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  5. Q&A of Financial Results for First Half of the Year Ending March 31, 2005

Q&A of Financial Results for First Half of the Year Ending March 31, 2005

The following includes answers to a number of questions at the conference as well as some submitted to the Company subsequent to the conference.

Earnings

Q:How did foreign exchange rates affect earnings?
A:

During the period under review, the exchange rate with the U.S. dollar and euro had a positive effect with respect to initial projections on a consolidated accounting basis. Overall changes in currencies lifted net sales approximately ¥3.2 billion and boosted operating income by roughly ¥1.5 billion.
Nikon forecasts a U.S. dollar/yen rate of ¥107 and a euro/yen rate of ¥128 for the second half of the fiscal year unchanged from the first half of the fiscal year.

Q:What is the status of interest-bearing liabilities?
A:

They increased ¥3.2 billion from the end of the previous period, to ¥223.7 billion. Nikon is moving forward with the liquidation of claims credit and plans to reduce interest-bearing debt to ¥210 billion by the end of the period.

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Precision Equipment Business

Q:Please discuss the sales and operating income in the Precision Equipment Business during the current period.
A:

Full-year sales will not meet initial projections due to revisions to volume sales of IC steppers, but profitability has been improved thanks to the shortening of work periods, cost cutting, and other measures, and operating income is expected to meet initial forecasts of ¥9 billion.

Q:How big is the stepper market and what is Nikon' s market share?
A:

The scale of the stepper market for calendar 2004 is expected to be around 550 units worldwide (not including used models). Around 500 are expected to be sold in 2005. Semiconductor manufacturers have grown rather cautious toward investments in some regards, but this differs depending on the customer. Nikon projects comparatively healthy sales to continue in the next fiscal year.

Furthermore, in January to September 2004, Nikon controlled 37% of the world stepper market by volume, thereby retaining its top position in the market for the second consective year.

Q:How is the IC stepper business?
A:

We are focusing efforts on development to use state-of-the-art models to establish a definite technological advantage.

We plan to start shipments by the year-end of the NSR-S308F lens-based scanning ArF excimer stepper equipped with a super-high numerical aperture (N.A.) lens of 0.92 and the ability to realize mass production for devices 65nm or smaller. Furthermore, we have started operations of an evaluation model for immersion technology that can extend the useful life of ArF models, and we expect a market launch of steppers with an N.A. of 1.0 and better in late 2005.

Q:Please discuss the LCD stepper business?
A:

Sales are being driven by the sixth-generation unit, which is leading the market, and sales in the current period are forecast to break all previous records. We are currently developing models to respond to the largest size of plates, which are 2,200mm x 2,400mm class, to open up into the market for seventh- and seven-point-five-generation models in 2005 and beyond. We plan to start shipments of these models in late 2005.

In addition, we have established the Yokosuka Branch at the Yokohama plant in October as a development site for next-generation LCD steppers.

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Imaging Business

Q:Please say something about the sales and operating income for the Imaging Company.
A:

We conducted a downward revision of volume sales projections for 2M and 3M digital cameras out of concern for profitability. As a result, although we do not expect sales to reach initial forecasts, we still anticipate sales will reach all-time highs. Similarly, even though operating income for the first half of the fiscal year fell somewhat short of projections, continued strong sales of digital single-lens reflex (SLR) cameras in the second half of the period and an ongoing shift toward high priced compact camera models have underpinned expectations for a recovery in earnings, and we anticipate operating income for the whole fiscal year to be in line with initial forecasts of ¥19 billion.

Q:Please discuss the size of the digital camera market and Nikon' s market share?
A:

In the year ending March 31, 2005, approximately 62 million units are expected to be sold worldwide. On a unit basis, Nikon' s market share is anticipated to be approximately 11%. The market is projected to expand to 74 million units in the fiscal year ending March 31, 2006.

By product type, the digital SLR camera market, sales of which were 1.2 million units in the year ended March 31, 2004, is forecast to more than double, to 2.5 million units, in the current fiscal year, and continue to sharply increase in the following fiscal year to around 4 million units.
Nikon is aiming for the top position in the digital SLR market with a share of 40% or more.

Q:Please discuss your business strategy for digital cameras.
A:

Nikon will work to expand its share in the growing digital SLR market centered on the D70, which continues to sell well worldwide. Moreover, the Company will consolidate its top position in the market by further strengthening its product lineup. With regard to compact digital cameras, we will launch high-value-added models to leverage Nikon's strengths and implement all-encompassing cost-cutting measures, including the expansion of overseas production, in an effort to improve profitability.

In its factory in Wuxi, China, Nikon has already started production of compact digital cameras and plans to produce 1.2 million units during the current fiscal year. Nikon is also boosting its in-house production of lens units at its factory in Thailand, making the Company increasingly cost-competitive.

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Other

Q:How is the patent litigation with ASML going?
A:

With regard to the patent dispute with ASML Holding NV that began in 2001, we reached a basic understanding for the settlement in September.

Pursuant to the terms of the settlement, Nikon is to receive a total of US$145 million from ASML and Carl Zeiss SMT AG, and Nikon will form a comprehensive cross-license agreement with the two companies related to semiconductor lithography equipment.