Hisamitsu Pharmaceutical Co., Inc.

FINANCIAL REPORTFiscal 2003

Contents
Management Policies …………………………………… 1
Review of Operations …………………………………… 3
Financial Review ………………………………………… 6
Consolidated Balance Sheets ………………………… 9
Consolidated Statements of Income ………………… 11
Consolidated Statements of Shareholders' Equity … 12
Consolidated Statements of Cash Flows …………… 13
Notes to Consolidated Financial Statements ……… 14
Report of Independent Certified Public Accountants 29

Management Policies(1) Fundamental Management Policies

Since it was founded, HISAMITSU PHARMACEUTICAL CO., INC. (the Company) has
adopted the management philosophy, “Improving Quality of Life (QOL) for People in the World”
through creation, manufacture and sale of pharmaceutical products derived from transdermal
therapeutic system (TTS) technology, adhering to its motto of “Customers First”.
Under this philosophy, the Company is actively developing corporate activities to satisfy
customers both at home and abroad through providing customers with pharmaceuticalproducts properly meeting their needs and is finally exerting itself to maximize its enterprisevalue.

(2) Fundamental Profit-sharing Policy

The Company, recognizing that profit-sharing to shareholders is the most important task,
maintains and continues rewarding shareholders with stable dividends, to which it occasionallyadds either commemorative or special dividends, taking into consideration the business results.
In addition to this, the Company flexibly takes such financial measures as acquiring treasury
stock, which is considered as an effective profit-sharing policy to shareholders.
The Company applies its internal reserves principally for future business development,that is, promoting research and development (R&D), strengthening sales, expanding
production facilities and developing overseas business activities.

(3) Target Management Ratio

In order to build up a strong corporate constitution enabling it to attain target sales as well as
to ensure profits even under the rapidly changing market circumstances, the Company has
settled on a target return on equity (ROE) of not less than 15% in its mid-term plans. The
Company is taking every possible means to keep this target.

(4) Mid-term Strategies
In line with the fundamental management policies mentioned above, the Company aims at
becoming a “pharmaceutical company oriented toward its own R&D” in its own way,
aggressively trying to create new transdermal pharmaceuticals both for topical use andsystemic use which properly meet the needs and concerns of medical institutions through TTS
studies.
In its mid-term plans, the Company is intending to promote further growth in business,achieving the “target net income of ¥10,000 million ($84,926 thousand)” as well as keeping the“target ROE of not less than 15%”.
In order to build up its future assets, the Company actively tries to increase cash flows fromoperating activities, promote R & D of new transdermal pharmaceuticals both for topical use
and systemic use as well as establish worldwide the Company’s brand including trade marks,
designs, manufacturing technology and quality control system.

1

(5) Measures for Enhancing Corporate Governance

From a viewpoint of separating the functions of managerial decision-making and businessexecution, as well as intensifying each function, the Company introduced a corporate officer
system in March this year. This will enable the Company to open up opportunities for putting
the right talented persons in the right places and lead to a subsequent improvement inbusiness performance and value for shareholders.
Aiming to raise the degree of managerial transparency, the Company endeavors toactively open its corporate information to the public and maintain smooth communications
with shareholders and investors by means of positive investor relation (IR) activities.

(6) Concept and Policy of Reducing Investment Unit

The Company recognizes that reducing the investment unit may be necessary to expand theclass of general investors as well as promote its stock circulation. However, at present, theCompany has not yet determined any concrete plan and time for reducing the investment unit.

2

Review of Operations(1) Overview of Fiscal 2003 ended February 28, 2003

1-1) Overall Business Performance
The basic Japanese economy throughout fiscal 2003 has assumed an aspect of long-lasting
deflation, and it has not yet shown any signs of escaping from these unforeseen circumstances.
In the field of the ethical pharmaceutical industry, the Japanese Government has been
implementing, since April 2002, reforms in the medical system such as cuts in the official
pharmaceutical reimbursement prices and in medical treatment fees. The industry ofover-the-counter (OTC) products also experienced a very severe business environment directly
affected by the sluggish domestic economy.
Under these circumstances, with respect to ethical pharmaceuticals, the Company’s
medical representatives (MR) developed pharmaceutical information activities primarily
focusing on the main products, topical analgesic and anti-inflammatory pharmaceuticals, toproperly meet the needs of medical institutions.
Regarding OTC products, the Company concentrated on topical analgesic andanti-inflammatory pharmaceuticals to develop sales activities despite the continuing stagnant
OTC market reflecting flat personal consumption.
The Company, specializing its R&D activities in TTS studies, strove to create newtransdermal pharmaceuticals for topical use and systemic use.
In the production division, the Company constructed a new manufacturing plant in the
Tosu site to increase production efficiency and product quality and, additionally, it tried tocontinuously follow the “ISO 14001” in order to safeguard the global environment.
With respect to the cable television broadcasting and other businesses, the Company andits subsidiaries (the Companies) continuously strove to improve business results rendering
good services to customers.
As a result of the above operating activities, consolidated net sales for the Companies
totaled ¥70,000 million ($594,480 thousand), a 0.7% increase over the previous year. As forconsolidated income, operating income amounted to ¥17,055 million ($144,841 thousand), a
7.1% increase and net income amounted to ¥9,397 million ($79,805 thousand), a 9.2% increaseover 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 very difficult circumstances, which have been affectedby lively disputes over reforms in the medical system. Despite this backdrop, the Company
aggressively developed its pharmaceutical information activities to medical institutions
focusing on disseminating and gathering information relating to pharmaceutical safety.
Additionally, the Company tried to increase the market shares of its mainstay ketoprofen
products consisting of MOHRUS TAPE and MOHRUS, which are transdermal patches andtransdermal gel patches, respectively. For this purpose, the Company launched in October oflast year a new ketoprofen patch, MOHRUS TAPE L, the size of which is twice as large as theconventional one.

3Concerning ESTRANA, an estradiol patch effective for treating menopausal disorders, theMinistry of Health, Labor and Welfare granted the Company permission to expand its
application to osteoporosis in April of last year and, since then, the Company has further
enhanced its pharmaceutical information activities on ESTRANA to medical institutions.
Although severe competition was also continuing in the domestic market for OTC products,
the Company made every effort to increase sales of the main products of SALONPAS throughemphasizing the advantage of “Enhanced penetration into the skin by occlusion”, expanding
the consumer base.
In order to meet diversifying customers’ needs, the Company aggressively launched onto the
OTC market nine new products, which consisted of an analgesic and anti-inflammatory rolled
gel patch, SALONSIP MAKIBARI, a medium-sized analgesic and anti-inflammatory patch,
SALONPAS 30 CHUBAN, a nasal spray for relieving rhinitis, ALFAST BIEN SPRAY, skin-care
products of LIFECELLA BIYOEKI MASK and LIFECELLA KYUTTO NINOUDE, and first-aid
pads for lowering fever, DECO-DECO COOL NETSUTORI MAKURA and DECO-DECO COOL
BAND TYPE. The two other new products were a new lotion and cream effective for athlete’sfoot, BUTENALOCK EKI and BUTENALOCK CREAM, respectively. These switch OTC
pharmaceuticals are characterized by initial compounding of butenafine hydrochloride as anactive ingredient.
As a result of the above operating activities, net sales in pharmaceuticals and related
products businesses amounted to ¥67,536 million ($573,554 thousand), a 0.5% increase overthe previous year.
(Cable television broadcasting and other businesses)
With respect to cable television broadcasting (service area: cities of Kurume, Ohkawa andYanagawa in Fukuoka prefecture and cities of Saga and Tosu in Saga prefecture) and otherbusinesses including production and sale of laboratory animals, the Companies devoted
themselves to achieving better results through expanding their market share, offering good
services to customers and streamlining the corporate structure.
As a result of the above operating activities, net sales in cable television broadcasting andother businesses amounted to ¥2,464 million ($20,926 thousand), a 6.5% increase over theprevious year.
(Dividends)
Considering the business performance for the year under review as well as intending to reward
the shareholders’ continued support, the Company paid cash dividends of ¥12.00 ($0.10) per
share of common stock, corresponding to an increase of ¥3.00 ($0.03) over the previous year.
The dividends consisted of the ordinary one for ¥10.00 ($0.08) and a commemorative one of¥2.00 ($0.02) for celebrating the 155th anniversary of the foundation of the Company.

(2) Outlook for Fiscal 2004 ending February 28, 2004

(Pharmaceuticals and related products businesses)
With regard to ethical pharmaceuticals, the Government is planning to promote radical reforms
in the medical system such as increasing the share of healthcare costs to be paid by patients.
It is, therefore, anticipated that the domestic ethical pharmaceutical market would
considerably shrink, depending on the trend of further reforms in the pharmaceuticalreimbursement prices under the national health insurance system.

4

Despite these unprecedented serious circumstances, the Company will continue
aggressively developing pharmaceutical information activities to medical institutions andchallenging the creation of new transdermal pharmaceuticals for topical use and systemic use
to exactly meet medical needs as well as patients’ needs.
The domestic OTC market has long been in a slump, which makes sales competition among
companies more and more acute. The Company is intending to increase sales of main OTC
products such as topical analgesic and anti-inflammatory pharmaceuticals and improveconsistently the existing OTC products as well as develop new OTC products properly meetingthe needs and concerns of its customers.
Additionally, the Company is actively developing overseas business activities in order toestablish worldwide the Company’s brands including trade marks, designs, manufacturing
technology and quality control system, to further strengthen the overseas manufacturing
plants and to promote the overseas clinical trials of the Company’s pharmaceutical products.
(Cable television broadcasting and other businesses)
The Companies are striving to further enhance sales activities in cable television broadcastingand other businesses, including production and sale of laboratory animals, to achieve better
results.
(Outlook for consolidated results)
The Companies, being fully aware of their responsibility for corporate citizenship, will
devote themselves to improve their business performance through strengthening of sales,
expanding the production system and specializing of R & D activities in TTS studies toaccelerate quicker launching of new pharmaceutical products onto the market. In addition tothis, the Companies will strive to streamline their management and build up their corporate
constitution.
Regarding the consolidated results of operations for the next year ending February 28, 2004,
the Companies are expecting that net sales will increase to approximately ¥74,000 million($616,667 thousand), a 5.7% increase over the previous year, but ordinary income will decreaseslightly to ¥17,000 million yen ($141,667 thousand), a 1.4% decrease from the previous year,
and that net income will increase to ¥9,700 million ($80,833 thousand), a 3.2% increase overthe previous year. In these projections, U. S. dollar amounts are calculated, assuming
US$1.00=¥120,00 for the next year.
However, it must be noted that these projections are made according to the Companies’
judgments based on the information available at the present time and include latent risks anduncertainties. Actual results, therefore, could significantly differ from the projections.
(Dividends)
With regard to cash dividends for the next year ending February 28, 2004, the Company isplanning to reward shareholders with a dividend of ¥14.00 ($0.12) per share of common stock,which corresponds to an increase of ¥2.00 ($0.02) per share over the previous year.

5Financial Review
The consolidated financial statements include the accounts of the Company and its eleven (12in 2002 and 10 in 2001) significant subsidiaries. Investments in two affiliated companies areaccounted for using the equity method.

(1) Results of Operations
Overall Operating Activities

With respect to ethical pharmaceuticals, the Company actively developed pharmaceuticalinformation activities meeting the diversifying healthcare needs of medical institutions,centering on its core products, such as analgesic and anti-inflammatory pharmaceuticals for
topical use. Of these products, the Company aggressively disseminated and gathered productinformation about both ketoprofen patch MOHRUS TAPE and ketoprofen gel patch MOHRUS,
in order to enable them to steadily introduce them into medical institutions.
Although the OTC market has been very stagnant throughout fiscal 2003, the Company
strove to principally promote the sale of analgesic and anti-inflammatory patches for topicaluse, SALONPAS. During the year, in order to keep up with diversifying customers’ needs, theCompany successfully launched nine new products. Of these new products, BUTENALOCK
EKI and BUTENALOCK CREAM are a lotion and cream effective for athlete’s foot. These
switch OTC pharmaceuticals are characterized by initial compounding of butenafinehydrochloride as an active ingredient.
The Companies continued to aggressively promote the cable television broadcasting andother businesses including production and sale of laboratory animals to expand the market.
Additionally, the Companies pushed forward with the streamlining of management to improvebusiness results.

Net Sales
As a result of the above operating activities, the consolidated net sales for the Companies
totaled ¥70,000 million ($594,480 thousand), a 0.7% increase over the previous year. This
primarily reflects the slightly increased sales in the pharmaceuticals and related products
businesses.

Costs and Expenses

Cost of sales amounted to ¥21,175 million ($179,830 thousand), a 2.2% increase over theprevious year, rendering the cost of sales as a percentage of net sales at 30.3%. Selling,
general and administrative expenses totaled ¥25,219 million ($214,174 thousand), a 5.3%
decrease from the previous year. In contrast, R & D expenses increased 4.4% to ¥6,551
million ($55,635 thousand) with the ratio of R & D expenses to net sales at 9.4%.
Operating income was ¥17,055 million ($144,841 thousand), a 7.1% increase, which
was obtained by deducting costs and expenses from net sales, yielding the ratio of
operating income to net sales of 24.4%.
Other expenses, net of other income, soared to ¥461 million ($3,915 thousand), a
78.7% increase over the previous year.

6Net Income
Income before income taxes was ¥16,594 million ($140,926 thousand), a 5.9% increaseover the previous year, and net income rose to ¥9,397 million ($79,805 thousand), a 9.2%
increase, which was obtained by deducting current income taxes, deferred income taxes
and minority interests in net income of consolidated subsidiaries.
The effective tax rate was calculated at 42.6%. Net income per share of common stockwas ¥101.28 ($0.86), a 10.1% increase and the Company paid its shareholders cash
dividends per share of ¥12.00 ($0.10).

(2) Financial Position

At February 28, 2003, total assets amounted to ¥89,379 million ($759,058 thousand), a
7.8% increase over the previous year. Total current assets amounted to ¥41,413 million($351,703 thousand), a 10.7% increase, principally reflecting increases in cash and time
deposits and in short-term investments.
Property, plant and equipment, less accumulated depreciation, rose to ¥37,164 million($315,618 thousand), a 9.4% increase, primarily reflecting increases in buildings andstructures and machinery and equipment. Intangible assets declined to ¥469 million($3,983 thousand), a 25.0% decrease.
Investments and other non-current assets fell to ¥10,333 million ($87,754 thousand),a 5.0% decrease, principally resulting from markedly decreased investment securities.
Total current liabilities amounted to ¥21,596 million ($183,405 thousand), a 7.7%
increase, principally coming from a marked increase in income taxes payable. Working
capital grew to ¥19,817 million ($168,297 thousand), a 14.0% increase and the current
ratio slightly increased to 191.8%, compared to previous year of 186.7%.
Total long-term liabilities were ¥7,076 million ($60,095 thousand), a 2.7% increaseover the previous year. Minority interests were ¥476 million ($4,042 thousand), which
was approximately the same as the previous year.
Total shareholders’ equity rose to ¥60,231 million ($511,516 thousand), a 8.6%
increase. This is primarily due to a marked increase in retained earnings, which far
exceeded a marked increase in treasury stock.

(3) Cash Flows

Operating activities generated net cash of ¥14,740 million ($125,180 thousand), a 12.7%
increase over the previous year, principally reflecting a marked decrease in income taxes
paid despite increases in notes and accounts receivable and in inventories.
Investing activities used net cash of ¥9,194 million ($78,081 thousand), a 39.5%
increase over the previous year, primarily reflecting marked increases in payments forpurchases of property, plant and equipment and in payment for purchase for marketablesecurities. Major capital investments were made for the construction of a new
manufacturing plant in the Tosu site as well as a plant specific for preparing new
pharmaceutical candidates for clinical trials in the R & D center.

7

Financing activities consumed net cash of ¥4,544 million ($38,590 thousand), a 17.8%
decrease from the previous year, primarily resulting from decreased repayment ofshort-term bank loans despite increased payment for purchase of treasury stock.
As a result, cash and cash equivalents at end of year totaled ¥14,307 million($121,502 thousand), an increase of ¥747 million ($6,343), compared to cash and cash
equivalents at beginning of year.

8Consolidated Balance Sheets
HISAMITSU PHARMACEUTICAL CO., INC.
February 28, 2003 and 2002
Millions of yen
2003
2002
ASSETS
Current assets:
Cash and time deposits (Note 3) ………………
Notes and accounts receivable:
Trade notes (Note 15) …………………………
Trade accounts …………………………………
Short-term investments (Note 4) ………………
Inventories (Note 5) ………………………………
Deferred tax assets (Note 11) …………………
Other current assets ……………………………
Less allowance for doubtful accounts …………
Total current assets …………………………
Property, plant and equipment:
Land (Note 6) ………………………………………
Buildings and structures (Note 9) ……………
Machinery and equipment (Note 9)……………
Tools, furniture and fixtures ……………………
Construction in progress …………………………
Less accumulated depreciation……………

Intangible assets ……………………………………
Investments and other non-current assets:
Investment securities (Notes 4 and 9) ………
Investment in non-consolidated subsidiaries
and affiliated companies (Note 4) …………
Deferred tax assets (Note 11) …………………
Other investments and other non-current
assets ………………………………………………
Less allowance for doubtful accounts …………

¥

14,341¥ 12,882$ 121,792

3,532
13,970
2,048
5,195
726
1,729
(128)
41,413

3,106
14,219
877
4,574
308
1,489
(31)
37,42429,996
118,641
17,393
44,1196,165
14,684(1,087)351,703

11,36625,83018,706
10,1672,513
68,582(31,418)
37,164

11,39822,002
15,7199,657
3,816
62,592(28,630)
33,962

96,527219,363
158,862
86,344
21,342582,438(266,820)
315,618

469

625

3,983

5,319

6,384

45,172

694
2,598

712
2,103

5,894
22,0642,240(518)
10,333¥ 89,379

1,887
(204)
10,882¥ 82,893

19,023(4,399)87,754$ 759,058

See accompanying notes.

9

Thousands of
U.S. dollars(Note 1)
2003

Millions of yen
2003
2002
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 ………………………………………
Other ………………………………………………
Income taxes payable (Note 11) ………………
Reserve for sales returns ………………………
Reserve for employees’ bonuses ………………
Other current liabilities …………………………
Total current liabilities ……………………
Long-term liabilities:
Long-term debt due after one year (Note 9)
Deferred tax liabilities relating toland revaluation (Note 6) ……………………
Severance and retirement benefits (Note 10)
Directors’ and corporate auditors’
retirement benefits ……………………………
Other non-current liabilities ……………………
Total long-term liabilities …………………

¥

339
351

¥

347
1,227

Thousands of
U.S. dollars(Note 1)
2003

$

2,879
2,981

7,706
248
6,003
5,675
199
499
576
21,596

8,356
506
7,169
1,227
197
481
538
20,04865,4442,106
50,981
48,195
1,690
4,237
4,892
183,405

1,613

1,353

13,699

1,955
2,584

1,955
2,711

16,603
21,945

866
58
7,076

804
67
6,890

7,355
493
60,095

476

481

4,042

8,474
―
8,242
47,470
2,729
(390)
(756)

―
8,474
8,242
38,976
2,729
(43)
(361)

71,966―69,996403,142
23,176(3,312)(6,420)(5,538)―60,231¥ 89,379―(2,543)55,474¥ 82,893(47,032)―
511,516$759,058

Contingent liabilities (Note 15)
Minority interests ……………………………………
Shareholders’ equity (Notes 13 and 14):
Common stock:
Authorized−380,000,000 shares
Issued−95,164,895 shares in 2003 …………
−95,164,895 shares in 2002 …………
Capital surplus ……………………………………
Retained earnings …………………………………
Land revaluation difference (Note 6) …………
Net unrealized holding losses on securities …
Foreign currency translation adjustments ……
Treasury stock, at cost
3,100,330 shares in 2003 ………………
1,006,596 shares in 2002 ………………
Total shareholders’ equity …………………

10

Consolidated Statements of Income
HISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28, 2003, 2002 and 2001

Net sales ……………………………………
Costs and expenses:
Cost of sales……………………………
Selling, general and administrative
expenses …………………………………
Research and development ……………
Operating income ……………………………
Other income (expense):
Interest and dividend income …………
Interest expense …………………………
Equity in earnings of affiliatedcompanies ………………………………
Gain on sales of property, plant andequipment ………………………………
Gain on sales of investment securities
Foreign exchange gain (loss) …………
Reversal of allowance for doubtful
accounts …………………………………
Transition obligation for employees’
retirement benefits ……………………
Governmental subsidy …………………
Loss on sales and disposals of property,
plant and equipment …………………
Write-down of investment securities …
Write-down of golf-club memberships…
Prior service cost under thecontributory pension plan ……………
Provision for allowance for doubtful
accounts …………………………………
Other−net …………………………………
Income before income taxes ………………
Income taxes (Note 11):
Current ……………………………………
Deferred ……………………………………
Minority interests in net income of
consolidated subsidiaries ………………
Net income …………………………………

Amounts per share of common stock(Note 2):
Net income …………………………………
Diluted net income ………………………
Cash dividends applicable to the year¥2003
70,000Millions of yen
2002¥ 69,538¥

2001
65,240Thousands of
U.S. dollars(Note 1)
2003
$ 594,480

21,17520,71020,068179,830

25,2196,551
52,945
17,055

26,635
6,272
53,617
15,921

25,746
5,435
51,24913,991

214,174
55,635449,639
144,841

184
(183)

149
(77)

103
(173)

1,563
(1,554)

72

47

50

611

―
―
(166)

267
―
29

2
8
(27)

―
―
(1,409)

―

60

―

―

―
445

318
38

―
159

―
3,779

(488)
(560)
―

(502)
(434)
(464)

(202)
(274)
(168)

(4,144)(4,756)―――(2,032)

―

(42)
277
(461)
16,594

(156)
467
(258)
15,663―542(2,012)
11,979(357)
2,352(3,915)140,926

7,740
(664)

4,216
2,774

5,771
(718)

65,732(5,639)121¥ 9,39766¥ 8,607138¥ 6,788

2003

Yen
2002

2001

91.99
91.99
9.00

¥ 72.82
72.70
7.00¥ 101.28
101.2812.00¥

See accompanying notes.

11

1,028
79,805$

U.S. dollars(Note 1)
2003
$

0.86
0.86
0.10

Consolidated Statements of Shareholders’ Equity
HISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28, 2003, 2002 and 2001

Common stock:
Balance at beginning of year…………………
Shares issued upon exercise of warrants(Note 14) ………………………………………
Balance at end of year ………………………
Capital surplus:
Balance at beginning of year…………………
Shares issued upon exercise of warrants(Note 14) ………………………………………
Balance at end of year ………………………
Retained earnings:
Balance at beginning of year ………………
Net income ………………………………………
Cumulative effect of adopting
tax effect accounting ………………………
Cash dividends paid …………………………
Bonuses to directors and corporate auditors
Retirement of common stock (Note 14) ……
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 ………………………
Net unrealized holding losses on securities:
Balance at beginning of year ………………
Valuation losses …………………………………
Balance at end of year ………………………
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 ………………………
Common stock purchased by a subsidiary:
Balance at beginning of year ………………
Common stock purchased by a subsidiary
Balance at end of year ………………………

2003

Million of yen
2002

2001

Thousands of
U.S. dollars(Note 1)
2003

¥ 8,474¥ 8,460¥ 8,414$71,966―¥ 8,474

14
46¥ 8,474―¥ 8,460$

71,966¥ 8,242¥ 8,227¥ 8,175$

69,996―¥ 8,24215¥ 8,24252¥ 8,227$―
69,996¥ 38,976
9,397¥ 34,719
8,607¥ 27,662
6,788$ 331,006
79,805

―
(847)
(56)
―
―
¥ 47,470

―
(666)
(61)
―
(3,623)¥ 38,976

1,783
(481)
(59)
(974)
―
¥ 34,719―(7,193)(476)――$ 403,142

¥

2,729
―
¥ 2,729

¥

(894)
3,623
¥ 2,729

¥

―
(894)
(894)

$

¥

¥

¥

$

¥

―
―
―

¥

$

23,176―23,176

¥

(43)
(347)
(390)

¥

―
(43)
(43)

¥

(361)

¥

(468)

¥

(478)

$ (3,066)

¥

(395)
(756)

¥

107
(361)

¥

10
(468)

(3,354)$ (6,420)

(1)
(1)
(2)

$ (14,293)(32,739)$ (47,032)¥ (1,683)(3,855)¥ (5,538)¥(2)(1,681)¥ (1,683)

¥

¥

¥

¥

―
―
―

¥

2003
Number of shares of common stock:
Balance at beginning of year ……………… 95,164,895
Retirement of common stock (Note 14) ……
―Shares issued upon exercise of
warrants (Note 14) …………………………
―Stock split (Note 14) …………………………
―Balance at end of year ……………………… 95,164,895

¥

¥

(736)
(124)
(860)

2002

2001

95,108,490―

48,063,166(605,000)

56,405―
95,164,895

127,419
47,522,905
95,108,490

See accompanying notes.

12

(860)
―
(860)

¥

(365)
(2,947)$ (3,312)

$
$

―
―
―

Consolidated Statements of Cash FlowsHISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28, 2003, 2002 and 2001

2003

Cash flows from operating activities:
Income before income taxes ……………………………
¥ 16,594
Adjustments to reconcile net income before taxes
to net cash provided by operating activities:
Depreciation and amortization ………………………
3,128
Increase (decrease) in allowance for severance(128)
and retirement benefits ……………………………
Increase (decrease) in retirement benefits ………
―Interest and dividend income ………………………
(184)
Interest expense ………………………………………
183
Equity in earnings of affiliated companies(72)
Write-down of investment securities ………………
560
Write-down of golf-club memberships ……………
―Loss on sales and disposal of property,
plant and equipment ………………………………
488(Increase) decrease in notes and accounts receivable(93)(Increase) decrease in inventories …………………
(676)
Increase in other current assets ……………………
(248)
Increase (decrease) in notes and accounts(511)
payable …………………………………………………
Bonuses to directors and corporate auditors ……
(56)
Other ……………………………………………………
(959)
Subtotal …………………………………………………
18,026
Interest and dividend income received ……………
186
Interest paid ……………………………………………
(184)
Income taxes paid …………………………………
(3,288)Net cash provided by operating activities …
14,740Millions of yen
2002

Thousands of
U.S. dollars(Note 1)
2001
2003

¥ 15,663¥ 11,979$ 140,926

2,754

2,851

26,5652,711(2,359)
(149)
77
(47)
434
464

―
53
(103)
173
(50)
274
168

(1,087)―(1,563)
1,554
(611)
4,756
―

502
1,259
358
(365)

202
471
(727)
(337)

4,144
(790)
(5,741)(2,106)(559)(61)(1,310)19,372
181(80)(6,395)
13,078

1,926
(59)
630
17,451102(172)(5,101)
12,280(4,340)(476)(8,144)
153,087
1,580(1,563)(27,924)
125,180(7,263)(4,481)(3,597)(61,682)47(47)(6,168)6,168(2,061)130(9,194)

1,760
(528)
(3,400)3,300(3,168)(72)(6,589)81(186)(3,300)3,359(1,350)(137)(5,130)399(399)(52,382)
52,382(17,503)
1,104(78,081)

Cash flows from financing activities:
Net increase (decrease) in bank loans ………………
Proceeds from long-term debt …………………………
Repayment of long-term debt …………………………
Proceeds from exercise of warrants …………………
Payment for purchase of treasury stock ……………
Proceeds from sales of treasury stock ………………
Cash dividends paid ………………………………………
Other …………………………………………………………
Net cash used in financing activities ………

5868(1,450)―(3,214)―(847)
94(4,544)(2,650)
173
(749)
32
(1,728)61(666)―(5,527)2,586―(2,607)98(1,162)
183
(481)
(124)
(1,507)42
7,372(12,314)―(27,295)―(7,193)
798(38,590)

Effect of exchange rate changes on cash andcash equivalents …………………………………………
Net increase in cash and cash equivalents ……………
Cash and cash equivalents at beginning of year ……
Cash and cash equivalents at end of year (Note 3) …

(255)
747
13,560¥ 14,307

72
1,034
12,526¥ 13,560

42
5,685
6,841
¥ 12,526(2,166)
6,343
115,159$ 121,502

Cash flows from investing activities:
Payments for purchases of property, plantand equipment …………………………………………
Proceeds from sales of property, plantand equipment …………………………………………
Payments for purchases of intangible assets ………
Payments for purchases of marketable securities …
Proceeds from sales of marketable securities ………
Payments for purchases of investment securities …
Other …………………………………………………………
Net cash used in investing activities ………

See accompanying notes.

13Notes to Consolidated Financial Statements
HISAMITSU PHARMACEUTICAL CO., INC.
Years ended February 28, 2003, 2002 and 2001

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
the Japanese Commercial Code (the “Code”) and the Securities and Exchange Law and in
conformity with accounting principles and practices generally accepted in Japan (“Japanese
GAAP”). The accounts of overseas subsidiaries are based on their accounting records
maintained in conformity with generally accepted accounting principles and practices
prevailing in the respective countries of domicile. Certain accounting principles and practices
generally accepted in Japan are different from International Accounting Standards andstandards in other countries in certain respects as to application and disclosure requirements.
Accordingly, the accompanying consolidated financial statements are intended for use by those
who are informed about Japanese accounting principles and practices.
The accompanying consolidated financial statements are a translation of the audited
consolidated financial statements of the Company which were prepared in accordance withaccounting principles and practices generally accepted in Japan from the accounts and records
maintained by the Company and its consolidated subsidiaries, and filed with the Local Finance
Bureau of the Ministry of Finance as required by the Securities and Exchange Law.
In preparing the accompanying consolidated financial statements, certain reclassifications
have been made in the consolidated financial statements issued domestically in order topresent them in a form which is more familiar to readers outside Japan.
The translation of the Japanese yen amounts into U.S. dollars are included solely for theconvenience of readers, using the prevailing exchange rate at February 28, 2003, which was￥117.75 to US$1.00. 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, 2003, 2002 and 2001
include the accounts of the Company and its eleven (12 in 2002 and 10 in 2001) significant
subsidiaries (the “Companies”). All significant intercompany balances, transactions and profits
have been eliminated.
The Company is required to consolidate all significant investees which are controlled
through ownership 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.

14

In the elimination of investments in subsidiaries, the assets and liabilities of thesubsidiaries, including the portion attributable to minority shareholders, are evaluated using
the fair value at the 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 theCompany’s equity in earnings in the aggregate is not material in relation to the consolidated
net income and retained earnings.
The consolidation difference between the cost of an investment and equity in its net assets atthe date of acquisition is 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 threemonths at the time of purchase are considered to be cash and cash equivalents.
Short-term Investments and Investment Securities
Prior to March 1, 2001, marketable equity securities included in both current assets andinvestments were stated at cost. Cost was determined by the moving average method.
Other securities were also stated at cost. If a decline in value below cost of anindividual security was judged to be material and other than temporary, the carrying
value was written down.
Effective March 1, 2001, the Companies adopted the new Japanese accounting
standard for financial instruments, “Opinion Concerning Establishment of AccountingStandard for Financial Instruments”, issued by the Business Accounting Deliberation
Council on January 22, 1999).
Upon applying the new accounting standard, all companies are required to examine
the intent of holding each security and classify those securities as (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 bysubsidiaries and affiliated companies, and (d) all other securities that are not classified
in any of the above categories (hereinafter, “available-for-sale securities”).
Trading securities are stated at fair market value. Gains and losses realized on
disposal and unrealized 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
by subsidiaries and affiliated companies which are not consolidated or accounted forusing the equity method are stated at moving average cost.
Available-for-sale securities with available fair market values are stated at fairmarket 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 such securities are computed using moving
average cost.
Debt securities with no available fair value are stated at amortized cost, net of theamount considered not collectible. Other securities with no fair market value are statedprincipally at moving average cost.

15

If the market value of held-to-maturity debt securities, equity securities issued byunconsolidated subsidiaries and affiliated companies, and available-for-sale 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 a corresponding 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.
Based on the examination of the intent of holding each security upon application of
the new accounting standard at March 1, 2001, trading securities as well as
held-to-maturity debt securities and available-for-sale securities maturing within one year
from the balance sheet date are included in current assets, and other securities areincluded in investments and other non-current assets. As a result, at February 28, 2002
investment securities decreased by ¥73 million compared with what would have beenreported under the previous accounting policy.
As a result of adopting the new accounting standard for financial instruments,
including the effects on securities, the allowance for doubtful accounts, discounted tradenotes and the revaluation of golf-club memberships, income before income taxes decreasedby ¥555 million for the year ended February 28, 2002.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is provided in amounts sufficient to cover possible
losses on collection. In prior years it was determined by adding individually estimateduncollectible amounts to an amount calculated by formula as permitted by the
Corporation Tax Law of Japan with respect to the remaining receivables.
Effective for the year ended February 28, 2002, the Companies adopted a new
accounting policy for allowance for doubtful accounts. The allowance for doubtful
accounts is provided in amounts sufficient to cover possible losses on collection. It isdetermined by adding individually estimated uncollectible amounts to an amountcalculated based on the percentage of the Companies’ past doubtful debt loss against thebalance of total receivables.
The allowance for doubtful accounts for the overseas consolidated subsidiaries isprovided in amounts calculated from individually estimated uncollectible accounts.
Allowance for Sales Returns
The allowance for sales returns is provided in the limited amount calculated by formulaas permitted by the Corporation Tax Law of Japan to cover possible losses on sales
returns after the balance 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 exceptthat certain land was revalued at fair value as of February 28, 2001. Depreciation isprovided over estimated useful lives as permitted by the Corporation Tax Law of Japan.

16

Depreciation of property, plant and equipment is determined by the declining balancemethod 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 thestraight line method. Amortization is provided over estimated useful lives as permitted
by the Corporation Tax Law of Japan, except that the amortization of internally usedsoftware is determined using the straight line method over the estimated useful life of
five years.
Income Taxes
The Companies provided income taxes at the amounts currently payable for the year ended
February 28, 2000. Effective March 1, 2000, the Companies adopted the new accounting
standard, which recognizes tax effects of temporary differences between the carrying amountsof assets and liabilities for tax and financial reporting. Under the new accounting standard,
the provision for income taxes is computed based on the pre-tax income included in thestatements of income.
The asset and liability approach is used to recognize deferred tax assets and liabilities forthe expected future tax consequences of temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts used for income tax
purposes.
The amount of deferred income taxes attributable to the net tax effects of the temporary
differences at March 1, 2000 is reflected as an adjustment to the retained earnings brought
forward from the previous year.
Reserve for Employees’ Bonuses
The Companies provided the reserve for employees’ bonuses in the portion of estimatedfuture payments applicable to 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 ofretirement. The amount of the retirement benefit is, in general, based on the length ofservice, base salary at the time of retirement and reason for retirement. Prior to March
1, 2001 the liability for lump-sum payments was stated at the amount which would be
required if all eligible employees voluntarily retired at the balance sheet date.
1996 pension plan
Commencing from July 1996, 30% of the above benefits are covered by a contributory
funded pension. The benefits are payable either as a monthly pension or, under certain
circumstances at the option of retiring employees, in a lump-sum amount. Prior to March
1, 2001 the portion of the liability for the unfunded lump-sum benefit plan, which was
no longer required due to the introduction of this plan, was reversed at the same rate asamortization of prior service costs.
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 thosewith over 20 years of service who terminate their employment under certain
circumstances. These employees are, in general, entitled to a lump-sum payment or anannuity.
17

Prior to March 1, 2001 both prior service costs for the 1996 pension plan and the1966 pension plan were expensed when incurred.
Effective March 1, 2001, the Companies adopted the new accounting standard for
employees’ severance and retirement benefits, “Opinion on Setting Accounting Standard
for Employees‘ Severance and Pension Benefits”, issued by the Business Accounting
Deliberation Council on June 16, 1998.
Under the new accounting standard, the liabilities and expenses for severance andretirement benefits are determined based on the amounts actuarially calculated using
certain assumptions.
The Companies provided for employees’ severance and retirement benefits at February
28, 2003 and 2002 based on the estimated amounts of projected benefit obligation andthe fair value of the plan assets at those dates.
The excess of the total of the fair value of pension assets as of March 1, 2001 andthe liabilities for severance and retirement benefits recorded as of March 1, 2001 overthe projected benefit obligation (the “net transition gain”) amounted to ¥318 million. Allof the net transition gain was recognized as other income in the year ended February
28, 2002. Prior service costs are amortized in equal amounts principally over two years
commencing from the date of change. Actuarial gains and losses are recognized asincome or expense in equal amounts principally over five years commencing from thesucceeding period.
As a result of the adoption of the new accounting standard, in the year ended
February 28, 2002, severance and retirement benefit expenses decreased by ¥20 million
Since the net transition gain of ¥318 million was included in other income, income
before income taxes increased by ¥338 million compared with what would have beenrecorded under the previous accounting standard.
Directors’ and Corporate Auditors’ Retirement Benefits
Retirement benefits for directors and corporate auditors under the Company’s unfunded
plan are provided 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
operating leases in accordance with Japanese GAAP.
Foreign Currency Translation
Short-term receivables and payables denominated in foreign currencies are translated into
Japanese yen at the exchange rates at the balance sheet date. Prior to March 1, 2001,
long-term receivables and payables denominated in foreign currencies were translated athistorical exchange rates.
Effective March 1, 2001, the Companies adopted the revised accounting standard for foreign
currency translation, “Opinion Concerning Revision of Accounting Standard for Foreign
Currency Translation”, issued by the Business Accounting Deliberation Council on October 22,
1999.

18

Under the revised accounting standard, long-term receivables and payables denominatedin foreign currencies are also translated into Japanese yen at the year-end rate. The effect of
adopting the revised accounting standard on the consolidated statement of income was notmaterial.
Financial statements of consolidated overseas subsidiaries are translated into Japanese yenat the year-end rate, except that shareholders’ equity accounts are translated at historical rates
and income statement items resulting from transactions with the Company 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 basedon the weighted average number of shares outstanding during each fiscal year.
For the purpose of computing net income per share assuming dilution, the average
number of shares has been changed by the number of shares which would have beenoutstanding assuming the retirement of treasury stock, exercise of dilutive warrants andstock split 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 and reversal of statutory reserves (Accounting Standards Board Statement No. 1,“Accounting Standard for Treasury Stock and Reversal of Statutory Reserves”, issued by
the Accounting Standards 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 2002 and 2001 financial statements toconform to the presentation for 2003.

3. Cash and Cash Equivalents

Cash and cash equivalents at February 28, 2003, 2002 and 2001 for the consolidated
statement of cash flows consisted of the following:
2003
Cash and time deposits …………………… ¥14,341
Add: Short-term highly liquid investmentswith maturities of not exceeding
three months ……………………
2,048
Less: Time deposits with maturities
exceeding three months…………
(81)
Securities excluding free financial
fund and money management fund (2,001)
Cash and cash equivalents ……………… ¥14,307

19

Millions of yen
2002
2001
¥12,882¥11,246

Thousands of
U.S. dollars
2003$121,792

877

1,345

17,393

(99)

(65)

(688)

(100)
¥13,560―¥12,526(16,995)$121,502

4．Short-term Investments and Investment Securities
A. The following tables summarize acquisition costs, book values and fair values of
securities with available fair values as of February 28, 2003 and 2002.
(a) Held-to-maturity debt securities

Thousands of
U.S. dollars
Millions of yen
2002
2003
2003

Securities with available fair values
exceeding book values:
Government bonds:
Book value …………………………
Fair value ……………………………
Difference ……………………………

¥ 2,450
2,450

¥

―

751
751

$ 20,807
20,807――

Thousands of
U.S. dollars
Millions of yen
2002
2003
2003

Securities with available fair values
not exceeding book values:
Government bonds:
Book value ……………………………
Fair value ……………………………
Difference ……………………………

¥

―
―
―

¥

1,800
1,799

(1)

$

―
―
―

(b) Available-for-sale securities
Securities with book values (fair values) exceeding acquisition costs:
Millions of yen
2003
Acquisition
Book value
Differencecost¥ 1,749¥ 334
Equity securities ………………………………
¥ 1,415

Equity securities ………………………………

Millions of yen
2002
Acquisition
Book value Differencecost¥ 1,626¥ 471¥ 1,155

Equity securities ………………………………

Thousands of U.S. dollars
2003
Acquisition
Book value
Differencecost$ 12,018$ 14,854$ 2,836

Securities with book values (fair values) not exceeding acquisition costs:
Millions of yen
2003
Acquisition
Book value Difference
cost
Equity securities ………………………………
¥ 3,729¥ 2,726¥ (1,003)

20Equity securities ………………………………

Millions of yen
2002
Acquisition
Book value
Differencecost¥ 2,457¥ 1,921¥ (536)Equity securities ………………………………

Thousands of U.S. dollars
2003
Acquisition
cost
Book value Difference$ 23,151$ (8,518)$ 31,669

B. The following tables summarize book values of securities with no available fair values
as of February 28, 2003 and 2002.
(a) Available-for-sale securities:

Non-listed equity securities(excluding securities tradedover-the-counter) ……………………
Free financial fund ……………………
Money management fund ……………
Total …………………………………………

Millions of yen
2003
2002
¥ 394
―
―
¥ 394

¥ 1,098240501¥ 1,839(b) Equity securities of subsidiaries and affiliated companies:

Subsidiaries ………………………………
Affiliated companies ……………………
Total …………………………………………

Thousands of
U.S. dollars
2003

Millions of yen
2002
2003
¥ 411
¥ 445
283
267
¥ 712
¥ 694

$ 3,348――$ 3,348
Thousands of
U.S. dollars
2003$ 3,490
2,404$ 5,894

C. Maturities of held-to-maturity debt securities at February 28, 2003 and 2002 are as
follows:

Government bonds

Government bonds

………

………

Withinone year¥ 2,001

Millions of yen
2003
Over one year
but within
five years
¥
449

Total
¥ 2,450

Withinone year¥
100

Millions of yen
2002
Over one year
but within
five years¥ 2,450

Total¥ 2,55021

Government bonds………

Thousands of U.S. dollars
2003
Over one year
Withinbut within
one yearfive years
Total$ 16,991$ 3,816$ 20,807

5．Inventories
Inventories at February 28, 2003 and 2002 consisted of the following:

Goods and products ……………………………
Raw materials …………………………………
Work in process …………………………………
Supplies …………………………………………

Millions of yen
2002
2003
¥ 3,661¥ 3,318
623
453
363
258
545
548
¥ 5,195¥ 4,574

Thousands of
U.S. dollars
2003$ 31,092
5,291
3,083
4,653
$ 44,119

6. Land Revaluation
As 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 (loss) was reported in a separate component of shareholders’ equity as “Landrevaluation difference”, net of tax.
The total market value of the revalued land at February 28, 2003 was lower than
the total book value after revaluation, in the amount of ¥1,044 million ($8,866
thousand).

7. Derivative Transactions

Use of derivative transactions:
The Companies utilize forward currency exchange and interest rate swap transactions tocontrol risks related to foreign currencies and interest rates.
Forward currency exchange contracts are used to hedge the risk of fluctuations inforeign currency exchange rates with respect to foreign currency transactions, andinterest 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 withhighly rated domestic banks as counterparty to these transactions to minimize credit risk
exposure.

22

Derivative transactions are, depending on materiality, subject to resolution of theBoard of Directors or approval by the General Manager of the Finance and Accounting
Department and contracted by the Finance and Accounting Department. The actual
results of the derivative transactions are reported to the Board of Directors after theend of each year.
Market values of derivative transactions:
The Companies had no derivative contracts outstanding at February 28, 2003 and 2002.

8. Lease Information

Finance leases which do not transfer ownership to lessees are accounted for in the samemanner as operating leases in accordance with Japanese GAAP.
The original lease obligations of the Companies for machinery, equipment, tools,
furniture, fixtures and software amounted to ¥1,595 million ($13,545 thousand) and¥1,276 million at February 28, 2003 and 2002, respectively.
Lease payments for finance leases which do not transfer ownership to lessees
amounted to ¥336 million ($2,853 thousand), ¥354 million and ¥288 million for theyears ended February 28, 2003, 2002 and 2001, respectively.
Future minimum leases payments, including financing cost, required under such leases
at February 28, 2003 and 2002 are as follows:

Due within one year …………………………
Due after one year ……………………………

Millions of yen
2002
2003
¥ 333
¥ 290
523
518
¥ 851
¥ 813

Thousands of
U.S. dollars
2003
$
2,827
4,396
$
7,223

9. Short-term Bank Loans and Long-term Debt

Short-term bank loans are represented generally by notes maturing within one year.
The average annual interest rate at February 28, 2003 was 0.95%.
Long-term debt at February 28, 2003 and 2002 consisted of the following:Thousands of
U.S. dollars
Millions of yen
2002
2003
2003
Unsecured long-term bank loans ……………
¥ 264¥ 1,532$ 2,242
1,048
14,438
Secured long-term bank loans ………………
1,700
1,964
2,580
16,680Less amounts due within one year …………
(351)
(1,227)(2,981)¥ 1,613¥ 1,353$ 13,699
The annual interest rates of the bank loans ranged from 0.0% to 4.92% and from
0.19% to 4.50% with the weighted average being 1.17% and 1.31% at February 28, 2003
and 2002, respectively.

23

At February 28, 2003 and 2002, assets pledged as collateral for short-term bank loans
including long-term debt due within one year of ¥224 million ($1,902 thousand) andsecured long-term bank loans were as follows:

Buildings and structures ……………………
Machinery and equipment ……………………
Investment securities …………………………

Millions of yen
2002
2003
¥ 921
¥ 477
295
748
1,033
416
¥ 2,249¥ 1,641

Thousands of
U.S. dollars
2003$ 7,820
2,510
8,773$ 19,103

The annual maturities of long-term debt are as follows:

Millions of yen
Years ending February 28/29
2005 ………………………………………
¥ 358
2006 ………………………………………
515
2007 ………………………………………
185
2008 ………………………………………
160
Thereafter………………………………
395¥ 1,613

Thousands of
U.S. dollars$ 3,040
4,374
1,571
1,359
3,355
$ 13,699

10．Severance and Retirement Benefits
As explained in Note 2. Summary of Significant Accounting Policies, effective March 1,
2001, the Companies adopted the new accounting standard for employees’ severance andretirement benefits, under which the liabilities and expenses for severance and retirement
benefits are determined based on the amounts obtained by actuarial calculations.
The liabilities for severance and retirement benefits included in the liability section of
the consolidated balance sheet as of February 28, 2003 and 2002 consisted of thefollowing.
Millions of yen
2002
2003
Projected benefit obligation ………………………… ¥(10,062)¥ (8,697)
Unrecognized prior service cost ……………………
―(117)
Fair value of pension assets ………………………
5,536
5,559
Unrecognized actuarial differences ………………
2,498
725
(181)
Accrued pension cost …………………………………
(556)
Liability for severance and retirement benefits ¥ (2,584)¥ (2,711)

Thousands of
U.S. dollars
2003$(85,452)―
47,01521,214(4,722)$ (21,945)

Included in the consolidated statement of income for the years ended February 28,
2003 and 2002 are severance and retirement benefit expenses comprising the following:

24Millions of yen
2002
2003
Severance costs―
benefits earned during the year ………………
Interest cost on projected benefit obligation ……
Expected return on plan assets ……………………
Net transition gain …………………………………
Recognized actuarial differences …………………
Adjustment to prior service costs …………………
Severance and retirement benefit expenses ……

¥ 590
216
(153)
―
145
(117)
¥ 681

¥ 598
203
(133)
(318)
―
(117)
¥ 233

Thousands of
U.S. dollars
2003$ 5,013
1,833(1,302)
―
1,232
(992)
$ 5,784

The discount rates used were 2.00% in 2003 and 2.50% in 2002. The rates of
expected return on plan 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.
Charges to income with respect to directors’ and corporate auditors’ retirement benefits
amounted to ¥62 million ($526 thousand) and ¥55 million for the years ended February
28, 2003 and 2002, respectively.

11．Income Taxes
The Companies are subject to a number of taxes based on income, which, in theaggregate, indicate a statutory income tax rate in Japan of approximately 41.7% for theyears ended February 28, 2003 and 2002.
The following table summarizes the significant differences between the statutory income
tax rate and the Companies’ effective tax rates for financial statement purposes for theyears ended February 28, 2003 and 2002:
Statutory tax rate ……………………………………
Non-deductible expenses ……………………………
Non-taxable dividend income ………………………
Per capita inhabitants’ tax …………………………
Other ……………………………………………………
Effective tax rate ……………………………………

2003
41.7%
1.6
(0.1)
0.1
(0.7)
42.6 %

2002
41.7 %
3.0
(0.1)
0.1
(0.1)
44.6 %

Significant components of the Companies’ deferred tax assets as of February 28, 2003
and 2002 are as follows:25

Millions of yen
2002
2003
Deferred tax assets:
Excess severance and retirement benefits …
Valuation loss on investment securities ……
Directors’ and corporate auditors’
retirement benefits ……………………………
Accrued enterprise tax …………………………
Accrued expenses …………………………………
Valuation loss on investment in capital ……
Excess employees’ bonuses accrued ……………
Net unrealized holding loss on securities ……
Losses carried forward …………………………
Other …………………………………………………
Total deferred tax assets …………………………
Valuation allowance …………………………………
Net deferred tax assets ……………………………

¥

595
477

361
507
―
620
73
279
44
412
3,368
(44)
¥ 3,324¥

Thousands of
U.S. dollars
2003

758
566

$ 5,052
4,051

336
105
7
330
104
31
84
174
2,495
(84)
¥ 2,411

3,070
4,306
―
5,266
617
2,370
375
3,495
28,602(375)$ 28,227

The aggregate statutory income tax rate will be reduced for the years commencing
on April 1, 2004 or later due to the revised local tax law. At March 31, 2003, theCompany and consolidated domestic subsidiaries applied the reduced aggregate statutory
income tax rate of 40.4% for calculating deferred tax assets and liabilities that are
expected to be recovered or settled in the years 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 inJapan and overseas.
(1) Business segment
The operations of the Companies are classified into three business segments, whichare “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, 2003 and 2002 were from the pharmaceuticals and related products
segment, the disclosure of business segment information is not required.
(2) Geographic area
Since more than 90% of the consolidated net sales and operating income for the years
ended February 28, 2003 and 2002 were made in Japan, the disclosure of segment
information by geographic area is not required.
(3) Overseas sales
Since overseas sales for the years ended February 28, 2003 and 2002 were not morethan 10% of the consolidated net sales, the disclosure of overseas sales information is not
required.

26

13．Shareholders' Equity
Under the 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 sharesas additional paid-in capital, which is included in capital surplus.
Effective October 1, 2001, 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 alegal 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 theshareholders’ 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 capitalremains being equal to or exceeding 25% of common stock, they are available fordividends 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 the unconsolidated financial statements of the Company in accordance with the
Code.
(Reduction in additional paid-in capital and legal earnings reserve)
At the 2002 annual meeting of shareholders held on May 23, 2002, it was duly approvedthat the total of additional paid-in capital and legal earnings reserve which exceeds 25%of the Company’s stated capital be transferred to retained earnings in accordance withthe revised Code. As a result of this transfer, additional paid-in capital was reduced to¥2,118 million and legal earnings reserve was reduced to zero.
(Acquisition of treasury stock)
At the 2002 annual meeting of shareholders mentioned above, it was duly approved that,in accordance with the Code, the Company could acquire 14,000 thousand shares ofcommon stock within the limited total amount of ¥28,000 million for a period of time
ranging from the termination of the 2002 annual meeting of shareholders to the 2003
annual meeting of shareholders.
The Company purchased 2,000 thousand shares of common stock out of profits for the
total amounts of ¥2,768 million ($23,507 thousand) from the stock market for a periodof time ranging from the termination of the 2002 annual meeting of shareholders to theend of the year.
(Number and amount of treasury stock)
At February 28, 2003, the Companies held the treasury stock of 3,100,330 shares ofcommon stock in the amount of ¥5,538 million ($47,032 thousand), as shown in the
consolidated balance sheets. This amount included ¥678 million ($5,758 thousand) which
was not deducted from the minority interests.

27

14. Common Stock(1) As a result of exercise of the outstanding warrants, 56,405 and 127,419 additional
shares of common stock were issued during the years ended February 28, 2002 and2001, respectively.
(2) Retirement of common stock
In accordance with the resolution of the Board of Directors on February 24, 2000, theCompany purchased 605 thousand shares of common stock out of profits for a
total amount of ¥974 million from the stock market and retired them by the time of the2000 annual meeting of shareholders held on May 25, 2000.
(3) Stock split
In accordance with the resolution of the Board of Directors on May 25, 2000, theCompany authorized a stock split as follows:
Effective date of stock split: August 21, 2000.
Split ratio: Split one share of common stock into two shares.
As a result of the stock split, 47,523 thousand additional shares of common stock
were issued.

15. Contingent Liabilities

Contingent liabilities at February 28, 2003 were as follows:

Notes receivable discounted…………………

Millions of yen¥
39

Thousands of
U.S. dollars$
331

16. Subsequent Events(Appropriation of retained earnings)
At the 2003 annual meeting of shareholders held on May 22, 2003, the appropriation ofretained earnings for the year ended February 28, 2003 was duly approved as follows:

Cash dividends−¥12.00 ($0.102) per share ………………
Bonuses to directors
and corporate auditors ……………………

28

Millions of yen

Thousands of
U.S. dollars¥ 847$ 7,19356

476

Report of Independent Certified Public Accountants
To the Shareholders and the Board of Directors of
Hisamitsu Pharmaceutical Co., Inc.
We have audited the accompanying consolidated balance sheets of Hisamitsu
Pharmaceutical Co., Inc. (a Japanese corporation) and subsidiaries as of February 28,
2003 and 2002, and the related consolidated statements of income, shareholders’ equity
and cash flows for each of the three years in the period ended February 28, 2003,
expressed in Japanese yen. Our audits were made in accordance with generally accepted
auditing standards in Japan and, accordingly, included such tests of the accounting
records and such other auditing procedures as we considered necessary in thecircumstances.
In our opinion, the consolidated financial statements referred to above present fairly
the consolidated financial position of Hisamitsu Pharmaceutical Co., Inc. and subsidiaries
as of February 28, 2003 and 2002, and the consolidated results of theiroperations and their cash flows for each of the three years in the period ended February
28, 2003 in conformity with accounting principles generally accepted in Japan (Note 1)
applied on a consistent basis during the periods, except as noted in the following
paragraph.
As explained in Note 2, Hisamitsu Pharmaceutical Co., Inc. and subsidiaries
prospectively adopted new Japanese accounting standards for financial instruments andemployees’ severance and retirement benefits and the revised Japanese accounting
standards for foreign currency translation in the year ended February 28, 2002.
Also, in our opinion, the U.S. dollar amounts in the accompanying consolidated
financial statements have been translated from Japanese yen on the basis set forth inNote 1.

Asahi & Co.
Fukuoka, JapanMay 22, 2003

29