Based on the measures taken as a result of this situation, Epson is revising the previous outlook to its financial results.

In addition to the measures announced today, Epson will continue to expedite steps aimed at achieving profitability in each of its businesses.

1. Structural reforms

(1) Current issues in the small- and medium-sized display business

In small- and medium-sized displays, FY2006 was positioned as a year in which we would strengthen our response to price erosion and sow the seeds for future growth. To achieve this we sought to bolster the business through measures such as introducing a global procurement program and by thorough cost-cutting. These efforts have reaped clear benefits. We also sought to improve relations with customers by ensuring a stable supply of high-quality LCD modules. However, in the course of these actions we identified a number of areas where we needed to improve our technical response to customer needs.

Among our various LCD technologies, both color STN and MD-TFD failed to achieve the sales volume forecast. In color STN, we had anticipated a shift in demand from monochrome to color. However, sales suffered as demand for monochrome LCDs remained unexpectedly robust. In MD-TFD, we had planned for high demand for the active low-end type, but these plans were hit by an influx of low-price amorphous silicon TFT LCDs onto the market.

In amorphous silicon TFT, we had forecast growth in active-type QVGA LCDs, which is the volume zone, and also expansion into new non-handset applications. However, the abovementioned issues in our technical response to customer needs were partially responsible for a decline in volume for handsets and a failure to secure orders for new non-handset applications. LTPS suffered from a lack of new LCD applications requiring high-resolution technology. As a result, sales of both amorphous silicon TFT and LTPS LCDs fell short of the plan.

As customer needs diversify in a variety of fields, Epson believes that one major cause of the poor display business results this fiscal year can be attributed to a dilution of resources among four LCD technologies. The second reason was that as we sought to develop new applications, we were unable to exhibit our traditional ability to develop and propose to customers technologies that anticipated market needs. Based on this situation, we are aiming to improve profitability by reviewing our technology portfolio and implementing operational reforms.

(2) Role of each technology

In color STN, we forecast ongoing demand stemming from a shift from monochrome to color LCDs in the handset market. While maintaining the business at a scale commensurate with handset demand, we will focus on developing non-handset applications. By transferring all color STN operations outside Japan, we will be able to ensure efficient management of this business.

As an LCD technology based on original Epson standards, production volumes of MD-TFD are lower than those for amorphous silicon TFT. This has created a limit to the extent of potential cost cutting. After reviewing the role of MD-TFD in its display strategy, Epson has decided to terminate this business.

Going forward, we will focus resources on amorphous silicon TFT and LTPS LCDs. In amorphous silicon TFT we will place renewed emphasis on answering customer needs in the existing handset market, and develop distinctive technologies in high-value-added fields such as portable media players. We will improve profitability by introducing standardized platforms and parts from the product planning stage, and renewing efforts to drive down procurement costs.

In LTPS, we will make determined steps towards promising growth areas such as high-end smart phones by supplementing our traditional technological strengths with high resolution technology.

In its small- and medium-sized LCD business, Epson will return to basics by refining its traditional strengths of low power consumption, compact design, and high image quality, and adding to the value of its products by creating distinctive technologies. Epson believes that next generation mobile displays will be much more than simple display devices, and will therefore concentrate its resources on creating displays with greater interactive functionality.

(3) Operational reforms

a. Strengthening development, design and manufacturing

Going forward, we will strengthen development, design and marketing functions with the purpose of better responding to customer requirements in terms of quality, cost, and delivery (QCD). Leveraging the advanced levels of manufacturing technology acquired through MD-TFD, we will continue to refine manufacturing capability.

b. Reviewing the manufacturing structure

Epson presently manufactures LCDs in Japan (in Nagano, Gifu and Tottori prefectures), China and the Philippines. As we review the role of each technology, we will consolidate our manufacturing sites and production lines to an appropriate scale.

As part of our efforts to terminate the MD-TFD business, we plan to close down the front-end production lines at the Epson Imaging Devices Head Office in Nagano Prefecture, Japan, during the course of FY2007. As we boost capability by improving productivity and yield, we will scale down the back-end lines, located outside Japan, at an appropriate time to a level commensurate with production volumes.

c. Transferring personnel to growth businesses

As we terminate the MD-TFD business, and concentrate resources on amorphous silicon TFT and LTPS, personnel currently employed in MD-TFD will be mainly transferred to growth areas within the company. Staff will also be transferred to amorphous silicon TFT and LTPS businesses as the situation demands.

d. Introducing standardized platforms and components

To drive further improvements in cost cutting, we will reduce variable costs by introducing standardized platforms and components.

2. Financial measures
(1) Impairment of assets and subsequent effects
Based on the financial results this fiscal year, Epson has decided to book 40.6 billion yen as an extraordinary loss on impairment losses in its display business. Epson will also implement changes to the financial structure that will support its business strategy going forward.

As a result of these impairment losses, Epson forecasts a 21.5-billion-yen reduction of fixed costs over the three years following FY2007.

(2) Improving the financial structure of Epson Imaging Devices

Epson will underwrite a capital increase in Epson Imaging Devices. The purpose of this measure will be to improve the financial structure of the subsidiary company, to ensure stable business management, and strengthen relationships with business partners.

Details of the financial status after the capital increase are as follows:

	Capital increase	55 billion yen (all underwritten by Epson, 27.5 billion yen of the total to be included in capital)
	Capital	27.5 billion yen
	Capital reserve	58.3 billion yen

3. Revised Full Year Financial Results Outlook

Increased sales in the display and visual instruments businesses have led us to increase our net sales forecasts since the previous consolidated outlook was announced on January 26, 2007. As a result of a forecast improvement in results driven by the effects of increased profitability and a reduction in fixed costs, we are revising our outlooks for net sales, operating income and ordinary income as follows. We are also revising our outlooks for net income as a result of an extraordinary loss incurred on the aforementioned impairment losses of 40.6 billion yen in the display business.

Since the previous outlook for individual businesses was announced on October 25, 2006, we have seen an improvement in our forecasts, notably as a result of fixed cost reductions and the profit-oriented market strategy in the printer business. We are therefore adjusting our net sales and operating income outlooks as follows. We are also revising our outlook for net income as a result of an extraordinary loss on a write down on shares of a subsidiary (48.3 billion yen).

(1) Revised consolidated financial results outlook (Full year ending March 31, 2007)

(Unit: billions of yen)

	Net sales	Operating income	Ordinary income	Net income (loss)
Previous outlook (A)	1,411.0	40.0	40.0	14.0
Revised outlook (B)	1,414.0	50.0	48.0	-18.0
Difference (B-A)	3.0	10.0	8.0	-32.0
Change (%)	0.2%	25.0%	20.0%	–
Reference: Previous fiscal year (year ending March 2006)	1,549.568	25.757	27.986	-17.916

Reference: Forecast net income (loss) per share (full year) -91.67 yen

(2) Revised non-consolidated financial results outlook (Full year ending March 31, 2007)

(Unit: billions of yen)

	Net sales	Operating income	Net income (loss)
Previous outlook (A)	827.0	34.0	1.0
Revised outlook (B)	842.0	53.0	-19.0
Difference (B-A)	15.0	19.0	-20.0
Change (%)	1.8%	55.9%	–
Reference: Previous fiscal year (year ending March 2006)	863.192	-20.112	-59.248

Reference: Forecast net income (loss) per share (full year) -96.76 yen

Cautionary statement
This report includes forward-looking statements that are based on management’s view from the information available at the time of the announcement. These statements involve risks and uncertainties. Actual results may be materially different from those discussed in the forward-looking statements. The factors that may affect Epson include, but are not limited to, general economic conditions, the ability of Epson to continue to introduce new products and services to markets in a timely fashion, consumption trends, competition, technology trends and exchange rate fluctuations.

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Structural Reforms in the Display Business and FY2006 Revised Financial Results Outlook
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