Annual Report 2008
Year ended March 31, 2008

TERAOKA SEISAKUSHO CO., LTD.

Established in 1921, Teraoka Seisakusho Co., Ltd. has evolved into a leading developer of highly
functional packing, electrical insulation, electronic equipment, and other industrial and general
home-use adhesive tapes.
During the term under review, the Teraoka Group continued to engage in the development of newadhesive tape products and in the qualitative improvement of other products. It also worked tostrengthen its production and sales activities, and to develop environmentally safe manufacturing
and supply protocols. TERAOKA remains dedicated to marketing highly functional value-added
products that are meeting rapidly evolving manufacturing and consumer needs.
TERAOKA has successfully developed and brought to market super-thin 0.030 mm silicone
rubber adhesive tapes with exceptional functional properties, workability, and dimensional stability.
Silicone rubber is used in a wide range of applications that include cell phones, flat-screen
televisions and automotive parts owing to its excellent heat and cold resistance, frictional, andcushioning properties.
Backed by original adhesive tape-processing technology, TERAOKA has succeeded in developing
one-body products with adhesive agents for use in a wide range of downstream manufacturing
processes and end products. This expertise has enabled the Company to create materials withwidely varying properties that include harness, transparency and surface conditions, expanding theapplications for these innovative products.

TERAOKA silicone rubber adhesive tapes

Changes in Overseas Sales
Overseas Sales
Export Ratio (%)(%)(¥ billions)
8

7.32

6.03

6

5.22

4

30

3.8

20

4.0

10
2

0

0

FY 2004

FY 2005

FY 2006

FY 2007

FY 2008

CONTENTS
Consolidated Financial Highlights
To Our Stockholders
Review of Operations
Consolidated Five-year Summary
Financial Statements
Financial Review
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
7
8
10
12
13
14
15
19
20

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED FINANCIAL HIGHLIGHTS

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

Millions of yen

2008

2007

2008

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

¥25,945¥23,536$258,932

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

1,540

1,424

15,369

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

1,155

2,004

11,527Net Income ..................................................................

758

1,242

7,565

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

32,69632,271

326,307

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

24,34324,472242,944

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

5.9

6.1

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

74.5

75.8

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

2.3

3.9

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

3.1

5.1

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

¥37.93¥62.12$0.38

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

14.00

14.00

0.14

U.S. dollars

Yen

The U.S. dollar amounts in this annual report are translated from yen, for convenience only, at the rate of ¥100.20 = U.S.$1, the rate prevailing on March 31, 2008.

Net Sales

Net Income

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

Non-Consolidated
Consolidated

1,500

30

40

1,200
30
20
900

20
600
10
10
300

0

04

05 06 07 08

0

04

05 06 07 08

0

04

05 06 07 08

Teraoka Seisakusho Co., Ltd.

1TO OUR STOCKHOLDERS

Business Environment
Fiscal 2008, the year ended March 31, 2008, marked Teraoka's 98th businessterm. During this period, the Japanese economy showed signs of a modest
recovery, backed by increases in investment in equipment and in exports. In thelatter half of the term, however, optimism began to fade as worries grewsurrounding the accelerating mortgage crisis in the U.S. housing market, spiking
crude oil prices worldwide, the downturn in stock prices at home, and the yen's
rise against the dollar. Although markets for our products continued to expand
owing to the gradual recovery of upstream markets, the business environment for
TERAOKA continued to be severe.
Under these circumstances, the Company focused on development of highly
functional tapes, reinforcement of its manufacturing capacity, and improvementof its sales systems. These efforts resulted in an increase in sales volume for all
product segments during the term; domestic and overseas sales of tapes for
digital home electronics and LCDs continued to expand. Profits from both
operating and ordinary income grew as a result of increased sales and more
efficient management, which managed to balance the negative effects caused byrepeated hikes in raw material prices, especially for petrochemical basedmaterials and natural rubber.

Results for FY 2008
Against this backdrop, consolidated net sales for the term under review amounted
to ¥25,945 million (US$258,932 thousand), increasing 10.2% from theprevious term. Consolidated operating income reached ¥1,540 million(US$15,369 thousand), increasing year-on-year by 8.1%. Consolidated income
before income taxes, however, decreased by 42.4% from the previous term andamounted to ¥1,155 million (US$11,527 thousand). Consolidated net income
amounted to ¥758 million (US$7,565 thousand), a 39.0% decline from theprevious term, owing to profits from the sale of land held by the Company
recorded in the previous term, and to special losses from revaluation of securities
recorded in the term under. Notwithstanding, both income and profit increased
during the term under review, in real terms. The dividend for the term underreview was ¥14.00 (US$0.14) per share, or ¥7.00 (US$0.07) for the interim
payout and ¥7.00 (US$0.07) at term-end, representing a payout ratio of 44.1%.

2

Teraoka Seisakusho Co., Ltd.

Future Focus
The future of the Japanese economy reflects the uncertain conditions prevailing throughout the global economy. TERAOKA is taking
steps to fortify its corporate structure to withstand the challenges
that lie ahead. As the U.S. economy continues to show signs of a
growing recession, the price of crude oil around the world continues to fluctuate, while other factors impact natively on markets theCompany serves at home and abroad.
Under these circumstances, TERAOKA continues to makestrenuous efforts to increase operational efficiency, expand production and sales, while intensely focusing on R&D activities thatshow great promise in bringing innovation and increasingly short
response times to changes in industrial client specifications andconsumer market trends.
During the fiscal period in review, TERAOKA began to integratea new internal control system expected to strengthen confidence
and enhance corporate value, while further increasing the Group's
production and sales capabilities. In conjunction with other new initiatives
currently being implemented throughout our organization, these chances are
expected to maximize the Group's lead in technology development and market
share for expanding lines of high-value-added tape and related products. We areconfident these measures will further increase TERAOKA's profitability in an
increasingly complex and challenging global business environment.
In presenting this report, I would like to extend my sincere thanks to ourstockholders and our customers for their continued support and patronage.
June 27, 2008

Keishiro Teraoka
President

Teraoka Seisakusho Co., Ltd.

3REVIEW OF OPERATIONS

During the term in review TERAOKA continued todevelop new products with an overarching goal of
making them environmentally friendly and safe. Fully
integrated with these efforts are production andrecycling protocols that enhance societies efforts toconserve natural resources and protect the natural
ecology. The development of a fully recyclable,
double-faced tape is an important example of ourcommitment to environmental conservation; manyhome electronics and OA appliances are bonded andfixed utilizing double-faced tape. The new technology
behind this product has made it possible todisassemble and recycle the tapes used for bonding
components at the end of product life, decreasing
waste the environmental load. Owing to efforts toclosely align products with evolving market demandand increase sales at home and abroad, consolidated
net sales for the term under review amounted to¥25,945 million (US$258,932 thousand).

Results by Business Segment
Packing Tapes
Sales of cloth adhesive tapes increased during the
fiscal term, thanks to growing demand spurred byeconomic recovery. Owing to the increase in costs formaterials, however, profits remained modest;
consolidated sales of packing tapes increased by
5.7%, to ¥5,213 million (US$52,026 thousand). This
represented 20.1% of total consolidated sales and a
decline of 0.8% from the previous term for thisbusiness segment.

Electrical Insulation and Electronic
Equipment Tapes
TERAOKA has focused its R&D efforts on improving
non-halogen adhesive tapes owing to heightened●Breakdown of Sales by Category
Packing Tapes• Olive cloth tapes• Kraft paper tapes• Polypropylene cloth/film adhesive tapes

20.1%

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

29.7%

4

Teraoka Seisakusho Co., Ltd.

Electrical Insulation andElectronic Equipment Tapes• Polyester cloth/film adhesive tapes• Acetate cloth adhesive tapes• Combination adhesive tapes• Kapton film adhesive tapes• Nomex adhesive tapes• Glass cloth adhesive tapes• EMI/RFI shielding tapes

50.2%

awareness of their impact on the environment. In thiscategory, electronic equipment tapes showed
continued growth thanks to increases in demand frommanufacturers of digital home electronic components
for flat-screen TVs, cellular phones, and gameequipment, as well as tapes used in the manufactureof automotive parts. As a result of the substantial
increase in demand during the term for tapes in thiscategory, consolidated net sales for this segment
amounted to ¥13,025 million (US$129,990
thousand), a year-on-year increase of 13.0%. This
represented 50.2% of total consolidated sales and anincrease of 1.2% over the previous term.

Other Industrial Tapes
Sales of TERAOKA's popular P-Cut high-quality, easy
application polyethylene cloth adhesive tapes
continued to increase during the term, as did sales of●Export Markets

non-halogen, double-faced tapes, double-faced tapes
for recycling components, and other environmentallyfriendly products. Owing to steady growth in themarket for these products, consolidated net sales forthis segment grew by 8.8% over the previous term to¥7,707 million (US$76,916 thousand). This
represented 29.7% of total consolidated sales and a
decline of 0.4% from the previous term.

Overseas Sales
Group efforts to expand markets in Hong Kong,
Shanghai and other locations during the term,
resulted in an increase of 21.4% over the previous
year, to ¥7,321 million (US$73,064 thousand) for
this business area. This represented 28.2% of total
consolidated sales and an increase of 2.6% from theprevious term.

●Export Ratio
Asia

92.4%

Europe 4.2%
North America 3.3%

Export28.2%

Domestic 71.8%

Other areas 0.1%

Teraoka Seisakusho Co., Ltd.

5

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED FIVE-YEAR SUMMARY

Thousands of
U.S. dollars

Millions of yen

2004

2005

2006

2007

2008

2008

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

¥20,408¥21,063¥21,829¥23,536¥25,945$258.932

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

1,911

1,463

1,399

1,424

1,540

15,369

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

1,993

1,401

1,452

2,004

1,155

11,527Net Income ................................

1,214

931

945

1,242

758

7,565

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

28,421

28,791

31,18432,271

32,696326,307

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

21,85922,57623,94024,472

24,343242,944

Operating Income to Net Sales .....

9.4

6.9

6.4

6.1

5.9

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

76.9

78.4

76.8

75.8

74.5

Return on Average Assets (ROA) ...

4.4

3.2

3

3.9

2.3

5.7

4.2

4.1

5.1

3.1

Years ended March 31

Ratio (%)

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

Per Share

Yen

Dollars

Net Income ................................

¥58.75¥44.65¥45.62¥62.12¥37.93$0.38

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

12.00

14.00

14.00

14.00

14.00

0.14

The U.S. dollars are translated at the rate of ¥100.20 per U.S.$1, prevailing on March 31, 2008.

6

Teraoka Seisakusho Co., Ltd.

FINANCIAL STATEMENTS
Fiscal Year 2008
Year ended March 31, 2008

Teraoka Seisakusho Co., Ltd.

7

FINANCIAL REVIEWBusiness Performance

production costs increased owing to escalating material
costs, resulting in only marginal profits for the term.
Consolidated sales of this segment amounted to ¥5,213
million (US$52,026 thousand), increasing by 5.7% yearon-year.
In the electronic equipment and electrical insulation
tapes segment, demand for non-halogen insulation tapes
grew in response for more environmentally friendly
alternatives for manufacturers utilizing electricalinsulation tapes. Sales of electronic equipment tapes foruse in flat-screen TVs, cellular phones, games equipment,
and automotive parts also increased. These trends
resulted in this segment achieving the highest growth insales during the term. Consolidated net sales of electricalinsulation and electronic equipment tapes amounted to¥13,025 million (US$129,990 thousand), increasing
13.0% year-on-year.
Sales of TERAOKA's popular P-Cut high-quality, easy
application polyethylene cloth adhesive tapes continued
to increase during the term, as did sales of non-halogen,double-faced tapes, double-faced tapes for recycling
components, and other environmentally friendly products.
Owing to steady growth in the market for these products,
consolidated net sales for this segment grew by 8.8% overthe previous term to ¥7,707 million (US$76,916
thousand).
Domestic sales amounted to ¥18,624 million(US$185,868 thousand), while exports amounted to¥7,321 million (US$73,064 thousand), representing an
increase of 21.4% from the previous term. Although
exports increased in all of the Group's primary productsegments, sales of industrial tape increased the most, by
31.5% over the previous term. The packing tape segment
also recorded high growth; a 29.4% increase whencompared with the previous term. Export markets in Asia,
North America, and Europe also continued to expand. The
Asian market plays a leading role, occupying a 92.4%
share, which equals to an increase by 0.3 points from theprevious term.

The business environment surrounding the Teraoka
Group's operations continued to be severe during the termin review, as a result of slowing investment in new
housing, more stringent revisions to the BuildingStandards Act, and the sharp rise in costs for materials.
Against this backdrop, TERAOKA focused onenhancement the value-added content of its expanding
line of highly functional tapes, while increasing
production capacity and strengthening its internationalsales network. As a result of these concerted efforts,
overseas sales for the term increased. Rising costs for
petrochemical materials and natural rubber, primary
components for the Group's products, continued to drive
operating and ordinary income up during the term in
review.
Consolidated sales reached a record high for theGroup, amounting to ¥25,945 million (US$258,932
thousand), a year-on-year increase of 10.2%.
Consolidated operating income amounted to ¥1,540
million (US$15,369 thousand), or 8.1% higher whencompared with the previous term. Consolidated income
before tax however, decreased by 42.4% to ¥1,155
million (US$11,527 thousand). As a result, consolidated
net income for the term under review amounted to ¥758
million (US$7,565 thousand), or substantial reduction of
39.0%, when compared with the previous term. This wasdue to the reporting of profits from the sale of land held
by TERAOKA during the previous fiscal period, and torevaluation of securities as a special loss for the term in
review. In real terms, income and profit both increased
during the term in review.

Segment Information
Sales increased for all product categories during the fiscal
period. Sales of packing tapes and cloth adhesive tapesrose in response to expanded demand brought on by thegradual upturn in business activities. Correspondingly,

Net Assets

Net Income per Share(¥ billions)(Yen)

Cash Dividends per Share andPayout Ratio
(Yen)

(%)
50

30

60

15

20

40

10

Non-Consolidated
Consolidated

40

30

20
10

20

5
10

0

0

04

8

05

06

Teraoka Seisakusho Co., Ltd.

07

08

0

04

05

06

07

08

0

04

05

06

07

08

Payout Ratio (%)

Financial Position
Total assets at the end of the consolidated fiscal term
amounted to ¥32,696 million (US$326,307 thousand),an increase of 1.3%, ¥425 million (US$4,242 thousand).
The term-end capital-to-asset ratio was 74.5%, declining
1.3 points from the previous term.
Current assets amounted to ¥17,460 million(US$174,251 thousand), increasing by ¥302 million(US$3,014 thousand) from the previous term end, owing
to an increase in inventory assets of ¥756 million(US$7,545 thousand). Fixed assets at the end of theconsolidated fiscal term under review increased by 0.8%,
or ¥122 million (US$1,218 thousand) to ¥15,236
million (US$152,056 thousand), due primarily to anincrease of ¥1,909 million (US$19,052 thousand) in theconstruction in process account and a decrease of¥1,099 million (US$10,968 thousand) in securities
investment.
Current liabilities increased by 13.2%, or ¥957
million (US$9,551 thousand), to ¥8,230 million(US$82,136 thousand) with notes and accounts payable
increasing by ¥858 million (US$8,563 thousand). Longterm liabilities decreased by 76.8%, or ¥404 million(US$4,032 thousand), to ¥123 million (US$1,228
thousand), resulting from reductions in accrued
retirement benefits for employees and debt for deferred
tax of ¥41 million (US$399 thousand) and ¥375 million(US$3,733 thousand), respectively.
Total net assets at the end of the period were reduced
by 0.5%, or by ¥129 million (US$1,287 thousand) fromthe previous term, to ¥24,343 million (US$242,944
thousand), owing to a reduction in unrealized gains on
securities of ¥460 million (US$4,591 thousand).
Retained earnings increased by ¥478 million (US$4,770
thousand).

Cash Flows(US$22,955 thousand), owing mainly to net income
before tax and other adjustments amounting to ¥1,155
million (US$11,527 thousand), depreciation of ¥1,372
million (US$13,693 thousand), an increase in inventory
assets of ¥766 million (US$7,645 thousand), and acorporate tax payment of ¥486 million (US$4,850
thousand).
Cash allocated to investment activities decreased
substantially, by 52.1% from the previous term to ¥748
million (US$7,465 thousand),owing to a decline insecurities held and payments of ¥2,645 million(US$26,397 thousand) for active equipment investment.
Cash allocated to financial activities amounted to¥263 million (US$2,625 thousand), declined year-onyear by 15.8% and included an increase of short-termborrowings of ¥39 million (US$389 thousand), dividend
payments totaling ¥280 million (US$2,794 thousand),and a payment of ¥22 million (US$220 thousand) for
reimbursement of the Group's own stock.
As a result, consolidated cash and cash equivalents at
the end of the term under review increased by ¥1,208
million (US$12,056 thousand) from the previous term to¥6,039 million (US$60,269 thousand).

Dividends
The Group's basic policy is to distribute profits while
thoroughly considering current business results, previous
dividend payout ratios, and business forecasts for ourbusiness sector. TERAOKA regards profit sharing as one ofits primary responsibilities, while also retaining earnings
necessary to maintain a solid financial base. Funding for
R&D and investment in equipment are also two very
important areas of investment. The dividend for the term
under review was set at ¥14.00 (US$0.14) per share, or¥7.00 (US$0.07) for the interim payout and ¥7.00(US$0.07) at term-end. This distribution represented apayout ratio of 44.1%.

Cash earned through operating activities increased by
35.9% over the previous term to ¥2,300 million

Equity Ratio

Return on Average Assets(ROA)(¥ billions)

Return on Average Stockholders'Equity (ROA)

(%)
(%)
80

5

Non-Consolidated
Consolidated

6

4
60
4
3
40
2
2
20

1

0

0

04

05

06

07

08

0

04

05

06

07

08

04

05

06

07

08

Teraoka Seisakusho Co., Ltd.

9

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETSMarch 31, 2008 and 2007

Millions of yen

Thousands of
U.S. dollars

2008

2007

2008

¥ 6,339¥ 4,331$ 63,263

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

6,918

6,907

69,041Affiliate ............................................................................................

195

240

1,946

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

(2)

(3)

(20)

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

—

2,496

—

Inventories (Note 2-c) ...........................................................................

3,529

2,773

35,220

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

239

251

2,385

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

242

163

2,415

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

17,46017,158174,251

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

3,724

3,724

37,166

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

7,328

7,289

73,134

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

20,41019,901

203,693

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

2,154

245

21,49733,61631,159335,489

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

(22,120)(21,156)(220,758)

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

11,496

10,003

114,731

Intangible Assets .......................................................................................

333

433

3,323

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

2,922

4,033

29,163

Investments in affiliates ........................................................................

113

100

1,128

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

50

—

499

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

322

544

3,214

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

3,407

4,677

34,002

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

¥32,696¥32,271$326,307ASSETS
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.

10

Teraoka Seisakusho Co., Ltd.

Thousands of
U.S. dollars

Millions of yen

2008

2007

2008

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

¥ 4,751
1,046
323
578
1,532

¥ 3,894
1,008
335
605
1,431

$ 47,415
10,4393,224
5,768
15,289Total current liabilities ...................................................................

8,230

7,273

82,136Long-Term Liabilities:
Retirement and severance benefits (Notes 2-h and 6):
Employees ........................................................................................
Directors and corporate auditors .........................................................
Deferred liabilities taxes (Note 2-f) ........................................................
Negative Goodwill .................................................................................
Other ...................................................................................................

—
—
—
6
117

41
99
375
11
0

—
—
—
60
1,168

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

123

526

1,228

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

8,353

7,799

83,363

NET ASSETSStockholders’ Equity:
Common stock:
Authorized: 80,000,000 shares
Issued: 20,081,955 shares as of March 31, 2008
and 2007, respectively ..........................................................
Additional paid-in capital ......................................................................
Retained earnings .................................................................................
Less: Treasury stock, at cost ..................................................................

3,904
3,491
16,732
(98)

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

38,962
34,840166,987(978)Total stockholders’ equity ...............................................................

24,02923,573239,810VALUATION AND TRANSLATION ADJUSTMENTS:
Unrealized gains on securities (Notes 2-b and 5) ....................................
Foreign currency translation adjustments (Note 2-i) ................................

395
(81)

855
44

3,941
(808)

LIABILITIES AND STOCKHOLDERS’ EQUITY

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

314

899

3,134

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

24,34324,472242,944

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

¥32,696¥32,271$326,307

Teraoka Seisakusho Co., Ltd.

11

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME
For the years ended March 31, 2008 and 2007

Thousands of
U.S. dollars

Millions of yen

2008

2007

2008

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

¥25,945¥23,536$258,932

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

19,896

17,830

198,563

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

6,049

5,706

60,369Selling, General and Administrative Expenses ................................................

4,509

4,282

44,999Operating income ...........................................................................

1,540

1,424

15,369Interest and dividend income ................................................................

93

75

928

Interest expenses ..................................................................................

(6)

(4)

(60)

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

(6)

(27)

(60)

Loss on write.down of investment in securities ........................................

(373)

—

(3,723)Gain on sales of land ............................................................................

—

482

—

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

(11)

(16)

(110)

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

(143)

4

(1,427)

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

14

11

140

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

47

55

470

(385)

580

(3,842)

1,155

2,004

11,527

Current ................................................................................................

496

506

4,950

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

(99)

255

(988)

397

762

3,962

758

¥ 1,242

Other Incom and Expenses:

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

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

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

12

Teraoka Seisakusho Co., Ltd.

¥

$

7,565

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended March 31, 2008 and 2007

Thousands of
U.S. dollars

Millions of yen

2008

2007

2008

Common Stock:
Balance at beginning of year .................................................................

¥ 3,904¥ 3,904$ 38,962

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

—

—

—

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

3,904

3,904

38,962

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

3,491

3,491

34,840Net sales of treasury stock ....................................................................

—

—

—

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

3,491

3,491

34,840

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

16,254

15,325

162,216Net Income ..........................................................................................

758

1,242

7,565

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

(280)

(279)

(2,794)

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

—

(34)

—

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

16,732

16,254

166,986

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

(76)

(75)

(759)

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

(22)

(1)

(220)

(98) ¥(76)

Additional Paid-in Capital:

Retained Earnings:

Treasury Stock, at cost:

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

¥

$

(979)

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

855

1,258

8,533

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

(460)

(403)

(4,591)

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

395

855

3,942

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

44

37

439

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

(125)

7

(1,248)

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

(81)

44

(809)

Foreign Currency Translation Adjustments:

Yen

U.S. dollars

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

¥37.93¥62.12$0.38

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

14.00

14.00

0.14

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

Teraoka Seisakusho Co., Ltd.

13

Teraoka Seisakusho Co., Ltd. and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended March 31, 2008 and 2007

Thousands of
U.S. dollars

Millions of yen

2008

2007

2008

758

¥ 1,242$ 7,565

1,372
(1)
(139)
(99)
(14)
—
—
—
0
0
11
—
373

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

13,693(10)(1,387)
(988)
(139)
—
—
—
0
0
110
—
3,722

(19)
(766)
908
9
(93)
1,542
2,300

(705)
71
88
58
271
451
1,693

(190)
(7,645)
9,062
90
(928)
15,39022,955Investing Activities:
Payment for purchases of property, plant and equipment .........................
Payment for purchases of intangible assets ............................................
Proceeds from sale of land ....................................................................
Payment for purchases of marketable securities ......................................
Payment for purchases of investment in securities ..................................
Proceeds from sales of marketable securities ..........................................
Net cash used in investing activities .........................................

(2,645)(65)—(1,395)
(35)
3,392
(748)

(732)
(31)
495
(4,593)(398)
3,699(1,560)(26,397)(649)—(13,922)(349)
33,852(7,465)

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

(280)
39
(22)
(263)

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

(2,794)389(220)(2,625)

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 ................................................

(81)
1,208
4,831
¥ 6,039

5
(173)
5,004
¥ 4,831(808)
12,056
48,213$ 60,269

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 earning (losses) of affliciated company ..............................
Valuation loss of foreign facilities ....................................................
Gain on dissolution of foreign facilities ............................................
Minority interest in net income .......................................................
Bonuses to directors and corporate auditors .....................................
Loss (Gain) on sale of land .............................................................
Loss on disposal of property,plant and equipment ............................
Loss (Gain) on sales of investment securities ...................................
Loss on write-down of investment in 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 ..................................

¥

Additional cash flow info
Interest paid ........................................................................................
Income taxes paid ................................................................................
The accompanying notes to consolidated financial statements are an integral part of these statements.

14

Teraoka Seisakusho Co., Ltd.

6
¥

486

¥

4

60

448

$ 4,850

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended March 31, 2008 and 2007

1. Basis of Presenting Financial Statements
The accompanying consolidated financial statements of
TERAOKA SEISAKUSHO CO., LTD. (the “Company”)
and its subsidiaries are prepared on the basis of accounting principles generally accepted in Japan, which
are different in certain respects as to application anddisclosure requirements from International Financial
Reporting Standards, and are compiled from theconsolidated financial statements prepared by theCompany, as required by the Financial Instruments andExchange Law of Japan. However, certain accountbalances, as disclosed in the basic consolidated financial statements in Japan, have been reclassified to theextent 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¥100.20=U.S.$1, the prevailing exchange rate on
March 31, 2008.

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, 2008 and 2007 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.

Teraoka Seisakusho Co., Ltd.

15

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
Effective in the fiscal year ended March 31, 2008, in
accordance with the revised Japanese Corporation Tax
Law, the Company changed the depreciation method oftangible fixed assets acquired on or after April 1, 2007.
As a result, the depreciation expenses for the fiscal
year ended March 31, 2008 increased by ¥21 million(US$210 thousand) and Operating income, Ordinary
income and Income before income taxes each decreasedby ¥18 million (US$178 thousand) compared with theamount under the formerly applied method.
Effective in the fiscal year ended March 31, 2008, in
accordance with the revised Japanese Corporation Tax

16

Teraoka Seisakusho Co., Ltd.

Law, the Company depreciates the residual value oftangible fixed assets acquired on or before March 31,
2007, which was depreciated in accordance with former
Japanese Corporation Tax Law, to memorandum value infive years using straight-line method.
As a result, the depreciation expenses for the fiscal
year ended March 31, 2008 increased by ¥137 million(US$1,367 thousand). Operating income, Ordinary
income and Income before income taxes each decreasedby ¥124 million (US$1,238 thousand) compared withthe amount under the formerly applied method.

4. Contingent Liabilities
Contingent liabilities in respect of trade notes andexport bills discounted with banks with recourse in theordinary course of business, amounted to ¥72 million(US$719 thousand) and ¥39 million at March 31,
2008 and 2007.

5. Securities
Historical costs, fair value and gross unrealized gains
and losses for marketable securities as of March 31,
2008 and 2007 are as follows.
Millions of yen

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

Historical costs

Fair value¥2,238¥2,902¥2,238¥2,902

2008
Net differences

Gross gains

Gross losses

¥664
0
—
¥664

¥769
0
—
¥769

¥(105)
0—¥(105)

Millions of yen

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

Historical costs

Fair value

2007
Net differences

Gross gains

Gross losses¥2,5761,496
1,000¥5,072¥4,0141,496
1,000¥6,510¥1,4370—¥1,437¥1,5550—¥1,555¥(117)(0)—¥(118)

Thousands of U.S. dollars

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

2008
Historical costs Fair value Net differences Gross gains

Gross losses$22,335——$22,335$(1,048)——$(1,048)$28,962——$28,962$6,627——$6,627$7,675——$7,675

Securities that do not have fair values are as follows:
Thousands of
U.S. dollars

Millions of yen

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

2008
¥18
—
¥18

2007
¥18
—
¥18

2008
$180
—
$180

Teraoka Seisakusho Co., Ltd.

17

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, 2008 and 2007 consisted of the following:
Millions of yen

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

2008¥(3,804)
3,642
313
151

2007
¥(3,836)
4,253
(457)
(40)

Thousands of
U.S. dollars

2008$(37,964)
36,347
3,124
1,507

Employees’ retirement benefit expenses for the years ended March 31, 2008 and 2007 consisted of the following:
Millions of yen

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

2008
¥205
76
(85)
(168)
¥ 28

Thousands of
U.S. dollars

2007
¥208
77
(82)
(177)
¥26

2008
$2,046758(848)(1,677)
$279

2008
2.0 %
2.0 %
5 years

2007
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, 2008, the Company’s Boardof Directors, with the approval of stockholders on June27, 2008 declared a cash dividend of ¥139 million

18

Teraoka Seisakusho Co., Ltd.

(US$1,387 thousand) equal to ¥14.00 (US$0.14) per
share, applicable to earnings of the year ended March
31, 2008 and payable to stockholders on the stockholders’ register on March 31, 2008.

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, 2007 and 2008, 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, 2007 and 2008, 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,
2008 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 27, 2008

Inoue Auditing Co., Inc.

Teraoka Seisakusho Co., Ltd.

19

COMPANY DATA

Company Outline(as of March 31, 2008)

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

532

Board of Directors and Auditors(as of June 27, 2008)

President

Keishiro Teraoka

Managing Director

Toshinobu Nishimura

Directors

Kuniyuki Takei
Takeo Kawaguchi
Kiyohiro Takagi
Jun Watanabe
Yutaka Nomiyama

Standing Corporate Auditor

Motoaki Hattori

Corporate Auditors

Kohji Dohmoto
Jun-ichi Ichikawa
Toshiyuki Nishimura

Operating Officers

Kazuhito Chiba
Minoru Tanaka
Hiroyoshi Ohbori
Nobuo Ito
Tadashi Shirota
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.

20

Teraoka Seisakusho Co., Ltd.

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 and Fukuoka

Investor Information
Financial Year
Common Stocks(as of March 31, 2008)

April 1 to March 31
Authorized Shares

80,000,000

Issued Shares

20,081,955

Stockholders

2,211

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

1,682

8.38

Japan Trustee Services Bank, Ltd.

1,120

5.57

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

976

4.86

Keishiro Teraoka

879

4.37

The Master Trust Bank of Japan, Ltd.

791

3.94

Resona Bank, Ltd.

678

3.38

Kuniko Teraoka

526

2.61

RBC Dexia Investor Services Trust, London Cliant Account

470

2.34

Employees’ Stockholding Group

380

1.89

SGSS / SGBT LUX

275

1.37

Teraoka Seisakusho Co., Ltd.

21

http://www.teraokatape.co.jp

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