TERAOKA SEISAKUSHO CO., LTD.
Annual Report 2007
Year ended March 31, 2007

A Characteristically Global Teraoka
Teraoka Seisakusho Co., Ltd. began its operations in 1921 and since that time hascontinued to grow to become one of Japan's leading developers of highly functional
packing, electrical insulation, electronic equipment, other industrial and general home-use
adhesive tapes.
Steadily growing over the past 86 years, the Company and its growing group of
consolidated subsidiaries have continued to strengthen its domestic production and sales
markets, and in January 1995, took that expansion overseas, to Hong Kong and then to
Shanghai in July 2004, where it established Teraoka Seisakusho (Shanghai) Co., Ltd. andsubsequently Teraoka Seisakusho (Shenzhen) Co., Ltd., in November 2006, as fully owned
subsidiaries of Teraoka Seisakusho (Hong Kong) Co., Ltd.
As its client network has become global, so has the Teraoka Group enjoyed steady growth indemand for its highly functional adhesive tapes for electrical insulation and electronicequipment, especially in Asia where growth of the digital industries has made homeelectronics such as cellular phones and flat screen televisions primary end uses for thesetechnologically advanced tape products.
The Teraoka Group continues to grow its Hong Kong and Shanghai operations, while also
expanding its sales networks in North America, Europe and Southeast Asia, building on its
successes to create a vibrant and thriving corporate structure that is both global andsustainable in the rapidly evolving global marketplace of the 21st Century.

Changes in Overseas Sales
Overseas Sales
Export Ratio(¥ billions)

6.03

6

(%)
30

5.22

3.8

4

4.0

20

3.3

2

10

0

0

FY 2003

FY 2004

FY 2005

FY 2006

FY 2007

CONTENTS
Consolidated Financial Highlights
To Our Stockholders
Review of Operations
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
Company Data

1
2
4
6
8
9
10
11
15
16

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED FINANCIAL HIGHLIGHTS

For the years ended March 31,
Thousands of
U.S. dollars

Millions of yen

2007

2006

2007

Net Sales .....................................................................

¥23,536¥21,829$199,376

Operating Income .........................................................

1,424

1,399

12,063

Income before Income Taxes .........................................

2,004

1,452

16,973Net Income ..................................................................

1,242

945

10,521

Total Assets ..................................................................

32,271

31,184273,369

Net Assets ....................................................................

24,472

23,940207,302

Ratio (%)
Operating Income to Net Sales .......................................

6.1

6.4

Equity Ratio .................................................................

75.8

76.8

Return on Average Assets (ROA) ....................................

3.9

3.0

Return on Average Stockholders’ Equity (ROE) ................

5.1

4.1

Per Share
Net Income ..................................................................

¥62.12¥45.62$0.53

Cash Dividends .............................................................

14.00

14.00

0.12

U.S. dollars

Yen

The U.S. dollar amounts in this annual report are translated from yen, for convenience only, at the rate of ¥118.05 = U.S.$1, the rate prevailing on March 31, 2007.

Net Sales

Net Income

Total Assets(¥ billions)(¥ millions)(¥ billions)

Non-Consolidated
Consolidated

1,500
30

20

1,200

20

900

10

600
10

300

0

03

04

05

06

07

0

03

04

05

06

07

0

03

04

05

06

07

1

TO OUR STOCKHOLDERS

An Evolving Operating Environment
Fiscal 2007, the year ended March 31, 2007, marked Teraoka's 97th business term.
During this period, the Japanese economy continued to show signs of moderate recovery,
owing largely to the gradual expansion of private sector capital investment and a steady
improvement in employment conditions. These gains were made despite increases ininterest rates and an upward spiraling of costs for crude oil and other raw materials.
Teraoka continued to operate in a business environment wrought with various
negative factors, including an increase in the cost of natural rubber and petrochemicalmaterial. Despite these circumstances, demand for packing and curing tapes increased,
owing to the growing strength of the physical distribution sector and a steady increase
construction projects. Sales of products incorporating LCDs, such as cellular phones andflat screen televisions, led the market expansion and contributed to increases incorporate sales during the fiscal term.
Teraoka continued to increase its investments in equipment in its domestic plants,
and in Shenzhen, China, we established a new tape-cutting/treating plant in order toreinforcing production capacity and expanding our sales network. During fiscal 2007 wewere also actively involved in the development of environmentally friendly and highly
functional products.

Financial Results for FY 2007
In fiscal 2007, consolidated net sales reached a record high of ¥23,536 million(US$199,376 thousand), increasing 7.8% from the previous term. Consolidated
operating income declined by 4.4%, year-on-year, to ¥1,424 million (US$12,063
thousand). While consolidated income before income taxes increased by 3.6%, to¥2,004 million (US$16,973 thousand), consolidated net income increased by 31.4%,
year-on-year, to ¥1,242 million (US$10,521 thousand). This increase resulted from thesale of Teraoka's Ohmiya parking lot.
The dividend for the term under review was ¥14.00 (US$0.12) per share, or ¥7.00(US$0.06) at term-end and ¥7.00 (US$0.06) for the interim payout. This remained
constant with the previous year's payout, and represented 26.2% of the payout ratio.
Consolidated cash and cash equivalents were reduced by ¥173 million (US$1,465
thousand) from the previous term, to ¥4,831 million (US$40,923 thousand).
Cash earned through operating activities also declined, by 19.3% year-on-year, to¥1,693 million (US$14,342 thousand), owing mainly to net income of ¥1,242 million(US$10,521 thousand), depreciation of ¥1,173 million (US$9,936 thousand), a2

decrease by ¥705 million (US$5,972 thousand) inincreased accounts receivable.
Cash allocated to investment activities decreased by
63.7% from the previous term to ¥1,560 million(US$13,215 thousand), due to the sales of a parcel of theGroup's land holdings during the term under review.
Proceeds from the sale amounted to ¥495 million(US$4,193 thousand). Equipment investment ¥732
million (US$6,201 thousand) and payment of ¥398
million (US$3,371 thousand) for purchases of investment
in securities were appropriated.
Cash allocated to financial activities, which included
dividend payments of ¥279 million (US$2,363 thousand)and reduction in short-term debt by ¥30 million (US$254
thousand), used and decreased to ¥311 million(US$2,634 thousand).

Focusing on Growth Potential
Although the trend towards a long-term business expansion is expected to continue,
backed by private sector capital investment and a steady increase in consumer
spending. These factors continue to create a challenging business environment forcompanies in our industry.
Under these circumstances, Teraoka and its consolidated subsidiaries will continue
to meet the rapidly evolving market demand for the highly functional and value-added
products used in digital home electronics, a market that is expected to expand in the
mid and long-term future. We will also build on original adhesive technology to enhance
the quality and diversity of our product lines to meet the requirements of industries thatare growing at unparalleled rates. To meet these goals, our management staff willcontinue to strengthen our sales activities and maximize corporate value.
In presenting this report, I would like to extend my sincere gratitude to ourstockholders and customers for their continued support and patronage.
June 28, 2007

Keishiro Teraoka
President

3

REVIEW OF OPERATIONS

The objectives of the Teraoka Group's research and de-amounted to ¥23,536 million (US$199,376 thousand),velopment activities include development and quality

as represented by the following categorized records.

improvement of new adhesive tape products with an increasing focus on environmental compatibility under our

Packing Tapes

corporate motto of "Service to customers by offering good

Sales of cloth adhesive tapes increased thanks to acti-

products quickly and at reasonable prices."vated physical distribution and increased construction

To develop highly functional and value-added products

projects backed by business recovery trend. Sales forthat meet market needs, the Group endeavored to en-this category were expanded, also backed by increase ingage in R&D activities by further reinforcing joint researchsales to direct marketing companies.

with end users, as well as tie-ups with universities andresearch institutes.

Consolidated sales of cloth adhesive tapes increasedby 2.4%, to ¥4,930 million (US$41,762 thousand). ThisR&D expenditures for the term under review amounted
to ¥919 million (US$7,785 thousand) and accounted

total represented 20.9% of total consolidated sales anda decline of 1.2% from the previous term.

for 3.9% of total consolidated sales.
During the term, Teraoka succeeded in developing

Electronic Equipment Tapes

an innovative tape made of extremely thin (0.030 mm)

Expanded sales of flat screen televisions, personal com-silicone rubber with high heat resistance, easy operabil-puters, game machines, cellular phones, and other digi-ity, and high dimensional stability. It is expected to betal devices both at home and abroad contributed to in-applicable to a wide range of industrial fields.

creases in sales of electronic adhesive tapes.

Consolidated net sales for the term under review

Consolidated net sales of Electronic Equipment Tapes inBreakdown ofSales by Category
Packing Tapes

Electrical Insulation Tapes• Olive cloth tapes• Kraft paper tapes• Polypropylene cloth/film adhesive tapes• Recycled PET bottle cloth tapes• Vinyl adhesive tapes• Polyester cloth/film adhesive tapes• Acetate cloth adhesive tapes• Combination adhesive tapes• Epoxy resin impregnated tapes

20.9%

18.3%

30.1%
Other Industrial Tapes• Double-coated adhesive tapes• Corrosion-proof tapes• Masking cloth tapes• Surface protection tapes

4

30.7%
Electronic Equipment Tapes• Belting tapes• Conductive/Shielding adhesive tapes• Cathode tube explosion-preventive tapes• Circuit tapes

the term under review were ¥7,228 million (US$61,228

increased by 14.1% over the previous year, to ¥7,083

thousand), a 7.1% increase over the previous year's re-million (US$60,000 thousand). This total represented

sults. This total represented 30.7% of total consolidated

30.1% of total consolidated sales and an increase ofsales and a year-on-year decline of 0.2%.

1.7%.

Electrical Insulation Tapes

Overseas Sales

Exports of Electrical Insulation Tapes remained favor-

During the term, our marketing systems in overseas sub-able throughout the term under review, mainly to China

sidiaries in Hong Kong, Shanghai, and other locations

and other Asian countries, recording an increase of 5.8%.

were upgraded to enhance customer service and encour-

Consolidated net sales of Electrical Insulation Tapes

age market development. These efforts together withreached ¥4,295 million (US$36,382 thousand) and thisconcerted efforts to expand sales registered favorable

amount represented 18.3% of total consolidated sales,

results. Overseas sales for the term under review

a decline of 0.3% from the previous year's result.

amounted to ¥6,031 million (US$51,088 thousand), a
year-on-year increase of 15.6%. This total represented

Other Industrial Tapes

25.6% of total consolidated sales and an increase ofSales of Teraoka's polyethylene cloth tape for industrial-

1.7% over the previous year's results.

use P-cut Tape increased, owing to its high quality andusability. Sales of other industrial tapes, including curing tapes, were on a par with results in the previous
term. As a result, Consolidated net sales in this category

Export Markets

Export Ratio

Asia 92.1%

North America 3.7%

Export 25.6%

Domestic 74.4%

Europe 4.1%
Other areas 0.1%

5

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETSMarch 31, 2007 and 2006

Millions of yen

Thousands of
U.S. dollars

2007

2006

2007

¥ 4,331¥ 4,505$ 36,690

Trade ...............................................................................................

6,907

6,229

58,509Affiliate ............................................................................................

240

205

2,032

Less: Allowance for doubtful accounts (Note 2-g) ....................................

(3)

(5)

(25)

Marketable securities (Notes 2-b and 5) .................................................

2,496

1,201

21,143Inventories (Note 2-c) ...........................................................................

2,773

2,843

23,490

Deferred income taxes (Note 2-f) ...........................................................

251

256

2,129

Other current assets ..............................................................................

163

100

1,377

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

17,15815,335

145,345

Land ....................................................................................................

3,724

3,729

31,548

Buildings .............................................................................................

7,289

7,319

61,748

Machinery and equipment .....................................................................

19,901

19,153

168,584

Construction in progress ........................................................................

245

148

2,073

31,15930,349263,953

Less: Accumulated depreciation ............................................................

(21,156)(20,366)(179,211)

Property, plant and equipment, net ........................................................

10,003

9,983

84,742Intangible Assets .......................................................................................

433

556

3,666

Investments in securities (Notes 2-b and 5) ...........................................

4,033

4,711

34,164

Investments in affiliate .........................................................................

100

90

847

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

544

509

4,605

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

4,677

5,310

39,616

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

¥32,271¥31,184$273,369

ASSETS
Current Assets:
Cash and time deposits .........................................................................
Notes and accounts receivable:

Property, Plant and Equipment (Note 2-d):Investments and Other Assets:

The accompanying notes to consolidated financial statements are an integral part of these statements.

6Millions of yen

Thousands of
U.S. dollars

2007

2006

2007

Current Liabilities:
Notes and accounts payable:
Trade ...............................................................................................
Short-term borrowings ...........................................................................
Accrued income taxes ...........................................................................
Accrued expenses .................................................................................
Other current liabilities .........................................................................

¥ 3,894
1,008
335
605
1,431

¥ 3,792
1,037
257
578
774

$ 32,985
8,536
2,836
5,129
12,124

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

7,273

6,438

61,610Long-Term Liabilities:
Retirement and severance benefits (Notes 2-h and 6):
Employees ........................................................................................
Directors and corporate auditors .........................................................
Deferred liabilities taxes (Note 2-f) ........................................................
Consolidated adjustment account ..........................................................

41
99
375
11

236
153
400
17

347
838
3,177
95

Total long-term liabilities ................................................................

526

806

4,457

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

7,799

7,244

66,067NET ASSETSStockholders’ Equity:
Common stock:
Authorized: 80,000,000 shares
Issued: 20,081,955 shares as of March 31, 2007
and 2006, respectively ..........................................................
Additional paid-in capital ......................................................................
Retained earnings .................................................................................
Less: Treasury stock, at cost ..................................................................

3,904
3,491
16,254
(76)

3,904
3,491
15,325(75)

33,07429,574
137,684(646)

Total stockholders’ equity ...............................................................

23,57322,646

199,686

VALUATION AND TRANSLATION ADJUSTMENTS:
Unrealized gains on securities (Notes 2-b and 5) ....................................
Foreign currency translation adjustments (Note 2-i) ................................

855
44

1,258
37

7,245
371

LIABILITIES AND STOCKHOLDERS’ EQUITY

Contingent Liabilities (Note 4):

Total valuation and translation adjustments ............................................

899

1,295

7,616

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

24,472

23,940207,302

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

¥32,271¥31,184$273,369

7

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME
For the years ended March 31, 2007 and 2006

Millions of yen

Thousands of
U.S. dollars

2007

2006

2007

Net Sales .................................................................................................

¥23,536¥21,829$199,376

Cost of Sales ............................................................................................

17,830

16,232

151,042

Gross profit ...................................................................................

5,706

5,597

48,334

Selling, General and Administrative Expenses ................................................

4,282

4,199

36,271

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

1,424

1,399

12,063

75

41

637

Other Incom and Expenses:
Interest and dividend income ................................................................
Interest expenses ..................................................................................

(4)

(3)

(32)

Loss on disposal of inventory asset ........................................................

(27)

(43)

(232)

Gain on sales of investment securities ....................................................

—

54

—

Gain on sales of land ............................................................................

482

—

4,079

Loss on disposal of property, plant and equipment ..................................

(16)

(10)

(133)

Gain on dissolution of foreign facilities ...................................................

—

15

—

Foreign exchange gains (losses), net ......................................................

4

(46)

33

Equity in earnings (losses) of affliated company ......................................

11

10

91

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

55

35

467

580

53

4,910

2,004

1,452

16,973Current ................................................................................................

506

438

4,289

Deferred ..............................................................................................

255

68

2,163

762

507

6,452

945

$ 10,521

Income before income taxes ...........................................................
Income Taxes:

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

The accompanying notes to consolidated financial statements are an integral part of these statements.

8¥ 1,242¥

Teraoka
TeraokaSeisakusho
SeisakushoCo.,
Co.,Ltd.
Ltd.andandConsolidated
ConsolidatedSubsidiaries
Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended March 31, 2007 and 2006

Millions of yen

Thousands of
U.S. dollars

2007

2006

2007

Balance at beginning of year .................................................................

¥ 3,904¥ 3,904$ 33,074

Issuance during the year .......................................................................

—

—

—

Balance at end of year ..........................................................................

3,904

3,904

33,074

Balance at beginning of year .................................................................

3,491

3,494

29,574

Net sales of treasury stock ....................................................................

—

(3)

—

Balance at end of year ..........................................................................

3,491

3,491

29,574

Balance at beginning of year .................................................................

15,325

14,718129,822Net Income ..........................................................................................

1,242

945

10,521

Cash dividends paid ..............................................................................

(279)

(300)

(2,371)

Bonuses to directors and corporate auditors ............................................

(34)

(39)

(288)

Balance at end of year ..........................................................................

16,254

15,325

137,684

Balance at beginning of year .................................................................

(75)

(74)

(639)

Net change during the year ...................................................................

(1)

(1)

(7)

Common Stock:

Additional Paid-in Capital:

Retained Earnings:

Treasury Stock, at cost:

Balance at end of year ..........................................................................

¥

(76)

¥

(75)

$

(646)

Unrealized Gains on Securities:
Balance at beginning of year .................................................................

1,258

554

10,653

Net change during the year ...................................................................

(403)

704

(3,408)

Balance at end of year ..........................................................................

855

1,258

7,245

Balance at beginning of year .................................................................

37

(20)

313

Net change during the year ...................................................................

7

56

58

Balance at end of year ..........................................................................

44

37

371

Foreign Currency Translation Adjustments:

Yen

U.S. dollars

Per Share of Common Stock
Net income ..........................................................................................

¥62.12¥45.62$0.53

Cash dividends paid ..............................................................................

14.00

14.00

0.12

The accompanying notes to consolidated financial statements are an integral part of these statements.

9

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended March 31, 2007 and 2006

Millions of yen

2007

2006

2007

¥ 1,242¥ 945$ 10,521

1,173
(1)
(248)
255
(11)
—
—
(34)
(482)
16
—

1,142
(4)
(198)
68
(10)
(15)
0
(38)
10
10
(54)

9,936
(8)
(2,101)
2,160
(93)
—
—
(288)
(4,083)
136
—

(705)
71
88
58
271
451
1,693

(291)
69
144
256
64
1,153
2,098

(5,972)
601
745
491
2,297
3,821
14,342

Investing Activities:
Payment for purchases of property, plant and equipment .........................
Payment for purchases of intangible assets ............................................
Proceeds from sales of property, plant and equipment .............................
Proceeds from sales of land ...................................................................
Payment for purchases of marketable securities ......................................
Payment for purchases of investment in securities ..................................
Proceeds from sales of marketable securities ..........................................
Payment for purchases of minority interrest in consolidated subsidiaries ........
Receipt from dissolution of foreign facilities ...........................................
Net cash used in investing activities .........................................

(732)
(31)
—
495
(4,593)
(398)
3,699
—
—
(1,560)(2,421)
(129)
2
—
(700)
(1,474)393
026(4,303)(6,201)
(263)
—
4,193
(38,907)(3,371)
31,334——(13,215)

Financing Activities:
Dividends paid .....................................................................................
Increases in short-term borrowings .........................................................
Other, net ............................................................................................
Net cash used in financing activities ........................................

(279)
(30)
(2)
(311)

(299)
978
(2)
677

(2,363)(254)(17)(2,634)

Effect of Exchange Rate Changes on Cash and Cash Equivalents ...........................
Net Increase (Decrease) in Cash and Cash Equivalents ...................................
Cash and Cash Equivalents at beginning of year .............................................
Cash and Cash Equivalents at End of the Year ................................................

5
(173)
5,004
¥4,83150(1,476)
6,481¥5,00442(1,465)42,388$ 40,923

Additional cash flow info
Interest paid ........................................................................................
Income taxes paid ................................................................................

4
¥ 448

2
¥ 137

34
$ 3,795

Operating Activities:
Net Income ..........................................................................................
Adjustments to reconcile net income to net cash provided byoperating activities:
Depreciation and amortization ........................................................
Allowance for doubtful accounts .....................................................
Provision for retirement benefits .....................................................
Deffered income taxes ....................................................................
Equity in earnings (losses) of affiliated company ..............................
Gain on dissolution of foreign facilities ............................................
Minority interest in net income .......................................................
Bonuses to directors and corporate auditors .....................................
Loss (Gain) on sales of land ............................................................
Loss on disposal of property, plant and equipment ...........................
Loss (Gain) on sales of investment securities ...................................
Changes in assets and liabilities(Increase) decrease in notes and accounts receivable ....................
(Increase) decrease in inventories ................................................
Increase (decrease) in notes and accounts payable ........................
Increase (decrease) in accrued income taxes payable ....................
Other, net ..................................................................................
Total adjustment .....................................................................
Net cash provided by operating activities ..................................

The accompanying notes to consolidated financial statements are an integral part of these statements.

10

Thousands of
U.S. dollars

Teraoka
TeraokaSeisakusho
SeisakushoCo.,
Co.,Ltd.
Ltd.andandConsolidated
ConsolidatedSubsidiaries
Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended March 31, 2007 and 2006

1. Basis of Presenting Financial Statements
The accompanying consolidated financial statementsof TERAOKA SEISAKUSHO CO., LTD. (the “Company”) and its subsidiaries are prepared on the basisof accounting principles generally accepted in Japan,
which are different in certain respects as to application and disclosure requirements from International
Financial Reporting Standards, and are compiled fromthe consolidated financial statements prepared by theCompany, as required by the Securities and Exchange
Law of Japan. However, certain account balances, as
disclosed in the basic consolidated financial statements in Japan, have been reclassified to the extent

deemed necessary to enable presentation in a form
which is more familiar to readers outside Japan.
The accounts of overseas consolidated subsidiaries
are based on their accounting records maintained inconformity with generally accepted accounting principles and practices prevailing in the respective
countries of domicile.
For the convenience of readers, the accompanying
consolidated financial statements are presented in
U.S. dollars by translating yen amounts at the rate of¥118.05=U.S.$1, the prevailing exchange rate on
March 31, 2007.

2. Summary of Significant Accounting Policies
a. Consolidation
The accompanying consolidated financial statements include the accounts of the Company andthree subsidiaries, TERAOKA SEISAKUSHO(Hong Kong) CO., LTD., TERAOKA SEISAKUSHO(Shanghai) CO., LTD. and TERAOKASEISAKUSHO (Shenzhen) CO., LTD. and anaffiliate, SHIN-EI SHOJI CO., LTD. Investment in
the affiliated company is accounted for by theequity method.
Significant inter-company balances, unrealizedinter-company profits and losses among thecompanies are entirely eliminated. The assets andliabilities of the consolidated subsidiaries areincorporated into the financial statements at fairvalue and the difference between net assets atfair value and investment amounts are amortizedby the straight-line method over a period of five
years.
The fiscal years of all subsidiaries end December 31. All subsidiaries’ financial statements are
based on temporary settlement dates of March
31, 2007 and 2006 and are used for the consolidation of the Company.
b. Marketable securities and investments in securities
Debt securities that are intended to be held tomaturity (“held-to maturity debt securities”) aremeasured at amortized cost in the balance sheet.
Securities other than held-to maturity debt

securities (“other securities”) are measured at fairvalue.
Other Securities that have fair values are stated
at fair value, with unrealized gains and losses
included in the net assets, net of applicable
income taxes. Realized gains and losses on sales of
securities are based on the moving average cost of
the securities. Other securities that do not havefair values are stated at cost determined by themoving average method.

c. Inventories
Inventories are stated principally at lower of cost,which is determined by the periodic averagemethod or fair value.
d. Property, plant and equipment and depreciation
Property, plant and equipment are carried at cost.
Depreciation is computed principally by the
declining balance method at a rate based on theirestimated useful lives, which range as follow:
Buildings .................................
Machinery and equipment .........

3~50 years
4~10 years

Depreciation of buildings, machinery andequipment of overseas subsidiaries and buildings
acquired by the Company and its affiliated company on or after April 1, 1998 is computed by thestraight-line method due to changes in Japaneseincome tax regulations.

11e. Leases
Finance leases, except for those that transfer
ownership of the leased asset to the lessee, areaccounted for in the same manner as operatingleases.
f. Income taxes
Income taxes are provided based on amounts
required by the tax return for the period.
The Company has adopted the asset-liability
method of tax effect accounting to recognize
deferred tax assets and liabilities for the expected
future tax consequences of temporary differences
between the carrying amounts of assets andliabilities for financial reporting purpose, and theamounts used for income tax purposes.
g. Allowance for doubtful accounts
Allowance for doubtful accounts provides forpossible losses on the uncollectability of receivables at the amount of estimated uncollectability,
based on past experience of doubtful receivables
and individual evaluation of collectability of thereceivables.
h. Retirement and severance benefits
Employees who terminate their services with theCompany are generally entitled to lump-sum
severance payments based on their current basic
rates of pay and length of service. In addition, theCompany maintains tax-qualified pension plans
with insurance companies and trust banks. The
plans entitle employees with more than 10 years ofservices, upon retirement, to receive either lumpsum payments or annuity payments over 10 years.

The provision for employees’ retirement benefits
recorded in the balance sheets, less the pension
plan assets, was sufficient to satisfy the projected
benefit obligation for employees’ services up to thebalance sheet dates.
With respect to directors and corporate auditors,
a provision is made for lump-sum severance
benefits based on internal regulations.
The Company’s overseas subsidiaries do not havesuch retirement benefit plan.

i. Foreign currency translation
All receivables and payables denominated inforeign currencies at the balance sheet date aretranslated into yen at current exchange rates. The
resulting exchange gains or losses are charged toincome.
Balance sheets of consolidated overseas subsidiaries are translated into yen at the year-end rates
except for stockholders’ equity accounts, which aretranslated at the historical rates. Income statements of consolidated overseas subsidiaries aretranslated at average rates. Translation differences
are presented as “foreign currency translation
adjustments” in the accompanying consolidated
financial statements.
j. Cash and cash equivalents
Cash and cash equivalents in the consolidated
statements of cash flows include all highly liquid
investments, generally with original maturities ofthree months or less, that are readily convertible to
known amounts of cash and are so near maturity thatthey present insignificant risk of changes in value.

3. Change in Accounting Policies
Accounting standard for presentation of net assets inthe balance sheets:
Effective from the current fiscal year ended March 31,
2007, the Company adopted the new “Accounting
standard for presentation of net assets in the balance
sheet” (Accounting Standards Board of Japan Statement No. 5 issued on December 9, 2005 by the

Accounting Standards Board of Japan) as well as“Implementation guidance for accounting standards
for presentation of net assets in the balance sheet”(Accounting Standards of Japan Guidance No.8 issued
on December 9, 2005 by the Accounting Standards
Board of Japan).

4. Contingent Liabilities
Contingent liabilities in respect of trade notes andexport bills discounted with banks with recourse in the

12

ordinary course of business, amounted to ¥39 million(US$334 thousand) and ¥31 million at March 31,
2007 and 2006.

5. Securities
Historical costs, fair value and gross unrealized gains
and losses for marketable securities as of March 31,
2007 and 2006 are as follows.
Millions of yen

Other securities:
Equity securities ......................................
Corporate bonds ......................................
Other ......................................................
Total ..........................................................

Historical costs

Fair value

2007
Net differences¥2,5761,496
1,000¥5,072¥4,0141,496
1,000¥6,510¥1,4370—¥1,437Gross gains¥1,4370—¥1,437Gross losses
¥0
0
—
¥0

Millions of yen

Other securities:
Equity securities ......................................
Corporate bonds ......................................
Other ......................................................
Total ..........................................................

Historical costs

Fair value

2006
Net differences

Gross gains¥2,1771,100
500¥3,778¥4,2901,100
500¥5,891¥2,1130—¥2,113¥2,1130—¥2,113Gross losses
¥0
0
—
¥0

Thousands of U.S. dollars

2007
Historical costs Fair value Net differences Gross gains
Other securities:
Equity securities ......................................
Corporate bonds ......................................
Other ......................................................
Total ..........................................................

$21,821
12,6738,471$42,965$34,003
12,673
8,471$55,146$12,1730—$12,173$12,1730—$12,173

Gross losses
$0
0
—
$0

Securities that do not have fair values are as follows:
Millions of yen

Equity securities ......................................................................................
Others .....................................................................................................
Total .......................................................................................................

2007
¥18
—
¥18

2006
¥18
—
¥18

Thousands of
U.S. dollars

2007
$152
—
$152

13

6. Retirement and Severance Benefits
Employees who terminate their services with theCompany are generally entitled to lump-sum severance payments based on their current basic rates of

pay and length of service. In addition, the Company
maintains tax-qualified pension plans for employeeswith more than 10 years of services.

Provision for employees’ retirement benefit obligations as of March 31, 2007 and 2006 consisted of the following:
Millions of yen

Benefit obligations ...................................................................................
Pension assets .........................................................................................
Unrecognized actuarial differences ............................................................
Provisions for retirement benefits ..............................................................

2007¥(3,836)
4,253
(457)
(40)

2006
¥(3,870)
4,115
(480)
(235)

Thousands of
U.S. dollars

2007$(32,495)
36,027(3,871)(339)

Employees’ retirement benefit expenses for the years ended March 31, 2007 and 2006 consisted of the following:
Millions of yen

Service costs ...........................................................................................
Interest costs ...........................................................................................
Expected return on pension assets ............................................................
Amortization of unrecognized actuarial difference ......................................
Benefits expenses total ............................................................................

2007
¥ 208
77
(82)
(177)
¥ 26

Thousands of
U.S. dollars

2006
¥183
86
(80)
(15)
¥174

2007
$ 1,762652(695)(1,499)
$ 220

2007
2.0 %
2.0 %
5 years

2006
2.0 %
2.0 %
5 years

Significant assumptions of pension plans used to determine these amounts are as follows:
Discount rate ............................................................................................................
Expected rate of return on pension assets ...................................................................
Years over which the actuarial differences obligations are allocated ..............................

7. Subsequent EventAppropriation of retained earnings:
Subsequent to March 31, 2007, the Company’s Boardof Directors, with the approval of stockholders on June
28, 2007 declared a cash dividend of ¥139 million

14(US$1,185 thousand) equal to ¥7.00 (US$0.06) per
share, applicable to earnings of the year ended March
31, 2007 and payable to stockholders on the stockholders’ register on March 31, 2007.

REPORT OF INDEPENDENT AUDITORSINOUE AUDITING CO., INC.
Shuhan Kaikan Bldg.
3-37, Kanda-sakuma-cho
Chiyoda-ku, Tokyo, JapanTo the Board of Directors of Teraoka Seisakusho Co., Ltd.
We have audited the accompanying consolidated balance sheets of Teraoka Seisakusho Co.,
Ltd. and consolidated subsidiaries as of March 31, 2006 and 2007, and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended, allexpressed in Japanese yen. These consolidated financial statements are the responsibility of
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
that the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures 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 allmaterial respects, the financial position of Teraoka Seisakusho Co., Ltd. and consolidated
subsidiaries as of March 31, 2006 and 2007, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles generally accepted in Japan, consistently applied during the period.
The accompanying consolidated financial statements as of and for the year ended March 31,
2007 have been translated into U.S. dollars solely for the convenience of the readers. We haverecomputed the translation and, in our opinion, the consolidated financial statements expressed in yen have been translated into U.S. dollars on the basis set forth in Note 1 of theNotes to Consolidated Financial Statements.
Tokyo, Japan
June 28, 2007

Inoue Auditing Co., Inc.

15

COMPANY DATA

Company Outline(as of March 31, 2007)

Company NameTERAOKA SEISAKUSHO CO., LTD.

Head Office

4-22, Hiromachi 1-chome, Shinagawa-ku, Tokyo 140-8711, Japan
Tel: 81-3-3491-1141
Fax: 81-3-3491-5316

FoundedFebruary 11, 1921

Paid-in Capital¥3,904 million

Employees

515

Board of Directors and Auditors(as of June 28, 2007)

President

Keishiro Teraoka

Senior Managing Director

Motoaki Hattori

Managing Director

Toshinobu Nishimura

Directors

Kuniyuki Takei
Takeo Kawaguchi
Kiyohiro TakagiStanding Corporate Auditor

Ikuo Ohkawa

Corporate Auditors

Kohji Dohmoto
Jun-ichi Ichikawa
Toshiyuki Nishimura

Operating Officers

Kazuhito Chiba
Minoru Tanaka
Jun Watanabe
Nobuo Ito
Yutaka Nomiyama
Masao Mochizuki

Consolidated Subsidiaries and Affiliate
Teraoka Seisakusho (Hong Kong) Co., Ltd.
Teraoka Seisakusho (Shanghai) Co., Ltd.
Teraoka Seisakusho (Shenzhen) Co., Ltd.
Shin-ei Shoji Co., Ltd.

16

R&D Center, Factories and Branch Office
R&D Center

Shinagawa-ku, Tokyo

Ibaraki Factory

Kitaibaraki, Ibaraki Prefecture

Sano Factory

Sano, Tochigi Prefecture

Ohmiya Factory

Saitama, Saitama Prefecture

Kannami Factory

Tagata-gun, Shizuoka Prefecture

Branch Offices

Tokyo, Osaka, Nagoya, Sendai, Ohmiya, Fukuoka,
Hong Kong, Shanghai and Shenzhen

Investor Information(as of March 31, 2007)

Financial Year

April 1 to March 31

Common Stocks

Authorized Shares

80,000,000

Issued Shares

20,081,955

Stockholders

2,098

Stock Listing

Tokyo Stock Exchange, Second Section

Transfer Agency

Mitsubishi UFJ Trust and Banking Corporation
4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-8212, Japan

Major Stockholders

Number of shares(thousand shares)

Voting rightratio (%)

Customers’ Stockholding Group

1,577

7.85

Japan Trustee Services Bank, Ltd.

1,221

6.08

The Master Trust Bank of Japan, Ltd.

1,097

5.47

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

976

4.86

Keishiro Teraoka

878

4.37

Resona Bank, Ltd.

678

3.38

Kuniko Teraoka

526

2.62

RBC Dexia Investor Services Trust, London Client Account

421

2.10

JPMorgan Chase Bank 385067

349

1.74

Employees’ Stockholding Group

344

1.72

17

http://www.teraokatape.co.jp

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