Action07 Mid-range Business Plan

Action07 Mid-range Business Plan March 25, 2004 Saburo Kusama, President Seiko Epson Corporation

Cautionary Statement When reviewing this information please note that the information was created as of the date of the information, should be considered in the context of the circumstances prevailing at that time and is only correct as of that date. The information contains certain forward-looking statements that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, the competitive environment, market trends, general economic conditions, exchange rate fluctuations and our ability to continue to timely introduce new products and services. 1

Today s Agenda 1. Mid to long-term corporate vision ( SE07 ), Mid-range business plan ( Action07 ) and FY2006 Financial Targets 2. Growth Strategies: i1: Imaging on Paper i2: Imaging on Screen i3: Imaging on Glass 3. Cost Structure Reform: Activities to improve cost structure and gross profit margin 4. Research and Development Direction 2

Mid to long-term corporate vision ( SE07 ), Mid-range business plan ( Action07 ) and FY2006 Financial Targets

The SE07 Concept and the Action07 Mid-range Business Plan SE07 Concept (clarification of business domains) Digital Image Innovation Targeting the Convergence of Imaging Domains i1 imaging on paper i0 core devices i2 imaging on screen i3 imaging on glass Action07 3i business growth strategy i1: Growth by increasing print volume i2: Growth by building on key devices and optical technologies to expand, generate and advance into markets i3: Growth by becoming a leading supplier of small and mid-sized liquid crystal displays Cost Structural Reform: Improved profitability from activities to reduce the total cost ratio Improving financial condition Continuous R&D activities for middle to long-term growth 4

FY 2006 Financial Targets (PL) ( 100 million) 20,000 15,000 Net sales Recurring profit margin 17,700 10% 9% or higher 12,741 13,224 14,140 10,000 5.0% 5% 5,000 3.2% 1.5% 0 FY2001 FY2002 FY2003 FY2006 (Projected) (Target) 0% 5

FY 2006 Financial Targets (BS/CF) Target Generate a total of 150 billion in FCF over the next three years 2,000 1,000 0 FCF 515 735 1,500-1,000-1,270-2,000 FY2001 FY2002 FY2003 FY2006 Target Aim at zero net debt by FY 2007 5,000 4,000 3,000 2,000 1,000 0 Net debt outstanding 4,708 4,171 2,366 FY2001 FY2002 FY2003 FY2006 FY2007 0 6

Capital Investment Plan Policy Carefully select the investments that are essential for growth Scale Approximately 320 billion over the coming three years Key investments to bolster production capacity (planned for FY 2004) Increase high temperature poly-silicon TFT production capacity (Chitose, Suwa-Minami) Investments to for new MD-TFD technologies and productivity improvement (Toyoshina) Third display base (to expand back-end capacity) (the Philippines) Expand 0.18/015µ production capacity for mobile graphics engines, etc. (Sakata) 7

Growth Strategies

i1 Mid-term Market Trends of Ink Jet Printers (million units) 100 90 80 MFP (4-color) SFP (4-color) MFP (Photo) SFP (Photo) CAGR ( 03-06) SFP/Photo +3% 70 SFP/4-color -13% 60 50 40 MFP/Photo +115% 30 20 MFP/4-color +21% 10 0 CY2002 CY2003 CY2004 CY2005 CY2006 Source: Seiko Epson estimates. * photo means printers using at least six colors 9

i1 Business Environment and Key Strategies Environ- ment Growth in input devices and transition to higher resolution (e.g., DSCs and mobile phones equipped with cameras) Axis Epson = Photos The inheritance of photo culture Strategy Growth by increasing print volume Measures to spread the use of long-lasting, fade-resistant ink Products for the distributed printing of photo contents 10

i1 Epson Digital Photo Link concept Realizing a world where diverse photographic data moves seamlessly among devices, and where everyone can enjoy photography culture at their own skill level EDPL@HOME EDPL@Public EPSON HOME DPE Living-- Room Print Living EDPL@Pro Public Imaging Mobile Imaging EPSON HOME DPE Family Photo User Commercial Imaging Pro Imaging Business Imaging g g EPSON HOME DPE Advanced Amateur s Web Imaging EDPL@Business EDPL@Business

i1 Opportunity: Expanding Print Volume Print volume expansion image Growth of DSCs Growth of mobile phones equipped with cameras Growth of digital home applian ce EPSON HOME DPE Paper contents PC contents FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 12

i1 EPSON Home DPE Digital camera direct printing Printing from film and from existing prints Fan printing (seals, copy sheets, etc.) Realizing all types of DPE services at home Album and index printing Output to CD-R and other media Video output (slide show)

i1 EPSON Home DPE Stand-alone unit exclusively for printing photographs Six-color pigment-ink (PX-E ink) Card slot (can accommodate full cards) USB connection (compatible with both USB DIRECT- PRINT and PictBridge) Infra-red communications compatible BlueTooth compatible Simple operation Pricing: Open pricing (expected to sell for over 20,000) Distributed photograph printing 14

i1 EPSON Color Laser Printer Replacing black & white printers with color printers Introduction cost is equivalent to that of black & white laser printers Smallest and lightest model on earth* * As of January 2004; compared to all A3-compatible color laser printers in term s of area and mass; Epson survey Low running costs; can be used for both color and black & white printing Fastest in its class*: 10 PPM color and 40 PPM black & white * As of Ja nua ry 2004; among a ll A3 compa tible co lo r lase r printe rs with standa rd prices be tween 100,000 and 200,000; Epson surve y Easy to read image quality that is ideal for business; color prints are also high resolution LP-7000C: From 158,000 LP-9000C: From 198,000 16

i2 Mid-term Market Trends of Projector (1,000 units) 9,000 8,000 7,000 6,000 Large projection televisions Front home projectors Front data projectors CAGR ( 02-06) Large projection televisions +113% 5,000 4,000 Front home projectors +70% 3,000 2,000 Front data projectors +22% 1,000 0 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 Source: Seiko Epson estimates based on survey company materials, etc. 17

i2 Business Environment and Key Strategies Environ- ment Axis Strategy Projector market, which is expected to have high growth Epson is No.1 in projection Building on projection technologies to expand, generate and enter into markets Expanding the data projection market and creating the home projector market Enter into the projection TV market 18

i2 Superiority of Liquid Crystal Display Projection High temperature poly-silicon TFT (HTPS); ideal device for projection applications Growth of liquid crystal projection televisions Low electricity consumption; low noise; high luminance Natural image Low cost; high supply capacity Development of product lineup User Convenience Brand business Engine business Good cost performance Optical strengths Competition with PDP and direct-view LCDs 19

i2 Market Share of Micro-device Projectors HTPS Good light use efficiency DLP 26% Anther company s HTPS 19% Epson 55% Good resolution Good mass production properties Replete product lineup FY 2003 Source: Seiko Epson estimates based on survey company materials, etc. (Chitose Plant) 20

i2 LCD Projection TV Provides large screen size and low-price compatibility with high vision broadcasts because it is a liquid crystal projection TV 16:9 wide, 1280 720 pixels, 16.77 million colors 47 inch: 45.7 (W) x 34.6 (H) x 14.8 (D) 57 inch: 54.4 (W) x 39.5 (H) x 16.3 (D) Standard models include print units Standard models include card slots (can accommodate full cards) US sales launched on March 5 th Leading large-screen TV 47 inch: $3,499 57 inch: $3,999 21

i3 Mid-term Market Trends of Mobile Phone (million units) 600 CSTN Active High End Active Volume Zone BW End User Demand Panel Demand 500 400 300 200 Unclear Area 100 0 FY20022 FY2003 FY2004 FY2005 FY2006 Source: Seiko Epson estimates based on TSR, D/S and PR. Note: Does not include back panels. 22

i3 Business Environment and Key Strategies Environ- ment More color, active-matrix LCDs will be used for mobile telephones Agreement on LCD business integration with SANYO Strategy Aim at becoming the leading supplier of small and mid-sized liquid crystal displays Full lineup ranging from state-of-the-art sophisticated units to mass-market, lower-priced models Strong customer service capabilities support global supply chain 23

i3 Development in Mobile Displays Active High-end Develop the most powerful small and mid-sized liquid crystal displays Active Volume Zone Leads with high-performance products and continues to enhance cost competitiveness CSTN Reflective and transflective technologies High-density mounting technologies Further reinforce cost performance Approach to the highvolume market Integrated production in China Reinforce mounting capabilities 24

Cost Structure Reform

Cost Structure Reform: Activities to Reduce the Total Cost Ratio Policy Aim at reducing the total cost to sales ratio* by ten percentage points *Total cost to sales ratio = (manufacturing costs + sales expenses) / sales revenues Simultaneous activities to reform the cost structure and enhance product merchantability (increase sales prices) Sales revenues Recurring profit Sales expenses Manufacturing costs up down Recurring profit Sales expenses Manufacturing costs Sales revenues Reallocate the funds saved from reducing expenses to strategic fields for future growth 26

Cost Structure Reform: i1 Cost Reduction Measures Strategy Advance thorough cost reductions to improve the profitability of hardware Dramatically reduce variable costs for MFP 100 50 0 Cost reduction in present leading models Present leading 2004 2005 models Decrease design, engineering, manufacturing and sales costs across the board, all at once Implement thorough standardization vertically (across models) and horizontally (from year to year) Create standardized bases, and then increase valueadded by customization for each individual market 27

Research and Development Direction

Research and Development Policy Implement pathfinder/ambusher-style R&D programs through forming a technology platform centered around the core of Epson s strongest technologies Micro liquid process technologies Low-temperature polysilicon TFT technologies Next-generation electronic photography technologies Digital projection technologies Development of Organic EL (OLED) technologies Ink jet industrial application technologies OLED Metal wiring 29

Intellectual Property Policy Firmly establish world-class intellectual property management Patent Ranking (1999-2003) 15th 10th 10th 9th Japan Domestic Patents Disclosed 9th 43rd 37th 31st 27th US Patents Registered 18th 1999 2000 2001 2002 2003 30

Summary

Action07 Mid-term Management Plan Targets and Strategies Action07 <Targets / Plans> Sales revenues: Recurring profit ratio: FCF: Net debt: Capital investment: 1,770 billion (FY 2006) 9% or higher (FY 2006) 150 billion (total FY 2004 FY 2006) zero (end of FY 2007) 320 billion (total FY 2004 FY 2006) 3i Business Growth Strategy i1: Growth by increasing print volume i2: Growth by building on key devices and optical technologies to expand, generate and advance into markets i3: Growth by becoming a leading supplier of small and mid-sized liquid crystal displays Cost structural reform: Improved profitability from activities to reduce the total cost ratio Improving financial condition Continuous R&D activities for middle to long-term growth 32