HISAMITSU PHARMACEUTICAL CO., INC.

FINANCIAL REPORTFiscal 2005

Contents
Financial Highlights
Management Policies
Management Performance and Financial Position
Management Performance
Analysis of Financial Position and Management Performance
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants

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Financial Highlights
Consolidated Balance Sheets
ASSET
Current assets
Property, plant and equipment
Intangible assets
Investments and other non-current assets
LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities
Long-term liabilities
Minority interests
Shareholders' equity

Millions of yen
111,064
61,08535,168318
14,493111,064
22,2877,209
699
80,86997,21947,95036,620350
12,29997,21919,872
7,225
669
69,4532005
28th
Thousands of U.S. dollars
1,060,378
583,206
335,765
3,036
138,371
1,060,378
212,784
68,8286,674
772,093

Consolidated Statements of Income
Net sales
Operating income
Income before taxes
Net income

Millions of yen
83,545
21,49521,89812,87374,58817,99017,873
10,823Thousands of U.S. dollars
797,642205,222
209,070
122,904

Amounts per share of common stock
Net income
Diluted income
Cash dividends applicable to the year

141.30141.3018.00

118.77118.77
14.00

1.35
1.35
0.17

Consolidated Statements of Cash FlowsNet cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash andcash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at begginning of year
Increase in cash and cash equivalents due
to changes in the scope of consolidation
Cash and cash equivalents at end of year

Millions of yen
20,130(4,755)(1,267)

7,697(2,259)(2,397)

Thousands of U.S. dollars
192,190(45,398)(12,097)

(48)

(110)

(458)

14,06017,4172,931
14,307

134,237
166,288-179-

31,477

17,417

300,525

Number of employees

1,541

1,432

Year ended February:

2005
28th

2004
29th

Yen

U.S. dollars

Note:The US dollar amounts represent translations of Japanese yen, for convenience only, at the rate of US$1=￥104.741

Management Policies(1) Fundamental Management Policies
Since they were founded, the companies in the HISAMITSU PHARMACEUTICAL CO., INC. (theCompany) group have actively conducted corporate activities and adopted the management
philosophy of “Improving Quality of Life (QOL) for People in the World” through creation,
manufacture and sale of pharmaceutical products, adhering to the basic policy of “Customers
First”.
Under this philosophy, the Companies are actively developing corporate activities to satisfy
customers, while actively seeking customers in an effort to increase enterprise value.

(2) Fundamental Profit-sharing Policy
The Company recognizes returning profits to shareholders as its most important task, based on
maintaining stable dividends, to which it occasionally adds either commemorative or special
dividends, taking into consideration factors such as business results. In addition to this, theCompany flexibly takes such financial measures as acquiring treasury stock, which is considered
as an effective method of returning profits to shareholders.
The Company applies its internal reserves to strengthen its operating foundations by focusing
investment on promoting research and development (R&D), expanding production facilities anddeveloping overseas business activities.

(3) Approach and Policy of Reducing the Investment Unit
The Company recognizes that reducing the investment unit is a vital issue for broadening ourinvestor base and increasing liquidity. In the meeting of the Board of Directors held on February
15, 2004, a resolution was passed to lower the investment unit from 1,000 shares to 100 sharesfrom June 1, 2005.

(4) Mid- to
Benchmarks

Long-termManagement

Strategies

andTargetedManagement

In order to build up a strong corporate constitution enabling it to attain target sales as well as toensure profits even in the rapidly changing market environment, the Company has established a
mid-term management plan with February 2006 a target, with net income of ¥10 billion ($95,475
thousand) and maintaining a return on equity (ROE) of not less than 15% as management
benchmarks, aiming to ensure they are achieved.
Furthermore, in accordance with fundamental management policies, the Company is focusing its
efforts on the creation of new pharmaceutical products and new preparations based on TDDS
(Transdermal Drug Delivery System) research, with the aim of becoming an “R&D-based
pharmaceutical company”.
Furthermore, through active operating activities, the Company aims to increase cash flow andpromote R&D on new transdermal pharmaceuticals for topical use and systemic use, together withthe global promotion of the Company’s brand including trademarks, designs, manufacturing
technology and quality assurance systems in order to build up future assets.

2

(5) Basic Approach Regarding Corporate Governance and the State of Implementationof Related Measures(1) Basic Approach Regarding Corporate GovernanceIn order to improve management transparency and ensure compliance in management, steps arebeing taken to strengthen corporate governance while implementing organizational reform for thecreation of an organization capable of rapid responses to changes in the management environment
as a key issue.
Furthermore, when conducting corporate activities, the Company aims for observance of laws andheightening of corporate ethics, while improving the relationship of trust with stakeholders as agood corporate citizen.

(2) State of Implementation of Corporate Governance Measures
The Company continues to adopt a corporate auditor system, and is strengthening corporate
governance together with the reduction of the number of directors and the implementation of acorporate officer system.
In May 2003, the number of directors was reduced from the previous figure of 13 to 9. Importantmanagement decisions are carried out in a management advisory council made up of major
directors, while important resolutions are discussed and decided upon by the Board of Directors.
Management oversight and the separation of decision-making and execution have been
implemented, and a corporate officer system was introduced in March 2003 with the aim ofstrengthening both of these functions to provide greater speed, transparency and strategic basis in
management decisions.
The corporate auditor system was changed in May 2004 to make 2 of the 4 corporate auditors
outside corporate auditors in order to ensure audits can be implemented with greater fairness.
In addition, the “Hisamitsu Corporate Charter” was established in June 2002 in an effort to ensure
behavior based on high ethical standards and values. At the same time, a compliance promotion
office has been established in order to promote thorough compliance throughout the entire
company, and efforts are being made to improve and strengthen compliance regarding social
responsibilities in the Hisamitsu Group such as corporate ethics, the environment and theprotection of personal information.
Furthermore, the QBA Center (Quality of Brand Assurance Center) was established in October
2004, creating a consistent system for assuring reliability encompassing manufacturing, sales andpost-marketing surveillance studies.
The Company has concluded an audit agreement with KPMG AZSA & Co. as the independent
auditors responsible for financial auditing. Furthermore, we receive necessary advice from legal
counsel regarding general legal issues that arise on a day-to-day basis.
In order to increase transparency in management, the Company works to actively disclose
information, while also endeavoring to smoothly communicate with shareholders and investors
through active investor relations.

3(3) Details of remuneration for directors
The remuneration for the Company’s directors and independent auditors is as follows:
Directors¥237 million ($2,263 thousand)Auditors¥34 million ($325 thousand)(including ¥6 million for outside directors)(Note 1) Director remuneration includes employee salaries for directors who also serve
as employees.
(Note 2) There are no outside directors.

(4) Details of remuneration for independent auditors
Remuneration to KPMG AZSA & Co., the Company’s independent auditors:
Remuneration for audit
based on the audit agreement¥25 million ($239 thousand)Remuneration other than that shown above¥10 million ($95 thousand)4Management Performance and Financial Position
1. Management Performance(１) Overview of Fiscal 2005 ended February 28, 2005
1-1) Overall Business Performance
During fiscal 2005, the Japanese economy continued to show signs of recovery such as a gradualimprovement in the employment situation and an improvement in corporate earnings, but thesituation remains serious due to factors such as a decline in consumer spending stemming fromstructural deflation.
Various reforms to the medical system have been underway in the ethical pharmaceutical industry,
such as cuts in the official pharmaceutical reimbursement prices (industry average of 4.2%) in
April 2004.
The industry of over-the-counter (OTC) products also experienced a very harsh businessenvironment due to the effects of the sluggish domestic economy.
Under these circumstances, with respect to ethical pharmaceuticals, the Company has developed
pharmaceutical information activities primarily focusing on the mainstay products, which are
topical analgesic and anti-inflammatory pharmaceuticals, to properly meet the needs of medical
institutions. With respect to over-the-counter (OTC) products, although the market continues toface sluggish consumer spending, we worked to promote sales centered on topical analgesic andanti-inflammatory pharmaceuticals. We are focusing our research and development on TDDS
research, and are developing new transdermal pharmaceuticals for topical use and systemic use.
Regarding production, we are proceeding with upgrades and modifications to production facilities
in order to increase efficiency and quality, while also endeavoring to maintain and improve ISO
14001 certification for protecting the global environment.
The Companies have also worked to improve customer service and increase performance in ourcable television broadcasting and other businesses.
As a result of these operating activities, the Companies posted consolidated net sales of ¥83,545
million ($797,642 thousand), a 12.0% increase over the previous year, and consolidated net incomeof ¥12,873 million ($122,904 thousand), an 18.9% increase over the previous year. All these figures
were record highs for the Companies.
1-2) Business Performance by Segment(Pharmaceuticals and related products businesses)
During the year under review, pharmaceuticals and related products businesses, especially the
ethical pharmaceutical business, faced extremely uncertain circumstances due to cuts in theofficial pharmaceutical reimbursement prices and reforms in the medical system.
Under these circumstances, the Company is conducting accurate and detailed pharmaceuticalinformation activities to medical institutions centering on topical analgesic and anti-inflammatory
pharmaceuticals. This involves providing and gathering information on efficacy and safety, in
addition to working on expanding the share of mainstay products consisting of MOHRUS TAPE
ketoprofen transdermal patches, MOHRUS TAPE double-sized patches and MOHRUS
transdermal gel patches.
Moreover, VOLLEY SPRAY (antifungal) that is directly sprayed on the affected area was releasedin July 2004, while the MOHRUS PATCH product was released in Hong Kong in November 2005
and KEPLAT (ketoprofen transdermal patches) was released in Italy in February 2005.

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With respect to over-the-counter (OTC) products, as intense sales competition continues in thedomestic market, advertising was revamped for mainstay products consisting of SALONPAS, AIR
SALONPAS, and Feitas, with efforts being made to increase sales by expanding and developing theconsumer base through an improved brand image.
In order to respond to the diverse needs of customers, LIFECELLA BIYOEKI MASK EYECARE,
LIFECELLA BIYOEKI MASK E, and LIFECELLA BIYOEKI MASK WRINKLE CARE werereleased in the LIFECELLA series. Furthermore, a 21-piece item was added to the Feitas topicalanalgesic and anti-inflammatory pharmaceutical line, in an effort to develop a new consumer base.
As a result of these operating activities, consolidated net sales in the pharmaceuticals and related
products businesses were ¥80,674 million ($770,231 thousand), a 12.0% increase from the previous
year.

(Cable television broadcasting and other businesses)
In the cable television broadcasting business, active investments are being made in an effort toexpand users of cable television and cable Internet services in order to respond to the coming ofdigital terrestrial broadcasting and expand regions covered.
Furthermore, efforts are also being made to improve performance in other businesses, including
production and sale of laboratory animals, by expanding sales channels and improving customer
service, while also streamlining management.
As a result of these operating activities, consolidated net sales for cable television broadcasting andother businesses were ¥2,870 million ($27,401 thousand), an 11.9% increase from the previous
year.
1-3) R&D activities(Pharmaceuticals and related products businesses)
The Company has concentrated R&D on TDDS (Transdermal Drug Delivery System) for sometime, and has achieved results inside and outside Japan. We are conducting joint R&D on
fundamental technologies with outside organizations and working to expand the potential oftransdermal treatments and commercialization technology.
Organizational reforms have been implemented, and together with a further improved patent
strategy and faster development, functions for the effective management of R&D resources andachieving effective investment, have been strengthened by conducting development project
feasibility assessments in the initial stages of development.
In the domestic field of ethical pharmaceuticals, the Ethical Drugs Division of SSP Co., Ltd. was
acquired in April 2005 to acquire products under development such as NS-126 allergic rhinitis
nasal drops (PIII tests are underway for this product jointly developed with Nippon Shinyaku) and
318-PW analgesic and anti-inflammatory patches (diclofenac gel patch, awaiting approval) and tostrengthen the Company’s contacts. Approval was also obtained for MOHRUS 60 (double the sizeof MOHRUS) in March 2005. A decision was also reached on the partner for joint development of
HFT-290 (fentanyl TDDS) after PII testing was completed.
Overseas, approval was received for HKT-500 (MOHRUS TAPE) in Hong Kong in May 2004 andthen in Italy in November. In addition, preparations are being made to apply for approval of afentanyl TDDS generic product in the United States, and preparations for PIII tests of FS-67(SALONPAS for overseas markets) and HKT-500 are also underway.

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Consolidated subsidiary GenoFunction, Inc. that conducts genetic operations is commissioned toperform discovery and functional analysis of disease-related genes using siRNA technology.

(Cable television broadcasting business and other businesses)
No R&D activities are being conducted in the cable television business.
Some R&D is conducted in other businesses, but the amounts are small and do not merit special
mention.
As a result of the above, R&D expenses for the consolidated fiscal year under review totaled ¥7,224
million ($68,971 thousand).
1-4) Issues to be addressed(Pharmaceuticals and related products businesses)
In the ethical pharmaceuticals business, promotion of policies aimed at lowering pharmaceuticals
prices is expected to continue in the future as society rapidly ages. In such a harsh businessenvironment, the Company aims to step up pharmaceutical information activities to medical
institutions, in addition to creating new transdermal pharmaceuticals for topical use and systemic
use that suit the needs of medical institutions and patients.
On May 21, 2004, the Company concluded an agreement to receive the spun-off Ethical Drugs
Division of SSP Co., Ltd. On April 1, 2005, SSP Co., Ltd. spun off its Ethical Drugs Division, which
was then absorbed by the Company. Based on this agreement, the Company completed theacquisition of all issued shares of Biomedics Co., Ltd., which took on the Ethical Drugs Division
spun off from SSP. Biomedics Co., Ltd. changed its trade name, etc. and was launched anew as
Hisamitsu Medical Co., Ltd. on April 1, 2005. With the acquisition of this Ethical Drugs Division,
the Company aims to strengthen its sales force and R&D capabilities, while also further improving
profitability and endeavoring to achieve further growth.
With respect to over-the-counter (OTC) products, amid a prolonged slump in the market andintensifying competition among companies, the Company is working to promote growth in sales ofmainstay products of topical analgesic and anti-inflammatory pharmaceuticals, while ceaselessly
making modifications to existing products and proceeding with development of new products tomeet the needs of customers.
In our overseas business, we are working to establish the Company’s brand including trademarks,
designs, manufacturing technology and quality assurance systems, while further improving
overseas manufacturing plants and promoting clinical tests overseas.

(Cable television broadcasting business and other businesses)
Regarding the cable television broadcasting business and other businesses including the
production and sale of laboratory animals, the Companies are working to expand businesses andprovide detailed services to customers, while endeavoring to further improve performance bystreamlining management and strengthening our corporate constitution.

71-5) Business risks, etc.
With regard to the performance of the Company, the following risks may have a material effect on
the judgment of investors. All forward-looking items shown within this document are based on the
judgment of the Company as of the end of the consolidated fiscal year under review.

(1) Risks regarding legal regulations
The pharmaceuticals and related products businesses that form the Company’s principal
businesses are subject to the effects of regulations such as the system of official pharmaceuticalreimbursement prices and the medical insurance system. For example, the revisions made to
official pharmaceutical reimbursement prices once every two years apply pressure to periodicallylower sale prices, and there is a possibility that there will be a detrimental effect on the Company’s
performance when this cannot be covered by increased sales volume. The businesses are also
subject to various regulations overseas.

(2) Risks stemming from dependence on certain products
In the year ended February 2005, sales of MOHRUS TAPE, MOHRUS TAPE L and MOHRUS
made up 66.4% of consolidated net sales. Because of this, there is a possibility that there will be a
detrimental effect on the Company’s performance if rights related to these products cannot be
maintained or there are serious unexpected side-effects.

(3) Risks related to research and development
The Company is conducting research and development regarding new products and newtechnologies. However, there is a possibility that there will be a detrimental effect on the
Company’s performance due to the termination of R&D activities because of factors such as
anticipated effects not being obtained or R&D investment not being recovered even through sales.

(4) Risks regarding manufacturing and stocking
Products are manufactured in the Company’s plants using original technology. Some products andmaterials are dependent on specific vendors for their supply. Because of this, there is a possibility
that there will be a detrimental effect on the Company’s performance due to a stoppage ofmanufacturing or stocking for some reason.

(5) Risks related to environmental issues
Some of the chemical substances used in the Company’s R&D activities and manufacturing
processes can have adverse effects on health and the surrounding environment. The Company istaking sufficient measures against this, but there is a possibility that there will be a detrimental
effect on the Company’s performance if it is judged that these substances had an adverse effect on
the surrounding environment.

(6) Risks related to intellectual property
In the event the Company’s business activities violate the intellectual property such as patents ofothers, there is a possibility of suspension of business or a dispute. Furthermore, in the event there
is a violation of intellectual property, there is a possibility of litigation, the result and process ofwhich may have a detrimental effect on the Company’s performance.

8(7) Risks related to litigation
With regard to our business activities, there is a possibility that we will face litigation regarding
side-effects of pharmaceuticals and product liability, the result and process of which may have a
detrimental effect on the Company’s performance.

(8) Other risks
In addition to the above, there are potential risks including those regarding the occurrence of
natural disasters and system security.
1-6) Important agreements, etc. in management(Stock purchase and sale agreement)
On May 21, 2004, the Company concluded an agreement with SSP Co., Ltd. that SSP’s EthicalDrugs Division would be spun off and transferred to the wholly-owned subsidiary Biomedics Co.,
Ltd. on April 1, 2005, and that 100% of the shares of Biomedics Co., Ltd. would be acquired from
SSP on that day.
Overview of the agreement(1) Objective
In the ethical pharmaceuticals business, the Company is continuing to see growth centeredon MOHRUS and MOHRUS TAPE topical analgesic and anti-inflammatory
pharmaceuticals. SSP’s Ethical Drugs Division has topical products that fall into theCompany’s strong area, and these is expected to undergo further growth using theCompany’s sales force. The research and development pipeline can also be strengthened.
(2) Name of the other company in the stock acquisition
SSP Co., Ltd.
(3) Name and size of the acquired company
Name: Biomedics Co., Ltd. (The name was changed to Hisamitsu Medical Co., Ltd. on
April 1, 2005)
Business details:
Manufacture and sale of ethical pharmaceuticals
Scale: Sales of ¥10,613 million(Based on the performance of the ethical pharmaceuticals division in SSP Co., Ltd. in
the year ended March 31, 2005)
Employees: Approximately 240(4) Timing of stock acquisition:
April 1, 2005
(5) Number of shares acquired, acquisition value and equity ratio after acquisition
Number of shares acquired:
300,000
Acquisition value:
The total price is ¥14.6 billion, but slight adjustments
will be made after confirming the acquired assets andliabilities.
Equity ratio after acquisition:
100%(6) Financing of payment
Own funds and bank loans

9(2) Outlook for Fiscal 2006 ending February 28, 2006
(Outlook for consolidated results)
Regarding the results of operations for the next year ending February 28, 2006, the Companies are
expecting that consolidated net sales will increase to approximately ¥98,000 million, a 17.3%
increase over the previous year, and that net income will increase to ¥13,900 million, a 7.9%
increase over the previous year.

(Pharmaceuticals and related products businesses)
The Company aims to step up pharmaceutical information activities to medical institutions, inaddition to creating new transdermal pharmaceuticals for topical use and systemic use that suitthe needs of medical institutions and patients. Furthermore, we will strengthen our sales force andR&D capabilities through the ethical pharmaceuticals division acquired from SS Co., Ltd on April
1, 2005.
With respect to over-the-counter (OTC) products, amid a prolonged slump in the market andintensifying competition among companies, the Company is working to promote growth in sales ofmainstay products of topical analgesic and anti-inflammatory pharmaceuticals, while ceaselessly
making modifications to existing products and proceeding with development of new products tomeet the needs of customers.
In our overseas business, we are working to establish the Company’s brand including trademarks,
designs, manufacturing technology and quality assurance systems, while further improving
overseas manufacturing plants and promoting clinical tests overseas.

(Cable television broadcasting and other businesses)
Regarding the cable television broadcasting business and other businesses, including the
production and sale of laboratory animals, the Companies are working to expand businesses andprovide detailed services to customers, while endeavoring to further improve performance bystreamlining management and strengthening our corporate constitution.
However, it must be noted that these projections were made according to the Companies’
judgments based on the information available at the time and include latent risks anduncertainties. Actual results, therefore, could significantly differ from the projections.

(3) Dividends
In response to the support shown by shareholders, dividends for fiscal 2005 were ¥16 ($0.15) per
share, an increase of ¥2 ($0.02) compared to the previous year, and a ¥2 ($0.02) commemorative
dividend marking 40 years since the release of AIR SALONPAS was added to bring the total
dividend payout to ¥18 ($0.17) per share.
In response to the support shown by shareholders, the Company plans to raise the next dividendby ¥4 ($0.04) to ¥22 per share.

102. Analysis of Financial Position and Management Performance(1) Analysis of the Financial Position in Fiscal 2005
The consolidated financial statements include the accounts for the Company and 12 subsidiaries of
the Company. Investments in two affiliated companies are accounted for using the equity method.

(1) Assets
At February 28, 2005, total assets amounted to ¥111,064 million ($1,060,378 thousand), an
increase of ¥13,845 million ($132,184 thousand) over the previous consolidated fiscal year.
Property, plant and equipment decreased by ¥1,452 million ($13,863 thousand) to ¥35,168 million($335,765 thousand) as a result of depreciation, but cash and time deposits increased by ¥13,727
million ($131,058 thousand) to ¥31,106 million ($296,983 thousand) due to increased cash flows
from operating activities. Investment securities and investment in non-consolidated subsidiaries
and affiliated companies increased by ¥1,861 million ($17,768 thousand) to ¥9,504 million($90,739 thousand) due to purchases of bonds, etc.

(2) Liabilities
Income taxes payable increased by ¥1,687 million ($16,107 thousand) to ¥4,915 million ($46,926
thousand) due to increased net income before taxes and other adjustments, and accrued expenses
increased by ¥1,129 million ($10,779 thousand) to ¥6,695 million ($63,920 thousand) due toincreases in expenses such as advertising costs.

(3) Minority interests
Minority interests increased by ¥30 million ($286 thousand) to ¥699 million ($6,674 thousand) due
to factors such as net income from the subsidiary, Saga City Vision Corporation.

(4) Shareholders’ equity
Shareholders’ equity increased by ¥11,416 million ($108,994 thousand) to ¥80,869 million($772,093 thousand). This is a result of retained earnings increasing by ¥11,571 million ($110,474
thousand) due to the posting of net income totaling ¥12,873 million ($122,904 thousand) andpayment of dividends totaling ¥1,271 million ($12,135 thousand).

(2) Analysis of Management Performance in Fiscal 2005
(1) Sales
Sales increased 12.0% from the previous year to ¥83,545 million ($797,642 thousand). As a resultof focusing our efforts on the growth of mainstay products, MOHRUS TAPE sales were 117% and
MOHRUS TAPE L sales were 175% of the previous year’s level, which contributed to the increasein sales.

(2) Operating income
Operating income increased 19.5% from the previous year to ¥21,495 million ($205,222 thousand).
The main factors leading to this are an increase in the proportion of sales of the Company’s own
products with a low cost ratio, together with a lower cost of sales ratio resulting from the effect ofimproved productivity and reduced manufacturing costs. Selling, general and administrative
expenses increased in a similar amount to the increase in sales.

11(3) Net income
Net income increased by 18.9% from the previous year to ¥12,873 million yen ($122,904 thousand).
This reflected the growth of operating income. As a result, net income per share in the consolidated
fiscal year under review was ¥141.3 ($1.35), and the net return on equity was 17.1%. This value
was calculated by deducting income taxes, deferred income taxes and minority interests in net
income of consolidated subsidiaries.

(3) Analysis of Cash Flow in Fiscal 2005
Operating activities generated net cash of ¥20,130 million ($192,190 thousand), a ¥12,433 million($118,703 thousand) increase over the previous year, principally reflecting increased net income
before taxes and other adjustments.
Investing activities used net cash of ¥4,755 million ($45,398 thousand), a ¥2,496 million ($23,830
thousand) increase over the previous year, principally reflecting increased payments for thepurchase of investment securities and reduced cash from the sale of securities.
Financing activities used net cash of ¥1,267 million ($12,097 thousand), a ¥1,130 million ($10,789
thousand) decrease compared to the previous year, principally reflecting reduced payments for theacquisition of treasury stock.
As a result, cash and cash equivalents at end of year totaled ¥31,477 million ($300,525 thousand),an increase of ¥14,060 million ($134,237 thousand) over the previous year.

12Consolidated Balance Sheets
HISAMITSU PHARMACEUTICAL CO., INC.
February 29, 2004 and February 28, 2005
Thousands of
U.S. Dollars
Millions of yen(Note 1)

2005

2004

2005

¥31,106¥17,379$296,983

ASSETS
Current assets:
Cash and time deposits (Note 3)
Notes and accounts receivable:
Trade notes (Note 14)

2,589

4,292

24,718Trade accounts

17,316

18,177

165,324

Short-term investments (Note 4)

1,174

502

11,209Inventories (Note 5)

5,837

5,192

55,728

784

658

7,485

Other current assets

2,387

1,907

22,790Less allowance for doubtful accounts

(108)

(157)

(1,031)

61,08547,950583,206

Deferred tax assets (Note 11)

Total current assets
Property, plant and equipment:
Land (Note 6)

11,30911,371

107,972

Buildings and structures (Note 9)27,35826,886

261,199

Machinery and equipment (Note 9)

20,62019,733

196,868

Tools, furniture and fixtures

10,291

10,442

98,253

Construction in progress

1,852

1,900

17,682

71,43070,332681,974(36,262)(33,712)(346,209)

35,16836,620335,765

318

350

3,036

8,925

7,163

85,211Less accumulated depreciation

Intangible assets
Investments and other non-current assets:
Investment securities (Notes 4 and 9)
Investment in non-consolidated subsidiaries

579

480

5,528

Long-term loans receivable

and affiliated companies (Note 4)

1,415

917

13,510

Deferred tax assets (Note 11)

1,804

1,919

17,224

Other investments and other non-current assets

2,088

2,249

19,934

Less allowance for doubtful accounts

(318)

(429)

(3,036)

14,493

12,299138,371¥111,064¥97,219$1,060,378

See accompanying notes.

13Thousands of
U.S. Dollars
Millions of yen
2005(Note 1)
2004

2005

¥1,475¥1,028$14,082

154

361

1,470

7,554

7,909

72,121

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITYCurrent liabilities:
Short-term bank loans (Note 9)Long-term debt due within one year (Note 9)
Notes and accounts payable:
Trade
Construction

111

122

1,060

Other

6,695

5,566

63,920

Income taxes payable (Note 11)

4,915

3,228

46,926

Allowance for sales returns

247

276

2,358

Accｒued employees’ bonuses

494

516

4,717

Other current liabilities
Total current liabilities

642

866

6,130

22,287

19,872

212,784

Long-term liabilities:
Long-term debt due after one year (Note 9)

1,374

1,506

13,118Deferred tax liabilities relating to land revaluation (Note 6)

1,887

1,894

18,016

Employees’ severance and retirement benefits (Note 10)

2,800

2,709

26,733

Directors’ and corporate auditors’ retirement benefits

1,022

947

9,757

71

95

678

Consolidated difference
Other non-current liabilities

55

74

525

Total long-term liabilities

7,209

7,225

68,827

699

669

6,674

8,474

―

80,905

Contingent liabilities (Note 14)
Minority interests
Shareholders’ equity (Note 13):
Common stock:
Authorized−380,000,000 shares
Issued−95,164,895 shares in 2005

―

8,474

―

Capital surplus−95,164,895 shares in 2004

8,242

8,242

78,690Retained earnings

68,704

57,133655,948

Land revaluation difference (Note 6)

2,781

2,790

26,551

Net unrealized holding gains on securities

1,067

1,084

10,187

Foreign currency translation adjustments(1,116)(1,037)(10,654)(7,283)―(69,534)

Treasury stock (at cost)
4,504,702 shares in 2005
4,389,426 shares in 2004―

(7,233)―

Total shareholders’ equity

80,86969,453772,093¥111,064¥97,219$1,060,378

14Consolidated Statements of Income
HISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28, 2005, February 29, 2004 and February 28, 2003
Thousands of
U.S. Dollars

2005
Net sales

Millions of yen
2004

2003

(Note 1)
2005

¥83,545¥74,588¥70,000$797,642

Cost of sales

24,72523,21021,175

236,061

Selling, general and administrative expenses

30,101

25,94325,219287,388

Costs and expenses:

Research and development

7,224

7,445

6,551

68,97162,05056,59852,945592,420

21,495

17,99017,055205,222

Interest and dividend income

120

143

184

1,146

Interest expense

(34)

(29)

(183)

(325)

Equity in earnings of affiliated companies

98

60

72

936

Gain on sales of property, plant and equipment

2

10

―

19

Operating income
Other income (expense):

Amortization of consolidated adjustment account

24

24

―

229

Foreign exchange loss

(13)

(63)

(166)

(124)

Reversal of allowance for doubtful accounts

100

95

―

955

Governmental subsidy

56

221

445

535

―

(220)

(444)

―

plant and equipment

(70)

(75)

(44)

(668)

Valuation loss on investment securities

(61)

(523)

(560)

(582)

Write-down of golf-club memberships

―

(20)

―

―

Provision for allowance for doubtful accounts

―

(3)

(42)

―

181

263

277

1,727

Advanced depreciation deduction of property,
plant and equipment
Loss on sales and disposal of property,

Other−net

403

(117)

(461)

3,848

21,89817,873

16,594

209,070

Current

8,816

7,167

7,740

84,170

Deferred

40

(261)

(664)

382

Income before income taxes
Income taxes (Note 11):

Minority interests in net incomeof consolidated subsidiaries
Net income

169

144

121

1,614

¥12,873¥10,823¥9,397$122,904
U.S. dollars

Yen
Amounts per share of common stock (Note 2):
Net income(Note 1)

2005

2004

2003

2005
$1.35

¥141.30¥118.77¥101.28

Diluted net income

141.30118.77101.28

1.35

Cash dividends applicable to the year

18.00

14.00

12.00

0.17

See accompanying notes.

15

Consolidated Statements of Shareholders’ Equity
HISAMITSU PHARMACEUTICAL CO., INC.

Years ended February 28, 2005, February 29, 2004 and February 28, 2003
Thousands of
U.S. Dollars
Millions of yen(Note 1)

2005

2004

2003

2005

Balance at beginning of year

¥8,474¥8,474¥8,474$80,905

Balance at end of year

¥8,474¥8,474¥8,474$80,905

Balance at beginning of year

¥8,242¥8,242¥8,242$78,690

Balance at end of year

¥8,242¥8,242¥8,242$78,690

Common stock:

Capital surplus:

Retained earnings:
Balance at beginning of year

¥57,133¥47,470¥38,976$545,475

Net income

12,873

10,823

9,397

122,904

Cash dividends paid

(1,271)(1,104)(847)(12,135)

(40)

(56)

(56)

(382)

9

―

―

86

¥68,704¥57,133¥47,470$655,948¥2,790¥2,729¥2,729$26,637

Bonuses to directors and corporate auditors
Land revaluation adjustment (Note 6)
Balance at end of year
Land revaluation difference:
Balance at beginning of year
Land revaluation, net of tax (Note 6)
Balance at end of year

(9)

61

―

(86)

¥2,781¥2,790¥2,729$26,551

Net unrealized holding gains (losses) on securities:
Balance at beginning of year

¥1,084¥(390)¥(43)$10,349

Valuation gains (losses)

(17)

1,474

(347)

(162)

Balance at end of year

¥1,067¥1,084¥(390)$10,187¥(1,037)¥(756)¥(361)$(9,900)

(79)

(281)

(395)

(754)

¥(1,116)¥(1,037)¥(756)$(10,654)¥(7,233)¥(5,538)¥(1,683)$(69,057)(50)(1,695)(3,855)(477)¥(7,283)¥(7,233)¥(5,538)$(69,534)

2005

2004

2003

Balance at beginning of year

95,164,895

95,164,895

95,164,895

Balance at end of year

95,164,895

95,164,895

95,164,895

Foreign currency translation adjustments:
Balance at beginning of year
Adjustments from translation offoreign currency financial statements
Balance at end of year
Treasury stock:
Balance at beginning of year
Treasury stock purchased
Balance at end of year

Number of shares of common stock:See accompanying notes.

16

Consolidated Statements of Cash FlowsHISAMITSU PHARMACEUTICAL CO., INC.

Years ended February 28, 2005, February 29, 2004 and February 28, 2003

2003

Thousands of
U.S. Dollars(Note 1)
2005

¥17,873¥16,594$209,070

3,564

3,128

31,869

123
(143)
29
(60)
523

(128)
(184)
183
(72)
560

888
(1,146)
325
(936)
582

220

444

−

(4,852)
52
(175)

(93)
(676)
(248)

24,336(6,359)(4,582)

287
(56)
(166)
17,219144(29)(9,637)
7,697

(511)
(56)
(915)
18,026
186(184)(3,288)14,740(3,704)(382)
9,491
259,452
1,127(325)(68,064)
192,190(3,274)(7,263)(20,794)

26(24)(2,983)
2,983
(251)
2,000
(736)
(2,259)47(47)(6,168)6,168(2,061)102
28(9,194)

3,055(1,146)(12,421)
4,793(18,751)
4,296(4,430)(45,398)

686
676
(754)
(1,763)(1,105)(137)(2,397)5868(1,450)(3,214)(847)
94(4,544)

4,325
2,339
(5,566)(726)(12,135)(334)(12,097)

(110)
2,931
14,307(255)
747
13,560(458)
134,237
166,288179¥17,417―¥14,307―$300,525

Millions of yen
2004

2005
Cash flows from operating activities:
Income before income taxes¥21,898
Adjustments to reconcile net income before taxes
to net cash provided by operating activities:
Depreciation and amortization
3,338
Increase (decrease) in allowance forseverance and retirement benefits
93Interest and dividend income(120)Interest expense
34
Equity in earnings of affiliated companies(98)
Valuation loss on investment securities
61
Advanced depreciation deduction of property,
plant and equipment−(Increase) decrease in notes andaccounts receivable
2,549(Increase) decrease in inventories(666)
Increase in other current assets(480)
Increase (decrease) in notes andaccounts payable(388)
Bonuses to directors and corporate auditors
(40)
Other
994
Subtotal
27,175Interest and dividend income received
118
Interest paid
(34)
Income taxes paid
(7,129)Net cash provided by operating activities
20,130Cash flows from investing activities:
Payments for purchases of property,
plant and equipment(2,178)Proceeds from sales of property,
plant and equipment
320
Payments for purchases of intangible assets(120)
Payments for purchases of marketable securities (1,301)
Proceeds from sales of marketable securities
502
Payments for purchases of investment securities (1,964)
Proceeds from sales of investment securities
450
Other
(464)
Net cash used in investing activities(4,755)
Cash flows from financing activities:
Net increase (decrease) in bank loans
453
Proceeds from long-term debt
245
Repayment of long-term debt
(583)
Payment for purchase of treasury stock(76)
Cash dividends paid
(1,271)
Other(35)
Net cash used in financing activities(1,267)
Effect of exchange rate changes oncash and cash equivalents(48)
Net increase in cash and cash equivalents
14,060Cash and cash equivalents at beginning of year
17,417
Increase in cash and cash equivalents due tochanges in the scope of consolidation―
Cash and cash equivalents at end of year (Note 3) ¥31,477

See accompanying notes.

17Notes to Consolidated Financial Statements
HISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28, 2005, February 29, 2004 and February 28, 2003

1. Basis of Consolidated Financial Statements
HISAMITSU PHARMACEUTICAL CO., INC. (the “Company”) and its consolidated domestic
subsidiaries maintain their accounts and records in accordance with the provisions set forth in theJapanese Securities and Exchange Law and its related accounting regulations, and in conformity
with accounting principles generally accepted in Japan (“Japanese GAAP”), which are different incertain respects as to application and disclosure requirements of International Financial ReportingStandards.
The accounts of overseas subsidiaries are based on their accounting records maintained inconformity with generally accepted accounting principles prevailing in the respective countries of
domicile. The accompanying consolidated financial statements have been restructured andtranslated into English (with some expanded descriptions and the inclusion of consolidated
statements of shareholders' equity) from the consolidated financial statements of the Company
prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureauof the Ministry of Finance as required by the Securities and Exchange Law. Some supplementary
information included in the statutory Japanese language consolidated financial statements, but
not required for fair presentation, is not presented in the accompanying consolidated financial
statements.
In the year ended February 28, 2005, the Company did not adopt early the new accounting
standard for impairment of fixed assets (“Opinion Concerning Establishment of AccountingStandard for Impairment of Fixed Assets” issued by the Business Accounting Deliberation Council
on August 9, 2002) and the implementation guidance for the accounting standard for impairmentof fixed assets (the Financial Accounting Standard Implementation Guidance No. 6 issued by the
Accounting Standards Board of Japan on October 31, 2003). The new accounting standard isrequired to be adopted effective March 1, 2006.
The translations of the Japanese yen amounts into U.S. dollars are included solely for theconvenience of readers outside Japan, using the prevailing exchange rate at February 28, 2005,
which was ¥104.74 to U.S. $1. The convenience translations should not be construed as
representations that the Japanese yen amounts have been, could have been, or could in the future
be, converted into U.S. dollars at this or any other rate of exchange.

2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements for the years ended February 28, 2005, February 29, 2004
and February 28, 2003 include the accounts of the Company and its 12 (12 in 2004 and 11 in 2003)
significant subsidiaries (the “Companies”). All significant intercompany balances, transactions andprofits have been eliminated.

18

The Company is required to consolidate all significant investees which are controlled throughownership of a majority of voting rights or the existence of certain other conditions.
The foreign subsidiaries are consolidated based on their financial statements for their fiscal year
ended December 31, because the difference between the closing date of the subsidiaries and that of
the Company does not exceed three months. Significant transactions occurring between December
31 and February 28 are adjusted on consolidation.
In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries,
including the portion attributable to minority shareholders, are evaluated using the fair value atthe time the Company acquired control of the respective subsidiaries.
Equity Method
Investments in two affiliated companies are accounted for using the equity method. However,unconsolidated subsidiaries are not accounted for using the equity method, since the Company’s
equity in earnings in the aggregate are not material in relation to the consolidated net income andretained earnings.
Consolidation Difference
The consolidation difference between the cost of an investment and equity in its net assets at thedate of acquisition is amortized equally over 5 years. However, small amounts are charged or
credited to income in the year of acquisition.
Cash and Cash Equivalents
In preparing the consolidated statements of cash flows, cash on hand, readily-available bankdeposits and short-term highly liquid investments with maturities not exceeding three months at
the time of purchase are considered to be cash and cash equivalents.
Short-term Investments and Investment Securities
The Companies classify securities as follows:(a) securities held for trading purposes (hereinafter, “trading securities”);(b) debt securities intended to be held to maturity (hereinafter, “held-to-maturity debt
securities”);(c) equity securities issued by subsidiaries and affiliated companies; and(d) all other securities that are not classified in any of the above categories (hereinafter,“other securities”).
Trading securities are stated at fair market value. Gains and losses realized on disposal andunrealized gains and losses from market value fluctuations are recognized as gains and losses in
the period of the change.
Held-to-maturity debt securities are stated at amortized cost. Equity securities issued bysubsidiaries and affiliated companies which are not consolidated or accounted for using the equity
method are stated at moving average cost.
Other securities with available fair market values are stated at fair market value at the year-end.
Unrealized gains and unrealized losses on these securities are reported, net of applicable income
taxes, as a separate component of shareholders’ equity. Realized gains and losses on sale of suchsecurities are computed using moving average cost.

19

Debt securities with no available fair value are stated at amortized cost, net of the amountconsidered not collectible. Other securities with no fair market value are stated principally atmoving average cost.
If the market value of held-to-maturity debt securities, equity securities issued by unconsolidated
subsidiaries and affiliated companies, and other securities declines significantly, such securities
are stated at fair market value and the difference between fair market value and the carrying
amount is recognized as loss in the period of the decline. If the fair market value of equity
securities issued by unconsolidated subsidiaries and affiliated companies not on the equity method
is not readily available, such securities should be written down to net asset value with acorresponding charge in the income statement in the event net asset value declines significantly. In
these cases, such fair market value or the net asset value will be the carrying amount of the
securities at the beginning of the next year.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is provided in amounts sufficient to cover possible losses oncollection. It is determined by adding individually estimated uncollectible amounts to an amountcalculated based on the percentage of the Companies’ past bad debt losses against the balance of
total receivables.
The allowance for doubtful accounts for the overseas consolidated subsidiaries is provided inamounts calculated from individually estimated uncollectible accounts.
Allowance for Sales Returns
The allowance for sales returns is provided in the limited amount calculated by formula aspermitted by the Corporation Tax Law of Japan to cover possible losses on sales returns after thebalance sheet date.
Inventories
Inventories are stated at cost (first-in, first-out method).
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation except that certain
land was revalued at fair value as of February 28, 2001. Depreciation is provided over estimateduseful lives as permitted by the Corporation Tax Law of Japan.
Depreciation of property, plant and equipment is determined by the declining balance method
except that the straight line method is primarily adopted by the overseas consolidated subsidiaries.
Intangible Assets
Intangible assets are stated at cost less accumulated amortization and amortized by the straightline method. Amortization is provided over estimated useful lives as permitted by the Corporation
Tax Law of Japan. Amortization of internally used software is determined using the straight line
method over the estimated useful life of five years.

20

Income Taxes
The Companies recognize tax effects of temporary differences in the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. The
provision for income taxes is computed based on the pre-tax income included in the statements ofincome.
The asset and liability approach is used to recognize deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Accrued Employees’ Bonuses
The Companies accrue employees’ bonuses for the portion of estimated future payments applicableto the current year.
Severance and Retirement Benefits(Lump-sum benefit plan)
Under the terms of the Company’s and domestic subsidiaries’ retirement plans, substantially all
employees are entitled to a lump-sum payment at the time of retirement. The amount of theretirement benefit is, in general, based on the length of service, base salary at the time ofretirement and reason for retirement.
(1996 pension plan)
Commencing from July 1996, 30% of the above benefits are covered by a contributory fundedpension plan. The benefits are payable either as a monthly pension or, under certain
circumstances at the option of retiring employees, in a lump-sum amount.
(1966 pension plan)
The Company also has had a contributory funded pension plan since 1966 which covers retirement
benefits for employees who retire at the mandatory retirement age or those with over 20 years ofservice who terminate their employment under certain circumstances. These employees are, in
general, entitled to a lump-sum payment or an annuity.
Employees’ Severance and Retirement Benefits
In order to provide for retirement benefits of employees in the Company and domestic consolidated
subsidiaries, the liability recorded at the end of the consolidated fiscal year is based on the
projected benefit obligation and pension assets at the end of the consolidated fiscal year.
Actuarial differences are recognized over a certain period (5 years) within the average remaining
service lives of employees from the following consolidated fiscal year. Prior service costs arerecognized over a certain period (2 years) within the average remaining service periods of
employees from the year they arise.
On April 26, 2004, the Company received approval from the Minister of Health, Labor and Welfare
to be exempt from future payment obligations for the substitutional portion of the employees’
pension fund. The amount estimated to be exempt (minimum actuarial liability) at February 28,
2005 is ¥1,178 million ($11,247 thousand). Assuming the payment was made at that date, theexpected gain in accordance with the “Practical Guideline for Accounting of Retirement Benefits(JICPA Accounting Committee Report No. 13) would have been ¥1,002 million ($9,567 thousand).

21

Directors’ and Corporate Auditors’ Retirement Benefits
Retirement benefits for directors and corporate auditors under the Company’s unfunded plan areprovided in the amount that would be required if they retired at the balance sheet date.
Finance Leases
Finance leases which do not transfer ownership are accounted for in the same manner as operatingleases in accordance with Japanese GAAP.
Foreign Currency Translation
Short-term and long-term receivables and payables denominated in foreign currencies aretranslated into Japanese yen at the exchange rates at the balance sheet date. Foreign exchange
gains and losses are reflected in the statements of income.
Financial statements of consolidated overseas subsidiaries are translated into Japanese yen at the
year-end rate, except that shareholders’ equity accounts are translated at historical rates andincome statement items resulting from transactions with the Company are translated at the rates
used by the Company.
Net Income per Share of Common Stock
Computations of net income per share of common stock, assuming no dilution, are based on theweighted average number of shares outstanding during each fiscal year.
For the purpose of computing net income per share assuming dilution, the average number ofshares has been changed by the number of shares which would have been outstanding assuming
the retirement of treasury stock and exercise of any dilutive warrants at the beginning of the year.
Treasury Stock and Reversal of Statutory Reserves
Effective March 1, 2002, the Company adopted the new accounting standard for treasury stock andreversal of statutory reserves (Accounting Standards Board Statement No. 1, “AccountingStandard for Treasury Stock and Reversal of Statutory Reserves”, issued by the AccountingStandards Board of Japan on February 21, 2002). The effect of adopting the new accounting
standard on the consolidated statement of income was not material.
Reclassifications
Certain reclassifications have been made in the 2004 and 2003 financial statements to conform to
the presentation for 2005.

22

3. Cash and Cash Equivalents
Cash and cash equivalents at February 28, 2005, February 29, 2004 and February 28, 2003 for the
consolidated statement of cash flows consisted of the following:
Millions of yen

Thousands of
U.S. dollars

2005

2004

2003

2005

Cash and time deposits……………………… ¥31,106¥17,379¥14,341$296,983

1,174

502

2,048

11,209

(3)

(14)

(81)

(29)

fund and money management fund

(800)

(450)

(2,001)(7,638)Cash and cash equivalents ………………

¥31,477¥17,417¥14,307$300,525

Add: Marketable securities……

Less: Time deposits with maturities
exceeding three months
Securities excluding free financial

4. Short-term Investments and Investment Securities
A. The following tables summarize acquisition costs, book values and fair values of securities withavailable fair values as of February 28, 2005 and February 29, 2004.
(a) Held-to-maturity debt securities
Securities with available fair values exceeding book values:
Thousands ofMillions of yen

U.S. dollars

2005

2004

2005

Government bonds and other debt securities:
Book value………………………………

¥ 499

¥ 449

$ 4,764

Fair value………………………………

500

449

4,774

Difference………………………………

¥

1

¥

0

$

10

Securities with available fair values not exceeding book values:
Thousands ofMillions of yen

U.S. dollars

2005

2004

2005

Book value………………………………

¥ 1,797¥ ―$ 17,157

Fair value………………………………

1,793

―

17,119(4)¥ ―Corporate bonds and other debt securities:

Difference………………………………

¥

$

(38)

(b) Other securities
Securities with book values (fair values) exceeding acquisition costs:
Millions of yen
2005
Acquisition cost

Book value

Difference¥4,448¥6,172¥1,724Equity securities………………………………

23

Millions of yen
2004
Acquisition cost

Book value

Difference¥3,728¥ 5,727¥1,999Equity securities………………………………

Thousands of U.S. dollars
2005
Acquisition cost

Book value

Difference$42,467$58,927$16,460

Equity securities………………………………

Securities with book values (fair values) not exceeding acquisition costs:
Millions of yen
2005
Acquisition cost

Book value

Difference

¥765

¥750

¥(15)

Equity securities………………………………

Millions of yen
2004
Acquisition cost

Book value

Difference¥1,196¥1,001¥(195)

Equity securities………………………………

Thousands of U.S. dollars
2005
Acquisition cost

Book value

Difference$7,304$7,161$(143)

Equity securities………………………………

B. The following tables summarize book values of securities with no available fair values as ofFebruary 28, 2005.
(a) Other securities:
Thousands ofMillions of yen

U.S. dollars

2005

2004

2005

¥506

¥435

$4,831

Unlisted stocks(excluding securities traded over-the-counter)
Free financial fund
Total

……

332

8

3,170

……………………………………

¥838

¥443

$8,001(b) Equity securities of subsidiaries and affiliated companies:
Thousands ofMillions of yen

U.S. dollars

2005

2004

2005

………………………………

¥54

¥80

$516

Affiliated companies ……………………………

525

400

5,012

¥579

¥480

$5,528

Subsidiaries
Total…………………………………

24

C. Held-to-maturity debt securities at February 28, 2005 and 2004 mature as follows:
Millions of yen
2005
Over 1 year but
Within 1 year
Corporate bonds…………………

¥within 5 years

Total

―

¥1,497¥1,497

800

―

800

¥ 800

¥1,497¥2,297

Other debt securities …………………

Millions of yen
2004
Over 1 year but
Within 1 year
Government bonds: …………………

¥

449

within 5 years
¥

Total

―

¥ 449

Thousands of U.S. dollars
2005
Over 1 year but
Within 1 year
Corporate bonds…………………

Other debt securities ………………

$―within 5 years$ 14,293

Total$ 14,293

7,638

―

7,638

$7,638$ 14,293$ 21,931

5．Inventories
Inventories at February 28, 2005 and February 29, 2004 consisted of the following:Thousands ofMillions of yen

U.S. dollars

2005

2004

2005

……………………………

¥4,074¥3,553$38,896

Raw materials ……………………………………

725

742

6,922

Work in process……………………………………

354

279

3,380

Goods and products

Supplies……………………………………

684

618

6,530

¥5,837¥5,192$55,728

6. Land Revaluation
At February 28, 2001, pursuant to the Law of Revaluation of Land and the revision thereof, certain
land for business operations was revalued at fair market value. The related gain was reported in a
separate component of shareholders’ equity as “Land revaluation difference”, net of tax.
The total market value of the revalued land at February 28, 2005 was lower than the total bookvalue after revaluation, in the amount of ¥2,167 million ($20,689 thousand).

25

7. Derivative Transactions
Use of derivative transactions:
The Companies utilize forward currency exchange and interest rate swap transactions to control
risks related to foreign currencies and interest rates.
Forward currency exchange contracts are used to hedge the risk of fluctuations in foreign currency
exchange rates with respect to foreign currency transactions, and interest rate swap transactions
are used to reduce the risk of fluctuations in interest rates in relation to notes payable.
The Companies principally use derivative transactions in connection with managing their market
risk and not for speculation or dealing purposes. The Companies deal with highly rated domestic
banks as counterparty to these transactions to minimize credit risk exposure.
Derivative transactions are, depending on materiality, subject to resolution of the Board of
Directors or approval by the General Manager of the Finance and Accounting Department andcontracted by the Finance and Accounting Department. The actual results of the derivativetransactions are reported to the Board of Directors after the end of each year.
Market values of derivative transactions:
The Companies had no derivative contracts outstanding at February 28, 2005 and February 29,
2004.

8. Lease Information
Finance leases which do not transfer ownership to lessees are accounted for in the same manner as
operating leases in accordance with Japanese GAAP.
The original lease obligations of the Companies for machinery, equipment, tools, furniture, fixturesand software amounted to ¥1,686 million ($16,097 thousand) and ¥1,783 million at February 28,
2005 and February 29, 2004, respectively.
Lease payments for finance leases which do not transfer ownership to lessees amounted to ¥506
million ($4,831 thousand), ¥377 million and ¥336 million for the years ended February 28, 2005,
February 29, 2004 and February 28, 2003, respectively.
Future minimum leases payments, including financing cost, required under such leases atFebruary 28, 2005 and February 29, 2004 are as follows:

Thousands ofMillions of yen
Due within one year………………………………

Due after one year………………………………

26

U.S. dollars

2005

2004

2005

¥268

¥320

$2,559

518

488

4,945

¥786

¥808

$7,504

9. Short-term Bank Loans and Long-term Debt
Short-term bank loans are represented generally by notes maturing within one year. The averageannual interest rates at February 28, 2005 and February 29, 2004 were 1.19% and 1.06%.
Long-term debt at February 28, 2005 and February 29, 2004 consisted of the following:Thousands ofMillions of yen
Unsecured long-term bank loans……………………

¥

Secured long-term bank loans ……………………
Less amounts due within one year……………

U.S. dollars

2005

2004

2004

156

¥ 707

$ 1,489

1,372

1,160

13,099

1,528

1,867

14,588

(154)

(361)

(1,470)¥ 1,374¥ 1,506$13,118

The annual interest rates of the bank loans ranged from 0.0% to 4.51% and from 0.00%
to 4.51% with the weighted average being 1.14% and 1.13% at February 28, 2005 andFebruary 29, 2004, respectively.
At February 28, 2005 and February 29, 2004 assets pledged as collateral for short-termbank loans, including long-term debt due within one year, of ¥150 million ($1,432 thousand)and ¥251 million, respectively, and secured long-term bank loans were as follows:
Thousands of
U.S. dollars

Millions of yen
2004

2005

Buildings and structures………………………

935¥ 1,016

Machinery and equipment……………………

277

339

2,645

…………………………

1,733

1,118

16,545¥ 2,945¥ 2,473$ 28,117

Investment securities

¥

2005

$

The annual maturities of long-term debt are as follows:
Thousands ofYears ending February 28/29

Millions of yen

2007………………………………………

2008………………………………………

180

1,719

2009

………………………………………

240

2,291

2010

………………………………………

108

1,031

………………………………

635

6,062

Thereafter¥

211

U.S. dollars¥ 1,374

27

$

$

2,015

13,1188,927

10．Severance and Retirement Benefits
The liabilities for employees’ severance and retirement benefits included in the liability section of
the consolidated balance sheet as of February 28, 2005 and February 29, 2004 consisted of thefollowing.
Thousands ofMillions of yen
Projected benefit obligation

U.S. dollars

2005

2004

2005

…………………

¥(11,302)¥(10,699)$(107,905)

Unrecognized prior service obligations ……………

(173)

―

(1,652)

Fair value of pension assets ………………………

8,754

6,544

83,578Unrecognized actuarial differences…………………

989

1,969

9,442

………………………………

(1,068)(523)(10,196)

Employees’ severance and retirement benefits……

¥(2,800)¥(2,709)$(26,733)

Accrued pension cost

Included in the consolidated statements of income for the years ended February 28, 2005, 2004
and 2003, are severance and retirement benefit expenses comprising the following:Thousands ofMillions of yen
Severance costs― benefits earned during the year

U.S. dollars

2005

2004

2003

2005

¥ 517

¥ 665

¥590

$4,936

Interest cost on projected benefit obligation……

212

200

216

2,024

Expected return on plan assets…………

(200)

(153)

(153)

(1,909)

Recognized actuarial differences…………

388

529

145

3,704

Adjustment to prior service costs………………
Severance and retirement benefit expenses………

(123)

―

(117)

(1,174)¥ 794¥ 1,241¥681$7,581The discount rates used were 2.00% in 2005 and 2.00% in 2004. The rates of expected return onplan assets used by the Company are 2.90% for the 1996 pension plan and 2.30% for the 1966
pension plan. The estimated amount of all retirement benefits to be paid at future retirement
dates is allocated equally to each service year using the estimated number of total service years.
Prior service costs are recognized as an expense in equal amounts over two years
commencing from the date they arise, and actuarial gains and losses are recognized in
the income statement as an expense in equal amounts over five years, commencing fromthe following year.
Charges to income with respect to directors’ and corporate auditors’ retirement benefits amounted
to ¥75 million ($716 thousand), ¥255 million and ¥62 million for the years ended February 28,
2005, February 29, 2004 and February 28, 2003, respectively.

28

11．Income Taxes
The Companies are subject to a number of taxes based on income, which, in the aggregate, indicate
a statutory income tax rate in Japan of approximately 41.7% for the years ended February 28,
2005, February 29, 2004 and February 28, 2003.
The following table summarizes the significant differences between the statutory income tax rate
and the Companies’ effective tax rates for financial statement purposes for the years ended
February 28, 2005 and February 29, 2004.
2005

2004

2003

Statutory tax rate…………………………………………

41.7％

41.7％

41.7%

Non-deductible expenses………………………

1.5

1.2

1.6

…………………

(0.1)

(0.1)

(0.1)

0.1

0.1

0.1

(3.8)

(5.1)

−

Non-taxable dividend income

Per capita inhabitants’ tax…………………………………
Less special tax deduction for experimental andresearch expenses
Other……………………………………………

1.0

0.8

(0.7)

Effective tax rate after applying tax effect……………

40.4％

38.6％

42.6％

Significant components of the Companies’ deferred tax assets as of February 28, 2005 andFebruary 29, 2004 are as follows:
Thousands ofMillions of yen

U.S. dollars

2005

2004

2005

Excess severance and retirement benefits………………

¥543

¥713

$5,184

Valuation loss on investment securities……………………

554

392

5,289

Directors’ and corporate auditors’ retirement benefits

413

383

3,943

Accrued enterprise tax………………………………………

Deferred tax assets:

470

361

4,487

Allowance for doubtful accounts ………………………………… 123

267

1,174

Valuation loss on investment in capital………………………

557

4,707

Excess employees’ bonuses accrued………………

Losses carried forward………………………………………
Other

493
198

183

1,891

573

439

5,471

……………………………………………

470

457

4,488

Total deferred tax assets ………………………………

3,837

3,752

36,634

Valuation allowance ……………………………………

(573)

(445)

(5,471)¥3,264¥3,307$31,163

Net unrealized holding gains on securities…………………… ¥(676)¥(730)$ (6,454)

Net deferred tax assets……………………………

Deferred tax liabilities:
Total deferred tax liabilities………………………………
Net deferred tax assets……………………

29

(676)

(730)

(6,454)¥2,588¥2,577$ 24,709

The aggregate statutory income tax rate was reduced for the years commencing on April 1, 2004 orlater due to the revised local tax law. At February 28, 2005, the Company and consolidated
domestic subsidiaries applied the reduced aggregate statutory income tax rate of 40.4% forcalculating deferred tax assets and liabilities that are expected to be recovered or settled in theyears commencing on March 1, 2005 or later. The effect on net income of adopting the new
accounting standard was not material.

12. Segment Information
The Companies are primarily engaged in the manufacture and sale of pharmaceuticals in Japanand overseas.
(1) Business segments
The operations of the Companies are classified into three business segments, which are“pharmaceuticals and related products”, “cable television broadcasting” and “other”.
Since more than 90% of the consolidated net sales and operating income for the years ended
February 28, 2005, February 29, 2004 and February 28, 2003 were from the pharmaceuticals andrelated products segment, the disclosure of business segment information is not required.
(2) Geographic areas
Since more than 90% of the consolidated net sales and operating income for the years ended
February 28, 2005, February 29, 2004 and February 28, 2003 were made in Japan, the disclosureof segment information by geographic area is not required.
(3) Overseas sales
Since overseas sales for the years ended February 28, 2005, February 29, 2004 and February 28,
2003 were not more than 10% of the consolidated net sales, the disclosure of overseas sales
information is not required.

13. Shareholders' Equity
Under the Commercial Code, the entire amount of the issue price of shares is required to beaccounted for as common stock, although a company may, by resolution of its board of directors,
account for an amount not exceeding 50% of the issue price of the new shares as additional
paid-in capital, which is included in capital surplus.
The Code provides that an amount equal to at least 10% of cash dividends and other cash
appropriations shall be appropriated and set aside as a legal earnings reserve until the total
amount of legal earnings reserve and additional paid-in capital equals 25% of common stock. The
legal earnings reserve and additional paid-in capital may be used to eliminate or reduce a deficit
by resolution of the shareholders’ meeting or may be capitalized by resolution of the Board of
Directors. On condition that the total amount of legal earnings reserve and additional paid-in
capital remains being equal to or exceeding 25% of common stock, they are available for dividends
by the resolution of shareholders’ meeting. Legal earnings reserve is included in retained earnings
in the accompanying financial statements.
The maximum amount that the Company can distribute as dividends is calculated based on theunconsolidated financial statements of the Company in accordance with the Code.

30

(Number and amount of treasury stock)
At February 28, 2005, the Companies held 4,504,702 shares of treasury stock in the amount of¥7,283 million ($69,534 thousand), as shown in the consolidated balance sheets. This amountincluded ¥526 million ($5,022 thousand) which was not deducted from the minority interests.

14. Contingent Liabilities
Contingent liabilities at February 28, 2005 were as follows:
Thousands ofMillions of yen
Notes receivable discounted………………………………

¥17

U.S. dollars$162

15. Subsequent Events(Appropriations of retained earnings)
At the 2005 annual meeting of shareholders held on May 26, 2005, the appropriations of retained
earnings for the year ended February 28, 2005 were duly approved as follows:
Thousands ofMillions of yen

U.S. dollars¥1,633$15,591

60

573

Cash dividends−¥18.00 ($0.17) per share
Bonuses to directors and corporate auditors(Material subsequent event)
Consolidated fiscal year (March 1, 2004 – February 28, 2005)
1. Based on an agreement to purchase the shares of Biomedics Co., Ltd. concluded between the
Company and SSP Co., Ltd. on May 21, 2004, the Company took over the Ethical Drugs Division of
SSP Co., Ltd. by acquiring 100% of the 300,000 shares issued by Biomedics Co., Ltd. (The namewas changed to Hisamitsu Medical Co., Ltd. on April 1, 2005) to which the Ethical Drugs Division
had been spun off. The total price of the transfer was ¥14.6 billion, but some minor adjustments
are scheduled to take place after the assets and liabilities transferred from SSP Co., Ltd. to
Biomedics Co., Ltd. have been finalized.
2. The Company concluded a loan agreement with a syndicate for which UFJ Bank Limited is thearranger and agent in order to provide future operating capital (including capital related to thetransfer of the Ethical Drugs Division of SSP Co., Ltd). The details of the syndicate loan are as
follows.
(1) Date of conclusion of agreement: April 26, 2005
(2) Date of execution of loan: April 28, 2005
(3) Amount borrowed: ¥10 billion(4) Repayment method: Equal payments of principal every 6 months plus interest
The date of the final repayment is April 30, 2007
(5) Interest rate: Japanese yen 6-month TIBOR +0.25%(6) Collateral/ guarantee: None31

Independent Auditors' Report

To the Shareholders and Board of Directors
Hisamitsu Pharmaceutical Co., Inc.：
We have audited the accompanying consolidated balance sheets of Hisamitsu Pharmaceutical Co., Inc.
and consolidated subsidiaries as of February 28/29, 2005 and 2004, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three years in the period
ended February 28, 2005, expressed in Japanese yen. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to independently 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. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether
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 all material
respects, the consolidated financial position of Hisamitsu Pharmaceutical Co., Inc. and subsidiaries asof February 28/29, 2005 and 2004, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended February 28 , 2005, in conformity with accounting
principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to the following.
(1). As discussed in Note 15 (material subsequent event 1), the Company took over the Ethical Drugs
Division of SSP Co., Ltd. by acquiring 100% of the 300,000 shares issued by Biomedics Co., Ltd. (Thename was changed to Hisamitsu Medical Co., Ltd. on April 1, 2005) based on an agreement concluded
between the Company and SSP Co., Ltd. on May 21, 2004.
(2). As discussed in Note 15 (material subsequent event 2), the Company concluded a loan agreementwith a syndicate for which UFJ Bank Limited is the arranger and agent.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year
ended February 28, 2005 are presented solely for convenience. Our audit also included the translationof yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on thebasis described in Note 1 to the consolidated financial statements.

KPMG AZSA & Co.
Fukuoka, JapanMay 26, 2005

32