Board of Japan on December 27, 2005).
The Company prepared the accompanying consolidated statement ofchanges in net assets for the year ended March 31, 2007 in accordance withthese standards.
(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, 2007. As described in note 3 (a), the consolidated balance sheet for2006 has been modified to conform to the new presentation rules of 2007. Also,
as described in note 2 (q), in lieu of the consolidated statement of shareholders’equity for the year ended March 31, 2006, the Company prepared the consolidated statements of changes in net assets for 2006 as well as that for 2007.

3. Changes in Accounting Policies(a) Accounting standard for presentation of net assets on thebalance sheet
Effective from the year ended March 31, 2007, the Company and its domestic subsidiaries adopted the new accounting standard, “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 theimplementation guidance for the 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), (collectively, “the New Accounting Standards”).

ANNUAL REPORT 07

The consolidated balance sheet as of March 31, 2007 prepared in accordance with the New Accounting Standards comprises of three sections;assets, liabilities and net assets.
Under the New Accounting Standards, the following items are required to
be presented differently at March 31, 2007 compared to March 31, 2006.
Unrealized gains or losses on hedging derivatives, net of taxes are included in
net assets. Under the previous presentation rules, unrealized gains or losses
on hedging derivatives were included in the assets or liabilities without considering the related income tax effects. Share subscription rights and minority
interests are required to be included in net assets to confirm to the New
Accounting Standards. Under the previous presentation rules, companies
were required to present share subscription rights and minority interests inliabilities and between the non-current liabilities and the shareholders’equity, respectively.
The consolidated balance sheet as of March 31, 2006 has been restated toconform to the 2007 presentation. As a result, share subscription rights andminority interests amounting to ¥1,014 million and ¥4,722 million, respectively,
are included in net assets as of March 31, 2006. On the other hand, unrealized
gains and losses on hedging derivatives amounting to ¥689 million and ¥441
million, respectively, as of March 31, 2006 are included in accrued expenses
and other current liabilities, and prepaid expenses and other current assets,
respectively, without considering the related income tax effects in accordancewith the previous accounting method.
The adoption of the New Accounting Standards had no impact on the
consolidated statement of income for the year ended March 31, 2007. Also,
the amount corresponding to total net assets as of March 31, 2007 and 2006
under previous standards were ¥460,353 million ($3,899,642 thousand) and¥376,900 million, respectively.
(b) Accounting standard for business combination
Effective from the year ended March 31, 2007, “Accounting Standard forBusiness Combination” issued by the Business Accounting Standards Boardof Japan has been adopted. The change had no significant impact on consolidated financial statements.
(c) 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 has been adopted. The change had no impact on
consolidated financial statements.
(d) Accounting standard for stock option
Effective from year ended March 31, 2007, “Accounting Standard for Stock
Option” issued by the Accounting Standards Board of Japan has been
adopted. Upon adoption, operating income and income before income taxes
decreased by ¥118 million ($996 thousand) compared to the amount thatwould have been recorded under the previous accounting standards.
(e) 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 has
been adopted. Upon adoption, operating income and income before income
taxes decreased by ¥652 million ($5,519 thousand) compared to the amountthat would have been recorded under the previous accounting standards.

TOKYO ELECTRON LIMITED

Business segment information for the year ended March 31, 2006, is reclassified in accordance with the classification for the year ended March 31, 2007.

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 ($38,341 thousand) on December 19, 2006 (seenote 17). The acquisition was accounted for using purchase method in accordance with U.S. generally accepted accounting standards. Negative goodwill
generated from the acquisition was deducted from the intangible assets related
to the acquired developed technology. The intangible assets, net amount of¥4,985 million ($42,221 thousand), have been amortized over ten years.

5. Investment Securities
Investment securities, which solely comprise of other securities, as of March
31, 2007 and 2006 are as follows:
Millions of yen

Cost

Carrying
value

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥4,517¥14,338

Other (Note) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

114

120

Unlisted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,015

183

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21

21

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥6,667¥14,6622007

Securities with market prices

Securities without market value

Millions of yen

Cost

Carrying
value

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥5,348¥13,940

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

114

119

Unlisted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,708

778

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23

23

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥7,193¥14,860

2006

Securities with market prices

Securities without market value

Thousands of U.S. dollars

Cost

Carrying
value

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .

$38,263$121,461

Other (Note) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

963

1,019

Unlisted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,070

1,551

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

179

179

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$56,475$124,210

2007

Securities with market prices

Securities without market value

Note: Bond investment trust of ¥19 million ($170 thousand) classified as prepaid expenses andother current assets as of March 31, 2007 is included in the above.

Gross realized gains and losses on sales of other securities are ¥1,244
million ($10,549 thousand) and ¥19 million ($168 thousand), respectively, forthe year ended March 31, 2007.

(f) 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 “Industrial electronic equipment” segment was reclassified to “Electronic
components” segment, which was renamed to “Electronic components andcomputer networks” segment, to more appropriately present the businesssegments in line with similarities types of products and operations.

51

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

6. Inventories

10. Accrued Pension and Severance Costs

Inventories as of March 31, 2007 and 2006 are as follows:
Thousands of
U.S. dollars

Millions of yen

Finished products . . . . . . . . . . . . . . . .

2007

2006

2007

¥102,515¥ 95,564$ 868,404

Work in process, raw materials
and supplies . . . . . . . . . . . . . . . . . . . .

92,32568,182782,086

Total . . . . . . . . . . . . . . . . . . . . . . . . . .

¥194,840¥163,746$1,650,490

7. Impairment of Fixed Assets
For the fixed asset impairment test, 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.
The Company recorded impairment losses for the lands used for employees’ welfare of ¥419 million in 2006. These charges were recorded in otherincome (expenses) in the consolidated statement of income for the year ended
March 31, 2006.
No impairment loss of fixed assets was recognized in 2007.

The Company and its domestic subsidiaries have a defined benefit plan (cashbalance plan) and noncontributory retirement and severance benefit plans covering substantially 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
to employees with ten or more years of service who retired or terminated theiremployment for reasons other than dismissal for cause. Under the cash balance pension plan, each participant has an account which is credited yearlybased on the current rate of pay and market-related interest rate. The noncontributory plans provide for lump-sum payment benefits to employees who
retired or terminated their employment for reasons other than dismissal forcause. Certain foreign subsidiaries have noncontributory retirement and severance benefit plans that provided for pension or lump-sum payment benefits toemployees who retire or terminate their employment for reasons other thandismissal for cause.
The funded status of the defined benefit plans, a substantial portion of which
consists of domestic benefit plans, as of March 31, 2007 and 2006 is as follows:
Thousands of
U.S. dollars

Millions of yen

2007

2006

2007

¥(69,414)¥(64,689)$(588,005)

8. Pledged Assets

Benefit obligation . . . . . . . . . . . . . . . . .

Tokyo Electron did not hold any assets pledged as collateral as of March 31,
2007 and 2006.

Fair value of plan assets . . . . . . . . . . . .

30,812

24,962

261,011

Unrecognized benefit obligation . . . . . .

(38,602)(39,727)(326,994)(17,904)

Unrecognized actuarial difference . . . .

(2,113)(1,496)

9. Short-term Borrowings and Long-term Debt

Unrecognized prior service cost . . . . . .

1,662

3,188

14,078

Short-term borrowings are represented by 365-day notes issued by Tokyo
Electron to banks and bore interest at the average annual rate of 2.61% and1.58% as of March 31, 2007 and 2006, respectively.
Long-term debt as of March 31, 2007 and 2006 is as follows:

Net amount recognized . . . . . . . . . . . .

(39,053)(38,035)(330,820)

966

–

8,180

2007

0.72% unsecured bonds due 2008 . . .

¥balance sheets consist of:Prepaid pension andThousands of
U.S. dollars

Millions of yen

0.42% unsecured bonds due 2006 . . .

Amounts recognized in the consolidated

2006

2007

–

¥ 20,000$–

30,00030,000254,130

–

4,500

–

5,500

5,500

46,590

1.59% unsecured bonds withwarrants due 2006 . . . . . . . . . . . . . . .
0.86% unsecured bonds withwarrants due 2007 . . . . . . . . . . . . . . .

severance costs . . . . . . . . . . . . . . .
Accrued pension andseverance costs (Note) . . . . . . . . . .

(40,019)(38,035)(339,000)

Net amount recognized . . . . . . . . . . . .

¥(39,053)¥(38,035)$(330,820)

Note: The provision for accrued pension and severance costs for directors and statutory auditors(¥667 million ($5,649 thousand) in 2007 and ¥716 million in 2006) is not included in the above.

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

Millions of yen

Other loans from banks . . . . . . . . . . . .

3,000

3,000

25,413

2007

2006

2007

Current portion . . . . . . . . . . . . . . . . . . .

(8,500)(24,500)(72,003)

Service cost . . . . . . . . . . . . . . . . . . . . .

¥4,912¥4,757$41,610

Total . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 30,000¥ 38,500$254,130Interest cost . . . . . . . . . . . . . . . . . . . . .

1,281

1,186

10,855

Expected return on plan assets . . . . . .

(499)

(276)

(4,229)Amortization of actuarial difference . . . .

391

1,876

3,310

Amortization of prior service cost . . . . .

1,526

1,526

12,92964,475

As of March 31, 2007, Tokyo Electron has unused lines of credit amounting
to ¥125,842 million ($1,066,006 thousand).
The maturities of long-term debt are summarized as follows:
Millions ofyenYear ending March 31

Thousands of
U.S. dollars

2007

2007

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 8,500$ 72,003

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30,000254,130

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

––2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

––2012 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . .

––Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥38,500$326,13352

Net pension cost . . . . . . . . . . . . . . . . .

7,611

9,069

Other . . . . . . . . . . . . . . . . . . . . . . . . . .

–

(24)

–

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥7,611¥9,045$64,475

ANNUAL REPORT 07

Significant assumptions of domestic pension plans used to determine theseamounts are as follows:
2007

Straight-line method

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.00%

2.00%

Expected rate of return on plan assets . . . . . . . . . . . .

2.00%

2.00%

Amortization period of prior service cost . . . . . . . . . .

4 years

4 years

Amortization period of actuarial difference . . . . . . . . .

4 years

4 years

11. Income Taxes
Significant components of the deferred tax assets and liabilities of Tokyo
Electron as of March 31, 2007 and 2006 are as follows:
Thousands of
U.S. dollars

Millions of yen

2007

2006

2007

Deferred tax assets
Accrued pension and severance costs . .

¥ 16,032¥ 15,134$135,810

Elimination of unrealized profit
on inventories . . . . . . . . . . . . . . . . . . .

10,463

8,298

88,631

Accrued employees’ bonuses . . . . . . .

5,736

4,140

48,590Accrued warranty expenses . . . . . . . . .

4,737

4,737

40,127

Accrued business taxes . . . . . . . . . . . .

3,890

1,555

32,952

Devaluation of inventories . . . . . . . . . . .

2,713

1,954

22,981

Net operating loss carryforwards . . . . .

1,966

1,123

16,658Depreciation and amortization . . . . . . .

1,598

3,653

13,536

Other . . . . . . . . . . . . . . . . . . . . . . . . . .

5,981

5,957

50,662

Total gross deferred tax assets . . . . . .

53,11646,551449,947

Less valuation allowance . . . . . . . . . . .

(1,952)(2,848)(16,535)

Total deferred tax assets . . . . . . . . . . .

51,16443,703

433,412(3,975)(3,480)(33,672)(3,517)(2,766)(29,792)

Measures Law, etc . . . . . . . . . . . . . . .

(1,932)(2,547)(16,373)

Prepaid start-up expenses . . . . . . . . . .

(1,659)(1,856)(14,050)

Deferred tax liabilities
Net unrealized gains on securities . . . .
Undistributed earnings offoreign subsidiaries . . . . . . . . . . . . . . .

Significant components of the difference between the statutory and effective
tax rates for the years ended March 31, 2007 and 2006 are as follows:

2006

Allocation method of benefit obligation . . . . . . . . . . . .

Reserves under Special Taxation

Other . . . . . . . . . . . . . . . . . . . . . . . . . .

(626)

(288)

(5,299)Total gross deferred tax liabilities . . . . .

(11,709)(10,937)(99,186)

Net deferred tax assets . . . . . . . . . . . .

¥ 39,455¥ 32,766$334,226

Effective from the year ended March 31, 2006, the Company and its
wholly-owned domestic subsidiaries adopted the tax consolidation forcorporate tax purposes.
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 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 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, 2007 and 2006.
The Company is subject to a corporate tax, an inhabitant tax and a deductible business tax, which in the aggregate resulted in a statutory income tax rateof approximately 40.69% for the years ended March 31, 2007 and 2006.

TOKYO ELECTRON LIMITED

Statutory tax rate in Japan . . . . . . . . . . . . . . . . . . . . .

2007

2006

40.69%

40.69%(5.21)(5.70)(1.33)

Adjustments:
Tax credits for research and development costs, etc. . .
Difference in statutory tax rates of
consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . .

(1.06)

Gain on sale of shares of consolidated subsidiary . . .

0.73

–

Change in valuation allowance . . . . . . . . . . . . . . . . . .

(0.60)

0.95

Dividends from foreign subsidiaries . . . . . . . . . . . . . .

0.57

0.59

Expenses not deductible for tax purpose . . . . . . . . . .

0.56

0.62

Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . .

0.54

0.86

Increase in deferred tax liabilities on
undistributed earnings of foreign subsidiaries . . . . . .

0.52

0.43

Others, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.32)(1.48)

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36.42%

35.63%

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 prices 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, thesmaller 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 consolidatedbalance sheets.
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 resolutionof 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 oflegal reserve and additional paid-in capital remained equal to or exceeded 25%of common stock, they were available for distribution by resolution of theshareholders’ meeting. Under the Law, all additional paid-in capital and alllegal 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.

53

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

At the general shareholders’ meeting on June 23, 2006, in accordance with
the Law, the Company altered the 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 11, 2007, the distributionof cash dividends amounting to ¥10,907 million ($92,390 thousand) was
resolved. Such appropriations have not been accrued in the consolidated
financial statements as of March 31, 2007. Such appropriations are recognizedin 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. In
addition, a stock option plan for statutory auditors was additionally approved at
the Company’s general shareholders’ meeting in June 2005. The cumulative
number of shares authorized up to the year ended March 31, 2005 totaled
2,723,100, with the weighted average exercise price of ¥7,326. Options topurchase 85,200 and 92,000 shares of the Company were authorized andgranted at exercise prices of ¥1 and ¥6,468, respectively for the year ended
March 31, 2006. Options to purchase 66,900 shares of the Company wereauthorized and granted at an exercise price of ¥1 for the year ended March 31,
2007. The options under the plans vest immediately with restriction on exercise
up to two or three years after the date of grant, and have an exercise period ofeight to twenty 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 and selected
employees since the year ended March 31, 2005. As of April 1, 2005, outstanding granted stock options were 300 shares, with a weighted-average
exercise price of ¥340,439. Options to purchase 350 shares of TED wereauthorized and granted at an exercise price of ¥281,492 for the year ended
March 31, 2006. As of March 31, 2007, outstanding granted stock options were
650 shares with a weighted-average exercise price of ¥308,698 ($2,614.98).
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 the directors and selected employees. By exercising the warrant,
directors and selected employees can purchase the common stock of theCompany, the numbers of which were 319,829 shares and 572,439 shares atthe exercise price of ¥14,070 and ¥9,608 for warrants issued in June 2000,
which were forfeited and recognized a gain of ¥526 million ($4,458 thousand)in 2007, and June 2001, respectively. As noted above, the stock option plan
granted stock options at an exercise price of ¥1 and to be in accordance with
the Warrant plan, the exercise prices of these warrants issued in 2001 were
adjusted to ¥9,601 ($81.33) and ¥9,604 in 2007 and 2006, respectively. The
number of outstanding granted options increased by 139 shares and 283
shares in 2007 and 2006, respectively as a result of these adjustments to theexercise price of the warrant.

54

The warrants vest immediately with restriction on exercise up to two years
after the date of grant, and have an exercise period of six years from the dateof grant. For financial reporting purposes, these transactions were accounted
for as an issuance of debt to third parties and separately as the issuance of
warrants to directors and selected employees.
As of April 1, 2005, outstanding granted stock options, including warrants
were 3,418,020 shares of the Company, with a weighted-average exercise
price of ¥8,108. For the year ended March 31, 2006, 28,705 shares of theoptions were forfeited and 198,900 shares of the options were exercised. For
the year ended March 31, 2007, 322,560 shares of the options were forfeitedand 530,900 shares of the options were exercised. As of March 31, 2007,
outstanding granted stock options, including the warrants were 2,581,477
shares with a weighted-average exercise price of ¥7,609 ($64.46).

14. Leases
Pro forma information of leased property such as 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, 2007 and2006 are as follows:
Leased assets not recorded in the consolidated balance sheets:
Thousands of
U.S. dollars

Millions of yen

2007

2006

2007

Acquisition cost . . . . . . . . . . . . . . . . . .

¥1,538¥1,448$13,029

Accumulated depreciation . . . . . . . . . .

1,104

797

9,353

Net leased property . . . . . . . . . . . . . . .

¥ 434

¥ 651

$ 3,676

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

Millions of yen

2007

2006

2007

Due within one year . . . . . . . . . . . . . . .

¥121

¥247

$1,023Due over one year . . . . . . . . . . . . . . . .

313

404

2,653

Total . . . . . . . . . . . . . . . . . . . . . . . . . .

¥434

¥651

$3,676

Lease payments relating to finance leases accounted for as operating leases
amounted to ¥274 million ($2,321 thousand) and ¥318 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, 2007 and 2006, respectively.
Future minimum lease payments on non-cancelable operating leases:
Thousands of
U.S. dollars

Millions of yen

Due within one year . . . . . . . . . . . . . . .

2007

2006

2007

¥ 733

¥ 690

$ 6,206

Due over one year . . . . . . . . . . . . . . . .

920

696

7,795

Total . . . . . . . . . . . . . . . . . . . . . . . . . .

¥1,653¥1,386$14,001

ANNUAL REPORT 07

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 loss
would not be material 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 conducted pursuant to
the internal management rule for derivatives by the finance division and theeffectiveness of derivative transactions is reported on a semiannual basis to theboard of directors.
The estimated fair values of the derivative financial instruments as of March
31, 2007 and 2006 are as follows:
Millions of yen

2007:

Contract
amountFair value

Unrealized
gains (losses)

Sell U.S. dollars . . . . . . . . . . . . . . . . . .

41,64844,142(2,494)

Buy U.S. dollars . . . . . . . . . . . . . . . . . .

1,770

1,870

100

Contract
amountFair value

Unrealized
gains (losses)

Sell U.S. dollars . . . . . . . . . . . . . . . . . .

45,872

46,313(441)

Buy U.S. dollars . . . . . . . . . . . . . . . . . .

1,909

1,922

13

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)
Equity in loss of affiliated company of ¥1,442 million ($12,212 thousand)which is included in other income (expenses) for the year ended March 31,
2007 mainly consists of the liquidation of a 42.9% owned affiliated company(e-BEAM Corporation).
The 19,247 shares of Tokyo Electron Device Limited, a domestic listed
subsidiary, were sold in the amount of ¥4,169 million ($35,311 thousand) in
March 2007, and a gain of ¥528 million ($4,475 thousand) was recognized.
As a result, the Company’s ownership interests 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

2006:

TOKYO ELECTRON LIMITED

Millions ofyen

Thousands of
U.S. dollars

2007

2007

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 548$ 4,642

Intangible and other non-current assets . . . . . . . . . . .

6,159

52,178Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(168)(1,427)

Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . .

(2,013)(17,052)

Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,526

38,341

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

(2)

(16)

Net: payment for acquisition . . . . . . . . . . . . . . . . . . . .

4,524

38,325

Thousands of U.S. dollars

2007:

Contract
amountFair value

Unrealized
gains (losses)

Sell U.S. dollars . . . . . . . . . . . . . . . . . .

352,797

373,921(21,124)

Buy U.S. dollars . . . . . . . . . . . . . . . . . .

14,991

15,842851

18. Segment Information
Business segment information as of and for the years ended March 31, 2007 and 2006 is as follows:
Millions of yen

Industrial
electronicequipment

Electronic
components
and computer
networks

Total(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥744,512¥107,463¥851,975(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,382

1,247

3,629

(3,629)–Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

746,894

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

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

606,540

104,740

711,280(3,283)707,996

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

140,354

3,970

144,324(346)

143,979

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,061360

20,421–

20,421

Capital expenditure, including intangible and other assets . . . . . . . . . . . . . . .

34,795274

35,069–35,0692007:

Eliminations
andcorporate

Consolidated

1. Net sales and operating income
Net sales¥–¥851,975

2. Assets, depreciation and amortization expenses and capital expenditure

55

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

Millions of yen

Industrial
electronicequipment

Electronic
components
and computer
networks

Total(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥569,308¥104,378¥673,686(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,220

1,426

3,646

(3,646)–

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

571,528

105,804

677,332(3,646)

673,686

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

500,002

101,623

601,625(3,642)597,983

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71,526

4,181

75,707(4)

75,703

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥618,265¥ 45,662¥663,927¥ (684)¥663,243

Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,375395

20,770–20,770Loss on impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

419

–

419

–

419

Capital expenditure, including intangible and other assets . . . . . . . . . . . . . . .

16,014353

16,367–

16,3672006:

Eliminations
andcorporate

Consolidated

1. Net sales and operating income
Net sales¥–¥673,686

2. Assets, depreciation and amortization expenses and capital expenditure

Thousands of U.S. dollars

Industrial
electronicequipment

Electronic
components
and computer
networks

Total(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,306,756$910,316$7,217,072(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,173

10,56430,737(30,737)–

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,326,929

920,880

7,247,809(30,737)

7,217,072

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,137,988

887,251

6,025,239(27,809)

5,997,429

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,188,941

33,6291,222,570(2,928)1,219,643

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,168,882$395,846$6,564,728$(37,715)$6,527,013

Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

169,932

3,050

172,982–

172,982

Capital expenditure, including intangible and other assets . . . . . . . . . . . . . . .

294,751

2,321

297,072–

297,072

2007:

Eliminations
andcorporate

Consolidated$$7,217,072

1. Net sales and operating income
Net sales–

2. Assets, depreciation and amortization expenses and capital expenditure

Note: 1. Method of classifying business segments: Business segments are classified after considering similarities in types of products and service, as well as sales methods.
2. Major products in each business segment:
Business segment
Major products
Industrial electronic equipment
Semiconductor production equipment, FPD production equipment and others
Electronic components and computer networks
Semiconductor products, boards, software, computer systems and networks, and other electronic components
3. Depreciation expenses and capital expenditure include those of long-term prepaid expenses.
4. Business segment information for the year ended March 31, 2006, which would have been classified in accordance with the classification for the year ended March 31, 2007.
5. Changes in accounting policies(1) 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 has been adopted. The adoption of the newstandards increased operating expenses and decreased operating income for the industrial electronic equipment by ¥118 million ($996 thousand) for the year ended March 31, 2007,
compared with the corresponding amount which would have been recorded if the previous method had been applied. The change did not affect the figures of the electronic components andcomputer networks segment.
(2) 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 has been 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($5,299 thousand) and ¥26 million ($220 thousand), respectively, for the year ended March 31, 2007, compared with the corresponding amount which would have been recorded if the previous
method had been applied.

56

ANNUAL REPORT 07

TOKYO ELECTRON LIMITED

Geographical segment information as of and for the years ended March 31, 2007 and 2006 are as follows:
Millions of yen

2007:

Eliminations
andcorporate

Japan

Other regions

Total

Consolidated(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥749,282¥102,693¥851,975¥(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69,93648,526

118,462(118,462)–

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

Eliminations
andcorporate

Consolidated

1. Net sales and operating income
Net sales–¥851,975

Millions of yen

2006:

Japan

Other regions

Total(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥602,564¥ 71,122¥673,686(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61,44343,811

105,254(105,254)–

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

664,007

114,933

778,940(105,254)

673,686

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

588,933

107,639

696,572(98,589)

597,983

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75,074

7,294

82,368(6,665)75,703

2. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥636,559¥ 85,730¥722,289¥ (59,046)¥663,243

Eliminations
andcorporate

Consolidated$7,217,072

1. Net sales and operating income
Net sales¥–¥673,686

Thousands of U.S. dollars

2007:

Japan

Other regions

Total(1) Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,347,157$ 869,915$7,217,072$(2) Intersegment sales or transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

592,428

411,061

1,003,489(1,003,489)–

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,939,585

1,280,976

8,220,561(1,003,489)

7,217,072

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,788,976

1,192,567

6,981,543(984,114)

5,997,429

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,150,609

88,4091,239,018(19,375)

1,219,643

2. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,276,747$ 806,290$7,083,037$ (556,024)$6,527,013

1. Net sales and operating income
Net sales–

Note: 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 bygeographic location.
2. Others comprises primarily of the United States of America, Europe and Korea.

Domestic and overseas sales for the years ended March 31, 2007 and 2006
are as follows:
Millions of yen

Net sales

Thousands of
U.S. dollars

2007

2006

2007

Japan . . . . . . . . . . . . . . . . . . . . . . . . .

¥313,816¥262,532$2,658,334

Taiwan . . . . . . . . . . . . . . . . . . . . . . . . .

182,918

150,322

1,549,497

Korea . . . . . . . . . . . . . . . . . . . . . . . . . .

122,628

83,571

1,038,780

United States of America . . . . . . . . . . .

105,717

93,314

895,527

Others . . . . . . . . . . . . . . . . . . . . . . . . .

126,896

83,947

1,074,934

Total . . . . . . . . . . . . . . . . . . . . . . . . . .

¥851,975¥673,686$7,217,072

Note: 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 the foreignsubsidiaries, except for export sales to Japan.
2. Others comprises primarily of China, Singapore, Germany and Ireland.

19. Subsequent Event
Grant of stock options under the stock option plans
On May 11, 2007, 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 Tokyo Electron.
The issuance of stock subscription rights is intended to enable the grant ofstock options. Under this stock option plan, the options to purchase the sharesof the Company at an exercise price of ¥1 ($0.01), up to 40,000 shares will be
granted to directors of the Company (excluding outside directors) and theoptions to purchase the shares of the Company at an exercise price of ¥1($0.01), up to 90,000 shares will be granted to executive officers of the Company, directors and executive officers of domestic subsidiaries, the chairman,
presidents, vice presidents, executives (including corporate officers) and senior
executives of its overseas subsidiaries as of March 31, 2007 and directors of
the Company resigning at the general shareholders’ meeting on June 22,2007. This grant of stock options was approved at the general meeting of theshareholders of the Company on June 22, 2007.

57

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

INDEPENDENT AUDITORS’ REPORTTo the Board of Directors ofTokyo Electron Limited:

We have audited the accompanying consolidated balance sheets of Tokyo Electron Limited and subsidiaries as ofMarch 31, 2007 and 2006, and the related consolidated statements of income, changes in net assets and cash flows
for the years then ended, expressed in Japanese yen. These consolidated financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, theconsolidated financial position of Tokyo Electron Limited and subsidiaries as of March 31, 2007 and 2006, and theconsolidated results of their operations and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to the following.
(1) As discussed in note 3 (f) to the consolidated financial statements, the Company changed its classification ofbusiness segments in the year ended March 31, 2007.
(2) As discussed in note 2 (g) to the consolidated financial statements, the Company adopted “AccountingStandard for Impairment of Fixed Assets”, issued by the Business Accounting Deliberation Council, for the year
beginning April 1, 2005.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended
March 31, 2007 are presented solely for convenience. Our audit also included the translation of yen amounts into
U.S. dollar amounts and, in our opinion, such translation has been made on the basis described in note 1 to theconsolidated financial statements.

Tokyo, Japan
June 22, 2007

58

ANNUAL REPORT 07

TOKYO ELECTRON LIMITEDSUBSIDIARIES AND AFFILIATES
As of March 31, 2007, the Tokyo Electron Group was made up of the parent company, 30 subsidiaries and 1 affiliate.

Company

Main business

JAPAN
Consolidated subsidiaries
Tokyo Electron AT Limited

Manufacture and development

Tokyo Electron Kyushu Limited

Manufacture and development

Tokyo Electron Tohoku Limited

Manufacture and development

Tokyo Electron TS Limited

Manufacture and development

Tokyo Electron Software Technologies Limited

Development

Epion Japan Limited

Development

Tokyo Electron FE Limited

Field engineering

Tokyo Electron PS Limited

Refurbishment and modification

Tokyo Electron Device Limited

Sales

Tokyo Electron BP Limited

Business and office support including logistics, leasing, facility management, etc.

Tokyo Electron Agency Limited

Nonlife insurance

Equity-method affiliate
e-BEAM Corporation

Development

AMERICA
Consolidated subsidiaries
Tokyo Electron U.S. Holdings, Inc.

Holding company

Tokyo Electron America, Inc.

Sales and field engineering

Tokyo Electron Massachusetts, LLC

Manufacture and development

Tokyo Electron Arizona, LLC

Manufacture and development

Timbre Technologies, Inc.

Manufacture and development

TEL Technology Center, America, LLC

Development

TEL Epion, Inc.

Manufacture and development

TEL Venture Capital, Inc.

Identification and evaluation of new technologies

EUROPE
Consolidated subsidiaries
Tokyo Electron Europe Limited

Sales and field engineering

Tokyo Electron Deutschland GmbH

Field engineering

Tokyo Electron Nederland B.V.

Field engineering

Tokyo Electron Ireland Limited

Field engineering

Tokyo Electron Israel Limited

Field engineering

ASIA
Consolidated subsidiaries
Tokyo Electron Korea Limited

Sales and field engineering

Tokyo Electron Korea Solution Limited

Modification

Tokyo Electron Taiwan Limited

Sales and field engineering

Tokyo Electron (Shanghai) Limited

Sales and field engineering

Tokyo Electron (Shanghai) Logistic Center Limited

Logistics

Tokyo Electron Device Hong Kong Limited

Sales

59

TOKYO ELECTRON LIMITEDANNUAL REPORT 07

INVESTOR INFORMATION(As of March 31, 2007)

Corporate Name and Head Office:

URL:

Tokyo Electron Limited
TBS Broadcast Center
3-6 Akasaka 5-chome, Minato-ku,
Tokyo 107-8481, Japan

http://www.tel.com

Principal Shareholders:Established:
November 11, 1963

Annual General Meeting of Shareholders:June

Common Stock:
Stock trading unit
Authorized
Issued and outstanding
Number of shareholders

100 shares
300,000,000 shares
180,610,911 shares
41,289Common Stock Listed on:
The Tokyo Stock Exchange 1st Section (#8035)

The Master Trust Bank of Japan, Ltd. (Trust Account)
Japan Trustee Services Bank, Ltd. (Trust Account)
Tokyo Broadcasting System, Inc.
The Chase Manhattan Bank, N.A. London
The Dai-ichi Mutual Life Insurance Co.
Japan Trustee Services Bank, Ltd. (Trust Account No. 4)
The Bank of Tokyo-Mitsubishi UFJ, Ltd.
Trust & Custody Services Bank, Ltd. (Trust Account B)
BNP Paribas Securities (Japan) Ltd.
Calyon DMA OTC

Number of shares
held (thousands)

Voting shareratio (%)

22,267
14,266
10,227
6,203
4,800
4,408
3,000
2,823
2,700
2,668

12.32
7.89
5.66
3.43
2.65
2.44
1.66
1.56
1.49
1.47

Shares of less than one thousand have been rounded down in the “Number of shares held”

Distribution of Ownership Among Shareholders:

Independent Auditors:

Japanese financial institutions andsecurities companies
81,793,184 shares
45.29%
Foreign institutions and others
68,774,799 shares
38.08%
Individuals and others
16,247,212 shares
9.00%
Other Japanese corporations
11,982,740 shares
6.63%
Treasury stock
1,812,976 shares
1.00%

KPMG AZSA & Co.

Administrator of Shareholders’ Register:
The Chuo Mitsui Trust and Banking Co., Ltd.
33-1 Shiba 3-chome, Minato-ku, Tokyo 105-8574, JapanFor Further Information, Contact:
Investor Relations
Corporate Communications Department
Tokyo Electron Limited
TBS Broadcast Center
3-6 Akasaka 5-chome, Minato-ku
Tokyo 107-8481, Japan
Tel: +81-3-5561-7003
Fax: +81-3-5561-7400

Stock Price and Trading Volume(Yen)(Thousands of shares)

12,00010,0008,000
Stock price
6,000

60,0004,000
Trading volume

30,0002,000

00FY200360

FY2004

FY2005

FY2006

FY2007

TOKYO ELECTRON LIMITEDANNUAL REPORT 2007

World Headquarters
TBS Broadcast Center, 3-6 Akasaka 5-chome,
Minato-ku, Tokyo 107-8481, Japan
Tel.+81-3-5561-7000 http://www.tel.com

Printed in Japan on recycled paper
PR45–143